Option Care Health Inc (OPCH) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the 2010 first quarter 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 today, Friday, April 30, 2010. I would now like to turn the conference over to Bill Bunting, Investor Relations for BioScrip. Please go ahead, sir.

Good morning and thank you for joining us today. By now you should have received a copy of our press release issued this morning. If you have not, you may access it through the Investor Relations section at our website. Rich Friedman, Chairman and Chief Executive Officer, Stanley Rosenbaum, Executive Vice President and Chief Financial Officer, and Rick Smith, President and Chief Operating 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. A replay of the conference call will be available shortly after the call. Interested parties can access the replay by dialing 800-633-8284 in the United States or 402-977-9140 for international callers and entering access code 21467687. 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, anticipation or intent, as well as those that are historical fact, are considered forward-looking statements and are protected under the Safe Harbor Act of the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to BioScrip today, and the Company assumes 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. Forward-looking statements are qualified by the inherent risk and uncertainties surrounding future expectations generally and may not -- may materially differ from the actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize synergies as a result of operational efficiencies for revenue opportunities and the risks that are described from time to time in BioScrip's reports filed with the SEC, including BioScrip's annual report on Form 10-K for the year ended December 31, 2009.

Also, the Company urges caution in considering any trends or guidance that may be discussed on the conference call. The pharmacy services, home infusion, and home health industries are competitive and trends and guidance are subject to various factors, risk, and influence, which are described in the Company's periodic reports filed with the SEC. In addition, as required by 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 statement three of today's press release. That schedule is available on our website under the links News found in the About Us sections at our home page BioScrip.com. Thank you. I would like to turn the call over to Rich Friedman. Rich?

Thank you, Bill, and good morning, everyone. We are extremely pleased that we were able to close the Critical Homecare Solution transaction in the first quarter. We are now focused on delivering the profitability we committed to. In the first 30 days, the acquisition is meeting all of our expectations. We welcome the CHS family to BioScrip. In our visits to the various CHS locations, we are struck by the team's dedication and professionalism. The integration process is right on schedule and the identified synergies are being achieved on time. In fact, we have identified additional cost of goods savings. We are already realizing the cross-selling opportunities we envisioned. Rick will provide you with more details in a few moments. On a combined basis, we can now offer a true continuum of care model encompassing all delivery technologies -- infused, oral, and injected, to better manage each patient. The vast majority of transaction related expenses are now behind us. We are keenly focused on execution.

As you can all appreciate, consummating a strategic acquisition of the scope and scale of CHS required an enormous amount of time and effort by a significant number of key management personnel. Amidst all the acquisition related activities, we also ran the Business during the quarter and I want to talk specifically about a few items, both positive and negative, that impacted the results. We experienced a soft January and February. Going into 2010, two low margin PBM accounts were not renewed and certain existing traditional mail accounts were renegotiated at lower rates. In addition, we experienced typical industry seasonality. These declines were to be offset by previously contracted new business. However, the timing of the new business and a return to normalized patient utilization levels from post year-end seasonality did not occur until March, later than expected. In March, specialty revenues increased by approximately $23 million or 22% compared to the average of January and February. This includes $5 million of revenues from CHS, representing only four days in the quarter. March and April revenues are back to expectations.

Regarding expenses, in the 2010 first quarter we reserved an additional $1.5 million for the CAP business that ended in 2008. Stan will address this later in the call. The Company reported expenses of $1.2 million, which includes acceleration of certain employee benefits, increased temporary staffing, and other expenses that were incurred in the first quarter, which in 2009 were expensed throughout the year. The future quarters in 2010 should not be burdened with these expenses. In comparing Q1 2010 to Q1 2009, you will note that we invested approximately $1 million between the expansion of our sales organization and new management, primarily infusion focused. This investment is beginning to yield results. Lastly, with CHS on board, the new business that has commenced, and the return to normalized patient utilization levels, we are reaffirming our 2010 guidance. Revenues between $1.67 billion and $1.73 billion and EBITDA of $67 million to $71 million. I will now turn the call over to Rick to give you more details on the business and the integration process.

Thank you, Rich. Good morning. We are very excited about the CHS acquisition, and I want to give you an update on the integration progress and the outlook for the balance of the year. On the cost side, we are exceeding our targets. In fact, we have identified an additional $1 million in cost of goods savings. The annual projected cost synergies are now $8.3 million, $5 million of which we expect to realize in 2010, and the full balance will be realized in 2011. The integration plan continues to progress as originally designed. The cross functional teams are meeting all expectations. The clinical programs are being combined and best practices are being established. Our senior team has completed a deep-dive review of sales and operations. We have confirmed the opportunities for growth in the CHS platform from the relationships. Our business showed the solid organic growth we expected and from where we have focused our resources. The specialty business grew 9% year-over-year, excluding the UHG, HIV, and transplant programs. Included in this growth was a 44% increase in our oncology programs, a 9% increase in iron overload, and a 13% increase in the MS category.

Our infusion business grew 19% organically year-over-year and 34% year-over-year, including the CHS revenues. The growth in the specialty segment reflects the additional contributions from our pay relationships, pull-through activities from the investment and the increased sales force added in the second half of 2009, and from CHS. While we saw good growth in the specialty areas year-over-year, we were expecting more infusion revenue in Q1 on business that was expected to begin in January and February. This additional business was delayed and did not begin until March. However, based on the strength of our programs, our managed care pipeline, and now the additional CHS managed care relationships, we expect to continue to see growth throughout the year. The decline in our traditional pharmacy services segments reflects the loss of two customers and the renegotiation of contracted pricing, offset by growth in our cash card programs. The net result lowered year-over-year revenues by $2.6 million. We look to mitigate this decrease in revenue this year, as we have identified opportunities to grow this segment. Since the merger, we have generated infusion and specialty revenues from patient referrals that previously each company would have turned away due to lack of contract access.

In addition, we have provided the CHS employees education and inservice training on the specialty pharmacy programs that BioScrip has developed. As a result, we are seeing a large percentage of patients from this process that we can bring onto service in our Company. The CHS acquisition continues to open up new revenue opportunities for BioScrip. There is now more to discuss and present in terms of infusion and specialty clinical programs in offering physicians a comprehensive solution for all their patient needs. We have begun to win new business as a result of the acquisition. We recently signed two managed care agreements in separate midwestern states, due to our clinical programs and our expanded footprint. We continue to aggressively attack the managed care market. As we have previously reported, we have a national agreement with United Healthcare, and I am pleased to report we now have a national agreement with Humana for infusion services. We are pursuing pull through strategies for these and other MCO agreements. We're also reviewing the MCO agreements we have acquired for specialty pharmacy opportunities. Access to specialty pharmaceutical pipeline is also a critical component of our strategy and value proposition.

We continue to add new products to our portfolio of limited distribution products and we are excited to announce that we have recently been awarded access to five new specialty drugs -- Xiaflex, Empera, Stelara, Sepriv, and Testabol We continue to offer physicians and patients access to new products. We offer our pharma-partners a trusted clinical expert in the delivery and management of these complex therapies. Access to these drugs and incorporating them into our programs provides us future revenue sources. We have also begun to expand our patient management programs to assess and offer appropriate technology solutions to payers that focus on improved quality of life and outcome measurements. For the second quarter, we will continue to focus on cross-selling initiatives, expanding our brand recognition in all markets, expansion of our Center of Excellence models in all strategic business units, we will work to successfully build our leadership position in new drugs awarded to us. We will continue our focus on operating cash flow generation through increased revenues, higher margin business, and effective operating performance levels. We are refining our operating benchmarks to improve overall operational efficiencies of the combined Company. We have built a powerful operating platform with clinical excellent programs and a motivated employee base to reach our potential. With that, I will turn it over to Stan.

Thank you, Rick, and good morning. Today we reported a first quarter loss of $7.2 million and a pretax loss of $9.5 million. Included in these results are $8.8 million of one-time costs. Of this amount, $7.3 million is the non-capitalized cost associated with the CHS acquisition. In addition, we provided for an additional $1.5 million bad debt expense related specifically to the CAP business that terminated in 2008. While we continue to pursue these collections aggressively, we believed it prudent to set up this additional reserve. It is important to note that we continue to collect on these receivables. Sales for the quarter were $335 million as compared to $326 million for the same period last year. Last year's numbers include $17 million of United HIV and organ transplant programs, which were taken inhouse by United in the early part of 2009. Without these programs, sales growth year-over-year was 8.6%, primarily in our specialty segment.

This quarter also includes $5 million of CHS from March 26 through the end of the quarter or four billing days. As Richard and Rick mentioned earlier, we experienced softness in revenues in January and February as a result of normal reductions due to seasonality in the quarter and the renegotiated contracts in our traditional pharmacy segment. While these were anticipated, we expected to offset this with new business that did not materialize until March. March revenues came in at anticipated levels and there is positive momentum heading into the second quarter. Gross margin for the quarter was 11.6% as compared to 11% for the same period in 2009. The increase is primarily due to the inclusion of CHS. Without CHS, margins increased slightly, despite the impact of AWP and other price concessions as a result of favorable mix as we continue to focus on higher margin therapies.

Let me say a few words on the drop-in margin from the fourth quarter. As stated above, we made certain pricing adjustments in our traditional mail segment that we anticipated. We stand by our guidance that full year margins will increase to around 16% as a result of the inclusion of CHS and continued focus on higher margin therapies over the remainder of the year. Operating expenses increased $13.5 million from the same period a year ago. Included in this increase are the one-time costs of $6.5 million or $5 million of transaction related expenses and the CAP bad debt reserve of $1.5 million. CHS costs for the stub period were $1.5 million. In addition, operating expense included increased broker fees associated with our traditional mail segment of $900,000 as a result of increased cash card revenues, a return to a normalized bad debt provision of $800,000, and an acceleration of employee expenses into the first quarter, that will be recovered later in the year of $800,000. The balance of the increase, approximately $1 million, represents our investment in our sales force and new additions to our management team, primarily in the infusion area.

As a result of the above, we reported a loss from operations of $6.3 million as compared to $4.3 million profit in 2009. Adjusted EBITDA was $2.7 million, reflecting the impact of one-time events. Interest expense for the quarter was $3.2 million and includes a $2.25 million fee from the financing of the CHS acquisition. Due to the treatment of the one-time costs associated with the acquisition as a discreet item for tax purposes, our tax rate in the quarter was 24%. Over the course of the year, we believe our effective tax rate will normalize in the 40% range. Taking a look at our balance sheet and the purchase accounting for CHS acquisition, based on our preliminary valuation of the intangible assets acquired, we have recorded $44.9 million of intangible assets. We want to remind you that we will continue to work on the evaluation of the intangible assets and have up to 12 months to finalize these values. CHS first quarter results are in line with expectations, as revenues were $65.8 million and gross profit was approximately 48%. I will now turn the call back to Rich.

Thank you, Stan. We are extremely excited about the opportunity in front of us, and we are committed to delivering value to all of our stakeholders. Operator, please open the lines for questions.

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. Can you hear me okay?

Yes, Brooks.

Good morning.

Good morning. Congratulations on closing the CHS transaction. Obviously, I guess some of the investors will focus on the first quarter results to just get a better picture on exactly what's happening in the Business, and I just want to be sure I understood some of the factors you mentioned. Sounded to me, if I was hearing you correctly, there was only about $2.6 million of reduced revenue related to some of the unusual nonrecurring factors you mentioned. Is that the right number or was it more significant than that?

On a net basis related to the traditional side, yes.

And that was related to these two terminated contracts and the pricing concessions on the mail contracts that you alluded to?

Yes. As it relates to that traditional pharmacy segment, it was a net reduction of about $2.7 million that was related to the two contracts that were missed and then also the -- that left us, and then also renegotiation of the traditional business.

Brooks, let's just give you some of the detail behind it. There was $2 million affecting the quarter on the renegotiation. In addition to that, there was very low margin PTM business, which was approximately $4.5 million. That was the business that was not renewed. Just to make sure everybody understands, we forecasted that into our numbers way up front and we knew about it. It's in our guidance and it was expected. The only thing that delayed us is really a timing impact. And we want to make sure everybody understands that. It was strictly timing of the seasonality and the timing of the new business that started. We did anticipate it coming in earlier, and that's why March came back and April to the levels that it's at today.

That's great. In terms of delayed contracts, can you comment at all about what it was specifically that delayed it and do you feel like, from a seasonal perspective, you've lost meaningful business in those two months? Or is the infusion business you're launching there going to be steady throughout the year?

No. This is a timing delay. We expected the -- we expected the business to come through. The business came through in late February into March. We also were able to see some good new patient generation from the referral sources attached to this business, and so we definitely believe that we will make this up the rest of the year. We're it disappointed that it didn't come over when it started, but sometimes when you get these new opportunities, the transfer, the patients, and the beginning of the new business doesn't always begin on time. So, it's just the ebb and the flow, and so our expectation is that we'll see -- that we project that there's about $10 million of revenue yet to get in terms of the timing impact of this the rest of the year.

Great. And then did I hear you correctly to say that the gross margin ex-CHS acquisition impact would have been around 11%? Is that the number you used?

No. No. We said they ran about 47%, 48% in the first quarter.

I think what Stan was referring to when we talked about the 11.6% in the first quarter and comparing that to the 11.1% or thereabouts the quarter of 2009, a significant portion of that increase was the utilization of CHS with only four billing days. So, you could all see the impact of adding CHS, which is everything that we planned. So, only four days has brought up that margin significantly and that's why we're at 11.6%, which is why we're forecasting for the year at 16% for the balance of the year on a combined basis.

Sure. And then in the G&A expense, Stan, you walked through some things, but if I was hearing you correctly, well maybe you can just walk through the G&A expense? Sort of unusual and one-time items one more time.

Sure. The biggest item was about the $800,000 of expenses that we took in the first quarter that traditionally would have been spread over the course of the balance of the year. That was essentially due to the payment of bonus in the first quarter of 2010. There was no bonus payment in 2009, so that accelerated the 401(k) and all of the taxes related -- player-related taxes as well. That was planned and budgeted for over the course of the year, it just got accelerated into the first quarter.

And then there was about $1 million of spending related to increased sales people and management?

Certainly, as Rick had said in earlier calls, we have strengthened our sales force. We have doubled our sales force over the last twelve months. We have added significant strength in our management team, and that's the impact in this quarter versus the first quarter of last year.

Brooks, one other thing. In addition to the $800,000 that Stan has mentioned, and that is really the benefit portion that moved forward on the 401(k) and other other areas, there were additional items in there, such as temporary staffing, that we incurred. One, working on a CHS transaction, pulling some pharmacists out, having to replace them with other ones, that we're taking out at this point in time. In addition, we held regional meetings in order to get ready for the CHS transaction, a number of teachings, we brought people together, and our cost is about $250,000, which is not going to repeat in the future quarters, which is how we got to the $1.2 million that we talked about earlier.

Okay. That's great. Thank you very much.

Thank you.

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

Good morning. I guess I am still very confused. So, maybe -- kind of adding to some of the questions questions Brooks had, you guys talked about the revenue weakness on the traditional pharmacy side. Can you just break out -- I know this isn't something you normally do until the 10-Q, but can you give us the breakdown between the traditional pharmacy services revenue and the specialty pharmacy revenue?

Sure. Traditional pharmacy was $48.8 million. Specialty was $286.3 million.

Okay. And then -- so that's a little bit helpful. I guess -- so, you saw relatively flat, if we just look sequentially here, specialty pharmacy was flat, the decline in revenue really, on a sequential basis, came from traditional pharmacy. I guess that makes -- that's where there is a little bit of confusion on my part. I guess I'm surprised that the gross margin declined as much as it did sequentially, even though most of the loss here was on the traditional pharmacy side and not on the specialty pharmacy side. Can you explain that a little bit?

I think, Mark, what we saw was with the delay in the infusion business that we projected to begin, we have a very strong oral oncology program where the gross margin is lower than the infusion side. And so, when you have a mix of that nature where the technology is essentially driving prescription writing patterns and referral activities, there is a high level of that concentration in the business, which will have strong cash flow on a per patient basis. But, the gross margin impact on those higher dollar amounts are reflected when you have that mix change. So, essentially, that's what we saw in Q1 in terms of that level of mix.

The other major item, obviously, was the price concessions that we talked about earlier, which is dollar for dollar.

Okay. Just on the gross margin number, can you give us a sense, since it looks like March is more reflective of what we're going to see the rest of the year, can you give us a sense of what the gross margins looked like in March?

It was around 11.6% inclusive of CHS.

In March?

Yes, because they only had four billing days of CHS.

I understand. That was your full quarter, though, correct? So, I guess my question is can you give us a sense since March itself seems to be more reflective of what we're going to see the rest of the year versus--

Mark, it is not. It is not.

Can you give us a sense as to how much of an improvement we saw in March?

Mark, it will not be reflective of what you see going forward because it only includes CHS for four days. When you include them for the entire month, we would see somewhere in the 17% to 18% margins is what we anticipate, which is why we said that the full year will come in around 16%.

Okay. So let me ask this one more time a different way. If we exclude CHS from your first quarter completely, I calculate a gross margin of 11.0%.

11.1% is what it worked out to, that is correct.

So, if we assume that and we exclude that CHS four days in March, I mean, obviously your March results on your legacy BioScrip business were better than January and February. And so, on that legacy business, were we looking at a number more like 11.8%, 11.9% in March? Or, was it still close to -- or was the margin really relatively consistent in January, February, and March on the legacy business?

Yes, Mark. As Rick point out, much of the infusion business started later than was initially anticipated. So, as we bring in the higher margin infusion therapies, you're going to see that creep up. The growth in March came from all areas. It came from both the injectable as well as the infused side. So, as this new business continues to come in, you're going to see the margins on the old legacy business creep up. I don't think we believe it will get -- because of the combined mix with the rest of the injectable business and a lot of the new products that Rick was talking about, to maybe that level, but it definitely will creep up. And in our forecasting it's exactly what Stan said. We're looking at 18%, or around 18%, per quarter going forward with the inclusion of CHS. Obviously, if we can improve on that by focusing in on our higher margin therapies, we're obviously going to do that.

Okay, and 18% is the number there, Rich, not 16%.

16% includes CHS -- it is inclusive of CHS for nine months.

Okay. I understand. So, going forward, as we think of Q2 through the last three quarters here, you're expecting gross margins to be around 18%?

That is correct.

Okay. That's helpful. I'll just leave it there on that question. Then, I guess a couple other pieces just as it relates to the adjusted EBITDA number, I am sure this has to do with what's allowed in your debt agreements, but why are you only adding back $5 million of the $7.3 million of financing fees to your adjusted EBITDA calculation?

Because the other $2.3 million is in interest expense and would not be part of the calculation to begin with.

Okay. That makes sense. And then -- and we'll see some of that -- is that just amortization?

Yes. Of the $21 million in fees that we paid, I belive around $12 million was deferred financing. So, that will go into the amortized of the five years of the new debt.

Okay. And then just -- maybe just one more clarification on the other one point -- was it $1.2 million of the accelerated employee benefits? You walked through some numbers, Stan, that I just wanted to make sure I understood. First of all, the accelerated benefits. What is that?

You know, normally when people get their salaries paid during the course of the year, we match their 401(k) program over the course of when they would get their salaries. We paid our employer taxes as it relates to when they would earn that. But, because the bonus was paid out in the first quarter, it accelerated the 401(k) match and various taxes associated with it into the first quarter. It was an expense that we would have had over the course of the year. It just got accelerated into the first quarter.

Okay. That makes sense. I will leave it there and let somebody else ask a few questions. Thank you.

Thank you, Mark.

(Operator Instructions)

The next question comes from the line of Kyle Smith with Jefferies & Company. Please proceed with your question.

Hi. Good morning, gentlemen. Congratulations again on the CHS acquisition.

Good morning, Kyle.

A lot of numbers have been thrown around here about the impacts in the first quarter, and I just wanted to make sure that I'm distilling everything correctly. So, your EBITDA comp was down about $3.5 million year-over-year. We talked a lot about the $1.2 million of the 401(k) match and these other accelerated benefits expenses, temporary staffing, and stuff. I also believe that last year in the first quarter you were not accruing bonuses. They all got accrued in the fourth quarter. So, that's maybe another $1 million, $1.2 million of expense. And then we've got the $1 million in expanding your management and sales infrastructure, much of which was in anticipation of the merger, which leaves maybe $200,000 of everything else in the business. Am I capturing everything?

We can't record -- what you are saying I guess from your standpoint is correct. Obviously we cannot accrue it that way, but the analysis that you are using using I could understand.

Okay. You're referring to the bonus piece, so I think $4.3 million of bonuses that you accrued in the fourth quarter?

Of course.

And then normal course -- sorry.

You're absolutely right. We took it in the fourth quarter, which is the way that we needed to account for it. Under normal circumstances, it would have been spread evenly among the year.

Right. As you recall, we added over the last nine months or the last year, about ten senior people with infusion, operations, sales, and reimbursement, as well as clinical expertise. So since -- last first quarter, so that is correct. Okay. In addition to the doubling of the sales force the second half of last year. Absolutely. And a lot of that infrastructure buildout is related to the anticipation of the CHS business coming under the platform, correct? So, once we see that earnings reflected it should get absorbed? Yes. Excellent. And I have a question about the bad debt expense around CAP. You terminated that business over a year ago. I'm just wondering why the expense is showing up now.

Let me take that one, Kyle. We had a business with the CMS kind of acquisition program under Medicare Part B, which terminated at end of 2008. We still have $7.6 million of receivables on our books, with a reserve of $4.2 million. All right? One of the problems we've run into is that, under this program, essentially the matching of the doctors -- the doctor as administration, as well as our submission to CMS had to be matched. It's becoming very difficult, with CMS and their payment agent, to get to two of them to match. We have taken a deep dive into our -- into the receivables. We believe we have the correct reserve now and we are aggressively pursuing that. What's important here is that, over the last month or two, we have collected close to $700,000 or $800,000 on this, and continue to collect every day. So, we believe we're adequately reserved right now.

Okay.

Kyle, one other thing related to that, and just so everybody is clear. The gross receivable outstanding is around $7 million, as Stan said. The net receivable is about $3 million. So, we have reserved $4 million for it. This is not a question whether they owe us the money, because they do. We met every obligation under the contract. Right now it's only a matter of making sure that the docs submit the right claims. But, by reserving as much as we did, we believe that we're more than adequately covered.

Okay. And I know that that reserve reflects your best estimates of what's ultimately going to be recoverable, but is there also some upside in that number where you might be able to, if things go well, collect some of that $4.2 million reserve as well?

We would hope that's the case, but for GAAP purposes we had to put down what is reasonable, and that's what we believe is reasonable. But, obviously we're attacking it on a daily basis to make sure we can collect all of it.

Excellent. And then my last question relates to the CHS integration. It sounds like it's going well over the first month. That's great to hear. I just to wanted to make sure I got the numbers right. The improved cost synergies you were previously looking for, I think it was around $7 million. Now you're looking for, you said $8.3 million, $5 million of that is to be realized this year? Yes, about $7.3 million originally, and we're about -- $8.3 million is our current estimate. Clearly, we continue to look for more opportunities in terms of the cost of goods and other ancillary supply items and costs between both organizations as a result of the increased purchasing power we now have. Excellent. And on the revenue synergy front, I know you were very hopeful that those would be quite material, although you didn't pro forma in any expectations into the materials around the bond deal. I think I may have heard some comment around $10 million of revenues that could be achievable this year. Is that tied into those synergies? Some of it may be, but we actually -- that's related to the timing delay on the newer contracts. I think on the cross-selling side, as I talked about, we aggressively went after it post closing and we identified just within a short period of time, three weeks, about 30 patients came onto service that we were not able to take. It was about $140,000 in revenue. We also, within the last couple weeks or last week essentially, when we did the in service education of the CHS employees and outline for them our programs, we've actually seen about 20 patients come in during the last week with a high percentage of those being able to be serviced. So it is really -- they're not big numbers out of the gate, but they're numbers essential showing us proof of concept and, as we can increase the awareness of all of our programs as a combined company in all of the markets in which we serve and all the pay relationships we have, then I think we have an excellent chance to build some good momentum and leveraging all of our assets in this Company.

And Kyle, one other thing. Qualitatively, as we went around and met with the team of CHS, being able to handle that patient and all their meds and that full management of that patient is what they're opening their arms to that. They see incredible opportunities. We were being told by a number of nurses that they have patients that could be on as many as 13 meds, that they're only able to handle a few of those meds. So this gives us an incredible opportunity as what we talked about on the road show.

Excellent. Wonderful. Well, best wishes for continued success on that front. Thank you.

Our next question comes from the line of Mike Petusky from Noble Research. Please proceed with your question.

Good morning, fellows. A few questions really just trying to keep up here. Earlier, and forgive me if you clarified this, but earlier you said a vast majority of your deal expenses are behind you in terms of what we should be looking at I guess in Q2 and beyond. Will we start seeing completely clean numbers in Q3? And what's left in Q2?

Q2 you'll have some registration, as we register the notes as we go forward here, but by Q3 we should be very clean.

There'll also be some of the people that were helped for transitional purposes, they will leave, and so those charges -- those severance related items will come through as well.

Okay.

We're talking about small numbers overall.

Okay. Small numbers being $1 million or $2 million or less than that?

Less than that. It's probably going to be in the hundreds, a few hundred thousand dollars at most.

All right. And then earlier I was trying to take notes here. You said two new managed care agreements and then you seemed to include some infusion services with Humana. Humana was included in those two new managed care agreements, is that right?

No. Humana actually came with the CHS acquisition.

Oh, okay.

The two newer ones that we had been working on and were essentially keying it up prior to the acquisition with our relationships that we had and as part of having a location there now in pharmacy and those states, it enabled to us get access to the panel.

Okay. Alright, and just trying to do some quick math here. Based on what you said about the March revenue in specialty, I guess that number in March was about $110 million, is that right?

Just on the specialty, yes.

Yes.

A little bit higher, but that's close.

Okay. About $110 million. So, if I'm looking at trying to model Q2 out, I can essentially multiply that $110 million by 3, maybe $48 million or so of PBM, and then maybe $60 million of incremental CHS. Is that a decent way to be thinking about this or at least to start to think about it?

We won't tell you how to do your model.

I understand.

Let us say this. Because we think it's fair to say it. Look, we had a very soft January and February, and we said that $23 million came back in March, including the $5 million, which brought us up to the $335 million. $5 million of the $335 million came from CHS side. So, we see the same exact momentum coming into the second quarter. We believe that the second quarter, I think, has one less billing day -- one more billing day. So, the second quarter should be much more reflective of what we've seen in the March month than obviously in the January and February.

Okay. So then if some of that was -- some of that margin --

And we also gave you the first quarter of CHS, right? Earlier in our comments.

Okay. Let me try to clarify this then. So, if you're saying essentially then some of that January and February business came back in March, really then March wasn't really -- I really shouldn't take that $110 million as kind of a run rate going forward. That the real run rate may be $100 million or something like that.

No, it's higher.

It's higher? Okay. Alright. Let me go back at this, then. I really want to try to clarify this, then. Let's say it's a little higher than $110 million. The PBM business, is it $48 million or is it really softer than that because some of that's some of those renegotiated pieces and the two that weren't renewed weren't impacted somewhere in the middle of the quarter? So, really the run rate is $45 million or $42 million?

Let's do this. Okay? Because I believe we owe it to you for the first quarter. So, let's say this because of the softness. In January and February, the total of those two combined months was approximately $205 million. Okay? We ran $335 million for the quarter, $5 million of that was CHS. In those numbers, you had about $48 million, $49 million of traditional and PBM. Okay. I think that's the best we can do with the roadmap.

Okay. Alright, okay. Thanks, guys.

Thank you.

Our next question comes from the line of Tony Perkins from First Analysis. Please proceed with your question.

Good morning, guys.

Good morning, Tony.

I'm trying to understand this a little bit better, and I'm relatively new to this story so I apologize if you've gone through some of this. But, that business that was delayed until March was mainly infusion business is what I heard. Was this one specific contract or a number of contracts working in tandem? And then also, was this delay -- did this delay have anything to do with the anticipated CHS acquisition or is that completely separate?

It' separate. The infusion was the delay in expected business. We saw other softness due to the normal post year-end seasonality utilization, and so the expected infusion business to come in was related to some existing business where we were expected to receive a transfer of patients due to a preferential position on the panel as it relates to some of their clinical therapies -- clinical programs. So, we were essentially delayed in going to receive those patients.

Okay. So, this delay is something that we should look at as more of a one-time it happened, it's over. We shouldn't expect these types of delays going forward as far as you can tell?

We believe -- yes, as we said it was a timing difference. We had expected to come in earlier in the quarter or beginning of the year -- closer to the beginning of the year, and essentially it got delayed. So, we also have seen new patients revenue generation coming from the transferred business and the relationships associated with the transferred business on the referral side. So, our people are running very fast to essentially take care of the timing difference.

Okay. That's all I had. Thanks, Rick.

Thank you.

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

Thanks for the additional clarification, Rich, just on the revenues in the quarter. It's very helpful. So, as we think about this, I guess I kind of look at where you're at now and you're probably even a little ahead of where I was expecting you to be in Q2 just in terms of the run rate, so to me that's real positive. I guess I had just a couple of follow-up questions on the infusion business, Rick. First of all, when you talk about the United Health contract and the national contract there, did that have any negative impact or positive impact on the United Health pricing for the CHS business?

No, it has not. I mean, I think that there were some CHS locations that were not a contracted provider, and so some of the business that they had was that out of network rate, so not contracted rate. I think that what we should see in, and as we've dialed it into our plans, we'll see the opportunity to have secured a very effective and strong license to hunt in all of their markets. So, there was really not a significant amount of United Healthcare business in the CHS business as well.

Okay. Great. So, there's opportunity there now that you have that contract for them to pursue new patients?

A significant opportunity, yes.

And then, just this is really more on the legacy BioScrip business and your infusion efforts there, but can you just give us an update on the hiring of sales reps and kind of all the infrastructure -- the infusion infrastructure you were starting to build last year and kind of where you're at with that and to what extent are we seeing the full benefit of that investment in the numbers now and how long is it going to take for that to continue to ramp up?

We've added a number of sales reps in each of our East Coast and our West Coast markets, and I think that in terms of the senior management team in sales, operations, and systems, as well as the reimbursement side, we added those people pretty much from March of last year through even November of last year. So, essentially anticipation of the CHS acquisition, and even before the CHS acquisition, looking to transform a good portion of our Company to a higher mixed infusion model, we added those people and those senior leaderships. So, we have been identifying additional sales reps that we have brought on in different markets with relationships and the contribution from those people has been very good. And, as we identify others that have significant amounts of books of business that they can bring to us through their relationships, then we will look to add any self funding asset in our sales territories.

Okay. So, you kind of view those new hires that you make in the sales side as really being self funding from day one?

Our focus is to get -- make sure they're self funding within really the first 60 days, as it takes time for them to bring them over, reeducate the referral sources, and move them. And then within those 60 days, if we're not seeing a fully self funding projection, then we move pretty quickly on reversing our decision. But, I think that those are expectations in terms of those types of assets.

Great. Thank you, guys.

Our next question comes from the line of Akshay Madhavan from Redwood Capital. Please proceed with your question.

Good morning. Thank you for taking the questions. My first question has to do with your share count. Can you give us the fully diluted share count post the acquisition, please?

In the first quarter we have 40.825 million. There is no dilution in the quarter because we reported a net loss. However, the total shares outstanding are about 53.5 million shares.

Great. Thank you. The second question has to do with your synergies. If I just sort of take the CHS and BioScrip businesses from 2009 and add up the two EBITDAs, I get to a 68 number. It sounds like you expect $5 million of synergies, and yet the midpoint of your EBITDA guidance for this year is $68 million. Am I thinking about that the right way and can you explain why that is?

Sure. Look, we put out numbers. When we put everything together we talked about the renegotiations. We talked about other things that obviously that we forecasted in there that had somewhat of a negative impact offset by the new business coming in. We wanted obviously to put numbers out there that were achievable that we felt comfortable with. We know that a bunch of the synergistic numbers, even though we put $5 million into the forecast, there's a bunch of them that are going to occur in 2011. As an example, the full-year impact of the cost of goods sold type of benefits. So, obviously our job is to exceed what is out there, and we wanted to put numbers out there that we all felt comfortable with from a revenue, gross profit, and EBITDA standpoint. What you're saying makes a lot of sense, and we put out numbers that we felt very comfortable with.

But, to be clear, the $5 million of synergies expected in 2010 should affect adjusted EBITDA in 2010, correct?

Yes.

Okay. The third question, and I think Kyle was trying to get there, but it would be very helpful if you could just articulate it clearly. If you could just provide a simple EBITDA bridge from the $6.2 million EBITDA number in 2009 to the reported $2.7 million adjusted EBITDA number in 2010 or at least the three or four large items, it would be very helpful.

Well, $6.2 million we had the adjustment for the traditional mail business was about $1.7 billion.

And that fell all to the bottom line?

Yes. UHG, the loss of UHG business was $1.2 million. A return to normalized bad debt rates of about $700,000, and the incremental employee wages would make up about the most of the balance of the difference, that is the 750 and the investment that we made in our management sales force.

But, what we will do to make sure, we're actually looking at schedules and putting that together, we'll refine that and get that out to you.

Via an 8-K?

It would be in the Q.

Okay. Fantastic. That would be extremely helpful. I just want to make sure I understand, sorry to repeat this, so $1.7 billion I understand from the traditional loss, the $1.2 million UHG, can you clarify exactly what that was?

Yes. We had said earlier in the call that United Healthcare took inhouse their HIV and organ transplant business that we had in the prior quarter, the first quarter of last year.

There should be no sequential impact in the second second quarter, is that correct?

That is correct. It is first quarter.

Thank you very much for taking the questions.

No problem.

Our pleasure. Thank you.

Our next question comes from the line of Matthew Buten with Catapult. Please proceed with your question.

Hi. Thanks for taking the questions. A couple questions. One, you have a 67 to 71 range. Maybe can you talk about what the variables are to get from the lower end, which seems like is very achievable, given the balance of the year, to the upper end? With the first quarter number I'm trying to understand how -- what the variables are to get to that number.

Well, and we've looked at this a number of different ways even taking into account the first quarter actual results. When we look at where CHS is today, and again we're extremely comfortable with where they are at, our current run rates of where we are today and the margins the new business that is coming in, it gets us right to the numbers that we put out on the forecast. So, and that takes into account the first quarter impact. So, I am not sure how to be more detailed in responding to that, but it's where we are today -- if we just take internally the current run rate on BioScrip's business with CHS's current run rates of where they are, taking into account some of the synergies that we know exist, we get right to the numbers that we put out there. And that, again, excludes, as Kyle pointed out, it does not include any of the revenue synergies, and that was not built into any forecast.

I think one of the -- there is clearly quite a bit of reaction to both the top and the bottom line miss, and I don't know if you guys have thought about maybe doing a better job at describing pacing. Is there anything you unusual about the pacing for the balance of the year? You kind of need to get up to a $20 million sort of EBITDA run rate and grow that from there sequentially to hit the low end of the range. Is that what you guys are thinking? Probably quarterly.

Yes, we expect to ramp up in the second, third, and fourth quarter. That would get us somewhere in the $60 million range. When you add the first quarter of $3 million and then you add the $5 million of synergies, that gets us right back to where we would expect -- or we put out there the $67 million to $71 million range.

And have you thought about maybe giving at least some better sequential -- I mean, I know you guys released in February and then now we've got this essentially reiterate and yet, you're looking at the substantial decline in market value and part of it is the surprise of all of these things happening in the first quarter and it's -- so I don't know if you can help yourselves by being a little more particular? What are your thoughts on that?

Okay. Look, we appreciate the comment. We really do. Timing, we built into our forecast somewhat of the timing, and we did anticipate earlier start with the new business. We are back to the levels that we anticipated. You are correct, there's no way to go around it that we were disappointed in the timing of the new business starts. The pacing is back on track. We expect from this point to go forward. Was it unusual? Seasonality in this business is not unusual, and we built that in. So, I think, and I appreciate your comment, and I think we could do probably a better job of communication, and we will work on that going forward. But, we are extremely comfortable with where we are today. We're extremely comfortable with the addition of CHS and growth opportunities that Rick has point out. We have new contracts starting. We are very comfortable with what we put out there. But, I appreciate your comment and we will do a better job.

Alright. Thank you.

Mr. Bunting, there are no further questions at this time.

Thank you, operator. We really appreciate everybody joining us today. We thank you for your participation. We really truly look forward to reporting on the future results. We believe there is an incredible opportunity in front of us. Again, we welcome the CHS family into BioScrip and we're starting something very special. Again, thank you very much.

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.