Option Care Health, Inc. (OPCH) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. We're going to get started with our next session. I'm Jamie Perse, health care provider analyst here at Goldman. And we've got Option Care, John Rademacher, President and CEO; and Nicole Maggio, SVP, Corporate Controller and Chief Accounting Officer. Thank you both for joining.

Pleasure.

All right. Great. I think maybe you wanted to make some quick opening remarks, and then we'll go to questions.

Yes. Well, neuromotor caveat, I'm sure in the sense of, we maybe making some forward-looking statements and that may or may not prove to be in line with the forward view. So please refer to our Investor Relations website for a full disclosure of the risks associated with any of the comments that we make. In general, just want to start by saying how proud I am of the team and the performance that we had in the first quarter, which we announced. The ability of this organization to not only show resilience in a dynamic marketplace, but also taking full advantage of opportunities that were presented in the marketplace. I think just speaks of the focus of the team, the durability of the model and more importantly, the utility of the role that we play in helping to reduce the total cost of care and more importantly, provide strong clinical outcomes. So really pleased with the progress in the first quarter. And as we had put forward, that strength of the first quarter, we raised the bottom end of our guidance for our full year knowing that there's a lot of uncertainties in the marketplace. We wanted to be prudent in our approach. But certainly, we're very confident with the strength of the first quarter.

Okay. Great. Maybe starting with the market, you've always characterized, the acute side of the business is like a low single-digit growth market. The chronic more high single-digit growth. And so this 5% to 7% blended rate. You've obviously been doing better. I'll come back to drivers of that piece. But just from a market perspective, I mean what are you seeing in terms of the growth of the market, I think the real question is, have we been in a period of above normal growth?

I think that for the 2 different areas of certainly the acute and chronic, and we can go into some more detail on acute. But I do think it's still patterning in the way that we have characterized it. I think that organically, that's growing in the low single digits. There are market dynamics that are allowing us to show much stronger growth on that. I think in the chronic, it is low single digits, and that is both in prevalence of disease and utility of some of the products that are in the portfolio as well as continued movement towards lower-cost settings of care. So I think that you have those components where we think that over the midterm that on a blended basis, high single-digit top line given the investments we've made into our facilities, our people, our process, our technology, we think that, that can be a low -- or that high single digit can be a low double-digit bottom line. And then when you think about what this organization can generate from a free cash flow and utilizing that within the way that we're either looking at share repurchase and/or M&A activity on an adjusted EPS basis, I'd say it's a tick higher. So we still believe that on an organic basis, that high single digits is a low double-digit bottom line.

Okay. Great. We'll kind of go through some of those components. I just wanted to clarify, I think you said chronic being a low single digit.

I'm sorry. Yes. The acute low single digit. The chronic is a double-digit growth, kind of, let's call it, the low teens.

So I want to get into a couple of the drivers of the market. I guess it's really on the chronic side, in particular. First on drug innovation and just the cadence there. What's your perspective on kind of where we're at from a new product introduction? And what that is enabling from a market growth perspective? And how that looks today versus historically versus looking forward, any perspective there?

I think there's a robust pipeline of products that are infused or injectable and require health care professional oversight. When you think of the platform that we've created, in the pharmacy network as well as the nursing infrastructure that we have. I think we're well positioned to participate in those advancements and as those products move into the marketplace. Now some in the rare and orphan and that limited distribution given the clinical capabilities that we have and that reach of our pharmacy infrastructure, I think, puts us in a really good position to participate in that end. I think when you're looking at the new products that are kind of more in the standard, again, given our capability set, given the payer access that we're able to provide, to manufacturers, I think that we will be well positioned to participate in those new products as they're being launched. To your question, this is always an evolving formulary for us as an organization. Nicole and I have been with the organization 10 years and when you look at where we were when we first carved out from Walgreens, I'd say a vast amount of our revenue and profit was coming from things like factor in hemophilia and bleeding disorders. Today, that's a nascent part of our portfolio. And so it's always evolving. We have a broad spectrum of products that we offer. We think that the clinical competencies of the enterprise in the practice of pharmacy in our nursing, in our nutrition support, and as we continue to expand our capabilities with advanced practitioner models and other things, we think that we are a partner of choice for manufacturer to introduce those products as a channel partner, but also as a reliable provider of services for those referral sources.

And you guys often get asked about just different formulations of these drugs, whether it's subcu or taking a pill, obviously, at an end state. Where are we in the cycle within your portfolio of things that could migrate to a different form factor? And how you fit into that?

Yes. We see uptake of those new forms of administration to go at different pace on the different products. What we continue to hear from our referral sources and those physicians that are prescribing is when a patient is responding well to a therapy, they normally stay on the therapy. And so with new introductions, although with some naive patients and others, you see that uptick or patients that aren't responding well, they're looking for a different product in order to support that. There is some durability within the portfolio and within the patient census to stay on. We also see that for some of the products, take IG, which has been in a biosimilar situation for years as well as has both subcutaneous as well as IV administration forms. We see that for some patients, subcu, really good solution for them, and we're able to help support them through that process. But we haven't seen a significant migration of the IVIG over that. In most instances, I don't think any year more 20% of the grams that are dispensed are subcutaneous on that. So I think there are different forms. The other thing is with some of the products even though it may go from an IV administration to a subcutaneous administration, it still requires a health care professional oversight. So the infrastructure that we've built with not only our nursing network, but our infusion suites allow us to continue to support those patients that may have been receiving it as an IV therapy, now are getting subcutaneous, but we're providing that health care professional oversight, and we're still dispensing it from our pharmacies.

The other piece of market growth, I wanted to dig into a little bit is just what's happening with the hospital channel, I think that's still more than half of volumes, hospitals first physician office. I think that's been migrating towards the home and infusion clinics. You guys have been a big part of that. Can you give us a sense of what's happening in terms of other channels of potential administration and where home and clinic fit into that?

Yes. So as an organization, our focus will always be a home infusion provider. I mean, being able to serve the medically fragile, the immunocompromised, the ambulatory constrained patients, all of that fits within our core competencies and what we can do. Our expansion into the infusion suites just provides additional patient choice and allows chronic patients that are out doing activities of daily living to have a more convenient place other than their home in order to receive that care. And we think that's a big part of the convenience strategy that we're bringing to patients. Within the hospital systems themselves, we partner with them in various ways. There are hospital systems that do their own home infusion. But normally, they have a narrow catchment area, as you would expect, kind of around the hospital or the community that they're a part of. And as they're drawing patients from outside of that catchment area, they still need a partner to be able to take those patients to the home. And so our ability and the reach that we have, the fact that we can reach 96% of the U.S. population with our footprint allows us to be a really great partner where they have a focus around home infusion. On other situations where they either don't have home infusion, their focus is around quality of care, around responsiveness at that local level and to make certain that you're not creating situations where you have adverse events or other things that create readmissions and never events for them from that standpoint or where they have DRGs and they're trying to manage bed days to mitigate their costs. We're a perfect partner for them in all of those scenarios when you think of what we've invested in not only our broad access, the clinical quality that we deliver and the responsiveness at the local level. We love the fact we're a national provider. We can use that scale as a competitive advantage. But health care is still local. And our ability to have those local teams that are very responsive to work with the hospitals for either discharges that are coming out on the acute therapies or in support of chronic conditions for patients that are part of their broader patient census that they're managing. All those things, we think we're well positioned to be that partner. And our broad market access, the fact we're in all 10 of the top 10 national payers as well as we have over 800 payer relationships over 1,400 contracts. In some ways, makes it easy for them because they don't have to go through a rubik's cube to try to figure out whether or not we're in network or not. Most times, we're in network because of the market access and the work that our team does there to negotiate for us to be in network for most payers.

Okay. Maybe turning a little bit more focus on the business now. Just looking back over the past 5 years, I think your revenue CAGR has been like 13%, which is above-market growth. When you just kind of take a step back, what are the big components you think, in terms of your ability to drive share gains, big differentiators versus the market and the extent to which you think those are durable going forward?

We've invested into people, process, technology facilities really since we went through the spinout. And we are purpose built around home infusion and really the focus to deliver that extraordinary care for the patients that we have the privilege to serve. And so a lot of the investments that we've been making is to be the best at our craft, to be as responsiveness as we can in the market place. I think when you look at the opportunities that were presented, some of it with competitive dynamic shifting, with other organizations making decisions to either exit therapies or exit markets, I think when you look at the investments we've made in reach and frequency, when you think of what we did to create Naven Health which is our nursing arm that allows us to continue to grow aggressively with having access to nursing, all those things, I think, just put us in a really strong position to capitalize on the market opportunities. But I think in instances to take share in those local markets given that we could be responsive. And through all of that, Jamie, you had a pandemic, you had bag shortages with -- this last year you had -- like there have been a lot of different things that were outside of our [indiscernible] but the organization showed agility and resilience to be able to find ways to navigate around that and always put the patient first in our approach. And I think that has created goodwill with the referral sources. It's deepened our relationship with the payers who need that access for their members. And I think it just positions us well to continue to focus on that growth as we move forward.

And just on the labor investments that you've made, you've obviously done a couple these acquisitions and built Naven. I guess how big of a differentiator is that in the market today? And just your flexibility in terms of meeting demand where it occurs quickly, just your responsiveness on the labor front?

I think that is a part of the competitive advantage that we've been creating. When you think about this business, it really is -- it requires highly skilled professionals, those clinicians to be able to serve the needs of the patients through that process. And as we are going through our growth, certainly, being able to compound dispense and distribute the products from the practice of pharmacy is important and having capacity to be able to do that is a part of that equation. But having the nursing resources to be able to oversee the infusion events, if not managed appropriately could be a limiter to the ability to take on those patients where you have to have all of those things aligned before you can say, yes, to bring the patient on to service. So having a robust network of nurses, the investments we've made there in not only training and development and recruitment and retention. All of that, I think, fits into this comprehensive strategy that we have of being able to say, yes, more often and continue to grow and deliver high-quality care.

The only thing I'd add to that is it also allows us to deliver care efficiently. So if you think about it using contract nursing agency rather than your own nurses adds quite a bit of cost on to the pharmacies and to the dispense. And so I think it's allowed us to excel where others have perhaps struggled because they didn't have the in-house nursing network that we have.

Yes, makes sense. I guess going to the acute business for a minute. Several competitors have walked away in different markets. I guess, first, just from a very high level, I mean, why do you think some of these other competitors have left this business behind you? Whether it's a scale challenge, a margin challenge for them? And I guess the signal that creates is, this isn't a good market. How do you respond to that? Why is this business you can run effectively whereas others need to walk away?

It is one where -- especially on those acute therapies, it is highly choreographed and one in which you have to be very responsive. I won't speak on behalf of other strategies. I can tell you that the investments that we've made into the technology, the investments that we've made into using that scale as a competitive advantage. I think are all things that allow us to be very efficient in the way that we onboard service and then bill and collect with those patients through that process. Again, most of those are shorter duration. They can be anywhere between 3 and 8 weeks, 2 and 8 weeks when you're thinking of some of the antibiotics a little bit longer for some of the nutrition support. But -- so these -- they turn over quickly within the portfolio. I can tell you from my experience in roles previously to joining Option Care Health, acquisition currency is easy to get. CapEx is hard when you're in a big organization that has a lot of priorities within that. Again, being purpose built around what we do in infusion services is one in which we continue to invest in the pace that is required to drive that efficiency to be effective in what we do. And again, I think that just puts us in a -- it gives us a competitive advantage when we're looking at how we participate in those markets. I will tell you, clearly, it is -- I mean it's profitable for us. You look at the gross profit that we talk about for these therapies, but even when you layer in, the fact there's more intensity around onboarding and off-boarding those patients given the shorter duration, it's still is something that contributes to our bottom line in a significant way. And from our perspective, it changes the dialogue with the payer community because they need us on both ends. They need us for both that ability to support those members who have the need for acute therapies but we also leverage that to make certain that we're in network for the chronic therapies. And I think the breadth of the portfolio that we're able to offer just allows us to have a differentiated dialogue with the payers who are looking for partners to be able to support the needs of their members across the broad spectrum of therapies we provide.

And just thinking about cadence of growth for the balance of the year, you've had 3 quarters of kind of this market benefit on the acute care side? In the back half of the year, should we expect acute to go back to kind of that low single trajectory? What's the cadence we should be thinking about...

I'll start at the high level, and Nicole can talk a little bit more about the mechanics. At a higher level, so where we saw the exit was kind of in the fourth quarter of last year. So around October was when we saw some of the competitive exits on that in the middle of a bag shortage scenario with the tragic events that impacted the Southeast and the Baxter plan. From that standpoint, like we've been continuing to grow, we think that we're continuing to focus around our execution, that ability to deepen the relationships with the referral sources and be their partner of choice is a focus of the organization. We'll continue to drive that through. What we saw in 2022 when there was a partial exit of a couple of competitors is we were able to capture that market demand and it really kind of reset the base in which we would then be building from as we move forward. I expect the similar phenomenon here is that we'll continue to drive that forward. But do you want to talk about kind of how we're thinking about the back half and the growth trajectory that creates?

Sure, so, as John mentioned, we really had the opportunity to start in Q4 of last year. And again, it was a little bit more muted just given the IV bag shortage. So I would expect the outside growth to continue really the balance of the year and maybe taper off a little bit in the end of Q4 as we start to lapse it. The patients that we even saw in Q4, most of them still aren't on service with us. So to John's point, on our ability to endure ourselves to the referral sources we've continued to see those referral sources send those referrals our way to be able to take on those acute patients, even though they are a new set of acute patients every few weeks.

Okay. That's helpful. And then just into '26, is that when you'd expect more market level growth or still some benefit?

I think -- from our perspective, again, we haven't provided '26 guidance and -- but what I would think that you should expect is like we have before, we think these therapies are growing in that low single digit. Our ability as an organization, though to capitalize on the market position that we have, we expect that we'd be a tick higher than what we would think as being the market growth given that we have reach and frequency as well as we have capacity within our infrastructure in order to continue to sweat the assets and capitalize on the position that we hold.

Okay. And on the chronic side, you guys have been in this sort of mid- to high teens growth trajectory for the last several years. It's been fairly consistent, plus or minus. You've talked about over the years, just the portfolio has changed a lot. So underneath that consistency, I mean, what's been driving growth? Just talk about the stability of the portfolio drivers and your visibility to that going forward?

Yes. I think a couple of things, Jamie, that I would highlight. One is, I do think from an execution, the team has executed really well of capitalizing on the market demand that's available and being well positioned to do that. The portfolio itself continues to evolve, as you said. But I think there's durability in chronic inflammatory disease. And the IG franchise and the continued focus there, some of the introduction of new products. Certainly, our -- and we've highlighted some wins in limited distribution in rare and orphan space that also help to provide some balance across the portfolio broadly. I think as we move forward, you're going to have some puts and takes there. Certainly, Stelara will be a revenue event as that declines, but there are other products that are in the portfolio in that chronic inflammatory disease area that will help to continue to drive that growth. There were kind of new developments in the neurological area. We've called out before Alzheimer's as being part of the broader portfolio that we're looking. Uptake is slower than I think folks at Lilly and Biogen were expecting on some of the products that were introduced. But as advancements happen in some of the diagnostics and blood-based diagnostics as it starts moving out of academic medical centres to community settings, all of that, we're well positioned in order to participate and support those types of patients. And there's some emerging areas in Parkinson's and others that we think the platform is well positioned. We think other vectors of growth, not only executing on the existing portfolio, but we've been talking a little bit more about oncology and how we see opportunities to utilize our infrastructure and our clinical capabilities and support of some of the products, the PD-1s, the KEYTRUDA, OPDIVO, Yervoys. They have a lot of the similar characteristics as our chronic inflammatory disease portfolio in the sense of they require health care professional oversight. They've got really tight care planning. A lot of that today is being done in hospital outpatient departments in oncology clinics and physician practices. But as we've seen with other products like REMICADE, that when it first came out, most of that was done in a physician practice. As economics start to change, as support for different channels gets modified, our ability to support that, we think will be something that will be an area of growth. And when you look at the TAM of those products, knowing that some of them are going to be in the IRA and the economics are going to start to change on that. We think the platform itself from a clinical competency and what we can do in both the practice of pharmacy as well as our -- at the point of care with our nursing oversight, we're well positioned to help support that, and we think that those are areas of growth.

Yes, you said you've been talking about oncology more. What are you doing in oncology? And just how are you evaluating like what you need to do from an investment standpoint to like really open up this opportunity?

Yes. So the investment -- a lot of that track has been laid with the infusion suites and the advanced practitioners we're building that out. We are serving those patients today and it's starting to grow in its census. A lot of that is going to be, I think, driven by site of care initiatives at the payer first and then some of the events that are kind of coming down the pathway around reset of pricings with IRA and other things through that process. But I think this is going to primarily be a site of care initiative, initially, and we're well positioned. And we're working with payers today on some site of care initiative that they have. We think that will start to become more broader as they're looking at opportunities to reduce the total cost of care and they're looking for opportunities to provide choice to their members around more efficient and effective settings for them to be able to receive these therapies.

And anything you can give us in terms of just context for how to think about where this opportunity could go over time? Obviously, there's a lot of very big drugs in that category. But what's the relevant subsegment for you that's most addressable in the near term?

Yes. As I said, I think the PD-1 portfolio is probably the one that is most addressable when you look at the characteristics and what it takes from a -- for us to manage those patients clinically. I think when you look at that addressable market, I think it will be expanding as potentially the total dollars starts to constrict because of pricing actions with IRA, et cetera. I think the portion that will be able to be moved to these alternate settings will start to increase. So our position all along was part of the investment into the infusion suites, our continued investment into our infusion clinics with the advanced practitioners and the pharmacy infrastructure being able to support that, we're well equipped to do. We'll continue to make investments, but there's no big -- there's no big investment that has to happen for us to be able to serve those patients. We're serving them today. It's just a matter of capturing of demand and being able to know that there's going to be competitive tension with those places of service that they're receiving it today. And we have to manage that effectively is the way we're looking at our go-to-market.

Okay. That's helpful. Maybe just turning a couple of questions on Stelara. You've discussed this a lot. It's been a big focus over the last year or so, probably more. Your -- you had about $5 million of headwind in the first quarter and you've guided to that ramping in the second quarter and back half of the year. $60 million to $70 million headwind for the year. Any updates to that? Are there any surprises in terms of what the impact on the business has been?

I think the team has executed extremely well, and it's in alignment with kind of our expectations as we had -- it was a little bit -- timing was difficult last year in the sense of when we received notice from Janssen around their thoughts of how they were going to price the products for us and the discount that we were able to enjoy and that changing as well as negotiating how much we could build up in inventory through that process. That was part of that negotiation that did not allow us to be able to come out with definitive aspects when we knew we had a significant change that was coming not being able to size that. As all of that came together, and we came forward with our guidance for '25, knowing that, that $60 million to $70 million was the right range on it. We're executing along those paths. And we feel really good about what the team has been able to do and how we've executed with that. I think -- a couple of things that start to cloud, what '26 looks like, and we haven't given '26 guidance, but just so that everyone can understand all of the different variables that we're working on. Part of it is going to depend on what is our census at the end of the year. Part of it is going to be dependent upon what is the biosim uptake as we go through the course of the year. Part of it is going to be what it would be the negotiations that we can do with Janssen for prices and the discount that we're able to enjoy as we head into 2026. What's the inventory that we're going to have on hand as we end the year. So there's a lot of things. I know everyone wants to kind of just straight line and say, okay, if it was $5 million -- like I don't know that that's good math given all of the different variables. What I would tell you is our focus is around growing through any of these disruptive changes. I think, again, we've demonstrated this year even with a $60 million to $70 million gross profit headwind, we've been able to grow through that. And so our focus is on capitalizing on the opportunities that we have. The Stelara patients that are on service are profitable for us today. We're working with the biosim manufacturers around getting access to the product at an appropriate acquisition cost for us. And we continue to work closely with Janssen and with other manufacturers around support of their patients, some of the new products like with TREMFYA with Janssen, with Skyrizi, certainly with ENTYVIO, there's just a lot of different products and therapies that we can look at, trying to maximize the positive impact clinically for the patients as well as sharing appropriately in the economics and the value that we're creating.

And this whole dynamic around Stelara created, I guess, questions around what would happen around other LOE events. You've got a couple of bigger ones, not quite the size of Stelara over the next few years. But has anything in your mind changed around how manufacturers will approach their pricing as LOEs occur? And any bigger gross profit events we should consider over the next 2 to 3 years?

Yes. I will again say, Stelara was such a unique situation. It honestly acted as a biosim with a branded product. And so most of the -- everything else in our portfolio, we've kind of tried to show nothing is more than 5% of our revenue. So the exposure is less. And the gross profit of those are more -- all of those branded products are in alignment with kind of what the historical are, not with what Stelara was given the program that we had put in place. So nothing has really changed in our view. In some -- in many instances with that LOE and that loss of exclusivity and what happens, it honestly helps us manage because you get competitive forces in the marketplace, our ability to work with the biosim manufacturers to drive better economics for us through that process. We think that there's opportunities for us to continue to leverage the platform, look at the patient census that we serve and be able to continue to navigate that as we move forward. So it creates opportunities probably at an equal amount of risk when you take a look at it from that standpoint. And I don't see any like significant profit event. I mean there's a lot of unknowns in MFN and tariffs as we talked about earlier. There's just a lot of things that, again, we're keeping our finger on the pulse. But if I look at the controlling what we can control and the execution path that we're on, I feel really confident in what we've done and the ability of the team to execute the strategy.

Yes. Let's maybe spend the last few minutes on some of these policy dynamics, MFN and tariffs. I mean what's your latest perspective? What are you watching in terms of what's going to guide how you're thinking about how this impacts your business?

Yes. So to break our revenue into kind of its components, and again, we tried to provide some visibility into this. So 50% of our revenue comes from generics and biosimilars today. We don't think that MFN is really going to have a significant impact on them given the competitive dynamics that they already exist. The remaining 50%, about half of that is rare and orphan and these limited distribution drugs, smaller cohorts of patients and then the remainder being the branded products within that. Again, rare and orphan may be exposed, but we don't think that's kind of the -- really what the target is on the MFN and the focus moving forward. When you then look at the composition of the gross profit, of the 50% of the generic and biosimilar, 75% of our gross profit comes from that category. The remaining 25%, approximately 25% comes from that rare and orphan and the branded pharmaceuticals. So it's a muted impact on that. We have our reimbursement mechanism is we get paid a spread on the drug. We have a clinical per diem and a nursing rate. And in certain circumstances where on specific products where economics have changed, given the fact that we are a lower cost setting of care, we've had the ability to negotiate with payers to get better balance across those 3 legs of the stool. Will it take time for us to be able to do that? Yes. I mean I don't know that there's an immediate change that happened. But if there were things that were to happen with MFN in which the reference price begins to decline on that, I do think that given the value that we bring to the payers in their total cost of care, we will be working really hard to get a better spread, if we can, from the manufacturer to look for better balance with the clinical per diems and the nursing rates and continue to manage the portfolio more broadly around that to look for any ways to mitigate or offset the impacts that, that could have. So we're working in earnest today. And certainly, we do the same things with the tariffs and taking a look and trying to figure out ways to mitigate and manage any of the costs that would be associated with tariffs.

Okay. Great. Well, with that, I think we're out of time, but thank you both so much for joining.

Our pleasure. Thanks, Jamie.