Lake Shore Bancorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Option Care Health Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Shapiro.

Operator

Please go ahead.

Speaker 1

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 We encourage you to review the information in today's press release as well as in our Form 10 ks 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.

Speaker 1

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. With that, I'll turn

Speaker 2

the call over to John Rademacher, Chief Executive Officer. Thanks, Mike, and good morning, everyone. Overall, the Q3 was a strong performance and our team of over 7,500 dedicated members at Option Care Health Continue to set the pace in home and alternate site infusion market and I'm personally quite pleased with our ability to remain focused on our key objectives and expand the census of patients that we serve. Patient care is at the center of everything that we do and our purpose is Given that there is a loved one on the receiving end of every dose that we dispense and infusion we oversee, I believe our team is relentless in driving for the highest quality and best patient experience. In the Q3, our patient satisfaction score exceeded 92% and we achieved a Net Promoter Score of over 75.

Speaker 2

So while we continue to deliver solid results for our shareholders, We also continue to deliver unsurpassed service to our referral partners and care for our patients. In the quarter, our team continued to collaborate with our key stakeholders across the spectrum of biopharma, payers, Health systems and physicians to support our patients and to deliver care in their homes or one of our convenient infusion centers. This resulted in balanced performance across the broad portfolio, including acute therapies for patients transitioning from a hospital setting to patients receiving care for an ongoing chronic condition. There's a lot to unpack in the financial performance, But overall, the results were strong and in line with our expectations. We generated approximately $110,000,000 And adjusted EBITDA on revenue of $1,093,000,000 resulting in another quarter of double digit adjusted earnings growth and an adjusted EBITDA margin of 10%.

Speaker 2

The capital structure has never been stronger We continue to generate solid cash flows and improve the leverage profile of the enterprise. In my opinion, The focus of our revenue cycle management team has been outstanding and our ability to drive the velocity of cash collections has never been better. On our Q2 call, you will recall that we committed to repurchasing $100,000,000 in stock in the near term, Roughly equal to the $106,000,000 gross breakup fee before taxes and fees related to the Amedisys transaction. I'm pleased to share that we completed that repurchase effort in the 3rd quarter. Year to date, we have repurchased $175,000,000 in stock, while continuing to drive our leverage profile well below 2 times.

Speaker 2

I want to shift gears before handing the call over to Mike to share a few thoughts on our M and A strategy given some of the developments from earlier this year. As we have consistently articulated, we view this deployment of capital in support of M and A as a cornerstone of our strategy to Create value for our shareholders. The base business continues to perform very well and has a strong foundation with favorable capital structure. Given this, we continue to be well positioned to evaluate opportunities for strategic capital deployment intended to deepen our market presence or increase our capabilities to serve patients in the home or alternate site setting. As mentioned on the Q2 call, we have thoughtfully considered feedback from our shareholders as we continue to seek to identify value creating opportunities and focus our M and A efforts.

Speaker 2

From my vantage point, we see an array of opportunities to strengthen our offering And given our strong foundation, we will continue to be disciplined and thoughtful in evaluating potential targets. Our primary focus continues to be on executing on our core home infusion business and maximizing the value of our platform as we evaluate capital deployment strategy. While we are not in a position to lay out details or specifics, As I mentioned, we would anticipate near term M and A efforts to focus on assets closer to our core business And we would anticipate deploying capital opportunistically from our cash balances and leverage capacity. As Mike and I have consistently conveyed, we are comfortable operating at a net leverage profile up to the 3 to 4 times range. Having said that, we will be quite disciplined in evaluating both economically and strategically the attractiveness of each opportunity.

Speaker 2

This is a facet of our strategy that we take very seriously and I am confident that given our market position and capital structure, We are well positioned to continue our M and A efforts to increase value for our shareholders by delivering value to our key stakeholders. And I will finish where I started, which is to reiterate the strong performance of our business and express the confidence I have in our team to continue providing unparalleled patient care in the home and alternate site setting. With that, Mike will provide additional color on the results. Mike?

Speaker 1

Thanks, John. Overall, the results from the Q3 were quite strong and continue our track record of double digit adjusted EBITDA growth with solid cash flow generation and we expect to deliver another strong year for our shareholders. Revenue of $1,093,000,000 was up 7% over the prior year and as John mentioned was balanced across the portfolio. We've seen growth in our acute therapy portfolio stabilize to lower single digit as we've anniversaried the competitive gains from a year ago, but volumes continue to be solid as we partner with health systems to transition patients from the acute care setting. Chronic revenue continues to be strong across the portfolio and recall that we exited 2 chronic therapies earlier this year that collectively represented a headwind of roughly 100 basis points on a consolidated basis in the quarter.

Speaker 1

Gross margins continue to be strong with Q3 gross margin of 23.3 percent as gross profit dollar growth outpaced the top line. Our ability to offset the mix shift towards Chronic and expand margins was driven by our relentless focus on operational efficiency as well as some procurement tailwinds. As I mentioned on the Q2 call, our procurement environment is quite dynamic and we see puts and takes every year. We believe our procurement team is the best in our industry and is constantly collaborating with biopharma as the majority of our procurement efforts are direct with manufacturers. Earlier this year, we were able to drive favorable margin dynamics for a number of codes that resulted in an approximate $8,000,000 to $10,000,000 Benefit to the gross margin line in Q2.

Speaker 1

In the 3rd quarter, that benefit was approximately $12,000,000 to $14,000,000 which benefited margins considerably. Again, this is not an exact figure as there are many volume payer and therapy dynamics at play. We see a similar benefit in the 4th quarter and that's incorporated into the revised guidance that we shared this morning. And while we are not in a position to provide any preliminary thoughts on 2024 this morning, we expect with a high degree of conviction that the favorable procurement dynamics that I'm referring to will subside in early 2024. Adjusted EBITDA of $110,000,000 represented 10% of revenue and grew 28% over the prior year.

Speaker 1

Even excluding the approximate $12,000,000 to $14,000,000 procurement benefit, we still delivered mid teens adjusted EBITDA growth in the quarter. As John mentioned, we completed the $100,000,000 share repurchase effort in the quarter. You'll recall we announced our first ever authorization in 1st quarter of this year for $250,000,000 and have deployed $175,000,000 to date. We exited the quarter with $386,000,000 of cash on the balance sheet even after the share repurchase efforts and settling all fees and taxes related to the Amedisys transaction. And we finished the quarter at a net leverage profile of 1.7 times.

Speaker 1

So very pleased with the progress and financial profile exiting the Q3. Finally, as you saw in our press release, We've updated our guidance this morning. And for the full year, we now expect to generate revenue of $4,230,000,000 to $4,280,000,000 Adjusted EBITDA of $420,000,000 to $425,000,000 and cash flow from operations of at least $350,000,000 So shaping up to be another very productive year for the Option Care Health team. And with that, we're happy to take your questions. Operator?

Speaker 3

Thank you.

Operator

Our first question comes from David MacDonald with Truist. Your line is open. Yes.

Speaker 4

Good morning, guys. Guys, just a couple of questions on the ambulatory infusion suites. I was wondering if you could give us that number in terms of Percentage of nursing visits in the quarter. And secondly, just are you continuing to see meaningfully higher uptake Amongst newer patients relative to kind of the installed base, so we should continue to see that figure drift higher over time.

Speaker 1

Hey, good morning, Dave. It's Mike. Yes, good progress in the quarter. In the quarter, we opened an additional 5 new infusion suites. So right now, We're at about 160 infusion suites across the country, right around 650 chairs.

Speaker 1

So good progress. The team continues to identify those strategic Expansion areas, we're still around that 28%, 29% of total visits. Although given The top line growth, we actually have seen really solid growth in the number of visits in the infusion suite, even though as As a percent of our total nursing, it's relatively consistent with the 2nd quarter. And so as you mentioned, One of the leading indicators is how well are we penetrating those new patient onboards and I'd say we're highly encouraged by the traction. And again, this is part of the Snowball rolling down the hill because part of it is making sure we have those infusion suites strategically located near The patient densities of those chronic cohorts.

Speaker 4

And then Mike is 25 to 30 kind of the right number to think about on an annual And as that footprint continues to expand, any more meaningful conversations with either payers About more aggressively pushing site of service redirection or even things like hospital JVs where you could drop a few of these around big hospital Just anything to update there?

Speaker 2

Hey, David, it's John. Yes, I think that the 25 to 30 is I'll be the right range. We will always continue to push that forward. And I don't know that we believe there is a cap At this point, but it takes time. And as we've talked about before, the different startup And then ramp up that happens with that as we're adding more facilities, it just drags down in the near term, some of those percentages.

Speaker 2

We are working with payers around Cytacare initiatives. We certainly continue to have very productive conversations with some of the leading health systems around ways that we can better meet their needs and the needs of their patients, whether it's through Utilizing our existing infrastructure or thinking about how we would better partner with them in order to capitalize on that patient flow. So encouraged with those conversations and So encouraged with those conversations and also encouraged just around the thoughtfulness around thinking about ZaidaCare and providing high quality care at an appropriate cost in a setting in which those patients want to receive it.

Speaker 4

Okay. And then just a couple of others guys. When we think about capital allocation, just given the cash flows of the company and the cash balance, Should we also think about buybacks becoming a more consistent part of the capital allocation on a go forward basis?

Speaker 1

Yes. I think Dave, we're going to continue to be balanced. I think as we've been open, given the strength of the balance sheet and the cash flow, I think that has We've established the right to have a multifaceted capital allocation strategy. I think as John mentioned in his upfront comments, I think, Look, we made good progress against the authorization, much in part due to the receipt of the breakup fee that we thought was appropriate to Quickly redeploy. I think we're going to continue to improve the capital structure because as John said, I think we see A quite attractive landscape on a multiple M and A opportunity front.

Speaker 1

And I think while we'll continue to balance both of those Strategies, frankly, I think in the nearer term, I think the priority is going to be more skewed towards M and A deployment.

Speaker 4

Okay. And then guys, just last question. I know you're not giving 24, but just how we think about kind of the bridge. I guess a couple of questions. 1, Mike, when we think about some of the procurement benefits

Speaker 5

And it looks like

Speaker 4

a little bit over $30,000,000 I would assume that the correct jumping off point is kind of in the upper 3.90s. You kind of back that out As you move towards 2024? And then I guess the other couple of questions is on cash flows, The AMED breakup fee and then on the top line, I think you had talked about those products being you expected roughly 200 basis point impact for the year. Is that kind of everything to think about in terms of 2023 relative to 20 24?

Speaker 1

Yes. I'll start with what you would expect as my legal qualification that we're not in a position to provide guidance on 2024. A couple of things. Number 1, yes, look, And these aren't exact numbers, but our best estimate is in Q2 and Q3 from my remarks. The procurement Tailwinds were somewhere in the $20,000,000 to $24,000,000 range.

Speaker 1

We expect somewhere in that call it $10,000,000 to $12,000,000 range for Q4. So yes, I think high love all the way to think about it is and with a high degree of confidence those are going away very early in Q1. So think of $30,000,000 of Procurement, which we've been very transparent, will is mostly transitionary and so 30,000,000 Likely will not continue into next year. On the cash flow basis, yes, I mean, our guidance of more than $350,000,000 includes the $106,000,000 break fee, Although, we demonstrated our relentless focus on cash flow generation and normalizing for The Amedisys receipt, we would continue to expect high cash flow efficiency. And in the quarter, the 2 exited therapies Makena and RAVA Cava represented a little over 100 basis points of headwind.

Speaker 1

So there was a little bit of that in Q1 and early Q2. So Well, anniversary. We'll obviously unpack this to a greater extent than February day, but I think that'll be more of a muted impact going into next year with a little bit of the 1st part of the year headwind.

Speaker 6

Okay. Thanks very much guys.

Speaker 1

Thanks, Dave. Thanks, Dave.

Operator

One moment for our next question. Our next question comes from Matt Larew with William Blair. Your line is open.

Speaker 7

Hi. This is actually Madeleine on for Matt. Thinking about the M and A sort of post Amedisys deal, I know you've talked about listening to shareholder feedback. Are there any specific criteria or specific, like things that you look at when you're evaluating deals that have changed in the last couple of quarters compared to how you were thinking about M and A maybe before the Amedisys deal?

Speaker 2

Hey, Madeleine, it's John. As I said in my prepared comments and I think we even talked about in the Q2 earnings call, Our focus and again based on some of the feedback that we got from shareholders through the Amedisys process will be closer The core home infusion, alternate site infusion business, I don't want to box us in too much on that. We're always going to take a look For opportunities to expand our capability set, to ensure that we remain and increase our relevance With our partners in the marketplace across the key stakeholders of biopharma, of our payers, of our prescribers, In the marketplace, so all of those components fit in there. We talk a lot about it needing to be both economic and strategic. And so if there's opportunities for us to increase our market presence, if there's opportunities for us to increase Our capability set to provide a better clinical outcomes for the patients that we serve, if there's opportunities for us to expand Our capabilities, should be more convenient for patients to receive care from Option Care Health, all of those kind of fit into that criteria.

Speaker 2

We're always looking at it on a cash on cash basis. We are focused around creating value for our shareholders Through the process and as Mike said in the last response, we believe that deployment of capital In a multifaceted way, but more importantly through deployment on M and A to expand on our capability set It is a really good use of capital and creates that value for our shareholders over the mid and long term.

Speaker 7

Great. Thank you. And then one more on the infusion suites. I think you've talked about you're seeing like a 10% nursing productivity uplift in the suites, but the suites so far have not been fully ramped. Can you talk about how you're thinking about that productivity uplift going forward as You add more suites and as they ramp up to full capacity.

Speaker 1

Yes, Madeleine, it's a great question and great to hear from you this morning. Look, as we talked about, in reality, our AIS expansion strategy is about 2 years old. We really lit the fuse on this In late 2021. And so as we've talked about, we have a Quite a disciplined model that would project it by the 1st anniversary around to month 15, these are breaking even, I. E.

Speaker 1

The nurse Productivity is paying the utilities, the rent, and insurance and cost of the facility infrastructure. We've said that by the 2nd anniversary of opening these and again some of these are based on the earlier tranches Of the sites that we're opening, we're seeing about a 10% productivity outlook, which is great from 2 perspectives because number 1, that helps us with our Cost of service and helps our margin expansion. It's also a growth enabler because think of it as we're adding additional Nursing hours, which is a scarce resource. We have not yet tested the upper bounds of what ultimately that Productivity uplift. And I think it's safe to assume that with our ops teams in the field, we would expect that ultimate productivity To be well north of 10%, because candidly none of our centers are operating anywhere close to full capacity nor do they have to for them to be a growth enabler and a margin accretive investment for us.

Speaker 7

Great. Thank you guys so much.

Speaker 1

Thanks, Madelyn.

Operator

One moment for our next question. Our next question comes from the line of Lisa Gill with JPMorgan. Your line is open.

Speaker 8

Good morning, John and Mike. Just want to follow-up on one thing to start and that is, Mike, on the Implied 4th quarter revenue. Historically, if I look back the last few years, you don't see a deceleration between the 3rd Q4. Is there anything that's shifting this year versus what we've seen historically?

Speaker 1

No. I mean, I think if you look And our revised guidance, it's consistent with the comments that we made on the Q2. We would expect given the number of dynamics that things will be a little bit Flat relative to the 3rd quarter view. I think I would say on the acute business where we've seen some of that subside back down into the first Into the low single digits, Lisa. We did still have a number of transitionary patients last year when a couple of the competitors exited.

Speaker 1

We did take a flood of patient transfers, which does create a little bit of still year over year headwind. There's some pricing involved as well, but overall we still see and would expect volumes to be Solid going into the Q4.

Speaker 8

Great. And then my second question is around Managed Care contracting. So If I think about this time of year, can you just remind us like how should we think about managed care contracting and kind of going back to one of your earlier comments talking about working with managed Getting more people into your infusion suite. Is this something that happens on an annual basis? Is this a 3 year type of relationship?

Speaker 8

And As you have those contracts come up renewal, is there anything that you would call out that you would say is different on a go forward basis with the relationships you have across Managed Care?

Speaker 2

Yes, Lisa, it's John. Most of our contracts are evergreen, so they'll have an automatic renewal within them. Some of our larger national programs, there'll be a 3 year On that. So we don't really come up to the edge every year waiting for the drum roll to see if we renew or not on that. They pretty much continue to flow Through that process, we have been working across the spectrum with the largest to the smallest Health plans, looking for ways for us to help them bend the cost trends.

Speaker 2

And some of the conversations that we're having, Certainly focusing around Cytacare initiatives that they have, looking at different cohorts of patients that they're focusing on Our things that happen on a regular basis and they don't necessarily only happen once a year. They happen through Our quarterly business reviews and other aspects that we are undertaking as a partner not only to demonstrate value that we're bringing them, the satisfaction of their members, those types of things, we're doing that on a pretty consistent basis With our team of dedicated professionals in the market access area. I'd say some of the conversations have been focusing really on that CytoCare initiative around looking at specific areas of focus depending on the payer. We certainly have been talking to them about Some of the cost of nursing and trying to make certain that we are getting rate increases where we can, where contracts will allow us with cost of living adjustments and or with some renegotiation in that process. And I think that folks understand some of the pressures on healthcare providers in recruiting and retaining Clinical talent in today's environment.

Speaker 2

So I'm not going to say that it's easy and Mike and I continue We remind everybody that no one's coming to us saying that they want to pay us more, but I think when you can put a strong back base behind it And you can demonstrate the high quality care that we're providing, the ability to have those conversations and seek Some rate increases is something that we are focusing on and again having those conversations across the board.

Speaker 8

And Don, if I could just sneak in one more as it pertains to staffing. You talked about retaining Staffing around nursing, etcetera. Can you just talk about the current environment? Do you feel like it's I mean, obviously, it was really challenged for a number of years. Do you feel like It's better if you feel like we're at this equilibrium.

Speaker 8

I know like there continues to be pressure from a wage perspective, but Anything else you would call out to us as we think about the cost from that side? Yes,

Speaker 2

I would say it is stabilized. It's not easy by any stretch of the imagination and I'd remind our team that we got to recruit our team every single day And we're looking for ways to put programs in place to provide appropriate incentives and other aspects To make certain that we are an employer of choice and that we have a high value proposition for the team, The ability that we have with Maven and Maven continues to expand its ranks of nurses That it has in its roster as part of its network, the ability for us to tap into that has allowed us to continue to grow As well as the recruiting that we're doing as Option Care Health for full time nurses within our environment. It's not easy, Lisa, but I'd say, it's not as crazy as it was, say 18 months ago, At the peak of some of the challenges that everyone was feeling in healthcare.

Speaker 8

That's really helpful. Thank you so much.

Speaker 1

Yes. Thanks, Lisa.

Operator

One moment for next question. Our next question comes from Joanna Gajuk with Bank of America. Your line is open.

Speaker 3

Good morning. Thank you. Thanks for taking the questions here. So a couple of follow ups, I guess, On the very last point on Nave, can you give us an update on integration there? I guess there was a new system you were And you added a 3rd smaller asset recently to the platform.

Speaker 3

So can you give us a flavor where we stand? And especially on this new system, are you also getting traction with biopharma when it comes to the, regarding staffing their clinical lobs and whatnot? Thank you.

Speaker 1

Joanna, it's Mike. Yes. I mean, look, Navin has just been a fantastic headline. John and I couldn't be more pleased with the progress we've made. The platforms are Fully integrated.

Speaker 1

We're on one technology stack. We've got 1 jersey, the Naven jersey now, and the team Has been really gaining traction both around recruiting now that we have a national presence and 1 national platform. As John said, we continue to recruit both our existing nurses as well as new nurses every single day. And I'd say that the platform is having a great degree of traction both in term and again we operate that as an independent platform to maintain a wall between Option Care and Navin for separation purposes, but most importantly, Navin is continuing to support growth on the Option Care Health side And they've had great traction across the industry with other Navin clients Including biopharm as they look at things like manufacturer programs, clinical trials, And yes, as you did pick up, we did make a very small acquisition in the 3rd quarter, a small nursing staffing agency that frankly is Integrated into the Navin platform, it was quite small, but complementary. And now as we think about that platform, The ability to scale it is quite attractive.

Speaker 3

And on this last point in terms of adding assets, so you repeated the comments from 3 months ago in terms of just in the near term, The spending will be more focused on the core infusion or close to core home infusion assets, but I guess we haven't seen much activity this quarter. So Is there some sort of timing of things or should we expect more things pick up in later this year or into next year? Any, I guess, flavor in terms of pace of the deals and the closing of those? Thank you.

Speaker 2

Yes, Joanna, it's We continue to take a look and understand what's available in the marketplace as Either assets come available or we engage in different conversations. And we don't really put a timebox around when that is, right. It's a matter of making certain that we're disciplined in our approach and that we're focused around where we can add value. Just to reinforce kind of that I said in my comments and that is we don't feel like we have to do anything. The core business is operating As you saw by the results in the quarter, we have confidence that we can continue to do that.

Speaker 2

But we also understand that With the capital structure that we enjoy today and with the ability to generate cash for us to find opportunities to increase value to our Shareholders deployment of that capital in a multifaceted way, but certainly in us looking M and A is part of that multifaceted strategy. We think it's the best use of that capital as we move ahead. And so I wouldn't timebox it. I don't feel as if there's a shot clock and we have to do something in the near term. We're going to look for great assets that are complementary to what we do and increase the relevance with the payers, With our patients, and if we find the right assets that are economically and strategically Aligned, then we will look to deploy capital for those types of opportunities.

Speaker 2

The only thing

Speaker 1

I'd add, Joanna, is look, And for every opportunity that makes it to a headline, there's likely dozens that die on the edit room floor because as John reiterated, I think we've driven a discipline that there's a lot of strategically attractive assets, but it has to generate very attractive Cash on cash returns and represent economic opportunities as well.

Speaker 3

No, I appreciate that. That makes sense. And If I may last follow-up, I guess, on the commentary on next year in 2024. So I understand you're not giving guidance and Appreciate the commentary on the procurement benefit this year creating headwind next year and also the therapy, I guess, exits Headwind this year, so I guess easier to confirm for next year. But any other big tailwinds and headwinds that we should be thinking about?

Speaker 3

I guess, There are subcutaneous formulations maybe coming for some of the main drugs like ENTYVIO or OCREVUS at some point in the next few years. And Moivy, with that, if you can give us a flavor of the Alzheimer drugs rollout and are you seeing more MA plans covering it? So I guess, any other things, I guess, we should be thinking about as we head into next year? Thank you.

Speaker 1

Sure, Joanna. And again, I'll reiterate my legal disclaimer, which is to say we're not in a position to provide granularity. Look, the reality is We're still in the process of working on our 2024 budget and expectations, which obviously we'll be eager to share in 20 In February of 24. I think I would underscore a couple of things. Number 1, John and I have reiterated that We maintain our conviction in the growth profile of this platform.

Speaker 1

Having said that, this is a very dynamic environment. We don't operate in There are constantly puts and takes both from a therapy portfolio, disruptive technologies, Procurement dynamics, payer dynamics. And so, as we formulate and finalize our thoughts, we'll definitely circle back. But rest assured, there's always going to be, as there have been over the last 4 years since we consummated the merger, a tremendous number Variables that are moving. I don't know, John, if you have any comments on that.

Speaker 2

Yes. The only other thing I would add to the specific question around the Alzheimer's, again, It's been slow in the uptake. As I think everyone is aware, we're still working to understand What are the medical policies in which the payers are going to utilize as we move forward? We again believe that The platform that we have and the capabilities from a clinical standpoint are well positioned to support these patients, But there's still so much that has to develop before us. We've talked before about the challenges of diagnostic Aspects of it as well as continue to track those patients through the process.

Speaker 2

And so we're working Both with biopharma as well as working or listening to the feedback from payers around that And are doing everything we can to be a partner where appropriate and look to participate where we can add value.

Speaker 3

Thanks for taking the question.

Speaker 1

Yes. Thanks Joanna.

Operator

One moment for our next question. Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Speaker 5

Hey, good morning, guys. John, maybe as I think about the pending legislation around hospital site neutrality for drug administration, How are you thinking about the potential downstream impact of that if implemented, for infusion providers such as you guys?

Speaker 2

Yes. We are well, I'll start with just the general, we continue to work in Washington kind of across the board Try to look for expansion of coverage and expansion of access for Medicare Beneficiaries to be able to receive the full benefits of home and alternate site infusion services. And again, well documented and well discussed, The limited access that they have today. As we continue to take a look at other areas where legislation is moving, Again, we look at that as potentially being an opportunity for us. We know that the efficiency of our model allows us to Operated extremely effectively within the home and alternate site infusion Delivery aspects of that, we talk about the efficiency of our nursing in the infusion suites and Our pharmacies and the way that they can compound dispense and distribute the product.

Speaker 2

So if this starts to open up additional opportunities and or It changes the economic dynamics to be more aligned with the lower cost providers. We think that there might be an opportunity for us to participate, but again, we're going to need to have Some legislative fix or other elements that allow us to be able to service those Medicare beneficiaries in the home or in one of our infusion suites.

Speaker 5

Got it. That makes sense. And then Mike, as I think about maybe the puts and takes on some of the moving parts with The drivers of revenue, exiting some therapies here and there, how are you thinking about the pipeline of drugs as it Drives to offset some of the therapy exits that you're contemplating?

Speaker 1

Yes. I think that's a Key variable that we're constantly watching. Obviously, we've got a business development team and our Procurement team has dialed in. They've got an ear to the rail with all the manufacturers. We know everything in the pipeline from preclinical through Filing the BLAs and so that's something that we absolutely take into account.

Speaker 1

I think you bring up a good point because I think part of What we also are discerning is looking under the lens of how do we leverage our clinical and pharmacy assets Across the country, even as things migrate from, let's say, an intravenous to a self administered or a sub Cutaneous administration or with biosimilars coming out, it's really vital that you look at the labels because a lot of things that are going subcutaneous might still Require healthcare professional oversight or injectables that require HCP oversight. And so those are all key variables. There's a couple of things on the Horizon with certain infliximabs that are going sub Q, STELARA, obviously one of the things that Janssen has been very open is they Biosimilar participation before the end of 2024. These are all variables that we're keeping in front of us. In terms of the pipeline of new to world therapies, that's an area where frankly we've Exercised and demonstrated our ability to excel.

Speaker 1

One thing we talked about earlier this year is just a phenomenal collaboration with the Folks at Crystal to commercialize, VJUVIC, which is a topical gene therapy, not probably the first therapy that would roll off somebody's tongue thinking about Things that we're commercializing, but when you look at the veil of it requires pharmacy infrastructure, healthcare professional administration. It's something that Well, again, it's not going to change the growth profile of the industry or of our platform. It's definitely complementary and efficient For us to launch given the technology and the clinical infrastructure that we've established. And so we'll continue to look at both some of those Orphan therapies where we can collaborate and be a trusted partner of choice as well as what are some of those structural Therapy dynamics that have been evolving over the last couple of years and will continue to evolve.

Speaker 5

That makes sense. Maybe if I can squeeze one more in. So you guys touched on some of the market share gains that you've had from the exits of Some of your competitors from the acute business, how are you thinking about remaining market share up for grabs? Or are there more of these situations that are Likely coming out where competitors are exiting certain therapy buckets.

Speaker 2

Yes, Brian. Look, From our perspective, I think everyone's going to continue to evaluate their position. We talked about The choreograph that has to happen in some of these therapies and the work that has to happen at the local level Can't really hazard a guess as to whether or not others are going to make different strategic decisions. We have built a Dynamic and resilient network that would allow us to take on additional patient volume if that were to come our way. And We're out every day hustling to try to capture market demand as it exists regardless of actions of our other competitors.

Speaker 2

So, that's the way we've always approached it and I think we're well positioned given the resilience and The capacity we have within our existing network.

Speaker 5

Awesome. Thank you, guys.

Speaker 1

Yes. Thanks, Brian.

Operator

One moment for our next question. Our next question comes from Jamie Purce with Goldman Sachs. Your line is open.

Speaker 9

Hey, good morning, guys. I wanted to start with a clarification on the 2023 EBITDA base. I know you guys gave the 100 basis Points of AFP pressure and 200 basis points from Makena and Radicava. I think you said that's been actually 100 basis Headwind so far this year, Makena and Radhika specifically. So I just wanted to confirm that and that's sort of what we should be expecting to The headwind next year.

Speaker 9

And then similar question on the ASP, just whether that has played out as you expected this year.

Speaker 1

Yes. So the 100 basis points I referred to Jamie was in the quarter, so in Q3. We started to see last year The Radakava start to ramp down. Again, I don't think that again, not in a position to unpack 24 really, but don't think we're going to be talking about Makena and Radhika in early 2024. Yes, there was some early revenue in 2023.

Speaker 1

It's not going to be a headline on a year over year basis. We have seen some further ASP erosion consistent with How we thought coming into the year specifically on some antibiotics and on some of the infliximabs for chronic inflammatory. So That has played out relatively consistent with how we projected it going into the year. The other thing is obviously we had I think somewhere in the neighborhood of 30 bps to 40 bps of and again, all this is not against the backdrop of a static platform, but We did exit a respiratory therapy business in late Q4 of last year, which I think represent about 30 bps to 40 bps Of headwind for this year, that topic goes away going into 2024 as well.

Speaker 9

Okay. And then secondly, just on the Q3, were the procurement benefits In line with your expectations, it was a little higher than I expected in the quarter. So just want to get a read on that. And then Relatedly, if the underlying business performance was in line with your expectations.

Speaker 1

Yes. I'd say overall, The quarter developed consistent with how we were expecting going into the Q3. Look, On the procurement benefit, they were a nudge better than we expected. And again, this is not an exact science. It's a little bit of hand grenade range.

Speaker 1

That's part of the reason, frankly, why we brought up the bottom end of our range to $420,000,000 to $425,000,000 with Drifting towards the higher end of the $415,000,000 to $425,000,000 we articulated in late July was if in fact some of those Procurement benefit manifested at a slightly higher level which candidly they did. And so look how and that's incorporated into Our Q4 implied guide, at the end of the day, it's shaping up to call it $30,000,000 to $35,000,000 of 23 procurement benefits, which are real and hats off to our procurement team. They muscled their way to realize this, But that is something that obviously we want to highlight to folks, which won't continue into next year.

Speaker 9

Okay, perfect. And then John, 2 for you. First, sometimes you talk us through the key drivers of growth, specific therapy classes. Can you Spend a minute just giving us a flavor for what's driving growth at this point and where those therapy categories are in their lifecycle?

Speaker 2

Yes. So we continue to work closely with our reach and frequency of our commercial team to make Certain that we are well positioned to capture demand coming out of the acute setting. And those antibiotics and nutrition support Products, they're kind of in a the later stages of those life cycles, right, in the sense of their Utility remains high, and we continue to see that. But as we've disclosed before, that's a lower Growth profile in the low single digits on the acute. On the chronic side, the Continue to see strength in immunotherapy.

Speaker 2

We continue to see strength in the chronic inflammatories. We continue to focus around neurologists and gastros to make Certainly, they are aware of our full spectrum of capabilities within that. Our team does a really good job and continues to refine its Ability to target and focus around the prescribers, and we're always looking to expand the capability set that we have in the Surveillance we can provide or the feedback we can give to those prescribing physicians around how patients are responding to the therapy. We feel good about the position that we have. Again, we fully expect that the chronic is going to grow at a faster pace than the acute, Given some of the innovative new products that are entering in, and as I said in my previous comments, we're Certainly looking at new areas of development, whether it's in the Alzheimer's space and in some of the oncology space, As there are a significant number of products that are in the pipeline for approval that will require infusion companies to compound dispense and or our nurses to oversee The infusion or the injection to ensure the best clinical outcome.

Speaker 9

Okay, great. And then one last one. Admittedly, this is the impossible to answer question, but John, if you have any

Speaker 1

perspective I'll

Speaker 2

give that one to Mike then.

Speaker 9

Yes, you know that where this is going, but just your perspectives on GLP-1s, if there's any categories within your business that you think are Have exposure to obese populations and potential for reduction in obesity across the Any early perspectives would be helpful. Thank you.

Speaker 2

Yes, Jamie. At this point in time, we don't see a lot of impact on The products that we dispense or the demand that we're seeing within the marketplace over the longer term Yes, to be determined around the long term benefits of this, but at least under the near or mid term, we don't see a Significant impact on the products that we dispense or the services that we provide.

Speaker 9

Okay, great. Thank you.

Operator

One moment for our next question. Our next question comes from Pito Chickering with Deutsche Bank, your line is open.

Speaker 6

Hey, good morning guys. Thanks for tuning in here. A question is actually on Jamie's question just there. So looking at the implied 4th quarter revenue guidance, I think you were saying that you're facing about 100 basis points impact from ASP pressure. Was it 150 to 200 in therapies and 30 to 40 in divestitures?

Speaker 6

And you said that all those sort of don't continue into 2024s. Is that sort of like the takeaway? It's about 300 basis points of revenue pressure in 4th quarter It doesn't continue into next year.

Speaker 1

Yes, I think that's about right. I think you're thinking about that right. Okay. Perfect. Awesome.

Speaker 6

And then on the procurement benefit, if you pull out sort of the $9,000,000 from 2Q, dollars 15,000,000 in 3Q and dollars 11,000,000 in 4th We sort of get to the back half of the year EBITDA guidance excluding procurement of about 9% margins. Again, is that just the right launch pad to think about for 2024?

Speaker 1

Yes. I think as much as we're celebrating and Commending our procurement team for what are real procurement savings, unfortunately. And while that's helped As achieved now 2 quarters of 10% EBITDA margins, unfortunately, that will subside. And I think you should absolutely adjust the EBITDA margins

Operator

One moment for our next question. Our next question comes from Michael Petusky with Barrington Research. Your line is open.

Speaker 10

Good morning. My GLP question was asked and answered, but let me switch over to M and A. I guess I'm just wondering, obviously, the Amedisys deal didn't Go through to completion, your current thoughts on Home Health assets and how that Potentially, could still be a place that makes sense going forward for you guys. Thanks.

Speaker 2

Yes. Hey, Michael, it's John. I think as we tried to convey, we really thought the Amediset asset was unique In its capabilities that certainly with its reach in the star ratings as well as some of its additional capabilities with Contessa and some of the other aspects of that. So not all Home Health assets are created equal on that. We still believe that there is opportunity for us to play a meaningful role in the home With the nursing resources that we have and find ways to have better coordination of care for the patients that we serve, I think as we are looking forward, as we outlined both in my prepared comments, but in our commentary, I think in the near term, we will be looking in the M and A activity closer to the core Expanding broadly into Home Health through that standpoint, but there's opportunity for us to Continue to innovate and to continue to work closely through that process.

Speaker 2

So, we'll continue to evaluate Opportunities that are available will continue to foster relationships where appropriate. We're going to continue to look at things both economically and strategically And make certain that we are ahead of the trends that are happening in the marketplace as the healthcare ecosystem continues to evolve.

Speaker 10

All right. Very good. Thank you so much.

Speaker 2

Welcome.

Operator

And this concludes today's question and answer session. I would like to turn the call back to management for closing.

Speaker 2

Thank you again for joining us this morning and for participating on the call. As we outlined, it was another strong quarter for Option Care Health and our team of passionate care providers. We look forward to continuing to make progress against our key initiatives and providing you updates on our next call. Take care and have a great day. Thank you, everyone.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Lake Shore Bancorp Q3 2023
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