Okay, good afternoon or morning, everyone. My name is Erin Wright. I am the Healthcare Services Analyst at Morgan Stanley, and welcome to our 24th Annual Global Morgan Stanley Healthcare Conference. For more important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. With that, we are happy to have Option Care with us today, CEO John Rademacher and CFO Meenal Sethna. Happy to have you with us today. I think, John, you wanted to start out with some prepared remarks or some opening remarks, and then we will get into the fireside chat.
Yeah. Thank you for coming today. Great seeing you again. As we exited the second quarter, just wanted to reinforce really the momentum that we feel within the business, the execution of the team. As we had called out, first quarter certainly had a step down in performance as our expectations, and we really wanted to look at the second quarter to identify how to stabilize and then more importantly, start to build the momentum and move forward. As we reported in the second quarter, that momentum not only has stabilized. Expectations were we needed to really understand the dynamics and the shifting dynamics that were different than we expected, especially in that chronic inflammatory portfolio as we were moving that ahead. We wanted to see how that patterned into the second quarter.
Again, we are pleased to be able to report the stabilization and the momentum that we felt out of that. From our perspective, we see that there are vectors of growth as we are looking at that forward view that we are excited about. We continue to drive extreme amount of value in the acute therapies in helping to manage patients safely and effectively to transition out of an inpatient setting into the home and manage them effectively through that process. The product portfolio within the specialty space continues to expand. There are great opportunities for us to capture more of that market share as we are deploying additional resources on that. Our capability set, when you look at a national network of highly advanced pharmacies, as well as the clinical capabilities with our nursing network, is unique in the marketplace.
To be able to partner with pharma, to be able to introduce new products and support that through its journey, we feel we are really well positioned to do that. The conversations that we have been having with payers around helping them manage the total cost of care and their medical loss ratios around utilizing our capabilities, those site of care initiatives, again, continue to pick up momentum through that standpoint. I would say, at a whole, across those dimensions of where we see and where we play today, we think there are opportunities for us to continue to drive that growth and utilize our national scale, but our local responsiveness in ways that captures more of the demand that is in the marketplace. I will put it around that, Erin, to contextualize our confidence in this model, our confidence in this business remains intact.
Trying to understand some of the implications of the chronic inflammatory disease, we just want to be very thoughtful in the way that we approach it.
Yeah, as we start thinking about getting into 2027, we, like other companies that have a December 31st year-end, we're finalizing the long-range plan, and that then nicely tends to dovetail into the budgeting process. It's a little early for us at this point to get into what that looks like for 2027 and beyond. But in the coming months, as we find the right timeframe, we'll definitely be providing more color, both on 2027, but with some of the aspects that John just talked about as we think about that longer term as well.
Yeah, I think sometimes it gets lost in the whole STELARA dynamic, the bigger picture here in terms.
Sure.
As a solutions provider across the healthcare system more broadly. But I do want to dig a little bit into the portfolio, and you've given some great metrics in terms of 4% or no more than 4% of your gross profit is tied to one product. How do you think about line of therapy exposure and dynamics around biosimilars or price changes or subcutaneous transitions, and how you can navigate that going forward and how, I think you're limited in terms of your outsized exposure, but how do you potentially limit that even further going forward?
Yeah. We start with the breadth of the portfolio. When you look at how broad the portfolio is in the expansion of bringing new products in, that is front and center, like the focus of the enterprise. We like the fact that we can provide everything from the acute, short duration antibiotics through the most sophisticated specialty drugs. That shows not only the breadth but the depth of the clinical team and our capabilities in order to do that. As you're looking forward around just the diversity of the portfolio and you called out, there is no product that is more than 4% of the revenue, and so that just demonstrates the breadth of the portfolio.
As we move that forward, I think we called out in previous conversations, we have over 600 products that are part of our portfolio, and that's growing every day as our team looks at those opportunities. The opportunity to support from a specialty pharmacy standpoint, we are a specialty pharmacy. We're URAC accredited. We maintain patients that move from IV induction dose onto subcutaneous. It's part of our normal flow. There's different dynamics associated with that, with the economics, when, again, you don't have nursing and other components involved. But we are a full-spectrum pharmacy, and we do have that specialty pharmacy capability to continue to support patients on their journey and then wrap around that the clinical competencies of the enterprise. So sitting here today, there's nothing that we're looking forward that is a significant disruption over that midterm horizon.
The products we're watching have dynamics of having a competitive environment today anyways around alternatives in the marketplace. A lot of our focus is around the new products that are being developed that are moving through the product pipeline and making certain that we are a partner of choice for pharma to introduce those products as being part of our formulary. Whether it's in a limited distribution network or in a full spectrum network, we want to be part of that pharmacy solution for them, and care team to expand the portfolio broadly.
Okay. Then I want to speak about biosimilars, just more broadly. Where are some of the puts and takes as you think about how it flows through your model, how you think about how PBM owned or private label biosimilars, like the dynamic we saw with STELARA and formulary exclusions change that traditional pattern of biosimilars. Although I think that is going to be defined as certain categories, right? Help to explain that in terms of that dynamic and how you think about more broadly biosimilars flowing through your model.
You want to talk about the model first, and I'll talk more broadly?
First, I'll start out with, I know we've had a lot of dialogue about STELARA, but STELARA was a pretty unique situation, as I start out with that. We talked about, I think the way we've described it to many people, it's really we had a branded product with some pretty strong margins, generic-like margins. We really don't have other products in our portfolio with that type of profile. What we typically see with biosimilars, and this has been the history we've had on a number of different therapies, is as there are biosimilars that have come in because of some event, an LOE event as an example, there's a fair amount of competition that starts in there, which tends to be quite advantageous for us because when it's just a single branded product, that isn't the case.
With that competition and even with the pricing, the pricing may drop a little bit initially, but we do tend to see improved gross profit as you see more entrants in that space. Then also with some volume increases as well, that can turn into improved profitability profiles for us overall. So that's more of a typical profile of what we've seen when we see a few biosimilars come in, and it's the big part of our portfolio as well.
Yeah. The only thing I'd add, Erin, is the uniqueness of the situation with STELARA. There's about 10 biosimilars that all entered in a pretty tight timeframe. That created a really interesting dynamic when you then had the IRA backdrop of a 66% reduction in the branded pharmaceutical price. Again, sitting here today and looking forward, there really is nothing else in our portfolio that has the similar characteristics. In a normal process, if you expect that it's going to be rational economic decisions that are being made, that ability to bring a biosimilar into market, there has to be incentive for that biosim manufacturer to have enough volume to be able to support that development and growth and moving forward.
We expect that when those happen, as Meenal said, it normally creates a very interesting dynamic for us as that glide path of the reference price begins to move down from the branded pharmaceutical price into a biosimilar type of environment, and our opportunity to use our scale and our patient census in order to negotiate best acquisition costs through that process. We are going to continue to manage and learn from this experience that we have gone through. We think the dynamic is set up pretty well. Again, we are supportive biosimilar introductions. We think we have got a great platform. We have got an existing patient census in which we are managing, and the clinical competencies that we have that can wrap around those patients is really an important aspect of the value that we bring.
Okay. Let us talk about acute. You mentioned that being a key driver for you, and it grew high single digits, for instance, in the second quarter. That is above the underlying market. What are some of the key drivers in acute or any subcategories to note on that front? How much are you still benefiting from your competitive positioning in terms of some of competitor exits and what is driving.
We have lapped the competitive closures. From that aspect, we do not believe that we are feeling much other than the goodwill that was created. As people exited the market, we stepped in, and our team did a really great job of responding to those market dynamics that, again, were not signaled broadly in the marketplace. Yet, our team stepped in and was that partner of choice for discharge planners, for hospitalist case managers in order to help to facilitate that transition out of the hospital into the home. Our team did a lot of great work there in order to do that. Again, that developed those deeper relationships with the hospital health systems.
We continue to invest in the commercial resources of embedding nurses into more hospitals to be that partner of choice to identify patients that are stable enough to be discharged but still require an infusion as part of their care plan moving forward. We are continuing to take a look at it from that perspective. As we look at the market in general, we are under-indexed in some markets. We look at an MSA level. I have mentioned before, we like our national scale and the consistency that we can drive across the country with that infrastructure. Healthcare is still local. That opportunity that we have to continue to deepen those relationships, invest in those relationships to capture more of that demand, and really drive that forward, I would say there still is opportunities for that above-market growth from our perspective. That is a broad portfolio of products.
Most of those are generic in nature, whether it is the antibiotics, nutrition support, or other products like inotropes and other things that support those acute discharges. There are opportunities for us to also look for procurement savings, as well as we are thinking about ways that we can use that scale in order to make certain that we are getting the best landed cost from an acquisition for some of the inputs on the nutrition as well as the generic products in the antibiotic space.
I would just add, we talk about the fact that our business is a hustle business. As we talk about it is really patient by patient. You can really see that as part of the acute business, right? Because it tends to be our referral sources are with our hospitals and health systems that are out there, and these tend to be patients that are coming out of the hospital and still need treatments on the same-day discharge. So you get a phone call, you have got to react very quickly. You have got to be prepared to have a nurse, and you have got to have the infrastructure to have nursing, to have the therapy delivery to the patient, often same day. That is why I think you see a lot of competitors have exited, but we have continued to grow because we have built out our capabilities.
With the foundation that we have that John Rademacher talked about, we have really figured out the right way to succeed in that space, which has been challenging, I think, for others. So that is why we look at it as further opportunity to gain additional share.
Okay. Across IVIG or IG and neurology, momentum has been building throughout 2026. I guess, what is driving some of the strength and how do you think about VYVGART or VYVGART Hytrulo and that impacting that portfolio?
Yeah. We had called out both first quarter and second quarter that we continue to see momentum within the IG neuro category broadly. That is across a broad, not only formulary within the IVIG space and the subcutaneous IG space, but also some of the emerging products in neuro, whether it is cognitive impairment or other products within that. We had called out that fourth quarter of last year and really into the first quarter of this year, we continue to invest in the commercial resources in that group of our team that focuses around those call points of IG neurology, as well as in support of hospitals that have specialty capabilities within that space. The team continues to make really good headways in not only developing and deepening those relationships, but also serving those patients well.
When you look at our patient satisfaction scores in the 90s, you look at our net promoter scores in the 70s, we are doing the things to not only put the patient at the center of everything that we do and really deliver that extraordinary care, but also wrapping around the service model in which we are getting high value from a promoter score basis based on the services that we provide. As an organization, that has been an area of focus of kind of putting the team better division around their call points, those relationships that they are developing, and then their focus around really capturing more of that market demand. Then we have a team that focuses around the other specialty areas that really drives around those call points and the value proposition that we have for those therapies.
And one more on the portfolio. Rare and orphan, you mentioned adding new therapies in this category, some going live late 2026 and into 2027. I guess, can you provide more specifics around some of those newer programs, the disease states that they address, any sort of expected contribution? Will these move the needle for you, and your ability also to compete on that LDD for some of those LDD type of relationships?
I will start at the highest level on the compete on the LDD and the platform and how unique it is when you think about what we are able to do. The conversations that we have with our pharma partners as they are thinking about what is their go-to-market strategy, their channel management process really is focused around access and whether that is your pharmacy infrastructure and your ability to reach and get to the patients. It is access in your payer relationships and the ability for them to have broad access for their product. It is the clinical capabilities of the enterprise, both at the pharmacy as well as at the point of care. And it is your infrastructure to be able to serve in the home or in a facility.
When you look at what we have as an organization, what we've built, it is very unique in that platform, and it is one that really resonates well with pharma through that process as they're making their selections of who to partner with, especially when they have medically complex patients, a complex therapy that may require additional manipulation or aseptic compounding to be able to dispense that into the marketplace, or that nursing network that can wrap around and provide consistent high-quality care. So that is part of the way that we put the value proposition as we're engaging with pharma around what we can do and how we can drive that forward. We think we're extremely well-positioned in order to do that.
Then you start to take a look at the clinical competencies of the enterprise, and then the way that we can manage those unique patients, not only in deploying training and clinical protocol at point of service so that our nurses can be trained and educated and qualified in order to do that, but also in the way that we're developing the care management plans in alignment with what the pharma partner wants to do. So those are capabilities that really, again, continues to position us well and position us uniquely in the marketplace. We had called out that we had won a few limited distribution rare. The only thing I'll caution is they're a little bit choppy in the sense of a lot of that has to do with how the pharma manufacturer goes with their commercialization and their rollout.
Some of it is the recruiting of patients onto service, and these are high-dollar products that normally carry a little bit lower margin within that process, and you'll see a ramp over time. So what we had called out, there were some delays, but we're seeing them move into portfolio today, and we expect we'll start to see that into the fourth quarter, but it won't be of material impact in 2026, but it will build then into 2027 and beyond. We have a very fulsome pipeline of products that we are engaged in today that we are working with manufacturers to be a partner of choice as they're making decisions around their channel partners moving forward, and we believe that will continue into 2027, 2028, and beyond.
Okay, great. I want to ask a regulatory question. CMS proposed to expand Medicare coverage for certain home infusion pumps and drugs. You said it was narrow, I think, as you previously commented.
Yeah.
How do you think about that multi-year opportunity as CMS were to meaningfully expand in terms of the home infusion benefit? Also anything else to keep in mind from a regulatory standpoint that's really top of mind for you?
Yeah. We have been consistent and a strong advocate of expanding access to the home for the elderly and for those that are participating in Medicare fee-for-service programs. We have been one of the leaders in alignment with the National Home Infusion Association of really trying to drive this forward. At this point in time, it's hard to hazard a guess of anything moving forward in Washington along those lines. It will require bipartisan support, and that's a little bit elusive at this point in time. The product that you had mentioned and really the expansion there, it's very narrow, but it creates a unique opportunity for expansion with an infusion pump of products into the home through that process. Again, we're partnering in trying to support that product as we move forward, but we think it's narrow.
We think it does demonstrate the value of an expanded benefit for Medicare beneficiaries. We're using that to educate and expand the understanding of the value that can come there, and more importantly, the savings it can drive to the U.S. taxpayers in the sense of if you can be able to serve these patients with high quality of care in these lower cost settings, there's a real benefit to Medicare and the Medicare fund associated with that by taking waste and cost out of the process.
Okay. Anything else from a regulatory perspective, whether it's MFN or IRA, that you're really focused on, and also 340B exposure, if you could comment on that?
Yeah. On the near-term horizon, there's nothing in the IRA that really has significant impact on our portfolio. As you're then starting to look with 340B, again, a lot of conversations going on. Certainly, pharma is putting some restrictive aspects around the way that they're looking at products that would be qualified for 340B. We support 340B today, and we work with our health system partners along those lines in support of patients that could qualify for those savings. We pass those savings back to the hospital. From an economic standpoint, we look at if there is a restriction in 340B and that moves in a different direction, it may create opportunities for those volumes to come our way, where it may be done by a hospital specialty pharmacy that no longer can continue to do that. It may move in our direction.
We also continue to support as a contract pharmacy, those 340B programs in order to provide those savings back to the health system for any qualified patient under the definition of the 340B program.
But at this point, you don't see any sort of fluctuation there in terms of contribution from-
It's product by product that you're seeing in the news, but we don't see a significant change in the program, at least over the near term.
Okay. I want to talk about the footprint. You have added five new ambulatory infusion centers, or clinics in the second quarter. That still is a key component in terms of complementing your pharmacy model. You also have these 32 locations with advanced practitioner capabilities. Can you talk about how you think about the bigger picture view of the footprint of Option Care longer term?
When you look at the footprint of Option Care and what we are designing, it really is focused around that ability to serve patients in the best setting possible and expanding the access more broadly. The program that we have in place and what we are driving to allows us to be focused around if a patient needs to be served in a facility, we can serve them in a facility either under the practice of pharmacy in one of our infusion suites, or we can serve them under the nurse practitioner model in one of our clinics. This is important because of some of the things that you just talked about. If it is a patient that could qualify for 340B, that ability to actually run it through the pharmacy and the pharmacy benefit allows that health system to be able to participate in the savings there.
If it is a patient that does not have broad access and does not have a benefit for home infusion, it allows, through the nurse practitioner model, to really expand and to be able to address what is a market that cannot be addressed by the pharmacy. So we look at this omni-channel approach to be able to be better positioned to support the needs of the patient first and then align it around the different mechanisms that are available, either through the practice of pharmacy or through the physician office fee schedule, which the nurse practitioner would qualify under in looking for the best path for that patient and for the service.
Okay. Then lastly, can you talk a little bit about how you would characterize the capital deployment priorities overall? Near-term focus has shifted a little bit more towards internal investment and share repurchases with $150 million repurchased in the second quarter. How do we think about that going into the third quarter? What is embedded into the second half in terms of guidance? How do you compare expected returns from some of the organic investments, the repurchases, and repurchase activity going forward, as well as M&A opportunities?
Sure. Historically, we've always prioritized internal organic investments as our first priority. There's a number of areas John just talked about, the ambulatory infusion clinics, that's been a big area. We've also talked about a number of the technology and technology advancements that we've been doing for the past several years as well, and then commercial resources, et cetera. We find that has a direct, much quicker impact to the business, and so that ends up continuing to be our priority there. We did more recently, but we've been doing this in the past few years, where we've been buying back our shares. It's a positive way of return of capital to shareholders in a shareholder-friendly way, and so I know a number of our investors, we get feedback on that, and they've appreciated that. At the same time, I don't want to lose sight of acquisitions.
What we've been talking about the past few years have been more around adjacencies and tuck-ins, and when you think about the breadth of the portfolio that John and I have been talking about, whether that could be hospitals that are making decisions on can I run my outpatient center economically or not? Is that where we can continue to be a partner? The industry, the broader infusion industry, is also still quite fragmented, and so there's a number of opportunities for us to go and take a look at assets in that fashion. That continues to remain a strong contender on our list of how we think about capital allocation.
Okay, great. Thanks so much for the time. I really appreciate it.
Yeah, great. Thanks.
Thank you.
Thanks for your time.