BrightSpring Health Services, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Results: Third quarter total revenue was $2.9 billion, a 29% year-over-year growth, and adjusted EBITDA was $151 million, a 16% year-over-year growth. The company raised the midpoint of its 2024 total revenue and adjusted EBITDA guidance.
• Pharmacy Segment: Drove exceptional volume growth, with Specialty outpacing forecasts due to higher script volumes from 2023 and 2024 LDD launches and generic scripts. Infusion and home and community pharmacy also saw strong growth. The LDD portfolio expanded, and SPRYCEL launched its generic version in the third quarter.
• Provider Segment: Segment revenue grew 10% year-over-year, with margin expansion driven by broad-based volume growth and infrastructure leverage. The rehab and motion program, community living performance, and the closing of the Haven Hospice acquisition were highlighted as growth areas.
• Operational Focus: M&A and de novo expansion remain a focus, with a strong acquisition pipeline. Investments in Infusion operations are expected to yield results in 2025, and efforts are ongoing to improve operational efficiencies across the organization.

Segment Performance

• Pharmacy Solutions: Third quarter revenue was $2.3 billion, representing 35% year-over-year growth. Infusion and Specialty revenue grew 42% YOY, while home and community pharmacy revenue grew 19% YOY. Total scripts dispensed in the third quarter were 10.9 million, a 15% year-over-year increase, with 36% growth in Specialty scripts. Gross profit was $189 million, up 16% YOY, and adjusted EBITDA was $99 million, up 15% YOY with a margin of 4.4%.
• Provider Services: Segment revenue grew 10% year-over-year. Segment adjusted EBITDA margin expanded by 50 basis points. Community and rehab care revenue grew 8%, and home healthcare revenue grew 13% with average daily census up 16%. Gross profit was $219 million, up 13% YOY, and adjusted EBITDA was $93 million, up 14% YOY with a margin of 14.5%.

Guidance

• Raised 2024 total revenue guidance to a range of $11.0 billion to $11.3 billion, with Pharmacy Solutions revenue expected to be $8.5 billion to $8.75 billion and Provider Services revenue $2.5 billion to $2.55 billion.
• Raised adjusted EBITDA guidance to a range of $580 million to $585 million for full-year 2024, representing 14.2% to 15.2% growth versus 2023. The company expects margin expansion in the fourth quarter.

Risks

• IRA Impact: Uncertainties around drug price changes, but CMS clarified mechanisms for long-term care pharmacies, reducing material risk. Biosimilars have limited impact on the company's business, especially in oncology and rare/orphan spaces.
• Legal and Regulatory: Legacy legal matters and ongoing regulatory discussions, but efforts to manage risks and clarify mechanisms for LTC pharmacies.

Question and Answer

Q: Congrats on a solid quarter. Just to the point that Jim made about margins, expecting to be -- expecting that to improve in the fourth quarter. Just curious how we should be thinking about that between -- between mix and other initiatives that would drive that margin expansion?

A: Q4 is always typically our highest margin quarter of the year for a variety of reasons, including days and other items. But we expect that trend to continue this year as it's been for almost every year. There are some other non-structural items that are going to occur or we expect to occur in Q4. We had a launch of a generic drug in Specialty, SPRYCEL. The hospice -- new hospice rate goes into effect in the quarter. We should be through some onboarding of some new customers as well. Those items, along with continued volume growth and leveraging our fixed costs are all ultimately as well adders to the margin in the quarter. And we're holding our corporate pretty much flat quarter-over-quarter at this point in time.

Q: Congrats on a solid quarter. Maybe, Jon, my first question, just to the point that Jim made about margins, expecting to be -- expecting that to improve in the fourth quarter. Just curious how we should be thinking about that between -- between mix and other initiatives that would drive that margin expansion?

A: Q4 is always typically our highest margin quarter of the year for a variety of reasons, including days and other items. But we expect that trend to continue this year as it's been for almost every year. There are some other non-structural items that are going to occur or we expect to occur in Q4. We had a launch of a generic drug in Specialty, SPRYCEL. The hospice -- new hospice rate goes into effect in the quarter. We should be through some onboarding of some new customers as well. Those items, along with continued volume growth and leveraging our fixed costs are all ultimately as well adders to the margin in the quarter. And we're holding our corporate pretty much flat quarter-over-quarter at this point in time.

Q: Congrats on a solid quarter. Maybe, Jon, my first question, just to the point that Jim made about margins, expecting to be -- expecting that to improve in the fourth quarter. Just curious how we should be thinking about that between -- between mix and other initiatives that would drive that margin expansion?

A: Q4 is always typically our highest margin quarter of the year for a variety of reasons, including days and other items. But we expect that trend to continue this year as it's been for almost every year. There are some other non-structural items that are going to occur or we expect to occur in Q4. We had a launch of a generic drug in Specialty, SPRYCEL. The hospice -- new hospice rate goes into effect in the quarter. We should be through some onboarding of some new customers as well. Those items, along with continued volume growth and leveraging our fixed costs are all ultimately as well adders to the margin in the quarter. And we're holding our corporate pretty much flat quarter-over-quarter at this point in time.

Q: Biosimilars exposure A: That's not relevant in our Specialty pharmacy oncology business and rare and orphan business. That's more of an oral and injectable business. As you look to infusion, STELARA is really the only drug we're aware of right now where you're seeing biosimilar activity. For us, given our business mix at the company as well as in infusion, we don't see a material impact from that. There's still multiple items that have to play out in that specific situation that could be positive as well. And then for us, specifically in infusion, there's a whole host of operational initiatives, as we've talked about, that we've been focused on this year in terms of our service delivery, our nursing, et cetera, et cetera, where we're really building for the future. We've been making investments to try to build a very durable long-term platform in the space with leading service levels.

Q: Haven Hospice acquisition A: It was good to see that close. And the first 30, 60 days have been excellent in terms of onboarding the team and really getting ingrained with everybody over there, just a ton of enthusiasm. And we think coming together, that will be about $1 million or $2 million of EBITDA realized this year. We believe that can be a $15 million opportunity over several years, sort of in a 5, 10, 15 stair step, if you will, over the next couple of years.

Q: IRA and Part D impact A: What you referred to there from a Part D perspective has been and we expect will continue to be positive for us to the extent that drugs are continuing to be made more affordable for patients, that is only a good thing. Oncology, in particular, is a very dynamic market. It is an extremely innovative and high-growth market right now. And with our quality, with our relationships with manufacturers and with our sales force, we are continuing to drive very robust volume growth in that business. Specialty and Infusion grew their revenue over 40% in the quarter as example. As the calendar turns into January every year, some of those items that you mentioned go into effect. That was an accelerant this year for us. And given our planning ahead of the changeover year-over-year this year into January, we expect a bolus of new referrals as well. And our sales and marketing team is always months out in front of an event like that, making sure that we take full advantage of it to get these life-saving drugs to as many people as we can.

Q: 2025 headwinds/tailwinds A: Yes, we'll be getting to 2025 guidance in time. Obviously, we're well down the path of budgets. So we need to formalize all that work and formalize numbers to be communicated. But at this time, as I've said in the past, we're feeling the same way, if not a little bit more positive as we were on the last call in terms of our ability to continue to drive our historical level of growth into next year. Over the last 8 years now, our CAGR has been in the double digits from a revenue and EBITDA growth perspective. And we see no reason why that would change next year and that's our base plan and how we're thinking about the business right now.

Q: Capital deployment A: From an acquisition strategy perspective, it's just going to be extremely consistent with what we've done over the past couple of years. On the Pharmacy side, if there's opportunities for very accretive transactions sub-4x in long-term care Pharmacy or Infusion, those will be things we look at. And then on the Provider side, it's been rehab, home health and hospice and then home-based primary care as well. So that will continue to be the focus. If I had to say a mix, it's probably 50-50 as a rule of thumb. In our pipeline right now, we have 3 or 4, just very small little CON tuck-ins in home health and hospice. Those are the kind of things that are a couple of million dollars or less of capital but just really high ROI investments that we can make.

Q: Primary care efforts A: That's a business that we continue to really grow and focus on mostly organically. It's been an organic build where we've never really lost any money which has been a prerogative for us. But the business has continued to drive very good patient growth this year. Again, these are doctors and 80% of the time, nurse practitioners going into assisted living, going into skilled nursing facilities and sometimes the home to be the primary physician and clinician to really drive 60% reductions in hospitalization rates. So with that value proposition and that benefit, we've continued to grow our volumes at 40%, 50% from a patient perspective this year.

Q: Provider margin improvement A: There's a little bit of both. So certainly, we had good volume growth in the quarter. With that, we were able to leverage fixed cost which was helpful from a market perspective, then you look at 4 factors. Number two, when you look at mix, with home health continuing to grow at attractive rates at a hospice with their margins relative to the community living business and rehab as well. So rehab, home health and hospice, those are higher margin than the community living business. And as those businesses continue to grow volume at higher rates, that is at play as well. Really third, we continue to drive some efficiency projects across the organization which really get reflected in the P&Ls of the individual segments and businesses. But for example, with our corporate BPO team, business process optimization team and with our corporate procurement team, we're on track to deliver over $20 million. This is really outside of Pharmacy initiatives. We're on track to deliver over $20 million of cost reduction this year. Just from a procurement, purchasing and efficiency perspective, the benefit of that really flows through the businesses and the segments and the P&Ls.

Q: Nonrecurring items A: So I'll turn that over to Jen and Jim. I mean, as it relates to any of the start-up costs associated with onboarding new customers, that would have been in the guidance before and all along. The item as it relates to an old payer situation, that dated back to literally 6 years ago. Very, very isolated but any other comments on that, too... Jennifer Phipps: Yes. So that payer settlement was also included from a guidance perspective as well. We did finalize, as we noted, all of the old other legal cases. So that was an increase this year and from a nonrecurring expenses standpoint as well as we had a lot of acquisition and integration costs in the quarter as we were working through some of those projects.