Option Care Health, Inc.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1. Hello, and thank you for standing by. Welcome to Option Care Health Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker for today, Mike Shapiro. Sir, you may begin.

Good morning. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release, as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the investor relations portion of our website. And with that, I'll turn the call over to John Rademacher, Chief Executive Officer.

Thanks, Mike, and good morning, everyone. As we reported in this morning's press release, the option care health team delivered another very solid quarter of results in the fourth quarter. Despite ongoing challenges on many fronts that we'll discuss on this morning's call, the team was relentlessly focused on delivering extraordinary care to the thousands of patients who rely on us every single day. And reflecting on 2022 as a whole, I am humbled by the dedication of the team and honored by the progress we've made over the last year to advance in our mission to help transform healthcare by providing unsurpassed care and superior clinical outcomes in the home or ambulatory setting. During 2022, we continue to expand our relationships with payers, providers, and biopharma to offer the highest quality care at the most appropriate cost. And over this time period, we provided care to over 265,000 unique patients and their families. As always, Mike will provide a more granular overview of the results. But in Q4, we generated revenue growth of over 10%, with balanced growth coming from both our acute therapies that grew in the mid-single digits and double-digit chronic therapy growth. At the same time, we've generated adjusted EBITDA growth of 8.7%, and importantly, delivered an adjusted EBITDA margin of 9.2%, up sequentially 80 basis points from the third quarter, despite continued inflationary pressures. And not to steal Mike's thunder, but our balance sheet has never been stronger. As we finish the year with $294 million in cash, and our net leverage ended the year at 2.3 times. Entering 2022, I don't believe that anyone anticipated the inflationary pressures that the broader economy would endure, or as we have communicated previously, the significant impact we felt across many of our inputs. Throughout the year, we faced emerging cost pressures head-on, and we conservatively digested more than $40 million in year-over-year cost pressures in labor, medical supplies, oil-derived products, and operating inputs. We focused on offsetting those pressures to the best extent possible through technology enhancements and driving operating efficiencies, as we also collaborated with our payer partners to seek reasonable rate increases where appropriate. Our pursuit of operating efficiencies never ends, and the team drove considerable leverage in what we believe is the new cost basis going forward. We also continue to manage through a very difficult labor market. With the acquisition of Specialty Pharmacy Nursing Network last April, combined with our Infinity Infusion Nursing Network platform, we have established what we believe is the largest clinical infusion nursing network in the country. And while recruiting key clinical disciplines remains challenging, we are confident we are weathering the storm better than many, and we continue to maintain our reputation as an employer of choice and a dependable partner to our referral sources as we can provide them with adequate clinical staffing capacity, allowing us to serve their patients. During the year, we also opened 22 new ambulatory infusion centers. increasing our total count to nearly 150 sites and added 63 infusion chairs, which increases our total to over 575. With the expanded footprint and capitalizing on patient preference, we continue to see greater percentage of our nursing visits in our infusion suite, now approaching 25%. We will continue our expansion in 2023 with plans to open over 20 additional sites in key markets. This will allow for greater operating efficiencies and continued high patient satisfaction scores. In summary, 2022 was a very productive year as we delivered $342.9 million in adjusted EBITDA for the full year, exceeding our original guidance of delivering $310 to $330 million in adjusted EBITDA. As we look ahead to 2023, I remain confident in our ability to deliver mid to high single-digit top line, leveraged bottom line growth, and strong cash flow from operations through strong execution and deepening partnerships. We will continue to focus on providing meaningful solutions to our key stakeholders as the marketplace evolves and new models emerge. We will continue to work closely with the payers to offer consistent, high-quality care at an appropriate cost and explore value-based arrangements for their members requiring infusion services across the country. We will partner with discharge planners and prescribers to provide seamless transition of their patients on the service with us and collaborate broadly as members of their extended care team. We will deepen our relationships with our patients to provide them unsurpassed support as they recover from an acute event or help them manage their chronic conditions so they can live life to the fullest. And we will provide the strongest clinical platform and broadest population access to pharma as they conduct clinical trials in support of novel new therapies or strengthen the data capture and analytics that we will provide for patients that are receiving their medicine. And we will continue to invest in our people as we provide training, development, and opportunities for advancement. to remain an employer of choice and the destination for passionate healthcare professionals. Also in this morning's release, we announced that we have received authorization from our board of directors to repurchase $250 million in shares as part of a multifaceted capital allocation strategy. Mike will provide more color on this program. However, I wanted to highlight this as proof positive of how far we have come since the merger in August of 2019 and acknowledge the discipline we have applied to unlock free cash flow, strengthen our balance sheet, and vastly improve our leverage profile. And with that, I'll turn the call over to Mike to review the results further. Mike?

Thanks, John. I'd like to start by providing some commentary on the fourth quarter results and close out with some additional thoughts on our initial 2023 financial guidance as articulated in this morning's press release. Revenue, as John mentioned, was quite strong in the fourth quarter with balanced growth across our acute and chronic therapy portfolios. Note that as previewed on our Q3 call, in late December, we divested certain respiratory therapy assets that were acquired through the bioscript merger in 2019. Consequently, the fourth quarter included respiratory therapy revenue for effectively the entire quarter. Gross margin of 22.5% reflects our mix of chronic and acute revenue, as chronic therapies comprise a bit over 70% of fourth quarter revenue, as well as the impact of inflationary cost pressures in our direct categories. Spending grew 8.5%, but dropped as a percent of revenue to 14.4% as we continue to drive spending leverage to offset inflationary cost pressures. Adjusted EBITDA of $94.3 million represented 9.2% of revenue, and while 20 basis points below prior year, as we've discussed, we've absorbed roughly $12 to $15 million in quarterly cost pressure on a year-over-year basis. Additionally, we're encouraged by the 80 basis point sequential improvement in adjusted EBITDA margin over the third quarter. I want to take a minute to provide a bit more color on the respiratory therapy asset sale that we completed in late December. Other income on our reported income statement includes a pre-tax gain on the net asset sale of $10.3 million, which we have also backed out of our adjusted EBITDA reconciliation included in the press release. So the gain which we reported in other income did not benefit our adjusted EBITDA calculation and was excluded from operating results altogether. As John mentioned, we finished the year with $294 million of cash on the balance sheet, and our net debt of approximately $800 million represented a multiple of 2.3 times. So our capital structure has never been in better shape and positions us well to continue investing for the future and deploying capital for our shareholders. To that end, we also announced this morning that our Board of Directors has authorized the repurchase of up to $250 million of common stock. Given our cash flow generation and capital structure, we continue to believe that deploying capital through our M&A strategy will create value for our shareholders going forward. However, as we evolve and continue to generate strong cash flow, we believe that share repurchases can provide additional optionality to complement our disciplined M&A strategy as we deploy capital for our shareholders. We are not in a position at this time to provide a specific time horizon or repurchase guidance and would anticipate modest repurchases at first. Again, we expect M&A to continue to be the primary area of focus for capital deployment. Shifting to 2023 preliminary expectations, We expect to generate revenue for the full year of 4.15 to 4.375 billion dollars. Our revenue composition is quite dynamic and this year will be no different. Our revenue guidance suggests top line growth of approximately 5 to 11 percent and that includes approximately two points of year over year headwind due to two specific therapies for ALS and high risk pregnancy in which we anticipate rapid decline along with the revenue loss from the respiratory therapy asset sale. Despite those headwinds, our top-line expectations affirm the strength of our diversified revenue base and our national platform. Adjusted EBITDA guidance of $370 million to $390 million implies growth of approximately 8% to 14%, and includes an estimated $15 to $20 million of year-over-year inflationary pressure as we'll annualize the cost pressures that emerged in 2022 and that we do not anticipate subsiding anytime soon. Our cash flow from operations guidance of at least $240 million reflects our expectation of being a federal income taxpayer for all of 2023, and our cash flow guidance reflects the year-over-year increase in federal income tax payments, which we estimated approximately $30 million. Despite the change in taxpayer status, we still anticipate strong cash flow generation for the year. So overall, we're quite encouraged by the momentum from the fourth quarter and expect 2023 to be another productive year for the option care health team. And with that, we're happy to take your questions. Operator?

Thank you. As a reminder, ladies and gentlemen, that's star 1, star 1-1 on your telephone. to ask the question, then wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David McDonald with Truist. Your line is open.

Hey, guys, just a couple of quick questions. Mike, I apologize. My line cut out there for a minute. But just on the inflationary pressures, can you repeat what you guys are assuming for 2023? And then, you know, once we get past one Q and have kind of annualized some of that 10 to 12 million, can you give us a sense of, you know, on a percentage basis, how we should think about, you know, what you guys are seeing on labor and just kind of overall cost trends?

You bet, Dave. Good morning. Yeah, so what we laid out is, you know, as we've mentioned, the inflationary pressures really started to emerge in Q2. So our guidance assumes that there's a buy-up of, you know, around $12 million of year-over-year inflationary, mostly in the first half of the year, affecting inflation. Q1, since those inflationary pressures really didn't emerge until going into Q2. So we fully expect that 12 to 15 buy-up on inflationary pressures, primarily in the earlier part of the year. From an inflationary pressure look, I mean, I think our presumption is that clinical labor, as we've been very clear, is going to continue to be tight. I think John, in his prepared remarks, was spot on in that we believe we're performing better than most, but our guidance also reflects that we're going to continue to be competitive for clinical labor throughout 2023 and beyond.

And then I guess a couple of other quick questions. In terms of the year-over-year cash flow, did you say the impact of moving in terms of the taxes is about $30 million? And then is there anything else from just a working capital standpoint that we should be thinking about in terms of 23 relative to 22?

Not really related to working capital. Again, you know, we did lay out in our press release, we do expect interest expense. We do have $300 million of floating exposure. So our guidance assumes probably in the neighborhood of $10 million of higher cash interest as well. So between cash interest and the federal tax payments, that we estimate to be a total impact of around $40 million year over year.

And then, guys, just, you know, you talked about on the cost side clearly being positioned better than most. That would suggest that, you know, with regards to potential M&A pipeline, is it fair to think about, you know, you guys probably have more incomings? And then secondly, you know, just any generic comments in terms of, you know, adjacencies and, you know, anything that you guys are seeing that would compliment the business that looks interesting?

Yeah, Dave, it's John. Good morning. Look, I think as we're looking forward, again, we feel really well positioned to your comment. Yes, you know, the pipeline of M&A activity continues to fill through that process. And, you know, we've always talked about the disciplined approach that we'll take to M&A, looking for those types of opportunities where we believe it's going to bring some competitive advantage and or augment our existing infrastructure. So we'll continue down that path and deals like Rochester Home Infusion and others we'll continue to pursue. You know, as we've talked about before, just broadly, I mean, we really are excited about the work that's being done in our nursing network and the integration that's happening as we've moved, you know, the specialty pharmacy nursing network and Infinity Infusion together, you know, moving them onto the same platform. So, really, you know, appreciate the great work that the team's doing there and moving that ahead. We think that gives us you know, an incredible platform as we're thinking about clinical resources moving forward, certainly in the nursing area, but also as we're looking to expand beyond that. And so, we're continuing down that path. We are continuing the look to find adjacencies as we're thinking more broadly about the post-acute space. Certainly, you saw in the or heard in the commentary of the the overview um you know the ambulatory infusion suites are uh incredibly beneficial to not only our operating efficiencies but also our patient satisfaction scores and so we're going to continue down that path we love the strength of the balance sheet as we kind of outlined We think that we have, you know, a lot of flexibility to, you know, continue down the path of looking at M&A as being ways to drive value to shareholders, and we're going to continue that path moving forward.

And guys, just last question on the ambulatory infusion suites. If you just kind of do the math around the higher assumed percentage on chronic that's growing more quickly, any reason to not think that that percentage should continue to grind, you know, 100 basis points or so higher per year. And then secondly, just any thoughts around suites that potentially have a few more chairs. Can you talk about the potential leverageability of that or not?

Yeah, as you can pick up, Dave, we're quite bullish on the infusion suite strategy. You know, we're in investment mode. The team has really refined our thinking around how we geomap these to get maximum coverage and convenience. And what we found is typically these are three to four chairs. We do design them that if we had to expand and toss a few more chairs in, we have that flexibility. And really, look, when we really started this as a strategy, we were in the high teens and were, as John mentioned, approaching a quarter of all of our nursing events in these suites over a couple of years. And again, given that these are generally more tuned towards our chronic patient cohorts and given the growth profile of those therapies, we would absolutely expect that our penetration of our nursing events will continue to accrete higher, which Again, as John mentioned, helps us from patient access and satisfaction as well as helps us offset some of the inflationary headwinds. Okay. Thanks very much, guys. Thanks, Dave.

Thank you. Please stand by for our next question. Our next question comes from the line of Matt LaRue with William Blair. Your line is open.

Hey, good morning. One of the thoughts on some of the contract labor utilization from last quarter related to some of the specific geographic market dynamics, just how did that trend through the fourth quarter in terms of your contract labor utilization? How do you expect that to trend here in 23? And then as you think about growing the clinician base in 23, how do you expect that to balance between full-time and those on sort of the SPIN and Infinity platforms?

Hey, Matt. It's Mike. So, look, in general, you know, look, as we've outlined before, part of our labor strategy is to utilize contract labor, I would say, relative to others in healthcare services. Our reliance on contract labor is not as concentrated. There are certain pockets and geographies where, candidly, you know, it's more efficient for us to lean on contract relationships. I think over time, our strategy has been to really build out our national platform. And, you know, we track our nurse census within our platform on a weekly basis. And our nursing roles have increased throughout 2022. And again, the per diem nature of the majority of that labor actually provides us with flexibility, and it's one of our key recruiting attributes. So in short, we feel good about using our employed nurses, and we think that that will accrete to a higher penetration over time. The team is energized now that we've brought the Spin It Infinity organizations together to create that truly unified national platform. And we would expect, as we continue to add to our nursing roles, that would predominantly be more of a per diem nature, but also one of the things that the team's doing a spectacular job is, you know, providing incentives and motivations for those per diems to provide us with more of our capacity so that not only are we increasing the number of per diem nurses, but we're also, over time, increasing the number of hours that we're getting out of those resources.

Yeah, and the only thing I'd add to that, Matt, is, look, I mean, when we run our staffing models and take a look at it, where we have density of patient population, we will be recruiting full-time nurses. I mean, where we can leverage that effectively, we will. And, you know, that is a big part of our strategy from that. But now having the ability to augment that with the per diems, with the nursing network, moving forward and continue to serve others in the marketplace, other market participants with that. It just gives us a significant amount of flexibility to utilize our own full-time nurses to the fullest, but then when we need additional capacity, our first default is to utilize that nursing network and the network of per diem resources that are available through that.

Okay, and then, you know, you referenced that the cost base is sort of the new normal, and that 12 to 15 incremental will be weighted at Q1. As you think about then this, your new normal cost base, where are the areas where maybe there are pockets of persistent problems in terms of your inflation? Where are areas that might be some improvements? And what are focus areas for you to start work on, start to work on gaining leverage on this new cost base?

Yeah, I think the reality, the way we're thinking about it, Matt, is we don't see clinical labor costs going down. We don't see medical supplies and transportation costs and mileage reimbursement rates going down. Miraculously, as some of those oil derivative supplies go up in price with oil, miraculously, the prices don't drop as oil recedes. And so, look, our our procurement team is the best in the industry and they're laser focused on squeezing basis points. But I think our expectation is that, you know, this is the new world order and we don't expect those key inputs to go down as always. And one of the things that I think is a, is a benchmark of this team is how hard we fight to maintain quality, but also focused on efficiencies of running our, our, our, our pharmacies and infusion center networks. A lot of that comes through the technology that we deploy to make sure that we're as efficient as possible in the clean rooms. We're interacting with our patients as efficiently as possible and utilizing those finite clinical resources and minimizing waste. So I think it's a little bit of D all of the above. It really comes from the patient referral to administration of the therapy. We're constantly looking at every facet of our cost structure to figure out how we maintain superior quality in a more efficient manner.

Yeah, and with that, Matt, the only other thing I would add is, look, we deploy... enhancements to the technology on a regular basis as we do new releases of the different aspects of our platform. Our team has done tremendous amount of work to look for opportunities to take repetitive process automation into our infrastructure to take a look and say, how do we streamline those processes? Where can we have our team members working at the highest level of their aptitude or the highest level of their licensure? and wherever we can to take waste and cost out of the process through technology deployment and automation with repetitive tasks that are kind of lower in that process. Certainly in the areas of revenue cycle management and some of the patient administration, there are areas in which we continue to push on there. And as Mike said, the technology that we've deployed within the four walls of the pharmacy allows us to become more efficient in the way that we're looking to compound dispense and distribute the products to the patient. All in all, look, we're going to push on every single lever. I think, as we've talked about before, I mean, we fight for every basis point of cost improvement wherever we can, and we believe that there's still opportunity for us to innovate around our policies, procedures, and the technology to make certain that we are utilizing our team members as efficient and effective as possible.

Okay.

Thank you. Thanks, Matt. Thanks, Beth.

Thank you. Please stand by for our next question. Our next question comes from the line of Lisa Gill with JP Morgan. Your line is open. Thanks very much.

Good morning. I just wanted to go back to your comments around revenue for 2023. Mike, I appreciated the 2% headwind that you talked about. If you were to look at it on the same star basis, it's 7% to 13% growth. I understand that chronic is growing faster, but are there any new drugs or new therapies that you're looking to when we think about that revenue driver for 2023? And then secondly, as we think about acute versus chronic, Are you giving similar guidance to what we've seen historically, which is kind of single digit growth for acute and double digit growth for chronic? Is there any changes around that trajectory as we think about 23?

Yeah, Lisa, good morning. I'll start. Maybe let John provide some color commentary. The other thing in our revenue base, we're actually looking at about a point of ASP headwinds. We've seen some price compression in some of the antibiotics as well as the chronic inflammatories and infliximab categories where, again, you know, I think it underscores the fact that our revenue base is quite dynamic, you know, with dozens of therapy categories, thousands of ASPs and other dynamics. You know, we don't break it out, you know, in too granular of a manner, but we did want to highlight that, look, you know, there's a couple of therapies that are, you know, being disrupted through other therapies. And, you know, I didn't include it in my prepared remarks, but Overall, we're probably going to see about a full point of ASP headwind. And again, as we talked about, the longer-term trajectory of a high single-digit enterprise, we've never really banked on any ASP tailwinds or headwinds because, again, there's always a lot of moves. And so we always try to anchor that just around high single-digit volume projects. growth. Maybe I'll let John talk about some of the emerging therapies.

Yeah. Look, Lisa, we continue to work upstream with biopharma and have a pretty robust pipeline of new products that are moving through the clinical trial phase and moving that forward. Things in short bowel syndrome, things in continued areas of neurological disorders, et cetera. And look, we've got strong relationships with some of the launches of products like VivDart and others as those moved into the marketplace. Our goal is we always look to have one to three new launches on a yearly basis, and the team is working efficiently and effectively in order to do that. You know, we feel as if we've always got to be focused around that regeneration of the product portfolio as new products emerge, as others hit the end of their life cycle through the process. And I think, you know, the team feels really good about the relationships that we've built, about the access to some of those products, whether it will be limited distribution or you know, products or others. And I think you'll see, you know, a continued, as we have historically, a launch of anywhere between, you know, one and three new products as we go through 2023.

And then John, just secondly, you know, when we first started talking a couple of years ago about the competitive landscape, it was, we think the hospitals are going to try to regain some of this market share, you know, COVID pushed people to places like option care. And then We hear about some of your other competitors having issues around staffing, et cetera, and you being in a much better position. Can you maybe just help us square away how to think about the current competitive marketplace and, you know, how you're thinking about that for 2023 and beyond? You know, you made in your comments that you were able to have reasonable rate increases with managed care. When we talk to managed care, they're really happy with the services from option care and keeping people out of the higher cost setting. So any comments that you can give around how to think about the competitive landscape going forward would be really helpful.

Yeah, look, I mean, Mike and I get paid to be paranoid, and quite frankly, it is extremely competitive from that, and we know that we've got to win every single patient in that process. However, when you look at the platform that we've created, when you think of the consistency of the quality of care that we're able to deliver and our access to the clinical resources that are necessary to make that transition of care and then be able to serve those patients, We feel like we're in a really strong position to continue to deepen those partnerships with our referral sources and be a partner of choice as they're helping to decide how to transition patients onto care. Look, we're always gonna have that tension with the hospital outpatient departments as they're trying to add value into their infrastructure and they're looking at ways to maintain the relationships where they can. Our ability to have that flexibility and that ease of doing business with the clinical resources is a big part of where we win. The depth of the relationships and the investments that we make in embedding nurses into hospitals to help with that transition of care and do the training and education of the patients as they're getting ready to be discharged. Again, helps support the overall desire of everyone on the care team to deliver the highest quality care at the most appropriate cost. So we feel like we're well positioned. Again, we talked before about our commercial team and their focus around reach and frequency of making certain that we have a clear understanding of segmentation in the marketplace, that we're calling on the right call points, that we're investing in developing those relationships. look you know I feel as good as you can feel with with the position that we have but again we win patient by patient we win market by market we win hospital by hospital or prescriber by prescriber and so we don't take anything for granted on that and we're going to continue to pursue what we think is above market growth and given the opportunities that we have and given the focus of our team in developing the relationships and providing real solutions to our key stakeholders.

Great. Thank you so much.

Yeah. Thanks, Lisa. Thanks, Lisa.

Thank you. Please stand by for our next question. Our next question comes from the line of Pito Chikarin with Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking my questions. Back to Lisa's revenue growth questions again. If you exclude respiratory therapy, what would revenues have been growing for 2023?

Yeah, so we haven't broken it out in great detail. It's in the neighborhood of $20 to $25 million of top line for that therapy line. It's relatively limited.

Okay, fair enough. And then... Maybe I missed it, but to the question about what do you guys assume for chronic growth for 2023 and acute growth for 2023 net of the ASP pressures? Did you put action numbers on that within better than guidance?

Yeah, no, we don't break out specific guidance for the categories. Again, the way we have broadly characterized this, Peter, is that obviously the acute portfolio is a slower growing, more mature portfolio of therapies, and the chronic is typically in that low double digit category. Again, there's a couple of disruptions from some therapies that are being disrupted with other therapies, but I would say those general growth descriptors remain intact for 23.

Okay, perfect. And then for the ASP pressure of 100 basis points, what's the EBITDA impact of that? Does that flow straight through or is a lot of that variable? And what percent of your portfolio are those antibiotics? Is that the bulk of your acute portfolio?

No. Look, intravenous antibiotics is a key therapy for us. It's one of our larger therapy categories, but it's not the majority of our acute revenue. And look, obviously, you know, a lot of our revenue is comprised of billing for the therapeutic, which is an ASP or an AWP reference. That also has a correlation to our our procurement. So, as ASPs increase or decrease, there is a general correlation to our procurement costs. So, I wouldn't necessarily assume that that point of revenue drops dollar for dollar. Obviously, we make a margin on a drug revenue. X percent of a smaller number is a smaller number, but there is some muting of the revenue impact through our procurement strategies.

Okay, great. And then last question, you know, the targets are one of three new limited drug distributions. These are also the ones that age out. Is there any change in the ability to get, to land those deals? Is it becoming more competitive or is this more of a timing issue?

No, I mean, I think, look, as John mentioned in his prepared remarks, one of the things that we really pride ourselves on is, look, we have direct procurement relationships with BioPharm. We have very intricate and developed relationships where we're supporting them both pre-approval as well as post, and that's one of the reasons why we've been successful in building a portfolio of well over 50 limited distribution therapies. I would characterize our discussions with Biopharm is robust, and we continue to speak with them on a number of not only new novel therapies, but also maybe some therapies where they're looking for additional indications or a broader... Again, some of the categories where we've seen some traction over the last couple years are, you know, in myasthenia gravis, multiple sclerosis, some of the, you know, emerging chronic therapies for drug-resistant HIV, et cetera. We've consistently launched one to three of these a year. Again, PETO, as you know, as we like to characterize right out of the gate, these aren't home runs. They're typically singles and doubles, but over time, you know, you can work with them post-launch to continue to support commercialization efforts. And I think that, again, we don't commercialize everything that's infused. It has to make sense for us strategically and clinically and economically as well. And we continue to expect to commercialize one to three of these a year.

Great. Thanks so much, guys. Thanks, Peter. Thanks, Peter.

Thank you. Please stand by for our next question. Our next question comes from the line of Jamie Pierce with Goldman Sachs. Your line is open.

Hey, good morning, guys. Sorry to go back to the inflationary question. I want to make sure I understand the message there. I get that you've got another quarter or so where it's not in the base, and so you've got to absorb the inflationary pressures that have started last 2Q. But from there, is the message that you expect the rate of of growth of some of these cost inputs, labor, medical supplies, et cetera, to go back to normal? Or are you expecting continued elevated inflation in some of those line items?

Yeah, Jamie, good morning. It's Mike. So look, we don't expect the cost to subside. We don't see some of these categories getting considerably worse. I think a lot of the areas of our cost structure have plateaued. Having said that, you know, we continue to expect that there's going to be some inflation going forward across a broad array of categories, including labor, building and facilities, you know, some of our medical supplies, et cetera. And so I don't think we're expecting it to be high single digits as it was in middle of 2022. And so, you know, our presumption going into it is there's going to still be, you know, As you mentioned, Jamie, going back to normal rates, I think our normal rates are there's going to be some modest inflation that we're going to have to continue to offset and tackle, which is how we've formulated our guidance. We're not expecting 7%, 8%, 9% continued inflation in these categories. But even at plateauing or staying relatively stable, as you mentioned, and as we tried to articulate, there's still a buy-up for the annualization of what we think is the new cost environment.

Okay, that's helpful. And then just on rate increases, reimbursement increases, it seems like your tone has changed a little bit there. You're now trying to get reasonable rate increases where appropriate, where your words. Can you give us a sense of what you think reasonable means and how broadly it is appropriate?

Yeah, I guess let me start by saying, look, we've always looked to get rate increase and appropriate. I think the message that we're trying to deliver there is, you know, the ability for us to actually have the conversations that yield outcomes is increasing on the percentage of success. Right. You don't have to. go far in picking up a newspaper to understand that everyone's dealing with pretty high inflationary pressures, especially on clinical labor. And so the ability that we have to bring data and insights to the payer community around some of those pressures and how we need to get offset for those pressures, especially around the nursing costs and the clinical per diems, is being received with a different ear than it had been historically when we were in low inflation period. So I can't say that we're batting 1,000 by any stretch of the imagination, but our team in market access is focused around making certain that we are having those conversations that we're looking to take a rate into the marketplace. And as we've talked about on previous calls, we are always looking at the balance, as Mike's previous comments. There is a free leg to our stool between the reimbursement that we receive for the drug and the drug spread, what we get for a clinical per diem, and what we get for a nursing rate. And each of our contracts is a little bit different in the way in which the value that we extract out of those three legs. And so we're really thoughtful about the way that we approach it. We're very formulaic in the way that we're trying to drive that appropriateness. but it's not a consistent across the board given that you've got these different dynamics on a contract by contract or payer by payer level. And the team is working to underwrite it in the appropriate way and looking to be able to, again, be able to get rate increases that we feel are appropriate and are in alignment with the additional costs that we're bearing, as well as the value that we deliver to their members and our patients through the programs that we administer.

Okay, thanks. And last quick one for me just on SG&A. It was a little bit higher than I think street modeled for this quarter. Is there any seasonality in that? Is that sort of the right base to model for the next few quarters or just, you know, any help on if there's one-time items or any considerations on SG&A? Thank you.

Yeah, nothing really of substance. Again, I think it did reflect some of the inflationary pressures that flow through the indirects. There's some kind of year-end true-ups and things like health benefits, et cetera, where we typically see some adjustments at year-end, but nothing really to see there. And again, I think more importantly, Jamie, we continue to see solid You know, solid leverage in that line as a percent of revenue, which we would absolutely expect going into this year. Okay, thank you.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Joanna with Bank of America. Your line is open.

Good morning. Thanks for taking the question. So a couple of follow-ups. So I guess on the last topic around the payer contracting, your commentary on, you know, pushing for better rates, but also can you step back and talk about your large payers in terms of the contract renewals? Are there any coming up for renewals? When were these contracts last renewed? and any kind of changes in kind of overall contracting with the commercial credit?

Hey, Joanna, it's Don. Yeah, I think as we've outlined before, look, all of our contracts are in really good state. Most of our contracts are evergreen annual renewals through that process. And so we don't feel that there's any significant risk of any of those. Most of the major payer contracts that we have are in the middle of multi-year agreements that we have there. So, we believe we're in a stable environment in 2023. However, you know, as my previous comments, I mean, we are continuing to have active dialogue across all of the payer community around some of the increase in the input costs. You know, our our labor and med supplies and other things to try to find ways to get some rate increase even in the interim periods of those agreements.

Okay, thank you. And I guess on the other smaller payers in terms of Medicare, you know, where we stand with this legislative fix there? And would you expect to get more traction when maybe some of these new drugs are getting approved, like the drugs for Alzheimer's? Would you expect this to be an impetus for something like that on the medical side to improve the coverage for infusion therapies at home?

Yeah, look, as we said previously, we continue to be active in Washington, D.C., both as part of the National Home Infusion Association as well as things that we do independently to try to move this forward. There is, you know, continued, you know, push and pressure from our standpoint. Again, we have bipartisan support, you know, to move things forward. It's a matter of getting it prioritized. And, you know, as we rolled through January, certainly with some of the changes in Congress and the Republican control, you know, there's a reset of committee leads and other things that goes through that process. So, look, we're always going to put this and try to put this front and center. as part of the government relations efforts that we have underway to try to move it ahead. It's hard to hazard a guess. There's a lot of moving pieces in Washington, D.C., as you know, with various agendas as well as things like the debt ceiling and other things that they're working through. So we're going to continue to be active. I'm always... cautiously optimistic because I know that offering high-quality care at an appropriate cost in a setting in which seniors deserve to be served resonates. It's a matter of finding how do they pay for it within the process. To the broader question around, you know, are there catalysts out there potentially with the new Alzheimer's indications and those, yeah, I mean, we're going to look for every one of those to be an opportunity to to continue to articulate the value of delivering care to beneficiaries in the home. We're going to continue to use those as being leverage points to change the dialogue and to get more receptivity of making that transition. And so we'll try to utilize that for the opportunities that it will present. as things move forward. But too early to tell. We're still, as everyone, waiting to see, you know, what CMS does with some of those novel new agents as they've received FDA approval or there's others that are in the pipeline. And so, we think we have a viable solution, especially with the infrastructure that we have, both within our infusion suites as well as in the home to serve those patients that would require an infusion. And so, you know, we'll continue to have dialogue both with biopharma and the innovators, as well as in Washington and with CMS around the value and virtues of home infusion as being part of that service model.

Right. Thank you. That makes sense. And one more follow-up on the discussion around cost efficiencies and how you, you know, continue to push for her to do more. So I guess the question, you know, are there still more things, I guess, you're trying to accomplish to try to take the costs up? And in that context, is there an update or is there going to be meaningful this expanded WellSky partnership that I guess you announced in December? So any color on that? Thank you.

Yeah, Joanna, look, our pursuit of efficiencies and cost outs never ends, whether there's inflation or not. And that's something that's just part of the culture and part of our focus. Again, the compass heading is always towards unsurpassed quality and the best clinical care in the industry, but doing it in a more efficient manner. And so The team knows this is part of the routine and it's something that never ends. John's a little closer to the WellSky partnership. I'll let him add any color.

Yeah, you know, really excited about the partnership that we announced. And again, given the platform that they have and, you know, our ability to work with them around driving operating efficiencies internally is something that we're really excited about to continue to push that forward. The other thing that, you know, the WellSky team has focused a lot of energy and we were early adopters into it is around interoperability and using their platform to make certain that we're leveraging health information exchanges and leveraging the information to drive operating efficiencies for all of those transitions of care and giving deeper insights into the whole patient or the whole person through that process. And so, you know, our team has been working in close partnership with the team at WellSky around continuing to push that forward. I'd highlight, you know, the work that we're doing with Aliyah Care as well as just being ways that we are working to – take industry leaders from a technology platform and helping them understand the needs of our business and then utilizing their platforms to drive that operating effectiveness and operating efficiencies that we know are going to be required for us to continue to look for ways to offset inflationary pressures and continue to be offering highest quality of care in the settings that we deliver our care in.

Thank you. And the last one, a follow-up, when it comes to interest expense increasing, and obviously your leverage ratio came down very nicely, but still, you know, any plans to pay down any or maybe some of this floating rate debt or at this point the 2.3 is kind of good enough or, you know, if you're comfortable with that rate and you don't feel the need to further lower the debt load.

Yeah, Joanna, look, we feel great about the capital structure and being at 2.3 times considering a few years ago at the merger, we started this journey at 6.2 times, feeling great about it. Of the $1.1 billion of gross debt, $800 million of it is fixed or we fixed it through hedges. We do have $300 million afloat. you know, three month LIBOR last year was at 50 bits. This year it's at 450 bits. So, you know, 400 basis points of, of increase on 300 million of, of, uh, floating rate debt, you know, it's about a million bucks a month. Um, look, we're obviously managing the capital structure closely. It provides us with considerable flexibility. And frankly, I think as we look forward from a value creation perspective, um, I don't know that, um, I don't know that paying off gross debt is a top priority. Again, as we said in our prepared remarks, clearly M&A continues to be what we believe is the top priority. And I think not a testament to less confidence in our M&A opportunities. It really speaks to the testament of the strength of the balance sheet. We've just announced that we're adding a facet where we have optionality around share repurchase as well, which candidly I think is probably – more attractive deployment than paying down gross debt.

I appreciate this. Thank you.

Thanks, Joanna.

Thank you. I'm sure no further questions in the queue. I would now like to turn the call back to management for closing remarks.

Yes. Thank you very much for joining our call this morning, and we look forward to providing updates throughout the year as we continue to make progress against our goals. Thanks everyone and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.