Option Care Health Inc (OPCH) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the BioScrip, Inc. third-quarter earnings results conference call. (Operator Instructions). As a reminder, this conference is being recorded on Friday, October 30, 2009. It is now my pleasure to turn the conference over to Lisa Wilson of BioScrip, Inc. Please go ahead, ma'am.

Good morning and thank you for joining us today. By now, you should have received a copy of our earnings press release issued this morning. If you have not, you may access it through the Investor Relations section at our website.

Richard Friedman, Chairman and Chief Executive Officer; Rick Smith, President and Chief Operating Officer; and Stanley Rosenbaum, Executive Vice President and Chief Financial Officer will host this morning's call. The call is expected to last about 45 minutes and may be accessed through our website at bioscrip.com.

Before we get started, I would like to remind everyone that any statements made on the conference call today or in our press release that express a belief, expectation or intent, as well as those that are historical fact, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to BioScrip today, and we assume no obligation to update these statements as circumstances change.

These forward-looking statements may involve a number of risks and uncertainties which may cause the Company's results to differ materially from such statements, including the impact of the AWP class-action settlement. These risks and uncertainties include factors detailed in our SEC periodic filings, including our most recent Annual Report Form 10-K and our 2009 Quarterly Results on Forms 10-Q.

Also, the Company urges caution in considering any current trends or guidance that may be discussed on this conference call. The pharmacy services industry is highly competitive, and trends and guidance are subject to various numerous factors, risks and influences, which are described in the Company's periodic reports filed with the SEC.

In addition, the impact of current national and global economic conditions on our business may be difficult to predict. The Company disclaims any obligation to update information on trends and targets other than in its periodic filings with the SEC. In addition, as required by SEC Regulation G, the reconciliation of non-GAAP financial measures mentioned during our call today to the most comparable GAAP financial measures can be found in Schedule C to today's press release. That schedule is available on our website under the link to News found in the About Us section of our home page at bioscrip.com.

Thank you, and now I would like to turn the call over to Rich Friedman. Rich?

Thank you, Lisa. Good morning, everyone, and thank you for joining us today. We are pleased with our operating performance and financial results. Our strategy remains the same. The message is consistent. The management of the chronically ill, consisting of adherence, compliance and retention, is the cornerstone of BioScrip and the key to our strategy.

Our focus is to deliver the full continuum of care through the clinical management of infusion, injectable and oral technologies. We continue to focus on improving the system by which patient care is delivered. We aim to control costs and improve quality of life for our patients through education and support. This approach also provides us a cost-effective and customized management solution for payors and physicians, while providing critical medical data for manufacturers and other healthcare constituents.

Our strategy is providing us with a competitive edge in the marketplace. The results we have achieved this year validate the value of our high-touch clinical model. Our strategy is working. We are delivering higher margins, higher profits and, more importantly, increased value to our customers and shareholders.

Stand will now review the third-quarter financials in more detail and then Rick will review our third-quarter operating performance. Stan?

Thanks, Rich, and good morning. Today, we announced third-quarter net income of $5.7 million or $0.14 per share on revenues of $333.5 million. These results compare to net income of $1.4 million or $0.04 a share on revenues of $359.4 million for the comparable period in 2008. EBITDAO was $8.9 million compared with $5.3 million for the same period a year ago.

Let me share some of the highlights of the third quarter. Excluding CAP and the UHG HIV and organ transplant programs, revenues increased 7.9% over the comparable period of last year. This increase occurred across all of our business lines. Gross profit for the third quarter of 2009 was $41.5 million or 12.4% compared to $36.1 million or 10% for the third quarter of 2008.

The increase in gross margin of the third quarter of 2009 was a result of improved product mix, the elimination of lower-margin business and improved supply chain programs. Included in the third-quarter results is a $1.2 million annual rebate related to these programs. Operating profit was $6.7 million or 2% of revenues as compared to $2.8 million or 0.8% in the comparable 2008 period.

EBITDAO in the third quarter was $8.9 million compared to $5.3 million the third quarter of 2008. Our interest expense continues to decline due to lower average borrowings. For the nine months ended September 30, we reported net income of $13.4 million or $0.34 per share on revenues of $988 million. These results compare to net income of $2.6 million or $0.07 per share on revenues of $1.04 billion for 2008. Again, without CAP and United, our sales growth would have been 7.4%.

Our reported gross margin increased to 11.7%. The increase in gross margin for the nine months was the result of improved product mix, the elimination of lower-margin business, and improved purchasing activities.

Operating profit for the nine months ended September 30 was $16.1 million compared to $6.4 million last year. EBITDAO was $22.1 million for the nine-month period compared to last year's reported EBITDAO of $13.9 million.

Our effective tax rate for the quarter and nine-month period was 7.5% and 8.5%, respectively, as a result of the expected utilization of net operating losses which were previously reserved and the reduction of our amortization of indefinite-lived assets commonly referred to as a naked credit. In determining our 2009 tax rate, we suggest you use 6% state income tax provision in addition to the annual $800,000 amortization of our naked credit.

At September 30, our borrowings under our credit facility were approximately $39.6 million. This represents an improvement of $11 million from December 31, 2008. Our average outstanding debt in the quarter rose slightly to $29.3 million. This increase in average outstanding debt is due to lower accounts payable and higher average inventory, partially offset by our improving operating performance. We continue to remain focused on strengthening our balance sheet and improving our liquidity.

As many of you are aware, the AWP class-action settlement was effective on September 26 of this year. We expect this to impact our Medicaid business by approximately $5 million annually. We expect that the impact of the AWP settlement will be more than offset by continued organic growth, higher-margin business and normal drug inflation.

Our system implementation continues to progress. We now have 15 stores operating on our new platform and plan to add six more before year end. We expect all stores, as well as our mail operations, to be operational by the end of the second quarter of 2010.

I will now turn the call over to Rick.

Thanks, Stan. Good morning. As we have previously stated, 2009 is focused on generating a higher quality of revenue and operating income for our business. This objective will be met by successfully positioning our Company for expansion of our national reach and local presence. We have established an aggressive agenda this year and we are making good progress on our priorities and towards achieving our goals.

Since Q2, we specifically have realized organic specialty growth of 8% on a same-store year-over-year basis; organic specialty growth of 3% from Q2 to Q3 of this year; double-digit growth in several therapeutic categories year in iron overload, MS, oncology and infusion therapies.

In Q2 to Q3, organic growth was 22% in our West Coast infusion business, reflecting pull-through from our UnitedHealthcare and other managed care agreements. During the quarter, we have increased our salesforce from 15 to 24. Most of these recruits were added in Q3. We also added four new infusion sales reps in October and expect some revenue contribution in Q4 from these new investments. We will seek to leverage these resources to increase our local market pull-through and market share position to drive revenue across many therapeutic lines.

We also continue to add experienced management talent to assist in the sales and operations area. We added [Michael Sirocco] as Senior Vice President of Specialty Services and [Jim Melansan] as Vice President of Managed Care. Together, these gentlemen have over 30 years of expertise and experience in specialty, pharma and managed care. We've also added several operational and clinical resources to support our specialty mail operations and the evolution of our care management programs. We are working diligently on our plan to be the industry's clinical leader with a focus on establishing our centers of excellence model in multiple therapeutic categories including confusion, oral and injectable technologies.

With that, I will turn the call over to the operator to open up the lines for questions.

(Operator Instructions). Brooks O'Neil, Dougherty.

Congratulations on a terrific quarter, guys. So I have a few questions. I'm curious if you would be willing to comment on whether you think the margin trends we've seen in the past few quarters are sustainable going forward?

Brooks, as we said on the last call, we're anticipating our gross margins to normalize between 10.5% -- excuse me, 11.5% and 12%. We expect that to continue as we go forward.

How about the operating margin, Stan?

We have also said, Brooks, that our goal is to get to 3%, and that continues to be our goal.

Okay. That's good. Could you comment just briefly on what specifically drove the increase in bad debt expense? Do you feel like a higher percentage relative to revenues going forward is appropriate at this time?

I've always said on our calls, Brooks, that our bad debt expense would normalize between 0.5% and 0.6%. It's slightly higher than that in this quarter, but I still think it will be between 0.5% and 0.6%, probably closer to the 0.6% as we do more and more business in the medical side as opposed to the pharmaceutical side.

And are you feeling at this time any significant pressures from the state budget woes that are so frequently reported in the press or the impact from the slowing consumer economy?

Brooks, we continue to get payments from the states, not as quickly as they have been in the past, but they continue to come.

So they haven't cut reimbursement in any way; they are just being slow at this time?

Other than the changes in AWP, there have been no other changes.

Sure. And then one last question. I'm hopeful that perhaps Rick could talk a little bit about the efforts you've made recently to increase your infusion capacity and what you might do going forward to take advantage of that and build further.

I think as we've talked previously, we are in 23 markets today with owned and managed infusion capabilities. We continue to work our plan and move and expand our existing community stores to add infusion capacity to that, especially in the United markets, with high numbers of members.

We're not currently scheduled to open up any additional infusion capacity between now and the end of the year, but we are scheduled to try to accelerate the pull-through out of the existing resources we've had. We've added the infusion sales reps during this quarter in the markets where we have existing locations to expand our opportunities for infusion growth in the heavily concentrated markets.

Great. Thank you very much.

Mark Arnold, Piper Jaffray.

I was hoping, Stan, you could clarify something you said in your prepared remarks and just comment further on it. The $1.2 million annual rebate from the programs, can you just restate that and what that is from?

This is Rick. It's part of our overall supply chain management program. It's based on achieving a certain level of volume in terms of our purchasing and supply programs. It is something that we have incorporated and went effective this year, and we achieved it in the third quarter. And we expect that just due to the timing of the anniversary of our agreement that it will occur each year, but most specifically in the third quarter over the next couple of years.

Okay, so there is a lumpiness to that. So if you exclude them -- I guess I could do this calculation myself, but if you exclude that $1.2 million, I assume that is coming off the cost of sales line. So what would the gross margin have been without that? Is that the right way to look at the normalized margin in the quarter?

No, not really, because I think what you need to do is annualize that. If it wasn't all in the quarter, it would've been in every quarter. So you've got to take the differential. So if you would've annualized, it would have been $300,000 per quarter. So I think the best way to do it is maybe add 10 basis points in Q2 and take out 30 basis points in Q3 if you want to get an apples-to-apples comparison. So Q2 would've been closer to 11.8 and Q3 closer to 12.1.

Perfect. That's what I was looking for. Then I wanted to -- I guess Brooks asked a few of these questions, but can you talk about revenue mix in the quarter? Are you walking away from some business that you've historically fulfilled because of low margins?

No, we are still bringing that business in. We think that there are therapeutic categories that have a high net revenue per patient, are needed in terms of our clinical services and our programs, so they still fit into what our strategy is as we go to market.

But we're also looking to take advantage of the same call points, the same physicians, specialists, as well as the hospital call points that we have to identify those areas where we can bring all of our clinical expertise -- the pharmacy, the nursing and the long-term care management -- to these patient populations wherein it has a higher-margin opportunity for us. So we look at our businesses based on clinical difficulty, execution and level of opportunity for us, given all of the technology that we can deliver.

Okay. So is it fair to assume that the new revenue growth that you achieved going forward, that you expect the gross margins on that new business to be comparable to what it appears the gross margins were on the growth that occurred here in Q3?

Our goal is to continue to inch up, I think to maintain the mix and take advantage of the opportunities. I think that you see the oral oncology business continues to grow strong for us, double digits. That we don't anticipate will be going away. So that will continue to be a strong part of our business. But we also have the opportunity to identify other mix opportunities that we can manage through all of our locations and our markets to try to continue to inch that gross margin up in this next several quarters and over the next year.

Okay. And then jumping to the average wholesale price, the AWP issues, you said you expect a $5 million impact on that -- from that change. So that's an impact to revenues? How should we think about that, the impact to gross margins, from that change?

It's going to have some pressure dollar for dollar on the gross margin side. But we believe that as we manage our mix, as we continue to grow our revenue, we should be able to mitigate that through other payor relationships and the [Pulitzer] activity that we have underway.

Okay, and just --

Mark, basically looking, we said it is around $5 million, which is about $1.25 million per quarter. So you've got to look at that as effectively 40 basis points off of the current revenue.

Okay. And just so I understand, when you guys go through that, that's your own internal analysis of your exposure to states that have just rolled forward with that change without adjusting their formulas? Or is that kind of a broader assumption on your entire Medicaid business?

We did a specific analysis as to each payor source, and that is our expected impact.

Okay. Is there -- maybe just one last question on this. Any thoughts on the lawsuits pending in some of those states, in particular some of the larger states for you guys, and how you expect the next year to kind of play out from that perspective?

I think we hope industry wins. But I think that we clearly have not baked it into our forecast. We essentially have what we believe -- where the current environment is, and if it does change positively, then we will see the benefit to that.

Great. I just have one last question, and Rick, you answered this to some extent previously. But can you give us a sense of kind of the roadmap that you have over the next 12 months regarding kind of important steps to expanding the infusion strategy?

The thing is, we have added the sales talent. We've invested in that. We are going to next move towards adding clinical liaisons in marketplaces to get a stronger in-hospital presence. We are going to aggressively look to reposition our community stores to add the infusion capability, and we've begun that process in several of our markets. And so we believe we have the leverage of our platform to keep going forward.

We also will look at the opportunities to maybe tuck in some smaller acquisitions that are of strategic importance to us in certain markets. We have put in place and will continue to add management with infusion and specialty experience. We are going to aggressively start to pull from our histories those clinicians and salespeople that have track record of successful infusion execution and sales. And we will continue to focus on those relationships that we know of and clinical programs that we also know will win in the market, as we've seen before.

So we're going to start bringing in those that have the relationship, the expertise, and start strategically looking at those markets where there's high concentration of managed care lives for us to accelerate our pull-through opportunity.

Great. Just one follow-up to that. When you are repositioning the stores, adding the capabilities, what is the process there in terms of -- I mean, your initial step is probably being able to compound the drugs. But what are the, in order, kind of the steps that you would add in terms of services that you add in a store that you are repositioning?

We would add clearly an infusion-trained pharmacist to complement the existing staff. We need an additional 300 square feet to build out the cleanroom. We would also anticipate putting in some inventory treatment chairs as part of the reformatted designed.

And then it is really open book. We can handle all therapies today. Our clinical services organization has the ability to get our people up to speed quickly. We have 2500 nurses nationally already either per diem or through a contracted relationship. We already have the opportunity to bring patients home on service. And so I think we've spent the last six months really preparing ourselves for a pretty aggressive launch in 2010.

Great, thank you, guys. Great quarter.

Mike Petusky, Noble Research.

Nice quarter. Stan, if you mentioned it, I didn't catch it. Did you break out the revenues between specialty and PBM?

We have not, but I could. Our specialty was $279 million and our traditional services was $54.5 million.

Great. And in terms of the transition, you guys have seen stores operating on the new system, six more before year end and the balance into 2010. Can you just talk about how that's going? Has customer service been maintained? Any issues there, or are you just kind of taking your time and making sure you do this thing right?

I think there's been no impact at all in terms of the transition. We have increased our training staff, so we've got some temporary help in our SG&A that is reflected in this quarter. And so we are essentially taking the steps necessary to bring it online. We also had mentioned that we have taken additional time to invest in the partner collaboration capabilities of the system itself.

So we are identifying those that we can continue to tuck in and convert, and those next that we identify will enable us to continue to do the same on a successful basis. So we're just looking at the year-end and other activities we have going on just to ensure that we continue to move forward with the conversions, but at the same time don't necessarily rush it into year-end as we've got other priorities.

Okay. Then jumping back to the AWP, in terms of the $5 million impact, when you guys are speaking to that, is that $5 million, is that after any mitigation efforts, or are there things you can do? Can you go to the pharmaceutical companies and try to get some help there? Can you adjust pharmacy hours our pharmacy services? Is the $5 million kind of after anything you might do to mitigate, or is the $5 million kind of --

This is essentially the raw number. It doesn't reflect anything that we believe can be done to mitigate. But we put it out there. That's the effect. We believe we can mitigate it through, as Stan mentioned in his script, revenue growth targeting the higher-margin therapy that requires less patients to essentially cover that, as well as next year we expect a level of some drug inflation across our entire book of business that should help to mitigate that as well.

Okay, but you don't have plans to, say, walk away from some state Medicaid business or just pharmacy hours or just services that you'll provide to those?

No. We look at our business and the pricing and revenue and margins on all of our businesses. An we determine what is adequate to continue to service. So we've taken the price cut, but I think we still identify those as patients that we want to continue to serve.

Got you. Okay. And I don't know, maybe this one is for Rich, but I guess anybody who wants to weigh in. Allion Healthcare, one of your publicly traded competitors and one that is probably most compared to you guys is being acquired by a private equity group. I was just wondering if you guys have any thoughts on that, if that presents any opportunities competitively, or thoughts on the valuation or anything else in terms of that deal?

Mike, we really don't comment on it. As you know, this industry has been under consolidation for a long time, and I'm sure they did what they felt was best for all their shareholders.

Okay. Let me ask you one other open-ended question. Healthcare reform -- you want to speak to that in terms of either opportunities or risks you see for BioScrip going forward?

Sure. As you know, and we've spoken about this quite often, we're pretty excited about healthcare reform. We've lobbied Congress strongly with our people. We believe that the language that is currently in the Senate Finance Committee's mark has the opportunity to benefit BioScrip. It talks about continuum of care in Title III, improving the quality of health.

So we're pretty excited. I still have to get through the House side. I think it is under 3200. But I think what's going on today is there is a real recognition, whether it's rehospitalizations, whether it's doing a better job of education and control of patients, fits exactly what BioScrip has been doing when you talk about access and care and education and quality. It's what we've been trying to do for years now.

And I am very happy that at least Congress has identified those areas that can improve the quality of life, but at the same time help reduce costs. So I think hopefully that there are certain sections of the bill that will be passed. We believe that this is a cost reduction, not a cost additive, and has the support of the various members. So we're pretty excited about this end of it.

All right. Very good. Well, congratulations again. Great job, guys.

(Operator Instructions). Brooks O'Neil, Dougherty.

I was just curious, in light of the significant number of people that you guys have talked about adding in the relatively recent past, how are you thinking about SG&A trends going forward? Specifically I guess we should probably model the addition of some SG&A dollars in the fourth quarter and into 2010. Is that right?

Not a material amount, Brooks, from where we are. I think there's ins and outs of SG&A all the time in different investments. I've think we've added the sales investment, but on a relative basis it's not material. We also have some variable costs that are unpredictable in terms of related to our traditional pharmacy services line, which is the mail side.

So I think that that variability has already occurred in terms of costs. And so those will come and ebb and flow. So I don't think there will be a material change, and I think Q3 could be the run rate that you could work with on that.

Great. That's fantastic. Any update on the implementation of the IT systems?

Yes, I think we've talked about it. We've increased the number of installs from 12 to 15 during the quarter and expect to get another six in before year-end, but still on track to get everything in by the end of Q1 next year.

Great. (multiple speakers). And then lastly, I'm just curious, Stan, as you think about capital needs, clearly you've been doing a great job of using cash flow to repay debt. How do you feel about your financial situation as it relates to paying for some of the initiatives you have planned and underway going forward?

We feel we have an adequate line, and our cash flow generation is more than adequate to cover all of our investment needs.

Great, thanks a lot.

Mr. Friedman, I will now turn the conference back to you for your closing remarks.

Thank you all for joining us today. Again, we are pleased with our operating performance. We look forward to getting back together in three months from now. Thank you very much.

Thank you, Mr. Friedman. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you. Once again, have a great weekend.