Option Care Health Inc (OPCH) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip, Incorporated First Quarter 2008 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 Friday, May 2, 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 first quarter conference call. Joining us today are Richard Friedman, Chairman and Chief Executive Officer; Stanley Rosenbaum, EVP and Chief Financial Officer; Scott Friedman, EVP Sales & Marketing; and Phil Keller, VP Finance. If you have not received it yet, you may find today's press release on the Company's web site at www.BioScrip.com under the Investor section.

Before we begin, I will remind all listeners that throughout this call we may make statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the intent, belief or current expectations 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 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, tax, 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 in the earnings press release disseminated this morning. This information is available under the Investor section of the BioScrip web site, www.BioScrip.com.

Today's call will consist of opening comments from Richard Friedman, a financial review of the quarter by Stan Rosenbaum, followed by a short summation by Richard Freidman. 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. Our revenues continue to grow and meet our expectations as evidenced by an 18% increase in Specialty Services. We expect our overall sequential sales trend to continue. In the first quarter of 2008, our margins as a percentage of revenues were lower as a result of a shift in business mix that was known, planned and previously communicated.

Our margins were also negatively impacted, both on a dollar basis and a percentage of revenue basis by drug cost increases. These cost increases were corrected by the end of the quarter, except for CAP and IVIG. We expect our gross profit as a percentage of revenues to be back to acceptable levels in the second quarter. Incremental margins as a percentage of revenues from payor contracts will be less. We expect SG&A to stay at the current levels. We also expect operating income to increase both in real dollar and as a percentage of revenues.

I will now turn the call over to Stan for a more detailed review of the first quarter.

Thank you, Rich. Total revenue for the first quarter of 2008 was $327.5 million, an increase of $31.3 million over first quarter 2007 or 10.6%. This was after the loss of $10.5 million of a previously announced PBM customer. Accordingly, our Specialty Services business grew $41.8 million or 17.8%, primarily due to new contracts in managed care and preferred distribution arrangements.

Despite this increase in sales, our gross profit dollars remained essentially unchanged. The increase in gross profit from the incremental sales, as well as improved purchasing, was offset by other factors. A primary factor was the drug acquisition cost increases and a negative impact of delays of updating of payor reimbursement rates.

As an example, one of our leading drugs increased prices to the market in early January and reimbursement rates did not get updated until the late part of January. Although this change was made retroactively, many contracts require us to accept the price on date of adjudication. Accordingly, we were not able to re-bill to offset this loss. We now believe that all first quarter pricing files have been updated.

As you are aware, when branded drugs go generic you would expect lower sales but higher profits. In the first quarter of 2008, several new generics to market negatively impacted profitability due to aggressive payor matching and supply side challenges. However, we expect this particular situation to improve going forward.

Additionally, one of our IVIG suppliers reduced our discount rate. Accordingly, our cost increased with no corresponding price increase. We are hopeful that the manufacturer will raise his price in the marketplace.

Turning now to CAP, CMS adjusted our reimbursement rates on January 1, 2008 based upon our cost data from the first half of 2007. Unfortunately, manufacturing drug cost increases and fixed reimbursement rates have put our first quarter CAP business in a loss situation for the first time. We will continue to work with CMS and manufacturers to improve the program. Our future participation in CAP is dependent on certain changes. We are hopeful that this program will return to acceptable levels.

Operating expenses in the first quarter of 2008 were $32.7 million, essentially unchanged from prior year. Favorable bad debt and amortization expenses were primarily offset by higher compensation expenses.

Interest expense was $500,000 lower due to improved working capital management and lower cost of borrowing. As a result, our free tax loss for the quarter was $550,000 better than the prior year.

Turning now to our tax provision, many of you are aware of our situation where we have set up a valuation reserve against our tax asset and the ongoing charge to our P&L for the naked credit. This year in accordance with ATB 28, which deals with interim reporting, we have included the effect of the naked credit in our effective tax rate. Since we are projecting a profit for the year, the impact of the naked credit will be charged to the P&L as profits occur. The total naked credit for the year remains at $2.8 million.

Turning now to the balance sheet, our working capital management continues to improve as evidenced by our lower DSO and days of inventory on hand. Our borrowings under our credit line increased by $14.7 million due to higher inventory and receivables in support of our sales effort. The EBITDAO of $2.7 million in the first quarter resulted in the Company missing the debt to EBITDAO covenant in its credit agreement. The lender has provided the Company with a waiver. Availability under our credit line at the end of the quarter was approximately $27 million and as of yesterday it was approximately $31 million.

The Company has made tremendous strides over the last year and a half. The first quarter results were disappointing; however, we believe that the positive sales trends and recovery of margin will return us back to profitability. I will now turn the call back to Rich.

Thanks, Stan. Our Payor and Pharma revenues continue to grow. Our service model of improving adherence, compliance and retention rates work. Our patient care programs address the changing needs of pharmaceutical care. They are patient centric, diseased focused and therapy conscious. Effective April 1, we have been designated by United Healthcare as the sole provider of HIV and solid organ transplant medications through an amendment to the previously-announced contract.

We are also one in a limited distribution network for Cimzia, a new injectable approved last week for Crohn's Disease. We have also launched a national, therapeutic vaccine specialty management program. The market sees therapeutic vaccines as one of the fastest growing pipeline segments.

Before we open the lines for questions, let me say this one more time. The major part of the margin decline in the first quarter was a timing issue that has been corrected. Our business model is sound. We expect the second quarter and the entire year to be profitable. We will now take questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Brooks O'Neil from Dougherty & Company. Please proceed with your question.

Good morning. This is Deepak Chaulagai calling in for Brooks O'Neil. Can you provide some more color on the margin decline? Specifically, you talked about some of the drugs with the manufacturer contracts. What have you done specifically to resolve that issue going forward, both on the drugs' side and also on the payor mix?

Good morning, Deepak, it's Stan.

Hi, Stan.

Some of these things that hit us would have hit us whether or not we had better systems in place. But nevertheless, we have taken steps to monitor the situation more closely as we go forward. For example, we have signed a - instituted a new system with a company that does allow us to look at many [scanned] updates on a daily basis. In addition, we are getting daily downloads from Cardinal so we can take a look at all price increases from the manufacturer. In comparing the two, we will then be able to call our payors to make sure that they are updating their system to reflect new reimbursement rates.

We are also, where we have the opportunity, we're going back to our contracts, to our customers, to see whether or not we can renegotiate contracts that will allow us to go back and re-bill for changes such as I described earlier. As it relates to IVIG, we have talked to the manufacturer. We believe he will raise his price sometime in the future. We can't tell you when. And as it relates it CAP, I can tell you that we have been in negotiations and discussions with both the suppliers, as well as CMS, to see if we can get a resolution to that situation.

So on that IVIG, as of now the situation is still status quo, or has it been resolved? In terms of your estimates, when would the price increase?

It really is not up to us. It is in the control of our supplier to do that. We are hopeful it'll be done sometime in the near future. Again, it's not within our control. There is no resolution at this time, though, in answer to your question.

But also to be clear, Deepak, when we talk about the margins coming back to acceptable levels, we have taken that situation in CAP into account. So when we say acceptable levels, it absolutely takes into account the current pricing from that particular vendor.

Deepak, that would also apply on the CAP situation as well. We have taken that into account as well.

That was my next question. What is acceptable level going forward? Let me just be more specific here. Your gross margin was 11.7% in Q4 and 11.97% in Q3, and it was 9.89% this quarter. So what's an acceptable level we should be thinking in terms of modeling, forecasting going forward?

For the existing business as it stands today, the acceptable model would be in the mid-10 range. And going forward let me also say that as we secure additional payor contracts we will see the margin on the gross profit line be somewhat less than that and we've said that before. But we do see, because of the leverage on being able to hold the SG&A at its current levels, the increase in income from operations on a percentage and real-dollar basis.

So to that effect, you commented on the CAP. If you see no resolution in terms of pricing or reimbursement modification updates from CMS, is the thought that you would not participate in CAP going forward if it seems like a long-term resolution doesn't seem possible?

Well, let me say this about CAP. In CAP, there have been incredible intangibles, and tangibles to this Company because of CAP. CAP has been a profitable piece of business for us up until this point in time. CMS, and there are effectively two products that have put CAP under water. We are working with both the manufacturers and CMS.

But I will say this, if there is no resolution to the current situation and the policies within the way CAP works does not change, I believe it would be hard for anyone to participate in this program. It is a positive program. It has done a world of good replacing the buy and bill in physicians' offices for Medicare Part B. It's a terrific program, but I've got to tell you they have to make some changes to the program to get anyone to participate going forward.

That makes sense. Now, going back to the Specialty Services' revenue, it was a pretty good increase there at 18%. Was United Healthcare the primary driver in that? If so or if not, could you provide some more color on that?

United was a part of that driver. In addition, the Pharma revenue continues to grow. All across our community operations continue to grow and other payors that we've signed up. So, right across the board we are experiencing some nice growth from all aspects of how we sell.

That's great.

And as I said, we expect this to continue.

Okay, and in terms of the United Healthcare business, now you announced you are the sole vendor, what is the margin on that business? Is it at your corporate level or is it lower than that; is it higher than that? If you could provide some more color on that, that would be helpful.

We can't get into specifics on an individual customer. But as I said, margins related to payor contracts will be less than what we believe, what I just said about acceptable levels in the mid-10s will be less.

Okay. All right then, in terms of -- I think you guys did a great job in controlling your operating expense even though the gross margin declined; $1 million sequential decline to $32 million while your revenue grew about $20 million. That's obviously positive. What should we expect going forward in terms of expense control in '08 and even in '09?

As I said, we believe that we can keep SG&A around the current levels and we expect to be able to do that. We've talked about leverage in the past. Of course, as we've invested and will continue to vest in the sales organization, as everyone knows we've been investing in our systems. But we believe that these levels are pretty close to where they should be.

A couple of housekeeping items then, you know, in terms of a share count, Stan, can you provide what the share count would be if you had inputted a profit instead of a loss?

It would be approximately $2 million royalty, more like it was in the 10-K at year-end.

Okay and then last one question and I'll jump back in the queue. Are there any other pressing issues that we should be thinking about in terms of profit, growth in Q2/Q3; the remainder of '08 I should say?

In terms of sales or expenses? I'm not sure I understand the question.

Anything in terms of any expenses we should -- I understand that the gross margin will go back to acceptable levels in mid-teens, the payor contract will be lesser than that; but is there anything else that we should be thinking about going into Q2?

What you should think about is revenues will continue to grow as they've grown sequentially overall. I think you will see margins on the existing business be in the mid-10 range. I think you will see SG&A holding at pretty close to the current levels. And we are not aware of anything else in the second quarter. So, taking all that into account, we would expect that the second quarter to be a lot better than the first quarter.

Thanks, guys. I'll jump back in the queue.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Steve Arpaia from Broadpoint Capital. Please proceed with your question.

Hi. Good morning, guys. I'm calling in for Glenn Garmont. I just had a quick question surrounding the UNH contract. Can you provide anymore color as to why [Esposito] backed out of the contract? Were they fired? Anymore color around that would be very helpful.

I'll tell you this. Since we started this program with United, I believe we've been doing an incredible job for them. I think all across the board they've been very excited about the work we do going back to our model. I can't talk about what happens with Acredo, but we've been very successful.

Let me turn it over to Scott, because he's responsible for this particular contract and all our contracts. Scott, can you add any color?

Hi, Steve. We've been acting in the capacity as the sole vendor. It was a formal designation that was established April 1. I can't get into the specifics. Quite frankly, it wasn't shared with us. It's none of our business why or why not Acredo wasn't part of it. All we know is we were rewarded for the service that we provided to United. We view that as a positive, and I think the fact that they didn't go out and pursue someone else with whatever happened with Acredo, also reflected on the performance within that contract.

Okay and just is that contract still expected to be valued at about $250 million a year?

I think the value that was put out was another analyst's report. It was Glenn's report on the value of that overall United business. We didn't give guidance on the value of the contract, so.

Okay and I'm sorry if the question was already asked, but regarding the decline in gross margin was that simply due to a little product seasonality, percentage of sales or was that attributable to the price increases.

Yes, there were two situations that impacted on a percentage basis. One was clearly as we do more business with the payors that we knew that the margin related to that business as it gets larger and larger will come down. The part that really negatively impacted the dollar portion of it and, quite frankly the percentage, were the price increases that we experienced January 1 that weren't corrected until the latter part of January. And as our Specialty business continues to grow, it has more of an impact. It has been corrected. We have taken corrective measures to watch this going forward so that we stay on top of it. Quite frankly, at year-end as we were closing year-end books and much of this took place in January, by the time that we were closing our January books and noticed all this it was a little late. We have recognized that going forward and are taking corrective measures.

Okay, great. Thanks for the comments, guys.

Our next question comes from the line of Mark Arnold from Piper Jaffray. Please proceed with your question.

Good morning. You guys mentioned the waiver on your credit facility. Can you give us a little bit more information there in terms of the terms of that on length and was there any sort of an amendment fee, or just a little more color on the situation there.

Good morning, Mark, it's Stan. Absolutely. Like all fees and labors, there's always a fee that comes with the labor. In this particular case, it was an additional 15 basis points on our margin, as well as a slight increase in our AR fee. We anticipate that it's probably going to cost us about $150,000 annualized.

Okay and is this a permanent waiver, or is this a short-term waiver?

It is a short-term waiver for the quarter; however, we believe that this will not be an issue going forward.

Okay. Then, just on the comment I think, Scott, you made regarding you've been acting in the capacity as the sole vendor on the UNH contract but it was made official on April 1. Since when have you guys been acting in that capacity? I mean if we go back to the beginning of the quarter, can we assume that you guys have been getting most of that UNH business already in Q1, or really is it effective Q2 where we're going to start to see some benefit from the sole-vendor relationship?

The business continues to ramp up. We were the sole-contracted Specialty vendor, but there was business out there. There were other vendors still in the network. We did not see the full -- we were not designated as exclusive, so the patients were not all getting driven to us and being locked out of other networks. So, when I said that, there is no other formalized Specialty vendor that had signed a contract at that point in time. But the business continues to ramp up and still we see that ramping up.

Okay and then, just back to the CAP comments, I guess I was a little confused, Rich, about the comments there. Maybe you could just go back through that again. What were the two issues, specifically, and maybe you could just walk through it again and then maybe I can add on a couple of questions.

Sure, Mark. CMS under the contract has the right to adjust reimbursement rates based upon cost data from BioScrip. CMS adjusted its rates effective January 1 of '08 based upon data in '07, first half of '07. Subsequent to CMS adjusting its rates, its reimbursement rates, manufacturers of two products in particular, the price was increased in the market by the manufacturers. CMS has not readjusted its reimbursement rate and the manufacturers, quite frankly, have not given BioScrip any relief on those particular products. We are currently working with both CMS, as well as the manufacturers.

This clearly points to a flaw in the system for this particular -- for the CAP program. So as I said, Mark, any company who is going to look at this going forward it's not going to work. The program has been profitable up until this point. So, we're going to continue to work with CMS. We're working on the hill. We've recommended changes to CMS. We're hopeful that the manufacturers, because quite frankly some of the products that we're selling are significant to these manufacturers. The physicians that are out there today, over 4,000 of them, utilize the CAP program. So, in order for this program to be successful, quite frankly, CMS is going to have to make some changes.

So, it's the time lag issue on the ASP's pricing that exists that's really the cause here. I guess that's the way to look at it. And you mentioned -- I guess you didn't explicitly mention any manufacturers or any drugs. Is it fair to say they are for cancer treatment?

I'm not going to get into that, because we're in the middle of negotiations and I don't think that would be fair. But Scott has a point that he would like to make as well.

Mark, more on the clarification on the ASP side, basically what it was is we delivered our cost files based on a period of time. Price adjustments were made afterwards and they were a one-time price adjustments for the year. Per the CAP rule when CMS adjusts their reimbursement rates, which both fluctuate up and down, you're locked in for the year at those rates. So at any point after those rates are adjusted where manufacturers take price increases over a normal course of the year, if they go up our rates don't. So effectively we're locked in.

Unlike ASP and Medicare, physicians were updated on the quarterly basis, o if there's price increases you'll pick up in the following quarter. CAP only has an annual update. So effectively, they took a snapshot of our costs from a period of time, reset the rates and any increases that occurred after that point we bore the negative impact of that.

Can I just ask one clarification then? Do you guys have the right to pull out of the CAP program at any point if the business is not profitable? I'm not saying that you want to do that and there's obviously some benefits to it, but pending the outcome of discussions with CMS do you guys have that right at any point in time?

I'll leave that to the attorneys.

Okay, great. Thank you, guys.

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

I'd like to thank you all for participating. Again, it has been a difficult quarter for all of us, but the Company is moving forward. This has been a temporary blip, a stumble. We are through it. Our model works and we're all pretty excited about the future of BioScrip. Thank you again and have a great day!

Ladies and gentlemen, that does end the conference call for today. We thank you for your participation and you please disconnect your lines. Have a great weekend everyone!