Option Care Health Inc (OPCH) 2006 Q1 法說會逐字稿

Welcome to the BioScrip first quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Lauren Posner, Investor Relations representative for BioScrip. Please go ahead.

Thank you and good morning. Welcome to BioScrip's first quarter conference call. Joining us today are Richard Friedman, Executive Chairman; Hank Blissenbach, Chief Executive Officer; and Greg Keane, Chief Financial Officer.

You may find today's financial press release on the company's web site 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 at the Company, its directors or its officers with respect to the future operating performance of the Company. The operational and financial impact of certain new governmental programs on the Company, and the Company's successful integrating of the businesses of former 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 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 risk.

Today's call will consist of opening comments from Richard Friedman, a financial review of the quarter by Greg Keane and closing remarks from Richard Friedman. 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 Lauren, good morning everyone.

Our first quarter revenue was in line with our expectations. We expect further revenue enhancements such as the cap program commencing July 1st of which we are extremely proud to be named as the soul vendor by CMS. Our infusion business remains strong and we have been very pleased with our ability to fulfill the distribution needs of manufacture partners, especially as it relates to new product distribution.

In the first quarter we experienced margin pressure, which is common in our industry. To offset this we must increase volume at extremely low incremental costs and reduce our overall spending. We are unhappy with the level of sales, general and administrative spending and we are focusing on significantly reducing these costs in the coming quarters.

I am here to tell you that in the last month a number of positive steps have been taken within finance and IT to have us run more efficiently. We have stepped up our collection efforts and I am confident the financial statements in the second quarter will begin to record these improvements.

I will now turn the call over to Greg for review of the financials. Greg.

Thanks Rich.

Our income statement comments will refer to Schedule 3 of the press release, which shows proforma income statement results in the prior year quarter for better comparability. You can also refer to the schedule on our web site at www.bioscrip.com. These proforma results assume that the Chronimed acquisition took place at the beginning of first quarter 2005.

Total company revenue for the first quarter 2006 was approximately 300 million, a decrease of 3 million or about 1% from the first quarter 2005 as expected. Within our two segments revenue for specialty services which includes the infusion, community and specialty mail business was 204 million, a decrease of 6 million or about 3% from the prior year quarter as expected.

This decrease was created by a $25 million decline in specialty mail revenue due mostly to last year's termination of Chronimed Aetna contract which ended on February 28th, 2005. These declines were mostly offset by 45% quarter over quarter growth in our infusion business and increases in community.

Our March, 2006 acquisition of ITS, a west coast infusion business, added about 1 million of revenue in the first quarter with the full benefit to be realized in second quarter.

Revenues for PBM services, which is made up of the PBM and traditional mail business was 96 million, increase of 3 million or about 4% from the prior year's first quarter. Revenues increased despite our recent PBM services contract terminations, including the beginning of the migration of Centene to its own PBM. We will see the full impact of the Centene revenue decline in the second and third quarters this year as the full transfer of business takes place.

Gross profit for the quarter was 30.3 million, a decrease of 3 million or 9% from the first quarter 2005. Gross profit as a percentage of revenue was 10.1% in the first quarter versus 11.0% for the same period last year due to reductions in reimbursement rates in both of our PBM and specialty services segments, changes in product and therapy mix and higher product costs.

More specifically in PBM services our traditional mail margins have declined as some of our higher margin contracts have been either repriced or replaced with lower margin business.

In specialty services most of the negative margin impact is in community where our revenue mix has moved to the lower Medicare Part D reimbursement rates that went into effect in the first quarter. Also infusion gross margins declined from the the prior year due to higher IV IG product costs in the quarter.

SG&A expenses for the quarter were 27.9 million, an increase of 1.9 million or 7% compared to 26 million in the same period a year ago. The increase is primarily due to higher spending in specialty services segment where we are investing for growth. Along with increased spending in finance and IT and stock option expense reported in the quarter. We also incurred 300,000 in severance during this quarter related to our CEO's retirement. The severance accrual will continue at approximately 300,000 per month through June of 06, second quarter.

Bad debt expense for the quarter was 2.3 million, an increase of about 700,000 compared to 1.6 million in the same period a year ago. As previously discussed this change reflects an increase in our bad debt reserve rates from 0.52% of revenue last year to 0.77% of revenue this year and it reflects our slower than expected collection rates that we experienced in fourth quarter 2005.

Also as previously communicated in this March, we added a senior project leader and began the process of adding staff to get us back on track along with tightening our billing and collection practices. We have fully staffed and trained these new employees and are beginning to see receivable improvements as of the end of April. We will report on our collection process again in our June quarter investor call.

So the resulting net loss for first quarter 2006 was 1.2 million or $0.03 per share compared with proforma net income of 900,000 or $0.02 per share last year.

Moving to the balance sheet, which is Schedule 2 to the press release, at the end of the first quarter BioScrip had working capital of 59 million and shareholders equity of 196 million. We had 30 million of outstanding borrowings on our 65 million line of credit and no long-term debt. The increase in outstanding borrowings from December is due to the acquisition of ITS in March, some opportunistic forward-looking inventory purchases, and the increase in account receivable as discussed previously.

Specifically regarding account receivable our day sales outstanding or DSOs, measure of the speed of collections were 39 days at the end of March, unfavorable to our 36 days at December year-end. We expect to see our DSOs improve by about three days by June quarter end, back down to approximately 36 days.

Our days on hand inventory is up slightly from December, from 11 days on hand to 12 days on hand. We have built up a modest amount of inventory to support our new manufacture programs and to execute some opportunistic forward buys. Of note is our historical days on hand rate had been between 10 and 11 days. So overall then we believe we can improve our working capital model by 3 to 4 days by June quarter end. Which will free up at least 10 million in cash from our March borrowing levels.

To summarize our balance sheet is strong with opportunity for improvements in our working capital model which we expect to see at June quarter end.

I'll now turn the call back to Rich.

Thank you Greg.

We believe we are taking the appropriate action to reduce SG&A. These include system enhancements to reduce labor costs and the elimination of nonessential spending. We are examining each aspect of our business to find expense reduction opportunities.

We are looking forward to increased revenues through the commencement of the CAP program starting in July, increased distribution of new specialty products such as [vivaglobin and exchange]. Increased infusion revenue for the acquisition of ITS and further expansion and increase in new therapy expansion at the local level.

We remain optimistic about our ability to grow BioScrip profitably.

We will now open the lines up for your questions. Operator. Operator.

Yes, sir.

We are now ready to open the lines for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Matt [Chihold], please proceed.

Morning Rich. Can you report, is there any progress on CEO search or have you decided, is that a position, you will keep the position yourself for awhile.

Hi Matt, good morning.

Morning.

The board has decided, decided a while ago, the board is commencing a search for the CEO, will be reviewing a number of candidates and that has commenced.

Is there a time line?

Yes, they are actually doing it right now. So we're hoping that, to have this wrapped up in the fairly near future and so it is something that's extremely important for the Company and they're in the process of doing it.

Can you comment at all, are there certain sorts of of backgrounds that you favor for this candidate, someone got a lot of specialty experience.

Yes. I think first of all it has to be a real good leader and we prefer somebody coming out of the industry. And especially with the consolidations that have taken place over the year, we expect that there are a number of very qualified candidates out there.

Personally, you know, I want to look for an individual that also has experience of reducing costs and working in an environment where you could leverage the assets that we have in place so we could take advantage of scale which was one of the major reasons that we put these two companies together. Quite frankly we have not been able to execute in what we believe that we could get out of it.

So having somebody coming out of the industry, somebody who realizes that we're dealing in an industry of tightening margins, reimbursement rates, distribution, somebody who has good manage care experience that could help us, I think we're doing well with the manufacturers, I think we're doing really well especially now with the government. But just somebody with well rounded experience I think would be very beneficial to this company.

Once you have identified and hire that individual can you speak to what your role will be on a go forward basis.

I would love to continue and hopefully the board, my contract is coming due in November and my expectation is to stay on in a role that would help strategically look at various opportunities as we have in the past. And be supportive of the CEO. So I would expect my role to continue and I look forward to that opportunity.

Great. One final question, are there any other key hires that you would like to make, any new members of the management team, sales force, senior sales people you would like to add?

Yes. The answer is yes. I think you always need to be looking for some strong talent to help us. We're effectively functioning without a COO today.

I think that once we put the businesses together I think there are ways that we need to strengthen the leadership of this Company. And we will be looking at that going forward. We're looking at it now. But I really believe that we need to strengthen what we have inside the Company.

Thanks very much.

Thank you. [OPERATOR INSTRUCTIONS] And the following question comes from the line of Eric [DeForest Penmen]. Please proceed.

Hi Rick. I have a question about the amortization expense. We had ITS acquisition and I think we had around 3 million going the intangible line, then we had a sequential decline in amortization. Can you talk about that and what should we expect for the rest of '06?

Let me speak to the forward. If you're looking at the Schedule 3 you have amortization for the quarter of a million 622, that will move up a little bit for the intangible amortization coming from ITS. Because that only hit as an estimate in one month in the quarter.

All right.

The reason it's down sequentially a little bit is that in the acquisition of Chronimed there were some trade name assets that were amortized through December of '05 that fell off the amortization schedule. So it should be fairly steady a little bit above the million 6 as we go forward. What we do evaluation of the intangibles and goodwill with an outside firm that will be complete by June and so for the June quarter you will see I'll say the full rollout of amortization. But it shouldn't be maybe much more than a million 7, million 8, back to historical level.

Then if we're looking at the bad debt expense in terms of the adjustment, I think we said that we weren't expecting that in the first quarter, we had 2.3 million. Are we going to see more bad debt expense or adjustment in the second quarter as well? Or do we think we have the collection kind of under control at this point.

What's happening Eric is that the, as Greg said that the collection, that the rate of which we're reserving bad debt expense is about 50% higher than it was a year ago. And you could see that in the slippage of the days outstanding.

The controls we started putting in place, we really talked to you about it just about a month ago, it's over that past month that we started to put more of the controls in place and enhanced the staff and really started focusing a lot more into that effort. We realized it in the first quarter and started taking corrective actions right away.

We fully anticipate over the coming months to get back to that historical rate of which we were reserving and what we're seeing now is that every week we're seeing improvements in collection rates. So we will be getting back down there, what we will be getting back down there in the next few months.

Then we have around a hundred thousand of measurement expenses, are those goes to fall off in the second quarter or will we still have some of those?

Very little. Yeah, they should be dropping off.

All right. Then we spoke about the SG&A line, what are some of the things - can you give us more color about the things we're looking at in terms of taking costs out.

Sure. Right now one of the things that's going on is that we're actually putting a lot of manual processes in place which really have to be automated. And that is significant both in the IT side and the finance side. And we really need to start looking at ways to automate many of these processes to reduce those costs.

We also have to look in the various areas of return of investment on certain of the areas, whether it's in the sales area and how each person is doing compared to what they should be doing and the return based upon what the margins are. We will be looking at certain areas that are fairly large in this organization that add up. You take a lot of the small costs and you start looking at them and they add up to what a large cost on a monthly basis that need to be reduced.

And so we're going right across the board looking in every area whether it's in corporate expenses, which we believe is way high. We're looking in each one of the operations for opportunities there. So we're actually looking at labor which is always the highest part of what you could expect. But we're also looking in all the areas, whether it's travel related or utilities or telephones, which quite frankly seem to be very excessive for this size company and we need to get our arms around them and start reducing them and we're going to be doing that immediately.

All right, thanks a lot.

Thank you. The following question comes from the line of Eric Miller, please proceed.

Yes, hi guys. We were long-term, have been long-term shareholders of Chronimed. And since the merger of MIM and Chronimed the stock is down 20, 25%. Looks like frankly you guys have done a pretty poor job managing operating expenses and basic blocking and tackling, managing balance sheets. One thing that jumps out at me there hasn't been one insider buy since the merger. I'm wondering, why should shareholders support you guys?

Eric, you know, I happen to agree with you. If you look realistically at the Company a year ago and where it is right now expenses are actually up and sales are flat. So, you know, that's pretty easy to go see. And what was anticipated in putting these two companies together was to go take advantage of the efficiencies of putting it together and then going ahead and when you have margin pressures that you would be able to absorb those because you had much more efficient operation.

I agree with you, basic blocking and tackling, we failed on it. And we have to get back to the basics to shore up the foundation. Why am I still in as a fairly large investor and I would hope others is, one; we are fixing the problem, but -- and that's extremely important, we are fixing the problem. We will get SG&A under control. We are in the process of doing all those things.

We are also in an extremely dynamic industry. This is probably the biotech industry and the new products that are coming out, the relationships we have with the manufacturers, the CAP program, there are so many good things going on that that we believe over a period of time and by getting the expenses under control and operating the way we should be operating today we believe that this Company should be extremely profitable and it's extremely disappointing that we're not there today.

But in terms of what we can achieve by bringing in new people who could handle some of this and enhancing our position I think we have a great opportunity. And so -- but the bottom line is we have to perform and over the past year we have not.

I guess if there's such a great opportunity I guess I'm surprised that I wouldn't see any one insider stepping up and buying stock.

That's a good point.

Thank you. And the following question comes from the line of Adam Goldman, please proceed.

Hi guys. We go back a little bit to the SG&A conversation we had a few minutes ago. Can you get more specific on what we should be looking for as far as SG&A reduction as far as total dollar amounts and also the timeframe that will occur in?

Yeah, good morning Adam. The SG&A line when we went into this merger we expected the SG&A line to be in the hundred to probably about the $105 million range and today it's probably running closer to the 130 range, total OP expense.

It's going to take us some time. In our expectation is to try to identify right now certain areas and what I would like to do and we're actually in the process of identifying certain areas. And I think before I give you a number I just want to make sure that those numbers are right.

But I would love to see over the next number of months a steady decline to get it down, probably in the 7 to the 8%,, a decline of 7, 8% from where we are now over the next number of months. And it's going to drop even further than that once we go ahead and we're able to take the IT area and to move us to one or two platforms where today we're running off of seven platforms.

So I think over a longer period of time we should be able to get down to a number that could show us some real savings, maybe the savings could be in the 10 to 12% range, about it's going to take us some time to get down there.

Should we expect to see results starting the next quarter and into the third quarter of this year.

Yes, I think what you're going to do is obviously see some results. You're going to have some offsets because as Greg talked about we have the severance payments related to Hank as his retirement which was $900,000 coming into the second quarter. We have a little bit of work on the CAP program, which we'll see a little bit in the month of June.

But you're going to see reductions in the bad debt expense, you're going to see -- you're going to see some reductions, but you're going to have offset that probably with certain severance payments. But you're also going to see quite frankly some of the other expenses starting to go down. My guess is you will probably see a lot more of that in the third quarter and into the fourth quarter because by the time -- and we're doing it right now, identifying those areas, putting it in place, doing the reductions and doing things like that, we will see a tail end of it in the second quarter, but we'll see a lot more of it in the third and the fourth quarter.

Okay. Moving to the revenue side, any major contracts coming up for renewal, or renegotiation with customers?

Not that I'm aware of. Greg, anything sticks out?

I would just comment that we have been discussing the Centene contract which we --

Adam, there's not one thing that sticks out that's major today that I'm aware of that we're in the process of renegotiating.

That's right.

Okay. And final question, can you give any more color with regard to the competitive acquisition program vendor with Medicare Part D and revenue opportunities and what we should be expecting to see on a going forward basis over the next say 12 to 24 months.

Yes. We're pretty excited about this program. And one of the areas right now we start out with about 181 drugs in a specialty area, it's going to be over 200 drugs. In fact, yesterday we started or CMS started the program of signing up the physicians and that's going to go until June 2nd. And we will be receiving [Nurateum] which is a designated process insurance carrier. We will be polling the local carriers of which there are 17 of those to get an indication of the amount of the physician enrollment.

Right now it's really just speculation on the CMS part or anybody else part about the number of physicians who we're going to sign up for this program. What we're excited about is not just the opportunity, we have on the Medicare side, but quite frankly we're more focused on going to be the spillover impact of the physicians being able to buy from us on the commercial population.

So the speculation has been all over the place on numbers and I'm not going to give you any of the numbers, because whatever we're going to give you is going to be wrong. But the CMS, one to forecast, is that they spent about $12 billion last year in the Medicare program. So the question is how many docs will sign up right now for the program to start in July. And then you will probably have a number of doctors waiting to see how the program works. And then you have the next session beginning in October for '07.

So it's going to be for us and for CMS and for the docs, let's get it going, let's see how it goes, CMS wants us to be successful, we want it to be successful, but to give a number today on what that revenue is we just can't do.

Fair enough. Thank you for the response.

Thank you. The following question is a follow up question from the line of Matt Shields, please proceed.

Hi Rich, this is David Maley picking up on the line. Given the transactions that have taken place in this industry, I can't imagine that BioScrip couldn't be sold for a significant premium. Why isn't that the best course of action at this point given the operational problems that you're having?

Well, good morning David. We're not going to comment on selling the Company or anything like that. Our job is to run this Company to get it back on track, to do what we have to do, and to enhance shareholder value. So up until the point that there's anything to publicly report we will. But I hear what you're saying.

Okay, thank you. I think we have been long time shareholders actually of both companies, and, you know, I think we are like a lot of others bought into the combination, but it appears that it's going to take a lot more work to try to make this work.

I agree

The best course of action would be what I mentioned.

I understand, thank you. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Friedman, there are no questions at this time. I will now turn the call back to you.

Okay. I would like to thank all of you for participating. Obviously we have a lot of work to do, we're committed to go get it done and we will be reporting back to you by the June quarter. Thank you very much.

Thank you. There will be a replay for today's conference. To access the replay please dial 1-800-633-8284 and enter number 21291037. I repeat to access the replay please dial 1-800-633-8284 and enter number 21291037. Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.