I'm Brian Tanquilut. I'm the healthcare services analyst, U.S.-based healthcare service analyst at Jefferies. Thank you for coming today. Joining us this morning is Option Care. They're one of the largest infusion operators in the U.S., and with us this morning is the company's CEO, John Rademacher, and the company's CFO, Mike Shapiro. So maybe I'll start, John. I think not everyone in the room is very familiar with what infusion is or what you guys do, what exactly does Option Care do? So maybe if you can give a little bit of an intro on the company.
Yeah, absolutely. Again, good morning, and thanks for being here. Before we start, just some housekeeping. We may make some forward-looking statements in our commentary today. These are subject to risk and uncertainty. We encourage that you go out to our investor website or to any of our SEC filings to understand those risks and uncertainties. With that, you know, as you kinda kicked off with, Brian, so we are the largest independent provider of infusion services in the United States. We operate and are licensed in all fifty states. We have about 7,000 team members. About 4,000 of them are clinicians. That's pharmacists, pharmacy technicians, dieticians, nurses that support that transition of patients out of the hospital into the home, or to provide infusion services for patients that are struggling with chronic disease.
That infrastructure that we have, so we operate 95 pharmacies across the U.S. That gives us coverage of about 96% of the U.S. population. We are in about 800 payers. We're in all 10 of the top 10 national payers as being in-network as part of their providers for that. That ability to have that reach and the capacity within our organization gives us an opportunity to really capture market demand that's available in the marketplace. Our referral sources really are hospitals. So we work with discharge planners, case managers, hospitalists, to identify patients that are receiving infusion while in the hospital, are stable enough to be discharged and be able to continue that infusion service in the home.
We call on physician practices, specialists, specialty clinics, in order to identify patients that have chronic disease that could benefit from some of the therapeutics that we are able to provide. And we wrap everything around not only that ability to compound, dispense, and distribute the product efficiently and effectively to get it to the doorsteps of the patient or into one of our infusion suites, but also marrying it up with a nurse to oversee the infusion or the injection event.
So, that infrastructure, that scale, allows us to have a competitive advantage and, more importantly, to serve the needs both upstream for partnering with biopharma as they're getting the products in the marketplace, of being a partner within the prescriber community, within the hospitals and the physician practices, and then also to focus around the needs of the patient and making certain that we're driving high value and high satisfaction to oversee that infusion event.
Jon, we've seen a lot of growth in your business, organically, right? So I know that the drug pipeline is an important factor. So maybe if you can just walk us through what drives growth in your business, and what kinds of drugs are these that you're infusing?
Yeah. So, we look at the categories really around what we categorize as being the acute therapies, and a lot of those around infectious disease, antibiotics, nutrition support, and many of that, again, coming out of the hospital through that process. We also focus around, you know, disease states within neurology, within gastroenterology, within immunology, so, products like IVIG, the chronic inflammatory diseases, some of the new neural products that are entering the marketplace, as well as some rare and orphan products, all that have the characteristics where they require a pharmacy dispense and the oversight of care management and care planning on that, as well as a healthcare professional to oversee the infusion or the injection through that process.
So we have a wide array of products that are part of our product portfolio. We continue to work upstream with biopharma, as we're also looking at that FDA pipeline and products that are in the approval path to be a partner of choice, to think about how we can be a channel partner as they're making determinations around how to get the product in the marketplace. And using our scale, our clinical competencies, as well as the reach that we're able to provide in order to be that partner of choice as they're making decisions around how they're going to bring the product in the marketplace. Today, we enjoy over 50 limited distribution drugs that are part of our portfolio, where we are one of maybe two or three providers of that product.
And again, we can use our clinical resources and some of the technology that we've deployed to be consistent and high quality on that. And that, I think, Brian, is part of the uniqueness of our portfolio, is that interconnectivity around the ability to serve a patient in Portland, Oregon, and Portland, Maine, with the same clinical protocols and the same process, and utilizing that technology in order to be seamless in the way, not only that we are collecting the data, and we're executing the clinical protocols, but we're also ensuring that high standard of care is being met. That has high value for, you know, the pharma companies that are looking for partners on that. It has high value for the payers that have members that are across many states.
And it also allows us to be not only local, where we need to be very active there, but use that national scale to drive that consistent, high-quality care.
No, it makes a lot of sense. Mike, maybe I'll shift to you. How should we be thinking about the growth algorithm for the company?
... Yeah, Brian, look, it's something we're very excited about, to a lot of John's comments. Look, when you look at the portfolio of therapies that we infuse in the pipeline and the utility that we can bring to patients and referral sources, we see the industry growing in the mid-single digits, call it the 5 to 7% range. I think given a lot of the attributes that John described around our broad payer access, limited distribution therapy, we would expect to grow faster than the market. And so what we've articulated and how people should think about this enterprise is that over the medium term, we expect to deliver high single-digit organic growth. We think through M&A and other strategies, we can potentially augment that, but from an organic perspective, we see this as a high single digit top-line engine.
Given the leverage that, that we, we can drive through the investments we've made in durable infrastructure, we think we can translate high single-digit top line into low double-digit organic earnings growth. And again, that would all be before any strategic capital deployment. And so over time, we would think by continuing to drive that leverage growth, that should accrete to, modestly better EBITDA margins.
Maybe for John, historically, you were a home-based provider, right? You were sending nurses to patients' homes to infuse the drugs. Now, you've got a strategy where you're building infusion suites or clinics, basically. Maybe walk us through the thinking behind that.
Yeah. So, you know, historically, the business was one that was more focused around those acute therapies. And as more products have entered into the marketplace around chronic conditions, it's changed kind of the profile of where we execute and what's in best interest of the patients. So, we will always be able to service a patient in the home. That's at the core of what we do. And for medically fragile, immunocompromised patients that are not ambulatory, that ability to reach into the home, we think is a core competency and it's something that we'll continue to execute around. But what we've seen is with that shift of being able to broaden the portfolio of products, and especially more in the chronic condition space, those patients are ambulatory. They're out doing activities of daily living.
Many of them are going to work or school or out in the local communities. And that ability for us to meet them where it's best for them, to offer an alternative so that they can schedule a visit, they can stop by on their way to or from, get their infusion event, be serviced well through that process, and then be on their way. We have high level of patient satisfaction, and we've seen a really positive uptake of that. About 28% of our nursing visits are being done now in one of our infusion suites. We expect that will continue to go higher as more and more products from the chronic are added into our portfolio. And it does several really positive things from our perspective.
Number one is it gives patients choice and, front and center, that we're always about putting the patients at the center of the decision, as we're making. The second thing is it drives operating efficiencies, as you would expect, being able to have nurses that are located within the centers and having the patients come to you eliminates windshield time of driving to and from a patient's home. Also allows us to see multiple patients at the same time, and you can oversee that within the infusion suite environment. So it drives ability for us to look for that leverage growth that Mike talked about. It also expands capacity.
And in today's marketplace, organizations that can focus around driving higher productivity and efficiencies within their clinical labor are gonna be advantaged on that, knowing that we have challenges with nursing and nursing shortage as we look forward, and that will allow that capacity for us to continue to grow and be able to service more and a bigger patient census through that process.
Since you talked about, chronic medications, how are you thinking about the opportunity with Alzheimer's and how you play a role in that?
Yeah, I mean, we're really encouraged with some of the breakthroughs that are happening within that disorder. I mean, it's such a devastating disease. So you know, we are looking to be a partner for the manufacturers as they're thinking about their channel approach. One of the challenges and one thing that we continue to call out is we're very conservative in our view of how this will start to ramp up, and a lot of it has to do around really two things. Number one is what are the medical policies that will be put in place by the payers? And there are a lot of hurdles both from the diagnostic standpoint as well as the ongoing oversight of these therapies, in which we're still everyone's trying to determine what's the best path.
And I know the manufacturers are working closely to try to get that defined. The health plans themselves need to put the medical policies in around what's the prior authorization and what is the way that they're going to expect feedback around the efficacy through that process that we're trying to determine. And then what's that path to payment? How do we make certain that the reimbursement model is in alignment of something that makes economic sense for us to be a you know part of that service model?
And given that the prevalence of this disease is going to be on the elderly, when you look at that and knowing that a vast amount of them will be Medicare-eligible or Medicare beneficiaries, and therefore, it would be either in Medicare Fee-for-Service or Medicare Advantage plans, we're working to try to determine what's the best path and how do we do that? I would end by, you know, on that and just saying, we believe we're part of the solution. Part of the investments that we've made, the capability set that we have, our ability to capture a lot of information around the patients with the technology platform, puts us in a really great position.
The infusion suites that we have built out and the chair capacity that we have there, we believe will be well suited in order to support this patient and this population. But there's still a lot of unknowns that really have to be determined around that medical policy and the path to payment before we can really size it and understand where that is. You know, again, the manufacturers, both with the approval that Eisai and Biogen have received, as well as Lilly has a pretty strong pathway. Again, we have teams that are dedicated to those relationships upstream with biopharma, and we're in conversations to try to determine how we can play a role that would support their needs and the needs of ultimately the patients.
Mike, maybe I'll shift to you. Just to—as we think about the relationships with biopharma and the payers-
Right, I mean, scale in this business matters, as well as local presence, right? So maybe if you can walk us through what that looks like in terms of the competitive dynamics in the space, what the payer relationships look like, and then your ability to buy well just because of your size.
Yeah, look, this is a fascinating market, and like, most in the U.S., you know, while we absolutely take advantage of our leverage and scale on a national basis, healthcare is still delivered on a very local level. And so what we pride ourselves on is being able to, you know, maintain broad payer access, broad therapeutic access, because in virtually every case, we have direct relationships with biopharm, where we're negotiating, not only better and favorable pricing, but also premier access to therapies, which if there are supply disruptions, that definitely comes into case. As well as the state-of-the-art technology and clinical tools that we've developed. And so we like to say, you know, that case manager in Chicago doesn't really care how many dots on a map we have in Texas.
They care about, are you gonna be responsive and turn around and respond to my question of, "Do you have this therapy? Do you have this payer access, and can you get a nurse to somebody's home within 24 hours?" And so, we absolutely leverage this scale on a national basis, but always with an eye on having that local collaborative spirit, and it's worked quite well with, for us. As you mentioned, you know, one of the things that we have a very demonstrated track record around is commercializing new novel therapeutics, some with thousands of patients nationally, some with orphan status. And so, again, back to John's point, the tools that we have developed allow us to very rapidly commercialize and deliver in a very clinically consistent manner, patient care, regardless of where they are.
That matters especially to smaller biopharm as they're bringing out novel new therapies. They want quick wins, and we have the ability to do that, and that doesn't come free.
So maybe, Mike, I'll use that as a segue to my next question. This year, you've seen some benefits on purchasing-
-that have driven upsides in numbers. We've gotten the question on: Why does that not recur next year? Or what are the dynamics around that?
Yeah, look, we have the best procurement and business development team in the industry, and where we have those direct relationships, every single year, this is block-by-block fighting. I mean, our team is constantly looking for procurement wins. And the reality is, in every year, there's procurement wins and losses, and, you know, we're constantly looking between the sofa cushions for spare change. It typically in a traditional year, nets to a modest procurement benefit as we continue to execute on a scale. John and I also pride ourselves on being as transparent with the investor community as commercially responsible. One of the things that emerged in the middle of the year was, for a limited number of codes where, you know, we didn't find coins, we found a couple pretty large bills.
And again, this is part of our ordinary course, and we called that out. I think the unfortunate side effect of that is that we now have a new non-GAAP measure of earnings without extraordinary procurement benefits. The reality is, in the Q3, you know, we delivered 28% earnings growth. Part of that was, you know, the realization that we had around $12 to 14 million of extraordinary commercial procurement benefits, and we're starting to see some of those benefits subside here, as expected and as we called out. But the reality is, in every single year, the team is clawing for dollars, and again, we've, as the market leader, you know, on a sustained basis, demonstrate procurement leverage, just simply not to the extent that it was this year.
I understand and fully appreciate that that does create a little bit of fuzzy math as folks are trying to dissect the results, which were phenomenal in the Q3, to really understand what's that apples-to-apples run rate.
So maybe I'll use that to send you a follow-up.
So one of the questions we've gotten as well is: Is the growth decelerating in the business once you adjust for these things, right? Or when you gave us your growth algorithms, maybe walk us through how you- you're both thinking about growth going forward?
Yeah, happy to. Maybe I'll start with, you know, a little bit more of dissection of the results and, and definitely defer to John and his thoughts on, on the outlook. Look, one of the things we recognize is unique to this year is there's a lot of very distinct idiosyncrasies create a little bit of ambiguity around the growth rate. At the end of 2022, we exited a respiratory therapy business that we inherited with the BioScrip merger. There's two distinct therapies, Radicava and Makena, we have exited for different reasons, but both of those were notable therapies for us. We also had a dynamic rewinding to the middle of 2022, where a couple of our skilled competitors exited a number of markets.
All of this creates a very ambiguous year around normalizing for prior year jump-off points, exited therapies, sold business. You know, we introduced mid-year this procurement benefit, so fully appreciate those dynamics. When you really unpack those and normalize for those, even going into the fourth quarter, which I understand some folks are trying to normalize the math, keep pointing out you also need to look at the jump-off point from last year, because those therapies, that business, were all humming along in the fourth quarter of last year. Really, and I think going into next year, our growth algorithm will be much more straightforward. We won't have to be qualifying and articulating with and without some of these idiosyncrasies.
But at the end of the day, even as you look at our fourth quarter, we, when you normalize for these, we see this as still a high single-digit top line, low double-digit leverage growth, earnings result. And I think as folks are looking at our fourth quarter implication, John and I also take into account and very serious, the credibility that we've built around doing exactly what we've said we're going to do. And so we typically, especially in the fourth quarter, enter that quarter with an air of conservatism because there are some seasonal up ramps that you typically see later in the fourth quarter that we're always very careful to you know qualify going into the fourth quarter.
So from my perspective, very pleased with the growth profile and fully appreciate that there is a little bit of a little bit of mud in the water as folks are looking for clarity.
Yeah, and the only other thing I'd add is, again, not in a position to give 2024 guidance, but to Mike's point, we think that the growth thesis remains along those lines. I also need to recognize how hard the team worked to actually capitalize on this procurement opportunity. That's growing a patient census, that's making certain that we are in the market in order to serve those patients and capture the market demand. And the team did extremely well for us to be in a position to talk about, you know, the benefits that we're getting out of that. As we're looking forward, again, we're always gonna have those puts and takes of... We have a wide array of products that are in the portfolio.
Some are at the end of life, some are in the mature part of their life cycle, and others are new and emerging through that process. And we're always taking a look to cultivate that pipeline of products, making certain that we're looking for expansion on that. And as I talk to the team, you know, we have a multitude of strategies, but one thing we talk a lot about is how are we best positioned with reach and frequency to take share? So where there is market demand, where there are those discharges happening, how is our team best positioned to capture that demand and to take share wherever possible? And then working upstream with biopharma, how are we in a better position to make share? So how do we help support new products entering?
How do we think about, you know, as they're looking at channel partners in a way to, to really, capitalize on the infrastructure that we have, how do we, how do we look at those two different, dimensions in order for us to continue to drive that growth? And to Mike's earlier point, that's why. Look, we think that the, infusion market is gonna grow in that 5-7 range. Our expectations are that we're above that, right? That, given the investments that we've made, given the position that we hold, given the competitive advantage that we continue to invest in, we expect that our team is going to be out there taking share and making share, in order to capitalize on the position that we have.
So maybe a layer on something from your—Mike's growth comment earlier. So historically, you've had acquisitions-
-in the growth algorithm. You tried to buy Amedisys earlier this year. And how are you thinking about acquisitions now in terms of both strategy and contribution to growth?
Yeah-
Maybe-
You, sir?
Maybe I'll start on a little more of the mechanics and to clarify some of the comments that were made on the fourth quarter call. Look, we have a track record of successfully acquiring and integrating enterprises. It started with the BioScrip merger back in Q3 of 2019, and we've, you know, executed a success of approximately five highly accretive transactions since then. Obviously, you mentioned the Amedisys transaction. There were a lot of lessons learned out of that and feedback as we continue to connect with our shareholders. And one thing we clarified is that, look, going forward, we see a very attractive landscape, again, leveraging a lot of our infrastructure.
We have said that, you know, in the near term, we expect to be pursuing more adjacencies and smaller scale deals that are highly complementary and closer to our base business. We've said that anything that we look at has to be both strategic and economic. I understand and respect that investors hear the word strategic, and they think, "Okay, brace for a dilution." Nothing that we pursue does not also possess a very attractive economic opportunity for us. It has to represent solid economics. And in this rate environment, you can imagine the hurdle rates are considerably higher. We have said that we are comfortable operating north of three times net leverage. I'd remind that when we pursued the BioScrip merger, we inherited a balance sheet that was 15 times leverage.
We reset it to 6.2x on a pro forma basis at the time of the merger, and we've driven that down to 1.7x. So we've. And we have a relentless focus on cash flow generation. So we have the ability to expeditiously deleverage, and we would only endeavor to go above 3x net leverage unless we had a clear line of sight, a trajectory, and we would make a commitment over a time period to get back under 3x net leverage. Said another way, we have access to capital, and we wouldn't expect to use equity to fund M&A going forward, and that would all be complementary to what we see as a very attractive growth profile on the base business.
The only thing I'd add is, you know, we tried to define and say, "Look, we're gonna look for opportunities where we can increase our market presence, and/or we can increase our capability set to serve patients in the home." And looking around with that aperture, as Mike said, everything we look at is both economic and strategic as we're thinking about how the healthcare ecosystem is evolving and how we can play a more important role. We looked and we defined, and as we're looking at the opportunities, Brian, we see that the ability that we have to spend time with patients, the ability that we have to oversee that infusion event, and that opportunity for us to influence the clinical care that they're receiving, we think it's a good use of our clinical resources on that.
We'll continue to probe and understand kind of how we can play a bigger role on that. The healthcare system's gonna continue to evolve through that process. We wanna make certain that we're hearing the voice of the payers, we're hearing the voice of the prescribers, we're hearing the voice of the patient in the way that we're evolving our model to that. But we have you know high-caliber clinical resources that we want working at the highest level of their licensure, and we think there's opportunities for us to continue to make smart investments as well as do other M&A activities that would allow us to achieve those goals of deepening market presence or expanding the capability set that we have while we're in the home.
Mike, maybe, as I think about your comment on how the company generates very healthy cash flows, right?
It seems like your M&A focus, you know, like you said, the hurdle rates are higher. So how are you thinking about redeploying that capital as you wait for the bigger good deals to come when you're generating a ton of cash?
Yeah, look, one of the things that we're thrilled with is the cash velocity of this enterprise, and as John and I continue to remind the team, it's not our cash, it's our shareholders' cash. How we deploy that in shareholder-friendly manners is one of the most important roles that we play as officers of this enterprise, and something we take very seriously. We have developed a multifaceted capital allocation strategy where, you know, first and foremost, we invest in internal initiatives that drive organic growth, whether it's new pharmacies, infusion suites, technological platforms, training, and capabilities. That's the most efficient. We feel that we have a very responsible and robust pace of investing internally, and yet we have the ability to further deploy cash. And so, in 2023, we had our first ever board authorization to pursue share repurchase.
They authorized up to $250 million, and through three quarters, we have repurchased $175 million of that. We see that as a continued additional lever that we can utilize, and so it's as simple, Brian, as looking forward at what we see the forward view of M&A opportunities. There isn't a book in the post-acute space that we don't see, and we say "no" a heck of a lot more often than we say, "Interesting, let's learn more." So we're very thoughtful and disciplined on that front, and we will constantly be looking at external deployments utilizing share repurchase as a gauge. But it's also a constant balance of, again, maintaining what is a very healthy balance sheet. We've seen significant response from both rating agencies, and we sit here at Ba3 BB-.
We have a very healthy capital structure. I think going forward, we feel very confident in our ability to pursue that multifaceted strategy, both through M&A as well as balancing that with share repurchase.
John, we got a minute here, so maybe just any closing thoughts that you want to share with the audience?
Yeah. The momentum of the business remains strong. You know, from an execution path with all of the things that we're managing, we know, it's you got to win at the local level and use that national scale to drive efficiency and effectiveness as we move ahead. You know, one of the things we've talked about, and I think in alignment with the cash velocity comment, is a lot of the investments that we've made internally within our technology infrastructure allows us to drive that operating efficiency and continue to find ways to sweat the assets as we move forward. And we talk about revenue cycle management and the investments that we've made in order to just drive that efficiency of creating that perfect claim from the moment we receive the referral.
And I think that's important in the sense of, as we're thinking about how this evolves as we move forward, that ability to make certain that we're getting paid fairly and effectively for every single service that we're delivering, is a big part of the focus of the organization, and using that technology to drive that efficiency, and effectiveness of our team. So, really encouraged about the momentum that we have as we head into the fourth quarter and into next year. We think the growth thesis remains intact, and we're, again, really pleased about the progress and the focus of the organization around providing that extraordinary care to the patients that we serve.
Awesome. Thank you so much,