Good morning. My name's Allen Lutz, healthcare tech and distribution analyst here at Bank of America. We are incredibly excited to have Guardian Pharmacy Services here. We have President and CEO, Fred Burke. Fred, thank you so much for joining us.
Thank you. We're very excited to be here, too.
Great. You know, Guardian just reported earnings last week. Would love to get a sense, do you have any prepared remarks or initial comments that you'd like to make?
I think we covered it pretty well in our call. We had a really good quarter that was better than the consensus, which was roughly our own internal plan as well, and flowed through some of the outsized performance into increasing our annual guidance. Everything seems to be rolling well. We dealt with the IRA, which was a complete sea change for our industry, probably the biggest change that we've experienced in a decade. I'm very proud of the team. Our data analytics capabilities and skill sets really shown through as we were able to work and understand, and see that the predictions we had made, the forecasts came were on track.
We had a busy first quarter.
Off to a good start.
That's great. I think Guardian's been a public company for less than two years, so relatively new still to the public markets. I think a lot of investors are still new to the Guardian story. Can you provide maybe a quick intro to Guardian, what the company does, and what differentiates you in the industry?
Allen, we're an institutional pharmacy that's focused on a particular segment of long-term care, assisted living facilities. Assisted living is where all, if not most, of the growth has occurred in long-term care, but they need a different type of service. From the outset, 20 years ago, when we founded the company, it was done so on the basis of providing that very specialized service needed by assisted living. It has served us very well as we have now grown to be the nationwide leader in assisted living. I'll hasten to add with a whopping 13% market share, which to us means there's 87 left to go. That's from a standing start, and our pharmacy map does not yet cover the entire geography of the United States.
The special service is working well. We feel like we have a great opportunity to continue and grow the business.
Yeah, I'd love to kinda follow up to that. The ALF market's growing about mid-single digits. The industry, unlike the retail pharmacy industry, unlike the PBM industry or the drug distribution industry, the long-term care pharmacy market is incredibly fragmented. Can you talk a little bit about the competitive landscape in the ALF market? Talk about the health of competitors and the outlook for M&A.
We consider our main competitor the single- unit independent pharmacy owner who, by and large, does a really good job of serving assisted living. They, too, have engineered their pharmacy for that, the special needs. They also have lacked the benefits of scale, such that the profitability is nowhere near what Guardian's is. That doesn't allow them the resources they may need to provide some of the extra services. They, unfortunately, and we're very upset or distressed about this, the effect of the IRA on our industry colleagues. They're already operating on thin margins, and we're worried that it will be untoward for them.
We expect it to hopefully bring some of the excellent operators that we respect and admire to wanna join the Guardian family.
As you think about the competitive landscape, a lot of the independent pharmacies are, you know, doing a good job, satisfying customers, but in many cases, their profitability, even before the IRA, was break- even or very, very low. Can you talk about what the Inflation Reduction Act did in your business, how you were able to offset the dynamics from IRA, and then we can go into, you know, maybe how that could have impacted your peers.
Sure. For the first 10 drugs in 2026, essentially, the law took away our sell-side margin, the spread that we made on the sell side. We still maintain the dispense fee and our buy-side margin. We, Guardian, set about the task, oh, two years ago of educating our pay or import partners of what the effect would be, and very happy to report that we were able to mitigate that entire headwind. The negotiating entities on behalf of the independents, the PSAO networks, also set about that task, and we don't know exactly how much of the headwind was mitigated, but some, but I'm afraid not all.
As we think about your business versus an independent pharmacy that competes in the market, maybe a single operator, can you talk about where does Guardian, where does their size and scale allow them to drive the EBITDA margins that you have today that are much higher than the peer average? Where are those competitive advantages? Would love to go through those.
Generally falls in four buckets. First, on the buy side, the purchasing. We have substantial purchasing advantages leveraging our scale. It's on the reimbursement side, as we have decided five years ago as a company to invest in all that's necessary to negotiate and contract directly with our PBM partners. We have set about the task of demonstrating the value add that we bring and, as a result, enjoy reimbursement from that. The third bucket would be national accounts and regional accounts. With our geographic coverage, we've been able to establish relationships with the larger assisted living groups, which allows us to bring that relationship to the unacquired entity. Finally, this is a very complex business under the covers.
Takes a lot of systems and processes, procedures, controls to manage the business such that you can exact the kind of profitability that you deserve. We bring that to the party as well, and that generally takes two, three, four years to implement but is very impactful. Those four buckets combine to take a new member of the Guardian family from break- even or making 1, 2, or 3 percentage points of the EBITDA margin up to our corporate average.
As you think about the fragmented nature of the competitive landscape or just the competitive landscape in general, what do you think? Obviously, you know, some of your competitors don't primarily support the ALF market. They support other populations. Why do you think that there hasn't been more of a consolidation? What are some of the reasons that it's hard to grow, it's hard to earn constant profitability in your space, as you think about the competitive landscape?
You're speaking now of the competitive pharmacies, the independent pharmacies?
Just in general. Could be large competitors, could be independents. Why have others not had success scaling in this market?
I think there has been some success in scaling on the SNF side, the skilled nursing pharmacies that serves the skilled nursing facility. There hasn't been on assisted living because it's such a specialized service model, and it does require scale to achieve the profitability. You've got that virtuous cycle, if you will, that you need the scale to get the profitability, but without the scale, you don't have the profitability to, you know, to aggregate players.
So if we kind of take everything you've talked about today, would love to get a sense of what you think the long-term growth algorithm of the business is. The ALF market's growing 5%. You talked about some of the challenges in the competitive landscape. Would love to think about how at 13% market share, how do you think about whether it's top line, EBITDA, EPS? How do you think about the long-term growth algo of this business?
Well, absent the anomaly of the IRA, which we can circle back to, which is a one-time revenue hit, we've guided to high single-digit organic growth, supplemented and augmented by the M&A program, so low double-digit with leverage at the EBITDA line. The one-time hit for 26 means that our revenue is going to be relatively flat-ish, is what we've guided to for this one year. In the past, looking in the rearview mirror, we've been able to exceed that. I think cumulatively over the life of our company, it's been mid- double-digit or teens growth cumulatively for CAGR on the revenue line. We're more conservative in our guidance. We feel very comfortable that we can continue what we've been doing to achieve this growth.
As you think about the targets for M&A, can you talk about when you acquire a pharmacy, what type of margin profile does that pharmacy have? How long does it take to get to the consolidated margin profile of the rest of your business?
As you mentioned earlier, most of our targets are operating at break- even or near break- even, low single-digit EBITDA margins. We generally say it takes three or four years to bring a pharmacy up to the Guardian corporate average, because we can implement some things quicker than others. We can implement our reimbursement soon, and that starts us on the journey. Our purchasing may take longer. Certainly, we want to make sure that the services are adequate and up to par before we launch our national account programs. Then those systems and processes, generally, that's pouring concrete over a two, three, four year period of time.
We'll get an initial jump from the purchasing and reimbursement, and then over time feed in the national accounts and the systems, such that, takes three or four years.
Can you talk about the balance sheet, a little bit and cash flow? Do you have any debt? Talk about the cash flow profile of the business, as we think about how you're funding these transactions.
No debt. $64 million of cash on March 31st. We generally say that we have a 60% cash conversion ratio. That was interrupted slightly in the Q1 as we did take a slight working capital hit associated with the IRA. We'll expect to see that resume as we move through the year. Obviously, the kinds of deals that we're talking about, we can fund out of our, out of our combination of cash. Of course, we do have additionally credit facility of $75 million, which we're not tapping at the moment.
Great. That's great color and perspective. Can you level set how many pharmacies do you own today? In a typical year, how many do you acquire?
We're at, believe it's 62 in total, with 54 being full service. In the past, we've generally added three, two, three, four new pins on the map. We do that not only by acquisitions, but also with what we refer to as contiguous greenfield startups. The way that works is one of our pharmacies may establish service of some key accounts in an adjacent metro area. Once there's enough critical mass, then they can expand there with bricks and mortar, that allows them to properly serve that entire market area. We've been very successful with that. It's a great way to grow. We'll do that as well. We should be adding two , three, four new market service areas per annum.
Great. Then last question. As we think about, you know, the remainder of 2026, what are you most excited about this year as you think about the trajectory of the business and the opportunities in front of you?
Well, it's been really, really gratifying to be a public company. We're very much employee-owned. We have over 200 employee owners of Guardian, and that's been a very rewarding for them, and I think it's been highly motivating as well. We just have so much opportunity. We feel like we're running in the open field, and I'm really excited as we move forward to capitalize on that opportunity.
That's great. It looks like we are out of time here. Fred, thank you so much for the time. Really appreciate it. Thank you to everyone in the audience for joining us.
Thank you, Allen. Thanks, everyone. Appreciate it.
What do you think was most broken or underappreciated when you arrived?
First of all, it begs the question, why did I choose Axogen? And I do my best to convey whenever the question's asked, the criteria that I was trained on many years ago, and I've tried to use as a, as a basic starting point. The first and foremost is, what's the purpose of the business? Why does it exist? Is it fundamentally credible? Is it emotive? When you start to think about peripheral nerve function, it's very quick, it's very easy to quickly conclude that yes, this is a very credible health condition that, if you can solve for, makes a difference. Second, is that particular situation that the business is focused upon, numerous enough to justify the allocation of people, capital, and time.
Finally, and most important of all, do you actually have a distinctive solution that is advantage relative to other existing standard of care options? If you have those three things, everything else is a functional exercise that you can adapt, adjust, or build further upon to bring that value proposition forward. When I was first learned about approach and learned about Axogen, I was able to quickly conclude that the purpose of the business was highly credible. It was a very numerous problem, grossly underserved, complex by virtue of the various care pathways, but nonetheless clear in terms of the opportunity to treat patients. Finally, Avance as a platform, as a foundation for the business, is one of those unique value propositions that's advantage.
It's a solution that, based upon benefit versus risk as compared to existing options, is genuinely superior. With that, those are the kind of projects that have always attracted me, and I believe that functionally what we need to do is simply to decide how to make the most of that. What we engaged in, there was nothing esoteric, a traditional strategic planning process to take a good look at ourselves, reevaluate and clarify our purpose at the highest level, and then, within each individual function, and then to bring that plan to bear. That kind of focus, and the process itself, is one that you can only complete properly if you include every single employee and every single stakeholder, which we did.
The plan that we have today that we posted publicly, is literally the plan. There's not like three plans or two plans or 2.5 plans, there's one plan. It's the same thing we discussed at the board level, same thing we discussed with every employee, same thing we discussed with our customers that we serve, and then obviously to this community as investors. We believe this is a business that, based upon the import of peripheral nerve function, is one that will be able to add value for all stakeholders for years to come.
Great. Turning to your business, you recently received some significant reimbursement wins. How do you see that affecting your revenue for the rest of 2026 and beyond?
We are in the process of trying to digest, to quantify it, because as you might appreciate, that's a question that's on everyone's mind, including ours. I know this is a trite answer. We know it's all gonna be good, but to explicitly describe the cadence and the objectively how that's going to affect the business, we're still trying to figure out. When these good events transpire, the first thing that happens is socialization of the news with all of the providers of healthcare. They need to negotiate their individual contracts with their payers based upon the new coverage decision.
It starts to pick up momentum, but it rarely is a light switch, to use that expression. It's a non-answer to your question. We know it's gonna be good, but we haven't quantified it yet.
Got it. Then, maybe thinking about the remaining payers after Cigna and Elevance, what is the timeline for Aetna, and what does near universal commercial coverage mean in practice for the business?
Sure. Aetna is the last significant payer that has not yet made a decision. Each payer has their own criteria, their own annualized schedule for reviews, and their own process for whether they even conduct a review. We are aware of each of those, and we have formally engaged in those processes by payer and made our submissions and requests for response and evaluation. What we've seen recently is obviously Elevance and Cigna respond to that. We are now awaiting to see the same from Aetna. Based upon their schedule, we would hope to hear something from Aetna by the end of June. There's no guarantee. They have no obligation to respond.
Generally speaking, when you satisfy all the requirements, Aetna will make their decision known in that timeframe.
Got it. Maybe stepping back a little bit, Elevance has a gap length restriction. Could you maybe walk us through that? How significant is the practical impact, and what is your path to getting the policy corrected?
Sure. We've already engaged with them immediately upon seeing that. As for the impact, we truly don't know. It could be a complicating factor, or it could be a non-event. We don't know whether it is a decision that was simply an oversight as part of the review process, because they don't reference the other clinical studies. They don't reference the biologics approval status from the FDA. They only reference the RECON study, which was the level one study done by Avance in extremities. It also requires a pre-approval requirement, which is a practical impossibility given that these are procedures that are emergent. You present, you don't know what the gap length is until you're actually doing the procedure.
We don't know that it's going to be an issue. We have not seen any issues thus far, but it's too early to say.
Got it. That's very helpful. The CMS outpatient reimbursement reclassification that took effect January 1st, 2026, produced roughly a 40% rate increase. Why did that not show up in Q1 results, and when should investors expect it to flow through?
Sure. Because nerve procedures were economically unattractive. In those settings, there is not a large activity base already allocated. Now that there is a positive economic situation allowing for such procedures to happen there, it will happen, but it's literally beginning as we speak. Just like with commercial coverage payment, when a positive reimbursement situation transpires, it needs to be socialized. In other words, example is Axogen knows 'cause, well, we got it. Guess what? All the hospitals have no idea that happened.
We need to make them aware, and then once they're aware, then the hospital needs to make a decision to then speak to their payers and negotiate the contracts for that site of service. They need to logistically decide which physicians are going to allow them to move cases into those settings. We know this is going to be a site of service in the future. Just like with commercial payments, it's gonna take a little time for it to take root and for people to make their own decisions as to where they move that. It's all positive. Again, it comes back to the issue; can we quantify it by quarter when it's gonna happen? The answer is no, not yet.
Towards the end of the year, we would expect to have some clarity as to where these procedures are moving in that regard.
Great. A little uncertainty, but positive outlook. I guess on that note, you reported your Q1 financial results two weeks ago. You grew 27% in Q1, but guided to at least 20% for the full year. How should investors think about the second- half growth rate, and what explains the implied deceleration?
Sure. First of all, the plan in terms of what drove the growth is all the elements that we previously publicly described. There's no one single factor. The business has simply continued to build off its prior historical basis. With regards to the implied deceleration, that's obviously not how we look at it. It's important to note that, you know, Q1 is a natural comparable that's easier as compared to the other quarters. The middle of the year is the largest volume of activity in our world. We expect that to continue to be, so it's a bigger base to build upon.
We're always mindful that we're continuing to expand our platform and activities, and trying to be prudent about not getting ahead of ourselves because each quarter, we gotta prove it. We're confident about the future, but just trying to be prudent in terms of what that growth will be. That's why we have always stated from the beginning in our strategic plan is that you should look at Axogen as an asset vehicle, as a market development exercise over a period of three to five years that will be able to generate continuous double-digit growth. There's no change whatsoever in our viewpoint in that regard.
Got it. Recognizing that more clarity will probably be gained over time, what visibility do you have on BLA transition flowing through your gross margin currently, and how should investors model the 74%-76% guidance range on a quarterly basis?
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In Q2, we expect to see an influx of more expensive product that we will be selling as a result of our transition from a tissue product to a BLA in Q4 of last year. With this, we should see our Q2 be kind of our bottom, per se. We should continue to increase from there in gross margin. Q2 should be at the low end of our guided range for the entire year. We should see increases from there. In 2027, we expect to see additional improvements as a result of certain initiatives we have going on at our facility. We have a lot of lean initiatives, yield initiatives, as well as new system implementations.
This gives us confidence in that our gross margin can improve over time because right now we know what our costs are, as processing as a biologic. All these improvements that we're putting in, doing things faster, more efficient, will only improve where we are today on top of our growth and increasing production, so economies of scale.
Great. I guess in the last couple of minutes, looking ahead, you're expecting clinical data in the second half. What are the key clinical endpoints for your prostate nerve repair pilot, and how should investors think about what a positive data readout actually looks like entering Q3? What does success look like to you?
The dataset that we are currently collecting is not a controlled study. It's important to emphasize that. This is work that's being done in partnership with various key opinion leaders, highly experienced robotic prostate surgeons. The effort is based upon the primary measures of erectile function and incontinence. We're looking at those very broadly. Each person's gonna have their own dataset. We're working with them to do the follow-ups. This will not be a published experience.
This is gonna be a collection of activity that, based upon the numbers, will allow us to take a look at this and then compare and contrast that with what we see in our other nerve applications and draw the conclusion as to whether or not the procedure is teachable. The basic premise is that biologically is a nerve is a nerve is a nerve. The prostate nerve is a little shorter, so it doesn't have as long a distance as, for example, some other nerves have to traverse. Secondly, it's a larger nerve, so there's more axons, more, to use the expression, more shots on goal. In principle, biologically, this should work very well in the prostate setting.
The caveat to that is you still need to do a good surgical procedure to do anastomosis. This dataset is intended to give us a glimpse as to whether or not we can truly teach the procedure as we need to. If it can be performed well, by the end of this year, we're gonna have a clinical dataset in terms of trajectory, which would allow us to make that judgment. If that judgment suggests that we can teach this procedure well, we will then begin to develop a go-to-market exercise that we'll make public. That's what's underway with that dataset.
Great. I guess in the last couple of minutes, would turn it to you for any closing remarks.
First of all, thanks again for the opportunity. People always ask, "Well, how should I judge you going forward?" Same way you've been judging us the last several quarters. This is a market development exercise. The clinical pathways that we're working are common only insofar as they involve peripheral nerve. Completely different, very heterogeneous in terms of the physicians involved, the care pathways involved, and so we work each of these with distinct business models. What's common to all of them is under service. The other element that's common is our value proposition has one of the most profound benefit versus risk equations that I've seen in my entire career.
We offer a great potential for improvement in quality of life and health, basic health, at extremely low cost to almost no cost with regards to risk. To that end, that's one of the reasons why we're so bullish that this will be a space that will develop each year in significant ways and then someday be a very large contribution to healthcare.
Thank you very much. Thank you.