Tabula Rasa HealthCare Inc (TRHC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tabula Rasa HealthCare Q1 2017 conference call. (Operator Instructions) As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. Kevin Dill. Sir, you may begin.

Thank you and good afternoon. I'm Kevin Dill, Corporate Counsel and Chief Compliance Officer for Tabula Rasa HealthCare. The Company intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements.

These risks and uncertainties include the developing nature of the market for technology enabled healthcare products and services and potential changes to laws and regulations that may impact our clients. For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the risk factors section of our S1.

A recording of this call is accessible through a link on the investor relations page of our website and it will be available for 90 days. I'll turn the call over to Dr. Calvin Knowlton, CEO, Chairman and founder, of Tabula Rasa HealthCare.

Thank you, Kevin. Good evening and thank you all for joining us for our first quarter 2017 earnings call. With me on the call today are Brian Adams, our Chief Financial Officer, and Dr. Orsula Knowlton, our President, and Chief Marketing and New Business Development Officer.

Tabula Rasa saw a strong start to 2017 with revenue of $27.7 million, an increase compared to last year of 37%. Adjusted EBITDA of $3 million compared to 2016's $2.8 million and adjusted earnings per share of $0.04, an increase of $0.03 from a year ago. During the first few months of 2017, we saw continued momentum and interest for our Medication Risk Mitigation platform and I firmly believe the value-based healthcare community is starting to better understand the benefits it could deliver in regards to avoiding adverse drug events and optimizing patients' medication regimen.

In addition to the success we've seen in the PACE market, our disruptive, innovative approach to medication management has led to increased interest from a myriad of providers across the entire healthcare continuum. In the first quarter and the subsequent month of April, we continue to executed on our growth plan and on the call today I'd like to spend some time sharing with you a number of exciting opportunities from the quarter.

To help provide a more discerning structure of our markets, we are characterizing our growth opportunities into two primary categories. The first category is payer and provider groups and the second category is pharmacies and pharmacists. The first category, payer and provider groups, includes the PACE market, our Enhance Medication Therapy Management initiative, additional at-risk providers and self-insured employers. The pharmacy and pharmacists group includes community pharmacists, hospital and long-term care pharmacists, schools of pharmacy and traditional medication therapy management companies.

So let's go to the first category, the payer and provider groups, and these are generally all at-risk for patient outcomes and as value-based care gains prevalence, the payer provider groups are accepting more risk for the quality of care they provide. Increasingly many of these groups seek solutions like ours to mitigate medication related risks. Within the payer provider category, I'd like to discuss these four growth priorities that I mentioned.

So the first growth priority in this category one is PACE. PACE represents the initial use case for our unique Medication Risk Mitigation platform within this category. PACE still accounts for the majority of our revenue and continues to hold great growth potential going forward. In the first quarter, we implemented three new PACE programs and signed contracts with two additional PACE organizations based in the northeast and southwest.

We also have a strong pipeline of new potential PACE participants both from existing organic growth and new PACE business. In addition to our PACE solution, we offer our PACE clients risk adjustment services and pharmacy management services. During the first quarter, Capstone Performance Systems, our risk adjustment subsidiary, notably signed 10 new contracts.

The second growth priority in the payer provider category is our Enhanced Medication Therapy Management program with CMS Center for Medicare and Medicaid innovation. The January 2017 launch is progressing as planned. In April, we, along with our partners, submitted our Part D bid requirements for year two of this five-year engagement. Year two will start on January 1, 2018, and at that time we will expand the number of patients that are served as well as offer -- increasing the offering that we have by providing patient intervention through a network of community pharmacists in the region.

The third growth priority in the payer provider category highlights two new clients that are at risk providers. The first is Landmark Health, a California-based provider of home-based medical care and they have licensed our Medication Risk Mitigation platform for their clinicians to improve outcomes, while at the same time lowering medication costs. We have recently completed training and certifying their pharmacists on-site in our New Jersey location on how to use MedWise Advisor for their New York and California markets, and they went live a week ago.

The other at-risk provider group client is a Pennsylvania-based company, Tandigm Health, which is owned by Independence Blue Cross in Philadelphia. This client is slated to begin in the third quarter this year and we will focus on performing care transitions, medication reconciliation after hospital discharge, both in the patients' homes and telephonically for the group's highest risk 3400 members.

The fourth growth priority in the payer provider category is self-insured employers. Our new client in this category is Benefit Services Group. Benefit Services Group is a national insurance broker with access to over 1 million members headquartered in Wisconsin and they are our initial channel partner to reach self-insured companies.

In addition to the various payer provider opportunities before us in category one, the second category growth priority is with pharmacies and pharmacists. They are the closest link to the patient and have the best ability to evoke positive change to a patient's medication regimen. While this segment represents very little of our revenue today, we are in active discussions with leading thought people to target first community pharmacists; second, hospital and long-term care pharmacists; third, schools of pharmacy and, fourth, traditional medication therapy management programs.

The first growth priority in this pharmacy/pharmacists category is community pharmacists. We are in discussions with three Midwest pharmacy chains to integrate our Medication Risk Mitigation software and medication decision-support tools into their platform. We are also in discussions with two companies that provide direct digital linkage within pharmacy software systems tethered to approximately 20,000 community pharmacies.

Additionally, we are keynoting the upcoming American Society of Automation in Pharmacy meeting in June. This association comprises the software companies that service most of the community, hospital and long-term care pharmacies in the United States. We will be linking value-based healthcare's impact on pharmacists, demonstrating how our Medication Risk Mitigation software and decision-support tools would be the disruptive solution these pharmacy software vendors need to incorporate within their traditional pharmacy platforms.

The second growth priority in the pharmacy/pharmacists category is hospital and long-term care pharmacists. We are in discussions with a company that has pharmacy (technical difficulty) with a large number of long-term care facilities and hospitals. This tactic would be again to embed our Medication Risk Mitigation medication decision-support platform within their current system.

The third growth priority in the pharmacy/pharmacists category is schools of pharmacy. The penetration of our unique Medication Risk Mitigation platform continues in beta for a dozen schools of pharmacy. It will be expanded at the end of this year.

And the fourth growth priority in the pharmacy/pharmacists category is traditional medication therapy management providers. A general awareness of the CMS Enhanced Medication Therapy Management pilots, such as the one that we're doing in the northern Plains, surprisingly has sparked interest in our technology by current traditional MTM programs who are aware that they will need to augment their offerings. We have reason to believe that this augmentation of traditional MTM service providers, with aspects of our novel platform, will be opportunistic for Tabula Rasa HealthCare.

To conclude, we are very pleased with our growth in the payer provider category during the first quarter and with our discussions regarding expansion into the pharmacist/pharmacy category. Our disruptive Medication Risk Mitigation and medication decision-support innovations are the backbone for personalized and precision pharmacotherapy, which happens to fit hand in glove with the emergent provision of value-based at risk healthcare. We're seeing success not only in our PACE market but across the healthcare continuum. With that I'll now turn the call over to Brian to discuss our financials in greater detail. Brian?

Thanks, Cal, and thank you to everyone for joining us on the call this evening. This was a very strong start to the year for Tabula Rasa and I'm pleased to share our financial results from the first quarter. For the first quarter, we generated total revenue of $27.7 million, a 37% increase year-over-year. Product revenue in the first quarter was $22.7 million compared to $17.8 million in the first quarter of 2016.

As a reminder, product revenue is primarily generated through our medication risk management contracts in the PACE market and the increase in the quarter came from both growth in our existing clients as well as new clients acquired during 2016 and the first quarter of 2017. Our service revenue, which comes from our non-PACE medication risk management services, risk adjustment and pharmacy cost management contracts, increased 110% in the quarter to $5 million. The majority of the increase was due to the commencement of our Enhanced Medication Therapy Management initiative on January 1.

Tabula Rasa realized a gross margin of 29% in the first quarter of 2017 compared to 31% in the same period last year. The majority of the decrease year-over-year was due to reduction in our product gross margin as a result of upfront investments associated with the implementation and on-boarding of new PACE claims. As a reminder, we continue to believe that we will achieve gross margins in the 35% to 40% range as the results of increases in our service revenue as we mature as the Company.

Product gross margin of 23% in the first quarter of 2017 compared to 27% in the first quarter of 2016 and was impacted by the investments we made to support the significant new contracts that were implemented in the quarter. As I have mentioned in the past, when we onboard new clients, we may see a temporary reduction in gross margin as the new clients transition onto our services.

Service gross margin of 55% in the first quarter of 2017 compares to 60% in the first quarter of 2016. This gross margin was in line with our expectations as we brought on new contracts for EMTM and care transitions. We do see an opportunity for margin expansion within the EMTM and care transitions offerings in future years.

Our operating expenses represented 38.8% of our total revenue for the first quarter, up from 22.9% a year ago. Excluding $3.1 million of incremental stock-based compensation related to restricted stock grants issued in connection with the initial public offering, operating expenses would represent 27.7% of total revenue. Additionally, we incurred approximately $400,000 in costs during the first quarter of 2017 related to operating as a public Company.

Our GAAP results again include the impact of noncash stock-based compensation related to our IPO, and as we have stated in the past, once these expenses are extinguished in the second quarter, we anticipate seeing our operating expenses decline as a percentage of revenue significantly. For the quarter, we are reporting a GAAP net loss of $2.9 million compared to GAAP net income of $209,000 in the first quarter of 2016. As I mentioned previously, there was $3.1 million of expense related to stock compensation for restricted stock grants issued in connection with the initial public offering.

Excluding this item, the Company would have generated pretax net income of approximately $300,000. We generated $3 million in adjusted EBITDA in the first quarter compared to $2.8 million a year ago. The increase was primarily driven by growth in the business, both in the PACE and non-PACE markets. Adjusted EBITDA margins for the first quarter of 10.8% compared to 13.9% in the first quarter last year. This was in line with our expectations for the quarter as we absorbed some upfront costs from onboarding new PACE clients, incurred costs related to operating as a public Company and made some investments that we alluded to on our last earnings call.

GAAP net loss per diluted share for the first quarter of 2017 was $0.18, compared to net income per diluted share of $0.01 for the same period last year. The net income calculations are based on diluted share count of 16.2 million for the first quarter of 2017 versus 12.4 million for the first quarter of 2016. As of today, we have 16.5 million shares outstanding and approximately 700,000 restricted shares that will best at the end of May.

Adjusted net income per diluted share for the first quarter of 2017 was $0.04 compared to adjusted net income per diluted share of $0.01 in the first quarter of 2016. Our adjusted net income per diluted share for the quarter excludes stock-based compensation, payroll tax on stock option exercises and changes in fair value of contingent consideration.

Turning to the balance sheet, as of March 31, 2017, we had a cash balance of $2.8 million, and outstanding debt of $1.6 million in equipment leases and, as of today, we have nothing drawn on our $25 million line of credit. Before I turn the call back over to Cal, I'll provide you with an outlook for the second quarter and review our previously stated outlook for the full year of 2017.

I also want to emphasize that while Cal laid out a number of exciting opportunities for us in the remainder of 2017, they are very much in line with our broader growth strategy and the majority of the financial impact from those opportunities have already been baked into our (technical difficulty) and a few of these initiatives with longer lead times will show results beginning in 2018 and assist us in achieving our longer-term growth targets.

For the second quarter of 2017, we anticipate revenue to be in the range of $27 million to $28 million; adjusted EBITDA to be in the range of $3 million to $3.5 million; net loss to be in the range of $2.2 million to $1.7 million. I'll remind you that we have stock compensation expensing in the second quarter of approximately $2.1 million related to the restricted stock grants issued in connection with the initial public offering.

Our outlook for the full year 2017 remains unchanged from our fourth quarter conference call in March and we continue to anticipate revenue to be in the range of $116 million to $118 million. Adjusted EBITDA to be in the range of $15.5 million to $17 million. As mentioned in March we anticipate continuing to invest in R&D, ramp headcount and increase our sales and marketing spend throughout 2017 as we onboard new contracts and grow to support incremental opportunities. We expect net income or loss to be in the range of a $500,000 loss to a $900,000 of income.

Again, I'll remind you, we have stock compensation expensing in the first and second quarter of approximately $5.2 million related to restricted stock grants issued in connection with the initial public offering. This was a very strong start to 2017 and I look forward to continuing to update you with our progress over the coming quarters as we begin to see the benefits associated with the investments we are making, which we fully expect will support strong revenue growth and margin expansion in the future.

That concludes my prepared remarks and I'll turn the call back over to Cal for closing comments. Cal?

Thank you, Brian, and thank you all again for joining us this evening. Brian and I covered a lot of ground on our call this evening. As we reflect on the opportunities we outlined on the IPO roadshow and we contrast that picture with the reality of where we are now, our opportunities are exponentially greater than what we originally thought.

I used the term in discussions several times on the call this evening. Our highly disruptive Medication Risk Mitigation technology has opened many doors for us over the last several months and these discussions that we are having represent a multitude of incremental opportunities that potentially meaningfully can expand our total addressable market.

I believe that the healthcare community as a whole is truly beginning to recognize the value of our Medication Risk Mitigation platform and, because of that, we're fortunate to have a lot of runway ahead of us. 2017 is off to a strong start. We are executing on our strategy and are on track to achieve our annual goals. The level of interest in what we are doing has never been higher and I've never been more excited about the future of Tabula Rasa HealthCare.

Before we open for questions, I would want to welcome all of our new customers and partners to the Tabula Rasa family and also share my genuine appreciation for all of our team members and our existing partners. I'm very thankful for the bright future of Tabula Rasa and I look forward to updating you throughout the year regarding our growth. With that let's open the call to questions. Operator?

(Operator Instructions) Michael Cherny, UBS.

Hi, this is Allen in for Mike. Thanks for taking the question. On enhanced MTM, can you share any of your early insight there? How are you guys performing in that market versus your original expectation and how are plans reacting to the program overall? And I know it's early but is there any way to quantify the savings you guys are driving for your clients?

This is Calvin. No, it's really too early. We give our first report to ClearStone --.

End of the 2Q.

The end of the second quarter is the first data we send to them. We are collecting internal data, but when we are talking about reducing falls, ER visits and hospitalizations, you have to wait after your intervention. And for many of the patients, we've intervened with thousands of them so far, but we just don't have the real-time data to see what their outcomes are until we get it from CMS. So it's just a little early. Brian, did you have anything to add to that?

Yes, just what I would add to that, Allen is, some of the traditional MTM providers out there looked at what we're doing and have become very attracted to the delivery model that we have. And so have come to us and we've got a number of discussions on that, just based on how differentiated our model is compared to what's typically been done, so --.

Got it.

I can tell you that just from the process standpoint that we are doing, on average, four interventions per patient, so --.

Got it. That's helpful. And we know the enhanced MTM is a five-year pilot but can you talk about the opportunities related to the program maybe over the next couple years?

All right. Hey, Allen; this is Brian again. There is going to be opportunities for us to expand within the current universe of EMTM participating plans and --. So we expect that there will be plans that look to us to provide additional services. What I think is even more interesting is the fact that there are payers out there that are looking at what we're doing in EMTM, and I'll remind you that this isn't a stand-alone PDP universe, and we've got a number of MA plans and other plans that would really significantly benefit from these types of interventions that are developing the pipeline right now. So --.

Got it. That's helpful. Thank you.

Tom Carroll, Stifel.

Hey, guys. Good evening. So, I wonder if you could reconcile for us the onboarding costs of new customers that you spoke about in your prepared remarks that looked like they pushed margins down a little bit. If we reconcile that with your comments about, Cal, I think you called it an exponentially greater pipeline visibility out there, so I guess what I am trying to get at is there -- for the rest of the year, are you expecting to see any more pressure?

For example, you mentioned you signed two new PACE contracts. Would they be onboarding in the late second quarter, third or fourth quarter that potentially messed with numbers? Or is there a seasonality we should think about that happens in the first quarter?

Yes, Tom; that's a great question. Thanks; this is Brian. You know, the way that I would think about margins right now specifically on the products side, you saw gross margins at around 23% in the first quarter. That isn't that far off from the past few quarters, to be honest with you. There is some depression that temporarily happens when we onboard some new clients and that can drag a little bit, too, to be honest with you. So I would expect over the next 3 to 6 months to see product gross margins in the 23% to 25% range, somewhere in there.

I would not expect there to be additional pressure beyond where we are at today from some new clients that are going to come on later in the year. But, I think that what is nice that we benefited from here is the contribution from the additional service revenue that we had in the first quarter really helping to offset some of that reduction that you saw year-over-year on the product side.

And then as a follow-up, the 35% to 40% gross margin targets you mentioned, over what time period do you expect to get there? Is that a -- within the next two years or longer than that?

I would say three years plus I think is the appropriate time frame to think about for that.

Okay, great. Thank you.

Peter Costa, Wells Fargo Securities.

Good evening, guys. A very similar question to Tom's, only perhaps on a bigger picture. You laid out all these different possible directions to go in, and from our perspective, it's perhaps a little scary that -- will you pick the right one or will you spend all your time chasing many different things. How do you -- how are you vetting the opportunities to make sure that your focus is on revenues and earnings in the near term as well as the longer-term so you don't miss a big opportunity in one area for a lot of people exploring?

We've seen the beginnings of precision medicine here with all these opportunities that you are highlighting from the MPM thing, but also you saw 23andMe getting the genetic testing approval from the FDA for consumers. So you can kind of see it on a whole other scale seeing more people being involved in genetic testing. So I'm kind of curious as to how you are going to vet these opportunities and just if you could explain it to us, what are you -- how are you deciding what to chase and what not to chase?

I think -- hi, Peter; Cal. it's a great question. Right now, we are staying on the first category of the PACE and enhanced MTM, and other at-risk providers and that's where the majority of our focus is right now. We will -- and it was very surprising that we got tapped on the shoulder with some of these software people in the pharmacy world, so we will address that. That's not going to happen right away, and we're exploring that now and in a ton of discussions with different people, but I'd say that we're really focused on the pace, the core PACE, the enhanced MTM is a very big focus for us and also the couple of new contracts we have for care transitions and then we have others that we're in discussions on care transitions.

I just wanted to foreshadow though, that because it's happened that we are getting some knocks on the door from this other side that we hadn't really considered at this point. And I just wanted to let you know that that was going on. That was really the reason there, not that we're going to have any numbers there in the short term.

Okay. And then can you tell us why you sought out or why you are getting a Board approval for a buyback even though it's small? I just kind of want to understand why you are doing that.

Sure, hey, Peter; this is Brian. I'll take that one. As you do mention, it is certainly a small amount, but I think that this is more indicative of our confidence -- the Board's confidence and management's confidence in the business and the opportunity that we have ahead of us. We have the liquidity today that can support this without impacting or limiting our growth initiatives. So we look at this as an opportunity where we feel the price understates the value of the long-term growth potential here and we see it as an attractive investment opportunity and an opportunity to really help our shareholders today.

Okay, thanks.

Nina Deka, Piper Jaffray.

Hey, guys. Could you please describe the nature of the new channel partnership that you have with the Benefit Services Group?

Hi, Nina; it's Orsula. Happy to answer that question. Benefit Services Group is a Wisconsin-based organization that really a broker to employee fee organization, so it gives us the opportunity to get involved in the self-insured employer area. And they service about 1 million lives of organizations that have between 250 and 15,000 employees, so really it's a co marketing opportunity. They see the value in this for their clients. We'll be initiating a program for 1000 individuals initially and then from there will be able to launch.

And will it be like a shared commission? Do they have sales reps actively calling on this market for your product?

Well, I can't really comment on that, but they do actively support their clients so they would be able to communicate our value and we would plan to visit with clients with them.

Okay, so like a joint call? And then could you also describe the breakdown of your PACE growth in terms of the same-store versus existing clients adding new sites and also of the new business how much of that was competitive displacements?

Sure, I can speak to the numbers, Nina; this is Brian and then maybe Orsula could talk a little bit more about the competitive displacement. But, I would say roughly in the first quarter it was about 50-50 in terms of -- well, actually, it was much more weighted towards new growth from these clients that we onboarded. Typically what we see over the course of the year is it is about 50-50 in terms of new clients brought on and organic growth from our existing clients. It was much more weighted towards the new client growth in the first quarter and I would say much closer to 75% from -- 75% to 80% from new clients, 20% to 25% from organic growth within our existing client base.

So in those cases, Nina, we're really displacing the existing pharmacies that were servicing the organizations. They were the same in two cases, different in another case. So it varies and they are really not able to offer what we're offering on the medication risk management side, which is why they chose to collaborate with us.

Great. Thanks so much.

Sean McBride, Robert W. Baird.

Hey. Thanks for taking the question. I was just looking for a little more detail on the tandem partnership, those 3400 members. Is that going to be pretty similar to the EMTM relationship that you have in the Midwest?

This is Cal; hi, Sean. No, this is actually secure transition. It is similar to a care transitions program we're doing in Minnesota, per se, for Minnesota Blue Cross. A portion of these people that are the highest risk, will get pharmacist visits at home within 72 hours to seven days post discharge from the hospital. The remaining group of these patients over the year will have telephonic medication reconciliation within 72 hours of discharge and we're going to see -- they want to see how both of those work, particularly on the very high risk patients. So it's kind of like the 8000 patients we have in Minnesota that are very high risk frequent flyers to the hospital and readmission to the hospital and this group has about 3600 of those like people.

Okay, great. And then on the $1.5 million contingent consideration payment, could you just give a little more detail on that?

Sure, that was related to an earn-out for the Medliance acquisition that we completed at the end of 2014, so that was a scheduled payment for the first quarter based on revenue achievement over last year. We will have another final payment the first quarter of 2018.

Awesome. Thanks for taking the questions.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program. You may now disconnect. Everyone have a great day.