Tabula Rasa HealthCare, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2018 Tabula Rasa HealthCare Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Now I would like to welcome and turn the call to your host, Mr. Kevin Dill.

[Kevin Dill:]

Thank you, and good evening. I'm Kevin Dill, Corporate Counsel and Chief Compliance Officer for Tabula Rasa HealthCare. The company intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include the developing nature of the market for technology-enabled healthcare products and services and potential changes to laws and regulations that may impact our clients. For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the Risk Factors section of our 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 to Dr. Calvin Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare. Cal?

[Calvin Knowlton:]

Thank you, Kevin. Good evening, and thank you for joining us for our first quarter 2018 earnings call. With me today are Dr. Orsula Knowlton, Co-Founder and Chief Marketing and New Business Development Officer, who will provide an overview and some promising new delivery changes and an update on our markets. Also, with us tonight is Mr. Brian Adams, our Chief Financial Officer, who will provide our financial update on the first quarter as well as our current outlook for the second quarter and full year 2018. The first quarter represented a strong start to the year for us, in which we again exceeded our expectations for revenue and EBITDA, and further raised the awareness of how our solutions can be beneficial to the greater health care marketplace. Our revenue of $43.9 million increased 57% from $28.0 million in the first quarter of 2017, and our adjusted EBITDA for the quarter came in at $4.3 million, a 31.5% increase from last year. Before I discuss some highlights from Tabula Rasa's first quarter, I want to share my thoughts on a recent article from Manage Health Care Connect, which is entitled, Are Inappropriate Prescriptions Common For Older Adults? The article emphasizes that avoidable adverse medication errors are a growing concern in all facets of healthcare delivery, which is further evidence of the growing awareness around this issue and the potential impact that could result from not addressing it appropriately. Tabula Rasa's Medication Risk Mitigation Matrix and suite of solutions based on that platform, directly address these concerns. We provide the patient and the prescriber with a simple way to interpret one's medication risk score, similar to an individual's credit score, and determine the appropriate course of action to avoid hazardous medication misadventuring and potential risk. Outside of PACE, from a growth perspective, our core focus continues to be on health plans, including self-funded employer groups. However, we are seeing a developing opportunity to serve at-risk provider groups. For example, during the last quarter, we secured a new engagement to provide Medication Risk Mitigation services to MDVIP, a company that operates a national network of concierge physicians, and is focused on preventative medicine and personalized primary care. Under the first phase of this agreement, TRHC's Medication Risk Mitigation technology and clinical services, will be available to a select group of MDVIP physicians. We are excited about this new opportunity, and we expect this relationship to grow over time. Our health plan pipeline is robust and active with productive and promising discussions progressing with national and regional players, including 2 provider-sponsored health plans. To support and expand this work, we're pursuing integration opportunities with EHRs and pharmacy management software systems. As the visibility of TRHC increases, we have been approached by a few international organizations to explore collaboration and integration. This includes the potential integration with up to 3,000 pharmacies in Europe. Discussions are ongoing. We also have been recognized for our experience and expertise in innovations in medication therapy management and care transitions by being called upon to speak at national industry conferences, including AMCP and PQA. Our leadership in the use of pharmacy based SNOMED CT Codes is also quickly becoming recognized by industry leaders. On our year-end call, just a few weeks ago, I briefly discussed the massively important issue of the growing misuse of opioids in this country. I'm incredibly pleased to say that we've made an exciting new development in this area, our Optimized Opioid Solution, which Orsula will dig into a bit more later on the call. But before I turn the call over to Orsula, I wanted to share some details with you around the acquisition of Peak PACE, which we announced last week. This is a relatively small acquisition for us, but it has the potential to be a very meaningful. Brian will discuss the accretive financial implications, however, this acquisition further solidifies our PACE footprint and enables us substantial cross-selling opportunities. Lastly, our acquisition of SinfoníaRx continues to open cross-selling doors for us. In addition, SinfoníaRx per se, a, had its strongest first quarter, however, completing more than 80,000 comprehensive medication reviews; b, launched its fifth clinical call center in Austin, Texas; c, expanded its programs and health plan partnerships with Walmart; and d, won a bid to the SaaS solution for a large Blue Cross plan, which starts in 2019. With that overview, I'll turn the call over to Orsula, to share some more details around favorable changes coming out of Washington, and an update on the PACE market. Orsula?

[Orsula Knowlton:]

Thanks, Cal. On April 2, CMS announced a number of rule changes that will take effect in 2019 and should prove to be highly favorable to Tabula Rasa HealthCare. I'd like to highlight 2 of those changes today that I believe are incredibly well-aligned with our mission as a company. The first, which Cal alluded to, has to do with improving opioid misuse control. As part of the CMS' final 2019 call letter, the communication stated that they were deeply concerned about the magnitude of the opioid misuse epidemic. Starting in 2019, CMS expects all party sponsors to implement real-time safety alerts at the time of dispensing as a protective step to engage both patients and prescribers about overdose risk and prevention. Further, the agency expects Part D providers to implement additional programs to alert the pharmacist about duplicative opioid therapy and concurrent use of opioids and benzodiazepine. According to that CMS call dated April 17, all Part D plans are required to submit an opioid strategy by June 4, 2018. To address the needs of our partnering plans, Tabula Rasa HealthCare has launched our Optimized Opioid Solution to predict and prevent unintentional opioid abuse. In the U.S., at least half of all opioid overdose deaths involve a prescribed opioid medication, and nearly 80% of those deaths are considered accidental or unintentional. When opioids are taken at the same time as other prescription and nonprescription medications, they may be less effective for relieving pain. As a result, patients may take more frequent and higher doses, which can cause full hospitalization and even death. The challenges presented in opioid patients are exponentially amplified when patients, such as the elderly, have complex medication regimens. We evolved this solution out of the Academy of Managed Care Pharmacy annual meeting held in Boston in late April, and has already began selling this solution into our MTM partners with SinfoníaRx. We've seen meaningful interest from our existing partners, as you can imagine, given their need to have a solution and strategy in place by June 4, and we see a tremendous amount of runway for this solution. The other promising piece of legislative news came in CMS' announced changes to its Medicare Part D program in terms of shifting MTM expenses to the MLR part of the equation from the ALR, beginning in January of '19. We believe this change will encourage Part D providers to invest in and substantially expand their MTM program. There are currently 19 million seniors enrolled in Part D programs, and Tabula Rasa provides MTM services to 3 million, through our 150 Medicare advantage partners. This is very encouraging for our SinfoníaRx business. To close out my comments on this evening's call, I'll provide an update on a couple of new opportunities within our PACE market. The first is the newly contracted PACE in Arkansas, which will start on July 1. With this addition, Tabula Rasa HealthCare now has all 3 PACE in the state of Arkansas, one of which is in the process of becoming a PACE organization. The second, is a newly contracted PACE organization in North Carolina, which will begin this summer as well. We continue to have a strong and promising pipeline within our core PACE market. Finally, I want to comment on our work with CenterLight. the organization saw a change in management, including both in the CEO and CMO roles, along with a number of audit and multiple locations, which have unfortunately precluded our ability to have them focus on the good news of our results. Our first quarter data showed the same strong improvement outcome, in particular, hospitalization reductions that we demonstrated with them in the fourth quarter. We have a meeting coming up in the near-term, and hope to have more to share with you during our next quarterly call. With that update, I'll turn the call over to Brian, to provide a detailed review of our first quarter results. Brian?

[Brian Adams:]

Thank you, Orsula, and thank you to everyone on the call for joining us this evening for a review of our first quarter 2018 results. Before I get started, I want to remind everyone that effective January 1, 2018, the company adopted new revenue recognition accounting standard, ASC 606, utilizing the full retrospective transition method. All 2017 financial results discussed in my commentary have been adjusted to reflect the change. In the first quarter, Tabula Rasa generated $43.9 million in total revenue, an increase of 57.1% year-over-year. Of that $43.9 million, product revenue accounted for 62% or $27.2 million in the quarter versus $21.9 million a year ago. Product revenue is derived primarily from the medication fulfillment component of our medication risk management offering in the PACE market. The 24% increase over the last 12 months was driven by new contracts as well as the expansion within our existing customer base. Service revenue, which is generated from our work with health plans and at-risk providers, represented $16.8 million or 38% of total revenue, a 178% increase year-over-year. The significant a year-over-year growth in service revenue was driven by the inclusion of SinfoníaRx, which contributed $9.3 million as well as the new fee increases with some of our existing partners. Our gross margin, excluding depreciation and amortization, in the quarter, was 27.9% compared to 29.7% a year ago. As we mentioned on our last earnings call, our SinfoníaRx business has a lower margin profile in the first quarter. In fact, less than 30%, which is in line with prior years. During the first quarter of the year, the qualification and notification process takes place to inform members they are eligible to receive Medication Therapy Management services, which is required before any interventions can take place. We continue to maintain a long-term gross margin target, excluding depreciation and amortization expense of 35% to 40% over the next 3 to 5 years. Product gross margin was 23.4% in the quarter, an increase of 40 basis points compared to 23.0% a year ago. This was consistent with our expectations for the first quarter. Service gross margin of 35.4% compared to 54.2% a year ago. As I mentioned a moment ago, our first quarter margins will be depressed, as compared to the remainder of the year, due to the seasonality of the SinfoníaRx business. As we expect, the Sinfonía business will realize an annual gross margin in the 40% range, and it will represent a significant portion of 2018 service revenue, we would not expect to achieve an overall service gross margin as high as last year in future quarters. Total operating expenses in the quarter represented 62.9% of total revenue compared to 38.4% in the first quarter of 2017. The primary cause of the year-over-year increase is a noncash charge of $13.5 million for the change in fair value of acquisition-related contingent consideration for SinfoníaRx. Excluding this charge, stock compensation, depreciation and amortization, operating expenses as a percentage of revenue would have been 19.7%, only slightly higher than last year's 18.9%. We generated $4.3 million in adjusted EBITDA in the first quarter compared to $3.3 million a year ago. The increase in adjusted EBITDA was primarily driven by new and existing client growth in both the PACE market and health plan markets. Adjusted EBITDA margin for the first quarter of 2018 was 10% compared to 12% in the first quarter last year, and was in line with management's expectations given the limited margin contribution from SinfoníaRx in the first quarter. Our GAAP net loss of $18.1 million in the quarter compared to a GAAP net loss of $2.6 million in the first quarter of 2017. Again, this quarter's net loss included a $13.5 million noncash charge related to the change in fair value of acquisition-related contingent consideration. This was the primary driver behind our negative effective tax rate of 17.2%, as the adjustment to contingent consideration is not deductible for income tax purposes. As a result, our first quarter GAAP net loss per diluted share attributable to common stockholders was $0.96 compared to a loss of $0.16 a year ago. The per share calculations were based on $18.8 million and $16.2 million diluted shares outstanding, respectively. Adjusted net income per diluted share for the first quarter of 2018 was $0.10 compared to adjusted net income per diluted share of $0.08 in the first quarter of 2017. Our adjusted net income per diluted share for the quarter excludes changes in fair value of contingent consideration, amortization of acquired intangibles, transaction-related expenses, stock compensation expense, payroll tax on stock-option exercises, and the related tax impact of those items. Turning to the balance sheet. As of March 31, 2018, we had a cash balance of $4.3 million and approximately $1.9 million of debt related to equipment leases. At the end of March, the company had access to $39.6 million under our line of credit. Before I get to our guidance for the second quarter and the remainder of 2018, I would like to briefly touch on the acquisition that we completed last week. As Cal mentioned, Peak PACE Solutions is a company that provides health plan management services to PACE organizations. We are excited about adding this capability to our portfolio of offerings that we can bring to the PACE market. And with only about 50% overlap in the 47 PACE organizations service by Peak PACE Solutions today, this gives us an excellent opportunity to cross sell. We expect the acquisition will be accretive on both the top and bottom line. We paid approximately $7.7 million in cash at closing, and there will be an earnout of up to approximately $2.3 million for the sellers based on performance of the business in 2018. I'll conclude my remarks today with our initial outlook for the second quarter and update to our outlook for full year 2018. For the second quarter of 2018, we anticipate revenue to be in the range of $46 million to $47 million. Adjusted EBITDA to be in the range of $6 million to $6.5 million, and net income to be in the range of $400,000 to $900,000. The net income projections for 2018 do not include any further charges or benefits related to the adjustments in contingent consideration, with respect to the SinfoníaRx acquisition. For full year 2018, we are updating our previously stated outlook. We now anticipate total revenue to be in the range of $188 million to $198 million. Of that total revenue, we expect product revenue to be $115 million and service revenue to be $78 million at the midpoint of our range. I'll remind you that we have not included CenterLight in our 2018 guidance. We continue to expect adjusted EBITDA to be in the range of $28 million to $32 million. The midpoint of our guidance range would equate to a 15% adjusted EBITDA margin for the full year 2018 and 160 basis point increase over last year. And we now expect a net loss in the range of $11.4 million to $7.4 million. Overall, I'm very pleased with our performance during the first quarter of 2018. We are beginning to see the impact of some of the investments we made in 2017, including SinfoníaRx. And as Orsula mentioned earlier, there are a number of regulatory tailwinds working in our favor that should benefit the company in the short- and long-term. I look forward to continuing to update you with our financial progress over the coming quarters. That concludes my prepared remarks. And I'll turn the call back over to Cal for closing comments. Cal?

[Calvin Knowlton:]

Thank you, Orsula and Brian. 2018 is off to a very strong start, and Tabula Rasa is extremely well-positioned to capitalize on the opportunities ahead of us as the only multidrug risk assessment provider in the market that is keenly aware of the growing need for our solutions. Further, while our medication -- Risk Mitigation Matrix addresses the problems we're saying in the U.S. society today, it's important to note that it runs off the ingredient, not the brand name, which means we are empowered with the ability to address the challenges of adverse medication events far beyond the domestic market. And I'm incredibly excited to see what the remainder of this year has to bring for Tabula Rasa. In closing, I would like to thank all of our customers, our partners, and Tabula Rasa team members. I look forward to continuing to update you throughout the year. With that, let's open the call for questions. Operator?

[Operator:]

[Operator Instructions]. And our first question is from the line of Ryan Daniels with William Blair.

[Ryan Daniels:]

Brian, let me ask you a quick one, just on the Peak acquisition. Can you give us a little bit more color on the actual sales and EBITDA contribution? I know you've said they would be accretive to both top and bottom line, but trying to get the magnitude there given the revenue was raised, but EBITDA was actually reiterated.

[Brian Adams:]

Yes. So the rationale there, Ryan, was that we beat revenue by about $1 million in the first quarter. And then, we're projecting, probably, an additional $2 million contribution from Peak from May to the end of the year. And if you annualize that number, it's probably around $3.5 million. Currently Peak is generating about a 20% EBITDA margin. And so using that, you're probably around $700,000 in contribution on a full year basis, and using around a 10 multiple. That's how we kind of got to the initial purchase price of around $7 million. So there's an opportunity for the sellers to earn a little bit more if the business does a little bit better. But at this point, given the fact that that's relatively modest in terms of additional EBITDA contribution. And given the fact that we kind of hit the midpoint of the range, we didn't feel it was appropriate to adjust the number up or down. And so that's kind of our rational at this point is -- we have a pretty -- a decently wide range related to our EBITDA guidance at this point. So we didn't think it made sense to share that.

[Ryan Daniels:]

No, that's fair. And it's a pretty immaterial change to EBITDA then. Helpful though. I guess, the bigger question maybe for Orsula or Cal, but the CMS call whether to have a plan in place for opioid management. I'm curious if you think it will have teeth, meaning do you anticipate that all of the Part D plans will have to have a truly robust solution? Or do you anticipate it could be similar to MTM regulations, which afford a lot of flexibility about how plans address the issue?

[Orsula Knowlton:]

Well, in the regular Medicare Advantage Plans, they are required to provide specific and detailed information. I'm happy to share the call letter and then, the format for the response. However, they also asked for additional plans as support. And almost innovation around what they could be doing to improve opioid unintentional misuse. So we believe we have the solution that can support that beyond what a PBM would have.

[Ryan Daniels:]

Okay. And can you talk about maybe the pricing of that product? I know it's new. Or just how you view the total addressable market size to give us a feel for the opportunity there?

[Brian Adams:]

Absolutely. This is Brian. I'll take that one. Right now, we're estimating that this would be a per member per month model, in which we'd have a range of, probably, similar between $0.50 to $1. So it's certainly less than our Enhanced Medication Therapy Management fees. But this is a slimmed-down program with a much more targeted approach. And as you think about the addressable market, it's much larger than just a Medicare and Medicaid market. So this includes commercial. So we're really sizing this opportunity as it could be upwards of $2 billion overall just in the opioid initiative.

[Ryan Daniels:]

Okay. Feels great. Then, one final one, and I'll hop off into the queue. The commentary and the positive update on the move to the MLR for MTM. Have you yet had conversations with new or existing health plans about how this could change their view of providing MTM? I know your operations are a lot more effective in engagement and enrollment. And I assume, number one, it could drive more spending; but more importantly, number two, it could drive some market shifts towards you would be my guess. I'm curious if you've gotten any early feedback there from payers?

[Orsula Knowlton:]

Our SinfoníaRx team has. They have actually been involved in -- through their relationships with Academy of Managed Care Pharmacy in this development. So this is something that helps them have desired in the ability to expand MTM to more people who need it, and to improve outcomes.

[Brian Adams:]

And it's certainly going to be more focused on the Medicare Advantage side than going to your traditional PDPs. That's not where this is going to be so relevant.

[Operator:]

Our next question is from Mohan Naidu with Oppenheimer & Co.

[Mohan Naidu:]

So Brian, also, on that last question on MTM cost into the MLR. Are there plans that are hesitant so far, now starting to have an engagement right now with you guys, obviously engaging conversations now that they can add the cost into the MLR calculations? Or I guess was the cost a big factor in deciding whether to offer MTM or not?

[Orsula Knowlton:]

Go ahead, Brian.

[Brian Adams:]

This is Brian. I think what we've seen in the past is there has been some conservatism along the lines of spending as it related to MTM. And we're certainly seeing much more interest in creating programs that are more robust and address a larger number of membership. So certainly, I think, we're going to see an expansion. And based on our initial conversation that's what we're seeing.

[Mohan Naidu:]

Okay. Got it. On Peak PACE. Just on the offering that they have. My assumption right now is that their solutions are just broader workflow on management software for PACE and it has nothing to do with MTM? Is that correct?

[Brian Adams:]

That's accurate. It doesn't have anything to do with MTM today. It's really an add-on capability that ties nicely into our medication risk management and risk adjustment services that we're already offering in the PACE space. So cross-selling is extremely attractive. One of the other pieces is we do get access to some data that allows for us to track outcomes with the other elements of our business and give us a more precision there. So we're excited to be able to utilize that as well.

[Mohan Naidu:]

Okay. Last numbers question for me. So on the gross margins on the Q1 side, I understand it's because of the qualification period. How fast do you -- should we expect that to ramp back up? Like, as we go into Q2, should SinfoníaRx come back to their usual margin profile? Or does it take longer than one quarter?

[Brian Adams:]

No. We're going to see that ramp-up in Q2. So it's a pretty significant step up from first quarter to second.

[Operator:]

Our next question is from Matthew Gillmor with Robert Baird.

[Matthew Gillmor:]

I was interested in Cal's comments about the opportunity to serve international pharmacy organization. I was hoping you could provide some details on what Tabula would provide that organization? And is there a way for us to think about the pricing model, so we could just get a sense for the size of that opportunity?

[Calvin Knowlton:]

Matt, this is Cal. I can't be specific yet because we're still in deliberation. But it would be a SaaS model. It would be an integration of our matrix into an EHR and also into a pharmacy software system, both. We work under ingredients, so it's not a heavy lift because the ingredients are pretty much the same across the pond. We didn't go out and seek this, Matt. This came over to transfer them to us, just because they heard about us. And so we -- since it's such a large opportunity, we didn't want to ignore it on the one hand. On the other hand, we're pretty busy with domestic things. But so we bolster our staff a bit. And now we're actually in -- it would probably take about 4 to 5 months in negotiations, mostly on due diligence on IT integration, and also, on some of the business model. But it's really exciting. I mean they're all over this stuff. And they're -- the Medical Director's out there. We went through the tour of what we were doing. We're extremely upbeat. And again, they're doing the same thing that's happening over here. They're just using a one-to-one drug interaction system and nothing at all with multidrug. And they also -- there was just a report, for example, in November of last year from England, from London, that while we have 39% of our people, the older people on Medicare, taking 5 or more meds, they actually, in their study, have 50%. So this issue of multidrug problems and polypharmacy is somewhat ubiquitous, we're learning. So that's not exactly what you wanted, but just to give you an overview.

[Brian Adams:]

I got two there would just be, this group is extremely influential in the European market. And so this is really the ideal partner for us to start to experiment with. So pretty exciting.

[Matthew Gillmor:]

Sounds like it. And then, just as a quick follow up to that question. The investment that you're putting in to make sure that the systems communicate. Could you -- would that be leverageable to the extent you had a pharmacy here in the U.S., want to adapt some similar capabilities?

[Calvin Knowlton:]

Actually, yes. The same thing we're doing. It's the same functionalities that we're using here, HTML and stuff, that we're using for pharmacies here to integrate that it would be -- that would be integrating in pharmacies across the pond. And also -- I think, the real exciting thing is that they're very interested in pushing it into the hospital first. And we haven't done that yet. So that's taking a little bit of a lift for us. That's a lift we needed to take. And this is kind of what's pushing us into that. And that will be the same type of integration that we're doing in the pharmacies just a little bit different because of the different type of intravenous stuff that goes -- that's in the hospitals.

[Matthew Gillmor:]

Okay. And then, following up on CenterLight, some of Orsula's comments. I just wanted to make sure we understood. Does that represent just a delay in your mind, in terms of when that revenue could be realized for Tabula Rasa? Or is there a broader risk now that the management team has changed? Just trying to understand how you're thinking about that part?

[Orsula Knowlton:]

Yes, we don't think there is a broader risk. In fact our results were, as I mentioned, really excellent and repeatable from the fourth quarter to the first quarter, which we were counting on to be able to present. So we are meeting, as I had mentioned. So we just believe it's a delay.

[Operator:]

Our next question is from Stephanie Demko with Citi.

[Stephanie Davis:]

Could you talk about just the cadence of the initial Optimized Opioid Solution rollout given your initial sales to MTM partners? And kind of help us in how the revenue stream should ramp over the following 2 years?

[Brian Adams:]

Orsula might talk first talk about the sales process and the launch. And then, maybe, I can dig in on the revenue ramp for you.

[Orsula Knowlton:]

Sure. As we mentioned, we launched the at the American -- or the Academy of Managed Care Pharmacy. A lot of the people there were customers of Sinfonía. We saw definite interest there from many of the large customers, looking -- people looking for solutions, and not really finding one that's differentiated. So we believe that we could be part of their opioid strategy, which is a requirement by CMS as well as still filling the need for some of their larger nonhealth plan partners. So we would think that this would take 6 months to -- into 2019 to really roll out.

[Brian Adams:]

And just on the revenue side, Stephanie, the way that we're kind of looking at it is, at this point, I would say, less than 1% of our revenues in 2018 are going to be generated from this type of program, but we are certainly seeing a lot of interest. And so would expect something probably in the 2% to 3% of revenues next year represented by the opioid program is kind of where our heads are at right now. But I think that there's considerable upside in that forecast at this point.

[Orsula Knowlton:]

Yes. And what we're anticipating is really being able to take data that we already have or data they would -- the plan would provide us to risk-stratify, identify those at risk, provide intervention and then remeasure results. So as Brian mentioned, something that's not as left as our MTM-plus or medication -- risk mitigation program. Something that we can accomplish rather readily for plans.

[Stephanie Davis:]

Okay. Understood. And so early days on the ramp. And then, Orsula, you mentioned some differentiation in your offering versus your peers. What do you think really differentiates yearly solution? And what kind of other add-on solutions do you have in the pipeline to maintain this mode?

[Orsula Knowlton:]

Sure. Well, it's through the use of our proprietary technology and tools that considers what they're doing today is, let's look at quantity, let's look at a maximum morphine-equivalent dosing, as opposed to we're looking at the challenges individuals have with multidrug interactions that can render their regimens ineffective, requiring increasing dose or changes in medications that could result in unintentional overdose. So eventually, what we're attacking, and we're doing it from a scientific approach using our matrix. Structurally, what differentiates us, we'll be able to add-on to that as we roll out and come up with additional interventions that can fine-tune the processes well.

[Operator:]

[Operator Instructions]. And our next question is from Frank Sparacino with First Analysis.

[Frank Sparacino:]

Maybe, two questions. First one, can you just give a little bit more color on the BCBS deal in terms of how they plan to utilize the technology, and sort of the sales cycle process and competition?

[Brian Adams:]

So Frank, I think you're referring to the Sinfonía contract closure at the end of -- that will go into effect in 2019. Is that right?

[Frank Sparacino:]

Yes. Yes.

[Brian Adams:]

Sure. So that's going to be a SaaS-based model where the plan and their PBM, we can't name them right now, will be utilizing the Sinfonía platform to perform MTM services. So similar to what our teams would do, they're just going to be using our platform. And just to give you a kind of sizing on the opportunity, it's probably going to be about a $500,000, maybe a little bit north of that, new contract for us, SaaS-based, in 2019.

[Frank Sparacino:]

Brian, is the 500k an annual figure? Or was that the TCV?

[Brian Adams:]

That is an annual figure.

[Frank Sparacino:]

Okay. And then, just on the sort of, I think, Cal, was your comment on health plan pipeline being robust. In your kind of view as this conversation has obviously been going on for some period of time, that -- are they progressing as quickly as you would like? And then, also, if there is any sort of delay in those conversations, what sort of the resistance or concerns perhaps coming up in those conversations?

[Calvin Knowlton:]

I don't think there's -- it's just selling to large entities. And there's a lot of layers. And we've been -- the sales cycle has not -- very, very quick, actually on the health plans. But we're having very good progress, even this past week for example. So I can't identify too much until we get to some contracts, but I will say that we've got over half a dozen large opportunities that we're working on in our pipeline right now. So it's just a longer sales cycle, Frank. That's the issue.

[Operator:]

And our next question is from Steven Wardell with Chardan Capital.

[Steven Wardell:]

So I apologize if this was already asked, but can you just give us some color about what you're hearing from your health plan channel? What is going on in the world of the buyers there? And what is their -- what are the areas they're most interested in talking to you about?

[Orsula Knowlton:]

Well, Steve, it isn't about that opioids, [indiscernible] come to the conference at AMCP, we had a large chemical structure of codeine to morphine to explain the challenges that people have with multidrug interactions. So opioids are at the top of the list. If you just read the paper, go to [indiscernible], there's a conference about opioids. So there's definitely a need for the solution that we're offering. I think that's the biggest issue with regard to what people are trying to get more of from us.

[Calvin Knowlton:]

This is Cal. I think, also, that there is still a gestalt there where there's a concern about reducing total cost and reducing hospitalizations, and certainly, reducing rehospitalizations. We have a lot of attraction now on our care transitions model. And people are -- not just because of Stars, but it's the right thing to do. And the hospital -- even found this, actually, across the pond too, that they're also working on Care Transitions, which surprised me. So I think that's another thing is the -- what's the total expenditure that can be reduced by -- reducing medication misadventuring, both in hospital and post discharge.

[Orsula Knowlton:]

Yes. Overall improvement in quality.

[Calvin Knowlton:]

Yes. The quality issues. Right.

[Operator:]

Thank you. And ladies and gentlemen, this concludes our Q&A and conference for today. We thank you for participating. You may all disconnect. Have a wonderful day, everyone.