All right, we can go ahead and get started. Hello, everyone. I'm Adam Heuser, part of the healthcare technology and distribution team here at Credit Suisse. Thanks everyone for joining us. Next up, we have Peter Kuipers, Executive VP and CFO, and Kathleen Nemeth, VP of IR from Omnicell. By way of background, Omnicell is a leading provider of solutions targeting patient safety and operational efficiency in healthcare facilities. Peter joins Omnicell in 2015 as Executive VP and CFO. Peter is gonna begin with a quick presentation, and then we can open the line for Q&A.
With that, Peter, over to you.
Yeah. Thank you, Adam. I thought what we would do is really give an overview of the company's strategy, our platform offering and our go-to-market approach and momentum that we have. This is a presentation that's available publicly on my website as well. We'll probably spend 15, 20 minutes on the presentation and leave the rest of the time for open Q&A here. Why don't we go ahead, Kathleen? Got our regular disclaimer. The way to think about pharmacy, we focus on health systems as pharmacy and then on retail pharmacy as well. We are, we believe a category creator, really transforming the care delivery model in pharmacy. We'll talk about that a little bit more after this page. Here are the financials.
Why don't we skip those for now and we can come back to those. Let's go to the problems in pharmacy. For the ones new to the story, the pharmacy in health systems is actually a very complex area. It's a very difficult function to execute. Think about health systems not as one hospital building, but think about large health systems that we focus on that have dozens of hospital buildings, dozens of patients, surgery centers, et cetera, where you do need medication. Medication is a very integral and critical part of western medicine care delivery.
Looking at the page here on the left, the core or the complexity of the issue is around the number of meds or drugs that you need to really have available at any given time to be delivered to the right patient at the right time via a medical professional and with the right dose as well. So you need to have about 3,000- 4,500 different SKUs, different meds available in your large health system, where you might have 20 hospitals, buildings, and 40 outpatient surgery centers. So that's where the complexity starts. The outcomes today are mediocre, I would say, at best. You can see the outcomes on the left side. One out of every 200 drugs dispensed to a patient has an error. Many other errors you can see there.
There's drug diversion, where drugs are used by a medical professional or by a family member. The financial aspects of rising drug prices, I think are pretty well known. From an efficiency perspective, the American Society of Health-System Pharmacists does an annual survey of where time goes for pharmacy teams. Think about pharmacy teams as, you know, being 600, 700, 800 or 1,000 people in the team between pharmacists and pharmacy techs. The study finds that about 75% of all time is administrative or logistical and does not include any interaction with patients or is focused on clinical care. There are of course active drug shortages, a lot of prescriptions that are never filled. Compliance is a difficult arena as well.
More and more really important is the people aspect, where all these manual efforts lead to dissatisfaction for employees. 50% or more experience burnout, turnover rates or attrition in health system pharmacy teams. In our population, we've got a large part of the market is running anywhere between 20% and 40% annually. If you have a pharmacy team of 1,000 people and your attrition rate is 400, 40% , you need to replace, hire, train and replace 400 people. 100 a quarter, which is difficult. On the right side you see what we can deliver. What we do is medication management automation. We automate the delivery of drug dispensing throughout a health system and also retail pharmacies.
We have some good solid outcomes we can deliver today. We are on a path. Let me go to the next page. Kathleen, you can go next page. There's an independent Autonomous Pharmacy Advisory board who came out with a white paper framework last year, I believe, on what are the issues in pharmacy and how can automation deliver better outcomes in different areas. You see them at the bottom. I think this is summary page on efficiency, on safety, on compliance, et cetera. We believe in our customer group and we have a large part of the market that generally our customers are at level two, that we can deliver today with our platform level three, probably level three and a quarter. We are executing our roadmaps for levels four and five.
We now have 151 out of the top 300 U.S. health systems who are long-term sole source partners of us who have signed a seven, 10- or at times 15-year exclusive agreement to really go on this journey. The vast majority of these have long-term co-develop plans with us together that we develop with them to really move the needle and get to the next levels of automation. Let's go next page, Kathleen. How do we do this? We have the largest installed base of connected devices. You see at the bottom of the page. In the middle of the bottom bar, you see several pharmacy connect devices. The XR2 robot and IV robots and workflow for IV.
Typically medication is prepared and stored and dispensed in a central pharmacy location and then brought to the floor, either in an ER, OR or a patient area, via dispensing systems that you see on the left. We are connecting it all via the cloud. Then we have value add software like Omnicell One, and the robotic services in EnlivenHealth and 340B, that really bring to life and add the value on the connected devices and drive the outcomes. Let's go next page. We operate in large TAMs. We believe that the top 300 U.S. health systems represent around 70% of the TAM for the first three rows here. Retail, we kinda treat separately here with, within EnlivenHealth. Let's go next.
We believe an important point here is that our business model really drives resilient and high visibility revenue. We have very healthy backlog that we have reported by the end of last year. We have updated our guidance in the last earnings call. We've increased our bookings guidance, revenue guidance and profitability guidance metrics as well. You can calculate using those numbers what our expected ending backlog would be this year. That gives high visibility into forward revenue. Again, 151 out of the top 300 U.S. health systems have signed a long-term sole source agreement with us, and the vast majority of those, actually, we have developed a multi-year co-developed investment plan that we have as a result, also high visibility.
From very high customer retention, then on the right side, the dark green, those are the best of connected device revenue. Again, because of the backlog, because of the 104.51 long-term sole source agreements, because of the high customer retention, and the long-term co-devel plans, investment plans, we have very high visibility in that forward revenue as well. In the lighter shades of green, we have a pure recurring revenue from technical services. The lightest green is what we call advanced services, which is SaaS and subscription software and tech-enabled services. That latter part, that 6% we expect to be able to grow quite aggressively. Let's go next page. This is measured as a percentage of revenue.
Those advanced services were about 6% of total revenue in 2020. This year we expect that to be around 10%. We increased our guidance point from 9%-10% earlier. Now we think it's a solid 10% of total revenue, while we're also growing revenue aggressively, right? We expect to grow that to 20%-30% by 2025 based on reasonable assumptions, mostly on the current customer base. Let's go next. Here's our total growth trajectory that we've laid out earlier this year. We expect organic revenue growth to be between 11%-12%. Again, it's expansion of automation with current customers, market share gains, upgrade cycles, and it will drive innovation to the next levels of autonomous pharmacy.
On top of that, we believe we're a very logical acquirer in medication management automation. We expect to get another 300 basis points or 3% of additional revenue growth for total revenue growth goal, CAGR of 14%-15%. Let's go next page. Those are from a profitability perspective. We're executing on margin expansion of about 400 basis points, both on the OM line and on the non-GAAP EBITDA line. Really driven by improved business mix from these advanced services that have higher gross margins. The long-term sole source partnership agreements, they have pricing momentum. We of course have volumes and scale benefits. Then we also have specific manufacturing saving programs and internal process efficiencies. Go next. Here's our shareholder return.
Pretty evident the stock has been doing well and is being appreciated. Let's go next. In summary, we believe we are a category creator solving real issues in pharmacy in the large market. We are a partner, a strategic partner to health systems. We have high visibility revenue via the factors I just discussed. We have a strong track record of profitable growth. Why don't we open it up for questions?
Yeah, no, that'd be great. Thanks for presentation, Peter. So I have some prepared questions, but if anyone from the audience wants to ask a question, feel free to email me at adam.heuser@credit-suisse.com, and I can ask on your behalf. So Peter, yeah, thanks again for the presentation and for participating this year at our conference. Maybe just going back to the continuum of care that you have as part of the Omnicell platform. Can you just give us a sense of about how you're able to you know drive your customers to focus more on the clinical aspect of what they need to do in their day-to-day as opposed to just the administrative tasks that come along with you know pharmacy inside of a health system?
Yeah. I think there's two parts to your question there, right. The continuum of care really goes from acute to kinda non-acute to retail. I would say we have a very strong platform, probably market-leading platform on the acute and kinda outpatient care side, if you will. Then also on the retail side, we're building this platform in EnlivenHealth with leading communication tools, med synchronization tools, now also with the acquisition of FDS. It includes also financial tools to improve profitability for retail pharmacies. Then it also now includes with FDS Amplicare medical plan comparison tools also. That platform is also growing. That's kind of the continuum of care, right? We gotta maybe look on the kind of the health system side.
Again, we have meaningful partnerships with these 151 health systems where we're really looking at what are the issues in pharmacy that team experiences. They do get a partner on-site, actually. It's called a customer success executive. Normally, that's a pharmacist or a nursing consultant that really helps them develop the strategy and also the investment strategy to resolve some of these issues and via automation get to better outcomes. That includes also, you know, better experience of life at work via less manual touches.
That makes a lot of sense. When we think about just the whole platform in general, I know you gave a slide or showed an image of the revenue breakout in terms of where it's coming from. But you know, when we think about just the software and the technology behind the whole platform, how would you kind of rank the level of importance, whether it be just the underlying software versus these devices that you have as part of the platform as well?
Yeah. The choice of specifically these 151 large health systems, they focus really on the platform, right? They want the outcomes, and to some extent, how it's delivered is less important. You know, from an R&D perspective, we said publicly before that, you know, 70%+ of our R&D spend is software related, right? Now, that is both, maybe go to the cloud page again, Kathleen. That is both control software for these connected devices, right? It is, of course, cloud software, and then it's also, of course, the software that you see as part of the dark green here of these advanced services. That's kind of the relative, you know, investment level, if you will. However, I think we're at a competitive advantage because we have these connected devices in the field, right?
Medication has a physical appearance. You need to safeguard that, track it, have high visibility to operate a pharmacy to good levels of outcome.
These future devices that you kind of allude to in the slide deck, is there anything that we should be, you know, taking into account here of what type of devices these would be, you know, projected out to be? Or any high-level thoughts about what this future device aspect might be?
Yeah. Well, you gotta think about, you know, in building the framework of the five levels of automation that we just looked at, right? There's more automation going from level three to four and from four to five and take out manual steps. That's kind of the way to think about it. The critical where errors occur, where less visibility occurs, where losses occur is always where there's a human involved, really, right? Yeah, could be more robotics, could be more software, etc., right? We traditionally don't disclose what we're working on from a product roadmap perspective, you would understand.
I fully understand. You called out the 151 of the top 300 health systems in the U.S. you're working with. Just give us a sense, like who else is operating in this market? Maybe even more so, do you see health systems doing some of these capabilities themselves instead of partnering with a vendor such as Omnicell?
Yeah. The answer to the latter is no. We can talk about competition. Maybe go to the cloud page again, Kathleen. We believe we have the most complete platform today, right? Servicing really enabling a level three and a quarter. There are point solution competitors, right? Becton Dickinson plays in the kind of point of care systems on the bottom left. But they don't have robotics or 340B software or as-a-service software, if you will. Swisslog has robots, the pharmacy robots, but they don't have an IV robot. They don't have the point of care units at the bottom left. Of course, they got nothing on the top layer as well, right? That's the way to kinda think about it.
The choice is for a health system, you know, most of them are recognizing the problems in pharmacy, kind of the first page where we started on, and you want to improve, there's really two choices, right? One is you choose Omnicell as a strategic partner. We have the most complete platform, not fully complete 'cause we need to go level four and five. Or you work with 10 or 15 point solution vendors, and you have your IT team try and stitch it together with APIs and hosting. Which is likely more difficult, probably less efficient and probably more error-prone.
Let's talk about some of the cross-sell opportunities that you see across the platform. Obviously, you have a very robust solution set right now, but maybe just talk about some of the cross opportunities you see as part of the acquisitions you've done and maybe just how creative you're thinking about these deals that you've done recently?
Yeah, maybe specifically to point out, 340B is a very important program for health systems. The vast majority of these 151 health systems that we have long-term partnership agreements with are licensed or have contract entities where they can have a 340B program. There's a great opportunity there. I think we've disclosed one or two cross-sell wins already since the acquisition. That's a great part of the platform to have. There could be future integration actually between 340B and central pharmacy robotics you see in the middle there because of the flow of the meds and where you actually get the discount. I think that's fantastic. We expect good cross-sell opportunities from FDS to EnlivenHealth and EnlivenHealth customers, right?
The services that way and also the other way, EnlivenHealth software modules, we expect to also be able to cross-sell to FDS customers. Those are two examples. Yeah.
Very interesting. What's been the overall, I guess, impact of COVID on your business? Obviously, the health systems have been, you know, under pressure a little bit here because of the focus on COVID and specifically, but maybe just talk about how the maybe just the focus from the health systems perspective has shifted for solutions like yours throughout COVID and maybe where we are now.
Yeah. I mean, what we saw during kind of the first wave of COVID was that the health systems realized that their feasibility to where they have these 3,000-4,500 meds of SKUs was very limited. To treat a COVID patient, you need 75 different meds. That wasn't acceptable. We believe that raised really medication management automation to an even more strategic level. We think, I think it's staying there, if you will. Very, very strategic. I think from just an operational perspective and health systems being able to implement medication management automation systems, I mean, that ability really came back late last year. That hasn't changed.
Health systems really know well now how to treat COVID patients and have implemented all safety processes as well. So that's not a hindrance for us to engage and implement systems.
Maybe just if we think about the spectrum of health systems, you have, you know, the very large ones on one side and kind of the more regional ones on the other. Would you say that Omnicell is pretty, you know, penetrated across all of those different types of, you know, got the large ones and your smaller ones? Or are you more focused on the smaller health systems? Or maybe just give us some thoughts there?
Maybe first, maybe a question we sometimes get and we've talked publicly about is kind of within the 151 health systems that have a long-term sole source partnership agreements, how are they spread out over the top 300? The answer there is it's a pretty equal spread between the super large, medium large and the large, if you will. Maybe that's one part of the answer. The other data point that we've given is that we believe that the top 300 U.S. health systems make up about 70%-80% of the TAMs that are relevant for our solutions, right? We do have smaller health system or hospital customers as well, but they make up a smaller part of it.
Got it. That makes sense. Maybe just give us some sense about how Omnicell manages more of like the some of the controlled substances, maybe some like the opioids. How does that impact your business and what kind of protocols or initiatives are in place to help manage that side of pharmacy, I guess?
Yeah. Well, really, you know, I would say, you know, first of all, you know, if you automate as a health system, you get to the next levels of automation, you get more visibility, including also more visibility and tracking of narcotics. We do offer a diversion software tool that's part of Omnicell One that really looks at behavior of medical personnel, looks at make sure people are actually on shift, make sure that they don't sign in where they're not supposed to work. They look at algorithms around wasting of narcotics or morphine to see if there's patterns there or not. So you can kinda triangulate in and correlate. I believe it also has algorithms around kind of the speed of actually entering numbers on the keyboard.
People that use narcotics have sometimes actually, I guess, a faster way of typing some words. So we got some good knowledge there and algorithms that we can actually with confidence detect. Those tools can help detect potential medical professionals that commit diversion, right? That's an important tool. Of course, the HR team of the health system will need to work on that, if you will. That's not the work that we do, we provide the software tool. From a fiscal perspective, we have a specific controlled substance dispensing tool, if you will, that's part of the point of care units on the bottom left.
That's a premium upgrade where essentially it's automated dispensing, but only one unit can be dispensed at a time, and it can only be dispensed if it is prescribed to a certain patient at a certain time that's on that location for that specific med, and it's architected that way that you cannot get to the other doses. We see some good uptake in that solution. We announced actually I think it was this week the partnership with Fresenius Kabi, right? Those specific form factors of Fresenius Kabi we ensure that those can go through the controlled substance dispensing system as well.
Got it.
Yeah.
Very interesting. What about just the regulatory landscape and how you think about that, I guess more so impacting your customers? You know, 340B is always in the news in terms of developments there, but maybe 340B and anything else you're willing to share in terms of the regulatory landscape that you've been maybe watching more closely as of late?
Yeah. It's on 340B. What we said publicly is, you know, if you kind of look at the history, every couple years there is pushback from pharmaceutical companies that operate at a 90% gross margin level, on participating in a program with their meds, if you will. Then you also see the government support or the legal system support, federal support, court support, for the 340B in favor of the 340B program.
I think if you look at it, if you research it, we see that trend again in the last couple of months, where there are a number of manufacturers that had excluded certain meds from the 340B program. If you look, I think over the last couple of months, what we've seen is that there are court rulings that are actually in favor of the 340B program, and then the manufacturers are obliged again to put those medications back into the program.
Got it.
Thanks.
On slide 13, I believe you had, you know, you laid out kind of the long-term margin expansion opportunities. Can you just elaborate on some of those, you know, specific components that you think about as you bridge to that long-term margin opportunity, and maybe what types of investments you're making now to kind of bridge to those levels in the future?
Yeah, I think that's a great question. I talked about, you know, what the profitability drivers are, but they, of course, do come with investments. Improving the business mix to more advanced services, that, you know, that is driven by essentially software engineering, right? That's where we make investments. On the long-term customer, long-term partnerships, you know, investment there is mostly on go-to-market, mostly in the form of customer success executives, right? That are embedded at the health system that help map out what are the current problems, what are the KPIs, what do you want to drive, and map out the strategy and investments. That's a commercial investment. Economies of scale, and then of course, the manufacturing savings.
We have certain programs, you know, automation, vendor saving programs that we have put in place. Process efficiencies. That's more on the IT side and process approval side. Yeah, but it does. That's an excellent point, Adam. It does require investments, and I think in our prepared remarks every quarter, we do comment on that as well, that we keep reinvesting, of course, part of the growth or the additional profitability into further scaling of the business. We think we're in it for the long term. Our 151 and other healthcare customers. These are really multi-year horizons and improvement programs.
Got it. Let's talk about some of the more, I guess, timely dynamics in the market that, you know, probably no company is immune to, is just the labor markets. Obviously with your business, a lot of it is technology-based and innovation-based. I mean, have you seen any difficulty in recruiting or retaining those, you know, maybe high value employees who are driving a lot of the innovation and thought processes that, you know, drives some of those future technologies and innovations for the business? Is that anything that you've seen recently?
Yeah, no, absolutely. We in our prepared remarks last week in the earnings call, we pointed out that we had hired over 100 new employees, net hires, if you exclude the acquisition, right, of FDS. And the majority of those were actually software engineering and in what we call customer experience, which is really implementation services, right, and consultants. So that, you know, that's those are highly talented, sought-after employees and team members. We think we're a very attractive employer. We are making a difference in healthcare. We do believe we're a category creator.
You know, the current size and the future size of the company, I think if you compare it to the really, really large healthcare technology companies, you can have an impact here, a real impact, and work with customers as well. We're on a mission, right? Two weeks ago, we had a leadership meeting with the top 120 people in the company. I have to say, that's probably by far the strongest leadership team I've been part of. Very proud of what we've done, and there's much more to come.
Oh, that's great to hear. Maybe just the other question I'll ask about just the supply chain disruptions we've seen globally. You know, with the device aspect of your portfolio, has that been much of an impact or has that been fairly offset by some of the efficiencies that you've been able to put in place?
Yeah. To be clear, right? Let me kind of summarize what we've said publicly, right? We've always put customers first and then employees a close second. We wanna support our health system customers. Back in the May, June timeframe, specifically for semiconductors, we saw that demand and supply was diverging, right? We had a choice to make. We analyzed what we could do. Option one is, you know, kind of continuing what you were doing or option two is look forward and really because we have a healthy backlog, right? We know many, many months ahead, you know, what implementations will occur, right, already contracted.
We know the configurations of those systems, and then we also know, of course, what we need from a semiconductor perspective. We decided to do a pre-buy for the calendar year 2021 and a pre-buy for calendar year of 2022, which comes of course with inflationary costs, but the trade-off is that we have a high level of confidence and surety of supply. Again, it's not 100% sure, there's still risk management, but a very high level of confidence. We had no shortages so far. We've said it in public comments as well, which is fairly exemplary. What we've also done is we have qualified alternative CPU parts that we can also use with at least the same performance or better performance. Then we've also done direct buys from semiconductor manufacturers, right?
That we then buy directly. Lastly, we have taken inventory of semiconductors early. You saw that in the prepared remarks. I think it was $3 million or $4 million of additional inventory in the third quarter of semiconductors, right? So that's from a supply chain perspective, ensure that we have a high confidence and surety of supply. It comes at inflationary cost. We said, I think for the fourth quarter that we had about $3 million, $2 million-$3 million more inflationary cost in the fourth quarter compared to the third quarter. Third quarter, of course, also had already you know, a fair amount of inflationary costs. What we've said going forward is that we also have, of course, freight and steel inflation.
Now, those two markets inherently are more spot markets, right? For example, sea containers shipping costs, for example, the rates for those is fivefold from what it used to be 12 months ago. That definitely is higher from what it used to be. That will continue to some extent, to a large extent, also probably into 2023. We do supplement or replace sea freight with air freight when needed. We've done that, and we'll continue to do that, 'cause the priority is serving our customers. Then somewhat similar fashion, steel as well, also a spot market. But we have you know, teams both on the freight side and steel side to really look ahead and make sure we continue to operate the supply chain.
Again, high confidence, but I think from a cost perspective on steel and freight, there's more volatility, right? 'Cause you cannot do forward buys, right? We have also at the same time initiated pricing actions. They are threefold. One, we increase pricing, list prices. Two, we increase the minimum levels or expected levels on margin levels on deals. Three, we've increased service pricing. Now, that said, of course, the impact to the P&L of these pricing actions will follow later, because of course, the already contracted purchase orders and contracts in backlog, by and large, we're not necessarily touching, right?
The inflation kind of comes first and is at a higher level, and then pricing actions, you know, are more and more offsetting, we believe, the inflation as we go through this quarter and next year.
Got it. Nope, makes a lot of sense. Maybe just the last questions as you wrap up here, but maybe you've got a strong presence here in the U.S. with the 151 health systems. Maybe just give us some sense about the international business and whether you see that as more of a maybe a larger growth opportunity longer term, or maybe just some high-level thoughts on, you know, U.S. domestically versus international?
Yeah, our international business is growing, you know, at a very strong clip. I think the difference between domestic practice of pharmacy and international is that the level of automation or need for automation in the workflows is higher in the U.S. and Canada than it is by and large in Europe. So in our customer base, when we look at this is more on a simplified level, but let's say a hospital building has 100 theoretical or potential locations for a connected device or including a robot, right? We see in the U.S. that around 60 of those 100 potential locations do have a piece of automation, a connected device. That used to be 55 five years ago, or maybe 55 years before that.
That same metric is probably 20% in the U.K., 20% in the Middle East, maybe around 10% in France, and then probably lower in Germany. The adoption is starting as well in international. There's a little bit more complexity that the workflows are different in every country, so we really have to watch scalability and the level of investment we put in. But it's definitely growth market, so we definitely believe on the long term that that's a very strong double-digit bar.
Oh, that's great. Anything else that you wanted to highlight before we wrap up for today in terms of Omnicell, the market, and maybe just some high-level thoughts as we wrap up for today?
Yes. I mean, you've seen the financials in the front, so we had a really good quarter. We increased bookings guidance, we increased revenue guidance, we increased EBITDA guidance, we increased non-GAAP EPS guidance. We had a strong free cash flow performance. We signed three new long-term sole source agreements, two of which were competitive takeaways. We announced what's called CPDS, which is a full robotic service for one of the VAs in the U.S. We're well managing inflation and surety of supply, partially offset with pricing actions. Very pleased with the momentum.
It's not unexpected 'cause we are managing the business, kind of on a layer basis, on a go-forward basis, and drive that recurring part and visibility. I'm really pleased with the execution of the strategy by the teams.
Oh, that's great. With that, I think we can wrap it up. Peter, thanks a lot for participating at the conference and thank you for everyone who joined in today. That's Peter Kuipers, CFO of Omnicell.
Great.
Thanks, Peter.
Thanks, everyone.