Option Care Health Inc (OPCH) 2003 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the MIM Corporation First Quarter 2003 Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance any time during the conference, press zero then star. And, as a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Ms. Rachel Levine, MIM Corporation's Investor Relation's representative. Please go ahead.

Thank you.

Thank you for joining us to discuss MIM's first quarter 2003 earnings. If you do not have a copy of our press release that went out earlier this morning, please call the Anne McBride Company at 212-983-1702 ext. 207 and I will e-mail or fax you one. Alternatively, you may obtain a copy of the release at the investor information section on our Corporate Web site at www.mimcorporation.com.

A replay of today's call may be accessed by dialing in on the numbers provided in this morning's press release or by accessing the Webcast on the investor information section of our Web site.

Before we begin, I will remind you that during this call you will hear some statements that may be considered forward-looking statements. These forward-looking statements may include statements relating to financial projections or other statements relating to the company's plans, objectives, expectations or intentions. These matters involve risks and uncertainties, and actual results may differ materially from those projected or implied in the forward-looking statements.

Factors that could cause actual results to materially differ from the forward-looking statements in this call are set forth in our most recent annual report on Form 10-K, as such factors may be modified in our quarterly reports on Form 10-Q.

During today's call, Richard Friedman, our Chairman and Chief Executive Officer, will comment generally on first quarter results and developments. Afterwards, Jim Lusk, our Chief Financial Officer, will discuss the company's financials in detail and certain supplemental data. We will then return for some final comments and open the call for questions and answers.

I would now like to turn the call over to Richard Friedman.

Thank you, Rachel, and good morning.

I am pleased to report that first quarter results have met all of our expectations. Our multifaceted managed care strategy continues to deliver specialty growth. We are benefiting from a single coordinated sales force.

MIM's approach is to make the disease state programs encompassing those conditions that are the most prevalent. Our overall depth of product offerings, including collection of medical data and reporting, allows our customers to effectively service more patients through one provider, resulting in improved quality of care, while reducing costs.

One example is a recently announced specialty and mail services contract with QualChoice. Our depth of disease capabilities and reporting were factors in winning the business. And we will be providing specialty management and delivery services for all 13 of our disease states.

I will now pass the call over to Jim to review the financial details of the quarter. I will come back later to share some insight into our dynamic industry and where we see the future of MIM. But before I do, I would like to say that in challenged - growth in this challenged global economy and a difficult market, healthcare is one of the few bright sectors exhibiting continued growth and expansion. And we feel that MIM is well positioned to capitalize on this unique opportunity - Jim.

Thank you, Rich. Good morning, everyone. I'd like to start by sharing some highlights of the quarter.

First quarter specialty revenues grew 64 percent over the first quarter of 2002. Cash flow from operations for the quarter was $5.5 million, up 135 percent from the fourth quarter of 2002. Mail and specialty prescriptions expense increased a combined 32 percent over the first quarter of 2002, and debt was reduced from $4.6 million at December 31 to $700,000 at March 31, after acquiring approximately 800,000 shares of stock under our new share repurchase program. Revenues for the first quarter increased to $162.2 million from $151.7 million in the first quarter of 2002.

Specialty management and deliver services revenues increased 64 percent in the first quarter to $54.2 million from $33 million in the first quarter of 2002 due to continued growth in each of the company's injectable and therapy programs. Revenues from PBM services, including mail, were $108 million in the current quarter, compared to $118.7 million in the first quarter of 2002. This was principally the result of a decrease in revenues associated with the company's classification of certain PBM revenues from gross to net and the company's termination of certain unprofitable PBM accounts.

Operating income for the first quarter of 2003 was $5.9 million, compared to $6.7 million for the first quarter of 2002. EBITDA for the first quarter was $7.3 million, compared to $8.2 million for the same period last year. Operating income and EBITDA for the first quarter of 2002 include a special gain of $.9 million. The operating income and EBITDA results reflect an increase in Selling, General & Administrative expenses of $2.3 million, primarily due to additions in the sales organization and corporate management, which remain in the second half of 2002.

After accounting for our 40 percent tax rate, first quarter net income was $3.4 million or 15 cents per diluted share, compared to $5.2 million or 22 cents per diluted share at a tax rate of 20 percent for the prior year's quarter. Net income for the quarter of 2002 gain of three cents per diluted share. As we discussed many times, please remember that the 2003 results reflect a fully normalized tax rate of 40 percent, compared to a tax rate of 20 percent in 2002 due to the utilization of net loss .

Cost of revenue for the first quarter of 2003 was $143.6 million, compared with $135.6 the same period last year. This increase reflects the growth of the company's specialty business.

Gross profit for the quarter increased 16 percent, an increase of $2.6 million to $18.6 million, primarily due to the growth in the company's specialty operations. The gross profit percentage for the first quarter of 2003 was 11.5 percent, compared with 10.6 percent for the same period a year ago.

SG&A expenses increased to $12.2 million for the first quarter of 2003 from $9.9 million for the same period a year ago. This increase is principally the result of an increased investment in sales resources to support the growth of the company's business. Margin expenses were in line with our guidance.

Now moving to the balance sheet, day sales outstanding have improved from 46 days at December 31, 2002 to 44 days at March 31, 2003. Inventory turns have improved from 25 to 38 for the quarter, resulting in a $3.4 million decrease in inventory from December 31, 2002. The company generated $5.5 million operating cash flow for the current quarter, 135 percent increase over the fourth quarter of 2002.

The outstanding bank borrowings for the company's credit facility were $.7 million at March 31, 2003, down from $4.6 million at December 31. This reduction in the credit facility was achieved through balance sheet management after using approximately $5 million to repurchase company shares.

I will now discuss some operational metrics. Total PBM prescriptions dispensed during the first quarter in 2003 were 3.5 million, compared to 4.1 million for the first quarter of 2002. Mail and specialty prescriptions dispensed by MIM during the first quarter of 2003 were 678,000 claims, compared to 512,000 claims for the corresponding period in 2002.

During the quarter, our boards authorized the stock repurchase program to purchase up to $10 million of the company's stock as of March 31, 2003. 799,893 shares have been repurchased at an average price of $6.34. Our strong operating cash flow and balance sheet management continue to fuel MIM's growth and enable us to support our .

With that, I'll turn it back over to you, Rich.

Thank you, Jim.

The trends of the future have . Growth and momentum in the biotechnology and specialty pharmaceutical industry continue to create enormous opportunity for MIM. Recent industry research by JP Morgan indicates that we are at the beginning of a multiyear product launch cycle, with a slew of new drugs over the next five years.

Today, there are approximately 350 discreet medical injectables, and it is estimated this number will grow to more than 600 over the next few years. The need to effectively deliver and properly manage the patient is critical and only increasing. It is estimated medical injectables will grow 20 to 40 percent per year, which is double the traditional pharmacy costs. At MIM, we have focused on meeting this need.

We are building a clinical management company with individualized delivery capabilities, which will offer the most complete value to health plans, doctors and patients alike. The value of this proposition is a true clinical approach to patient management, education and fulfillment, paving the way for seemless patient care at reduced costs.

We continue to build close position, patient health plan and manufacture relationships. And we will continue to deliver customized programs tailored to individual client and patient needs. The fundamentals of our industry, our business and our organizational structure are in place to deliver on a 2003 plan.

With that, we will now open the lines to answer any questions you may have.

Ladies and Gentlemen, if you wish to ask a question, press the one on your touch-tone phone. You will then hear a tone indicating you've been placed in queue. If you pressed one prior to this announcement, we ask that you do so again at this time. You may remove yourself from queue at any time by pressing the pound key. And if you are using a speakerphone, please pick up the handset before pressing the number. Once again, if you have a question, press the one on your phone at this time.

Our first question Arnold Ursaner from CJS Securities. Please go ahead.

Hi - good morning, Rich and Jim.

Good morning.

Good morning.

Congratulations on the nice conference call. Can you give us a sense of operating margins in the specialty business, please?

Sure. Just some overall comments. As we said, our overall guidance for the year, we had margins between 11 and 12. We're obviously right in the middle of that overall.

The gross profit for our specialty for Q3 is 18.8 percent.

Q1.

Q1 - sorry. And PBM and mail is at 7.8 percent. That gives you the weighted average of 11.5. But overall, the overall margin is right in the middle of the guidance range that we had given out for the year.

OK. And can you comment on the impact of on your margin in the quarter in specialty?

Yes. is really a small piece of our overall revenue. So...

OK. And a question I guess for Rich. Can you comment on the - on the new sales force, I know you've put in some plans to encourage your sales force to get greater share of revenue from existing clients. Can you be a little more specific of some of the metrics your sales force has accomplished in the - I guess it's eight or 10 weeks that it's been out there?

Sure. Arnie, Al is with us - Al Carfora, our President and COO. And we'll have him address this, since it falls under his area.

Thanks, Rich.

Arnie, as we have discussed in the past, we've realigned our sales force singular and disciplined. We have a sales force now that can execute at any point of our business, and, of course, all points of our business, and can be focused specifically on an individual customer if the need arises.

Each of the sales executives has specific account assignments and customer target lists. And they report on those on a weekly basis in a formal reporting process, which we actually now have captured through our computer system so anyone can turn it up on their screen and take a look at what progress has been made.

Our commission structure has been realigned so as to segregate the commissions payable against each of the lines of business that we execute in. And, as well, we've initiated signing bonuses for bringing in new contracts, which obviously encourage our outside sales force to look for new business opportunities at every turn.

We've been very successful in increasing the penetration within our existing customers by extending the range of therapies that we provide to them, as Rich mentioned in his closing remarks. So the sales force has been very effective in what they've been able to accomplish over the last three months. We're very satisfied with their success.

OK. Again, do you have any more specific numbers you can give us? Perhaps a number of new accounts, incremental revenue per account, anything along those lines?

No. We're not reporting it , but you obviously see that we have the new account that we cited in terms of QualChoice. We've picked up a couple of other accounts in terms of being able to bill, not specifically mentionable. However, each of them provide us with new opportunities.

Arnie, Jim gave the EBITDA for Rx - you know, for the specialty - and that's really the metrics that we're going to be giving. We're not going to break out the number of new accounts that we pick up. But we did pick up new accounts. But what we're going to offer is the information that Jim has already given.

I know there are a lot of other people probably on the line. Final question for me: could you comment a little bit about - your expense structure has grown, and we think very - you know, that's a good move, building the infrastructure needed. Can you comment on what you think of more normalized type numbers or their - any expenses that maybe a little bit better to control as the year goes on?

I think, Arnie, the year-over-year growth, Q1 over Q1, relates to the investment in the sales force and some of the management team, like Al and myself. Sequential quarters were actually down, and I think the expense structure we have in place right now will be the expense structure that will take us throughout most of the rest of the year. So as we continue to grow revenues consistent with our guidance, we don't see expense at this point in time. So...

OK. Great job - thanks.

Thank you.

We have a question from the line of Grant Jackson from First Analysis. Please go ahead.

Good morning, gentlemen. If you could comment on any changes within the mix of specialty, whether it be towards blood products, away from blood products, the infusion versus your regular injectables.

Sure, Grant - good morning. What we are finding, as we do greater penetration, that it is growing in relation of the prevalence of the disease states on a national basis. As we started the business, I think as you know, we originally took on a lot of patients to break in and then grow from there. And I think as we've all been experiencing, that we're starting to pick up more Hep C patients. And as you look at the growth in the specialty area and the increase in the number of drugs that are going to be out there, I think we'll just follow in lines.

You know, today, we have access to almost 20 million for specialty. And I think what you'll find is that we will follow this same prevalence as what's in the United States under those disease programs.

And a slightly different question. Looking at your strategy, where you see yourself moving in the future, are you going to be looking to more dominate regionally in the New York tri-state area and then develop more of a regional strategy with an integrated infusion and specialty model, or is it more of a national specialty model? And then if you could just comment on your position relative to, you know, some of what we're seeing with the PBMs, particularly advanced , which has been maybe more aggressive than most.

And are you targeting slightly different types of accounts? What's your message to those prospective clients who are looking at you, as well as some of the other competitors out there?

Sure. , our specialty model is a model that will take advantage of the relationships on a regional basis. And we believe strongly in local presence. We believe that by being part of the community and working with the health plans, working with the hospitals and the physician community, that will gain you the greatest access to the referral base to bring in. So we strongly believe in that on the injectable and also the infusion side.

However, there are also national accounts that we will continue to take advantage of, which looks more like a distribution model with clinical on the phone, as opposed to on a local basis, where we're much more involved in the clinical management of the patient. We are trying to be a major player in the New York area. We seem to be growing nicely in the New York area.

We will be looking at densely populated areas, and so far we're very happy with what we've been able to achieve. And we're continuing to explore more people on the ground in these areas.

So we're very happy with the model that we have chosen, which is the local presence, dealing with the managed care, the hospitals, the physicians. And each one of those are our customers and we take them all very seriously.

In terms of the PBM side, we continue to go after smaller managed care accounts. We believe that we offer tremendous services on an overall basis. And we will take advantage occasionally on some larger . But that's really on a basis that one may come up. But we are not taking our resources and putting it heavily into the growth on the PBM side.

It is growing based upon our clients growing. It's growing based upon relationships we have out in the field. But we're really concentrating our effort on the specialty side.

Thanks. Last point is just, on the operating margins, if you could talk to what kind of operating margins you're seeing on the specialty side. I think Arnie had asked that. And then where do you see that going in, say, two years?

OK. Jim will talk to that, but we really addressed the gross profit because of the integration of our costs. But, Jim, go ahead.

Yes, just overall, Grant, the - as I mentioned when Arnie asked this question, the overall margin guidance we have - gross margin we have - there was 11.5 - there was 11 to 12, excuse me. This quarter, we're kind of right in the middle.

PBM and mail on a gross profit perspective is, you know, at 7.8. That's pretty much where we would expect it to say. And specialty is in the high 18s right now; it's 18.8.

And the reason we gave a range out there is because we will continue over time to see some price pressure in the overall business. But I would say, in the short term, we'll definitely be in that overall - short term being this next year - we'll definitely be in that range of 11 to 12 overall. And going forward, it really depends on, you know, what happens in the overall industry. But we don't see it going down too much.

The other thing, Grant, that you have to realize is that growth in the number of products are going to be out there. When it goes from the 350 to the 600 products, I think on the newer products you'd probably see a little bit higher margins that are out there. But, in fact, as we have said, we have an injectable business and we have an infusion business.

And as we grow the injectable business much faster than the infusion business, you're going to see our margins on the specialty side coming down probably pretty closer to the 10 to 12 percent range on the injectable side, and that's just a question of our product mix. So as we continue to grow specialty, and the injectables outpace the infusion business, you will see a decline in the margin strictly because of product mix.

Thanks.

And we have a question from the line of Ann Barlow from Southwest Securities. Please go ahead.

Yes, good morning. Several questions for you guys.

First of all, any update you can provide on the PBM contract with TennCare? I know there's been some discussion in the state there on what to do and how to manage that contract going forward. And, secondly, I wondered if you could give us your insight, or rather your overview, of what you think was contained in the report that was released yesterday.

Sure. Regarding the TennCare situation, first of all, our contract is not with the state. Our contracts are with the that are contracted with the state.

Right.

And we have both there the PBM side, as well as specialty side. The state is looking to find ways to help reduce their costs. And over the past number of years, some of the programs have really increased their costs they way they handle certain things, like and other things.

What we are doing is working with the state, going ahead and participating in helping the state look at various alternatives to how they can overall reduce costs. I think one of the points that the governor has made is that they're $175 million over where they need to be. And we've been pretty active of trying to work with the state to identify opportunities where the state could save money.

The state has to go ahead and find ways to reduce costs. And they're looking at a number of alternatives to do that. And we are hoping that we will be part of that.

Are they still considering going to, you know, one PBM for all of their managed care organizations, or do you think they'll still be multiple?

Yes. I think, Ann, that they are looking at a number of alternatives. You know they've made it clear that they may be looking at one, but they are looking at a number of alternatives. And until they come out with a final decision on what they want to do, for us it's business as usual.

We continue working with the , we continue working with the state. And we will do everything we can to support the governor in what he wants to accomplish.

There's no visible timeframe on when the - any ultimate decision may be made at this point?

We expect decisions to be made shortly, but we have not - the state has not set a date on when those decisions may be.

OK. And then on the report?

Barry?

Hey, Ann, how are you?

Good - fine.

Good. You know going through the information yesterday, it's really a reiteration of past policies and statements they've put out in the past. You know, as we've said many times, our programs and our policies are customized to meet our customers needs. The goals and objectives of each specific managed care plan are created around their formularies, and then rebates are driven off of that.

We don't have some of the concerns of sort of the pure rebate and maximization programs that some of the other competitors, you know, participate in. So we're comfortable and confident that we're OK in terms of any statements they put out.

Ann, one other point is that we have a comprehensive compliance program that has been approved by the in this company for a number of years. And I think it's important to point out that every one of our employees participate in that program and are required to participate in that program from the top down to the bottom. And we take it very seriously, we have a compliance committee, and we are aware of what is going on, and we do everything we can to manage this program.

All right. One last question. Guidance remaining the same for '03?

Yes, ma'am.

All right. Thanks.

Our next question comes from the line of from . Please go ahead.

Hi - good morning. How are you, fellows?

Good morning.

Rich and Jim, I guess.

Yes, thank you.

I'm not familiar with the - a couple of questions I have - two questions. One is, how long the company has been a public company and how long was it private? I want to know a little bit about the history. And maybe - I hope I didn't miss that and ask you to repeat it.

And, also, is the fact that your market cap is relatively small a problem? And who would be the competition, I guess is the third question, also. Is the market cap working against getting new contracts? Or is that a negative, or is that a positive, or is that a - or a non-event - low market, small market cap?

I guess I've got three questions. I hope I didn't confuse you.

No. A little bit of the history. The company was actually founded effectively January 1, 1994 and had one account - being the TennCare program - and a subcontract to Rx care.

The company went public in August of '96. So it has been a public company for...

Seven years.

... six to seven years. In terms of the market capitalization, you know that's not for us to determine. You know...

OK.

... that is based upon Wall Street and investors to determine what this company is worth. And all we can do is continue to run this company, and that's what we're trying to do. And in terms of competitors, we consider ourselves a pharmaceutical healthcare organization, and our competition is really looking at - if you want to look at some of the public companies, you have a , you have , , AdvancePCS, ExpressScripts. You know those are some of the PBMs that are major players, and they're all quality companies out there.

We're a company that has really integrated the specialty with the PBM side. We believe in the approach of managed care, giving us the greatest access to the number of . We also believe that our customer is the physician and the patient, and our approach on modeling to specialty is really more involved with the physician community, the patient community, as well as the hospital and the HMO community.

And we have done a lot of work on the reporting on tracking of medical costs, combined with pharmacy, and to do an overall clinical approach to the management of the chronically ill. And that's how the company will continue to move.

You answered my questions very well. One last addition to that last question I had about your competition. a right choice combination, or or Cardinal Health or , or Merck ? Would your competition?

The simple answer is: yes.

Yes? OK. Because those are larger companies. And the one you mentioned, like , I think was...

You have and you have and some of the other ones that are distributors that want to get into the specialty business. Just understand that the specialty business does not flow through the traditional channels of distribution, being the drugstore.

You've looked at and getting into specialty; they've made some acquisitions. And they should be in that business. It's a huge business and it's a growing business.

Our model - and I think what you have to look at is specialty - it requires special handling. It requires more patient care. There are a lot of things that are going on that make it unique for a company like ours to get more involved in the patient, where some of these larger companies have been more of a distribution model.

And I submit to you that the future of this is going to be individualized medicine, individualized care, and better compliance programs of tracking and reporting for the benefit of the patient and benefit of the health plan and the physician's office. It's not strictly going to be a distribution model. And we are trying to build this company to meet those objectives.

Thank you very much, Rich and Jim. Very well answered and very well done.

Thank you.

Congratulations on your quarter.

Thank you.

We have a question from the line of Harvey Stober from Goldsmith & Harris. Please go ahead.

Thank you. My question relates to some of the PBM numbers. Given the change in accounting that you had for those account , it's very hard for us to gauge what is the level of growth underlying PBM.

If you look at the pharmacy network claims, they're down 17 percent year over year. The question is, one, does the net accounting business, does that flow through to the network claim process numbers? And, either way, is there some way to give us a pro forma type of number as to the underlying growth on the PBM side?

Sure. Thanks, Harvey. It's Jim. I'll take that one.

We did have a big contract that moved from gross to net last year, which is called . If you exclude that in the first quarter of '02, the PBM and mail segment would be up 14 percent and overall revenue would be up 27 percent by that move. It's about $25 to $30 million in that range.

And yet, it would have an impact on claims, because we did have a subsequent termination of the account later in the year. So it did impact claims. But the - apples to apples, we had 14 percent growth in PBM and mail.

OK. Thank you very much.

And if there are any additional questions, please press the one on your phone at this time. And we do have a follow-up from Arnold Ursaner from CJS Securities. Please go ahead.

Jim, just a quick question on your balance sheet. If I were to look at the - in your balance sheet, the liabilities and shareholder equity line, pretty big swing between accounts payable and claims payable. Could you walk us through that, please?

Sure. If you kind of look into the cash flow, if you look at the cash flow side of the balance sheet, lines met, and the improvement in cash flow was driven by a reduction in inventory. We had some incredible inventory turns this quarter. We actually got up to 38 turns.

Inventory has actually moved to just about a just-in-time basis. Our delivery facilities are located very close to our vendors, and that has really helped to improve it.

If you look at the specific balance sheet lines, Arnie, the accounts payable is really driven by the lower purchases of inventory that I just mentioned. And claims payable are based on the timing and the volume of kind of quarter over quarter.

OK.

And nothing unusual there at all.

OK. Final question for you, Jim. Have you - or Rich - have you guys attempted to expand or more formalize lines of credit as you look at various opportunities that are out there? Have you thought about perhaps locking in or expanding some of your financial flexibility in the current environment?

Arnie, we have - we've talked through with a number of potential partners. Right now, we have a very good partner and we have some very good interest rates. We don't need funding for anything besides an acquisition or, you know, some other big event like that. But we're always planning for that, and I have talked to a number of potential partners.

But, in the meantime, our current bank has really good rates that we can't beat any place. And they've been really good to us. But I am potentially lining things up for that potential acquisition in the future.

OK - thank you.

We have a question from the line of from . Please go ahead.

Hi guys, a couple of questions. Can you give us the total number of contracts in specialty year over year?

, we do not have that - they're large numbers. We track by contract to contract. We report on what we look on the number of access that we have, and the access right now is pretty close to 20 million that we have. And I know it was significantly less than that last year.

OK. And then the repurchase, was that for a million shares?

We repurchased roughly 800,000 shares for $5 million. The board gave us a $10 million line. We've only spent half of it. So we have another $5 million remaining to do future purchases. But we did do roughly 800,000 shares for $5 million.

And then there are other - any other uses for your free cash flow besides share repurchase?

At this point in time, we are just letting - having it sit there with operations, and we've built it up for potential acquisitions.

All right, great. Thanks, guys.

And we have a question from the line of Grant Jackson from First Analysis. Please go ahead.

Hi. Could you just comment on your provision for loss on receivables? It's more than doubled over the past year. Is that due to mix shift or what?

The provision overall is just based on the growth in revenue. We have very low actual write-offs of accounts, so we would say knock on wood on that. We really try to stay on top of our relationships with our customers, and we're constantly going after them.

So it's basically just the growth in the business, as opposed to specific individual problems we've had. Like I said, we've had very, very few write-offs. And the other thing helping that is that our DSOs are dropping. We've dropped to 44 this quarter, too.

So we are keeping the pressure - Al and I and Rich are keeping the pressure on the business to not only sell, but collect. And good customers do want to pay when they get the right bills and the right time. So we have a lot of that good stuff going on. So it's just a matter - the biggest issues right now is there's no specific big issues that we're looking at.

And it does look pretty low on a percentage basis, but it has jumped year over year. Is that due to maybe a slightly higher level of - whether it be infusion products or blood products, some of those products which have generally higher levels of uncollectables?

Yes. I'd say, overall, we're in line with the industry. And we do have a conservative basis for booking the revenue to start with. So I'd say it's in line with the industry. So...

And there are no further questions at this time. Please continue.

Well, we would like to thank all of you for participating. We feel very good about the quarter. We feel very good about our growth prospects. And any additional information that comes up we will be happy to share with you.

Again, thank you for joining in today.

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