Option Care Health Inc (OPCH) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip Inc. third quarter 2007 earnings results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded Thursday, November 1, 2007. I would like to turn the conference over to Craig Allison, Investor Relations representative for BioScrip. Please go ahead sir.

Welcome to BioScrip's third quarter conference call. Joining us today are Richard Friedman, Chairman and Chief Executive Officer; and Stanley 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 operational performance of the Company, and 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 and nine months by Stan Rosenbaum, followed by a short summation by Richard Friedman. And then we will conclude with a brief question-and-answer session. I will now turn the call over to Richard Friedman. Please go ahead.

Good morning everyone. I'm pleased to report that BioScrip continues to make steady progress. Today we reported 2007 third quarter earnings of $1.7 million, or $0.04 per share, representing an improvement of $5.1 million, or $0.13 per share, over the same period last year.

For the first nine months of 2007 we experienced an earnings improvement of $11.1 million, or $0.30 per share over last year. More importantly, we are showing consecutive quarterly revenue and earnings growth.

BioScrip is growing. Our products and services, combined with our successful sales efforts are driving growth. There is a great deal to be excited about in the coming quarters as we continue to grow from our successful initiatives.

These include preferred distribution and service agreement with manufacturers, managed care contract wins for specialty pharmacy services encompassing BioScrip care therapy programs, growth from the expansion of our community pharmacy sales initiatives, increased revenue resulting from Medicare's Competitive Acquisition Program, and increased growth of Infusion.

Specialty revenues grew $24.5 million in the third quarter of '07, and $83.4 million for the first nine months of '07 over the same periods a year ago. We expect to see further revenue growth in the fourth quarter as a result of the ongoing ramp up of new business and other organic expansion.

As we previously reported, UnitedHealthcare awarded BioScrip a contract to provide HIV/AIDS and transplant pharmacy services to its approximately 26 million plan members nationwide, starting August 1, 2007. We were one of only two providers selected by United for this important agreement. We began providing services under this contract during the third quarter, and we continue to ramp up in the fourth quarter.

This win for BioScrip was the perfect example of how our expertise in working with patients and providers to promote adherence to therapy and appropriate utilization positively impacts a patient's health. These programs result in positive financial returns for payors, and most importantly makes BioScrip a company that payors want to partner with.

Revenues associated with preferred distribution arrangements with manufacturers totaled $87 million for the first nine months of 2007. This compares to $57 million for all of 2006. Manufacturers typically evaluate and assess the performance of their specialty vendors on performance criteria, such as adherence, compliance and other patient management metrics. BioScrip continues to experience ratings that significantly outperform many of our competitors.

As we reported last quarter, multicultural training continues throughout the organization. This important employee education program is part of our expansion initiative to better align BioScrip's services to the health conditions we serve among ethnically diverse communities.

This past quarter we expanded our ambulatory infusion suite in Burbank, California, and added a new ambulatory infusion suite in Morris Plains, New Jersey. In the fourth quarter we expect to be operational in our new infusion pharmacy and suite in Broward County, Florida, and in our Las Vegas community store location. We continue to look to expand our Infusion Services across the country in select markets that are conducive to growth based on population, payor mix, and current BioScrip business. We're in discussions on a number of Infusion related business opportunities. The robust pipeline of infusion administered drugs will provide attractive growth potential.

As a result of the August 1, 2007 election period, physician enrollments in CAP increased to 3,352. On July 1, 2006 we had 478 enrollees. CAP revenue for the third quarter was $11.8 million, representing a 26.8% improvement over second quarter. A new election period commenced on October 1, 2007 for enrollments effective January 1, 2008.

Financially, we continue to make significant strides. Our collections have improved dramatically over the past nine months, which means we have been able to reduce our average debt outstanding, and we have been able to continue to reduce our bad debt expense. Stan will discuss these items in greater detail during his comments.

Overall, the last several months have been very meaningful for BioScrip. We committed to attaining performance goals, and we achieved them. We outlined new objectives, and we met them. We continued to become a stronger Company and bring greater value to our patients, partners and shareholders.

I will now turn the call over to Stan for the review of our financial statements.

Total revenue for the third quarter of 2007 was $298.1 million, compared to $280.9 million for the same period a year ago. Third quarter 2007 Specialty Services revenue was $244.5 million, an increase of $24.5 million, or 11.2%, over the same period last year, primarily due to revenues associated with preferred drug distribution arrangements with manufacturers, new business resulting from managed care contracts of specialty pharmacy services, and Medicare's competitive acquisition program.

Third quarter 2007 PBM Services revenue was $53.6 million, a decrease of $7.3 million, or 12%, as compared to the third quarter of 2006. This decline in revenue was primarily due to the loss of previously reported PBM customers.

Gross profit for the Company in the third quarter of 2007 grew by $6 million to $35.7 million, or 12% of total revenue, from $29.7 million, or 10.6% of total revenue, for the comparable period of 2006. This resulted in an increase of 140 basis points in our overall gross margin, primarily due to favorable sales mix and improved drug acquisition costs.

Third quarter 2007 operating expenses decreased $1.1 million to $32.5 million, or 10.9% of total revenue, as compared to $33.7 million, or 12% of total revenue, for the third quarter of 2006.

The decrease is primarily due to our cost reduction efforts, along with lower bad debt expense of $2 million, and $1.1 million in lower amortization of intangibles, partially offset by employee incentives resulting from improved performance.

Interest expense has improved by approximately $200,000 as the Company continues to reduce its debt through improved collections and profitability. The Company reported an income tax provision of $760,000 for an effective tax rate of 31%.

The Company was able to use some of its NOLs this quarter, and also settled two state tax issues, which resulted in a lower provision than was required in the second quarter. As a result of the above, the Company's net income of $1.7 million represented an increase of $5.1 million over last year's loss of $3.4 million. Our EBITDAO increased by $6.1 million to $5.5 million.

Turning to the nine months, our net income was $800,000, or $0.02 per share, compared to a net loss of $10.3 million, or $0.28 per share, for the same period of a year ago. Revenues increased $29.3 million to $889.5 million for the nine months ended September 30, 2007 from $860.2 million reported in the same period of last year, despite the loss of $54.1 million of revenues associated with certain PBM customers.

Specialty revenue increased 13.2% to $717.5 million for the nine month period ended September 30, 2007 from $634.1 million recorded in the same period a year ago.

Our gross margins increased from 10.3% to 11.5%, or $13.1 million. This improvement is essentially due to the mix of replacing lower margin PBM business with higher margin Specialty business, as well as improved drug acquisition costs.

On a year-to-date basis total operating expenses decreased by $6.5 million to $96.1 million, essentially due to a lower bad debt provision of $4.8 million and lower amortization of $2.4 million. As a result, our net income for the first nine months of 2007 shows an improvement of $11.1 million over the comparable period of a year ago. Year-to-date our EBITDAO totaled $13 million, representing a $17.1 million increase over the same period a year ago.

From a liquidity standpoint, at September 30, our borrowings under our current credit facility was down to $36.2 million, an improvement of $16.7 million from December 31, of 2006. At September 30 availability under the facility was $38.8 million, and as of yesterday availability was approximately $50 million. As a result of improved performance our interest rate will improved by 25 basis points in the fourth quarter.

I'm very pleased by our performance, and I will now turn the call back to Rich.

Strategically we remain committed to delivering customer and shareholder value by providing cost-effective health care solutions within the specialty pharmacy marketplace. Our current programs and initiatives support our value proposition, strengthen our performance, and help us effectively pursue and manage new opportunities.

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

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

I have a member of questions, guys, but first congratulations on a really solid quarter. Were there any parts of your business that performed meaningfully less well than you had expected? Specifically I'm thinking about the top line right this minute, as it was a little below what we were looking for? And I am curious if you could just comment if United contributed anything meaningful in terms of top line revenue this quarter?

No, we did not put out any guidance, as you know. The revenue numbers came in almost exactly where we expected them to come in. United was very minor for the quarter. As we mentioned in our opening remarks, the United patients continued to ramp up and will ramp up in the fourth quarter, and most likely into the first quarter of '08. But every one of our businesses performed exactly as we expected during this quarter.

That is what I thought. So it was more a problem of bad modeling on my part, not bad performance on your part.

No comment.

Secondly, I am just curious if you would comment in a general sense -- I know you're not then to provide guidance and I'm not looking for any -- but where you feel the status of cost containment efforts are right now. Do you feel like you have captured or recaptured some of the potential low hanging fruit from the merger, or do you think there is still aways to go in terms of the ultimate opportunity to reduce cost in the business?

I will start first, and then we will have Stan pick it up. As everyone knows, last year we took out a significant amount of cost when we were going through the significant problems that we experienced a year ago. And by the financial results you could see the results of those efforts.

In saying that, we reengineered a lot of the Company. We put a lot of policy and procedure into the Company. However, we still have system issues -- not so much issues, but we are refurbishing, we're upgrading our systems. We have a lot of manual efforts still going on. And I believe that as we become much more efficient, as the systems are upgraded over this year and next year that we will see continued cost improvement. Stan, do you want to pick up on it?

Sure. Picking up on what Rich said, clearly as you know, we have picked a new system to be put into our -- for our processing of prescriptions and AR and inventory. That system, when it is implemented will eliminate 16 other systems that we are currently using right now. We are looking strongly to that. That will occur during 2008, but you won't see the full impact -- that will be 2009.

That is very helpful. A couple of quick questions. Would you expect, Stan, the tax rate to continue to fluctuate around a bit or would you comment at all on that item?

I would be happy to. It is hard for us to talk about rates as a percentage. As you know, last year at year-end we took a valuation serves against our tax receivables. And until that is resolved going forward, we really are talking about dollars rather than rates. As previously reported we will always have that $717,000 hit to our tax line for the negative credits associated with our goodwill write-off for tax purposes and the FIN 48 adjustments

I will comment that these charges are non-cash charges because we continue to use our NOLs, as we did this quarter. But the other issues that we set up -- we set up several tax reserves under FIN 48 as it related to certain issues related to certain states. And we have solved two of those issues in the third quarter, and we have resolved two more of those issues in the fourth quarter.

I would say that certainly in the third quarter we're down to $760,000. I would not see that number rising in the fourth quarter as in absolute dollars. But I give you no -- nothing beyond that going forward.

That's very, very helpful. How about if you could comment on the bad debt line. Do you think you have exhausted the opportunity to reduce that, or will it go back up, or any thoughts on where you are there?

A couple of conference calls ago I talked about using a 1% in any model, but clearly we have made some substantial gains in how we process our receivables upstairs. We have learned a lot as we have gone forward here. I would say it would be a higher number though than we are currently showing in our current quarter. But if you -- our year-to-date is running about 50 basis points. I think that going forward that is probably a good number, maybe a little bit higher than that, but somewhere around there.

That is very helpful as well. I don't mean to monopolize the questions, but I'm just curious about two other things real quick. One, do you expect the PBM to continue to decline at about the rate it has been recently, 12,13%?

Two, is there a way you could talk about one or two specific preferred distribution arrangements, how they are working, why they are attractive to you, etc., etc.? Thanks a lot.

Sure. On the PBM, we don't anticipate any additional loss than what we have seen over the last year or so. In terms of the preferred distribution arrangements, we're not going to get into product by product, but I will tell you that the programs that BioScrip has in place, the Care programs, working with the manufacturers and the payors, doing the patient compliance programs, the adherence programs is what manufacturers want today.

Keeping patients on therapy, keeping them out of the hospital is what BioScrip is about. BioScrip has evolved into much more than a distribution company. It is a company that clearly takes care of patients. And if you take care of the patients, you keep them on therapy, you do the things that you need to do overall you're going to reduce cost by keeping the patients out of the hospitals.

By working on behalf of the manufacturers and behalf of the payors we accomplish that. We score extremely well with our manufacturing partners. That is what we will continue to do. We believe that that model is a model that works today and it is going to work even more so into the future.

It sounds like that is what the payors want as well, is that right?

Absolutely. The most expensive part is sending patients to the hospital, especially for the chronically ill. If we could keep them on therapy that is what the payor wants.

Melissa Mullikin, Piper Jaffray.

Congratulations on a nice quarter. Brooks covered a lot, but I do have a couple of extra questions here. Can you tell us how much revenue UNH contributed in Q3?

No.

No.

Can you give us -- that is extremely helpful guys. Can you give us some idea of how you see that panning out in terms of the size of that opportunity on an annual runrate basis?

There was a report that was put out last quarter by one of the analysts that called up -- First Albany that called up United and got some information that we will not quarrel with. Based on that, we're one of two providers that came into it. As you know, they have 26 million lives. And you really should look at the U.S. Census data for HIV and transplant, but I think that will pretty much follow.

But my understanding is lots of folks that are receiving drugs for HIV aren't necessarily covered by a managed care plan, they would be covered through like an AIDS drug assistance program. So would we be overstating the opportunity if we just take it as a percentage of the population?

No, you will not be overstating the opportunity. Of course, there is going to be coordination of benefits as primary and secondary. And we will be doing that on behalf of them. It is very similar to like the CAP situation, where we go through the coordination of benefit issue.

But when you go ahead and look at the incidence rate of these diseases and apply that to the population of United, it works. And we will continue -- it just started. United gave their patients an opportunity to finish off their scripts before transferring over into this program. And we continue to see a very steady ramp up of those patients into the fourth. And we expect good things to come out of this contract.

How are you getting those patients? Is UNH auto assigning them to you or to your competitor, or are you having to market to the patients? How does that work?

They are auto assigning their patients.

At this point does it appear that they're doing it 50-50 or --?

I can't tell you, but I think they're doing -- we know they're doing a great job and we are seeing a nice inflow of patients.

Just on that bad debt side, Stan, you mentioned that it might actually be going up a little bit in Q4. Was there something special about Q3 in terms of your processing or in terms of one specific account that you were able to collect on that Q3 was quite good, and you would expect it pop back up again a little bit in Q4, or are you just being conservative?

No, I think we're clearly, as I said before, as we have processed our -- as we really attacked the AR issues that we inherited, we have collected on items that we had previously written-off or fully reserved. And as a result, we've gotten something pick ups in that area. But going forward I think we'll go back to a much more normalized provision, as I said earlier.

Did you bring in temporary staff or outsource some of this to bring in some of these collections?

No.

Will you be able to trim some of that workforce, or once you are at a more normalized bad debt rate going forward, will you need as many collections? Are you going to maintain that level of staffing?

We're always looking at ways to reduce our cost, but I can't guarantee or offer any -- where we will be on that issue.

Glenn Garmont, Broadpoint.

No, we are with Broadpoint. You guys are with BioScrip. Just a couple of quick questions. Rich, I think number one on the Express Scripts call a week or two ago, the CEO had made some bearish comments on the infusion business that they picked up through the Priority acquisition. I think that they are -- because it is such a fragmented business, they're having difficulty achieving any kind of scale with payors. And it actually lead to some softness in their specialty results for the quarter. But I was wondering if you could sort of compare and contrast that view with your own view of the infusion business? I agree that there is a very full pipeline, but it just sounds like you're much more bullish.

Yes, there is a robust pipeline of products. The payor community I'm not sure at this point in time has really embraced this same type of managerial control and programs that we see in maybe some of the other areas. But I feel right now that we are seeing more and more of the managed care organizations really taking a harder look at infusion.

We will continue to look at infusion. We're expanding our footprint. We believe whether it is going to be done in the infusion center or at home or in a physician's offices there will continue to be incredible opportunity because of the pipeline. Not all infusion will be done in home. They will be done -- there will be infusion done in physicians offices and in clinic settings or infusion suits. We will continue to look and expand our infusion pharmacy and suits where appropriate. We are in a number of discussions now on infusion pharmacy.

We look at infusion, quite frankly, no different than we're looking at some of the other therapies. What BioScrip is doing is trying to help manage and if, as everyone realizes, the most expensive part is sending people into the hospital as an inpatient, entering them in and having infusion done. If we could keep them on an outpatient basis, either in an infusion suite setting, a physician office, or it even at home, it is less costly to the plan.

We're bullish on infusion. Clearly the majority of our growth right now is coming through on the specialty programs, the therapy optimization programs, the care programs that we have instituted. But quite frankly, we're looking at all aspects of our business that continue to grow and continue to contribute.

Rich, today you're doing both home infusion and ambulatory infusion, is that right?

That is correct.

How many infusion suites does the Company operate today -- or how many will the Company operates after the ones that you had indicated will be operational in Q4?

We have set up a number of infusion suites over the past year and a half or so in physicians' offices, which we either help operate or have set up and we are involved with. I think those run into the mid teens. In addition, as I mentioned earlier, we have now set up infusion suites in Morris Plains. We have an infusion suites in Burbank, California. We have a new one heading into Broward County, Florida. We are opening one in our Las Vegas location. We're looking to expand some of the infusion suites in our other locations across the United States.

What we're looking to do is look at the opportunities more than anything else. We're not going to open up an infusion suite and expect patients to come in there. That is not the model we're going after. We have to have business within that geographic area. We will be having salespeople in the area before we do anything else. I don't believe in putting in bricks and mortars before you have the business in there that could sustain that type of operation. We will be looking to utilize our own assets. We will be looking maybe to joint venture on some other opportunities that may be out there. So we're looking at this very carefully in how we expand this particular business.

(OPERATOR INSTRUCTIONS). [Ashlam Zingra, Glaise Gerbais Capital].

I just had a couple of questions for you. First, on the gross margin, I just wanted to get a sense of how sustainable you think the 12% level is going forward? Should we assume that you will continue to improve drug acquisition costs, or do you think a more sustainable level is lower than the 12% range?

It is hard for us to judge going forward. The 12% that we have achieved this quarter we believe in the short-term is sustainable, but as we grow in the specialty pharmaceutical area that number may come down, but the gross profit dollars will continue to go up.

There are a few things going on. If you look at our model today, part of our model under the service side may or may not include drug distribution as a part of our management. In that particular case, the margins are significantly higher because they encompass therapy optimization and care management type programs.

On the other hand, when you have some of the distribution you may see margins a little bit less. In the -- when you look at the infusion side margins are a little bit higher there. So Stan is right. We're not going out and forecasting. But as we continue to grow our service side, the revenues generated with service should be higher, but revenues on the distribution side should approximate what we have seen historically.

That definitely helps. On the bad debt expense, you mentioned that a more normalized level is probably about 50 basis points or more of sales. If we were to look at this quarter on a more normalized bad debt expense level, what do you think EPS would have been?

Bad debt expense for this quarter was normalized for this quarter. What we do at the end -- what we do during every quarter is we analyze the accounts. And we go through, we have models that take us through it. And we determine at the end of every quarter what is the appropriate reserve and what adjustments to bad debt expense that we have to do in every quarter?

It is just part of our normal business, just the way any other expense is part of that period. You can't say that in this particular quarter something was abnormal. It is just -- it is not the right comparison.

But just going forward we should assume a higher level?

Yes, that is exactly what Stan says. I think -- part of the reason for this, if we few go back over the past year and a half of what this Company went through, we're really trying to manage this and still work on the receivables. And as you can see from the improvement in liquidity, and the reduction of the bank debt how well they're doing in collecting. But there are still some receivables that are out there, and Stan and his team are managing those.

Gentlemen, there are no further questions at this time. I will now turn the call over to you. Please continue with your presentation or closing remarks.

Thank you very much. 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, and 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 line.