Option Care Health (OPCH) Earnings Call Transcript & Summary

Our next presentation, and thank you, Nicole, for coming to join this conference. Next presentation, we have the team from Option Care Health, Nicole Maggio, Senior Vice President and Corporate Controller, will be joining. And I figured, Nicole, thought we'd just start out with coming out of '24, there's a tremendous amount of disruption into the business, the hurricanes and so forth and create some conflict certainly in the Southeast and so forth. So maybe we'd start there and you've carried it forward into what very strong numbers recently. Maybe you could walk us through kind of your thinking. And if you want to just do that as kind of part of your slide presentation, it would be great.

Sure. And obviously, 2024 did have quite a bit of disruption between Change Health and the supply chain shortages, but have made some really good progress this year and really excited about where the team landed. I know given this is a Leveraged Finance sponsored and a generalist conference, I will go back a little bit more just to give a very high-level overview of Option Care Health, starting with our disclaimer. Everybody can read that. Option Care Health is the leading home and alternate site infusion provider in the United States. We operate in over 90 full-service pharmacies and have coverage across 96% of the population. Our mission is to serve health care, and we infuse patients both in the home and one of our over 700 alternate site suites. We've got a full network of therapies across acute and chronic. And what we do from an infusion perspective is we compound the drug, deliver that drug to the patient either in their home or one of their alternate site -- one of our alternate site suites and marry it up with the nurse to provide that patient their life-saving therapy. We've got a very strong financial track record as well as cash flow generation profile, strong cash flow and a very attractive capital structure. And as we alluded through, Q3 was a great quarter with 12% top line growth and adjusted EBITDA growth of 3.4% as well as adjusted diluted EPS growth of 9.8%. Also raised our guidance. One thing that I'll highlight is that the team has performed extremely well this year. From the beginning of the year, we've raised our adjusted EBITDA guidance $15 million as well as increase our adjusted EPS projection to be an additional $0.06. So again, very good progress and even better than we expected at the beginning of the year. Additionally, we still expect to generate over $320 million of cash flow from operations and have a very strong record of producing cash flow and being able to actually collect on the revenue that we generate. One other item I'll highlight is also in the third quarter, we did refinance our first lien debt. So we decreased our interest spread and extended the principal out to 2032 as well as added about $50 million to our capital profile, still at 1.9x levered. So very impressed with where we've come from. Again, just a little bit of additional history. So we became public back in 2019 through a reverse merger with BioScrip. At that time, we were 6.2x levered on an extremely pro forma adjusted basis. And so again, the progress that we've made in this area is nothing that we take lightly. Just a little bit more on the overall home infusion landscape. So we do operate in a very fragmented market. We believe we represent about 25% to 30% of the market in the home infusion space, which is part of the broader infusion space, which we believe is about $100 billion. Again, that numbers are a little bit grave because it's not exact data that you can pull out of anywhere because it does involve HOPDs, in-hospital infusions as well as other alternative provider sites. But again, represents a very attractive opportunity and still significant opportunities for growth. Additionally, our portfolio, just a little bit of additional color. We do operate in both the acute and chronic therapy portfolios and have low direct government exposure, about 12%, which is comprised of direct fee-for-service Medicaid -- fee-for-service Medicare, Medicaid and some VA programs. Diving a little bit more into the acute chronic therapy mix. Our acute therapies are really about 25% of our portfolio, and these represent really a hustle part of the business. And so think of this as your patients coming out of the hospital after acute event, IV antibiotics, parental nutrition, more mature therapies, lower and mostly generic, lower growth just given their maturity, low single digits, although we've typically performed slightly above that. Our chronic therapies represent about 75% of our portfolio, and that's the faster-growing piece of the organization with new market drugs as well as a number of other biosimilars, which are still in that more chronic therapy. So think of these as referrals coming out of physicians' offices with chronic patients that are going to be diagnosed and need infusions for a number of years, if not for the rest of their lives. Again, much faster-growing category, higher dollars on the revenue line, but again, still a very attractive part of our portfolio. Just another quick highlight on how that translates into gross profit. So again, higher dollar chronic drugs are 50% of our portfolio. But if you take a look at where it drops through to the gross profit, it's only about 25% of the gross profit margin. So a lot of the questions we get around the patent cliffs and drugs moving to biosimilar. But again, the risk profile of our business and where that profit is coming from is much more skewed towards generic and biosimilar already. Again, just highlighting the financial track record. Again, the one I want to point it out here is that cash flow from operations with the 26% CAGR. Again, as I had just mentioned, our ability to generate cash to continue to collect on the revenue that we generate is one of the hallmarks of our team. Quick bullet on capital deployment, $1.2 billion deployed since 2021. And again, with a nice balance between strategic tuck-in M&A, internal investment as well as share repurchase. Again, we have the priorities listed down there at the bottom in a slightly different order than they appear on the chart over there. But honestly, that's really just given some of the M&A marketplace and some of the multiples that are out there. We're very thoughtful about the dollars that we deploy. It's our investors' money, not ours. And so I want to be thoughtful in the way that we deploy it. And to the extent there isn't strategic M&A out there, we have the other option to return through capital deployment. So I just wanted to give that brief update, and we can dive back in now to your Q4 question. So obviously, we did have a unique opportunity that began in Q4 of last year with Quorum exiting the acute space really across the country. We were able to execute on that. I do want to highlight, we weren't the only competitor in any market. So it truly is a testament to the team on being able to capture that share. We will start to lap it in Q4 of this year. We were facing at the end of last year, the North Cove bag shortage and a number of different things. But we did see a little bit of a pop in acute there. We'll fully lap it in Q1 of this year. Again, Baxter did a great job of getting back online and getting the supply back out there. So expect to fully lap that. But given the relationships that we've built, we do expect to continue to grow at a slightly above market rate, so call it, mid-single digits, but mid-teens are not the new expectation for acute.

It's not. Okay. So you see that's kind of a near-term bump, if you will, on the acute side and therapy side, yes.

Yes, a near-term bump on the acute, but we've been through this in the past mid-2022, a number of our other competitors exited. And we did see a return to a more normalized growth rate, but at a higher altitude. So we are able to keep that share and grow off of the new base.

Okay. How do you see -- like from a competitive landscape perspective, I mean, how -- maybe just ask, what is truly your competitive landscape? I mean, is it other large consolidators? Or is it more of other providers in the space?

It does vary market by market, but we have a variety of competitors in the space, both in acute and in chronic. We believe we're about 25% to 30% of the market. And again, possibly a little bit higher in acute and it varies market by market. But we continue to see that evolve as competitors exit the acute space, and they're still in the chronic space in many instances. We compete with captive assets. We compete with private equity-owned infusion. We compete with hospital owned infusion, and we compete with the alternative clinic model, which is run by advanced practitioners. So a variety of competition in there, but we feel like we're very well positioned in all of the markets to be able to take -- continue to take share as well as to make share.

Does scale factor into that? Does it enable in given markets, does your scale? Is it -- can you leverage that scale?

It certainly does. I would say really the fact that we're in network with all top 10 payers really gives us that -- the confidence in the discharge planners or in the physicians to know that, yes, Option Care is likely going to be in network. They're going to be able to serve that patient, and it gives us access to all of those patients. From a payer perspective, it does provide that advantage as they're looking to give choice to their members and they have a provider that has the breadth of services across both acute and chronic as well as our limited distribution drugs and that ability to reach all of their members does provide us with an advantage there. Again, not everybody is in the acute space. And if we're in network for acute, we're in network for the whole portfolio of therapies. Only thing I'd add to that is from a from a manufacturer perspective, as they're looking to commercialize drugs and looking for partners for their limited distribution network, knowing that we have a national reach able to reach over 96% of the population and to be able to reach all the patients into their therapies, does provide us with another advantage. We've got over 50 limited distribution drugs in our portfolio today.

Are you out of network any of the major payers?

There are certain carve-outs of individual therapies, but we are in network with all of them and in network with just about all of the therapies.

Okay. And can you speak to your payer relationships broadly.

Our payer relationships remain extremely strong. And honestly, some of the noise in the acute space have provided us with an additional benefit to be able to offer them. If you think about where the cost of the MLRs are being driven up, a hospital bed day is extremely expensive and moving to a home or alternate site can provide up to 50% depending on therapy savings for them. And so they do recognize that we are part of the solution to reducing the total cost of care.

So they're looking to you to help them manage their discharge process in some way.

We are, and we've been working very closely and have seen an uptick in some of the site of care initiatives. If you recall, back pre-COVID, there was a big focus on that and kind of dissipated when MLRs went down, have seen a renewed interest in that as they are looking to manage their costs. And we're a great partner for that, both on the acute and the chronic therapy. Again, they do -- some of them do have captive resources. So obviously, United has Optum, and they are our largest payer. They've been 14%, 15% of our revenue since I've started here almost 10 years ago, and we've been growing in double digits. So they continue to grow with us, and we continue to have a really great relationship with the health plan side of the house.

They do. Okay. Even though they [indiscernible]. It's really interesting for us, I guess, 5 or 6 years since BioScrip and you came together and so forth. Your leverage profile obviously is materially different inside 2x. What are their opportunities core? I guess -- maybe I'm asking core competency and kind of noncore competency. I know it's obviously been a transaction in the past that you referenced, but I mean what is your thinking around -- what is your thinking around that metric today in terms of M&A, given your leverage profile, significant cash generation, I mean what is your thought around the environment where opportunities could arise?

Sure. And we continue to see a very active M&A market. A lot comes across our desk. But as I mentioned, we're extremely disciplined in our capital deployment strategy. So not everything makes it past the first desk on to the rest of the company, but continue to see some very attractive assets out there. Primarily, we're looking at tuck-ins and adjacencies. So whether it be a home infusion provider in a space where we're in the market, but we could use a deeper presence, whether they have a strategic relationship, new clinical competencies or ancillary services. Again, our nursing network that we've built out in Naven has provided a significant ability to allow us to grow by being able to accept patients and not say no due to lack of nursing. So we're really still looking at areas like that in very close adjacencies, not looking for transformative deals at this point.

And since you make an acquisition, a tuck-in acquisition in the market, is it -- how does that fit? Does that you have -- presume you have the payer relationships in that market. You're basically acquiring the patient base? How does the formula work with the tuck-in?

It depends on the tuck-in. So at times, if there's a carve-out, we can acquire a patient base. There are certain relationships. I'll point to our acquisition of Rochester a number of years ago where that particular company has a strategic relationship. In that instance, they had a pharmacy right on the Mayo campus. And as you can imagine, most patients that go to Mayo aren't necessarily from Rochester, Minnesota. And so to provide that additional catchment area to be able to take patients out of the hospital and to bring them back to wherever their home might be really provided a strategic view for us. So it depends on the market, but there -- while we are the largest player, we are not the largest provider in every single market.

Right. So the opportunity to gain share in a given market, on tuck-in. To what you're saying outside of -- you're in no way -- I shouldn't say no way, but right [indiscernible] see yourself potentially pursuing anything outside of your core competency.

Core competencies and adjacencies. So again, the Intramed Plus infusion from earlier this year is a good example of that. And while they were a home infusion provider, they also had a very unique hybrid model that also involved alternative infusion clinics in that advanced practitioner model. We've made some really good progress with them and have had some great learnings and continue to advance our own organic growth of our infusion clinic portfolio, up to 24 sites by the end of Q3.

Up to 24. Okay. I know it's -- you've been talking about [indiscernible] on Stelara.

I don't know if he's asked...

Exactly. Would you mind just kind of rolling out what the -- what you've seen through '25 relative to expectations and kind of your thinking, I guess, you can't get into '26 guidance, but certainly, your kind of puts and takes around your experience year-to-date and relative to expectations, what you may see going forward?

Sure. And at the beginning of '25, when we gave our guidance, we outlined a $60 million to $70 million headwind. At that time, we only knew our Stelara patient base, and we knew the change to the discount that we'd be receiving from Janssen. As the year has progressed, we knew that biosimilars would be coming out, but we didn't know how quickly they would come out or what their pricing strategy would be. As we ended Q3, we do believe we are still in that $60 million to $70 million range, albeit at the higher end. But -- the breakout of that is both now comprised of the patients which are still on Stelara, which are being impacted by that discount as well as patients which have moved to biosimilars. So we called out a 380 basis point headwind to the chronic revenue in Q3, but the gross profit dollars are still within that range. Reason being is with the unique dynamics of Stelara and knowing where the pricing will be come 1/1/26, most of the biosimilar entrants have come in lower to the 2026 price to try to gain market share and to be competitive in the current environment, whereas in other biosimilar events, they would typically come in much higher to that branded price. So it created a revenue headwind, but from an overall gross profit impact, we do believe it's still within that range, albeit towards the higher end.

Right. Okay. But at the higher end, you said the higher end of the $60 million.

The $60 million to $70 million, but...

But is there incremental impact in '26?

We are not ready to talk about 2026, but what that will depend on are a number of things. We do expect a revenue headwind for patients that are still on Stelara, just given the IRA impact and the way that will flow through the financials. For patients that are already on the biosimilar at this point and remain on the biosimilar, you won't see that step change in the revenue. And again, for a gross profit impact, right now, we're still in negotiations with Janssen for both Tremfya and for Stelara, negotiations with AbbVie on Skyrizi and negotiations with the biosimilar manufacturers. So a lot of those factors do play into our calculus for 2026. And again, where those patients end up and if they're still on Stelara is one of the pieces that impact the negotiation with Janssen. If you can imagine if we've got -- and these are fake numbers, we've got 10,000 patients on Stelara versus 10, it does make a difference in how much that negotiation impacts both of us.

Right. But those -- the other products that you referenced, you said you've not given any type of indication of potential impact.

No, we have not. But again, we do have relationships in our negotiations as well as in our budgeting process right now and looking where -- as we look every year, where to allocate resources to.

But was there anything unique to the Stelara's model and the Stelara's profitability that translate into a greater impact with that particular product or [indiscernible] anything to that product?

So just to kind of relevel set on Stelara. So when Stelara moved on to the SAD list, the self-administered drug list back in 2021, '22, most of those patient volumes went to a self-administered drug administering for themselves at home. Janssen had identified a small group of patients which could not self-inject, whether it be due to dexterity compromise, immunity compromised or other issues that they were not able to self-inject. They needed a partner to be able to continue to service these patients. And these patients all have a letter of medical necessity. And in return for that program that we developed with them, knowing that we would get kind of self-administered reimbursement, they did reward us with a larger discount. At the time, we had a very small patient population on Stelara. And truly, the level that we were able to grow it to was based on our team's ability to execute on this opportunity and to identify those patients. Again, when you're looking at the kind of Stelara volumes, most of that truly is self-administered, but we found a way to continue to participate to keep these patients on Stelara. So we did enjoy a much healthier discount than we typically would on a branded drug, which, again, when a branded drug comes out and there's no competition, there isn't necessarily that need to negotiate or provide an additional incentive because they are the only player out there.

Right. Okay. And longer term, maybe I'm asking for your business model, but I know -- perhaps this question. What's your vision towards really kind of your mix of home infusion versus infusion suites? Like where do you kind of see that longer term?

We don't necessarily have a target for infusion suites. I will say there will always be a need for patients to be serviced in the home. That is at the heart of what we do, patients that are coming out of the hospital, patients that have other issues where they shouldn't be leaving the home. That will always be a core part of our business. We have seen great progress in the infusion suite utilization. Again, back in 2021, we really started taking a look at where our suites were and started moving them from where it was convenient to us, meaning in our pharmacies, industrial part to where it was convenient to the patient in more metropolitan areas or where patients were doing their activities of everyday living. We've seen that move up from about 16% in 2021 to 34% in 2024...

That 34% being...

34% of our nursing visits occurred in one of our suites or clinics. And I expect to continue to see that ratchet up. Again, we do often see chronic patients who prefer being in one of our suites. They're out anyway doing their daily living. They just have to go once a month for a 4-hour infusion and to put that square convenience to them allows them to schedule it when works for them, not have to wait it to home for the nurse and also leaves their disease state out of the home. But again, expect continued progress. We don't have a target for X percentage.

Yes. Okay. There's no specific target. Okay. Do we have questions in the audience? All right. I want to get back to just the whole leverage message. I look at the model and kind of see 1.9x leverage. You said your reference point about its really tuck-in acquisitions that [indiscernible]. How do you -- are there other capital deployment? I mean, you generate a wealth of cash. Your leverage profile is obviously very, very well disciplined. What do you think about longer term in terms of where driving value off of that leverage metric? It's -- that's not an easy question. There's a lot of moving parts there, but I'm just kind of curious how you think about driving value off that leverage metric.

Sure. And we continue to be a capital-light organization. We've put a lot of investment into our pharmacy footprint and into our infrastructure, but continue to look for opportunities to do that, either to advance our clinical capabilities, continue to look to build out our advanced practitioner model or to look for ways to just generate organic growth within the business. So we always will look for those internal opportunities. Beyond that, again, M&A, it's a little bit choppy. But with the number of assets that are out there that are very attractive and fit well within our portfolio of capabilities, continue we'll look for those. And at the absence of that, we do have our share repurchase authorization. So again, we'll continue to look for ways to bring -- deploy capital to shareholders. And we don't see a need to go much lower than 1.9x. And for the right acquisition, we'd be willing to go up to 3x levered. But again, doing so, we want to make sure that we had a plan to strategically delever relatively quickly. Again, from where we came from, we don't take for granted the capital structure that we have today, and we'll continue to try to maintain that and our cash flow generation speaks for itself.

What is the capital -- the advanced practitioner model, what is the capital deployment that's necessary for that model? Is it material?

So what's great about the advanced practitioner model is that we're able to use the infusion suite model that we've already built out. So we have over 700 chairs. And in order to convert one of those to an advanced practitioner to a clinic, there's a couple of like capital improvements need. You need to lock door to keep the drugs in. You need to find the advanced practitioner, go through the credentialing and the licensing. But we really are able to leverage that model that we -- the footprint that we already have. And none of these suites are at capacity yet. So we believe that we can leverage them to be able to do both to execute both an infusion suite and an advanced practitioner model within the same suite. So plenty of opportunity to leverage what we've already put in place and think it's a really nice complement to the services that we already offer. So I guess just a little bit more on the difference between the 2. So for the traditional infusion suite model, so we get paid under the home infusion benefit, which means that we are paid for a spread on the drug, the time a nurse is with the patient as well as a clinical per diem, which is covering our pharmacy infrastructure, delivery costs, pump costs and all of the other things that go into the clinical monitoring of the patient. Under the advanced practitioner model, we actually bill off of the physician's fee schedule, albeit at a discount to the physician's fee schedule. So still a lower cost site of care as well as with a spread to the drug. What that does for us is it allows us to open ourselves up to more acute therapies because we have that more advanced -- that advanced practitioner who can treat -- think neurology, think oncology, think patients with higher needs as well as it does open up Medicare fee-for-service for patients that could be seen in that space because with only 12% government exposure, Medicare is only a slice of that. So it does provide additional access to those patients as well.

And what's most challenging -- is it sourcing the advanced practitioner and the licensing -- in terms of building out that model on this site?

We're very thoughtful about where we're building out that model, making sure that we understand state level corporate practice of medicine to be able to execute them properly. Yes, we do need to find the advanced practitioner and do the credentialing, but we are being very thoughtful about where we put them. We have -- typically, we will add a number in the same area rather than trying to have one in each of the 50 states just to be able to build out that presence in those specific markets.

Okay. Thank you, Nicole. Unless there's any other questions in the audience, we'll go ahead and wrap up. Thank you, everyone. Thank you, Nicole.

All right. Thank you.