Option Care Health Inc (OPCH) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the MIM Corporation's third quarter 2003 earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. If do you need assistance during the call, please press star and then zero and an operator will assist you. And as a reminder, this conference call is being recorded. I will now turn the conference call over to your host, MIM Corporation Investor Relations Representative, Ms. Rachel Levine. Please go ahead.

Thank you for joining us to discuss MIM's third quarter 2003 earnings. If you do not have a copy of our press release that went our earlier this morning, please call the Anne McBride 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 website 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 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 and 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 the quarter and pass the call to Jim Lusk, our Chief Financial Officer, to discuss the company's financials in detail. 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, everyone. In addition to Jim, Al Carfora is also with us. Al is our President and Chief Operating Officer . The press release issued this morning contains more detailed information on the operations of MIM than ever before. During today's call Jim will walk you through these details. The third quarter demonstrates the viability of MIM following the loss of TennCare PBM business and the loss of wholesale oncology business and related margin at out of our Vitality distribution center on Long Island. With the exception of the Long Island distribution center, our special key business grew 33% over last year. This momentum continues.

We have picked up three major contracts, two in the Midwest and one in New York. We had to solidify our foundation through diversification of product lines and the strengthening of our management team. Our revenue run rate today is approximately $520 million. Following TennCare, we responded quickly by eliminating costs and related expenses. We reallocated assets, consolidated customer service activities in our Columbus facility to improve efficiencies. We continue to make vital investments in our sales organization to further strengthen our market position in the Midwest and the Northeast. In fact, we have added over $1.5 million in related selling expenses this past year.

We are a [inaudible] Specialty Management company with complementary PBM services. Specialty is our foundation and we have seen continued strength in immunosuppression, hepatitis C, rheumatoid arthritis, multiple sclerosis and growth hormone therapies. PBM and mail services also continue to add to our revenue's base despite the loss of TennCare PBM. I'll now turn the call over to Jim to review the financial details of the quarter and year to date. Jim?

Thank you, Rich. Good morning, everyone. Before we dive into the specifics of the quarter and the associated special items, I'd like to review some important highlights. First, we did achieve a third quarter EPS of 8 cents excluding the TennCare restructuring charges which are now complete. We did not meet expectations, however. Our EPS was significant considering the $6.4 million decline of Vitality, our Long Island, New York, distribution center, which we will describe in greater detail. If we assume the 2003 40% effective tax rate and excluded the results from the TennCare PBM business for third quarter of 2002, EPS would have been 8 cents as well the previous year.

Secondly, revenue growth overall increased 25 percent excluding the TennCare PBM business, and specialty revenues grew 33% excluding the decline in our Long Island distribution center. Our balance sheet remains strong with no outstanding bank borrowings as of September 30th. Revenues for the third quarter decreased to $129.6 million from $138.5 million for the third quarter of 2002 primarily due to the termination of TennCare. Excluding the TennCare business, third quarter revenues increased 25%. Third quarter Specialty Management and delivery services revenues increased to $44.6 million from $43.7 million for the same period last year. This increase includes a $6.4 million decline in revenues from the Long Island distribution center over the prior year as a result of the reduction in the wholesale oncology business and the loss of a major payer.

Physicians are feeling significant pressure from the managed care organizations regarding oncology reimbursements which, in turn, are putting significant pressure on doctors to reduce their acquisition costs of that oncology product. This has led, for example, to a number of payers contracting for oncology drugs on a national basis effectively reducing the wholesale cost of the product. We are finding it difficult to maintain our wholesale customers as a result of the current price demands. This dynamic has an impact at our Long Island facility only.

Excluding the results of that Long Island, New York, distribution center, the Specialty Management delivery service services segment grew 33% quarter over quarter as I noted earlier. Third quarter PBM services revenue decreased to $85 million from $94.8 million from the same period last year. Excluding the TennCare PBM business, revenues from PBM services grew 41% to $85 million in the current quarter, an increase of almost $25 million over the same period last year.

Operating income for the third quarter was $2.3 million compared to $5.8 million for the third quarter of 2002. Operating income for the third quarter of 2003 includes a restructuring charge of approximately $973,000 for employee and consultant-related severance and termination payment. Excluding the restructuring charge for 2003, and the results of the TennCare business for 2002, operating income remained relatively flat at $3.3 million. These results include our continued investment in sales and marketing people. In addition to the restructuring charge noted above, third quarter operating income includes approximately $627,000 of nonrecurring consulting and recruiting expenses. These expenses are offset by a reversal of approximately $600,000 related to bonus compensation. As a result of falling below our aggressive internal targets, we made a decision not to pay bonuses for 2003.

Based on a 40% effective tax rate, third quarter net income was $1.3 million, or 6 cents per diluted share. Excluding restructuring items, net income for the third quarter of 2003 was $1.8 million, or 8 cents per diluted share. Net income for the third quarter 2002 was $4.5 million, or 19 cents per diluted share, which was reported using a 20% effective tax rate. Applying a 40% effective tax rate and excluding the results of the TennCare business, third quarter 2002 earnings per share would have been 8 cents per diluted share. Gross profit for the quarter was $15.4 million, or 11.9% consistent with expectation. Excluding the TennCare PBM business, gross profit for the third quarter of 2002 was $15.4 million or 14.8%.

SG&A expenses increased to $12.6 million for the third quarter of 2003 from $11.7 million for the same period a year ago, including the restructuring charge. Included in the third quarter is approximately $400,000 of additional sales and marketing investment, that's the amount just for the quarter. The specific restructuring initiative related to the loss of TennCare business has now been completed. We continue to review our cost structure and may take additional action to further reduce expenses.

Now to review the numbers for nine months. Revenues for the nine months increased 6% to $453 million from $429.9 million in the nine months of 2002. Excluding the TennCare business, revenues for the nine months increased 20% over the prior year's period. Specialty Management and delivery services revenues for the first nine months increased 22% to $145 million from $119.1 million for the same period last year. The nine-month performance includes a $10.9 million decline at the Long Island distribution center. Revenues from PBM service grew to $308 million in the nine months compared to $306.8 million in the same period in 2002. Excluding the TennCare business, revenues for the PBM services grew 19% in the current year.

Operating income for the nine months in 2003 was $14.3 million compared to $18.5 million for the same period in 2002, excluding the TennCare related restructuring charges of $1.6 million for 2003 and the TennCare operating results for 2002 and 2003. Operating income for the nine months was $10.3 million compared to $9.4 million for the same period 2002. Net income for the nine months was $8.2 million, or 36 cents per diluted share based on a 40% effective tax rate. Excluding TennCare restructuring items, net income for the nine months was $5.8 million, or 26 cents per diluted share. Net income for the period in 2002 was $14.3 million, or 60 cents per diluted share, which was reported using a 20% effective tax rate. Applying the 2003 40% effective tax rate and excluding the results of TennCare business, nine-month 2002 earnings per share would have been 22 cents.

Gross profit for the nine months increased to $53.3 million, or 11.8%, from $51.4 million, or 12.1% the prior year. Excluding the TennCare business, gross profit for the period 2003 was $47.7 million, or 12.4%, compared to $42.3 million, or 13.2% for 2002. Nine-month SG&A expenses increased to $37.6 from $32.8 million for the same period a year ago. SG&A expenses for the 2003 nine-month period, including restructuring-related charges of $1.6 million and the nonrecurring expenses and compensation reversal I discussed before. Including the restructuring charges, nine months, excuse me -- excluding the restructuring charges, nine months SG&A expenses were $36 million.

Moving to the balance sheet, inventory turns remained strong for the quarter at 41. Day sales outstanding increased to 51 days at September 30, 2003, from 44 days at June 30th. This increase is primarily related to the loss of the TennCare business. The company generated $7.3 million in operating cash for the nine months. For the third quarter, the company had negative cash from operations of $2.9 million due to a $12.6 million reduction in claims payable primarily related to the TennCare PBM business. A rebate payment related to TennCare is expected in the fourth quarter with an expected return to positive cash flows in the first quarter of 2004. There were no outstanding bank borrowings under the company's credit facility as of September 30, 2003.

Overall, the quarter showed continued growth in our specialty business despite our challenges at the Long Island facility. We are making changes in both approach and focus at that distribution center which, we believe, will mitigate further erosion of the business in 2004 and create a stable platform for future growth. Given the challenges noted above, we are forecasting a 7- to 9-cent range of earnings per share for the fourth quarter of 2003. I will now turn the call back over to you, Rich.

Thanks, Jim. The dynamics of our industry and MIM have not changed. The specialty business is estimated between $12 and $15 billion today. Growth is estimated at 15%. As a [inaudible] specialty company, we help control costs for managed care while improving the quality of life of the patients. 70% of biotech products on the market today were approved in just the last seven years. There are 371 products in clinical trials covering 200 disease states estimated at $20 billion. The introduction of new drugs and indications and the need for individualized delivery and patient care remains strong.

We have a solid core business and are aggressively pursuing new expansion opportunities through acquisition and service relationships. Our regional strength and ability to pursue niche opportunities is as robust as ever. We have an enhanced detail sales force in place and with the regional approach we look forward to the future. With that we will open the lines to answer any questions you may have.

Very good. Ladies and gentlemen, at this time if you have a question, please press star 1 on your touch-tone phone. You'll hear a tone indicating you have been placed in queue. You may remove yourself from queue by pressing the pound key. If you are on a speaker phone, please pick up the handset before pressing the numbers. Once again for questions, please press start 1 at this time. First question in the queue is from the line of Arnold Ursaner from CJS Securities. Please go ahead, sir.

Good morning, Rich and Jim.

Good morning, Art.

A couple of questions I have. One, if you could kind of give us a little bit of a feel for -- your revenues from PBM services grew 41% without TennCare. Can you give us a little feel for where that growth is coming from?

Sure. I will do some of the high-level stuff and Al will probably fill in some more details. Although it's not an overall focus for us as a business, we are taking business opportunistically in trying to delight our customers; and we are having deeper penetration in a number of our existing contracts. And, Al, maybe you want to add some more color to that overall

Arnie, we've had a marked increase in the mail business year over year. Our mail business run rate is about $125 million on a current run rate basis, which shows a marked improvement from prior year. Our penetration within the accounts have been substantial. One of our accounts set out a goal with the beginning of this year for us to achieve a 12% mail ratio against total drugs spent for them. And just this month we reported 11.9% penetration rate. We've had a 41% overall increase in mail sales year to date. Additionally, we have had a substantial shift in the business in that we've been able to accumulate a generic substitution rate for the mail business of approximately 40%, which we consider to be quite substantial. Does that answer your question, Arnie?

That helps, yes. Thanks. On a margin question, Jim, even after adjusting various items which you've done, your overall margins continue to soften despite growth in what I normally would have viewed as higher market in business, specialty and mail? Can you comment on what's holding back your margins here?

Yeah. First of all, overall, Arnie, when had expected margins in the 11 to 12 kind of range for the year, which we are within that range. Our infusion business has continued to grow very nicely. It's not growing quiet at the rate of the overall injection business, which is a piece. And also the bigger issue for the quarter itself is the issue of our Vitality, our Long Island distribution center, where margins have dropped quite a bit year over year. But overall, we are within the range of what we had laid out at the beginning of the year, 11 to 12. What I'd like to do, maybe to answer your questions a little bit deeper, Arnie, is turn it over to Al to explain a little more detail about what's happening in the Long Island distribution business, which I think will probably be the last part of your question.

Yeah, Arnie. Let me give you a quick review of the Long Island distribution facility. For the current nine-month period sales were approximately $47 million, compared to $58 million for the prior year, representing almost an $11 million decline on a year-to-date basis. The gross profit margin for the current nine-month period was slightly over 10% compared to approximately 20% for the same period last year. The 10 percentage point difference in gross margin, taken against the $47 million in sales, represents about $4.7 million, decline in gross profit dollars. Additionally, the $11 million erosion of business, with its implied gross margin of last year of 20%, represents a further gross margin dollar decrease of $2.2 million for a total gross margin decrease of $6.9 million on a year-over-year basis.

The falloff in sales and margins are the result of a few issues. A substantial portion of our Long Island distribution center sales is in the oncology products, more specifically, they are in the wholesale of oncology products, which carried a high gross profit margin. Not long after acquiring the facility one of the our large wholesale customers went bankrupt. Obviously, we lost that ongoing business. Additionally, industry-wide, payers have been wrestling with getting high oncology costs under control. To that end some payers have signed national supply agreements with specialty providers at reduced costs. In one specific instance, we were excluded from the oncology payer [inaudible] for a payer with which we had provided significant sales in the past.

Reduced reimbursements for oncology products to oncology physicians have also pressured our margins as they have pushed us hard in their attempt to maintain their own profitability. Unlike us, those companies that are fully dedicated to the wholesale of oncology products, and the now inherent margins, benefit from these changes. Addressing these conditions we have shifted our approach and focus at this facility. Our approach has been to create a more conventional specialty pharmacy selling across all categories of therapies.

We have emphasized our product offering to include hepatitis C, rheumatoid arthritis, multiple sclerosis and other specialties. We have modified our focus by establishing a five-member detailed physician sales team that concentrates within the geographic region. Their role is to call on those physicians who specialize in the therapies we service. This shift and approach and focus has stabilized the business level at the facility and provided us with a platform going forward. The current business is generating approximately 10% gross profit margin consistent with the business. I hope that answers your question, Arnie.

Arnie, let me say two more things that kind of tie up some of Al's comments. Number 1 is that with the margins in our New York, our Long Island distribution center coming down, they are coming down to about 11%, which is in line with the overall margins in our injectable business. So they have come down in line after the wholesale oncology issue that Al talked about. That's Number 1. Number 2 is that we had planned on these margins coming down year over year. In the third quarter the business itself went away a little bit faster than we had originally anticipated; but our overall 11% to 12% margin for the overall business had anticipated some of this oncology business, which just accelerated faster in the third quarter than we had anticipated.

Okay. Thank you.

Next question is from Grant Jackson from First Analysis. Please go ahead.

Good morning, gentlemen.

Good morning, Grant.

You talked about three major contracts, two in the Midwest, one in, I believe, in the New York area. Could you expand a little bit on that in terms of what products you are going to be supplying to those customers, whether the margins are consistent with the rest of the business?

Yeah, Grant, this is Al. Relative to the Michigan area, we picked up a contract there that has 600,000 lives under contract which allows us the ability to provide all specialty products on an exclusive basis with certain minor exceptions relative to the infusion side of that business. Additionally, we picked up a second contract there on a nonexclusive basis that represents approximately 200,000 lives. In order to support that market, we have started a detailed physician sales team there which is calling on physicians that cater to the specialties that we service. In the New York market environment we've become a preferred provider on the payer panel of a major New York health plan that permits us to distributes all specialty product on a nonexclusive basis, which was part of our impetus to increase the amount of physician detailed sales personnel available for the New York market.

And on a mix adjusted basis, are the margins consistent with the rest of your specialty business?

Yes, they are, Grant.

Great. And if you could just expand on the specialty margins. Once you take out Vitality it looks like, I guess, specialty margins are pretty comparable to what they were in the previous quarter. Is that accurate?

Yes, it is.

This is Al again. Can I make one correction? On the New York marketplace we have became part of the payer panel, we have been accepted on the payer panel for a a group of 1.6 million lives.

Thanks. And were you going to -- at what point would you expect to give 2004 yearly guidance?

Grant, we are working through that plan right now; and it will be available probably some time in late December, early January, typically when we are done, depending on board meetings, et cetera. Probably more like December.

Thanks.

Next question is from the line of Anne Barlow from Southwest Securities. Please go ahead.

Yeah, several question. First, going back to the Long Island situation. If I'm hearing you right then we had two things go -- cause the problems. One was the loss of a payer due to a bankruptcy, and the rest was loss of market share to larger players or -- is that correct?

Yes, that is correct, Anne. One was that we were excluded from a panel for a payer that we had been providing service to in the past which, obviously, eliminates our ability to sell through that. And the other is a wholesale company, that we sold to in the past, went bankrupt. We can no longer compete in the wholesale part of this business. The margins are being compressed to the point where they are not practical for us because the market is being driven by price only.

So your focus on oncology going forward will be strictly mail order?

Mail order for the tabs. We still have a substantial mixing business in that we compound product and deliver it to local hospitals and to local physician groups. And, as a result of requiring that mixing specialty, we have the ability to fulfill contracts that we have with certain entities.

And you were excluded from the other panel because of price competition?

That's correct. The thought process of the payers is to establish an exclusive network and force the physicians to either bill at that network rate or to purchase their drugs from those exclusive suppliers.

And I think just to make sure we are all clear on this, we are moving away from the wholesale piece of the oncology business because given the pressure that payers have on doctors when doctors are buying from wholesalers, the prices are getting down to like all wholesaler margins right now, which are very low single digits, so that just does not make business sense for us. We are staying and do have contracts on the retail side of the business where it's customer specific, and that's the area where we are seeing the margins basically look like the rest of the margins of our business. The wholesale piece that we are getting out of because of margins are just being driven so low.

A couple other quick questions. Just looking out ahead, are you seeing or are you expecting new PBM contracts to be on board in January for '04? And, secondly, the TennCare specialty business, that's an August of '04 contract renewal time?

There is no contract on the TennCare specialty business, Anne. The business for TennCare is controlled through the PBM, one single PBM. As you may recall from our last conference call, we, along with other companies, maintain the ability to sell specialty product into the Tennessee marketplace. And if we look at the TennCare specialty business today, we are running at approximately $4 million more than we did over the prior year. On the specific quarter, I believe that number was just under $1 million over the prior last year quarter.

Okay. What about new PBM contracts for '04?

Well, we continue to work for -- we continue to have our salespeople work in the PBM arena. And we have just picked up a new contract in Ohio for PBM, and will continue to push our PBM business. We believe that there's still a considerable amount of opportunity there.

And just going back to you, Jim, really quickly on the restructuring charge. Could you give a little bit of detail on where the dollars fall?

Sure. There's really two pieces of the restructuring here in the third quarter, which was $973,000. One piece was the buyout of consultant contract that we had with somebody who was helping us in Tennessee. That is no longer going to go forward since Tennessee is not going forward. That's about a third of the charge. And the other two-thirds are basically people. I would expect out of this charge that we get an annual savings next year in SG&A of about $1 million for the year, which would be on top what have we did last quarter. Last quarter you will recall that we had a smaller restructuring of about $600,000 which we said would save about 700. So both combined should save us next year expenses of $1.7 million for the year, and that is net of the additional salespeople we've added and the additional marketing people we've added. So that is a net savings just coming out of these two restructurings for next year on top of the incremental investments we've done in sales and marketing.

Thanks.

Your next question is from the line of Jerry Trupple (ph) from Wheaton (ph) Capital Management. Please go ahead.

Hi, how are you doing?

Good. How are you doing, Jerry?

A couple questions here. When will the decline in the LI business anniversary -- in other words, when is that business going to start to show growth again?

Well, we still have another quarter of comparison for the oncology business; however, the current state of business is stable, and we expect at the current pace to be able to maintain the level and growth from that level of business.

So you have another quarter of --

Yeah, Jerry, when you look at it on a sequential quarter basis, which I think is becoming more meaningful for us, as compared to looking back over prior years because of a lot of what's going on, I think what you will find specifically at the Long Island facility is that that business is now stable and poised for growth going forward. But we still -- there's still a little bit of oncology business there, wholesale oncology business. But for the most part that business is stable, so the declines that we've seen in the past, I think going forward will you see increases there. We've added salespeople to the New York area. We've picked up new contracts. And the thing that we don't see on the reporting side but the acquisition of that facility, which took place a year and a half ago, has absolutely helped the other distribution facilities both in New Jersey as well as the one in Columbus, Ohio. So we are specifically targeting this one because of the wholesale oncology business, which is totally different than any other business that we have. So when you look at overall and the Long Island facility, that is the one that has the issue because it is unique because of the wholesale oncology business. But it is stable.

And just to clarify on the cash flow, you said this quarter was negative by some odd million dollars.

Correct.

Did I hear you say that's because of TennCare?

Yes. Basically the way the cash flows work is that you have things called "claims payable," which is what you owe to the pharmacies for reimbursement, basically. When an accounts payable goes down -- we owe them less since we stopped doing business with them -- when accounts payable goes down you are going to have a negative hit, and that was offset by the accounts receivable going in the other direction. So basically, you had less claims to pay your local pharmacies and, therefore, you had a negative impact. So that's basically --

Yes. So basically, it was really a timing issue --

Right.

-- because historically you collected the money up front then paid the pharmacist later on. And when that business disappeared in July, effectively what happened is that you ended up having to pay the pharmacist for money that you received five, six, seven years ago. So it was a total accumulation from the beginning of the time when you first got paid to the final payments. And, in addition to the claims payable, you also had the rebate situation. So it's a combination of both -- when you originally get it you have your up-front positive cash, which actually started taking place in '94, and then when the contract was terminated you ended up paying back what you got up front.

I understand. And you said you would be cash flow positive in the fourth quarter or the first quarter --

Jerry, we have one more major rebate payment that we owe to the people that were part of the TennCare umbrella. That payment will be made in late December and that will most likely drive us negative in Q4 from an operating cash perspective, but it's the same issue as Rich Friedman just mentioned that at the very beginning we had this relationship. You had a positive. Now you kind of catch up [inaudible] to date and you have a negative, but that payment will be made in the end of December and will bring us back to normal operating cash in the first quarter of '04.

Okay, that's clear. Thanks.

Next question is from the line of Harvey Stober from Goldsmith & Harriss. Please go ahead.

Yes, good morning.

Morning.

Can you give us some color on the residual TennCare payment for the fourth quarter?

The discussion we just had, Harvey, on the rebates. I was kind of netting the cash I am going to get in versus what I owe them, so it's the net of the two that's going to drive us slightly negative in operating cash for Q4. I was talking in net numbers. Net of what they owe me versus what I owe them. Yeah, a it's a couple million dollars. It's about $5 million net thereabouts.

Okay. Thank you.

And we have a follow-up question from Grant Jackson from First Analysis. Please go ahead.

Just a followup on the sales season for 2004. If you could talk -- you've spoken about three contracts that you expect to be getting for specialty as well as you had one for PBM. Can you just talk about what you've seen in the sales season overall as to how certain specialty players maybe -- maybe managed care people are cutting the number of providers that they use? And just talk about where you look to be entering 2004 relative to where you are ending 2003 from a [inaudible] perspective and what that means for revenue?

Well, first f all, Grant, in terms of the contracts that you just referenced, we have those contracts signed currently; so they are starting to accrue sales as we speak. The difficulty, of course, is penetrating into those contracts with the exclusion, of course, of the exclusive agreement that we have. That's a challenge that we have is to make penetration into the existing accounts. We continue, of course, to market ourselves to the major MCOs. We find it a slow process. The agreements that we are discussing right now we signed a few months ago and implementation literally just took effect. So there is a delay in terms of timing of realization of sales against actually signing contracts.

We currently, for our specialty business, have approximately 20 million lives that we have the ability to sell specialty products to; and we continue to work towards penetrating that. Going forward we will emphasize our efforts on the major payers, demonstrate the value that we bring them, and hopefully have the opportunity to secure additional contracts. There isn't a day that goes by that we don't go through various opportunities within the payer community to provide some form of service and clearly compete in the marketplace.

Grant, also just let me -- one other factor. One, is that we probably have the best backlog ever in terms of what is going on with our sales organization than ever before. Number Two is that we now have access to lives of over 20 million in the specialty arena. And it's a combination of we continue to pick up contracts. But understand that a major focus of ours is also the detail sales organization within the local geographic area where we are going after the specialists there. And I think what is satisfying to see and, again, I hate to do this but moving the oncology aside and looking at the rest of the our product line, you continue to see tremendous expansion of the organic side of our businesses, which is where we've had the focus on the detail sales organization. In fact, when you look it's pretty close to a 60% increase in business year over year. When you are looking at that model which is going after, getting the contract and then focusing on the physician practices of that specialty.

So with having the access -- by being a [inaudible]-type of company as opposed to a manufacturer center, what we are interested in doing is going into managed care organizations and then proving the cost containment issue with all the new products that are coming out and what you are doing there. And I think our model and just demonstrated by the ability of us growing is absolutely on track. So having access, increasing penetration rates, the detail sales organization and the continued picking up not only of large contracts but of small contracts I think bodes very well for MIM.

And just as a followup, do you have an estimate that you want to share with regards to the revenue opportunity from the $600,000 -- I'm sorry, 600,000 live exclusive contract in Michigan? And, then, were there any major contracts that you lost going into 2004 or recently on specialty?

The answer to the second part is no, we haven't lost anything. And in terms of the expectations, we always get into trouble when we try to go ahead and forecast expectations. When we talk about -- when you add up all the lives that we have just picked up, which was 600 on one, 200 on the other, and 1.6 on the third, effectively you're looking at 2.5 million lives. The incidents or the prevalence of the disease states are the same, and we are managing by prevalence of the disease states these days. So as we go into each one, what we are looking to do is go ahead and say, how many patients are there, and go ahead and do that. But I don't think it's going to be fair at this point to put out any type of number out there. I think what we have to do is continue to operate our business, continue to make the penetration rates and to prove our worth and I believe that the numbers will be there. But putting out any number today is just going to be wrong.

Fair enough. Thanks.

A follow-up question from the line of Grant [sic] Ursaner from CJS Securities. Please go ahead.

Well, it's actually Arnie Ursaner. A couple questions, if I can. Can you give us your Capex number or expectation for Q4 -- Q3 actually if you have it, Q4 expected?

You always ask the one question I don't have off the top of my head. It was a couple hundred thousand in Q3. It was very small, the Capex. We basically had some servers and PCs.

Okay. Another question I have is, in one of your footnotes I noticed a pretty sizeable jump in your revenue per prescription in the three-month period for September versus your nine-month period. What caused that major pop?

Well, actually that's a very positive indicator of what is happening within us. But basically, it's the improvement in your specialty businesses that go ahead and show that improvement. It's the revenue per Rx is obviously specialty, is much higher revenue than when you look at the normal claims that go out the door. Here the average is over $1,200. And the same thing, Arnie, holds true for the gross profit. As the expansion -- and you're less dependent upon PBM and mail, which we are at this point -- you are going to see the increases. The best one in the industry today is Care Market, and Care Market continues to have the highest gross profit per Rx and revenue per Rx. As our specialty continues to be a major, major part of this company going forward your gross profit for Rx and revenue per Rx will increase as well.

Okay. I'd like to focus a little bit -- well, one other specific number for Jim, if you have it. What do you think your SG&A expense line for the year will be?

It will be about $49 million including the restructuring charges. And the restructuring is about 1/6 or so, but 49 should be all in.

Okay. And I'd like to try to get a better feel for Q4. You'll have a positive, one-time benefit from the rebate, if I've got that right? You won't have bonus --

No, no, no, no, no. That is not right. We actually -- our rebates are a net outflow of cash. So basically I have a liability and a payable now.

That has already been accrued and brought into -- from a financial statement purposes, Arnie, it is already there. What Jim is talking about is strictly the payment, the cash side of the business.

Right.

Okay. So it will have no earnings impact in Q4 at all?

Correct.

That's correct.

Okay. And then you have -- I assume since you have no bonus accruals or reverse bonus accruals you won't have them in '04?

Correct.

And now, I guess, the only other question I have is, Why would you not have a seasonal benefit? A lot of your drugs obviously pick up -- normally your Q4 seasonally picks up quite dramatically from Q3.

Agree if history -- if the past is going to predict the future, you would expect a little bit of an uptick.

So what's holding back your earnings in Q4?

What's holding back our earnings --

Relative to a Q3 adjusted.

Probably the CFO. No. I just think it's -- based on the rhythm of the business and what's happening -- you have two things happening. You have the issue with Vitality continuing, and you have all the good news in the other direction. The combination of those two are what's giving the range.

Okay. So when we look at Q4, have you figured out a quantification of the negative hit from Vitality?

Yeah. We have a rough feel right now based on -- what we were seeing all year and the little acceleration we saw this quarter, and that's what I baked into the numbers.

I have a question for Al. Al, you put in a real relatively new comp plan in January of '03 and, obviously, as you indicated it was a little aggressive. Have your salesmen come back to you and said it was too aggressive and it should have been adjusted? What are you hearing from your field reps out there?

No, in reality our salesmen have been successful as demonstrated by the recent contract awards that we've signed, Arnie. Additionally, they've grown the business, or their bulk of business, because we've had a dramatic increase in sales excluding the Vitality business. Their responsibility is not only to secure new contracts, it's also to make certain that we extract as much business out of the existing contracts as we can. So I think that the commission program that you are alluding to has been very effective. Additionally, the individuals that we have in our detailed sales force have been able to earn commissions through their work in the physician offices which has been a plus for us. And finally, we haven't spoken about it, but we also continue to have ten people that represents our inside physician sales team that work out of our Columbus facility making phone calls, not only to the new plans that we bring on board, but also reinforcing our service levels with those existing customers. So the combination of the sales force and their commission structure has been very positive for us, Arnie.

So the reductions in the bonus would be executive level comp?

That's correct.

That's right. Yeah, they were -- just management is the better way to say it.

Okay. Very good. Thank you.

And another follow-up from Grant Jackson. Please go ahead.

I promise it's the last question. On specialty again, if you could just talk to your expectations for Synergist. What is your relationship with [inaudible] at this point?

We don't have a relationship. That's the short answer, Grant. We were not selected as one of the distributors on Synergist.

And will you be able to access it as a home healthcare provider?

We have not even attempted to go do that. Historically it's been a very low margin business for us. It has not been our focus. We're, actually, concentrating on other type of therapies, higher margin therapies. We are going to be aggressively going after the suppression businesses where we believe that the expansion makes more sense for us. It's nice to have Synergist. We did 20 plus million dollars last year in the Synergist market, but it was a relatively low margin for us. I guess being [inaudible] is not exactly what maybe [inaudible] wanted and so we are just not included in that.

So we should not expect the seasonal up as you would have last year, expect more of a normalized growth throughout the year?

Oh, absolutely. Absolutely.

Thanks.

Thank you. Again, any additional questions, please press star 1 at this time. And a follow-up question from Harvey Stober from Goldsmith & Harriss. Please go ahead.

Thank you. The question evolves around the use of cash. Now the business is relatively stabilized, you are completing your restructuring and you can look forward to augmenting growth in various ways. Can you outlay your priorities in terms of cash usage?

Well, it's definitely not going to be bonus in January/February, that's for sure. I think we continue to look at our options. Obviously, we have been very consistent in saying that acquisitions are a part of our strategy so we are looking for the right high touch. Business is growing so we are continually looking at that. Nothing to report at this point in time. And, obviously, we always consider share buy-back and things like that.

And it's clear, Harvey, that we are investing in the business. We are going to be opportunistic, as Jim said, with the acquisition side. We will continue to look at the equity market. But we are still going to invest as we pick up contracts in regional areas. It may make sense to be in that regional area, go in there with a sales team, potentially pick up a specialty pharmacy within there. So there's going to be plenty of uses for our cash, but the number one priority is adjusting back in our business for the long haul.

Despite the percentage gain in PBM, I don't imagine you are going to be looking at any PBMs for acquisition even if they would be leveraged for specialty?

I think that's a fair statement. I think that when we look at what is available out there today, the PBM business, everybody saw the Care [inaudible] and advance PCS that did incredible business and great results. And there are opportunities. There are still a number of smaller PBMs out there today that could potentially be rolled up in other things, but that clearly is not our focus. Our focus has to be in the specialty arena. But if there is an opportunity to do something with a PBM in order to grow our specialty business, we will take a hard look at it. But to change our focus from specialty back into PBM is something we are not going to go after. We are going to continue to use our assets in-house to grow the PBM business, but clearly the focus is on specialty.

And with reduced seasonality going forward, do you view the second half as a trough in earnings and consistent earnings improvement on a quarterly basis in '04?

Well, historically and as most people reported recently in this industry that the summer months have been pretty much of a down season. And I think for those of us who come out of like generic and other pharmaceutical places, the summer months are relatively low; and with the back-to-school season they tend to pick up again. Specialty is a situation where, again, pulling Vitality distribution aside, we've seen tremendous growth in the rest of our product lines. Slightly impacted, very slightly impacted by August; but we continued to see the movement there. And, again, this is the management of the chronically ill; so one would expect that you don't have, Synergist aside, those type of situations where you are going to see the seasonality when you are dealing with 12 disease-state management programs. Yeah, there are times probably during the summer in certain therapies where there's probably less people in hospitals, surgeries are put off a little bit, which could have an impact on you; but hopefully the momentum that we have gained will continue.

Thank you.

Thank you. There is another follow-up question from Arnie Ursaner. Please go ahead.

Can you give us a little feel for how the pattern of the quarter develops month by month? Jim or Rich?

The quarters are fairly, I mean, the PBM business is fairly -- and mail business is more like an annuity business. That tends to be fairly flat. The specialty business tends to grow a little bit throughout the quarter. And for this particular quarter the issue for us was, I mean, our prediction of exactly how much was going to go down in Vitality wholesale; but it pretty much goes, again, specialty up a little bit each month and PBM and mail fairly flat.

I think,Arnie, what we look at in specialty is actually what we are trying to manage to is month-over-month growth. I think we pay a, tremendous attention to that, really, on a daily basis. And the mail business, it's up significantly over last year. I think it was 41% over last year. And the trend in mail business only continues, and the increase of generic substitution in mail continues. The one that is virtually -- has been somewhat flat is PBM. But with the PBM increases and with new customers coming on -- so when you look at -- unless you are having a loss somewhere, for example, wholesale oncology business, one would expect that each month you would show somewhat improvement.

I was trying to get a feel for whether August was particularly weak and you picked it up in September or --

Well, I'm not sure if it was unusual. It's hard to tell. [inaudible] we started this business effectively in August of 2000.

Right.

So this is -- so when you just look at what's going on, yeah, August was a little bit down and there may be more vacations and other things going on out there which had less. But do I know whether it was all made up in September? I don't know. I suspect it was.

Okay. Thank you.

Thanks.

There are no further questions at this time. Please continue.

Okay. Again, thank you for joining in with us today to review the quarter. I think overall that this company continues to go forward. I think we are bullish of where we are and where we sit in with this industry. I think overall that we are in a great business at a great time. So thank you all for joining us today, and we look forward to these discussions in the future.

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