Option Care Health Inc (OPCH) 2003 Q2 法說會逐字稿

Welcome to the MIM Corporation second quarter 2003 earnings results conference call. (CALLER INSTRUCTIONS). We would now like to turn the conference call over to our host, MIM Corporation Investor Relations Representative, Rachel Levine. Please go-ahead.

Thank you. Thank you for joining us to discuss MIM's second quarter 2003 earnings. If you do not have a copy of our press release that went out earlier this morning, please call the call the Anne McBride (ph) Company at 212-983-1702, extension 207, and we will e-mail or fax you one. Alternatively, you may obtain a copy of the release at the investor information section on the Company's 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 MIM's website.

Before we begin, I will remind you during the 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 second quarter developments and pass the call to Alfred Carfora, our President and Chief Operating Officer to review some operational details and perspective on sales and marketing strategy. Afterwards Jim Lusk, our Chief Financial Officer, will discuss the Company's financial 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 say that we have just concluded a solid performance for the first half of 2003. We are on track for the quarter and the year, reflecting momentum in the Specialty Management and Delivery business. The Company's growth and strategic direction continued to be driven by our Specialty Management and Delivery service business and our plans for the future are focused on specialty pharmaceuticals where we believe our ability to provide efficiency, cost savings and management meets current industry needs. In addition, we will continue to pursue opportunistic PBM and mail business.

Second quarter has been a combination of challenge and success. We lost the TennCare PBM business and we were not named as one of the three national distributors for RSV Products synergist (ph) (ph). However, we have experienced significant growth in several disease categories including hepatitis C, multiple sclerosis, arthritis, growth hormone and gar--(indiscernible) disease. We also continue to provide specialty services to the Tennessee Managed Care organizations and expect to increase our overall penetration in that market. We believe that the current consensus estimate for 2003 of 52 cents will be achieved.

I will now pass the call over to Al to review some operational details of the quarter and offer some perspective on sales and marketing strategies. Al?

Thank you Rich, good morning. First, I would like to briefly review some of the operational metrics we track each quarter. Mail and specialty prescriptions dispensed by MIM during the second quarter of 2003 were 717,000 as compared to 547,000 for the corresponding period in 2002. For the first half, mail and specialty prescription dispensed were 1.4 million in 2003 and 1.1 million during the same period in 2002.

As mentioned, we were recently informed of a restriction in the distribution channels of product for RSV. We are currently pursuing alternative supply channels. Although the potential financial impact would be notable on a revenue basis, it would be minimal from a gross profit and earnings perspective since the product produces less than companywide margins. RSV product currently represents less than five percent of the Company's revenues.

I would now like to take a few moments to discuss our sales and marketing initiatives. Although we are no longer the PBM provider for TennCare, we continue to be able to provide our specialty pharmacy and management services. In order to take advantage of this market opportunity, we have established an on the ground physician detailed salesforce in the Tennessee market. These sales representatives will visit all of the respective physicians that are prescribing specialty drugs and will be further supported by our inside sales team who will call these physician offices providing information, sales literature and follow-up.

As a result of our sales efforts in Michigan, we have secured an opportunity to provide specialty services to two large payer groups representing approximately 600,000 lives. We have employed physician detailed sales representatives to address this market opportunity and they will also be supported by our inside sales team.

Our strong presence in the Northeast continues to provide new sales opportunities as well and as a result, we've engaged new physician detailed sales representatives for both the New York and New Jersey markets. This concentration of effort supports our strategy of establishing a strong local presence. We plan to continue our investment in developing and supporting sales and marketing opportunities and we will refine our clinical expertise to provide the most comprehensive specialty pharmacy management program available.

Providing exceptional customer service to our payors, patients, physicians and drug manufacturers is our primary goal. We continue to be dedicated to our PBM and mail customers and will pursue PBM and mail business that fits our strategic direction.

I would now like to turn the call over to Jim to review our financials.

Thank you Al. Good morning everyone. We have met all of our expectations for the first half and are on track to deliver analyst consensus of 52 cents for the year. Excluding RSV, Specialty Management Delivery revenues are expected to grow approximately 20 percent over 2002 levels.

Some highlights of the quarter and the first half included 19 percent increase in revenues over the second quarter last year, a second quarter EPS in line with consensus including a $616,947 or 1.7 cents of EPS of employee related severance payment, 4.7 million in cash flow from operations for the quarter and a combined 32 percent increase in mail and specialty prescriptions dispensed for the first half. I'd like to note all the growth I have and will discuss is organic.

Revenues for the second quarter increased to 161.2 million from 135.7 million in the second quarter of 2002. Second quarter Specialty Management and Delivery services revenues increased 9 percent to 46.2 million from 42.4 million due to continued growth in each of the Company's injectable and infusion therapy programs. Revenues for PBM Services including mail grew 23 percent to 115 million in the current quarter compared to 93.3 million in the second quarter of 2002. This increase is principally the result of strong growth in the Company's PBM and mail services operation.

Operating income for the second quarter 2003 was 6.1 million compared to 6.0 million for the second quarter 2002. This modest increase reflects an additional 1.7 million of selling, general and administrative expenses due to additions in the sales organization and corporate management, which were made in the second half of 2002. In addition the Company incurred expenses of $616,947 from employee related severance payments.

Based on a 40 percent effective tax rate second quarter net income was 3.5 million or 16 cents per diluted share compared to earnings per share of 14 cents per diluted share for the prior year's quarter assuming the same 40 percent effective tax rate. This is an increase of 14 percent. Reported net income for the second quarter of 2002 was 4.6 million or 19 cents per diluted share which was reported using a 20 percent effective tax rate.

Cost of revenue for the second quarter of 2003 was 142 million compared to 118.3 million for the same period last year reflecting the increase in the Company's Specialty Management Delivery services and PBM Services including mail.

Gross profit for the quarter increased 11 percent to 19.3 million from 17.4 million in the prior year primarily due to growth in the Company's specialty operations. The gross profit for the second quarter of 2003 was 12.0 percent compared with 12.9 percent for the same period a year ago.

As a result of the loss of TennCare, the Company initiated a review of its cost structure and costs associated with the TennCare business. This review resulted in certain staff reductions and 616,000 in related employee severance payments that were taken in the second quarter.

MIMs growth and strategic direction continue to be driven by our Specialty Management and delivery services and we're still providing these services to our customers in Tennessee and intend to increase our penetration in this market. As Al said, we will continue to pursue PBM and mail service business that fits our strategic direction.

SG&A expenses increased to 12.8 million for the second quarter 2003 from 11.1 for the same period a year ago. This increase is a result of increasing investment in sales resources and expanded management to support the growth of the Company's business and it's severance related expense of $616,947.

Revenues for the first half increased 13 percent to 323.4 million from 287.4 million in the first half of 2002. Specialty Management and Delivery services revenue for the first six months increased 33 percent to 100.4 million from 75.4 million for the same period last year. Revenues from PBM Services including mail grew 5 percent to 223 million in the first half compared to 212 million in the same period in 2002. Operating income for the first half of 2003 was 12 million compared to 12.7 million for the first half of 2002.

Based on a 40 percent effective tax rate net income for the first half was 6.9 million or 31 cents per diluted share compared to earnings per share of 31 cents per diluted share for the prior year's period assuming the same 40 percent effective tax rate. The reported net income for the first half of 2002 was 9.8 million or 41 cents per diluted share which was reported using a 20 percent effective tax rate.

Cost of revenue for the first half of 2003 was 285.5 million compared with 253.9 million for the same period last year, reflecting the increase in the company's Specialty Management and Delivery services and PBM services including mail businesses.

Gross profit for this first six months increased 13 percent to 37.9 million from 33.5 million in the prior year, primarily due to growth in the company's Specialty operations. The gross profit percentage for the first half of 2003 was 11.7 percent compared with 11.6 percent for the same period a year ago.

SG&A expenses increased to 25 million for the first half of 2003 from 21.1 million the same period a year ago.

Moving to the balance sheet inventory remained relatively flat and turns have improved from 38 to 42 turns. Days sales outstanding remained at 44 days as of June 30, 2003.

The Company generated $4.7 million in operating cash flow for the second quarter 2003. There were no outstanding bank borrowings under the Company's credit facility at the end of the quarter. I'm also pleased to announce we've recently renewed our line of credit with Healthcare Finance Group and currently have access to more than 100 million at a beneficial cost.

We will continue to review costs and investments throughout the year as a result of the loss of TennCare and new opportunities and prospects in the specialty arena. Our ability to deliver predictable and strong financial results is based on our sound balance sheet and cash flow characteristics. Our goal is to leverage the Company's excellent cash position and additional revenue gains for our shareholders.

I will now turn call back over to you, Richard.

Thanks Jim. As you heard, we have met our goals for the first half of the year. As Al has said, we have a number of sales initiatives and we are pursuing new opportunities. We expect to achieve analyst consensus estimates for 2003.

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

(CALLER INSTRUCTIONS). Arnie Ursaner of CJS Securities.

Good morning gentlemen. This is actually Will in for Arnie. Can you give us an idea of what your gross margins were for PBM and Specialty in the quarter?

Sure. This is Jim, Will, how are you doing?

Great.

Gross margins for specialty for the second quarter of '03 were 21.9 percent and for mail and PBM they were at 8 percent, which gives you a weighted average of 12 overall.

Perfect thank you. Can you tell me did TennCare contribute any revenue after July in PBM for the quarter?

No, it was effective -- the contract ended effective 6/30 with the exception of Specialty revenue which as Al and Rich both said, does continue in the third and fourth quarters.

Okay. What do you think PBM growth can be now without TennCare?

We are not really going to predict that specific number right now. We are going after that opportunistically. That's probably all I would say right now.

Okay. Can you give us an idea how you want to prioritize your use of free cash flow in terms of buying back shares and acquisitions?

In terms of buying back shares, the Board did approve earlier in the year a $10 million buyback. We've used 5.1 of that so we have 4.9 to go. We currently do not have an active program but it is approved by the Board so opportunistically, we will decide what we do with that and for right now as we have been doing in the past, we are looking to take our cash flow and use it for strategic investments, accumulate it basically for acquisitions and our working capital is pretty much funding the rest of the business pretty adequately.

Great. And finally, should we expect any additional severance payments in Q3 or 4?

We are looking at one or two other small things right now but nothing to announce.

Okay. Thank you very much.

Anne Barlow of Southwest Securities.

Good morning everyone. I've got several questions. First, now that TennCare is gone, can you give us an overview of your PBM book of business, kind of the makeup of the revenues and approximate number of members?

Well, our primary business in the PBM area today is with Santene (ph) Corporation. In terms of total overall lives covered -- do we report on that Rich?

Yes, and basically where we are today is that the PBM business overall is approximately $300 million and the membership that we were reporting on previously was close to nine and without the TennCare in there, TennCare in total was 4 or 500,000 lives, so we still have a very active PBM business. We are continuing to pursue strategic PBM business that absolutely fits with our overall plan and as you know with what is happening on the federal side, we believe we are well positioned to take advantage of anything that may take place with Medicare or any of the other initiatives that has been put out there by the government. But we will be continuing to look at that niche opportunities on the PBM side.

Okay. And Jim, knowing what you know now on TennCare, what you know as far as costs going away and that type of thing, could you give us a little color on where you see, on an absolute dollar amount, the cost of revenues and the SG&A lines going into the third and fourth quarters?

Let me talk Anne about what we did with costs. It was a little over $2 million related directly to TennCare that we took out of the business, which is what generated the $617,000 one time charge. However, that whole 2 plus million is not going to affect a yearly number, it is not going to flow through because we are continuing to invest in additional salespeople and some things like that. So for the year, I would say we probably took a net 700,000 or so out for the year, so you divide that by 4, you get the quarterly amount, but we are continuing to invest in additional salespeople. As Al mentioned, a couple in New Jersey, a couple in Michigan, a couple in New York and continuing to have our face in front of doctors, etc. So it will be net of the restructuring and the additional addbacks, about 700,000 for the year.

Okay, so, I mean, then SG&A as far as the third quarter goes, you would probably say flat on a dollar basis?

Yes, I would say pretty much flat on a dollar basis and from there it will improve by 700,000 divided by four.

What about the cost of revenues?

Cost of revenues will stay roughly about where it is right now. I mean, TennCare had a slightly lower gross margin than some of the other business but you also have to back out some of the rebate sharing we did so there might be a slight improvement but it is not going to be a lot in the short-term.

So cost of revenues where it is now, you mean as a percentage basis?

Yes, as a percentage of revenue, correct.

Okay. And just a couple of other quick ones. On the synergist (ph) guidance, you said you expected 20 percent growth in specialty this year excluding synergist. Is that excluding synergist in the fourth quarter of this year?

Yes. Right now, as Al mentioned in his opening comments, we are looking at alternative means to get the product. We are not exactly sure what's going to happen with that right now so I just wanted to give that number without synergist but I do want to reiterate that with or without synergist we are going with the consensus number of 52 cents for the year.

Okay and two real quick ones, just looking ahead at '04, any color on guidance there? And lastly, just looking at the specialty growth for the quarter, it was 9 percent. That's still low compared to your peer group and I just wondered were there any loss of contracts during the quarter and kind of what is your sales goal as far as how you are going to get to 20 percent growth year-over-year in the third and fourth quarter?

Regarding 04, we have not done any guidance out there. We will be working on that later in the fall. We are just starting our planning process right now for 04 so we don't have anything out there at all.

Regarding specialty, we are 9 percent in the second quarter. Year-to-date, we are 33 percent on specialty. No lost contracts per se at this point in time. Al, do you want to add anything to that at all?

Anne, the specialty business, it's a little bit of a shift in mix in the book of business that we have relative to growth. However, as you can see based on the new plans we are bringing online, the ones I noted in my opening comments, 600,000 lives in the state of Michigan and with the new and continued emphasis on a detailed sales force, we expect to be able to continue to grow at the rates that Jim has projected for the overall year.

Okay great. Thanks.

Grant Jackson with First Analysis.

Good morning gentlemen.

Good morning.

If you could, since specialty is an important component of growth, if you could break out a little bit of your expectations for the infusion type products versus the injectable products? And then on synergist, my understanding from talking to MedImmune (ph) was there were going to be 3 national and 9 regional distributors of synergist. You mentioned you were not selected as one of the three national. Is it possible that you will be one of the 9 regional or if not, I guess my other question is you are looking for ultimate distribution mechanisms, but my understanding was that the reason why MedImmune was growing the way that they were was because they wanted to limit the number of distributors.

High Grant, this is Rich. I will talk about the MedImmune situation. We were not selected as the national and to date, have not been selected as one of the regional distributors as well. We continue to have conversations with them and also to looking to take care of some of our clients that in fact, use that product. But as of now, we do not have a contract at all with MedImmune to distribute their product going forward. So we don't want to say at this point that we are definitely out of it because the conversations do continue but in fact, we do not have a source of supply at the present time which is why Jim and we all have stated what the growth would be without Synergist. And reemphasizing Jim's point, it has an impact on the revenue line. It has no impact at all on gross profit or the bottom line.

In terms of looking at the products that are going to infusion products, we all pay more attention to the disease states where in fact the product is infused whether its zerazyme (ph) or remacaid for Crohn's or (indiscernible) disease and we continue to focus on those disease states and probably will continue even stronger in those disease states of which there are products that are infused where a specialty company is much more in demand as opposed to strictly distribution maybe in some of the other products for HIV and some of the other things that are going on where it's more of a distribution type of situation. We want to be more involved in the management side and we believe many of these disease states and even when you are looking at other classes, for example pulmonary hypertension or even some of the other products like for MS on new products that are coming out that are infusion products, I think that's a great area where we will participate or try to participate going forward. We look -- we still look at our customers being the managed care organization, the patient, the physician and the manufacturer but you have to -- we believe that we are going to have to be more focused in certain disease states going forward and that's what our strategic plan will be.

Just looking at the 20 percent growth, I guess that implies a low growth for the second half of the year. Does the injectables grow faster than infusion or is it the other way around?

Even with -- we consider some of the products I mentioned part of our overall specialty business and no, the answer is that they are going to grow in expectation. I don't think they are going to grow any slower, infusion is going to grow any slower than anything else we have at this point.

Okay thanks.

Jennifer Prudeman of Burgandy Asset Management.

I was actually wondering, I was going to ask a question on the synergist issue which I think you covered. I was wondering -- my second question actually related to the core PBM business now that the TennCare piece has been stripped out and if you could give over the next few quarters, some kind of estimate of what you expect growth to be in that business? What we can expect from the core PBM?

Jennifer, this is Jim Lusk. On the core PBM, that segment also includes mail, we are about 5 percent year-to-date. I would expect roughly that kind of range at this point in time. We really have not given specific guidance on a per se but I expect that kind of momentum to continue. We are going after these things opportunistically. We want to delight the mail and PBM customers that we currently have and make sure we take good care of them and help them take care of their customers but it will be somewhere in that range.

Are we seeing there the high-growth mail piece sort of offsetting the loss in TennCare, TennCare piece going forward?

Yes, we could look at it that way.

Okay. I was wondering if you could shed a little more light on the difference in Q2 versus Q1 on the specialty side, the non versus high double digit growth in Q1 and what are the dynamics at play? You talked about product mix shift impacting that somewhat but what's going on in the marketplace that caused you to under perform the peer group and certainly sequentially under perform?

Part of the issue of Q1 versus Q2 of '03 has to do with the fact that we did have synergist in Q1 and synergist was a piece of the growth that was year-over-year. You have very little synergist in the second calendar quarter, so I think if you look at those together, we were 33 percent through six months which is right in the middle of the range that we gave at the beginning of the year and not having synergist in the fourth quarter would obviously slowdown the overall growth.

So if you are attributing the slowdown to synergist, primarily to synergist, how could so much revenue top line impact have what you referred to as really negligible EPS?

I think we used the word modest at this point in time. We are obviously going to -- right now, we are committing to the guidance that's out there with or without synergist. Obviously it impacts the topline but the margin is much lower than the average margin on specialty, so we will be able to push other products etc. to make up the difference.

Would your -- I know it's not a done deal and this will be my last question but if some of those regional bids, if you guys are a winner of regional contract with synergist, would you expect the margins to substantially improve now that the supply has been constricted by MedImmune?

That is hard to tell because we are not certain why there is the restriction of distribution. You could suppose that that may be the case but that's MedImmune's plan, not ours.

All right, thank you.

Harvey Stober of Goldsmith & Harris.

Thank you. Question is strategic in nature, I guess earlier in the year you were aggressively buying back shares and you recently stopped buying back shares. Is the resumption of that more in issue of price or is there some suspension in an effort to make a strategic decision as to where the Company is going at this juncture and along those lines, you made some comments in the written remarks for the quarter about the focus being on specialty pharmaceuticals but nothing mentioned about mail and PBM and to how much of that will fit into the future. Can you be a little bit more specific at this juncture now that you have been able to mull this over for a couple of months?

Sure. Good morning Harvey.

Good morning.

Regarding the acquisition of shares, the buyback of shares, we will continue to look at that on an opportunistic basis right now that we've been in certain blackout periods but we will continue to look at that on an opportunistic basis and when we look at what the best thing is for the value, we will go ahead and do what we have to do. We still have almost $5 million left which was authorized to go buy back shares and as you know, when we thought it was a good opportunity, we went out in the marketplace and we bought back shares.

Regarding the future of the PBM and mail business, as you can see on the number of scripts which were reported by Al, mail business continues to grow significantly and number of scripts that are out the door continue to grow significantly.

Inside the PBM sector, there are some terrific companies that are out there today, as you know. There are some major companies out there. And we have always taken the approach that we are going to be more a niche player where we believe that we can provide flexible services to managed care organizations or potential cash card (ph) customers where we could have a much greater impact on them with very tight and restricted formularies. We will continue to pursue PBM business and the game plan currently is to continue with the PBM business and the mail business as part of the strategic direction of this company.

Will it also be the focus of your acquisition strategy or is it just a maintenance type of situation?

Well, it's more than maintenance because we do have people out there trying to grow it organically but it is not a focus of our acquisition strategy. The focus of our acquisition strategy is clearly in the specialty management and distribution area.

Okay. A couple of other short questions. In terms of SG&A, is there a run rate of where you are looking to get down to once this metamorphosis is completed post TennCare?

Harvey, I reiterate what what I was kind of answering Anne's question that we did manage to take out more than $2 million of expense related to TennCare. We are however, putting some additional salespeople on the street. That would result in about a net $700,000 per year reduction from where we are right now, so you can kind of divide that by four starting in the fourth quarter so it would be a couple of hundred thousand a quarter down from where it is right now but that is about the level given the sales basis we have right now where we really believe -- Al and the team really believe putting additional salespeople on the street is important, especially in front of physicians.

So Harvey, if you take the numbers of the 12.7 million of SG&A for the quarter and back out the 616,000 which are the severance payments and then pull out maybe another 175,000 to 200,000 on top of that, that is pretty much going to be the run rate.

Okay so that is about 11.9. And finally now that TennCare is at least the PBM side is on the way out, what will be done regarding the lobbying fees that were in part being paid to secure that business?

Well, the lobbying fees were not just for Tennessee but it is overall fees paid to consultant, also a board member, not just Tennessee but other areas, other states. That contract I believe is for another year and Harold Ford (ph) was helpful in securing the ongoing specialty business so we will assess those fees and that contract as we do with all of our other contracts and look at the cost benefit, the benefit relationship of retaining or not that relationship.

So it expires year end '03 or year end '04.

I actually think it is September --

About 15 months or so from now.

I think it is September of next year.

September '04?

Right.

Okay, thank you very much.

You are quite welcome.

Grant Jackson of First Analysis.

With the focus on a local presence there for the infusion part of the business, could you give some quantification around your geographic concentration? I know there is a lot in New York and that whole area. Could you provide some details around that?

Grant, clearly the most economical form of geographical expansion would be the continuing of Northeast and down the Eastern Seaboard although we do have a substantial concentration in the Midwest so I would say anything Midwest to East would be a more concentrated area for us. In addition to that obviously, Tennessee, where we have a substantial opportunity. We do have contracts outside those geographic areas which are easy enough for us to service but our major emphasis would be in the areas I just suggested.

Grant, understand that when we talk about some of the infusion business and some of those products, whether it's zerazine (ph) or remacaid (ph) or some of the other ones, that these are products that are being sent either to the gastroenterologist or being sent to the hematologist, where we may not be the ones infusing it, so I don't want you to feel that if you are thinking of this as more of the edema model, it's not. It's more infusible type products that are going to physicians offices for the infusion.

I was thinking along the edema lines.

I thought that's where you were going. We are also looking for that expansion but we seem to be doing more of the concentration in those areas where the disease state requires more intervention.

So it's more of a wholesale model than a --

It goes beyond wholesale because we are also getting more involved with the patient and the physician so if it was strictly a distribution model, that's one thing but this is not strictly a distribution model.

Could you then just characterize the -- how you see your specialty business evolving from if you are looking at it as the typical specialty care management (indiscernible) you send out from the Columbus facility that you always have in the past, things like a synergist even if that's not a good example going forward, but then you've got more of a local business in ADIMA, some of the chemo drugs being delivered wholesale, and then again some of the newer infusion -- infused drugs that you would be sending out to these physician offices, your view as to how that mix might evolve over time?

Sure. I will tell you what we are looking at and what we are working on currently. First of all, when we look at the disease states, part of our direction is to work on behalf of the managed care organizations and look at what their needs are. When we look at the disease states, what we are really looking to do is really be a cost-effective player for the managed care organization and help them with the compliance programs, getting the lab results on those disease states which we need to help better manage the patient and better control the costs. We believe strongly in a local presence in the densely populated areas. As Al has mentioned earlier, we are concentrating in those areas with the detail sales organization where in fact we have contracts. So in New York where we have significant contracts, we are adding salespeople on the ground to become more involved with physicians offices, offer education -- educational material to the physicians on protocols, working with the manufacturers on certain of their drugs and disease states for better education of not the patient, as well as the physicians office. And in fact, getting the product there and the easiest part is getting the product there on a timely basis but I believe it is building relationships on a local level which is meaningful to us and I believe it's meaningful to the local community.

So where we are looking at geographically is clearly in the New York tri-state area which is the most densely populated area there is to be. We continue to experience significant growth in this area. We are also looking down in the state of Tennessee and we were down there and just added a number of salespeople down there because we do have the ability to continue to work with not just the managed care organizations that we had previously, but we now have the ability to work with the physician community and get reimbursed and obviously key is being on the panels, is getting reimbursed from any of the patients in any of the managed care organizations that are down there today. Since we have built up relationships and are in fact -- we have hired people, salespeople and people who could help us in the physician community down in Tennessee, we believe that would be a great opportunity for us for growth.

When you look into the Michigan marketplace, the same thing has happened. We picked up two significant contracts in the state of Michigan and we believe by putting people on the ground in Michigan who have a local presence who know the local community who know the physicians, that the referral sources would be easier, so our strategy first is really to get on the panels to make sure we get reimbursed and to work with the physician community and then I believe that we have tremendous reporting capabilities in order to help the managed care organizations do a much better job of managing their patient, while at the same time helping to reduce costs.

So we clearly want to participate on a local level. We want to participate. We believe that information and education are going to be value added services and we believe those are going to be more important on some of the more severe disease states and we believe those will continue to have the highest margins.

Looking at -- I recognize you are trying to serve all of your managed care needs around the specialty benefit --

That's not going to be true. I think what we have to do is originally when we broke into this, we were willing to take on any disease state in order to break in and get our foot in the door. With quite frankly, some very low margin disease states like a synergist (ph) in order to start moving moving other disease state in when we prove our worth for example, (indiscernible) disease and I think we have experienced that. I think the numbers indicate that our initial strategy of getting in there with certain disease states and then following up with disease states that have a significantly higher margin, we have been able to accomplish. I think going forward, you may see us doing more and more in those disease states that are higher margin items and we may not take on in the future any disease state, so there may be much more of a concentration and more of a clinical concentration in some of those disease states that require much more management intervention.

So you would be looking for more of a carve out approach for certain disease states rather than a one-stop shop --

Yes, that's exactly right and I think that's an alternative we are looking at currently.

Arnie Ursaner of CJS Securities.

Hello Rich, good morning.

Hi Arnie, how are you?

Good. The question to ask you, are there any other specialty drugs where you are at risk of losing access to the product, that you are in any discussions on at the moment?

No, not that we are aware of.

Going back to the broader question of where we are in the specialty growth market, the nine percent growth you are basically, you said for quite a while that you are in the infancy of educating the managed care organization about managing their specialty costs. Again, can you highlight why after your sales force buildup and being at such an early stage, you are able only to show nine percent growth?

I think when we look at our organic -- there's one significant part that we did an acquisition a year ago as everyone is aware of, and there were certain businesses as part of that acquisition which was more of a wholesale type of related businesses that we decided over a period of time did not fit into our strategic direction. When, I believe and we are talking about Vitality, I believe that the issues related to Vitality we have in fact brought in some terrific people to run that business. Mark Wener (ph) has been moved into new business development role. There was a transition going on for a while. There have been some changes made at Vitality which strengthens that business and I think when -- and I hate breaking out pieces and I am not going to give you any numbers there, but I think when you look at Vitality by itself, you would see something that it was actually probably somewhat of a decline or less than in 2003 the revenues were less than the same period in 2002. When you look at our BioScrip business, you would see significant growth in that business, so I think we had a hiccup on the Vitality side which nets us to the nine percent and I believe at this point, that is behind us. I am actually looking to Al and Jim but I believe clearly, that is behind us. I think that at this point, Vitality's base is solid. There are some terrific people in there. We are adding people on the ground in New York, so I think going forward, I think our growth rate will be what Jim has estimated.

Question for Al. I know you put in a different type of compensation base system for yourself for your salesforce in January. Can you give us a feel for how that is working and what sort of turn overrates you have had perhaps relative to when you started it in January?

The commission piece is not related to the turn over rate but we have had a turn over in sales staff I believe total year-to-date is we've turned over 4 individuals. Coming back to the commission side, the specific commission side or programs we put into place, we believe are being effective. They are specific to individuals improving within the managed care organizations, a number of disease states that we are able to sell them which I believe has been discussed before and we have also commissioned the individuals specifically on signing a contract that is to our satisfaction, on the gross profit side. We think those are working.

As it relates to the salesforce itself, we went through a process of analyzing the people that we had and understanding what qualities we needed. I believe our conversation was we would have people that are not going to make the cut and as a result, we've turned over the 4 individuals that I am speaking about because we just felt that we needed to improve the quality of our staff. So I think we are making good progress on the sell side.

A follow-up question for Rich, I know you had some major contracts you had announced over the last year or so with larger organizations and you're hoping to get a toe in the door and expand those contracts. Can you give us a feel for how any of that may be going?

Sure. I think overall, not just service contracts but I think overall in what we have been experiencing that -- and a lot of that has been for the BioScrip side. We have seen continued progress overall. We've done a number of things internally where we now analyze each account, the prevalence of each disease state that we have. We also go ahead and see based on the percentages where we have holes, where we don't have holes and we work with managed care organizations to fill those in so I think as everyday goes on, we get a little more sophisticated in what we're doing with Al's team, that we are identifying those opportunities within the contracts we do have and we will continue to hopefully increase the number of lives that in fact, we are filling prescriptions for and managing. Yes, I think overall we are right on track I think when all of us collectively feel real good about the first half of the year and the prospects for the future.

Okay thank you.

Anne Barlow of Southwest Securities.

Rich, a follow-up to your discussion on the PBM overview. You said you were at -- the PBM was about a $300 million business. I assume that's an annual run rate so we are looking at approximately 75 million a quarter?

That's true.

Okay, we spent a lot of time talking about the salesforce and everything on the specialty side. I wanted to look at the PBM side and get a handle as to what all is going on there. Obviously this is a selling season time right now and looking ahead to '04, so we have a little detail on what's going on on the PBM side?

Sure. Number one is that and then I will let Al pick it up since he is responsible for it, one is that we have renewed whatever contracts have come up recently. We are in fact meeting and continue to work on our piece (ph) on the PBM sector but -- and we are very selective in what we are looking at. If it's a million or 2 million-member group where we have our competitors in there and it doesn't give us an opportunity for specialty as an example, we will pass on those today. We will look for the opportunities where the PBM or potential new PBM contract will give us the opportunity for our Specialty Management distribution business. However, we're still significantly growing our cash (indiscernible) business and different areas of the Company continue to perform very well on the PBM side. Al, do you want to add?

We also add by virtue of the plans we service, the plans are growing so we add lives via the plans that are already in-house and as well, as Rich pointed out, we tend to be selective so as to have our salesforce working on the PBM side but also keeping in mind the absolute necessity of our desire to fulfill the mission of providing specialty product. We've added a number of modest plans. I don't think we are going to be extremely successful at getting multi-million life plans relative to vis a vis the competition, but we have added a number of plans in the 2 to 15,000 life range over the course of the last quarter. We've had seven new plans come online for the quarter, not big plans but they give us great opportunities and we will continue looking for those opportunities. We've also added additional mail contracts over the past quarter. We have four new mail contracts that came on line. Each of those give us an opportunity to look further into the specialty side of the business.

All right, thanks.

At this time, there are no further questions in queue. Please continue.

We would like to thank everyone for joining us. Again, we feel very excited about the quarter and the past six months and we look forward to the next six months. Thank you very much for sitting in this morning.

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