CRH Medical Corp
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Good morning, ladies and gentlemen and welcome to the CRH Medical Fourth Quarter 2019 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 12, 2020. I would now like to turn the conference over to Richard Bear. Please go ahead.

[Richard Bear:]

Thank you, Jessica and good morning everyone. I am joined today by our CEO, Dr. Tushar Ramani; the President of CRH Anesthesia, Jay Kreger; and Vice President of Commercial Development, Tom Sanders.Before we start, I would like to remind everyone that certain statements you will hear today constitute forward-looking statements within the meaning of the applicable security laws. For important assumptions, definitions and cautionary statements about forward-looking information and the risks inherent to our business, please refer to the cautionary notes in our Annual 10-K. During this call, we will discuss non-GAAP financial measures as indicators of our performance. You can refer to our Management’s Discussion & Analysis for the 3 and 12 months ended December 31, 2019 for the reconciliation of non-GAAP measures to reported GAAP measures. These documents are available on SEDAR, EDGAR and the Investors section of our website. In addition, please note that we will be using abbreviation GI to refer to gastroenterologist. Finally, please be advised that our reporting and functional currency is the U.S. dollar and that all dollar figures referenced today are in U.S. dollars.With that, I will now turn the call over to Dr. Tushar Ramani.

[Tushar Ramani:]

Thank you, Richard. Good morning to everyone. Thank you also to everyone on the call. We know that there is some very important things going on in the world, but we appreciate you joining us here as we discuss CRH’s fourth quarter and year end 2019 results. We are pleased to report that we have generated yet another highly profitable quarter on the back of 17% anesthesia volume growth and we closed two acquisitions from our robust pipeline. Despite a challenging finish to 2019, we will note that our continued progress and execution as we manage our – though our payer related headwinds in order to best position the company for sustainable long-term growth. These headwinds impacted our fourth quarter growth and profitability more than we had anticipated. And while frustrating to us, it also strongly, they also – excuse me, strongly validated our earlier decision to transition away from non-contracted volumes in order to become a more fully contracted provider.So let me just discuss in our other initiatives in some further detail. So first, with respect to business development, during the fourth quarter of 2019, we doubled the size of our business development team. In addition to expanding this BD team, we also expanded a variety of approaches that we can use to engage with prospective targets. We envision growing our anesthesia business now through a portfolio approach with a mix of de novo deals coupled with more traditional capital deployment related transactions. We view these de novos as an attractive means of development as they tend to be a cashless, sweat equity means of entry into a market. That being said, we have a multitude of deals in our expanded pipeline that are either pending closing or in late stage negotiation and we are actively working to close those deals. We expect our acquisition capital spending in 2020 to approximate our recent historical levels of spend.Second, a key part of our anesthesia plan revolves around our payer contracting strategy. And in mid 2019, we made a decision to transition towards a more fully contracted case mix with an eye towards revenue per case and margin stability and visibility, especially given the heightened industry focus on non-contracted billing and we find ourselves right now very much in the middle of that transition. When the original surprise billing legislation with its very payer favorable framework seemed likely to pass towards the end of 2019, payers sensed their upper hand became very aggressive in driving down non-contracted payments throughout the industry significantly more than we expected.While this validated our strategy to a more fully contracted business mix, it did have the effect of reducing our 2019 per case revenue and profitability as we adopted a less aggressive response so that we don’t impair our payer relations for a go forward state as compared to our peers who have employed litigation and high patient balance billing among our other tactics in their responses. The other effect of that impending legislation note is that it appears to us that payers are not engaging in good faith negotiations until the final bill is passed. And with the slippage in the timing of the final legislation to now May 2020, this dynamic has created some headwinds for us that have extended into the first part of 2020. Fortunately, the current versions of the surprising billing legislation appear much more provider friendly and we look forward to finality within the next couple of months facilitating our continued transition back to our more fully contracted book of business.The third initiative for us involves implementing strategies to generate growth in hemorrhoid treatment volumes and more fully maximizing the potential of our O’Regan segment. Tom Sanders who has been leading the O’Regan segment now since January will introduce himself a little later in this call. And then finally, we look to evaluate other ways to serve the GI practice community. These efforts remain ongoing and we continue to actively explore new opportunities. I will now hand it off to Jay and then Tom before turning it over to Richard to review our financials in some more detail.

[Jay Kreger:]

Thank you, Tushar. As Tushar noted, we completed two transactions during the fourth quarter. The first was the exercise of an option to acquire controlling interest in the prior MAC development program, Triad Sedation Associates. The second transaction was the acquisition of a majority interest in Florida Panhandle Anesthesia Associates. As I mentioned on the last quarter’s call and as Tushar alluded to earlier, in addition to our core acquisition-oriented BD activity, our expanding pipeline contains an increasing amount of nontraditional opportunities that we believe can contribute to shareholder EBITDA.We believe it that our path forward is to grow from being niche acquirer of embedded anesthesia services into a market leading provider, acquirer and developer of these services. Providing anesthesia services to 58 ASCs across 11 states and serving now and nearly 400,000 patients per year provides us the scale that no on else in the GI space has earned or employed or enjoys. We believe that the portfolio approach towards business development that Tushar spoke of gives us greater flexibility as we go to market. One such non-traditional approach we expect to be employing more is that our de novo approach, where we developed a new anesthesia antigen jointly with the target gastroenterologist group without a corresponding acquisition capital outlay, which yields CRH a modest minority interest in these entities. I note that these de novos which have more of a below line impact initially present future accretive acquisition opportunities for the company. At the end of 2019, we effectively doubled the size of our business development team again as Tushar noted and we look forward to executing across the multiple business development fronts as we go into 2020. We expect our acquisition capital spend this year to approximate recent historical spending levels. And I will now turn the call over to Tom Sanders.

[Tom Sanders:]

Thank you, Jay. I would like to start by saying how excited I am to join CRH in January. Although it’s still fairly early in my tenure, I have been very impressed with the team and our capabilities. As you know, I have been charged with overseeing the O’Regan franchise, which is the first time CRH has named a dedicated executive in charge of O’Regan. O’Regan is far and away the leader for hemorrhoid treatment within the GI community. We have great relationships with the GI community having trained over 3,000 GI physicians to use O’Regan and we are actively looking to strengthen and deepen those relationships even further. We remain extremely excited about the long-term market opportunity for O’Regan as we expect patient demand to continue to grow. Although I am still wrapping my arms around O’Regan, we see a great synergy potential with the anesthesia business and we are actively developing initiatives that will once again enable O’Regan to realize its growth potential. I expect to have more detail to share with you later this year. Thank you.

[Richard Bear:]

Thanks, Tom. We reported Q4 revenue of $30.4 million, a decline of 5.2% compared to the fourth quarter of 2018. Anesthesia revenue declined 4.5% on a 22% decline in revenue per case. While this is an unusually large decline in revenue per case, we faced a number of headwinds in the fourth quarter related primarily to the issues that Tushar outlined earlier. With the pending surprise billing legislation, payers have aggressively reduced non-contracted payments more than we expected resulting in us having to adjust our 2019 estimated payer rates in the fourth quarter. We have been frustrated by these dynamics, but we believe visibility into these trends has improved and should continue to strengthen following the expected passage of surprise billing legislation in 2020. We serviced a record 94,503 patient cases in the fourth quarter, representing a 17% increase over the same period in 2018.Sales of the O’Regan System were $2.7 million for the fourth quarter, a drop of 11% as compared to the fourth quarter 2018. Total adjusted operating EBITDA for the quarter was $12.3 million compared to $15.9 million during the fourth quarter of ‘18. Adjusted operating EBITDA attributable to shareholders was $8.8 million during the quarter compared to $10.7 million for the fourth quarter of 2018 and total adjusted operating EBITDA margin was 40% in Q4 2019. We finished 2019 with $6.6 million in cash and cash equivalents and total borrowings of $69.3 million. We generated $29.1 million in free cash flow after distributing to non-controlling interest during 2019, an increase over the $21.7 million that we generated during 2018. We have $130 million in unused borrowing capacity available to us through our syndicated debt facility.I will now turn it back to Tushar for his closing comments and then we will open it up for questions.

[Tushar Ramani:]

Thank you, Richard. So, I will finish here with some additional color for the anesthesia business specifically for – in 2020. First, we are projecting now full year revenue per case – per anesthesia case to be in the range of $300 to $310 per case. This contemplates a continued conservatism around estimated reimbursement rates reflecting the current standstill environment that the payers are in given the legislative delays. We believe that our cooperative approach towards payer relations will yield positive results as billing legislation is passed and payers resume working with us towards more holistic contracting likely before midyear.Second, in terms of the quarterly cadence of our 2020 financials, we would expect that first quarter and second quarter revenue per case will be in line with fourth quarter 2019 and we expect that as we progressively transition throughout the year towards a more fully contracted case mix, our strongest revenue per case for the year will be delivered towards the end of 2020 at what we estimate to be around $330 per case. And then third, as I mentioned earlier, we expect to deploy at least as much capital towards acquisitions in 2020 as we have in recent years. At the same time, we are expecting to communicate other non-traditional forms of BD activity in the coming weeks that will nicely complement our acquisition related growth. And we expect that throughout the year as well.And then finally as the healthcare company, we do have a particular interest in the progression of COVID-19, coronavirus as it’s known throughout our geographic footprint in 11 states in the United States. It has the potential to affect our gastroenterologist partners and customers, our providers, our frequently traveling administrative staff and our patient population. And given the daily, even hourly updates on the spread of COVID-19 disease and the resulting responses, we are unable to estimate the likely impact to our business. From a business standpoint, we acknowledge there is a high potential for disruption to our case volumes, while we remain concerned for the well-being of our employees and our patients. We are watching these developments very closely and we will take any advised actions as they become necessary for the safety of our constituents.I will now turn it back to Janice – excuse me to Jessica for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Richard Close of Canaccord Genuity. Please go ahead.

[Richard Close:]

Yes, thanks for the questions. First of all, on the payer contracting Tushar, I was wondering I think your commercial book of business or percentage of cases was around 60% in the fourth quarter, is there any way to give some sort of range in terms of how much of that 60% was related to non-contracted cases?

[Tushar Ramani:]

Richard, Tushar here. Yes, thanks for the question. We normally do not disclose our non-contracted mix. It’s ever changing. And as you know strategically we want that to be a declining number. And typically, you will see the effects of our strategy in our increasing revenue per case number throughout the year, but it’s not a data point that we have disclosed.

[Richard Close:]

Okay. And then with respect to I guess this question might be for Jay, but with respect to the pipeline including non-traditional opportunities and you mentioned de novo, are there any other non-traditional opportunities or is it just de novo and then how many de novo projects I guess is the right word, do you expect to announce or start up during 2020?

[Jay Kreger:]

Hey, Richard. Thanks for the question. I think I mentioned on the last quarter’s call that the breakdown between de novos and acquisitions was now starting to approach more of a 50

[Richard Close:]

Okay. And then my final question is on COVID-19, I know you did have one of the MAC programs that you ultimately acquired in the Washington – in the state of Washington area. Can you give any thoughts in terms of what the impact on case volumes was maybe as we sit here in the – you know what second week of March now provide any indication obviously Washington was hit and most states so far?

[Jay Kreger:]

Obviously, our operators are in almost daily contact with our group out in Washington as they are all of our sites. It’s a changing daily report. I don’t think we have seen a substantial difference at this point, but next week and next month can be different stories as Tushar alluded to. I think it’s just too early to tell.

[Richard Close:]

Okay, thanks. I will jump back into queue.

[Operator:]

Your next question comes from Endri Leno of National Bank. Please go ahead.

[Endri Leno:]

Hi, good morning. Thanks for taking my questions. First, I will start with network negotiations. How long do you expect this negotiation to last? And I mean why would you expect payers to be rushing to get you guys in network around the second – around second half of the year?

[Tushar Ramani:]

Endri, thanks. Thanks for asking that. We expect that the payers should resume those discussions. Remember, it’s a resumption of the discussions. Most of these are things that were sort of in process before they kind of pulled back towards the end of 2019. So we anticipate that we should be able to pick things back up once they are kind of understood what the lay of the land is with the new legislation the reason for them wanting to do it is fairly easy they it is important to payers that they have as competing network as possible for their own sponsors for their own internal book of business so they can better compete for their own contracts with employer sponsored plans etcetera so not having complete network not having contracted providers in their key markets is not ideal for their businesses so they have a strong motivation to get to the table as well.

[Endri Leno:]

Okay thanks for that. And one more question is there any state or region in particular where you had more of these out of network contracts or are they all over at the place?

[Richard Bear:]

Yes, I think it is fairly disbursed throughout our network.

[Endri Leno:]

Okay thank you. And last one for me, days sales outstanding, perhaps for Richard, how do you see that? We are a little bit higher in Q4 and we had a – I think you had guided to a bit lower range like how do you see the development in 2020?

[Richard Bear:]

Yes I think as we moved to being more fully contracted 2020 we will see that number go down I think that number that you see that is got up as representative of the aggressiveness on our non-contracted payers. It's just taking longer for us to get paid and we are getting paid less

[Endri Leno:]

Okay, that’s it for me. Thank you.

[Operator:]

[Operator Instructions] Next question comes from Ammar Shah of Eight Capital. Please go ahead.

[Ammar Shah:]

Hey good morning guys and thanks for taking my questions. The first question I had was just hoping you can provide some color on the increasing case volumes just on the prospective of kind of what you saw organically versus from some acquisitions?

[Richard Bear:]

Yes, we – during the year if we look at the entities that we had owned at the end of 18 and but 19 we saw pretty close to 5% organic growth rate overall on those at 3% was the growth rate fourth quarter compared to fourth quarter 2018 so then the rest of the growth would have come from acquisitions.

[Ammar Shah:]

Great. And majority of my questions were asked. So just one final one I was hoping you could provide a little bit of context in terms of maybe this is for Tom just the kind of go to market strategy and just the strategy in general on how you anticipate product sales should see a return back to growth just any color there would be great?

[Tom Sanders:]

Yes, thanks. So as I have mentioned earlier I am about 60 days in, so it is early right now we are really in the mode kind of discovering and planning meeting with both existing and prospective practices so identifying areas of opportunities we were probably in the next 30 to 60 days formulated more of our strategy and plan that supports the market.

[Ammar Shah:]

Thanks guys. I will turn it back.

[Operator:]

Your next question comes from Richard Close of Canaccord Genuity. Please go ahead.

[Richard Close:]

Great. Thanks for the follow-up. Tushar I guess on the guidance with respect to the rate case in the progression through 2020 just help us out with your confidence in setting those rate ranges, what provides you that confidence, is it based on where the negotiations were before they stalled out, is it based on any finalized negotiations using that as a rule of thumb just what are your thoughts there?

[Tushar Ramani:]

Yes, Richard. So the way you should think about that is that will go into 2020 sort of at par with where we finished 2019. Normally, we would actually see a drop between fourth quarter and the following first quarter because our case mix changes more of a Medicare, Medicaid mix. This year, we have already seen the benefit of some of our contracting strategy that’s going to start to take hold in Q1. So, we are not forecasting that drop, because I think we have good visibility into the new rates with one of our key payers. As we progressed throughout the year and again the wildcard of course is getting that legislation done. But as we progressed throughout the year, we expect to complete negotiations with several of the other major payers. Our confidence comes around what we have been led to believe the range of outcomes I would say in those negotiations will be based on some early discussions we had already been having based on some things that we are being advised from our partners on as well. So, as those pop in and then as we get credential – as we get providers’ credential through the course of the year, we will see our revenue per case rate grow up. As I mentioned, we expect to exit 2020 at 330 per case.

[Richard Bear:]

Yes, let me – Richard, let me just add something to that. I mean, as we exit 2020 we won’t be fully implemented. So we will continue as we head into 2021 completing our implementation strategy and which we expect would yield additional improvements in revenue per case.

[Richard Close:]

Okay. And then as we think about, I mean obviously there is, I guess four major payers out there, is there any – is that a majority of the 60% of your commercial cases or maybe you could help us out with the size of that book of business of those four payers, insurers?

[Tushar Ramani:]

Yes. The majority actually is probably Blue Cross Blue shield and various siblings of the Blue. And then of course United, Cigna, Aetna makeup – and Humana makeup the large part of the rest. And then we have any number of sort of smaller splinter payers throughout the portfolio that probably are maybe 5% to 7%.

[Richard Close:]

Okay. And my final question would be on the legislation itself. Obviously hard to get things – legislation passed through that [indiscernible] here although I guess this is one area that there is bipartisan support, but still hard to get things passed. So, just give us your thoughts in terms of – what are the key points of the legislation for you guys, for CRH? And then I assume you would be aware associations or have lobbyists yourself that are providing perspectives on the status of the legislation in terms of mix maybe the magical day and whatnot, so thoughts in and around the legislation?

[Tushar Ramani:]

Yes, the important thing to us is that any surprising legislation be as fair as possible to providers as well as payers. Obviously, we advocate more strongly for the provider side, but needs to be a level playing field, which I think the original one that looked very close to passing end of 2019 was not – it was very payer friendly. In that it didn’t allow for an arbitration process, if indeed, the payer and the provider hit an impasse in trying to negotiate an out of network or non-contracted bill. That’s an important provision for us to be able to have that arbitration opportunity not because strategically, we expect to be adjudicating a whole bunch of non-contract bills, but the ability to be able to do that forces a more fair negotiation process in order to achieve a direct contract with the insurer and that’s ultimately our CRH’s goal, I can’t speak to other providers or provider sets. And so we will be watching that legislation very carefully to make sure that the arbitration provision that’s in there currently persists and that it’s truly accessible pathway again not because we expect to be using it or hitting it often, but we do want that to create a fair negotiating arena for us.

[Richard Close:]

Okay, thank you.

[Operator:]

We have no further questions at this time. Please proceed.

[Tushar Ramani:]

Well, I think we will close that out. Thank you everybody again for the time and attention this morning and we will caution to be safe and healthy.

[Richard Bear:]

Take care, everyone.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.