Tabula Rasa HealthCare Inc (TRHC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Tabula Rasa HealthCare, Inc. Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now 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 S-1. 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 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 update on our leadership in the PACE market; and Mr. Brian Adams, our Chief Financial Officer, who will provide our financial update on the third quarter as well as our outlook for the remainder of this fiscal year.

The third quarter was another strong one for Tabula Rasa where we beat our financial expectations and report some very positive developments in the business. Our revenue of $33.3 million increased 38% from $24.2 million in the third quarter of 2016. While we had solid performance in all aspects of the business, our services business was again particularly strong. Our adjusted EBITDA for the quarter came to $4.6 million, a 43% increase from last year.

I'll begin with an update on the integration of SinfoníaRx and discuss some early success. I'll also provide an update on the eMTM market, the Enhanced Medication Therapy Management market, and then I'll review the broader Tabula Rasa market before turning it over to Orsula to discuss the PACE market in greater detail.

As I'm sure many of you are aware, in early September, we announced our acquisition of SinfoníaRx, a leading provider of medication therapy Management technology and services for Medicare, Medicaid and commercial health plans. Over the past few weeks, we have been working on the initial phases of our financial and cultural integration. We have also started to explore many options we have regarding client and IT collaboration. Both of these initiatives entail extensive planning, and we would not expect to see the result of these integration efforts until late 2018 or early 2019. In general, however, the alignment of SinfoníaRx with TRHC is going very, very well. We have seen very positive reaction from both our customers, with some early signs of cross-selling opportunities that could materialize in the fourth quarter.

Turning to the Enhanced MTM market. As a reminder, the Enhanced MTM pilot program is focused on deploying a disruptive medication safety platform to optimize medication regimens, enhance quality of life for patients and reduce hospitalizations. In year 2 of the program, which starts January, this coming January, we will continue to use our proprietary medication risk stratification tools along with our MedWise Advisor, medication decision support platform; plus introduction of our consumer version, MyMedWise Advisor.

In year 2, the Enhanced MTM program is expanding as we develop and manage a network of community pharmacists throughout the 7 states of region 25. Beginning in January, those pharmacists will perform 20% of patient interventions using our technology, MedWise Advisor, which will -- which we have identified based upon medication risk scores. We also will be rolling out our patient engagement smartphone app, MyMedWise Advisor, to eligible patients throughout that region, and we are actively performing market research to continue to enhance understanding and acceptance of our products and services in the market.

Finally, we are commencing work to engage and educate prescribers throughout the region as prescriber involvement will be a cornerstone of Enhanced MTM for year 3, starting in January 2019. The Enhanced MTM model test program was set up by CMS to encourage various regions to learn from each other and apply best practices that are working in other regions to drive improvements across the country. We were pleased to be contacted by one of the other eMTM pilot organizations, which is interested in adopting portions of our eMTM technology into their program.

Now beyond eMTM, we are also seeing some very promising developments in the broader health plan market, specifically using our risk stratification engine, and also our in-home Care Transition program, I'll touch on both of those. With our medication risk stratification engine, we are collaborating with health plans in the broader market, which typically entails a 2-step process. First, we risk stratify the population using our proprietary medication risk software. That includes numerous pharmacokinetic, pharmacogenomics and pharmacodynamic components, which then is presented as an aggregated medication risk score in a histogram display. By year-end, we expect to have risk stratified over 10 million patients for different health plans. You may remember, on our last earnings call, we had approximately 1 million patients stratified.

Our homogenized medication risk score, which includes all of our medication risk factors, ranges from 0 to 50. Anyone over 19 is spending at least twice the average for medical expenditures and is at risk for a preventable adverse drug event. Interestingly, what we have found is about 7% to 15% of the commercial lives are at high risk, with a risk score above 19. Then the second step is to intervene on these highest-risk patients. Tabula Rasa can perform the mitigation efforts using our pharmacists, or we can license the technology to the health plan leading the mitigation efforts and allow their pharmacists to take charge.

Turning now to our in-home Care Transition programs, our early results show our cohort has a hospital readmission rate that is about half the national average. We're excited by these preliminary results. Furthermore, we are pleased that one of our health plan partners that offers our in-home pharmacist medication reconciliation Care Transitions programs has renewed and expanded their agreement for 2018.

So we have a lot of exciting things happening at Tabula Rasa right now. We just finished a strategic doing retreat where we finalized our market priorities for 2018.

With that, I'll turn the call over to Orsula to discuss the PACE market. Orsula?

Thanks, Cal. In addition to Cal's remarks around the traction our solution is getting in the broader healthcare market, we are continuing to expand our leadership with PACE market penetration. We are pleased to have successfully implemented 3 new PACE organizations during the third quarter.

In the quarter, we also signed a new startup PACE organization contract in the Midwest as well as supported a number of expansions with our existing PACE customers. We recently returned from the Annual National PACE Association Conference in Boston, or NPA, where we unveiled our medication risk score to the market. The initial response from PACE providers has been extremely encouraging. Our PACE medical directors attested to the traction of this approach of identifying medication risk based on a 0 to 50 score. An unanticipated finding was that physicians and other prescribers are using it to help communicate with patients about their medication risk. A couple of physician quotes from the conference include "my job as a physician is to first do no harm, and the risk score is valuable to help me demonstrate the harm caused by medications." Another, "this is a great bedside tool to help my participants understand why we need to adjust their medication."

Numerous presentations at the conference identified ways that PACE organizations are growing their traditional dual eligible PACE population. For example, one of our clients in New York, alongside the PACE program manager from the New York State Department of Health, led the presentation entitled, PACE Innovation Act, The New York Way. This not-for-profit, PACE-based organization highlighted that by creating partnerships that drive enrollment growth; servicing specialty population who are eligible, such as the developmentally delayed demonstration in the state; offering housing and social support where they are seeking an assisted living demonstration; and using existing waivers such as the referrals from the community physicians, they can and are driving the growth of the PACE population in the state where 750,000 dual eligible individuals are enrolled in the Medicaid program. Also at the conference, NPA launched PACE 2.0, an initiative to drive PACE growth using the PACE Innovation Act. NPA launched the PACE 2.0 project with support from the John A. Hartford Foundation and West Health. The initiative will expand access to programs for all-inclusive care for the elderly for many complex, high-need, high-cost populations across the country. Overall, elder care providers are starting to be more vocal that the PACE model is well aligned to deliver care in both Medicare and Medicaid. The SCAN Foundation issued a report in late September, entitled Top 10 Recommendations to Strengthen Integrated Care for Dual Eligible. In this report, Dr. Bruce Chernof, CEO of The SCAN Foundation, lamented that providing health care for roughly 11 million dual eligible is challenging primarily because Medicare and Medicaid do not talk to or work very well with each other. Patients often find themselves caught between the 2 healthcare programs, receiving less than optimal care. Doctor Chernof also notes that PACE is the gold standard in terms of offering comprehensive medical and social services for dual eligible members and best integrating the care provided by both Medicare and Medicaid. We hope that the tight integration between Medicaid and Medicare in the PACE environment and the improved quality of life for dual eligible individuals will drive further adoption of PACE program.

With that review of the PACE market, I'll turn the call over to Brian Adams to provide a detailed review of our third quarter results. Brian?

Thank you, Orsula, and thank you all for joining the call this evening to discuss our third quarter results. For the third quarter of 2017, Tabula Rasa generated total revenue of $33.3 million, a 38% increase year-over-year. Product revenue in the quarter was $24.6 million compared to $20.7 million in the same period a year ago. As a reminder, product revenue is primarily generated through our medication risk management contracts in the PACE market, and the growth this quarter was mainly the result of expansion within our current client base.

Service revenue, driven by our non-PACE medication risk management contracts, which also now include the SinfoníaRx business as well as our risk adjustment and pharmacy cost management contracts, came in at $8.6 million in the quarter, an increase of 151% from the third quarter of 2016. The increase in the third quarter was primarily due to 2 factors: first, a $2.6 million contribution from the SinfoníaRx business; and second, our Enhanced Medication Therapy Management contract, which contributed $2.2 million. As a result -- or, excuse me, as a reminder, our acquisition of SinfoníaRx closed on September 6, and we will only be sharing their results stand-alone until year-end. Thereafter, we will combine their results with Tabula Rasa's service revenue. And as I just mentioned, during the quarter, SinfoníaRx generated $2.6 million in revenue.

Tabula Rasa generated a gross margin of 29.5% this quarter versus 28.9% in the same period last year. Consistent with past quarters, this improvement can be attributed to an increase in service revenue contribution, which is associated with a higher gross margin. This quarter, we continue to trend in the right direction as we move closer to achieving our previously stated goal of gross margins in the 35% to 40% range as service revenue constitutes a greater portion of our business.

Product gross margin was 23% in the third quarter of 2017, consistent with the third quarter of 2016 as well as the first 2 quarters of 2017. This result was with -- in line with our expectations based on new customers onboarded this year.

Service gross margin of 48% in the third quarter of 2017 compares to 64% in the third quarter of 2016. Although this represents a significant decline from last year, this met with our expectations as the gross margin generated by the SinfoníaRx business is approximately 40%, which is in line with our other medication risk management service contracts. And combined, the 2 represent over 55% of service revenue. We do expect to generate efficiencies from the combination with SinfoníaRx and see margin expansion in the outer years for these services.

Our operating expenses represented 30.2% of total revenue this quarter, up from 21.9% in the same period a year ago. Our operating expenses included approximately $900,000 of transaction-related expenses for the acquisition of the SinfoníaRx business and a charge for an adjustment to the contingent consideration for SinfoníaRx of approximately $900,000. Additionally, we incurred approximately $300,000 of costs related to operating as a public company during the third quarter. These costs did not incur in 2016.

Our GAAP net income of $7.7 million compares to a GAAP net loss of $142,000 in the third quarter of 2016. During the third quarter of 2017, we reversed a portion of our deferred tax asset valuation allowance and recognized tax windfall benefits, which resulted in a onetime tax benefit of $9.4 million.

We generated $4.6 million in adjusted EBITDA in the third quarter compared to $3.3 million a year ago. The increase in adjusted EBITDA was a function of growth in all of our businesses. Additionally, the SinfoníaRx business contributed approximately $600,000 of adjusted EBITDA in the quarter. Adjusted EBITDA margin for the third quarter of 2017 was 14% compared to 13.5% in the third quarter of last year. This was in line with our expectations as we begin to see higher-margin services businesses have an impact on overall adjusted EBITDA margins.

GAAP net income per diluted share for the third quarter of 2017 was $0.41 compared to GAAP net loss per diluted share of $0.08 for the same period last year. The net income and loss per diluted share calculations are based on diluted share count of $18.6 million for the third quarter of 2017 versus $10.3 million for the third quarter of 2016.

Adjusted net income per diluted share for the third quarter of 2017 was $0.08 compared to adjusted net income per diluted share of $0.04 in the third 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, transaction-related expenses and changes in the fair value of contingent consideration as well as adjustments toward the tax benefits related to the partial release of our valuation allowance and recognition of tax windfall benefits, as I previously stated.

Turning to the balance sheet. As of September 30, 2017, we had a cash balance of $5.9 million, an increase from last quarter of $3.1 million. The increase is the result of positive cash flow from operations. And as of today, we have $35 million drawn on our line of credit, which we used to finance the initial closing payment for the SinfoníaRx acquisition. Additionally, we have outstanding debt of $1.9 million in equipment leases.

Before I turn the call back over to Cal, I'll provide an outlook for the fourth quarter and an update on our outlook for the full year of 2017. As you've seen in the first 3 quarters of the year, we have realized sequential quarter-over-quarter growth in both revenue and adjusted EBITDA. We expect that trend to continue for the fourth quarter of 2017. We anticipate revenue to be in the range of $37.5 million to $39.5 million, net income to be in the range of $1.9 million to $2.9 million and adjusted EBITDA to be in the range of $6 million to $7 million.

With 3 quarters behind us, we're taking this opportunity to update our full year projections. We're increasing our revenue projection to account for the revenue beat last quarter, increasing our net income projections to account for the tax benefits created by the SinfoníaRx acquisition and maintaining our adjusted EBITDA range in line with prior guidance.

As of today, we expect 2017 revenue to be in the range of $128 million to $130 million, adjusted EBITDA to be in the range of $17.5 million to $18.5 million, and we expect net income to be in the range of $6.5 million to $7.5 million.

Again, I'll remind you that we have stock compensation expense in the first quarter and second quarter of approximately $5.2 million related to restricted stock grants issued in connection with the initial public offering. Additionally, we have partially reversed our valuation allowance and recognized tax windfall benefits for a onetime benefit of $9.4 million in the third quarter.

Finally, if you were to annualize our revenue run rate for the fourth quarter using our projection, it would be $154 million. I'm incredibly pleased with the results from not only the third quarter but for the full year-to-date. Our business continues to perform extremely well. Our pipeline has never been more robust, and the integration with the SinfoníaRx business has been a very smooth process so far.

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

Thank you, Orsula and Brian. I'm very pleased with our third quarter results and continued momentum we're seeing in the business. And as always, I want to thank our customers, our partners, our Tabula Rasa team members. And I also want to express my excitement to have -- how we have incorporated our new Sinfonía team members on board. I believe we have some really interesting things and opportunities ahead of us as a newly combined organization, and I look forward to continuing to keep you updated on all of our progress.

So with that, let's open the call to questions. Operator?

(Operator Instructions) Our first question comes from the line of Matthew Gillmor with Robert Baird.

Maybe wanted to start with the PACE business and ask about CenterLight which is one of the biggest announcements, I guess, for the quarter. If I remember correctly, you were going to transition a few centers and then that would determine the rollout for future periods. Can you maybe just update us on how that relationships progressed over the first couple of months? And then what you're thinking in terms of transitioning those members over to the Tabula platform?

Sure, Matt. This is Orsula. Thanks for your question. So we've transitioned 1 location with regard to our services. And we continue to monitor services, we actually have a meeting them this week. So we would expect to have more news about this for the first quarter.

Okay, great. And then also on the SinfoníaRx pipeline. I think there was a -- if I remember, there was a larger earn-out tied to that, I'm just curious if there was any updates with respect to how their pipeline has progressed and the conversations around that. And would we hear about that sort of before year-end with the timing of their sales or could that be sort of at any time?

It's Brian. Yes, things continue to progress nicely with the SinfoníaRx pipeline. No announcement to be made just yet. We are hopeful that we will be making an announcement prior to year-end. You do note that earn-out was structured in order to accommodate some pretty material opportunities that could impact 2018, and we are still pretty confident that we're going to see that happen.

Okay. And then one more if I could. Cal had mentioned readmission rate being 50% below the national average, and I missed kind of the context of that comment. So could you just repeat that for our benefit?

Sure. Matt, we've been doing fiduciary Care Transitions program with a large health plan where we do in-home, pharmacists, Care Transitions and medication reconciliation using Medwise Advisor, Medication Risk Mitigation software. And the -- this particular company was running at about a 30% readmission rate for hospitalizations. And the preliminary information we have through the first 2.5 quarters is we're around 17% in that rate. So we'll see what the end of the year brings for us, but it's good. And in fact that is already renewed for 2018 with a larger cohort. So, so far so good.

And our next question comes from the line of Nina Deka with Piper Jaffray.

I was wondering if you could provide some more detail on the eMTM as you transition into year 2 and then into year 3. I know you've mentioned some in the prepared remarks, but how do you expect this to impact the different product segments and service segments? Would we see something come out of product and something grow in service? Or would we only see a change for services? And then how would that transition further in year 3?

This is Brian. Basically, all of -- or not basically, all of eMTM revenues today are recognized in the service category. So we would expect that to grow to accommodate some of the new services that we'll be providing in the eMTM program in next year as well as the following year.

And did you say how many numbers you're expecting to go live on the consumer -- the mobile app?

We did not say how many members would go live at this point. So we're still working with our partner to establish what percentage of the population will be exposed to it.

Okay, great. And then I had a question about the -- you had been working on opioid projects, and I know that there is some population health type work that you've been publishing about, and I was wondering if you had any updates on that. And if you might see more opportunity in that, the opioid space, moving forward?

We have nothing concrete to share other than there's a pipeline of activity in that -- in the domain of the opioid unintentional misuse.

And then just, if you could, one more update on the pharmacy and pharmacist segment that you had discussed with -- a couple of quarters ago?

So Nina, we're going to actually be using the eMTM program to expose pharmacists to the tool, given that they're going be providing about 20% of the interventions in year 2. So we're going to use that as kind of an incubator to really learn from their experience next year.

And our next question comes from the line of Jamie Stockton with Wells Fargo.

I guess, maybe just a couple more on the eMTM. First, I think that the year 1, it was something like 240,000 lives and you're making somewhere around $3 PMPM. Is there any kind of direction you can give us as far as the magnitude of the improvement you might see in year 2 or year 3? I know that it does definitely sound like the breadth of what you're doing is going to expand. And then maybe the second one, I thought Cal mentioned that you guys were talking to one of the other -- the pilots about maybe adopting some of your technology. It sounds like maybe there won't be kind of the whole breadth of services there necessarily, but just any indication on the size of their pilot population would be great.

Sure, Jamie, this is Brian. Thanks for your questions. I'll take the first, I think Cal will take the second. So as you think about our revenues for next year, we did get approval from CMS and CMMI for the proposal that we had put forward, which does have an increase in the PMPM that we'll be charging, to give your ballpark, of about 10% going into next year to accommodate some of these additional services. We've also been told by our partner that they're expecting about a 10% increase in enrollment going into next year. So as we charge that PMPM across the entire population, you could expect to see an increase there as well. So that should kind of give you some ballpark on that.

This is Cal. And we did, this week, received final notification from our partner and from CMS that everything is fully funded for year 2. It takes them a while to get preliminary approval and then secondary and final. We got the final approval for the -- for everything for next year this week. As far as the -- there's 6 programs that are doing this eMTM. And that we are allowed to, if someone sees something or hears something in another program, we're allowed to cross-pollinate with that. And we have been approached by another large program to do that. And that will not be our entire offering, but it actually will help bring some of the clinical information that we're doing into a Care Transitions model that they're trying to build. And we'll -- it looks like they'll be using -- well, they will be using our information to do that. And that's -- that'll be in year 2, late year 2 probably, but mostly in year 3 because their -- from what I understand, their budget was already approved for year 2. So we'll get some increment on that in year 2, but mostly it'll happen in 2019.

And our next question comes from the line of Steven Wardell with Chardan Capital Markets.

Can you just help us understand the -- in a little more detail, what are you selling now into the managed-care market? And what new product are you seeking to sell into the managed-care market over time?

Yes. So Steve, this is Brian. I think right now what we are selling into the managed-care market looks and feels a lot like the eMTM program that we are running. In addition, we have the Care Transitions programs that Cal was describing. We've also seen a nice interest in terms of the risk stratification model that we can deploy, and the medication risk scoring that we've developed as well. And so our plan right now is to continue down the fairway, selling those types sort of services and technologies to the managed-care population because right now we are seeing a tremendous amount of interest for those at this point.

And our final question comes from the line of Frank Sparacino with First Analysis.

Maybe just following up on last question. Cal, I think you noted that you hope by the end of year to have greater than 10 million lives running through the risk stratification engine. And I guess what I'm wondering is, how that translates into future potential revenue. How we should think about that from a downstream perspective for you?

Well, I'll start, and Brian, if you want to chime in. It's a -- really a 2-step process. First, we have been asked by many organizations now to restratify certain cohorts of their population to find out who is at risk for medication adverse drug events, and this (inaudible) of hospitalizations that ensue. And so we've been doing quite a bit of that in the last month or so. And we will exceed 10 million by the end of the year, by this quarter that we're in now. The next step, though, is once you've identified that high single digit, low double digit in most of the commercial plans, folks at risk, something should be done to mitigate the risk. And it can even be done by us with our systems or we can -- we could use -- we can share our systems with pharmacists that the health plans have, and teach them how to use it. And then they can do the interventions themselves. So that's kind of the -- that's a very large part of it. For -- the risk stratification is the first blush to figure out who is having a problem, and then to dig deep into this. It almost goes down to a one-on-one intervention, and that's a heavy lift. So I would say that's probably what we're looking for as far as on the revenue side.

Yes, it's -- yes, Frank, it's a little difficult to give you kind of a -- some guidance of revenue at this point because the interest varies depending on the customer or depending on the health plan that we're engaging with and where they might really see the value of these offerings and the types of services that we might deploy. As Cal described, it could go from licensing to full suite of services. But I think what's important to note is the fact that at this point, a few months ago, when we were doing our Q2 earnings call, we were just maybe around 1 million lives that have been run through the tool. I think this is just a real demonstration of the interest level that we've had from some pretty significant potential partners. And it's really been a nice sales tool because we can take data and show potential partners in their population where their risk level really is. And so I think that's been really enlightening and helpful as part of that process. So maybe a little bit early on the -- to give you guidance on revenue, but I think we'll probably be able to give you some more information on that in the coming months.

Thank you. And that does conclude today's Q&A session. And ladies and gentlemen, thank you for participating in today's call. This does conclude the program, and you may all disconnect. Everyone, have a great day.