卡地納健康 (CAH) 2002 Q1 法說會逐字稿

During the conference, all lines will be muted. Should any participant need assistance, please disconnect and redial the conference number.

There will be a Q&A session held at the end of the conference. To ask a question, press 0-1, and to remove yourself from the queue, press 0-9. You may enter yourself in queue any time throughout the conference, but please remember your questions will not be addressed until the end. Please limit yourself to one question.

Syncor's management team is ready to begin. And now I'd like to introduce Mr. Bill Powell, Director of Investor Relations for Syncor International Corporation. Mr. Powell, you may begin.

Thank you. Good morning. I'm Bill Powell, Director of Investor Relations for Syncor, and I'd like to welcome everyone to Syncor's First Quarter 2002 Earnings Conference Call.

On the call with me today is Bob Funari, President and CEO of Syncor, who will provide brief highlights of the achievements Syncor has made against its strategic goals in the first quarter. Following his comments, Rod Boone, President and CEO of Syncor Pharmaceutical Services, and David Ward, President and CEO of Comprehensive Medical Imaging will provide details of their respective businesses.

Finally, Bill Forster, Senior Vice President and CFO will wrap up by providing details of our financial performance during the first quarter. And then we will open the call for questions.

Before we begin, I want to remind you that projections or other forward-looking remarks made during the course of this call involve risks and uncertainties. These statements are based on current expectations and actual results may differ materially. Among the factors that could cause actual results to differ materially from those projected are the following: the effect of general economic and market conditions, supply and demand for the company's products, competitor pricing, changes in reimbursement rates for our services, maintenance of the company's current market position and other risks, uncertainties and factors discussed in the risk factor section of the company's annual report on form 10-K for 2001 and in the company's other filings with the SEC. Given these uncertainties, undue reliance should not be placed on such forward-looking statements.

And now I'm pleased to introduce Bob Funari, President and Chief Executive Officer of Syncor International Corporation. Bob?

Good morning and welcome. As we discussed during our last call, we took action during the first quarter to implement a number of strategic initiatives at Syncor International. This included the redefinition of our CMI business model and the successful consolidation of our International Imaging and Pharmacy operations into our US businesses. We are pleased with the progress we have made and our well on our way to achieving the goals we laid out for the year.

I'm also pleased to report that we've been able to deliver strong financial results while implementing these significant changes. Revenue for the quarter increased 18.8 percent to 215.5 million and diluted earnings per share increased from 38 cents to 41 cents per share, beating the analysts' consensus estimates by a penny. More importantly, we have made significant improvements in the generation of free cash flow, a major priority for 2002. During the first quarter, we generated 12 million dollars of free cash flow compared with 4 million dollars in the prior quarter. We are well on track to achieving our positive cash flow objectives for the year.

The financial and operational results you will hear about today demonstrate our continued commitment to pursuing profitable growth for Syncor. The major milestone of the quarter was the agreement we signed with Idec Pharmaceuticals for Zevalin, which Rod will discuss further during his comments.

This agreement is further evidence of our leadership position in preparing, dispensing and delivering complex pharmaceuticals to the point of patient care. We look forward to announcing similar agreements as we continue to expand into the growing complex pharmaceutical market. With regard to our preferred distribution agreement for Cardiolite, let me first begin by congratulating Don Hayden [phonetic] on becoming President of Bristol Myers Squibb's North American Medicine group. Don and I have been working together since last fall in exploring opportunities to extend and expand the relationship between our two companies. Our discussions are ongoing, and we continue to exchange information on the history and success of our relationship. I am confident that we will have a resolution on this issue later this year. As outlined on our last call, our CMI business is focused on improving profitability and cash flow in 2002. During the first quarter, we began to implement many of the initiatives that will allow us to achieve these goals. These changes are under way and will continue through the second quarter. We expect to see the benefits of these initiatives in the second half of the year. The major focus for CMI in the coming months will be to improve the accounts receivable situation which is clearly unacceptable. David will outline the decisions we have made and the steps we are making to improve DSOs later in this call.

Achieving significantly better performance results in this area is a major priority, and we are dedicating focused resources and attention to find effective solutions that will improve this complex situation.

Finally, as I stated in my opening remarks, our International Pharmacy and Imaging operations have been successfully integrated into our US businesses. We are also currently reviewing the status of a number of non-strategic assets that were a part of Syncor overseas. I anticipate sharing the results of this review and the decisions we will make with regard to these assets later in the year.

In conclusion, the first quarter was successful for Syncor in a number of ways. First, we continued to deliver positive earnings per share growth while at the same time taking significant steps to improve the profitability and cash flow of CMI and consolidating our international operations.

We further demonstrated our leadership position in dispensing and delivering complex pharmaceuticals with our partnership with Idec Pharmaceuticals and the launch of Zevalin. And most importantly, we made outstanding progress towards our stated objective of generating strong positive cash flow in 2002 with a record performance of 12 million dollars for the quarter.

These first quarter achievements give me further confidence in our ability to reach our previously stated guidance, and we look forward to delivering on these goals as we move forward throughout the year.

With that introduction, I will now turn the call over to Rod Boone, who will review the results for Syncor Pharmaceutical Services. Rod?

Thanks, Bob. Hello, everyone. The Pharmaceutical Services business enjoyed a strong start to the year with first quarter sales increasing by 23.1 percent over the year ago quarter to 164.1 million. Radiopharmaceutical sales were 145.2 million or a 12.4 increase over the prior year. This growth was largely driven by increased sales of Cardiolite as well as solid growth in new business initiatives.

Our major milestone during the quarter was the announcement of our relationship with Idec Pharmaceuticals. Under the agreement, Syncor will prepare and distribute patient-specific doses of Zevalin, a novel radio-immunotherapy for the treatment of non- Hodgkins lymphoma. This is the fifth most common type of cancer diagnosed in the United States, with approximately 300 thousand people estimated to be living with the disease.

I want to make a couple of points regarding our agreement with Idec Pharmaceuticals. We're the first company that Idec has partnered with for the delivery of this breakthrough treatment. They selected us because of our proven record in combining position, accuracy and speed in the preparation and delivery of life-saving complex pharmaceuticals. We've already demonstrated our ability to meet their requirements with the delivery of the first doses of Zevalin to patients in Colorado Springs and New York earlier this month, and delivered more doses over the past few weeks. We believe our first-to-market status coupled with our national network of pharmacies positioned us well for future growth with this product.

Also, I'm very pleased to reaffirm the success of our Xygris Emergency Response Service, which continues to strengthen our relationship with Eli Lilly. Syncor fulfilled orders in an average of 2 hours from the time of order to the receipt of products by the hospital pharmacy and our sales are tracking in line with our expectations.

The launch of Zevalin and our continued success with Xygris and Cardiolite puts Syncor in an excellent position to leverage our strengths in the complex pharmaceutical market. We continue to explore opportunities with several leading pharmaceutical and biotech companies and believe there's a strong pipeline of products that will need special services to drive market adoption and gain additional market share. We believe Syncor Specialized Pharmaceutical Services provides significant value to manufacturers seeking to establish, build and grow their proprietary product franchises over existing or future competitors.

Turning now to FDG and PET, as we indicated back in December, we believe that the proposed changes in reimbursement for PET receivers would have a minimal impact on Syncor's financial results, and we continue to believe that. In late March, the centers for Medicare and Medicaid announced that the reimbursement rates for PET procedures will be adjusted upward from the proposed $13.75 per scan to $17.64 per scan, which includes separate pass- through coverage for the FDG used in the procedure.

In addition, CMS also announced that breast cancer imaging is now a covered PET procedure. The potential volume for this is significant, as there are over 193 thousand newly diagnosed cases of breast cancer annually. With the addition of breast cancer, some 53.3 percent of all new cancers are now covered for PET imaging. The first quarter, we continued to grow our FDG sales from existing cyclotrons and key supply agreements. And we're on track to have our PET business profitable by the fourth quarter of this year. Two additional cyclotrons, one in Houston and the other in Seattle, are due to be operational by mid-year. FDG sales for the quarter increased 35.2 percent over the prior quarters to 3.8 million. This is the third consecutive quarter of sales growth in excess of 35 percent.

Utilizing our existing Pharmacy Services network, we continue to improve the availability of FDG so more patients can have access to FDG and PET imaging. Syncor can now provide FDG in 59 of our 130 Pharmacy Services markets.

In conclusion, the Pharmaceutical Services business delivered strong financial results in the first quarter of 2002, and we're confident that this trend will continue throughout the year and that we will meet the growth goals that we've previously set.

I will now turn to David for comments on the CMI operation.

Thank you, Rod. As you were aware, the first quarter was one of consolidation for CMI. As outlined on our last call, we made major changes to the structure of the business, including the decentralization of several support functions to the regions and individual imaging centers as well as delayering our management structure. At the same time, we also integrated 7 new centers into our network.

CMI ended the quarter with 72 imaging centers compared to 65 at year-end. 6 of these centers were Donobo [phonetic] developments, expanding our presence in our existing target market. While these new centers had an impact on earnings in the first quarter, they are all expected to be accretive in the second half of this year.

4 of the new centers are PET imaging operations, expanding our presence in this emerging market to 7 units. We also assumed management of San Juan MRI in Puerto Rico which was previously a part of Syncor Overseas. Revenue for the first quarter increased 4 percent to 40 million. Volume growth on a same-store basis was down 2 percent for MRI and up 2 percent for CT. These results principally reflect the termination of a number of low or slow-paying contracts, a decision that we made as we continued to pursue our goal of improving profitability of the business throughout the year.

As reported on the last call, we received IDTF provider numbers for an additional 13 centers during the quarter. This essentially completes the conversion process for the majority of our centers, and we continue to aggressively pursue this certification status for the new centers that we have just opened.

However, we have not yet completed the required steps that allow us to electronically submit claims, and therefore have had to continue to file on a manual basis throughout the first quarter. Because the time to declare manually submitted claims is substantially longer, it unfavorably influenced our DSO during the quarter. This was the major contributing factor to the 19-day increase in DSO from year-end.

I can assure you that resolution of this situation is our highest priority. We have engaged outside consultants to assist us in overcoming these process complexities and other issues, and pending the resolution, remain committed to reducing our DSO by year-end. On April the 11th, we received the latest release of the IDX product, and are currently testing this enhanced version. We anticipate this will take approximately 4 weeks to complete and will not begin implementation of the system into our remaining centers until we are completely satisfied with its stability.

As a contingency, in the event that this version is unable to meet our needs, we are mapping alternative options. In the meantime, we continue to experience the [duplicative] impact of costs associated with the management of multiple systems.

I believe we are taking the steps necessary to deliver improved profitability for CMI in 2002. Our focus continues to be on improving our cash collection, streamlining costs and increasing throughput.

I'll now turn to Bill for review of the financial results.

Thank you, David. We are pleased to report that our first quarter revenue grew 18.8 percent to $215.5 million from the prior year quarter. This growth was primarily driven by the strong sales growth of the pharmaceutical business as the results of our new business initiatives begin to take effect. Our gross margin as a percentage of sales expanded 40 basis points to 38.3 percent for the quarter due primarily to continued cost improvements. Operating income grew 1.4 percent to $21.3 million in the first quarter versus the prior year quarter in line with our expectations. Operating income was affected by the strategic initiatives undertaken in the CMI business during the quarter. Our fully diluted earnings per share increased 7.9 percent to 41 cents per share versus the prior year quarter of 38 cents per share on a similar number of shares outstanding. Next, I would like, I will review the highlights of Syncor's consolidated balance sheet and cash flow, which showed significant improvement during the quarter. Accounts receivable, net of allowances, increased 11.8 million to $167.5 million at March 31st, 2002, from $155.7 million at December 31st, 2001.

Our consolidated DSOs increased by 4 days versus the fourth quarter of 2001, primarily due to the increase in the imaging business. Our cash flow from operations was $21.4 million in the quarter versus a negative $17 million in the prior year, and essentially the same with a $22.7 million of cash flow in a prior period. Free cash flow showed significant improvement, increasing to $12.4 million compared with $4.2 million in the fourth quarter of 2001. The company's total debt decreased $10.4 million to $216.3 million at March 31st, 2002, compared to the fourth quarter of 2002 as we committed to use excess cash to reduce our debt level.

Regarding our share buy-back program, Syncor purchased 175 thousand shares during the quarter. As of March 31st, 2002, the company had approximately 26,732 diluted shares outstanding. We continue to believe that a share repurchase program is an excellent way to bring value to our shareholders. And as a result, on April 9th, the Board of Directors voted to increase the share repurchase program by an additional 3 million shares.

Under the preceding authorization, there were 233,000 shares remaining for repurchase, and this increase in authorization will be added to that balance.

I would now like to provide guidance on how we see the business tracking for the rest of 2002.

We continue to remain confident in meeting our previous full-year 2002 guidance range of $1.80 to $1.85 per diluted share. We are reaffirming our range of 41 cents to 45 cents per diluted share in the second quarter, improving to 97 cents to a dollar per diluted share in the second half of the year as the strategic initiatives we have undertaken begin to positively impact earnings. On a revenue basis, we continue to believe that growth in consolidated net sales for 2002 of 20 percent is achievable, and growth in both operating income and EPS is expected to be in excess of 20 percent for the full year. I would also like to reaffirm that we expect our cash flow from operations to be in the $75 to $80 million range. Based on our first quarter results, we are increasing our guidance for free cash flow to between $20 million and $30 million for the full year. We will continue to use any excess cash to repay debt as was evident this past quarter, having lowered total outstanding debt by $10.4 million.

That concludes my review of the financial results and outlook for the future. I will now turn the call back to Bill for closing remarks. Bill?

Thanks, everyone. Before we open things up and begin taking questions, to improve our call flow to include more questions and to not make this an overly long Q&A session, I'm going to ask our questioners to limit themselves to one one-part question, and if necessary one follow-up question. And if you have further questions, you can always rejoin the call queue while we have time this morning, or, as always, Tim Gutman [phonetic], Bill Forster and myself, Bill Powell, will be available today if you'd like to call to follow up on things.

For the benefit of everyone listening, please be sure to state your name and your firm or affiliation before you begin. Operator, why don't we take some questions? Would you go to the first questioner please?

Yes. Again, if you would like to ask a question, please press 0-1 on your telephone keypad at this time. The first question comes from Yee Bin Wang with Deutsche Bank.

Hi, this is Yee Bin Wang from Deutsche Bank. I've just got a question about the FDG market. I'm wondering if you could share some [inaudible], you know, like how much you estimate the market is worth and how fast is the market going up and how competitive it is please? Thank you.

I'm sorry. The question broke up very badly. If you could repeat it for us, we'll try to pay particular attention to the question so that we can answer it.

Hello?

Yes.

Can you hear me?

That's better.

All right. Okay. I've got a question about the FDG markets. I was wondering if you could share with us some of the dynamics you're seeing in the market, you know, like, for example, how big the market is at the moment, how fast it's going up and how competitive it is.

I'm going to let Rod respond to that question.

Yes. These are, these are approximations, but 2001 we think the market was about $80 million for FDG. 2002, we think it'll be around $100, $105 million. So it's growing nicely.

In terms of competition, there's good competition in the FDG market, but I think what's differentiating, especially for ourselves, is this is a very hot isotope and it requires special handling and safety and shielding. And that's where we have a lot of products already in our core business. So we're really able to provide a high level of service but also a high level of safety for the health care workers and the patients as well.

The next question comes from Glenn Senteggimo [phonetic] with Salomon Smith Barney.

A question about Cardiolite. It sounds like you have a pretty decent relationship with Don Hayden. If you could just sort of talk about some of the primary issues that come up, you know, with your negotiations with these guys. Is it more about price? Is it, you know, is it service? Is it profitability? You know, if you could just sort of, you know, flush that out for us a little bit more, that would be great.

Glenn, I think you're quite right in your assessment that the relationship that Don and I have built has been a positive one, and I think he would reflect that same set of feelings.

As you can well imagine, Glenn, one of the things that both Don and I have agreed to do is to not discuss the details of what we're talking about publicly, because we think it, it sends the wrong sort of messages to both organizations and to, and to the public.

What I can tell you is that with the appointment of Corey Zwirling [phonetic] as the next president of the Medical Imaging Group at BMS, we're moving ahead here in terms of the timetable that we laid out to get into more detailed discussions about how this relationship will look beyond 2003.

And so I'm encouraged that the progress continues to be very positive and that those discussions are going to lead us in the right direction, but it would be very inappropriate for me or for Don, either one of us, to engage in, in a lot of speculation about where those conversations are going to take us.

The next question comes from Mitra Rongapal [phonetic] with Fedaddi [phonetic].

Yes, hi, good morning. Just a question regarding the DSOs. I note it improved sequentially in the fourth quarter and then obviously it went up quite a bit this quarter. In light of the initiatives you're undertaking, could you give us a sense in terms of what we should expect for the rest of the year?

I'm going to let David answer that one first, and then I may have some other comments.

Well, it, it's probably still too early in the second quarter to draw any definitive conclusions, but on a month-to-day basis in April, the indications are a fairly significant improvement in cash collections on a per-date basis. So right now we are certainly tracking through thus far in April for a lower DSO. I think that we will see an improvement. We were certainly disappointed that we were unable to electronically submit our backlog of Medicare claims and we were thus forced to submit them on a manual basis, and manually submitted claims simply go back to the, to the back of the processing queue, and so we did not receive the benefit of that backlog of, of claim submission in Q-1 with respect to, to cash collections.

The next question comes from Larry Marsh with Lehman Brothers.

Good morning everyone, and congratulations on the good, good results. I know Powell's got us all on a short leash here so let me be…

[laughter]

A very short one. So I'll, I'll try to be brief, which is atypical. I - I guess maybe just my first question to follow up maybe with just the last question, David, could you talk a little bit about how much of the imaging centers you have with the IDX system, how many are still yet to be converted? And what sort of feedback are you looking to get from the new and improved IDX system before you roll that out here in the next several weeks?

Well, as, as I discussed on our, our last quarter call, most of the, the issues that have delayed the deployment relate to the stability of the interface between the, the front end, you know, where we schedule and register the patients, and the back end, where we do the coding and the billing. And, you know, that is a crucial interface and it has not been stable.

We had hoped to have a version to test in early March from IDX. Unfortunately, we did not receive that version, the 10.3 version, until April the 11th. We're in the process of field-testing this, and at this stage I think it is still too early to draw any, any real conclusions.

I, I think it is safe to say, though, that we are making sure that we are examining, examining any alternative options if this latest release does not meet our business requirements. To date, we only have 10 centers that are on the integrated product. We have approximately 40 centers that are on the back end of the IDX product but it's not the complete product.

Okay. Very good. Thanks.

Mm-hmm.

The next question comes from Lavonne Gretin [phonetic] with Hackey [phonetic] Capital.

On the DSO issue, given that you guys had a very decent drawdown on the DSO for that, that last quarter, and I'm not sure I really do understand the answer as you guys kind of put it together for what happened for the increase in the DSO. Maybe you can just kind of explain to me, obviously we don't have this electronic functionality but we didn't have it before either, so I'm still a little confused there. And the only other question that I had, my primary question relates to the, the free cash flow number I think previously talked about, a number that would I think have been somewhere in the 10 million dollar range if I'm not mistaken. Given that the, the cash flow from operations hasn't changed, I just, I want to make sure I understand why we're getting an up-bump in the free cash flow number.

We'll let David handle the first part of that question. I'm going to ask Bill to respond to the second piece.

Well, we had, you know, certainly the increase in DSO was not all related to the, the Medicare claims. Unfortunately, the, the backlog of Medicare claims that we thought we were going to be able to submit in the first quarter and be paid in the first quarter, we in fact were not able to do that. We filed those claims late in the quarter on a manual basis and did not receive payment in Q-1 as a result of those submissions. The aging of those Medicare claims is what has continued to, to significantly drive up the, the DSO in the quarter. It is not 100 percent of the issue but that is the vast majority of the, of, of the influence.

As far as the free cash flow, our previous guidance was in the $15 to $20 million range. The reason that I feel confident of increasing the free cash flows as a result of further review of what we're going to accomplish this year, we think that we can accomplish all of the targets that we have on our plate and support the individual businesses, and possibly not have to spend as much as we had originally thought.

The next question comes from Paul Prizilski [phonetic] with AG Edwards.

Yes. I was wondering if you could give me a possible reason for the sequential decline in CMI revenues given that you opened 7 new centers in the quarter.

Yes. The vast majority of the, you know, of the adjustment has, with reflection of the fact that we terminated a number of low and slow-paying contacts in 3 of our regions, they were principally in the, the Phoenix market, our Inland Empire region and in our South Florida market.

And once again, in order to be also appropriately and prudently conservative, we continue to be very aggressive in our reserves for contractual allowances.

Thank you. My question relates to the Corporate Executive Management Incentive Plans. Can you review the EPS target for 2002 that management gets paid on? And then, does your definition of return on assets include intangibles and current assets, and will it include any potential write-down of international assets or receivables?

Let me answer the first part of that question because I'm, I'm capable of doing that, Bob, and then I'm going to turn the second piece over to Bill. The number that gates the payment of an annual cash incentive for Syncor executives in the year 2002 is $1.85. And I'll let Bill perhaps respond to the second part of our question.

The second part, Bob, was what? Your second part?

What's your definition of return on assets there? Is it an EBITDA number over a, a, assets that include working capital and intangibles? Or what's the definition on that?

It does not include intangibles at all. We do it on a basis of, of the working capital.

Again, if you would like to ask a question, please press 0-1 on your telephone keypad at this time. The next question comes from Larry Smith with Gerard Prodo Madison.

Bob, could you or Rod, could you walk us through the economics on, on Zevalin? As I understand it, the total cost of, of treatment, you give the pre-administration of Rituxan and the, the imaging, then the Zevalin dose and then another Rituxan is 28 thousand.

How much of, of those economics do you get out of that?

I'm going to let Rod provide the initial part of the answer. I may add, add some color here behind it.

Yes. Larry, in recent discussions with Idec and as we look at our partnership agreement with them, they've asked that we not get into those details.

You know, part of, part of the difficulty we have, Larry, and, and I know that there's a, a desire to have access to as much information as possible, but we, we've tried to be very respectful of these initial relationships that we're building with pharm and biotech companies. And as Rod indicated, you know, particularly in the case of this new relationship around Zevalin, and to some extent even our relationship with Lilly, we've been asked to be very circumspect about what it is that we share or don't share on the call.

So, you know, as time proceeds, you know, we may be in a position to be more forthcoming here, but we can't do that today.

The next question comes from Larry Marsh with Lehman Brothers.

All right. Just to follow up I guess a thought, could you elaborate a little bit, I know we and, and everyone in the market has heard about a lot of the changes that Bristol has undergone with, with obviously the impact in terms of, you know, perhaps strengthening the negotiation, negotiating relationship. Could you just kind of elaborate on maybe how the, the changing of the players has impacted any conversations? And whether, you know, once again to confirm whether that sort of the new lineup, if you will, perhaps makes the process a little bit easier for you or, you know, it's kind of about the same?

Well, first of all, let me say that, you know, I, I fully appreciate and recognize that Don is, you know, had a tremendous expansion in the scope of his responsibility and, and that obviously means tremendous demands on his time.

Notwithstanding that, I think Don has continued to be extraordinarily responsive to replying or responding to questions that I have or discussions that we're carrying on, so I have not seen any impact in terms of our ability to continue to have productive conversations going forward, even given this tremendous expansion in the scope of his responsibilities.

I, I feel very fortunate that we have this working relationship with Don on the BMS side because I think that in many ways we share kind of a common view of how this relationship should be managed and how we should go about the process of building this relationship.

So I guess in summary, while there certainly have been a lot of things going on at BMS, I don't think they've had any negative impact on our ability to work together or our ability to continue to have positive dialogue.

And I really think that this recent appointment of Corey Zwirling [phonetic] is, is going to be another positive step in helping us accelerate the process of getting down into a more granular level of discussions about the future.

All right. That pretty much concludes our call for this morning. We'd like to thank everyone for calling in. Again, Bill Forster, Tim Gutman [phonetic] and myself will be available to take, to take questions. Please feel free to give us a call.

Thank you very much for listening in this morning. We appreciate your support.

If you should have any additional questions, please contact Neil Powell [phonetic] of Syncor Investor Relationships at area code 818-737-4702. And thank you for joining the Syncor Conference Call. Have a good day.