BrightSpring Health Services, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading home and community-based healthcare services platform, delivering complementary pharmacy and provider services to complex patients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BrightSpring Health Services, Inc. (BTSG) operates in the fragmented healthcare services sector, focusing on providing care and services to individuals with complex and chronic conditions.

Business Overview

  • Revenue Distribution:

BrightSpring’s revenue is generated from several sources, each with varying levels of growth and profitability. Here’s a breakdown:

  • Provider Services: Encompasses a range of healthcare services, including in-home health services, and programs for people with intellectual and developmental disabilities (IDD), behavioral health and autism services. For the twelve months ending September 30, 2022, revenue from provider services accounted for 61% of total revenue.
  • Pharmacy Solutions: Focuses on specialized pharmacy services, including dispensing medication for individuals at home or at group housing locations and for those receiving care for chronic conditions, such as infusion. For the twelve months ending September 30, 2022, revenue from pharmacy solutions accounted for 39% of total revenue.

  • Within their pharmacy solution, specialized prescription medicine accounted for the largest portion of revenues during 2022. Other parts of pharmacy include institutional pharmacy, specialty infusion services, and other services such as medication adherence packaging and analytics.

  • Industry Trends:
  • The healthcare industry is witnessing a growing demand for home- and community-based healthcare services, driven by an aging population, an increase in chronic conditions, and a preference for home-based care among patients and families.
  • There are rapid changes in pharmacy technology, new drug therapies, and the use of data analytics to improve patient care.
  • Consolidation within both the pharmacy and healthcare provider industries to increase competitive scale and efficiencies is occurring.
  • Competitive Landscape:
    • The healthcare services sector is highly fragmented with many smaller players. Competition comes in many forms, from local and regional organizations to national chains.
    • The pharmacy sector sees competition from the large players such as CVS and Walgreens, and also numerous smaller local pharmacies.
    • Competitors are more likely to be other companies that have the same capabilities in providing at-home services in their geographies as Brightspring.
  • What Makes BrightSpring Different?:
  • They focus on “specialty” patients which is complex patients (with high-cost, chronic and complex conditions and disabilities, often requiring a combination of services and supports), and offer both pharmacy and provider services to them which requires a high degree of integration and coordination.
  • They operate in a growing market with tailwinds in terms of more and more patients requiring care.
  • The Company states that more than 90% of their patients are either paid for with government funding. Their government-focused business model allows them to have predictable cash-flows.

Moat Assessment: 2 / 5

  • Sources of Moat:
    • Switching Costs: There’s a moderate level of switching costs in their home healthcare and community health operations. When patients or their families have chosen a specific healthcare provider, they tend to stay with the provider, as these relationships are built on trust and familiarity. These switching costs don’t provide much pricing power, or defensibility.
    • Economies of Scale: Some advantages can be gained from their scale in negotiating contracts and discounts, both with manufacturers and health insurers. However these benefits are easily replicable.
  • Limited Moat: Overall, while BrightSpring operates in an industry with high regulatory barriers and some moderate customer switching costs, they have no major sources of competitive advantage and their revenues are easily replicable, meaning there are minimal sustainable or long term competitive advantages that create barriers to competitor access to their profits.
  • Justification for Rating While BrightSpring has a specialized approach that allows it to serve more complex clients, it faces challenges in building a wide moat to prevent competitors from eventually replicating its processes. The company’s services are primarily concentrated in providing human-led labor, a service that is easily replicated by competitors.
  • Their contracts with Medicare, Medicaid, and other organizations are short-term, meaning they have no recurring, long-term revenue source.

Risks to the Moat and Resilience

  • Industry Changes: Regulatory changes or shifts in healthcare policies and payment structures can have a major impact on revenue and profitability. For example, any change to state or federal funding structures would immediately impact the company’s profitability.
  • Competition: Increasing competition from other healthcare service providers or alternative models of care would put downward pressure on revenues and margins.
    • Further consolidation or acquisitions of smaller entities could make their businesses weaker.
    • New technological offerings could also harm them. For instance, the expansion of remote patient monitoring and telehealth could render their traditional service model obsolete.
  • Labor Costs: Labor costs, which represent a large portion of the business expenses, may rise which might erode margins. They also must pay competitive wages in order to retain and acquire workers. There is high competition for skilled healthcare workers.
  • Acquisition Risk: There is also the risk of poor acquisitions made in the past. Any goodwill impairment related to these acquisitions would have a large impact.

Resilience: BrightSpring is somewhat resilient due to the essential nature of its services in the healthcare sector. They do have some degree of customer switching costs, but those are mostly based on familiarity with their home and in-house service rather than true lock-in. However, reliance on government funding makes them susceptible to legislative changes or government policies related to Medicare and Medicaid payments.

In-Depth Financial Analysis

  • Historical Performance:
  • The company has demonstrated good revenue growth, driven by increases in same store sales, acquisitions, and organic growth. However, recent growth has been negatively impacted by changes to Medicare payment rates.
  • Gross margins are consistently around the 30% mark. Operating margins have been around 8-10% the last few years.
  • 2023 Financials:
    • Revenue for 2023 was 7.8B, vs 7.16B in 2022, an increase of approximately 9.1%.
    • Adjusted EBITDA for 2023 was $580.5 million, vs $504.1 million in 2022, an increase of 15.2%.
    • Net loss attributable to common shareholder decreased to approximately $137.5 million in 2023, from $409.8 million in 2022.

The company stated their performance for 2023 exceeded its original projections, and also that the revenue growth for both 2022 and 2023 was hampered by lower reimbursement rates in the Medicare and Medicaid systems.

  • They also provided 2024 guidance of ~$8.3 - $8.4 in revenues and $600 - $630 million of EBITDA.

  • They did overpay for acquisitions, which was a concern in past years, which may hurt future earnings.

  • Margins: The company does not report segment wise profits, and it is hard to gauge the true profitability of their service lines. Management has cited the importance of both economies of scale and customer stickiness for margins. Their gross margins for the year remain within a tight range, and this is something that investors should track going forward.
  • Balance Sheet Analysis
  • The company has high levels of debt ($5.1 billion in long-term debt, and $461 million in debt equivalents as of September 30, 2023).
  • The company has a debt-to-equity ratio of approximately 4.04.
  • They do have good liquidity ratios, with current assets of $1.6B and a quick ratio of over 1.

The balance sheet health is okay but not great. While the company has enough current assets to cover liabilities, their high debt load may cause risk and volatility if interest rates rise. They also do not have much equity.

  • Free Cash Flows: They have historically had negative free cash flow because of a combination of high investment requirements and operating losses. In FY 2023, their FCF came in negative for $268 million, significantly improved from previous years due to an improvement in profitability.
  • Capital Structure: The company has a high amount of debt on its balance sheet ($5.1 Billion) and they are relying on this for their financing.

Understandability: 2 / 5

  • Justification: While the broad concept of providing healthcare services, is easy to grasp, a detailed understanding of their business model and the differences in their different service models is more complicated. Understanding the impact of government policy on their revenues or profit is also a nuanced topic. Their financials are not straightforward, and require more effort for their analysis. This complexity makes the business more difficult to grasp for typical investors.

Balance Sheet Health: 3 / 5

  • Justification:
    • High Debt load: the company relies on a large amount of debt for its growth. This adds risk and may mean that the company becomes distressed when interest rates rise, or business conditions deteriorate.
    • Okay liquidity: the company’s current assets are able to cover its liabilities in the short term, giving it some level of stability and resilience.
    • Low equity: The equity on the balance sheet is relatively low. Therefore, the company is leveraged, with debt being a far greater percentage of the balance sheet.

Recent Controversies/Concerns/Problems

  • 2023 Results: In past earnings calls, the company has mentioned a negative impact on revenue growth due to Medicare Advantage rates not keeping pace with expenses, and thus leading to reduced reimbursement rates. The performance has been negatively impacted due to lower organic growth in certain areas, high labor costs, and increased interest rates on their debt. The company mentioned in their latest earnings call for Q4 2023 that they expect to see an improvement in the organic growth of their business in the future.
  • Management’s Plan: The management team has stated that they are planning to create new efficiencies within their systems, while also working on growing their base of specialty patients. They are looking to prioritize and develop programs in high-margin sectors, and also make an effort to increase employee retention, and hire qualified staff for their various healthcare services.
  • Debt: The company has significantly increased its debt levels over the past couple years, in order to fund growth and acquisitions. While interest rates have remained steady, a future increase in interest rates would have a larger impact on the company’s profitability.