Awesome. Hi, everybody. My name is Jess Tassan. I am the Healthcare Services Analyst at Piper, and I'm so excited to be here with Omnicell. We've got CEO Randall Lipps, CFO Nchacha Etta, and Vice President of IR Kathleen Nemeth, who is going to kick us off with a quick safe harbor.
Great. Thank you, Jess. Thank you for inviting us. We're delighted to be here with all of you today. Before we get started, we'd like to remind all of you that we will be making forward-looking statements. To the extent that we do, there are risks associated with those statements, so please review our most recent filings with the SEC. Thank you, Jess.
Of course. So I understand Randall is going to kick us off with some opening remarks.
Yeah. And again, thanks for having us. It's always great to be here. I think it's 20-plus years we've been coming here, right? And so it's always great to be here.
Not by my watch, but.
We won't talk about that, but Piper's here, so it's been great. As many of you know, Omnicell is a strategic partner to health systems in the large and growing medication market with over 30 years with a great track record of product innovation and a strong client base, including over about half of the top 300 U.S. health systems. Now, recently, we introduced XT Amplify, making a reinvigorated focus on new product developments and services. Omnicell has also developed a suite of advanced services to enhance deliverables to both existing and new customers, including IV compounding with our robot and also with our robot for central pharmacy dispensing, cloud-based inventory optimization, outpatient digital pharmacy services, and, of course, specialty pharmacy. Now, advanced services is expected to be a key driver for future growth and will account for an increasing percentage of total revenue.
But Omnicell remains committed to being a leader in the connected device segment, with XT Amplify bringing more value to current XT customers and increasing overall competitiveness. Now, at the same time, we want to create more linearity in the business over the long term. Now, we believe we have a strong balance sheet with expectations to drive sustainable and profitable growth and bring what we believe is great shareholder value.
I've got a bunch of questions.
Beautiful.
That sounds great. Thank you so much for that.
Thanks for letting me introduce that.
Yeah, of course. So I'm going to kick off with some really interesting survey data. So 2024 survey data of hospitals indicates that Omnicell's ADCs represent 45% of the market, with 62% intent to buy versus 57% for Omnicell's largest competitor. What's driving this sustained market share growth entering, I think, by my estimates, the eighth year of the XT cabinet cycle?
There's a couple of things. One, our customers are really looking for, as they get larger, as they continue to consolidate, they want to work with large platform players that can drive not only solutions in their inpatient, but also in their outpatient and other areas of their healthcare systems that they don't have visibility to medication management, so we believe we're the only company committed to this long-term innovative platform that's going to deliver really well in what we believe is the autonomous pharmacy, but really allows us to get 100% visibility of both the drug management and all the locations and all the venues in these institutions, and look at the drug spend. It's becoming more and more critical to the success of every healthcare system, whether it's in their specialty pharmacy, whether it's about safety or regulatory compliance.
You have to have great medication management solutions, and that's what we're shooting for.
So your largest competitor, I think, introduced what they're calling their first new cabinet cycle in 15 years. That same competitor also just got a warning letter from the FDA. I'm curious if you're just seeing anything different or worth calling out on the competitive landscape? And then just with respect to warning letters, how common are these? And is this a durable kind of 6-12-month tailwind for Omnicell, or is it less significant than perhaps I'm hoping?
I think certainly letters from the FDA run the gamut. I think in this case, for cabinets, it's probably not as big of a deal. For us, customers aren't just buying on current issues, but really what the long-term roadmap is for their partners. That's really key. That's what drives decision-making. That's what gets nurses involved, the IT people involved, is really more of these intricate issues around how do you make medication seamless, how do you make it work easy, and how do you get the outcomes that you want with the best system? I really feel like people tend to look at these as short-term issues. For us, we really play to the long-term game. That's what we're thinking about.
Okay. Helpful. So you all introduced XT Amplify, a suite of product enhancements to help hospital customers optimize the functionality of and return on Omnicell ADCs. The first five products are XT Extend, MedChill, SupplyXpert, ServerScale, and CarePlus. Can you kind of give us the elevator pitch for each and just delineate, are all five new products, or would you consider several to be kind of new commercial models for existing products?
Yeah. There's a combination of both. Good. XT Extend is the console, but it is the down payment you need to make in order to get access to the XT Amplify platform. And the XT Amplify platform is just not these five products, but it's a commitment to these first five and that there are more products to come to extend the life of the product as well as the reach to where we are going, which is in non-acute spaces and other solutions that just don't exist in the market that we know that these big providers need. And the XT Extend is a console. If you think about a console in the inpatient world, it gets used every day. It's the second most touched product in the hospital, so they do wear out.
But customers want these new products just not for the hardware, but for the better cybersecurity, the better chipsets, the better and easier usability for the nurses. And they want them to be consistent across their entire platform. So they tend not to buy them as one-offs. They tend to buy a whole set of consoles to upgrade all of their systems so that all the clinicians have access to the same standard of product. ServerScale is interesting. It's kind of a reformation of servers. Today, we sell servers to the customer with software on them. Instead of selling servers, we will take on the burden of buying the servers, making sure they're getting installed and upgraded.
And this is really key because IT departments in these healthcare systems are stressed, and they don't have to worry about when they get to their next hundred of connected devices, "Oh, gee, they have to go budget for a new server." We will take that burden on as part of the cost of the monthly service cost. Server - Care Plus is another product that is a little reformation. This is our distinct product line that allows us to consult with customers through their change management. As you put in new systems in hospitals, there's a lot of change that comes with it. And we see better results when they deploy and hire our consulting services, and that's the CarePlus. And we see a lot of competitive conversions. Generally, always buy that product line to make sure that they have a successful conversion to the new tech.
Okay.
And then on MedChill, we're really excited about MedChill. Almost every ADC in an inpatient area can take a MedChill. And the reason this is important is there are refrigerators located with our ADCs or connected to our ADCs. But the problem is once a refrigerated unit is open, the traceability of what's in the refrigerator, what's taken out, what's placed in there, what's removed or not removed isn't known. And so take a patient's insulin, which must be refrigerated and placed in a refrigerator, and that same bottle must be taken out and used again and put back. And so MedChill allows for the discrete control of each individual drug that's in the refrigerator. And that's a new solution set that every pharmacy knows about that is a problem. So they tend to not execute well on cold storage doses that are kept up on the floor.
Now they will have the traceability like they have on all the other drugs that are on the Omnicell with this new product.
That's actually come up a bunch this week. So every ADC could use a MedChill, and we should consider refrigerated medications as part of the typical mix in an ADC.
Yeah. And just to be clear, MedChill isn't actually the refrigerator. It's the device that goes in the refrigerator that makes and controls the access to the drugs once they're in the refrigerator. So it's a remote device that goes in. So you don't have to replace. We're not actually getting into the refrigeration business. We're actually creating these unique shelves that go into refrigerators that then allow controlled access.
Got it. So is it typically like one refrigerator per floor in a hospital? So if you could have 10 or 12 beds per ADC, but those beds would be supported by a single fridge and one MedChill, or what's the?
Each nursing unit would have one.
Okay.
So it's not by floor, but it'd be by nursing every 20 beds or so.
Okay. Super helpful. Nc hacha, I want to kind of move to your area of expertise. How should we think about bookings from XT Amplify in 2024 and revenue contribution in 2025? One of my kind of key questions is just does XT Amplify revenue offset or Eclipse XT cabinet declines next year?
There’s two parts to your question. The first part is, so all the products that we announced under the XT Amplify program are available to book today. We do expect those to contribute to revenues in 2025. However, we do not expect or anticipate any revenues from XT Amplify in 2024. With regards to your second question, we do not expect that the decline in that XT Amplify will eclipse or offset the decline in the ADC sales, primarily because, again, they’re very different products. We’re very excited about our XT Amplify multi-year innovation program because we do believe it will provide us or positions us to expand into new markets or expand our market share as well as continue to grow within our segment. As the macroeconomic environment continues to stabilize, we do believe that we will continue to see some growth there.
Okay. That's really helpful. So when does a customer become eligible for XT Extend? At what point in their cabinet's lifecycle? And then just in terms of the entire XT Extend or console opportunity, over what timeframe would you expect it to convert?
It depends. Obviously, the older XT installs from seven years ago would be more likely just from the hardware standpoint. Because we're offering better cybersecurity, access to some new technologies, you can't get the MedChill, for instance, if you don't have the Extend product. It really allows for a customer to upgrade their whole system to the new platform without having to upgrade all the pieces of the frame. It's an easier lift, and it provides more than just the console. It provides access to these new technologies. As we announce more technologies, obviously, it gives us more leverage to go in and work with customers to put this in place. We've had customers who have some older systems. They upgrade to the Extend product, and then they upgrade all of their systems to the Extend.
Some of them, they may have bought just last year because they want a consistent user interface and a consistent hardware user interface for them. So it's not always based on age. It's based on what the entire platform, if they're ready to move to the platform. So it might give sort of in the old world, we would have console upgrades, and they kind of had maybe they peaked out in the third year. We might have some acceleration of that because now you're just not getting the console upgrade. This is the way you get your next version of software and access to the new tech.
Okay. That's very helpful. So just the XT Extend, obviously, it sounds more comprehensive than a typical console upgrade. I think you've described historical console upgrades as being roughly a third of the cabinet ASP. Should we think about XT Extend because it is more comprehensive as being in line with that one-third, or is it slightly better?
I think it's probably sort of in line. I wouldn't try to put a number on it. Also at the same time, you're able to sell additional products. You can move beyond that 1/3 price per location because you're selling these additional products and innovations. It really gives us a big opportunity. As you know, most of our customer base is already on XT. Moving to XT Amplify is something you can bring into every single customer and start a pipeline on. It's a very new piece of innovation that allows you to get highly engaged with the customer about the next three-to-five years of their spend.
My question is just where are these dollars coming from in kind of the hospital, either OpEx or CapEx budget? Hospitals understand that they need to purchase ADCs roughly every 10 years. Were they equipped to purchase a console upgrade? Are they struggling to find the dollars to support this investment, or are you kind of seeing liberal and willing?
I think it's kind of a tale of two cities. I think more than half the hospitals generally have capital dollars these days. I think particularly around the cybersecurity improvement and the on-ramp. Generally, what we were seeing, which we're very encouraged by, is when they move to the XT Amplify, they usually sign a new multi-year agreement, five to 10 years, which really means they're buying in not just to the product line that they're getting today, but where our future is. One of the things that's really key to customers as they move forward, as they've gotten very large, is they're really worried about the disruption of taking out systems and having to install new systems while they're running these massive organizations.
So to the extent that you can upgrade over time, both software and hardware without these large one-time movements is something very important to them. And from a long-term linearity on our revenues and earnings is important to us. So we're aligning better to a better go-to-market so we're not in this roller coaster, really great, and then really not so great.
So I want to come back. I have one quick one, and then I would love to get into that. So just in terms of the % kind of of eligible ADCs or five-plus-year-old ADCs that have opted to upgrade their consoles historically, what is that? Is it maybe 50% or 70%? And then just what would your expectation be this go-around with XT?
Generally, on any upgrade cycle, I don't know, you start at 10%-15% the first year. We haven't even got through a full first year yet. We got through nine months. It moves up until you maybe peak out in the third or fourth year. I feel like we're ahead of schedule this year, and we're going to do really well next year as we see the pipeline mature. Really happy about that. It's just, again, it's not the customers buying into just a piece of equipment. They're buying into our long-term product roadmap, which is really key to our long-term success as long-term shareholders should be enthused about these long-term agreements we're signing up as they sign up because this really means that they agree with us in our approach and our long-term strategy.
Yeah. So the one kind of critical question then is, does XT Amplify extend the cabinet's lifecycle, or does it kind of eliminate this every 10-year cabinet intro pattern entirely?
Yeah. It can extend, and it depends on the customer how long it can extend the lifecycle of the cabinet. But our goal is to continue to come up with innovation that's so compelling that it's worth swapping out. And it's just not. And so traditionally, we relied on the age of the equipment or the tech to be the reason to swap it out. We're moving from that to such compelling innovation that it drives both safety, efficiency, and outcomes that you can't just ignore it and just don't think of it as a basic piece of equipment, but a strategic piece of technology that's really going to help you move the needle. Medication management is a lot of times the difference between profitability and unprofitability in an institution. It's the risk, particularly on inpatient where it's a cost. Outpatient is about revenue and earnings.
It's like our specialty pharmacy, so if you get medication management right, you can be a profitable institution. If you get it wrong, then it goes the other way, so it's moving from sort of a basic operation what it has been over the few years, last 10 years, to more of a super strategic area.
Okay. That is, I think, a relief for me at least. I like the cabinet cycle. I'd be likening it to an annuity. Yeah.
I like it too.
So that is a big relief. It augments, does not eliminate. So Nchacha, one for you. So we appreciate the additional revenue disclosures year to date. Advanced Services growth accelerated in the Q3 , was up 23% year- over- year. Can you kind of help investors understand the key components of Advanced Services revenue and then just what's driving the 2024 momentum?
Yeah, so first of all, I want to reiterate that we are very excited about the growth prospects of our advanced services business. It's growing, as you heard, double-digit. With regards to the components of advanced services, so there's five different services that are within that advanced services. We have the IV compounding services, which is our IV robot. And then we have a central pharmacy dispensing service as well as inventory optimization services. And then we have Enliven, which is basically the retail services, retail pharmacy services. And lastly, our specialty pharmacy services. From a growth standpoint, within the advanced services portfolio, specialty pharmacy services is the key growth driver. It's growing double-digit, and we do expect it to continue to grow in the near future.
Awesome. So a couple of questions there. Is there an opportunity for you guys to deploy? So to the extent that these specialty pharmacies are being established in the outpatient setting, to what extent has Omnicell deployed, or to what extent does Omnicell intend to deploy your connected devices in those outpatient specialty pharmacies?
Today we don't have a specific connected device for outpatient services, but we think that could be in our roadmap in the long term. I think the specialty service spin-up is the most important part of getting revenues and generating return for the hospitals first. Then bringing in technology is second as far as bringing efficiencies to that.
Okay. That's helpful. So then just with respect to gross margin expectations, product's gross margin, what are your product's gross margin expectations just as we think about XT winding down and Amplify ramping up? Is Amplify more or less profitable from the gross margin perspective than the existing or the 2024 mix of product revenue?
Yeah. So if you look at our gross margin since the beginning of the Q1 of this year, we've seen quarter- over- quarter to date. We've seen an improvement in both our product and as well as gross margin. And as Randy mentioned earlier, as we continue to invest in our advanced services businesses and those businesses continue to scale, we will see modest improvements in our gross margin. Secondly, to your question, within XT Amplify, we have XT Extend, and the gross margin for XT Extend is even higher than the gross margin for the cabinet. And so again, those are areas that we believe will contribute to our overall gross margin in the long term.
Okay. Great. I wanted to ask one quick one on just the IV compounding robot. I think there were some regulatory and go-to-market type headwinds attached to that product. Is everything squared away and it's ready for deployment and actively being sold today?
It's getting more squared away. We're deploying more robots in first quarter with our next release, which is more compliant to what we need to do for the FDA. We probably have one more release after that to probably get to the ultimate, but it's very close to what the market needs are. We'll see as we get to the next version after this one about deploying it a lot more quickly.
Okay. So by middle of 2025, we think it should be roughly or maybe by end?
Next year, definitely we'll be running on all somewhere.
Okay. Helpful. On the services gross margin side, sorry to jump a bit, but just on the services gross margin side, should we think about you mentioned specialty pharmacy, which we understand is a largely human capital-intensive consulting business, growing the fastest? So should we expect services gross margins to kind of remain in the 50-ish% realm?
We do expect our services gross margin to be relatively flat over the years as the businesses continue to grow. Yeah.
I'm interested to know, is the 2024 operating expense base capable of supporting XT Amplify? Basically, are you spending enough to ensure that customers are happy and satisfied and will consider investing in additional Omnicell services and products, or do you need to invest in human capital or IT infrastructure to kind of support this new commercial effort?
We do continue to assess our business, the respective bits of our business, and we will make the right both product, people, and infrastructure investments to help drive sustainable and long-term growth.
I don't think we have any significant people. Particularly in people, we don't need a lot more people for the XT Amplify to leverage to grow. We may have some specialists in sales force that we're deploying, but we're pretty much set.
Okay. Got it. So then just in terms of 2025, should we expect flat operating margins, up, down, or any kind of thoughts in that regard?
We haven't made any comments about 2025 as to what's the plan.
That was an obvious one there. Okay.
Good try.
Got it. And I'm going to wrap up probably with one for Randall. So I'm interested to know just a little bit more about, well, with two. I'm interested first off to know just the reach of Omnicell's pharmacy administration and workflow software. So investors have been asking, does this software provide kind of end-to-end visibility from purchasing through dispense? Is it integrated with the EHRs? Where does it fit in the kind of hospital HCIT infrastructure stack? And then just what are some of the kind of key clinical, financial, operational outcomes that this workflow software has been able to deliver?
Yeah. It's really important that we integrate with our EHR partners, particularly Epic and Cerner. So we do deep integrations with them, and we really want to be succinct and congruent with what in our systems and their systems is the source of truth. And that's probably more key than what portions do we do or they do. It's most important that it's succinct. Most of the software that we deploy is operationally oriented, ensuring that drugs get to the right place at the right time and then that they're managed properly. There's a lot of rules and regulations about managing drugs in these locations. And usually, the management of medications, there's a lot of room. There's usually too much inventory, too much inventory in the wrong locations. It's very difficult to manage these 2,500-3,000 SKUs across all of these continuums.
Generally, even a 25-hospital-bed system has over a million discrete locations of medications that they're trying to manage. You can imagine a million discrete locations you're trying to manage is done. Even if it's not done good, it's going to be done poorly. So we're trying to solve those problems. There's a lot of money to be saved. There's a lot of safety to deploy. Then most importantly, there's a lot more outcomes to be able to drive. You should, as a healthcare system, want your medications to be digitized. They shouldn't be non-digitized. You have to digitize your medications in order for you to be successful in managing the risk of getting the right medication to the right place.
That's helpful. Last one is, how would you describe the health of the end market in 2024 heading into 2025? And any general feedback from your hospital customers on what they think or expect out of the new administration, good, bad, or otherwise?
I think they're prepared for anything, but healthcare doesn't change much quickly. I think that's on our side. I think medication management is becoming more strategic. It's moving from the tactical to the strategic, particularly on the revenue side as more and more this year, I believe in 2025, most medications will be greater than 50% of the spend will be in specialty pharmacy products. If you can't manage the specialty pieces of medication, you're not going to be successful. This is the first year that specialty meds have exceeded half the budget of medications for probably only 5% of the population.
That acquisition was very prescient. I will say that much. Thank you guys so much for the time. I appreciate it.
Have a good one.
Everyone here.
You bet. Thank you.
Good to see you.
Thank you.
Okay. I think we can go ahead and get started. My name is Ally Bratzel, one of the biotech analysts here at Piper Sandler. It is my pleasure to introduce our next company, AbCellera. Joining us today, we have Martin Hogan, Senior Director of Strategic Finance there. Just on format, we'll have a couple of minutes of introduction and then kind of go into Q&A. If anyone has any questions, go ahead, raise your hand. We'll get to you. But yeah, first off, Martin, why don't you give us a couple of minutes overview on AbCellera, what you've done, where you're going?
Absolutely. First of all, thanks for having us, Ally. Always a pleasure to be here. Really enjoy your coverage, and so it's great to be in person. Maybe before I start, I will be making some forward-looking statements. Please take a look at our risk factors and our SEC filings, and with that, I think in terms of background of the company, it's maybe useful just to sort of reflect back that the company was founded in 2012, and we then spent a decade and over $500 million. Building out the capability to go from the concept for an antibody-based drug now all the way through manufacturing into the clinic, and we built that capability with a view from the beginning to solve technical problems that stood in the way of achieving some really remarkable new therapies with antibody-based drugs and to do that in a way that was scalable.
And so we had the opportunity to both develop and then practice that skill on over 100 drug development programs for partners over that period. And what we're looking at now is we.