Tabula Rasa HealthCare Inc (TRHC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tabula Rasa Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn your conference over to Kevin Dill, Corporate Counsel and Chief Compliance Officer. You may begin.

Thank you, and good afternoon. I'm Kevin Dill, Corporate Counsel and Chief Compliance Officer of 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 factor 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. With me today are Dr. Orsula Knowlton, our Chief Marketing and New Business Development Officer, who will provide an overview update of 2 beneficial regulatory items; and Mr. Brian Adams, our Chief Financial Officer, who will provide our financial update on the second quarter, as well as our outlook for the next quarter and the full year.

This represented another strong quarter for Tabula Rasa, as we continued to make solid progress on our strategic plan and from a numbers perspective, exceeded both our revenue and adjusted EBITDA forecasts for the quarter.

Our revenue was $29.7 million in the quarter, up 32% from last year. We saw growth across the board, with particular strength in our services business. Additionally, this quarter represented our 26th consecutive quarter of revenue growth.

Our adjusted EBITDA in the quarter came to $3.6 million, representing a 30% increase year-over-year. Our value proposition is our innovative, science-based medication safety platform, which includes both Medication Risk Identification and Medication Risk Mitigation decision-support tools.

We continue to raise greater awareness of the serious and deadly consequences associated with adverse drug events, which are especially prevalent in patients taking multiple medications. As indicated by a recent CMS report, 39.1% of people over age 65 take 5 or more prescription medications a day. When you add nonprescription medications, it brings the total exposure of these people to more than 8 medications per day.

The literature shows that 5 or more medications per day increases the risk of adverse drug events to 50%, while 9 or more medications per day increases the risk of adverse drug events to greater than 80%.

And why is this? It's because the current software used by pharmacists, electronic health records and PBMs is 3 to 4 decades old and does not analyze multidrug combinations simultaneously. This anachronistic software embodies a very high noise to signal ratio and provides superficial binary textual information that is neither personalized, nor interactive, nor readily adaptable in workflow.

Our novel medication safety platform is applicable in numerous segments of the healthcare continuum. In the near term, we are focused on 3 primary market segments.

The first market segment is PACE providers who license our Medication Risk Identification software and utilize our pharmacists to interpret and apply it using our Medication Risk Mitigation decision-support tools. These PACE providers also have us robotically package and deliver the medications to their patients in order to assure proper time of day administration and to facilitate medication adherence.

The second market segment is payers who license our Medication Risk Identification software and have our pharmacists interpret and imply the medication science, using our Medication Risk Decision support tools.

And the third market segment is financially at-risk providers, who license the entire medication safety platform and who use their trained in-house pharmacists to interpret and apply it with our Medication Risk Mitigation decision-support tools. I'm very pleased to say that during the quarter, we made notable progress in each of these segments and I'd like to spend a little time today touching on a few of these opportunities.

Regarding PACE providers, we have 2 new PACE clients, both of which will begin on October 1. One of these is part of the completion of a national agreement implementation which we announced early in 2017.

Turning to our expanded presence in the payer market. Our pipeline continues to grow from exciting new prospects as well as opportunities to augment our relationship with existing customers. I would like to note that our CMS, CMMI, Center for Medicare & Medicaid Innovation, enhanced medication therapy management, 5-year pilot, is progressing very well and remains the only eMTM pilot program that is focused on deploying a disruptive medication safety platform to optimize medication regimens to enhance the quality of life for the participants and patients and to reduce hospitalizations.

In terms of financially at-risk providers, I want to update you on our first license agreement which we announced last quarter. During the second quarter, we continued to meet our milestones with Landmark Health, a national at-risk provider group, taking care of home-based, frail, elderly and disabled individuals in various markets.

Also within the financial at-risk provider market, as of July 1, we successfully implemented our previously announced pharmacist-driven, in-home and telephonic care transitions program with Tandigm Health, an independent Blue Cross company.

This complements the same post hospital discharge pharmacist home visit care transitions program we have been doing since January for a Midwestern Blue Cross client. We continue to confirm that our proprietary medication safety platform is cutting edge technology that provides valuable and unique assistance to pharmacists and prescribers in improving outcomes and potentially saving lives. We remain steadfastly focused on our mission of attacking the public health plague of preventable adverse drug events.

In addition to the segments of the market I just discussed, we believe our medication safety platform can optimize medication therapies and improve outcomes in several other markets beyond those in which we currently operate. There are several interesting emerging trends that I want to bring to your attention before I turn the call over to Dr. Orsula Knowlton, who will update you on 2 beneficial regulatory items.

The first emerging opportunity is the rapid migration to value-based care. We are starting to see an evolving trend of pharmacies willing to take financial risk on covered lives. The system incentivized pharmacies to only dispense medication when clinically appropriate, compared to the traditional fill and bill incentive model.

The different segments of the healthcare are becoming more aligned and we are in discussions now with various pharmacy dispensing software vendors to integrate our medication safety platform.

The second emerging opportunity is with the new Comprehensive Primary Care Plus model conceived by the CMS innovation center. CPC+, as CMS labels it, is aimed at strengthening primary care through payment reform and care delivery transformation. Under this model, practices will receive reimbursement incentives to move from providing episodic reactive care to comprehensive services. For practices to succeed under this model, they will need to understand how to identify and mitigate multidrug risk among other things.

And the third emerging opportunity for us relates to Star measures and HEDIS scores. HEDIS, or the Healthcare Effectiveness Data and Information Set, is a tool used by more than 90% of America's health plans to measure performance. The Star Rating System is a tool used by CMS to measure a health plan's quality and performance. Star Ratings range from 1 to 5 stars and the measure is a key component in how CMS reimburses health plans. We are in discussions with various payer provider groups regarding our medication safety platform, since many of these HEDIS and Star measures now concern optimized pharmacotherapy regimens.

Lastly, to make our medication safety platform more understandable to healthcare professionals and eventually to consumers, we have spent the last few quarters extracting from our data and developing a complex, but simple to use, personalized medication risk score on a 0 to 50 scale. We are launching the risk score model this quarter.

This new and unique medication risk score could be akin to a FICO credit score. When used in conjunction with our medication risk mitigation decision-support tools, the medication risk score can be reduced. We envision the day when every patient and/or caregiver will know their medication risk score and understand how to reduce it. Since our unique system science is based upon medication ingredients rather than brand names, the medication risk score is scalable beyond the United States which substantially increases our total addressable market.

With that overview of the business, I would now like to turn over the call to Dr. Orsula Knowlton to comment on a few regulatory developments we saw in the quarter. Orsula?

Thank you, Cal. To support the financial discussion today, I'm going to provide a brief update on potentially beneficial regulatory changes we saw in the quarter. With regard to PACE, I want to bring you up to date on the status of 2 important pieces of legislation and rules: the PACE Innovation Act and the PACE Conditions of Participation.

First, the PACE Innovation Act provides authority to waive certain provisions to test application of PACE-like models for additional populations. CMS is considering expanding and has requested comment on potential elements of a 5-year PACE-like model test for individuals duly eligible for Medicare and Medicaid, age 21 and older. This proposed model has been provisionally named Person Centered Community Care or P3C.

Earlier this year, CMS completed a study that found that by incorporating these people into the PACE model, the government would have saved just over 30% on their healthcare expenditures, when compared to traditional fee for service settings. CMS is currently accepting additional comments through August 15, 2017. We view this as another success for the PACE model and its proven ability to take better care of complex patients at a lower cost. This also expands the addressable market potential for Tabula Rasa and our PACE partners.

Second, the PACE Conditions of Participation is the proposed rule to update and modernize the PACE program. While the proposed rule was published nearly a year ago, it is now awaiting release of the new final rules for PACE.

The 2 key takeaways from the proposed rule changes that could potentially lead to exponential growth in PACE include: first, the removal of the requirement that PACE organizations are non-for-profit. This is really a formality since for-profit organizations were enabled as sponsors in 2015 and already led to several new entrants into the market.

And second, the expanded definition of primary care provider, allowing not just the employed physician to be the PCP but also nurse practitioners, physician assistants and community-based physicians.

Allowing participants to keep their PCP is a huge step and opportunity for expansion, as many patients are hesitant to separate from their current physicians. This new rule will take effect as soon as it is approved.

In summary, as Cal mentioned, our value-based care offerings continue to have excellent uptake in at-risk markets. Thank you. It is now my pleasure to introduce Mr. Brian Adams, our CFO, to you at this time.

Thank you, Orsula, and thank you to everyone for joining the call this afternoon. I'm pleased to share with you our financial results from the quarter as the business has performed extremely well.

For the second quarter of 2017, we generated total revenue of $29.7 million, a 32% increase year-over-year. Product revenue in the quarter was $24.1 million compared to $20.2 million in the second quarter of 2016. As a reminder, product revenue is primarily generated through our medication risk management contracts in the PACE market, and the growth in this quarter was the result of the expansion of our existing client base.

Our service revenue, which comes from our non-PACE medication Risk Management Services, risk adjustment and pharmacy cost management contracts, was $5.6 million, and increased 153% compared to the second quarter of 2016, primarily due to our enhanced medication therapy management contract which contributed approximately $2.1 million.

Tabula Rasa generated a gross margin of 29% in the second quarter of 2017 compared to 28% in the same period last year. This improvement can be attributed to an increase in service revenue contribution which is associated with a higher gross margin. We maintain our previously stated intention to achieve gross margins in the 35% to 40% range, as service revenue constitutes a greater portion of our business as we mature as a company.

Product gross margin was 23% in the second quarter of 2017 compared to 25% in the second quarter of 2016 which was expected based on the contracts that started in the first quarter. Product gross margin of 23% was consistent with the first quarter of 2017.

Service gross margin of 55% in the second quarter of 2017 compares to 57% in the second quarter of 2016. This gross margin was in line with our expectations and we continue to anticipate additional margin expansion in the outer years as we generate efficiencies in the delivery of our new service offerings.

Our operating expenses represented 33.4% of our total revenue in the second quarter, up from 21.5% a year ago. Excluding $2.1 million of incremental stock-based compensation related to restricted stock grants issued in connection with the initial public offering, operating expenses would represent 26.2% of total revenue. Additionally, we incurred approximately $400,000 in costs during the second quarter of 2017 related to operating as a public company which we did not incur in the second quarter of 2016.

Our GAAP results again include the non-cash impact of stock-based compensation expense related to our IPO. And as we've stated in the past, this expense will not recur past the second quarter, so we anticipate seeing our operating expenses decline as a percentage of revenue significantly in the second half of 2017 and over the next year.

For the quarter, we are reporting a GAAP net loss of $1.5 million compared to a GAAP net loss of $286,000 in the second quarter of 2016. As I mentioned previously, there was $2.1 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've generated pretax net income of approximately $800,000.

We generated $3.6 million in adjusted EBITDA in the second quarter compared to $2.8 million a year ago. The increase in adjusted EBITDA was a function of solid growth in all of our service lines.

Adjusted EBITDA margin for the second quarter of 2017 was 12.2% compared to 12.4% in the second quarter of last year. This was in line with our expectations for the quarter as we incurred costs related to operating as a public company and continued to invest in our infrastructure.

GAAP net loss per diluted share for the second quarter of 2017 was $0.09 compared to a GAAP net loss per diluted share of $0.18 for the same period last year. The net loss per diluted share calculations are based on a diluted share count of 16.5 million for the second quarter of 2017 versus 4.9 million for the second quarter of 2016.

Adjusted net income per diluted share for the second quarter of 2017 was $0.06 compared to adjusted net income per diluted share of $0.01 in the second quarter of 2016. As a reminder, 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 June 30, 2017, we had cash balance of $2.8 million and outstanding debt of $1.5 million in equipment leases. 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 an outlook for the third quarter and update our outlook for the full year 2017.

As you've seen in the first 2 quarters of this year, we've realized sequential quarter-over-quarter growth in both revenue and adjusted EBITDA. We fully expect that trend to continue for the remainder of the year. And for the third quarter of 2017, we anticipate revenue to be in the range of $29.5 million to $30.5 million, net income to be in the range of $700,000 to $1.2 million and adjusted EBITDA to be in the range of $3.5 million to $4 million.

With half the year behind us, we're taking this opportunity to tweak our full year projections. We are maintaining our revenue range but tightening our adjusted EBITDA and net income projections. As of today, we expect 2017 revenue to be in the range of $116 million to $118 million, adjusted EBITDA to be in the range of $15.5 million to $16.5 million. We expect a net loss in the range of $1.2 million to $200,000.

Again, I'll remind you that we have stock compensation expense in the first and second quarter of approximately $5.2 million related to restricted stock grants issued in connection with the initial public offering. Additionally, we expect our year-end annualized revenue run rate to be $127 million.

I cannot emphasize enough how pleased I am with the growth of the business and the opportunities in our pipeline that will help us to meet our long-term growth targets, drive higher contribution from service revenue and increase our margins. In addition to the strong organic growth of the business, we continue to review opportunities for inorganic growth in order to accelerate our market penetration and enhance the capabilities within our platform.

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

Thank you, Brian. Before we open the call for your questions, I just wanted to reiterate how pleased I am with our second quarter results and accomplishments. We're making great progress on our growth initiatives.

And taking a moment to look at the bigger picture, I believe Tabula Rasa is uniquely positioned within a complex healthcare industry. Our proprietary solution addresses the massive and underappreciated problem of adverse drug events, and I'm very confident that we will continue to make great strides toward increasing awareness of this issue and delivering promising results to our customers and the patients they serve.

As always, I want to share my appreciation for all of our customers, our partners and the Tabula Rasa team. I look forward to continuing to keep you updated on our progress throughout the remainder of the year.

Operator, let's open the call for questions.

(Operator Instructions) Our first question comes from the line of Sean Wieland of Piper Jaffray.

Nicely done on the quarter. The Landmark deal, did that make a meaningful contribution in the quarter and in license fees? And can you talk a little bit about how you expect that to impact the numbers on the back half of the year? And is that generating any interest in other similar kind of license agreements?

Sean, this is Brian. I'll talk a little bit about Landmark. So it really did not make a meaningful impact on second quarter numbers, it's still kind of in a Phase I scenario. I would really look to probably 2018 to see some meaningful contribution from Landmark. We've made some nice progress with those folks and it's our anticipation that that would move forward.

And in fact, we have seen other deals develop in the pipeline that look and feel very similar to that model. So we're pretty excited about what we're doing with Landmark. And in fact, Landmark itself has doubled in size over the past year. So those are the folks that we really want to look to partner with in the future that are really capturing market share in this value-based environment. So hopefully that answers your question.

Sure. Just wanted to maybe get a little bit of help on the ramp in services revenue in the second half of the year. Is that -- is it going to look kind of like the first half of the year or is that business going to ramp?

So I would continue to think of the services side of the business pretty consistent, probably going to see some slight increase in the second half of the year. But in general, there's kind of an immediate step up, January 1. And then as we roll in new customers, there will be incremental impact which we'll announce as that happens. But for -- if you were to exclude any new customers, I would generally assume that it's going to look pretty similar to the first half of the year.

Okay. And so why did you take the high end of adjusted EBITDA guidance down a little bit?

Sure. So we did have 2 PACE clients that we had expected to start in the third quarter that got pushed out to the fourth quarter. And so really, we're accounting for the impact there. There were 2 different scenarios that presented. It's really just a timing issue at this point.

Both contracts are underway, being implemented right now. But we were ready to service those clients but they had some internal challenges that didn't allow for them to make the transition as we had originally anticipated, so we lowered a little bit to accommodate for that pushout.

Our next question comes from the line of Peter Costa of Wells Fargo Securities.

Just a follow up on that last question about the 2 PACE centers that moved from 3Q to 4Q. You didn't move your revenue guidance but you did move EBITDA and net income. Why didn't you move the revenue guidance? Is it just too small and it's still within the range? Is it the lower end of the range now more likely? Is that the way I should think about it?

Hey, Pete, this is Brian again. To be honest with you, I think we would have been in a position to increase revenue guidance for the year during this quarter, had those 2 contracts started as we had anticipated. So that's kind of the story there. I mean, I think you would've seen us push up our numbers a little bit on the top line, but having those push out just a little bit, we held where we are.

Well, that makes sense, given the strength in the quarter. Can you talk about the margins, the gross margin in the services line of business? It seems like that's coming in around the -- sort of the 55% range. I thought it might be a little bit higher than that going forward because of the CMS contract.

That seems like it's got a more clinical component to it than perhaps just the software business. So can you talk about, do you think the future contracts are going to be more just services, only as a software service? Or do you think it's going to be more often the clinical component in there as well?

I think it's going to be a combination of the 2, to be honest with you. We're going to see some contracts that come in that look and feel a lot like Landmark, where you've got really, just a standalone technology that's being licensed. And then I think you're going to see some customers that are using both the technology and the clinical services, like the enhanced medication therapy management model.

Now, I will say, we're still in very early days in those contracts, so it's -- we're a little more than 6 months in, so I think that we will be generating efficiencies in that model and we will see incremental margin associated with it. But I think that it still requires some clinical intervention from our teams here. And as we migrate with year 2 and start to push some of this into the community, I think we'll be able to see some leverage in the model.

Okay. And then just the last question, sort of getting into 2018. So you said you'd have a run rate of $126 million at year-end. Does this -- the PACE business is pretty clear to see how that grows going over the course of the year, but I'm curious about the services business in terms of the growth expected there. What do you know today will be additive for 2018?

That's a great question. Yes, we do have high level of predictability within the PACE model. We do have a number of things in the pipeline right now that we are working on that will impact 2018, and we do expect to see a step-up in Q1.

Most specifically, probably in terms of visibility, we are working with CMS right now on our year 2 bid for the enhanced medication therapy management project. And that does have an increase in fees and it does also have an increase in potential enrollment. So that's the biggest piece we have visibility into right now, but I would expect, similar to last year and beyond, just the eMTM project that we will see a step-up going into the first quarter.

And so you're saying the step-up would be beyond the step-up that you'd get from the eMTM, so some incremental contracts on the services side? The things that are close to closing? Or where are they right now in terms -- are they closed and you're sure they're coming in on January 1? Where exactly are those?

Yes, Orsula, maybe you want to take that question since it's more of a pipeline one?

Sure. So I think you're pretty clear on where we are. And we'll hear in October about a couple things that are going to be happening. So unfortunately, can't answer that question with too much more specificity than Brian did.

Our next question comes from the line of Michael Cherny of UBS.

Thinking a bit about some of the long-term opportunities and, Orsula, you outlined, and, Cal, you touched on them a bit as well. Is there any way, if not quantitatively, to at least qualitatively size how stuff around the PACE Innovation Act or some of the other opportunities maybe in terms of what you've seen already with some of the conversions to core profits, in terms of what that could mean to the overall TAM that you can address over time?

Sure. So in particular with the PACE Innovation Act of individuals who are 21 or older, who are living in the community that I described during the call, we see that as quite a bit of TAM in the --.

If you look at the actual research that was done by CMS and where they looked at the economics of it and where there was a 30% savings in the PACE model, which is truly capitated versus fee for service model, they had estimated 1/3 of the eligible people who would fit the category, and that was about 10 million people.

So the whole category is probably close to 40-plus million individuals, assuming a 30% enrollment of the individuals. It's very large, 1 in 5 people in United States has at least 1 disability, so it really does impact the market size.

The conditions of participation with regard to PACE enrollment, that is also exciting because it really supports the workflow of the PACE organization. In addition, the community physicians in allowing the for-profit market. For-profit organizations are enabled now and we are seeing many startups who are for-profit that are contacting us and looking at 2018, perhaps even 2019 to start.

So that's exciting but I think the most exciting part of that is the community physicians. About 20 PACE organizations today use community physicians and it really allows them greater flexibility on being able to service participants. So not necessarily quantifiable but very exciting.

And then just another kind of big picture question. There's obviously a lot of volatility market-wide on the overall debate over drug pricing. I know you guys have addressed that in the past. Can you just remind us, in an environment where drug pricing is volatile on both branded, generic specialty side, what if any impact that has to your overall business? My understanding is pretty much none, but I just want to make sure we have a full understanding of how that impacted traditional PACE market customers that you have?

Yes, this is Cal. It really does not impact us, nor does it really impact the PACE organizations. Each has their own Part D plan and the drug cost is pretty much a pass through, as is the dispensing fee. And then the admin fee that they have, that's non-reconcilable. So it doesn't really impact anyone from where we sit.

Yes, just to build on that a little bit, Mike. As we structure our contacts, they're based on kind of an industry standard metric. And as our price, our acquisition cost goes up, the cost that we would pass through to our client also goes up. And then as our prices decrease, similarly, the price that we pass through along to our clients would decrease, so relatively insulated from a margin standpoint.

Our next question comes from the line of Steven Wardell of Chardan Capital Markets.

So my first question is, have you seen any effect of the healthcare reform turbulence coming from Washington, the recent failed vote, do think that that is adding any uncertainty in the minds of buyers?

Well, frankly -- this is Cal -- the answer is really no. We have not seen any headwind from the chaos that's going on there. Orsula, did you have more?

Well, just to suggest that value-based care will continue to move forward, aligning quality with payment even in the fee for service market. So people, I think, are even more interested than ever.

Yes. I think that that train left the station no matter what happens, and everything's moving quickly to value-based care as was in the talk. We've got new contracts coming in that we're focused on value-based care pricing now. We see all sorts of people getting into that mindset. So regardless of what the law -- how the law changes, if it does, the regulators in CMS have really been pushing this thing in one direction.

Great. And I know you guys talk to prospects and customers in the PACE area all the time, and can you give us some additional color on what are they thinking about? And are they changing the mix of the products they buy from you or are there other trends you're seeing in your primary customer base?

Well, we continue to see a robust pipeline in our customer base. They -- we recently did some videotaping of customers. They really see us as their partner and people informing them of how to react to some of these from a medication standpoint. From a legislative standpoint, I think they're happy to keep things moving along the way they have been.

And that is all the time we have for questions. Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.

Thanks.