Option Care Health - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Option Care Health Q2 2023 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 one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Shapiro, Chief Financial Officer. Please go ahead.

Mike Shapiro (CFO)

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 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.

With that, I'll turn the call over to John Rademacher, Chief Executive Officer.

John Rademacher (CEO)

Thanks, Mike. Good morning, everyone. The Q2 was a very dynamic period for the Option Care Health team, and we will discuss many of these items in our prepared remarks. First and foremost, I cannot be more grateful for our team or more proud of the execution and dedication that was demonstrated across the organization. Their focus continues to enable us to provide unparalleled patient care and customer service, which translates into strong key performance metric achievement and financial results in the quarter. As always, Mike will review the results in greater detail, but I'll cover some of the highlights. The growth profile of the business continues to be strong as we delivered solid results across the board.

Revenue growth of 9% was comprised of a balanced growth across the acute and chronic portfolio and due largely to our strong execution and unique procurement benefits in the quarter that Mike will discuss. Adjusted EBITDA was $110 million, and adjusted EBITDA margin exceeded 10%. Building on the strength of our Q2 performance, we are tightening and raising our adjusted EBITDA target for the full year to $415 million-$425 million. Over the quarter, we continued to be active on the business development front as well, announcing a new collaboration with Krystal Biotech and preparing for potential emerging therapies to treat neurological disorders such as Alzheimer's. Our collaboration with Krystal Biotech enables us to help provide a new and innovative gene therapy treatment for patients who suffer from dystrophic epidermolysis bullosa.

We believe our ability to leverage our advanced capabilities and comprehensive pharmacy infrastructure to support this innovative gene therapy demonstrates the responsiveness and broad clinical capabilities we possess across our network and that these attributes are valuable to our pharma partners. Although this product is for a rare disease that impacts roughly 3,000 patients across the United States, the collaboration continues to validate the investments we have made into our platform and the clinical capabilities necessary to support complex products and care plans. We also continue to focus on the emergence of new infused treatments for Alzheimer's. With the recent FDA approval of Leqembi, we remain closely connected to patients, pharma, providers, and payers to help ensure we are part of the solution to a potential revolutionary category of new therapies.

While we remain cautious on the near-term impact these therapies may have on our business due to the expected patient adoption pace and reimbursement challenges, I believe we are uniquely positioned to help ensure access to care for Alzheimer's patients and their families across the country. We continue to work closely with key stakeholders to determine coverage, seek fair reimbursement, and to advocate on behalf of patients to allow us to provide high-quality care at an appropriate cost in a safe and convenient setting in which they want to receive their care. Turning to M&A, as you know, in early May, we announced our intention to merge with Amedisys, which we believed was a unique opportunity to create an innovative post-acute platform that would help us transform the way care would be delivered in the home.

As articulated over the course of the Q2 and reinforced by the continued positive results we are reporting today, the merger was pursued from a position of strength, as we believe our base infusion business has had a solid foundation and continues to perform quite well. Since announcing our proposed merger with Amedisys, Mike and I have spent a significant amount of time engaging with many of our shareholders and others in the financial community. We appreciate the opportunity to hear your feedback and perspectives and look forward to continuing this conversation with you in the coming weeks. In that vein, we made the disciplined decision to terminate our agreement to merge with Amedisys and accept the $106 million break fee.

Today, we are announcing that given the strength of our performance and cash position, we intend to deploy an additional $100 million through share repurchases over the near term. Given the strength of our balance sheet and forward outlook, we believe it is appropriate to return essentially all of the break fee to our shareholders through our existing share repurchase program, which our board approved earlier this year. Our capital allocation strategy has been, and will continue to be, focused on generating favorable returns for our shareholders on a sustainable basis. While we have consistently identified pursuing opportunistic M&A as a top capital allocation priority, over the near term, we expect that this will be limited to smaller, tuck-in type transactions designed to deepen our existing strategic position and deliver additional value to our stakeholders through the provision of patient-centric care.

Where circumstances allow, we will also look for ways to return capital to our shareholders through continued share repurchases or other means. Before I turn the call over to Mike, I will finish where I started. I believe the Option Care Health team is uniquely positioned in the post-acute space to deliver extraordinary care and change lives for the better, while also generating strong financial results. We understand the privileged position we possess in serving patients in their homes or in one of our infusion suites, and the trusted advisor role that our clinicians play in supporting the care plan. We will continue to work in a disciplined way to identify opportunities that deepen our expertise or broaden our capabilities to capture more share and play a more significant role in care delivery in the home or alternate site setting.

As evidenced in our revised guidance, we are expecting 2023 to be another solid year, with double-digit earnings growth and attractive cash flow generation. We will continue to focus our efforts to position Option Care Health to serve more patients and provide significant value to all of our key stakeholders. With that, Mike will provide additional color on the results. Mike?

Mike Shapiro (CFO)

Thanks, John. Overall, the Q2 carried the momentum from the Q1. The business continues to perform quite well. Revenue growth of 9% reflects continued strong commercial execution, partially offset by the headwinds we articulated heading into the year, namely the divestiture of certain respiratory therapy assets, the decline of two key therapies, Radicava and Makena, as well as some ASP declines in certain therapies. Utilization continues to be strong and reflects our efforts to be a partner of choice for our referral sources. I would highlight that as we enter the back half of the year, the impact of exited therapies and higher acute baselines due to competitive closures last year will be more pronounced than in the H1. Gross margin of 23.5% reflects our continued focus on operational excellence, as well as some distinct procurement benefits in the quarter.

On the execution front, we continue to drive efficiencies, including utilization of our ever-expanding infusion suite footprint. In the quarter, we opened an additional four new centers, we exited the quarter with suite utilization above 29% of all of our nursing visits. As we've discussed on many occasions, our procurement efforts are quite dynamic and affected by variability in pricing indices. In the Q1, we realized approximately $8 million-$10 million from favorable procurement dynamics that emerged due to the timing variances in reference prices that affect our costs relative to reimbursement. This generated approximately 80-100 basis points of gross margin benefit. We expect this dynamic to continue into the second half of the year and is reflected in our guidance. However, we do not anticipate that this will be sustainable in the medium term.

Excluding the procurement benefit, gross margins continued to expand modestly despite the mixed headwinds we've talked about. Adjusted EBITDA of $110 million represented 10.3% of revenue and grew 29% over the prior year's Q2. Again, these results reflected the estimated $8 million-$10 million procurement benefit. Excluding the benefit, the business continued to perform quite well and still generated mid-teens earnings growth. Cash flow generation continues to be quite robust, and our relentless focus on cash conversion continues to result in solid cash flow from operations. Our leverage profile continues to improve, and we are quite encouraged by our recent upgrade by Moody's to Ba3, which we believe is affirmation of the progress we've made around our capital structure.

In our results, you will note that we recognized a non-operating net gain, reflecting the receipt of the $106 million break fee, offset by accrued deal-related expenses. All aspects of the merger activities, including the break fee and expenses and related tax impact, have been adjusted out of our adjusted EBITDA results, as reconciled in this morning's Form 8-K. GAAP earnings per share is naturally inclusive of the merger-related activities. We received the break fee prior to the end of the quarter, which is also reflected in cash flow from operations. As John articulated, we anticipate deploying $100 million through our share repurchase program in the near future, subject to market conditions and applicable legal requirements. As a reminder, earlier this year, our board of directors authorized a share repurchase program of up to $250 million.

We have repurchased $75 million of stock year-to-date, and therefore, have sufficient authorized capacity remaining under the board authorization. As John referenced earlier, we see a multifaceted capital deployment strategy focused on strategic M&A and share repurchases as the current optimal strategy to maximize shareholder value. Given the momentum in the base business, we expect that our near-term focus will be on driving organic growth and potentially on pursuing smaller adjacent or tuck-in acquisitions. Based on the strength of the second quarter, we are revising our guidance accordingly. We now expect to generate revenue of $4.2 billion-$4.3 billion. We expect to deliver adjusted EBITDA of $415 million-$425 million, inclusive of the near-term procurement benefits I mentioned earlier that are expected to continue into the back half of the year.

While we do not provide quarterly guidance, we do expect the remaining quarters to be relatively flat to Q2 with respect to net revenue and adjusted EBITDA, given a number of dynamics, including tougher prior year comps, as well as the impact of the two declining therapies and divested respiratory therapy assets I referenced earlier. Additionally, our revised cash flow guidance of at least $350 million includes the second quarter inflow from the merger break fee. Overall, we expect to deliver another very solid year of growth. With that, we're happy to take your questions. Operator?

Operator (participant)

Thank you. We will now conduct a question-and-answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lisa Gill of JPMorgan. Please proceed with your question.

Lisa Gill (Managing Director and Senior Equity Research Analyst)

Thanks very much. Good morning, and congratulations on a great quarter. Just want to understand just a couple of the comments that you made. First off, when I think about the revenue growth in the quarter, I think, either Mike or John, you talked about it being more evenly split, but was there anything that you would call out on either the chronic or acute side? I'm just curious, as more MCOs are shifting towards the outpatient setting for surgical procedures, et cetera, are you seeing that also translate into higher acuity on your side? Would be my first question. Secondly, I know you're cautious around Alzheimer's, but this is a big opportunity. Is there any way you can frame, you know, the potential of what could go through Option Care eventually?

I'm thinking of this as probably more of a 2024 opportunity than a back half of 2023 opportunity. I'll stop there.

Mike Shapiro (CFO)

Yeah, Lisa, it's Mike. I'll start with some of the mechanics around revenue. Look, we're thrilled with the 9% top line in the quarter. As consistent with what we shared on the first quarter, that was comprised of mid single-digit acute, low double-digit, chronic. Again, that's after a little more than two full points of headwind, given, you know, the fact that last year we had the respiratory therapy revenue, we did see a meaningful decline throughout the quarter in the two exited therapies. We did start to see some tougher comps emerge later in the Q2 last year with some of the competitive closures. You know, the 9% is. Again, we just like to go with the results that we post.

There were, you know, conservatively 200 basis points of top line headwind from those therapies and the comps from the prior year.

John Rademacher (CEO)

Lisa, on your, the second part of your question, both on procedures and, and what we're seeing from the acuity standpoint. Again, productive quarter. You know, we talk a lot about the reach and frequency of our team. We think we're well-positioned, especially as there seems to be a little bit more of an uptick of utilization, in the inpatient setting. The byproduct of that is we, you know, with the embedded resources that we have in our care transition specialists, working closely with those discharge planners and case managers at the hospitals, you know, finding the opportunities to identify patients that safely and effectively can be transitioned onto care with Option Care Health.

Feel as if well-positioned there. We'll continue to, you know, monitor the situation closely. Feel really good about what the team was able to do, especially in the acute space, and deepening the partnerships and the relationships that we have there. On the Alzheimer's front, you know, to kind of put a little more color around that, again, really excited for, you know, the revolutionary aspect of some of these therapies and the positive impact that it can have on, on patients and the families, that are suffering from, you know, cognitive impairment.

At this point in time, you know, the CMS has come out with, you know, a high level of view of how they're looking at coverage determination, but many of the payers have not yet woven it into their medical policy, and have not come out with, you know, clear guidance around how to bring patients onto service. We've called out before that the diagnostic aspect of this is going to be a pretty heavy lift, both in positron emission tomography scans that are required, as well as MRIs. You know, we wanna be cautious and thoughtful around the way that we're approaching it.

In the current Medicare fee-for-service model, as you know, there isn't a robust home infusion therapy reimbursement path. We expect that MA plans will benefit from, you know, our infrastructure. We built out a significant amount of our infrastructure with our infusion suites in order to support these types of emerging products. Therefore, you know, as we get better clarity around the path to payment, we get better understanding around what is the prior authorization requirements and how that would fit within a normal flow. We think we are well-positioned as being part of the solution of offering high-quality care at an appropriate cost in a setting in which patients want to receive it.

That's kind of where we are at this point in time, and we think it will develop, as it moves forward, and there's some better clarity around that, coverage determination, medical policy, and then, reimbursement path.

Lisa Gill (Managing Director and Senior Equity Research Analyst)

Just to be clear, that's probably a 2024 opportunity, right?

Mike Shapiro (CFO)

Yeah, 24 or 25.

Lisa Gill (Managing Director and Senior Equity Research Analyst)

Okay.

John Rademacher (CEO)

You know, it's, it will start to build. It's hard to anticipate right now the pace of uptake of the patients, given some of the hurdles that will exist with the diagnostic imaging and other components.

Lisa Gill (Managing Director and Senior Equity Research Analyst)

Okay, great. Thanks for all the comments.

Mike Shapiro (CFO)

Yeah. Thanks, Lisa.

John Rademacher (CEO)

Thanks, Lisa.

Operator (participant)

Thank you. Stand by for our next question. Our next question comes from the line of Brian Tanquilut of Jefferies. Please proceed with your question.

Brian Tanquilut (Senior Equity Research Analyst)

Hey, good morning, guys. Congrats on the quarter.

John Rademacher (CEO)

Thanks, Brian.

Brian Tanquilut (Senior Equity Research Analyst)

I guess my question for you guys, as I think about the durability of this strength in, you know, organic growth, obviously, Mike, you've talked about some of the moving parts in the gross margin line, but how should we be thinking about your ability to sustain this level of performance going forward?

John Rademacher (CEO)

Yeah, look, Brian, you know, I think the quarter was very illustrative of how we've tried to articulate the growth proposition of this platform. You know, the high single-digit top line translated into leveraged earnings growth at a pace greater than top line. As we've tried to articulate and call out when there's some idiosyncrasies that we benefit from or that represent headwinds, that's why we wanted to call out that, look, while we're thrilled with the quarter and we're thrilled to eclipse 10% EBITDA margins, that is with some benefit on the procurement line that is a bit transitory. Putting that aside, you know, I think despite some of the top-line headwinds, this platform is still performing in line with how we've articulated.

Given some of the macro trends around where care is headed, given the fact that when patients are given the option, this is the care setting in which they would prefer at a cost that is attractive to payers, we think that's a message and platform that has durability, to borrow your terminology, and will resonate for some time.

Brian Tanquilut (Senior Equity Research Analyst)

That's awesome. Mike, maybe I'll follow up. As I think about, you know, the proxy that was filed related to the Amedisys deal, right? I mean, there was a number or there was an EBITDA number there for next year, for 2024. I mean, is it without thinking about guidance, but is it right to think that as, you know, given the strength this year and the moving parts, that number should push it up a little bit as well?

John Rademacher (CEO)

I'm gonna respond with what you would expect, Brian, which is, at this point, we're in no way, shape, or form, in a position to provide guidance into 2024, nor should the proxy be interpreted as longer-term guidance. I think it, again, underscores the growth platform that we've articulated. Obviously, there's a lot of moving pieces, in terms of, you know, some of the competitive closures and positions, as well as our procurement position that we will gain better insight into in the back half of this year, and we will update accordingly. Again, as part of my prepared comments, I did wanna highlight that some of the procurement benefits are more transitory in nature.

Brian Tanquilut (Senior Equity Research Analyst)

No, I appreciate that. Just thought I'd try. Thank you.

John Rademacher (CEO)

Thank you, Brian.

Operator (participant)

Thank you. Our next question comes from the line of Matt Larew of William Blair. Your line is now open.

Matt Larew (Partner and Equity Research Analyst)

Hey, good morning, Mike and John. you know, Mike, you called out obviously the, the procurement benefits on the gross margin line, but some of the things affecting EBITDA margins are utilization of the ambulatory suites and, you know, your efforts on the staffing side, both the acquisitions and then through Novant. You gave us a quick flash on, on utilization of the suites in the quarter. you know, as you're thinking about both the back half of the year and then maybe as you're now contemplating the future here, how do you feel about how those, the two pieces are contributing, and what more can you do with now the Novant platform under your helm?

John Rademacher (CEO)

Hey, Matt, it's John. I'll start with Novant, and Mike can put a little more color around, you know, how we're looking at the overall performance aspect. First and foremost, really thrilled with the progress we're making with Novant Health. As we have talked before, bringing those two organizations together under that common umbrella and the investments that we're making into the technology infrastructure and really the operating model, we feel is making significant progress and, you know, at or above our, you know, our expectations as the team has really pulled that together.

We truly believe that this is part of, you know, the capacity management, as we're looking at our growth trajectory, and we're looking at the ways that we can tap into scarce clinical resources or have access to scarce clinical resources. This gives us an advantage in order to do that. As Mike said in his prepared remarks, you know, really thrilled that about 29% of our nursing visits were done in our infusion suites. As we've talked about, that has been a focus for us. Again, reminding folks that we offer that choice to our to our patients.

It's one in which we believe that convenience and access is a big part of that story and part of the build-out, not only positions us well for some of the future therapies, but also gives choice to our patients in where they want to receive their care. The team has done a great job in launching those new sites in filling the chairs. On that, we're over 600 infusion chairs today. You know, we continue to believe that is a big part of our ability to not only manage expenses and drive some operating leverage, but also provide better choice to our patients.

Mike Shapiro (CFO)

The only thing I'd add, Matt, is, again, just to underscore what John said, we don't force patients into the centers. We educate them on their care options, and we provide them with a very pleasing setting where they have a very favorable experience. It, you know, when we really embarked on our AIS initiative, we were in the 16%-17% penetration range. We've added over 10 points of penetration on our nursing visits, which is important because, obviously, that helps us on the operating leverage line. It also gives us the confidence to take on additional patients by better utilizing our clinical capacity. It also sets us up well for future growth vectors in response to Lisa's question around being ready for new disruptive therapies in the pipeline.

Matt Larew (Partner and Equity Research Analyst)

Okay. Just following up on Alzheimer's, obviously, this opportunity has always had the caveat of CMS reimbursement. You know, CMS recently changed their coverage around PET scans for beta-amyloid imaging, and that was perhaps another gating factor. Curious, given the changes that would be needed for home infusion, do you view that as a sign that CMS or is more open to changes? Have you had conversations that have perhaps been more progressive than they have in the past about potential changes?

John Rademacher (CEO)

Matt, we continue to have constructive conversations, both as an industry, so, you know, as part of the National Home Infusion Association, as well as independently, you know, with folks in Washington, trying to find a better path and better access for home infusion for Medicare beneficiaries. Yeah, I do think that, you know, there is going to need to be a solution for the size of the patient population that potentially could be treated by some of these Alzheimer's products. You know, I think it is gonna require some different thinking at the national level around how to provide access safe and effectively at an appropriate cost for Medicare beneficiaries. I'm always cautiously optimistic.

Mike is always cautiously pessimistic on that. You know, so we'll continue that balance. We truly believe that we are, you know, on the right side of this conversation, in that high-quality care at an appropriate cost in a setting in which patients want to receive it, seems to be in alignment with what Medicare beneficiaries want and what ultimately federal taxpayers would want. So we're gonna continue to have the conversations and continue to advocate, you know, strongly on the benefits of home infusions, as well as our AIS infrastructure as being part of the long-term solution.

Matt Larew (Partner and Equity Research Analyst)

Okay, thanks.

John Rademacher (CEO)

Thanks, Matt.

Operator (participant)

One moment for our next question. Our next question comes from the line of David MacDonald of Truist. Please proceed with your question.

David MacDonald (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys. Just a couple left. Guys, can you talk a little bit about utilization in a different way in terms of the ambulatory infusion suites? I know you talked about the 29%, but if you look at running these things from, let's say, nine to five, you know, five days a week, where are you relative to that? Are we still talking about, you know, maybe 20%-25% or less utilization in terms of kind of the full range of hours that you could run these? Just trying to get a sense of how quickly these things could scale up and how much capacity you have.

Mike Shapiro (CFO)

Yeah, that's the exciting thing, Dave, is, you know, from a capacity perspective, we have tremendous additional capacity at our disposal. When we open these, they're not open five days a week, you know, 12 hours a day. We typically ramp up, and when they're not being used, we turn out the lights, and we lock the door. We've talked about in the team models, the uptick in utilization, and we have a very tight band of yield, given the proven successes we've had. They break even at about one year to 15 months, where the clinical labor savings offset the rent, the utilities, and the cost of the facility.

Typically, within two years, we're generating about a 10% clinical labor productivity, which again, helps the bottom line, but it also think of it as it adds 10% more capacity through Novant Health and our nursing core. As we think about the road ahead, virtually none of our sites today are operating five-seven days a week, you know, 8-10 hours a day. To generate the type of yield and productivity, they don't have to. As we think about whether it's demand shocks, whether it's additional volume of existing therapies or it's new therapies.

We feel really good about the capacity and the chair volume that we can absorb within the existing centers, as well as the ones that we have planned in the back half of this year and going into next year.

David MacDonald (Managing Director and Senior Equity Research Analyst)

Guys, are you continuing to see dramatically higher uptake amongst, you know, new chronic patients as opposed to, you know, kind of installed patients? So as that continues to grow, this 29% should or could continue to drift higher?

John Rademacher (CEO)

Yeah, Dave, it's John. We see a higher yield from that perspective on new patients that are being presented to us through that process. We do get some conversion of existing just because of convenience. As we've started to build out a more comprehensive network, that, you know, looking at the gravity maps of where our patient census lives and works, we're getting, you know, some transitions into the infusion suite. I'd characterize it as you did, in that the vast amount of where we see the utilization is on those new patients as we're bringing them on board and presenting them with those opportunities.

That's where we expect that as we continue to grow, we'll continue to see that move northward, you know, above the 29%. Our goal is, you know, to utilize it as efficiently and as effectively as possible.

Mike Shapiro (CFO)

Dave, we're also seeing some expansion of scope of therapies that are applicable in a center. For example, there may have been injectables or short-duration therapies that required healthcare professional oversight, that in a normal home, economic model, wouldn't make sense. Take something like a Cabenuva, which is a regular injection for drug-resistant HIV. It requires healthcare professional oversight, but it's a relatively short-duration therapy, one that wouldn't justify sending a nurse to, on a two-hour round trip. Those economics are much more attractive if you have the infrastructure and the clinical labor in a setting. We've been able to expand our therapy capacity at the same time.

David MacDonald (Managing Director and Senior Equity Research Analyst)

Okay. Just last question. You know, I know you guys have talked about kind of year-over-year inflation and comps and stuff like that. Are there any, you know, one or two areas that you'd call out as still, you know, kind of stubbornly painful on the cost side?

Mike Shapiro (CFO)

You know, look, I guess as John properly labeled me as cautiously pessimistic, we are always operating under the premise that the cost challenges are part of our structural playing field, and that, you know, clinical labor is going to continue to be a challenge. We need to recruit our clinical teams and our broader teams every single day. That, you know, the overall cost of operating the facilities, maintaining clean rooms, you know, working with our suppliers to make sure we have, you know, adequate supplies.

It's our working presumption is that this is the new world order and that, you know, the higher inflationary cost is an arena that we use as a rally cry for the team to continuously look for operating efficiencies.

David MacDonald (Managing Director and Senior Equity Research Analyst)

Okay. Thanks very much, guys. Appreciate it.

John Rademacher (CEO)

Yeah. Thanks, Dave.

Operator (participant)

One moment for our next question. Our next question comes from the line of Pito Chickering of Deutsche Bank. Please proceed with your question.

Pito Chickering (Equity Research Analyst)

Hey, good morning, guys. Two quick questions here. As you look at capital allocation, you're quite clear that you're going to return the break fee to shareholders in a repurchase, doing small plug-in acquisitions. I think you used the word near term in the script. I just want to explore that, and if in the medium term or long term, you look to do another transformational deal.

John Rademacher (CEO)

Hey, Pito, it's John. So, you know, from our perspective, our responsibility is to always look for, you know, sustainable growth for our shareholders and all our key stakeholders. You know, we know that the healthcare ecosystem is going to continue to evolve. We know that care in the home is going to continue to be a center of focus. We know that we've got to continue to identify opportunities to increase our relevance and expand, you know, our capability sets through that process. You know, as I called out in my prepared comments, you know, in the near term, we will, you know, be focusing a little bit closer to the core around that.

We're always going to take a look to understand what capabilities are going to be required to build that sustainable, durable, long-term growth for the business and, you know, best position Option Care Health to continue to be a leader in home and alternate site infusion services. You know, we'll continue to take a look at that, and as we have done before, use a very disciplined approach in which we, you know, stack up the opportunities that sit before us and make certain that we are hearing the voice of our customer and the voice of our patients, and, you know, the voice of all of our key stakeholders as we're determining that best path forward.

That's kind of what the comments were, and I believe that's our responsibility, is to look for those opportunities to build that durable, sustainable, long-term growth trajectory for Option Care Health and our shareholders.

Pito Chickering (Equity Research Analyst)

Okay, great. Mike, a numerous question for you. If you think about the headwinds and tailwinds for 2024 from what you've provided so far today, the tailwinds would be the 200 basis points of top-line growth pressure this year from tougher comps and declining therapies. At the same time, I guess, how does, you know, how does that impact margins next year? Then on headwinds, how do we think about the procurement growth pricing going for tailwind 2023? Is that a headwind for next year, and how does that impact margins? Then finally, on the acute side, if the acute business normalizes out next year, so how does that impact both the top line and bottom line? I guess when you put all these things together, how do you think that's for 2024 versus your typical year?

Is it in line, both revenues and margins? Is one higher, one lower? Just there's a lot of moving parts here, just wanna make sure I understand how to think about the launch pad in 2024, the way you provided today.

Mike Shapiro (CFO)

Yeah, Peter, as, as you can imagine, I'm gonna preface my comments by it's, it's way too early, and we're just simply not in a position to be providing any granular thoughts on 2024 at this point. Obviously, we're just getting started with our, with our budgeting processes for next year. I think the fundamental takeaway or, or message that I would say is, back to my comments I made a few minutes ago around our underlying conviction around the way we've socialized the growth profile of this business remains intact. We've said that we see the acute growing in the low to mid single-digit, and the, the chronic growing in the, at the other end of the barbell in, in the low double- digit, you know, giving us confidence that this is a high single-digit top line enterprise. I don't think that changes next year.

Again, if there are idiosyncrasies that affect it, we'll call that out as we've done this year. Look, as it relates to how we translate that into leveraged growth, there's a lot of moving pieces we need to quantify, not exclusively, but including our procurement dynamics as we head into that year. You know better than I do that, you know, with ASPs and AWPs and procurement dynamics, there it's constantly shifting. Unfortunately, not in a position to provide you a lot of guidance.

What I would just underscore is, as John and I said in our prepared remarks, our conviction in the underlying growth profile of this business, which is founded on our ability to be that referral partner of choice for health systems and payers, remains very much intact, and we think that fundamental profile, persists.

Pito Chickering (Equity Research Analyst)

Great. Thanks so much.

Mike Shapiro (CFO)

Thanks, Peter.

Operator (participant)

Thanks, Peter. One moment for our next question. Our next question comes from the line of Jamie Perse of Goldman Sachs. Please proceed with your question.

Jamie Perse (Equity Research Analyst)

Hey, thanks. good morning. I just wanted to spend a minute on just inflationary pressures and gross margins. you know, so with the inflation pressures having anniversaried, I guess really the question is just how to think about, you know, COGS growth going forward in the back half of the year. On the procurement benefits, you know, it sounds like those are transitory but not isolated to two Qs. Just any color on how much that continues in the Q3? I've got one follow-up.

Mike Shapiro (CFO)

Yeah, Jamie, maybe I'll start. Look, on the inflationary pressures, look, it's a constant battle as we think about the cost environment. I mean, obviously, as we highlighted last year, like every other enterprise, you know, we were facing, you know, once in a generation inflationary impacts across the board. We think that we've put a fence around those, and we've remained subject to what I would characterize as ordinary course inflationary pressures. There's additional emerging areas, whether it's health benefits, continued, you know, wages in certain pockets with certain disciplines, that again, we're gonna continue to be battling. The one connotation I don't wanna leave the audience with is that, you know, costs are completely flat or isolated. It's just the new arena in which we're operating.

How that translates into COGS growth, I mean, the operations team has done a spectacular job of uncovering every rock to make sure that we're providing unsurpassed patient care in a more efficient setting and managing all aspects of the supply chain, and we'd expect that to continue. Again, on the procurement benefit, again, our estimate, and again, it shifts with payer dynamics and with utilization in certain settings, but the $8 million-$10 million that we estimate we saw in the Q2, we'd expect to continue, you know, at least for the next quarter. Again, we characterize it as continuing into the back half. As you know, this isn't a light switch where one day we have it and one day we don't.

To the best of our modeling abilities, we would expect a relatively similar benefit, at least in Q3.

Jamie Perse (Equity Research Analyst)

Okay, thanks for that. Then on SG&A, it's, you know, it's historically been a big source of operating leverage for you guys. It's up about 9%, and in the H1 of the year, not far below where revenue is growing. Are you making specific investments right now, you know, at a time when gross margin. You've got some of these offsets on gross margin, are they related to, you know, some of the preparing for Leqembi type of comments? Or just, you know, any investments you're making at this point, and, you know, if those are leverageable, you know, in the, in the back half and into 2024.

Mike Shapiro (CFO)

It's a great question. I appreciate you asking it, Jamie, because you're absolutely right. One of the things we pride ourselves on is the discipline around expense management and delivering leveraged growth. The reality is, at the same time, it's our responsibility to be making investments for sustainable, durable growth going out. A perfect example is our infusion suites. Our SG&A is where we report all of our facilities expenses. As we've, you know, expanded meaningfully our suite presence in the H1 of the year, all of that rent, utilities, insurance for those new centers, when we flip the light switch on, that all hits SG&A.

We're investing in other capabilities, internally, to make sure that we're supporting, as John mentioned, the business development investments to commercialize new therapies like Vyjuvek and make sure that we're manning the guns, so to speak, with Alzheimer's on the horizon. There's absolutely a number of investments we're making that will either pay off later this year or frankly, in 2024 and 2025, and that's where we need to manage for the near term as well as the medium term.

Jamie Perse (Equity Research Analyst)

Okay. Just to clarify on that real quick, I mean, just you talked about all the capacity you have in the infusion suites a few minutes ago. Is it right to think that you don't have to, you know, kind of continue growing SG&A at this pace in the back half and in 2024 as you grow into that capacity? Are you, you know, still actively opening new centers and chairs and that'll drive the SG&A?

John Rademacher (CEO)

Yeah, Jamie, it's John. We'll continue to make investments into the network and the footprint. When we talk about the capacity, certainly that is within the market, and we'll look for utilizing that with growth as we're driving that forward, and certainly as we bring on more and more patients within those communities. We also take a look and understand at the local market level, what that network of infusion suites needs to be to capture, you know, the patients as we're looking at it being conveniently located and along the lines of where the gravity maps show patient density either where they live or where they work. We're gonna continue to make investments into the infrastructure.

There are metros, markets that will require some additional suites in order for us to truly capitalize on the network and optimize the network design through that process. You know, at some point in time, I'd say, you know, in 2024, 2025, it may start to slow, but we expect that we're gonna have an investment that's gonna be required at least over the near to medium term on that.

Jamie Perse (Equity Research Analyst)

Okay, that's helpful. Thank you.

John Rademacher (CEO)

Thanks, Aaron.

Operator (participant)

One moment for our next question. Our next question comes from the line of Michael Petusky of Barrington Research. Please proceed with your question.

Michael Petusky (Managing Director and Senior Investment Analyst)

Hey, guys, thanks for taking the question and really appreciate the commentary, prepared comments and, and the Q&A. I wanna follow up on a couple of things, related to sort of capital allocation and external growth opportunities. Just real quickly, preface, you know, there was a rumor out there, you know, a year or so ago about you guys potentially pursuing a health risk assessment business. Stock acted poorly and, you know, in the under, I guess, under the shadow of that, the Amedisys deal was, you know, less than universally loved.

I guess my question is, understanding that, you know, these are, you know, potentially, pursuing assets that'll help in a, you know, future of healthcare and value-based care and all the rest. I think everybody gets that, but I think concerns essentially around the size of the deals and the risk associated with deals of that size. As you've talked to shareholders, I guess I'm wondering, future deals where maybe you're looking to position the company for the future of healthcare. I mean, would you more consider, you know, partnerships that weren't, you know, straight M&A or smaller deals, essentially wading into the pool as opposed to, you know, jumping into the deep end as you look at assets? Thanks.

John Rademacher (CEO)

Michael, it's John. I'll try to answer that question. I guess first and foremost, our focus as an organization is, you know, making certain that we are well-positioned to deliver extraordinary care to the patients that we serve. We're always going to look for opportunities to invest, to either deepen our capabilities within a market or to broaden the capabilities that we can offer while we're in the home. We believe we're in a privileged position in order to do that, and that trusted advisor role that we play with patients and their prescribers as we're executing around the care plan. You know, that is the focus of the leadership team, and certainly for Mike and I, as we're thinking about strategically how we want to move that forward.

As I said in my prepared remarks, you know, our focus over the near term is certainly gonna be around probably closer to the core of looking at tuck-in and additive aspects of that. We're gonna continue to evaluate, you know, what opportunities as, as we look at how the healthcare ecosystem evolves. We have very productive relationships with the Managed Care Organizations and health plans, and, you know, we listen to their voice around where they have needs and how they want to manage their patient populations, and we wanna be part of that solution as we move ahead. You know, we're gonna continue to look at those opportunities. We'll be disciplined in our approach. We will certainly, you know, have conversations with all of our key stakeholders.

You know, I would tell you that, you know, as we went through the process, and certainly as we announced the Amedisys deal, we got a wide range of feedback from our shareholder base around understanding how that fit into the long-term strategy, and how that creates a different model and durable as the healthcare ecosystem is evolving. I think as an organization, we've demonstrated that we can take on, you know, big transactions.

We're coming up almost to the fourth-year anniversary of the BioScrip merger, and, you know, as an organization, we have executed extremely well on that, and we're gonna continue to focus around our ability to drive meaningful growth and sustainable growth for our shareholders, you know, through the appropriate, you know, capital allocation strategy. I feel really good. I mean, we're disappointed that the Amedisys transaction went in a different direction, but also, hopefully, folks understand the discipline that we apply in the way that we look at acquisitions, and the additive nature that can bring to the business, but also in a very disciplined and focused way.

Michael Petusky (Managing Director and Senior Investment Analyst)

Okay, very good. Congrats on the great quarter. Thanks.

John Rademacher (CEO)

Yeah, thank you.

Mike Shapiro (CFO)

Thanks, Mike.

Operator (participant)

At this time, we'd like to turn the call back over to management for closing remarks.

John Rademacher (CEO)

Yeah. Thank you, Ruthka. Thank you very much for joining us on this call this morning. As you heard, we had a very solid quarter and first half of the year, and expect to carry this momentum into the Q3 and back half. We look forward to providing you with further updates as we execute our strategies and deliver extraordinary care to more and more patients and their families. Thank you, everyone, and I hope you have a great day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.