Option Care Health Inc (OPCH) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip fourth quarter earnings conference call.

[OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Ms. Rachel Levine, Investor Relations representative for BioScrip. Please go ahead, ma'am.

Thank you, and good morning. Welcome to BioScrip's fourth quarter conference call. Joining us today are Richard Friedman, Executive Chairman, Hank Blissenbach, CEO, and Greg Keane, Chief Financial Officer. You may find today's financial press release on the Company's website at www.bioscrip.com, under the investor section.

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's successful integrating of 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 future plans. 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 the differences described above 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. I direct you to these documents to understand the current business environment and its associated risks.

Today's call will consist of opening comments from Rich, a financial review of the quarter and year by Greg, and closing remarks from Rich. We will then conclude with a question and answer session. I will now turn the call over to Richard Friedman. Please go ahead.

Thank you Rachel and good morning.

Last year we created one of the strongest, most diversified and broad specialty pharmaceutical companies with 36 locations across the United States, Including community, infusion, and mail. This was our key goal for management and investors, and the impetus for our merge with Chronimed. The integration of MIM of Chronimed is complete, and BioScrip has been established.

While I am pleased that we achieved revenues and gross margin percentages in line with or even better than our expectations, and we were successful in the integration of our mail facilities, I am personally disappointed that we did not successfully conclude all of the synergies that we planned. We laid out an aggressive integration timeline aimed at quickly achieving our synergy targets for finance and IT. In hindsight, we moved too quickly, and our financial and IT systems, as well as our human resources, were severely stressed.

We are now focused on addressing these systems and human resource issues, completing the integration and capitalizing on the combined assets and strengths of the merged entity. Our business outlook going forward is strong. I will now turn it over to Greg for a review of the special charges and financials, and then return later to share with you where we are in our integration and discuss our growth strategy and business outlook. Greg?

Thanks, Rich.

Let me first review the charges we incurred as discussed in the press release. Charges came from goodwill impairment and PBM services, an increase in our allowance for doubtful accounts receivable, and merger-related expenses. The goodwill impairment charge of $19.4 million for the quarter, and $25.2 million for the year is the result of discontinued PBM services contracts, most notably Centene Corporation. It's a non-cash charge related to goodwill from prior acquisitions. As you know, we have been and will continue to focus our strategic energy on our specialty services segment, particularly our community and infusion businesses.

The increase in our allowance for doubtful accounts receivable of $7.1 million reflects a reduction in our collection rates during the fourth quarter due to the issues arising during the integration of our finance and IT organizations. We diverted resources to integration processes during the fourth quarter, and as a result, did not keep up with the collection demands of a growing business. We've recently added a senior project leader and 20 collectors to get us back on track, along with tightening our billing and collections practices.

Our days sales outstanding and collection rates have been historically strong. DSOs are currently 36 days, up from 34 days, good performance but we can improve. The merger related expenses were $2.5 million for the quarter and $4.6 million for the year. They include severance, facility close-out costs, and rebranding efforts, and are winding down. We will have some final merger-related expenses in 2006 as we complete the process.

Let me now address our reported financial results as provided in schedule 1 to the press release. Just a reminder, these results reflect the financials of former MIM for the full years 2005 and 2004, and the former Chronimed starting March 2005. Total fourth quarter revenue was $304 million, an increase of $137 million over the prior year's quarter of $167 million. Total year revenue was about $1.1 billion, up about $440 million over the prior year. These increases are due primarily to the revenues added by the Chronimed acquisition starting March of '05. Looking forward, we expect meaningful revenue growth in our community and infusion businesses in 2006, which will be masked by the loss of Centene and other PBM contracts.

Gross profit in the fourth quarter was $33.6 million, or 11% of revenue compared to $17.6 million or 10.6% of revenue last year. Gross profit for the year was $116.3 million, or 10.8% of revenue, compared to $68.2 million or the same 10.8% of revenue last year. The dollar increase in gross profit is again primarily a result of the Chronimed acquisition. The gross profit rate has stabilized this year due to consistent pricing and increased generic mix in PBM services. Nonetheless, we expect to see some reimbursement pressure in both of our segments in 2006.

Operating expenses totaled $61.1 million in the 2005 fourth quarter, compared to $15.7 million last year. For total year 2005, operating expenses totaled $145.5 million compared to $55.9 million last year, and again the increase in expenses is due to the charges discussed earlier, and to the addition of Chronimed's expenses starting March of '05. So the resulting loss for the quarter was $22.6 million and $0.61 per share.

The net loss for the year was $23.8 million and $0.70 per share. Moving to the balance sheet, as of December 31, 2005, BioScrip had $67 million of working capital and $196 million in shareholders equity. We had 7 million of outstanding borrowings on our $45 million line of credit. The year-end borrowing balance has covered our $12 million acquisition of Northland pharmacy, a community specialty pharmacy that we acquired in October 2005. This month, March 2006, we acquired Intravenous Therapy Services, ITS, for 13 million in cash, to give us a west coast presence from which to grow our infusion business.

We have recently increased our line of credit to 65 million to absorb these acquisitions and to provide us with capacity to cover our working capital needs. Our balance sheet is strong, and should strengthen in 2006 as we improve our collection rates and increase profitability. So to conclude, our revenue and gross profit rates have held up well this year. We're encouraged by the growing prospects in our community and infusion businesses and with our opportunities with manufacturers, and our balance sheet is strong.

Rich, back to you, please.

Thank you, Greg. We have consolidated all of our operations but have not pulled out all the anticipated costs. We are currently in the process of ensuring that our financial and technology systems are properly aligned with our business processes and that our systems are efficient. This is our top operational priority. However, this work will not hinder our ability to grow our business.

The specialty pharmaceutical industry is growing, from an estimated $40 billion to an estimated $80 billion over the next few years, and there are more drugs in the pipeline for approval than ever before. BioScrip is well positioned to take advantage of this growth through our unique pharmacy model, which includes local, regional, and national distribution. Our strategy is to grow our community pharmacy and infusion businesses and leverage our relationships with pharmaceutical manufacturers.

Community pharmacy expansion is being accomplished in several ways. First, we will continue the rollout of new therapies into our existing community pharmacies. We have already rolled out oncology, multiple sclerosis, rheumatoid arthritis and hep-C at a number of our locations. We are also selectively opening new pharmacy locations. This plan will be complimented by strategic acquisitions such as Northland Pharmacy, which was completed in October. This acquisition is expected to add approximately 25 million in annual revenue, and a new region to our national presence.

Our infusion business presents immense opportunity as well. Many of the drugs in the approval pipeline that I referred to are administered through infusion, and BioScrip is well positioned to leverage the demand for these services. We continue to sign new contracts and build therapy capabilities in our existing infusion business, and we recently announced the acquisition of Intravenous Therapy Services, a specialty infusion company in California. We now have the ability to service infusion patients on both the east and west coasts. We are focusing more resources on pharmaceutical manufacturer relationships and have signed several preferred agreements for distribution of new products.

We believe that the scale and breadth of BioScrip's merge operations were an important factor in obtaining these distribution agreements. Our community based approached to national coverage and focus on specialty services will drive our future success. We have the right model and resources in place to realize synergies and capitalize on the dynamic growth of our industry. Our vision of community-based pharmacy is the right one.

We will now open the line up for your questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS].

Our first question comes from the line of Brooks O'Neil from Avondale Partners. Please proceed.

Good morning. Thank you. I have a number of questions. I guess, Rich, I'd like to start off with the idea that historically Hank, and I think you were involved as well, had suggested that the Company would exit 2005 on a run rate to achieve EBITDA of around $35 million, and I notice your comments did not provide any insights on forward guidance. Can you share with us anything about what you think your EBITDA targets might be for 2006, or what your charges are, or how you're looking at that today?

Sure. I think that everybody realizes that we feel really confident of where the Company is going, especially on a revenue and gross profit line. Until we could get our arms around the operating expenses, fix some of the issues that we've encountered, especially in the fourth quarter, with the integration of the finance and IT, we just don't have our arms around the operating expense portion of that at this time for to us provide that guidance.

Just trying to understand. I guess the business is performing well, but you're going to spend a lot of money in 2006 to complete the integration of finance and IT, or you don't have a good handle on what -- how the business is performing, or what's the issue?

Obviously the businesses are performing well. The issue that we're facing in the finance and IT area was that the human resources and the systems were not adequate to handle everything that was being brought over. Money will be spent this year, and probably also into '07, on new systems, on upgrading what we have, potentially some new platforms the Company is running off of eight platforms of IT. It has to come together.

There are too many human resources being thrown against the systems and that has to change. We have to become much more efficient as a company. That I believe we will be able to reduce where we are today on the operating expense line in the future but we have to do a lot of work to get there. So we feel very comfortable, Brooks, about where the business is, we feel very comfortable about the growth of the business, the expansion of community, the expansion of infusion, the manufacturing contracts that we have are critical and this company is performing extremely well in those areas.

The operational side of our business is performing well. The operating expenses as it relates to each one of our businesses are right in line. The area that we have to get under control and become much more efficient is corporate finance and corporate IT and that's where we're going to be spending money initially to get this where it should be.

I guess we can follow up more on that later. Is it your thought today -- I'm getting the impression since you're leading this call and Hank hasn't said anything that you are running this company. Is that likely to be the result going forward, and if so are you planning to run it from New York or Minneapolis or some combination of the two?

Well, you know, the Company is being run where the revenues are being generated. This Company is a national company with revenues being generated in all of our facilities. What is in New York and what is in Minnesota are effectively cost centers, and, you know, I've been spending a great deal of time out in Minnesota. I'm in Minnesota today. And I will continue to do that.

I will be before I need to be to make sure this Company performs. Whether that's out in Columbus or in Minnesota or New York, or out in the west coast, it doesn't matter. The performance of this company is dependent upon the ability to continue to grow, getting manufacturer contracts, opening up additional community stores, rolling out additional product, and also reducing our costs. So I will be where I need to be to help run this company.

The longer term issue about a CEO, as we've put out, is that the board will be looking for a CEO, and we have said that. Hank is here. Hank still participates, but, you know, there is a transition going on, which is why I'm leading this call today.

Should we expect that ultimately the PBM business will wind down and go away, or do you think there's some hope that that business can be stabilized going forward?

Well, over the last number of years we've obviously selected specialty as the focus of this company and for obvious good reasons. The growth in specialty business is where you want to be. The PBM, as everyone knows is a highly competitive business. There are a number of major players out there. But we do believe there are some niche areas that we can participate in, and we believe that there are still some opportunities out there, and we will be putting a little bit more focus on that this year.

Okay. And then can you just update us on what number of the community pharmacies today can offer the infusion capabilities? I've always had a sense that infusion, like the community business is a local business, and you mentioned you have two primary locations, one on the East Coast and one on the west coast, and I just want to get a sense for where you're really at today in terms of your infusion capability.

That is a great question, because what we are currently doing, and as you know, Brian Reagan and Tony Zappa were actually looking at the number of locations we have right now that are the community pharmacies and seeing which one of those can start being used for infusion as well. As a matter of fact, in some of the stores we're actually doing some buildouts so that it can handle infusion, so over the next number of months, we will be examining and we've started that process of looking at which locations can serve also as an infusion distribution point, taking advantage of the BioScrip reputation.

I think we have an incredible infusion business. I think with the acquisition of ITS, and now using the branded name of BioScrip and with more and more recognition every day, I happen to believe that the infusion business is going to be a terrific business for us and tremendous growth opportunities.

I agree with that 100%. One last question, and I appreciate the time. Could you just comment on what level of debt you might be willing to put on the Company? Historically, obviously, up until very recently, there was none, and that was, you know, in a time when you were integrating two businesses and trying to take a lot of costs out. I think that gave investors a lot of comfort. How much debt are you willing or do you think you need to put on the company to achieve the business strategy you have laid out today?

It's a good question, because right now, we will -- the strategy at the company right now is to take advantage of what we've built out in the community and infusion side. We will be looking at opportunities going forward, but we also need to concentrate on fixing the system issues. So in the immediate term, unless there's a tremendous opportunity, we probably will not be running after any large acquisitions. So looking at the balance sheet, you're right, the balance sheet is very strong, we can take on debt, but, Greg, I have not gone through the balance sheet and looked at the debt level.

I think Rich's comments are right. We are focusing on the operation and streamlining cash, Brooks, but we have the capacity, but I don't think we have the immediate goal of I'll say loading up on debt to leverage up.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of [Ed Groom from Roanoke.] Please proceed.

Yes, I have a couple of questions. I noticed on this report, which is the first report that you didn't do this you haven't broken out PBM revenues. Do you have a number on that, and could you give us some idea of the adjustment based on whether that includes the Centene revenues for the fourth quarter and what revenues look like without Centene going forward?

Sure this is Greg. This will be disclosed in the 10-K that we'll be filing soon, the segment information. For the year, which is a full year MIM, the PBM services segment, which has got the PBM business and the traditional mail be about $380 million, a little short of $400 million.

And Centene represented how much of that?

About $130 million.

so run rate going forward, we're looking at $250 million.

Again that segment which includes traditional mail, yes.

When these two companies were merged I think the run rate in the PBM business was 400 million. That was the basis for the -- in terms of determining this merger, so I'd like to have someone who can take ownership of the results of this PBM business over the last four or five years, because it's not been a business where smaller companies haven't really prospered, smaller PBMs haven't prospered, and this company has gone from a $400 million run rate to now 250 in a five-year period when most of these companies have almost doubled their revenues. So I'd like to have someone in your organization address and take ownership of the kind of results that have been achieved in a business that represented 35% of the total when these companies were merged.

Sure, I'd be happy to take ownership and discuss it. We made a conscious decision a number of years ago that we were going to focus our efforts on the specialty pharmaceutical business. We believe that's where the growth was for this company for the future. And in doing so, decisions had to be made as to the allocation of resources, allocation of sales staff, and which direction this company was going in, and that decision was made that we were going to spend our capital, human resource capital to take advantage of the growth in the specialty pharmaceutical marketplace.

The margins in the PBM business continued to drop. It's a highly competitive business, and if you don't have, quite a few lives out there and the ability to leverage your infrastructure on the PBM side, we didn't feel there would be enough money being made there to warrant the investments against those competitors that are out there and that decision was made consciously by everyone involved in the direction that this company was going.

You know, I don't want to differ with you, but that certainly wasn't the verbiage that was articulated when the management of the two companies were going around talking to stockholders before this merger was completed, and I can assert that myself.

I'm not sure I agree with that, but it's okay.

Secondly, in terms of business sort of trying to get this business under control, I don't understand the rationale of starting a new business on the West Coast. Due existing infrastructure on the West Coast that's already established so that's not going to be a new cost center?

Well, it's a profit center, not a cost center, and the business is a freestanding business that has tremendous capability and the ability to leverage what we've done on the East Coast with the products that are sold on the East Coast could now be offered by ITS on the west coast, so it's not a cost center this is a profit center and will be accretive to this company this year and going forward.

Last question. Has the full -- have you completed the move of your IT facilities from Rhode Island to Minneapolis? Has that now been complete?

Yes.

So as for as this company is concerned, you will have on a long-term basis an -- at least your IT operations located in Minneapolis?

Yes.

And your accounting and finance?

As well.

Okay. Thank you.

Our next question comes from the line of John Riley from ACK Asset Partners. Please proceed.

The first question I have is related to the receivables issue and the write-down that you have. Where did those occur? Was it one facility? Was it one specific product?

What ended up happening is, it was primarily out of the community pharmacy. The way this company has always operated is that this company does coordination of benefits at the local level for our patient population, which I believe is an important factor for this company now and going forward. I think we're one of the only companies out there that actually offers the service.

In handling coordination of benefits, many times we're up against paper claims as opposed to electronic claims. Paper claims obviously takes a lot more work because you have to make the phone calls to the payers and you have to follow up on copays which also requires a lot of phone calls. What broke down was during the integration process, the human resources that were used historically to chase these paper claims and make the phone calls on the coordination of benefit, those human resources were re-allocated to work on the integration process of moving the finance folks -- the finance work load from Rhode Island into Minnesota.

The diversion of those people to work on that created the issue for us, because those people did not have the ability, during that period of time, to get on the phone and follow up on what was always done manually. What we're working on today is to do much of that process up-front, so that the work load on the back end is much more limited and, quite frankly, much easier to collect. So we need to put the systems in place that helps us up-front as opposed to all the manual effort on the back end.

Okay. So you anticipate during the current -- what you're seeing in your first quarter is you don't anticipate further write-downs of receivables?

Yeah, actually what happened was, as opposed to a write-down it was additional reserves that were acquired. And what you'll find over the course of this year as we start implementing many of the things that were recently found is that the collection rates will improve over the year. So that's not to say that we may have slightly higher reserve rates at the beginning of the year, trailing off toward the end of the year, and we will obviously be looking at that on a weekly, monthly, and quarterly basis. And it is being measured. So we are on top of it and we're taking the corrective action.

Following comments about what the CFO said about reimbursement pressure and gross margin in 2006, which products are you seeing that I know and how significant could that be?

What Greg was referring to is probably much more of the government-type reimbursements where there's a portion of the population. As you roll out the Medicaid/Medicare situation, especially Medicare, you will some pressure, but that's coming more on the government side than we're seeing on the commercial side.

We always make that statement, because you never know what reimbursement is going to look like in the long term, and as you know, this is a tremendous volume type of business, so we always anticipate some downward pressure. We're pleasantly surprised when it doesn't happen, but we always forecast some downward pressure.

Okay. And then just -- you said some positive comments related to opening new pharmacies and making new acquisitions. At would point would you want to make those transactions, or are you focused more on your internal right now?

Well, it's -- interesting question, because we're focusing on internal, but some of the acquisitions that we've made, especially ITS there had their own systems in place that did not have to be integrated with the accounts receivable in Minnesota. If some of those are presented to us and we could use model and that receivable at that location we would probably look at it quite hard. If there's more of a situation where we have to absorb a lot more into the Minnesota facility today, most likely we would pass on it.

At least nor the next number of months. This is all fixable. Nothing that we have is not fixable. It's a question of the receivables -- it's not like we recorded bad receivables. They were good receivables that weren't collected and they just got aged. That is all fixable. So as quickly as we fix that we get back object to the acquisition side.

Okay. Thank you.

Our next question comes from the line of [DeForest Hinman] from Paradigm Capital Management. Please proceed.

You were talking about doing some things and strengthening IT and collections. Are we going to see a jump in Capex next year? Do we have any idea what that's going to look like?

Yes, you're right, we will see somewhat of a jump in capex related to the IT systems. The stores generally don't require much capital at all.

Our capex traditionally been combined in the $4, 5 million variety. We could be up a little with the IT investment.

the capex, we'll be looking at the new systems as well as the hardware for it but when we look at the new systems we're going to be looking to bay, not build, and then go ahead and modify. There are good operating systems out there today, and it's a question of identifying which one and then having that implemented. So there will be additional Capex this year.

All right. And I had to hop off call for a second. Did we say anything about maybe collecting some of those receivables that we wrote off? Any chance of collecting those down the read or are we just giving up on those?

No, we did not give up. There are some that are very hold that the likelihood of checking is remote but there are other ones that we've reserved against that there is a possibility of collecting those. And we're going to be looking to take M of the real old ones and outsource that, then to concentrate more of our efforts on the newer ones to make sure they don't become older ones. If we could prevent many of these receivables from aging, and we think we can, we will be in very good shape, then we will deal with the older ones on an outsourced basis. So we think there is a potential.

And how old do we consider an old receivable to be? How many days?

We start looking -- I personally start consider it getting pretty old when it hits the 180-day bucket. Our job is to make sure we don't get them to that 180-day bucket, that also it's on an exception basis, but we have to be in position to prevent that from happening. All right. And we couldn't give guidance at this time but at the end of the first quarter will we have a better idea in terms of what's going on in terms of operations?

I think as we get our arms around it I'm hoping we see much more normalcy and are able to do -- yeah, I'm hoping that we will have the visibility so you could see it.

All right. Thanks a lot.

Our next question comes from the line of Glenn Garmont from First Albany.

Just a couple of questions. I just wanted to understand the gross margin expectation issue a little bit, Rich, because thinking about, with Centene rolling off midyear with the upcoming generic cycle, the fact that specialty is going to be a higher component of overall mix to model flat to downish gross margins sounds like there's some degree of conservatism in that commentary. Is that fair to say? Or is there something else that I'm missing that --

No, you're not. I think historically, when you look at the infusion business, for example, years ago, they were running in the 40% plus range, and they've come down into the low 30% plus range. Across the board. In certain cases when you were bidding on some large national contracts the margins are significantly lower than that. Lack at the cap program, being part of the cap program your margins, based on government reimbursement, is going to be significantly lower.

The part D program causes a significantly lower margin. So, I think overall what you have to look at are the products that are out there, infusion historically has been higher margins. The infusion business has also been more of a fragmented business. It's a major focus of us today because the margins are significantly higher than you see in a community pharmacy side. So we're going to spend a lot of time and a lot of effort growing that infusion side, and if we're very successful over the next number of years of growing infusion, you should see margins maybe even increase because of infusion. So over the longer term, Glenn, I think as we grow more of infusion it's all going to be dependent, I believe, on product mix and payer mix. That's going to drive where the margin is at any particular point in time.

Okay. Fair enough. And with the latest acquisition, you know, what's the current infusion revenue run rate for this company?

At ITS? I think we reported that.

At ITS, I think we reported a run rate of about 10 million. Your question is what is the total infusion business. I think what we've communicated, with various points by now is, with the two combined you'll find an 80, $90-plus million run rate. And growing

And that's with ITS?

Yes.

That's helpful. Rich, you made reference to the cap program. Have you -- has there been any recent communication with CMS, or where do we stand with that?

It's a week to week. We actually anticipate hearing something next week, so we're waiting to see, like a number of other companies.

Okay. And then finally, you know, is there any target date by which the board hopes to have the CEO search concluded by?

I think they would really like to have that done sooner than later to, you know, bring stability, so I anticipate that, you know, hopefully the process will be sooner than later.

Rich, are you considering sort of throwing your hat in the ring on a full-time basis, or is there a search underway?

I'm going to do whatever it takes to bring the vision that we all had here from a number of years ago. When we started this, we were doing about $200 million, and now we're up to $1.2 billion. we've reengineered the company. I think the vision here, a great part of it has been my vision and Hank's vision of putting this company together and where it's going, so I'm going to -- and I'm also a significant shareholder.

So I'm going to do whatever it takes in whatever position to make sure this Company achieves its potential. And, you know, whether that's Chairman or CEO or -- it doesn't matter to me. What I need to do is make this company perform to the best of its ability, so the position really doesn't matter to me. It's really getting this job done.

Okay. Thanks for the comments.

Our next question comes from the line of Bill Nasgowitz from Heartland Funds.

Good morning. Just refresh my memory, when did this merger -- when was it finalized?

March of '05, Bill.

Coming from the Chronimed side of the family where we struggled with profitability, it's disconcerting essentially year after this merger to hear about dislocations within the -- because of integration problems and this and that. I think you just said we're going to continue to grow this company. Profitability seems to be an afterthought. It's most disconcerting as a shareholder. Could you comment on that?

I have to agree with you. I am a shareholder. I think that from a revenue and margin standpoint, that we've done well, very well. I think there's tremendous upside potential in this marketplace. I think from getting our SG&A and operating expenses under control, it was extremely disappointing.

The systems that we believed could handle the integration, systems including technology as well as human resource systems, were not able to handle what we were trying to bring over. So I agree with you.

Well, I would like to see a concerted effort on the part of management and the board to keep profitability as -- perhaps as a number one goal here going forward, versus continual growth and growth without little on the bottom line.

Couldn't agree with you more.

Thank you.

Our next question comes from the line of Jennifer Pearlman from Burgundy Asset Management. Please proceed.

Good morning. Couple of questions, really just to flesh out some things you've already spoken to. The first relates to capital spending. I'm just wondering if you could quantify, both in terms of a dollar amount and a time horizon, for the investment that will be required to address the deficiencies that you've spoken about in terms of IT and finance. And also what kind of implication that investment of both management's time and of capital will have on growth capital spending, so whether it's expansion of your community pharmacies to add infusion capability, like you've talked about, or building West Coast infrastructure or acquisition.

Jen, I can maybe break into it two parts, the way you asked it. The growth capital -- and I'll say maybe the maintenance capital, because we have been growing at fairly consistent rates, is the $4 to 5 million level, and that is some basic IT and leasehold improvements as we build out and grow pharmacies. The incremental capital, the IT capital as you're speaking to, honestly I would say is not fully quantified. We're completing the process of laying out the framework for that IT process rollout. So I couldn't answer that. In orders of magnitude, though, arguably in the 3 to 5 range for that.

3 to 5 incremental?

Potentially.

And the time horizon, presumably if you don't have a number you're sort of just flushing it out now, are we talking several quarters? Is this a 2007 --

Yes, Jen, you're on the target. It will come in pieces, and it's certainly small pieces three months across, up to a two-year horizon.

So, in other words, we'll see -- the P&L pressure and higher levels of I guess growth or incremental capital spending for the next two years?

Thereabouts, yes.

And then, also in terms of -- how does this -- how do you prioritize with acquisitions and you've talked and others have asked about building out west coast infrastructure. How does that factor in here, in terms of your overall capital spending? Is there incremental spending to address those two buckets?

I would say no, that the capital there is really going to be nominal. It's applying the sales and marketing resources and the operation resources to take advantage in both locations of what each location brings. So there's not a significant capital --

It's a normal part of our spending and we don't see any incremental capital spending for that.

Okay. And then in terms of acquisitions you've already alluded to perhaps a slow down there as you tried to get what you've already eaten up integrated, so can you give us a run rate for organic growth, infusion, specialty, and PBM?

At this time we're not going to put guidance out there but the industry is doing extremely well and we're hoping to keep pace with the industry.

Okay, and my last question just relates to bad debt, which you've spoken to, and I understand sort of the hiccup in Q4, but going forward can you give us a feel, and it sounds like it will take you awhile to get things up to snuff with collecting your receivables, but can you give us a run rate maybe for '06 or even longer term on what bad debt should look like?

At this point, I wouldn't want to give awe rate. As Rich alluded to earlier we may after slightly higher rate early in the year to be reserving until we're certain where our collection rates land, and then manage that down through the year into '07.

Okay.

Our goal is to get back to where we were, and we will get back there. It's going to take a little time to do that.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from the line of Anne Barlow from Sterne Agee & Leech.

Most of my questions have been answered. Quickly, Greg, we should expect to see merger related expense detailed in, what, first and second quarter or rest of year?

First and second maybe, and a small amount relative to what we've reported.

Smaller than what was in fourth quarter?

Yes.

And going back, I don't think I caught the number of infusion locations you have right now.

Two. One east, one west. Burbank and New Jersey, Livingston. What we have, as Rich alluded to, we're examining the existing other community locations to expand infusion into on a select basis.

and if you looked out a year or two years out what is the goal on the number of retail locations as far as, I know you talked about expanding that -- talking about adding ten, or what are kind of long term plans there?

Yeah, right now, what we're looking at is in the neighborhood of 40 stores, and based upon those 40 stores I believe that the expectation is 60 -- we will get to 60% of the population on those 40 stores.

Right now we are at 32 community pharmacies plus the two infusions, so Rich is talking about growing from 32 towards 40.

Five stores planned in '06.

Right.

And, so we should have the adequate coverage by the end of '06 into '07 to be able to get to the community pharmacy layout and therapy expansion of where we anticipate it to go.

Okay. Thanks.

Our next question is a follow-up question from the line of Ed Groom from Roanoke. Please proceed.

One other question on this whole IT area. You've moved your Rhode Island facilities to Minneapolis. In that process, wasn't there some thought about whether you could handle all of your processing and IT needs from -- in that office? What does that involve? Moving your Rhode Island facilities to Minneapolis, did you just move a few people? Did you move the people with no infrastructure? What happened here in terms of that integration?

Ed, this is Hank, since I've been quiet here for the whole thing, there never was a concern about whether we could handle that out of Minneapolis. What was involved was both equipment and people. The equipment was transported from Rhode Island to Minneapolis and reset up here. For the most part, outside of maybe a half a dozen people who actually moved from Rhode Island to Minneapolis, the rest of the positions were eliminated in Rhode Island and rehired here in Minneapolis. But there never was a concern as to whether it could be handled out here. And I think --

what's the problem then?

Ed, I think you've got to go back to what I said earlier. What happened was that the systems that were being used for a number of years where we set up, for example, exception reports to look at the items that didn't normally go through the system on an automatic basis. When you -- the coordination of benefit issues, the copay issues that we had to chase that came out on exception reports that we were using -- we were using manual systems in order to chase down these items. The systems were the same way they were for a number of years. The reallocation of personnel during that integration, when they started moving it over in the fourth quarter, the people who were normally chasing down those exceptions were no longer chasing down those exceptions.

They started to do other work and therefore the agings increased. The systems that were in place are the same systems that were in place for a number of years, it's the human resources -- the system probably wasn't adequate poor the last number of years. And the human resources were being thrown against a problem. And then when you re-allocated those human resource you created the aging issue. What it we're doing now is fixing the system.

Our next question is a follow-up question from the line of Bill Nasgowitz from Heartland Funds.

back to profitability again, just looking out since we're supposedly all long-term investors here, looking out two or three years, what do you think is a reasonable range in terms of net profitability? Net on sales for this company in this industry. What is management's goal looking out let's just say three years?

Well, when you look out three years we got to be able to start leveraging the infrastructure, which is absolutely critical. A perfect example is when we moved the mail facility down to Columbus. We moved down 70, $75 million and just had to add less than 20 people in order to handle that volume. That's leverage.

So if we could be in a position that we could take the operating expense as it is today with modest growth in that area, get it down to where it should be, and start looking at that growth on the top line, there's going to be more and more profitability that drops down to the bottom, so if one is able to get that operating expense down to a level of 8% or a decent number over the next number of years, and actually have that number kind of decline as the revenues go up, and the margins are in the 10 and 11% range, you're going to see lot more, and you'll see on a percentage basis the operating expense as a percentage of revenue start coming down more and more profitability.

That is the whole purpose of this, is to take advantage of that pipeline that's going from 40 to $80 billion and get our operating expense to a level that's efficient, significant, less than where it is today. And take advantage of that profitability. That's the whole point of what we're trying to accomplish.

What target range would we be shooting for three years out?

We're not putting guidance out there now so it would be -- I don't think it would be adequate to come one a number today for you.

Does the board specifically have a profitability goal for three years?

The board has reviewed and approved the forecast for 2006, and they have not looked beyond that.

Well, perhaps they should. Thank you.

You're welcome.

Our next question is a follow-up from the line of Brooks O'Neil from Avondale Partners.

just wanted to follow up one more time on Ed's questions on the AR and what exactly happened. I think you said the problem was in the community pharmacies. Sounds to me that the problem was primarily based in Rhode Island, it was a manually handled issue and most of those people are no longer part of the company. Is that --

Brooks, absolutely not. Community pharmacy was always housed in Minnesota.

No, I know. That's why I was surprised because it sounded like the A R issue was more related to some of the people that were in Rhode Island. Is that not right?

No, it was during the consolidation of the finance group in Minnesota that the people in Minnesota who were chasing down the coordination of benefit and copays got diverted to work on other finance or other issues. And in addition to the community stores it was also some of the mail, so I don't want anybody to think it was strictly, but it really related to how we went ahead and had the coordination of process.

Fair to say those people are still part of the company and they're back doing what they've historically done at least until you can buy a system that will enable to you do this more effectively?

Well, yeah, they are -- we are focused. We've added more people to the process. We've assigned senior people to monitor this thing and manage this process on a daily basis, and obviously we're all on top of it.

I think I understand better. Thank you.

Mr. Friedman there are no further questions at this time. I will turn the call back to you, sir.

Thank you very much. And thank you for participating.

Thank you. There will be a replay for today's conference. To access the replay please dial 1-800-633-8284 and enter 2128-6494. 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. Have a great day, everyone.