Yahoo Finance Option Care Health, Inc. (NASDAQ:OPCH) Q1 2024 Earnings Call Transcript
Option Care Health, Inc. (NASDAQ:OPCH) Q1 2024 Earnings Call Transcript April 23, 2024
Option Care Health, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.22. OPCH isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Option Care Health Q1 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mike Shapiro, Chief Financial Officer. Please go ahead.
Mike Shapiro: Good morning. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition.
You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that, I'll turn the call over to John Rademacher, Chief Executive Officer.
John Rademacher: Thanks, Mike and good morning, everyone. As always, I'd like to share a few thoughts upfront on the performance of the enterprise as well as the quarter before handing the call back over to Mike to dive into the financial results a bit deeper. Overall, the first quarter was very solid start to the year despite some of the challenges we recently disclosed regarding the Change Healthcare situation which I will expand upon in a moment. Revenue growth of over 12% reflects the dedication of the more than 7,500 team members who are committed to an unparalleled patient care and finding a way to serve more patients. We saw a solid top line growth with considerable contribution from a number of the newer chronic therapies launched over the past year.
The team is consistently executing across the country and across relationships with key stakeholders, including payers, referring physicians, hospital and health system teams as well as our pharma partners and while we are proud of the top line results in the quarter, we are equally as proud that our patient satisfaction remains quite strong in the quarter at 93% with a Net Promoter Score of 76.2. Knowing that more than 9 out of 10 patients who we have the privilege of serving view the experience with Option Care Health quite favorably, despite managing through an acute medical event or a chronic condition is humbling and affirmation that our team is truly unique. As you are all aware, on March 14, we made a voluntary disclosure regarding the potential impact from the Change Healthcare cybersecurity incident.
Given the impact on our operations and the fact that it has been just over a month since we shared that disclosure, I wanted to provide a few updates. First and foremost, the Option Care Health team responded immediately and decisively to help ensure that we secured our platform and that there was no impact on our patients. Throughout this situation, we maintained our ability to serve our existing patients and to seek and onboard new patients. Our team worked closely with our referral sources to establish alternative paths for referral submission, qualification and onboarding which helped further strengthen our relationships and deepen our position as a trusted partner with them. As I mentioned earlier, given our patient satisfaction results, we believe the patient experience was not significantly impacted by this event.
My confidence in the agility of our team and the resilience of this platform has never been higher. As many of you know, the first quarter typically presents a number of challenges to our patient registration and revenue cycle operations as patients switch health plans, insurance plans reset, benefits require verification and patients on service require reauthorization. Although we plan well in advance for this annual event and prepare accordingly, we were just emerging from this bolus of activity when we were notified of the Change Healthcare incident in late February. Upon notification, we immediately severed connectivity between our systems and the Change Healthcare suite of applications that we rely upon. Those applications include claims clearing house capabilities for both pharmacy and medical claims, along with a number of other tools we have incorporated into our highly automated revenue cycle management function.
During an already hectic time of the year, our patient registration and revenue cycle management teams quickly developed workarounds to maintain patient care. In many cases, we reverted to a more manual process or sought alternative tools and applications to maintain basic operations within patient registration, refill administration, benefit verification and payer authorization workflows. As we disclosed last month, the incident had resulted in certain inefficiencies and incremental costs within these functions, while for the most part, we have been able to return to our previous ways of working, some of those inefficiencies continue to this day. The most significant impact on our operations and related financial results was our ability to transmit a large percentage of our claims to the payers through the Change Healthcare Clearing House.
Upon severing our connectivity, we aggressively pursued alternative methods to qualify patients and transmit claims. However, given the fact that the Change Healthcare Clearing House was our primary conduit, this presented considerable challenges. In fact, from the date of the attack through the duration of the first quarter, we were unable to transmit more than half of our claims for payment during that period. This has resulted in a detrimental impact on our cash flow results in the quarter which we believe is temporary. And as you saw in our updated guidance this morning, we believe we will recover and we have not changed our cash flow expectations for the full year. In the final days of the first quarter and into April, we were able to begin to submit both pharmacy and medical claims.
As we sit here today, I am very encouraged by our progress with respect to reconnecting to the Change Healthcare applications that are back online to establish and connect to alternative platforms we have implemented. And with the effort of our team has made in submitting claims for payment. We have made considerable progress in terms of working through the claims backlog and would expect cash flows to recover by the end of the year. As we emerge from this chapter, there are lessons learned and insights we will use to strengthen our platform as we move forward. Again, I believe our ability to maintain focus, expand access and provide exceptional patient care during such a challenging period affirms the resilience of our model and the tenacity of our team.
The strength of our balance sheet and liquidity position also enabled us to weather this storm and we have not needed to draw upon our credit facilities for business operations or additional liquidity. It also reinforces our priority on investing in our own cybersecurity, enterprise risk management process and market-leading technology to help us remain vigilant on clear and present risk to our operations and agile in our response. I could not be prouder of how this team rose to the challenge and the level of patient care we maintain throughout this disruption. Even with these distractions, our team remains on plan to execute on our commercial priorities, drive operational excellence, expand our capabilities and explore new vectors of growth.
We continue to invest in our team through training and development programs, invest in our technology to create the next-generation intelligent platform and build out our clinical programs to deliver extraordinary care that helps improve outcomes, eliminates waste and reduces the total cost of care for our patients and their families. With that, I'll hand the call over to Mike to provide additional insights. Mike?
Mike Shapiro: Good morning, everyone. As John mentioned, the first quarter was a solid start to the year. Double-digit top line growth was balanced across the portfolio as we delivered single-digit growth from our acute portfolio and mid-teens chronic therapy growth. With respect to the revenue mix in the quarter, we saw especially strong growth from some of our newer chronic therapies introduced over the last year. Chronic therapy growth far outpaced acute therapy growth which was not unexpected. Gross profit of $238.5 million represented 20.8% of revenue and grew 4.1% over the prior year. A few things to unpack that affected our gross profit in the quarter. Gross margin dollar growth was negatively impacted by the absence of the transitory procurement benefits that we've discussed over the past several quarters.
Beyond the prior year comparison headwind, there were 3 factors that affected gross margins in the quarter that we want to highlight. First, gross margin was negatively impacted by the inefficiencies we've described related to the Change Healthcare incident. Second, we experienced some supply chain disruptions for certain acute drugs and compounding inputs that led to higher-than-expected therapy costs. The supply chain disruptions led to higher input costs as well as inefficiencies in pursuing alternative sourcing strategies and we anticipate these impacts to continue into the second quarter. Finally, gross margin was also negatively impacted by our revenue mix as a significant component of our chronic therapy revenue growth was driven by newer chronic therapies launched over the last year that carry lower initial gross margins that we believe we can expand upward over time.
SG&A grew 4.7% and represented 13.5% of net revenue as we continue to drive spending leverage despite the challenges we encountered in the first quarter. As disclosed, the Change Healthcare incident led to inefficiencies in our patient administration and other functions and we continue to see the impact today. We're not in a position to quantify a specific impact from the disruption as our focus is on full recovery and remediation but we were able to drive spending leverage in the quarter regardless. And as I'll cover in a minute, the impact did not lead us to lower our revenue and earnings expectations for the year. Adjusted EBITDA of $98.3 million represented 8.6% of net revenue. Overall, the results were consistent with our expectations despite the Change Healthcare disruption we've articulated and the gross margin impact outlined above.
Also note that we have not adjusted for any impact due to the disruption from our reported adjusted EBITDA results. We believe the silver lining of the Change Healthcare incident has been the reflection on the resiliency of our capital structure and overall liquidity position. The inability to transmit a majority of our claims from February 21 clearly impacted our cash flow from operations in the quarter. Our prior efforts to strengthen our balance sheet and manage our capital efficiently, helped to ensure we were able to operate the enterprise and maintain business as usual in the eyes of our patients and referral sources. At no time did we need to draw on our credit facilities or drop below what we believe are the minimum cash levels required to operate the business, nor do we anticipate needing to draw on the revolver with respect to the disruption in the foreseeable future.
Our operational cash outflow in the quarter of approximately $69 million reflects the revenue cycle disruption, yet we still finished the quarter with over $219 million in cash on the balance sheet. Earlier in the first quarter and prior to the incident, we did deploy $40 million towards share repurchase and upon learning of the change health incident, we temporarily paused our capital deployment efforts to help preserve liquidity. As reiterated in this morning's release, we have reaffirmed our cash flow guidance for the year and expect to fully recover from the incident within the year. Finally, to summarize our revised guidance, for the full year, we expect to generate net revenue of $4.65 billion to $4.8 billion, adjusted EBITDA of $430 million to $450 million and cash flow from operations of at least $300 million.
And with that, we're happy to take your questions. Operator?
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