Tabula Rasa HealthCare Inc (TRHC) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q3 2018 Tabula Rasa HealthCare, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

It is now my pleasure to turn the conference over to Mr. Kevin Dill, General Counsel. Sir, you may begin.

Thank you, and good morning. 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 most recent annual report on Form 10-K filed on March 14, 2018.

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 morning, and thank you for joining us for our third quarter 2018 earnings call. With me today are Dr. Orsula Knowlton, Co-Founder and Chief Marketing and Business Development Officer; and Mr. Brian Adams, our Chief Financial Officer.

I'm pleased to report that we exceeded our expectations across the board in the third quarter. Our revenue of $54.4 million increased 66% from $32.7 million in the third quarter of 2017. And our adjusted EBITDA for the quarter came in at $9.3 million, a 125% increase over last year.

Beyond the numbers, this was a quarter in which we further demonstrated our ability to deliver real results to our customers and to our members.

In PACE, we continued to see our Medication Risk Identification and Mitigation science yield substantial reduction in falls, ER visits and hospitalization.

This builds on the success we announced last quarter in the first year of a 5-year CMS Enhanced Medication Therapy Management pilot, whereby applying our Medication Risk Identification and Mitigation platform we exceeded CMS goal of reducing medical expenses by at least 2% for Part D members.

In addition, Landmark Health was one of our first partners to license our MedWise platform to manage their members using their own physicians and pharmacists. Landmark conducted a study of 1,000 of their members and recently shared their preliminary findings with us. They segregated their members into 2 groups, the control group and an intervention group utilizing MedWise.

In the study, Landmark found that they were able to realize approximately $2 million of annualized savings due to a reduction in ER visits and hospitalizations while using MedWise. This translates to a roughly $4,000 reduction per person in annual medical expenses in the intervention group.

Across the board, the benefits and savings our clients are experiencing serve as a wonderful testament to the value our platform delivers in a variety of settings. These are real dollars being taken off of the healthcare system.

Further, our successes in the quarter prove how well our platform fits into a value-based setting. Extrapolating these pockets of success across the entire United States population could yield billions of dollars in savings.

It's important to emphasize that the economic benefit is not the only thing to be excited about here. We started this company to help people from a pharmacotherapy perspective since the current 4-decade of old technology used in pharmacies and electronic health records does not identify multi-drug simultaneous interaction issues.

When we use our patented technology to identify and then mitigate preventable adverse drug events, we reduce falls, ER visits and hospitalizations. The key result is enhancement of patient's quality of life.

While we're seeing incredibly promising developments in the U.S., we are also in discussions with several other countries to explore how our solutions could benefit their populations as well. We are currently working to implement our system in a Portugal hospital as a pilot, which we expect to launch sometime in the first half of 2019.

Recent publications from John Hopkins University, the University of Toronto and the University of Messina in Italy each underscore the increasing risk and negative sequelae from multidrug interactions.

Beyond the Eastern Europe, we are having some very preliminary conversations with other international markets in Southeast Asia and in the Middle East. The problem of preventable adverse drug event is ubiquitous both within ambulatory communities and within hospitals. The issue is magnified in the elderly, the comorbid populations, who are taking many medications. We're very enthusiastic about the international opportunities as well as our entrance into the hospital markets, both here and abroad. We anticipate having more to share with you as 2019 unfolds.

Before I turn the call over to Orsula, I want to provide you with an update regarding our Tabula Rasa 2.0 efforts, which I mentioned on our last call. In order to maintain our favorable positioning to properly accommodate our ongoing growth, we have committed additional resources to each of our operational and financial departments. And to continue our vanguard status regarding deep science, undergirding, personalized and precision pharmacotherapy, we have committed additional resources to our TRHC precision pharmacotherapy research and development institute, as well as to our healthcare predictive analytics center.

Finally, I want to announce that Tabula Rasa will be holding its first Analyst and Investor Day in New York City on December 4 at the Westin. We will have a speaker discussing likely CMS, CMMI trajectory, as well as a representative from Portugal to present her study on the incidence and prevalence of adverse drug events in Eastern Europe and also a representative from PACE to discuss PACE 2.0. So we hope to see many of you in New York in just a few weeks.

And with that, I'll hand the call to Orsula. Orsula?

Thanks, Cal, and thank you to everyone for joining our call this morning. To echo Cal's sentiment of increasing interest and opportunities for Tabula Rasa, I'm going to spend my time on this call providing an update about our PACE business and going into greater detail regarding the development of our analytics platform.

First, we are excited by the outcome of our efforts at the recent national PACE association conference in Portland, Oregon, where we hosted 250 people at our kickoff event, which included clients, new customers and several potential customers. This was followed by 2 days of education where we co-presented with clients on topics such as polypharmacy, how to reduce medication risk using novel risk stratification and a system for medication risk scoring and PACE participant to reduce preventable adverse drug events, pharmacy and clinical topics and finally, the CMS 1/3 Financial Audits are Changing, Are You Adapting?

During the conference we had a strong presence in the exhibit hall, hosted a well-attended focus group meeting of clients, participated in networking events of clients and potential new customers and as a result, we had several new business meetings. We also had the opportunity to sponsor the National PACE Association's annual award luncheon, which was attended by nearly all registrants.

Also at the conference, there was much focus around PACE 2.0, including 2 feature presentations on the topic. The stated goal of PACE 2.0 is to accelerate the membership enrollment to 200,000 by 2028.

Right now, PACE is at about 50,000 enrollees, growing at 8% to 9% year-over-year. PACE 2.0 would essentially double the growth to about 15% year-over-year by 2028.

Perceptions about this growth goal were addressed during a PACE 2.0 presentation that included 2 CEOs, 1 from your New York City, New York; the other from Omaha, Nebraska. Both organizations are long-standing clients of Tabula Rasa.

Each CEO demonstrated their current growth trajectory during their presentation and expressed their strong confidence and enthusiasm regarding their program's ability to achieve the PACE 2.0 goal.

TRHC is poised to support the scale and growth required for PACE to achieve this goal. What this would mean for TRHC is an increase in PACE client organic growth by adding new participants, expanding into new geographic areas and/or servicing new groups or types of PACE-eligible patients. Of course, TRHC plans to continue adding new programs.

There was also discussion at the conference around the -- expanding PACE to include all Medicare members beyond the current dual-eligible population that makes up the majority of enrollees. This would increase the potential number of members more than fivefold.

At least one pilot is being considered around this topic in the state of Michigan. As Cal mentioned, we will have a special guest speaking regarding PACE 2.0 at our Investor Day and Analyst Day conference on December 4. I think our PACE companies and clients would echo that this year's conference was a great success.

On another related topic, as you may recall, during the quarter, we effectively completed 3 acquisitions that bolster our offering in the PACE market. Mediture and Cognify are the leading EHR providers in PACE, and eClusive offers powerful analytics for capitated healthcare providers such as PACE.

Just to note that Cognify is an integrated healthcare technology platform for PACE that is also EHR agnostic. This provides them with the flexibility to integrate with any electronic health record. Their standard offering is Greenway. Between the 2 companies, they service about 2/3 of the electronic health record needs in PACE today.

With these and our existing PACE services, we believe there is tremendous opportunity to offer an integrated platform that turns demographic, clinical, claims, medication risk and outcomes data into predictive and actionable information.

This information could be turned into knowledge and used by PACE organizations and their medical teams to further personalize their services and bolster organizational performance.

We previewed this offering to our partners at the recent PACE conference and the response was overwhelmingly positive. As Cal mentioned, we have added dedicated resources to our healthcare analytics center to enable a first phase launch as soon as mid-2019.

We are thrilled about the sizable cross-selling opportunity with our array of integrated offerings and the addition of robust data analytics platform for PACE. Right now, amongst our PACE service provider organizations, we partner with 85% of PACE companies. Yet less than 15% are utilizing our entire suite of solutions. We believe that our enhanced service and integrated platform offering will allow us to maximize the cross-selling potential in the PACE market, which represents million of incremental dollars of annual revenue.

To close my comments, I'll provide a quick update on our PACE new business.

In the third quarter, we began the implementation and transition process for the largest single-location PACE organization in our company's history, Rocky Mountain PACE in Colorado Springs, Colorado. Rocky Mountain PACE is perhaps one of the largest, if not the largest single location in the United States. They have aggressive plans for continued growth and we are delighted to have been selected as their medication safety partner. We also began our medication risk mitigation services with a new client in North Carolina.

In the fourth quarter, we will complete the transition of Rocky Mountain PACE onboard 2 new client expansion locations, both located in Pennsylvania, and we'll add new clients to our other PACE technology and service organizations as well.

I'll now turn the call over to Brian to review our financial results.

Thanks, Orsula. This was another strong quarter for the company across the board. Tabula Rasa generated $54.4 million in total revenue in the third quarter of 2018, representing a 66% increase over last year. Product revenue of $28 million increased 18% year-over-year and represented 52% of total revenue. Service revenue of $26.4 million increased 195% from the third quarter of 2017 and represented 48.5% of total revenue.

Recent acquisitions, including the SinfoníaRx business, which was acquired in September 2017; the our Peak health plan management business acquired in May 2018; and the Mediture and eClusive businesses, which were acquired in September 2018, contributed $12.3 million to the increase in service revenue during the quarter.

Additionally, during the third quarter of 2018, we received notification from our data aggregation partner for the pharmacy cost management business that they have transitioned to a new data submission platform, which involved directly contracting with pharmaceutical manufacturers versus using a third-party service effective January 1, 2018.

As a result, revenue attributable to the sale of data from our pharmacy cost management services increased by $4.1 million, of which $3.1 million -- excuse me, $3.4 million is related to the first and second quarters of 2018.

Gross margins came in at 36% versus 28% in the same period a year ago. While margins hit the low end of our long-term target of 35% to 40%, they were somewhat inflated by the contribution in pharmacy cost management business from the first and second quarter. If you remove that contribution, gross margin was 31%, still a marked improvement over last year, primarily the result of an increase in service revenue as a percentage of total revenue.

Product gross margin of 25% compared to 23% a year ago and 27% last quarter. As I mentioned on our last call, when we onboard a new client, or 2 in this case, we can see temporary positive and negative impacts on gross margin.

As we expected, margins are dropping in line with prior quarters as these new clients start to align with the TRHC methodologies for managing medication risk.

Service gross margin of 47% compared to 44% a year ago, this year-over-year increase is the result of the inclusion of prior period revenue related to the pharmacy cost management business. When you exclude that contribution from the first and second quarter, service gross margin was 39%, and in line with last year -- last quarter.

As we have mentioned in the past, the SinfoníaRx and Peak businesses carry lower margins than the service offerings represented in historical periods.

In addition, our eMTM program had the higher cost structure in year 2. We believe that there are opportunities to generate some efficiencies and improve margins in the program but at this point, the cost structure is designed to continue driving similar outcomes to our year 1 results.

Operating expenses, excluding the change in fair value of acquisition-related contingent consideration, represented 33% of total revenue, up from 28% in the third quarter of 2017 and compared to 32% in the previous quarter.

On the second quarter call, we mentioned that we anticipated a slight uptick in operating expenses in the second half of 2018 associated with Tabula Rasa 2.0, and that was the case. The investments we are making back into the business, we believe, will support growth in 2019 and beyond.

Adjusted EBITDA of $9.3 million in the third quarter compares to $4.1 million a year ago. Our adjusted EBITDA margin of 17% in the quarter increased from 13% a year ago as the result of the incremental contribution from the pharmacy cost management business.

If you eliminate the contribution from the first and second quarter, adjusted EBITDA margin is 11%, and this is in line with our expectations given that incremental spend related to Tabula Rasa 2.0.

Our GAAP net income of $10.4 million compared to net income of $6.2 million in the third quarter of 2017. This net income was impacted by a benefit of $8.3 million due to the change in fair value of acquisition-related contingent consideration for the SinfoníaRx acquisition. The benefit recognized in the third quarter of 2018 decreased the amount of contingent consideration we expect to pay in connection with the acquisition.

As of September 30, 2018, the SinfoníaRx contingent consideration liability was $71.9 million, with the potential for up to an additional $13.1 million if the maximum contingent amount is earned, which would flow through as a charge to GAAP net income or loss.

As a result, third quarter net income per diluted share attributable to common stockholders was $0.47 compared to $0.33 a year ago. The per-share calculations are based on 22.3 million and 18.6 million diluted shares outstanding, respectively. Adjusted net income per diluted share for the third quarter of 2018 was $0.26 compared to $0.10 in the third quarter of 2017.

Turning to the balance sheet. As of September 30, 2018, cash on hand was $13.9 million compared to $10.4 million at December 31, 2017. Cash flow from operations contributed to the increase during the 9-month period. TRHC had $26.5 million drawn in its line of credit at the end of the third quarter. The company is in the process of evaluating refinancing options, in order to increase its borrowing capacity.

Before I review our updated guidance, I did want to touch on our most recent acquisitions, Mediture, eClusive and Cognify. These businesses will be captured in our service revenue. And in aggregate, they will generate approximately $15 million in revenue for the full year of 2018, about $4 million of which will be recognized by TRHC.

We anticipate these businesses to have an adjusted EBITDA margin around 20% in 2019. We paid approximately 2.5x 2018 revenue, 10x 2018 adjusted EBITDA. The acquisition of these businesses enhances the capabilities we can offer to our customers and further deepens the clinical and cost data that we can access to provide enhanced analytics to our clients in order to help them better manage care for their members and reduce cost while at the same time increasing quality.

To close out my remarks today, I'll review our current financial outlook for the remainder of the year.

For the fourth quarter of 2018, we anticipate revenue to be in the range of $53 million to $58 million, adjusted EBITDA to be in the range of $7 million to $9 million, net income or loss to be in the range of a loss of $1 million to an income of $1 million. This amount does not include any forecasted adjustment to acquisition-related contingent consideration.

For full year 2018, we are updating our previously stated outlook. We now anticipate total revenue to be in the range of $200 million to $205 million. Of that revenue, we expect product revenue of $115 million and service revenue of $88 million at the midpoint of our range. We continue to expect adjusted EBITDA to be in the range of $28 million to $30 million as we account for that additional investments related to our Tabula Rasa 2.0 initiatives and costs related to becoming a large accelerated filer.

Additionally, we expect to incur expenses related to the integration of Mediture, Cognify and eClusive businesses during the remainder of this year, and therefore, we are not changing our guidance for adjusted EBITDA at this point to reflect any incremental contribution from those businesses.

The midpoint of our guidance range would equate to approximately 14 percentage adjusted EBITDA margin for the full year, approximately 100 basis point increase over last year.

And we now expect a net loss in the range of $36 million to $38 million. The projected net loss is primarily the result of $40 million in charges related to an increase in the acquisition-related contingent consideration liability.

As you can likely tell from my commentary today, I continue to be extremely pleased with the performance of the business and my enthusiasm keeps growing as I look at all the opportunities ahead of us.

And with that, I'll turn the call back over to Cal for some closing remarks.

Brian, thank you very much. Orsula, thank you very much. Kevin, thank you. And thank you to our clients, our investors and our team members and partners. And at this point, I'd like to ask the operator to open up the line for questions.

(Operator Instructions) And our first question will come from the line of Ryan Daniels with William Blair.

Just a financial housekeeping one. When you provided the third quarter outlook, I know the revenue was $52 million to $53 million and about $9 million EBITDA at the midpoint. Did you contemplate the updated change in the pharma services contract? Because it looks like that bolstered both the top and bottom line results to kind of get you there. Without that, maybe it would have fallen outside the range. Is that a fair comment?

Yes, we -- Ryan, this is Brian. We did contemplate that into our guidance for the quarter when we had provided that previously. We had an early indication at that point that this was coming down the pipe, so we wanted to make sure that we included that at that time.

And then a little bit broader question. As we think of kind of the eMTM program, maybe a twofold question. Number one, I know last quarter, you provided a very positive data and I think you were working with CMS to get the ability to actually market that more actively. So I want to get an update on if you're going to be able to use that data to market the plans. And the number two, I know it's probably still early to talk about 2019, but any outlook for how that may look in '19 in regards to life growth, or pricing, or benefits provided and interest with other providers maybe contracting with you given your strong results?

This is Cal. Let me take the second one first. We had a lot of -- out of the 240,000-some patients that we were assigned, when we risk stratified them down using our risk stratification methodology, we came down to about 34,000 that needed intervention. Last year, we were able to contact about 15,000 of those people. This year, we're up to about 24,000. So we had a much better penetration this year than we had before. I think that will reflect in the results, I would certainly hope so. But -- so the penetration -- because the #1 issue is getting in touch with these people. And it's been difficult but we've got some new ways to do it and we did and we've attained it. As far as the market results, we haven't had an okay yet to do anything about it, right? Because they haven't given any comparative -- they haven't given us comparatives on the other 5 programs that are doing this, right? So I know that they're holding their cards close to their vest on it.

That being said, we are using the data that we do have to actively go out and talk to plans. So those have been very positive conversations and they're starting to accelerate some of what we have in the pipeline already. So the data that we do have available to us, we are actively using. But as Cal mentioned, we don't have the comparative data to share at this point.

That's helpful. And then last question just on the management contingent consideration going down a little bit, is that just -- I know that can be a powerful metric quarter-to-quarter as it's revalued. But any major changes in the outlook for the business and the EBITDA that drove that? Again, I know it's pretty minor.

Yes, no. It's actually a pretty minor adjustment that we made. But just given the sensitivity of the metrics that we use to develop the earn-out model, any little change can really drive a pretty major fluctuation in the near term. So no major fundamental difference in the business. We're still extremely pleased with the outlook for Sinfonía.

And next question will come from the line of Mohan Naidu with Oppenheimer.

Orsula, on your comment about getting to 200,000 PACE members by 2028, that seems to be a pretty aggressive goal given that you're growing 8% to 9% on the PACE side and that needs to probably get to a 15% year-over-year. What needs to happen here? And you talked about that Medicare change, but is that a regulatory change or can that be made by CMS?

Sure. Well, I think those are 2 questions. First, is it possible for PACE organizations to achieve that goal by 2028? And we believe it is. It would mean a net positive new patient enrollment by 13 per month. So in other words, they need to work on their enrollment processes, and there are consultants and consulting that we actually provide as well on how to help organizations get to that. We have organizations and clients that way exceed that number. So we know that, that's possible. With regard to Medicare, I think it is a broader question and perhaps from a regulatory standpoint, Medicare patients who are not also adult can enroll in PACE, however, it can be quite cost prohibitive. PACE picks up a lot of the Part D co-pays and also -- all of the Part D co-pays, and also the Medicaid rate. So they're basically paying the Medicaid rate as their co-pay plus the Part D plan for a very high risk group of patients. So they're working on some models on how they could work that out so that Medicare enrollees can have that benefit without the additional cost. So we'll see how that goes. I believe that there will be opportunities for people in different levels of income to enroll with some concessions around it, but that would require some regulatory or at least some state approval.

That's great. That looks very encouraging. And you also made a comment that your clients use less than 15% of your solutions. Is that including the new acquisitions that you have made? And how do you think about cross-sell once you get all of these folded into your portfolio?

Sure. Well, we are seeing some positive results already as a -- I hate to say this, but like a one-stop shop for organizations, especially in the startup mode, to be able to organize all of the service providers under 1 group. We see that as an opportunity where it's 15% across the board, each of us have a good 1% of the market. However, the entire market using all of our services is really where we'd like to go. And of course, the incentive for that is the data analytics platform that we would be able to provide by having all of their data.

That's great. One more, Cal, on the international market, you said the Middle East and Asia. Are you talking about similar arrangements as with ANF?

Yes. Yes, we are. They have the same issues that we do on preventable adverse drug events and without any solutions. So it's prime territory. We've had really interesting uptake on it from these people.

And our next question will come from the line of Matthew Gillmor with Robert Baird.

Had a follow up to Ryan's first question. I was hoping you could just sort of explain what this change was that resulted in the higher revenue for the pharmacy cost management. I wasn't really clear in terms of what change that caused you to recognize the revenue this period.

Sure, Matt. This is Brian. So generally, we get paid about 180 days after we submit the data to this vendor that we work with. And so we were not aware at the time that we were submitting the data in the first and second quarter of this shift in the way that they were sharing the data then with the pharmaceutical manufacturers. They traditionally had used the third-party vendor, which was not as -- didn't have as favorable relationships with the pharmaceutical manufacturers and so now they've gone to direct relationships, where they're partnering and contracting directly the pharmaceutical manufacturers and have increase the fees. So as we accrued in the first and second quarter on the information that we have at that time, those announced weren't lower than what we anticipated actually realizing at this point. So once we were communicated that there has been a change, which happened in the third quarter, we've increased the amounts that we anticipate being able to receive related to that data.

Got it. And then sort of going forward, this will be something that will -- it won't, of course, be as lumpy because you've got the right...

Yes, that's correct. It won't be as lumpy going forward. It'll be much smoother.

Okay. But it'll sustain sort of at the -- roughly the current pace?

That's correct.

That's helpful. I wanted to ask about the sort of bigger picture question, the direction of the traditional MTM program under Medicare Advantage and Part D. I know the opioid legislation had some changes that I think are effective for 2021. But I was hoping you could talk about some of those changes and what that would mean for Tabula and SinfoníaRx and your ability to engage with payers?

Sure. Of course, that information is pretty new, but what we see as an opportunity is in particular with the opioid legislation, that it is required for the individual Part D plans to have an opioid initiative. This year, they have to submit a plan, I believe it was by June or in the spring. And there was no review of it, it was just, "We're going to have a plan." So we feel that those plans will, over time, require to -- will be required to be more robust in particular with regard to avoiding unintentional overdose, and we certainly have an offering around that. We are seeing some interest now, so we're excited about that.

We also have 2 peer-reviewed publications in the hopper that will help solidify our position once they're published.

Our next question will come from the line of Nina Deka with Piper Jaffray.

Regarding the acquisitions, can you discuss anything around potential expected growth rates in '19 or beyond?

Yes. Thanks, Nina. This is Brian. Our expectation is that they're going to be consistent with Tabula Rasa growth rates at this point. So we've guided for about 25% annual growth rates for the business. I think that those are reasonable expectations for these acquisitions as well based on what we've seen historically, the pipeline that they have available and also the opportunity for cross-sell between all of our businesses now. So I think that's a pretty reasonable expectation.

Okay. And then also regarding the eMTM pilot, you mentioned that year 2 was a similar cost structure as year 1. Could you provide a little bit more insight on that and then potentially what would happen in, say, year 3 that would bring that cost structure down?

So the shift in cost structure in year 2 is we are using community pharmacists to deliver some of the interventions -- about 20% of the interventions that we target for the full year. And so that has a higher cost than us using our resources here. And so over time, we're going to continue to evaluate the operating model to make sure that we're driving the outcomes that we expect to drive by utilizing the community pharmacists. And that might require some adjustment to how they get used in the future. But we definitely do see opportunities over time to drive efficiencies in the model. But that's the biggest change from year 1 to year 2.

(Operator Instructions) And our next question will come from the line of David Grossman with Stifel Financial.

Just a quick clarification first on the guidance. Could you just help us understand how much the acquisition has added to the annual guide and how much of that obviously falls on the fourth quarter?

Yes. For most of the acquisitions, it's going to be in the fourth quarter and so it's about, I would say, $4 million to the full year annual guide in top line. And as I was discussing on -- with my remarks, we really are not adding any contribution to adjusted EBITDA at this point. There's going to definitely be some investment that is required over the coming quarter to integrate some of these businesses. So really just being a top line contribution at this point.

Okay, got it. And then just, I know you've talked a little bit about higher investment spending in Tabula Rasa 2.0. And obviously, you have a very scalable model and you're growing fast. But how do you want us to think about that kind of margin investment trade-off over the next 12 to 24 months?

Yes. I would say that for us, a lot of the investment today is to be able to access the hospital market and really develop an analytics platform that is going to enable clinicians to better use this information at the point of care, like we do in PACE today but just much more broadly. And so for us, that is absolutely critical in being able to not just sustain the growth rate that we have today but actually increase it. So we think that the investment that we're making today is relatively modest related to the trade-off in terms of overall growth of the business as we would expect, not necessarily in the next 12 months, but I would say going out from that, I would say in the next -- beyond 12 months. So talking maybe more like 2020 and beyond, that's where we're going to see an acceleration of our growth rate, I would expect.

I think -- this is Cal, I think that the science continues to be very fast-paced in oncogenetics, oncogenomics in dynamics, with information that we need to be aware of, and we are, for the information we need to incorporate into our matrix. And so we are spending a lot of time and effort being on top of things, constructing our next version of the matrix, which is going to be much more efficient and much more in-depth with the deep science. So there is a responsibility we have to make sure that what we're using out there to help people optimize their use is state-of-the-art, and that's very important. So that's part of the reason for it.

So is it still realistic, though, to think of operating profits and EBITDA growing faster than revenue despite the need to increase those investments?

I would think over the next year that EBITDA margins are going to be pretty consistent. But then as we get out into 2020, I think we will start to see an acceleration, not just in revenue, but in contribution to gross margin as well as EBITDA margin.

Okay, great. And then just the actual question I think that was asked a little bit earlier about some of the dynamics, the changing dynamics in the PACE market. There are some real changes, I guess, that are underway. So can you help us better understand at least which changes you think will be most impactful in the PACE market, as well as share whatever insight you have in terms of when the timing of those changes may really kind of come to bear on the overall growth of the marketplace?

I can comment, I know all of this kind of on that but -- this is Cal, I think the most important thing is that the first time PACE has really kind of put the pedal to the metal on increasing census. And they've been very vocal about this and this process they're going through. They have done a couple of pilots and so forth. They're actually looking to get to 100,000, double where they are now, by 2021. And then 200,000, as Orsula said, by 2028. So I mean, they're really -- and then PACE also realizes that they can't sit on the sideline and just have tens of thousands of patients that they're going to be materially involved in Medicare and healthcare. So they're really moving this. Now I think that's probably the most important thing to me, is that it's all about census. And they're -- we can't help them too much, sitting where we are, but we can -- we will gain from that organic growth that they're catalyzing.

Yes. I would echo that also with the change in conditions participation that are required to be accepted before the end of this year that, that will help the PACE organizations from a regulatory and operations standpoint. They're easing some regulations on the requirement of who is on the team, allowing people to fit the position -- fit a position on more than 1 person on the team. And also from a regulatory standpoint right now, to just get referrals from community physicians, a quite lengthy process is required to get -- obtain a waiver for that as well as for nurse practitioners or other ancillary members of the team. So they're going to do away with some of those types of regulation, so it will be easier for PACE organizations to operate as well.

And any thoughts on the kind of for-profit initiatives that are underway in the marketplace?

Well, we saw that in hospice when we were in hospice and it was the best thing that ever happened to hospice because it's -- all boats rose. And that -- I think that's what's going to happen here. It's a great addition. And it helps the nonprofits and they'll put their nose to the grindstone. I think it's a good thing just like it was with hospice.

We certainly are seeing more programs pick out the territories with regard to their locations and their expansion locations, stating that they are going to go ahead and expand so that other folks, in particular the for-profits, don't take those zip codes from them. So we are, as Cal mentioned, seeing that happen in the market.

And our next question will come from Stephanie Demko with Citi.

Driving it then the investment side, could you just give us an update on where we are for the investments in sales and R&D? And maybe what other pieces that you're hiring are left to finish up the process?

Well, we're going to go into that in much more detail during our Investor Day. We have embarked on the process in investing in sales. I'll speak to that, Cal can speak to R&D, in particular with -- related to expanding into other markets. So we'll see much of that occur during the first quarter.

The R&D is -- it's kind of like an R&D 2.0 also because of some of the recent science that's hit the press and some that we have to simulate ourselves and some of which we have to create ourselves too. So I think that it's a purposeful enhancement that will require some additional FTEs in the R&D department. I don't think it's going to be overbearing impact, but it's -- the outcome is going to be very significant on keeping us on the cutting edge of what's going on with multidrug interactions.

Yes, just from a financial perspective, Stephanie, I think we're about halfway there, I would say, in terms of the hiring that we're doing on the R&D side and still pretty early days on the sales front, as you heard Orsula say. I think we are on the process of interviewing and getting folks onboarded there. We want to make sure that they're right individuals to really go after the markets that we now have available to us. So we're being pretty careful about the people that we're looking at and bringing on board. But -- and you'll see most of the sales probably play out over the fourth and first quarter of next year.

And I think the predictive analytics department center that we have is just very exciting to the PACE -- the PACE community because they don't -- and because we have so many people, have so many things under our umbrella now, with data or data pool, it's 60 million patients or approximately, and our data late coming. And it's -- you can answer questions like what happens when I admit this type of person to my program? What expenses will they incur with PT, OT, meds, everything? And you can really start giving people predictive analytics so they know what's going to happen and they can plan operationally for it in their organization. So it's a really exciting opportunity, the way that the whole analytics is coming together too. And I think that our clients, we shared this, we socialized this with them at the National PACE meeting and set up an analytics advisory panel of PACE physicians. And they're very excited about the potential for this. So I think that, that's also an important component. We did spend a little -- resources on it, but I think it's going to pay off, it's big.

Understood. Lots of 2.0s. Now on the predictive analytics side, I think it was particularly interesting. Has there -- does that shift kind of the pools of talent that you normally look for versus your legacy solution when you look at a more predictive tool?

I think it may shift a little bit, but it's really additive more than it's shifting, so we still have the clinical people. It's kind of like, if you think about a data lake in the middle and there's 3 things around it, the first is clinical; the second is analytics, which is prospective; and the third could be business intelligence, which is mostly retrospective, reports you get every day and things like that on what's going on. And that's kind of the conceptual framework we have. So I think it's adding together a wonderful triad -- triangle actually of -- with data analytics in the middle and then these things around it, the clinical, the BI and the predictive. So that's kind of our conceptual framework.

Got it. Getting people to navigate the lake.

And our next question will come from the line of Frank Sparacino with First Analysis.

Just wanted to go back to the hospital market, I guess. It sounds like based on the commentary that the revenue contribution we would see in 2019 is fairly minimal, is that a fair assumption?

Yes, that's fair. I mean, the way to think about it, Frank, at this point is what we're on working with ANF is going to be a pilot. And we're both really picking up our own expenses related to this. We would anticipate them really being a channel partner for us in Europe. So I wouldn't anticipate any really material revenues coming from the hospital market until 2020.

The hospital market for us, Frank, is -- the reason we're able to enter into it is because we've got additional science now that also incorporates parenteral drugs -- parenteral medications, like I.V. and injectable medications, which we didn't have before. And that science is very, very deep and predictive. And that now allows us -- because every -- so many people in hospitals are on intravenous solutions and so forth with drugs. And our traditional system, that's mostly oral. Some of the liquid drugs that go through first pass in the intestine and liver, so now we're adding the I.V. drugs and the other parental drugs and that's just a huge new thing for us. And that allows us, there's 16,500 hospitals in the world, 5,500 here in the states. And no one has a solution for the adverse drug event and it's very, very significant in the hospitals with increasing length of stay and recidivism.

And maybe just one follow-up on that, Cal and Brian, just in terms of if you had to look I guess 2020 and maybe even 2021, do you think the U.S. market or the international market is the faster growing on the hospital side for you?

Well, I think that I don't know if they're growing at all, but they're there. But they need help. And just it's somewhat easier for us, it seems, to think about single-payer systems, that -- where the decision is more concentrated in the States. Of course, we're going to penetrate states. But it is difficult because you're dealing with all these different healthcare systems and all that stuff. So there is just a little bit of an advantage when you have a countdown type of system. So that's kind of the trade-off between the 2. But they all need it. They all need this type of science.

Ladies and gentlemen, this concludes our question-and-answer session for today. Thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.