Tabula Rasa HealthCare, Inc.

Good day, and thank you for standing by. Welcome to Tabula Rasa Health Care's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Sparacino, Senior Vice President of Investor Relations and Corporate Development. Please go ahead.

Good morning. This is Frank Sparacino, SVP of Investor Relations and Corporate Development 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 our expectations regarding industry and market trends, including the expected growth and continued structural change and consolidation in the market for healthcare in the United States. Our expectations about the growth of programs of all-inclusive care for the elderly pays organizations. Our plans to further penetrate existing markets and enter new markets, plan strategies and objectives of management for future operations, future capital expenditures, future economic conditions or performance, and our estimates regarding capital requirements and needs for additional financing. For additional information on the risks facing Tabitha Rasa Healthcare, please refer to our filings with the SEC, including the risk factors section of our 2021 10-K, filed on February 25, 2022, and our 2022 10-K to be filed shortly. When we discuss our results on this call, unless indicated otherwise, we are referring to results from continuing operations. For additional information on our results from discontinued operations, please refer to the financial statements contained in the earnings release issued on March 6, 2023, and the notes to the financial statements to be included in our 10-K for 2022. A recording of this call is accessible through a link on the investor relations page of our website. I will now turn the call over to Brian Adams, President and Interim CEO of Tabula Rasa Healthcare. Thanks, Frank.

Good morning and thank you all for joining us. I'm proud of the Tabula Rasa team and what we accomplished during 2022, especially in the second half of the year. The numbers speak for themselves. For the full year, revenue grew at a rate of approximately 15%. And in the fourth quarter, however, revenue growth accelerated to 20%. As many of you know, It's been quite a transformational year on many levels for us. We sold our prescribed wellness business unit in August, announced an important leadership and board changes in September, named April Gill as our first chief commercial officer in November, and recently completed the sale of Symphonia RX and Dosme, two non-strategic assets. This is in addition to being recognized as a 2022 Champion of Board Diversity by the Forum of Executive Women and named one of America's greatest workplaces for diversity by Newsweek. I'm extremely proud of our nearly 700 team members for how they have helped position us as we enter 2023 with strong momentum. These important events and the continued evolution of our business over the past year have brought a number of new individuals to these calls. so I thought it might be helpful to provide a short overview of what we do. Tabula Rasa has been around since 2009 and has developed an expertise for managing the most complex patients in our healthcare system. We provide individualized care for the curation of personalized medication regimens to reduce risk and optimize efficacy and help organizations responsible for those patients operate more effectively. Over the years, we have developed our proprietary MedWise platform, which is our unique multi-drug interaction solution that helps predict medication-related risks. We have numerous peer-reviewed publications that showcase the profoundly positive impact from MedWise on patient health outcomes and the reduction of total cost of care in various settings. Our MedWise platform has been developed through a collaboration of our R&D and software engineering teams and contains a robust set of proprietary clinical algorithms that highlight multi-drug interactions and help clinicians to optimize individual medication regimens for their patients, reducing the risk of serious side effects while also promoting maximum effectiveness. MedWise can also account for a person's genetic makeup and their individual response to certain medications allowing for more precise prescribing. On a personal note, I really enjoy hearing the weekly updates our teams share showcasing the positive effects we are having on patient care by using the MedWise platform. These stories are personal and each one is worth celebrating. These are moments that help to motivate our team every day. In the program of all-inclusive care for the elderly, or PACE market, which represents the largest percentage of our revenue base today and grew at 27% in the fourth quarter, we have demonstrated a $5,000 annual savings per person when using our MedWise platform coupled with our pharmacy services, as compared to those not using Tabula Rasa. For those of you not familiar with PACE, it is a program funded by Medicare and Medicaid and designed to allow people to age in the community or at home rather than institutional care like a nursing home. It is arguably the most successful example of value-based care and has demonstrated material reductions in hospitalization rates and ER utilization compared to those individuals in long-term care settings. Over the years, we have added other technology-enabled services and software to our suite of solutions to help our clients simplify their operations and allocate more resources towards patient care. We believe a combination of these solutions is not only relevant to PACE, but also to adjacent healthcare markets taking on financial risk and serving similar demographics. Thanks to our efforts to refocus the company around these solutions, our cross-selling activities are gaining momentum. This is evidenced by the average revenue we generate per PACE individual per month. which increased to $494 in the fourth quarter of 2022, up 16% from $427 a year ago. The total monthly revenue we could generate from each individual if they were to be covered by all five of our services is currently more than $1,200. The most significant opportunity we have to increase the $494 average revenue per patient per month is through driving greater adoption of our pharmacy services into our existing PACE customer base. And we're making progress towards that goal. In 2022, we increased penetration of our pharmacy services to 38% of our overall base versus 34% at the end of 2021. In addition to the opportunity to provide incremental services to existing customers, the PACE market continues to grow, thus expanding our total addressable market. I want to highlight a few important developments that took place over the past 12 months. During 2022, Maryland, Ohio, and New Jersey committed to expanding their PACE program. According to the National PACE Association, Ohio has an estimated 66,000 individuals currently eligible for PACE but without access to services, making it one of the top states in terms of opportunities. Ohio passed a PACE expansion bill that includes $50 million to support startup costs, and the state is taking a proactive approach on outreach to drive enrollment in their PACE program. This proactive approach includes identifying eligible individuals and notifying them of PACE programs in the appropriate service area. This is important because it will increase consumer awareness. One of the key policy recommendations we highlighted last quarter from the bipartisan policy center to accelerate PACE adoption versus individuals residing in a nursing facility. In addition to these three states' expansions, Missouri and Kentucky became the two newest states in 2022 to start enrolling PACE participants, bringing the total number of states to 30. And according to NPA, Missouri and Kentucky have an estimated 40,000 plus individuals currently eligible. Last quarter, I highlighted NPA's PACE 200K project, and all of the developments I noted are important in driving an accelerated rate of market growth to reach the 200,000 enrollees by 2028. Using the $1,200 average revenue per PACE enrollee per month, that would result if a client used all of our PACE services, and applying that to the 200,000 targeted PACE enrollees would yield an estimated TAM of $2.9 billion by 2028. The expansion in existing states plus new states coming online gives us confidence in our expectation for continued strong growth over the next several years in the PACE market as we seek to increase our market share. As Tom will discuss in more detail, we're making important investments in our PACE business to accommodate this anticipated demand and to better serve our customers while also building a best-in-class commercial sales organization for profitable, scalable growth inside and outside of PACE. As we have discussed in prior calls, key adjacent markets include health plans and at-risk provider groups with a focus on the more than 12 million dual eligible beneficiaries that exist today and drive a disproportionate share of the country's total healthcare spending. Before I turn the call over to Tom, I also wanted to briefly mention the recent divestitures of Symfony Rx and DOSME. The decision to sell non-core assets and exit non-strategic markets is part of our continued strategy to realign the organizational structure and allow Tabula Rasa to grow in a more profitable manner while making strategic investments for the future. This strategy has resulted in a sharper focus. And this is one of the many reasons I am confident in our ability to execute on our future growth plans and expand our margins in the coming years. This process did not come without its challenges, as we were not able to find continuing roles for some of the team members associated with the Symphonia Rx business. I want to thank each and every person associated with Symphonia and Doceni for the important work they did while part of Tabula Rasa. And I wish you the best of luck in the future. These asset sales, along with our full year 2023 guidance, represent our commitment to focus on creating long-term value for our shareholders. 2022 was a transformational year for Tabula Rasa, and today we have highlighted the significant progress we have made so far. We remain focused on executing on our strategy, and we look forward to providing a more fulsome view of what you can expect from Tabula Rasa throughout the remainder of 2023 and beyond on a future call. I will now turn the call over to Tom to review our financial performance. Thank you, Brian, and good morning, everyone.

I will focus my comments on three areas, fourth quarter results, key operational metrics, and 2023 guidance. As you saw in our earnings release, the company retitled its revenue categories from product revenue and service revenue, medication revenue, and technology-enabled solutions revenue, respectively. Changes have no impact to amounts previously reported. I will be using our updated revenue line titles in my comments today. Fourth quarter revenue of $82.7 million increased 20% versus the year-ago quarter and 7% on a sequential basis versus the third quarter of 2022. Our strong revenue performance was primarily attributable to better than expected PACE participant growth. and the onboarding of another large new PACE client in October. These factors led medication revenue growth of 27% versus a year ago. As Brian mentioned, there are a number of statewide commitments to PACE program expansion. This, coupled with our already robust growth in our existing centers, is why we expect census growth to be a strong driver of revenue growth in the quarters and years to come. Fourth quarter technology-enabled solutions revenue was flat versus a year ago. Including EMTM, fourth quarter technology-enabled solutions revenue increased 14% versus the year-ago quarter and 6% on a sequential basis versus the third quarter of 2022. CMS's EMTM pilot program ended in December 2021. That will no longer be in our comparisons going forward. Adjusted gross margin as a percentage of revenue was 24.6% for fourth quarter, down from 28.7% a year ago. This was largely due to revenue mix as well as to higher shipping charges, which we are working to address. On a sequential basis for the third quarter of 2022, adjusted gross margin percent improved by 130 basis points, driven by improved technology-enabled solutions margin. We are providing additional non-GAAP financial measures starting this quarter, and our earnings release issued yesterday includes descriptions of these. Two headwinds that negatively impacted medication gross margins in 2022 related to revenue mix and higher shipping charges. During 2022, shipping charges increased significantly and adversely impacted adjusted gross margin by nearly 100 basis points. We are working to improve both of these factors in 2023, and as noted above, did see some improvement in gross margins in the fourth quarter. While on the topic of gross margins, we note that our pharmacy business is experiencing significant growth, and in order to gain scale, as well as to support future demand, we plan to invest in automation and expansion of our pharmacy lab facilities. While these efforts will take the better part of 2023 to implement, We do anticipate roughly 300 basis points of improvement at the overall gross margin level from 2024 through 2027, in large part due to these investments in automation and other initiatives, which will lower our cost to fulfill orders in coming years. We believe our adjusted gross margins can be in the ballpark of 26.5% to 27.5% by 2027. Our gap net loss for the quarter of $18.4 million compares to a net loss of $13 million a year ago and includes $4.9 million of non-cash impairment charges related to lease terminations and other costs to consolidate our real estate footprint, as well as $1.4 million of severance costs. Adjusted EBITDA of $4.1 million from continuing operations for the quarter was flat versus a year ago. On a sequential basis versus the third quarter of 2022, adjusted EBITDA roughly doubled, primarily driven by the adjusted gross margin improvement noted earlier. With respect to our key operational metrics, we provided a table in our earnings release that provides greater transparency into the performance of our business. These include PACE medication census, which at the end of 2022 increased 20% versus a year ago, driven primarily by same-center participant growth, as well as by new PACE clients. In addition, we have provided our PACE average revenue per participant per month for medication and for our technology-enabled solutions, which increased 7% and 2%, respectively, in the fourth quarter versus the year-ago quarter. Our total PACE average revenue per participant per month increased 16% to 494 during the fourth quarter of 2022. In terms of guidance, we are introducing first quarter and full year 2023 revenue and adjusted EBITDA guidance. First quarter revenue from continuing operations of 82 to 84 million represents growth of 24% versus the year-ago period at the midpoint of the range. An adjusted EBITDA of 3 to 4 million for the quarter compares to $1.1 million a year ago. For the full year 2023, revenue from continuing operations of $343 million to $354 million represents growth of 16% at the midpoint. An adjusted EBITDA of $17 to $20 million represents growth of 98% at the midpoint and an adjusted EBITDA margin of 5.3%. I want to provide some additional color for 2023, starting with revenue. We expect revenue growth comparisons in the first half of the year to be higher than the second half of the year. That is because we onboarded two large PACE programs in the second half of 2022. With respect to adjusted EBITDA, I want to provide some added detail with regard to 2023. Similar to 2022, we expect the fourth quarter of 2023 to be our highest adjusted EBITDA quarter, and we project the second half of the year to account for a similar percentage of the full year adjusted EBITDA, as in 2022. The first quarter may be flattish to the fourth quarter of 2022 due to certain seasonal items, and the second quarter of 2023 will be negatively impacted by annual merit increases which present a sequential increase to expenses versus the first quarter. While we are not providing guidance with respect to cash flow, we can highlight a few items. First, we expect total investment in property and equipment to be in the range of $7 to $9 million, including $5 to $7 million in 2023 to support the automation and expansion initiatives I mentioned earlier. We expect capitalized software for 2023 to be approximately 18 million, including non-recurring investments to integrate and modernize several legacy IT platforms. In total, we expect capital investment in 2023 to be in a range of 25 to 27 million. This is down from a total capital investment of 29 million in 2022. Excluding the non-recurring investment in automation, Total capitalized software and property and equipment in 2023 is projected at $20 million. We believe over the next several years, total investment in software development and property and equipment should average $15 to $19 million per year. I will now turn the call back to Brian for some concluding remarks.

Thanks, Tom, for those updates. I'm inspired by the progress we have made with these transformational steps to reposition Tabula Rasa for long-term success. I want to specifically call out our team members who make a difference in solutions offered to improve patient care every day. Thank you for the work that you do. As we look ahead to 2023, we are well positioned to drive growth and profitability while also investing strategically to deliver long-term value. With that, I will turn the call over to the operator for Q&A. Operator?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and 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 Stephanie Davis with the SVB Securities. Your line is now open.

Hey, folks, congrats on a good quarter and the return of Guy into profitability. Brian, now that April's four months in the role, I was hoping to tell us a little bit more about some of her year-on-to-niches for the new chief commercial officer seat and how you're going to evaluate success for the new seat.

Stephanie, thanks for the question. It's a great one, and I am so glad that April is on our team. She's been an amazing addition so far, and there's some of the structure that she's putting in place. And as I mentioned in my talking points, our goal here is really to develop a best-in-class commercial sales organization, and she's doing a lot of that work today. And so the first four months have really been about evaluating what we have in place and One of the things that we've done recently is develop a team that's really focused on commercialization of our products and solutions. And that's not necessarily something that we had the framework and rigor around previously. And so I'm excited that we have that new I don't know if you'd call it an office or a team or whatever, but it's a group that's really focused on driving the commercialization process. And so I think you're going to see a lot of good things come in the second half of this year. But in terms of how we're specifically going to measure that, you're going to see it in terms of growth in the pipeline, in terms of backlog, in terms of new sales, both within the PACE market and in some of those adjacencies that I referenced on the call.

Now, related to that then, Tom, you talked to a relatively elongated arc to get back to your pre-M&A profitability profile. Is it because we're making investments like what Brian just talked about, or is there anything that could accelerate this timeline, like a macro or economies of scale heading faster than expected?

Hi, Stephanie, and thanks for the question. No, I think your first instinct was correct. I think Some of these, such as the investments in automation, take some time to bear fruit. It'll take the better part of 2023 to get those in place. And so, as you saw in our guidance, we project margins to be consistent with fourth quarter of 2022 or the bulk of 2023. And then it's from 2024 on when we start to get the benefit of some of these investments.

All right. Helpful. Thanks, folks. Thank you. Our next question comes from the line of Craig Jones with Stiefel. Your line is now open.

Hey, thank you. So I was wondering, could you walk us through sort of your assumptions around member growth and PMPM growth when you think about the top end and the bottom end of your 23 guidance?

Hey, Craig, thanks for the question. I think maybe first I'll just kick it off with some comments around what we're seeing happen in the market right now, and then I'll let Tom get into some of the specific numbers. But I've been interacting more frequently with customers in this new role, and I have to tell you I'm really excited about what I'm hearing. In all cases, they are focused on growth, and that's really evident in Our backlog numbers, as you can see, those are up significantly from the last time that we reported. A lot of that is related to expansions of existing customers, and the majority of that is really focused in the pharmacy space. But it's pretty exciting to see what's happening in the market right now. I'll let Tom talk more specifically about the upper and lower ends.

Yeah, Craig. growth in the average revenue per participant per month largely tracks with what we've seen over the past year. And that's how we modeled it in our guidance. So you've got single-digit growth in each of the medication and the technology-enabled services revenue per participant. But the blend of the two increases because of some of the cross-selling that Brian has talked about.

Right. So you're saying that the medication is going to grow faster on a member basis, I believe, so the mix gets better?

The medication grows faster than the tech-enabled services. That's correct. And the blend of the two grows faster than the individual pieces as the mix shifts and as the cross-selling that Brian alluded to with April coming on board starts to bear fruit.

Got it. And then, I think, Brian, you mentioned the backlog. It looks like it increased by 44% as you were saying, which is you know, pretty incredible from 3Q to 4Q. Can somebody just walk us through the map and sort of how we got there?

Sure. So I'm just all happy to provide a little bit of color on the top, and then Tom could probably jump in on some of the specifics. But, you know, the way that we look at this and measure backlog today is based on the maturity of each of those contracts that we have in place. And so just to use an example, If we've signed a pharmacy services contract, we're assuming at 250 members or participants or individuals at maturity of that center or location that you're using our average PMPM of roughly $1,000 on the pharmacy side, multiplying that by the 250 and then by 12 months, so you get to a little over a $3 million contract. contract. So that's on an individual or unit basis, if you're thinking about it, and then we just build from there. So it's really related to specific which contracts we have in the pipeline, what services they aligned around, and we have seen significant expansion over the past few months coming in from existing customers. Tom, I don't know if you have anything to add to that.

Oh, just that the large increase in backlog was due to a large national provider that we, PACE provider, that we signed with multiple centers who is taking both the medication services but also some of the tech-enabled services.

Okay, great. Thanks. That's all from me. Thanks, Greg.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Ryan Daniels with William Blair. Your line is now open.

Hey, good morning. This is Jack Malik on for Ryan. Regarding the bit of EBITDA expansion you guys are modeling out for 2023, could you provide some additional color on which cost levers you anticipate to get you that you know, extra 200, 250 basis points of improvement over the year. I know you mentioned some gains in gross margin as those 2022 headwinds ease, but any additional, you know, comment on cost optimization efforts would be great. Thank you.

Jack, thanks for the question. This is Brian. I'll start and then turn it to Tom to talk more specifics. But, you know, in 2022, We referenced that we had a couple headwinds that we do expect to abate in 2023. The first was really related to higher shipping costs. And we've renegotiated or in the process of renegotiating more favorable terms with some of our largest shipping vendors. We've also identified some lower cost delivery methods and plan to use them. And then we've finally started to see the surcharges that we experienced in 2022 start to abate. All these are going to have a positive impact on our Shipping costs in 2023 and then the second area that we mentioned on the call. It's really related to revenue mix and This mix was impacted by our medication acquisition cost in some cases And as Tom mentioned we're investing in automation and process enhancements that will ultimately give us greater flexibility and how we source medications that lower costs Tom anything you want to add as relates to either of those?

Yeah, so Roughly $9 million increase in EBITDA. And how do we get there is your question. Well, at the midpoint of revenue guidance, you're doing about $49 million more than the prior year. As we said earlier, we expect margins, gross margins, adjusted gross margins, to be flat to the fourth quarter of 2022. That yields about $12 million in gross profit. And nine of that falls to EBITDA. So what that tells you is we're getting much more operating leverage. We've been able to hold SG&A costs relatively flat, not entirely flat because we do have 20% revenue growth. You're going to have some incremental costs, but largely flat because of some of the savings we talked about previously as a result of sharpening our focus to our remaining business.

Thanks, appreciate the detail there.

With respect to top line visibility, I guess, one, how much of this incremental sales guide, close to 50 million euro per year at the midpoint, is based on contracted revenue versus assumed in-year sales? And two, any additional color on what might drive the target either to the low end or high of the guidance range? Thank you.

I'll start, Jack, and just provide a little bit of color. As I was mentioning before, you know, the backlog is extremely healthy right now and continues to grow. And I think that all that we are observing through conversations with customers, what we're hearing through the National Pace Association is that we would expect to see an acceleration of growth over the next few years. The revenue that we're projecting we feel is

um you know very reasonable for uh what we're seeing happen in the market right now but i'll let tom talk a little bit more about the specifics yeah jack at the high end of the range the growth resembles 2022 or the split of the growth that is to say a little more than half of it comes from same store sales if you will new participants at existing centers and the rest is split between new centers and pricing, drug price increases, new contracts, et cetera. At the low end of the range, it is almost entirely existing centers and pricing and very little ascribed to new centers added.

Great, thank you.

Thank you. I'm sure no further questions at this time. Thank you for participating. This concludes today's conference call. You may now disconnect. And I'm sorry, it looks like we have one question that just popped in from Jessica Casson with Piper Sandler. Your line is now open.

Sorry about that. So can you just remind us what the backlog to revenue conversion process looks like? Like how many years of projected revenue are included in backlog and what is the anticipated rate of conversion?

Thanks, Jessica. Good question. Good to talk to you. So those are all contracts that are in place today. What's reflected in backlog is at full ramp. So once those contracts are at maturity and those locations are They have full census associated with them, which on average is about 250 participants or 250 members. So we would expect over time, and that time is anywhere between 18 months to three years, we would see that revenue be realized. Effectively what you're looking at there in our backlog is ARR, right? That's what we're looking at. So, it does take some time for those locations to ramp up.

Got it. That makes sense. And then just, Brian, you spent a little bit of time in the prepared remarks talking about the drug-drug interaction or the Medwise platform. I'm just interested, what is the monetization strategy for that platform right now? And then is the intention to sell this product or this platform outside of PACE? And kind of where does that fit within the landscape of physician drug reference products? Our understanding is Epocrates has about 50% of market share. And so just curious to know if you think about MedWise as a complement or an alternative to that offering.

That's a great question. We've talked a lot about MedWise. And I think it's important for everybody that's listening to understand that We use MedWise today in our PACE platform, where we're bringing pharmacy services to our PACE customers. We use MedWise to analyze those medication regimens for every single individual. The thinking around bringing MedWise into some of those adjacent markets will not be us bringing pharmacy services, but in a different capacity. April and the strategy team and the commercialization team have really been looking at new ways for us to bring that to market and couple it with some of our existing paid solutions that we feel are very relevant for some of these adjacencies. I am excited over the coming quarters. I think we're going to have some good things to share with you on how we plan to effectively relaunch our MedWise go-to-market strategy. You know, I wouldn't necessarily think of it in the same way that you think about Hippocrates. You know, this is a platform that's looking at multi-drug interactions, whereas some of these other products are, you know, it's one-to-one drug. It's a very simple process. I think we're going to come at it from a very different perspective. And the value that we can ultimately provide by using this platform is significantly higher.

Got it. And so the relaunch would be a 23 relaunch with impact on 24 bookings or 24 revenue. Can you just kind of frame the timeline? And that's it for me. Thanks.

Yeah, I think that's a good timeframe in terms of expectations. We plan to be back in the market in the second half of the year with revenue being recognized starting in 2024.

Thank you. All right, thanks, Jess.

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.