Tabula Rasa HealthCare Inc (TRHC) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Tabula Rasa HealthCare, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference to your speaker today, Kevin Dill, General Counsel. Please go ahead, sir.

Thank you, and good morning. I'm Kevin Dill, Corporate Counsel of Tabula Rasa HealthCare. The company intends to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include the developing nature of the market for technology-enabled 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 10-K filed on March 2, 2020. 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.

Now I'll turn the call over to Dr. Calvin Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare. Cal?

Thank you, Kevin. Greetings, and thank you for joining us for our second quarter 2020 earnings call. With me today are Dr. Orsula Knowlton, Co-Founder, Chief Marketing and New Business Development Officer; Mr. Brian Adams, our Chief Financial Officer; and Dr. Kevin Boesen, our Chief Sales Officer. Orsula and Kevin will be with us to respond to questions after we conclude our prepared remarks.

As a reminder, this conference call and webcast is accompanied by a PowerPoint presentation available at the IR section of our website, and I would encourage you to download the slides to follow along with our prepared remarks.

Given the ongoing challenges posed by the COVID-19 pandemic, which became more pronounced since we last reported in early May, I'm pleased to report second quarter 2020 total revenue of $76.8 million and non-GAAP adjusted EBITDA of $7.1 million, both are within our guidance range.

I want to focus my comments on 4 areas: first, bookings; then, PACE; then, MedWise and PrescribeWellness; and then, MedWise and managed Medicaid. These 4 key areas are reflected on Slide #3.

First, we had another strong quarter of bookings within our MedWise HealthCare segment, and specifically, our sales to health plans, which increased exponentially as compared to a year ago and increased 40% on a sequential basis as compared to a strong first quarter.

Unfortunately, we experienced softness in our CareVention HealthCare segment due to COVID-19, resulting in a year-over-year decline in Q2. In response to the pandemic, PACE organizations have been forced to alter their business operations along with their delivery of care processes, which has slowed sales activity. With that said, we do have a number of large sales opportunities in late stages that could materially change our current census expectations exiting 2020.

Second, I wanted to provide another update on PACE, which, as many of you know, is largely comprised of community-based dual-eligible Medicare and Medicaid beneficiaries. In late July, CMS published updated data on COVID 19, showing the disproportionate impact the virus has had on the vulnerable population we serve in PACE, with dual-eligible individuals hospitalized at a rate more than 4.5x higher than Medicare-only beneficiaries. Our PACE clients are focusing on ensuring the safety of its existing members and staff.

On a positive side, the Medicare COVID-19 data snapshot from CMS shows the number of cases, which totals more than 0.5 million Americans, peaked in early May and has steadily trended down throughout June. Similarly, the number of hospitalizations peaked in mid-April and has trended sharply down by 73% in late June. The most recent data from CMS shows patient enrollment growth of 6.6% in July, where prior to the COVID growth, it was usually greater than 9%.

Our internal data for our CareKinesis clients shows we continue to grow materially faster than the overall market but not at the rates we have enjoyed historically given the pandemic and short-term challenges our clients faced.

During our Q1 call, we shared that our April census showed a material decline versus March. And in May, our census was negative for the first time in company history, driven entirely by a spike in the number of deaths. The data from June and July is encouraging, with census trends turning back to positive growth in each month, driven by a reversal in the number of deaths.

We continue to see new PACE centers opening and existing centers adding new members at levels on par or above the pre-COVID figures, offset by a few geographic hotspots. We have 13 PACE client expansion sites, or new PACE programs scheduled to open between now and year-end. In addition, we have a dozen PACE expansion sites or new programs already scheduled to open in 2021.

Last on PACE. Despite the short-term headwinds, the pandemic has highlighted the positive attributes of this value-based program supported by an integrated and coordinated care team within the home designed as the preferred care setting. Some of our PACE organizations have adopted this PACE-at-home construct with success.

Third, I'm excited to talk about the July launch of MedWise within our PrescribeWellness community pharmacy network, which includes a new feature known as medication decision support or the medication decision support MedWise sandbox. The new sandbox enables pharmacists to simulate changes to a patient's medication regimen and visually see the impact on the medication risk score in real time. This new feature tremendously helps to assess simultaneous accumulative multidrug interactions amongst complex medication regimens in an efficient manner to quantitatively score the results.

Now regarding the PrescribeWellness community pharmacy network, we have closed some sales within the first week of this MedWise community pharmacy offering and are building a pipeline that includes several large opportunities with the potential to reach hundreds and even thousands of pharmacists.

Fourth, I wanted to share positive data from one of our recent MedWise wins. For a large Medicaid managed care plan, we designed a program that targeted patients on opioid therapy and patients with medication or MedWise risk scores above 19. This targeted group represented 13.1% of the total population. We completed hundreds of medication safety reviews for this client as well as the clinical interventions addressing competitive inhibition and other factors associated with high-risk scores. Common recommendations included a change in the medication regimen, a change in the time of administration of medication dosing and deprescribing or discontinuing medications to reduce risk when the therapy risk is higher than the benefit.

In summary, we were able to show an average MedWise risk score reduction of 6.35 units for those having scores above 19. While 6.35 was the average declension of the MedWise risk score, for 29% of the patients we analyzed, we were able to reduce the MedWise risk score by 10 or more units.

Now in EMTM and in PACE, a 1 unit reduction equates to $600 to $1,100, respectively, in annual medical expense. Since false ER visits and hospitalizations are a lagging indicator, we will monitor the reduction in medical spending utilization in the patients for whom we intervene over the next few quarters. We believe the reduction will mimic the $600 in EMTM per unit risk score. Why? In PACE, our interventions are prospective before the medication is dispensed. The prescribers are at financial risk in the capitated environment and peg to accept 85% of our recommendations. And we touch the patient at least every month whenever the medication regimen is altered.

In EMTM and in this project, our interventions are retrospective after the patient has been taking the medications. The prescribers are somewhat less at full financial risk with no acceptance threshold percent, and there is only one touch from us each year. Our overarching goal is that all MedWise interventions will be prospective, as we enroll more and more community pharmacists as certified MedWise Advisor pharmacists.

So in addition to establishing value in this Medicaid population, it was important that we found the average age of the program participants was 46.5 years. This is key for us for it demonstrates that our MedWise program can positively impact a younger population.

I will now turn it over to Brian to talk about our financials. Brian?

Thanks, Cal. Before I dive into the numbers, I want to remind everyone that the second quarter of 2019 marked a record in revenue and profitability for our MedWise segment. And for reasons we've previously discussed, we did not anticipate those same factors to influence the second quarter of 2020, making it a difficult comparison period for both the MedWise segment as well as our overall results.

Starting with Slide #4. CareVention revenue increased 13%, and MedWise revenue decreased 16% as compared to a year ago. As a result, total revenue of $76.8 million was flat as compared to $76.3 million a year ago and 6% higher on a sequential basis as compared to the first quarter.

Within the MedWise segment, software subscriptions increased 14%, but medication safety services declined by 30%. On a sequential basis, as compared to the first quarter, medication safety services increased 10%, with the number of comprehensive medication reviews and total clinical interventions up significantly as we had originally forecasted.

While we expect COVID-19 to have a temporary impact on our revenue and profitability, we need to continue to invest to drive future growth, as evidenced by 40% growth in corporate shared services. Additionally, we anticipated lower profitability within our MedWise segment compared to last year. And as a result of these 2 factors, non-GAAP adjusted diluted EPS of $0.07 is down from $0.35 a year ago. Non-GAAP adjusted EBITDA of $7.1 million is down from $13.7 million a year ago.

By segment, excluding corporate shared services, CareVention adjusted EBITDA increased 5% to $12.1 million, a 24% margin; and MedWise decreased 48% to $4.7 million, an 18% margin.

Moving to Slide #5. We expect Q3 total revenue to be in the range of $74 million to $78 million, the midpoint of which represents 2% growth compared to a year ago; and non-GAAP adjusted EBITDA to be in the range of $7 million to $9 million. Furthermore, we expect CareVention HealthCare revenue to be flat to modestly higher on a sequential basis versus Q2.

We expect MedWise HealthCare revenue to be modestly lower to flat on a sequential basis versus Q2, with the 2 major Q1 wins starting in Q3 versus Q2, as originally expected, and our largest contract signing being delayed until 2021.

Moving on to Slide #6. For the full year 2020, we now expect total revenue to be in the range of $300 million to $310 million, the midpoint of which represents 7% growth and non-GAAP adjusted EBITDA to be in the range of $27 million to $33 million. With respect to 2020, using the midpoint of our prior and current range, revenue is coming down by 11% or $37 million.

In order of importance, the key factors in this reduction are: one, COVID-related delays in closing health plan deals with project time lines, in some cases, shifting to 2021; two, COVID-related slowing PACE census growth; three, the previously cited implementation delays impacting Q3; and four, the cancellation of all major pharmacy trade shows in Q3 negatively impacting a key selling season for PrescribeWellness.

With respect to the first point, as we noted in our press release, we've experienced strong growth year-to-date in our sales pipeline, and we continued to see deals progressing through the sales funnel with late-stage opportunities in our largest end market of health plans, up substantially on a sequential and year-over-year basis. However, we have seen delays in closing contracts. We would attribute this to the unusually low utilization and medical loss ratios at health plans and uncertainty about the strength of a potential recovery in the second half as well as improved adherence rates in 2020, benefiting from actions taken by CMS in the wake of the pandemic, including waiving prescription refill limits and relaxing restrictions on home and mail delivery.

Lastly, on 2020, our EBITDA outlook is disproportionately impacted by the reduction in revenue, given our view that it is important to continue investing across all areas of the business in order to effectively execute on our future growth plans.

Turning to Slide #7. While we will not provide formal 2021 guidance until our Q4 earnings call, as of this point in time, we see a path to returning towards our historical organic growth rates. Given our modest revenue outlook for the second half of 2020, we thought it would be important to provide some details behind our early optimism for 2021.

Starting with CareVention HealthCare. If our recent PACE census growth trajectory continues, we would expect to return to pre-COVID enrollment rates during the fourth quarter. In addition, the vast majority of our new PACE starts and expansions with existing clients are slated for the second half of 2020 with a greater emphasis on Q4. We also have a dozen new starts and expansions already scheduled for 2021. Lastly, the late-stage deal cited earlier represent a few thousand PACE lives and well in excess of $10 million in annual revenue.

Shifting to MedWise. As evidenced by Cal's earlier comments, we have delivered strong results for new health plan accounts during the first half of 2020 that have the potential to deliver exponentially higher revenue in 2021, with active expansion discussions ongoing. With master service agreements in place and proven outcomes, we expect shorter sales cycles and higher conversion rates with some of the nation's largest health plans.

In addition, our key pharmacy win announced last quarter has the potential to drive double-digit growth in our 2021 software subscription. In short, our current revenue gap to close in order to return to our long-term growth rate target is significantly smaller in 2021 as compared to entering 2020.

Lastly, 2021 profitability is expected to grow at a materially faster rate than revenue, as we reap the benefits of our heavy investment spend in 2019 and the first half of 2020.

With that, I will turn it back over to Dr. Knowlton for his closing comments. Cal?

Thanks, Brian. And in summary, while our growth prospects for the second half of 2020 have been impacted by COVID-19, I am encouraged by the increased success we're having with MedWise sales; early evidence that PACE census growth is again trending positively; the large number of contracted PACE centers to open in late Q3, Q4 and in 2021; as well as the late-stage deals, that Brian mentioned, all of which will impact 2021 in a meaningful way.

Operator, let's open the call for Q&A.

(Operator Instructions) Our first question comes from Sean Dodge of RBC Capital Markets.

This is Thomas Kelliher on for Sean. So I've got one on sales pipeline. You mentioned it's continuing to grow. It's now up 73% year-over-year. Can you walk us through the mechanics involved in calculating that?

Then you talked a little bit about potentially normalizing growth rates for 2021. But how should we kind of think about this significant increase in the sales pipeline relative to 20-ish percent revenue growth?

Maybe -- this is Brian. Thanks, Tom, for joining the call. Why don't I have and ask Kevin maybe to answer the first part, then I can get into -- the return to a normalized growth rate after that.

Yes. Thomas, thanks for the question, and thanks for everybody for joining the call this morning. With respect to the pipeline, we look at aggregate growth across the different business units, PACE, payer and the pharmacy space. So in aggregate, all those pipelines are strong. One of our focus obviously has been in the payer space to extend the MedWise technology and science to our payer programs. And what we have seen from the most significant growth is we had record bookings in Q2 compared to any other year, any other quarter. So we had sequentially about a 40% quarter-over-quarter growth in the health plan bookings. And then, as Cal mentioned, that was exponential year-over-year about sixfold increase.

In terms of the other things that we're tracking relative to the bookings are sort of late stage and movement within that pipeline. So quarter-over-quarter, we've had a 25% increase in really those late-stage proposals, qualified leads in terms of what we're tracking. And so from those reasons, those are how we sort of look at our confidence level and having this be a delay of contracts moving from what we had anticipated to be 2020 prepandemic to what's been moved to 2021.

And maybe just to talk a little bit about our confidence level in 2021, as you look at the midpoint of our guidance this year, we're now setting that at about $305 million. And as we've tracked census growth and PACE over the past few months, it has steadily, and sequentially on a monthly basis, increased from that low point that we saw at our first quarter earnings call.

And so we're -- we have confidence that by the end of the year that hopefully, we're in a position where we've seen ourselves get back to pre-COVID enrollment rates. And as a result, the contribution from PACE should be about $30 million just from the organic growth within our existing PACE customers, couple that with the Health Mart pharmacy deal that was pushed out that should contribute about another $5 million. We've got payer deals that Kevin and his team have signed for another $5 million to $10 million that will impact next year and then some late-stage PACE deals that are in excess of $10 million.

So when you combine all of those things together, it puts you very close to the $60 million in growth that we would need to get to just for a 20% growth rate. So while the latter half of this year is going to be slightly challenging, it does help from a comp perspective next year. But I think we've got a lot of very positive factors as we move into next year, especially that we've got 25 PACE centers that are going to come online in between now and this time next year.

And I'll just say that I think when I look back to where we were at this point last year versus where we sit today, we're in a much better position than we were a year ago.

That's very helpful. And then just another quick one. Turning to growth a little bit more in Q4. What's driving the majority of that? Is that pretty much all dependent on ramping medication reviews? Or what's kind of embedded in that assumption?

Sure. So we are expecting a little bit of PACE growth over the latter half of this year, but we do have clinical reviews that we are expecting to ramp a little bit over the next 2 quarters. So some of the deals that Kevin and his team have been working on and closing, those will be impactful on Q3 and then a little bit more meaningfully in Q4.

Our next question comes from Ryan Daniels of William Blair.

This is Jared Haase in for Ryan. Brian, maybe just one on the sort of gross margin dynamics. So it sounds like, obviously, that was a little bit pressured by the decline in the MedWise services revenue. Can you just talk about kind of the outlook for the rest of the year? Should we think about seeing some sequential improvement in Q3 and then maybe faster sequential improvement in Q4? Just any thoughts on that dynamic there for the rest of 2020.

Yes. I think that in terms of seasonality, that's the right way to think about it, Jared. So you've got some level of flat, and it's probably going from Q2 to Q3 and then a slight improvement going into Q4. But as you know, the margins were pressured as compared to last year, given the fact that Q2 2019 was an extremely strong year -- or strong quarter for the MedWise segment. So it was a little bit of a challenging comp for this year, but you will see improvement going to Q3 and then into Q4.

Got it. Yes, that's super helpful. And then just on capital allocation priorities. So it's good to hear the comments that you kind of continue to support investment through some of the short-term slowdown in growth in 2020 and a lot of positive dynamics for 2021 that you want to set up. I guess, could you maybe just comment on maybe any specific areas that you're looking to target to invest in, whether that's kind of continuing to support sales and marketing infrastructure, maybe more focused on R&D, product development, any specific areas of the platform that you're looking to invest in? Any thoughts there.

Yes. In terms of the spend, we are continuing to invest in sales and marketing. We think that, that's important for future longer-term growth of the business. Similarly, with R&D, we continue to invest in the science and algorithms that we're using to manage medication risk in a pretty novel way. But at the same time, we are investing in harmonizing a lot of the platforms that we have on the IT side.

So with PrescribeWellness, in Sinfonía and the core Tabula Rasa business, there is some specific investment going on there so that we ultimately have, not necessarily one platform, but a unification of a number of platforms that we're managing today. So there should be some savings in the outer years related to that. But in terms of the capital that we have, right now, we've got about $40 million on the balance sheet, $60 million available on our line of credit.

We're projecting at this point to generate about somewhere between $0 and $5 million of cash for this year. So the business does not need to access additional capital in order to fund future growth. And I will say that the -- as you've seen in the market, the M&A activity has increased, and we continue to keep our eyes open to see if there are assets or companies that might make sense to become part of the Tabula Rasa family. So we're continuing to keep our eyes open there and have, I think, the capital that could be deployed in a very positive manner.

Our next question comes from Sandy Draper of Truist Securities.

This is Stan on for Sandy. First, when looking at bookings in the quarter, can you comment on any notable changes maybe in duration of the deals or the average contract value?

Yes. I'll jump in. We've had some great success if we specifically look on the health plan side, which is where a lot of the bookings are driven in reaching our goal of trying to get the MedWise science into more of the national payer base. So we've launched a program -- large program looking at, similar to what we did in the Medicaid space, initially looking patients on opioids, the impact of competitive inhibition, those with high-risk scores with Humana. And that helps us then to get at national payer and really grow a lot of those programs.

And what we've seen from -- a lot of the work that we do with health plans and trying to initially integrate the science and grow those, it typically will start with a smaller contract that may be in the $0.5 million range to multimillion dollar contract. So it's typical client journeys that we start with some programs, and we continue to add on services, not only with the MedWise science, but also then bundling on some of the community pharmacy pieces of it through our PrescribeWellness network, some different interventions related to really targeting improving Stars and HEDIS measures.

So in terms of the pipeline, not only are we growing those and closing deals, but a lot of those are with larger companies, and they're larger deal sizes. However, I don't necessarily want to say it's all limited to that because there are several more start-up Medicare plans in that mix as well that are really interested in looking at the new version of how you manage medical costs through pharmacy benefits. And so there's a mix of both. But in terms of one of the goals of really driving national payer exposure with the MedWise science integrated within their programs, it was 1 of the big 2 huge wins for us.

Got it. Helpful. And then maybe a question for Brian. Just looking at 2021, considering the recognition of operating leverage next year, how should we think about the cadence of operating expenses? I know you touched on investing in sales and marketing and in R&D. But when you think about recognition of operating leverage, where are the levers that we should be thinking about as you guys accelerate revenue growth next year?

Sure. So I think that you're going to see some modest continued investment going into next year, but it will not be at the rates that you're seeing this year, certainly as a percentage of our overall revenue. So as you look at the 3 buckets, R&D and sales and marketing, those 2 will continue to increase in terms of absolute dollars, but not as a percentage of revenue. And then similarly, on the G&A side, I think I would expect that to stay pretty steady going into next year.

Our next question comes from Sean Wieland of Piper Sandler.

It's Jess on for Sean. Just interested if you guys could maybe elaborate on the Star Ratings changes that impacted MedWise medication safety services in the quarter? And then just how did the ratings changes influence your contracts, if at all? Or was it just more on the fulfillment side?

So Jess, the material changes in the Star Ratings really influenced 2019. And maybe, Kevin, if you could maybe give some background on that, I think that would be helpful.

Sure. In terms of the Star Ratings that drive a lot of -- some of our revenue on the MedWise service side is the comprehensive med review rates. And so as over the years, CMS has aggressively increased the target rates for health plans, meaning the percentage of patients that they want to have a comprehensive med review if they qualify for an MTM program. And so we saw a really large increase in that in 2018, 2019, that drove a lot of growth. Those rates have gone up to -- for the Medicare Advantage plans, the 80% range. And so there's not a lot of continued movement to have that be a continued driver for increase in services. And so that's sort of the change in having the Star Ratings impact some of the growth rates.

The additional opportunity then as we shift from health plans, really looking at the percentage of patients who are having those comprehensive med reviews, it's really what is the impact of those reviews. And because it's a Medicare Advantage plan that's really driving that, we're starting to see a shift in the types of services that they want connected with a comprehensive med review, and that's really opened the door for the key interest in MedWise.

So as we -- as in the core Tabula Rasa science, so as we talk to plans about the opportunity to have those be more valuable and reducing overall total cost of care, that's been driving some of our pipeline growth in terms of us being able to offer something within that service that our competitors or clients trying to do in-house services can't do on their own. And I think that's a key piece of the technology, so to have another year where we're producing that data. We also published, as Cal mentioned, a study in the second quarter that really looked at quantifying the dollar savings associated with that. And that's really helped us. But that's really the shift that we're seeing in Star Ratings specifically.

Got it. And can I just ask one more on that then? Is that a 2021 event or likely 2022 that you incorporate some of those savings-based or risk-based components of the MedWise contract?

It's -- the majority of the pipeline has been -- is in the 2021 launch, so first half of 2021. Although, as I mentioned, we've got a couple clients that have implemented that within the second half of 2020 as well. But the majority of that is 2021 in terms of some of the review that Brian gave around what we're expecting from some of those bookings and revenues that's been pushed from 2020 to 2021.

Our next question comes from Stephanie Davis of SVB Leerink.

This is Joy on for Stephanie. I guess to start off, can you give us an update on the CVS contract and perhaps some details on what drove the delay?

Yes. I can -- appreciate the question, Joy. This is Kevin. I can jump in and talk about that. From a CVS standpoint, we're still in discussions with them about what the second half of this year will look like. So we've only put sort of a modest number relative to what we anticipate in the second half of this year in some of our forecasting.

Probably the key driver has been some of the points that we brought up, which were unexpected, in terms of if you look at patients where they sit this year compared to last year with overall Star Ratings, specifically looking at medication adherence, which is a key driver for a lot of the clinical initiatives that community pharmacies need support for. Patients are more adherent this year at this time compared to prior years, largely dependent upon or because of changes that CMS made to allow for early sales, more days' supply. So to help manage patients' access to medications during the pandemic, patients were allowed excess medications. And we haven't seen that catch-up just yet. And so we (inaudible) that has sort of caused some of the delays relative to services it will provide in the second half of the year.

Got you. I guess with that in mind, since the contract was pushed -- originally pushed out to the second half and now pushed out to FY '21, I guess, what gives you the confidence that it's going to ramp next year?

We think based on the experience that we have with clients in terms of the programs that -- and discussions that we have, we haven't necessarily seen any changes in that. So there isn't anything relative to the types of services that they want to provide, the vision that they have for having us provide some of those services. The challenge really has been the pandemic. I mean it really is -- and you look at the 2 of the markets that we're in are markets where in the pharmacy space and in the PACE space, we're dealing with frontline workers who are managing the day-to-day, and they're challenged with just sort of fulfillment in terms of the medication services.

And we -- for several months there, all conversations relative to adding clinical service, supporting patient care have been stalled as we sort of try to meet with those immediate needs are. And so as we're coming sort of at the tail end of the second quarter, we started to see those conversations change really in July in terms of what's getting back on track in terms of the bigger picture.

And so I think it really is with that business line, in particular, is just that we saw just a really, really sharp halt in how they were thinking about the future, just from a delay standpoint, managing the pandemic and being on the front lines.

There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.