Option Care Health, Inc. (NASDAQ:OPCH) Q3 2023 Earnings Call Transcript

Option Care Health, Inc. (NASDAQ:OPCH) Q3 2023 Earnings Call Transcript October 25, 2023

Option Care Health, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $0.29.

Operator: Good day, and thank you for standing by. Welcome to the Option Care Health Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Shapiro. Please go ahead.

Mike Shapiro: Good morning. Please note that today’s discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today’s press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company’s performance and financial condition.

You can find additional information on these non-GAAP measures in this morning’s press release posted on the Investor Relations portion of our website. With that, I’ll turn the call over to John Rademacher, our Chief Executive Officer.

John Rademacher: Thanks, Mike, and good morning, everyone. Overall, the third quarter was a strong performance, and our team of over 7,500 dedicated members at Option Care Health, continue to set the pace in home and alternate site infusion market, and I’m personally quite pleased with our ability to remain focused on our key objectives and expand the census of patients that we serve. Patient care is at the center of everything that we do. And our purpose is to provide extraordinary care that changes lives for the better, and the team continues to fulfill that on a daily basis. Given that there is a loved one on the receiving end of every dose that we dispense and infusion we oversee, I believe our team is relentless in driving for the highest quality and best patient experience.

In the third quarter, our patient satisfaction score exceeded 92%, and we achieved a Net Promoter Score of over 75. So while we continue to deliver solid results for our shareholders, we also continue to deliver unsurpassed service to our referral partners and care for our patients. In the quarter, our team continued to collaborate with our key stakeholders across the spectrum of bio-pharma, payers, health systems and physicians to support our patients and to deliver care in their homes or one of our convenient infusion centers. This resulted in balanced performance across the broad portfolio including acute therapies for patients transitioning from a hospital setting to patients receiving care for an ongoing chronic condition. There’s a lot to have impact in the financial performance but overall, the results were strong and in line with our expectations.

We generated approximately $110 million in adjusted EBITDA and revenue of $1,093 million, resulting in another quarter of double-digit adjusted earnings growth and an adjusted EBITDA margin of 10%. The capital structure has never been stronger and we continue to generate solid cash flows and improve the leverage profile of the enterprise. In my opinion, the focus of our revenue cycle management team has been outstanding, and our ability to drive the velocity of cash collections has never been better. On our second quarter call, you will recall that we committed to repurchasing $100 million in stock in the near term. Roughly equal to the $106 million gross breakup fee before taxes and fees related to the Amedisys transaction. I’m pleased to share that we completed that repurchase effort in the third quarter.

Year-to-date, we have repurchased $175 million in stock while continuing to drive our leverage profile well below 2 time. I want to shift gears before handing the call over to Mike, to share a few thoughts on our M&A strategy, given some of the developments from earlier this year. As we have consistently articulated, we view this deployment of capital in support of M&A as a cornerstone of our strategy to create value for our shareholders. The base business continues to perform very well and has a strong foundation with favorable capital structure. Given this, we continue to be well positioned to evaluate opportunities for strategic capital deployment intended to deepen our market presence or increase our capabilities to serve patients in the home or alternate site setting.

As mentioned on the second quarter call, we have thoughtfully considered feedback from our shareholders as we continue to seek to identify value-creating opportunities and focus our M&A efforts. From my vantage point, we see an array of opportunities to strengthen our offering and given our strong foundation, we will continue to be disciplined and thoughtful in evaluating potential targets. Our primary focus continues to be on executing on our core home infusion business, and maximizing the value of our platform as we evaluate capital deployment strategy. While we are not in a position to lay out details or specifics, as I mentioned, we would anticipate near-term M&A efforts to focus on assets closer to our core business and would anticipate deploying capital opportunistically from our cash balances and leverage capacity.

As Mike and I have consistently conveyed, we are comfortable operating at a net leverage profile up to the 3 to 4 times range. Having said that, we will be quite disciplined in evaluating both economically and strategically the attractiveness of each opportunity. This is a facet of our strategy that we take very seriously and I’m confident that given our market position and capital structure, we are well positioned to continue our M&A efforts to increase value for our shareholders by delivering value to our key stakeholders. And I will finish where I started, which is to reiterate the strong performance of our business and express the confidence I have in our team to continue providing unparalleled patient care in the home and alternate site setting.

With that, Mike will provide additional color on the results. Mike?

Mike Shapiro: Thanks, John. Overall, the results from the third quarter were quite strong and continue our track record of double-digit adjusted EBITDA growth with solid cash flow generation, and we expect to deliver another strong year for our shareholders. Revenue of $1,093 million was up 7% over the prior year, and as John mentioned, was balanced across the portfolio. We’ve seen growth in our acute therapy portfolio stabilized to lower single digits as we’ve anniversaried the competitive gains from a year ago, but volumes continue to be solid as we partner with health systems to transition patients from the acute care study. Chronic revenue continues to be strong across the portfolio and recall that we exited two chronic therapies earlier this year that collectively represented a headwind of roughly 100 basis points on a consolidated basis in the quarter.

Gross margins continue to be strong with Q3 gross margin of 23.3%, as gross profit dollar growth outpaced the top line. Our ability to offset the mix shift towards chronic and expand margins was driven by our relentless focus on operational efficiency as well as some procurement tailwinds. As I mentioned on the second quarter call, our procurement environment is quite dynamic, and we see puts and takes every year. We believe our procurement team is the best in our industry and is constantly collaborating with bio-pharma as the majority of our procurement efforts are direct with manufacturers. Earlier this year, we were able to drive favorable margin dynamics for a number of codes that resulted in an approximate $8 million to $10 million benefit to the gross margin line in Q2.

In the third quarter, that benefit was approximately $12 million to $14 million, which benefited margins considerably. Again, this is not an exact figure as there are many volume payer and therapy dynamics at play. We see a similar benefit in the fourth quarter, and that’s incorporated into the revised guidance that we shared this morning. And while we are not in a position to provide any preliminary thoughts on 2024 this morning, we expect with a high degree of conviction that the favorable procurement dynamics that I’m referring to will subside in early 2024. Adjusted EBITDA of $110 million represented 10% of revenue and grew 28% over the prior year. Even excluding the approximate $12 million to $14 million procurement benefit, we still delivered mid-teens adjusted EBITDA growth in the quarter.

As John mentioned, we completed the $100 million share repurchase effort in the quarter. You’ll recall, we announced our first ever authorization in the first quarter this year for $250 million and have deployed $175 million to date. We exited the quarter with $386 million of cash on the balance sheet even after the share repurchase efforts and settling all fees and taxes related to the Amedisys transaction, and we finished the quarter at a net leverage profile of 1.7 time. So very pleased with the progress and financial profile exiting the third quarter. Finally, as you saw in our press release, we’ve updated our guidance this morning. And for the full year, we now expect to generate revenue of $4.23 billion to $4.28 billion, adjusted EBITDA of $420 million to $425 million and cash flow from operations of at least $350 million.

So shaping up to be another very productive year for the Option Care Health team. And with that, we’re happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from David MacDonald with Truist. Your line is open.

David MacDonald: Yes. Good morning, guys. Guys, just a couple of questions on the ambulatory infusion suites. I was wondering if you could give us that number in terms of percentage of nursing visits in the quarter. And secondly, just are you continuing to see meaningfully higher uptake amongst newer patients relative to kind of the installed base, so we should continue to see that figure drift higher over time?

Mike Shapiro : Good morning, Dave, it’s Mike. Yes, good progress in the quarter. In the quarter, we opened an additional five new infusion suites. So right now, we’re at about 160 infusion suites across the country, right around 650 chairs. So good progress. The team continues to identify those strategic expansion areas. We’re still around that 28%, 29% of total visits, although given the top line growth, we actually have seen really solid growth in the number of visits in the infusion suite, even though as a percent of our total nursing, it’s relatively consistent with the second quarter. And so as you mentioned, one of the leading indicators is how well are we penetrating those new patient on-boards. And I’d say we’re highly encouraged by the traction. And again, this is part of the snowball rolling down the hill because part of it is making sure we have those infusion suites strategically located near the patient densities of those chronic cohorts.

David MacDonald: And then, Mike, is 25 to 30 kind of the right number to think about on an annual basis? And as that footprint continues to expand, any more meaningful conversations with either payers about more aggressively pushing site of service redirection or even things like hospital JVs where you could drop a few of these around big hospital system? Just anything to update there?

John Rademacher : David, it’s John. Yes, I think that the 25 to 30 is probably the right range. We will always continue to push that forward. And I don’t know that we believe there is a cap at this point. But it takes time. And as we’ve talked about before, the different start-up and then ramp up that happens with that as we’re adding more facilities, it just drags down in the near term, some of those percentages. We are working with payers around site of care initiatives. We certainly continue to have very productive conversations with some of the leading health systems around ways that we can better meet their needs and the needs of their patients, whether it’s through utilizing our existing infrastructure or thinking about how we would better partner with them in order to capitalize on that patient flow.

So encouraged with those conversations and also encouraged just around the thoughtfulness around thinking about site of care and providing high-quality care at an appropriate cost in a setting in which those patients want to receive it.

David MacDonald: Okay. And then just a couple of others, guys. When we think about capital allocation, just given the cash flows of the company and the cash balance, should we also think about buybacks becoming a more consistent part of the capital allocation on a go-forward basis?

Mike Shapiro: Yes. I think, Dave, we’re going to continue to be balanced. I think as we’ve been open, given the strength of the balance sheet and the cash flow, I think that has — we’ve established the right to have a multifaceted capital allocation strategy. I think as John mentioned in his upfront comments, I think, look, we made good progress against the authorization, much in part due to the receipt of the breakup fee that we thought was appropriate to quickly redeploy. I think we’re going to continue to improve the capital structure because, as John said, I think we see a quite attractive landscape on a multiple M&A opportunity front. And I think while we’ll continue to balance both of those strategies, frankly, I think in the near term, I think the priority is going to be more skewed towards M&A deployment.

David MacDonald: Okay. And then, guys, just last question. I know you’re not giving ’24, but just how we think about kind of the bridge I guess a couple of questions. One, Mike, when we think about some of the procurement benefits and it looks like a little bit over $30 million. I would assume that the correct jumping off point is kind of in the upper 390s [ph]. You kind of back that out as you move towards 2024. And then I guess the other couple of questions is on cash flows, the Amed breakup fee? And then on the top line, I think you talked about those products being — you expected roughly a 200 basis point impact for the year. Is that kind of everything to think about in terms of ’23 relative to ’24?

Mike Shapiro: Yes, I’ll start with what you would expect is my legal qualification that we’re not in a position to provide guidance around ’24, a couple of things. Number one, yes, look, with — and these aren’t exact numbers, but our best estimate is in Q2 and Q3 from my remarks, the procurement tailwinds were somewhere in the $20 million to $24 million range. We expect somewhere in that, call it, $10 million to $12 million range for Q4. So yes, I think high level, the way to think about it is, and with a high degree of confidence, those are going away very early in Q1. So think of $30 million of procurement, which we’ve been very transparent, well, it’s mostly transitionary. And so $30 million likely will not continue into next year.

On the cash flow basis, yes, I mean, the — our guidance of more than $350 million includes the $106 million break fee, although we’ve demonstrated our relentless focus on cash flow generation and normalizing for the Amedisys receipt, we would continue to expect high cash flow efficiency. And in the quarter, the 2 exited therapies, Makena and Radicava represented a little over 100 basis points of headwinds. So there was a little bit of that in Q1 and early Q2. So we’ll anniversary. We’ll obviously unpack this to a greater extent in February, Dave, but I think that will be more of a muted impact going into next year with a little bit of first part of the year headwind.

David MacDonald: Okay. Thanks very much, guys.

Operator: One moment for our next question. Our next question comes from Matt Larew with William Blair. Your line is open.

Madeline Mollman: Hi. This is actually Madeline on for Matt. Thinking about the M&A sort of post Amedisys deal, I know you’ve talked about listening to shareholder feedback. Are there any specific criteria or specific, like things that you look at when you’re evaluating deals that have changed in the last couple of quarters compared to how you were thinking about M&A maybe before the Amedisys deal?

John Rademacher: Hey Madeline, it’s John. As I said in my prepared comments, and I think we even talked about in the second quarter earnings call. Our focus, and again, based on some of the feedback that we got from shareholders through the Amedisys process, we’ll be closer to the core home infusion, alternate site and infusion business. I don’t want to box us in too much on that. We’re always going to take a look for opportunities to expand our capability set to ensure that we remain and increase our relevance with our partners in the marketplace across the key stakeholders of biopharma, of our payers, of our prescribers in the marketplace. So all of those components fit in there. We talk a lot about it needing to be both economic and strategic, and so if there’s opportunities for us to increase our market presence, if there’s opportunities for us to increase our capability set to provide a better clinical outcome for the patients that we serve.

If there’s opportunities for us to expand our capabilities to be more convenient for patients to receive care from Option Care Health, all of those kind of fit into that criteria. We’re always looking at it on a cash-on-cash basis. We are focused around creating value for our shareholders through the process. And as Mike said, in the last response, we believe that deployment of capital in a multi-faceted way, but more importantly, through deployment on M&A to expand on our capability set is a really good use of capital and create that value for our shareholders over the mid and long term.