Omnicell, Inc. (OMCL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to day 3 of the JPMorgan Healthcare Conference. My name is Annie Samuel, and I'm the health care technology and distribution analyst here at JPMorgan. We're thrilled to have Omnicell with us this morning. CEO and Founder, Randy Lipps, is going to give us a presentation, and then we'll open it up to Q&A afterwards with the whole team. So if you have a question, we'll have a mic runner. We can get your questions answered. And so with that, let me turn it over to Randy.

I'm going to turn it over to Kathleen for...

Yes. Just very briefly -- good morning, everyone. It's great to be here with everyone this morning. Just very briefly, we will be making forward-looking statements during today's presentation. Please be sure to review our SEC filings for a full list of risks and uncertainties. Also, I do want to point out that we are in our quiet period, so we will be focused on the long term and our long-term strategy. Thank you.

Thank you, Kathleen, and thank you, Annie, for having us at the world premier place to be for a health care conference. Well, we at Omnicell, our vision has not changed despite the challenges we outlined in our last call. And we recognize the need to slim down parts of our business as a result of getting ahead of ourselves. And we are pausing until we reach the next significant growth cycle. And we will manage conservatively as we move forward until we get there. We, every day, are improving our operations and implementing better forecasting tools. We are continuing to invest in the future. And most importantly, throughout this time, we continue to partner with our health care systems, and they continue to rely on us to deliver improvements in patient care and better ROI. We also are very excited about our integration. We're going to take this time to integrate the company to make sure that we can leverage better as we scale and move forward and strengthening our business operations. Now I really appreciate being here. I see a lot of long-time shareholders or people who I've known over the past, but there may be some new people here. So I'd like to just make a little introduction to Omnicell if this is your first time. We're out to raise the importance and influence of the pharmacist in our health care world. And today, much of what a pharmacist does is not clinical work, but administrative work. And so our job and our vision is to take that administrative work and remove it. Do what naturally makes sense, let robotics do the picking, let robotics do the calculating, let tech-enabled systems help create an intelligent network for pharmacies to run. And we want pharmacies to run at near perfection, not almost there, but near perfection. And we're taking on this big goal because it needs to be taking on. And I think, frankly, we're the only company out there who is aggressively going after this broad platform for both inpatient and outpatient. And the problem with medication management in health care, it's a huge beta in the results of the outcome of health care, but it's actually practiced very differently in different silos of health care. When you go to different venues, medication management, even the names that you call, certain drugs are different in inpatient than they are on outpatient. And because of each of these silos are trying to optimize their own functionality, it doesn't always coincide with the rationalization of medication management the way it should be. And so the patient is confused. It's our job to actually change that. We want the patient to have a rationalized view of all their medications no matter what venue they're in as well as clinicians. Because of this, I don't know, multifaceted venue approach that health care has developed, it's created a very large market opportunity for us. Now many of you know us as being very strong in the point-of-care market. It's a large market. Mostly mature, not totally saturated, probably about 70% to 80% saturated in the U.S. But there are new versions of technology and technological stacks that will empower these systems to do more for clinicians and allow them to spend less time doing administrative work and more work. So it's just not about what we have today, but it's about what we'll have there tomorrow. But a very big market that's greenfield is actually the central pharmacy. Here, we see very low penetration. We have the most advanced solutions in this market for robotics, both in the IVCS area as well as in the single-dose picking robotics area. It's not important to have just the robots, but it's also important to have the infrastructure to support all of those. And what we're finding as we move forward in our industry is that people want a single trusted partner to work with over the long term. It's very important. Now retail is a big market. But as we disclosed in our last call, we have about a $90 million SaaS business growing very well in the retail business that's all cloud work that is a system that drops in next to the legacy system of retail pharmacy. And we have products that work in independent pharmacies, what's called the middle tier, and the big tier. So we are very broad-based in the market, but most of our customers have only deployed one solution set. So we have a huge opportunity to cross-sell in this market because we've already completed the integration to the legacy systems. And so pharmacy can use these solution sets to better the economics of pharmacy, to have pharmacy do other tasks other than dispense meds that generate revenue and reduce costs. So very large opportunity there. One area that we just launched at our latest Illuminate conference with specialty pharmacy services for hospitals. We bought ReCept at the end of last year. This is a pharmacy outsourcing business, where we will put a specialty pharmacy inside of providers pharmacy and run it for them. It's very complex to run a specialty pharmacy. And because of the Supreme Court decision to back the providers and not reducing the discount, they moved the discount back to where it was, is even a bigger opportunity to exercise your own specialty pharmacy inside your pharmacy. So we've seen a strong development of pipeline in this product. And as we've seen, many of the customers who are in the pipeline and have already signed for this new service, I asked, "Why are you going with this? I mean we're not the biggest or the most experienced." He said, "Well, you're Omnicell. I buy everything else from Omnicell. I'm going to buy this from you as well." So the strong brand name is pulling this through. So large TAM for us to go after. Now you put on top of that our fantastic customer base. We have over 150 of the top 300 largest providers, not just that they are customers. These aren't customers. They have signed long-term strategic relationships. They're not buying products. They're investing in a long-term strategy to work with us to get to the Autonomous Pharmacy. Many of these contracts are 7-, 10-, even a 15-year contract. These go beyond the useful life of a product. It's not a product sale. This is a strategic engagement. And the significance there is that this allows us to work with them to deploy more of our products, which will automate more of their infrastructure. Just 2 weeks ago, we signed our next largest 100 -- largest account, multi-hospital, multi-solution set strategy. So we'll be talking more about that on our call. But even in this environment, we are making competitive wins away from products to strategic relationships with very large customers. Now we also listed on this site, the retail. We have 80% of the retail in the U.S. as -- buys at least one product from us. But it's still small. As I said, it's $90 million and growing rapidly as a SaaS business. And we're also heavily connected to the post acute. So as you can see, we're in all of these pharmacy environments that are necessary to create a strategy that allows us to go after a complete solution. And that's important. In order for us to be able to reach this ambitious goal, we have to be connected both to the inpatient and the outpatient. We have to provide solution sets that allow pharmacies to work efficiently and safely and bill appropriately based on the kind of venue that they're in. We call this the connected intelligent infrastructure. And while we have used this infrastructure today, primarily to support all the connectivity but toward our connected devices, we see in the future that other outside products will be connecting to this network to provide solutions either we don't provide or maybe even a competitive product that is not ours but we'll be connecting the data and closing the loop. So this is very important as we move forward. And it's one of the reasons, I believe, that our customer base continues to grow because we're committed to this total solution. Now I think we have a lot of opportunity as a company to grow. We have a lot of greenfield. We have large markets. We certainly have a need. And I think we are moving to capitalize on the next generation of technology. And what's important about that is recreating a single native app with supercharged edge technology using microservices to really allow us to do things nobody else can do. But in particular, this single app construct will support all of our customers, whether they're retail, post acute or acute care. And this type of technology really allows us to move at speed, allows us to introduce new solution sets that we haven't even dreamed of without having to wait months and months or years to deploy them, just minutes. And we are seeing a day when we can deploy new solutions and new problems on a daily basis. We can make updates to our software. We don't have to wait for a cycle as we do today on most of our products or 6 months. We continue to take market share gains. I think if there's anything that says that our strategy is working, why would a big institution go through all the heartache of ripping out one set of systems and deploying with us? They have to do new interfaces. They have to retrain their people. They have to move in new equipment. This has been in the DNA of Omnicell for years and years since we started, and it continues. And we believe that as our position with our platform only strengthens, that thesis, only strengthens. And the reason that we are moving into new territory that others won't, it's not just that we have the tech stack, we have the products, but we have the experts who are working on site to make sure that we have the ultimate outcome of these systems. We're not relying on training key people on site. We're not relying on a few visits. We have people who live and run and manage the systems at a senior-level optimization specialist so that all the outcomes are at the highest. And I believe that our vision is unique. I think most people want to take a vision. They get some down the road a year or 2. This is probably 5 or 7 years to get to the Autonomous Pharmacy. And I would just point to the Autonomous Pharmacy Industry Board that we launched, which we no longer have control over because the industry has taken it over. And they are defining what the Autonomous Pharmacy looks like. They've created new governance. They've created new positions. They've hired new residents in pharmacy to run different research studies on the Autonomous Pharmacy. This is something pharmacy wants and it naturally makes sense to automate things that are currently done on spreadsheets or done manually. And I think one of the things that we have done over our history is we've done a lot of M&A, but we've made strategic acquisitions that really enhance the value of our platform. And I think, certainly, you can see that with the specialty pharmacy acquisition that we did, that we put it into the pipeline and fit it into the salesperson's bag. And that message got directly to our 152 really quickly and is driving a great pipeline. We see more opportunity out there for M&A. I think maybe this year, at least at the beginning of this year, we're going to focus on integration. But I think it really speaks to the point of a total solution that can meet the market's needs. So good solution, lots of TAM. As we change our business model from capital equipment to as-a-Service business, we see opportunities to accelerate our business. So today, our point-of-care is virtually the only business that is a capital equipment. Our robots are all as-a-Service, our IVCS is as-a-Service. These businesses, while they make up, we said in Q3, 13% to 14% of our revenue, and that's grown from less than 4%, 3 years before that. We see the big uptake in these because they have strong ROI. And so they don't come out of the capital budget, they come out of the operating budget. It's easy to deploy because we're the ones managing the project; easy to run because, again, we're the ones doing the major piece of running these systems and getting the results. So we are buckled down here and where we are and with the macroeconomics we're seeing. We want to run a conservative business this year for 2023. We've seen a slight improvement in November with provider margins, but I don't think we've seen any change in behavior. But it's really still a very exciting time to be in health care, to change pharmacy to improve health care for everyone, for everyone. So with that, Annie, I'll turn it back over to you.

Yes. Great. So we can now open it up to Q&A. If you have a question, please raise your hand. We can have someone bring you a mic or you can also use the digital conference book, and we'll take your questions that way. But I'd like to start with -- you talked a little bit about -- at the end of your presentation about the macro backdrop, and I think that's kind of something that has been a theme we've heard all week. We were expecting labor shortages to be a really big tailwind for automation. It seems like that's maybe something that's going to be a little bit longer to take because from what we've heard from everyone, people are looking for near-term acute issues, fixing ROI, that kind of thing. So hospitals, it sounds like just maybe had too much to overcome recently to really focus on automation. So can you discuss what pressure points your customers are facing? And how are you helping them solve for those in the near term?

Well, obviously, the freezing capital budgets has slowed down the point-of-care. But we're working really closely with them on the installation. Typically, we have done most of the installation, but hospitals have to be part of that. And for the first time, particularly in Q3, we saw where hospitals couldn't even provide enough people to do their small part of the installation. So one of the steps we're taking is to actually do that for them. We are actually charging them for that. But in that way, they can complete these installations that sometimes -- and it's not only in a small number of people. But we do see the robotics as the current economy as a tailwind. I think people understand it's either now or soon, they need to replace people with capital. And these robotics make a lot of sense because not only can they not get the people, they can't get the right people in their institution to do some of these functions. So one of the hardest pieces of -- one of the hardest labor pieces to get is a well-trained pharmacy tech. A well-trained pharmacy tech can do the compounding of fluids in the hood. And if you can't get that person, you can't compound your fluids in your pharmacy. You have to go out and pay very expensive for outsourcing. But if you have a robot, and they can do it for you and can do a lot of them, then it makes sense to replace that job or at least supplement that job with the robot. So I think that makes sense to everybody. It's just when am I going to get the funds to spend the money, right?

Yes. And maybe a follow-up to that. I think it's interesting, you talked about kind of solving one of the problems. So on the 3Q call, you talked about it was both a labor issue and a budget issue -- so as we think about magnitude, how much did one contribute versus the other? And it kind of sounds like you are maybe solving for one already.

Yes. Yes. Yes, I would say that definitely, the budget issue was the biggest one. But as even if you look out into this year, 2023, if you listen to what hospitals and even the Kopin [indiscernible] talking about, their #1 issue is labor. And the reason that's an issue is you can't get the revenue or the margin if you don't have enough people to execute all your lines of business. And so I think that needs to improve to really overall help the macro conditions for these health care systems to improve. But I think they've got a handle on it. I think the temporary labor costs have come down a little bit, and some of the things are not as acute as they were. But I think they're running in a cautious mode. But I still believe that these advanced services, which have relative less than 12-month ROI, are things that they will deploy if they have the people to help deploy some of these things that, obviously, we can't do everything. But they're -- it's very disruptive to put a rope in. You have to go in and clear out space and add power and do a few things like that. So there were some things that had to be done. And different facilities have different energy for doing some of those things or not. But not everybody is stuck in the mud, just a few.

Great. And maybe just one more question on macro. Something that's come up a lot of the conference, and Jamie kind of talked a little bit about this on his keynote on Monday is there's a lot of conversation, the market's pricing and to a certain extent in upcoming recession, but we haven't necessarily really seen the indicators yet. I would think that your business would be fairly recession-proof, but can you just talk to us about what might impact your business in the event of a recession?

Well, actually, a light to medium recession would really help us because it would help hospitals. Because a lot of nurses, for instance, work part time when they get to a recession and they might be the only breadwinner in the family, they go back to work and so -- full time. So getting more of these clinicians involved in this institution, we've seen a snapback when a recession takes place. So that would actually help us. Also, I think in a recession, you want to spend your money very carefully and getting a good ROI, particularly for these advanced services or even specialty pharmacy service still makes a lot of sense. I think we've got into some really horrific deep recession or somehow the capital markets locked up and they can't get access to capital. Obviously, that would slow things down a lot.

Great. If anybody has a question in the room, please raise your hand. I wanted to talk about the Advanced Services business. We've been seeing really, really great demand there. It seems like that part of the business hasn't really been impacted by any of the things that you're seeing. So can you talk about your go-to-market strategy there? And what's working so well?

Well, I think health care, in general, has a really hard time adopting technology. And the one thing that really helped us through the pandemic was that hospital pharmacies were sort of a closed area. They didn't really allow you to go in and run operations inside 4 walls of their pharmacy, so to speak, because that was a domain that they wanted to control and obviously has a lot of cost and safety issues. But the pandemic really allowed us for the first time to suggest, why don't you allow some of our people to come in and run the IV robot, why don't you allow us to come in and run our pharmacy dispensing XR2 robot. We're not going to do all the running up to the floor, but we're just going to stand there and be the supervisors of these technologies. And then we're going to connect them back, and we'll bring in all the rest of the robot workers and learn together and keep these systems running at the highest level and do the same thing for IVCS. So one, they can't get the labor. Also, you're going to provide the labor and expertise to run it. Two, you don't need capital. It's just as-a-Service sign up for a long-term payment. And three, you're committed to keeping me up-to-date on whatever needs to go. So you can buy with confidence and you don't have to wait for the organization to absorb new technology, get trained on it and keep them trained up on it. All of those issues are taken off the table. So we're just -- and everything we're doing as-a-Service seems to just be easier to bring into the hospital or to the big providers and move fairly quickly on as well. And so we think those systems are going to continue to grow really rapidly, really rapidly. And so the -- I think, what, Scott, we had 6 years ago, we had one Advanced Services...

3 years ago, we had one.

One?

Today, we have 6.

Today, we have 6. And I remember when we were launching the one, we were kind of like, well, we're going to start impeding on their space. Will they allow us? What about the liability issues? And we're all past that. I mean we feel really confident that we can walk in and deliver these services, and they're willing and ready to sign up for.

The only thing I'd add to the Advanced Services is that the reason that we're seeing some positivity or buoyancy in those products versus the ADCs is they produce ROI, positive NPV, quick paybacks. And even in this environment, that's what CFOs want to have conversations about. So they produce ROI.

That makes sense. Can you talk about within your customer base, how penetrated are you in Advanced Services at this point? Like how many of your hardware customers are using you for Advanced Services? And how much opportunity is there to grow that?

Yes. So I would say, our XR2 base is less than 10%, and the [ IV ] is less than 5%. But I would say from a strategic side of basis, it's greater than 50%. Everybody has signed up for it. They haven't implemented it or they may not be implementing this year or next year, but they're committed to the strategy. So a lot of greenfield, a lot of road map to go there. As you remember, that TAM box was $32 million, I believe, in the bottom there. So a lot of growth to go. And it's the part that makes sense. Why I need to -- I want to buy the whole thing. And yes, I'll change out my point-of-care system. But really, I'm buying your vision, I'm buying your platform because that's going to help me get somewhere, not -- and it's not the point of our -- cost of our point-of-care system. Our point-of-care system is actually more expensive than competition. But you're going to save more money if you can run a system effectively and not have as many shortages, deal with specialty pharma, have robots do the work more accurately, not have waste. So very...

Maybe to add to that as well. So I would say the last 2 years, 3 years, the competitive wins in the 152 long-term sole-source partners, the -- I'd say the majority there really choose the Omnicell platform and commit to signing up and implementing multiple fan surfaces. So 1, 2, 3, 4 at times as well. So that's really the choice for Omnicell as a partner.

Maybe as a follow-up to that question, something that we get a lot from investors is if you are a hardware customer, do you need the Advanced Services? How much overlap is there between those products?

Well, you could buy a base system, but we don't see anybody doing that anymore. So I think that's -- particularly Omnicell One, which is the optimization engine that's looking at all these different pieces and gathering the data and then optimizing supply chain and pharmacy activity. But -- so I guess not all of our customers have Omnicell One yet, but I don't think I can think of a new customer that signed up in the last couple of years that hadn't signed up for at least one Advanced Service and usually multiple. And sometimes, it just takes a while to get to the point where you're doing the upgrade and you're going to do a bigger project and trying to understand what those beginning and end of that project might be. But you can't really separate the software, particularly as you go into the future. It's not so much product that's laid on top of another product. It is the interaction with the product. It's the same.