Option Care Health Inc (OPCH) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MIM Corporation 2nd quarter 2004 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions being given at that time. If you should require assistance during the call, please press star then zero. I would now like to turn the conference over to our host, Investor Relations representative, Ms. Rachel Levine, please go ahead.

Thank you. Good afternoon. Thank you for joining us to discuss MIM's Q2 2004 earnings. If you do not have a copy of our press release, please call the Anne McBride Company [ph] at 212-983-1702, ext. 207 and we will have one sent to you. 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 the 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 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.

During today's call, Richard Friedman, our Chairman and CEO will comment generally on developments in the quarter, and then pass the call to Jim Lusk, our CFO who will discuss the financials and operations in detail. Rich will then 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.

Thanks Rachel, and good evening everyone. Before I turn the call over to Jim to go through some detailed financial information, I'd like to comment on the 2nd quarter. First of all, we are pleased with the 2nd quarter. Our two operating segments are performing well. The implementation of the Natural Living acquisition has been successful, and we continue to deliver substantial growth in our Specialty area. We have expanded customer contracts and increased our national base through our strategy of developing local relationships. As you all know, we announced our merger with Chronimed which will create one of the largest specialty pharmacy businesses in the country. The combined annual revenues based upon current earnings are $1.1b. We look forward to combining our established BioScrip brand with Chronimed and leveraging our strong PBM capabilities across Chronimed's customer base. We reported Q2 earnings of $0.09 per share. As I mentioned, we are pleased with our performance. Specialty revenues grew more than 36% over the 1st half of last year, if you exclude Synagis. PBM and Mail segments grew 19% in the 1st half of 2004, excluding TennCare. In the 2nd quarter, we expanded our relationship with one of our customers to cover a larger geographic area. This was a strategic long-term decision. In return for this expansion, we provided certain pricing concessions which had an impact on Q2. We expect strong, volume growth from these expanded territories to add to revenues and profitability in the 4th quarter and beyond. I will now turn the call to Jim to go through the details of our quarter. Jim?

Thank you Rich. As Rich stated, earnings were strong for Q2 despite the effect of certain pricing concessions on an expanded Specialty contract. Excluding TennCare and Synagis, results for Q2 of 2003, our total revenues for Q2 2004 increased by 22% over the same period last year. The press release contains all reported numbers, in addition to a reconciliation table outlining results for comparative purposes, which would include TennCare and Synagis, and the restructuring charges from Q2 '03. The numbers I will review on the call today are adjusted results for this table, which most accurately depict results in our existing business going forward. Total revenues for Q2, 2004 were $154.1m, compared to $126.1m for Q2 2003. Q2 Specialty revenue increased to $60.4m, compared to $44.4m in the prior year's period. PBM and Mail segment revenue was $93.7m compared to $81.79m in Q2 2003. Revenues from PBM services grew 15% in Q2 2004. Operating income for Q2 of 2004 was $3.5m, from $3.8m for Q2 of last year. Gross profit for the quarter was $16.8m or 10.9% compared to $16.4m or 13% in the prior year's period. Decrease in gross margin reflects the change in the company's product mix, and the overall industry trends.

SG&A expense for Q2 was $12.6m compared to $12.1m in the same period last year. Total revenues for the 1st half of 2004 were $302.2m compared to $241.8m for the first half of 2003. 1st half Specialty revenue increased to $118.2m, compared to $86.6m in the prior year's period. PBM and Mail segment revenue was $184.0m compared to $155.2m for the first half of 2003. Operating income for the 1st half of 2004 was $7.3m compared to $6.1m for the first half of last year. Gross profit for the 1st six months of 2004 was $33.8m, or 11.2% compared to $31.4m or 13% in the prior year's period. I'll now turn to the balance sheet. Inventory turns remain strong for the quarter at 46. Days sales outstanding decreased to 40 days at June 30, 2004, or 41 days at March 31, 2004, and we have reduced our line of credit used to purchase Fair Pharmacy by $3.7m during the quarter.

Even with the rebate payment to TennCare MCO's in the 2nd quarter which we anticipated, we had positive cash flow from operations of $4m. Regarding operational performance, our PBM and Mail revenues excluding TennCare grew 19% in the 2nd quarter of this year compared to last year at 4% sequentially. On a standalone basis, our Mail business, which operates out of our Columbus Ohio facility filled over 804,000 scrips during the quarter, compared to 675,000 in 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 by the reduction in cost per scrip by 20% year-over-year. As our volume increases, we had to add very little expense.

Our stringent approach to our expenses as a result of SG&A bring 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. Our balance sheet remains strong and we are well positioned to continue our momentum. We entered the Chronimed merger with little debt and a healthy cash flow. This will allow us to continue to make strategic investments and acquisitions to further build our revenues and profitability.

Our goal is to pay off the remainder of the credit line for the Natural Living acquisition by the 1st quarter of 2005. With respect to the coming quarter, at this time we expect that the 3rd quarter will approximate the results of the 2nd quarter, and as something to look forward to, the 2nd quarter of 2004 will be the last of our reconciliation tables. We are not changing guidance for the year at this time. Rich, with that I'll turn it back over to you.

Thanks Jim. Regarding the Chronimed merger. I'd like to be very clear of why this merger makes sense. Number one, MIM believes strongly in the local platform community [base]. Chronimed has 27 locations, where we're going to be able to use that asset to roll out additional products. Chronimed also has a mail order facility and so do we, which we will be able to take advantage of the synergies involved there. This is a strategic move, I believe it is very strong for the long term. You need to be larger in this healthcare business, and by putting these companies together we will get there. We believe this is a winning combination for customers and shareholders. We will combine our individual strengths into a stronger customer centric and profitable business. Our businesses are complimentary and distinct. In a rapidly growing and fragmented industry, the combined companies cover a larger piece of the market, and offer more access to complete pharmacy and pharmacy services. In conclusion, we will continue to live on our strategic in initiatives to wrap this year and next. We feel confident that with the management team we have in place, and the newly combined entity, that we will be able to focus on our primary goal of executing against our benchmarks and delivering shareholder value. With that, we will open up the lines to answer any questions that you may have.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please for our first question. We have a question from the line of Brooks O'Neil from Dougherty & Company. Please go ahead.

Good afternoon. You alluded to the contract expansion that it impacted your 2nd quarter. I'm hoping you might be able to give us some additional detail on what geography or roughly how big an expansion. Because I think you then went on to say that the 3rd quarter was going to look like the 2nd quarter, but you're not changing your guidance for the year, which I guess if I do the quick math, looks like you're going to have to have a whopping 4th quarter to kind of get where you need to get.

Well, I'll be happy to Brooks, and good talking to you again. Let's talk about what we did. Early in Q2 we made a strategic decision that relates to the Northeast. And what we did, is we had a contract, we have a contract with a very strong managed care organization that gave us the opportunity to expand the market share in the New York and Connecticut marketplace. That organization last year in its entirety, in the 3 regions now that we covered, did in excess of $90m in Specialty pharmaceuticals. We were covering strictly their New Jersey operation. So when we look at the New York and New Jersey opportunity, that in itself I think was close to $60m of total revenue of the Specialty part of the $90m. This also, though, in addition to us picking up that piece which we have signed and it is being implemented as we speak, the relationship we have with this organization has now brought us to look at other territories that they've asked us to look for, which is more out west. So we believe this was the right strategic decision to do, and you're right, when you look at the 4th quarter, we expect a good 4th quarter, we've all along expected a good 4th quarter. In addition to this particular one, we've picked up additional contracts, which makes us look at, for example, we did a deal with Montefiore Hospital in the CMO program. We've picked up MDNY, we've picked up business with Oxford. So this company has added quite a bit of contracts over this last quarter that will be implemented in the 3rd quarter, and you will see the volumes in the 4th quarter. And the reason we're saying that the 3rd quarter will look more like the 2nd quarter, is because of some of those pricing concessions. We're hopeful that we will be able to achieve greater results, but what we're trying to do is based upon-and the pricing concessions actually took place starting in the 2nd month of the 2nd quarter. And now you have the 3rd quarter, three months, somewhat impacted. So we have to make up some of that volume to offset that pricing concession, but we anticipate that we will be able to achieve that.

Okay. So, I'm not asking you to build my model for me, but I'm assuming based on what you just said that maybe the 10.93% gross margins might come down a little bit more here in the 3rd quarter?

Yeah, I think they will, and I think they will come down slightly, and I think Jim as he refines, and obviously we've been spending the last number of weeks working very hard on the Chronimed deal, that Jim will be able to fine-tune the model and be able to go out with it.

Okay. The only other item in detail I wanted to ask about is the amortization expense was up a bit this quarter. Is that at a level now where we'd expect it to be flat on a quarterly basis going forward?

Hank or Jim could answer that one.

Yes, the amortization expense relates to the acquisition we did, and yes, going forward that should pretty much be level.

Okay. I guess that's it for right now. Thanks a lot.

Thanks Brooks.

Thank you. We have a question from Arnold Ursaner from CJS Securities. Please go ahead.

It's Mike Rosso [ph] for Arnie. A quick call, from the prior call, could you just clarify again, what is included or not included in terms of charges or expenses in the $35m EBITDA guidance real fast?

Yes, we didn't go through the details of that number, but let me try to lay it out for you a little bit better. What we did in that $35m, is we've assumed, and you have to understand, that we've assumed for a calendar year that there is absolutely no [EBITDA] in that business. What we've also assumed is that we said that there is gross synergy amount of $10m. It's going to take us the better part of a year to realize that $10m. Offsetting that, there is significant cost related to severance retention and duplicative type of expenses. We have not broken that out, and there's a good reason that we haven't. Because we need to refine exactly this as the implementation teams finish off what they're doing. We will get back to everyone in the coming months to give them more of the detail behind the synergies and those costs. Again we try to be very conservative. This is not a short-term gain right away, it is accretive, you have to look-we have to look, this company is looking at long-term. It is the right thing to do in the healthcare sector, it is the right thing to do for MIM, it'll be extremely accretive in 2006. We expect tremendous revenue growth, and I can't put a number on that today. We expect lower cost of goods sold, and I think longer term-2005 is going to be the toughest one to predict because of everything going on. I will tell you, 2006 is going to be a fantastic year.

Okay, a final question in terms of the margin impact from this expanded relationship-what do you expect the response from your current customers is going to be as they start to look at what might be better terms [from] another competitor?

Yeah, I think-well, I don't know about better terms. I think what it does is gives us a greater opportunity to compete. We're absolutely using leverage, the cost of getting product out of the facilities will decline, we will be able to buy better, we will be able to participate where in a case of a larger managed care client, if we have to go ahead and say, you know what, we're going to take this business and it's a little bit lower margin-we may in fact go ahead and do that. I think having retail stores absolutely gives you leverage and gives you some margin protection. Our Fair model has absolutely done that. The Higher Touch, Higher Feel [ph] therapy is usually-generate higher margins for you. You know, so you're going to have a mix, and you want to have a mix. The mix between the customer itself, the physician, the hospital, the clinic, and the large managed care organizations. So there is going to be margins in all these different trades that are going to vary. But I think overall, the margins in this industry, and I've said this for a long time, these margins will continue to tighten. As a new product comes out, you may see higher margins. Over a long period of time those margins will shrink. I anticipate that, we run this company in anticipation of margins shrinking. I come out of the generic pharmaceuticals business-I understand that. This is a volume type of business with clinical expertise that you're offering, and that's why you have to be bigger. You have to be able to provide your services and get the increase in volume so that your facilities could absorb a lot of that overhead cost. This is a terrific deal, and I'm looking forward to it.

Good, thank you.

Thank you. I have a question from Glenn Garmont, of First Albany Capital, please go ahead.

Thanks, good afternoon. Just real quick-Jim, are the TennCare payments done at this point, and is there a full year operating cash flow number that you've provided.

Yeah, TennCare payments, there's a minor trickling, it's not even worth talking about. We are pretty much done with TennCare at this point in time. In terms of operating cash for the year, we were saying somewhere in the high single digits, around $10m, somewhere in that range. [inaudible] how much we pay out to TennCare [inaudible].

To TennCare we paid out $7.6m in two quarters, $2.4 this quarter, and it was over $5m last quarter, so some big numbers.

Okay, and taking all those things into account you're still going to do operating cash flow of $10m.

Yes, in that range, correct.

Okay, thanks.

Thank you. We have a question from Kevin Casey [ph] of WPJ [ph] please go ahead.

Hi Rich. I was wondering if you can clarify or explain in more detail the industry trends that seem to make you guys cautious on gross margins.

Sure, hi Kevin, how are you?

Good.

Yeah, you know, Kevin, this is an industry where you have some major players, whether it's Caremark, Express with Carascrip Now [ph], Priority, where a lot of business in Specialty at the larger managed care accounts is based upon pricing. When you're not a manufacturer you have a lot more pressure being put on you in that competition. We don't see that as much on the local distribution level, but you do see that with the larger managed care accounts. And that's why you need to be able to use your leverage in order to pick up a reduction of expenses and a lower unit cost per item. You're not going to make it up on the sales side. You know, the selling price in the market is governed by the market, and the only thing that we're going be able to do is try to buy better, and to lower the labor cost and the overhead cost of getting it out the door. So I believe the market trend will be to continue to see pricing pressures, I think that will always be the case. I think you'll have new products coming out. I think you'll get to a multi-source environment in the near future. There are still plenty of biotech, there's 280 biotech products that are out there today at the FDA. So I think what's going to happen is you'll see a lot more multi-source products coming out there, and as you know, in the distribution business, you make more money on generics than you do on a brand. So I think right now you're going through that period of time where you're seeing pricing pressures. I think that you'll see more products out there. But I think overall, when you look at strictly the injectible of-I hate to say run-of-the-mill type of injectible products, not the IV products, IVIG products, where you have to get into the nursing component and some other high hand holding ways, but you'll see margins, probably less than 10%. You'll probably see them in the 8% range, 9% range. And I think a few years out, and maybe even sooner than saying that. So I always anticipate that there is going to be lower margins.

And then, speaking of getting lower cost of goods sold, have you looked at products that you and Chronimed both source, and what's then, like, who gets the better price, or actually, not even who gets the better price, but what's the difference between the better price and the worse price?

Yeah, actually when we looked at both companies, and what they're buying today, there was an opportunity based on our contracts that we will be able to take advantage of. There are some other things that we could do as well, for example, as opposed to the corner store, and the [inaudible] store, if you have a closed store operation you have advantages on the buy side. When you combine the Specialty businesses of both companies, you'd be talking pretty close to $800m, and then you throw the Mail on top of that, you're $950m of $1.2b. So when you look at that, it creates a much better playing field to go out in the RFP process with the major distributors. The manufacturers are very excited about this process. The manufacturers like local presence. The people on the street like local presence. So we believe that we will have opportunities with the manufacturers to work closer with them, giving us greater opportunity.

Okay, and one final question. When you talked about that contact that was expanded, that lower prices, was that across all regions or just the new regions?

That was across existing regions and new regions.

Okay, thanks guys.

Thank you. We have a question from Marvin Loh of Decision Economics, please go ahead.

Good evening gentlemen. What has the feedback been from the customers that you've spoken to today, and do you feel, or have you sensed any challenge in selling the deal to the clients, particularly those that might have come to MIMS because of your more payor centric model, where as Chronimed has clearly some more manufacturer centric contracts?

Marvin we've actually changed a bit over the past year or so to concentrate with the manufacturers. But I have to tell you that Mike Sicilian who heads up our sales operations reached out to the customers today, we've had tremendous feedback from them. As a matter of fact, some of our larger ones, one in particular was thrilled, saying that, "You know what-this will open up more markets for you. We could take advantage of you now because you have more locations." I think that we didn't have overlap, but what this does do, for our clients, that-healthcare is regional, so you'll have managed care organizations that have facilities in various states, but for the most part, it is regional. So if you're able to offer their populations, the physician community and everything else, distribution, clinical services on a local level, it works for everyone. And I think the feedback today has been terrific.

Okay, great. What can we expect from the PBM side given that most of the operating leverage and synergies seem to be more specialty focused and you know, PBM has kind of been chugging along, but generally hasn't posted any knock out numbers over the last year or so.

I totally agree with you. This is an opportunity for us. We consciously made a decision to reallocate resources to take advantage of the Specialty arena. And as you know, the PBM market is a very tough market, it's highly competitive. Certain people from Chronimed bring tremendous experience with them, they have tremendous relationships, primarily Hank, Tony Zappa and a few other people there. And I've got to tell you, that I'm looking forward to getting back with a vengeance into the PBM marketplace. I think it's a tremendous opportunity. I think especially in the small to medium sized market. I'm looking forward to getting to the small to medium sized employee groups. I'm looking forward to get back into the TPAs, I think this is a tremendous growth opportunity. You have some fine companies out there that go after the same groups, but with our leverage, and being able to compete, and we have the best computer systems that are out there today, I think we do a great job in the PBM. And I know Hank, and he said it before, is looking forward to taking advantage of that passion of his.

Okay, so it's going to be one of your top efforts come 2005.

It's going to be one of those efforts, absolutely true.

Okay, thanks very much guys.

Thank you. We have a question from Mark Cooper [ph] of Wells Capital. Please go ahead.

Hi, I only listened to a little part of the first call earlier today, but the concept of this accretion that you talk about, is that relative to what the estimates are for MIM for next year-I think-I don't know, it's like $0.56 somewhere around there.

Yeah, I've got to say, I'm not sure it's relevant to those numbers. What we're looking at, and we have not put out guidance for 2005 yet, what we're looking for right now is obviously, the guidance we have on the Street right now is $0.42 per share for 2004. And you know what the Chronimed numbers are right now, and you have to adjust those for [ETNA] and you have to adjust for the synergies involved. Based upon the analysis that Jim has done and our financial advisors have done, and that we did show to our Board of Directors, this deal is accretive to us in 2005, and as I said earlier, Jim is going to come out with numbers as we refine these, and we will come out with 2005 guidance in the next few months, and for both organizations. And again, I have to say this again, 2005 will be accretive-2006 is going to be an incredible year. You will have the benefits of everything going on, you will have the cross selling opportunities, and I know that's a long way off, but I got to tell you, it's where the industry is going, we will be a leader there, we will be doing other things in between, we will be growing our businesses, 2005 will be accretive, 2006 will be even more so.

And did I understand your comments about this longer-term contract that you signed, you felt that diminished margins this quarter-did I understand that to say that that added, you think that will add $30m of incremental revenue?

No, what I did say is, how much that they were doing.

They were doing $90m.

Yeah, you know, last year they did over $90m in Specialty, you know, and a big part of this is how much we're going to pick up and over what period of time we're going to pick up as it's being converted over to us. But it does create an opportunity in-I also said in those regions that we picked up, it's about $50m of, I think I said $50-$60m, $60m of Specialty business we did not have. So it's a question of, could we get to all $60m, what's going to happen there, and we're working our tails off to go make that happen, and that's the responsibility of Mike and his team. But we anticipate having significant volume come to us in the 4th quarter, while we're picking some up right now. But to make up for that loss in the margin, we're expecting that to turn for us in the 4th quarter.

And my last question, and I didn't hear this on the earlier call either, there is no collar or anything in place to set a minimum value for the Chronimed shareholders?

There is no collar, right.

Thank you.

Thank you. We have a question from Jeff Green [ph] of Healthco [ph] please go ahead.

Hi, one of my questions was answered about the $35m, which I'm a little bit surprised that you weren't able to just aggregate that a little bit better today, given the time you've put into this merger, it's a little disappointing that you can't figure out what the true run rate is yet to date that, for showing that the deal's accretive, so that's a little bit hard to swallow. But, having said that, and you've addressed that, moving onto what management in each respective company, what change of control issues there are with each of the respective management teams in regard to options vesting etc.

The change of control, both, the senior people in both companies waived their right to anything regarding change of control. For those executives that in fact may not be part of the combined entity at a certain point in time, there will be severance and retention agreements with them and they will have an option to go ahead. And actually, Barry Posner is with us, and Barry, do you have anything to add to that?

Yeah, there will be some, thanks Richard, there will be some dilution from option acceleration under the Chronimed plan. It's not a very large number.

Can you quantify how many options and which executives are getting them, and how they're being-are they automatically vested and what the strike price is? And similarly on the other side.

I could do it, but it's about a 15 page list. This is not going to 3 or 4 executives, these are options that were granted to a number of their employees, and I'm talking in excess of 30-40-50 people over years at varying strike prices. They are not a very top-heavy company when it came to option grants. But I think it's more appropriate for you to have that discussion with them and they could give you the particular details of it.

Okay, what about you guys?

[that's not a change of control for us]

And there's no change in how your options are addressed then in terms of this transaction?

Yes, it's addressed by there being no affect on them. That's a matter of change of control. If particular people are not going forward, then it's a matter of their employment contracts and those are all filed with Edgar to the extent they're executive officers.

Got it. So what kind of-what are the timeframes you plan on elucidating how this $35m is disaggregated. Is this like a month, or 6 months, or a year?

Yeah, I will tell you that we will probably get back to you in the better part of 6 weeks, you know, with this information. It's clear to say that there is a plan, we have certain of this information, and it just needs to be refined before we go out with it.

I mean, curiously then, it's not been my experience that companies come out with a number like that and then not been able to sort of pinpoint it. Was this just that you didn't want to announce this soon, and you had to announce it for some reason or another? It just seems a little strange.

I have absolutely no response to that. This is the number that we have given, this is the number that both companies felt comfortable with when we went through. We're not at this point going to say what's a contribution from each of the companies, as well as what the synergies are. Clearly we know it, we have chosen not to share it.

I'm sure that's got to make for a lot of dissatisfied and unhappy callers on this-I could probably speak for others, but anyway, I'll let you go, I just-it's something I've never heard in my career, which is not terribly long, but it's strange. Anyway, good luck, thanks.

Thank you.

Thank you. If anyone else would like to ask a question please press star one at this time. We have no more questions in queue, please continue.

Thank you. It's been a long day, it's been a terrific day. We're excited about moving forward. We think this is a terrific deal for both companies and we will absolutely get back to everyone in the coming weeks with more detailed information. Have a good evening.

Thank you. Ladies and gentlemen, this conference will be available for replay after 9:30pm today, through midnight August 16, 2004. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701, and entering the access code 740878. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701, and 320-365-3844. Access code 740878. That does conclude our conference for today, thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.