Option Care Health Inc (OPCH) 2007 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the BioScrip Second Quarter of 2007 Earnings Results Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Thursday, August 2, 2007. I would now like to turn the conference over to Mr. Craig Allison, investor relations representative at BioScrip. Please go ahead, sir.

Welcome to BioScrip's second quarter conference call. Joining us today are Richard Friedman, chairman and chief executive officer, and Stan Rosenbaum, EVP and chief financial officer. If you have not received it yet, 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 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; the operational and financial impact of certain new government programs on the Company.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance or the successful execution of the Company's strategic plan and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking 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 with the Securities and Exchange Commission, including its annual report on Form 10-K. I direct you to these documents to understand the current business environment and its associated risks.

Earnings before interest, taxes, depreciation, amortization and option expense, EBITDAO is a non-GAAP financial measure as defined under U.S. Securities and Exchange Commission Regulation G. As required by Regulation G, BioScrip has provided a reconciliation of this measure to the most comparable GAAP financial measure. This information is available under the investor section of the BioScrip website, www.bioscrip.com.

Today's call will consist of opening comments from Richard Friedman, a financial review of the quarter by Stan Rosenbaum, and the conclude with a brief question-and-answer session. I will now turn the call over to Richard Friedman. Please go ahead.

Thank you, Craig, and good morning, everyone. I am pleased to report that BioScrip's second quarter results show that we are successfully executing on the strategy that we committed to over a year ago. In fact, we are ahead of our internal timeline. Financial results are getting stronger. Significant improvement has been made in those areas previously identified as essential in order to bring value to our patients, our partners and our investors.

Most importantly, the strategic and tactical changes that we've made have increased our operational efficiency, strengthened our sales and marketing capabilities and have driven growth. Collectively, these improvements have permitted us to leverage our organizational assets and capitalize on our contractual opportunities and to attract new ones, such as the recently announced UnitedHealthcare contract.

Overall, our strategy, our people and our processes are proving effective in driving revenue growth and improving profitability. Specialty revenues grew 13% in the second quarter of '07 over the same period a year ago, with a consolidated $10 million improvement in EBITDAO. For the six months of 2007, specialty revenues have grown 14% to $473 million and overall consolidated EBITDAO has improved by $11 million.

So what is behind the improvement? We are doing the things we said we'd do to reinforce our strategic position in the marketplace and strengthen the Company's finances and operations. There are two significant areas of progress that I'd like to point out. First, our collections have improved dramatically over the past six months, which means we've been able to reduce our average debt outstanding. And we have been able to reduce the bad debt expense for the quarter.

Second, our specialty business continues to get stronger as a result of preferred distribution arrangements with manufacturers for newly-approved drugs, renewed payer marketing efforts, therapy optimization programs, infusion services, CAP and [MV-STAR] and our community store initiatives. These assets are beginning to work in tandem.

Along with the obvious importance of better financial performance, we have upgraded personnel. Through efficiency initiatives, we have made dramatic improvements to our customer service. And we have enhanced our sales and marketing efforts, increasing new contract opportunities. Simply stated, the changes at BioScrip are attracting more physicians and patients, more payers and stronger relationships with our manufacturing partners.

Let me share some of the latest BioScrip news and update you on our progress on some of the initiatives introduced during last quarter's call. And you'll see some of the broader impact of our performance. As was recently announced, we received from very good news from UnitedHealthcare.

Last month United awarded BioScrip a significant contract to provide HIV/AIDS and transplant pharmacy services to its approximately 26 million plan members nationwide starting yesterday. We were one of only two providers selected by United for this important contract. We will leverage our existing infrastructure to service this contract without significant incremental cost.

The CAP enrollment period for the August 1 effective date has just ended. Although final election results have not yet been completed, preliminary information indicates an increase of approximately 35% in physician enrollment effective August 1. Since we specifically targeted certain disease states, namely rheumatology, ophthalmology and allergy immunology, we anticipate higher utilization rates than we experienced in the past.

The next enrollment period begins in October for January 1, 2008. Should results track similarly in the next enrollment, we anticipate a significant revenue stream from this program in 2008. Of course, we will have to wait and see where this goes. In the second quarter, revenues associated with preferred distribution arrangements with manufacturers for newly approved drugs totaled $29 million, an increase of 141% over last year. In fact, for the six months of '07, the total is $57 million, equally the entire total of 2006.

In other marketing news, multicultural training continues across the organization. This employee education program, which was introduced in last quarter's call, is part of our expansion initiative to better align BioScrip's services and the health conditions we serve with population shifts amongst culturally and ethnically diverse communities across the country.

This past quarter, we expanded our ambulatory infusion suite in Burbank, California and added a new ambulatory infusion suite in Morris Plains, New Jersey. We signed a lease for an infusion pharmacy and suite in Pompano Beach, Florida. And we are currently in discussions with a number of interested parties.

Another area that I am most proud of is the successful investment in resources to meet the stringent requirements of our biotech manufacturing customers. As you may know, manufacturers typically evaluate and assess the performance of the specialty vendors within their distribution networks on performance criteria such as adherence, compliance, and other patient management metrics.

We take these business reviews very seriously and have seen our ratings in many cases significantly outperform many of our competitors which speak to the quality of the specialty services BioScrip provides. The focus and investment on ensuring adherence to therapy and appropriate utilization affect both positive patient outcomes and financial returns for BioScrip and our contracted partners.

In a moment, Stan will address BioScrip's systems upgrades to ensure continued improvement and efficiency. Investing in software tools and automated processes are just part of our commitment to our patients and our customers. Ultimately, you need the right people.

Over the past year, we have made significant personnel changes in almost all key areas of our organization, and with them come a great deal of direct and related experience. New management includes Chief Financial Officer Stan Rosenbaum, Vice President of Finance [Phil Keller], Chief Information Officer Doug Lee, as well as Scott Friedman who took over sales and marketing as executive vice president last August.

Our strength in sales and marketing due to the organizational revamp under Scott is growing and having a significant impact on the entire organization. New personnel are responsible for the development of our core products and services, establishing contractual relationships with manufacturers.

And our managed care sales team bring with them clinical as well as big pharma and specialty pharma experience. Existing sales people are also benefiting from new tools and processes. Our message is more consistent and focuses on the broad, yet complementary, assets of BioScrip as a whole and is getting to our key market targets.

There is much more yet to do. But the combination of the sales and marketing personnel, as well as the finance and IT team, certainly had an impact on the UnitedHealthcare contract win. We feel we are beginning to hit our stride to harness our potential. As I have previously mentioned, we have also made great progress in operations.

We are very pleased to welcome [Tom Ordemann] to the BioScrip management team as Head of our Community Pharmacy Operations. Tom was formerly the VP of Operations for Duane Reade's New York Metro region, which was a $1 billion-plus operation with 250 stores and over 6,500 associates.

He also spent nine years with Eckert Drug in a Dallas Fort Worth metroplex and North Florida region, moving through the ranks from pharmacy department manager to regional vice president. He bring expertise to BioScrip. And we will be expecting a lot of great things from him.

We have taken the time to make the right changes for the right reasons. And the results indicate that we are, in fact, on plan to drive growth through the development of efficient, innovative and relevant solutions for our patients, doctors, payers and pharmaceutical manufacturing partners.

One other area of significance is the pending legislation being addressed in Washington and as it relates to CAP included in the Children's Health and [Medicare] Protection Act of 2007. We believe that the market initially misinterpreted the intent and impact of this legislation and specifically on its implications for BioScrip. Last night, the House passed their bill.

There is a provision that would require CMS to alter its methodology for calculating average sales price for drugs provided under Medicare Part B. That provision has the potential for reducing reimbursements to physicians for certain drugs, not BioScrip. BioScrip is locked into the current methodology under contract through 2008 and potentially to mid-2009.

The new methodology would apply to physicians who administer Part B drugs in an office setting. The reduction of rates paid to doctors for Part B drugs administered in the office may cause more physicians to consider the CAP program. Since BioScrip is a sole CAP provider, you can see how that would work to our benefit.

Additionally, there are other provisions in the legislation that would benefit BioScrip, as there would be a continuous CAP enrollment, rather than only during annual enrollment periods, providing physicians with continual access to the CAP program. Automatic re-enrollment would also be allowed, requiring physicians to opt out of the CAP rather than requiring them to affirmatively re-enroll.

Further, BioScrip will now be allowed to deliver drugs directly to a patient's administration site as opposed to solely the office from which the physician or practice group enrolled. This change helps physicians with multiple practice sites, who did not want to enroll in CAP because of the delivery issue, now reconsider their participation. Lastly, CMS will be required to perform additional physician education and outreach to encourage CAP participation.

All in all, the last several months have been an extremely positive period of change and development for BioScrip. We are proud of the accomplishments we have made and intend to continue this trend.

I will now turn the call over to Stan for the review of our financials. Stan?

Thanks, Rich. Second quarter 2007 revenues were $295 million or $15.4 million higher than the second quarter of 2006. As previously reported, BioScrip's loss of certain PBM business negatively impacted revenue by $12 million from the same period of 2006. However, revenues in our specialty services group grew in excess of $27 million or 13.1% to more than offset the loss of that PBM revenue.

Consolidated gross profits for the second quarter of 2007 grew by $4.5 million over the comparable period of 2006. This resulted in increase of 1% in our overall gross margin. This margin improvement was primarily mix related, as higher margin specialty revenues more than replaced lower margin PBM business.

Total operating expenses for the second quarter of 2007 were $30.8 million, a $6.3 million improvement over the same period of 2006. This improvement represents lower intangible amortization of $1.3 million, lower severance cost of $1.3 million, reduced bad debt expense of $3.4 million, and a net reduction of other expenses, which includes our cost reduction program that we announced in the second half of last year offset by CAP-related expenses.

Bad debt expense for the quarter was $1 million or 0.4% of revenue, as compared to $4.4 million or 1.6% of revenue in second quarter 2006. Our methodology, which remains unchanged from previous quarters, used for determining our current quarter provision, was favorably impacted by improved collections and cash posting, as well as processing all the credits in our aging.

As a result of the above, the Company reported income from operations of $2.5 million, an increase of $10.8 million over last year's loss of $8.3 million. Our EBITDAO increased by $9.7 million to $4.6 million. BioScrip's pre-tax profits in the second quarter of 2007 was $1.6 million, compared to a second quarter 2006 loss of $9 million. Net income for the period was $500,000 or $0.01 per share.

If we had normalized our provision at 39%, our net income would have been $1 million or $0.03 per share. On a year-to-date basis, our first half revenue was $591.3 million or $12 million higher than the same period a year ago. As with the quarter, lower PBM revenue due to lost contracts of $47.3 million was more than offset by increases in our specialty services sector of $59 million.

Our first half margins increased from 10.2% to 11.2% or $7.1 million. This improvement is essentially due to the mix of replacing lower margin PBM business with higher margin specialty business. Total operating expenses for the first six months of 2007 improved $5.4 million to $63.6 million due to a lower bad debt provision of $2.8 million, reduced severance of [$1.6 million] and lower amortization, $1.5 million.

Other savings were somewhat mitigated by CAP-related expenses. As a result, our income from operations in the first half of 2006 was $2.6 million, a $12.5 million increase over the comparable period a year ago. Pre-tax income was $700,000 or an $11.8 million increase over 2006's loss of $11.1 million.

As previously discussed, the Company continues to maintain its valuation reserve for the tax benefits arising from our first half taxable losses. Accordingly, despite the positive pre-tax income for the half, we are reporting a net loss for the period of $900,000 or $0.02 a share. Again, assuming the same normalized tax provision of 39%, our net income would have been $426,000 or $0.01 positive per share.

Turning now to our balance sheet. Our net accounts receivable have improved by $5.5 million from March 31st, and our inventory is down $1.8 million for the same period. At June 30th, our borrowings under our credit facility were $41.9 million, an improvement of $8.3 million from March 31st of this year. Availability under the facility was $33.1 million as of June 30. As of yesterday, we had approximately $42 million of availability under our facility.

In our last call, we stated that we would make a decision regarding a new system in the second quarter. We have selected [Crean] and Company to be our supplier of an upgraded system that will provide us with superior, scalable, integrated system for both our mail and specialty pharmacy business.

This solution will give us operating efficiencies by combining dispensing, point of sale, accounts receivable, inventory and data management into one platform. Implementation will begin in third quarter and continue through 2008.

Since joining the Company, we continue to see strong improvements in our financial and IT infrastructure as evidenced by the improved credit collections efforts reported in the second quarter. Improved reporting timing and strengthening the IT areas and supply chain management continue to happen.

At this moment, I'd like to turn the call back to Rich.

Thank you, Stan. Strategically, we remain committed to delivering customer and shareholder value by providing cost-effective health care solutions within the specialty pharmacy arena. Our mission is to be a stronger, more efficient specialty pharmaceutical health care organization that partners with patients, physicians, health care payers and pharmaceutical manufacturers to provide access to medications and management solutions to optimize outcomes for chronic and other complex health care challenges.

Our current programs and initiatives support our value proposition, strengthen our performance and help us effectively pursue and manage new opportunities in the marketplace. If this past year's challenge was a stabilization of post-merger BioScrip to position us for growth, then the task ahead is to build on those accomplishments and drive growth through innovation and operational excellence.

I thank you for your attention. And we will now open up the lines for questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Melissa Mullikin. Please go ahead.

Good morning, guys. Congratulations on a good quarter.

Thank you.

Just a couple of questions here -- and I apologize if you covered any of this during your prepared remarks. The line went dead about halfway through, so I missed a little bit. But just a couple of questions here -- first on your PBM revenues. Is Centene completely gone? Are they completely rolled out of your business?

Yes, they are.

They are? And then how much of the decline was due to [excelleRx]? And over what time period do you see those guys rolling out?

Well, we still had sales of excelleRx of about $4.5 million in the quarter. That should roll out by the end of third quarter. We still have sales in July. We'll probably have some in August as well. But by the end of the third quarter, we think that will be gone.

Okay. And the sequential decline in your specialty revenue, would you characterize that as normal seasonality? Or can you just give us some color behind that? How should we -- given that your revenue mix has changed so much, how should we look at seasonality of each of these revenue lines going forward?

Hi, Melissa, it's Rich. Yes, there was some seasonality, especially with Synagis, (inaudible) half a season, coming back in in November time period. And what we also did is we did a contract analysis looking at certain accounts that we did not believe were performing well. And we made the decision to exit some of those accounts. So the change in the revenue were absolutely planned.

Okay. So it wasn't anything that as unexpected. And you would expect -- so seasonality-wise, you would expect Q2 and Q3 to be somewhat lower than Q1 and Q4, purely because of Synagis and those types of medications?

Right. And as you see, what we said earlier -- I hope that wasn't blocked out -- the new product revenues continue to grow. We have obviously United coming in effective yesterday. We had the new CAP enrollment period effective yesterday. So we do anticipate going forward from the second quarter.

Okay. CAP revenue was also down sequentially. Would you also attribute that to Synagis or -- it went from, I think, $10 million in the last quarter to $9.2 million this quarter.

Yes, that was not related to seasonality. I think that was strictly related to buying patterns of the physicians under Medicare Part B. And we anticipate that increasing as more docs come on August 1.

Okay. And obviously excellent in terms of the bad debt expense -- is that a good run rate going forward, around that $1 million mark, Rich or Stan, or would you expect that to top back up? It sounds like some of that was due to running through some old credits. So is that artificially low this quarter?

Let me answer that this way. We believe that we are adequately reserved at the end of the quarter. And yes, we do continue to work on our older receivables and there might be some more credits that pop up that were previously -- for items that were previously written off. And we will continue to look at that. We are always working on our agings. But if I was doing what you're doing, I would probably continue to use the 1%.

Okay, great. And then lastly -- and again I apologize. You might have talked about this. But in terms of your infusion capabilities, it sounds like you've added some in the quarter. Can you talk about -- can you help quantify for us what your capabilities were before in terms of shares or facilities or that sort of thing, and how many [chairs] you've added since Q1?

The truth is we haven't added up the chairs

Okay.

We will have that information, pass that on to you.

Okay.

We continually expand the number of sites. The sites differ in the amounts of chairs. And we will provide that information down the road.

All right. So offline, or later in future calls?

If we give it to you, we would have to disclose it publicly. So we'll figure out a way of getting that out.

Great, perfect. Thank you, guys.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Mr. Glenn Garmont. Please go ahead, sir.

Thanks, good morning. Rich, what is the --?

Hi, Glenn.

Hi. When is the next CAP enrollment period?

Next CAP starts October 1. And it's effective for January 1, 2008.

Okay. So conceivably -- and I know this House bill that was passed, there's still a lot of ground to be covered before that's enacted, if at all. But we could conceivably see some uptake during that October enrollment period if there's some concern that this legislation is ultimately enacted. Is that the way to think about it?

Yes. Actually, I'm not really sure that many of the changes will impact -- it will impact from the standpoint, Glenn, of making it easier for the current physicians to re-enroll in the program. They won't have to. So I think that would make a lot of sense. We've learned a lot through this last period.

This last period where we picked up, probably, greater than 35%. The educational part -- going out to the doctors, understanding exactly what is going on, why, why not and the help they need to better understand this program -- we will obviously take into account as we start marketing for the October 1 period.

So there are many things that we have learned that we will put into place to help us in the next time period. So I think that, as docs definitely get more educated into the benefit of this program, we should see a continued uptick in the number of docs who join.

Okay, great. And then two real quick numbers questions. Stan, what was the -- and I'm sorry if I missed it, what was your operating cash flow in the period?

$12,500,000 net increase in cash due to operating activities -- $12.5 million.

And that's in the quarter or year-to-date?

That's year-to-date. I'm sorry.

Okay. And then roughly what percent of specialty sales this quarter were infusion-related? Is it still in that 8%, 9% range?

Yes. We're not breaking out that type of information. But infusion has continued to grow. And the numbers currently are pretty close to the historical rates.

Okay, great. Thank you.

There appear to be no further questions at this time.

Thank you. BioScrip, once again, continues to make great progress. Our initiatives are the right ones. We look forward to updating you again at our next conference call. Thank you for your participation. Have a great day.

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