Option Care Health Inc (OPCH) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip Inc. second-quarter conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, August 4, 2004. I would now like to turn the conference over to Brad Schumacher, Director of Investor Relations. Please go ahead, sir.

Thank you and good morning. Welcome to BioScrip's second-quarter financial release conference call. Joining me today are Hank Blissenbach, BioScrip's President and CEO, and Greg Keane, BioScrip's Chief Financial Officer.

Before we begin, I will remind all listeners that throughout this call we may make statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the intent, belief, or current expectations of the Company, its Directors or its Officers with respect to the future operating performance of the Company and the Company successfully integrating the business of MIM Corp. and Chronimed Inc.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance or the successful execution of the Company's strategic plan and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statement as a result of various factors.

Important factors that could cause some or such differences are described in the Company's periodic filings of the Securities and Exchange Commission, including its Annual Report on Form 10-K filed with the SEC on March 4, 2005. I direct you to these documents to understand our current business environment and its associated risks.

Also, in accordance with the Securities and Exchange Commission Regulation G, I direct you to Schedules 5, 6, 8, and 9 of the Company's second-quarter financial results release for line item reconciliations between GAAP and non-GAAP financial measures referenced in today's press release and the conference call.

Today's call will consist of opening comments from Hank, financial review of the quarter by Greg, and closing remarks from Hank. We will then conclude with a question-and-answer session. I will now turn the call over to Hank Blissenbach.

Thanks, Brad. Good morning, everyone.

We have completed our first full quarter as the merged entity of BioScrip and we are truly a stronger force in the specialty marketplace. Our second-quarter revenue was ahead of plan and is building. Our underlying June-quarter revenue, excluding previously disclosed lost contracts, grew 6 million from the previous quarter. Our growth is coming from our overall Specialty Services business. Also, our PBM and traditional mail segment has shown tremendous resilience. This year's second-quarter revenue is holding its own with last year's second quarter, despite the contract losses.

We're making significant progress on our cost initiatives. Our operating expenses are where we had planned them to be at this point in the integration process. The second quarter, which is early in the integration process, does not yet reflect the savings that will be realized from our cost take outs. The full benefit of our spending actions will be realized by first quarter 2006. We expect our total operating expenses, including amortization, to be between 26 and 27 million in the first quarter 2006, down 3 million from this quarter's June run rate. My goal for the balance of this year is to drive costs down through our integration and cost initiatives while building the platform for revenue growth for next year.

Regarding our integration progress, we have successfully moved the Minneapolis mail service business into the Columbus, Ohio mail facility. We incurred additional temporary labor costs during the second quarter to ensure a smooth transition of that mail service business with as little disruption as possible. We expect these costs to decline significantly in the third quarter.

The next piece and in progress is integrating the back office functions. The balance of the year we will be moving the IT function, which includes hardware and employees, to our Minneapolis business headquarters. Similarly for finance, we're moving that function from Rhode Island to our Minneapolis location. It is important that we move these two areas in a very planned and deliberate way to ensure continued service levels and controls. We will be continuing to incur duplicate costs from these two functions at varying levels until the consolidation is complete at year end.

We believe our best growth opportunities are the specialty product expansion into our community-based pharmacies and infusion. The product expansion into the community store strategy is based on the fact that medicine is practiced locally. And it takes our existing 30 retail stores, which have delivered strong historical revenue growth, enrolls medications to treat additional chronic conditions into these locations. Currently our community pharmacy revenue is concentrated in HIV and transplant with limited oncology. Our strategy broadens the revenue stream to include oncology in all key locations, plus other core conditions treated by the biotech injectable products. This strategy includes assigning sales representatives to each store working closely with the pharmacy which provides the necessary local pull through effort to drive growth.

Although the community strategy is key to our growth in 2006, we also expect to get some early payback this year. The beauty is that these additional sales will be at higher than average gross margins with little to no increase in operating expenses. This model currently exists in two of our retail locations, and we have just rolled out our expanded product line to an additional four locations -- Atlanta, Seattle, Las Vegas and Indianapolis. We will implement at least eight more by year end and the remainder in 2006.

We also expect continued growth from our infusion business and are very optimistic about its future. We have three reasons for that. Number one, our New Jersey operations specializing in IVIG and hemophilia products continues on an impressive growth track. Second, we've been awarded certification by the New Jersey Hemophilia Association as one of only three providers endorsed to distribute blood factor to hemophilia patients in New Jersey. And third, we have opened a new infusion facility in Pennsylvania and are already ramping up that business. As you know, both hemophiliac and IVIG are high revenue and gross margin businesses.

On the marketing side we've made the decision to operate under one brand, BioScrip. We believe it is prudent to operate under one defined brand in the marketplace. We will be moving all of our businesses to this brand over the next several months.

Before I provide the financial outlook and my closing comments, I will turn the call over to Greg to review the financials in more detail.

Thanks, Hank. First, let me comment on the special charges for the quarter.

As discussed in the press release, special charges in the quarter totaled 6.6 million and $0.11 per share. It's important to know that 5.8 million of this charge is non-cash with a write-off of trade names and intangible assets as we move to a new single brand under the BioScrip name. The remaining 800,000 is for merger and related expenses including severance that will continue through the integration period.

I would also like to focus on our second-quarter adjusted results that have been provided in Schedule 4 to the press release. These are the results that reflect the financials of both Chronimed and MIM as if we were combined for the full quarter in the prior year and excludes special charges. These adjusted results reflect a reasonable basis for comparison and provide a foundation for future projections.

So on an adjusted basis second-quarter revenue was almost 287 million, a decrease of 25 million, or 8%, over last year's quarter of 312 million. This overall decline came primarily from the Specialty Services segment due to the previously disclosed loss of business from Aetna whose contract terminated at the end of February '05. The PBM Services Segment revenue, which includes the traditional mail service operation, remained essentially flat in second quarter '05 at 94 million. This is a remarkable achievement given the previously announced contract losses in the recent March and December quarters. Underlying growth with our core customers has been good, up more than 15% over last year.

Gross profit in the second quarter was 30.5 million, or 10.6% of revenue, compared to 33.6 million, or 10.8% of revenue, last year. This slight reduction in gross margin profit rate is due mostly to price and cost pressures in our Specialty Services segment, particularly our specialty mail and infusion operations.

Now let's take a look at operating expenses on an adjusted basis. Total op expenses were 29.5 million, an increase of 2.6 million, or about 10%, over the prior year quarter. New amortization expense tied to the Chronimed acquisition accounted for almost half or 1.2 million of this 2.6 million increase. Op expense as percent of revenue is 10.3% in the current quarter compared to 8.6 in the prior-year quarter.

As Hank mentioned, we're working aggressively to reduce expenses as we complete the integration through the balance of '05. Also as we discussed before, we expect that our efforts will deliver over 10 million in targeted cost savings from the merger.

The resulting income from operations on an adjusted basis was an even 1 million for the quarter. This compares to 6.7 million in last year's second quarter at 2.1% of revenue. Our resulting EBITDA, a measure of our underlying cash flow, is 3.8 million for this June quarter, significantly better than our 1 million in op income given our high level of non-cash charges from amortization. And again, our income from operations and EBITDA results do not yet reflect the benefit of the merger cost savings.

Looking forward, we now expect that amortization expense will be about 1.7 million per quarter through 2005 year end, reflecting the net effect of both the new intangible assets acquired from Chronimed, as well as the write-off of the trade names.

Depreciation going forward this year will run at about 900,000 to 1 million quarter. This total of 2.7 million a quarter equates to more than $0.04 per share in quarterly non-cash charges.

So wrapping up the P&L discussion, net income is $0.02 per share for the second quarter on an adjusted basis compared to net income of $0.11 a share in the prior year.

Taking a very quick look at the balance sheet, as of June 30 we had 76 million of working capital and 217 million in shareholders' equity. Our cash balance was a little higher than 5 million. We had no outstanding borrowings on our $45 million line of credit as of June quarter end.

Hank, I'll turn the call back to you.

Thanks, Greg. Let me close our prepared comments by providing the financial outlook for you.

First, for the remainder of this calendar year excluding special charges we expect revenue for total-year 2005 to come in at about 1.17 to 1.18 billion with between 580 and 590 million in the second half. We expect EBITDA for total-year 2005 to come in at about 18 to 19 million before special charges with 8 to 9 million in the second half. We expect full-year EPS of $0.15 to $0.17 before special charges with $0.05 to $0.07 EPS in the second half as we ramp up for a strong first quarter March 2006. We expect that special charges related to the merger and branding will continue through the first quarter of March 2006.

Let me give you our financial outlook for first quarter 2006, which will be our first full post-integration, post-synergy quarter. This quarterly outlook is consistent with our previous communications of an annual run rate starting 2006 of 1.2 billion in revenue and 35 million in EBITDA. We expect first-quarter March 2006 revenue of 303 to 308 million, EBITDA of 8.5 to 9.5 million, and EPS of $0.08 to $0.10.

In future conference calls we will continue to update you on the growth plan that will drive us to these first-quarter 2006 numbers and beyond.

With that I will turn the call over to the operator for our Q&A session.

(OPERATOR INSTRUCTIONS) Brooks O'Neil, Dougherty & Co.

This is Jeff Hornanman (ph) sitting in for Brooks O'Neil. A question about margin pressures in the key areas like IVIG, HIV/AIDS. What are the trends you're seeing there? Is there any kind of steps you can take turn around the gross margin pressures you've seen over the last two years?

That's the $1 million question, the steps that we can take. (indiscernible) answer and kind of segment by segment or product line by product line, on the IVIG side quite honestly the margin pressures have decreased somewhat. Pricing seems to be maintaining at what it was last quarter. Our payors' pressures have seemed to have plateaued, at least quarter-over-quarter, although we do expect some marginal pressure there.

The HIV business, the pressure really is coming from the payors and lumping the HIV medications into their discounted requirements for all the rest of their medications. And because most of our -- the greater proportion by far of our HIV business comes from our community stores, we have maintained probably higher gross margin on our HIV business than we do on our other product lines.

Greg, you want to add anything to that?

I will just also add that -- I will say on the cost side of IVIG we're seeing that stabilize as well. And we're also seeing, I'll say manufacturers beginning to react to the demand. And we're not concerned as we look forward in getting product. Our IVIG team has done a great job of finding product and locking it up. We also see that loosening up going forward. So price quarter-to-quarter has been fairly stable, and underlying cost of goods has been fairly stable compared to a year ago.

Okay, thanks. Next question, what steps are you taking to strengthen the PBM business and what is the outlook for that business in 2006?

The PBM business continues to maintain its existing business with the help of the traditional mail which includes our cash card business.

We are niching ourselves into areas that seem to be under the radar of some of the larger PBM, like the Medicaid business, like some of the other special types of PBM businesses. We think we have an opportunity there. We do a significant amount of what I will call PBM/traditional mail business from payors or employers who are looking to just provide mail service. We are beefing of our sales efforts with our sales force, focusing them on those areas of PBM opportunities that kind of fly below the radar.

That said, I would say that 50% of the RFPs we're receiving into the Company today are for request for a proposal on PBM businesses. So we are beefing it up on the sales side. We're strengthening our leadership. We're focusing on kind of niche aspects of PBM business. And we're moving aggressively to sell our traditional mail business along with it.

I have one more and I then will jump back in queue. It's pretty clear that the big three PBMs are kind of focusing more on specialty pharmacy now. Are you seeing any changes in the competitive environment there?

It's going to be more competitive, there's no doubt about that. And the big PBMs, particularly as you can see with the recent acquisitions, are focusing on the specialty business.

We believe that our advantage is going to be our community-based capability in the specialty market. We think that is a huge opportunity for us. That's why we're moving quickly into expanding our product lines into our community stores. That will be the selling point that we have in the marketplace which currently the bigger PBMs don't have.

Thanks. That's it for me. I'll jump off and get back in the queue.

Anne Barlow, Southwest Securities.

A few questions. I missed the rollout of your additional disease states, which markets you had already achieved that or were planning this quarter.

It's Vegas, Seattle, Atlanta and Indy, all very good markets with we believe the capacity to grow pretty quickly.

And which additional drugs have you deployed in these markets?

The one that we're deploying all across the network is oncology. The other, the secondary one, in most cases is going to be multiple sclerosis medication. In some areas, specific I guess to location, the geographic sort of disease opportunity will probably be moving rheumatoid arthritis and/or hepatitis C.

And you plan on how many more in the third and fourth quarters? And you're going to be done by the first quarter of next year, is that what you said?

That's correct. We should have by the end of this year 8 more. So we will have a total of 14 by the end of this year.

We won't be rolling out to 100% of the 30 locations. A very high proportion for sure, but not 100% because some of the markets and stores we don't believe are quite as fertile as others.

Do you think that is still a first half of '06 initiative to get everything done?

It's pretty much a first quarter of '06 initiative to have everything done.

Kind of could you go over a little bit of -- you talked about spending initiatives for the rest of the year. Could you kind of give us some details of where that money is being spent, what line items you're looking at, what specific initiatives are being targeted?

I'll review that. Top-level corporate -- broadly corporate administration, finance, IT, and then overall I'll say that business unit operations. Line item level I think you're looking for certainly the majority is labor take out between, I'll say the middle of April and May starting, all the way through December. We also have significant within corporate I'll say public company cost savings, ranging from the insurance side of this, both D&O and property and casualty insurance we have re-bid and are seeing significant gains from. We have one audit; had one significant Sarbanes-Oxley effort instead of two.

Digging deeper, we're seeing significant consolidation of hardware and software for multiple systems, the common systems that will drive non-labor savings, ultimately driving productivity savings. So those are significant examples.

There are also in the finance area obviously two CFOs, two Controllers, two collection heads, on down the line. The finance headcount will be dropping fairly significantly. And along with that, we're going to have one financial system instead of two so that there are many pieces there that are kind of line item level. I'll even add telecommunication costs as we move to basically one business headquarters is going to reap significant savings, not just by consolidating, but by getting better rates with our carriers which we're already negotiating and seeing.

Just quickly then a couple of follow-ups, just housekeeping. Depreciation for the quarter, and changing the name across the board to BioScrip MEI. I assume you mean also the StatScript stores. And I just wondered what you're going to be doing marketing-wise to brand everything as one name.

I'll take the branding question and I will let Greg take the amortization question.

The branding question, we made the decision to go with one name across the market. We did a -- we spoke with the individuals who were run our StatScript stores. We had a meeting with them two weeks ago. Uniformly they had no problem with the name change; thought it was in the best interest of the business, and believed with the appropriate amount of information to our customers about the name change it would not be a problem.

We are in the process of putting together a marketing plan to roll out the re-branding. We have out, amongst other things, besides getting the public name -- or the public information out about the name change in areas that are affected, we also have re-licensing and other kinds of certifications where the changes have to be made. But we have a -- we will have a I'll say marketing re-branding campaign that we will be rolling out to our markets letting them know about the name change and why we're doing it.

(indiscernible) asked a second part. You're looking for depreciation or costs related to the re-branding?

No, just for the quarter.

The depreciation for the current quarter just ended was about 900,000. And the amortization for the quarter just ended was about 2 million. What I provided -- you may have missed maybe part of the call. But I tried to provide clarity there that going forward as a result of the revaluation of Chronimed and the write-off of some of the brand-related intangibles will give us about 1.7 million amortization a quarter going forward starting third quarter and as we invest in capital about 900,000 of depreciation. Could move up a bit per quarter to 900 to 1 million as we kind of finish out the year. Does that help?

Yes thanks.

(OPERATOR INSTRUCTIONS) Brooks O'Neil, Dougherty & Co.

You talked a little bit about the community strategy with the PBMs, and I'm just wondering what's involved there in expanding the service capabilities of the local pharmacies as far as capital or people or any other costs.

Good question, the capital cost is basically nothing. The store is there. The infrastructure is already there. The people addition costs really are virtually none. We're redeploying sales force assignments from a, I will say a state territory to a very local territory. So we moved our sales force from territories that require them to do a lot of driving, a lot of airplane, calling on a lot of customers throughout many states to localized and working out of a store. So realistically the increase and expense on the sales side is essentially nil.

The requirements in order to be successful are the ability to get good information about the physicians who prescribe medications within 10, within 25 and within 50 mile radiuses of the store; the ability to get a sales individual who becomes part of that store and markets into the community to pull the product through. And it requires some educational component for the staff. Most of our stores have HIV and transplant and with the exception of our pharmacy in the Bronx have done very little to no oncology. So there is a bit of an educational component to it, but we expect this to be down at very little -- essentially no capital and very little additional operating expense.

Okay great. Last question from me, what's the outlook, if you can give it to us, as far as integration costs for the balance of this year?

We haven't provided that. Including severance, including the re-branding that we just described, and the specific, I'll say invoice or incremental costs of the integration -- and we are using some outside consulting and teams -- it's going to be in the $3 million plus range, the total in the next two quarters. That would be including severance and the direct costs that we can measure associated with it. And a good part of that -- and it could drive it up a little -- is the advertising and promotion and signage related to the re-branding that we must do and must incur.

Do you see that evenly throughout the next two quarters, or more loaded towards the front or back end?

Fairly even. A little bit towards the back end, because I think heavier piece of re-naming and re-branding -- and we mentioned this in the press release, too, in the conference call -- it's going to be fourth quarter and continuing to some degree into the first quarter of '06.

Thanks. That's all for me.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. I will turn the call back to you.

So now as we close I will remind you can listen to a recording of this conference call beginning at noon Eastern time today through noon Eastern on August 11, 2005. You can access the recorded call by dialing 800-633-8284 or 402-977-9140 and then enter the reservation number that is found in the press release. So in case you didn't catch that, you can go back to the press release and get it. You can also access the recorded call through our website at www.bioscrip.com.

Thanks for joining us today, and thank you for your continuing support for BioScrip. Have a great day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.