Q3 2024 Guardian Pharmacy Services Inc Earnings Call
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Speaker Change: Good day, everyone, and welcome to Guardian Pharmacy's third quarter 2024 earnings call. At this time, all participants are on a listen-only mode.
Speaker Change: Later, you will have the opportunity to ask questions during the question and answer session.
Speaker Change: Today's speakers will be Fred Burke, President and CEO of Guardian Pharmacy and David Morris, EVP and CFO of Guardian Pharmacy.
Speaker Change: Before we begin, I'd like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
Speaker Change: These statements include, but are not limited to, comments regarding our plans, objectives, business outlook, and our financial results for 2024 and beyond.
Speaker Change: Actual results could differ materially from the expressed or implied in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in the company's quarterly report on Form 10-Q and earnings release issued today.
Guardian Pharmacy undertakes no obligation to update any forward-looking statements.
Speaker Change: Additionally, on this afternoon's call, the company will reference certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, and free cash flow.
Speaker Change: Included in our earnings release, as well as on our website at investors.guardianpharmacy.com, are reconciliations of these non-GAAP financial measures to the GAAP measures reported in our financial statements.
Speaker Change: This afternoon's call is being recorded and a replay of the call will be available later today.
Speaker Change: I am now pleased to introduce the President and CEO of Guardian Pharmacy, Fred Burke.
Fred Burke: Welcome to Guardian Pharmacy's first quarterly earnings call after we began trading on the New York Stock Exchange on September 26th of this year.
Fred Burke: On today's call, we will be discussing our third quarter, 24, financial results.
Fred Burke: I'm pleased to share strong results today, which include resident count at the end of the quarter of approximately 180,000, a 12% increase from the third quarter of 2023.
Fred Burke: Revenue of $314 million, an increase of 20% year-on-year, and adjusted EBITDA of $23 million, also representing an increase of 20% compared to last year's quarter.
Fred Burke: Before David shares additional information around these financial results, I'd like to give you a brief overview of the Guardian story, especially for those of you that we did not have the opportunity to meet on our roadshow.
Fred Burke: Guardian Pharmacy Services is a leading long-term care pharmacy facilitating the full life cycle of pharmacy administration and associated services for residents of long-term care facilities.
Fred Burke: Our extensive suite of technology-enabled services is designed to ensure residents are firstly on the appropriate drug regimen and then to promote medication adherence.
Fred Burke: Both of which improve clinical outcomes and bend the cost curve.
Fred Burke: We are purpose-built to address the complex medication management needs of residents in long-term care facilities, including assisted living, behavioral health, and group homes.
Fred Burke: We also have robust capabilities to serve residents of skilled nursing facilities and other types of long-term care facilities.
Fred Burke: Our focus on assisted living positions us in an attractive, high-growth market where residents require specialized care and the high-touch, individualized, consultative pharmacy services that each of our local pharmacies provide.
Fred Burke: Currently, there are more than 800,000 assisted living residents in the United States. A market is growing around 5% per year.
Fred Burke: Guardian currently serves about 120,000 assisted living residents from our 50 locations across the country.
Fred Burke: We operate in a highly fragmented market, competing with over 1,200 independent pharmacies. While we've come a long way from our original pharmacy in Phoenix, Arizona, there's still significant runway ahead of us.
Fred Burke: Specifically, according to the NCHMAP data, we are the U.S. leader in assisted living, despite not yet having 100% geographic coverage, with a 12% market share.
Fred Burke: which means to us that there's 88% left. I'm excited to have you all following along with our progress.
Thank you.
Fred Burke: I want to point out that our pharmacies are not your traditional retail pharmacies stocked with a variety of non-pharmaceutical items on their shelves.
These are closed door.
Fred Burke: institutional pharmacies, and 10 to 20,000 square feet of industrial space with an average of 50 to 100 employees in each location.
Fred Burke: Each pharmacy can serve residents in a two to three-hour radius, operating on a 24-7 basis, continuously adapting to the needs of the facilities we serve and their residents.
Fred Burke: In the assisted living facilities we serve, the average resident is 87 years old and is impaired by multiple activities of daily living or ADLs.
Fred Burke: They are older and face many health challenges, but they are also financially capable, opting to live in newer, nicer facilities and doing so via private pay.
Fred Burke: Unlike traditional skilled nursing facilities where the pharmacy is dealing with health care professionals, including RNs and a physician serving as medical director, in assisted living facilities there are very few clinical professionals.
Fred Burke: Thus, the pharmacy needs to be able to provide a different type of service.
Fred Burke: Our consulting pharmacists work with each resident's multiple community physicians to help ensure they're on the proper drug regimen, and our technology platform enables the non-healthcare professionals in these settings to safely administer drugs to the residents and ensure adherence.
Thank you.
Fred Burke: As I mentioned, there's a lot of room for us to grow, and we have a strong track record of executing our multi-pronged growth strategy that includes three organic drivers plus M&A, which David will discuss in more detail next.
Speaker Change: Turning now to a few business highlights from the third quarter.
Speaker Change: First, we completed our second quarter with Heartland Pharmacy, which we acquired in April of this year.
Speaker Change: This was larger than our normal course acquisitions and included four pharmacy locations, 8,600 residents, and brought us into the Intermountain West.
Speaker Change: While our acquisitions typically take two to three years to realize the full synergies of Guardian, Heartland is progressing well and the local team is excited about continuing to implement the Guardian platform to achieve growth and operating leverage.
Speaker Change: Secondly, the recent hurricanes wreaked havoc on many areas we serve. I'm proud of how we successfully navigated the challenges brought on by both Hurricane Helene in the third quarter and Milton in the fourth.
Speaker Change: As the storm approached, Helene's projected path was broad, potentially impacting 13 of our pharmacies in six states.
Speaker Change: Out of an abundance of caution, each pharmacy implemented its emergency procedures to prepare for potential impacts of the storm.
Speaker Change: As many residents were evacuated, we ensured they left the facilities with all necessary prescriptions for an extended period of time. Our teams worked diligently and swiftly to ensure there would be no disruption to access or adherence for dislocated residents.
Speaker Change: Ultimately, while very challenging and costly for our pharmacy teams to navigate, this is the right thing to do to ensure continued care for the residents we serve.
Speaker Change: I'm pleased to report day-to-day operations have returned to normal in most areas except western North Carolina, and none of our pharmacies were severely impacted by these storms.
Speaker Change: Finally, I'd like to touch on the Inflation Reduction Act, or the IRA, which we spoke to many of you about on our road show.
Speaker Change: One of the unintended consequences of the IRA's negotiated maximum fair price provision is potential margin headwinds in 2026 on these negotiated drugs.
Speaker Change: We continue to work on solutions and are taking a number of steps to navigate this issue including engaging in discussions directly with our PBM payor partners and pursuing a possible legislative fix. We'll continue to keep you updated on this issue as we learn more.
Speaker Change: Before I turn the call to David to review the numbers, I want to take a moment to express my heartfelt gratitude to all of our dedicated employees.
Speaker Change: Their hard work and commitment to our cultural service have been instrumental in our journey.
Speaker Change: It's an exciting time for Guardian Pharmacy Services, and I'm thrilled to share our story with you all. Thank you for your interest in Guardian, and I look forward to updating you on our progress. David?
Speaker Change: Good afternoon and thank you all for joining our first earnings call as a public company. I am pleased to share more information on our strong third quarter operating results.
David Morris: In the third quarter, we generated $314 million in revenue, an increase of 20% compared to a year ago, driven by growth in our resident count due to organic growth and the Heartland acquisition, as well as a slight uptick in branded drugs.
David Morris: Our resident count at the end of the quarter was approximately 180,000, which reflects an increase of 12% year over year.
David Morris: From a gross profit standpoint, we generated $60.9 million of gross profit in the quarter, an increase of 16.6 compared to a year ago, and reflects a gross margin of 19.4%.
David Morris: In the quarter, we have some headwinds impacting our gross margin percentage. This can be attributed to two main factors which drove the majority of the impact.
David Morris: First, we experienced an increase in our self-insured health care costs for employees due to a lag in processing claims.
David Morris: which we attribute to the change healthcare issue earlier in the year. It's important to note that we finished on budget for the full planned year ending 9-30, and we don't anticipate a significant impact from this issue moving forward.
David Morris: Second, a portion of the decrease can be attributed to the Heartland Pharmacy acquisition. As Fred mentioned, this was significantly larger than a typical acquisition with approximately 8,600 residents, and we expect
David Morris: It will take two to three years to fully implement Guardian's platform and ultimately achieve normalized operating metrics, including gross margin percentage.
David Morris: Additionally, and to a lesser degree, the business overcame a couple of other items impacting gross margin percentage. This includes the impact of Hurricane Helene with incremental labor and courier expenses.
David Morris: We also experienced a spike in COVID cases in the quarter that drove an increase in the usage of branded COVID therapeutic drugs, such as Paxlovid.
David Morris: As a reminder, these drugs are no longer subsidized by the federal government now that the pandemic-related mandates have expired.
David Morris: Therefore, we are feeling the full financial impact, which is a lower gross margin percentage on a higher drug cost, but contributing nicely to revenue and gross margin dollars.
David Morris: Historically, and consistent with this year, we are experiencing volatility within quarters related to gross margin.
David Morris: Despite the volatility, we believe gross margins will remain consistent with prior years on an annual basis.
David Morris: Despite these factors negatively affecting gross margin percent, we achieved adjusted EBITDA of $23 million in the third quarter, compared to $19 million in prior year, a 20% reduction in gross margin percent.
year-on-year growth and steady adjusted EBITDA margins of 7.3 percent.
David Morris: Included within the adjusted EBITDA is an add-back of $122 million in share-based compensation expense related to the corporate reorganization and IPO, which resulted in negative net income and EPS for the quarter.
Thank you.
David Morris: Certain of these awards carry an additional one-year service period, resulting in a total of approximately $13.5 million of unamortized share-based compensation expense as of September 30, 2024, which will be recognized ratably over the next four quarters.
David Morris: The required accounting treatment has no effect on cash and is non-recurring.
David Morris: As a result of the corporate reorganization and IPO, we have 230 employees owning over 35% of the company.
David Morris: Together, this team is focused on continuing to execute and grow the business as we have historically done.
As Fred mentioned, we've continued our strong growth profile.
Let me recap our growth strategy.
David Morris: Our first organic driver is the addition of new residents serviced by existing pharmacy locations.
David Morris: This can occur in two ways, the first being servicing new long-term care facilities on our existing markets. We have a sophisticated sales force at the national, regional, and local level actively working to onboard new facilities.
David Morris: Occasionally, we add new residents to an existing pharmacy through a small opportunistic bolt-on acquisition where long-term care residents are acquired from another pharmacy operator in our footprint and integrated into our existing pharmacy operations.
Thank you.
David Morris: Our second organic driver is increased adoption within long-term care facilities already serviced by Guardian Pharmacy.
David Morris: When we start as the preferred pharmacy provider of a new facility, we typically begin serving about half of its residents, and by implementing our pharmacy adoption toolkit, we have been successful increasing our adoption rate to 90% over time.
David Morris: Our final organic driver is when one of our existing pharmacies launches a new greenfield startup in a geographically contiguous market.
David Morris: In addition to organic growth, we also utilize M&A to augment our organic growth strategy. We expand our geographic presence through acquisitions by forging new partnerships and additional territories.
David Morris: We have made 30 since our inception in 2004, 24 of which were in the last 10 years.
David Morris: I'd now like to give a couple updates on these growth initiatives, beginning with our contiguous startups.
David Morris: We have launched eight of those in the last two years, which are coming up to scale.
David Morris: As it relates to our M&A strategy, Fred's already touched on the Heartland acquisition, which we're now six months in, and pleased with the integration process and operating results or tracking with expectations.
David Morris: Additionally, earlier this month, we completed a smaller acquisition of a pharmacy near Morristown, New Jersey, which represents a new geographic market for us.
David Morris: While this location currently services a relatively small number of residents, it has an excellent operator and capacity to grow in this large, robust market.
David Morris: Turning to the balance sheet, we ended the third quarter with $37.2 million in cash, which includes net proceeds from our IPO.
David Morris: Additionally, we ended the quarter with minimal net debt and are well positioned to execute our growth plan moving forward.
David Morris: Finally, I'll touch on our Guidance Outlook before opening our call to questions.
Thank you.
We're providing our initial guidance for the full year 2024.
David Morris: We now expect revenue to be in the range of $1.205 billion to $1.215 billion.
Adjusted EBITDA to be between $86.5 million and $87 million.
David Morris: Longer term and consistent with our message on the IPO Roadshow, we believe we will continue to generate high single-digit organic revenue growth with EBITDA leverage going forward augmented by our robust M&A pipeline.
David Morris: In conclusion, I'm very pleased with our third quarter performance and am proud of how hard the entire Guardian team has worked to reach this point.
David Morris: I believe these quarterly results demonstrate the company's continued growth and our year-to-date results set a solid foundation for future success.
David Morris: I'm excited to be in the public markets and look forward to keeping you all updated on our success over the future quarters and years to come.
With that, operator, let's open the call to questions.
Speaker Change: At this time, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: You may remove yourself from the queue at any time by pressing star 2.
Once again, that is star 1 to ask a question.
Speaker Change: We'll go first to David McDonald with Truist. Your line is open, please go ahead.
Yeah, good afternoon, guys. Congratulations.
Speaker Change: All right, I guess just wanted to start with, I know you probably can't get into a ton of detail, but is there any additional comments you can make just in terms of.
the conversations with your payer partners and...
Speaker Change: Do some of the changes that are taking place with the IRA potentially present an opportunity in terms of tweaking how you contract with some of your partners?
Yes, we can now.
Let you know that we are having conversations.
Speaker Change: I'll let David brief you in a little more detail. Obviously, these are sensitive and we're not prepared to disclose specific details, but we've socialized the issue. We're engaged in very productive discussions.
Speaker Change: And David, I'll add to that, as we talked about on the road show and with the analyst community, we're talking about, you know, 25, 26, and all of the things that we're working with our payors on from a partnership standpoint, and are having very productive conversations.
Speaker Change: Continue to be very confident that we'll work our way through this with really no issue
Speaker Change: Okay, and then I'm just a couple of others guys. I'm just curious. Is there any Hurricane impact that you would call out that you're absorbing in the guidance and
in the fourth quarter of note.
Speaker Change: And then I guess just my last question would be anything incremental that you'd call out with regards to Heartland now that it's been a couple of quarters, either the markets that they're in, growth, just anything other than the prepared comments that you'd kind of strike out as maybe better or worse.
than when you acquired the property.
Speaker Change: David, I'll start first with the hurricane and we had, you know, minimal impact in Q4.
David Morris: It was similar to what we had with Helene and Q3, so there's nothing significant.
that we'll be dealing with there.
Speaker Change: And then from Heartland, as Fred said, we continue to be very excited.
about
Speaker Change: It's making great progress coming up on our platform. We'll start to see more and more synergies as we go through 25. And there's tremendous growth opportunity starting to manifest. And it'll be a key piece of our continued growth in 25. So we're very excited and opportunistic.
Speaker Change: I'm optimistic, excuse me, about the opportunity with Harlan. Okay. Thanks very much.
Thank you.
Speaker Change: We'll go next to John Ransom with Raymond James. Please go ahead.
John Ransom: Hey, good afternoon. Congrats. A couple of questions for me. First of all, I'm just kind of intrigued. You know, the company has capital, more capital. You've got 230 new shareholders. You've got a public currency. A year from now, do you think we'll look back and say just that set up?
John Ransom: Causes the behavior to change just a tad in terms of the external growth execution which to be fair has been fine But but do you think that that might accelerate some of the unmodeled external growth? growth opportunities
Speaker Change: John it certainly provides us with resources to do so. I cannot say for sure whether that will happen because we've got our head down doing what we've always done. 20 years of track record here putting one foot ahead of the other and and we're going to continue to operate
Speaker Change: just exactly that way, but we're going to have our peripheral vision scanning the horizon for, you know, other opportunities that may come our way.
Speaker Change: You know, I'll add to that, and Fred touches on, you know, 12% market share, you know, we're excited about taking that to 20 or 30.
Speaker Change: and from an investment community, we're gonna continue to do what we've done for the last 15, 20 years, be great stewards of capital, and we're gonna continue to manage the business with low leverage. I think that really helped us get where we...
are today.
Speaker Change: And then, you know, you touched on, you know, the collapse, I think, you know, we're excited to have over 230 employees, you know, owning over 35% of the business, and I think that will really.
Speaker Change: you know, coalesce everybody, you know, focused on growing the overall company, and I think that will have a positive effect. So, you know, we're very excited, John, about, you know, where we're headed.
Speaker Change: Great. And then the second one is a little bit follow-up on David's question, that's more focused on 25. So a lot of, you know, turmoil in the Part D market. So as you executed your 25 contracts, was the degree of difficulty notably higher as anything else you'd call out there?
Speaker Change: John, first of all, you know, our contracts are more longer term, so there's nothing specific to 25, and we're working, you know, on
Speaker Change: So no obstacles for 25, and we're very encouraged about navigating any impact RRA will have in 26 or 27.
Speaker Change: We'll go next to Scott Fidel with Stevens. Please go ahead.
Scott Fidel: Hi, thanks. Good evening. First question, just, you know, with the elections having just played out, you know, Fred, interested, just as you think about some of the strategies around the addressing the IRA headwinds.
Scott Fidel: for 26 and beyond, and in particular, just the legislative strategy.
Scott Fidel: Um, you know, given potential for the Republicans to take over Congress, how do you think that sets up for potentially, like, a larger. Um, technical corrections bill, uh, that could be, um, sort of set up to address the IRA and have the opportunity to get, um, you know, your, um, your considerations, um, you know, included in that and then similarly. Potentially a larger type of, uh, you know, corrections at the CMS level as well. Um, as relates to the IRA, just curious around obviously, I know that you guys are very active on the market based solutions.
Scott Fidel: with your payer partners. Just curious how you think about the opportunity now on the legislative side post the elections.
Speaker Change: Thank you, Scott. Great question. Let me see if I can get out my political crystal ball to answer it. We certainly, with our trade group, are assessing that very situation. I was on a call literally this afternoon thinking about
Speaker Change: any changes in our constituency, in the Congress, and by and large the supporters of our activities are still in place and still very interested in finding solutions.
Speaker Change: feel comfortable that we'll be able to move forward on that front seamlessly even though we've got a new majority over on the Senate side.
Speaker Change: Okay, and then just as a follow-up, I just wanted to ask about sort of two observations on the business that were called out. One, you had mentioned in the press release just around the trend of serving higher acuity residents and that driving some of the higher
Speaker Change: sort of volumes that you're seeing on a per resident basis. You know, anything more that you would highlight around that? Is that just this trend of general higher acuity that we've been seeing really across healthcare? Or just interested if there's been any sort of nuance to that in terms of how that's been affecting your business. So that's the first question, then I'll have one more follow-up.
Speaker Change: Yes, I believe that you're exactly right. Our experience in assisted living is tracking right along with health care in general. Our residents are aging. They're paired with multiple ADLs and that's leading to a few more prescriptions per resident and
Speaker Change: use of some of the newer branded products. As David mentioned, we also had some COVID therapy going on in that spike in August.
Speaker Change: September that you read about in the news with COVID. So that's what was driving that.
Speaker Change: Okay, and then just one last one for me, just on that higher branded drug utilization that you had mentioned, and know that David had called out the COVID, the PaxLovid being one of the drivers of that, just interested, you know, there's been some sort of mentioning amongst at least one of the very large payers that they've seen.
some pull forward of 2025 IRA changes.
driving some branded drug volume trends.
Speaker Change: with drug manufacturers, for example, pushing, you know, rebate strategies around that. Just interested if that's something that you've observed, you know, that's maybe playing into this higher branded drug, you know, volume that you've seen, or is that just more related to the COVID effect that David had mentioned?
Speaker Change: I believe it's the latter. I cannot point out any specifics that we see that's
Okay, thanks.
Speaker Change: And as a reminder, if you'd like to ask a question, please press star 1.
Bye-bye.
Speaker Change: It appears we have no further questions at this time. This does conclude today's question and answer period as well as the Guardian Pharmacy Services third quarter 2024 earnings call. Thank you for your participation. You may disconnect at any time.