Option Care Health Inc (OPCH) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter and year-end 2007 earnings results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, March 4, 2008. I would now like to turn the conference over to Craig Allison, Director of Corporate Communications. Please go ahead, sir.

Welcome to BioScrip's fourth-quarter and year-end 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 officers with respect to the future operational performance of the Company and the operational and financial impact of certain new government programs and customer accounts 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 options 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 in the earnings press release disseminated this morning. 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 the 2007 year-end results by Stan Rosenbaum, followed by a short summation by Richard Freeman. Then we will 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. By all accounts BioScrip had a successful year and our fourth-quarter results are indicative of the successful execution of our strategic initiatives. In 2007 we solidified our foundation to give us the ability to grow. We upgraded our management team, we repaired our collection issues, we took the first critical steps to improve our systems and successfully eliminated our SOX material weaknesses.

We significantly increased our Specialty Services revenues. We implemented a Specialty Service model that provides our customers greater value. We enhanced our relationships with payers and manufacturers, including our win with United. We dramatically improved our industry reputation and, most importantly, we returned to profitability and, as a result, increased BioScrip's market capitalization benefiting all of our shareholders.

Our focus on a service driven approach to specialty pharmacy management is resulting in positive outcomes for our customers. Our programs are generating interest and recognition among stakeholders who need effective and proven product and service offerings for the management of certain chronic conditions. This recognition has positively impacted our results and will continue to do so in the future.

As importantly, our programs are differentiating BioScrip from our competitors and from commoditized specialty drug distribution. Our strategy has paved the way for successful sales efforts which are driving growth. These efforts have produced new revenue from preferred distribution and service agreements with manufacturers, managed care contracts for specialty pharmacy services, community sales initiatives, Medicare's competitive acquisition program, and Infusion Services.

Our service first philosophy has set the stage for stronger relationships and performance. By focusing on the individual patients' therapy and disease we've shown we can produce quantifiable health and financial outcomes for our customers. Our proprietary BioScrip care specialty care management programs are being marketed as part of our specialty pharmacy service offering and are being well received by the payer and manufacturer markets.

These services have become more critical as many manufacturers now evaluate and assess their contracted specialty vendors based on performance criteria such as adherence, compliance and other patient management metrics. BioScrip's management services continue to produce results. Consequently ratings from manufacturers demonstrate superior performance versus many of our competitors. These results create increased revenues and new business opportunities.

We continue to strategically expand our Infusion Services across the country. These expansion efforts include more aggressively marketing our home infusion and nursing services; the buildout of infusion pharmacy capabilities in select markets that are conducive to growth based on population, payer mix and current BioScrip business; and the development of an alternate site of care model to address the economic inefficiencies of infusing certain infusion therapies in the home, physician office and hospital settings. The robust pipeline of infusion administered drugs should provide attractive growth potential for this specific model.

Additionally, we recently opened an infusion pharmacy and treatment site in Pompano Beach, Florida and we have begun marketing Infusion Services in Las Vegas, leveraging our pre-existing pharmacy location. We are in the process of opening an ambulatory infusion center in mid Hudson Valley, New York. We also executed a contract with ActiveCare Network, the country's largest national infusion and injectable network that provides alternate sites of care for drug administration.

The relationship will provide opportunities for BioScrip to market management programs to payers and manufacturers where we can help to provide more convenient access to sites of care utilization management and clinical oversight to help control costs. ActiveCare has thousands of contracted sites nationally.

Financially we continue to make significant strides. For the quarter we generated net income of $2.5 million or $0.06 per share on revenues of $309 million. EBITDAO was $5.9 million. Fourth-quarter 2007 specialty service revenue increased 10.4% to almost $257 million over the prior year. These improvements are primarily due to additional revenues associated with preferred drug distribution arrangements with manufacturers, specialty contracts with payers and Medicare's Competitive Acquisition Program.

For the 12-month period ending December 31, 2007 net income was $3.3 million or $0.09 per share compared to a net loss of $38.3 million or $1.03 per share for 2006. For 2007 Specialty Services revenue increased 12.4% to $974 million. Our collections have improved dramatically over the past year 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 as a percentage of revenues.

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

Thank you, Rich. Total revenue for the fourth quarter of 2007 was $309.2 million as compared to $292.1 million for the same period a year ago. Fourth-quarter 2007 Specialty Services revenue was $256.7 million, an increase of $24.2 million or 10.4% 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 specialty pharmacy services and Medicare's Competitive Acquisition Program.

Fourth-quarter 2007 PBM Services revenue was $52.4 million, a decrease of $7.1 million or 11.9% as compared to the fourth 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 fourth quarter of 2007 grew by $5.9 million to $36.2 million or 11.7% of total revenue from $30.3 million or 10.4% of total revenue for the comparable period of 2006. This resulted in an increase of 130 basis points in our overall gross margin primarily due to favorable sales mix and improved drug acquisition costs.

Fourth-quarter 2007 operating expenses increased $500,000 to $33.1 million or 10.7% of total revenue as compared to $32.6 million or 11.2% of total revenue for the fourth quarter of 2006. The increase reflects higher compensation costs arising from the Company's improved performance. Offsetting this were significant improvements in bad debt expense of $2.7 million and lower amortization of intangibles of $1.2 million.

Interest expense for the quarter has improved by $318,000 as the Company continues to reduce its debt through improved collections and increased profitability. Our fourth-quarter tax benefit of $59,000 represents our provision for taxes on the amortization of long lived asset, generally referred to as the naked credit, which was more than offset by the favorable settlements of certain state tax liabilities. As a result of the above the Company's net income of $2.5 million represented an increase of $30.6 million over last year's loss of $28 million.

It should be noted that BioScrip established a non-cash reserve of $25.7 million against its deferred tax assets primarily associated with its net operating loss carryforwards in the fourth quarter of 2006. Excluding this reserve the Company's loss for the fourth quarter of 2006 was $2.3 million or $0.06 per share. Our EBITDAO increased by $4.6 million to $5.9 million in the fourth quarter of 2007.

Turning to the full-year results, our net income was $3.3 million or $0.09 per share compared to a net loss of $38.3 million or $1.03 per share in the same period a year ago. Our 2006 net income was negatively impacted by the previously mentioned reserve against our deferred tax assets. Revenues increased $45.8 million to approximately $1.2 billion for the 12 months ended December 31, 2007 from $1.15 billion reported in the same period last year, despite the loss of $61.8 million of revenues associated with certain PBM customers.

Specialty revenue increased 12.4% to $974.2 million for the 12-month period ended December 31, 2007 from $866.6 million recorded in the same period a year ago. As in the fourth quarter, the increase reflects higher revenues associated with preferred drug distribution agreements, new managed care contracts and the competitive acquisition program.

Our gross margins increased from 10.2% to 11.4% or $19 million. This improvement was essentially due to the mix of replacing lower margin PBM business with higher margin specialty business as well as improved drug acquisition costs. For the full year total operating expenses decreased by $6.1 million to $128.2 million, essentially due to lower bad debt provision of $7.3 million and lower amortization of intangibles of $3.6 million. This was partially offset by increased compensation costs essentially as a result of the Company's improved performance.

As a result, our pretax income for the 12 months of 2007 shows an improvement of $24.8 million over the comparable period of a year ago. Our 12-month EBITDAO totaled $18.9 million representing a $21.8 million increase over the same period of a year ago.

Turning now to our balance sheet, at December 31st our borrowings under our current credit facility were down to $33.8 million, an improvement of $19.1 million from December 31, 2006. At December 31st availability under the facility was $41.3 million and as of yesterday availability was approximately $34.3 million.

Over the past year significant improvements have occurred in both our accounts receivable DSO and inventory days on hand. Our DSO has improved approximately four days and our inventory days on hand is lower despite the increased inventory demands necessary to support the increase in Specialty Services. I am pleased with their overall financial performance and I will now turn the call back to Rich.

Thanks, Stan. Overall 2007 was very meaningful for BioScrip. We committed to attaining performance goals and we achieved them. We outlined new objectives and we met them. We continue to become a stronger company. Our service first philosophy sets the stage for stronger relationships and performance. By focusing on patient therapy, disease and utilization management we provide valuable expertise for managing chronic conditions.

Bottom line, our programs improve compliance and adherence which positively impact both a patient's health and financial returns for payers. A perfect example of this type of program involves our contract win with United Healthcare. As we previously reported, United Healthcare awarded BioScrip a contract to provide HIV AIDS and transplant pharmacy services to its approximately 26 million plan members nationwide. We remain committed to delivering customer and shareholder value.

I thank you for your attention and we will now open the lines for questions. Operator?

(OPERATOR INSTRUCTIONS). Mark Arnold, Piper Jaffray.

Good morning, guys. Nice quarter. I just have a few questions. I guess on gross margins I would assume we'll continue to see some further improvement as you continue to add these service components to what you offer your customers. And I guess to that point, without giving guidance on it, what are some of the factors that could cause that number to jump around quarter-to-quarter here in the next year?

I know in 2007 you had really nice year-over-year improvement and you mentioned kind of some of the key things driving that. But it did bounce around a little bit. And I guess as we look forward here in the next year what are some of just the facts that could cause that to jump around a bit again?

First of all, the margin kind of moves around slightly based upon the mix of the products; obviously the infusion business has higher, some of the mail distribution has lower. As we improve the service side it has to become a larger percentage down the road which will hopefully -- it will over the next number of years. And obviously service will have higher margins than strictly a distribution model. But I'm not sure you're going to see the full impact of that increase in margins actually for years to come when the service side becomes a more significant portion of the total of the Company.

I think as we try to expand the infusion therapies those typically have higher margins. But I think more important than the gross without a doubt is going to be the operating income line. I think what you are seeing, and what this company is all about, is going to be taking advantage of the leverage we now have. As we pick up more revenues you're going to see more and more of the margin fall down to the bottom line and I think that's pretty exciting a for us right now. Stan, do want to add to that?

Well, we said that as we have our operating expenses under control now, whatever the margins that fall through on new sales contracts at the gross margin line will fall right to the operating income line. So that while our gross margins may move around, we certainly expect that our operating margins will increase in the future.

Okay. You answered my second question without me even asking it, so I'll move on. Just on CAP, I know sometimes people spend too much time focused on this and it's not that significant a piece of your business today, but do you have any updates just on where the bidding on that program stands looking forward here and when you expect to hear whether you maintain that contract?

The RFP did go out. We understand there are a number of others who are looking to participate. I welcome it quite frankly. Just an update -- we have seen an incredible increase in the utilization of the number of docs that we have. And we're almost up to the same level as we were when we entered into the year, but the number of docs we're utilizing are significantly higher.

I think has more companies look to get into this it's not going to be about splitting what's already there because, as you said, it's a great customer but it's not that significant. What I'm looking for is to see greater marketing coming out of CMS and if there are any other vendors that would be affected in '09, I would look for them to start marketing out to the physician community to get the message out even greater. What we're seeing is that in some of the specialties increased utilization the cost of CAP program actually works and the more that we have out there marketing these programs I think it's going to benefit everyone.

Great. Just one last question. You mentioned the ActiveCare Network contract. Pardon me for my ignorance if this is something that was announced earlier and just me being new to the story here I'm not familiar with it. But is that a new contract?

It was not announced earlier (multiple speakers).

Could you elaborate a little bit more on that? I thought that was very interesting?

Yes. What this is, it's effectively a network that was put together across the United States. They have anywhere between 6,000 and 8,000 different sites of care that BioScrip could utilize. Rather than putting money into bricks and mortar all over the country, it will supplement what we have and we believe that the collaborative relationship will be rewarded for both organizations. What it does do, it gives us the sites to be able to deal with both the manufacturer partners as well as the managed care partners, utilizing their sites of care in order to handle our business. So we think it's a great addition. We're looking forward to an incredible partnership between both organizations.

Great, thank you very much.

And Mark, as I said, it is nationwide which is critical for us.

Brooks O'Neil, Dougherty & Co.

Good morning. I have a few questions as well, guys. Perhaps you could give us a little bit more detail on the impact of the United contract in the fourth-quarter results and what you think the outlook there might be for 2008?

Sure. Brooks, we're not going to give numbers but we will say this -- when we were awarded the United contract effective in August of '07 the existing vendor at the time still had run outs to do and they were still getting 90-day supplies. The benefit change became effective in 2008, so therefore we continue to see ramp up. I will tell you today it is right on track of where we believed it would be at this time of the first quarter. But in terms of revenue in the fourth quarter it was fairly low.

Okay, that's very encouraging I guess I'd say. I think we talked a little bit, Rich, during 2007 about the possibility of securing additional contracts like the one you got with United. Do you still feel like that's a possibility for sometime this year?

I wish I had a crystal ball, Brooks. What I can tell you is that our programs are being accepted in the marketplace, I see it every day with those that we're talking to, both on the manufacturing side as well as on the payer side. What we do is we manage. It's individual therapy. We look at the disease state, we have touch points, we have shown better retention, adherence, everything through as we continue to manage. If companies, if managed care organizations want to help control costs for the chronically ill I believe our programs are an answer. As manufacturers want to do more I think BioScrip is the answer.

We are away from the commoditization of the specialty side, we manage. And United is unique in its size, but that's not to say that we're not going to have success in the coming years because of our model, I think we will. I think people who are interested id in helping to control cost do a better job of managing the chronically ill. I think the BioScrip care programs, the MD Star program are programs and, quite frankly, are people -- we have upgraded people, as you know, the past year. I think we're well positioned to take care of what is happening in this industry today.

That's great. Do you guys think that the PBM business has stabilized in here at this point? Are we at a place where on a run rate basis it ought to be about where it's at now?

Yes, I would think that that's true. We lost 17 in the '05-'06. And Excel RX ran out this year. We're unaware of any other changes to our PBM business at this stage.

Okay, good. How do you guys feel about acquisitions? Do you think acquisitions are important to the growth of the business for you or not a big factor for 2008?

It's a great question. Historically we haven't done great in the integration, but we have upgraded our management team. I feel more confident today with the people. It's really the integration, Brooks, that's a key to any good acquisition. There are some terrific companies out there, but if you can't put them together well it doesn't pay to go do it.

I will tell you that organically the Company is doing fine. But there may be some assets out there that could work and fit in with what we're trying to do. So I'm not saying that we're going to be doing it and I'm not saying we're not going to be doing it. We will look, but I want to make sure that there's a strong management team and the integration process is put in place so that as we go forward and if we decide to go do one that we're ready to go do it.

I think that makes a lot of sense. Let me just ask two more quick sort of detail questions. One, Stan, you mentioned the resolution on some state tax issues. Can you just refresh our memory if there are any additional opportunities like that that are still out there?

Not as it related to these -- these were state Nexus issues that we settled in '07. And we got a benefit on that in the fourth quarter. If you remember, we adopted FIN 48 on January 1st that will require it to set up certain reserves on some state tax issues. We resolved those later in the year and that's why you see the favorable benefit in the fourth quarter.

Okay. And do you have any update on when you might be able to reverse the naked credit?

Well, the naked credit exists forever. What you're saying is can we reverse the valuation reserve?

Right, sorry.

That's okay.

You probably know I'm not an accountant.

That's okay. This is not an easy thing to understand, but -- even for us accountants. But the same criteria that required us to set up the reserve will be used in determining the reversal of that reserve. And amongst those are 12 cumulative quarters of profits, six consecutive quarters of profits, and an outlook going forward that says we will utilize the NOLs as we go forward. As you know (multiple speakers) '05 and '06 (multiple speakers) -- with '05 and '06 being huge losses I would not expect it to happen in '08.

Okay, that's great. And then maybe -- can you give us any update on the IT projects that you're involved with and how those are coming along?

Sure. As you know, this year we've eliminated our material weakness. That was the number one issue in IT. Among other things, that will have a significant impact on our audit going forward. We've also upgraded our general ledger system this year and that has gone smoothly and that's up and running. And we have selective [Creon]. And as you'll notice when you look at our balance sheet, we've spent some money in the fourth quarter as we started to implement this system. The implementation will occur over the next 18 months, it will be a phased implementation and to date we are right on track as to our plan.

That's great. I think you guys are doing a great job, keep it up.

(OPERATOR INSTRUCTIONS). Glenn Garmont, Broadpoint Capital.

Good morning, guys. A couple of quick questions. Stan, can you give us the operating income at the segment level, or do we need to wait for the K for that?

You have to wait for the K; we're still making some adjustments to it.

Okay, all right.

(multiple speakers). Glenn, I don't want to put you off, but we're still making allocation issues off our corporate expenses. That will be filed on Friday.

Fair enough. And then with respect to the gross margin, it was down a little bit sequentially. Is that some seasonality? Is that Synagis or is there some other mix shift going on there?

It's a mix issue.

Okay. And then Rich, how many infusion sites today and how many do you see the Company adding in 2008?

We have five infusion sites today plus a number of offices where we put sites into physicians' offices. It's going to be -- Glenn, with the ActiveCare Network, I think that's a great opportunity for us. We're going to be looking at sites -- first of all, as we said earlier -- where our business is. I think there's plenty of opportunity with our locations. As an example, in San Francisco we may have an opportunity; in Miami we may have an opportunity.

We also -- the contract that we just signed, we're opening up in New Pauls, New York with a very prestigious group up there, should do very well -- we're hoping will do very well for us. So we're looking at opportunities as we go around, but we're going to be concentrating where we are first and we believe that we can use our existing locations. And also it's a benefit design model for the payers that will drive our volume.

They're not going to be one-off for the patient. So we're going to be going into the payers, talking to them about the benefit design and that we have a national presence and able to handle them on a national basis. So it's not just going to be the one-offs that have kind of been historical, but it's now going to be the payers on a nationwide basis.

Okay, that's helpful. And I know you don't break out infusion revenue, Rich, but is your infusion business growing faster than your specialty business as a whole?

No.

Okay. Okay, thanks for the comments, guys.

Bill Nasgovitz, Heartland Funds.

Good morning, nice progress. Congratulations. I might have missed this; did you give some EBITDA guidance here for 2008?

No.

No, you didn't miss anything.

Would you like that opportunity?

No, we would not. Look, you know, we've made tremendous progress over the past year, as you know. And our job is to keep it going. We have a lot of good things going on, but we have decided not to put out the guidance.

Well, looking out longer-term, what kind of gross margins do you think is possible looking out two, three years, Rich? Last quarter was 11 what, 11 and change?

Can I tell you, Bill? As I said earlier, I'm really concerned much more about the operating income, the percentage there. I think we could drive that number up significantly. I think that quite frankly the gross profit line -- you're going to see different mixes. On the service revenue side, as that continues to grow that's going to have a higher margin. I see that on the specialty distribution side it's probably going to remain where it is somewhat.

But the leverage of this company today, being able to bring down 50, 60% of the gross profit or variants or more -- Stan just said "or more" by the way -- down to the operating income line is what's critical to this company. And as we're able to really move that up I think more and more is going to hit the bottom line and EPS is just going to go up.

So it's tough to predict the gross profit because it's really market-driven as opposed to us driving that line. But I do see opportunities in infusion. I do see opportunities on the service side. On strictly the distribution side, I kind of see that kind of flat going forward. So there are plenty of opportunities out there, but it's exciting for me to see more and more fall down to the bottom.

Okay, thank you. That was helpful.

Mark Arnold.

I just wanted to follow up again on the ActiveCare Network, just so I understand that right as it relates to those infusion sites. Those are typically going to be in a physician office where the physician would bill for an admin fee would you guys then bill for the drug component?

It's some physician's office, but that's a small percentage. It's actually many different sites, it's in clinics, it's AICs, it's all across the board. Where BioScrip effectively leases out the chair in order to perform -- these sites are credentialed, the physicians or nurses are credentialed, it fits the therapy that we're doing, BioScrip provides the drug and it's affectively a leased type of setup for BioScrip.

Okay, great. Thank you very much.

There are no further questions at this time. I will now turn the conference back to you.

Well, thank you very much. BioScrip again continues to make progress. Our initiatives are the right ones. We look forward to updating you again on 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 lines. Have a great day, everyone.