Option Care Health, Inc. ($OPCH)

Thank you so much for joining the Bank of America Health Conference. My name is Joanna Gajuk. I cover health care providers here at Bank of America. It's my pleasure now to host this session with Option Care, who is the largest home infusion provider in the U.S. And today with us, we have John Rademacher, the CEO; Meenal, CFO; Nicole, in the audience right there. And John has some very little of the slide presentation. He's going to walk through, and then we'll go right into Q&A.

Great. Thanks, Joanna. Thank you, everyone, for joining. We thought it was important given so many people are interested in the story to kind of set the stage around who Option Care Health is. Certainly, for those of you that have been following the organization for a while, little bit repetitive, but it was important. Certain disclaimers, housekeeping, as you would expect, we may make some forward-looking statements. Again, please review any of the information on our website, our Investor Relations website or the 10-K on some of the risk factors associated with that. . As Joanna said, Option Care Health is the nation's largest provider of home and alternate site infusion therapy. And our strategy is built on this national scale, but local responsiveness that is really important in health care and important for us to put a patient at the center of what we do, but be part of the communities that we serve. Our network of pharmacies include those local pharmacies as well as specialty centers of excellence as well as a broad aspect that really supports specialty and chronic patients as well as those being discharged from the hospital on acute therapies. We have a comprehensive network of nurses in across the country. They really are focused around providing that extraordinary care in the home in one of our infusion suites or in one of our clinics. And when you think about the high-quality care that we can provide at an appropriate cost and the setting, which patients want to receive it, we add an incredible amount of value to the health care ecosystem and especially as part of the post-acute space. So our coverage map is broad. We cover about 96% of the U.S. population, given the reach that we have. Our nursing environment allows us to really reach into those homes or into the infusion suites. And we have over 750 chairs and over 190 facilities to be local, where it's important and really drive the business performance from that standpoint. We have a broad portfolio of products. We have over 600 therapies that are part of the portfolio of products that we provide broadly across that spectrum. And our strong cash flow and cash generation of the organization really allows us to build on that strength and continue to invest in the business and invest in the capabilities that are required to continue to innovate and drive the process forward. When you think about the industry itself and some of the secular trends that are really driving that, we're well positioned given the footprint that we have and given the relationships that we have broadly across the health care ecosystem and the payer community to really drive value, knowing that we've got shifting demographics and the aging population and prevalence of the disease, that really continues to have high value around the products and services that we offer. We know that patients want to age in place as that continues to move forward. And we can help enable that as an enterprise in what we do in the support that we wrap around the patient, not only the compounding dispensing distributing of the product, but the care plan and the care coordination that we're able to execute to. There certainly is a preference around site of care, looking at the total cost of care, both at the patient level as well as at the payer level to make certain that you're getting the most efficient and high-quality outcome. Significant amount of pharma innovation that continues to bring innovative new therapies into the marketplace that require health care professional oversight, whether it's an IV administration, injectable administration or subcutaneous administration and a lot of new launches certainly in those products in our position with the platform that we have positioned us well to be a partner of choice. We continue to invest in technology. We know that a greater use of data and analytics is going to be important to drive waste and cost out of the process as well as to help to automate and improve the overall supply chain and the supply aspect of the products moving forward. And the policy reimbursement landscape, again, is an important aspect. And ongoing, we are a part of the solution as we're having conversations with payers around how to look at the total cost of care and how to bend that overall cost trend. We have called out today as we're sitting here. We have 26 priorities that really are aligned with some of the mixed performance that we had in the first quarter, knowing that we need to respond and reaccelerate the business. And that focus is really around taking some of the decisive actions to really drive growth and get us back on that growth trajectory, really focusing around 3 key areas. One is around just coverage and making certain that we have the right team in the right place to build the relationships and capture the market demand. The second is really around conversion, taking those referrals and converting them to [ starts ] in a very efficient and effective manner. And the third, I'd say, is convenience is the ease of doing business with Option Care and more importantly, the operational excellence that we can provide. We had called out earlier today as part of this is on a near-term basis, we are refocusing some of our capital allocation priorities to reinvesting in the business and making certain that we're continuing to invest in growth, but also to take a look at the opportunities for share repurchase given the dislocation of the stock price and where we think there is value that can be created. And then our focus is around really rebuilding the momentum of the enterprise as we're looking sequentially quarter-over-quarter in rebuilding from this point forward. We believe the foundation of the business is strong. We believe the value that we provide to the key stakeholders is extremely valuable. And we think we are well positioned to continue to build on the trends of moving more care to the home, moving to a better cost effectiveness equation and to utilize our clinical resources to the fullest. So with that...

Right, let's dive in. So maybe I appreciate the last slide. I want to touch base on a couple of these things. But maybe before we do that, to your point about the stock being dislocated maybe just less flashback Q1, very disruptive. A lot of things kind of not really going the way you originally anticipated. And I know you adjusted the guidance to reflect this, right? So now the revenue came down, but your EBITDA guidance wasn't changed. So kind of walk us through what gives you confidence, right, that you can ramp the EBITDA to get to fill your target for the year?

Sure. Why don't I go ahead and get started. Good morning, everyone. I'm Meenal Sethna. I'm the Chief Financial Officer, and thanks for having us today, Joanna. So let me just touch a little bit on Q1. As John mentioned, we -- and Joanna also mentioned, we had some challenges in the first quarter. And as we are working through those and have been working through those. One of the things that we took a look at was what our challenges in the first quarter meant as we looked ahead to the full year. And given some of the revenue impacts that we had in the full year, which really were related to a decrease in a patient -- in our patient census on a particular set of therapies. What we looked at was rebuilding that revenue, rebuilding that census. We expect it is going to take a little longer than we were going to be able to accomplish in a year. And so that was really what drove our revenue guidance to come down $175 million at the midpoint. We don't take that lightly, especially as we're sitting here in the first quarter and doing that, but we felt that right now given the circumstances that reflected where we were, the business. However, having said that, when we took a look at EBITDA, we felt that there were things we could do that could have an impact during the upcoming quarters during the year. And so we left our EBITDA range as it is. It's a pretty broad range, but there's work that we definitely are focused on, on driving reduced cost, driving some opportunities around procurement savings, taking a look at the clinical value that we're driving and working with our partners on making sure that we're recognized for that, financially as well. And then also just cost savings that we also need to take a look at when you have a revenue reduction of that amount we want to make sure that our cost structure is aligned with that. And then also, in part, is related to the management incentives, the variable management incentive compensation as well. So that's what gives us confidence as we look at 2026 to be able to drive some of those plans that we have.

And would you be able to quantify some of these buckets because I guess your Stelara CID headwinds went up, call it, $20 million versus your original guidance with a headwind. So is it fair to say of that $20 million like the cost savings is the most. So is there something you're doing in terms of changing the cost structure in that portfolio because the revenue kind of came down? Can you help us understand like where is it coming from.

Sure. Yes. So what we articulated as part of the first quarter, so we expected an additional $25 million of headwind of gross profit headwind, which generally aligns the EBITDA. And that's really what we're looking to offset. I would say, really, the cost structure and just the other initiatives I mentioned are not specific to that portfolio, and we refer to that as our chronic inflammatory portfolio with a lot of autoimmune diseases, that's a piece of the business. But when we take a step back, a lot of our business goes to supporting patients across multiple therapies. So whether we can drive additional revenue in other parts of the portfolio where within the first quarter, our acute side of our business has been doing really well. Our IG and our neuro side of the business, also very solid results for the quarter. So are there opportunities where we can drive revenue, are there some cost opportunities across the portfolio, not specific to our CID chronic inflammatory portfolio. And that goes -- that's the same with procurement. That's the same with clinical value realization. So it's not specific to any one area, but we're looking across the company.

The only other thing I do want to add is as we're going through that exercise to make certain that we're rightsizing the organization and aligning around some of those. We continue to invest in the business. So as I called out on the areas that we're focusing on, certainly around our our commercial team and some of the coverage. We continue to invest in that team, both in size and strength from that as well as we are focusing around training and tools that will allow them to be better at targeting and selection when you're taking a look at the way that they're spending their time through that process. So these fit together, but I don't want to walk past the fact that we continue to invest in the business. We think there's opportunities to enhance our go-to-market strategy associated with that, and we think that also helps to drive that growth and get back on that reacceleration math.

Yes. And that's a good point, John. The other thing I would add to that is we -- specifically, we've gotten some questions. We are continuing to invest in our commercial resources. That's really what's driving the strength of our growth across some of the areas of our portfolio. So that's not something that we're going to let, let's put off the gas on that. We really started that at the back part of 2025 going into 2026. And that's a key part as we think looking ahead and we think about our growth trajectory and the opportunities as we take a look at the market, that's definitely a focus for us.

And when it comes to that specific headwind you outlined a $55 million Stelara CID headwinds there what gives you confidence that you kind of -- you have a handle on things, right? Because clearly, that Q1 experience deteriorated dramatically, right? So initially, I think you gave this guidance in late January, maybe, or February, right? And then I still call it like 2 months later, right, things change dramatically. So where you sit right now? Like is there still some variability in the outcome for the year when it comes to the $55 million? Or kind of -- you kind of set on that number?

I'll start, and then certainly, Meenal can add around the way that we've looked at it. As you would expect with this patient population, really in the first quarter, we get a view around their coming on service or staying on service with us through that process. Most of these therapies are every 4-, 8-, 12-week type of regimen. And a lot of patients try to schedule in December. So that they can kind of get through the January timeframe without having to get an infusion through that process. So as we exited the first quarter, the -- I'd say the vast majority of our census has gone through the process of benefit verification and revalidation through that process. And so we feel confident around the exit as we exited the third quarter. It was a little bit elongated given the quantity of patients that had changes this year around with either they switched payers in some of the reenrollments that we saw in Medicare and other aspects as well as they had benefit design and/or formulary change within that process. But we feel as if we had gotten through, and that is when we had the clarity around how we saw the census patterning out through that process Joanna. So again, we reverify before every dispense. As you would expect, patients switch employers, patients switch health plans. So we always go through that process, but we have gone through the vast majority of the patients that are on census were all done through that first quarter that gave us confidence around where we were going to end and then what the carryforward was as we looked at it from that perspective.

Yes. And so I'll add a couple of other comments to what John mentioned. So when we talk about this particular census of patients, we were tracking a census as of January 1. And so when we refer to a drop in the patient census, it's that particular group of patients that we've been serving. But on any given day, we continue to add patients to our census, right? So it's not as if, okay, once -- if that census dropped off in the first quarter, nothing else is growing. That's not the case at all, even with the therapies where we had some shifts going on, on any given day, any given week, we have new patients that are coming under our service that we're continuing to support, et cetera. So as I talk about whether that's growth or whether that's just the ongoing focus of the business, that's part of what we expect to continue to drive going forward for the year. And then really just articulating your question about we talked about a $55 million headwind for the full year from a gross profit perspective relating to this transition of this patient cohort group on Stelara moving to other therapies. We had originally estimated that headwind impact was going to be around $30 million. We had talked about a $25 million to $35 million range, which was largely due to the shift in -- because of the IRA implications that came through the shift in economics, net of patients moving into other therapies under our census. When we fast forwarded to our April earnings call, our first quarter earnings call, what we noted was the fact that there were more patients that left our census than we had estimated as part of that process, even though we had put together a number of different assumptions of patients, which therapies, what was going to happen. The census drop was higher than that and a little bit of a mix issue as well, and that's what really drove the incremental $20 million to make that headwind now $55 million for the year.

And just to clarify, so your guidance does assume there's a little bit of a growth in that census for the CID population? And where is it coming from?

Yes. Again, with the investments that we've made into the commercial team and even through the first quarter of the year, we've continued to go and to work with the prescribing physicians and the practices to identify patients that could benefit to come on to service with Option Care Health. So that continues, and we believe that there's still opportunities to capture those referrals to convert those to starts within the portfolio as we move it ahead. We also, again, have a broad portfolio of products. So as our team is out selling, not only inflammatory disease therapies, they're selling the other therapies along that. We want to be a full-service provider to the practices if they have a patient that requires infused or injectable products, that require a health care professional or could use our specialty pharmacy infrastructure. We're trying to capture all of that as we move forward. So our expectations are we're going to continue to see that growth. It's just the reset that we had in the first quarter of that loss of census, take some of the reoccurring revenue aspect of a chronic patient out of the base, and then we build forward from there.

And on other development, I guess, since you gave this update was that CVS removed Stelara from the formulary. And also, I guess there were a couple of other branded therapies. So any impact to your views of things based on that on that announcement?

Yes. So again, we saw the announcement, as you called out. it really is focused around their commercial population in which we do not have a big exposure to that. I will say that the products that they also called out on Tysabri as well as Soliris those are products, the alternative products we have in our portfolio. So we have the ability to offer those as part of our full spectrum of therapies that we offer into any of our referral sources at any of the payers. So we feel we're well positioned given the breadth of the portfolio, but we don't see a significant impact from that announcement.

And I guess stepping back, it sounds like that experience in can very disruptive, and you kind of said foundation is still strong in your prepared remarks. So should I read this as in your long-term growth algo is still intact in terms of can you still grow high single digit topline and EBITDA, high single digits or maybe double digits over time?

Yes, I guess what I would say is, the foundation of the business remains strong. And we executed extremely well on the vast number of therapies and the clinical competencies that we have as an enterprise. And that has not changed. And we believe in the value that, that creates across the entire ecosystem. We understand the reset that happened and are working aggressively to try to reaccelerate the business through that process. And the other thing is we believe there is a significant amount of new products that are in the pipeline that will be -- we're in active conversations today with pharma to be part of their go-to-market and launch strategy as they're bringing those forward. So I don't think anything has changed within the fundamentals of the business. This certainly was a setback on the expectations that we had and how we thought this was going to pattern out we had worked very closely with the branded manufacturers around how they thought some of the transition was going to happen. We looked at this across multiple dimensions of how this was going to play out. And it just didn't pattern the way that we had expected. But at the core of this business, at the core of the clinical competencies, at the core of the capability set and the breadth of the portfolio that we have now that no product is more than 4% of our gross profit across the entire portfolio, we believe we are in a position of strength to begin to grow forward from here.

And we talk about -- a lot about CID and Stelara, but there are a couple of other products there of interest, ENTYVIO Ocrevus, the way -- they have subcutaneous formulations now or maybe coming. So kind of walk us through the thought process around that switch in some of these categories where you have the subcutaneous formulation as an option to for that product. So kind of what's your -- or what option curve can do when that is still happening.

Yes. So as an enterprise, we offer a full spectrum as a pharmacy. So we do both the home infusion compounded dispense, distributed products where we're actually compounding in clean room. We have the health care professionally overseen infusions and injectables. And we also have a specialty pharmacy capability that allows us to continue to support those patients as they move to subcutaneous, whether it requires a health care professional or it doesn't through that process. So again, we see the opportunities that exist there as we move forward. We don't think that subcutaneous changes the overall view and the way that we look at the strength of the business. The vast majority of the patients we have on service today require a health care professional to oversee and infuse an injectable or a health care professional overseeing drug within that process, and we're well positioned to continue to deliver value as things transition. And we don't see overnight a transition from an IV administration to a subcutaneous administration. We've called out before and people have asked questions around things like IG, which has had a subcutaneous indication for years. It has a valuable place within the marketplace, but it is not something that has changed over the entire IG infrastructure from that. So we'll work closely with the prescribers, we'll be part of the solution set. We have specialty pharmacy capabilities. We'll continue to try to follow patients on a longitudinal basis where value is created from that. But we don't see that as being something that changes the foundation of what we offer and the value that we can bring into the marketplace.

So to clarify. So your point is that with subcutaneous formulations, as long as there's a health care professional requirement, you still participate. And should we say that this is sort of comparable revenue and margin versus, say, an IV or things kind of change when there's another, I guess, option that's available there.

And I would say we continue -- we can also support and we do support just subcutaneous that doesn't have a health care professional on that. As you would expect, and we've explained this, they are very responsive the way that we get reimbursed. So there's really 3 legs of our reimbursement stool. One is a spread on the drug that we receive. The second is on a clinical per diem in which we get to really cover the dispense in all of those aspects. And the third is a nursing where we're overseeing the nursing event. If it is a self-administered drug, we're not getting the nursing, as you would expect. There's no nursing that is involved in that. But depending on the way that it's structured, either we're getting the spread on the drug and/or the per diem is being part of the way that dispense happens, depending on where that moves. So the economics do look different on those different forms, but the cost structure also looks different on those as well. If we're not having to deploy a nurse as being part of that solution.

And I guess it's somewhat related to this, but you also mentioned when it comes to Stelara and CID and how the PBM-owned pharmacies and how those formulary is changing and kind of these guys, so to speak, took over some of that product. So is there a risk there could be something similar, say, for these other product categories where you would say that you would expect a white label type competition to come in and kind of creating the same pressure you're seeing in Stelara in the future?

Yes. I mean it's hard to deal in hypotheticals. Part of the interesting thing, first and foremost, Stelara was unique. It just had different characteristics than other products that we've had in our portfolio or have in our portfolio today. The second thing is you had 2 things kind of working at the same time an IRA force that was driving down the price of the drug as well as an introduction of a significant number of biosimilars all at the same time. As we look forward at the portfolio that we have today, there certainly are some products that enter into the IRA conversation moving forward, but they don't have biosimilars and they're under patent protection at least until that expiry happens. When you look at where biosimilars are being introduced, the starting point from the profit pool that we have, given that they're branded pharmaceuticals that don't have the same dynamics as Stelara, it just doesn't possess the same aspect. In a normal form, when a biosimilar enters into the marketplace, and there's 1, 2, 3 biosimilars that are entering in as that moves forward, that actually is normally sets up as being a positive for us in the sense of it allows us to negotiate with the innovator that has the branded pharmaceutical as they're trying to maintain their market presence. It allows us to negotiate with the biosimilar manufacturer because they're looking for an entry point and we have a sense as to patients that they want to have access to. And so it allows us to probably do that a little bit differently than what set up as part of the uniqueness of the Stelara situation. So again, just looking forward, at least over the midterm horizon, we don't see any setup that is the same as what we saw with Stelara.

And I want to go back to your slide because it was also one of the things I want to ask you, and you put it out there in terms of just maybe changing your capital deployment priorities a little bit this year. And also, as I think about you raise your revolver capacity and now you're talking about maybe pivoting more into share repurchase type capital deployment versus maybe acquisitions. So kind of how do you balance those 2? Should we expect you guys being very aggressive on that front and kind of your leverage going up from the current levels?

Sure. So let me answer it in 2 parts. One, talking about capital allocation and then with the revolver, virtually more around capital structure. From a capital allocation perspective, we've been talking about the past several quarters regarding the prioritization being investing in the business, just like you heard John talk about the fact that we're investing, whether it's on commercial resources, investing in technology to make the business more efficient. The second had been around M&A, much more around tuck-in and adjacencies that we felt were accretive and would add to our existing portfolio. And the third really being around periodic share buyback. What we've always said about share buyback was at times when we felt that our -- maybe our acquisition funnel was a little lighter. We were -- we continue to generate strong cash or where we see our share price being a bit more dislocated. Those are times when you would typically see us in the market. So given what we're seeing right now with the market, with our share price in the market. And frankly, also really trying to respond to shareholders when we talk about return on capital to shareholders. We don't have a dividend program. So really, the share buyback program is one of the ways that we can return capital to shareholders. So we've said in the near term, we're prioritizing that, we're prioritizing internal investments and periodic share buyback. As it relates to the revolver, we doubled the size of the revolver in late March from $400 million to $850 million. That was really -- the basis of that started with capital structure. For a company of our size, we've grown pretty rapidly over the past several years, double-digit growth every single year. And so a revolver really is for a couple of functions. One is it's a safety net. I mean, for those who lived through COVID that was the time that comes back to me when you want to make sure you have a revolver just in case? And then secondly, when you want to be able to access capital quickly for whether that's internal investments and/or working capital, it might be for a tuck-in M&A. And it may also be for the share buyback that we've talked about. So having the revolver size aligned with the size of the company made sense, and that was really the impetus of moving forward with that.

And can you remind us how much you have on share retail authorization.

It is $675 million, right now, as of the end of the first quarter.

And I guess, last question, Option Care up as the company, and you guys could highlight some of the investments around AI to kind of very quickly high level where you are on this investment and also of the deployment is there more kind of room to utilize that technology.

Yes. I'll take it and try to be quick. Yes, we continue to invest in it. I mean we think there is opportunities to continue to innovate around the back office, a lot of that being around the efficiency from a patient registration through revenue cycle management. Team is working aggressively on that too, to look for ways to take waste and cost out of the process, look for repetitive process automation and using analytics and advanced intelligence to really drive that forward. We're not in a point where we're putting it in the pathway of clinicians. We think that it has to mature a little bit longer before we do that. But we think there is significant opportunities to take cost and waste out of the process. The last thing I'll say, and I know we're out of time is, look, we've demonstrated we're an execution-driven organization. And we understand and the focus right now is on reaccelerating the business and really gaining momentum from this reset. That's going to happen through coverage. It's going to happen through conversion. It's going to happen through convenience in the way that we drive that forward. But we believe that translates into sustainable growth and long-term value creation for our shareholders. So our focus is there. Our commitment is there, and we're driving the business to make certain that we get back that momentum, and we really build on the strength of this enterprise.

Thank you so much.

Thank you, everyone.