Alright. I guess, we will get started. Hello, everyone. I'm Jalenra Singh, health care technology and distribution analyst at Credit Suisse. Thanks everyone for joining us.
Next up, we have Omnicell. From the company, we have Peter Kuipers, executive VP and CFO, and Kathleen Nemeth Nemeth, VP of IR. Omnicell is a leading provider of solutions targeting patient safety and operational efficiency in health care facilities. Peter joined Omnicell in 2015 as executive VP and CFO. Peter and Kathleen will begin with a quick twenty, twenty five minutes presentation, and we will then open the line for q and a.
With that, Peter, over to you.
Thank you, Gelinda. It's great to be here and talk to everyone, give an update on the business and strategy. We do have a presentation, I think, that we can show. Let's go ahead and do that.
Bethany, you're to share the slide? Yeah. You're on mute. Unmute you, Kathy. Yes.
I'm I I thought I had the screen shared. Sorry. Yeah. Alright. That's fine.
Here we
go. There you go. There you go.
We will go on slideshow. Yeah.
K.
Because we have the the normal disclaimers that will flip through, of course. So, again, great to be here. Thank you for inviting us. Excited here today to to give you an update on a a Friday topics you wanna focus on. We go kinda to the to the agenda here.
So a couple areas. If we go to the next page. So, really thank you for the introduction, Dylan. I really wanted to talk about and go a little deeper on the large market opportunities that we see for our solutions for medication management automation. We believe now that we have the market leading platform that can drive meaningful outcomes for stakeholders.
We've also innovated and we're driving innovation both in products and also services. And lastly, I want to focus on and talk about our successful go to market strategy where we now have 143 out of the top 300 U. S. Health Systems under long term exclusive partnerships to invest and drive outcomes in medication management via automation. So let's talk about the mission and vision of the company first.
So we are a mission driven company and that's why we believe we've been successful with our stakeholders, including employees, customers and also investors. So what we want to be, we want to be the caregiver, most trusted partner for medication management automation. We do want to accelerate pharmacy and pharmacy operations and strategy to perfection via technology. If you look at the evolution of the company on the next page, we have driven substantial value for our stakeholders, including employees, customers and investors. We've evolved to now be the market leading platform in medication management automation, and we're evolving and building and realizing the vision of the Autonomous Pharmacy together with our customers and the industry.
So let's take a step back and talk about what is pharmacy, what are the issues that pharmacy is facing every single day. As you can see here, 20% to 30% of prescriptions are never filled. There are a million emergency room visit as a result of medications not taken properly or not timely. One hundred and twenty five thousand hospitalizations as a result from medication errors or medications not taken properly and hundreds of billions of dollars resulting cost from non adherence. We click one step deeper, really look at what now the complexity is driving all these issues.
So here you see from left to right issues in pharmacy and that need solutions ordered, if you will, right in the middle. So think about if you operate, if you're the leader of a pharmacy in a large health system, and the top 300 U. S. Health systems by and large have ten, twenty, thirty, forty, 50 or even 100 different locations, many floors. You have hospital buildings.
You have outpatient surgery centers, outpatient clinics. Within all those locations, need to be able to manage between 7,500 different SKUs of NETs. You need to have those available for the right patient at the right time via the right medical professional. So that's the core of the problem to solve. If you go on the the left if you look at the left side of the page here, you can see at the bottom that one out of every 200 medications dispensed has a detected error, which is not acceptable.
You can also see from a financial perspective that actually medication or pharmacy is the fastest growing cost line in the P and L of a hospital. Medication waste because of expiration is also a significant cost driver within that line. And also from a staffing perspective, an ASHP, an American Association of Hospital Pharmacists time study showed that 75% of the time spent by pharmacists is actually on administrative tasks and not focusing on patients. Then also of course the compliance component is very, very important. There's many issues there.
We've come to market with some leading solutions that we can talk about later in the presentation. And then there's also the issue of burnout, the turnover. Turnover rates in pharmacy staff and pharmacists are twenty percent, thirty percent or even higher. So many, many issues to solve there and we can do that via technology, digitization and automation. If we then go on that results to our priorities, We want to be the leader in medication management automation and drive the vision of the Autonomous Pharmacy.
And we are leading in many areas with our platform. Point of care has many growth drivers that I'll focus on in a little bit further on in the presentation. Central pharmacy automation, that's a newer market. Again, we've got some really, really strong market position there, both from an installed base perspective and upgrade opportunities and also greenfields. And we are transforming the company to more tech enabled services.
Of course, COVID, we believe, has made our offerings and our platform even more strategic because you do want to automate. That's what we've seen our customers automate and digitize. And how do we differentiate? We believe we're the only tech provider in medication management automation with a comprehensive portfolio. And again, over half of the top 300 U.
S. Health systems are a current Omnicell customer and with 143 of those we do have long term sole source agreements. So let's take a look at our platform as of today. So pharmacy automation started in point of care. So the automation layer you see here in the solution set, that is a automation layer of connected devices.
Point of care is close to a patient, also called point of use, where medications are dispensed to a patient, either in a patient wards, in an operating room or in an emergency room. And our systems are connected and interoperable with electronic health record systems like a Cerner or an Epic. But that's only one point in the medication dispensing process. Of course, you need to start at the beginning in a health system and where it starts is the central pharmacy, where now we can offer robotics systems like the Ekso2 that enable the digitization, tracking and dispensing to perfection. We also have IV Prep and IV Robotic systems that can do the same thing for fluids.
And then over time, we've built a software layer to bring to bear the power and optimize the outcomes via that connected device layer, if you will. Omnicell One that we'll talk about in a minute is an optimization engine, can help you drive actionable insights and suggested actions to optimize medications across your large health systems with many, many locations. We've recently also added 340B. We acquired a company called 340B Link, which is the we think has the strongest tech stack, if you will, and has marketplace. 340B is very strategic for our customer base, and we also expect some cross selling opportunities.
And then last year in December, we've also announced the development of more professional services. So beyond break fix, standard maintenance services, more and more we're developing professional services and advisory services. And then on the retail side, the non acute side, we have relaunched the Enlive and Health retail pharmacy platform that can drive via different modules, man adherence and value add for both retailers and payers. And also for that segment, have robotics and packaging also for that group of customers. And it's all powered by a data platform.
Let's talk about the market opportunity in a relative size. So point of care is the more mature market. However, we think there's significant growth there to be had. We are a market leader. The biggest drivers in our growth actually from our bookings and revenue perspective is actually expansion by our current customers, where they deploy more of these systems on more floors and in more locations.
We're early on in an upgrade cycle. Today, we're at 30% booked on the installed base from December 16, so much more to go there. It is high visibility revenue for us because we are really close to our biggest customers and we know their cohorts, their aging and their implementation strategy. And then we've been taken and we believe we will continue to take market share as well in point of care. Central pharmacy, again, that's the next big automation opportunity in the market.
It's a very logical place to start. We do believe we have a leading line of robotics there for both solids with the Ekstra two and then also with IV. And then increasingly, our customers are asking and we're implementing the robotics in the central pharmacy also as a service. 340B, very interesting and sizable TAM as well, really strategic for a lot of our health systems and it really expands the autonomous pharmacy portfolio to also outpatient medication management with visibility for the health system. And then lastly, on the retail institutional payer side, we have the Alive platform plus their robotics and packaging that drives value for those stakeholders.
What does the Autonomous Pharmacy look like? If you go here on the following page, the vision of the autonomous pharmacy is a fully autonomous medication management delivery system with essentially no or very limited manual steps with 100% visibility, 0% error rate, six sigma levels of error rates and high levels of efficiency and six sigma levels of compliance. Now we're not the only ones that are working on the autonomous pharmacies. If we go to the next page, there is a group of leading and prominent pharmacists in The US that have published a white paper earlier this year on the framework of the autonomous pharmacy. And this is a page from that white paper.
You can see here it's close or it's similar to the autonomous driving framework, if you will. So there are different levels of automation in pharmacy going from level one to level five to the right, where customers and health systems can choose to drive different KPIs and with automation and digitization kept to the next level. Earlier, we talked about the significant issues in pharmacy. So we definitely see the demand here, and it's great to see also the industry movement here. We've probably stated before that we believe most of our customer base is between level one and two as far as automation.
And with our current customers that we believe we can deliver a level of automation and digitization slightly above level three. So we continue to innovate and to get to the next levels. And it's also important to point out on the available market slide that is actually the TAMs that we have there and that we talked about, those are based on the current solution set. So let's go to the example of Omnicell One. What does that look like?
So Omnicell One is the optimization engine. So again, if you're the pharmacy leader in a health system, let's say you have 30 locations, you have many, many of 30 buildings, you have many, many locations where you keep nets, They're also called par locations and you could have tens of thousands of locations where you keep medication. You of course want to be able to manage that across and so only SOLO-one actually gives you the insights and actually comes with recommended work actions, a task list that then a pharmacy tech, you can see on iPhone at the bottom right, can execute. So you typically, it could be a recommendation to move medication from one location to another location where in the existing location the medication might expire based on historical usage and projected usage that Omnicell One calculates via algorithms. And in a location where it's recommending to move it to, there might be a shortage coming because of the current stock level and the expected patients that will be there in that ward.
Very elegant solution, very impactful as well that really brings to power the total visibility and actions across all your connected devices in your health system. Let's talk about our go to market strategy as well. So I mentioned earlier that we focus on the top 300 U. S. Health systems as defined by Definitive Healthcare.
We believe that around 70 to 80% of our TAMs that we discussed earlier are within these top 300 US health systems that are winning in the market, if you will, they are expanding geography wise and they're offering additional services also in outpatients. So more than half of the top 300 US health systems are current Omnisoft customers. And with 143 of these we do have long term sole source partnership agreements, which means that only sell our exclusive partner, so more than eFender, we're more strategic than eFender. We become the partner for that health system to help them develop medication management automation strategy and and plan that accordingly. For most of these, we have a customer success executive either located or sometimes now virtually embedded at the health system to help them develop that strategy.
And the majority of these have multi year co development plans and we have an example of that on the next page. So on the next page here you can find is also an investor deck that we posted on our website, it's in the October deck. So this is a real example of a 12 location health system, one of the 143. So of the 12 locations, a number of those are hospitals, but many others are outpatient clinics or surgery centers. And you can see here investments in every single year in automation, in point of care, in XR2 robotics, in IV robotics and also in anesthesia workstations for most of these locations.
And you can see actually the health system driving KPIs to the right side as well. Now this is a summary of the more detailed, a multi year medication management automation plan, which you can kind of see the concept here. So this is the partnerships we have. We're in constant contact with these large health systems to really help them drive the KPIs to the next level. And think also about here, so a customer like this probably has a staff, a pharmacy staff of 200, 300 or 400 people to really manage medication.
Automation and digitization is very, very critical. And how does this then summarize in a financial perspective? Let's talk about our financial framework. We talked about the large market opportunities. We talked about the leading medication management automation platform.
We talked about product and services and then the long term partnerships as well. And you can see on right, of course, that has led to a very strong revenue growth. Talking about the dynamics within 2020, we've said publicly in the last earnings call that by and large, our customers have returned to more normalized business operations. Many of them are at 100% admission rate. Most in general, on average, elective surgery levels are also increasing.
Our belief and what we hear from customers is that there is a trend to be roughly at pre COVID levels of ninety five percent of elective surgeries again next year. We've also seen that it's very clear now that medication management automation has even become more strategic and we've seen our customers now executing again on their multiyear automation plans at the same investment levels as pre COVID. And as a result of that, we have reinstated our original product bookings guidance for the year in the last earnings call. So let's talk about also our business model. So we believe that we have the leading medication management automation platform.
We have a very, very high customer retention and we have very high revenue visibility. So we have, of course, recurring revenue from the consumables, the packaging. We have very good visibility from the recurring maintenance services. But also the roughly remaining 60% of connected device revenue, have very high visibility as well because we have these 143 long term sole source agreements by which by and large for the majority, we have multiyear medication management automation plans as well that we've co developed. So very, very high visibility and we also have a very strong free cash flow conversion.
So let's talk about the growth drivers in the difference in types of products. So point of care that we talked about earlier, our biggest revenue driver there is expansion in current customers current customer base, so we land and expand, if you will. We have a prior generation upgrade cycle that is still fairly early. And then we continue to gain market share from perspective, and we'll continue to innovate as well. In simple pharmacy, we do have a prior generation installed simple pharmacy robots that we're now in for an upgrade cycle.
We also have and there's a more brownfield, an upgrade cycle from carousel to robotics. And a carousel, the way we describe it, is an open bookshelf system, semi automated with a scanner and open boxes essentially. We believe there are around 3,000 of these carousels in the installed base in The U. S. From different vendors, including Omnicell.
And that's a really nice upgrade opportunity as well. And the last, the greenfield, where there's no automation in separate pharmacy. Between those three growth drivers, if we look at the opportunities, the bookings and the revenue, they're equally in size roughly, a third, a third and a third. And then lastly, on retail institutional payer, our life and health platform has been driving innovation and we've announced additional modules over time as well. And we also have meaningful modules that really help payers make sure that their insured patients or population adhere to medications and therefore preventing hospitalizations, if you will, for the same ICD-ten code.
So overall, we believe we can grow organically between 1012%. Let's talk about the profitability goals for us as well. So from a margin perspective, we have built and architected the company to really be able to scale fairly well. A big driver of our gross margin expansion is volume leverage or economies of scale. The long term sole source agreements also help on the margin side because there are no RFPs and prices set.
And then we have a very rigorous program around manufacturing savings, where we work with our vendors to get parts at equal quality or better quality at lower cost, if you will. Very rigorous program there. Then of course, with the continuous process improvements program as well. And then part of these margin expansion drivers, we reinvest in innovation and we talked about where we are in the Autonomous Pharmacy and the issues that are in pharmacy and that need automation solutions. We're also investing in customer success and experience and then we're consolidating and streamlining some of our internal systems.
Overall, we're very comfortable with a long term operating margin goal of 18%. And then tying it all together in summary, so our long term financial framework is an organic revenue growth CAGR of 10 to 12%, a long term non GAAP operating margin goal of 18%, free cash flow conversion goal of 90% to 110% of GAAP net income and we've achieved that for many quarters, And the strategic acquisitions remain part of the strategy. Thank you. Maybe, Giuliano, we can move to questions.
Sure. That was good. Very, very detailed and very insightful. I actually want to follow-up on your last, comment around financials. Good free cash flow conversion.
I mean, I think over the past few quarters, you have been paying down your debt. Maybe talk about the capital deployment strategy, how you think about the investing in more organic growth and innovation versus some M A opportunities, and just maybe also spend some time what kind of M and A targets make more sense for you guys?
Yes. I think that's a great question. So I would say since two years now, we are we've implemented a product phase gate methodology, right? So we look at our end markets, what are the solutions our market needs, right? And that we do that with a time horizon of five years.
And then for kind of newer innovation, we probably plan out eight years ahead. So we're fairly long term focused, really drive value for our stakeholders, including customers and investors. And in that, we also look at do we build that solution, do we partner or do we buy, if you will. So we apply a lot of rigor there and we look at internal return rates there, of course, as well, right? From an M and A perspective, we walk through the platform, if you will, right?
And we do have a dedicated strategy and M and A team that constantly looks at the market. We focus on medication management automation, right? So there are definitely areas where, you know, potentially we could build out or partner or or acquire additional capabilities. Specialty pharmacy is an interesting area, of course, as you know. You see a lot of the top health systems looking at central distribution centers as well, right, that require both hardware and software and services.
Net reconciliation on discharge from a hospital system to the home if you will is an interesting area. And then expansion of software capabilities and services and retail as well. So there is a variety, would say. We apply a pretty strict very strict rigorous evaluation of acquisitions, right? So in general, we believe an acquisition needs to be able to grow double digits and maybe even higher than the 10% to 12% that we just talked about.
It needs to, of course, be strategic in the sense that it is medication management automation. I would also say we do think when we do an acquisition, we need to be able to make it better, right, either via cross selling or get expertise we don't have or vice versa. And then lastly, we also think that by and large, acquisitions need to be accretive on a non GAAP basis from day one.
Okay. Well, that's helpful. So as we think about the underlying industry, I mean, clearly, there's a lot of focus on, you know, patient safety awareness and regulatory control from the FDA, Joint Commission, etcetera. We have a lot of complex drugs coming in market. Biosimilars are seeing pretty good growth.
And, I mean, so in the area of, you know, medicate medication management, do you think those are tailwinds for you guys that industry is moving towards more complex drugs, biosimilars? I mean, there'll be a lot more focus on medication management and, you know, the whole patient safety. Just help us understand that from that perspective.
Yeah, I think the thank you for the question. Think the short answer is yes. So I think if you kind of step back and what we said publicly about COVID, right? So during COVID, and we talked about this in the April earnings call, it was actually a fairly tragic from the perspective that visibility into inventory for the 75 most used nets to treat COVID patients actually was fairly poor. So that needs to improve and health systems realise that there needs to be additional feasibility, if you will.
If you look at the opioid crisis as well, so we believe we have leading hardware and software capabilities there for track and space and ensure compliance and safety as well, including consultations via our life and health platform. So we think overall it's a tailwind. I think from a vaccine perspective, it's likely that retail pharmacies will play or will have to play a very important role as well. I would say overall medication management, and then of course you can only really do it at scale with good insights, the automation, definitely has become more strategic from, you know, from many stakeholders' perspectives. Absolutely.
Yeah. That makes sense. Just to remind everyone, if anybody has any question they want me to ask on their behalf, please email them to me at Jalendra.Singh@Credit-Suisse.com. The other thing we we want to ask about is the cross sell opportunities among your solution offerings, especially after the 340B LINK acquisition? How accretive do you believe this acquisition will be going forward?
And anything you can share there for from cross sell perspective?
Yeah. So then maybe maybe just a a tad about the the strategic rationale on on the 340B acquisition. So we hadn't done an acquisition. We probably would have built the capability ourselves, right? Again, build ourselves, partner or acquire, right?
So for this in this case, we decided to acquire. So we acquired the number three player in the market with the most advanced tech stack actually. So the business we're acquiring, we believe, has been winning and will continue to win the market share against the number one and number two, right? So first thing, of of course, we're doing as well is really, you know, of course, looking at our 143 top customers with long term sole source agreements to see if they have a three forty b program and if they have one that they automated for your software and, you know, and just looking at what's the opportunity there for cross selling. And then vice versa, of course, also the 340B customers, you know, some of those might not be Omnicell customers.
What's the opportunity there to introduce the automation layer and Omnisol one as well to really drive medication management automation to the next level. So in our business case, when we look at the acquisition, we have not counted on cross selling and the benefits from there because we are fairly conservative from an M and A perspective, but the opportunities are definitely there and we're working those and it's needed as well for the industry.
All right. I think this was a great conversation. But I guess we're out of time here, so we will leave it there. Thanks a lot for participating at our conference, and have a nice rest of the afternoon.
Great. Thank
you, Luna.
Thanks for having us.
No problem. Thanks for having us. You. Bye bye. Bye.