Description

We believe Option Care Health, Inc., (“Option Care” or “OPCH”) is a compelling compounder story that provides an attractive opportunity to play the shift to value-based care with reduced government reimbursement risk and a strong track record in navigating labor headwinds – two of the biggest risks facing healthcare services businesses.   

Sources used: Publicly available OPCH investor presentations (including 2021 J.P. Morgan Healthcare Conference presentation and July 2020 investor presentation), earnings call transcripts (including OPCH Q12022 earnings call), and SEC filings (including OPCH Q12022 Form 10-Q and FY2021 Form 10-K).

Business Description

Option Care Health, Inc., (“Option Care” or “OPCH”) is the largest independent provider of home and alternate site infusion services in the U.S. OPCH offers infusion therapy – the intravenous or subcutaneous administration of drugs – outside of the hospital setting. Most of OPCH’s services are provided in patients’ homes. OPCH also has a network of 97 pharmacies and 57 stand-alone infusion sites.

OPCH holds ~20% share of the $14B U.S. home infusion market, which is growing 5-7%. CVS and UnitedHealth Group each hold ~15% market share, with the remaining half of the market addressed by 800+ smaller players, which we believe represent attractive targets for a roll-up strategy.

Most of OPCH’s revenues come from commercial third-party payors (~85% of FY20 revenues), with the remainder coming from government payors (e.g., Medicare and Medicaid). We believe OPCH has strong payor relationships and is the only provider in-network with all top ten payors.

OPCH is reimbursed for both (1) the cost of pharmaceuticals sold (generally purchased directly from the manufacturer) and (2) the cost of services provided (including a per diem for each day of therapy and the cost of nursing services).

Infusion services revenues are split roughly 70/30 between chronic and acute therapies. Chronic therapies are for patients with chronic conditions requiring longer-term drug infusions. Chronic patients are primarily treated with branded therapies, resulting in lower gross margins (~10-25%). This is OPCH’s faster-growing segment, growing in the low double-digits. Acute therapies, ~30% of revenues, are primarily aimed at patients being discharged from the hospital who only need infusion services for two to six weeks. This is OPCH’s more mature segment, growing in the low single digits, and primarily features generic therapies, resulting in higher gross margins (50-70%).

OPCH used to reside within the pharmacy giant Walgreens Co. (“WBA”), where it was known as Walgreens Infusion Services, Inc. In 2015, Madison Dearborn Partners (“MDP”) acquired a majority interest in Walgreens Infusion Services, Inc. and rebranded the business as Option Care. In 2019, Option Care completed a reverse merger with BioScrip, Inc. to form the largest independent provider of infusion services in the U.S. Walgreens remains the company’s largest shareholder, owning ~21% of shares outstanding. While MDP fully sold out of its position in 2021, MDP Co-President Timothy Sullivan and Managing Director Elizabeth Betten remain on the Board of Directors. MDP’s exit eased the liquidity overhang over the stock, allowing OPCH to transition to “a truly public float company.”

Financials

OPCH earned $3.4B in revenues in FY21, up 13% YoY, and has guided to 11% growth at the midpoint in FY22. FY21 Adj. EBITDA of $290M (8.4% margin) was up 31% YoY.  OPCH has guided to $328M in FY22 Adj. EBITDA at the midpoint (8.6% margin), up 12% YoY.

We believe OPCH has continued to execute with a growth algorithm of mid-to-high single digit revenue growth and low-to-mid-teens EBITDA growth. Adjusted EBITDA margins are now approaching 9%. We are impressed by how OPCH has grown margins through operating leverage and labor efficiencies, even as lower-margin chronic therapies have grown as a percentage of its therapy mix, and we believe this is a testament of OPCH’s strong operating model. 

We believe leverage is manageable at 2.9x net debt / 22E EBITDA, and we believe OPCH has generated strong levered cash flow with modest CapEx requirements (under 1% of sales). 

Capital Structure

Source: OPCH Q12022 Form 10-Q and FY2021 Form 10-K filings.

Thesis

We believe OPCH holds a strong position in the fragmented home infusion services market. OPCH is the largest independent provider of home infusion services, with roughly half the market addressed by smaller players.

We believe OPCH will continue to execute with mid-to-high single digit revenue growth and low-to-mid-teens EBITDA growth. We project OPCH reaching $4.2B in revenues in FY23 with $370M in Adj. EBITDA (8.8% margin and 13% growth YoY).

We believe OPCH is an attractive compounder story with several compelling characteristics:

·         We think OPCH will be a leading beneficiary of the secular shift to value-based care, especially care in the home: We believe spiraling healthcare costs have led to a greater emphasis on value-based care. Infusion services have increasingly shifted away from the hospital to the home / alternate site setting, with lower costs for payors (40%+ cost savings) and what we think is a better / safer experience for patients (including reduced risk of hospital acquired infections). We believe OPCH is an attractive way to back this secular tailwind as OPCH is entirely focused on delivering care outside of the hospital setting.

·         We think OPCH is much less dependent on government reimbursement than peers: More than 85% of OPCH’s revenues come from commercial payors, who we believe recognize the value of home / alternate site infusion services given the significant cost savings. This contrasts with many of OPCH’s healthcare services peers (especially home health companies), which are much more dependent on government funding. We believe improved government funding of home / alternate site infusion services is a source of additional upside, as we think the current reimbursement situation for Medicare recipients leads many patients to seek care at the hospital due to high out-of-pocket costs for home / alternate site infusion.

·         We believe OPCH has done a much better job of managing labor headwinds than peers: Rising wage rates and labor shortages have taken their toll on healthcare services businesses. We believe that OPCH has navigated these significant labor headwinds much more adeptly than peers and will continue to do so going forward. Why is that the case? For one, we believe OPCH has a more attractive labor profile in that most of its workers are skilled nurses and nurse practitioners, while peers are more reliant on unskilled labor with higher turnover. We believe OPCH has taken a proactive approach to labor headwinds by acquiring nursing staffing agencies to get ahead of labor shortages. OPCH has also focused on driving labor efficiencies through its infusion sites, which allow nurses to infuse several patients at once and allows OPCH to save on nurse transportation costs to patients’ homes.

In sum, we believe OPCH is a compelling compounder story that provides an attractive opportunity to play the shift to value-based care with reduced government reimbursement risk and a strong track record in navigating labor headwinds – two of the biggest risks facing healthcare services businesses.  

Valuation

We believe that OPCH deservedly trades at a premium to healthcare services peers. Despite this premium, however, we believe that there remains additional upside, and we think it is worth paying for quality here, especially in an inflationary environment where peers are heavily exposed to labor along with reimbursement risk.

Our FY23E Adj. EBITDA estimate implies that OPCH trades at a 15.6x 23E multiple. We believe that OPCH should re-rate closer to a 20x 23E multiple.

Applying a multiple range of 17-23x to our 23E Adj. EBITDA estimate of $370M implies that OPCH should trade between $30 and $42 a share, representing a 11-56% premium to the price of $26.85 at market close on 06/14/22.

Risks

Customer concentration risk – revenue from the Company’s largest payor (UnitedHealth Group) was ~15% in Q1’22. OPCH’s largest payors – UnitedHealth Group and CVS – are also its competitors. Despite this, we believe that OPCH is an attractive alternate option for these payors, as it is the only independent provider of infusion services with a national footprint.

Inflationary pressures – labor inflation and shortages — have hit healthcare services businesses particularly hard. While we believe OPCH has navigated these headwinds more successfully than peers, this may not hold.

Disclaimer

This document is for informational purposes only. All content in this report represents the author's opinion. The author obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind — whether express or implied. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any information contained herein. This report is not a recommendation to purchase the shares of any company, including Option Care Health, Inc., and no fiduciary duty is owed due to this report. The information included in this document reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change and we are under no obligation to provide any update to our views if they do change. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity. Any or all forward-looking statements, assumptions, expectations, projections, intentions or beliefs about future events included in this document may turn out to be wrong. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone, independent judgment prior to making any investment decision.

Catalyst

Continued execution leads to multiple re-rating.