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

Okay. We're ready to get going. So next up is Option Care. We're very pleased to have management with us, Meenal, this is Chief Financial Officer. This is her first conference. Glad and we got Nicole as well.

I guess I should ask, you're new in the role, but you had some history with the company and the management. What have you found? You've only been here a couple of weeks or 2 months, I guess, now, right? So what have you found? What is your impression? Is it what your thoughts?

Yes. You know what -- well, first, I wanted to say thank you, A.J. And really thank you to you and to UBS for having us here. It's Option Care Health. We're really excited to be here, and we really appreciate everyone's interest in the company. What I've been talking to folks about is that as I went through a typical interview process and got a chance to meet a number of members of management, John, our CEO and members of the Board, I describe it as what I heard is what I got, which is great, right? The best thing that you can find is that if you talk to people and you get to know the company, you get a good feel of the culture and what I thought it was going to be like is exactly what it's like. And that's really a big part of what drew me to the company as well. And then when I take a look at Option Care Health across the broader health care ecosystem, it really seemed like the right place to be given our ultimate mission is really to provide patients and their families with hope as we have the privilege of serving them. And so beyond being a CFO and beyond a lot of the things and a lot of the questions, I think that, of course, you're going to ask me about having a bigger, broader mission and the impact that we have has been really important to me as well.

Okay. That's great. So -- and I may lean on the call a little bit to help you out on this one. We're 10 months into the year. How would you sort of assess how things have gone year-to-date relative to expectations coming into the year?

Yes. Again, it's been a great year. Again, from where we started at the beginning of the year, if you recall, we put some guidance out at the beginning of January, we've raised our adjusted EBITDA guidance by $15 million, and we've raised our adjusted EPS target by $0.06. So again, a great year and patterning out better than expected on all fronts. Again, a lot of dynamics that we've seen throughout the year, but very pleased with how the year is shaking out and again, feel very confident in the guidance that we've outlined for the full year 2025.

And there's always some new people to the Option Care story or to any story at an event like this. For those who are new to Option Care, how would you briefly describe the company's business? How would you size the growth opportunity broadly and the extent to which underlying industry is growing?

Sure. Maybe I can take a step back. I know what it's like to be new. So I think I can offer just a quick summary here. For those who may be less familiar with Option Care Health, we're the nation's largest independent home and alternate site infusion services business. So you can find us across all 50 states. We cover about 96% of the footprint across the nation. We have the privilege of serving close to 300,000 patients a year. And really, we provide our services through -- either through going to individual patients' home. We have the privilege of being invited into their home as well as we have about 170 sites across the United States covering clinics and pharmacies. And so many of our patients choose to get their treatments by visiting one of our sites as well. So really pleased about that. The other thing just from a couple of financial metrics. The company went public in late 2019. So since 2020, we've been able to grow our revenue by 13%, a 13% CAGR. We've grown our EBITDA by 19%, and we've grown our operating cash flow by 26%. So again, just back to some of my opening comments, it's a privilege to be able to serve patients and do everything we do every day. And at the same time, really share in that with our shareholders and really continue to drive shareholder value.

That's great. When you sort of alluded to some of the growth dynamics. When you think about the long-term growth algorithm of high single-digit top line growth, low double-digit EBITDA growth, I know Stelara, and we can talk about that in a minute, has had some impact on that. But do you see a return in '26 and '27 after putting behind you, the company headwinds around the Stelara restructuring?

Yes. That's been -- as you can imagine, that's been a topic of conversation with a number of investors. First, I would just talk about the long-term growth algorithm, as you articulated, right, high single-digit revenue growth, low double-digit EBITDA growth and then EPS a bit higher than that. And as I look out even just in my 6 weeks so far with the company, I feel good. I feel good about that long-term growth algorithm. As I'm getting to know the business more, I feel confident in a number of the different growth vectors we have, a number of the different initiatives we have going on, whether that's with our pharma partners, with a number of our payer partners as well. We have coverage with the top 10 payers and numerous, numerous other payers as well. So I feel good about all of the different initiatives that we have to drive that. I think as we look -- we've talked about the fact that in '25, we knew we were going to have some headwinds. And we pointed out the fact, as Nicole just did, despite the fact that we had these headwinds relating to some of the situation with the Stelara drug, we were still able to grow is what we're projecting as part of our guidance on a revenue, EBITDA and earnings per share basis. And as we look ahead to 2026, one of the things we mentioned on our third quarter earnings call is it's still early for us to offer some guidance as many companies are, we're in the middle of our planning processes and have some work to do, but we feel confident in looking at growth again in '26. despite the fact that we will have some headwinds that we've got to mitigate in '26. But if I look beyond that, I feel that growth algorithm is intact.

Okay. Okay. Stelara is sort of dominated the discussion for the last 12 months for better for worse, I guess. First of all, I think there's a perception that maybe there was a change in the way it's played out that it was basically this tough comp that you were going to have in the first quarter because of the forward buying and then that it would be more normal for them with the $60 million to $70 million headwind. Now we're sort of talking about a second round of negotiations. Just to level set people, is that how you -- have you been surprised by the way it's played out? Or is that the way you basically thought it was going to be all year long pretty much?

Yes. If I step back, I know there's been a number of different questions. What we talked about in the fall of '24, almost a little over 12 months ago or so is that as part of our discussions -- ongoing discussions we have with Janssen, who, of course, continues to be a great partner, and we have a number of different initiatives going on with them. There was -- we knew at that time for Janssen that their pricing was going to drop as part of the IRA in 2026, and it was going to drop 66%. And so as they were -- as we were in discussions with them, there was a change that we ultimately settled on relating to the discount rate off the reference price. And that's what created our headwind, our gross profit headwind in 2025. as we fast forward into 2026, we're, again, in some discussions, but it's different and it's broader now because we now have seen in the middle of 2025, just within the past few months, there were a number of biosimilars that have been approved and released. We did know at the beginning of 2025 that there were likely going to be some biosimilars that would be coming out. Exactly when, how many would be approved, that was unknown at the beginning of '25. But as we're starting to see that as well as there are the next-generation drugs that are being launched, both from Janssen, who's launching TREMFYA and then also Skyrizi. So now there's a lot of discussion of patients transitioning to other therapies that may be better for them, and it's really each patient working with their prescribing physician around that. But for us, in terms of the economics, we have a lot of discussions going on beyond with Janssen with other -- with the biosimilar manufacturers and things like that. So I wouldn't call it a surprise, but these things are in terms of approvals and what's going to be released, you don't really know exactly when they're going to happen until they do and then you've got to figure out how you react to that. But again, I would just emphasize that we knew that these things were going to eventually happen. And that's why really as part of our earnings call, we put -- sort of put that line in the sand saying, despite these headwinds, we know what to do, and we do expect to grow in 2026.

And there did seem to be a little confusion on the third quarter call around some of your comments on gross profit. I think some thought the company was calling out an incremental impact to the previously announced $70 million headwind. related to biosimilars and what you were seeing. That doesn't actually seem to be the case. But maybe can you update us or maybe try to put some clarity around that and how it's incorporated in your updated outlook?

Sure. So just referencing what A.J. no problem. what A.J. is speaking about. As part of our guidance in the beginning of 2025, we talked about the fact that with the lower discount that we were getting from the Stelara drug discussions with Janssen, we expected about a $60 million to $70 million gross profit headwind. As the year has progressed and as Nicole mentioned, it's patterned out as we expected. I mentioned earlier that there had been some -- a number of biosimilars that were approved and released late in the summer. And so within the third quarter, we started to see that some patients were starting to transition to some other products. As part of that, as the biosimilars have come to market, the typical pricing that we would see, they would be pricing underneath the pricing of the branded drug. But in this case, because everybody knows that the branded drug is going to be dropping 66% in price, the biosimilars have come out at a much lower price point. So when we talked about the 380 basis point headwind to our revenue as part of our third quarter earnings call, we were trying to point out 2 things. One, mentioning that we were starting to see some biosimilars that were approved in patients transitioning. But just as importantly, despite the fact that we had a 380 basis point revenue headwind to our chronic sales, we still grew double digits in our product sales. So really just trying to point out that the strength of our portfolio is strong. It's not linked to one drug only that we still expected to see some strong results as we move on into the next year.

And I'll just add that at the beginning of the year, all we knew was our Stelara census at the time and the change in our discount that we were going to receive. And to Meenal's point, we knew that biosimilars would come into play, but we didn't know how quickly and what their pricing strategy should be. So when we clarified that we were at the upper end of that 60% to 70% range, that is inclusive of both patients still on our Stelara census as well as those that have moved to the biosimilar alternatives.

And so as we think about '26 and when you -- what information is outstanding to, I guess, Janssen and you, that needs to be resolved to get to a point where you can start to quantify what the impact will be in '26. What are some of those? Maybe just give a little sense about the negotiation, how the process works and when you think you might have an update.

Sure. So in terms of the process, in addition to continued discussions that we're having with Janssen, which again, are good productive discussions. And as always, they take a little bit of time. What's different this year is we have new therapies that are being released, right? So the discussions with Janssen as an example, include both Stelara as well as TREMFYA. We have a number of biosimilar manufacturers, and we're having some similar discussions around what the pricing will look like with those biosimilar manufacturers. So I would say it's not just one set of conversations. It's multiple conversations. We, like a lot of other -- I call it, a lot of other December 31 year-end companies, we're in the throes of our planning process. And so this is one of many things that we're working through right now. But I still feel good that as we're working through not just the Stelara and byproduct impacts, but other parts of our portfolio, we feel good going into '26. We understand the fact that investors are looking for more clarity from us on what 2026 looks like. So as soon as we have a better view and we have confidence in what '26 looks like, that's part of our plan to make sure that we communicate that clearly.

There may not be much to be said on this, but I'm going to ask anyway. So you absorbed -- you're saying a $70 million headwind this year on this product. I think people rightly or wrongly estimated maybe you started in '25 with it being $110 million, $120 million contributor to at least gross profit, if not operating profit. I think you've said you won't do it losing money. You won't provide them. So is there any way to bracket? Is it 0 to 40 sort of the bracket on what the exposure might be here? Or how would you react to that?

Well, I appreciate you started out with -- I'm guessing you won't answer the question, but I'm going to try anyway. We've been getting asked that question a lot, as you can imagine. And really for us, we try to take a look at the portfolio in buckets. You can imagine with a lot of people listening to this conversation now, people would love to get some details on really our profitability by individual drug or therapy. And it's just not something that we get into that level of detail. I would just circle back to my comments of 2026, right? I'd say we're in a different today than we were a year ago, where a year ago, this was unknown, and we were in some early discussions. We continue to be in discussions, but also in some new discussions. But given the state of those discussions, but also more importantly, the fact that we've been able to grow through this headwind in '25, that really gives us confidence as we look ahead to '26 that we feel comfortable, which is why we said this on our earnings call that we're going to grow through this in 2026.

Okay. Okay. Given the issues in Stelara, we are often asked, what would be the next largest drug? And is there another Stelara out there? Can you just comment on that and give some perspective on that?

Sure. And again, we try not to give too much color on individual drugs because they are such a one part of a much larger portfolio. We don't have any other significant concentrations like Stelara, which again, was a very unique program that we had put in place for a small cohort of patients. Typically, the higher dollar branded drugs carry a much lower product margin. And in this case, we were able to squeeze quite a few extra additional basis points out of it given the program we had put in place. What I would say to that question is if you look at our overall portfolio, even though about 50% of our revenue comes from those branded drugs, only about 25% of our profit margin comes from those drugs. So really no other place to have a large concentration for something as profitable as Stelara was for us.

Okay. If you were to take the core business ex Stelara, is that basically trending toward your long-term algorithm for growth? I mean will we -- is there anything else that's really deviating from that in any way?

Yes. I would generally say I think that's sort of a back-ended way to come back to Stelara impact. But what I would say is this is coming back to the long-term growth algorithm, we feel good about that as we look forward. 2026 is still going to be a year that we have to work through some of this. It's -- again, we're working through that now. We'll have a better view coming up in the next few months or so. But I feel confident as I look out further that, that growth algorithm is intact. we haven't had a chance to talk about a number of the different initiatives that we have going on between other therapies with other pharma partnerships that we have, between the work that we're doing around our advanced practitioner model. There's a number of programs that we're working on with our payers today around bed day management and site of care management. I feel good about those being profitable growth drivers to be able to deliver as we look ahead on the long-term growth algorithm.

And I'll just highlight, we obviously had the benefit of this year of some unique competitive dynamics in the acute market. And even though we're going to eventually lap those really starting a little bit in the fourth quarter, I just want to highlight the execution by our team on that opportunity. We are not the only competitor in any of these markets where we had the chance to continue to capture share and the team's daily hourly execution, if I'm being honest, really shows the strength of our platform and our ability to continue to endure ourselves to both referral sources and payers to show our value and to capture that share. So again, I'm really excited about the progress the team has made, but it truly was execution and not something that was just handed over to us.

And I was going to ask you about the opportunities to drive future growth. You mentioned new therapies, advanced practitioner model. I think infusion suite adds has been another aspect of it. What -- how do we think about those relative to the overall company and the growth potential those contribute?

Yes. I think for us, right, we've talked about the fact that we're not -- even though we have been talking a bit about Stelara, as we think about the broader portfolio, I think with the relationships we've built, we talk about the fact that we're -- we have partnerships are in network with the top 10 payers and numerous other payers beyond that, a lot of long-standing relationships with a number of pharma partners. And I think as I step back even as being a little new and you take a look at the broader health care ecosystem, we're on the right side of health care, right, in terms of cost and cost structure and more and more conversations are taking place, both from a payer perspective of what's the affordability, how do I think about reducing my medical loss ratios. But if you also think about it from a patient perspective, right, how many of you have had a loved one that's in the hospital and the first question they're asking is, how many days do I have to be here? When can I leave? When can I go home? So being -- doing what we do, being able to provide alternate settings, whether that's at a patient's home, whether that's in one of our clinics where patients can receive the services they need that give them hope, they give their families hope. I think that's important. And we've had a number of payers, of course, that recognize that, but that's a service we can provide. So that's why those partnerships are extremely important to us.

Okay. Infusion suite adds, are you -- what's the plan on that going forward at pace?

Yes. So we have a footprint of about 170 facilities that are suites, including some pharmacies. Of those, about 24 of them now as of the end of the third quarter have that additional advanced practitioner capabilities as part of that. As I sit here today, and that's part of my first 6 weeks, just really getting an understanding of the footprint and what we're doing. But I think we've got good coverage across the United States with the footprint that we have. That doesn't mean that we don't need another site or 2 or that acquisitions wouldn't add another site or 2. But I think we have pretty good coverage. What we are trying to do are really 2 things. One is by adding the advanced practitioner model in, that brings in an additional grouping of patients that maybe weren't getting care under a home infusion umbrella because of the payer coverage that they have, but coming in under the advanced practitioner model, it's considered a medical office visit. So you get maybe a different cohort of patients coming in that also need some different services, maybe need some more complex medical attention, et cetera. So there's that. So more that we can do around that becomes important. And then whether it's additional therapies, additional use cases as we think about the old adage of how do you sweat the assets, right? How do we think about attracting more patients to our model where they would feel more comfortable, a little bit more like a home-like setting or an alternate setting close to their home.

To Meenal's point, we spent a significant amount of time building out that footprint really starting in 2021, again, where we moved our patients or nursing events that happened in one of our suites from about 15%, 16% up to 34%. So to her point, really, the focus now is maximizing that capacity, perhaps identifying some new de novo locations, but the speed at which we need brand-new locations probably won't be as quick. It's more of that focus on which ones make sense to convert to the advanced practitioner model and how do we best utilize what we already have in place.

Where are you at in terms of capacity across those infusion suites?

We have capacity in all of our infusion suites. And again, that capacity as not even being open 7 days a week, not having extended hours. So plenty of room to continue to do that as well as the way that we build these. We have that ability to get some additional modular walls add a couple of additional chairs to actually increase capacity on our existing sites.

I got you. Okay. This is a little granular, but fourth quarter a year ago, you had CVS exit the market, and we'll start to lap that. But I know you didn't get full benefit because you had the Baxter IV issues. How should we think about the comparisons for the next few quarters relative to those 2 dynamics?

Sure. I just want to echo what something that Nicole said a little bit earlier, and I really want to give really some public accolades to our team. There's -- I think perhaps we made it look or our team made it look a little too easy. But as Nicole was saying, when you think about acute patients, these are patients that need immediate care, right? They've been discharged from the hospital. Maybe we get a call at 10:00 in the morning saying, okay, we need to be working with this patient by 4:00 in the afternoon at their home. We need to think about readjusting schedules to be able to really meet with that patient. We need to think about the medication that they're going to need, compounding that's going to be necessary and really getting to know that patient in a very short time frame. So you need to have the right staffing models in place, the right processes, the right resources in place. And I give a lot of credit to our team that's really been able to put that together, which is really why we have been successful in the past year because it wasn't even about taking share. In some cases, there weren't others to even really serve those patients. And so we feel lucky that we had the opportunity to do that, but that also came with a lot of a lot of efforts involved. As we look ahead to next year, there's a couple of things. One is the fourth quarter is a little bit of a partial overlap, a partial not as we "lap the year." But even as we look at that, we're now at a different base level, meaning that even though acute patients might only be with us for, say, on average, 4 to 12 weeks, we now have the referral sources, and we're -- we've got the relationships and the proven track record now with a lot of those referrals that we'll continue to build on that base. It's a market that we think is this acute market that grows in the low single digits or so. But we think with everything we've done, the track record that we now have that we'd be able to grow that part of our business in the mid-single digits.

Okay. And I think you got low double-digit growth for the chronic. Is there any dynamic that's likely to change that? Or is that just stable and predictable on both sides pretty much?

As Neil highlighted, we had really great performance across the entire chronic portfolio, both in -- I know we've been highlighting some of the rare orphan or LDDs over the past couple of quarters, but also in our core therapies, so in our IgG portfolio as well as the other parts of our business. So obviously, with some of the higher dollar rare orphan drugs, they do have a bit of a ramp that we'll see right at the beginning of it. We called out a couple that we've added to our portfolio for this year or for next year. I wouldn't say that any of those are going to necessarily change our growth trajectory upfront. But again, lots of opportunity ahead with both those and with our existing portfolio of therapies.

And you think about the margin profile between acute and chronic, is -- are you at a stable point, I guess, putting aside Stelara and all? And is there either of those segments where you'd see it materially changing?

I'd say with the acute portfolio, again, those are primarily generic drugs and pricing is pretty stable on those. So I wouldn't expect much pricing pressure or tailwinds on those. On the chronic side, again, as we called out, of the 50% of our revenue that's branded, only 1/4 of our profit is actually coming from those branded drugs. And so biosimilars already make up a meaningful portion of that portfolio. Again, rare orphans, as we've called out, do typically come in at a lower margin profile. That does take some time to try to squeeze additional basis points out of those, but always looking for opportunities as we continue to expand the patient cohort, but nothing significant that I'd call out.

When you think about labor trends, are those relatively stable? Or is there anything to call out there with your clinicians and so forth?

Yes. I know there have been a lot of discussions about post-COVID, what was going on with labor trends. We think we've passed a lot of that now. We're back to pre-COVID levels as we think about our staffing. One of the things that we've built out a little bit as we think about our Naven nursing network, right? That's also been a great add to the organization as we think about the group, but also allowing us to have some flexibility in being able to serve patients. Sometimes if we see a rise in a particular location or at a particular time, it gives us a little bit more flex. But at the same time, Naven also does some work with other parties as well. So from a cost perspective, it gives us a nice balance there, too. So the model is working well for us, and we're really glad that we've put that in place.

And how about on the SG&A front? Do you see leverage there? Or how do we think about SG&A?

Yes. So we have -- we've been talking about the fact that we've made and are continuing to make some investments in SG&A. I think we announced -- it's been a little over a year where we announced our partnership with Palantir around AI. I know everybody has jumped into the AI well at this point. But for us, as we think about a number of our different processes and people that are spending time on patient registration and billing and different areas, there's a lot of opportunity for us to be able to look at and try and streamline those processes. And so we're doing things like that. We talked about the fact that we had 3 initiatives that we were undertaking this past quarter, ranging from scheduling, really doing more on automating scheduling and delivery and routing. And a number of people will say, well, Meenal, when do I see the benefits coming out of SG&A? And I'm pointing out, look, we're putting these in place. We're absolutely getting benefits coming through SG&A. But the other thing that I think I really wanted to articulate is the benefits we're seeing coming through from cash flow. I think that's an important part of what makes our company successful is when you take a step back and we talk about a number of financial metrics, Option Care Health is a really strong cash generator. We've got a cash conversion cycle when we think about working capital management in single days or so. And a lot of these initiatives, right, when we talk about streamlining our processes, impact not just the resources we need, but the working capital as well. So I feel really excited by a lot of the work that we're doing and a lot of people have gotten a lot of traction from that.

Cash flow brings up something I was thinking about. In the first quarter, there was a lot of discussion about the fact you did some forward buying, and that was helping mitigate some of the pressure. But I think it's also sort of come out that, that was part of your negotiation that they agreed to let you do the forward buying. Are we at a point where for most of your drug categories, it's just part of the negotiation as opposed to something you can strategically have the opportunity to do proactively. How should we think about inventory management as a lever to drive incremental profitability?

Yes. I think the great news is when you are a strong cash generator, I would say it gives us optionality, right? It gives us optionality from a broader capital allocation perspective, some of which may be from a timing perspective, it can invest a little bit more in inventory, knowing that that's going to give us a bit of a better cost position, knowing that if we need to build another clinic, if we need to think about another site, we have the ability to do that in M&A, share buyback, et cetera. So those are always things that we're looking at and where it makes sense, economically, we absolutely will do that.

And we will always look for opportunities to make strategic buys on the inventory front as we're looking towards price increases. As you would imagine, you can't just go ahead and buy a full year of inventory to keep buying yourselves ahead of a price increase, but always look for those opportunities when we've got the chance. And to Meenal's point, we have the balance sheet to be able to do so.

And it's -- but it's mostly in discussion about the overall way you're working with the manufacturer as opposed to just -- I think there's going to be a rate increase, so I'm taking forward buying action. It's it's really a feather in your cap or...

You can imagine pharmas are pretty sophisticated with monitoring allocations and what our purchasing patterns are. So...

But to the extent that we can do that and it's part of the discussions, we would absolutely do that. But on their side, they also realize what's going on. So it's part of a broader discussion that we're having.

Okay. That's what I figured. We always get asked about the self -- conversion to self-administer. There's been a couple of drug categories that people have asked about that. What -- how do you think broadly about that?

We recognize that the ultimate goal of pharma is to have a little white pill that every patient takes in the morning. But this is really part of the calculus and part of the trends that we've seen over the course of the nearly 10 years that I've been here. There is still significant utility in the IV formulations of drugs. And while some therapies may shift administration or may come into or disappear from our portfolio altogether, it's what we've grown through over my time here and what I expect will continue to grow through really over the next iteration of Option Care here.

Yes. And I would add, even with the subcutaneous applications that are out there, many times, they still need a medical -- they need a medical professional oversight as well. So that's something that -- that's a service that we provide. Sometimes you still need the specialty pharma because there's compounding, the drug comes in a vial. So that's also services we provide. And then many times, when there are more self-administration products that come out, the payers aren't always happy because they can be a lot more expensive, right? So there's a lot of different variables that enter into it. In many cases, we can still be part of that delivery to the patient. In other cases, there may be some time and evolution before that actually catches on as well.

Maybe just to finally wrap up a little bit on capital deployment. M&A opportunities, what's sort of in your sweet spot there? What about share repurchases? Maybe some comments on that.

Sure. As part of our third quarter earnings call, we talked a little bit about that. We've talked already about some of the organic internal investments we're making in ourselves. We see some nice payback there. With M&A, our focus is really around tuck-ins. We feel like in the home infusion space, there's still a vast amount of market left for us to take a look at, which we'll continue to do. We've also talked about some adjacencies and some other clinical capabilities. We've talked about nursing, specialty pharmacies and even just some of the data and analytics, right, as we think about AI, is there something we can do there. Share buyback continues to be the way that we return capital to shareholders. And I think especially our model has been periodic, and I would even say a bit opportunistic when we feel like we're not quite at the valuation we deserve. There might be a time where you see us buying back more shares as well. But overall, the great news is we generate a lot of cash flow. And so it gives us the optionality more broadly on how we think about capital deployment across all the vectors.

So you're going to tell us that this is a good time to be stepping up and buying -- you're buying your stock?

Okay. Stay tuned. There you go.

All right. Well, we appreciate Option Care participating in the conference this year. And thank everyone for joining, and have a great afternoon.

Thanks, A.J.

Thanks, A.J.