Tabula Rasa HealthCare Inc (TRHC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Tabula Rasa HealthCare Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Kevin Dill, Corporate Counsel and Chief Compliance Officer. You may begin.

Thank you, and good evening. I'm Kevin Dill, General Counsel for Tabula Rasa HealthCare.

The company intends to avail itself of the safe harbor provisions of the Private Securities and 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 health care 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 10-K. 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 now to Dr. Calvin Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare. Cal?

Thank you, Kevin, and good evening. Thank you for joining us for our fourth quarter and full year 2018 earnings call. Also, with me tonight are Dr. Orsula Knowlton, Co-Founder and Chief Marketing and Business Development Officer, who will provide an update on our new business activity; and Mr. Brian Adams, our Chief Financial Officer, who will provide our financial update on the fourth quarter and full year as well as an initial outlook for fiscal 2019.

In 2018, we saw strength across our entire organization as we delivered a 53% revenue increase and a 70% adjusted EBITDA increase compared to 2017. Further, we continue to see constant and consistent growth in PACE, expanding our PACE membership by 20%. We built out our PACE offerings with selective strategic acquisitions. Our product service mix continues to see service revenue expansion from 19% in 2016 to 41% in 2017 and 45% in 2018. We expanded our leadership position in the Medication Therapy Management market. We received our Enhanced Medication Therapy Management year 1 results whereby our Medication Risk Mitigation interventions exceeded expectations with net savings of $37 million or $2,500 per person in reduced medical expenses. We announced our first international expansion. We entered the hospital market with our acquisition of DoseMe, and by year-end, TRHC entities had serviced 7.5 million patients in the United States.

With our new analytics department, we have been able to show that our Medication Risk Mitigation interventions consistently demonstrate a 4-point reduction in medication risk score, which translates most importantly from a quality perspective to reduced morbidity as well as to medical savings, especially hospitalization admission reduction, falls reduction and ER visit reduction.

I referenced our acquisition of DoseMe and I'd like to dig into that opportunity a bit.

DoseMe represents a great strategic fit for Tabula Rasa. It not only brings our precision medicine and science-based approach to the dosing of potentially dangerous narrow-therapeutic index parenteral medications, but it also opens up an opportunity for us in the hospital market with their 125 hospital health care system clients in the U.S., Western Europe and Australia.

Turning to Enhanced Medication Therapy Management. We just moved into year 3 of our eMTM pilot. One of the things we are focused upon is leveraging the community pharmacists to provide more of the interventions. At year-end, we had trained more than 400 community pharmacists at 300 locations in the northern plains. These partners conducted more than 100 interventions in the second quarter of 2018, and by the fourth quarter, it was over 1,100 interventions. And we anticipate they will complete more than 10,000 interventions in 2019. Beyond the eMTM project, in 2019, we intend to expand to a large number of community pharmacies via network collaboration.

Another recent development which we officially announced last week, I mentioned on our last quarterly call as part of our Tabula Rasa 2.0 efforts, is the launch and the location of our new Scientific Precision Pharmacotherapy Research and Development Institute in Lake Nona, Orlando, Florida. The Research and Development Institute is committed to the continued development of proprietary products for optimizing medication regimens and to achieving validation and recognition of these products by the scientific and regulatory communities. Our goal by year-end is to have additional TRHC pharmacokinetic pharmacogenomic scientists in the location at Lake Nona. Lake Nona is particularly a market that's rich with PhDs focused on pharmacokinetics. To maintain our vanguard status globally in medication risk identification and mitigation, the emphasis at Lake Nona is to continue adding pertinent attributes to our medication risk identification and mitigation software in addition to submitting germane NIH grants. Our enhanced research and development science group is a necessity to develop, hone and advance the products we need for the coming years.

Last week, we were able to participate in the Annual Invitational Lake Nona Impact conference, and I'd like to share just a bit of what I heard and learned while I was there. This innovation forum is an annual meeting of C-Level health care leadership leaders throughout the United States to continue the future of health care and well-being discussion. Our 17th Surgeon General of the United States, Dr. Richard Carmona, opened the program with an ongoing criticism of our health care system that it is not, in fact, health care, but sick care, considering that 70% of chronic disease is preventable. We made excellent contacts during the meeting and feel that we are positioned very well to support the medication safety well-being needs in the United States and around the world.

Before I turn the call over to Orsula, I want to take a moment to touch on our plans to expand our sales force, spearheaded by Dr. Kevin Boesen in his new role as Chief Sales Officer. Kevin is leading our enhanced sales organization to support all sales and cross-selling efforts and will ultimately be responsible for all direct and channel sales efforts. Our focus is to expand the adoption of MedWise into health plans, health care systems, hospitals, community pharmacies and any financially at-risk health care organization. We believe that this is a great position for Kevin, and expect he will really thrive as he helps Tabula Rasa expand our footprint into these marketplaces.

So 2018 was a busy year for us, and I believe we are well positioned in the market and have the scale and the infrastructure in place to capitalize on the opportunities ahead of us. Medication adverse events is rampant and a pandemic.

I'll now turn the call over to Orsula to talk about all the recent happenings in new business. Orsula?

Thanks, Cal, and thank you to everyone on the call. We are pleased to report a 2018 revenue retention rate of 99%, consistent with 2017 and higher than 2016 at 98%. Similarly, our client retention rate was 96%, an increase over both 2017 and '16, which were 95% and 93%, respectively.

As with all aspects of Tabula Rasa business in 2018, including our successful add of new clients and new services, we are excited about the future starting in 2019.

First, we are focused on our enhanced ability to expand into our existing markets. One such example is the payer market where we are leveraging the recent integration of SinfoníaRx, its capabilities and client roster. Our key successes at SinfoníaRx in 2018 include a sixfold increase in the number of Medicare plans that achieved a comprehensive medication review or a CMR completion rate of 85% or more, which is the current 5-star cut point. We had 4 plans reset in 2017 and 29 plans in 2018. Overall, SinfoníaRx completed 450,000 CMRs which translate into over 1 million recommended intervention.

Sinfonía also had a full launch of RxCompanion, their technology, with the New York health plans. And through the fast licensing of RxCompanion with a national retail pharmacy chain, community pharmacists completed over 3.1 million in-store interventions resulting in the improvement of their medication adherence metrics and overall network performance.

Second, we are thrilled to be in a new market as a result of the DoseMe acquisition. We have done extensive research on this market, including a survey that we distributed during the third quarter to 250 PACE subscribers from across 18 states who already see the TRHC medication risk score in their workflow. 50% of prescribers responded that they're more confident in prescribing when using the medication risk score. 85% indicated that they'd reconsider their medication choice when the risk score is affected by a new prescription, 90% more likely to be prescribed a medication or remove the number of medications the person is taking as the result of the medication risk score, and over 90% said they both would use their medication risk score again given the opportunity and would recommend it for use by other prescribers in and outside of PACE. It is now our goal to take the system to other health care and hospital systems. We believe that DoseMe bolsters our go-to-market strategy and capabilities in the market. Preventing adverse drug events, medication optimization, performance improvement programs is how we plan to market the implementation of our decision support tools at the point of care. The value we bring in addition to quality and outcomes improvement include the economic benefit of aborting downstream effects of adverse drug events along with reducing hospital length of stay and readmission.

We are involved in a conversation of medication safety and performance improvement most recently through our attendance at the Institute for Health Improvement's 2018 National Forum. Over 5,000 health professionals seeking quality improvement methods to help solve some of their biggest challenges, including adverse drug event prevention were in attendance.

During the conference, we saw high interest, including from those members participating in IHI signature program Age-Friendly Health Systems. Age-Friendly Health Systems is an initiative of The John A. Hartford Foundation, the Institute for Healthcare Improvement, the American Hospital Association and the Catholic Health Association of the United States. In case you're not aware, the goal of this initiative is to develop an age-friendly health system framework and rapidly spread to 20% of U.S. hospitals and health systems by 2020.

The 4 essential components of an age-friendly health system are known as the 4Ms framework for age-friendly care and include: What Matters -- align care with specific health outcome goals; Mentation -- prevent, identify, treat and manage dementia, depression and delirium; Mobility -- ensure that older adults move safely in order to maintain function and to do what matters; and, of course, Medication -- if medication is necessary, use age-friendly medication that do not interfere with what matters, mobility or mentation. Considering that adverse drug events are the fourth leading cause of death in the United States, we envision a great opportunity to support the success of this important program for our elderly population.

We also attended the 2019 Health Information Management Systems Society or HIMSS global conference 2 weeks ago where health care providers and innovators use new technology to improve performance and solve problems. While many TRHC members have attended HIMSS for years, this year, we exhibited at their innovation showcase. Cal had the opportunity to present in the innovation theater as well. This presentation had an excellent response from the audience including ideas to get into new markets from audience participants. It was an exciting time for us, and we had numerous positive conversations with interested folks and look forward to the follow-up.

Finally, to ensure our success in the space, we are working on public API integrations using SMART on FHIR and CDS-Hooks with major health information platform vendors. We have a number in process and have had 1 recently validated. We are pleased to share that athenahealth has completed their validation of our API integration, which we tested through a collaboration with one of our client physician practice groups. Athenahealth has more than 100,000 providers and 100 million patients who are using its health information technology platform. The solution that was validated with athenahealth embeds our SMART on FHIR applications within their EHR. A prescriber will be able to see the medication risk score, cut through to additional visualization of risk and consult with a certified MedWise Advisor. Our team will be working closely with Athena's marketplace group with the expectation that we will have our integration -- integrated technology generally available by the fourth quarter of 2019. So more on new markets during our next quarterly call.

Looking back at 2018, we had wonderful growth in our program allowing us to care for the elderly or PACE service clients and continue to demonstrate market leadership. Overall, we are seeking early signs of success from the industry PACE 2.0 initiative which is to double the census by 2021 and to service 100,000 participants by 2028. An example of an encouraging move we saw in December was the state of North Carolina approved PACE expansion of providers to serve a broader portion of the state's population. This marks the first expansion of service areas in North Carolina initiated by the state since they were established over a decade ago. We have also been contacted by startups in states that do not currently have PACE as well as startup in states that have not had a new sponsor in years. Our overall PACE growth for our medication risk management and comprehensive pharmacy services in 2018 was consistent with prior years at 18% product revenue growth and 20% patient growth. We expect to see an increase in rates of member enrollment and momentum in this area throughout the year. When we acquired Peak PACE manager equipment in Cognify last year, we believed there existed a clear opportunity within the PACE market for an integrated offering that combined the EHR, analytics, third-party health plan management services consulting, along with our proprietary Medication Risk Mitigation Matrix. Across our 4 primary PACE offerings, we touch approximately 85% of PACE providers today with at least 1 of our PACE service lines. We saw great success in terms of cross-selling in the last half of 2018. In August of '18, our existing PACE providers utilized all of our 4 core solutions, and today, the number has grown to 19. We also made progress on the other side of the spectrum, decreasing the number of PACE organizations that use none of our solutions from 21 to 16 as we welcomed 5 new PACE organizations customers over the past 2 quarters.

On November 1, we launched our Medication Risk Mitigation services with Rocky Mountain PACE in Colorado Springs, Colorado. Rocky Mountain is unique in that it has leveraged its growth to over 600 participants at 1 single PACE center. While not our largest client, their location is now our largest PACE center with TRHC. Rocky Mountain is seeing signs of early success in hospitalization reductions as a result of our collaboration. We also are partnered with Cognify EHR. As noted, they added Medication Risk Mitigation in November and then further expanded into the TRHC service suite with TRHC's Peak health plan management services. During the fourth quarter, we also completed the client expansion locations for Mercy LIFE West Philadelphia PACE. CareKinesis started with Mercy LIFE in 2012. Their success has more than doubled since then. We have also maintained an extremely robust pipeline of client expansion locations for 2019, including 1 in New Jersey, 1 in Indiana and 2 in Florida. We have 5 startup organizations under contract in Arkansas, California, Colorado, Florida and Michigan for a total of 9 new centers all starting with multiple service lines of TRHC in 2019.

Finally, we have a wonderful pipeline of new and existing PACE organizations within our services this year.

With that, I'll turn the call over to Brian Adams, our CFO. Brian?

Thank you, Orsula, and thank you all for joining us this evening. I want to reiterate Cal's and Orsula's comments that 2018 was a great year for the company, and we took several steps to help support our growth well into the future.

Let me now provide some highlights from 2018 before reviewing the fourth quarter in more detail.

For the full year 2018, we saw revenue grow 53% to $204 million. GAAP net loss of $47.3 million compared to GAAP net income of $12.8 million in 2017. The net loss this year was mainly the result of $49.8 million in charges for adjustments to contingent consideration we will pay in connection with the SinfoníaRx acquisition. Non-GAAP adjusted EBITDA growth of 70% year-over-year to $29.3 million. GAAP net loss per diluted share of $2.48 compared to net income per diluted share of $0.68 in 2017 and non-GAAP adjusted net income per diluted share of $0.77 compared to non-GAAP adjusted net income per diluted share of $0.42 in 2017 based on a diluted share count of 22 million and 18.8 million shares, respectively.

For fourth quarter of 2018, Tabula Rasa generated total revenue of $57.3 million, a 32% increase over last year. Product revenue in the quarter was $30.2 million compared to $26.2 million in the same period a year ago. Service revenue came in at $27.2 million in the quarter, an increase of 59% from the fourth quarter of 2017. Gross margins of 33% this quarter compared to 32% the same period last year. This was in line with our expectations as we saw some impact from the Mediture and Cognify acquisitions.

I'll reiterate that our longer-term gross margin target is 35% to 40%, and we continue to make incremental progress against that goal. Product gross margin was 24% in the fourth quarter of 2018, a slight decline from 25% last year due to the onboarding of Rocky Mountain PACE. This was a significant new client for Tabula Rasa. And as we've commented in the past, we can see temporary positive and negative impacts on gross margin during the time when new clients are aligning with Tabula Rasa's methodologies for managing medication risk.

Service gross margin of 42% in the fourth quarter of 2018 was directly in line with fourth quarter of 2017. Q4 2017 had the first full quarter contribution from the SinfoníaRx business, providing a more appropriate comparison than previous quarters. Our operating expenses represented 49% of our total revenue this quarter, up from 12% in the same period a year ago. Excluding the impact of change in fair value of acquisition-related contingent consideration, operating expenses would have represented 33% of revenue, up from 28% in the fourth quarter of 2017. These amounts are consistent with last quarter. And as we noted last quarter, operating expenses in the second half of the year have ticked up to reflect investments in Tabula Rasa 2.0, which we believe will support growth during 2019 and beyond. We generated $8.5 million in adjusted EBITDA in the fourth quarter compared to $6.5 million a year ago. Adjusted EBITDA margins for the fourth quarter of 2018 was 15% and consistent with fourth quarter of last year. This is in line with our expectations given the incremental spend related to Tabula Rasa 2.0.

Our GAAP net loss of $10.6 million compares to a GAAP net income of $10.9 million in the fourth quarter of 2017. The net loss was largely impacted by a charge of $9.1 million related to the change in fair value of acquisition-related contingent consideration for the SinfoníaRx acquisition.

The charge we incurred in the fourth quarter of 2018 increased the amount of contingent consideration we will pay in connection with the acquisition.

GAAP net loss per diluted share for the fourth quarter of 2018 was $0.54 compared to GAAP net income per diluted share of $0.55 in the same period last year. The net income and loss per diluted share calculations are based on a diluted share count of 19.4 million for the fourth quarter of 2018 versus 19.9 million for the fourth quarter of 2017. Adjusted net income per diluted share for the fourth quarter of 2018 was $0.21 compared to adjusted net income per diluted share of $0.15 in the fourth quarter of 2017. The net income and loss per diluted share calculations are based on diluted share count of 22.8 million for the fourth quarter of 2018 versus 19.9 million for the fourth quarter of 2017.

As a reminder, our adjusted net income per diluted share for the quarter excludes stock-based compensation, amortization of acquired intangibles, payroll tax on stock option exercises, transaction-related expenses, changes in fair value of contingent consideration as well as any resulting impact on income taxes.

Turning to the balance sheet. As of December 31, 2018, we had a cash balance of $20.3 million compared to cash at the end of the last quarter of last year at $13.9 million. The increase is the result of positive cash flow from operations. As of today, we have nothing drawn on our $60 million line of credit. We have outstanding debt of $1.1 million in equipment leases compared to $1.7 million at the end of last year.

Before reviewing our financial outlook, I want to comment on 2 additional items. The first is the Sinfonía earnout. Sinfonía has performed extremely well since the acquisition, and we've finalized the calculation for the earnout payment. The sellers will receive the maximum earnout of $85 million, 50% of which will be paid in stock and 50% of which will be paid in cash.

The second item is our recent convertible debt offering. On February 12, we closed a $325 million convertible senior subordinated note offering due in 2026, which carries a rate of 1.75%. Tabula Rasa received net proceeds from the offering of approximately $315 million. We used $35.8 million of the net proceeds to pay the cost of the convertible note hedge transactions, which effectively increases the stock conversion price to $105, reflecting approximately a 100% premium to the shares at the time of pricing. The remaining proceeds were used to pay down our existing line of credit and will be used to pay the Sinfonía earnout and to ensure that we have some capital to support future acquisitions.

I'll close out my comments today with an initial outlook for the first quarter and full year 2019. For the first quarter of 2019, we anticipate revenue to be in the range of $55 million to $60 million, adjusted EBITDA to be in the range of $4 million to $5 million, and net loss to be in the range of $6.1 million to $5.3 million. I'll remind you that there is some seasonality to the Sinfonía business that depresses the first quarter. In addition, we will see some negative impact on earnings from the DoseMe business as well as the recently launched Scientific Precision Pharmacotherapy Research Institute. While DoseMe and the research institute will have a shorter term impact on earnings, we believe that these are important investments to ensure that we're able to continue to stay on the front edge of medication management and to enhance future growth potential.

For the full year 2019, we anticipate total revenue to be in the range of $250 million to $260 million. Of that total revenue, we expect product revenue of $140 million and service revenue of $115 million at the midpoint of our range. We expect adjusted EBITDA to be in the range of $32 million to $37 million. As mentioned previously, our guidance includes expected losses for 2019 for the DoseMe business as well as costs related to the recently announced Scientific Precision Pharmacotherapy Research Institute.

As we previously communicated, we did not expect to have an adjusted EBITDA margin any higher than what we realized in 2018. And after folding in DoseMe and the research institute, we expect to be about 100 basis points below 2018 margin at the midpoint of our guidance, a very reasonable investment related to the future potential we are creating.

As we expect net loss to be in the range of $12.9 million to $9.2 million, our first quarter and full year 2019 outlook assumes an all-in normalized tax rate of 26%, and we do not expect to be a cash taxpayer in 2019 for federal taxes. Our net loss projection does not include any impact from the change of fair value contingent consideration for the DoseMe and Cognify acquisitions and only contemplates cash interest expense associated with the $325 million senior subordinated notes.

I'd like to echo both Cal and Orsula's comments and say that 2018 was another very strong year for Tabula Rasa. And in 2019, we again expect to drive very strong top line growth, continue to expand our gross margin and make investments that will position us well to enter new markets and expand our existing footprint.

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

Thank you, Brian. As I think Orsula and Brian and I have all stressed on this call, we're incredibly pleased with everything Tabula Rasa accomplished in 2018. We continue to diversify our business markets while relying on our unique multidrug simultaneous interactions core. We are quickly becoming the go-to provider for medication risk management regardless of the market. As has been the case every quarter, we could not have delivered these results without the ongoing hard work, strategic vision and dedication of all our team members.

We entered 2019 with great momentum and a clearly defined growth strategy in which we will continue to innovate and keep Tabula Rasa on the cutting edge of health care as the industry moves from hindsight to insight to foresight. I look forward to continuing to update you throughout the year.

Operator, let's please open the call to questions.

(Operator Instructions) Our first question comes from Ryan Daniels of William Blair.

Brian, maybe one for you, with the growth of the services business and all the deals you've completed later in 2018, early 2019, I'm just hoping to get a bit more color on the sales and EBITDA cadence for the year. So should we anticipate kind of a similar 1 half versus second half performance for sales and margins on '19? Or is there any nuances we should think about when building out the model?

Yes, I think that's a good question, Ryan. Appreciate it. And I would expect a very similar cadence as we experienced in 2018 to repeat itself at this point. The Sinfonía business has become a larger percentage of the overall revenue base, and there is some seasonality there where first quarter certainly is more depressed, and then second, third quarter start to really tick up and then kind of level off in the final quarter of the year. So I would expect a pretty similar cadence.

Okay. And then in regards to the margin performance anticipated for 2019, I know The Street estimates had an increase in EBITDA despite the fact that you said on the Q3 call and the Investor Day that they would be down. I'm actually, therefore, more curious about the outlook for 2020. Are you still anticipating kind of after an investment year with some of these growth initiatives that we'll see a rebound in EBITDA heading into 2020?

Yes, that's our expectation, Ryan. I think that we're going to start to see some incremental stair steps up going into 2020 based on this investment. I think that the leveling off this year was anticipated earlier in the fall and even almost in the summer as we started to make some plans. But we do expect and are holding that our longer-term EBITDA target is maintained at about 20%.

Okay. That's helpful. And then final question, I'll jump back in the queue. On Rocky Mountain, that was an interesting data point that despite not being your largest PACE program by members, they're your largest customer. So can you maybe talk about any key learnings there on the sales front, how to drive others either towards that level or to get new clients to come in with a bevy of services right up front?

Well, absolutely, we definitely learned from that experience. They're a wonderful partner. They certainly took their time evaluating their options. They had to actually remove the previous provider from their building so there was quite a negotiation there. And I think now that we are -- have an integrated model, we're focused on all offerings when we're visiting with potential customers, including in a startup mode. They're not always in a position to make all those decisions, but we certainly are able to support them through that process.

And our next question comes from Matthew Gillmor of Robert Baird.

I wanted to ask about the priorities for your new sales leadership, especially the cross-sell opportunity into SinfoníaRx. You obviously elevated Kevin Boesen as the Chief Sales Officer. So just hoping to understand his team's priorities for 2019 and then get a sense for your goals for the year as you're integrating Sinfonía offering with the Tabula Rasa capabilities and taking that to the Sinfonía clients.

Matt, this is Cal. We have a number of initiatives planned for 2019. One of the top ones we're working on right now is as you said the Sinfonía crossover with MedWise. We just had numerous meetings on that and conferences about it. We have a plan set forth for how that's going to happen. And it's nice because they have a disease management angle in their software and we have a Medication Risk Mitigation -- identification and mitigation angles. So they really complement. And we'll be using -- MedWise will actually be the main platform as we roll this out. As far as the selling, it's going on right now. We've got things happening on the opioid front. We can't be confirmed yet to tell you, but there's cross-selling going on right now in the first quarter. And we have a very large expectation with that, just like we do in PACE with the cross-selling that's going on there. And then the other things we're really focused on, we're really keen on is with DoseMe is the hospitalization opportunities for us. And that's a huge opportunity globally with adverse drug events, the length in the stay in the hospital. And then in -- whether if it's a DRG company that -- I mean, process or whether they care about that or whether it's a single-payer system that cares about it, there's a lot of interest in cutting down the adverse drug events during the stay. And lastly, we're really keen also on taking off on the eMTM project we've had with the 300 pharmacies that we've certified and 400-some pharmacists. We're really going to have a huge initiative this year on taking software to many, many pharmacies through some collaboration we're establishing that will exponentially, literally exponentially, propagate pharmacies with this in the United States. So that's kind of the 4 main things that we're really focused on right now.

Okay, great. And then maybe get an update on your M&A priorities as well. You obviously raised a good amount of cash with the convert offering. So just hoping you could put some parameters around the types of acquisitions that you'd be interested in. And then I guess specifically in event -- if you did a larger deal, should we assume that there would be some revenue and EBITDA associated with that?

Well, this is Cal again. I think that just like we saw with Sinfonía, we're always looking for technology that can bring us into a new market, and that's kind of a very key thing for us right now. So in other words, we have this core and it can be used in so many places and so we have to be discreet about how we do it. And we're going to look at somebody or some technology we can partner with that will help us do that. And that would, Brian, I would say that we definitely would be looking in our -- I said we should -- we'll be looking for accretive top and bottom.

That's right. So Matt, I would agree with that, Cal. Anything we're looking at, at this point would be expected to be both accretive on the top end and on the bottom.

Our next question comes from Nina Deka of Piper Jaffray.

Congrats on the quarter and the great finish to 2018.

Thanks, Nina.

So to what degree are the expansion opportunities that you discussed into the new markets factored into the guidance that you've provided today for FY '19?

Nina, that's a great question. So I would say in terms of material expansion into the hospital market, it's not really factored into our guidance right now. It's still very early days with the recent acquisition of DoseMe and starting to integrate the 2 offerings. So at this point, we have really just factored in the DoseMe standalone business growth and have not factored in any sort of real cross-sell at this point, although we do anticipate to see some of that happen before the end of the year.

And how about the athenahealth opportunity?

Similarly, since that really won't be launched until the end of the year, we would not expect to see material revenues in 2019 related to it.

Yes, and I just want to clarify that DoseMe is involved with health care organizations, so it's not necessarily the hospital market, it's physio, outpatient clinics, the health care organization market.

Yes, they're involved in hospitals obviously, but also in fusion companies. And we haven't talked about it too much, but the TAM that DoseMe estimates just in the U.S. is about $500 million revenue. So it's a very, very large opportunity for us. We're being very conservative, Brian, aren't we?

Yes.

On how we're...

I would say that $500 million is just the DoseMe product standalone. It does not include the overlap of the Tabula Rasa offering as well.

That's correct, yes. Most installations now are in the U.S. believe it or not. Of the 125 installations, over 100 of them are in the U.S.

Okay. That's helpful. And what was your organic growth for 2018?

So organic growth for 2018 was about 20% overall.

Our next question comes from Stephanie Demko with Citi.

First one's for Brian, could you give us a little more color on the Athena collaborations? Just how we should think the revenue share of that model and its contribution to this year?

So right now, we're not expecting any real material contribution from Athena to revenues given the fact that it's really going to be a Q4, I would say, launch within their customer base. So I wouldn't be looking for any material contribution until 2020 at this point.

But we're very happy about it.

How should we think about the revenue model itself as you move into the EHR space?

Yes, so there's going to be 2 pieces. There would be a monthly recurring fee for utilization of the services, and then there will be an escalation component if they want to access our call centers or -- and pharmacists.

So it's like a per fee basis?

Yes, that's right.

Got it. And then next one would be on the R&D Institute side. It sounds like you're doing a lot on product development for MTM, eMTM there. With that in mind, how do you see that influencing the PMPM for your eMTM offering?

So we do think, over time, we're going to have the ability to continue to increase that PMPM just based on the pure fact that the ROI that we delivered in year 1 and we're hopeful that that's going to increase in year 2, is pretty significant for a health plan. So we do feel like we're in a position right now to expand that. And our hope is that through further development at the research institute, that will continue to drive more significant savings for our customers and be able to expand the PMPM that we're able to charge there.

And I think that if you just think about PACE, let's just go there for a second, we have barely scratched the surface on what we can offer to PACE organizations from -- that will come out of the R&D institute. I mean, we're working on obviously different genes now, we're working on not just the metabolic enzyme genes, but we're also working on the genes that are receptors and the genes that transport drugs around the body. There's also some new stuff that will be coming out in the next year that has to do with like some sensors that can help people understand how a patient at home is doing. And so we're involved in some of that. So there's -- this whole personalized patient-centric care model is just blossoming, and we've got so much opportunity to continue down that path, particularly located there which is where a whole bunch of the innovation is going on. So I think we're going to continue to upsell. I mean, we hardly are doing enough right now in the pharmacogenomics in PACE, and we've just expanded that immensely this quarter, and that's an upsell. So there's a lot of opportunity for us, Stephanie.

And our next question comes from Mohan Naidu of Oppenheimer.

Let me add my congratulations as well. Cal, just a couple more questions on DoseMe product. Can you give us some insights on how current hospitals are using DoseMe and how you can integrate your own core services into that? And within the U.S., the 100 or so locations you talked about, are they in value-based reimbursement settings? Or what is the driver for the hospitals to pull this product right now?

A lot of it -- that's a good question, thank you. A lot of it is quality. The way that the narrow therapeutic index medications that are injected in hospitals are done right now is mostly through a lot of blood draws to see where the trough is and then just recalculate using algorithms how much you're going to give on the next dose. And with DoseMe, you don't really need to do that. It's based on inference, and you can do maybe 1 or 2 draws during the time of the antibiotic, for example, for a week or so. And that's all you need. And so it cuts down on expense, it increases the quality, and it decreases the problems. The problems with narrow-therapeutic index drugs, particularly some of the strong antibiotics and some of the oncology medicine or we'll just leave it there, they cause a lot of side effects when the peak goes above where it should, and like kidney damage and ear problems and stuff like that. So you reduce the chance of problems for the patient, you increase the quality, you help with a workflow immensely. And we -- the way it works right now, it's a standalone in the cloud system that's very easy to use. I'd be happy to give you a drive through at some point, if you like. It's very easy to use, and it's also been now accepted by a couple of -- 3 of the largest electronic health record companies in the country that are -- will be incorporating it with the SMART on FHIR, so it won't be standalone, but it will be built into their system. So that's kind of how we're doing the integration.

And I just wanted to comment that, recently, I was out on kind of a sales call. We know many people in the roles of Chief of Pharmacy in hospitals and health care systems around the U.S. and the consolidation of hospitals is really a concern for the role of the Chief of Pharmacy in understanding the need to scale, but also the need to standardize systems and processes. So that seems to be a very key issue of having a SaaS system that they could use across the entire 15 to 20 hospitals that continue to consolidate.

That's very interesting. Maybe 2 more questions on the M&A side, I was hoping to hear a little bit more on the opportunities in the current selling season now that we have the CMS MLR change and some of the impressive data points from your own pilots. Anything we should expect through 2019 about potentially M&A plan deals?

Yes, we do expect -- this is Brian. We do expect that there will be some opportunities that we close on the M&A side during 2019. And just to talk for a moment more maybe about Kevin Boesen transitioning into that Head of Sales role. I mean, that's really his background. He's been focused in the payer space and selling MTM into that market. And so we feel like he's very well positioned to further offer the Tabula Rasa strategies and products to those customers today that he's already working with. So we have seen an increase in responses that include our MRM capabilities to RFPs and other ongoing processes with potential clients. So yes, the short answer is, yes, I would expect to see something close in 2019.

Okay, great. And maybe one last one, any updates on the Portugal pilot and Landmark expansion? That would be great.

Well, the Portugal pilot is right where we thought it would be right here in the first quarter. And we are, right now, working through workflow integration with their IT group over there. And that's exactly what we'll be doing this week actually. So I would suspect that, that thing's going to be launched. They're not -- no I don't want to say anything. Let's just say it's a little slower process than we would have in the U.S. So our thoughts are the second quarter, we're going to be launching the thing. We have another -- a couple of other pilots that might even beat it because they're so methodical there. But they're very excited about it, they're very embracing of it, and we're -- we spent a lot -- every week we're with them on calls and stuff. So it's moving ahead. What was the other question?

I am happy to talk about Landmark. That Phase II continues to move forward, really excited about the progress that we're making there. And there are other Landmark-like entities out there that you all are probably aware of on the phone that are similarly interested in the Medication Risk Management offering that we have. And Landmark, in fact, is helping to facilitate and participate in some of those discussions. So pretty excited about their level of continued interest in utilizing the tool.

And our next question comes from David Grossman of Stifel Financial.

I wondered if I could just go back to an earlier question. And Brian, maybe you could deconstruct a little bit the revenue growth and margin guidance for us. And what I mean by that is maybe take revenue, what's the acquired component, how much growth do you expect from PACE and maybe the other service lines? And then similarly, using 2018 as a baseline, how to think about margins in the core versus some of these investments that you outlined earlier?

Yes, David, we typically haven't gone to that level of detail in the past as we've talked about guidance. So I'll give you what I'm comfortable giving at this point. I'd tell you that we expect PACE from the product side to continue to grow at about 20%. We're comfortable with that number. It's historically what we've seen based on the organic additional members that these programs continue to add each month and what we can expect to see from a new business development side as well. And so the kind of -- you can force out our assumptions around the service growth at the same time given that we're targeting about a 25% overall growth rate. I do expect that gross margins will increase this year, going probably somewhere closer to 34%, something that looks like that. And then the investment related to both DoseMe and the Lake Nona office, I'm estimating to be around $5 million for 2019. So if you kind of -- if you back that off of the numbers, we would be actually exceeding the EBITDA margin that we had talked about in the fall. So those are kind of the bigger moving pieces right now. We don't expect a whole lot of movement in gross margin for the product or services side. I think that, that's going to be relatively consistent, but there still will be a little bit of a change in mix driving incremental gross margin overall.

All right. Got it. That's actually very helpful. And then maybe for Cal or Orsula, the Managed Medicaid market and maybe I misunderstood earlier, but I thought that was also an area that you were going to focus on beginning in 2019. So if I'm remembering that right, could you give us any color in terms of how you expect that market to evolve over the next 12 to 24 months? And are you seeing any indication of what type of services and how those deals may play out relative to your existing book of business?

Sure. Well, we certainly are responding to RFPs from Medicaid in states where we're able to qualify for those. And I think that what the opportunity is that the states do not -- they're not required to go by the Part D MTM regulations so we can provide a different level of service, provide our MedWise medication risk mitigation tools and really be able to demonstrate ROI based on risk stratification data that we are able to collect and then deliver to them. So that is under Kevin Boesen, and he is actively working that market.

That's correct.

One thing that I will note on that, David, is that in some cases, these state Medicaid plans are looking for a local presence to distribute some of these services. So in cases where that is a requirement, we're looking to build out that function similar to what we did with the enhanced eMTM model where we've got a network of community pharmacies because we think that, that will really enable us to respond well to the state programs where they're looking to keep some of those dollars within the state.

So is -- with that said then, would we expect some of those types of deals then to reflect more of the PMPM of eMTM type deals versus the traditional MTM? Or is the market kind of falling out somewhere in between?

No, I would think right now, it's going to be closer to the eMTM PMPM.

Got it. And just one last question on that. Are there certain states that have mandated this? Or is this more of a voluntary thing that's happening within the state Medicaid programs?

Yes, I believe some certain states are being mandated to provide this as a way to reduce costs and improve outcomes and reduce total spend. I don't have any detail on that, but I can follow up with you.

It is very much a state by state initiative. And most of them, as Brian said, are really starting to circle the wagons and make sure that the dollars -- pushing the dollars to stay within the state.

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

I guess maybe, Brian, would you just run through the acquisitions, which of the 2 segments are they really contributing to? I know I think you guys recast some revenue because of 606 from product to service in 2018. I don't know if that impacts how you're recognizing revenue from some of these recent -- DoseMe I think it's pretty obvious it's going to be in the services segment, but Cognify, Mediture, eClusive, if you could just give us a feel for where that's going through, that'd be great.

All of the revenue related to acquisitions last year is falling into the services bucket. So the reclass related specifically to the per member per month fee, we're charging for our PACE customers as they're receiving the clinical services and the technology for that charge. And so we moved that from product this past year to service.

And our next question comes from Frank Sparacino of First Analysis.

Given the time, I'll just keep mine to one. Orsula, you talked about the growth in the Medicare plans and the CMR rates, and I'm just curious what were the factors that drove the dramatic growth to 29 versus the 4 plans?

I believe it's the increase in 5-star cut point. So people are going more for the 5-star or improving their star ratings. And in order to do that, the requirement was 85% completion rate.

In addition to that, Frank, we started with a very large new customer in 2018 that drove a significant increase. And we've continued to expand that relationship even into 2019. And we've seen, in fact, the cut rates go up again going into this year. So we would actually expect continued expansion within our existing customer base for those targets.

And our next question comes from Bill Sutherland of Benchmark.

Yes. Like Frank, I'll just keep this to one. On eMTM, I think you've talked in the past or recent past about potential expansion, another pilot. Is that something that we should still think that, that's possible?

Yes, I mean, we continue to look at all of the other participating plans as potential partners and so those discussions continue. What we do see though is the fact that this model that we've developed for eMTM is really something that we can go out and sell today into the Medicare Advantage. And so that we're going to charge Kevin Boesen with doing is taking this existing model into the MA market because it's something that can benefit them immediately today, whereas the standalone prescription drug benefit plans, I wouldn't expect to see significant expansion outside of the pilot until it's mandated.

That's the 2020 time frame?

It's going to be -- we would think within the next couple of years, we're going to start to see some transition based on conversations with CMS.

Okay. And then on that organic growth question you just had, Brian, so product is all organic, and service is -- what would that be for '19?

So right now, product is all organic. There was contribution from the Peak PACE business, the Mediture business and the Cognify business, which, in total, was about $8 million to $9 million in 2018.

It was '18. So there, nothing is transitioning over to '19 then, right?

Well, all of those -- all the contracts and everything will continue, the businesses are still fully in place in 2019, but we'll pick up a full year related to those businesses whereas...

But I've forgotten the dates of those so there's some...

So Peak PACE was acquired May 1, 2018. Mediture and eClusive were September 1. Cognify was October 19.

And this does conclude our question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.