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Edited Transcript of TRHC.OQ earnings conference call or presentation 27-Feb-20 11:00pm GMT

Q4 2019 Tabula Rasa HealthCare Inc Earnings Call

Moorestown Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Tabula Rasa HealthCare Inc earnings conference call or presentation Thursday, February 27, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian W. Adams

Tabula Rasa HealthCare, Inc. - CFO & Secretary

* Calvin H. Knowlton

Tabula Rasa HealthCare, Inc. - Co-Founder, Chairman of the Board & CEO

* Kevin J. Dill

Tabula Rasa HealthCare, Inc. - General Counsel

* Kevin P. Boesen

Tabula Rasa HealthCare, Inc. - Chief Sales Officer

* Orsula Voltis Knowlton

Tabula Rasa HealthCare, Inc. - Co-Founder, President, Chief Marketing & New Business Development Officer and Director

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Conference Call Participants

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* David Michael Grossman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Ryan Scott Daniels

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Sean William Wieland

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Steven Paul Halper

Cantor Fitzgerald & Co., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Tabula Rasa HealthCare Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Kevin Dill. Please go ahead.

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Kevin J. Dill, Tabula Rasa HealthCare, Inc. - General Counsel [2]

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Thank you, and good afternoon. I'm Kevin Dill, Corporate Counsel for Tabula Rasa HealthCare. The company intends to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include the developing nature of the market for technology-enabled healthcare products and services and potential changes to laws and regulations that may impact our clients.

For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the Risk Factors section of our most recent Form 10-K filed on March 1, 2019. A recording of this call is accessible through a link on the Investor Relations page of our website, and it will be available for 90 days.

I'll turn the call over to Dr. Calvin Knowlton, CEO, Chairman and Founder of Tabula Rasa HealthCare. Cal?

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Calvin H. Knowlton, Tabula Rasa HealthCare, Inc. - Co-Founder, Chairman of the Board & CEO [3]

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Thank you, Kevin. Good evening, and thank you for joining us for our fourth quarter and full year 2019 earnings call. With me today are Dr. Orsula Knowlton, Co-Founder, Chief Marketing and Business Development Officer; Mr. Brian Adams, our Chief Financial Officer; and Dr. Kevin Boesen, our Chief Sales Officer. Orsula and Kevin will both be available to respond to questions after we conclude our prepared remarks.

2019 ended on a solid note with fourth quarter total revenue of $73 million, near the high end of our guidance range and up 28% versus a year ago. Non-GAAP adjusted EBITDA of $8.0 million exceeded the high end of our guidance. For the full year 2019, total revenue of $285 million increased 39%. Non-GAAP adjusted EBITDA of $38 million increased 30%. We are pleased to report another year of 20% or better organic growth, plus 3 important developments I'd like to highlight for the year, including: one, growth in our core PACE market; two, the significant investments in sales and marketing and in research and development; and three, the March 2019 acquisition of PrescribeWellness.

First, our core PACE market continues to exhibit strength fueled by a 14% increase in our membership and nearly $10 million of cross-sell revenue recognized during 2019. This has increased our per member per month, or PMPM, fee 10% versus a year ago to $490. Note, this figure is less than 50% of the potential PMPM fee of $1,100. This is an indication that our comprehensive family of CareVention product offerings remains underpenetrated. Based on new PACE center openings and industry enrollment beginning to trend higher under the PACE 2.0 initiative, along with a strong 2019 selling season, we are confident that 2020 will be another robust year.

Second, during 2019, we made significant investments in sales and marketing to fuel future growth, and in research and development to continue to innovate and advance our proprietary medication safety technology platform, including the launch of our Precision Pharmacotherapy Research & Development Institute in Lake Nona, Florida. For instance, GAAP research and development spend in 2019 increased 78% to $21.7 million, which is 7.6% of revenue versus 6.0% in 2018. Including capitalized software, R&D spend increased 104% to $36.2 million or 12.7% of revenue versus 8.7% in 2018.

During 2019, in addition to streamlining the Medication Risk Stratification process, the team initiated 3 major research products with different universities and is focused towards increasing peer-reviewed publications. In fact, we received 182 citations during 2019, which translates to someone giving reference to the work completed by our team every 2 days. For the year 2019, sales and marketing spending increased 162% to $25.3 million or 8.9% of revenue versus 4.7% of revenue in 2018.

As we have discussed on our last few earnings calls, we have been adding to our direct sales team to better target the health plan market, and we are excited about the new opportunities building in our sales pipeline for 2020 and beyond. Given the timing of our sales investments through calendar year 2019, we began to see significantly more sales opportunities enter our funnel during Q4 and into Q1 of this year. For example, the number of sales leads in the first 2 months of 2020 is up nearly threefold versus the same period last year. We have a healthy sales pipeline across our 3 target markets: PACE, pharmacists and payer market. Last, our March acquisition of PrescribeWellness greatly expanded our total addressable market by its strong pharmacy footprint and synergies to deliver clinical programs on behalf of health plans as well as diversifying our revenue mix, driving services revenue to 52% of total revenue and software-related revenue to 16% of total revenue.

Before turning over to Brian to cover the financial highlights, I wanted to reiterate our key 2020 growth drivers, including: one, continued success with our cross-selling activities within PACE; two, accelerating the adoption of our MedWise solutions by health plans across all business lines, for example, Medicare, Medicaid and commercial; and three, increasing the number of pharmacists licensing the MedWise platform. We signed important new deals in 2019 during the fourth quarter, including Magellan and Blue Cross Blue Shield of Arkansas. Plus, we have seen encouraging interest from pharmacists looking to license our tools outside of our recently launched MedWise pilot, validating our strategy to propagate the use of MedWise across new populations and in new settings.

A recent industry article identifying tools to help pharmacies meet operational and clinical goals highlighted the use of MedWise by the owner of 22 Central Iowa pharmacies. The pharmacies used MedWise to review complex multi-drug medication regimen while also leveraging PrescribeWellness to gain insights into medication this year. These pharmacies are participating in our pharmacy network, supporting the Enhanced Medication Therapy Management Program for Part D patients.

According to their pharmacy director, pharmacists are improving patient outcomes by assessing the risk level of a patient for an adverse drug event using the MedWise Risk Score. This allows their community and long-term pharmacy location to be a part of the value-based health care movement. Finally, the owner of the pharmacies noted that he is now looking for ways to extend the benefits of MedWise to a broader patient population in his local market.

Let me now turn it over to Brian.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [4]

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Thank you, Cal. A couple of highlights from the quarter include another strong period of performance from our PACE segment, driving product growth of 25% versus a year ago and 8% on a sequential basis, and non-GAAP adjusted EBITDA of $8 million, which was $1 million ahead at the high end of our guidance range due to favorable expense management.

Now turning to financial results. For the fourth quarter of 2019, we generated total revenue of $73.2 million, an increase of 28% compared to a year ago. For the full year, total revenue of $284.7 million, which increased 39% on a reported basis and 20% on an organic basis. Fourth quarter product revenue of $37.8 million increased to 25% versus a year ago while service revenue of $35.4 million increased 30%. For the full year, product revenue of $137.1 million increased 22% versus a year ago while service revenue of $147.6 million increased 61%. The strong year-over-year growth in our service revenue of $56.1 million was driven by contributions from acquisitions, namely PrescribeWellness, and 17% organic growth within our service offerings.

Gross margin, excluding depreciation and amortization expense, was 34.3% in the quarter and represented a 150 basis point improvement versus 32.8% a year ago. For the full year, gross margin of 36.3% represented a 370 basis point improvement versus 32.6% a year ago. The increase during Q4 and the full year 2019 is primarily the result of the ongoing shift in our revenue mix towards services, which includes SaaS. SaaS revenue accounted for 16% of total revenue during 2019 versus just 4% during 2018. Increasing the mix of services and SaaS revenue is a major focal point and an important driver in improving and meeting our long-term gross margin target range of 40% to 45%.

As we have noted previously, over time we expect an increasing bias towards licensing MedWise for internal use by employees of clinical pharmacies versus the full outsourcing model that dominates today.

Product gross margin, excluding depreciation and amortization, was 25.7% in the quarter compared to 24% a year ago. As we expected, the increase in margins is the result of our recent transition to a new prime vendor. For the full year, product gross margin improved more modestly to 25.4% from 24.7% in 2018 given the timing of implementation with our new prime vendor.

Service gross margin, excluding depreciation and amortization, was 43.5% in the quarter compared to 42.5% a year ago. For the full year, service gross margin improved more than 400 basis points to 46.5% from 42.4% in 2018. The increase in service gross margin is primarily the result of higher margins on the SaaS offering from the PrescribeWellness acquisition in March of 2019.

Operating expenses of $33.6 million, excluding the impact of the change in fair value related to acquisition-related contingent consideration, represented 45.9% of total revenue in the quarter, up 77% from the $19 million or 33.2% of total revenue a year ago. For the full year, operating expenses of $132.2 million, excluding the impact to the change in fair value to the acquisition-related contingent consideration, represented 46.4% of total revenue, up nearly twofold from $66.9 million or 32.7% in 2018. The increase is due to several initiatives: the launch of our Precision Pharmacotherapy Research & Development Institute, investments related to our recent acquisitions, and the build-out of our sales infrastructure.

As previously stated, we expect improvement in our operating leverage to begin to materialize over the next 2 to 3 years as we capitalize on expanding our sales force, execute on synergies resulting from the acquisition, and continue to integrate our platforms and infrastructure. In terms of adjusted EBITDA, we generated $8 million in the quarter compared to $8.5 million a year ago. Adjusted EBITDA margin for the quarter was 10.9% compared to 14.7% a year ago. This was ahead of our guidance range of $6 million to $7 million due to better expense management. For the full year, adjusted EBITDA of $37.9 million increased 29% and represented a margin of 13.3% versus 14.4% a year ago.

Research and development costs, including stock compensation, increased 37% to $5.1 million or 7% of revenue compared to 6.5% last year. For the full year, R&D increased 78% to $21.7 million or 7.6% of revenue versus 6% in 2018. Sales and marketing costs, including stock compensation, increased 149% to $6.7 million or 9.1% of revenue compared to 4.7% last year. For the full year, sales and marketing increased 161% to $25.3 million or 8.9% of revenue versus 4.7% in 2018. G&A costs, including stock compensation, increased 52% to $12.1 million or 16.5% of revenue compared to 13.9% last year. For the full year, G&A increased 81% to $50.9 million or 17.9% of revenue versus 13.8% in 2018. And lastly, depreciation and amortization costs more than doubled to $9.8 million or 13.3% of revenue compared to 18.2% last year.

Our GAAP net loss of $6.8 million compares to GAAP net loss of $10.6 million a year ago. GAAP net loss per diluted share for the quarter was $0.33 compared to a GAAP net loss per diluted share of $0.54 for the same period last year. The net loss per diluted share calculations are based on a diluted share count of 20.9 million for the quarter versus 19.4 million a year ago. For the full year, our GAAP net loss of $32.4 million compares to GAAP net loss of $47.3 million a year ago. GAAP net loss per diluted share was $1.57 compared to GAAP net loss per diluted share of $2.48 for 2018. The net loss per diluted share calculations are based on a diluted share count of 20.6 million for 2019 versus 19.1 million for 2018.

Adjusted net income per diluted share for the quarter was $0.13 compared to adjusted net income per diluted share of $0.21 a year ago. The net income per diluted share calculations are based on a diluted share count of 23 million for the quarter versus 22.8 million a year ago. For the full year, adjusted net income per diluted share was $0.79 compared to adjusted net income per diluted share of $0.77 for 2018. The net income per diluted share calculations are based on diluted share counts of 22.9 million for 2019 versus 22 million for 2018.

Turning to the balance sheet, as of December 31, 2019, we had $42.5 million of unrestricted cash compared to $47.3 million last quarter and $20.3 million at the end of 2018. We currently have $60 million available on our line of credit with nothing drawn.

To wrap up my comments today, I'll provide an outlook on the first quarter of 2020 and our initial outlook for the full year 2020. For the first quarter of 2020, we anticipate revenue to be in the range of $68.5 million to $73.5 million, adjusted EBITDA to be in the range of $4 million to $5 million and net loss to be in the range of $13.2 million to $12.5 million. In terms of linearity throughout 2020, we expect the first quarter to mark the revenue low point for the year, followed by a material sequential increase each quarter as we benefit from the seasonal strength in MTM and the conversion of opportunities in our pipeline. We expect profitability to follow a similar path.

For the full year 2020, we anticipate total revenue to be in the range of $332 million to $352 million. Note, our guidance range is wider than it has been historically due to the overall growth of the business and the changing revenue mix with an increased focus on the payer market. The sales pipeline is exponentially larger versus the year ago, including larger opportunities and average deal sizes. Adjusted EBITDA to be in the range of $46 million to $52 million. The midpoint of the 2020 margin range, 14.3%, represents a 100 basis point increase from where we landed in 2019 and 150 basis point expansion versus the midpoint of the full year 2019 guidance provided last quarter and is consistent with my prior comments. And net loss to be in the range of $31 million to $27 million. These net loss projections do not include any future adjustments to contingent consideration liabilities related to M&A.

We expect to generate $15 million to $20 million of free cash during 2020. And looking beyond 2020, recall we provided long-term targets during the Analyst Investor Day at the end of January, including revenue growth of 20% to 25%, gross margin of 40% to 45% and adjusted EBITDA margin of 20-plus percent. For modeling purposes, we anticipate margin expansion in 2021 to be at a slower rate versus 2020 with the key factor being 2019 is an easier comparison and an anomaly given the dilutive impact of our acquisition of DoseMe, the launch of our R&D Institute in Florida and the significant expansion of our sales force, as highlighted earlier.

Overall, I'm pleased with Tabula Rasa's performance in 2019. We ended the year at the midpoint of our initial guidance ranges for both revenue and adjusted EBITDA that we provided post the March acquisition of PrescribeWellness despite the loss of the large contract we discussed last quarter. Our traditional PACE market remains robust, with continued strong membership growth and cross-sell efforts that exceeded internal expectations in 2019. We're optimistic that the sales force investments we've made in 2019, early wins and the resulting growth in the pipeline will convert into even stronger sales momentum outside of PACE in the years ahead.

With that said, I would like to turn the call back over to Cal for his closing remarks. Cal?

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Calvin H. Knowlton, Tabula Rasa HealthCare, Inc. - Co-Founder, Chairman of the Board & CEO [5]

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Thank you, Brian, and thank each of you for joining our call. Sincere thanks to our sophisticated team members who have enabled us to continue to propagate our disruptive MedWise medication safety solution. We look forward to continued solid growth in 2020. Operator, please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Ryan Daniels with William Blair.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2]

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Brian, maybe one for you. In regards to the wider revenue range this year, I appreciate some of the volatility there given the size of the pipeline. But can you provide a little bit of color, maybe at the midpoint, of how visible your revenue is for the full year and then maybe some of the key puts and takes to get you towards the higher or lower end of the range?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [3]

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Sure. So at this point, Ryan, we've got about a 10% bogey that we've got to go and win at this point, so to get to the midpoint of the range. And in conversations with Kevin, and I'm sure he'll expand in future questions today, and we feel pretty good about that number based on what's in the pipeline. We've got a number of pretty large opportunities that could put us at the high end. But we did spend last year building out the sales infrastructure, so we felt it was appropriate to put a little bit of a wider range and a bigger target given the fact that we've now got a team that's out there and actually selling. And so that -- the midpoint of the range would be about a 10% to go.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [4]

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Okay, that's helpful. And then you talked about one of the potential things being conversion within your current client base. Is that when you referenced converting MTM to EMTM? And if that's the case, can you talk about what the type of momentum you're seeing in that specific opportunity?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [5]

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Maybe we'll have Kevin take that one. But I think that your question was, can we talk a little bit about conversion in the pipeline and what we're expecting to see?

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [6]

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Yes. What is that exactly? Is that just MTM to EMTM? And then kind of what level of strength are you seeing or what opportunity?

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Kevin P. Boesen, Tabula Rasa HealthCare, Inc. - Chief Sales Officer [7]

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Thanks, Brian. The -- probably what's building -- this is Kevin Boesen -- but what's building in that pipeline from a conversion standpoint, probably more than a traditional MTM to an EMTM, is new programs by Medicaid and commercial payers. There are some Medicare plans that are looking to add the MedWise or the EMTM solution to their existing programs, but not necessarily forecasting any changes that CMS would do to change requirements in the MTM model, so a lot of it is in other markets or as Cal mentioned, community pharmacies taking on some of that delivery and opportunity as well. We've seen some good strength in the collaboration of how we've aligned our payer and our pharmacist business unit in that we have this pharmacy network that can provide clinical services. The payers are excited about that. It's a great patient engagement strategy. And likewise, the community pharmacies are excited about our payer relationships and the opportunity to provide services in some of those other markets.

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Operator [8]

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Our next question will come from Matthew Gillmor with Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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I wanted to ask about the payer deals you signed in the fourth quarter. I think last call, we talked about Magellan. I know you mentioned Blue Cross Blue Shield of Arkansas, which was, I think, a new disclosure. So I was hoping you could talk about that relationship and sort of the nature of the services you're providing. Is that on the MedWise side or is that PrescribeWellness? Or if you could just provide some details, that'd be great.

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Kevin P. Boesen, Tabula Rasa HealthCare, Inc. - Chief Sales Officer [10]

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Sure. The Arkansas, Blue Cross Blue Shield contract is something that came through the PrescribeWellness side. Their interest is in working specifically with community pharmacies to deliver services. It's very much gap-in-care-closure focused. So leveraging the community pharmacies to provide more support for patients with diabetes, hypertension, dyslipidemia, high cholesterol. So it's an opportunity that came from that relationship and their interest in community pharmacies. So they're very pleased with the outcomes that they've seen in that program. They've been a great partner to work with, and we're looking at expansion opportunities and including increasing the use of MedWise from a patient targeting standpoint.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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And then as a follow-up, Cal had mentioned getting MedWise licensed by more pharmacists as one of the key goals for 2020. I was hoping you could talk a little bit about the ability for -- and the willingness for pharmacists to pay and kind of how you're thinking about the pricing model given that it allows pharmacists to participate in these value-based care programs? I just wanted to get a sense for their ability to buy these services.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [12]

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Matt, this is Brian. We already have some pharmacists that are licensing the platform, as you know, with some of the at-risk provider groups that we're partnered with. But that's more on an enterprise basis. And the goal that Cal outlined was to have more pharmacists, more so in the independent pharmacies, license the platform. We launched a pilot very recently. We have a number of pharmacies that are involved in that pilot, and part of it is to really understand what is the ROI that we're able to deliver for the pharmacy and the willingness to pay. So that's going to run over the next few months.

So our expectation is that the bulk of those pharmacies that we ultimately on-board as licensing and paying customers, they're going to happen in the second half of this year once we have some more information. So we don't have all of that ironed out just yet. Although, as Cal commented, we have a large number of pharmacists and individuals that are interested in licensing the platform outside of those that have decided to -- or we've allowed to participate in the pilot.

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Operator [13]

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Our next question will come from Sean Wieland with Piper Sandler.

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Sean William Wieland, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [14]

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So just to continue on that. You also said, Brian, that you're going to use the licensing model more than the full outsourced model based on the demand that you're seeing. Can you just expand on that a little bit as to why that trend and what's the -- how that impacts your economics?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [15]

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I'll take it first, and then maybe I'll turn it over to Kevin. I think that we've continued to see interest from at-risk provider groups and those health plans that employ pharmacists with using our platforms and licensing those. And we're expecting that that trend is going to continue. We have that on a very limited basis today. So even incremental conversion of those opportunities could be pretty significant for us. But Kevin, I don't know if you want to expand on that.

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Kevin P. Boesen, Tabula Rasa HealthCare, Inc. - Chief Sales Officer [16]

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I'd agree with everything that Brian said. I think as the -- as we go out and do a lot of education of the at-risk providers or even the payers, when the pharmacists at those plants have the opportunity to see the platform, they very much want to use it themselves. And then there's a great opportunity for them to use it and collaborate with some of the other internal programs that they have. So there's probably a higher interest than I think I would have expected initially in having it be a license model versus a full-service model, sort of anticipating a little bit of the challenges of pharmacists taking on the education around it. But we've seen probably the opposite in most cases.

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Sean William Wieland, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [17]

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Okay. And does that change your economics at all?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [18]

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Sure. Over time, those relationships are going to be SaaS-driven, very high margin. But certainly, in the longer term, going to play into how we expect this business mix to shift, and that's ultimately what's going to lead to us being able to achieve those longer-term margin targets of 40% to 45% and EBITDA margin target north of $20 million.

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Sean William Wieland, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [19]

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Okay. Got it. And then just one on the cadence, the seasonality in Q1. We haven't seen revenue down Q4 to Q1 before. Can you comment on that and what you expect the mix to be between products and services?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [20]

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Sure. So typically, what we see is Q1 is the weakest quarter from the MTM offering standpoint. This is where they're qualifying a lot of their members. And we did have a strong second half of the year, which, as you look towards to the first quarter, it's modestly down. But we do anticipate that that's going to ramp pretty significantly into Q2 and then the following quarters as well. But just given the amount of work that goes into qualifying those members is really what's driving the revenue to be more modest in Q1.

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Operator [21]

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Our next question will come from Jamie Stockton with Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [22]

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I guess maybe just to follow up on what Sean was just asking about, maybe more specifically for the PACE business. It sounded like last quarter, you guys talked about signing a lot of business. You expected some of it to launch, I think, early in 2020. Can you just give us an update, I guess, maybe on how things have gone and the cadence of -- for the PACE organizations that you've already got signed that are going to go live this year? What is that going to look like? Are we going to see most of the business early in the year and then a relatively steady level of business? Or is it going to continue to ramp?

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Orsula Voltis Knowlton, Tabula Rasa HealthCare, Inc. - Co-Founder, President, Chief Marketing & New Business Development Officer and Director [23]

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Jamie, this is Orsula. Well, our cross-selling certainly has begun. And with regard to existing, what's already signed, last year at this time, we had about 8 new clients and expansions scheduled. At this point, we have over 20 for 2020, so exciting year for us. That is made up of client expansions, new client startups as well as client expansions with multiple locations. So typically, we do bring on new larger programs later in the year, and we expect that to happen this year as well.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [24]

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Okay. And then just maybe specifically because I think a lot of us think about this, I think your commentary is kind of like holistic, thinking about what you're doing for just PACE organizations, but a lot of us think about it along the products and services lines. Should we think about maybe the product revenue or the traditional pharmacy revenue ramping earlier in the year and some of the cross-sell stuff hitting later in the year?

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Orsula Voltis Knowlton, Tabula Rasa HealthCare, Inc. - Co-Founder, President, Chief Marketing & New Business Development Officer and Director [25]

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I don't know that's necessarily earlier in the year.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [26]

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Jamie, the way that -- this is Brian -- the way that we've modeled it out at this point is a pretty consistent growth rate for the PACE business throughout the entire year, although there is an opportunity to see some of that accelerate in the latter half of the year. But what we've currently modeled and guided to is about a 20% growth rate.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [27]

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Okay. And then maybe my only other question was just PrescribeWellness contribution during the quarter.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [28]

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Sure. So -- it's Brian -- PrescribeWellness, maybe just even to recap for the year, and I don't know if Cal or anybody else has comments on the PrescribeWellness performance, but I think the business has really done significantly better than we had expected when we completed the acquisition. So we're all extremely pleased with not only the financial performance, but the team that we've inherited and feel quite lucky about having on board with us now. And so if you look at the revenue contribution specifically for Q3, it's about $8.5 million or -- excuse me, for Q4.

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Operator [29]

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(Operator Instructions) Our next question will come from Steve Halper with Cantor.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [30]

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One housekeeping question and then another. What did you say the free cash flow would be for 2020?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [31]

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$15 million to $20 million, Steve.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [32]

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Okay. And that's after the interest expense, correct?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [33]

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That's correct.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [34]

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Okay. And then in the 2020 guide, did you make any assumptions about the expanded CVS contract?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [35]

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At this point, we haven't. So should that come through the way we hope, that could put us at the higher end of our guidance. But at this point, the midpoint did not assume a significant contribution from that new contract.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [36]

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And why is that? Is that -- it just takes time for -- to get that thing going?

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Kevin P. Boesen, Tabula Rasa HealthCare, Inc. - Chief Sales Officer [37]

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Yes, Steve, this is Kevin. It does. So that contract is to help and work with CVS as they approach payers with the opportunity to provide and use us for additional services. So we're in the process and CVS is in the process of talking to their payers about what makes the most sense for 2020. So we just haven't forecasted that because of that.

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Operator [38]

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Our next question will come from David Grossman with Stifel.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

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Brian, I don't know if I got the numbers right, but just based on the PrescribeWellness contribution in the quarter, it looks like service revenues may have been flat year-over-year. So first of all, am I getting that right? And if that is right, perhaps you could explain why the organic growth rate decelerated so much in the fourth quarter.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [40]

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Sure. David, you do have that pretty much right. At this point, if you do recall, we had forecasted about $6 million worth of revenue from the CVS contract that was canceled in the third quarter for Q4. So we had really planned for that to be staffed during that time frame. And so we had pulled some of the work forward into Q1, 2 and 3 in order to accommodate that. And so the growth rate on the first half of the year, which was much more significant than what you saw in Q3 and Q4 as a result of that.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41]

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So basically, there was a $6 million divot from the loss of CVS on the service line in the fourth quarter?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [42]

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That's right.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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Okay. And how does that play out then as 2020 progresses? Does the new contract start contributing in a way that that growth rate improves in the first quarter? Or do we still have that headwind since you pulled forward revenue last year and we're not fully ramped yet in 2020? I'm just trying to get a sense of what to expect for service revenue organic growth as 2020 progresses.

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [44]

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So there's going to be some pickup related to PrescribeWellness for Q1 and Q2. But on an organic basis, I would say that there's going to be modest growth in the first quarter, somewhere between, let's call it, 5% in Q1. And so we are starting to build off of that base. But that's an appropriate expectation.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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Got it. And then as you look at your guide for the year, I just want to make sure I understood you correctly, where you talked about that you needed about 10%. So does that mean, to hit the midpoint -- so does that mean you have visibility on the low end of the range today and that to get to the midpoint of the range, you need basically another $30-some-odd million of revenue to book over the course of the year?

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Brian W. Adams, Tabula Rasa HealthCare, Inc. - CFO & Secretary [46]

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That's right. I mean -- and just to put that in perspective, when you look back a year ago, where we were and what we guided, we were somewhere in the 5% to 10% range. And now, this year, we're saying we're going to be closer to 10% at the midpoint. So this is not an unusual place for us to be. We have a little bit larger of a bogey this year given the sales infrastructure that's in place and the opportunities that we see in the pipeline that we expect to convert. So we think that it was appropriate to kind of put the band out that we did. But yes, I mean, we have clear visibility as to how we get to the low end of the range and then we would need to close about $35 million or so in order to get to the midpoint.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [47]

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Got it. And Kevin, just while you're on the line, I know you spoke a moment about the pipeline, but can you give us a little more granularity of kind of what's in the pipeline that could close in 2020? What type -- you don't have to obviously name names, but just give us a better flavor for the type of revenue that's in there and the type of customer and the size of those deals because I think you did mention that you were up a lot year-over-year.

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Kevin P. Boesen, Tabula Rasa HealthCare, Inc. - Chief Sales Officer [48]

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Yes. I was going to give the names, but then you said I didn't have to. So the -- so what we're seeing in the pipeline, we're heavily focused, the sales team, on the expansion of MedWise in the payer space. So the majority of what we're really focusing on is the EMTM type of model in different markets. So the majority of what we have, probably half of what we have in the pipeline, are those contracts and they involve commercial payers, Medicaid payers and then some add-on services, like I mentioned, in the Medicare space. So for example, a Medicare plan that wants to target patients on opioids from a medication safety standpoint. So those programs that -- what are nice about them is they're not calendar year related so that we can start on midyear. So those are the types of programs that we're expecting to fill that need within 2020.

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Operator [49]

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Thank you. Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

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Calvin H. Knowlton, Tabula Rasa HealthCare, Inc. - Co-Founder, Chairman of the Board & CEO [50]

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Well, thank you very much for everyone that participated. And again, we are very optimistic on our 2020 disruptive solution to continue the solid growth on medication safety. And we didn't mention, we do have a couple of other things in the pipeline that are fairly interesting, and we'll be able to share this with you, hopefully in the next month or 2.

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Operator [51]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.