Joining us. My name is Joanna Gajuk. I work at Bank of America Equity Research, cover some of the small-cap and medium-cap healthcare services providers. So now it's my pleasure to host this session with Option Care. They are the largest home infusion provider in the U.S. And today with us, we have Mike Shapiro, the CFO, but also we forgot to put your name down. But Nicole Maggio, who's the corporate controller at Option Care. Did I get it right?
You did.
OK, perfect. So I guess Mike said that he wants to introduce, I guess, some concepts that he want to make sure we hit, and then we're going to go right into Q&A.
Sure, Joanna. Thank you very much. We're thrilled to be here, really excited to share some thoughts on Option Care Health. Recently released our first quarter results. Really solid start to the year, especially considering some of the operational challenges we endured with some of the disruptions on the technology side. For everybody in the room and listening in, we're the largest provider of home and alternate site infusion therapy in the United States. We have a physical presence in 46 states and are licensed and have patients across all 50 states. In the first quarter, we saw very solid traction for our model as we continue to strive to drive greater census of patients in the alternate site, where we have the privilege of treating patients that are dealing with both acute and chronic conditions.
In the first quarter, we delivered 13% top-line growth, which really just underscores the strength of the platform. And I think, as many folks at the conference have been reflecting on, the first quarter was quite challenging with the disruption with the Change Healthcare IT environment, which was very well integrated with our overall operations. And so starting in late February, really through the entire first quarter, we had quite a bit of disruption around our ability to triage new patient referrals, process and support existing patients, as well as seek reimbursement for claims. And so the team really performed at just an exceptional level. The level of patient care was not disrupted at any time. We actually maintained all of our responsiveness. And equally as important, our patient satisfaction scores in the first quarter were the highest ever recorded at 93%.
On the heels of the first quarter, again, we reaffirmed. We actually brought up the lower end of our guidance range. We think 2024 is going to be yet another very productive year for the Option Care Health team.
I guess to that end, with some of the disruption you mentioned, the Change Healthcare outage and also some supply cost pressure, but you still were able to lift the lower end of the guidance. To me, it sounds like the core is actually doing better. I guess, can you talk about that? What was the driver for the better sort of core?
Sure. So when you unpack our revenue base, we have literally dozens and dozens of different therapeutic categories, each of which have their own attributes, growth profiles, competitive dynamics. We have roughly around 26%-27% of our revenue are what we refer to as acute therapies. These are therapies like intravenous antibiotics, parenteral nutrition, where we're helping to transition patients out of an acute care setting into the home to complete their recovery. These are, as I like to use the analogy, these are the diving catches. We get calls from hospital case management teams. They expect us to get back to them within 30 minutes to tell them, are we in network with the payer? Do we have the drug? Can we marry it up with a nurse and be at the patient's home, literally some cases within hours?
Our responsiveness in the first quarter for that portfolio of therapies, despite not having full access to some of the technology and tools we lean on to process those therapies timely, was quite remarkable. Frankly, continuing to be that collaborative partner of choice with hospitals and health systems, I think we earned some additional stripes and some credibility in the first quarter. Our chronic therapies, which are approaching three quarters of our revenue. These aren't those diving catches where we need to respond within 30 minutes. These are for folks that are more often diagnosed with a chronic condition, conditions that in many instances they'll be managing throughout their life, like Crohn's, colitis, rheumatoid arthritis, CIDP. So those are the therapies where, again, we utilize a lot of the tools in the Change Healthcare technology suite to process and onboard those patients.
I'd say the team jumped through several flaming hoops within the quarter to make sure that we were onboarding and supporting those patients at the same time. So really across the board, the teams in the field perform miracles in maintaining existing patient support as well as onboarding and supporting new patients. I think one of the really exciting things around the first quarter is, in addition to what was a very solid performing core portfolio of therapies, we actually saw some really nice top-line traction in some of the newer rare orphan and limited distribution therapies that we've launched over the last year. These are typically very, very expensive therapies for very small patient populations.
And these therapies really play well into our platform with a national consistent leading platform of clinicians, driving best-in-class quality, effectively universal payer access, as we're the only ones that are in network with every major payer across the U.S. And so we've built a reputation as being a commercialization partner of choice with pharma as they introduce new therapies, especially with some of the more limited population therapies where you might have 1,000 or 3,000 patients nationwide. Our model allows us to quickly and comprehensively develop clinical protocols, disseminate that so that if there's a member in Portland, Maine, and another patient in Portland, Oregon, for an orphan drug, they receive the exact same clinical experience. And that's really resonated with biopharma as they introduce some of these new therapies. And in the quarter, we saw considerable traction from some of those newer therapies that we've launched.
On the flip side, right, you mentioned that the new therapies, on the flip side, they come at a lower gross margin, right? So maybe can you talk about that? Because I guess it sounds like they could be low single digits, maybe mid-single digits gross margins initially, right? But for the reasons you can talk about to us. But I was just asking also about the trajectory, right? So I guess they come at lower margins, but the idea is that eventually the gross margins improve. And also the other element on those orphan therapies, as you call them, they come at a higher dollar, right? So in the end, it kind of all adds up and is additive. So maybe can you talk about that trajectory? How should we think about these new therapies being additive over time?
Yeah, absolutely. So they are a little bit of a different economic proposition. So again, back to our portfolio of revenue. The acute therapies, which are really growing in the low single digits, these are some of the more mature therapies like IV antibiotics and parenteral and enteral nutrition. They typically carry a gross margin rate of north of 50%, which on a rate basis is very, very attractive. But the patient revenue per patient start or per patient event is relatively limited. Typically, we'll get a referral from a hospital. We treat them in the home as they recover from whatever sent them to the hospital for two to six weeks. And hopefully, we never see them again. On the chronic side of the house, those therapies typically are in the 10%-25% gross profit rate.
But the difference is it's a lower margin rate because of the branded therapy in our revenue. We don't have really control over ASPs or AWPs, the reference price of the therapy. But the dollars per patient start is considerably higher. And it's for a much longer period. Some of our patients, we have the privilege of treating for years or decades. So even though those therapies carry a lower rate, it's really a function more around the branded nature of the therapeutic. The dollars typically at a gross margin contribution are greater, even though a lower rate. So it's a little bit of a paradigm shift. As we think about some of these emerging chronic therapies that are in the rare and orphan category, if you're biopharm a and you're introducing a new novel therapy for an underserved population, typically there's less price pressure.
And so the margin rates, what we're clearing over that reference price is very, very minimal upfront. In addition, we typically have to build out a patient support model. So as you said correctly, Joanna, these typically, while they're very, very expensive therapies for limited patient cohorts, they typically carry mid-single digit gross profit rates. It might be 5%, but it might be 5% on $300,000 for a patient we might be serving for years. So as we evaluate these novel new candidates, to be clear, we don't launch every therapeutic. We're a for-profit enterprise. And we make sure that we're clearing a reasonable gross profit on those patients. But over time, as you build that patient cohort, as you build your "street cred" with manufacturer, that allows us to develop a deeper relationship with them. We might be able to negotiate better procurement levels.
We may be able to monetize patient experiential data back to the manufacturer after we build a substantial patient cohort. Those are ways that over time we can enhance that margin. But to be clear, that's a multi-year journey with biopharma on these novel therapies. They're never going to be the portfolio leading gross profit margin profiles. But the cash-on-cash contribution, given the infrastructure that we've established through our investment technologies and pharmacy infrastructure, allows these to still remain a very attractive proposition for us.
When thinking about these orphan therapies, they could be very small in totality in terms of just the market penetration, the patient population. But I guess they keep adding, right? So maybe can you talk about your kind of outlook longer term in terms of just all these therapies and maybe other things and how we should think about your views in terms of the top-line growth for the company longer term? Has anything changed based on the biosimilars or subcutaneous? There's a lot of different dynamics in the industry. So has anything changed on that front?
Look, one of the attractive aspects of this industry is it is very, very dynamic. The portfolio of therapies that we have the privilege of providing to patients is constantly changing. We have the best-in-class business development and trade relations teams who are constantly monitoring the drug pipeline. So therapies are enhanced with subcutaneous administration methodologies or oral substitutes. There's biosimilar events where branded therapies have biosimilar entrance into the marketplace. There's new therapies that are introduced. We've seen several since we've both been with the enterprise since back in 2015. And so you look at the portfolio of therapies that we provide to patients across the country today, it's very different than it was five years ago. Now, there's what I will call some of the blue chip therapies, like IV antibiotics and nutritional support, immune globulins and infliximabs, enzyme steroids, where those are very stable and predictable.
But there's a number of other therapies that enter into the portfolio that exit. We've highlighted a few. Radicava is a therapy that we used to provide for ALS. The great news for the ALS population is that an oral indication was approved. So they didn't need to receive the therapy intravenously anymore. And so we knew that was going to develop. And that's a case where there were some therapies that have exited our portfolio while we've introduced new therapies for muscular dystrophy and multiple sclerosis and CIDP. And so there's this constant anticipational evolution of the therapy portfolio. Nothing develops on the therapeutic level that catches us by surprise. We know the forward calendar of items that might have a subcutaneous administration that's introduced or that there's a biosimilar that evolves.
Those are all market developments that we take into consideration as we project, taken into the calculus of projecting this as a high single digit growth enterprise. There's a lot of tailwinds in this industry. There's definitely some headwinds. As we think about our position in this industry, we think a high single digit growth enterprise over the medium term is the way folks should be thinking about this. The good news is, up to this point, we have consistently exceeded that. Going forward, that's kind of how we think about the enterprise.
The only thing I'd add is really our current portfolio of therapies does include biosimilars and subcutaneous administration. It's nothing that we haven't worked through before. It doesn't already currently exist in our portfolio.
Absolutely.
I just coming back to you, Mike about the high single digits and how, I guess, Q1 played out. Because clearly, the revenues came in much better. I guess when I look back, historically, Q1 tends to be down from Q4. But instead, it was actually up. So it sounds to me like there's some market share gains. And maybe those new therapies so sort of is that sustainable? The performance in Q1 when it comes to revenues, given that seasonality was kind of outperformed. And what does it imply for, I guess, the rest of the year when it comes to revenues?
Yeah, you bring up a number of good points. There is a little bit of seasonality in this industry in that Q1 is typically a little bit below Q4. There's a Herculean lift to reauthorize chronic patients, to verify benefits, to implement plan design changes. That does carry some inefficiency. John highlighted that on the call in that we were just coming out of that annual heavy lift when the Change Healthcare incident evolved and tossed us an additional curveball. The great news is the commercial team continues to execute very, very well. We did see that seasonal downshift in some of the more kind of legacy therapies. But to your point, offsetting that, we had a very productive quarter with some of these newer, again, very costly emerging therapies that we've added to the bag, so to speak, over the last year.
So a lot of those newer therapies that carry a very large revenue per patient start more than offset what has historically been that seasonal downshift. All I'll say is, look, for the year, we did bring up the lower end of our revenue guidance range. So I think folks can infer that our confidence in that range is increasing as we exited the first quarter. And the only thing I'll say is throughout the year, there typically is a first half to second half lift. I think with some of the challenges that we highlighted on our call, not the least of which is the Change Healthcare impact, that does imply. And we're comfortable with the expectation that there's a little bit of a bigger first half to second half lift than you would have historically seen in this enterprise.
So I guess we talk about revenue. But the other component here in terms of the margins, right? So we were getting a lot of questions about that and gross margins. And we kind of covered one of the headwinds here around the new therapies coming at lower gross margins. But you also highlighted Change Healthcare. And you also mentioned some higher supply costs. So is there any way for us to kind of maybe stack up these three, I guess, major headwinds that you called out in Q1 in terms of the magnitude of things? And also how do you expect this to play out for the rest of the year?
Yeah, so as we highlighted on the call, because obviously we fully anticipated that there would be some questions around how do we triangulate the top-line growth to the gross profit dollar growth. We highlighted a couple of idiosyncrasies around the quarter that definitely impacted it to a greater extent than usual. The reality is we're making progress on recovering from the Change Healthcare impact every single day. We think that by mid-year, we will most likely have that in the rearview mirror. And similarly, on some of the nutritional and some of the acute therapy inputs where we've had some supply chain disruptions from API and key input manufacturers, those therapies, to a great extent, are compounded in clean rooms under hoods where we're acquiring different commodities, compounding them into patient-specific doses.
There's been a lot of API and other key input disruptions that, again, our procurement teams are working through. So we haven't put specific numbers on those items. Again, we weren't looking for a cheat sheet on the gross profit. But we did want to underscore for folks that there were a couple more headwinds that have emerged in the quarter than, frankly, we were anticipating. The good news is the supply chain disruptions, as well as the Change Healthcare impacts and inefficiencies, while both of those impacts continue to this day, we think we have a line of sight to mitigate those for the most part by mid-year, which, again, gives us more confidence in the back half lift.
One of the other things we highlighted, Joanna, and this goes back to last year, when we called out some pretty unique procurement benefits that benefited 2023 to the tune of $33 million-$35 million, which was great until we have to explain the year-over-year growth in 2024. That's going to obviously persist. And that's, frankly, part of the reason why we're not calling out specific dollar amounts from the supply chain and the Change Healthcare disruption. Because, frankly, neither of those are leading us to deviate from our communicated guidance ranges. Conversely, we actually lowered the high end of our or brought up the lower end of our adjusted EBITDA guidance range by $5 million in the quarter. So increasing confidence in our expected results for the year.
Also, maybe we could talk about some of the things we mentioned before: biosimilars and subcutaneous. Like you said, these are not new concepts by no means for the company. But I guess there's, I guess, maybe more attention being paid because Stelara is viewed as a key therapy for some providers, at least. So maybe help us think about that concept first in terms of either helping us understand how the Stelara, in particular, might evolve, but also giving us examples from the past of how prior therapies switching to biosimilars, how that impacted your business.
Yeah, look, when a therapy goes biosimilar, it's not necessarily a bad thing from our perspective. You have a lower-risk supply chain with multiple manufacturers. And again, back to my point earlier, Joanna, nothing evolves from a biosimilar or a subcutaneous administration event that catches us by surprise. These are all dynamics that we fully anticipate as we think about the road ahead. It's not lost on us that is, look, if you're a biopharma, the easiest thing for you to do is produce a pill, an oral pill. Maybe the next easiest is a transdermal patch or a cream. And all the way down the line are complex molecules that require infusion intravenously under the purview of a healthcare professional. And so we're not trying to be everything to everyone.
As we think about the strength of the platform that we've established, we have an industry-leading pharmacy footprint with presence in 46 states. We have over 2,500 highly trained infusion nurses that can provide care either in one of our suites or more often in the home. So as we think about those skills and those strengths, we're very thoughtful around the patient cohorts that really fall under the purview of our care. There's no question that if something goes subcutaneous, for example, there are patient cohorts that may elect to self-dose in the home. But there's also both a number of patients that maybe due to cognitive conditions or motor skills don't have the ability to self-administer. It's also well documented that if a drug goes subcutaneous, typically it's more costly to a health plan. And adherence drops considerably.
When we're tasked with providing infusion care, we can ensure that appear 100% compliance with the dosing regimen that has been prescribed for the patients. When a patient is shipped subcutaneous doses to the home, that's out of the purview of a healthcare professional oversight. And as therapy administration evolves, you also have to look at the label as well as the uptake. Immune globulins have had subcutaneous administration for more than 15 years. And intravenous administration of immune globulins remains more than three-quarters of all the patients because of the clinical outcomes and the track record of the intravenous administration. So as something goes sub-Q, it doesn't necessarily become the standard of care quickly. And as it relates to biosimilar developments, it's much more of a revenue event.
Because, again, typically, it follows a similar fact pattern as something going truly generic where the more competitive the space is, the more pressure on the reference pricing, ASP or AWP, which compresses the revenue per patient event. But it also gives us more leverage back to my earlier point around having a multi-source strategy of procurement where you have leverage across multiple manufacturers. So the revenue per patient, it compresses. But the gross profit rate, how much we're keeping, typically expands. And so biosimilar events are much more of a revenue event than it is a gross profit dollar event for us.
So would you say because you started talking about the subcutaneous formulations as well because there are also some of these that come for the existing infusion drugs? But also there are completely new therapies, right, being developed as subcutaneous as a starting point. So is that an opportunity for you? Would you kind of pursue some of these new therapies even though they are not necessarily infusions?
Absolutely. A lot of it comes down to the label. Because some of the labels require healthcare professional oversight if there are certain conditions or certain monitoring that the FDA is requiring as they approve the label. As we think about subcutaneous therapies, really, it comes back to my earlier comment around, is there value and a desire for us to provide that clinical oversight? Again, with our clinical pharmacists, with our infusion nurses, is there a training and monitoring requirement for the patients? In many instances, we're one of the only healthcare professionals that sees some of these patients between their episodic trips to their specialists. And so if it's just a very standard pick, pack, and ship subcutaneous administration, that might not be the best, we might not be the most relevant player. That might be better suited through a mail order specialty pharmacy.
But if there is a role to play with that clinical oversight to monitor the patients, to provide training and ongoing assessments, that very much falls within our purview.
So that will be potentially a kind of, I guess, new avenue to add additional therapies. But also brings me to another topic, the infusion suites, right? So I guess the company has been growing rapidly, right? And I guess the latest count was, what, 167 locations? So how should you think about that? Are you continuing to add more? Are you more focused on just ramping up the existing locations? And are you doing both? Because I also feel like something like this, like the subcutaneous formulations, for example, that would be a good, I guess, place, so to speak, to leverage those suites, right, for something like that. So maybe talk about the strategy around the suites.
I'd say it's an ideal place to leverage those subcutaneous administrations. We really started on our journey of building out the infusion suites back in about late 2021, have really created a significant map all over the United States, and have over 600 chairs in those suites. We're still continuing to build where it makes sense, but also focusing on making sure that we're leveraging the existing platform to get those up to the maximum capacity. Again, I think we've geomapped them out into very highly concentrated areas for our patient populations. Still a few more to go. But if it slows down, it's not because we're moving away from the strategy. It's only because we're focusing on building up the capacity within those.
These are really integral to our growth strategy. Not only does it drive nurse productivity, we've seen that some of our more mature centers, we're seeing north of 20% nurse labor productivity. So not only does that help us become more efficient and drop more to the bottom line, but it's almost like we're virtually creating 20% more nurse capacity, which is a finite resource. And it also has given us the opportunity to challenge the scope of therapies that we provide. Historically, we wouldn't send nurses behind the windshield driving out for a 10-minute injection that requires healthcare professional oversight. But if we have a nurse operating out of our Midtown Manhattan infusion suite off of Park Avenue, having 15 injection patients stop by to receive their injection between infusion patients, those economics actually are quite attractive to us.
The other thing I'll say is we don't force patients into the infusion centers. We make them aware of conveniently located infusion centers. As Nicole said, we place these logically. We invite them to come by and assess the experience. We've actually found that the patient experience and the patient satisfaction is actually higher in the suites than it is in patients receiving care in the home, which just reaffirms that we've created an aesthetically pleasing environment for patients who, frankly, would love nothing more than to go about their day and not have to receive infusion therapy. So very important and a critical part of our growth strategy.
Is there any target in terms of just how many you think you still need to add to kind of cover your geographies?
I think, as Nicole said, look, we've built a great network across the country. We still have a significant amount of capacity. We'll continue to add. We opened 3 or 4 in the first quarter. We're hitting a point where we have pretty good coverage. And these are quite efficient. They only cost $150,000-$200,000 in capital to open. So we're not capital constrained on these. But we open them at a pace where we drive discipline accountability within our field teams to make sure that when we're cutting the ribbon, we're shortly after filling the chairs.
Where are you in terms of the capacity for the existing?
The great thing is we're not even at 50% capacity of the chairs that we have. But the great thing is for them to generate that type of productivity, they don't have to be anywhere close to that. And so the great thing is they're creating a tremendous amount of value today. And we still have considerable productivity and capacity going forward.
Right. And the very last question, I guess, because we're running out of time. But the other part of the story is free cash flow generation by this organization. And the leverage came down very nicely. So I guess this free cash flow is really free. So can you talk about capital deployment? Because last year we talked all about Amedisys. So kind of we passed that. So maybe give us, I guess, a few seconds on capital play.
Yeah, look, we're maniacally focused on cash flow generation. We like to say cash pays the light bills, not EBITDA. And so converting that revenue into cash is paramount and central to our strategy. This year, we expect to generate more than $300 million in cash flow from operations. And the capital efficiency of this business is significant. It's typically $30 million-$35 million. So that implies somewhere in the neighborhood of $250,000 of free cash flow. We always preach it's not our cash. It's the cash flow of it's the cash balance belonging to the shareholders. And how we deploy that strategically is a critical aspect of our strategy. We continue to believe that there are attractive M&A opportunities out there that represent strategic and economically attractive opportunities for us. We also have deployed a significant amount of cash towards share repurchase.
We see a multifaceted strategy going forward. During that time, we've still driven leverage well below 2x. That gives us the confidence to continue to deploy capital on behalf of our shareholders because of the cash flow generation ability of this business and our ability to de-leverage in a relatively expeditious manner.
Great. Thank you so much.
Thanks, Joanna.
The time runs very quickly. Thank you.
Thank you.