Tabula Rasa HealthCare, Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for standing-by. Welcome to the Q3 2018 Tabula Rasa HealthCare Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. Following management’s prepared remarks, we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Kevin Dill, General Counsel. Sir, you may begin.

[Kevin Dill:]

Thank you, and good morning. I'm Kevin Dill, Corporate Counsel and Chief Compliance Officer for Tabula Rasa HealthCare. The company intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include the developing nature of the market for technology-enabled healthcare products and services and potential changes to laws and regulations that may impact our clients. For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the Risk Factors section of our most recent annual report on Form 10-K filed on March 14, 2018. A recording of this call is accessible through a link on the Investor Relations page of our website, and it will be available for 90 days. I'll turn the call over to Dr. Calvin Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare.

[Calvin Knowlton:]

Thank you, Kevin. Good evening, and thank you for joining us for our third quarter 2018 earnings call. With me today are Dr. Orsula Knowlton, Co-Founder and Chief Marketing and Business Development Officer; and Mr. Brian Adams, our Chief Financial Officer. I'm pleased to report that we exceeded our expectations across the board in the third quarter. Our revenue of $54.4 million increased 66% from $32.7 million in third quarter of 2017, and our adjusted EBITDA for the quarter came in at $9.3 million a 125% increase over last year. Beyond the numbers, this was a quarter in which we further demonstrated our ability to deliver real results to our customers and to our members. In PACE, we continue to see our medication risk identification and mitigation science yield substantial reduction in falls, ER visits and hospitalizations. This builds on the success we announced last quarter in the first year of a 5-year CMS Enhanced Medication Therapy Management pilot whereby applying our medication risk identification and mitigation platform, we exceeded CMS goal of reducing medical expenses by at least 2% for Part D members. In addition, Landmark Health was one of our first partners to license our MedWise platform to manage their members using their own physicians and pharmacists. Landmark conducted a study of 1,000 of their members and recently shared their preliminary findings with us. They segregated their members into two groups, a control group and an intervention group utilizing MedWise. In the study, Landmark found that they were able to realize approximately $2 million of annualized savings due to a reduction in Er visits and hospitalizations while using MedWise. This translates to a roughly 4,000 reduction per person in annual medical expenses in the intervention group. Across the board the benefits and savings our clients are experiencing serve as a wonderful testament to the value our platform delivers in a variety of settings. These are real dollars being taken off of the healthcare system. Further, our successes in the quarter proved how well our platform fits into the value-based setting. Extrapolating these pockets of success across the entire United States population could yield billions of dollars in savings. It's important to emphasize that the economic benefit is not the only thing to be excited about here. We started this company to help people from a pharmacotherapy perspective since the current four decade old technology used in pharmacies and electronic health records does not identify multi-drug simultaneous interaction issues. When we use our patented technology to identify and then mitigate preventable adverse drug events, we reduce falls, ER visits and hospitalizations. The key result is enhancement of patient's quality of life. While we’re seeing incredibly promising developments in the US, we are also in discussions with several other countries to explore how our solutions could benefit their populations as well. We are currently working to implement our system in a Portugal hospital as a pilot, which we expect to launch some time in the first half of 2019. Recent publications from Johns Hopkins University, the University of Toronto and the University of Messina in Italy, each underscore the increasing risk and negative sequelae from multi-drug interactions. Beyond the Eastern Europe, we are having some very preliminary conversations with other international markets in Southeast Asia and in the Middle East. The problem of preventable adverse drug events is ubiquitous, both within ambulatory communities and within the hospitals. The issue is magnified in the elderly, the comorbid populations who are taking many medications. We are very enthusiastic about the international opportunities as well as our entrance into the hospital markets both here and abroad. We anticipate having more to share with you as 2019 unfolds. Before I turn the call over to Orsula, I want to provide you with an update regarding our Tabula Rasa 2.0 efforts, which I mentioned on our last call. In order to maintain our favorable positioning to properly accommodate our ongoing growth, we have committed additional resources to each of our operational and financial departments. And to continue our vanguard status regarding deep science, undergirding, personalized and precision pharmacotherapy, we have committed additional resources to our TRHC Precision Pharmacotherapy Research and Development Institute as well as to our Healthcare Predictive Analytics Center. Finally, I want to announce that Tabula Rasa will be holding its first Analyst and Investor Day in New York City on December 4th at The Westin. We will have a speaker discussing likely CMS CMMI trajectory, as well as a representative from Portugal to present her study on the incidence and prevalence of adverse drug events in Eastern Europe, and also a representative from PACE to discuss PACE 2.0. So we hope to see many of you in New York in just a few weeks. And with that, I'll hand the call to Orsula. Orsula?

[Orsula Knowlton:]

Thanks, Cal, and thank you everyone for joining our call this morning. To echo Cal's sentiment of increasing interest and opportunities for Tabula Rasa, I'm going to spend a lot of time on this call providing enough update about our PACE business and going into greater detail regarding the development of our analytics platform. First, we are excited by the outcome of our efforts at the recent National PACE Association Conference in Portland, Oregon where we hosted 250 people at our kickoff event, which included clients, new customers and several potential customers. This was followed by two days of education, where we co-presented with clients on topics such as polypharmacy, how to reduce medication risk, using Novel Risk Stratification, and a system for Medication Risk Scoring and PACE participants to reduce preventable adverse drug events, pharmacy and clinical topics. And finally, the CMS 1/3 Financial Audits are Changing - Are you Adapting? During the conference, we had a strong presence in the exhibit hall posted a well attended focused group meeting with clients, participated in networking events of clients with potential new customers. And as a result, we had several new business meetings. We also have the opportunity to sponsor the National PACE Association’s Annual Awards Luncheon, which was attended by nearly all registrants. Also at the conference there was much focus around PACE 2.0, including two featured presentations on the topic. The stated goal of PACE 2.0 is to accelerate the membership enrollment to 200,000 by 2028. Right now, PACE is at about 50,000 enrollees, growing at 8% to 9% year-over-year. PACE 2.0 would essentially double the growth to about 15% year-over-year by 2028. Perceptions about this growth goal were addressed during a PACE 2.0 presentation that included two CEOs, one from New York City, New York; the other from Omaha, Nebraska. Both organizations are longstanding clients of Tabula Rasa. HCL demonstrated their current growth trajectory during their presentations and expressed their strong confidence and enthusiasm regarding their program’s ability to achieve the PACE 2.0 goal. TIC is poised to support the scaling growth required for PACE to achieve this goal. What this would mean for TRHC is an increase in PACE client organic growth by adding new participants, expanding into new geographic areas and/or servicing new groups or types of PACE eligible patients. Of course, TRHC plans to continue adding new programs. There was also discussion at the conference around the expanding PACE to include all Medicare members beyond the current through eligible population that makes up the majority of enrolling. This would increase the potential number of members more than five-folds. At least fourth pilot is being considered around this topic in the State of Michigan. As Cal mentioned, we will have a special guest speaking regarding PACE 2.0 at our Investor Day and Analyst Day Conference on December 4th. I think our PACE companies and clients will echo that this year's conference was a great success. For another related topic, as you may recall, during the quarter, we effectively completed three acquisitions that bolster our offering in the PACE market. Mediture and Cognify are the leading EHR providers in PACE and eClusive offers powerful analytics for capitated and health plan providers such as PACE. Just to note that Cognify is an integrated healthcare technology platform for PACE that is also EHR agnostic. This provides them with the flexibility to integrate with any electronic health record. Their standard offering is Greenway. Between the companies, they service about two-thirds of the electronic health record needs in PACE today. With these and our existing paid services, we believe there is tremendous opportunity to offer an integrated platform that turns demographic, clinical, claims, medication risk and outcomes data into productive and actionable information. This information could be turned into knowledge and used by PACE organizations and their medical teams to further personalize their services and bolster organizational performance. We previewed this offering to our partners at the recent PACE conference and their response was overwhelmingly positive. As Cal mentioned, we’ve added dedicated resources to our Healthcare Analytics Center to enable a first phase launch as soon as mid-2019. We are thrilled about the sizeable cross-selling opportunity with our array of integrated offerings and the addition of robust data analytics platform for PACE. Right now amongst our paid service provider organizations, we’ve partnered with 85% of PACE companies. That’s less than 15% are utilizing our entire fleet of solutions. We believe that our enhanced service and integrated platform offerings will allow us to maximize the cross-selling potential in the PACE market which represents millions of incremental dollars of annual revenue. To close my comments, I will provide a quick update on our PACE new business. In the third quarter, we began the implementation and transition process for the largest single location PACE organization in our company’s history, Rocky Mountain PACE in Colorado Springs, Colorado. Rocky Mountain PACE is perhaps one of the largest if not the largest single location in the United States. They have aggressive plans for continued growth and we’re delighted to have been selected as their medication safety partner. We also began our medication risk mitigation services with a new client in North Carolina. In the fourth quarter, we will complete the transition of Rocky Mountain PACE, on board two new client expansion locations, both located in Pennsylvania and will add new clients to our other PACE technology and service organizations as well. I will now turn the call over to Brian to review our financial results.

[Brian Adams:]

Thanks, Orsula. This was another strong quarter for the company across the board. Tabula Rasa generated $54.4 million in total revenue in the third quarter of 2018, representing a 66% increase over last year. Product revenue of $28 million increased 18% year-over-year and represented 52% of total revenue. Service revenue of $26.4 million increased 195% from the third quarter of 2017 and represented 48.5% of total revenue. Recent acquisitions including the SinfoníaRx business which was acquired in September of 2017, the Peak health plan management business acquired in May of 2018 and the Mediture and eClusive businesses which were acquired in September of 2018 contributed $12.3 million to the increase in service revenue during the quarter. Additionally, during the third quarter of 2018, we received notifications from our data aggregation partner for the pharmacy cost management business that they had transitioned to new data submission platform, which involved directly contracting with pharmaceutical manufacturers versus using a third-party service, effective January 1, 2018. As a result, revenue attributable to the sale of data from our pharmacy cost management services increased by $4.1 million of which $3.4 million related to the first and second quarters of 2018. Gross margin came in at 36% versus 28% the same period a year ago. While margins hit the low end of our long-term target of 35% to 40%, they were somewhat inflated by the contribution in pharmacy cost management business from first and second quarter. If you remove that contribution, gross margin was 31%, still marked improvement over the last year, primarily the result of an increase in service revenue as a percentage of total revenue. Product gross margin of 25% compared to 23% a year-ago and 27% last quarter. As I mentioned and our last call when we on-boarded a new client or two in this case, we can see temporary positive and negative impacts on gross margin. As we expected, margins are dropping in line with prior quarters as these new clients start to align with the TRHC methodologies for managing medication risk. Service gross margin of 47% compared to 44% a year ago. This year-over-year increase is the result of the inclusion of prior period revenue related to pharmacy cost management business. When you exclude that contribution from the first and second quarter, service gross margin was 39% and in line with last year -- last quarter. As we have mentioned in the past, the SinfoníaRx and Peak businesses carry lower margins than the service offerings represented in historical periods. In addition, our EMTM program has a higher cost structure in year two. We believe that there are opportunities to generate some efficiencies and improve margins in the program, but at this point the cost structure is designed to continue to driving similar outcomes to our year one results. Operating expenses excluding the change in fair value of acquisition-related contingent consideration represented 33% of total revenue, up from 28% in the third quarter of 2017 and compared to 32% in the previous quarter. On the second quarter call, we mentioned that we anticipated a slight uptick in operating expenses in the second half of 2018 associated with Tabula Rasa 2.0 and that was the case. The investments we are making back into the business we believe will support growth in 2019 and beyond. Adjusted EBITDA of $9.3 million in the third quarter compares to $4.1 million a year-ago. Our adjusted EBITDA margin of 17% in the quarter increased from 13% a year-ago as a result of the incremental contribution from the pharmacy cost management business. If you eliminate the contribution from the first and second quarters, adjusted EBITDA margin is 11% and this is inline with our expectations given the incremental spend related to Tabula Rasa 2.0. Our GAAP net income of $10.4 million compared to net income of $6.2 million in the third quarter of 2017. This net income was impacted by a benefit of $8.3 million due to the change in fair value of acquisition-related contingent consideration for the SinfoníaRx acquisition. The benefit recognized in the third quarter of 2018 decreased the amount of contingent consideration we expect to pay in connection with the acquisition. As of September 30, 2018, the SinfoníaRx contingent consideration liability was $71.9 million with the potential for up to an additional $13.1 million if the maximum contingent amount is earned, which would flow through as the charge to GAAP net income or loss. As a result, the third-quarter net income per diluted share attributable to common stockholders was $0.47 compared to $0.33 a year-ago. The per share calculations are based on 22.3 million and 18.6 million diluted shares outstanding respectively. Adjusted net income per diluted share for the third quarter of 2018 was $0.26 compared to $0.10 in the third quarter of 2017. Turning to the balance sheet. As of September 30, 2018, cash on hand was $13.9 million compared to $10.4 million at December 31, 2017. Cash flow from operations contributed to the increase during the nine month period. TRHC had $26.5 million drawn in its line credit at the end of the third quarter. The company is in the process of evaluating refinancing options in order to increase its borrowing capacity. Before I review our updated guidance, I did want to touch on our most recent acquisitions, Mediture, eClusive and Cognify. These businesses will be captured in our service revenue and in aggregate they will generate approximately $15 million in revenue for the full year of 2018, about $4 million of which will be recognized by TRHC. We anticipate these businesses to have an adjusted EBITDA margin of around 20% in 2019. We paid approximately 2.5 times our 2018 revenue, 10 times 2018 adjusted EBITDA. The acquisition of these businesses enhances the capabilities we can offer to our customers and further deepens the clinical and cost data that we can access to provide enhanced analytics to our clients in order to help them better manage care for their members and reduce costs while at the same time increasing quality. To close out my remarks today, I'll review our current financial outlook for the remainder of the year. For the fourth quarter of 2018, we anticipate revenue to be in the range of $53 million to $58 million, adjusted EBITDA to be in the range of $7 million to $9 million, net income or loss to be in the range of a loss of $1 million to income of $1 million, this amount does not include any forecasted adjustment to acquisition-related contingent consideration. For full year 2018, we are updating our previously stated outlook. We now anticipate total revenue to be in the range of $200 million to $205 million. Of that revenue, we expected product revenue of $115 million and service revenue of $88 million at the midpoint of the range. We continue to expect adjusted EBITDA to be in the range of $28 million to $30 million as we account for the additional investments related to our Tabula Rasa 2.0 initiatives and costs related to becoming a large accelerated filer. Additionally, we expect to incur expenses related to the integration of Mediture, Cognify and eClusive businesses, during the remainder of this year, and therefore, are we’re not changing our guidance for adjusted EBITDA at this point to reflect any incremental contribution from those businesses. The midpoint of our guidance range would equate to approximately 14% adjusted EBITDA margin for the full year, approximately 100 basis point increase over last year. We now expect a net loss in the range of $36 million to $38 million. The projected net loss is primarily the result of $40 million in charges related to an increase in the acquisition-related contingent consideration liability. As you can likely tell from my commentary today, I continue to be extremely pleased with the performance of the business and my enthusiasm keeps growing as I look at all the opportunities ahead of us. And With that, I'll turn the call back over to Cal for some closing remarks.

[Calvin Knowlton:]

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

[Operator:]

[Operator Instructions]. And our first question will come from line of Ryan Daniels with William Blair. Your line is now open.

[Ryan Daniels:]

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

[Brian Adams:]

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

[Ryan Daniels:]

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

[Calvin Knowlton:]

This is Cal. Let me take the second one first. We had a lot of -- out of the 240 some thousand patients we were assigned when we risk stratified them down using our risk stratification methodology, we came down to about 34,000 that needed intervention. Last year, we were able to contact about 15,000 of those people. This year we are up to about 24,000. So we had a much better penetration this year than we had before. I think that will reflect in the results, I would certainly hope so. But -- so the penetration -- because the number one issue is getting in touch with these people and it has been difficult to address the new ways to do it and I believe that we have obtained that. As far as the market results, we haven’t had a, okay, you have to do anything with that? Frankly, they haven’t given any comparative to add. They haven’t given us comparatives on the other five programs they are doing this, right? So, I don’t know -- they are holding their records closely to their part.

[Brian Adams:]

Nothing that we are using the data that we do have to actively go out and talk to plans. So those have been very positive conversations and are starting to accelerate some of what we have in the pipeline already. So the data that we do have available to us we are actively using. But as Cal mentioned, we don’t have the comparative data to share at this point.

[Ryan Daniels:]

And then last question just on, the contingent consideration going down a little bit. Is that just -- I know that could be a volatile metric quarter-to-quarter, it’s a three-valued, but any major changes in the outlook for the business and the EBITDA that drove that, again I know it’s pretty minor?

[Brian Adams:]

Yes, it’s actually a pretty minor adjustment that we made. Just given the sensitivity of the metrics that we used to develop the earnout model any little change can really drive a pretty major fluctuation in the near term. So no major fundamental difference in the business we are still extremely pleased with the outlook for Sinfonía.

[Operator:]

And our next question will come from the line of Mohan Naidu with Oppenheimer. Your line is now open.

[Mohan Naidu:]

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

[Orsula Knowlton:]

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

[Mohan Naidu:]

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

[Orsula Knowlton:]

Sure, well, we’re seeing some positive results already as of. PACE plays like a one stop shop for organizations especially in the startup mode to be able to organize all service providers under one group. We see that as an opportunity. We’re at 15% across the board. Each of us have a good percent of the market. However, the entire market using all of our services is really where we would like to go and of course the incentive for that is the data analytics platform that we would be able to provide by having all of their data.

[Mohan Naidu:]

One more, Cal on the international market, you said Middle East and Asia, are you talking about similar arrangements as with AMS?

[Calvin Knowlton:]

Yes, so yes we are. They’ve the same issues that we do on Preventable Adverse Drug Events and without having solutions. So it’s a plain territory. We’ve really interesting uptake from these people.

[Operator:]

Thank you. And our next question will come from the line of Matthew Gillmor with Robert Baird. Your line is now open.

[Matthew Gillmor:]

I had a follow-up to Brian’s first question. I was hoping if you could just sort of explain what this change was resulted in the high revenue for the pharmacy cost management. I wasn’t really clear in terms of what change that caused you to recognize the revenue this period?

[Brian Adams:]

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

[Matthew Gillmor:]

And then just going forward this will be something that'll -- it won't of course be lumpy because you've got the …?

[Brian Adams:]

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

[Matthew Gillmor:]

Okay. But it will sustain sort of at the roughly the current pace.

[Brian Adams:]

That's correct.

[Matthew Gillmor:]

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

[Orsula Knowlton:]

Sure. Of course that information is pretty new but what we see as an opportunity is, particular with the opioid legislation that it is required for the individual Part D plans to have an opioid initiative. This year they have to submit a plan, I believe it was by June or in mid-year spring. And there was an overview of it, was just really have a plan. So we feel that those plans will over time require -- will be required to be more robust and in particular with regard to avoiding unintentional overdose, and we certainly have an offering around that. We are seeing some interest now. So were excited about that.

[Calvin Knowlton:]

We also had two peer reviewed publications that will help solidify our position once they are published.

[Operator:]

And our next question will come from Nina Deka with Piper Jaffray. Your line is now open.

[Nina Deka:]

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

[Brian Adams:]

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

[Nina Deka:]

And then also regarding the EMTM pilot, you mentioned that year two was a similar cost structure as year one. Could you provide a little bit more insight on that? And then potentially what would happen in say year three that would bring that cost structure down?

[Brian Adams:]

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

[Operator:]

Thank you. [Operator Instructions]. And our next question will come from the line of David Grossman with Stifel Financial. Your line is now open.

[David Grossman:]

Just a quick clarification first on the guidance, could you just help us understand how much the acquisitions added to the annual guide and how much of that obviously falls in the fourth quarter?

[Brian Adams:]

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

[David Grossman:]

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

[Brian Adams:]

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

[Calvin Knowlton:]

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

[David Grossman:]

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

[Brian Adams:]

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

[David Grossman:]

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

[Calvin Knowlton:]

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

[Orsula Knowlton:]

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

[David Grossman:]

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

[Calvin Knowlton:]

Well, we saw that in hospice, when we're in hospice and it was the best thing ever that happened to us just because it all bodes growth and I think that’s going to happen here. It’s a great addition. And it helps the non-profits and they'll put their nose to the grindstone. I think it's a good thing just like it was with hospice.

[Orsula Knowlton:]

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

[Operator:]

And our next question will come from Stephanie Demko with Citi. Your line is now open.

[Stephanie Demko:]

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

[Orsula Knowlton:]

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

[Calvin Knowlton:]

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

[Brian Adams:]

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

[Calvin Knowlton:]

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

[Stephanie Demko:]

Now on to predictive analytics part, I think it was particularly interesting. Has there -- does that shift kind of the pools of talent that you normally look for versus your legacy solutions when you look at the predictive tool?

[Calvin Knowlton:]

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

[Operator:]

Thank you. And our next question will come from the line of Frank Sparacino with First Analysis. Your line is now open.

[Frank Sparacino:]

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

[Brian Adams:]

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

[Calvin Knowlton:]

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

[Frank Sparacino:]

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

[Calvin Knowlton:]

Well, I think I don’t know if they're growing at all but they are there, but they need help and it's just is a somewhat easier for us it seems to think about single-payer systems that where the decision is more concentrated in the states, of course we want to benefit states but it is difficult because you’re dealing with all these different healthcare systems and all that stuff. So there really is just a little bit of advantage when you have cost down type of system. So that's kind of the trade off between the two but they all need this type of science.

[Operator:]

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