Tabula Rasa HealthCare, Inc.
Q3 2016 Earnings Call Transcript

Published: 12 Nov 2016

[Operator:]

Good day ladies and gentlemen and welcome to the Tabula Rasa Third Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today Kevin Dill, Corporate Counsel. You have the floor, sir.

[Kevin Dill:]

Thank you and good afternoon. I am 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. This 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 risk facing Tabula Rasa HealthCare, please refer to our filings with the SEC including the risk factor section of our S1. 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 Calvin Knowlton, CEO of Tabula Rasa HealthCare.

[Calvin Knowlton:]

Thanks, Kevin. Good afternoon and thank you for joining us on our first earnings call as a public company. For those of new whom I have not yet met, I am Cal Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare. And on the call with me today are Brian Adams our Chief Financial Officer and Orsula Knowlton our President. We are very pleased with the strong reception from the market to our IPO and I am excited by the future that since tour for Tabula Rasa HealthCare. On today's call, I'd like to share couple of highlights from our third quarter and then provide you with a brief overview of what we do and the exciting markets we serve. In terms of some financial results from the third quarter, we grew our revenue by 35% year-over-year to $24.2 million. Our adjusted EBITDA increased by 38% to $3.3 million and our adjusted earnings per share grew to $0.06 from a negative $0.01 last year. Brian, our CFO will dig deeper into our financial results, but I'd like to spend the remainder of my time this afternoon taking a deeper look at our products and explain a bit more about the markets we serve. Tabula Rasa has created a proprietary unique multi-drug Medication Risk Mitigation analysis software platform. We believe our solution has a meaningful step forward in terms of outcomes and cost savings. The traditional approach which has been the standard for the past 30 years screened for potentially harmful one drug to one drug interaction and has only able to analyze the potential risk of one drug to one drug at any given time. While these systems exit today as the standard in pharmacies, electronic health records and pharmacy benefit management program, they are not able to identify a person's risk of multi drug interactions or the risk from cumulative impact of multi-drug side effects that has embodied in a particular person's drug regimen. So this system is not only out of date, it is very dangerous and the root cause for adverse drug events. At Tabula Rasa, we have moved into a personalize medication error where we are able to optimize medication regimens for patients who take multiple drugs. Our proprietary software does this by looking at personalized characteristics, the possibility of unintentional overdoses due to cumulative side effects within the regimen and the competition for metabolic enzymes within the regimen. When we add to that mix, pharmacogenomic we move from a personalized approach to a precision medication approach. This is our vision applying advanced science and the precision medication error, we'll also be able eradicate adverse event just as we have witness the eradication of certain diseases. In other words, our proprietary Medication Risk Mitigation or MRM platform takes into account each patient's commodities current medicine, demographics and clinical lab results to create a personalized and optimized prescription regimen. When we add genomics which we do with the very high risk patients we serve, we move into precision medication regimens. The use of our medication risk mitigation personalized and precision system dramatically reduces the likelihood of adverse drug events, which is the fourth leading cause of death in the United States today as well as the resultant force ER visits and hospitalization incurred. In today's healthcare system, payers are incentivized to expand their oversight and coordination of care. Our solution which improves patient outcome while at the same time reducing cost meets those payers need, as of September 30, we have 127 healthcare customers that manage at risk population as compare to 100 customers at this point last year. Nearly, all of our revenue is recurring and we have a revenue retention rate of 99% and the client retention rate of 96%. We have four Medication Risk Mitigation products, each of which are powered by our proprietary multi-drug Medication Risk Mitigation platform. Our first Medication Risk Mitigation product is called EireneRx and it is an e-prescribing module that integrates with various electronic health records within a closed health system. We first launch the EireneRx in January 2011 in PACE a CMS Program of All-inclusive Care for the Elderly and we have grown rapidly in this market over the past five years. We are currently the market leader in PACE in terms of medication risk mitigation solutions with about 20% market share. Within the PACE market and only in PACE, we also provide medication reminder packaging services to their population. Our second Medication Risk Mitigation product is called MedWise Advisor. This app is able to assess medication risk in one person or in thousands of people simultaneously. This is a standalone app that utilizes our Medication Risk Mitigation platform used to optimize prescription regimens of patient populations through the use of our medication risk strategy. MedWise Advisor was launched in the second quarter of this year and we have already signed a significant multi-year contract with the health plan to risk stratify 240,000 to use this novel system to help identify patients at the highest risk for adverse drug events and to intervene with such patients and prescribers. Our third Medication Risk Mitigation product MyMedWise Advisor is a patient engagement tool that patients can access through their smartphones. This is another example of the flexibility of our Medication Risk Mitigation platform and how we can easily customize it to address adjacent markets that can benefit from personalized and/or precision medicine. MyMedWise Advisor is about to go into testing, and we anticipate it will be available to the consumers of our partners in 2017. Our fourth Medication Risk Mitigation product is called NiaRX and it issues in more than a dozen schools of pharmacy by faculty and students to train the next generation of pharmacies of our Medication Risk Mitigation system. Like our other solutions, NiaRX enables them to perform simultaneous multi-drug risk analysis and therapy recommendations and also has additional built-in educational functionality such as case studies and testing for this equity. With that product overview, I would like now to turn to a discussion of the markets we serve including the PACE market and beyond. The PACE market is a fully at risk plan provider system, which represents our largest market today. Using a capitative payment system, PACE programs are able to provide the entire continuum of care and services to older adults with chronic care needs while maintaining their independence at home. This frail elderly person decided to become a PACE participant rather than nursing home resident. We’ve seen very strong results in PACE and we still only have 20% penetration in that space. Our PACE revenue show strong growth in the third quarter of 35% on year-over-year basis and the same-store growth within our PACE clients continue to come in at about 20% annualize. Once we sing up a new PACE program, we receive a PMPM, per member per month amount for each of their members to manage their medication regimen as well as revenue associated with traditional pharmacy services. As they grow their populations, their new members are automatically added to our solution. We support their growth by reducing the medication risks, which leads fall ER visits and hospitalization in this frail ambulatory elderly population. During the third quarter, we added one new PACE client in Indianan and one expansion of an existing PACE client in Western Pennsylvania. We have signed agreements for a total of three new start-up PACE organizations in the queue for a total of 39 PACE organizations we serve out of 119 organizations. I am very confident with our position in the PACE market today as well as with the deep pipeline of other PACE organizations that have shown interest in our products and services, and I look forward to continuing to update you on our success over the coming quarters. While PACE is our first vertical unless a core market, we’re also seeing continued success in expanding our Medication Risk Mitigation platform outside of PACE specifically with MedWise Advisor. And I’d like to update you on a few of those developments. All of these initiatives are captured in our service revenue. The first, which we previously announced is a significantly engagement for us, as it is our first major project outside the PACE market. On January 1, 2017, we begin work with six health plans operating in seven states to provide enhanced medication therapy management services to their largest standalone Part D program. This is a really exciting project for us as we are tasked with optimizing the medication use, reducing medication way to hospitalization and improving coordination of care, for nearly a quarter of million older Americans. Second in September, we signed two additional contracts with the same clients of health insurers to provide two different 2016 year end medication quality initiatives for their Part D members using MedWise Advisor. One of these projects which we're working in now focuses on general medication safety, helping approximately 250,000 Medicare beneficiaries. The second one is an opioid use, misuse and abuse project targeting 15,000 patients. While these projects are a onetime engagements, they represent our ability to deepen our relationships with our partners and I'm optimistic about the long-term opportunity that this signals. Third, we entered into another engagement that will begin on January 1, 2017. This one is with a health plan and it will use MedWise Advisor to monitor 8,000 patients who have a history of frequent hospital use. This engagement is referred to as a novel care transitions project. So, these are great examples of the scalability and flexibility of our Medication Risk Mitigation platform and our ability to extend to adjacent markets using MedWise Advisor. This unexpected surge has accelerated more than planned our staffing and space needs, both of which we've handled very well. Another key component of our service revenue, I want to comment on, is our risk adjustment service, which currently is used by 42 of the 119 PACE organizations to optimize revenue by ensuring that all pertinent diagnosis or being captured for each patient within the CMS hierarchical condition categories risk scaling model. This is an additional PMPM that is complementary offering to our Medication Risk Mitigation services. We're able to help our risk clients to assure that all diagnoses are being captured in order to optimize reimbursement while also focusing on containing costs thereby improving the PACE organization's profitability. Since acquiring the business about two years ago, we've been successful in cross selling this service into our existing client base. And during the third quarter, we added two new PACE organizations bringing our penetration and the risk adjustment services to 35% of the PACE market. It's also important to note that we expect to continue to see cross selling between the businesses. Before wrapping up my comments, I want to take a moment to mention just two items that we've seen affecting other healthcare companies recently and explain why Tabula Rasa has not and will not be impacted in the way others have been. The first is the impact of direct and indirection remuneration or DIR fees. While some companies contract directly with PBMs causing this issue of DIR fees to come up to the forefront during the third quarter. Tabula Rasa designed our PACE contracts to be directly between the Company and the Medicare Advantage Part D plans of the PACE organization. Our contracts do not put us in the position where we are subject to DIR fees. And I firmly believe that we'll continue to perform well as our business model is built around increasing quality and lowering costs for our patients. The second point is the impact of drug price inflation. While U.S. medication spending over the past several years has increased 37% and many pharmacies wholesalers and manufacturers benefited by ongoing price inflation, the average PACE participant using our using our services has experienced an increase in the medication spending over the past five years of only 3%. This is due to our Medication Risk Mitigation processes, which as each medication regimen is personalized using our software and services, reduces the number of chronic meds per patient, reduces the frequency of trial and error prescribing and converts more than 90% of the medication use to generic medications. Thus our growth is not secondary to medication price increase. Our growth is derived from two aspects adding new clients and capturing all of our clients on growth. Before I turn the call over to Brian to discuss third quarter results in greater detail, I just wanted to reiterate how pleased I am with our first quarter in the public market. We saw a strong financial performance, but more importantly we've begun to deliver on the plan we laid out on the IPO road show. So, I believe there is a tremendous opportunity ahead of us and I look forward to keeping you up to date on our continued progress. I'll turn the call over now to Brian for a closer look at the quarterly results. Brian?

[Brian Adams:]

Thanks, Cal. As part of my review of financials, I will refer to some non-GAAP operating results. Please note that reconciliation can be found in our earnings press release issued earlier today. Turning to the third quarter, we generated strong results with total revenue of $24.2 million, an increase of 34.6% compared to a year-ago. Both our products and service revenue grew in line with our total revenue at about 35%. Products revenue of $20.7 million in the third quarter compared to $15.4 million a year-ago, an increase 34.7%. Products revenue primarily generated through our Medication Risk Management contracts was driven by a combination of an increase in the number of PACE organization we serve and growth within our existing customers. Our service revenue of $3.4 million in the quarter compared to $2.6 million and grew 34.3% year-over-year. Growth in our service revenue which comes primarily from our risk adjustment and pharmacy cost management services can be attributed mainly to growth within our existing risk adjustment customers and the addition of new PACE organization. Additionally, we started one of the year end quality initiatives that Cal was describing earlier. Before I move on, I'd like to take this opportunity to remind you that this project will not be recurring next year and included in this quarter's results is some non-recurring revenue for risk adjustment as well. In total, both were roughly $900,000. The Company generated growth margin at 28.9% for the third quarter of 2016, an increase of 80 basis points sequentially, but was down 270 basis points year-over-year. We do find that our gross margin can vary form quarter-to-quarter based on client mix, business mix and medication mix. And although, Q3 gross margin was lowered than the same period last year. This met our expectations based on business clients and medication mix during the period as well as increases in staffing to trained for upcoming contracts. By looking at this metrics on an annualize basis, it will help to normalize for any quarter-to-quarter fluctuation. Finally, I remind you that we believe that our gross margin is immature and we have longer term gross margin targets in the range of 35% to 40% due to the expected increase in service revenue. Operating expenses represented 16.4% of total revenue for the quarter, essentially flat sequentially and down from 19.3% a year ago. We expect operating expenses as a percentage of revenue will decline modestly over the next couple of years as we scale-up and leverage our platform. Our GAAP net income in the quarter was a loss of $142,000 and included a $1.4 million expense related to the early extinguishment of our debt with Eastward Capital Partners, which was paid off on July 1, 2016. For your reference, we expect to incur $5 million loss related the extinguishment of debt in the fourth quarter as well. On an adjusted EBITDA basis, we delivered $3.3 million, which compared favorably to $2.8 million last quarter and $2.4 million a year ago. Adjusted EBITDA margins in the quarter of 13.5%, increased to 100 basis points from last quarter and 30 basis points compared to a year ago. GAAP net loss per diluted share for the third quarter of 2016 was $0.08 compared to $3.21 last year. I also want to remind you that the net loss per share calculations used for all periods used in the denominator pre-IPO weighted average common shares outstanding. In future reporting periods, our share counts will be dramatically impacted by our IPO where we issued 4.95 million new shares of common stock. As of today, we have 16.1 million shares outstanding including the conversion of preferred stock, the issuance of restricted stock and conjunction with the IPO, and excluding any potential dilution from stock options and shares that will be issued in connection with the acquisition completed in September. Adjusted net income per share for the third quarter was $0.06 compared to a net loss of $0.01 in Q3 ’15. Our adjusted net loss per share for the quarter excludes stock-based compensation loss on extinguishment of debt and changes in fair value of warrant liability. Before I move on to the balance sheet, I want to review our recent IPO. On September 29th, our initial public offering is price a $12 per share and consisted of 4.95 million primary shares, this resulted in growth proceeds of $59.3 million to the Company, which was $51.6 million net of underwriting discount and offering expenses. The proceeds are being used to repay debt into new market segments, expand the sales and marketing infrastructure, fund acquisitions and for working capital and corporate purposes. Turning to the balance sheet on September 30th, we had a cash balance of $1.8 million and debt of approximately $46 million. But keep in mind that we did not receive our IPO proceeds until four days after the transaction price, which was actually October 4th. So I believe it would be more relevant to share our capital structure today where we have a cash balance of $24 million and an outstanding debt of $18 million excluding the remaining payable related to the acquisition completed in September of approximately $3 million. As of today, we have a $15 million drawn on our $25 million line of credit. And before I get to our full year outlook, I just want to take a moment to comment on our acquisition of InterMED-Rx that it was commercially known which we close on September 15th and is part of our use of proceeds from the IPO. InterMED-Rx supplied one key element of our Medication Risk Mitigation metric. As a reminder, we were previously licensing this technology, but felt owning would allow for us to control the technology and customize it to better meet to needs of our clients. With that, I want to close up my comments tonight with our view of the remainder of 2016. For the fourth quarter of 2016, we anticipate revenue to be in the range of $25 million to $26 million. We expect the fourth quarter will include approximately $3 million of revenue related to the two 2016 year-end medication quality initiatives that Cal mentioned earlier. I want to highlight them because while they are indicator of the value of our platform and the deepening of our relationship with this customer, they are non-recurring and shouldn't be rolled forward into 2017. Adjusted EBITDA to be in the range of $3.5 million to $4 million, net loss to be in the range of $6 million to $7 million which includes a $5 million expense related to the extinguishment of debt. This payoff dramatically decreased our interest expense going into 2017. In addition, we will incur stock-based compensation expense of $3.5 million related to restricted stock grants and shares issued in conjunction with the IPO. These two items total $8.5 million and if backed out would put us in a positive net income position. For the full year, we expect revenue to be in the range of $92 million to $93 million. Adjusted EBITDA to be in the range of $12.5 million to $13 million and net loss to be in the range of $6 million to $7 million, which includes a $6.4 million expense related to the extinguishment of debt as well as $3.6 million, and stock-based compensation related to restricted stock grants and shares issued in conjunction with the IPO. These two items total $10 million and if backed out put us in a positive net income position. We'll provide our initial 2017 outlook when we release our 2016 year end results, and in subsequent quarters, we will update our annual projections and provide guidance for the upcoming quarter. Before I turn the call back over to Cal, I just want to echo his earlier sentiments. I'm also very pleased with the results of our first quarter in the public market. I believe we're well positioned for future growth and expansion and I look forward to providing you with updates in the quarters to come. That concludes my prepared remarks and I'll turn the call back over to Cal for closing comments. Cal?

[Calvin Knowlton:]

Thank you, Brian. The new non-PACE initiatives we mentioned earlier truly demonstrate our deepening relationship with our enhanced medication therapy management partner as well as our ability to utilize our technology to offer more differentiated services to the market. We've multiple avenues of growth ahead of us across all of our proprietary products including; first, EireneRx where we'll continue to grow within our existing customers as well as add new PACE organizations with strong recurring revenue; second, MedWise Advisor which we'll continue to expand across various of our health plan; third, MyMedWise Advisor which we aimed as available to the public through our health plan partners by the middle of next year; fourth, NiaRx where we'll continue to add the number of pharmacy schools where we service and train the pharmacists of the future; and fifth, our Risk Adjustment Services as well as our Pharmacy Cost Management business where we'll continue to penetrate and cross sell into our PACE client providers. I'm very proud of our accomplishments thus far in our company's history and I want to acknowledge that we could not have maybe strides of course including the successful exceptional completion of our IPO without the hard work and dedication from our team. I also want to take this opportunity to thank each and every one of our customers, partners and investors. With that, let's open up the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question for today comes from the line of Peter Costa from Wells Fargo Securities. Your line is open.

[Peter Costa:]

Couple of questions for you regarding first the 8,000 life contract that you've starting in January, can you talk a little bit more about the revenue implications of that contract and sort of what is that mean for you going forward? And who is the customer there? Is that the same customer, the CMS contract? Or is it the different customer and what areas that customer in?

[Brian Adams:]

This is Brian. Thanks, Steve. So just a couple of quick tweets on the, first, this is a Medicare Advantage Plan that we are going to be working with. There is a relationship with the enhanced medication therapy management partners, so it's not necessarily the same contracting entity, but the revenue model there is a PMPM and for next year it's going to be an incremental probably close to about a $1 million.

[Peter Costa:]

And then, this quarter your revenue seems very strong, the up side the EBITDA was more or less in line. So little bit higher cost, I guess it's from the staffing up getting ready for some of these contracts that you have projects for the fourth quarter. Can you tell us what is the impact was this quarter the staffing up cost for lose things?

[Brian Adams:]

Sure, so just in terms of the gross margin. As you could see we were down by 270 basis points compared to last year. So about half of that came from the staffing implications and the other half came from the on boarding of a couple of new clients. At which time, from time to time we'll a temporary reduction in margin. We expect those to be back in normal state in the fourth quarter. But that's really a result of bringing on a new client and then transitioning those patients on to our services.

[Peter Costa:]

Understood and do you think there was any implication from the Republican sweep regarding the PACE program?

[Calvin Knowlton:]

Hi Pete, this is Cal. As far as we can tell, it should not be, it's economical for the government compared to nursing home placement. And there is large trust by CMS at least right now on trying to push, not push, but to point people into enter PACE. So, we don’t believe this is going to rally have an impact form what we can see right now.

[Operator:]

Thank you. Our next question comes from the line of Michael Cherny from UBS. Your line is open.

[Michael Cherny:]

Good evening guys and congratulation on the nice quarter and a good start following the IPO. So, I want to dive in a bit to the PACE program because I know that this is one area that for investors, I think it's fairly new form kind of investing perspective. Can you just may talk over the last two or three years, Cal you've just mentioned that there is support from CMS regarding further PACE enrollees, but maybe some of the changes that driven the ability to further enhance that PACE enrollment in terms of some of the changes to flexibility and either structural changes to the program?

[Calvin Knowlton:]

Sure. Michael, let me turn that over to Orsula.

[Orsula Knowlton:]

So the PACE program continues to grow at over 20% per year based on our clients. And what we see as promoting PACE includes, what Cal mentioned on CMS promoting it form a standpoint of letting people realize that they have access to it. When we do have access to it, they have enabled full profit sponsors in 2015, which we foresee will start to feel the effect of that in the next year to two years. They enforced an act of the PACE Innovation Act which will allow sponsors to provide services particular less than 55 years old and they are changing the conditions of participation at least at this time proposed for 2017. That would allow for greater flexibility from a staffing perspective even from a wavier perspective. Right now to have community physicians for patients and managed them a waiver required. And the conditions of participation are proposing that there is no waiver for that or for other types of debts other physicians to service patient.

[Michael Cherny:]

Just again on the PACE program, you've mentioned some pretty nice statistics regarding adding new customers, I think if recall correctly, one go-live in the quarter, three more than a size in the queue for a deployment. Can you maybe just give us a sense of the sales cycle looks like for the average PACE customer in terms of when you first engage with them towards gain and fully up and running?

[Orsula Knowlton:]

Well, it really depends. We see an average of about 18 months. So, it’s a pretty long sales cycle, mostly driven by consensus through the non-profit organizational structure.

[Michael Cherny:]

And then, Brian one last question for you, now you have a lot more cash for you disposal obviously you guys made a small acquisition so far. As you think about the use of cash going forward and potential for further bolt-on tuck-in acquisition right now as part of the S1, what areas you think are most right for additional add-on to your current platform?

[Brian Adams:]

So, we’re going to be very strategic the types of acquisitions that we look at. Right now, one point do we want to make is that we’re not looking for anything that wouldn’t be accretive to the business. And we’re looking at things that are going to be helping us to get into some new markets or add some capabilities to the technology that we don't otherwise have announced right now.

[Operator:]

Thank you. Our next question comes from the line of Sean Wieland from Piper Jaffray. Your line is open.

[Sean Wieland:]

So I got one on the PACE side too. So maybe just wanted to try to get an understanding of your PACE customers exposures specifically to the Medicaid market, and if Medicaid does indeed move, the financing move to block grants to the states as Trump has promised. What that means for the states to do business and in terms of funding PACE or future PACE organization and growth of PACE organizations?

[Orsula Knowlton:]

This is Orsula, thanks for the question Sean. Certainly, not clear at this point, but we don’t foresee any changes or Medicaid only percentage of PACE is very, very small overall. So, we would foresee that the doors which still have access to PACE.

[Sean Wieland:]

Okay. The three new PACE contracts that you did sign, I want to confirm that those also include your packaging services?

[Orsula Knowlton:]

They do, yes.

[Sean Wieland:]

And then let’s see finally just one quick one is in the capital structure, I heard you said, your debt is 18 million and then you went to say, you have 60 million drawn on the 24 million line of credit. I just want to confirm that the 16 is part of the 18?

[Brian Adams:]

That is correct. There is about $2 million in equipment today as well.

[Operator:]

Thank you. Our next question comes from the line of Matthew Gillmor from Robert Baird. Your line is open.

[Matthew Gillmor:]

Hi. Good morning, everyone and let me congrats to the team as well on the first quarter. I wanted to ask first on the health plan sales. So, Cal talked about this is being an unexpected surge, so just curious if you could talk about what you think drove that surge, was that visibility around the IPO or some internal sales efforts? And then second, what does the pipeline look like in terms of the health plan side? Are you seeing more demand for sort of these one-time quality projects or more on the lines of the enhanced MTM models that have recurring revenue?

[Calvin Knowlton:]

The health plans that we're working with and these two one quarter project that you want to mention, it's co-pay -- these are really laying the foundation for future offerings for us. So, it's kind of like two crucibles. The one in the opioids which is very popular throughout the country and we're taking 250,000 patients there, we're stratifying them, we've already done that and put them into two buckets of people on opioids and people on odd. And then, we look at a whole bunch of criteria for the people that have taken the opioids to see who is at the risk, whatever drug advancements, and we follow that path down. We believe that that type of project could be and we used some [Indiscernible] [0

[Matthew Gillmor:]

And then maybe one more just on the -- I was curious on, how you collect safety and utilization data for your PACE clients. And I know you have a lot of good testimonials from your PACE clients and you keep presented some sort of anecdotal data around the ER visits and utilization, but just curious if there's a plan to make this a little bit more systematic or you maybe use third party to validate the outcomes you're delivering on. And I guess the reason I'm asking is, I assume as you move outside of PACE, some other stakeholders are asking to have that data validated and make sure that it's been driven your technology?

[Orsula Knowlton:]

This is Orsula. So, we have our clients reporting that information to us directly and 80% of our clients are reporting outcomes data on a routine basis. We understand that there may be a need for third party to validate that data and that data may be available more readily perhaps in the future in more of a systematic way through the association as well.

[Calvin Knowlton:]

I think Matt if I could, just to go back, there was a question also that I skipped over, I apologize on the pipeline. The way we look at these projects we're doing with these health plans is that they are part of a larger group of health plans in the United States and they're 35 of them individually, but they're part of it. They're all similar and we found very high interest in some of the other groups that are within this cohort, if you will, in other states, on the stuff that we're doing. So, we're just starting to reach out and visit them and try and -- probably what we're doing with the ones in the Midwest, and I think it's going to be very interesting to see that unfold. So, the pipeline is healthy, and we believe that we feel good about that. We feel about the business. We feel good about the vision that they're taking on with this personalized medicine/precision medicine. So, it's been positive for us.

[Operator:]

Thank you. [Operator Instructions] We will take our next question from the line of Tom Carroll from Stifel. Your line is open.

[Tom Carroll:]

I thought, I wonder if I could ask you to may be go over one more time Cal and you've referenced in your prepared remarks the DIR fees and how Tabula Rasa is different from companies like diplomat and some of the challenges that we saw with them recently probably help for maybe on this venue to kind of may be touch on that a little more details? And then secondly I have for Brian, I wonder if you can just kind of re-comment on what you said about non-recurring revenue in your prepared remarks in order you like?

[Calvin Knowlton:]

The DIR fees, our contracts are with PACE organization's Part D plan. Each PACE organization has their own Part D plan. It is there on part D plan. And once a year, they put a bid into the government for this is what there drugs spend will be and their dispensing fees and their administrative PMPM. And we participate in those discussions with each of our clients as they're presenting or preparing their bid to be presented. So, it doesn't go through any PBM, we're directly contracted with them. So, I think that's where the main focus Tom of the differentiation.

[Brian Adams:]

And then just to touch briefly on the non-recurring revenue component really this really relates to the new year-end quality initiative the Cal was describing earlier. We did start one of those projects in the third quarter that in congesting addition to some small revenue in risk adjustment business. Total about $900,000 on the services side that will be deemed non-recurring and in addition to that will have another $3 million or so of non-recurring revenue associated with those projects in the fourth quarter.

[Operator:]

Thank you. I am seeing no other questioners in the queue at this time. So, I would like to turn the call back it over to management for closing remarks.

[Calvin Knowlton:]

Well, thank you for joining us on this call. Thank you for the questions. We just want to reinforce that we are very excited about the project, the progress we have made so far and the future. And we feel very good about the pipeline, the business, the team we put together, the structure we have around, the processes that we are using and the vision. And really, it has to do with -- frankly just to catch later with a couple of orders. It really has to do with getting into the swimming pool of adverse drug events and trying to reduce them in society and that’s really what are our focus has been. So, we thank you for your support through. And you have Brian or Orsula.

[Orsula Knowlton:]

Thanks. Look forward to our next call.

[Calvin Knowlton:]

Yes. Great.

[Brian Adams:]

Thank you.

[Operator:]

Ladies and gentlemen thank you again for your participation in today's conference call. This now concludes the program. And you may all disconnect at this time. Everyone have a great day.