Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue grew 23% in Q2 2024 compared to the prior year period.
- Signed a record number of new capitation contracts, including three additional contracts in Q2.
- California pharmacy projected to generate over $70 million in incremental revenue for the full year.
- Operational efficiencies have kept SG&A flat despite significant top-line growth.
- Positive momentum expected in the second half of 2024 with improved IV margins and new capitation contracts going live.
Negative Points
- Gross margin was lower than expected due to continued reimbursement pressures on IV and oral drug margins.
- Oral margins compressed by 750 basis points compared to Q2 2023.
- Full year guidance for gross profit has been updated to $62 million to $69 million, and adjusted EBITDA to negative $21 million to negative $28 million.
- Net loss for Q2 2024 was $15.5 million, an improvement but still a significant loss.
- Cash, cash equivalents, and short-term investments reduced by $19.5 million relative to Q1 2024 due to operating losses and deferred acquisition payments.
Q & A Highlights
Q: I wanted to start with maybe sort of bridging forward, obviously, some margin pressures in the quarter and some improvement that's implied in the updated guidance. I wanted to get a sense for, if you could give a little more color on exactly sort of what the building blocks are getting from where we are in the second quarter on margins in particular and then moving forward. So I guess the 3 areas I'd really be curious to hear about are sort of how big was that DIR fee impact, and how should we be thinking about that improvement, and then IV margins and the layering on of the new cap contracts being the other pieces. But if you have a different way of thinking about the bridge, open to hearing that, too.
A: Yes. Thanks so much, Jack. Appreciate that question. Obviously, a lot to unpack there. So in quarter, the impact of the DIR fee to margin was about $2.3 million, which is obviously sizable for a business our size. And hopefully this came through in the call, but the issues we're dealing with in Q1 and Q2 were the change in assessment of DIR fees to point-of-sale plus the overhang from fees assessed in arrears for 2023. That obviously won't be an issue in Q3 and Q4, plus we have the go-live of all the capitation contracts we signed in the first half of this year in Q3 and Q4, all culminating in both improvement in drug margin as well as improvement in our capitated revenue in our existing sort of clinic footprint. So that's where we're seeing that fairly significant pickup in Q3 and Q4 to the rest of the year.
Q: Okay. Got it. That's really helpful. And then so maybe just on the Dispensary piece then. If you back out some of the DIR fees, it looks like margins perhaps getting a little better, is that fair to say, on sort of the core margin ex DIR fees in Q1 and Q2, that sort of that progression we had thought about is improving? Or is it still holding about the same?
A: That's exactly right. Yes. So there's other factors as well besides the DIR fees. So there's additional improvement in margin related to expansion in the actual business, Part D business itself, relating to improvement in our rebate hearing. There's seasonality effects, which hit in Q1, which then wash out in the back half of the year, all which drive additional margin improvement in Q3 and Q4.
Q: Got it. Really helpful, Dan. Last one for me. Mihir, I appreciate some of the comments you had on cash flows. I guess entering the quarter, the thought was some of that receivable impact we were seeing related to change in other disruptions might reverse. It didn't really reverse in the quarter. I just want to make sure I got your commentary right. How should we be thinking about moving cash burn forward in light of some of the working capital efforts that you highlighted?
A: So the impact of Change Healthcare was almost all reversed in Q2. The increase in AR in Q2 is solely related to our pharmacy business, which -- about 90% of which is from medical, state of California medical Rx, where the state were holding funds for about 3 weeks due to its fiscal year end, which has been -- those funds have been collected in the first half of July. So it was timing due to state's holding funds due to its fiscal year.
Q: Can you provide more details on the strategic review process and what potential outcomes you are considering?
A: We have engaged Leerink Partners to assist the Board with the ongoing review. The purpose of this review is to be transparent, fair, and thorough in our consideration of all alternatives, with the goal of enhancing shareholder value. The Board plans to proceed in a timely manner but has not set a timetable for completion of its review. The company does not intend to provide further updates on its review until it deems further disclosures to become appropriate or necessary.
Q: What are the key drivers behind the 23% revenue growth in Q2 2024 compared to the prior year period?
A: Our revenue growth was driven by an exceptional 76% increase in oral drug revenue. Our latest full-year projection for our California pharmacy has increased to over $70 million of incremental revenue as we continue to break monthly fill records. Additionally, we signed a record number of new capitation contracts in Q1, and that pace continued with an additional 3 capitated contracts signed in Q2, covering 2 states and including both medical and radiation oncology services.
Q: How are you managing cost efficiencies given the significant growth in revenue?
A: I'm very proud of our operational efficiencies, which are driving flat corporate SG&A for the full year of 2024 compared to 2023 in terms of absolute dollars, and have reduced total SG&A as a percent of revenue by 15.1% for the same period despite growing the top line significantly. Our existing footprint and infrastructure in the markets we operate in today have the capacity to absorb significant growth without adding additional providers and overhead costs.
Q: Can you elaborate on the impact of the 2023 DIR fee runout on your financial performance?
A: The DIR fee runout was anticipated but was realized at record levels as a percentage of revenue. The specialty pharmacy industry attributes the historically low reimbursement net of DIR fees to the PBM's inappropriate response to the intended transparency of the Inflation Reduction Act. In light of the pressures seen year-to-date, we are updating our full-year guidance for gross profit to $62 million to $69 million and adjusted EBITDA to negative $21 million to negative $28 million. Revenue guidance remains the same.
Q: What are your expectations for the second half of 2024 in terms of financial performance?
A: Looking forward to the remainder of the year, 2023 DIR runout is complete, IV margins in Q3 have improved, and with most of the capitated contracts signed in the first half of the year going live in Q3, we expect significant improvement in our net loss and in our adjusted EBITDA in the second half of the year. The annualized revenue of the new capitation deals signed year-to-date is over $41 million, and adjusted EBITDA contribution is expected to be $13 million.
Q: How do you view the company's path to profitability?
A: We are confident we can achieve our path to profitability with our current level of cash generation. Despite the challenges faced in the first half of the year, we believe we are now through the period of fee assessments from 2023 and have positive momentum on growth and ongoing drug margin expansion efforts in the back half of 2024.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
