Comments in today's comments. We ask that you go and review any of the pertinent information, the disclaimers within our investor relations part of our website. General update for the organization, you know, really pleased with the first quarter that we had. As we had announced earlier, you know, entered the year with some strength. Certainly, a little bit of a curveball with the Change Healthcare situation, as that started to develop, really in late February, and impacted really the back half of the quarter.
Team responded extremely well, as we had reported on the call, but even from that point, we continue to make really strong progress, as an organization, you know, recovering from that situation. We have been able to reattach to the claims processing standpoint. Just to, you know, in full disclosure, and I think as we have called out earlier, there are multiple systems that we utilize through Change Healthcare. They're in various stages of recovery. We expect that, you know, we're gonna have continued work through the second quarter and into the third, as we're continuing to process those claims and do the cleanup work necessary, from the disruption that was caused. But making really good progress on that.
As we had called out in the first quarter earnings call, we still have confidence that by the end of the year, we will be fully recovered from that, and it's gonna get better, you know, as we exit the second quarter and then, you know, continue to into the third quarter. You know, the dynamics of the business, you know, continue to be strong, you know, market by market. We are vigorous in our competitive approach in that local market. We talk a lot to the team about the ability to use our national scale as a competitive advantage, and that consistency and high quality that we can provide as well as the infrastructure from a technology standpoint.
But to really win at the local level and to make certain that we understand the nuances of those local referral sources and the execution path there. And so, the team has been spending a lot of time, effectively, you know, working on that reach and frequency, building those relationships at the local level, and continue to know that, you know, this is a hustle business in so many aspects of making certain that you're out, you know, capturing those referrals and really picking up that demand in the marketplace. So all in all, you know, business is in really great position. Love the position of strength that we have in the marketplace.
Balance sheet continues to get stronger and stronger as we move through the disruption caused with Change Healthcare and move to that next phase, and are really well positioned to continue down the growth trajectory that we've outlined.
I appreciate that, John. So maybe, Mike, shifting gears. Since the Q1 earnings release, I mean, there's been a lot of focus on margins, and I think you called out three moving pieces that impacted margins. So how are you thinking about the ability to reverse some of these issues and firm up margins over the course of the year or the next 12-24 months?
Yeah, absolutely, Brian, and good morning, everybody. Look, obviously, gross margin dollars, and John and I have been very open and transparent about that. That's a key metric, and that's how we drive the business is maximizing the gross margin dollar growth. We called out in the first quarter a couple of items, each of which we believe are, you know, on a road to remediation. Obviously, the first one, as John articulated, is the Change Healthcare situation, and we're coming out of the woods, and every day we're getting better. Obviously, one of the items that we called out were some supply chain disruptions, especially on our acute portfolio of therapies.
As we said on our first quarter call, we see a line of sight to remediating those supply chain challenges by midyear, and I would characterize those efforts as on track, and our confidence remains high in that. And then third is, you know, one of the areas I think highlighted some of the key themes around the gross margin of this enterprise is the fact that in the first quarter, we saw very solid traction in lower margin rate, new, rare, and orphan and limited distribution therapies, where the dollars are quite attractive, but on a rate basis, because of the exorbitant nature of the therapeutic cost, it reflects a lower gross profit rate. And so, look, we weren't looking for a crib sheet.
As you know, John and I try to be as transparent as competitively possible and, you know, providing some folks some color on, you know, why we, you know, why the dollars might not have been as robust of a growth on a year-over-year basis. But, you know, central to our thesis is that, you know, first and foremost, we focus on gross margin dollar growth over the long term.
Mike, maybe just on the LDDs, the limited distribution drugs, if you can walk us through the dynamics of that, why LDDs matter to your business and why you think there's opportunity to drive margin percentages-
Sure
... going forward.
Look, these are relatively low populations of patients across the country. Given the investment we've made in the infrastructure, both our technology and our pharmacy and nursing infrastructure across the country, we have the ability to collaborate quite efficiently with biopharma around commercializing new and highly complex therapies. Rare and orphan patient populations typically carry a very complex patient care plan that we can, you know, develop and invest in centrally and efficiently support those patients. So our speed and effectiveness in commercializing new complex therapies has been proven time and time again. As we approach these therapies, you know, you might have hundreds, if not a couple thousand patients nationwide. The therapy is typically quite expensive, as these are new novel therapies.
Again, part of our revenue, as you know, is reimbursement for the therapeutic cost, over which we have limited impact, given the fact that we bill on an ASP or an AWP basis. So out of the gate, these are typically very low margin rate, 4%, 5%, 6%, 7%. You say, "Well, why would you commercialize something that's 4%, 5%, 6%, 7%?" Might be on a very high revenue per patient start basis. So upfront, given the investments we need to make to support that care model, it's typically somewhat limited in terms of that margin rate.
But over time, as we, quote-unquote, "gain our sea legs," invest in patient support model, build a patient cohort, that affords us the ability to further collaborate with said biopharma enterprise, whether it's patient experiential data service fees, whether it's volume incentives, discounts, et cetera, where, you know. And this doesn't happen over months or quarters, but typically over multiple years, you can drift those margins northward to, you know, 7%, 8% , 9%. And if you can do that on an established patient base, it's a nice value creation opportunity.
Yeah. Brian, the only, the only other thing I would add is when you think of the platform that we've created, the clinical competencies, like, the acuity of the patients that we work with and that our team is trained around, really positions us well for partnering with those biopharma partners, creating the clinical protocols, having a learning management system where we can push the training out to our, our workforce. Even though it's a small cohort of patients and you may only have one patient in a market, our ability to do that and then use that national platform to consistently manage those patients is a differentiator.
We're trying to maximize the value of not only the technology and the infrastructure, but the clinical competencies that we have as an enterprise, which is why these are a part of the strategy as we look forward. As Mike said, we believe there's an opportunity for real dollar drop through, but also for margin expansion, as they mature over time.
So just maybe just to follow up on that, right? So as we think about your growth, I think in the past, Mike, we've talked about how these LDDs are, you know, the, the drug pipeline is a big driver of the growth for Option Care. So how are you thinking about the importance of LDDs and maybe just overall growth and the demand dynamics for the business?
Look, I think it just, it just adds to our portfolio and the ways that we can collaborate with referral sources, patient cohorts, and biopharma. You know, look, we've got a very diverse and broad and diversified therapeutic portfolio. Some intravenous antibiotics, immune globulins that have been around for decades. Some are new novel therapies for, you know, myasthenia gravis or muscular dystrophy. And so, the incremental investment to commercialize some of these, given the the investments that we've made over the last several years, it's quite efficient. It just gives us the ability to broaden and de-risk our portfolio base. But, you know, going forward, you know, the established therapies will be critical to our growth as well, and even in some of those more mature therapeutic categories, where we have years and years of experience.
That's frankly where the majority of those gross profit dollars or growth is going to come from.
So, Mike, to wrap that together, is it right to, right to think that your focus right now is really gross profit dollar growth rather than managing gross margin?
Yeah. Look, to state the obvious, we fight for every basis point. We look for coins in the sofa cushions every single day. But because our gross profit rate, again, not to sound defeatist, Brian, but to some extent, the rate is somewhat out of our control. We don't control ASPs, AWPs, and reference pricing. What we can control is, what are those dollars that we're clearing after the therapeutic cost and the cost to administer and prepare the therapy? So first and foremost, the way that we manage this enterprise is to maximize gross profit dollar growth. Obviously, we're quite conscious around shaving every basis point, but that's how we think about that. That would imply, as you know, on our growth algorithm, we've articulated this as a high single-digit revenue growth enterprise over the longer term.
Given some of that mix shift towards the chronic portfolio, that would infer that gross profit dollars will grow modestly slower than the top line.
Yeah. And Brian, from a commercial strategy standpoint, you know, based on your question, we focus on really two dimensions from a commercial standpoint, and that biggest dimension is take share. Our team is aligned, again, with the portfolio of the products that we have. With how fragmented the marketplace is and the value proposition we believe we can bring to the referral sources, our team is out, you know, hustling for that demand capture and to take share of the market demand on that existing portfolio that we have. Then on an additive basis, the LDDs or the other is a make share, right? There's opportunities for us to make new markets, to participate in new drugs. We get a lot of questions around kind of the maturity cycle of some of the drugs that we have.
They're gonna go through that cycle. We know that, you know, the easiest form of administration is a pill that you take with a glass of water. But a lot of the products that we have, they need to be either intravenously administered or injected with a healthcare professional oversight. So we're always looking at what's that pipeline of new products, how do we think about the maturity curve of the portfolio that we have, and make certain that we're regenerating through that process, but all along, making certain that we are in the market and where we can, taking share, given the investments that we've made into our people, our process, our technology, our facilities.
Yeah.
... Go ahead.
Guys, on the LDD drugs, given the investment you've made in infrastructure, but also the inflation. So just given the investment you've made in the infrastructure and also the inflation we've seen in labor, is your pricing with the biopharma companies getting better on LDD relationships, or is competition for those relationships such that you can't get better economics, as it were?
Yeah, as a broad category, we price in kind of the value of the clinical efficacy and the clinical competencies that we're able to bring, Tom. It's, you know, that's cut into the factor. It is competitive, but there are very few organizations that kinda have the platform and the clinical competencies we have. We try to make certain that we're extracting fair value for the value that we're delivering to that key stakeholder in pharma. And, you know, it's really product by product, and it's program by program in the way that we look at it.
But both from the team that's focused on that in our procurement and trade relation side, through Mike's team, that does the models to make certain that we're looking at it from the economic contribution. We're pretty disciplined in the way that we do it. And there are some products that we just don't take because they're unwilling to pay what we think is fair value, and we're gonna make certain that we protect the value of the platform that we've created.
And the other thing I'd add, Tom, is, look, the other thing that we pride ourselves on, and this resonates with biopharma, is when we can articulate that we're in network with every major payer, so they have the broadest payer access to ultimately make sure that they get paid, as well as the fact that with the investments we've made coast to coast, and we can articulate that their member or the patient in Portland, Maine, receives the exact same clinical experience as Portland, Oregon. That resonates with manufacturers.
John, since you talked about, you know, the administration of these drugs, right, either IV or injected, there's a lot of focus among investors today on subcutaneous drugs and how some manufacturers are trying to convert their drugs to subQ, right? So what are investors missing in that equation with the thought that a lot of your big chunk of therapies could eventually shift to subQ?
Yeah. This is a, you know, this is a constant process within pharma, and we've seen it historically within home infusion. You know, I guess, where I'd look for parallels and proxies, some of the conversations we've had is there's this fear that it's a night switch event. Like, overnight, everything flips just because there's a subcutaneous or self-administration form, that everything just converts immediately to that. And we just haven't seen that. You can take a look at at IgG as a proxy. That has been available subcutaneous for 10 years plus. Right now, it's about 20-25% of the grams administered are there.
What we hear from our referral sources, from the physicians that we work closely with, is if a patient is responding well to the therapy they're on, they're not looking to make a switch. And so I expect that as new indications come forward, as subcutaneous, you know, formulations are available, it will impact some of the naive patients, those that are newly presenting, it'll move on that. I think that if people are not responding well to the IV therapy, they may make changes to that. But our expectations are that it's going to be part of the process, but there's also an awareness that is created when some of these new indications come out there, in which it increases demand of all of the products. And so, look, we're gonna manage it closely.
That's why we're focused around what else is coming through the pipeline. Mike and I have highlighted before, when we started with the organization in 2015, factor hemophilia was a big part of home infusion. Humira entered the marketplace and some other products on that. It's, you know, a small portion of what we do today, and it's been replaced with other products that have entered in and are part of that that pipeline. So we're always going to be looking upstream and working with biopharma to identify what are those next generation of of products entering in.
We believe that given the care that we're able to deliver and the clinical outcomes that we're able to provide, through the administration forms that we're on, we think that there still is ample opportunity in those products that even if they move towards a biosimilar or they move towards a subcutaneous administration form.
The only thing I'd add, Brian, is, look, I mean, obviously, as things come out in a subcutaneous presentation, that's typically a more expensive form of the therapeutic. And the one thing that we can articulate is, a patient under our care receiving intravenous or even, in some instances, subcutaneous administration, we can ensure adherence to the treatment regimen if folks are relying on... You know, and it's proven time and time again that self-administration adherence to clinical protocols is considerably less than 100%. And so to avoid the proverbial, you know, vials building up in a refrigerator that haven't been administered, you also have a lot of patient cohorts where they might have, you know, cognitive impairment or compromised motor skills, not able to self-administer.
There's still, as John said, especially use immune globulins or even some of the infliximabs as a proxy. We haven't seen where subcutaneous becomes the standard of care to date for many of the therapies where we participate.
Mike, just to follow up on that, right? Like, I think you and I have spoken in the past about how just because a drug goes subcutaneous doesn't mean that you're disenfranchised with that patient, right? So there, there's still cases where you have a role... even with a subcutaneous drug?
That, that's right. I mean, central to our model is providing clinical care to complex, chronic, and acute patients. Newsflash, if it's just pick, packing, and shipping a cardboard box, including a chronic infusion or a subcutaneous therapy, you know, there are folks that can do that cheaper than us. But for those patients where the provider or the patient or the payer are looking for, you know, that additional clinical case management and care to support the patient, that's where we're trying to play, and there's still a very large patient cohort where that's applicable.
Hey, John, shifting gears a little bit, as we think about the competitive landscape, you know, we've had investors ask about insourcing. Obviously, Elevance bought an infusion business recently. So what are you seeing in the market in terms of, you know, payers bringing in infusion, and how do you see that as a potential threat to your business?
Yeah. Again, it's a competitive environment. You know, as we've talked about in Elevance, certainly with some of the moves that they've made, but, you know, with Optum Infusion as well as with Coram as part of the CVS enterprise, they keep us sharp. It is competitive in that marketplace. There is still a lot of room for us to play a meaningful role in support of their members on a nationwide basis. When you look at the networks of pharmacies and the infrastructure that these organizations have, even with some of these recent acquisitions, it doesn't cover the map.
When you look at the coverage map that we have, the ability that we can, you know, reach 96% of the U.S. population based on where we have our pharmacy network, our licensure, and our nursing network, all of that kind of plays into the strength that we have in being able to offer that consistent high-quality care to their members. You also look at the diversity of our portfolio and why we're focused on providing not only just the acute, but the chronic, in that. And, you know, our belief is, we offer that full spectrum. We're not looking to be carved out, you know, on that aspect. And so we're really focused around the totality of what we can provide.
The investments that we've made into the clean room infrastructure really allows us to be in network and a partner of choice. This business, because of the way that we get the patient volumes, the relationship with the payer is really a fishing license. Our ability to prove that we can offer cost-effective solution, high-quality care, broad access to their members, and a high level of patient satisfaction, gets us into the game. Once we have that fishing license, it's a hustle business with our commercial team. It's about developing those relationships at the hospital with the discharge planner, case manager, hospitalist, to identify those patients that you can transition, and we've embedded resources, nurses into those facilities to capture that demand.
When we're out calling on physician practices and clinics, again, it's that responsiveness and the feedback loop that we provide to the caregivers, and the prescribers around how that patient is moving forward. So we think we're doing the things that are necessary to be in network, given the value that we can provide. And I think in today's setting with payers, especially now, those that have at-risk portfolios that are seeing their medical loss ratios reaching, you know, higher levels and in some instances, untenable, their focus needs to be on the total cost of care.
When you offer a product that is high quality care at an appropriate cost in a setting in which their patient, their members want to receive it, you're in the right side of that conversation because there's a lot of value you can offer to them, as they're trying to achieve their goals.
Hey, Mike, maybe shifting gears. So we're about a year removed from the proposed Amedisys' acquisition-
We're more than a year removed.
More than a year. As we think about the balance sheet, it's as strong as ever. How are we thinking about capital deployment, and what are the opportunities that you see in the market for M&A?
Yeah, look, one of the things we pride ourselves on is the cash flow generation ability of this business. Revenue doesn't pay the light bills. Cash in the bank does. And that's something that we're relentlessly focused on, is efficient working capital management and converting earnings to cash flow. At the end of the second quarter, even with the Change Healthcare situation, we were 2x leverage, and we would expect reaffirming our expectation of generating more than $300 million of cash flow from ops this year, that the leverage profile will improve from here. Look, we've been very productive over the last 18 months in terms of deploying cash towards share repurchase. Admittedly, we've tapped the brakes on strategic capital deployment, focusing on liquidity optimization through the Change Healthcare situation.
But as we emerge from that, you know, game on, so to speak, in terms of refocusing on M&A opportunities, where we see a lot of opportunities. But we are very disciplined because, you know, it's not our cash, it's our shareholders' cash. And how we deploy that in an optimized manner is something we take very seriously. And we think that the combination of a very strong balance sheet, additional capital access through cash flow generation later this year, and, you know, being able to deploy that through share repurchase and M&A, will benefit our shareholders going forward.
Hey, John, so we've got a few seconds here, so maybe just closing remarks on where you think the growth of the business will be, as we normalize out of a lot of these moving parts beginning next year.
Yeah, I mean, we believe the thesis that we've kind of put out there of this high single-digit top line, low double-digit bottom line holds over the midterm. You know, the focus of the organization is around execution. As Mike said, the ability to use the balance sheet to look for opportunities on M&A or other forms of capital deployment remain intact. So, love the position that we're in. You know, we have the pieces in place to really continue our execution path. And I think if we've demonstrated anything, it's that consistency of the execution of the business, even with some of the curve balls that have been thrown our way, with the Change Healthcare, et cetera.
The team is very responsive in making certain that we can capture the market demand and convert those into starts, and then ultimately into the economic value that we create for our shareholders.
Awesome. Thank you, everyone.
Thanks.
Thank you.