Good morning and welcome to the 2025 Jefferies London Global Healthcare Conference. I'm Brian Tanquilut, Healthcare Services Analyst here at Jefferies. With us this morning is Option Care Health, one of the leading home infusion providers in the U.S. And joining us today is John Rademacher, the company CEO, and Mike Shapiro, the company CFO. Maybe, John, I'll start with you. If we can start with the sort of a state of the union on everything that's going on with Option Care, and we'll get it rolling from there.
Great. Thank you. And great seeing you, Brian. Good morning, everyone. I want to report that, you know, third quarter, we went through and announced a really strong performance for the quarter. That's our 19th quarter in a row of delivering on the commitments that we've made as an organization. Continued really good progress across all of the fronts of the operations aspect of the business. We reported that we have, for the most part, cleared most of the disruption that happened with the Change Healthcare situation earlier in the year, that the team continues to work really aggressively to make certain that we're getting the final pieces of that cleaned up. We continue to work really well in responding to natural disasters.
Had a couple of hurricanes at the end of the quarter, but the team made certain that we put the patients at the center of everything we did. And we're able to respond, you know, not only with the resilience of our network, but the ability that we had to really flex around that in a very important way. So, you know, the organization continues to perform well. The fundamentals continue to be strong, continue to make really great progress against our key initiatives for 2024, and building that momentum as we head into 2025.
So maybe, John, one of the things that came up during your earnings call was the issue with Stelara. Maybe let's hit that right away. If you can share with us, you know, what's going on there, the dynamics in the industry that prompted you to bring this up, and how you're thinking about, you know, the way forward.
Yeah. So we announced, you know, that we are going to be facing some significant headwinds given the situation with Stelara. There's some really unique aspects with that product that is different than other products in our portfolio. First and foremost, just the type of patients that we serve through our organization. Most of them have, you know, conditions that require a healthcare professional oversight. So we have letters of medical necessity that really are behind that. Most patients that are served generally across the globe do it in self-administered form, but we have a smaller cohort of patients that have some unique characteristics. Given, I'd say, first and foremost, the backdrop of the Inflation Reduction Act and some of the impacts that the pricing initiatives have on that, there's a bit of a distortion that exists with Stelara. We have a really strong relationship with Janssen.
They have been a great partner. They have allowed some additional support to the home infusion channel and to our business in order to support the uniqueness of the patients. And as that kind of moves forward in a more aggressive state than I think originally anticipated, we're going to feel the impacts of that earlier than anticipated. We always knew there was going to be a glide down. It's just how quickly that impact is going to be felt is, I think, what became available to us in October, which is why we needed to report it. But again, very constructive conversations going on with Janssen, very, you know, deep partnership there, not only on existing products, but we're trying to find a path to make certain that we're working closely with them with the Stelara event.
They have some really interesting products in their pipeline in which our platform will serve really well the patients that will require care in that space, and so we're going to continue to work with them in partnership and find the best path forward as we move ahead.
Maybe, John, I'll stick with Stelara for a little bit here. So we talked about the IRA, and we talked about your conversations with Janssen. What about biosimilars? I mean, how does that play into the strategy for Stelara going forward?
Again, there's some unique characteristics, as I said, with the Stelara patients that doesn't repeat in the rest of our portfolio. So, you know, it is different, you know, from that standpoint. When you look at, you know, the next 10 have not come out for the list that CMS is going to have for the next grouping. But when you look at the products that we have in our portfolio and you look at where spend is from a CMS standpoint, there doesn't appear to be a product that we have that's within our portfolio that will fall into that next list when you look at that spend. So, you know, over time, as the net gets wider and wider, it will start to do it. But, you know, we've talked before, Brian, about our portfolio.
When you think about the way the revenue sources that we have, about, you know, 30% of our revenue comes from acute therapies that are generic today. I mean, it's antibiotics, it's nutrition support. Most of these products are in a generic status. You look at the IG book of business, that's in a biosimilar state and has been in a biosimilar state for a while. And there's equilibrium that kind of exists there. When you look at the chronic inflammatory disease, which is another 20% of our revenue, Stelara falling into that, outside of Stelara and Entyvio to a lesser extent, most of the other products are in a biosimilar state. So we don't have, other than Stelara, we don't really have a big portion of our revenue that is under threat when you look at that.
The remaining of the book of business is across, you know, hundreds of therapies, and a lot of those fall into some of the rare and orphan space that don't necessarily make sense for a biosim. There might be some innovation and new products that enter in that could, you know, put some disruption there, but they really don't fall into a biosim type of structure within that, given the uniqueness of those rare and orphans and the patient cohorts that you're serving there.
Mike, maybe I'll shift you for a little bit here. Is there an opportunity, number one, in Stelara with biosimilars? And then number two, how do we size? I mean, I know you're probably not willing to quantify it, but how do investors think about the sizing of the Stelara exposure?
Yeah, thanks, Brian. Look, I think one thing that John and I pride ourselves on is trying to be as transparent with the investor community as possible. And I think just given some of the unique developments that John articulated around some of the recent dialogue with Janssen, we felt it, you know, appropriate to at least provide, you know, a heads up to the investor community that, you know, as we approach 2025, we did see, and again, discussions are ongoing, but as we look at the variety of scenarios, we didn't see that there wasn't a significant margin reset. Now, obviously, we've told you that there's a bit of a monster in the closet, but we haven't provided additional details. And we fully appreciate that there's some ambiguity around what that margin reset is.
Having said that, you know, we felt it appropriate, again, given the very recent and unique correspondence with Janssen that, you know, it was appropriate to highlight that. I think, you know, we fight for every basis point at the margin level. And given our unique model and that we're the only independent scaled national provider of home infusion across the country, that does provide us with some leverage. And most of our procurement relationships are direct with manufacturers. So no different than when other drugs have evolved to a biosimilar environment. Given our scale and volumes, we have the ability to collaborate with biosimilar manufacturers. And typically, we would expect to see margins, you know, modestly improve over time as those relationships evolve and the number of biosimilars continue to introduce.
But this is a unique scenario, not to completely dodge your question and not give you a range, but, you know, this is a unique scenario where before the biosimilars, you know, have the effect of expanding gross margin on an incremental basis, the overall profitability is set to be, you know, reset at a significantly lower level. So we would expect going forward that the emergence of other biosimilars would create over the next few years some value on the margin. But it'll be, you know, to John's point, given the fact that we do provide care to a very unique patient cohort of Stelara patients, how that evolves, you know, will play out over time.
Maybe just to close the loop on this, right? John, you mentioned that it's a very unique patient base. Most patients are on self-administered, right? Is there a difference in your ability to take advantage of that biosimilar opportunity within Stelara just because it's a different kind of patient?
Yeah. So just to clarify, most of our patients are not self-administered.
Exactly. Yeah.
Yeah. Our patients actually have a healthcare professional providing that oversight, which is somewhat unique to the broader Stelara population on that. We are in a privileged position, right? We have the ability as a trusted advisor to be working not only with the patient and the prescriber to make certain that there's a good match between the therapy that is selected and how that patient is going to respond. So we always have the opportunity in there to help to, you know, provide support and influence around how products are selected, aligning along the needs from a clinical standpoint. So, you know, our expectations are we're going to be well positioned to continue to support those patients with the right product as it moves forward. So, and that's been a part of our organization's, you know, value as we look at what we do.
It's not just the dispensing of the product. We're actually working with the prescribing physicians and providing that feedback through the process along how that patient is responding as well as the clinical outcomes that we're seeing, given the relationship that we build with the patient over time.
Mike, maybe just to piggyback on that, I mean, I think on the last earnings call, you mentioned that there's OpEx associated with Stelara, right? So outside of gross profit margin, you're spending a certain amount of OpEx or investing into OpEx. So maybe if we can talk about that and what that looks like and, you know, how that factors into this whole economics of the drug.
Yeah. And I think that gets back to John's comment about our deep collaboration with Janssen over the last several years. We've shown time and time again, whether it's with rare and orphan manufacturers, whether it's Janssen with their Stelara cohort, we have the ability to create unique clinical programs to support patient cohorts. And that's something that, you know, does enable us to negotiate decent margins for therapies because below the gross profit line on our dime, we're investing millions of dollars in patient care models. And for manufacturers, that truly resonates and it differentiates us from a clinical model perspective. A broader comment, when you think about our ability to leverage SG&A, it's been a hallmark of our value creation thesis, and that doesn't change.
Even though our SG&A has grown in the low single digits consistently over the last five years, behind the curtains, we've been unlocking a tremendous amount of productivity through technology deployments and other efficiency initiatives, which has enabled us to invest in whether it's Stelara patient support models, our expanding infusion suite footprint. So we have the ability to, you know, flex, reallocate indirect spending, chasing decent returns. Even at the same time, we can, you know, consistently, you know, maintain that growth in the low single digits, and that won't change.
So maybe I'll use that as a segue to move away from the Stelara discussion. I mean, we've spent eight minutes, so I think we're good on that. Capital deployment, I mean, you've talked about the ability to generate cash. How should we be thinking about your capital deployment plans going forward, whether it's investing in the business again or M&A and buybacks?
Yeah, we were thrilled on the third quarter call to share that, you know, the balance sheet and the capital structure has never been stronger. A little bit of history. When we merged with BioScrip, we were at 6.2 times pro forma net leverage. At the end of the third quarter, we were at one and a half times net leverage. We expect to generate more than $300 million of cash flow this year, and that leverage profile is quite impressive, especially when you consider that since the first quarter of 2023, when we initiated our share repurchase efforts, we've repurchased more than $400 million of equity. At the same time, you know, we've evolved to, again, the lowest leverage profile for the company. Going forward, you know, as thrilled as we are with the balance sheet, we take capital deployment efforts very, very seriously.
Given the cash flow generation of this business, given the health of the balance sheet and the access to capital, we think we, you know, can deploy capital very effectively for shareholders, really through our two legs of the strategy, first and foremost being share repurchase, as well as strategic M&A, and we've been very, very active on the M&A front. Again, the headlines typically are a little lumpier. They're not perfectly predictable with a certain amount of M&A quarter to quarter, but the team remains very focused on exploring both strategic and economic opportunities, and I'm confident in the coming quarters, you know, we'll have some news to share on that front, and I think given the strength of our balance sheet, it affords us that dual strategy, which we think in the long term will unlock tremendous value for our shareholders.
I mean, John, I'll use that as a follow-up, right? So as we think about M&A, we've seen deals in the space at fairly healthy valuations, you know, whether it's infusion or infusion suites, right? How are you thinking about, number one, valuation and then weighing strategic options in terms of where you're chasing deals versus, as Mike said, economically additive transactions?
Yeah, so a couple of things. One is we also continue to invest into the business. And, you know, the ability that we've been able to invest into the people, process, technology facilities puts us in a unique setting and a unique position in the marketplace. You know, as Mike said, we're always going to take a look at both the strategic and economic merits of any transaction and balance that out. When we look at the footprint that we have today and the ability that we have to serve patients in all 50 states, have over 96% coverage of lives in the U.S. population, and think about how we sweat the assets, we put a pretty high bar around where a strategic move could make sense. We've got capacity within our existing infrastructure to try to use that through that process.
But there are some providers that are unique in their position, either at a market level or some of the capability sets. And so, you know, we'll continue to evaluate those and place value on them in order to move forward. But we don't feel like we have to make moves in order to continue on the growth trajectory that we're on, given the investments that we've made into that facility and the footprint and the opportunities that we think exist within our existing plant and equipment and within our clinical capabilities that we have today. But we're going to always continue to take a look and seize on those opportunities as they present themselves.
Got it. And then maybe I'll shift gears a little bit. There's been disruption in the infusion market with the exit of some of your competitors or peers from different aspects of the infusion space, right? So just curious, you know, your thoughts on why they're doing that and why you're able to stay within your markets and expand even maybe some of your service lines.
Yeah.
And then what are you seeing in terms of share gains that are resulting from some of these moves that we've seen?
Yeah. And I think it builds on the comments that I just made. The investments that we've continued to make within our capability sets, I think, positions us uniquely in the marketplace. You know, since, you know, Mike and I have been with the business since 2015 and really since the merger with BioScrip, we've continued to invest, you know, hundreds of millions of dollars into that infrastructure so that we have a best-in-class capability set, not only from a technology, but a facility and a clinical capability standpoint. So I think that just sets us apart and the ability to have those state-of-the-art facilities that can operate efficiently.
You know, to some of the market disruption and what's happening there, again, as an organization that's solely focused around providing home and alternate site infusion therapy, we understand what it takes and where we want to deploy our capital for the investments in there in order to be that best-in-class. That's different than when you're part of a large organization and you're fighting for capital. Mike and I both come from large organizations in our past. Acquisition currency is easy to get. CapEx is really hard, especially when you're not at the core of the business. The core of our business is home and alternate site infusion therapy, and therefore our investment dollars go into that to expand our capabilities and to differentiate ourselves in the marketplace. We think that over the near or the mid to longer term, this is great, right?
We're well positioned to be that partner of choice. We're well positioned to continue to move forward. I'd be remiss if I didn't call out with the Baxter plant being knocked offline and some of the IV bag shortage in the near term that creates disruption, and our commitment is to make certain we have supply to meet the needs of our existing patient cohorts, and so we called that out in the third quarter that we think it'll be slow as we're kind of ramping up and making certain that we have a certainty of supply, but as that comes back online, we think we're well positioned to capture market demand and to be that partner of choice. In the conversations that we have with referral sources, so a lot of this is the hospital systems, the case managers, discharge planners, hospitalists through that process.
They want to make certain that they have high-quality care, and they want to make certain that they have consistency and reliability. With the investments we've made, we're able to provide that. In the conversations that we have with the payer community, the interesting aspect is of the 270,000+ patients that we serve on an annual basis, over 75%-80% of them are in the acute therapies, right? These are shorter duration, higher turnover patients.
The savings and the value that we generate in that part of the business to help hospitals who are managing DRG and need to get patients moved through the process and safely transitioned, or with the payers who are trying to manage bed days, there is a significant amount of value that's created because we help to reduce the total cost of care on both sides of that with that safe transition out of the hospital to the home, so we think we're really well positioned as it moves forward. Again, there's kinks in the supply chain with some of the plant closures and as that ramps back up.
But as we're looking over the midterm and starting to think about that, we think we're really well positioned to be that partner of choice and to capitalize on the investments we've made into those local communities with the pharmacy infrastructure that we operate today.
John, maybe just to.
I think I want to add and dovetail some of John's comments. First and foremost, you know, we continue to invest significant capital despite, you know, having access to capital for other deployments. Over the last three months, we've opened state-of-the-art compounding pharmacies in New York City, in Tampa. Dating back further, we've, you know, in the last five years in Chicago and Atlanta, this is an area where in our $30 million-$35 million capital run rate, we've been continually investing in state-of-the-art capabilities. In the acute therapies, make no mistake, it's very attractive for us. It's a key driver of both our gross profit and our EBITDA margins. It's not an easy business. As John articulated, we need to have local responsiveness.
Back to your comment, Brian, on our dime, we've invested at the SG&A level in more than 300 RNs that are embedded in leading health systems across the U.S. so that when our health system partners send a referral to help transition a patient home, we can be bedside to that patient within, you know, 30-45 minutes to explain the benefits. So this is not a, it's, I think to your question, it's a very complex portfolio of therapies to support, but it's a portfolio set that we very much, we like it from a financial impact perspective as well as from an ability to deliver value to our health system partners.
Maybe John, just on the Baxter comment, are you seeing any improvement on the Baxter side right now?
You know, every day it gets better. I would say, you know, the responsiveness in twofold. Number one, they've started to get the plant back up and they're doing that. But we have a wide variety of products. I mean, just because they're showing the pictures of the, you know, saline bags being done, I mean, there's just a lot of products that are still disrupted that are part of our portfolio. I would say other alternate suppliers are stepping up. Some of the importation is having some positive impact on that. So it's getting better. We don't have a line of sight as to when it's going to be solved, but it seems to get better week over week as supply lines kind of adjust and other alternative providers and those importations start to have a positive impact on the supply dynamics.
Got it. And then maybe Mike, last question for me, but we've got a couple of minutes here. As we think about, you know, without looking at guidance into 2025, I know Stelara obviously creates some uncertainty, but if we isolate the Stelara impact and that overhang, how should we be thinking about the growth algorithm for the remainder of the business? Kind of like, how are you thinking about X Stelara?
Yeah, I think, look, we're obviously going to come back in Q1 as early as possible to provide thoughts on 2025 when we have a little more granularity to share. I think coming out of the third quarter call, one of the things that unfortunately was a bit muted with some of the other headlines was the base business is performing incredibly well. When we normalized for the procurement benefits last year, gross profit dollars were up sequentially more than $7 million over the second quarter. They grew about 7% over the prior year. And so as John articulated in the call, our conviction in the underlying growth algorithm of high single-digit top line, low double-digit earnings growth remains firmly intact.
With some of the acute opportunities that lie ahead of us, with some of the dialogues we're having with manufacturers around additional rare and orphan platforms that are coming to market, again, we need to get to a point where we can articulate what the 2025 reset is at margin. But putting that aside, I know that's, you know, a big item to put aside in the near term. Our conviction in the underlying growth of this platform remains as confident as ever.
John, any closing remarks?
Just echoing Mike, the fundamentals remain strong. When you look and understand that providing high-quality care at an appropriate cost in a setting in which patients want to receive it, you're extremely well positioned. The investments we've made over the years in making certain that we're well positioned to capture that demand. I couldn't be more proud of the performance of the team or more excited about what the future holds for us as we move through this near-term disruption, but over that mid and long term.
Awesome. Thank you, everyone.
Thanks, Brian.
Thank you.