Option Care Health, Inc. (NASDAQ:OPCH) Q4 2023 Earnings Call Transcript

Option Care Health, Inc. (NASDAQ:OPCH) Q4 2023 Earnings Call Transcript February 22, 2024

Option Care Health, Inc. beats earnings expectations. Reported EPS is $0.32, expectations were $0.29. Option Care Health, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Option Care Health Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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, Chief Financial Officer. 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, Chief Executive Officer.

John Rademacher: Thanks, Mike, and good morning, everyone. To say that 2023 was an eventful year for Option Care Health is quite the understatement. It was a dynamic year for the team and we advanced our mission to set the pace in home and alternate site infusion care and treat more patients by providing innovative services designed to improve outcomes, reduce costs, and deliver hope for our patients and their families. In 2023, we treated more than 270,000 distinct patients and expanded our portfolio of life saving therapies through our collaboration with referral sources, payers, and biopharma partners. As always, Mike will dive into the financials in a few minutes, but it could not be more pleased with the effort, dedication, and results generated by my devoted colleagues at Option Care Health.

For the full-year, we delivered revenue of $4.3 billion representing 9.1% growth over the prior year. Adjusted EBITDA of $425 million represents 24% growth over 2022 and significantly exceeded the initial expectations we articulated in early 2023. Since the merger in August of 2019, the Option Care Health team has consistently delivered solid growth and met or exceeded our commitments to our shareholders. Reflecting back on 2023, beyond the solid financial results, I’d like to highlight a number of key accomplishments and milestones. In the second quarter, we launched Naven Health, one of the largest infusion nursing platforms in the industry comprised of more than 1,500 clinical professionals. Naven is critical component in our mission to serve more patients and strategically the platform is vital to our continued success.

We continue to invest in our ambulatory infusion suites, footprint, and in 2023 we expanded our network to 164 suites and over 660 chairs nationwide. Again, this is a key investment strategy designed to enable continued growth, while unlocking clinical labor efficiency. We advanced our use of advanced analytics and repetitive process automation within our pharmacy and revenue cycle management operations to reduce waste and improve cash velocity. We also recently announced our multi-year collaboration with Palantir to deploy their artificial intelligence technology across our operations to drive efficiencies and improve the patient experience. We launched a number of new therapies in 2023 through our collaborations with BioPharma, including VYJUVEK, VYVGART, [indiscernible] and Cabenuva to name a few.

We believe our integrated international network of state-of-the-art pharmacies and expanded number of infusion suites combined with the clinical know-how and our leading technology platform continues to resonate with the biopharma partners and positions us well to continually expand our portfolio. Every member of the Option Care Health team understands that behind every dose is a loved one, and behind the scenes is a comprehensive team of pharmacists, pharmacy technicians, dietitians, infusion nurses, patient support professionals, and supply chain experts. Their focused dedication and collaboration help ensure that we deliver unparalleled care in the comfort and convenience of our patients’ homes or in one of our infusion suites. Making certain we are an employer of choice and a destination for health care professional is also critical to our continued success.

In 2023, we were thrilled to have earned the designations of the Gallup Exceptional Workplace and a Military Friendly Employer. These recognitions affirm our relentless focus on recruiting our team every day and delivering extraordinary care to our patients. As the old saying goes, you can do well by doing good and we believe that our financial results for 2023 demonstrate that we are doing just that. Exiting 2023, our balance sheet has never been stronger and our liquidity position is in great shape. During 2023, both S&P and Moody’s upgraded our credit profile to the highest ratings yet. Our net debt leverage profile is well under 2x and we generated more than $370 million in operating cash flow in 2023 and deployed $250 million towards the share repurchase.

So reflecting on 2023, we continue to deliver strong growth, while investing in this unique platform and our capabilities to enable sustainable growth. As we outlined in our 2024 guidance this morning, we expect to continue this trend of delivering strong financial performance as we grow and serve more patients. I’ve never been prouder of the Option Care Health team and the level of service that we deliver to our patients every single day, and I remain confident in the road ahead. With that, Mike will provide additional color on the results. Mike?

Mike Shapiro: Thanks and good morning, everyone. As John mentioned, we’re quite encouraged by the solid finish to 2023. Fourth quarter revenue of $1.124 billion represented 9.5% growth over Q4 of 2022. Performance was solid across the portfolio and execution in the field was very strong. Full-year revenue of just over $4.3 billion was up 9.1% despite a number of headwinds we’ve talked about throughout the last year including two exited therapies and the impact of the divested respiratory therapy asset. So overall we’re quite pleased with the top line performance. Q4 gross margin of 22% represented dollar growth of 6.9% as we saw some mix shift impact towards the chronic portfolio as well as a smaller procurement benefit in the quarter.

In recent quarters, I’ve spoken about the favorable procurement dynamics that persisted in 2023 and in Q4 we estimate we realized approximately $8 million in benefit related to the dynamic. For the year, we estimate that we realized $33 million to $35 million of these transitory procurement benefits, which we believe will not continue into 2024. SG&A of $147.8 million actually declined versus Q4 of 2022 and spending leverage improved to 13.1% of revenue, which we believe affirms the scalability of the platform. An adjusted EBITDA of $111.6 million in Q4 represented 9.9% of revenue and was up 18.4% over the prior year. Again, Q4 adjusted EBITDA included roughly an $8 million procurement benefit. Beyond the P&L, we generated more than $370 million of cash flow from operations for the year, which again includes approximately $85 million from the Amedisys transaction termination fee net of related expenses.

During the year, we deployed $250 million for share repurchases and still finished the year with approximately $344 million of cash on hand and a net leverage ratio of 1.8x. This is the fifth year end that we have reported as Option Care Health and reflecting back to 2019 when we completed the merger, we socialized the combined enterprise at the time as generating roughly $2.7 billion in revenue and roughly $200 million in pro forma adjusted EBITDA. Four years later, we’ve increased revenue by 50% to $4.3 billion and more than doubled adjusted EBITDA to $425 million. We’ve also driven dramatic improvements in our balance sheet, reduced the leverage profile by more than two-thirds from 6.2x to 1.8x and slashed net interest expense by more than half from $110 million to $51 million.

And while we’re proud of how far we’ve come, we’re equally excited about the road ahead. As disclosed in this morning’s press release, we anticipate delivering another year of solid growth for our shareholders. In 2024, we expect to generate revenue of $4.6 billion to $4.8 billion. We expect to generate adjusted EBITDA of $425 million to $450 million. And we expect to generate cash flow from operations of at least $300 million to provide some additional data points, we expect net interest expense of $55 million to $60 million approximately $45 million in stock comp expense and an effective tax rate of 26% to 28%. So overall, 2023 was a very productive year, and we expect to continue our track record of leveraged growth into 2024. With that, we’re happy to take your questions.

Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Lisa Gill with JPMorgan. Your line is now open.

Lisa Gill: Thanks very much and good morning and congratulations. Just really want to understand a couple of things a little bit better as we think about 2024. And the first would be just the mix. So I think, Mike, you noted in the quarter stronger growth in chronic versus acute, which had an impact on the mix. How do we think about mix going forward would be my first question? And then secondly, as it plays into that, how do we think about the swing factor between the $425 million and $450 million on the EBITDA line for guidance?

Michael Shapiro: Yes. Good morning, Lisa, maybe I’ll give a start here. Look, I mean, as we’ve talked about consistently within our two portfolios of therapies, we see the growth trajectory of the chronic portfolio being in that low double-digit zip code with the acute therapies being — those therapies are really a more mature category, that’s growing in the low-single digits. Having said that, obviously, during 2023 and 2022, there were some pretty interesting market dynamics with some competitive closures, which accelerated some of the reported acute growth. I think as we’re going into 2024, absent any of those large shocks to the comparables or like the exit therapies we talked about, I think we’re back to what we see are the underlying therapy growth dynamics, which is to say, we see that acute category growing in the low-single digits, and at the other end of the barbell, the chronic therapies are growing low-double digits.

Given the fact that the chronic, as we’ve talked about consistently, carries a lower gross margin rate, we would expect going forward that there’s going to be some mix shift towards that lower chronic therapy profitability profile. Having said that, obviously, you know we fight for every basis point. And the way we really focus is on maximizing the dollar growth. And look, the only thing I’d say about $425 million to $450 million, look, there’s a lot of dynamics. Obviously, we have some new emerging therapies that were still ramping up. Given the fact that, on the acute side, the duration of our therapy is from two to six weeks, we haven’t met the majority of the acute patients that we’ll have the privilege of treating this year. And so — and behind the scenes, there’s always a million moving dynamics that we’re trying to manage on the procurement and payer and local competitive front.

So just — I wouldn’t attribute anything more than just the typical volatility of the markets that we’re operating in.

Lisa Gill: And then just last quarter, you talked about, again, strong cash flow, and you’ve obviously just guided to strong cash flow of $300 million for 2024. John, when we think about the strategy around acquisitions, I know the last quarter you talked about, look, there’s kind of a sweet spot for us, tuck-in and some other things. But maybe can you just update us on how you’re thinking about capital allocation and how you’re thinking about any kind of potential strategy around acquisitions in ’24?

John Rademacher: Yes, Lisa, good morning. We are continuing to do a lot of work to understand those market dynamics and what’s in the pipeline for consideration as we move forward. I think one of the biggest things, Mike and I have talked about, we talked about it on the last quarter call as well is being very disciplined in the approach that we take. We are looking at things both strategically and economically. It must meet those hurdles on both ends as we’re looking at that. We’re going to kiss a lot of frogs before we find a prince in that process. And we really pride ourselves in the discipline that we adhere to as we’re looking at that. There aren’t many books that are out there that we don’t get a look at. We have been very active in our corporate development process and the ability to take a look at opportunities, but we apply that discipline and we’re going to continue to do that.

As we’ve talked about before and as we outlined in the third quarter and the press release coming in the fourth quarter, we exhausted the $250 million of the original authorization. We have an additional authorization of $250 million for share repurchase. We will continue to balance that priority of making certain that we’re doing everything we can to maximize the value to our shareholders and whether that’s through deployment for M&A or whether it’s through continued share repurchase as well as from our investments into our business as part of our normal flow of CapEx. We will continue to balance across those dimensions and maximize the value for our shareholders.

Lisa Gill: Great. I appreciate the comment.

Michael Shapiro: Thanks, Lisa.

John Rademacher: Thanks, Lisa.

Operator: Thank you. One moment for our next question. Our next question comes from Pito Chickering with Deutsche Bank. Your line is now open.

Pito Chickering: Hey, good morning guys. Thanks for taking my questions. Looking at the midpoint of ’24 guidance, if we exclude the — say, $34 million procurement benefit, EBITDA guidance is about 11.8% growth. Are there any one-timers in the next year that we should be thinking about as we think about 2025? Does the procurement benefit just really stop on January 1st? And on the chronic side, what are the new emerging therapies you just referenced? And are there any therapies that we should be aware of on the negative side? And on the chronic side, we saw pretty strong in-patient liquidization in 2023. Do you assume that continues into ’24?

John Rademacher: Thanks, Pito. One question and 15 parts. Appreciate it. Hey, listen, look, at the midpoint, the good thing, and I think you’ve heard this in some of our public comments. The good thing going into 2024, we don’t have the prior year comp challenges, the exit respiratory therapy assets, the exited therapies. So I think the growth algorithm in the story is a lot cleaner and a lot more digestible for all of you to get your hands on. Naturally, the one thing I would say is, look, growth is going to be a little more muted in the first half just given the fact that we did have some of those Makena and Radicava revenue in the first half of the year. So — but overall, I think it’s just a much — it’s a much cleaner story going forward. So the short answer is, no. No big box cars on the track that you guys have to try to model with and without.

Michael Shapiro: Yes. And Pito, on the chronic side and some of the therapies that we outlined, we continue to see strong progress from our commercial team. Our focus around reach and frequency and making certain that we are developing those relationships and deepening them with our referral sources continues to be a high priority and an execution path for the team. We continue to see a focus by the payers around thinking about site of care and making certain that they’re maximizing wherever they can achieve high-quality care at an appropriate cost in a setting in which patients want to receive it. So we think that the market dynamics will remain strong for us on that and we’re going to continue our execution path of being that partner of choice and being able to onboard those patients and continue to provide them care.

John Rademacher: And Pito, the only thing I’d add is, look, specific on your question around any positives, negatives. Look, there’s always going to be some incremental therapies that we’re looking at. I wouldn’t say there’s anything in the hopper that I would say is a major needle mover in the first year. And on the negative side, look, and we’ve had this conversation with folks repeatedly, this is a dynamic marketplace and there’s always therapies that will be going subcutaneous that will have different delivery methodologies. And that’s all something that we’re never surprised by that and that’s fully accommodated in our guidance range.

Pito Chickering: Okay, great. And then sort of John, a follow-up to the payer commentary. Are you seeing any different behavior from the payers that own infusion companies? So CVS, Aetna or obviously United and now Elevance with their infusion. Have you seen any changes of how those referrals are changing now that there’s maybe have their own options as well? Thanks so much.

John Rademacher: Yes. We always — they’re vigorous competitors and so we take all of that full view as we’re approaching the marketplace. And one of the things that we bring to all of the payer community is that consistency of care. We’ve talked before about our ability on a national basis to leverage our platform to provide that high consistency and high quality care, whether you’re a patient in Portland, Oregon or Portland, Maine. And so that ability that we have to provide consistent high quality care across the country is something that they seek. Our ability to be in network with those payers is something that we’ve worked very hard to make certain that we achieve that we’re focusing around key areas of delivering high quality care of providing access to their members, of driving high member satisfaction or patient satisfaction when we have the opportunity to serve their members.

And so we will never discount the competitive dynamics that we operate within. But on the other side of that, we provide a very valuable service, especially when you look at the breadth of the product that we can provide on both the acute and the chronic portfolio. And we will continue to foster those relationships and be a partner of choice for the plans as they’re trying to find place for their members to receive high quality care.

Pito Chickering: Great. Thanks so much.

John Rademacher: Thanks, Pito.

Mike Shapiro: Thanks, Pito.

Operator: Thank you. One moment for our next question. Our next question comes from Brian Tanquilut with Jefferies. Your line is now open.

Brian Tanquilut: Hey, good morning guys. I guess my first question, maybe sort of a follow-up to Pito’s question. As we think about, Mike, the kind of like the normalized growth rate going forward, obviously, there are a few moving parts for 2024. How are you thinking about how investors should be modeling or thinking about your growth going forward and what those drivers should be?

Mike Shapiro: Yes, Brian, thanks for the question. Look the way we’ve consistently articulated what we view as a reasonable way to think about the growth horsepower of this platform is we see this as a high single digit top line enterprise. That’s on a broader market growth. And I know you asked 15 people what they think the infusion market is growing. You’ll get 20 answers. But as we look at the therapies in the areas of focus, we see this industry growing in the mid-single-digits, call it, the 5% to 7%. We think with our unique platform and competitive strengths, we think folks should expect us to consistently deliver in the high-single-digits on the top line. Given the scalability of the platform and the investments we’ve made, we think we can consistently deliver leverage growth. And on an organic basis, that should manifest in low double-digit earnings growth as kind of a medium term growth outlook.

Brian Tanquilut: Got it. And then during the quarter, it’s clear that the G&A line was very well managed. So as we think about that, right, I think some of that is probably the benefits from your infusion suite strategy. So how should we be thinking about the remaining opportunity to open infusion suite and to offset expected gross margin compression from just the growth in chronic?

Mike Shapiro: Yes. Look, I’ll start and let John jump in. Look, we fight for every dollar and we always have and we always will. With the spending actually coming down versus the prior year. Admittedly, we did move some of the investments, some of the more discretionary investments, new programs earlier in the year as we knew that we had some margin favorability. Of note, in the fourth quarter, that does have some year-over-year burden from the 20 or so infusion suites that we opened during the year. And again from a P&L geography, the cost of those facilities resides in SG&A, the rent utilities, insurance, et cetera. The benefit through the nursing leverage actually is in the gross margin line. So with the SG&A as we reported, it has the gross increase from the infusion suite investment, but the benefit is actually north up in the gross profit line.

So look, we’re going to continue to drive leverage growth at the SG&A line and a lot of the results in the fourth quarter beyond some of the intra year timing are the efficiencies. And as John mentioned, the investments in technology and automation, which has manifested in much more efficient spending.

John Rademacher: Yes, and the only other thing I will add Brian is on the infusion suite side, continued really great progress by the team of opening the new facility. As we’ve talked before, we do a thorough analysis when we’re looking at the market, we look at density maps of patient populations and we’re really selective in the way that we’re looking at where we place them and how to utilize them. In the quarter about 30% of our nursing interventions were done in one of our infusion suites with that growing population of chronic patients, as well as our ability to serve some of the acute patients that may need a dressing change or a lab draw or those types of things, we’re going to continue to maximize that as we move forward.

So as we built out the network, we’re getting closer and closer to having the fulsomeness that we want there. We’ll continue to make investments on that. But I would set the stage that that may start to slow as we’re then utilizing and optimizing the infrastructure that we have. We added over or almost a 100 chairs over the year. And so now the trick for the team is really to focus around the execution of utilizing capacity that we have there as we continue to build out probably at a bit slower pace than what you’ve seen over ’22 and ’23.

Brian Tanquilut: Awesome. Thank you.

John Rademacher: Thanks, Brian.

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

Matthew Larew: Hi, good morning. Wanted to ask about kind of the other piece of the gross profit line beyond procurement, which could be labor costs and maybe a sense for what your expectations are in 2024? And sort of within that question, maybe an update on how Naven Health is helping you better manage your labor needs?

Mike Shapiro: Hey, good morning, Matt. Look, as we’ve tried to be as transparent as possible and again this isn’t binary, in the fourth quarter as expected, we saw that transitory situation that we tried to be as open as we could from a competitive perspective. It pretty much dissipated down to nothing by the end of the fourth quarter. And so look, it was real. It was a great milestone for our procurement team who we think are the best in the business. And look part of it is our direct relationship with manufacturers and biopharma that John talked about in the prepared remarks. Going forward, we are always looking for coins in the sofa cushions and the procurement team is constantly looking. And as we’ve said, there’s always procurement puts and takes that typically nets in a typical year to a modest tailwind, well below the numbers we talked about in 2023.