Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) Q2 2022 Earnings Conference Call August 5, 2022 8:30 AM ET
Company Participants
Kevin Dill – Corporate Counsel
Calvin Knowlton – Founder, Chairman and Chief Executive Officer
Orsula Knowlton – Founder, President and Chief Marketing Officer
Brian Adams – President
Tom Cancro – Chief Financial Officer
Conference Call Participants
Thomas Keller – RBC
Jared Haase – William Blair
Jessica Tassan – Piper Sandler
David Grossman – Stifel
Operator
Good day and welcome to the Second Quarter 2022 Tabula Rasa HealthCare, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to turn the call over to Kevin Dill, General Counsel. You may begin.
Kevin Dill
Thank you and good morning. I’m Kevin Dill, Corporate Counsel for Tabula Rasa HealthCare. The company intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law.
These forward-looking statements are subject to risks uncertainties and other factors that could cause Tabula Rasa HealthCare’s actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include the developing nature of the market for technology-enabled healthcare products and services, and potential changes to laws and regulations that may impact our clients.
For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the risk factor section of our 10-K filed on February 25, 2022. A recording of this call is accessible through a link on the Investor Relations page of our website.
I’ll turn the call over to Dr. Calvin Knowlton CEO, Chairman and Founder of Tabula Rasa HealthCare.
Calvin Knowlton
Thank you, Kevin. Good morning, and thank you for joining us. Consistent with our pre-announcement on July 20, we delivered better than expected second quarter revenue of $72.6 million, which was 13% higher versus a year ago. We continue to execute on our planned divestitures and strategy to refocus the company in a few large markets led by PACE. Orsula and Brian will expand further on this topic in a minute.
A key part of our growth is dependent on our existing base, and as such, I wanted to highlight last week’s announcement of a five-year contract renewal with Trinity Health PACE for our CareKinesis Pharmacy services. Trinity is the largest non-for-profit PACE provider with approximately 3,500 participants across nine states and was our largest client as measured by revenue in 2021.
PACE is one of only a few models that provides an integrated care offering for more than 12 million individuals who qualify for both Medicare and Medicaid known as dual eligible beneficiaries. This segment of the population is a major focus for CMS and states giving that duals account for a disproportionate share of Medicare and Medicaid spending.
For example, based on 2020 data, two eligible individuals represented 15% of Medicaid enrollment, but accounted for 33% of Medicaid expenditures. Despite federal and state policy actions to date, only 12% or about 1 million of full benefit truly eligible individuals in 2020 were enrolled in an integrated program such as PACE.
As a reminder, in its recently released fiscal year 2022 annual report, the National PACE Association cited a community of 146 PACE organizations serving more than 60,000 individuals and their families in 31 states.
I now would like to turn the call over to Orsula, who will expand on our PACE business.
Orsula Knowlton
Thank you. In early June, we hosted our fourth Annual CareVention HealthCare Advisory Summit. I’d like to highlight two key takeaways from this event. First, there is a growing demand in moving from personalized to precision medicine through pharmacogenomics or PGX testing in PACE.
During the first half of 2022, we began to deliver a growing number of tests and consults for PACE participants. Second, there is an exciting level of startup PACE program projected to open in the next two years. We have an increasing number of PACE partners who plan to expand outside of their home state and have already won new state requests for applications.
Given our existing footprint and proven outcomes documented in peer-reviewed publications, we feel confident in our ability to win future sales opportunities. Also, it is important to note that our 17% revenue growth this quarter within CareVention remains driven by organic growth.
As Cal noted, there are significant growth ahead of us given the low market penetration rates among the PACE eligible population across the existing 31 states with PACE programs today.
Finally, we view the flurry of federal and state legislative activity and heightened interest in delivering integrated care programs for dual eligible individuals as a potential positive future development. The most recent example is bipartisan legislation titled Comprehensive Care for Dual Eligible Individuals Act of 2022 introduced last week on July 27.
This bill supports [think efforts] [ph] to offer integrated, coordinated care options, including PACE with funding of up to $10 million per state. This adds to the seven distinct active bills in the U.S. Congress aiming to grow pace right now. The pace market relies on TRHC as they explore potential opportunities build new programs and growing existing ones.
At these three stages, our clients need a variety of services that Tabula Rasa delivers to start or continue their journey. We are simplifying our branding, messaging, and how we sell these integrated paid services and this refresh will be completed by the end of 2022. Our solution will become even more accessible, easier to adapt, and to integrate.
Now, I’d like to turn it over to Brian.
Brian Adams
Thank you, Orsula. With the sale of PrescribeWellness behind us, we are focused on the remaining planned divestitures of Sinfonía, and DoseMe, as well as positioning MedWise our simultaneous multi-drug clinical decision support tool for growth in 2023. As part of the TDS announcement on June the 21, we signed a strategic partnership to offer our MedWise Science as part of TDS’ pharmacy management systems, which represents one of the largest retail pharmacy networks in the country. We plan to share further details around this important relationship in the coming quarters.
Last quarter, I highlighted our solid base of clients outside of PACE, including at risk provider organizations, where we have a compelling value proposition that addresses revenue and profitability. The latter through our ability to reduce the total cost of care. Earlier, Cal cited the millions of dual eligible individuals that represent the majority of participants today were roughly 90%. This population also represents the largest percentage of the individuals served by at risk provider organizations that are existing TRHC clients today or a future prospect.
In recent months, we have worked to refine and validate our return on investment or ROI model with existing MedWise clients. And we recently presented our ROI analysis to a large national provider of complex chronic condition management that went live in the second half of 2021. Our services include identifying their high risk members across both government sponsored and commercial populations to perform medication safety reviews through our New Jersey call center.
In addition, we’re running a medication surveillance program that provides alerts around medication adherence, medication safety, and medication related care gaps. Our success with this client where we’re able to deliver a ROI ranging from three to four to one and numerous other MedWise engagements, strengthens our confidence in going at risk with an ROI guarantee.
I will now turn it over to Tom.
Tom Cancro
Thank you, Brian, and good morning, everyone. I’d like to focus my comments on three areas: second quarter results, our balance sheet, and guidance. Second quarter revenue of 72.6 million increased 13% versus a year ago, and 8% on a sequential basis versus the first quarter of 2022. Our revenue performance versus our guidance range of 66 million to 69 million was attributable to accelerating pace enrollment growth and the onboarding of a new large PACE client in California.
In all, this resulted in product revenue growth of 19% versus a year ago and 10% growth on a sequential basis versus the first quarter of 2022. Excluding EMTM, service revenue increased 10% versus a year ago and 4% on a sequential basis, driven by our PBM services, which increased 44% during the quarter versus the year ago quarter.
Gross margin of 22% is down versus 25.9% a year ago, but improved by 60 basis points versus the first quarter of 2022. There are a few headwinds we are facing this year in distribution costs and we expect that to normalize in the coming quarters. Within product revenue, higher shipping fees due to rising fuel prices, as well as a change in product mix towards community pharmacy network or CPN revenue are the major drivers.
Within service revenue, the ongoing BPO transition resulted in elevated expense levels, including higher consulting and professional services. Adjusted EBITDA of 2.1 million from continuing operations is down from 3.3 million a year ago, but nearly 1 million higher versus the first quarter of 2022.
We made meaningful progress during the second quarter in reducing operating expenses and expect continued improvement in cost structure with the sale of prescribed wellness [indiscernible] and the additional planned divestitures of Sinfonía and DoseMe.
During the second quarter, R&D, sales and marketing and G&A in aggregate totaled 20.6 million, a decrease of 12% versus a year ago and a decrease of 9% on a sequential basis versus the first quarter of 2022.
Moving to cash. We ended the second quarter with 26.5 million of cash, which is 12.1 million higher than March 31, 2022. We remain committed to producing positive free cash flow on a sustained basis heading into 2023.
Turning to the liability side of the balance sheet, upon closing the prescribed loan to sale, we immediately paid down our existing line of credit, which totaled 57.2 million as of June 30, 2022. Our debt now is solely our convertible bonds maturing in 2026.
Now, turning to guidance for continuing operations. We are introducing third quarter 2022 revenue guidance as follows: Revenue [up] [ph] $72.5 million to $75 million, which represents growth of 7% to 10%, including CareVention Healthcare growth of 11% to 14%. Excluding EMTM, the midpoint of our revenue guidance for the third quarter would represent 12% growth.
For the full-year of 2022, we are raising our revenue guidance on continuing operations to a range of 286 million to 292 million, which represents growth of 10% to 12%, including CareVention Healthcare growth of 14% to 16%. The midpoint of our new range is 7 million higher than our prior guidance.
With that, I will turn it back to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Sean Dodge with RBC. Your line is open.
Thomas Keller
Hey, good morning. This is Thomas Keller on for Sean. Thanks for taking the question. I want to start off on the recent contract extension with Trinity Health PACE, was this a simple extension or was there any expansion or cross-selling that went along with it? And was there any change in pricing related to that good or bad on a same store basis that you can comment on?
Orsula Knowlton
Good morning, Thomas. This is Orsula. Yes, we have been partnering with Trinity Health since actually we started the company. So, we’re extremely positive and they are seeing a tremendous return on their investment. So, there were no change in the pricing. And we did likely for any contract that’s old, clean up a few areas, expanded some areas, nothing really relevant from that perspective, except that we can you to partner with them, all new programs that they’ll be starting, which include winning the [indiscernible] Western Maryland, also in Florida and in Louisiana, they will be added to our services.
Thomas Keller
Okay, great. Thanks, Orsula. And then, I guess on cash flow, are you guys expecting to end 2022, I guess positive free cash flow for the full-year and I guess if so, what needs to happen to get there?
Tom Cancro
Yes. Hi, this is Tom. For the full-year, well, the first half of the year was slightly negative, right. First quarter is negative, second quarter is positive. So, you’ve got to dig out from that, but I guess the way I’d answered is this way, over the entirety of the last half of the year, I believe we will be positive. We have positive adjusted EBITDA.
The thing to remember is, there’s ebbs and flows in working capital that can make any one quarter positive or negative. So, you can’t ever really control whether the receivable comes in December 28 or January 2, and that can influence it too, but directionally, we are [going to be] [ph] flat to positive over the second half of the year.
Thomas Keller
All right. Understood. Appreciate it. Thank you. That’s all from me.
Orsula Knowlton
Thank you.
Operator
Our next question comes from Jared Haase with William Blair. Your line is open.
Jared Haase
Yes. Hi, good morning and thanks for taking the questions. I guess I just wanted to ask one on the guidance and maybe a point of clarification on how I should interpret things. So, if I look at the outperformance in second quarter, it sounds like that was – a lot of that was driven by more favorable PACE [census trends] [ph] than maybe a little was expected, and that favorability will, sort of run out for the rest of the year, which kind of contributed to the increased guidance, but when I look at revenue on a sequential basis in Q3 and in Q4, it looks like you’re kind of implying fairly flat to only a modest increase on a sequential basis. So, I guess just sort of curious how much should we interpret that as just market services in the second half of the year versus any other puts and takes that I might be overlooking?
Tom Cancro
No, I mean – this is Tom. It’s slightly up in the second half of the year. So, there is some sequential growth there and it’s consistent with the 0.9% we modeled out in our growth rate.
Jared Haase
Okay. Fair enough. I guess then just as a quick follow-up, if I look at the disclosures in the press the quarter, it looks like growth for the PACE business was fairly balanced between enrollment growth and PMPM rate, I think sales were up by 8%, so I guess looking forward over the next couple of years, do you feel like you – we should see kind of a similar relative mix of, kind of even contribution to growth from both the census and the sort of PMPM rate. I know you kind of have levers to grow both just obviously with the overall market growing and your ability to see the market, sort of census rate and then obviously have a lot of upsell opportunity for the PMTMs. So, I guess just, how should we think more broadly about the balance between those two drivers longer-term?
Brian Adams
Hi Jared, this is Brian. Thanks for the question. I do think that you’re going to continue to see a pretty balanced growth in both of those throughout the future years, the average PMPM uptick is really reflective of the continued cross-sell within the customer base. So, that is part of our growth strategy and we continue to see evidence of that play out in our average PMPM. So, we do believe that that’s going to be a pretty balanced part of our growth in the future years.
Jared Haase
Okay. Thanks for taking my questions and I’ll hop back in the queue.
Operator
Our next question comes from Jessica Tassan with Piper Sandler. Your line is open.
Jessica Tassan
Hi. Thank you so much for taking the questions. I appreciate it. I was hoping just, to the extent that you guys can comment on this, can you just walk us through, kind of where managements goals are, kind of incongruent with the filed intentions of your [activist] [ph] and just kind of what led you to undertake the recent actions to dilute control? Thanks.
Tom Cancro
Well, I don’t know that the – this is Tom, by the way. I don’t know that our actions are inconsistent with our activists. As far as the shareholder rights plan, that’s pretty common thing that a lot of companies have. I guess I’d go back to what we said last quarter, which is, we encourage and we take investor feedback to all of our shareholders, but we’re not going to comment specifically on that matter.
Jessica Tassan
Okay, got it. And then can you just remind us, kind of what the maximum per member per month for a PACE member might be excluding the divested assets? And then just how you’re trending in terms of that level and what you’re seeing in the contracts that you’re expanding or renewing for 2023? Thank you.
Brian Adams
I’m happy to start comment on the maximum amount. in terms of the PMPM, but what we’re seeing is about $1,300 PMPM, if somebody were to sign up for all of our services today. Maybe I’ll turn it to Orsula just to comment specifically on what we’re seeing from a renewal perspective.
Orsula Knowlton
Absolutely. We’ve definitely seen close to 100% renewal of the ones that we’ve been able to renew so far this year and anticipate that ongoingly. We’ve had client retention of 96% or higher. And with the acquisition of Pharmastar that has really been an excellent opportunity for us to share the value of our risk mitigation services in particular using our risk stratification engine. So, we’re seeing more opportunities to close deals. So, we believe that will continue to increase on the average. Thank you, Jessica.
Jessica Tassan
Thank you. That’s helpful. I just have one quick follow-up. Can you guys just remind or I guess elaborate on the recent contracts that you signed with CBS? I think you mentioned and it’s a software sale into CBS retail, but if you could elaborate on that, that would be helpful? Thank you.
Brian Adams
Sure. This is Brian. I’m happy to take that. We’re really excited about partnership with TDS that goes well beyond just the transaction where they acquired the PrescribeWellness business. We continue to see an opportunity to provide clinical services through their network. And so today, they will be licensing our MedWise risk scores, as well as our clinical decision support tools to be used across their installed pharmacy base. And we hope in the future that we’re going to be leveraging that network to support a number of our payer customers. So, it’s a really exciting opportunity I think for both companies.
Jessica Tassan
Got it. Thanks again.
Orsula Knowlton
Thanks for your questions, Jessica.
Operator
[Operator Instructions] Our next question comes from David Grossman with Stifel. Your line is open.
David Grossman
Thank you. Good morning. I want to go back to Tom, to your comments about the balance sheet and cash burn. Can you share with us just when it’s all said and done after all fees and taxes or whatever what we should use for net proceeds or if you have it just what the pro forma balance sheet would have looked like at [6/30] [ph] assuming the transaction has been completed and the 57 million of debt has been paid down?
Tom Cancro
Sure, and good morning, David. So, the cash proceeds on close were $125 million. There is, as you know, another $15 million in earn out that will come – that may come in the future. Some friction costs take that down to about [$120 million] [ph] and then almost 60 on the revolver, right, 57.4.
So, your net proceeds, if you will, a little bit over $60 million from the transaction, we had [27-ish cash] [ph] at June 30. So pro forma, your June 30 cash position would be a little under $90 million and that’s exactly where it is today by the way.
David Grossman
And does the balance sheet include the payment for the technology piece that was part of the transaction or was that after the end of the quarter?
Tom Cancro
No, it does include that.
David Grossman
That’s reflected in the [6/30] [ph] balance sheet?
Tom Cancro
Yes, sir. Okay. Thank you.
David Grossman
And then on the cash burn comments, in the back half of the year, it sounds like call it breakeven to modestly positive depending on timing of collections, etcetera. So, if we – I assume that includes the discontinued ops as well, is that correct? And if it does, is there a material cash burn or contribution from either of those businesses?
Tom Cancro
That’s a really good point and I’m glad you raised it. Some of the cash result from the second half of the year is going to depend of the timing of a close of the Sinfonía at sale. So, remember that PrescribeWellness generated a bit of cash, and Sinfonía in some quarters is slightly cash flow negative.
So, with PrescribeWellness gone, we’ve got the benefits of that through the sale and that 90 million on our balance sheet and then solve our short-term liquidity issues, de-levered debt that was starting to get expensive in a floating rate environment, but you lose the cash [inflow of that] [ph].
So, depending on how far into fourth quarter, a Sinfonía close goes, you could see a little negative cash flow in any one quarter. But I think the key thing is that we exit the year cash flowing. And then once you have all of these assets off the balance sheet, your ability to get synergy to improve your cost structure really starts to take shape.
You’re talking about going from 1,600 employees at the start of the year to less than 1,000 when Sinfonía closes. And that’s just the direct cost. As we talked about in the last call, there’s all the indirect savings we can push on. Things like business services that are tied to headcount, legal fees, insurance, real estate, other areas of cost that should scale with a smaller organization.
So, the timing of the Sinfonía close will greatly impact our ability or the timing of when we’ll start to see savings from that. And that’s really the reason we haven’t projected adjusted EBITDA is that, you know any one month in a three-month quarter can have a real impact on your cash flow. So, if you close in the first month of the quarter versus the third month of the quarter, it can have a big impact.
David Grossman
And can you dimension at all, kind of what the magnitude of Sinfonía’s cash burn is, just give us a rough sense of what it’s for?
Tom Cancro
Oh, I think there were quarters where it was roughly $1 million or so and then quarters where it was flattish. On average, it probably averages 0.5 million to 1 million.
David Grossman
Got it. Okay.
Tom Cancro
Maybe a little [bit more] [ph].
David Grossman
Right. And then just going back to an earlier question that was asked about the, I guess, the TAM really for PMPM within your installed base and PACE, I think Brian used to $1,300, they took everything, so Orsula, can you give us a sense within the installed base what your average is today and then, kind of what the renewals are looking like? And I guess renewals probably isn’t the right way to ask it, but just some idea of how that average has been trending over the last couple of years?
Orsula Knowlton
Well, we’ve been trending a above 95% since we started the company. Last year we’re 100% renewal. So, we expect to be very close to that this year as well.
David Grossman
No, actually the question – I’m sorry, maybe I wasn’t very clear. Just – I think Brian said that the – was giving us an idea that you – if a client took all the services, I think you said $1,300 if I got that right. And just curious how that number has been trending within the installed base vis-à-vis that $1,300?
Brian Adams
No, David we only disclosed that on an annual basis. But if you look at Q4, it was about $426, $427 PMPM. So, there’s still a very significant runway for us there and that was up about 8% over the prior year. So, we continue to see similar growth trajectory.
David Grossman
And is that 8% what you’ve been getting historically, Brian?
Brian Adams
Yes, I think that’s a fair way to think about it.
David Grossman
Great. And just one last question. I saw the Form-4s that were filed, I guess, a couple of days ago, is that, can you maybe explain the context of those, the [RFU grants], if – I may not have read that correctly, by the way. So, which is one of the reasons I’m asking a question, just what those were if you could just kind of review that quickly? Thanks.
Brian Adams
Yes, this is Brian. I’ll take that one. That was related to the 2022 long-term incentive grants for the named executive officers. So, those had not been granted to date. So, that’s what that relates to. Typically, those are granted much earlier in the year. So those grants just happened.
David Grossman
Does those grants relate to 2021?
Brian Adams
No. The 2022 long-term incentive.
David Grossman
I see. Okay, great. Thanks very much.
Orsula Knowlton
Thank you.
Operator
There are no further questions at this time. Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.
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