Option Care Health Inc (OPCH) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip second-quarter 2006 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, August 8, 2006. I would like now 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 second-quarter conference call. Joining us today are Richard Friedman, Chairman and Chief Executive Officer, and Stan Rosenbaum, Chief Financial Officer. You may find today's 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 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, program success and the Company's integration of its operations. 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 risks.

Today's call will consist of opening comments from Rich, a financial review of the quarter and year by Stan and closing remarks again 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.

Good morning. Over the past year, BioScrip has had many successes and has faced a number of challenges. Certain initiatives that we embarked upon after the merger worked, while others did not. Business techniques and systems that worked individually for their respective businesses did not necessarily work when applied to the larger combined organization or when transitioned to different departments and personnel. We're committed to bringing BioScrip to the level of success expected at the time of the merger.

Our proven success with new specialty drugs has led to solid relationships with a growing number of pharmaceutical manufacturers. BioScrip has benefited from the inclusion in limited drug distribution networks on novel therapies used to treat iron overload, rheumatoid arthritis, MDS, renal cancer, immune deficiency, MS and others. New product revenues in the second quarter exceeded $12.5 million. We have consistently performed above expectations. That proven success makes us an ideal partner for new and established specialty products.

As the sole vendor supporting the US government's Competitive Acquisition Program, or CAP, for Medicare Part D drugs, BioScrip increased its name recognition. And CAP will provide additional revenue opportunities for us in the near future. Our efforts to educate the physician market on the benefits of CAP have led to the enrollment of approximately 1100 physicians, representing over 2700 locations. It is still early, but the trend is encouraging. We anticipate that the program will contribute profitably in the fourth quarter.

Our IVIG and other products related to infusion are performing well. Through the acquisition of ITS, we expanded our highly profitable infusion business into California, establishing an East and West Coast presence. All indications are that this acquisition will yield strong results.

Our community stores continued to contribute. However, our greatest challenges are attributable to systems. This strain placed on our financial systems and operational controls as a result of our merger integration led to significant accounting charges at year-end. That strain continues to impact our financial results, which is evidenced by our bad debt expense. Until remedied, we must reserve greater amounts than we previously reserved, which adversely impacts our profitability.

As noted in our press release this morning, the quickest way to restore profitability to BioScrip is through cost reductions and improving our collection efforts. We have identified annual savings opportunities in excess of $7.5 million, which we will begin to realize by September 1. We have reorganized our collections process and implemented new procedures that will aid us in collections. We have already seen improvements in June and July, and we expect this trend to continue ultimately leading to an improved bad debt expense as a percentage of revenue.

Before we go over the details of the quarter, I would like to introduce Stan Rosenbaum, our new CFO. I am very excited to have Stan on board. His combination of financial and operational experience will be instrumental as we work through all these issues. Stan will comment on his initial analysis of the Company and the action plan we're implementing as well as a review of the second-quarter results. Stan?

Let me start by saying that I'm excited about the opportunity afforded to me by the Company. When Rich first approached me to help out, I was impressed by the industry and by its (technical difficulty) prospects. It's become clear to me that the path to profitability would be through revenue enhancements, improved systems and collection efforts. The systems and collections issues are not unique and indeed are often identified after a merger or launch acquisition. In my career, I have experienced these challenges and have been successful in remedying them.

My focus is to restore BioScrip to profitability. Since coming on board in June, I have identified several key areas of opportunity and have action plans in place to address them. This process takes time, but we have already made an impact, particularly in the collections area. Although, let me note that these improvements are not shown in the second-quarter numbers.

We have worked to update the cash posting system and improve building accuracy. In a short time, we have reduced un-posted cash by one-third, and 60% of cash postings are now done electronically. In addition, we have simplified our AR processes and systems. On the operations front, we have implemented stricter timing policies for co-pay collections in our community pharmacies, which will ultimately improve collections and accordingly profitability. As Rich mentioned, we have also identified annualized saving opportunities in excess of $7.5 million, which we will begin to realize by September 1.

Now, let's turn to a review of second-quarter results. Revenue for the second quarter of 2006 was $279.6 million, a decrease of $7 million or 2% from the second quarter of 2005. Second quarter of 2006 operating results include $1.4 million of severance related to the departure of senior management members; $1.5 million of ongoing sales, general and administrative expenses related to acquisitions made by the Company since June of 2005; $3.1 million of additional bad debt expense and $0.5 million of charges related to the adoption of FAS 123R. Revenue decreases were primarily the result of the loss of PBM services businesses, offset by increases in the Company's other business units which included approximately $7 million of revenues associated with the acquisitions made since June of 2005.

Revenue from PBM services, which is made up of the PBM and traditional mail business, was $69.1 million, a decrease of 24.4 million or 26% from the prior year quarter. This is primarily due to the loss of contracts with Centene Corporation and its transition of that business to its own acquired PBM business. That decrease was partially offset by increases in traditional mail.

Revenue from specialty services, which is made up of the Company's infusion, community pharmacy and specialty mail service businesses, was 210.5 million or an increase of 17.4 million or 9%. That increase was due primarily to new product introduction, growth in our IVIG business, the acquisition of Northland Pharmacy in October of 2005 and the acquisition of intravenous therapy services in March of 2006.

Gross profit for the quarter was $28.8 million, a decrease of 1.7 million from the same period a year ago. Gross profit as a percentage of revenue was 10.3% in the second quarter versus 10.6% in the same period last year. The gross margin decline was the result of program changes associated with the implementation of Medicare Part D in January of this year and industry-wide reimbursement pressures more generally.

Selling, general and administrative expenses for the quarter were $31.1 million, an increase of 26.3 million for the same period a year ago. The increase in SG&A was due primarily to the Company's incurrence of $1.4 million in severance expense related to the departure of former senior management members, $1.5 million of ongoing operating expenses associated with acquisitions made by the Company since June of 2005, $500,000 of stock option expense due to the adoption of 123R and $400,000 of finance and IT expenses incurred to improve receivable collections and system infrastructure improvements.

Bad debt expense in the second quarter was $4.4 million or 1.6% of revenue compared to $1.3 million or 4% of revenue for the same period a year ago. This is an increase of 3.1 million, reflecting the increased bad debt reserve rate while the Company works to improve its collection experience.

DSOs for the quarter were 41.9 days compared to 38 in the first quarter of last year. This has not improved as rapidly as we initially expected. However, we have made significant progress on collections in the past two months as was discussed earlier.

Net loss in the second quarter of 2006 was 5.7 million or $0.15 per share compared with a net loss of 3.5 million or $0.10 per share reported in the same quarter last year. For the six-month period ended June 30, 2006, revenue increased 22% to 579.3 million from 475 million reported in the same period of last year. Net loss for the six-month period ended June 30 was 6.9 million or $0.18 per share compared to a net loss of 1.9 million or $0.06 per share in the same period a year ago.

Operating results for the six months ended June 30, 2006 and the three-month period ended June 30, 2005 include the Company's acquisition of Chronimed, Inc., which was made in March of 2005. Operating results for the six months ended June 30, 2006 include $1.8 million of severance expense, $2.2 million of ongoing SG&A expenses of the combined company's acquisitions, $4.6 million of additional bad debt expense and $1.1 million of charges relating to the adoption of FAS 123R. These results also reflect the loss of certain PBM services contracts with Centene Corporation.

Moving to the balance sheet. As of June 30, 2006, BioScrip had $53.6 million of working capital and $190.9 million in shareholders' equity. We had $38.2 million of outstanding borrowing on our $75 million line of credit. The increase in outstanding borrowings is due to the acquisition of ITS for approximately $14 million, the paydown of claims payable associated with the loss of the Centene PBM business and the funding of our operating loss.

Looking ahead, we realize there's still a lot of work to be done. But we are off to a good start and are confident that we can meet the challenges that face us. With that, I will return the call back to you, Rich.

We have implemented a program to reduce costs, improve collection rates and enhance volume. We are committed to turning BioScrip around for our shareholders and employees. We will now open the line up for your questions. Operator?

(Operator Instructions). Brooks O'Neil.

I have a couple of questions. I guess the first one is -- you have commented in the past that you have six or seven different information systems related to the various acquisitions and mergers that the respective companies have completed over the last couple of years. And I'm just trying to get a sense for where you stand or where you feel you stand with regard to making the systems improvements that would ultimately allow you to really gain control over the business.

We entered this year with nine active accounts receivable systems. We're now done to four. Two are completely gone; three are inactive and are being turned over to collection but are fully reserved. And we're now down to four, and we'll get down to three by the end of the year. So, in that regard, we've made some significant progress.

We've also converted several of our stores onto our [PFW] system, so our dispensing systems are becoming more homogenous throughout our organization which is also something that we need to do because it insists on training. We hope to get that down to a number which escapes me at the moment, but I believe that will get down to about three or four systems as well by the end of this year.

Three or four systems at the store level, at the local level?

We have one for mail. We will have a couple at the store and one in infusion. So I think four is where we are. We'd like to get that to three. Our ultimate goal would be to get to two.

Then, I guess one of the big questions I'm wrestling with is -- clearly, you need to continue to make investments in improving the operation of the business. At the same time, you appear to be clearly focused on trying to cut costs. I'm just trying to make sure you feel you can truly achieve this 7.5 million of annualized cost savings, while truly doing things that strengthen the operations of the business.

We have identified that $7.5 million. It should not have any impact on our ability to do what needs to be done to strengthen the operations as we go forward.

Yes, where -- the $7.5 million does not affect certain of those support areas that are absolutely needed, for example in the collection area, to make sure that we could get the collection rates improved. These are in other areas throughout the Company where everyone feels that we have the ability to reduce these costs. So we do not believe that any of these potential costs would have a negative impact on the operations of the Company.

Do you guys -- I know you're not making any forecasts or projections, but would it be reasonable to assume that your access to the line of credit will continue to increase over the next couple quarters until we start to see some of the impact of these new programs maybe in the fourth quarter?

We have sufficient -- you know we have sufficient borrowing ability under our line that would get us out certainly through the foreseeable future without any impact whatsoever on our ability to run the Company.

In fact, the collection rates are improving. And we should be able to see the bank line start to be reduced.

In fact, in June, we had borrowings of about 50 million and up. Peak borrowing as of the last six weeks has only gone up to about 40 million. So we've actually seen an improvement in our cash collections as we've noted in June and July.

We're closer to a positive EBITDA. So as we go forward, the improvements we're putting in -- the improvement in collection rates, the reduction of expenses, some of the enhancement in some of the product lines -- ITS has a great example, which we bought earlier this year -- is going to start contributing significantly by the fourth quarter. When you take all this into account, the improvement in operating results should be significant as we get to the balance of the year.

I'll just ask one more right now. Can you give us any feel -- again, I'm not asking for a projection but just sort of a general sort of assessment of what the profile of the business under the CAP program might look like? I mean are we talking 50 million or 100 million of revenues? Are we talking a gross margin that's at or substantially below sort of the corporate average from this quarter?

What I can tell you about the CAP is that we are extremely encouraged by now having the number of docs that have signed. Don't forget there's one more enrollment period for October 1 for January 1, '07. So the educational program that's been put forward by the Company seems to be working quite well.

I think it's a bit early to say how many scrips each one of those physicians on the Medicare side will be writing. So it's hard for us really to go out today and say it's five scrips per physician per month. It's 10, it's 15, it's 20. It's too early in the program to say that. In terms of the dollars per prescription, it's also too early to say whether it's $500, $800 or $1000.

So when we look at the physician-administered drugs, we anticipate a significant amount of physicians signing up. We can't predict today the exact number of the number of scrips which will be coming in on a monthly basis. We can't predict right now -- we probably could do a much better job on the range of the dollars per scrip, but it's still early in the process of really looking at it.

When you go ahead and you take a look really of the specialties that have signed up, we see a lot in internal medicine. We see a lot in allergy, pulmonary disease. We're looking at products that are basically related to allergy, rheumatoid arthritis and ophthalmology, which happens to be the four of the larger categories that we're seeing.

The gross profit, as I think most people know, when we went ahead and bid this, we actually bid the program at about 5% gross profit. What we look at quite frankly when we go ahead and did that are two things. One is the ability to leverage the infrastructure in our Columbus facility. We've said before that for about the next $100 million of revenue brought in, it only requires approximately 20 people. So if we're able to leverage it even at 5% on $100 million and take 20 people at $40,000 or $45,000, it contributes significantly to the bottom line of an infrastructure that has its costs absorbed. Then, it also gives us the opportunity to market to those physicians under non-Medicare part. So if a physician has 40% Medicare or 60% commercial business, it now provides BioScrip the opportunity to go ahead and offer more product to that physician. So overall, we may see a little bit higher blended rate of margin when you factor in the commercial side and the government side.

Did you expect that revenue to start kicking in when, January 1?

No. The revenue actually started July 1. We will see -- July 1 was the first, August 1 was the second and then the next phase. So the 1100 docs that we mentioned before have all signed up for the August 1. So you are going to start seeing that revenue kick in right away. And then, the next one is going to be the January '07, which the enrollment date is October 1.

Melissa Mullikin.

I think on the Q1 call, you talked about having hired entering staff to tighten up your billing and collection practices and that you had seen some initial improvements in April. I was just wondering if you could talk a little bit more about the performance in May and June, since we did see bad debt actually tick up sequentially in Q2. Did you not see those improvements continue through May and June, or can you just give us a little bit more color on that?

This is Stan Rosenbaum. We experienced some collection issues in April and May. They were not to the level we had hoped, but June and July had come in very strong. June and July's cash was 105% of our sales. So obviously, we're doing a much better job collecting our past due receivables. And as our model goes forward, you will see that that will help us in our bad debt reserve computations going forward.

The other things that have happened since then is that we have -- we were remiss in sending our customers' statements early on. But since -- since March, we've sent out statements to all of our mail customers. Starting in June, we started to send out statements to our retail customers. That was helped by the fact that we have a lot fewer systems. It was very difficult to generate statements when you had accounts that were on multiple systems. So now that we're getting closer to fewer and fewer systems, sending out statements helps tremendously. We've also reorganized the credit and collection department by taking cash posting away from that department and giving it to the financial department to improve and to concentrate on getting our un-posted cash into the accounts to give us better statements, more accurate statements helping us to focus our cash collection calls.

I think also what Stan has done is also look at -- we had a significant amount of batches that were sitting in an unapplied cash account that Stan has focused the efforts of a number of people, reorganized the department, concentration on posting the cash quickly and accurately so that we have a much greater understanding of exactly who owes us what. Historically, over the last number of months, what we found was that we were sitting there with significant batches of unapplied cash that could've been weeks and weeks and weeks' worth of cash that was received that weren't accurately posted.

Did you give us that -- I think you gave us a number in this call and I might have just missed it on how much of that unapplied cash has since been now applied and accurately posted to the accounts?

In the month of July, the number has improved by about 33%

Then I did have a follow-up on the CAP program. In your testimony, Rich, before the Ways and Means Committee, you talked about having hired about 90 additional staff to ramp up for about 1500 to 2000 docs. Obviously, that number has improved since the 307 that you reported at that time to about 1100. But have you had the opportunity then to pare down that staffing level to more closely approximate what you would actually need for the balance of the year?

Absolutely. As a matter-of-fact, what we did I think as you know is we hired temporaries during that and then we're going to convert the temporaries over to permanent. We're back down to about 20 people. So we took corrective action right away as soon as we saw the amount of physicians going in. And even with the 1100 that we have in there, it is kind of that we're taking a look at it and saying -- you know what? We could do it based upon the current staff that we have in there. So at least at this point with the number of physicians who have signed up for it, we do not believe that we're going to have to add anymore than we have today.

Just so I understand the timing right, you had about 307 that started on June 1 or July 1?

July 1.

July 1. And then you will have 1100, so a net addition of about 800 starting August 1 and then who knows how many starting January 1?

That is absolutely correct. By having the support of CMS, having the support of Ways and Means, a number of the groups out there, what we have found is that the greatest way to get the docs into the CAP program is through education. And I think CMS is committed to it. Ways and Means are committed to it. We're committed. Noridian is committed to it.

So we all realized in the 30 days that we had, we picked up another 800 effective physicians into the program. You know, the hardest part as you realize is the oncologists. If Ways and Means could figure out a way to support the oncologists, whether it's with service fees or handling fees, I think you'll see a significant amount of oncologists potentially entering into this program.

(Operator Instructions). Anne Barlow.

A couple of questions. It's my understanding then your doctors that are enrolled right now, those are enrolled through 2007, correct?

That is correct.

And they have an annual election?

That is correct.

That will be every -- going forward, every October 1 will be the magic date or January 1?

That is correct.

Question on your IVIG. Could you give us a little bit of update on where you are as far as contracting and your supply for this year and next? Obviously, we've seen some issues in that market and just wondered where you sit as far as your supply and your ability to get the drug.

Sure. There is always an issue with IV -- as long as we've all been doing this, there tends to be an issue with IVIG. The fact being is that even though there's a perception of an issue with IVIG, we always seem to be able to secure product to meet our customers' demands and that continues. We have incredible relationships with the suppliers of IVIG, the manufacturers. Every gram that becomes available, we are made aware of it and we procure it. What occasionally happens is that we have to pay more for certain other of the product than for other product. But we have not seen a disruption at all in our ability to obtain the product.

Just quickly on the SG&A and the bad debt expense. On the dollar level, should we see those level or going down or what should we be looking for in the next couple of quarters?

Clearly, the $7.5 million will essentially affect G&A. So that clearly will have an impact on lowering our G&A. Certainly, while we would expect our bad debt expense to go down, the way our model works is that we take historical collection rates and work the current months into those rates. So it will come down, but it's hard to quantify how much that would be going forward.

So they are going to be elevated though probably for a couple of quarters from where they have been historically?

Yes. Historic seems to be current (indiscernible) the last few months. And the way it works is, like Stan said on 105%, that new amount will be put into the model as well as some really lousy collection rates of the previous months and it will be blended. As we continue to improve on collection and put the judgment to it as well, that would then at that point be able to put a lower reserve rate. Whether we could get down to the historical balance, you know hopefully we can. But obviously through the model, that's going to take some time.

We're going to see a drop right away in the SG&A expense related to the cost reduction program. There probably will be some severance that's offsetting that in the next quarter coming up. And as revenues increase, somebody asked the question last quarter of what we expect SG&A should be on a percentage basis. Based upon the anticipation of CAP, the new product and everything else, we're running about 9.9% today in SG&A, which I could see it getting closer to 8% next year if we are able to manage the SG&A line.

Glenn Garmont.

For the purpose of modeling sales for the next couple of quarters, can you give us a sense of what your run rate with Centene was at the end of the quarter? I'm just trying to get a sense for how much of that business has already rolled off and then how much remains to go.

I believe [7] million for the quarter. Centene ran about 24 million for the second quarter.

I'm sorry. You did about 24 million with them in the second quarter?

Yes. Higher in April and May and lower in June but yes.

That was a business that was -- that was a business that was running at what, 30 million, 32 million a quarter. Was it not?

At one time.

Also one other thing. The margin related to Centene actually was very low. And you actually kind of see that gross margin as a percentage of revenues actually increases with Centene coming out.

Rodney Hathaway.

Did you state earlier roughly when you expect to get your receivable collections back to your historical norm?

No, we did not put a time specific. Stan was going through and I'll let Stan talk about it. What we are experiencing are the improvements in the collection rates that are all factored into the modeling of how we reserve on a monthly and quarterly basis. So, as Stan and the department continues to improve on those rates, that results in a lower requirement of the bad debt reserve. So the longer that we're successful in lowering that, the quicker the rate will come down.

Have you noticed if your new business practices with requiring upfront co-payment -- has that affected your sales in any way? Have customers shied away with your new procedures?

Well, since they were implemented only as of July 31st, it's hard to get a real feel for it at this time.

I'm not aware of anything. We will get back to you if we notice something. But, we have not been made aware of really anything that seems to be significant affecting the business by the changes being made.

Back to the CAP program. How many physicians have you enrolled so far?

We have over 1100 physicians.

Any targets on what you think that might be by the end of the year?

It's hard to say. If you take a look -- we were talking to Melissa earlier -- but if you take a look and we went from 300 plus to 1100 in the better part of 30 days, we continue to be out there with our sales organization, with CMS, Noridian to go ahead and educate the physicians spending more time with societies and groups. The more the education -- you know I really believe that the buy and bill of the CAP program presents the physicians with an incredible opportunity, especially on lower reimbursement rates on the inventory. So I think the more they are educated, the more they see the benefit. It increases their cash flow. They get to see the patient not sending them to an outpatient clinic. I think there are some incredible opportunities for the docs out there. And the more they know about the program and the benefits for them, I think we'll see more and more sign up.

What's the probability you would see an additional entrant into the program this year?

This year, being '06 or '07? I think '07 -- look, if we are successful with this program and it's reflected in financial statements, I think you'll see probably more people wanting to get involved. I think it's a good program. I think it will be profitable to BioScrip starting in the fourth quarter and going forward. The more physicians who sign up, the more profitable it's going to be. So I would anticipate at some time in the future that another vendor -- potential vendor would like to get involved.

Brooks O'Neil.

I had a couple of little detailed questions. I'm just curious, it looked to me like the tax rate was a little bit lower this quarter. Could you comment on that and just give us a sense for what tax rate you think we should use going forward?

I think you could use the six-month rate going forward. And there was a slight adjustment to the rate from the first quarter.

Then is the 1.6 million of amortization the rate we should use for the next I don't know few quarters?

Yes.

And then the same thing with stock-based compensation, about 0.5 million a quarter?

Yes.

This may be not a detailed question, but I'm just curious -- as you guys look at the business today, is the 7.5 million of annualized cost savings, is that kind of the well you think you could tap into? Or is there additional opportunities? Are there additional opportunities for cost savings as you move into '07 and beyond?

I will give you my opinion. I will let Stan give you his based upon the time he has been here. As I said earlier, we have not touched anything related to the systems side -- finance, collection, IT. We're running on multiple systems. And clearly, one would expect as we move to common platforms that we should be able to pick up incredible efficiencies. We have 110 people in the collection area. So we've thrown more and more people into the situations to help us that we all assume that once we're able to put systems in place, get caught up, that there would be greater opportunity for us.

That makes sense to me. Can I ask just one last one? I'm not trying to be incendiary here when I ask you this. But I'm just curious if you've had conversations with your auditors as the year has gone on and get any sense for how they view you guys in relation to the material weaknesses that were identified at the end of the year? Do you think you are making progress there? Is it still an issue, kind of where are you at?

We meet with the auditors every month and review our remediation process, but we have placed Sarbanes in its proper perspective. Our goal here is to return this Company to profitability, so we have to measure that against all of the -- all of the things that are required for Sarbanes.

That being said, our three material weaknesses -- on revenue reporting, we've made significant progress, converting the Bronx to the common system. We've made improvements on order cancellations. We believe we will remediate that material weakness by the end of the year. AR collections with everything that we have done and I've previously reported on, we believe that that is also a -- will be remediated. The IT side of things, we've gotten a little bit setback because of the two months that were required to work on the CAP program to get that up and running. Nevertheless, we will put a full-court press in the second half.

That being said, I want to caution everybody that the change in systems -- even if we did this, we still have to test it and we still have to get [ENUI's] buy off by the end of the year. That may or may not happen, so we may carry over one or two material weaknesses into the next year. But we have made significant progress on these issues.

[Richard Travis].

Are there any other contracts in jeopardy?

I'm sorry; could you repeat that?

Are there any other contracts in jeopardy?

Not that we are aware of. I'm just looking around, and everybody is shaking their head no.

How about anymore write-offs coming up that we don't know about?

The only area that we've all identified that has created an issue for us has been the AR. And I think with Stan and the team focusing on that, we are hoping to see some improvement. But I'm not aware of another asset on our books -- you know, if you take a look at it, our assets are kind of made up of inventory and receivables. So you know I'm not aware of anything that would require at least today any type of a write-down.

And no more buyouts of management?

Not that I am aware of today.

In other words, they are not buying you out?

If they are, I'm not aware of it.

How about insider buying or selling? Anything going on?

I'm not aware of any selling. I am aware of some individuals whom expressed interest to me in buying. But we are in a blackout period.

How about any interest from anybody in buying the company out?

No comment.

Does that mean it's possible?

It means it's no comment.

Let me put it differently. As one of the owners of the Company, shouldn't we know about that if it's going on?

If anything -- if there was any point in time where the Board and we felt that we needed to disclose something, we absolutely would. It's just we're not going to comment on rumors. We're not going to comment on conversations. Our job right now is to maximize shareholder value, is to turn this Company around. And the best way to maximize shareholder value is restoring us to profitability. That is what our focus is, and that is what it's going to continue -- conversations that we're just not able to comment on those, and I don't think it would be appropriate.

[David Malley].

With the loss of the Centene business and the small size of the PBM business, is there any thought to exiting that?

You know from time to time, we look at our assets, look what they are contributing, look the best way to maximize that asset. We look at opportunities, and we will continue to do that as an organization. But we're not going to comment whether it's for sale, it's not for sale. Right now, it is part of our business. It still contributes, even without Centene. It's an asset and it's part of what we have. And we will always look at opportunities.

Is it profitable at this size?

Yes, it is.

Brad Evans.

I was curious as to whether you could perhaps -- it sounds like your excitement or your expectation for the CAP opportunity in the medium-term has not changed, is that correct?

Yes, absolutely. I have to say that I was initially disappointed in the sign-up the first enrollment. And I was extremely encouraged by the second sign-up. When we did our modeling -- when we went into this, our model -- and I think I've said this to a few people -- was around 2000 to 2200 physicians that I felt would be pretty decent by entering '07. And so, I'm encouraged by what I see out there. I am encouraged by what I hear. We continually hold meetings with physicians and physician groups. We're getting good feedback from our sales organization. So I'm pretty encouraged by what I see.

Could you just from a very high level just frame the opportunity for BioScrip in generic terms as to what the market opportunity is here and the financial impact to your organization?

I can talk -- in general terms, I mean CMS in terms of specialty being administered in physician's office spent anywhere between $8 billion and $12 billion last year. There's 40,000 physicians that are eligible to sign up for this practice. A significant portion of the spend -- I think was 70% or so -- was related to the oncology area.

The opportunity quite frankly when they changed the ASP model under MMA and they went to the ASP plus 6 -- and I think as most of you have realized even last quarter, ASP has declined. So the opportunity for the physicians to make money on drugs is declining. What the government wanted to do was give the physicians an alternative to them being in the inventory business. And that opportunity goes to CAP.

So what BioScrip looks at quite frankly is the physician, the number of scrips and the average price of that prescription. And here is where it is still early in the program to specifically understand what the value of each physician is. But typically, a specialty drug runs anywhere from $500 on up, $1000 or maybe even higher. And we need to determine how -- and once the physician signs up, they are going to get all their drugs for their Medicare Part B through us. So it's a 10 patients, 15 patients, 5 patients. So you have a number of variables in there.

But when you look at the financial impact to BioScrip at the bid rate of -- and we accepted the contract if -- just for simple math, if you say it's at a 5% gross profit -- and again, if it's $100 million and it's $5 million of incremental profit and you only need 20 people, the balance of that 20 people, even say $50,000 or $1 million, you've taken the balance of that of $4 million down to the operating income line. It's the ability to leverage the Columbus infrastructure that gives us that opportunity.

On the other hand, we also looked at the opportunity of marketing to the same physician for their commercial population. So if 40% of their population is Medicare and 60% is commercial, if they are already buying from us for Medicare, why would they not buy from us for their commercial piece? And we're seeing some of that happen. On a commercial piece, the margins are slightly higher. So when we look at a blended rate, we see this as a pretty good opportunity for BioScrip to be -- and it could be significant revenue down the road.

Would you have bid on this if you thought you would've gotten 1% market share?

1% market share of $12 billion?

I'd take the midpoint, so say 10 billion -- 100 million on 10 billion?

Of course.

Was that your expectation or is it higher without being specific?

You know it's kind of funny. When we first looked at this, we thought we would be one of five vendors. And the expectations quite frankly were much lower as one of five. When the opportunity presented itself for us to be the sole vendor, all of a sudden the expectations got much greater.

Are you doing anything differently this enrollment period for October 1 to try to ramp up the enrollment rate? Any changes to the strategy in terms of educating the doctors?

No. The strategy that we employed during the month of July is continuing. I think you'll see more of the Web seminars -- the Webanaires that were put on. I think you'll see more coming out of Noridian, more coming out of CMS, more coming out of us. I think there's a lot more traction going on, and I'm encouraged for October.

Just a couple of follow-ups if you don't mind. Where's your debt level today?

Stan, where are we at?

Today? I would --

Or just recently as opposed to the end of the quarter.

We're about 27 million I think around today, somewhere in that range.

Can you give us a range of where you think the revolver borrowings will be at the end of the year?

I don't see them getting any higher than our peak at June.

But it sounds like they should be coming down over the course of the year though?

They've already come down significantly -- excuse me; I meant at the end of July on that comment. But we've already had good collections in June and July, so that's why I'm leaving it at that level at this point.

Let me ask the question this way. Is it your anticipation that as we close the fiscal year that debt levels will be down from where they are today or what would cause them to go higher at this point if you're able to just continue to be successful in improving your collections?

The only thing would be continued losses.

Or growth.

Or growth or financing our AR and inventory to support our business growth.

Which would be a good thing (multiple speakers). My last question -- I'm sorry -- is, it sounds like we should hopefully start to see things getting better here from a financial perspective on a linked quarter basis. Any bit of improvement is obviously positive. But what type of financial metrics should shareholders hold management to here over the next several quarters on an operating margin basis or EBITDA margin basis? Where does this business need to be for us to consider management's efforts to be successful?

I actually think and Stan can comment on this, but I actually take a look and I'm looking at -- it's coming in -- it has to come in three areas. It has to come in revenue enhancement. It has to come in cost reductions, and it has to come in improvement in collection rates. You know clearly, those are the three areas that will yield the profitability to this Company. We've already seen by reducing the $7.5 million -- I think a goal into '07. Then, I have got to think about whether it is first quarter of '07. But getting closer down to 8% as SG&A as a percentage of revenue should be a goal for us.

We need to see the increase in revenues. I think we're going to get that through the CAP program. I think we're going to get that through the expansion of new product distribution. As you know, there are a lot of new products that are hitting the market, and we plan to be part of that limited distribution network. I think what you're going to see is further expansion of our infusion business. So I believe those are the three drivers for our top line. I think that the expense reduction and SG&A and improvement collection rates have to be the three areas that we're held to the fire on. Stan?

I would agree.

Thank you very much. Mr. Friedman, there are no further questions. At this time, I will now turn the call back to you, sir.

Thank you all for participating, and we are committed to make this thing work, turn it around. And all our effort is on this. Thank you again.

Thank you very much. There will be a replay for today's conference. To access the replay, please dial 1-800-633-8284, enter reservation number 21300376. (Repeat numbers). Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day, everyone.