Option Care Health Inc (OPCH) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip third-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the conference call over to Mr. Brad Schumacher, Director of Investor Relations for BioScrip. Please go ahead, sir.

Thank you and good morning. Welcome to BioScrip's third-quarter conference call. Joining me today are Hank Blissenbach, BioScrip's President and Chief Executive Officer, 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 businesses of MIM Corporation 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 plans and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors. Important factors that could cause some of 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 Securities and Exchange Commission Regulation G, I direct you to Schedules Five through Eight of the Company's third-quarter financial press release for line item reconciliations between GAAP and non-GAAP financial measures referenced in today's press release and conference call. You may find today's financial press release on our website at www.BioScrip.com under the Investor Relations section.

Today's call will consist of opening comments from Hank, a 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 now completed our second full quarter as BioScrip. From our combined entity purchasing power, increased growth opportunities to the cost takeouts realized and to be realized during integration, we're reaping the benefits of that merger. We are right on track with our expected performance for first quarter 2006 as we have been communicating since the time of the merger. And importantly, our community pharmacies are now approaching a $600 million annual run-rate, representing over half of the Company's revenue and exceeding the total revenue of the Legacy Chronimed.

Let me give you some key updates. We are making real progress as we move to the final stages of integration and realization of our cost reduction initiatives. Operating expenses are where we had planned them to be at this point. As originally communicated, the full benefit of our spending actions will be realized by first quarter 2006. Remaining cost takeouts to occur this year include expense duplication and finance and IT, as well as some one-time charges from completing our Sarbanes-Oxley compliance work, savings from facility consolidation in Rhode Island and Minneapolis and savings from consolidating our business insurance policies.

Our growth strategy of expanding the specialty products offered in our community-based pharmacies is well underway. We have expanded therapies into 10 of our 31 stores. This strategy broadens our community revenue stream to include oncology in all key locations, plus other core conditions treated with biotech injectable products.

Consistent with this strategy, we have strengthened our community pharmacy business through the acquisition of Northland Pharmacy located in Columbus, Ohio. Completed in early October, Northland gives us an established community specialty pharmacy in a geographic region that we previously did not have a presence. Northland currently generates approximately 25 million in annual revenue and has a business model representative of our goal in our other community pharmacy locations.

Third-quarter revenues were slightly ahead of plan, and we are building off of our second-quarter 2005 results. Our underlying September quarter revenue, excluding previously disclosed lost contracts, grew approximately 36 million or 14% from last year's September quarter. Revenue growth is coming from all of our business units.

From a gross margin perspective, third-quarter consolidated gross margin increased 20 basis points from 10.6% in the year ago quarter to 10.8%. PBM Services has been stronger than a year ago due to stable reimbursement levels and improved generic utilization, along with stable Specialty Services margin.

One more thing before I turn this over to Greg, we made the decision to operate under one brand, BioScrip. We believe it is prudent to have one recognized name in the marketplace. By the end of this calendar year, most if not all of our business units will be rebranded as BioScrip.

Now I will turn it over to Greg for a review of our financials in more detail.

Thanks, Hank, and good morning, everyone. Let me comment on the special charges for the quarter first.

As discussed in the press release, special charges in the quarter totaled about $1 million or more than $0.01 per share. These charges were made up of merger and rebranding expenses, including severance that will continue through the end of the year and to a lesser extent in the first quarter 2006.

Let me discuss our third-quarter adjusted results then provided in Schedule Four to the press release. These are the results that reflect the financials of BioScrip at both Chronimed and MIM and combined for all periods presented and exclude the special charges. We believe these results reflect a reasonable basis of comparison and provide a foundation for projections. So

on an adjusted basis, total third-quarter revenue was about 294 million, a decrease of about 10 million or 3% over the prior year's quarter of 304 million. This decline came from the Specialty Services segment, which was down about 12 million from 208 million last year to 196 million this year, due mostly to the previously disclosed loss of business from Aetna. Excluding the 30 million of Aetna business from prior year results, the underlying Specialty Services business grew 10% year-over-year.

PBM Services revenue, which includes the traditional mail service operation, was 97.9 million in the third quarter '05, an increase of 1.9 million or 2% over the same period a year ago. This modest growth was realized despite the previously disclosed contract expirations of almost 16 million in PBM-related contracts earlier in the year.

Gross profit in the third quarter was 31.7 million or 10.8% of revenue compared to 32.3 million or 10.6 of revenue last year. This increase in gross profit rate is due partly to the loss of Aetna, which was at a lower gross margin than the remainder of our business. Also, though, our PBM Services gross margin rate has improved year-over-year due to stable pricing and increased generic mix.

Now let's take a look at operating expenses, excluding special charges. Total operating expenses were 29.7 million, an increase of 2.9 million or 11% over the prior year quarter. New amortization expense from the Chronimed acquisition accounted for a third of this 2.9 million increase. Operating expense as a percent of revenue was 10.1% in the current quarter compared to 8.8% in the prior year quarter.

As Hank mentioned, we are completing the final stages of integration and cost takeouts through the end of 2005. Income from operations on an adjusted basis was 2 million compared to 5.6 million in last year's third quarter. Our resulting EBITDA was 4.7 million for the September quarter, significantly greater than our 2 million operating income given our significant non-cash charges for amortization. So this total of about 2.7 million a quarter in depreciation and amortization equates to about $0.04 per share in non-cash charges. Also, our income from operations and EBITDA do not yet reflect the full benefit of the merger cost savings, which we expect will be fully realized starting January of '06.

On an adjusted basis then excluding the special charges, net income was $0.03 per share for the third quarter compared to net income of $0.09 a share in the prior year quarter.

Now moving to the end here, taking a look at the balance sheet at September 30, BioScrip had 79 million of working capital and 217 million in shareholders equity. We had no outstanding borrowings in our $45 million line of credit, though as expected our cash balances are down. This is a result of the last several quarters of merger and related charges, as well as an increase in our receivable collection periods. I fully expect that our targeted cost savings, improved wholesaler payment terms and improved collection periods will result in expected positive cash flows from operations in 2006.

Now also as just recently announced in early October and as Hank mentioned earlier, we completed the acquisition of Northland Pharmacy, a community specialty pharmacy located in Columbus, Ohio. Now the purchase price was about 12 million in cash, plus a potential earnout payment based on future performance benchmarks. Northland currently generates about 25 million in annual revenue, and we expect Northland to be accretive to earnings per share in calendar 2006.

Hank, back to you.

Thanks, Greg. Let me comment on the financial outlook for the balance of 2005 and first quarter of 2006 and remind you that these are on an adjusted basis, which excludes special charges and assumes the Chronimed acquisition took place at the beginning of the year.

We expect revenue for total year 2005 to come in at approximately $1.18 billion with fourth-quarter revenue of 295 to 300 million; total year 2005 EBITDA to be approximately 20 million with fourth-quarter EBITDA of about 5 million, and we expect total year adjusted earnings per share of approximately $0.17 with about $0.04 EPS in the fourth quarter.

As I look to first-quarter 2006, I expect that our drug purchasing efforts will have a positive impact on gross margins. I also expect to see some revenue declines in our PBM Services area as a result of planned changes offset by growth in Specialty Services.

So for first quarter 2006 we continue to expect revenue of approximately 303 to 308 million, EBITDA of 8.5 to 9.5 million, and EPS of $0.08 to $0.10. We expect that there will still be some special charges related to the merger and rebranding that will continue through the first quarter March 2006, but these are expected to be minimal.

Last, beginning in first quarter of 2006, consistent with our growth strategy and our intent to increase reporting transparency to our shareholders, we will begin providing more information on the performance of each of our key businesses, including community pharmacy.

As I close, again we are right on track with our expected performance for first-quarter 2006. I'm looking forward to a strong post-merger 2006, and I will now turn the call over to the operator for a Q&A session.

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

Good morning. This is Tony Fellington (ph) in for Brooks O'Neil. How are you guys doing? So Brooks just had a few questions along the line of, in terms of what issues are you guys finding out there as you kind of look at your local store front and the store front in terms of expanding there with the payers, doctors, hospitals, patients, pharmacists, etc.? Are you seeing anything there?

Well, I don't know if I would call it an issue. The challenge is that the pull-through endeavor focuses on physicians, which was a little different from the traditional specialty pull-through, which is a payer-driven process. This is a pull-through at the physician's office.

Our sales force that we have, as you know, restructured over the last several months is a sales force that is -- has experience with and will continue to drive the business through at the physician level. So that is probably the biggest change. It is not an issue; it is just a change.

Secondly is that the stores in the past outside of the store -- the operations that we picked up from MIM have been primarily HIV and transplant operations. So there is a new type of physician that we are calling on at this point. It is oncologists.

I think the third is that the oncologists are going through a decision process as to whether they are going to continue to do what is called the buy and bill process, which is what they have been doing in the past, which is buying the product from a wholesaler and then billing. As you know, CMS is in the process of decreasing the reimbursement to physicians, and it is because of that that we are primarily going after the oncology business.

So the biggest change for us has been a different product focus, which is oncology and a different prescriber, which is the oncologists. That ramp-up period -- I think pharma will say that you need three or four calls to a physician before you actually see some results. You know, we have been working on this now for three or four months in several of our stores, and we are beginning to see that ramp-up.

So it is a little different sale and a little different opportunity for us with a different product line.

Sure. And are you seeing any supply or pricing issues impacting margins or kind of your outlook? I mean obviously IVIG has been a big topic for some of the other companies out there. Are you guys seeing anything there? Can you talk about that?

Greg, I will let you comment on that.

Tony, really nothing different than we have been talking about for at least the last quarter. We are finding the product we need to meet our customers' needs. There is I will say cost of goods pressure continuing to get that same value. So margins have kind of come down over certain periods. They are kind of leveling out at the levels we have seen in the last quarter or so, and we don't see significant changes in IVIG going forward.

I think one of the benefits that we have is experienced people who have for several years been -- have kept their ear to the ground in terms of pricing opportunities and purchasing opportunities. Any product that is a blood-borne product such as IVIG runs into the supply and demand issues and pricing issues, and we utilize our ability to do prepurchasing as much as we possibly can.

Sure. Can you talk just lastly kind of your outlook for kind of further acquisitions or new drug relationships? I know you have talked about it a little bit, but if you can expand on that at all?

The only thing I can say is that, as we have said, acquisition is part of our growth strategy. We continue to work our relationships with the pharmaceutical industry in new opportunities with drugs. As you know, we have decided awhile ago that we were going to concentrate on only areas that we could provide value to pharma and areas that we have expertise in, and those processes and opportunities are working very well.

(OPERATOR INSTRUCTIONS). Anne Barlow, Southwest Securities.

Good morning. Congratulations on the quarter. A couple of questions. Looking at the change in the oncology environment, Hank, how are you guys positioned to work either way? Are you guys basically positioning yourself to work either way whether it is buy and bill, or are you being in the billing position and just filling the scrip for the oncologist?

Yes, I'm not sure -- the answer is yes. We are able to work either way. Are you talking about whether we would partner with somebody else (multiple speakers) or other pieces of it? Or --

I just meant are you positioned to definitely take the scrip and bill Medicare directly or do the buy and bill either way the physician wants to do it?

We would position ourselves to do it either way. Our opportunities is really what the physicians who decide not to do the buy and bill piece. I mean that way we would do all of the billing process. We would distribute the drug and so on. The margins on a wholesale type of an arrangement with the physicians is significantly less.

We do some of that now in some of our locations, but it is a small part of the business. But we wouldn't be able to do that.

But again I will say I think the real opportunity is to take advantage of what we believe is going to happen with the oncologists, which is the buy and bill is going to go by the by, and physicians will begin to move to the -- or administer the drug in the office after it is purchased through the normal prescription drug channel.

Are you seeing any movement or any interest on your private payers to go to that same model?

Yes, I think that is what is going to happen. You can see that across the board. You can see it with the -- our biotech injectable contracts include oncology drugs, and they are all at discount levels that are similar to what CMS is offering on the Medicare side of Part B.

Great. And then a couple of follow-up questions. It looks like maybe your rollout of your new drugs to the StatScrip stores is maybe a little ahead of schedule, or are you pretty much right on where you thought you would be?

They are a little bit ahead of schedule. I'm actually trying to slow it down a bit. Because I want to make sure that the small number of stores, the smaller number of stores, the 10 that we have today, is solid, up and running, and that we are learning what we need to do and need not to do. But I would say that the process -- I mean it is running ahead of schedule. You are right.

What is your end goal here on the number of stores? I know not all 31 will necessarily have expansions that -- about what are you looking at?

Well, it depends on who you talk to inside here. I expect to have expansion on all 31 stores. The product line could be different. I mean the oncology emphasis could be less in some stores and more in others.

I think I will give you an example. In the Northland Pharmacy we just bought, they do little to no HIV or transplant business, and the opportunity there is to expand that product line into those stores. We have stores that are strong on the multiple sclerosis, MS, side; do a little rheumatology and no oncology.

So we will go store by store. It is just that right now because of the timing with CMS and Part B is I wanted to get out in front of the oncology situation. After that, we will decide what else we put in the stores.

My last question is to Greg. On the receivables, you mentioned maybe a tick-up in the DSOs. Where does that stand, and kind of what is your goal for the next few quarters there?

Good question. I would say I would have expected a little bit of a bubble here from March to September, which we are seeing, as we transition the functions into one location.

Right now what we are seeing is about 39 days sales, and combined at acquisition we were at about 36. So we are up a couple of days. We are still I will say very strong relative to how you look at other specialty pharmacies, you know, at 39 days. But I would expect us to get that back down in a quarter or two.

Glenn Garmont, First Albany Capital.

Greg, I apologize if you gave this number to us earlier. You know, digging into the gross margin a little bit, you mentioned that one of the drivers for the improving year over year was the loss of the Aetna contract. I guess if you kind of strip out the lower margin at the contract for both periods, directionally were your margins higher or lower in specialty this quarter relative to a year ago?

Let me try to answer that a little clearer than maybe the way we laid it out. Let's look at sequential quarter first, which I think is the most important because a year ago is a little I will say difficult to be pure apples-to-apples.

The same answer is even without Aetna, the margins are flat or up in specialty. But specialty from second-quarter June to third-quarter September are up just a little bit. You know, I think it is about 10 basis points.

And then the PBM Services, including traditional mail margins, are up a little bit as well sequentially. You know, the price is holding I will say on the PBM Services side with generic mix positive, and specialty I would not say is necessarily a trend. Moving 10 basis points up or down a little is I think solid indication of not great price pressure despite the infusion of price pressure. But quarter against last year without Aetna it is still slightly favorable.

Okay. And then on the PBM side of the business, are there any noteworthy contracts up for negotiation either in the back half or the back part of '05 or early '06 that we need to be aware of?

There is none that are up for negotiations there that I'm aware of. There are some opportunities that we have on the PBM side that we hope to come closer.

Your question is an appropriate question because it is this time of year when the PBM changes, as you know, this in our commentary that we know that we are going to lose a couple of PBM contracts. We expect to offset that with some new PBM contracts as well, neither of which have we really talked specifically about.

Okay. Great. Thanks for the comments, guys.

Thank you. Mr. Blissenbach and Mr. Schumacher, there are no further questions at this time. I would like to turn the call back to you. Please continue with your presentation or closing remarks.

Okay. Thank you. So now as we close, I will remind you that you can listen to a recording of this conference call beginning at noon Eastern time today through noon Eastern time on November 10, 2005. You can access the recorded call by dialing 1-800-633-8284, and then enter the reservation number, 21266460.

I think this is also in the press release, so in case you did not 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.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect. Have a great day.