Option Care Health Inc (OPCH) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MIM Corporation first quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given at that time. If you should require assistance during the call, please press star zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host and Investor Relations Representative, Ms. Rachel Levine. Please go ahead.

Thank you, and good morning. Thank you for joining us to discuss MIM's first quarter 2004 earnings. If you do not have a copy of our press release that went out this morning, please call the N. 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 mace be accessed by dialing in on the numbers provided in this morning's press release or by accessing the Webcast in the investor information section of MIM's website.

Before we begin, I will remind you that during this call, you will hear some statements which 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 projects 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 From 10K and such factors may be modified in our quarterly reports on Form 10Q.

During today's call, Richard Friedman, our Chairman and CEO, will comment generally on developments in the quarter and then pass the call to Al Carfora, our President, to review operations. Jim Lusk, our CFO, will then discuss the financials in detail and Rich will return for some final comments before opening the call to questions and answers. I would now like to turn the call over to Richard Friedman.

Thank you, Rachel. Good morning, everyone. We are pleased with the first quarter's results. We've delivered on our internal benchmarks and surpassed consensus estimates with an EPS of 10 cents per share. Excluding TennCare and Synagis, this is a 100% increase over the first quarter of last year. In our press release, we have provided a reconciliation which you should follow along with because we do a comparison with the exclusion of TennCare as well as Synagis. Our two operating segments are performing well. Specialty revenues were up 20% sequentially and more than 37% over the first quarter of last year if you exclude Synagis. PBM and PBM Services segment revenues, which includes Mail Service, were $90.3 million compared to $108.0 million for the same period last year. Excluding TennCare PBM services, PBM and mail segment revenues w re up 23% excluding TennCare.

We are excited by the opportunity to participate in a discount drug program established by Medicare. Our Scrip Solutions PBM business is geared up for the May 3rd start. Now the Freedom and Choice Medicare programs will provide beneficiaries with access to discounts on eligible brand and generic prescription medications. We have served as the PBM administrator for a significant number of our clients cash discount cards for several years and we will partner with them to offer the discount card program to their customers as well as to individuals directly. Al Carfora, our President and COO, will review our operational highlights and then Jim Lusk will review our financial results. Al?

Thank you, Rich, and good morning, everyone. I'm please to provide an operational overview of our first quarter results and share with you some of the measures of our business. For the purpose of this discussion, I have excluded last year's first quarter TennCare revenue which represented $34.5 million, and last year's first quarter Synagis revenue, which represented $11.8 million. Excluding these items, our total revenue for the first quarter increased by 28% over the same quarter last year and 9% over the fourth quarter of 2003. Our specialty business really performed well, growing 37% year over year and 20% sequentially quarter over quarter, excluding Synagis.

The growth in our specialty business is in part a result of the solid double digit sales growth in most of the disease state therapies we service. The two exceptions are the wholesale oncology business that I have discussed in the past and Hepatitis-C which is in line with the national market trend. Our inside and field sales forces, our comprehensive clinical programs, and our newly acquired specialty pharmacy have positively influenced each of the growth areas of the disease states I've discussed. Our effort to maintain this momentum included continued marketing for managed care contracts, continued expansion of therapies within existing accounts, consistent patient compliance monitoring and a deeper penetration in the markets we service with our detailed physician sales team.

We are also expanding our offerings of IVIG and hemophilia into the Pennsylvania and Maryland markets. Our PBM and mail revenues, excluding TennCare, grew 23% in the first quarter of this year compared to last year and 4% sequentially. On a standalone basis, our mail business, which operates out of our Columbus, Ohio facility, filled over 745,000 scripts during the quarter compared to 625,000 scripts for the same period a year ago. Along with the increased revenue we are beginning to benefit from the leveraging of our efficient infrastructure as demonstrated in the reduction of cost per script by 26 cents year over year. As our volumes increase, we will have to add very little expense. Speaking of costs, our stringent approach towards expenses has resulted in SG&A being almost flat with a year ago even after our continued investment in our sales efforts.

We will continue to enforce strong cost containment measures although not at the expense of increased market opportunities. Now I will turn the call over to Jim Lusk to go through the details of our strong financial results. Thank you.

Thanks, Al. Good morning, everybody. As Rich and Al stated, our momentum is building. Compared to the fourth quarter, specialty revenues increased 20% and overall revenues increased 9%. The press release contains all the reported numbers in addition to a reconciliation table outlining results for comparative purposes which would exclude TennCare and Synagis. The numbers I will review on the call today are adjusted results from this table which most accurately depicts results in our existing business going forward. Total revenues for the first quarter grew 28% to $148.1 million compared to $115.8 million for the first quarter of 2003. Specialty revenues increased 37% to $57.7 million compared to $42.3 million in the prior year's period. PBM and mail segment revenues increased 23% to $90.3 million compared to $73.5 million Operating income for the quarter grew 64% to $3.8 million from $2.3 million for the first quarter of last year.

Net income doubled to $2.2 million or $0.10 per share compared to $1.3 million or $0.05 per share for the prior year's quarter. Gross margins decreased to 11.5% from 13% in the beginning of 2003. This is mostly due to changes in the product mix and the accelerated growth of injectibles as opposed to infusion therapies on the specialty side of the business. Sequentially, gross margins were up compared to 11.2% in the fourth quarter.

SG&A expenses for the quarter rose slightly to $12.5 million from $12.2 million in the first quarter of last year but decreased as a percentage of sales from 11 to 8%. We have focused on cutting costs but continue to invest in sales and marketing efforts. I will not turn to the balance sheet. The company made a significant rebate payment to TennCare NCOs in the first quarter. As a result, we had negative cash flow from operations of $6.8 million. A return to positive cash flow from operations is forecast for the second quarter. We expect to make the final payments related to TennCare PBM in this quarter. Inventory turns remain strong for the quarter at 41. Days sales outstanding decreased to 41 days at March 31, 2004 from 44 days at December 31, 2003.

We have been successful in executing on our plan. Our balance sheet is strong and we are well positioned to continue our momentum. Rich, I'll turn it back over to you.

Thank you, Jim. Thank you, Al. As both Jim and Al have reported, 2004 is off to a solid start. Our investments in the business and our strategy of local presence are yielding results. We are leveraging our infrastructure and our delivering growth across our business segments. This growth is also evidenced by the increasing revenue per Rx. Sequentially we were up 6% and year over year 20%.

The specialty market continues to expand and we are well positioned to take advantage of this expansion. We are working hard with our customer base, including plan sponsors, physicians, the chronically ill, and our manufacturing partners. Over the last number of months, we invested significantly into our capabilities of IT to prove to the biotech community that we have superior reporting capabilities. Our systems provide key information to help manage the patient population and provide critical information to our manufacturing partners.

The specialty market will only accelerate. Plan sponsors better understand the advantage of identifying and managing these costs. Consolidation in our industry continues and we will continue to pursue further accretive acquisitions which compliment our product lines and add to out regional strength. The new Medicare discount drug program will provide MIM access to new lives. Mail, as a component of the distribution channel, will also continue to grow. MIM is well positioned in our segments. We are on track to deliver earnings growth and increase shareholder value. With that, we will open up the lines to answer any questions that you may have.

Ladies and gentlemen, if you do wish to ask a question, simply press star one on your touchtone phone. You will hear a tone indicating that you have been placed in queue and you may remove yourself from that queue at any time by depressing the pound key. And if using a speakerphone, please pick up your handset before pressing the numbers. One moment please for our first question. That will come from the line of Arnold Ursaner with CJS Securities. Please go ahead.

Good afternoon, gentlemen, this is actually Joe Geomichael in place of Arnie Ursaner. Just one quick question for you. The TennCare rebate payments - - you say you'll make the last one in this next quarter. Any idea what the size is going to be on that?

Yeah, Joe, as we reported at our last conference call, we said we had about $10 million of payments to be made. We made roughly $7 million in the first quarter so we have another $2 to $3 million left in this second quarter.

Got it. Thank you. And just one other quick question and then I'll get out of the way. In talking about potential accretive acquisitions, can you give any color on what the pipeline is looking like? Are you seeing opportunities out there.

Well we continue to look at acquisitions like the one we did with Natural Living a few months ago. The amount of potential targets out there are not as robust as they once were. I think there are a number of companies looking to expand their specialty lines by looking at these types of acquisitions. But we have people working on them. We do have a pipeline of potential candidates. And it's apart of our strategy to continue to grow. Not just organically, but through acquisitions. So there are still - -when you go back and look at the entire specialty area, and you add up probably all the players in the specialty area today, there's still maybe $8 billion, $9 billion that are out there today. And the market is probably anywhere from 15 to 20 billion, so there's still a significant portion of specialty products that are now coming through the so-called majors in the industry. So there's plenty of opportunity. We just have to find them and we spend a lot of time doing that.

Got it. Congratulations on a good quarter and thank you. .

Thank you. Next we will go to the line of Brooks O'Neill with Dougherty & Company. Please go ahead.

Good morning. You didn't mention acquisitions specifically as you discussed the internal growth. Is it possible for you to break out in any way the impact of acquisitions on your growth this quarter?

Well, the impact of acquisitions is as it is basically almost every year. It's hard to do that. I will tell you that the Natural Living acquisition is meeting our expectations. We gave the forecast when we originally acquired it and it is meeting our expectations which is positive. And recently, it's already been integrated into our infrastructure so there's a lot of cross selling opportunity, there's a lot of cross selling that is currently going on. And when we look at Natural Living, it's really another distribution side as well as our Long Island facility and our New Jersey facility and our Columbus facility. So it becomes increasingly more difficult to look at these things on a standalone basis and determine what their individual contribution is because there are therapies that end up in different places.

So you know, we would love to say it's easy to go do, but as - - and the good part is that putting it together is working very well. There's great relationship and team building that is taking place. The people at Natural Living are absolutely terrific, we're thrilled with them and they're very much part of our infrastructure today.

Can you just refresh my memory on how big that acquisition was at the time you made it, in terms of revenues, annualized revenue or something?

We forecasted that the revenues would be $40 million in 2004 and don't forget that we purchased them effective February 1st.

Brooks O'Neill. Great. That's very helpful. Just a couple of other quick questions. Were there any meaningful changes in terms of reimbursement, up or down, this quarter?

No.

Good. Then last question, there's been a lot of change as you mentioned in the competitive environment, this recent CareMark and Advance combination, the Express Scripts and Care Scripts, MedCo and the partnership with Acredo. Have you seen any changes in the competitive environment as a result of those actions or how might you anticipate the competitive environment changing going forward.

Richard Friedman. Great question. It's actually been terrific and what we really like about it is our position as the local presence of being able to open up specialty facilities and to capitalize on the relationships within a geographic area. This is a competitive business. We've said that all along. It will be more competitive. This will turn more into a multi-source type of business down the road. Our paved centric focus of working with the managed care players. And as Al pointed out in his speech earlier about the improvement in all our therapies across all the lines, it just indicates how well our marketing and sales people are doing. But the landscape is terrific and there's going to be fewer and fewer players. We have a great robust pipeline where I think we're very well respected out in the industry today. We're probably the fifth largest that's out there today with some really nice growth, and the pipeline is terrific. We will continue to look at these accretive acquisitions. And we just think that the landscape is terrific and as more and more drugs are coming out all the time. And you look at the FDA pipeline of 380+ drugs of another $20 billion over the next few years, it's absolutely a wonderful position to be in today.

That's great. Thank you very much.

Thank you. And next we'll hear from the line of Glen Garmont of First Albany Capital. Please go ahead.

Thanks. Good morning. Two quick questions. I think on your fourth quarter call you had indicated that you were looking for a full year gross margin in the 10.5 to 11% range. You did a little bit better than that in the quarter. How should we think about the full year gross margin expectation? Should we continue to model out something in the 10.5 to 11 or will it be closer to 11.5? And then secondarily, in light of the final TennCare payment, Jim, I was wondering if you could tell us where you expect your cash balance to be at the end of the year.

In terms of the margin and in terms of overall outlook we're sticking with where we are. The company has obviously performed well. We continue to strengthen and continue, but we're not - -use what we originally gave - -we're not going to go and say change things at this point in time. What we want to do is continue to run our company and beat estimates that are out there. So our guidance to you is stick with what you have. And, Jim, cash?

Was your question on the cash balance or the operating cash? To make sure I got the question right.

It was really on the cash balance. You've got about what, 2.5 million in cash and equivalents in the quarter and in light of the payment that you're going to make in the second quarter, I was just wondering where you think the end of year cash balance may end up.

Typically the cash balance is in the $1 to $2 million cash range. It's the way we use our credit lime, so that's very typical of where we'll end up.

Okay.

Glen, just looking at the balance sheet - -we borrowed money to go do the Natural Living acquisition and there's $14 million on the balance sheet at 3/31. So based upon the TennCare payment and based upon the ability to generate cash for the balance of the year, Jim expects this short term debt without any additional acquisitions to be greatly reduced if not fully out of debt - -

Between year end and the first quarter of next year, somewhere in that range.

All right. Very good. Thanks.

Thank you. And next we'll go to the line of Anne Barlow with Southwest Securities. Please go ahead.

Good morning. A couple of questions. First, do you guys have any major accounts up for renewal in 2004? And secondly, just again, we've talked in the past about the sales effort on both sides of your business. Just kind of wondered what you're seeing on the PBM side of things competitively and within the smaller clientele base you generally serve. And then , Jim, just lastly, just looking at the balance sheet, I just saw receivables from the end of the year tick up about 12% and payables up about 8%. Are there any timing issues or anything there that you want to comment on?

Sure. Let's go through - - Al, you want to kick it off with the sales effort?

Yes. Anne, how are you today?

Fine.

The sales effort - -you referred to specifically PBM sales efforts, smaller PBM customers that we typically market to. And as well, you were also asking about any major renewals. On the renewal side, on the Bio Script, what we consider our bio script specialty side, we're in the process of finalizing the renewal. In fact, the agreements are already completed for our single largest customer there and there are no other major contracts that are yet to be renewed during this year. So we feel very comfortable where we are. There are, of course, the PBM contracts are just about all annual for us so during the course of the year we renew on a regular basis . We don't see anything there that would be a problem nature for us.

Okay, good.

Our PBM sales efforts continue to be to market towards small group offerings where we believe we have the greater advantage. We've added about five small groups in the first quarter of this year and I'm not talking of 100,000 type groups, smaller groups. And, of course, certain of the existing customers that we have, have grown there business. So we've seen a nice improvement in our PBM business over the course of the quarter.

So you'd bring on 5 new accounts?

Yeah and they're small. They're not major accounts. But of course, our infrastructure is in place and we leverage it.

And just one other thing, one of the other things that we've done recently is gone out to the brokerage community, the TPA marketplace in a brokerage community with a new product that we believe will be very successful out there and we just started that sales effort. So we're looking in the small employer range in the TPA marketplace and brokerage marketplace and we believe that will have some success with that through the year. And in terms of balance sheet - -.

In terms of balance sheet - -

Anne, in terms of the receivables and the payables. Remember that the balance sheet at year end, at 12/31, was not pro forma for the acquisition, so - -

Okay, that's fine.

So part of what's ticking up is the acquisition. But the DSOs on the accounts receivable did improve from 44 to 41 and any point in time, depending on how a week cuts off with a given month, you can have a couple of million dollar swing either way. But it's the acquisition not being in at year end.

So it's just acquisition and then just some other incidentals?

Yeah, normal timing. DSOs did improve by three days.

Okay, great. Thanks.

Thank you. Next we'll hear from the line of Grant Jackson with First Analysis. Please go ahead.

Good morning, gentlemen. If you could break down your growth in specialty into growth from new clients, growth from new therapies and then penetration within those existing clients.

In terms of new therapies, there was just the addition of one new therapy during the period that was kind of small and that was in the psoriasis area. Overall, Grant, we've seen increases in every one of the therapies except for like Al said, in the Hep-C area which is following the national trends and also in the wholesale oncology business. But we're very pleased. We've seen significant increases in MS and osteoporosis so we're very pleased with the way that our sales folks are out there marketing the training on our clinical programs out there. In terms of new business versus exciting business, we don't break that out and we're not going to break that out. What we look at and we continue to look at, is every client, the incidence rate of every disease. We measure ourselves against that. We measure ourselves on a number of referrals we get in on a daily basis from the physician community and those are internal numbers that we do look at, but we do not share those numbers.

You indicated that you were expanding in hemophilia and IVIG into Pennsylvania and one other state, I can't remember which one that was. Could you talk a little bit about what you see happening in those markets? It looks like supplies are maybe going to start getting tightened up a little bit in the IVIG market.

Yeah. Part of our strategy for the last number of years is the regional expansion for the IVIG market. And this year we have decided to expand down in to the Pennsylvania area which we are in the process of doing. We have built relationships there and we believe thaw we will be successful in that market. We have recently hired a biotech individual with significant experience in the hemophilia marketplace and that individual is working out of his old territory and we expect him to have tremendous success. So the expansion that Al was talking about earlier, we believe that we'll be successful in that regional expansion which is what our game plan has been all along. And we have terrific relationships with our suppliers and right now - -Al, do you want to add anything to what I've just said?

Well just the fact that we are in the process of servicing the north Philly market out of our New Jersey location today. We would like to expand, obviously through Pennsylvania and then naturally into Maryland particularly in light of the fact that we have this new sales person on board. And I think it's a very good opportunity for us.

Great. Thanks.

Thank you. Next we'll hear from the line of Marvin Lowe with Decision Economics. Please go ahead.

Good morning, gentlemen. Could you provide a little bit more color on gross margins - whether or not it was the specialty in the PBM side that kind of allowed to meet the high end of your guidance there?

Yeah, it's easy. It's always specialty. The PBM business and the mail business typically margins are running anywhere from 6 to 8%. And your specialty margins are significantly higher, so the answer is always going to be specialty.

Okay, great. What are your expectations for the discount drug card and is there any investment on your side to get you to those expectations?

Well, we don't know what it's going to mean at the end of the day. We have two programs in place, the Freedom card and the Choice card. If you look on the Medicare website, I think we're one of two out there that has a card that is a zero charge type of card. It's so hard to predict right now what this means. There's 41 million people that may have access to the card. It's really tough to put a finger on it. We deal with some of the larger affinity type groups in the U.S. We will be partnering with them in the marketing effort. We have a website that's already been established to deal with that. But you're not going to see us put a major marketing effort and a lot of resources into that. We're going to rely more on our competitor nature on the Medicare side and as well as partnering with our customers today.

Could I just add to that? Also, to make certain that our existing customer base is not interrupted by the excitement that's going to be surrounding this card in the next few days, we've decided to engage temporary help that will be taking care of our enrollment process.

Okay, thank you. Just jumping around to one last question, if you don't mind. Looking at SG&A, while the absolute numbers good, the relative number obviously has jumped up kind of given where revenues have gone over the last year. How are we to look at this? Is the absolute number kind of trimmed to the lowest common denominator for you now and that will hold steady while the relative percentage kind of decreases as you grow your revenues? Or are we to look at the level relatively and then tick that up?

Yeah, Marvin, the slight increase this quarter is do to the acquisition is now part of the pie. We did take out several million dollars out of the cost structure. We reinvested it in sales and marketing, but the absolute level of SG&A will stay relatively flat and therefore, as revenue and margins grow, we will continue to get leverage on the bottom line, which we see for the foreseeable future.

What is key for us is that the infrastructures have been built, whether it's on the operational side or whether it's on the IT side. So we happen to be in terrific position to take more of the gross profit dollars down to the bottom line.

Great. Thank you very much.

Once again, ladies and gentlemen, if you do have any further questions, please press star one at this time. Next we'll hear from the line of Jennifer Pearlman with Burgundy Asset.

Good morning. You may have answered this in addressing Anne's question earlier but I'm just wondering if you have any more visibility on Aetna and if that was the customer that you had referred to earlier.

I don't know what you're talking about.

Just if there is any risk in losing business from them with this renewal coming up with them.

No, first of all, you got a bad name and second of al, we don't look at any of our customers right now being problematic.

Okay.

Ms. Pearlman, does that answer your question?

Yep.

Very good. Thank you. Next we'll hear from the line of, pardon me, return to the line of Glen Garmont with First Albany Capital. Please go ahead.

Thanks. If I could just ask a real quick follow up. With regards to the Natural Living, I think you commented on the gross that you're seeing there. Is that - - I'm assuming that's primarily coming out of the retail channel. Or is some of the growth coming from competing specialty pharmacies in the New York area? Any color you can add would be helpful. Thanks

Natural Living is really not a retail operation. The amount of retail that they do in that store is pretty minor. Natural Living is a specialty pharmacy and their growth overall in the New York region happens to be due to the number of people and the quality of people that we have on the ground. We have a sales organization tat goes after the MCL contracts and then we have a terrific sales organization that handles the telemarketing side and probably one of the best detail sales organizations that's out there on the street. So the growth that we're experiencing overall is quite frankly due to our people, our clinical programs, our reporting capabilities, and we expect that to continue. Our strategy is to be inside the community to prove our worth to the physician, to the patient, to the manufacturer and to the managed care organization and that is exactly what's going on.

Okay, great. Thanks.

Thank you and speakers, we have no one else queued up for questions at this time. Please continue.

Well, we would all like to thank for you joining us today. We are proud of the numbers that we put forward. And hopefully we will speak to you shortly and we expect this trend to continue. Than you very much and have a great day.

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