Earnings Transcript for TRHC - Q1 Fiscal Year 2023

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2023 Tabula Rasa HealthCare Inc. 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 session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Sparacino.

Frank Sparacino: Good morning. This is Frank Sparacino, SVP of Investor Relations and Corporate Development for Tabula Rasa HealthCare. As we start, I want to make clear that certain statements we make during this call about the company's future plans, prospects and expectations constitute forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, which should be considered in conjunction with the cautionary statements contained in our earnings release and in our most recent annual report on Form 10-K filed on March 10, 2023, which is available under the heading Financial Reports in the Investors section of our website tabularasahealthcare.com. While we may elect to update such forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. When we discuss our results on this call unless indicated otherwise, we are referring to results from continuing operations. For additional information on our results from discontinued operations please refer to the financial statements contained in the earnings release issued on May 08, 2023 and the notes to the financial statements indicated in our 10-K for 2022. Also during this call, we will be referring to certain financial measures not prepared in accordance with GAAP. A reconciliation of those non-GAAP financial measures to the most directly comparable GAAP measure is available in the press release of our first quarter 2023 earnings and also available under the heading Press Releases in the Newsroom section of our website. A recording of this call is accessible through a link on the Investor Relations page of our website. I will now turn the call over to Brian Adams, President and CEO of Tabula Rasa HealthCare.

Brian Adams: Thanks, Frank. Good morning, and thank you all for joining us. As you saw from our release we've had a great start to 2023. Top-line we have revenue growth of 32% and adjusted EBITDA growth of 337% compared to first quarter 2022. These numbers represent one of the highest levels of organic growth we have generated as a public company. With the divestitures of DoseMe and SinfoniaRx completed during the first quarter of 2023 behind us, we are focused on executing on our longer-term strategic objectives and continuing to drive profitable growth and improved cash flow over the coming years. I want to take a few minutes to talk about how we're going to continue to do that with an update on three specific areas

Tom Cancro: Thank you, Brian, and good morning, everyone. I will focus my comments on three areas. First quarter results, key operational metrics, and our updated 2023 guidance. First quarter revenue of $88.3 million increased 32% versus the year ago quarter comprised of medication revenue growth of 35% and technology-enabled solutions revenue growth of 21%. Medication revenue growth was primarily attributable to continued strong year-over-year PACE participant growth and higher revenue for PACE participants as seen in the operational metrics disclosed in our earnings press release. Technology-enabled solutions growth was led by our PBM and risk adjustment services. Our revenue outperformance during the first quarter was driven primarily by two factors

Brian Adams: Thanks Tom for those updates. I'm excited by our strong start to 2023 and the commitment from our 700-plus team members that are enabling Tabula Rasa to be successful. Thank you for your dedication. As we look ahead to the remainder of 2023, we are focused on building a strong foundation to drive future growth and profitability to create long-term value. With that, I will turn the call over to the operator for Q&A. Operator? And as we queue up the first caller, I did want to clarify one comment first. I said, for profit, PACE operators represent 38% of our PACE pharmacy backlog. It's actually 54% and that's more than double what it was last year at this time. So with that, why don't we open up the call? Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from Jared Haase with William Blair & Company. You may proceed.

Jared Haase: Yes. Hi. Good morning. This is Jared on for Ryan Daniels. Thanks for taking our questions. Brian, you talked a little bit about the commercial sales organization. And I think you mentioned the voice of the customer program as a way to sort of better incorporate client feedback to enhance retention and overall customer relationships. Just curious if there's kind of any particular learnings you've had through that program or data points you could share about maybe some successes with the commercial sales organization? Maybe some continued opportunities for improvement?

Brian Adams: Jared, great question and thank you for that. We recently launched that program. We've only had one event so far we have another one planned for next month on the West Coast, with a number of our customers. The feedback has been very positive so far. I think there's a real appreciation for our ability to listen and take customer feedback in and include that as part of our road map going forward. What we're trying to really identify our common themes throughout our customers, so that we focused our resources around those things that are going to be the most impactful for our clients and provide the most value. It's also giving us an opportunity to share with them where we are making investments. And so, it's been a really a good dialogue so far.

Jared Haase: Great. That's great to hear. And then, I will just ask a follow-up on the Q2 guidance. Tom, I think you mentioned, there's a little bit of sequential growth impact coming from the off-boarding of a temporary client. I'm sort of curious how unique is that relationship or you have a pharmacy client that's sort of temporary in nature? And then, just any way that you could size that impact sort of a Q-over-Q basis, relative to that temporary client? And do you think there's opportunities to sort of eventually bring them back over time as kind of a full-service customer?

Brian Adams: Yes, that's a great question. This is Brian. I'll take the first part, and then I'll turn it over to Tom. It's a pretty unique scenario in that this client reached out to us last year with a pretty immediate need, we were able to onboard the customer within 60 days, which is a fantastic effort by our team here, and I think shows the scalability of our platform. The client again is pretty unique in that, it's part of a larger health system has multiple lines of business. We don't see this anywhere else really in the PACE market today. They do have an in-house pharmacy. In many cases, over the years where clients have had an in-house pharmacy or part of a system that has an in-house pharmacy we have successfully been able to onboard those clients to our pharmacy services. So, I think longer term we look at this as a real opportunity for us. And we hope to retain the business at some point. But right now this is the desire of the program today which is really taking a broader approach as they look at their whole book of business which again is much larger than just pace. So, I don't see this at all as indicative of anything in the market. Our backlog remains extremely healthy even with programs that arguably could have an in-house pharmacy.

Tom Cancro: Yes. And to your question about sizing it, depending on how quickly they roll off in second quarter you're probably looking at $1.5 million to $2.5 million headwind. So, that kind of explains why revenue at the midpoint is flattish to first quarter.

Jared Haase: Understood. Appreciate all the color guys and I'll hop back in the queue. Thanks.

Brian Adams: And while we're just waiting for the next person to queue up I did want to just round out one of the -- one comment related to the voice of the customer. I think one of the things that we're hearing and there's a real desire for is for our pharmacy to have an agnostic EMR API, right? So, we want to be able to work with any EMR out there and provide our solutions through that from a medication management perspective. And so that's an area where we will continue to make an investment and there's a real desire from the customers to see that happen.

Operator: Thank you. Our next question comes from Craig Jones with Stifel. You may proceed.

Craig Jones: Thank you. So, I guess just as a quick follow-up to the last question. So, if it's a $1.5 million to $2.5 million headwind in 2Q, is it a further headwind in the third quarter as it will have completely rolled off at that point?

Brian Adams: It is a slightly less headwind in the third quarter. Some of it will depend on how much it all comes off in the second quarter in which case it wouldn't be a headwind at all. If it is it could lead into July a little bit but not of the magnitude that it would impact the second quarter.

Craig Jones: Got it. Okay. And then just looking at the services gross margin, so that line used to be prior to all these acquisitions that you made that you now divested it used to be it looks like in the 60% range and now it's sort of mid-20s. Is there an opportunity to get that higher now that you sort of clean that revenue line up? And sort of how high could it potentially go as well?

Brian Adams: Craig, I'll let Tom talk about the specifics, but I think there is an opportunity to drive that number higher. We're making a lot of investments in refocusing our resources on really driving efficiencies at the same time trying to focus on how we contain our cost structure more closely. So, I would say more broadly there's absolutely an opportunity and a desire from the business to see that increase.

Tom Cancro: Yes, in terms of some of the specifics what's weighing down that margin a bit is external costs we've incurred to consultants and others to integrate multiple platforms. So, we talk about how over the last six months since Brian assumed his CEO role. We are focused on efficiencies in our operations on reducing operating expenses and we've had some success there. But in the background we're also focusing on optimizing our platform our product offerings so that they meet the needs of our customers. And we can create it was a little bit of spend necessary to integrate multiple acquired platforms that perhaps hadn't been integrated to the satisfaction of some of our clients. So, if you can get everybody on one platform, it's a lot more efficient. That lets us get back to those higher margins. And some of these businesses do retain those higher margins. Some of them are working to get them there.

Craig Jones: Okay. Got it. Thank you. And then so it looks like the PMPM growth sequentially from the fourth quarter was pretty solid at mid-single digits. Is that a normal seasonality we should expect just to looks like January one pricing?

Tom Cancro: Yes. Pricing tends to increase in the first quarter, not always in January, last year it came a little later in the first quarter, which is part of the reason why you didn't get such a big bump in first quarter of last year. But it did happen this year. That is the biggest driver. So you won't see that sequential bump quarter-over-quarter but you will probably see low to mid-single digits each quarter as contracts evolve.

Craig Jones: Got it. Okay. And then it looks like if we calculate the non-PACE revenue, it looks like that declined about 12% sequentially. Is there anything that you call out there that drove that? And then how should we think about that for the balance of the year?

Tom Cancro: I don't think there's anything significant going on there. It's just maybe the ratio from – of the PACE to the non-PACE. But I don't think there's anything significant going on there.

Craig Jones: Okay. Got it. That’s all for me. Thanks.

Operator: Thank you. Our next question comes from Stephanie Davis with SVB Securities. You may proceed.

Stephanie Davis: Hi, folks. Thanks for taking my question and congrats on the continued momentum here. Now Brian, you have had a bunch of hires, you officially have the CEO seat, so you've been hired yourself and you've divested a bunch of assets. What are the biggest go-forward changes you should think about from a strategy perspective, now that kind of your house cleanup is behind you?

Brian Adams: Stephanie, thanks for the question. There's not going to be a huge shift in what we've been communicating over the past couple of quarters, right? We've talked about refocusing around PACE and focusing around the solutions that are going to be relevant to adjacent markets serving similar demographics, strengthening our commercial orientation and making some investments to ensure that the offerings that we have are scalable and deliver high value to our clients. We're also committed to improving profitability and investing in efficiencies and ultimately managing our cost structure more closely. So those are some of the bigger priorities for us. I'm looking forward to over the coming quarters being able to provide some more specificity from a go-to-market perspective. We're right now launching strategic planning for the year and for the longer-term as well. So I think coming into next quarter's earnings, we'll be able to share a bit more in terms of some of those priorities. But the management team is very focused on the areas that I was just mentioning.

Stephanie Davis: Well, let me maybe ask that in a little bit of a different way how are you spending the majority of your time?

Brian Adams: So there's kind of a split at the time. One of those is with customers today and there's been a good bit of time listening, right? So it's listening to customers, also listening to the employee base to understand where they're at as we continue to build out and refocus around a new vision and a new mission for the company. They're not necessarily new, but they're recapped, right in terms of what we want to focus on. And our focus as a business the why we're here is to ultimately provide simplified and individualized care to improve the health of those that we serve. And so we want to make sure that all of our solutions can fit squarely within that. And so we're making sure that the team understands that that's the focus of the business, aligning their individual goals with the corporate goals associated with that mission. And as I was describing, also listening to the customers, so we can make sure that our strategic priorities are aligned so that we can provide significant value there, so there's a lot of work being done and a lot of listening as well.

Stephanie David: All right. One last quick one for me, we've talked about this stuff in your control. Let's talk about the stuff completely, out of your control PACE census growth, it has been accelerating sequentially and it looks like it's doing pretty well quarter-to-date. Can you just touch on, what's going on with that market? How sustainable this acceleration is? And anything else you should think of there?

Brian Adams: Yeah. We're pretty excited about the growth rate within the PACE census, especially within our customer base today. As I was mentioning in my prepared remarks, I was at the NPA Spring Policy Conference just a little while ago. And the ones that again, that stood out was that there are 50 PACE operators set to open their doors over the next 24 months. So I think that's indicative of the investment in the space, the understanding and awareness that this is a model that can make a really meaningful difference for those vulnerable seniors, specifically dual eligibles which represent, roughly 12 million lives across the U.S. that we need to serve better. And so I think that, that investment itself that we're seeing is going to yield some really positive things for Tabula Rasa, as we continue to support our customers so that they can scale and grow and support those patients even better.

Stephanie David: Got it. Sound well. I'll hop back in a queue. Thanks guys.

Brian Adams: All right. Thanks, Stephanie.

Operator: Thank you. Our next question comes from Jessica Tassan with Piper Sandler. You may proceed.

Jessica Tassan: Hi. Thanks so much for the question and congrats, on the results. I was just hoping you could offer maybe some color on the back half launches, so the product mix between medication and tech-enabled solutions?

Brian Adams: I'm going to let, Tom dive in on that. This is Brian. Go ahead, Tom.

Tom Cancro: On the product mix for the second half of the year, you mean the relative growth rates?

Jessica Tassan: Yeah, yeah that would be helpful. Thank you.

Tom Cancro: Yeah. I think we grew medication pretty significantly this quarter, over the same quarter last year in-part because first quarter of last year was a weak quarter. There were a number of things going on there that kind of held that down a bit. Going forward, I think you'll see something much more in line with our recent traditional averages. So if we forecast the midpoint of growth for the year at 20%, I think, you'll see medication revenue grow a little bit above that maybe low-20s. And you'll see the technology-enabled solutions grow kind of mid-teens, some of them a little higher than mid-teens, but on average low to mid-teens. But because the medication revenue is 80% of the total, the total will average out around 20% growth.

Jessica Tassan: Got it. And then, I'm just wondering, is there any kind of cost or margin dilution associated with these launches? It doesn't look like it, but I guess just how should we think about the counterbalance of kind of a mature contract terminating versus a bunch of new contracts ramping? Thanks.

Tom Cancro: I didn't hear the first part of your question, Stephanie.

Brian Adams: It's Jessica.

Tom Cancro: Yeah, Jessica.

Jessica Tassan: Yeah. So just -- is there any cost or kind of margin dilution associated with the new PACE customer launches in the back half of the year? It doesn't appear that way from your guidance, but just how should we think about the termination of an older or mature contract versus the ramp of several new ones?

Tom Cancro: Yeah. There's typically very little if any integration costs. Occasionally, someone coming on for tech-enabled solutions will need a migration or installation. But even those tend to not be terribly significant in terms of costs.

Jessica Tassan: Okay. Great. Thank you.

Tom Cancro: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Bill Sutherland with The Benchmark Company. You may proceed.

Bill Sutherland: Oh, Thanks and congrats on a good quarter, guys. Brian, I'm curious, if there's, any updates on your initiatives in the adjacent markets?

Brian Adams: Sure. Thanks Bill for the question. I did mention in my prepared remarks that we did have a win in the non-PACE market. It's a provider focused on the rural space and focused primarily on primary care and delivering primary care to Medicare beneficiaries. It's not clinic-based as you might expect given the rural focus. It's an early win. I think it's a sign of some success. And I think you're going to hear more wins like that in the future as that continues to be an area of focus for the company. I would continue to send the message that we are leveraging existing solutions that we built within the PACE market. So this is not requiring significant investment to target some of these adjacent markets.

Bill Sutherland : Got it. And the Oak Health relationship is there a big expansion potential?

Brian Adams : Yes. With Oak Street things remain very strong. They are starting to expand into the PACE market. So we're hopeful that we'll be able to support them with that as well.

Bill Sutherland : Great. Last one in your discussions with the PACE organizations Brian, did the Medicaid redetermination issue come up? And how are they thinking about it?

Brian Adams : Yes. It really has not been an area of focus Bill to be honest with you.

Bill Sutherland : Okay. Okay. That's it for me. Thanks guys.

Brian Adams : All right. Thank you.

Operator: Thank you. Our next question comes from David Grossman with Stifel. You may proceed.

David Grossman : Thanks. Good morning. I hopped on a little bit late, so I apologize if this has been asked. But maybe you could talk for a minute about the penetration rates of PACE as a program. And any things that you may see on the horizon either structural or regulatory or things that you're doing for that matter that may kind of result in those penetration rates going up?

Brian Adams : Hey, David, good question. This is Brian. One of the things that I did talk about was the relative growth of the PACE operators that's expected over the next couple of years. And we're going from about 150 PACE programs that took 50 years to get operational to close to probably 200 over the next 24 months. So I think that's indicative of the interest and awareness in the space, but you do highlight one of the areas that I think that we're focused on very acutely, which is the fact that the PACE program, which supports primarily dual eligible is less than 5% penetrated within the market and service areas that exist today. And so the fact that there is more for-profit investment in the space right now about 54% of our PACE pharmacy backlog is represented by for-profit providers, which is more than double what it was a year ago. I think it's also a pretty positive sign that we're going to continue to see and even enhanced level of investment in the space, there's a lot of regulations right now that are proposed that support the model. There's a lot of awareness at the government both federal and state levels that are supportive of the program and the expansion of the program. I'd call out Florida, in particular, there's been quite a bit of expansion in the state of Florida recently. And so I think that's the more macro view. What can we do as an organization, ultimately, we can continue to support our PACE operators to the best of our ability so that we can ensure that they're prepared to scale and are not wasting precious resources in other areas of their business. And so, it's incumbent upon us to make sure that we're delivering really high-value solutions. But I think that what we're seeing is the set of a foundation that can support significant expansion going forward.

David Grossman : Got it. And you just said in your opening it sounds like 50 new centers over the next 24 months. So of those 50 centers are you involved in all of that expansion, or is that just a market statement?

Brian Adams: That's more market today, but I would tell you that, we are involved with the majority of those.

David Grossman: Okay. And you do disclose a backlog number and I'm wondering, if you could give us a sense of how we should think about the rollout of that backlog, now that I think in the past, you had given a number, but I'm just curious, whether that's changed at all now that the business has evolved quite a bit over the last 12 months. So, just curious of that -- I think it was an $84 million number, how we should expect that to rollout over the next several quarters?

Brian Adams: Yes. So, the immediate impact is pretty minimal I would say, because most of these programs that we're quoting in our backlog are start-ups. So, as they onboard census which is actually happening at a much more rapid rate with some of these for-profit providers, so what I would tell you and this is really anecdotal today is that, I would anticipate that the on-boarding and ramp of these customers that are in our backlog today, given the penetration of for-profit is going to happen at a much quicker rate. In the past, it's taken anywhere between 24 to 36 months to get to full ramp in capacity. I do believe that, we're going to see that happen more quickly going forward.

David Grossman: Okay. And then just one last question and it's really just on better understanding, what impact pricing is -- has on your revenue growth or what it will have or you expect it to have in this year and how that may contrast with prior years? Is it pretty much consistent with prior years, or are we getting a little bit more of a lift with higher drug prices or whatever other inflationary dynamics are in your model?

Brian Adams: I'll let Tom take that one.

Tom Cancro: Yes. I mean, you have to break it down into two elements of it, right? There's the external drug price inflation. But then there's the impact of re-contracting and CTI inflators et cetera that are built into contracts. Drug price inflation is probably mid-single digits impact to our revenue and our PMPM. For example, if you take the beat for first quarter over guidance. About two-thirds of that $5 million was drug pricing happening quicker than we thought. But another just under $1 million of it was the impact of new contract pricing, where pricing has stepped up over prior contracts. And a little bit of it was due to slightly higher census growth. You don't see the census growth, so obviously because you also had that customer who was spinning off. And so the totals are marginally higher than December. But there are actually quite a lot more in than you typically expect in the first quarter and that drove the beat a little bit. And that's likely to persist for the rest of the year. I think you see 4%, 5%, 6% impact of drug price inflation carrying through. Most of that's a pass-through, but there is some margin on it. Does that answer your question David?

David Grossman: Yes, yes. And just on the contract turnover, what impact do you think that has for the year?

Tom Cancro: I don't know that we've disclosed this for the year. I can tell you, as I mentioned in the first quarter, it was a little over -- or roughly $1 million.

David Grossman: Okay. Great. Thank you.

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