CareRx Corp

TSX:CRRX

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Centric Health's First Quarter 2018 Results Conference Call. Please note that this call is being broadcast live over the Internet and will be archived for reply both by telephone and via the Internet beginning approximately one hour following completion of the call. Details of how to access the replays are available on yesterday’s news release announcing the company's financial results as well as on the company's website at www.centrichealth.ca.Today's call is accompanied by a slide presentation. Those listening via telephone can access the slide presentation from the company's website in the Investors section under Events and Presentations by loading the webcast and choosing the non-streaming audio option.Before we begin, let me remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Centric Health’s future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Centric Health’s periodical results and registration statements, and you can access these documents in the SEDAR database under www.sedar.com. Centric Health is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to Jack Shevel, Chairman of Centric Health Corporation. Please go ahead Dr. Shevel.

[Jack Shevel, Interim CEO & Executive Chairman]

Thank you, and thanks to everyone joining us. Good morning. Welcome to our conference call to discuss the first quarter of 2018 results and other key developments. With me for today's call is our Chief Financial Officer, Leslie Cho, and it's also my pleasure to extend a warm welcome to our new CEO and President, David Murphy. David joined Centric just a few days ago, on the 1st of May, and we are pleased to have him on the team. He's a seasoned healthcare leader having led the Canadian divisions of 2 of the world's largest and most successful health care organizations. Particularly, David has a very impressive track record of increasing operating margins in the face of ongoing margin pressure, and for leading complex integrations of newly acquired businesses, while improving employee engagement and workplace culture. Most recently David was with Cardinal Health where he has served as President of the Canadian operations and held operating and P&L responsibility for the $1.2 billion Canadian business. Prior to that, he had similar success at Stryker Corporation, where he was President for Canada and Latin America.For today's call, we'll begin with an overview of our recent highlights, give an update on the regulatory environment and provide some comments on our outlook and some of the exciting opportunities that we -- that present themselves. Leslie will then review our financial results for the first quarter and we'll pass it on to David for some concluding comments.In terms of the quarterly results, revenue for the first quarter of 2018 increased by 2% to $44.5 million. Revenue growth was generated from slight increase in Specialty Pharmacy, along with increased surgical procedures and healthcare services at some of our Surgical and Medical Centres. Specialty Pharma adjusted EBITDA was negatively impacted by reduction from the Ontario Drug Benefit fee changes, inventory adjustments related to the pan-Canadian reductions in generic drug pricing and excess labor cost due to workflow inefficiencies. This was partially offset by the continued strong earnings performance in the Surgical and Medical Centres business.Last week, we made an announcement about pending regulatory changes impacting our business. There are still discussions going on with key stakeholders, and we have not reached a final resolution. We have developed an action plan to mitigate the impact of these proposed changes in the event that they are implemented in the current proposed form. We believe that even after the net impact of all the known regulatory headwinds, we will still deliver full year adjusted EBITDA growth in 2018 compared to 2017. And I'd just like to repeat that, that we believe that even after the net impact of all the regulatory headwinds, we will still show growth -- EBITDA growth for 2018 as compared to 2017.British Columbia wait times continue to increase with the longest backlog in Canada for diagnostics. As a result, there are now 17 private MRI centers and 57 private clinics in the province, which currently save the BC government in excess of $300 million a year. Despite strong public support for access to private healthcare to alleviate wait times, the current legislation remains a challenge. The constitutional challenge that is currently in the BC Supreme Court is entering its fifth year with government continuing to obstruct and delay the process with the hope that the plaintiffs will run out of money.A previous injunction granted to Cambie Surgery Centre expires on the 1st of October, and an application will be made to extend this and also to sustain the proposed new changes to the Medicare Protection Act, which will -- pending the resolution of the constitutional challenge. False Creek and a coalition of other providers will be a part of this legal application, which is expected to occur during June or July. There will be increased focus at our False Creek Surgical Center to use unenrolled doctors to offer insured services, focus on new technologies that are not coveted by the public system and to increase the treatment of out-of-province and out-of-country patients with the upcoming launch of our new website.We have previously mentioned the increasing trend of governments going to the pharmacy industry to achieve cost savings in the broader healthcare system, and we are seeing this at both the federal and provincial level. At the end of January, the Canadian Generic Pharmaceutical Association and the pan-Canadian Pharmaceutical Alliance announced the April implementation of a 5-year initiative aimed at reducing the prices of many commonly used generic drugs. We are currently estimating the impact for this to be approximately $2 million on an annualized basis for the company.And as we recently announced, a new pharmacy funding framework is expected to be implemented in Alberta. This new program limits the frequency of dispensing and also reduces the dispensing and clinical fees that can be charged. Traditionally, Alberta and the College of Pharmacists have been the most progressive in Canada by expanding the scope of practice for pharmacists to provide consultations and essential clinical intervention. The scope of these services are vastly different from the traditional community or retail pharmacy dispensing, as clinical pharmacists offer on-site evaluations and after-hours emergency services, which reduce the number of referrals to emergency rooms and also reduce hospitalization.Centric has embraced on a patient-first strategy, focusing on the highest levels of care and outcomes. Our team in Alberta has won numerous awards from the industry recognizing the quality of care delivered to Albertans. Centric now provides compliance packaging, clinical services and after-hour services to the majority of seniors living in designated supported living facilities. We have had active discussions with the Alberta government and expressed our concern that the proposed changes will compromise safety and the standards of care regulated by the College of Pharmacy.Centric is hopeful that it can offer solution and continues to seek an opportunity to discuss its proposals with the Ministry of Health. These changes were implemented without proper consultation and members of the RxA board were required to sign a nondisclosure agreement. However, the government's focus now appears to be purely on achieving financial targets, despite the concerns raised by pharmacists in Alberta at 2 recent rallies. The action is regrettable, and we view this as a step backwards for seniors in Alberta. Centric remains committed to finding a solution and would like to conclude an amended agreement with the Alberta government.In the first quarter, we began working with our Specialty Pharmacy division to ensure it continues its strong contributions to revenue and is positioned to succeed in today's funding environment. This work has been accelerated in light of the announcement relating to the Alberta funding model, with the primary focus on improving efficiencies and driving margin growth. A large area of focus will be utilization of technology to help automate manual processes. This includes the digitization of our medication review program, which will eliminate paper records and enable data analytics. We are also consolidating our performance centers to create volume efficiencies and adjusting the labor contingent at the centers to optimize workflows and streamline labor costs.With all the initiatives that are currently underway, we have increased our annual savings target from $4 million to $7.5 million, of which $2 million has already been implemented to date. When you consider that the average Canadian over the age of 65 is on multiple medications a day and that every day 1,000 more Canadians turn 65, the mismanagement of medications lead to increased false admissions to hospital, ER visits and a burden on a system that is already stretched. The need for medication adherence is essential to reduce hospitalization costs, which are the biggest costs government is facing, and we'll continue to see this increase in number of patients admitted to hospitals per thousand.Karie has significant potential to assist with this. It will also help us to increase our penetration in the retirement homes and opens up a whole new market of more than 3 million seniors taking more than 5 meds aging at home. The average cost of the seniors' consumption of meds and -- is approximately $3,000 annually. Initially, Karie will only be available through Centric Health and it will be provided for a monthly fee of $60 to $80, which includes the cost of the cellular network it communicates across.In addition to the distribution and prescription provision agreement with Karie, Centric also owns 17.5% of AceAge, the manufacturer of the device, and this can be increased to 32.5% for an additional investment. This allows Centric multiple ways to participate in its success. To launch the device, a broad-based marketing campaign is planned, including direct-to-consumers and cheniors, the children of seniors. This is top line for most children in terms of are their parents taking their medication correctly.Karie has made strong progress in the quarter. The award-winning Canadian invention has now been extensively tested and refined to meet the challenges of people taking multiple medications. Manufacturing has commenced and we expect to take delivery of the first 2,000 devices during August. We also introduced the device recently at the Long Term Care Center Conference in Ontario and received a very favorable response from operators. As a result of that conference, in Alberta alone, 350 devices have been reserved for -- by home operators to launch pilot projects.AceAge has also met with Amazon, Google and Walmart's innovation team to demonstrate Karie's abilities and discuss points of cooperation. We expect to be adding compatibility with Amazon's Alexa and Google Home into Karie, which will further secure its potential as key healthcare appliance. Karie also has R&D capability that could help us enter the cannabis industry.In 2015, we applied to Health Canada for sales-only license to distribute medical cannabis. We have met all the specifications and regulations under the application and the license is under final review with Health Canada. While there's no guarantee that a license will be granted, we are developing a new division which will be called [ Holistic Cannabis Solutions ] as part of our future plans. We are looking at making medical marijuana available to our patient group based on its growing adoption as a treatment for chronic conditions, many of which are endemic with seniors. We believe it could help reduce the number of daily medications they are taking. We have mentored several license producers over the past few weeks and expect to finalize agreements in the near future.Centric is well-positioned to become an expert of prescribing medical marijuana for complex-care patients taking multiple meds. In the homes we work with, there are more than 46,000 senior residents and more -- serviced by 1,000 doctors, and our hundred clinical pharmacists actively serving these residents and working closely with the staff. This will give us the opportunity to have a much greater acquisition conversion rate at a lower cost. Karie, of course, opens up a much larger patient group made up of seniors and others at home managing multiple medications.Now I'd like to hand over to Leslie, who will discuss some of our financial results.

[Leslie Cho, Chief Financial Officer]

Thank you, Jackie, and good morning, everyone. Our complete results for the quarter are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website.As Jackie mentioned, consolidated revenue for the first quarter grew to $44.5 million from $43.6 million for the same quarter of the prior year, a 2% increase. Adjusted EBITDA from continuing operations declined 14% to $3.8 million from $4.5 million in Q1 2017, and adjusted EBITDA margin for Q1 2018 was 8.6% compared to 10.2% in Q1 2017.I'll now walk through the quarterly results for each of our 2 business segments separately. Beginning with our Specialty Pharmacy segment, revenue increased 1.9% to $33.5 million from $32.9 million, partly due to an increase in the domestic cases. Adjusted EBITDA decreased by 28.2% to $3.5 million from $4.9 million, and adjusted EBITDA margin declined to 10.5% from 15%. These results were negatively impacted by the ODB reductions implemented in September 2017, which reduced adjusted EBITDA by about $140,000 for the quarter. We are estimating the impact of the reduction to be between $650,000 to $750,000 annually. There is also a onetime impact from the pan-Canadian generic drug pricing as well as labor inefficiencies. We expect the re-engineering program mentioned by Jack earlier will address these shortfalls moving forward as well as mitigate the impact of the additional funding changes that were disclosed through the annual savings target that we have increased to $7.5 million.Moving to our Surgical and Medical Centre segment, revenue for the first quarter of 2018 increased 2.6% to $10.9 million and $10.7 million in the same period of the prior-year period. Adjusted EBITDA for Surgical and Medical Centres grew by 30.7% to $1.5 million from $1.2 million, and margin expanded to 14.1% from 11% in Q1 last year. Growth in revenues was largely driven by higher surgical volume at our Don Mills and SmartShape facilities in Toronto, and increased revenue from the family practice at our False Creek Healthcare Centre in Vancouver. These higher-dollar value procedures and higher-margin services provided a significant increase in adjusted EBITDA, along with the labor savings achieved through our continued focus on operational efficiencies.Corporate costs for the first quarter of 2018 were $1.3 million, down from $1.7 million for Q1 of the prior year. The decline corporate cost is primarily due to reduced labor cost from certain vacancies, particularly from the executive team. The run rate for corporate office expenses as a proportion of revenue from continuing operations, inclusive of the labor costs associated with our new CEO, is expected to remain below our target of 4%.Turning to our balance sheet. Over 2018, we will continue to focus on strengthening our leverage position following the refinancing activities last year. We ended Q1 2018 with a total debt-to-adjusted EBITDA ratio of 5.19x, and we continue to aim to achieve a ratio of below 4x in the short to medium term.Through strong leadership and innovation, especially with an experienced and entrepreneurial CEO in place, Centric is well-positioned for the future. In the coming quarters investors can expect to see further news on Karie as it advances to the market; high-volume solutions driving efficiencies in our Specialty Pharmacy business, including further digitization and automation; we will continue to examine dispensing medical cannabis to improve the quality of life of seniors; and we'll continue to focus on growing our surgery business.I'll now pass the call to David for some final comments.

[David Murphy]

Thank you, Leslie. Good morning, everyone. As Jackie mentioned, I've just finished my first week as CEO of Centric Health. Before I make some comments on our business, I thought I would provide some insights as to why I decided to join Centric Health. I've spent the bulk of my career in healthcare and I've had the opportunity to work in a number of different segments of the industry. And I've long believed that the demographics and economics of Canadian healthcare will create a clear opportunity, in fact, a pressing need for a diversified healthcare services company that serves as an essential partner to the healthcare system. Helping the system deliver high-quality patient care in the most efficient and effective manner possible.That was the founding aspiration of Centric Health, and it is one that is perfectly matched with today's emerging demographic and economic realities. I believe that Centric is still as strategically recently well-positioned as any organization in our space to be that essential partner to the Canadian healthcare system. So as a Canadian who loves the Canadian healthcare industry, the chance to be the CEO of an organization with that kind of strategic potential was an exciting and compelling next step in my career.Of course, because I know Canadian healthcare, I also know that an unavoidable reality in our space is that government changes and interventions can periodically change the rules of the game and create short-term financial pressures. Centric is obviously facing some of those headwinds right now. But from my past experience, I know that there is a path through these challenges. That path requires, first, a commitment to operational and executional excellence; and second, a clear, focused growth strategy. Companies that deliver these 2 things can not only absorb government interventions, but can in fact emerge stronger from them because of their ability to withstand these events much more effectively than their competitors.I can tell you that I have reviewed the business reengineering plan of our Specialty Pharmacy division and I have confidence that this plan will significantly mitigate the negative effect of any regulatory changes and allow Centric to still deliver growth in 2018. As we move from a historically decentralized regional operating model, to one which maximizes the efficiencies of a truly national specialty pharma platform, we have the ability to optimize our operation and overcome these short-term challenges.More broadly, what you can expect from Centric under my leadership is a relentless focus to the 2 themes I have just mentioned, execution and growth. We will commit to being the best operator in the markets we serve and to demonstrating an organization-wide commitment to disciplined execution. And we will pursue a growth strategy that combines organic and acquisitive market share gains in our core business with expansion due to adjacencies that fit our guiding strategic purpose, to work with the Canadian healthcare system in areas where demographic and economic realities require a different approach and a different kind of partnership.Both the medical cannabis and Karie opportunities that Dr. Shevel mentioned earlier are just a couple examples of these types of adjacencies. As we pursue this strategy, our goal is to not only become an essential partner to the Canadian healthcare system, but to become a reliable, trusted option for investors, a company that consistently and sustainably delivers value to shareholders.So I look forward to updating you on our progress on this journey and hopefully, to meeting some of you at our Annual General Meeting later today.With that, I will throw it open to questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Neil Maruoka with Canaccord Genuity.

[Neil Maruoka, Analyts]

First question, I wanted to focus a little bit more on the Specialty margins -- Specialty Pharmacy margins. How much were the onetime costs that were associated with the generic repricing? And is that netted out of your adjusted EBITDA calculation?

[Leslie Cho, Chief Financial Officer]

Neil, it's Leslie. Yes, so the adjustment that we had there was a couple of hundred thousand, and that is reflected in the adjusted EBITDA number in there.

[Neil Maruoka, Analyts]

Okay. And you talk about in your MD&A, inefficiencies of labor. Is this where you're going to be driving much of the cost synergies that you're talking about in terms of the increase from -- your $4 million to $7.5 million, is that going to be coming out of the employee cost or out of your COGS volume?

[Leslie Cho, Chief Financial Officer]

That will be a big part of the reengineering plan, yes.

[Neil Maruoka, Analyts]

Okay. And you've targeted low to mid-teen margins. Your margin for the quarter were lower than what we expected. Clearly, you're still -- you continue to go through that transition. But can you give us some idea of how you see your margins evolving over the next few quarters in the segment, especially now that you have more beds online?

[Leslie Cho, Chief Financial Officer]

Sure. And we do also want to reiterate that the first quarter is generally a seasonally low quarter. We still think that the low to mid-teens target for the division will be achievable. And I think the execution of the business reengineering plan will drive those as well.

[Neil Maruoka, Analyts]

And that's something you expect to see in Q2? Or is that kind of second half of the year?

[Leslie Cho, Chief Financial Officer]

It will probably be in the second half of the year.

[Neil Maruoka, Analyts]

Okay. And maybe just quickly on your cannabis strategy. What kind of investments do you need to make in order to secure that license? And can you give us a little bit more color on this process because I don't think that Health Canada has really kind of moved beyond the LP model at this point?

[Jack Shevel, Interim CEO & Executive Chairman]

Sure. So I think we were one of the first to apply in 2015, and the application was made by [ Classique ] out of Burlington. And this is where basically the distribution site will be situated. So we've appointed consultants. Plans have been drawn. Obviously, the specifications around HVAC, safety issues, et cetera, have to be complied with. So there's been ongoing interactions with Healthcare Canada with regards to this, and I think that our application is done in terms of what's needed, what we -- what's needed is really supply agreements just to fulfill it. I think they see the need for us, and being in a unique situation and position, that we have seniors and that we're distributing to them, distributing narcotics, et cetera, that we're well-positioned, really, to do this in an efficient and safe kind of way. So I think the model is -- will undoubtedly change from what it is today we've seen in other jurisdictions and -- I live in California. Today, most of it is all through distribution centers, not directly from the LPs. I think that, that model will change and I have no doubt that pharmacies will become more involved in terms of that distribution. I think what's also an advantage is we have 4 compounding facilities. So once we have this license, we have Karie, I think it gives -- it does give us a distinctive advantage in terms of being able to do some research. With Karie devices we may be able to put -- put devices into a home, what was your pain 7 days before you started medical cannabis, what's it 1 week after on the scale of 0 to 10, et cetera. So again, more validation which I believe is needed and then, obviously, move that on in terms of getting a PK, a pharmacokinetic number. And then, health product, et cetera. So I think this is going to be an evolution. It's not going to happen tomorrow. And I believe that the license will go active in terms of basically moving it forward probably 60 to 90 days before that final date for legalization occurs. So in terms of -- for those familiar with all the regulation and stuff, we would become a caregiver and would be able to receive product from LPs and then to manage and distribute those to our patients. Just to give you an idea, cost-wise, it's $1 million to $2 million. And then obviously, we'd expand our compounding and then the marketing. So we're looking, really, to partner with some reputable LPs that are focused in the space that -- and we believe, really, that we're well-positioned to service this market. I think having been in the homes, a lot of people have to tried to penetrate them and, really, with very limited success. So it's going to take repeated marketing. Our clinical pharmacists, I think, will be key to influencing the doctors, the nurses, the management of the homes, et cetera. But there's a huge need there. Probably 80% of the patients within these homes have some sort of a chronic condition that would really benefit from medical cannabis.

[Neil Maruoka, Analyts]

And what's that timing of those investments, do you think?

[Jack Shevel, Interim CEO & Executive Chairman]

So as I said, we'll go active -- I think that initially, there was an expectation that something would happen in May, June and now, obviously, with the uncertainty around the date. So we continue to be in touch with them. As soon as we conclude our supply agreements, we will go back and -- so the timing in terms of getting the distribution system, the cost, and the timing is around 3 to 4 months to get that built and established. But we would be able to obviously just continue the way that things are structured now, with product being delivered directly from the LPs.

[Neil Maruoka, Analyts]

Right. And final question. At this stage, are you talking to insurers as it relates to reimbursement?

[Jack Shevel, Interim CEO & Executive Chairman]

We haven't yet. And I think that, that's something that we would probably do together with our partners going forward. And once you can also validate and show them the benefits and then also the savings. I think there's really so many people that would like to get their parents off analgesics and stuff that have their own side effects in terms of chronic pain relief.

[Operator]

[Operator Instructions] And your next question comes from the line of Doug Cooper with Beacon Securities.

[Doug Cooper, MD & Head of Research]

Just a couple of housekeeping things first. Leslie, how many beds do you have under -- at the end of Q1?

[Leslie Cho, Chief Financial Officer]

We're about 28,600.

[Doug Cooper, MD & Head of Research]

Sorry, 28,600?

[Leslie Cho, Chief Financial Officer]

Correct.

[Doug Cooper, MD & Head of Research]

Okay. And what do you expect for exiting the year end?

[Leslie Cho, Chief Financial Officer]

I mean, the number is still fluid, I think, but we certainly expect to be above the 30,000.

[Doug Cooper, MD & Head of Research]

Okay. And can you give us an idea of the sort of RFP pipeline for the pharma business for the rest of the year?

[Leslie Cho, Chief Financial Officer]

Yes, so I think we've kind of mentioned this before, we're still obviously quite active in the business development stage going after any of the RFPs that are in the market. Generally, they are smaller contracts that are coming up and so we're going to be targeting all of them. But as far as the total size of the market, I don't have the number for you right now.

[Jack Shevel, Interim CEO & Executive Chairman]

I think, exactly, there's about 5,500 that bids at the moment on RFPs. Some are less attractive than others.

[Doug Cooper, MD & Head of Research]

Sure. Maybe just on that point, with the changes -- in terms of the regulatory changes, what’s the impact in some of these smaller operators? I'm assuming if the impact on you guys is you've disclosed them, I'm assuming that for them it's going to be more severe?

[Jack Shevel, Interim CEO & Executive Chairman]

Correct. And not only I think the impact in terms of the pricing, but I think the regulations are getting extended in terms of what's needed. So we see growing demands, accreditation, inspection issues for the homes and it's going to be more difficult for a lot of the smaller providers to match that. So there'll be added pressure on that. And the success of this business is further consolidation and scale.

[Doug Cooper, MD & Head of Research]

Right. Switching to the Surgical side, I haven't been able to go through the MD&A. What was the utilization rate in the quarter?

[Jack Shevel, Interim CEO & Executive Chairman]

41%.

[Doug Cooper, MD & Head of Research]

4-1?

[Jack Shevel, Interim CEO & Executive Chairman]

4-1 yes.

[Doug Cooper, MD & Head of Research]

Okay. In terms of your guidance that 2018 will be -- will show growth in adjusted EBITDA versus 2017. 2017, I believe, just correct me if I'm wrong, $17.5 million, is that the base we're talking about?

[Jack Shevel, Interim CEO & Executive Chairman]

That's correct.

[Doug Cooper, MD & Head of Research]

Okay. And is that inclusive of the $7 million cost savings? Or would that be sort of on top of that? I'm just trying to get -- understand?

[Jack Shevel, Interim CEO & Executive Chairman]

Yes, that would be the net growth throughout the year.

[Doug Cooper, MD & Head of Research]

Okay. So you'll see that $7 million of cost of savings, you said $2 million is already implemented by the end of May. The other $5 million will be implemented throughout the year?

[Jack Shevel, Interim CEO & Executive Chairman]

Correct, yes.

[Doug Cooper, MD & Head of Research]

Okay. So in the latter 9 months of 2017, I guess you did $13 million of EBITDA. So to be above that, I guess we're expecting -- or you're expecting sort of $14 million-plus in the back 9 months of the year, right? Is that -- my math right?

[Jack Shevel, Interim CEO & Executive Chairman]

Correct. And I think it will be back-ended obviously just in terms of -- that $7.5 million this year is not $7.5 million for the next 8 months, right? It's an annualized number in terms of savings. And then obviously as things settle, we move to the new structure. David gets his hands around the business, et cetera, then obviously there'll be, hopefully, in the last quarter, some more -- some Karie devices being deployed with new revenue. So it's not going to be just beds in senior communities but also obviously supplying patients at home.

[Doug Cooper, MD & Head of Research]

That's sort of -- Jack, that was the sort of point I was trying to get, was it's not like an annualized -- this is an annualized savings, but you're talking actual EBITDA growth in 2018 versus '17?

[Jack Shevel, Interim CEO & Executive Chairman]

Correct.

[Doug Cooper, MD & Head of Research]

Okay. The Karie, how much of sort of in your model, to get to that number, is Karie in that sort of plan?

[Jack Shevel, Interim CEO & Executive Chairman]

With this being a technology device and new, we've been very cautious. So the preliminary -- the initial testings have been very encouraging and Urtech in Burlington has really started on their rigorous test in quality assurance, et cetera. So we'll have the 2,000 devices. We expect that initially probably 60% of the devices will be used by existing customers or operators on patients that we're already servicing. So not all the new 2,000 devices would be new revenue in terms of pharmaceutical dispensing. So we're looking in the fourth quarter, if we can -- and we're just being cautious and realistic in terms of -- in terms of the rollout. But looking really in the fourth, if we can finish the fourth quarter 2,000 to 3,000 new patients on Karie and using the -- they are on Karie and with pharmaceutical services, that's what we're basing that on.

[Doug Cooper, MD & Head of Research]

Just in terms of the homes that you're operating in today, obviously roughly 30,000 beds. How many patients were there? Or like, home patients, how many people would be living in those facilities in total?

[Jack Shevel, Interim CEO & Executive Chairman]

Yes, so in total there's over 42,000. And obviously -- mostly -- so in the long-term care, we do 100% because it's in terms of a contract with government. But in the retirement homes, our penetration really is like under 50%. So this was why one of the appealing things with Karie was that, hopefully, people will pilot in the homes, it become something that helps the homes in terms of their medication management and that we'll be able to increase that penetration. So there's an existing market opportunity there of probably 12,000 to 14,000 seniors that are not using Centric for their pharmaceutical fulfillment.

[Doug Cooper, MD & Head of Research]

And what would you deem a success sort of 2 years from now or, say, exiting 2020, what would you deem a success in terms of penetration?

[Jack Shevel, Interim CEO & Executive Chairman]

It's hard to estimate that. I think the product is being well accepted. There's a lot of excitement. remember also that, I think, once we're really comfortable that we've got the process and we've got the line working and that we can deliver. This is something that can be marketed and advertised on television. It's a Class I medical device. So they should then become a decision in terms of direct-to-consumer if there was that need and that, obviously, would help us with the -- with those growth plans.

[Doug Cooper, MD & Head of Research]

Maybe if you could expand a little bit on the -- you talk about early-stage talks with Amazon and Google, could you just expand on them maybe a little bit?

[Jack Shevel, Interim CEO & Executive Chairman]

So what is interesting is these were -- they reached out to AceAge, right? And in terms of meeting with them and this has all happened in the last 2 to 3 weeks. I think, there'd been a couple of conferences that they presented at, won a couple of more awards within Canada, innovation awards, [ IREC ], et cetera. I'm not sure, it's different to the country. But -- so I think that exposure is growing and, obviously, all of them are really focused in that home market at various levels. So I think wanted to understand and see Karie, and I think we're impressed just with the simplicity of how it works and then also how easily it could interface or connect with a lot of the stuff that they do. So I think it was the preliminary talks and discussions. There has been follow-up from Amazon already and probably, for a lot of these things, this would be more a licensing arrangement more than anything else if it goes anywhere.

[Doug Cooper, MD & Head of Research]

Okay. And just your final comment question, there was an interesting article in the paper today on the BC situation. How do you to think this all unfolds, basically, over the next couple of years? I'm assuming this is just unsustainable, they can't continue this.

[Jack Shevel, Interim CEO & Executive Chairman]

Yes. So -- I mean, the economics of this things, I think, we tried to demonstrate is crazy because part of the rationale of implementing this Medicare Protection Act from 2003 was to save on transfer payments of $15.9 million that the federal government has withheld. And you can see, they could save that and -- but it will cost them $300 million for the services that has been taken over by private. So my view is this is a practice that's been going for 15 years that BC, I think, is -- I don't know if you saw Paul's earlier, but 81% of British Columbia residents were in favor of private health care when government couldn't meet the wait times. So I think from a public opinion, people are happy with it. I get feedback in terms of how many Canadians are just going south for surgery, increasing over time. So the system is not delivering, it's not working, there's obviously a reluctance to admit that. But what I thank will happen is, the same basis, is in terms of how the injunction was received pending the outcome of the constitutional challenge, I think everything is going to get stayed until the end of that case. And that case is probably going to go on appeal. Remember that the same constitutional challenge in Québec with Charlie case was actually -- was very favorable in 2005. So I just don't think -- I think this is progress. I know it's nuisance value for investors and shareholders, but if healthcare is not on the front page and you're not [reacting] with government, there's probably not going to be much progress or change. So...

[Doug Cooper, MD & Head of Research]

And just on the Ontario election obviously about 1 month away, if Ford wins, how do you see it shaping up? And if one of the other win, do you see any risk to moving towards more the BC kind of talk?

[Jack Shevel, Interim CEO & Executive Chairman]

Well, I mean, what's interesting in terms of Ontario is that [the Premier] won -- said that she would pay for all copays. So this is an area that would be a huge area of growth for us as we waive a lot of copays for the 18,000, 19,000 seniors that we service. Like in long-term care, we can basically bill 52 weeks. If you bill weekly, we don't charge copays 52 times a year. It's a far lesser number. So it will be a boost from that point of view, but I think that the potential changes in government, yes, Alberta maybe even BC would be very favorable because I think there is a realization that the private sector has a role to play, and as David said, there's an economic reality out there right now. In terms of -- and with the aging demographics, the demands on the system are only going to increase, they're not going away.

[Operator]

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

[Jack Shevel, Interim CEO & Executive Chairman]

Thanks, everyone, for your attendance, and we look forward to updating you, and we wish David the warmest welcome possible. And I think I can talk on behalf of the board to say that everyone is extremely confident that with the new leadership, that we'll be able to achieve the growth in the forecast going forward. Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.