Tabula Rasa HealthCare, Inc.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2017 Tabula Rasa HealthCare, Inc. Earnings Conference Call [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Dill. Sir, you may begin.

[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. 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 S-1. A recording of this call is accessible through a link on the investor relations page of our Web site 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. With me today are Dr. Orsula Knowlton, our Chief Marketing and New Business Development Officer, who will provide an update on our leadership in the PACE market, and Mr. Brian Adams, our Chief Financial Officer, who will provide our financial update on the third quarter as well as our outlook for the remainder of this fiscal year. The third quarter was another strong one for Tabula Rasa where we beat our financial expectations and reported some very positive developments in the business. Our revenue of $33.3 million increased 38% from $24.2 million in the third quarter of 2016. While we had solid performance in all aspects of the business, our services business was again particularly strong. Our adjusted EBITDA for the quarter came to $4.6 million, a 43% increase from last year. I will begin with an update on the integration of SinfoníaRx and discuss some early success. I will also provide an update on the EMTM market, enhanced medication therapy management market, and then I will review the broader Tabula Rasa market before turning it over to Orsula to discuss the PACE market in greater detail. As I am sure many of you are aware, in early September we announced our acquisition of SinfoníaRx, a leading provider of medication therapy management technology and services for Medicare, Medicaid and commercial health plans. Over the past few weeks, we have been working on the initial phases of our financial and cultural integration. We have also started to explore many options regarding client and IT collaboration. Both of these initiatives entail extensive planning and we would not expect to see the results of these integration efforts until late 2018 or early 2019. In general, however, the alignment of SinfoníaRx with TRHC is going very very well. We have seen very positive reaction from both our customers with some early signs of cross-selling opportunities that could materialize in the fourth quarter. Turning to the enhanced MTM market. As a remainder the enhanced MTM pilot program is focused on deploying a disruptive medication safety platform to optimize medication regimens, enhance quality of life for patients and reduce hospitalizations. In year two of the program which starts this coming January, we will continue to use our proprietary medication risk stratification tools along with our MedWise Advisor, medication decision support platform, plus introduction of our consumer version, My MedWise Advisor. In year two, the enhanced MTM program is expanding as we develop and manage a network of community pharmacists throughout the seven states of region 25. Beginning in January, those pharmacists will perform 20% of patient interventions using our technology, MedWise Advisor, which we have identified based upon medication risk scores. We also will be rolling out our patient engagement Smartphone app, My MedWise Advisor, to eligible patients throughout that region and we are actively performing market research to continue to enhance understanding and acceptance of our products and services in the market. Finally, we are commencing work to engage and educate prescribers throughout the region as prescriber involvement will be a cornerstone of enhanced MTM for year three, starting in January 2019. The enhanced MTM model test program was set up by CMS to encourage various regions to learn from each other and apply best practices that are working in other regions to drive improvements across the country. We were pleased to be contacted by one of the other EMTM pilot organizations which is interested in the [drafting] [ph] portions of our EMTM technology into their program. Now beyond EMTM, we are also seeing some very promising developments in the broader health plan market, specifically using our risk stratification engine and also our in-home care transition program. I will touch on both of those. With our medication risk stratification engine, we are collaborating with health plans in the broader market, which typically entails a two-step process. First, we risk stratify the population using our proprietary medication risk software that includes numerous pharmacokinetic, pharmacogenomic and pharmacodynamic components, which then is presented as an aggregated medication risk score in a histogram display. By year-end we expect to have risk stratified over 10 million patients for different health plans. You may remember on our last earnings call we had approximately 1 million patients stratified. Our homogenized medication risk score which includes all of our medication risk factors, ranges from zero to 50. Anyone over 19 is spending at least twice the average for medical expenditures and is at risk for a preventable adverse drug event. Interestingly, what we have found is about 7% to 15% of the commercial lives are at high risk with a risk score above 19. Then the second step is to intervene on these highest risk patients. Tabula Rasa can perform the mitigation efforts using our pharmacists or we can license the technology to the health plan leading the mitigation efforts and allow their pharmacists to take charge. Turning now to our in-home care transition programs, our early results show our cohort as a [hospital] [ph] readmission rate that is about half the national average. We are excited by these preliminary results. Furthermore, we are pleased that one of our health plan partners that offers our in-home pharmacist medication reconciliation care transitions program, has renewed and expanded their agreement for 2018. So we have a lot of exciting things happening at Tabula Rasa right now. We just finished a strategic doing retreat where we finalized our market priorities for 2018. With that I will turn the call over to Orsula to discuss the PACE market. Orsula?

[Orsula Knowlton:]

Thanks, Calvin. In addition to Calvin's remarks around the traction our solution is getting in the broader healthcare market, we are continuing to expand our leadership with PACE market penetration. We are pleased to have successfully implemented three new PACE organizations during the third quarter. In the quarter we also signed a new startup PACE organization contract in the Midwest, as well as supported a number of extensions with our existing pace customers. We recently returned from the Annual National PACE Association Conference in Boston or NPA, where we unveiled our medication risk score to the market. The initial response from PACE providers has been extremely encouraging. Our PACE medical director attested to the traction of this approach of identifying medication risk based on a zero to 50 score. An unanticipated finding was that physicians and other prescribers are using it to help communicate with patients about their medication risk. A couple of physicians quote from the conference include, my job as a physician is to first do no harm and the risk score is valuable to help me demonstrate the harm caused by medications. Another, this is a great bedside tool to help my participants understand why we need to adjust their medication. Numerous presentations at the conference identified ways that PACE organizations are growing their traditional dual eligible PACE population. For example, one of our clients in New York alongside the PACE program manager from the New York State Department of Health, led the presentation entitled PACE Innovation Act, the New York Way. This not for profit PACE based organization highlighted that by creating partnerships that drive enrollment growth, servicing specialty population to our eligible, such as the developmentally delayed demonstration in the state offering housing and social support with their [seeking] [ph] and assisted living demonstration and using existing wavier such as the referrals from the community physicians, they can and are driving the growth of the PACE population in the state where 750,000 dual eligible individuals are enrolled in the Medicaid program. Also at the conference, NPA launched PACE 2.0, an initiative to drive PACE growth using the PACE innovation act. NPA launched the PACE 2.0 project with the support from the John A. Hartford Foundation and West Health. The initiative will expand access to programs for all inclusive care for the elderly for many complex high-need, high-cost populations across the country. Overall, elder care providers are starting to be more vocal that the PACE model is well aligned to deliver care in both Medicare and Medicaid. The SCAN Foundation issued a report in late September entitled top ten recommendations to strengthen integrated care for dual eligible. In this report, Dr. Bruce Chernof, CEO of the SCAN Foundation, lamented that providing healthcare for roughly 11 million dual eligible is challenging primarily because Medicare and Medicaid do not talk to or work very well with each other. Patients often find themselves caught between the two healthcare programs receiving less than optimal care. Dr. Chernof also notes that PACE is the gold standard in terms of offering comprehensive medical and social services for dual eligible members and best integrating the care provided by both Medicare and Medicaid. We hope that the tight integration between Medicaid and Medicare in the PACE environment and the improved quality of life for duel eligible individuals will drive further adoption of PACE program. With that review of the PACE market, I will turn the call over to Brian Adams to provide a detailed review of our third quarter results. Brian?

[Brian Adams:]

Thank you, Orsula and thank you all for joining the call this evening to discuss our third quarter results. For the third quarter of 2017, Tabula Rasa generated total revenue of $33.3 million, a 38% increase year-over-year. Product in the quarter was $24.6 million, compared to $20.7 million in the same period a year ago. As a reminder, product revenue is primarily generated through our medication risk management contracts in the PACE market and the growth this quarter was mainly the result of expansion within our current client base. Service revenue driven by our non-PACE medication risk management contracts which also now include the SinfoníaRx business, as well as our risk-adjustment and pharmacy cost management contracts, came in at $8.6 million in the quarter, an increase of 151% from the third quarter of 2016. The increase in the third quarter was primarily due to two factors. First, a $2.6 million contribution from the SinfoníaRx business and second, our enhanced medication therapy management contract which contributed $2.2 million. As a reminder, our acquisition of SinfoníaRx closed of September 6 and we will only be sharing their results standalone until year-end. Thereafter, we will combine their results with Tabula Rasa's service revenue and as I just mentioned, during the quarter SinfoníaRx generated $2.6 million in revenue. Tabula Rasa generated a gross margin of 29.5% this quarter versus 28.9% in the same period last year. Consistent with past quarters, this improvement can be attributed to an increase in service revenue contribution which is associated with a higher gross margin. This quarter, we continue to trend in the right direction as we move closer to achieving our previously stated goal of gross margins in the 35% to 40% range, as service revenue constitutes a great portion of our business. Products gross margin was 23% in the third quarter of 2017, consistent with the third quarter of 2016 as well as the first two quarters of 2017. This result was in line with our expectations based on new customers on-boarded this year. Service gross margin of 48% in the third quarter of 2017 compares to 64% in the third quarter of 2016. Although this represents a significant decline from last year, this met with our expectations as the gross margin generated by the SinfoníaRx business is approximately 40%, which is in line with our other medication risk management service contracts and combined the two represent over 55% of service revenue. We do expect to generate efficiencies from the combination with SinfoníaRx and see margin expansion in the outer years for these services. Our operating expenses represented 30.2% of total revenue this quarter, up from 21.9% in the same period a year ago. Our operating expenses included approximately $900,000 of transaction related expenses for the acquisition of the SinfoníaRx business and a charge for an adjustment to the contingent consideration for SinfoníaRx of approximately $900,000. Additionally, we incurred approximately $300,000 of cost related to operating as a public company during the third quarter. These costs did not incur in 2016. Our GAAP net income of $7.7 million compares to a GAAP net loss of $142,000 in the third quarter of 2016. During the third quarter of 2017, we reversed a portion of our deferred tax asset valuation allowance and recognized tax windfall benefits which resulted in a onetime tax benefit of $9.4 million. We generated $4.6 million in adjusted EBITDA in the third quarter compared to $3.3 million a year ago. The increase in adjusted EBITDA was a function of growth in all of our businesses. Additionally, the SinfoníaRx business contributed approximately $600,000 of adjusted EBITDA in the quarter. Adjusted EBITDA margins for the third quarter of 2017 was 14% compared to 13.5% in the third quarter of last year. This was in line with our expectations as we began to see higher margin services businesses having impact on overall adjusted EBITDA margins. GAAP net income per diluted share for the third quarter of 2017 was $0.41 compared to GAAP net loss per diluted share of $0.08 for the same period last year. The net income and loss per diluted share calculations are based on diluted share count of $18.6 million for the third quarter of 2017 versus $10.3 million for the third quarter of 2016. Adjusted net income per diluted share for the third quarter of 2017 was $0.08 compared to adjusted net income per diluted share of $0.04 in the third quarter of 2016. As a reminder, our adjusted net income per diluted share for the quarter excludes stock-based compensation, payroll tax on stock option exercises. Transaction related expenses and changes in fair value of contingent consideration as well as adjustments for the tax benefits related to the partial release of our valuation allowance and recognition of tax wind fall benefit as I previously stated. Turning to the balance sheet. As of September 30, 2017, we had a cash balance of $5.9 million, an increase from last quarter of $3.1 million. The increase is the result of positive cash flow from operations and as of today we have $35 million drawn on our line of credit, which we use to finance the initial closing payment for the SinfoníaRx acquisition. Additionally, we have outstanding debt of $1.9 million in equipment leases. Before I turn the call back over to Cal, I will provide an outlook for the fourth quarter and an update on our outlook for the full year of 2017. As you have seen in the first three quarters of the year, we have realized sequential quarter-over-quarter growth in both revenue and adjusted EBITDA. We expect that trend to continue for the fourth quarter of 2017. We anticipate revenue to be in the range of $37.5 million to $39.5 million. Net income to be in the range of $1.9 million to $2.9 million, and adjusted EBITDA to be in the range of $6 million to $7 million. With three quarters behind us, we are taking this opportunity to update our full year projections. We are increasing our revenue projection to account for the revenue beat last quarter, increasing our net income projections to account for the tax benefits created by the SinfoníaRx acquisition, and maintaining our adjusted EBITDA range in line with prior guidance. As of today, we expect 2017 revenue to be in the range of $128 million to $130 million. Adjusted EBITDA to be in the range of $17.5 million to $18.5 million and we expect net income to be in the range of $6.5 million to $7.5 million. Again I will remind you that we have stock compensation expense in the first quarter and second quarter of approximately $5.2 million related to restricted stock grants issued in connection with the initial public offering. Additionally, we have partially reversed our valuation allowance and recognized tax windfall benefits for onetime benefit of $9.4 million in the third quarter. Finally, if you were to annualize our revenue run rate for the fourth quarter using our projection, it would be $154 million. I am incredibly pleased with the results from not only the third quarter but for the full year to date. Our business continues to performance extremely well. Our pipeline has never been more robust and the integration with the SinfoníaRx business has been very smooth process so far. That concludes my prepared remarks and I will turn the call back over to Cal for closing comments. Cal?

[Calvin Knowlton:]

Thank you, Orsula and Brian. I am very pleased with our third quarter results and continued momentum we are seeing in the business and as always I want to thank our customers, our partners, our Tabula Rasa team members. And I also want to express my excitement to how have incorporated our new Sinfonía team members on broad. I believe we have some really interesting things and opportunities ahead of us as a newly combined organization and I look forward to continuing to keep you updated on all of our progress. So with that, let's open the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Matthew Gilmore with Robert W. Baird. Your line is now open.

[Matthew Gilmore:]

Maybe wanted to start with the PACE business and ask about [indiscernible] which is one of the bigger announcements I guess for the quarter. If I remember correctly, you are going to turn this into a few centers and then that would determine the rollout for future periods. Can you maybe just update us on how that relationship has progressed with the first couple of months and then what you are thinking in terms of transitioning those members over to the Tabula platform.

[Orsula Knowlton:]

Sure, Matt. This is Orsula. Thanks for your question. So we transitioned one location with regard to our services and we continue to monitor services. We actually have a meeting with them this week so we would expect to have more news about this for the first quarter.

[Matthew Gilmore:]

Okay. Great. That’s really helpful. And then also on the SinfoníaRx pipeline. I think there was -- if I remember there was a larger earn out tied to that. Just curious if there was any updates with respect to how their pipeline has progressed and the conversations around that and we will be here about that sort of before year-end with the timing of their sales or could that be sort of at any time.

[Brian Adams:]

Hey, Matt, it's Brian. Yes, things continue to progress nicely with the SinfoníaRx pipeline. No announcement to be made just yet. We are hopeful that we will be making an announcement prior to year-end. You do note that earn-out structured in order to accommodate some pretty material opportunities that could impact 2018 and we are still pretty confident that we are going to see that happen.

[Matthew Gilmore:]

Okay. And then one more if I could. Cal had mentioned readmission rate being 50% below the national average and I missed kind of the context of that comment. So could you just repeat that for our benefit? Thanks.

[Calvin Knowlton:]

Sure. We have been doing for this year a care transitions program with a large health plan where we do in-home pharmacist care transitions and medication reconciliation using MedWise Advisor medication risk mitigation software. And this particular company was running at about a 30% readmission rate for hospitalization. And the [summary] [ph] information we have through the first 2.5 quarters is we are around 17%, in that rate. So we will see what the end of the year brings forth but it's good and in fact they have already renewed it for 2018 with a larger cohort. So, so far so good.

[Operator:]

Thank you. And our next question comes from the line of Nina Deka with Piper Jaffray. Your line is now open.

[Nina Deka:]

I was wondering if you could provide some more detail on the EMTM as you transition into year two and then into year three. I know you have mentioned some in the prepared remarks but how would you expect us to impact the different product segments and service segment. Would we see something come out of product and something grow in service or would we only see a change to services? And then how would that transition further into year three?

[Brian Adams:]

Hi, Nina, this is Brian. Basically all of -- not basically, all of EMTM revenues today are recognized in the service category. So we would expect that to grow to accommodate some of the new services that we will be providing in the EMTM program next year as well as the following year.

[Nina Deka:]

And did you say how many members you are expecting to go live on the consumer, the mobile app?

[Calvin Knowlton:]

We did not say how many members would go live at this point, so we are still working with our partner to establish what percentage of the population will be exposed to it.

[Nina Deka:]

Okay. Great. And then I had a question about the -- you have been working on opioid project and I know that there is same population health type work that you have been publishing about. And I was wondering if you had any updates on that and if you might see more opportunities in the opioid space moving forward.

[Calvin Knowlton:]

We have nothing concrete to share other than there is a pipeline of activity in the domain of the opioid unintentional misuse.

[Nina Deka:]

And then just, if you could, one more update on the pharmacy and pharmacist segment that you had discussed with a couple of quarters ago.

[Calvin Knowlton:]

So, Nina, we are going to actually be using the EMTM program to expose pharmacists to the tool given that there are going to be providing about 20% of the interventions in year two. So we are going to use that as kind of an incubator to really learn from their experience next year.

[Operator:]

Thank you. And our next question comes from the line of Jamie Stockton with Wells Fargo. Your line is now open.

[Jamie Stockton:]

I guess maybe just a couple of more on the EMTM. First, I think that the year one, it was something like 240,000 lives and you are making somewhere around $3 for PMPM. Is there any kind of direction you can give us as far as the magnitude of the improvement you might see in year two or year three? I know that it does definitely sound like the breadth of what you are doing is going to expand. And then maybe the second one. I thought Cal mentioned that you guys were talking to one of the other pilots about maybe adopting some of your technology. It sounds like maybe there won't be kind of whole breadth of services there necessarily but just any indication on the size of their pilot population would be great.

[Brian Adams:]

Sure, Jamie. This is Brian. Thanks for your questions. I will take the first one and then Cal will take the second. So as you think about revenues for next year. We did get approval from CMS and CMMI for the proposal that we had put forward, which does have an increase in the PMPM that we will be charging, I will give you a ballpark of about 10% going into next year to accommodate some of these additional services. We have also been told by our partner that they are expecting about a 10% increase in enrollment going into next year. So as we charge that PMPM across the entire population you could expect to see an increase there as well. So that should kind of give you some ballpark on that.

[Calvin Knowlton:]

This is Cal. Hi Jamie. We did this week receive final notification from our partner and from CMS that everything is fully funded for year two. It takes them a while to get preliminary approval and then secondary and final. We got the final approval for everything for next year this week. As far as the -- there is six programs, that are doing this EMTM, and that we are allowed to, if someone sees something or hears something in another program, we are allowed to cross-pollinate with that and we have been approached by another large program to do that. And that will not be our entire offering but it actually will help bring some of the clinical information that we are doing into a care transitions model that they are trying to build and it looks like they will be using our information to do that. And that will be in year two, late year two probably, but mostly in year three because from what I understand their budget was already approved for year two. So we got some increment on that in year two but mostly it will happen in the 2019.

[Operator:]

Thank you. And our next question comes from the line of Steven Wardell with Chardan Capital Markets. Your line is now open.

[Steven Wardell:]

Can you just help us understand in a little more detail, what are you selling now into the managed care market and what new products are you seeking to sell into the managed care market over time?

[Brian Adams:]

Yes. So Steve, this is Brian. I think right now what we are selling into the managed care market looks and feels a lot like the EMTM program that we are running. In addition we have the care transitions programs that Cal was describing. We have also seen a nice interest in terms of the risk stratification model that we can deploy and the medication risk scoring that we have developed as well. And so our plan right now is to continue down the fairway selling those types of services and technologies to the managed care population because right now we are seeing a tremendous amount of interest for those at this point.

[Operator:]

Thank you. And our final question comes from the line of Frank Sparacino with First Analysis. Your line is now open.

[Frank Sparacino:]

Maybe just following up on the last question. Cal, I think you noted that you hope by the end of the year to have greater than 10 million lives running through the risk stratification engine. And I guess what I am wondering is, how that translates into future potential revenue. How we should think about that from a downstream perspective for you?

[Calvin Knowlton:]

Well, I will start then Brian, if you want to chime in. It’s really a two-step process. First, we have been asked by many organizations now to re-stratify certain cohorts of their population to find out who is at risk for medication adverse drug events and [indiscernible] of hospitalizations that ensue. And so we have been doing quite a bit of that in the last month or so. And we will exceed 10 million by the end of the year, by this quarter that we are in now. The next step though is, once you have identified that, that high-single digit low double-digit in most of the commercial plans, folks at risk, something should be done to mitigate the risk. And it can either be done by us with our systems, or we can share, our systems with pharmacists that the health plans have and teach them how to use it and then they can do the interventions themselves. So that’s kind of the -- that’s a very large part of it. The risk stratification is the first blush to figure out who is having a problem but then to dig deep into this, it almost goes down to a one-on-one intervention. And that’s a heavy lift. So I would say that’s probably what we are looking for as far as on the revenue side.

[Brian Adams:]

Yes, Frank, it's a little difficult to give you kind of some guidance on revenue at this point because the interest varies depending on the customer, depending on the health plan that we are engaging with and where they might really see the value of these offerings, and the types of services that we might deploy. You know as Cal described, it could go from licensing to full suite of services. But I think what's important to note is the fact that at this point few months ago when we were doing our Q2 earnings call, we had just maybe around a million lives that had been run through the tool. I think this is just a real demonstration of the interest level that we have had from some pretty significant potential partners and it's really been a nice sales tool because we can take data and show potential partners and their population where their risk level really is. And so I think that’s been really enlightening and helpful as part of that process. So maybe a little bit early to give you guidance on revenue but I think we will probably be able to give you some more information on that in the coming months.

[Operator:]

Thank you and that does conclude today's Q&A session, and ladies and gentlemen thank you for participating in today's call. This does conclude the program and you may all disconnect. Everyone have a great day.