Rocket Lab USA Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

Operator

Good evening. My name is Jordan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to DaVita's Third Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Q1. Thank you. Mr.

Operator

Eliason, you may begin your conference.

Speaker 1

Call. Thank you, and welcome to our Q3 conference call. We appreciate your continued interest in our company. I'm Nick Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO Joel Ackerman, our CFO and Doctor.

Speaker 1

Jeff Gillian, our Chief Medical Officer. Please note that during this call, we will make forward looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward looking statements. For further details concerning these risks and uncertainties, Please refer to our Q3 earnings press release and our SEC filings, including our most recent annual report on Form 10 ks, all subsequent quarterly reports on Form 10 Q and other subsequent filings that we make with the SEC. Our forward looking statements are based on information currently available to and we do not intend and undertake no duty to update these statements except as may be required by law.

Speaker 1

Additionally, we'd like to remind you that during this call, we will discuss some non GAAP financial measures. A reconciliation of these non GAAP measures to the most comparable GAAP financial measures call is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Speaker 2

Thank you, Nick, and thank you all for your interest in DaVita. We delivered another strong quarter. We began the year by making progress earlier than expected across many of our key operating priorities and that momentum has continued into the Q3. We have balanced a strong focus on near term operating discipline, while continuing to invest for future growth. At the same time, we're creating a differentiated experience for our teammates and of course, delivering the highest standard of care for our patients.

Speaker 2

Today, I will address our outperformance in the 3rd quarter, share a perspective on the potential impact of GLP-one drugs, provide an update on 2023 guidance and then wrap up with some thoughts on next year. Before we get into Q3 details, I would like to start as I always do with a clinical highlight. This time, I will highlight our international business, which provides care for more than 40,000 patients across 11 countries. Each country is unique in terms of health status, local methods of practice and regulation. Over the past 5 years, we have developed universal protocols to combine our kidney care experience with local practices within each country.

Speaker 2

Since launching this proprietary framework, we have seen consistent and meaningful improvements in clinical outcomes. We now outperform the clinical benchmarks of every international market in which we operate. And at the aggregate level, all cost patient mortality across our international countries has dropped by 20% since 2020. These results energize the soul of our company, which is to extend life and improve the quality of life of our patients. Transitioning to our financial performance.

Speaker 2

We had a strong Q3, delivering adjusted operating income of $525,000,000 and adjusted earnings per share of $2.85 This was ahead of our expectations for the quarter. We continue to perform well across our key operating metrics and also had additional benefit related to seasonality and timing. Now let me go to the next level of detail and highlight 3 drivers including patient census, patient care costs and integrated kidney care or IKC. 1st, our patient census has remained steady following the growth we saw in the first half of the year and we expect to end the year with a census of 1500 to 2000 patients higher than the end of 2022. Mortality continues to decline in 2023 in line with our expectations.

Speaker 2

Assuming these trends continue, we expect to return to positive volume growth in 2024 and beyond. 2nd, patient care costs continued to decrease during the Q3. Outside of the seasonal items, the conversion to MIRCERA for anemia management was a key driver of the decrease. That said, wage growth remains above historical trends and exceeds growth in revenue per treatment, but was below our expectations for the quarter. Our experience On labor is consistent with recent macroeconomic trends.

Speaker 2

The tight labor market and low unemployment has continued to put pressure on retention and training, offset by slight easing in the wage environment. And finally, our IKC business had a strong quarter and is tracking ahead of our forecast for the year. We're improving patient health outcomes and reducing the total cost of care, which generates savings that is shared between DaVita and our partners. We also realized the revenue associated with these savings earlier in the year than anticipated. We continue to invest in growth, while carefully managing our model of care costs and we remain on track with our multi year plan to achieve breakeven by 2026.

Speaker 2

Transitioning to a topic of recent focus, there's been a lot of discussion on GLP-one drugs, including speculation on their potential impact to dialysis growth rate. We're excited by the evidence that these drugs could improve the health of many people worldwide. That said, despite the evolving body of evidence about the positive impact of these drugs will have on obesity, diabetes and cardiac disease, We continue to believe that the impact on dialysis volumes will be limited. We believe this is true even if results from near term clinical trials proved to be positive in regards to progression of chronic kidney disease or CKD. To explain our perspective, it is important to segment the population based on disease state.

Speaker 2

In the group that is upstream from CKD Stage 3, it is intuitive That lower obesity should lead to lower incidence of diabetes and hypertension, lower incidence of chronic kidney disease and ultimately fewer people on dialysis. This thesis is built on many uncertainties within a progressive disease, but the one area where we can have clarity is in regards to timing. In this population, the progression to end stage renal disease is typically 15 to 20 years Now turning to late stage CKD population. We believe that there are 4 key factors. 1st, GLP-one adoption rate in CKD population.

Speaker 2

2nd, the impact on CKD progression. 3rd, the offset impact of cardiac mortality benefit and finally, the impact on payer mix due to any changes in the average patient age. For the purpose of building a conservative forecast, we assume robust adoption and long term adherence, Supported in part by the possibility of strong uptake by those who may take GLP-1s for obesity rather than for the CKD benefits. We also looked at a wide range of possible clinical impacts from current and future clinical trials. Simulating across these assumptions, the midpoint of our model reflects a neutral impact on 10 year dialysis growth rates with a small but immaterial impact on payer mix.

Speaker 2

We recognize this may not sound intuitive, Which is why we must consider several misunderstood characteristics about kidney disease. If we look at the approximately 16,000,000 people in the U. S. Today with CKD Stage 3 and beyond. Over the next 10 years, approximately 75% will pass away before reaching end stage kidney disease.

Speaker 2

This compares to less than 10% of those individuals The positive impact of reduced cardiac event has a much larger population to influence than the effect of timing from slower disease progression. To better quantify the downside case on dialysis growth, we also modeled a scenario in which efficacy is found across all kidney endpoints in each of the FLOW and Select trials with 0 offsetting cardiac mortality benefits. This scenario, which should be clear, is not something we expect, reflects a 0.5% annual growth headwind over the same 10 year period based on our model. This would equate to approximately $25,000,000 of operating income headwind per year. Let me wrap up by acknowledging the disconnect between our view and what we believe is the market's perspective.

Speaker 2

To be clear, The disconnect is not related to the popularity of GLP-one or their numerous health benefits, but specific to the impact on kidney care. Because of this, we have pressure tested our analytics with external epidemiologists and consultants with extensive review available research and across a wide band of assumptions. We have focused not on the midpoint, But on the downside scenario on volume and incorporated possible financial headwinds from lower commercial mix. In the end, Our conclusion based on what we know today is that strong adoption of these drugs will not prevent us from achieving our long term operating income growth targets in the next 10 years. This is a complicated topic and we're happy to elaborate or answer any questions on our assumptions.

Speaker 2

Transitioning topics. Looking forward to our Q4, We are revising our 2023 adjusted operating income guidance range of $1,565,000,000 to 1.6 $75,000,000,000 to a new range of $1,650,000,000 to 1,725,000,000 We're also updating our adjusted earnings per share range of $7 to $7.80 per share to a new range of $7.80 to $8.30 per share. It's too early to give guidance for next year, We expect 2024 to be a year of positive growth in volume and adjusted operating income. Despite continued cost pressures and our ongoing commitment to invest in our teammates, we expect the midpoint of our 2024 adjusted operating income guidance will fall within our long term target growth rate of 3% to 7%, driven by continued progress on our operating initiatives. We will provide more detail during our Q4 call.

Speaker 2

With that, I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Speaker 3

Thanks, Javier. I will walk through the strong performance in the quarter, provide some detail about how we are thinking about the 4th quarter and give an update on capital deployment. Starting with volume. Q3 was in line with our expectations. U.

Speaker 3

S. Dialysis treatments per day and census were approximately flat to the 2nd quarter. For the first time Since the pandemic began, we've now experienced 3 sequential quarters of year over year growth in admits. Trailing 12 month mortality rate continues to decline. We are now approaching pre pandemic levels of mortality rate as we once again improved quarter over quarter.

Speaker 3

Revenue per treatment was up $3.60 versus Q2. This increase was the result of continued improvements in our revenue cycle performance as well as normal contracted rate increases and an uptick in private pay mix. For the full year, we expect to be near the top end of the 2.5% to 3% year over year RPT fee range that we shared last quarter. Looking ahead to 2024, the Medicare PPS final rate for ESRD was released last week. Despite CMS acknowledging that the 2022 forecast error was larger than originally calculated, the net rate update finalized for 2024 was only 2.1%, which is still below what we believe is appropriate given continued forecasting errors, current inflation and other rising costs.

Speaker 3

That said, We continue to find ways to expand margin despite RPT increases below current inflation trends. Non GAAP patient care cost per treatment was down $2.30 sequentially. As Javier mentioned, This was the result of a number of items, including the conversion to MIRCERA for anemia management. In IKC, quarter over quarter results improved by $50,000,000 due to two factors. First, we recognized approximately $45,000,000 more of shared savings revenue in the 3rd quarter than in the 2nd quarter.

Speaker 3

It is important to note that this is higher than our forecast, But the difference is primarily timing as we had anticipated this revenue in the 4th quarter. 2nd, We had $15,000,000 of positive adjustments from reconciliations from our special needs plans in the quarter. These revenue increases were offset by approximately $10,000,000 of higher costs. Because of the concentration of the shared savings revenue in Q3, 3. We are forecasting a decline in IKC operating results in Q4 compared to Q3.

Speaker 3

As we have said in the past, results in the IKC business are likely to be somewhat volatile from 1 quarter to the next. So focusing on annual results remains the better way to understand our performance. Our IKC business continues to make progress and we now expect a full year 2023 IKC adjusted operating loss of approximately $110,000,000 which is slightly ahead of our prior 2023 guidance. Turning to Q4, our updated operating income guidance implies 4th quarter adjusted operating income of $380,000,000 a sequential decline of approximately 1 $145,000,000 The vast majority of the delta is due to 2 factors, IKC and seasonality. In IKC, 4th quarter results will be lower due primarily to timing as previously noted.

Speaker 3

The Q4 will also have typical seasonality driven by several factors, including higher mistreatment rates around the holidays, higher spend on health benefits for our teammates, increased G and A and other year end costs in the 4th quarter. The magnitude of this seasonality is higher than what we would normally see in the Q4 this year. We closed or consolidated 15 clinics in the 3rd quarter, bringing our year to date number to 51. We will continue to evaluate our footprint in light of utilization trends. On taxes, we now expect our full year 2023 tax rate to be approximately 23% to 24%, which is below our previous range for the year.

Speaker 3

The updated range is reflective of larger benefits recognized for stock based compensation and forecasted tax credits. Transitioning to the balance sheet, our capital allocation strategy remains focused on capital efficient growth. As we have said in the past, We target maintaining a leverage ratio of 3 to 3.5 times EBITDA over the long term and had paused our share repurchase program 1 year ago as part of our goal to return to this range. Accordingly, we did not repurchase any shares this past quarter and we ended the quarter with a leverage ratio near the middle of our target range. As a result and after considering our typical set of capital allocation principles, including our view of intrinsic value relative to current market price of our stock, We intend to resume purchasing shares this quarter.

Speaker 3

We expect to fund share repurchases using a combination of excess cash flow and capacity within our revolving credit facility. As a reminder, we upsized our revolver earlier this year to provide us with more liquidity and flexibility in our capital structure. We continue to manage our exposure to rising interest rates. Approximately half our debt is long term notes with very attractive fixed rates, while the other half of our debt is floating rate. We have implemented interest rate caps to manage the majority of this exposure through the end of 2025.

Speaker 3

That concludes my prepared remarks for today. Operator, please open the call for Q and A.

Operator

Thank you. We will now begin our question and answer session. Our first question comes from Pito Chickering with Deutsche Bank. Your line is open.

Speaker 4

Hey, good afternoon guys and thanks for taking my questions. I guess a couple for me here. I guess on year over year patient care costs, You guys were some pretty, pretty big reductions sort of year over year and sequentially. You sort of talked about changes within Management. But can you just help us sort of think about sort of what were the drivers, bridge those drivers to us?

Speaker 4

And then while you're not talking about 2024. You've done a pretty amazing job this year controlling costs, I guess. Do you still see the same opportunity going to next year?

Speaker 5

Yes. Thanks for the question, Pito. So, if you think about, patient care costs, I think the right way to think about it is continued wage rate pressure, which we are seeing. As you think about SWBs that is offset by the lower contract labor. Remember last year that was a big pain for us And we got that under control relatively early in the year.

Speaker 5

So you're probably seeing the better part of $100,000,000 Maybe a little bit less than that, but of that order of magnitude in savings year over year. In terms of other items, we've done a nice job here Controlling, our anemia costs. We've talked about that in terms of the reduction from the switch to MIRCERA. And then you have additional savings from us, consolidating our footprint as a result of lower patient volumes. So Those are the big items year over year.

Speaker 5

If you think about 2024, I think We anticipate continuing to see pressure on the wage rate relative to a pre COVID number. I don't think we're ready to give guidance on where that will land, but it's certainly not coming back to the pre COVID level from what we see now. We would expect some continued savings as the savings from both MIRCERA to bring the cost down to mitigate what ultimately will be a higher wage rate pressure than we see in our RPT growth.

Speaker 4

Okay. And then shifting sort of to the GLP-1s. We sort of tried to do the same thing a few weeks ago, sort of building out a 10 year model. There's definitely a lot of moving parts here. Any chance you guys want to sort of share with us the model that you guys had just so we can play with the assumptions sort of within those variables?

Speaker 4

And at the same time, can you just talk to us about what you saw with the SGL-two inhibitors? Yes. What impact did you guys see from CKD patients going to end stage renal disease from that drug and just as you think about the impact from GLP-1s?

Speaker 6

Well, Pito, this is Javier, and I saw your notes. So you've been swimming in all the complexity here. So Since there's different levels of familiarity and understanding on the call, and as you know, the variables have interplay with one another, I think it would be good to step back, get a common foundation so that we can all take off from the same place. So to get that model that you asked for, what I'm going to ask is, first for our Chief Medical He can give us a bit of the financial impact, so we could give you a framework and then we can talk about assumptions. Is that fair?

Speaker 7

Sounds good.

Speaker 8

All right. Doctor. G? Yes, perfect. Thanks, Pito.

Speaker 8

Let me just start by saying, I acknowledge the energy in society right now All around these medications. And as Javier mentioned at the outset, I'm encouraged, I think we're all encouraged that these drugs can truly change the lives of many people. And We certainly endorse the use of therapies that benefit people living with heart disease and those living with kidney disease. When it comes to the GLP-one agonist, They've been available since 2,005. They've generated dozens of high quality clinical studies.

Speaker 8

And what I found interesting Is that really fewer than half of the studies that even looked at kidney disease demonstrated any efficacy in delaying progression. So that's about 40% of those studies showed no improvement, 40% showed some aspects of improvement and then about 20% had some mixed results. And then of course of those that demonstrated that improvement or the impact, the greatest impact was on a subset of patients. And so that's where we started with all of this. Now like you're probably wondering, I think the 2 biggest questions I get are, A, What percent of people are ultimately or do we ultimately expect are going to be on these medications?

Speaker 8

And then B, what That delay in progression of CKD is that going to lead to. So let me kind of walk you through our clinical thinking and then I'll hand it off to Joel to talk more about the financial impact. On that first question, about 5% to 8% of patients right now with CKD are on these medications. And the published discontinuation rates is as high as 69%. And to be very conservative in our model, We've ultimately estimated that about 30% of CKD patients could someday take these medications and we arrived at that number By triangulating from a number of different data points, we looked at uptake of other medications, including generic medications, which are known to slow kidney dysfunction.

Speaker 8

We looked at patient clinical eligibility and specifically on that one about 70% of CKD patients who ultimately progress to dialysis Are either obese or have diabetes or both with the other 30% really not being eligible for these drugs. And so We were assuming about 40% of those that are eligible could potentially receive these medications in the future and then that would translate to At maximum, we believe around 30% of the total CKD patient population who would be on these medicines of those that ultimately progress to dialysis. So that's the first part of the question. The second part of the question is how to estimate impact. And we did that by looking at things that we know of In terms of evaluating slowing disease progression and that is if there is even a delay with these medicines.

Speaker 8

Right now, we are estimating a 25% delay in progression. And to arrive at that number, we looked at the impact In the subset of clinical trials that did demonstrate renal progression efficacy, as I had mentioned, that's about 40% of those studies. And then we picked the data points from those of the smaller subpopulations in those studies where the medications demonstrated benefit. And so in general, that appeared to be about 25% and we used that 25% to really extrapolate for the CKD population. And again, this was to be conservative in our approach.

Speaker 8

And I'll just sort of end by saying, no therapy Has really demonstrated the halt progression or reversal of kidney damage over time. And so that goes to the second part of your question, Which includes the SGLT2s. Right now, about 8% of our ESRD population has been on an SGLT2 And that's for a number of reasons, including the fact that about 65% of patients that get prescribed those medications ultimately discontinue them. So that impact, we believe we have considered already in our model, and I'll let Joel share a little bit more on that.

Speaker 5

Great. Thank you, Doctor. Gillian. So, I have had the benefit of weeks weeks of being steeped in the clinical aspects of this with Doctor. Gillian, other nephrologists, epidemiologists, both internal as well as external.

Speaker 5

So let me try and sum up what Doctor. Gillian said, and then I'll talk about our modeling. I would say 3 things. First, our assumptions are not pulled out of the air. These GLP-one drugs have been used, for At least 7 or 8 years for the management of diabetes.

Speaker 5

So there are a number of robust studies as Jeff Certainty still and we wanted to be conservative. So we landed on 2 assumptions that are incorporated in our modeling. First, That 30% of the CKD population will be on these drugs. It's not going to happen overnight. It will play out over time.

Speaker 5

That's one of the things that makes the modeling complex. So that's Assumption 1, a 30% utilization rate or penetration rate among our population. Again, we think that is a conservative number. 2nd, a 25% efficacy rate. And what that means is, For the patients who take this drug, their progression in CKD will be slowed down by 25%.

Speaker 5

To put numbers on that, if you think of a typical CKD patient progressing from A later stage of CKD to ESRD over 10 years that would convert that 10 year progression to 12.5 years. So those are the clinical inputs that we are using for our modeling. Now let me turn to how we modeled 2 different numbers. The first I'm going to talk about is commercial mix impact. And let me start with this because I think it's a little bit easier to understand and the financial implications could be serious, but What you'll hear is they are not and here's why.

Speaker 5

So, as you would expect, we've got a very robust model around this that we've used to simulate the impact in a number of scenarios. We use this also to create a much simplified framework that we can use to explain to you how we are thinking about this. So let me start that framework with some known inputs. 1st, we have approximately 22,000 commercial patients today that we know. And second, again, most of our patients who are 65 and over commercial mix of almost 0.

Speaker 5

And for the commercial mix of our incident patients below 65, It is pretty constant. It doesn't matter if they're 40 or 50 or 60. It's a pretty constant number and the number drops when they hit 65. The result of that shape of the curve is that when we think about modeling the impact Is the cohort of patients who are just below the age of 65, who without GLP-1s Would have been incident to dialysis with commercial insurance, but because of GLP-1s, their incidents will be delayed And instead of being delayed at younger than 65 instead of being incident at younger than 65, they will be incident at older than 65. So With that framework, let me tell you our assumptions.

Speaker 5

First, we're talking about a 25% delay in progression. We talked about that already. That translates, as I said, into a 2.5 year window of incident patients that we care about. And here's an important fact, about 10% of our commercial population incident in that 2.5 year window before 65. Said another way, 10% of our commercial population is aged 62.5 through 64.

Speaker 5

And so here's the math. You take 22,000 patients, Assume 10% of them are in that incident window that we care about of 62.5% to 64% and say 30% of them will be on the GLP-one drug and that gets you 22,000 times 10%, times 30%, that's 660 patients. That's the number of commercial patients we would expect to lose as a result of GLP-one penetration getting to 30%. That's 660 patients Divided by our 200,000 patients is 33 basis points of commercial mix. So again, let me be clear what that 33 basis points of commercial mix means.

Speaker 5

It means the cumulative impact Of the growth of GLP-1s, however long it takes us to get to that 30% and to see that flow through our CKD population will be a reduction of 33 basis points in total. If that happens over 10 years, that's about 3 basis points a year. It is a negligible amount. To put it in perspective, our commercial mix went up 18 basis points this quarter alone. You would never find this in our numbers.

Speaker 5

That's why we believe commercial mix effectively will not change as a result of the delay in progression.

Speaker 6

All right. Peter, we said a mouthful just to set it up. There is of course the second part, which is just an overall volume, but we wanted to start off with commercial patients 1st and the impact on that, which is, as Joel said, not financially important. So, any questions on that?

Speaker 4

So, I'm going to just sort of take all that

Operator

Our next question comes from Justin Lake with Wolfe Research. Your line is open.

Speaker 7

Thanks. Appreciate all that detail. That was incredible. So let me just follow-up on one of those points, which is that 30%. So The 30% in a CKD population that knows they're progressing to ESRD and dialysis, Is there what's the kind of grounding behind that number?

Speaker 7

I thought it might be higher Given the end state of kidney powder.

Speaker 8

Yes. Thanks, Justin. This is Jeff Gillian. We've looked at a number of things. Indications ACE inhibitors and ARBs on the market, that have good impact on potentially slowing progression of renal disease.

Speaker 8

When you look at the uptake of those medications, even in patients who you just described know that they're progressing through CKD, Even that ranges between only 17.8% and about 30% to 35% of the population. And those medications tend to have a slightly lower discontinuation rate than the GLP-1s. And so looking at that, We have a pretty strong baseline of what to expect for uptake of these medications.

Speaker 6

And remember, Justin, It's better to think of it as 40% because 30% are neither diabetic nor obese. And so it's 30% overall, but 40% of the applicable population. And we're assuming 100% adherence, which is not A normal assumption, we're just trying to be as conservative as we can be because as Doctor. G said, many, many people Get off the medicine actually more than 50% after year 1 is the stat that's useful.

Speaker 7

And then, Doc, can you tell us why that number is so low, again, among people that are kind of marching towards kidney failure? Why is the take up rate only 18% to 30%? Do you not think that goes higher given some of these studies that are coming out that are highlighting the benefits or those benefits always been known and the magnitude of those benefits always been known and there are reasons why it's still so low.

Speaker 8

Yes. It takes a lot of speculation to understand why patients do or don't do what they ultimately choose. Some of this has to do with access to physicians and access to medications and social determinants of health. Some of it has to do with discontinuation rates for any number of reasons, such as side effects and things along those lines. And quite frankly, our clinical research team has done research in the population of patients that ultimately progresses from CKD to end stage renal disease.

Speaker 8

And there's just a number of social and other reasons, including behavioral health, education, etcetera, that limits the full uptake like we might expect on paper.

Speaker 7

Got it. Appreciate it. And then just two quick numbers questions, I'll jump out. The first, can you tell us Your run rate in terms of patient care costs that are now coming from drugs, just trying to understand the totality of where drug spending is at the moment. And then secondly, Joel, if we look back, it's exciting to hear you're kind of going to get back to buying back the stock.

Speaker 7

I think the last time you were buying it in 2022, I think you averaged around $200,000,000 a quarter. Could investors think about that as a reasonable kind of jumping point In terms of what that how to think about your kind of pace of buybacks? Thanks.

Speaker 5

Yes. Let me take the buyback one first. In terms of pace, it is hard to put a number out there. I'd say, look, We've always been comfortable using excess cash flow as well as available leverage to buyback. What I would Point out is we have a bigger revolver than we've had historically.

Speaker 5

We used to have $1,000,000,000 revolver. We up Size that to $1,500,000,000 So if you think about the limitation of liquidity on our share buybacks,

Speaker 6

And the second part of the question was what percentage or what's the cost of treatment On drugs?

Speaker 5

Yes. I assume what you're really interested is In anemia there, that's been the source of the biggest savings. That number has come down dramatically to a point where I think it's hard to bake in a lot of major savings from that going forward.

Speaker 7

That's helpful. Thanks, guys.

Speaker 6

Thank you, Justin.

Operator

Our next question comes from Kevin Fischbeck with Bank of Erika. Your line is open.

Speaker 9

Great, thanks. Maybe just to circle back to the buyback comment. Is it safe to say that the 3% to 3.5% is still the gating factor then to that? Or now that you feel more comfortable about Your base EBITDA, the ability to grow, that you'd be okay over some period of time going above the 3.5 Knowing that you would get back to that 3% to 3.5%.

Speaker 6

Yes, Kevin, I wouldn't view it as a negating factor, but rather, we committed to getting Back to that place and now we're there and we feel comfortable being there and we will revert back and forth as we see appropriate. Right now, we see a disconnect between how we're feeling about our business and how the market is interpreting our results. And so we might be very aggressive. And so that is of course a term of art because if I use that and I buy $300,000,000 you're going to think it was $400,000,000 And so I would say, from my perspective, the right way to think about it is We want to give our money back to our shareholders and we want to be capital efficient and we want to pounce if there's an opportunity or window. And that's probably the best way to think about it.

Speaker 9

Okay. That's helpful. And then I guess one of the things As you walk through your model about you talked about the slowdown in progression of the disease, you kind of started with like an advanced CKD population. Is there any potential that taking the drug Earlier would start that clock earlier than that and extend the 25% slowdown? Or is this really something that really does just kind of kick in It's all going to happen later on and that 10 year window is when the clock starts.

Speaker 9

And I think at the beginning, you talked about how You only see a volume impact for whatever it was 15 years or so. But then you start talking about how The drug has been used the last 7 years. So I'm trying to figure out when does the clock start on that volume impact?

Speaker 8

Sure. Thanks, Kevin. This is Jeff Gillian again. A couple of things. Number 1, for chronic kidney disease in general, The timeframe can be variable, but from moving from early CKD stage 3 all the way to end stage kidney disease is It's been 15 to 20 years.

Speaker 8

I think the average is about 18 years. Even for people living with diabetes, that timeframe is 11, 12 years Or even longer in some cases.

Speaker 6

Sorry, let me correct you. You said 3 you meant

Speaker 8

to say pre from yes, exactly. Thank you. And so as we look at this and have modeled it out and have thought about it, We don't believe that we're going to see a major impact in the next 10 years. Then to take that one Further, as we've looked at the clinical studies, even the subset of clinical studies that have demonstrated any kidney impact at all, That impact is significantly lower in the patient population that is pre CKD Stage 3.

Speaker 5

Kevin, it's Joel here. Let me add one more point because we're probably not Talking enough about the potential offset from a reduction in cardiac mortality. And that plays into this question of What impact are we seeing and when are we seeing it? And I think one of the reasons we're seeing We think we're seeing so little impact now is because the uptake in the drug has been so low. Jeff, correct me if I'm wrong, but GLP-one uptake in CKD is low single digits today, right?

Speaker 5

So You wouldn't expect to see it at such a low uptake. The other important thing is both for GLP-1s And for SGLT2 inhibitors, there has been clear demonstration of a reduction in cardiac mortality. And the way we think about that playing through our population is so many more CKD patients So if you can reduce that number who are passing away from cardiac disease, it creates a larger population that Potentially ultimately be incident on ESRD and that would offset some of the impact P2 inhibitors or GLP-1s today, even though the uptake of those drugs is so small, there is a good chance that we are also seeing the mitigating

Speaker 9

Okay. That's helpful. I guess maybe then a question would be, In the quarter, you talked about mortality improving. Are the new starts back to where you would expect them to be? Or does that also

Speaker 5

Our new starts are back to where we would have expected them to be. We felt that pressure intensely last year, but we are now seeing year over year starts back to what we would have expected.

Speaker 9

Okay. So you're looking at it and saying 2% volume growth is the right number. Longer term, the new starts Back to where it should be, it's really just the mortality that's the difference between where we are now, the 2%.

Speaker 5

I think that's a reasonable summation of where we are.

Speaker 6

Yes. If you were to be a little more refined or sharpen your pencil, our mistreatments Slightly higher than before and we're working on that as well, but your point's bigger.

Speaker 9

Okay. And so then this comment that you're making about that this drug is adopted and the cardiology benefit is The way you think it could be, would we see more new starts then? Is that what would show up? We see that before we saw the progression? Or how does that How would we ever see that that's actually the way that that's playing out?

Speaker 5

Well, I think, yes, you would see it in new starts. I mean, you'd never be able to pinpoint these patients, but these are patients who without these drugs would have passed away at late stage CKD before being incident to ESRD, but that again would be offset by the delay in incidents of patients who are taking these drugs and remain in CKD longer.

Speaker 9

Okay. Makes sense. Let me just last question. The ITC business coming in better, but you're still kind of keeping that 2026 target. Is there anything Unusual or prior period in that or is it just not a big enough change from your projection to kind of say that the trajectory is accelerated.

Speaker 5

Yes. So look, the quarter was really strong, but a lot of that was the result of timing. It was shared savings revenue that we expected in Q4 and Cayman in Q3. As we've talked about in the past and we think will be true in the future, the quarter over quarter variability in IKC And I think the right way to look at IKC is full year. What we see now, We called out $110,000,000 loss approximately for IKC for the year.

Speaker 5

That's a bit better than what we were talking about before, but nowhere nearly as big as the beat this quarter. And again, that's largely because of the timing between this quarter and next. So I'd say overall IKC is on track. They are performing slightly better than we expected, but in the range. And for that reason, we continue to expect better number next year again in 2025 and then breakeven by 26.

Speaker 9

Great. Thanks.

Speaker 6

Thank you, Kevin.

Operator

Our next question comes from Lisa Kley with Bernstein. Your line is open. Hi.

Speaker 10

Thanks very much. In talking about the late stage CKD patients, How should we think about the diagnosis of that group? Obviously, even stage 3 is severely under diagnosed and there's been a big push to try and improve that. Now that there are A variety of medications that can really potentially have an impact, if used early enough. It seems like it's the right thing to do by patients.

Speaker 10

How are you involved in this? And where do you see the diagnosis rates going?

Speaker 8

Thanks, Lisa. This is Jeff again. A couple of thoughts on that. There's been a push to diagnose patients earlier with CKD for a long time and yet we are not seeing epidemiologically A large increase in that. There's been a push to get the word out about kidney disease and things along those lines.

Speaker 8

When it comes to the medications available, medications like ACE inhibitors and ARBs, SGLT2 inhibitors and the GLP-1s, They've been available for a long time and the knowledge regarding their kidney impacts have been known to the nephrology community for several years. So for us, this isn't necessarily new news, although I know it's been making headlines recently. So from that standpoint, we're not seeing a lot of change. We are continuing to work with physicians upstream, to educate them about medications that are available and things like that. And as we think specifically about our role in integrated kidney care and improving transitions of care for those patients that do go on to dialysis.

Speaker 8

This is something that's important to us. We work with our physician partners regularly

Speaker 10

Okay. And a related question, just looking at the disease prevalence over time, as we've seen the obesity rate go Over the last 20 years from sort of 30% to 40% of the adult population, clearly, we've seen a notable increase in diabetes and lockstep, but at least The estimated prevalence and it's a big estimate because there are so many undiagnosed patients, but the estimated prevalence of CKD has really been pretty flat over that time period. Any thoughts on why that may be the case? I'm just thinking if that obesity rate even potentially pulled back, what the relationship will be with CKD.

Speaker 8

Yes. Most of the estimated prevalence comes from physicians coding CKD as a diagnosis through what's called ICD-ten codes. And so as physicians focus on other things, cardiovascular risk factors and cancer type risk factors and things like that. CKD in the early stages, especially CKD-one and two and early CKD Stage 3 It isn't top of priority in some cases. And so we're just not seeing at least the documented prevalence of those with CKD Stage 3 rise.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Speaker 4

Hey, guys. So I'll follow-up here, the couple sort of Quickie here. SGA, a lot of moving parts this quarter, including, I think, funding of Charity Groups. Just curious if you can sort of bridge us sort of what moving parts in 3Q and how we should think about G and A for 4Q?

Speaker 5

Yes. I don't think there's a lot to call out on G and A overall quarter over quarter. There's really nothing that jumps out. In terms of Q4, I would expect a modest uptick From seasonality, but nothing major.

Speaker 4

Okay. Revenue for treatment had a nice pickup sequentially as well. Was there any mix shift here or is that just more of a seasonality thing at this point?

Speaker 5

Yes. The biggest impact on RPT quarter over quarter was continued progress On our collections efforts, we're really proud from an operational standpoint of what our team has been able to accomplish We talked about it last quarter. We got a little bit more this quarter. And I would say, for the time being, we've probably gotten the vast majority of that. So I'm not anticipating a whole lot more of that, in the next few quarters.

Speaker 5

We did see a commercial mix uptick in the quarter, but we also got the benefit of some just negotiated rate increases as well.

Speaker 4

What are the colas that you're getting at this point from commercial payers?

Speaker 6

Sorry, what was the question?

Speaker 4

What are the, I guess, the rate increases that the managed care payers are giving you at this point?

Speaker 6

As we've said in the past, our contracts are multi year. So in any given year, you don't have that many at bat. What we've seen up to now is a lot of regional accounts and it's fair to say that the increases have reflected The environment that we're in, I. E, an inflationary environment, so they've been a bit higher than pre pandemic. And we will see what next year brings as we have a couple of the larger ones up for renewal.

Speaker 4

Okay. On IKC, I guess things got a little bit worse there for the year. I guess what was driving that if I heard that right? And then Yes. You talked about sort of 2024 OI in the 47% range.

Speaker 4

How much of that is coming from improvements of IKC versus from kidney?

Speaker 5

Yes. So, Pito, I think you misheard there. IKC has gotten a little bit better. We have lowered the loss Since our prior guidance. So, we continue to see improvement over the course of the year.

Speaker 5

In terms of 2024, it's too early to give guidance. Javier talked about 3% to 7 Percent as being where we think the midpoint of the range will fall. Again, Too early to quantify, where that will come from. I'd say it's fair to say some of it will come from IKC, but that will not be all of it.

Speaker 4

Okay. And the last question here for me, just a follow-up on Kevin's question, specifically on Q3. What were the new patient adds in the 3rd quarter? How does that compare versus where we were pre COVID? And specifically, what was the mortality in the quarter?

Speaker 4

And how did that compare versus sort of Just curious the interplay between incidence of new patients versus extension of mortality to help figure out treatment growth? Yes.

Speaker 5

So for the quarter, volume came in right where we expected it. The new adds were consistent with kind of a pre COVID type number. Excess mortality, I'm going to peg it at 400. I think the excess mortality number is a number that We're probably going to start phasing out as a metric. It's getting so close to pre COVID levels.

Speaker 5

It's getting kind of within the error band of what you consider as our pre COVID number and that number moved year to year pre COVID. So for consistency with what we've called out historically, The number is 400, but I think, I would expect that number to continue to decline and ultimately, like contract labor, It was something that was important for a period of time, but is no longer important. So we're going to try and move away from that number going forward.

Speaker 4

Okay, great. That's it for me guys. Thanks so much.

Speaker 9

Thanks, Peter. Thank you, Dave.

Operator

Our next question comes from Lisa Clive with Bernstein. Your line is open. Hi. Just wanted to squeeze in

Speaker 10

some questions on home dialysis while I can. Do you have any specifics you could give us about what proportion of your incident private patients are still employed versus on COBRA and how that looks, if there Any difference in your home dialysis patients and how we should think about that mix going forward?

Speaker 6

I actually don't know the mix between COBRA and private, but I know that that Number is pretty steady in when there's full employment that usually just moves in recessionary periods. So we can look at that, but I don't think it's a meaningful change if that's what you're going for. And as it relates to home. It does have a higher mix. We have now roughly 15% change Our patients at home and that number has been stable.

Speaker 6

We've continued to work hard to get more patients on it. But we have not seen any shift and insurance as it relates to the cohorts.

Speaker 10

Okay. I guess I was really just wondering For the patients that are on COBRA, a lot of them won't make it through the full sort of 30 3 months. Could you just comment on whether I'm right on that and whether that whether greater home dials, this could mean sort of more patients employed for longer.

Speaker 5

Yes. We've looked at that number and it's not an easy piece of analysis because You can run into the trap of correlation without causation and you wind up with a number that looks good, but ultimately doesn't really drive any better financial results as your home dialysis rates go up. So I would put that down as inconclusive. And Lisa, one of the

Speaker 6

things that is important for the last decade or so, People assume that patient would go home, they would have more flexibility and they would keep their ability to work. But the reality is That the dropout rate on dialysis at home has continued to be incredibly high. So roughly about half of the patients Their on therapy would rather be taken care in center or have to be taken in center because of a medical condition.

Speaker 10

Okay. That's helpful. Thanks.

Speaker 6

Thank you.

Operator

And we have no additional questions in the queue.

Speaker 6

Okay. Well, I know that that was a very dense conversation, Unusual in that it was not so much related into the quarter, but something that is really important to have an understanding of what we're looking at and what you're looking at. So let me make a couple of closing comments. 1st, we had a very strong quarter and we continue our track record of meeting our commitments. Secondly, hopefully it became clear.

Speaker 6

We are very happy that these drugs are out there and it can improve the lives of many. But on kidney, it is more nuanced to understand the impact it will have on the population. 3rd, even with a robust adoption, based on what we know today, we believe that this class of drugs will not impact our plan to deliver a 3% to 7% OI growth for our long term plan. And then lastly, but really important, we remain really diligently and focused delivering the best care today for our patients, while also building the capabilities and models of care for a healthier tomorrow. It just dawned on me that this is the last time that we're scheduled to speak for the year.

Speaker 6

So on behalf of our team, I'd like to wish you and your families happy and healthy holidays. Be well.

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Earnings Conference Call
Rocket Lab USA Q3 2023
00:00 / 00:00