Ellerston Capital: Option Care Health

Option Care Health is the only scaled national provider of post-acute infusion therapy covering 96% of the US population with close to 3,000 highly skilled team of clinicians providing quality care generally at home or alternatively in one of its infusion suites located across the country.

The total US Infusion market is estimated at $100bn with only c13% of this currently administered at home despite obvious cost and patient care benefits.  The industry is shifting to at-home care and we expect continued migration from a hospital or physician office setting to the home as patients prefer its convenience and reduced risk of infection while payers benefit from the significant cost savings associated with at-home treatment.

In August 2019 OPCH became public through a reverse merger with a listed counterpart and the combination is delivering substantial cost and revenue synergies to the group. At the time of transaction, Management expected to generate $60m of run rate synergies within 18-24 months post-merger, however this has been realised much faster with full synergies realised within one year and over achievement of its synergy target expected from here.

We consider that OPCH offers long term durable growth opportunities as it offers a better patient outcome at significantly lower costs to the payers – basically a win/win. We expect it to deliver mid to high single digit revenue growth for the foreseeable future which translates into double digit earnings growth as the platform scales.

Private equity still owns c70% of the business and this is creating an overhang on the stock as the market anticipates further sell downs.  OPCH is trading at a double-digit EBITDA discount to comparable companies as a result of this. As patient investors we look forward to further sell downs as in our experience this creates additional liquidity while concurrently reducing the overhang risk, both of which result in a higher multiple and significant capital appreciation to us as shareholders.

This information has been prepared and provided by Ellerston Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.