Option Care Health Inc (OPCH) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the BioScrip 2010 third-quarter results conference call. During the presentation all participants will be in a listen-only mode, and afterwards we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded Tuesday, November 2, 2010. I would now like to turn the conference over to Lisa Wilson, investor relations. Please go ahead.

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 received it, you may access it through the investor relations section at our web site.

Richard Friedman, Chairman & Chief Executive Officer; Stanley Rosenbaum, Executive Vice President and Chief Financial Officer; Rick Smith, President and Chief Executive Officer; and Phil Keller, Senior Vice President and Principal Accounting 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 will be available shortly after the call. Interested parties can access by dialing 800-633-8284 in the US or 402-977-9140 internationally and enter access code 21485382.

Before we get started I would like to remind everyone that any statements made on the call today or in our press release that express a belief, expectation or intent as well as those that are historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. These forward-looking statements are based on information available to BioScrip today, and the Company assumes no obligation to update 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 inherent on risks and uncertainties surrounding future expectations generally and may differ materially from any actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize synergies as a result of operation efficiencies or revenue opportunities; the failure to successfully integrate the CHS and Drugstore.com acquisitions; failure to successfully execute on our succession plans, our ability to maintain or increase our gross margins by, among other things, improving therapy mix and improvements in our strategic purchasing and the risks 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 and guidance that may be disclosed and discussed on the conference call. The pharmacy services/home infusion/home health industries are competitive, and trends and guidance are subject to various factors, risks and influences which are described in the Company's periodic reports filed with the SEC.

In addition, as required by Regulation G, reconciliation of non-GAAP financial measures mentioned during our call today most comparable to GAAP financial finance measures can be found in Schedule B of 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.

And now I would like to turn the call over to Rich Friedman.

Thank you, Lisa, and welcome to BioScrip's third quarter 2010 earnings call. This morning we issued a press release covering our results for the quarter, which we will discuss later during the call. We also issued a separate release announcing Rick Smith's appointment as CEO. So I would like to take the first few moments to reflect on my time as CEO of BioScrip and what this transition means for the Company.

It has been a pleasure spending the last 14 years leading this Company. Not only was I fortunate to have worked with some outstanding and motivated individuals, I was able to watch BioScrip evolve into a key player in the specialty pharmacy and home infusion industry. BioScrip has significant resources, deep capabilities and a strong commitment to our patients and the healthcare community we serve. With the addition of CHS I feel very confident that this Company is headed in the right strategic direction.

We now have over 110 points of service, 1000-plus managed care relationships, direct contact with over 80,000 prescribing physicians and a patient census of over 125,000. Furthermore, our improved position in the Infusion/Home Health segment will strengthen our margins in the long-term and provide us with a solid platform for growth. I know that our Company is strong. We have solid growth prospects, a diverse business mix and a well-positioned and promising healthcare sectus, so it's disappointing that we haven't been able to consistently meet our guidance. We know that improvements are needed in this area, which is one of the reasons why we have withdrawn our previous financial guidance as set forth in our press release. Rick will provide more insight into this during his prepared remarks. We also recognize that consistent execution is required for this Company to realize its full potential. And even though I'm proud of what has been accomplished during the last 14 years, I also know that this is the right time to turn BioScrip over to someone who can lead this company into a new period of growth, and that person is Rick Smith.

Rick has improved BioScrip's operations, as demonstrated by his work in integrating CHS, and brings a successful track record of running businesses in the industry. Moreover, his time at Byram Healthcare and Option Care makes him the ideal candidate for overseeing development of our Company into a leader in this highly lucrative sector of healthcare. As non-exec Chairman of BioScrip's board, I will have a chance to work with Rick in a new capacity. Under this management structure, I believe we can accomplish great things at BioScrip. Although our model to provide specialty pharmaceuticals, administer IV therapies and provide comprehensive nursing services and clinical solution to our constituents remains the same, I believe that Rick will utilize his experience and expertise to enact changes that will make this Company even stronger.

With that, I would like to turn the call over to Rick.

Thank you, Rich. Good morning, everyone, and thank you for joining today's call. I would like to begin by saying that I'm excited about leading BioScrip, given our strong position in the industry. We have many great assets, and I look forward to building an organization based on accountability, growing value through leveraging core competencies and maximizing margins and operating cash flow generation. I will now provide comments on the results from the third quarter and then move to a discussion of our strategic priorities, including an immediate assessment of our cost structure and analysis of our revenue lines as we plan for 2011.

Our third quarter revenue was $441.2 million, adjusted EBITDA was $18.1 million, and net income was $2 million. In our Infusion/Home Health segment, we were successful in posting solid organic growth of 5% sequentially, although revenue was slightly below our forecast. The BioScrip legacy Infusion business grew 19% year-over-year. This growth was from the managed care contracts we added since June of 2009. Further, the CHS Infusion division grew 12% year-over-year.

The ability to achieve successful quarters of organic growth is a result of the sales, operations and clinical areas of the division working together to grow the specific therapies we're focused on. Since closing the CHS transaction, we have made important progress by focusing our efforts on revenue growth, operating synergies and cash flow. The importance of the direct managed care relationships enables us to grow market share based on strong clinical programs and our local sales relationships.

Also, as part of the integration plan, we sought to reduce duplicate costs and obtain cost of sales synergies quickly. Originally, we forecasted cost savings and cost of revenue synergies of $7.3 million annually. As of the third quarter we have identified an incremental $1.8 million in savings, which brings the total to $9.1 million annually. We continue to build momentum in the Infusion/Home Health segment. On the reported $5.2 million increase in revenue from the second to the third quarter, we reported an incremental $1 million in Infusion/Home Health adjusted EBITDA, or a 20% contribution margin. This result reflects the strength of home infusion margins, incremental value of the CHS platform and the profitability that we believe we can continue to build as we transform BioScrip. We are confident that the CHS acquisition will continue to be a significant contributor to our bottom line and remains an important part of our strategic direction. We view the Infusion/Home Health segment as one that provides greater control over the growth and the profit potential of BioScrip.

In our Pharmacy Services segment, revenue exceeded our forecast, but the mix was not as strong as we expected. Our sales organization generated strong growth in revenue from new patients starting service with us during the quarter. However, our retention levels fell below expectations as we witnessed patient reorder patterns late in the quarter become softer than projected. We also saw pricing pressures in some parts of the business impacting revenue per patient and, consequently, gross margins.

Let me now turn to certain factors that negatively impacted gross margins in the third quarter by $2.4 million. In the Infusion/Home Health segment, margins were negatively impacted by $1.4 million due to various manufacturer issues related to IVIG products, including product allocation and the Octagam recall; a decrease in heart failure therapy patients and bringing certain CHS patients from an out-of-network billing relationship into a long-term contractual relationship.

In the Pharmacy Services segment margins were negatively impacted by approximately $1 million as a result of certain drugs being paid at lower than anticipated maximum allowable costs by some PBMs and the suspension at the beginning of the third quarter of an industry-wide rebate that we had previously received on a branded drug.

We continue to see new patient census growth under our national home infusion contract with United Healthcare. On October 1 we became a provider under a new Aetna national home infusion contract. In addition, on October 1 we began servicing patients under the new specialty pharmacy contract mentioned on our second-quarter call. Going forward, we continue to focus on generating more pull-through revenue from our managed care contracts to further grow our patient census and improve our revenue mix.

Before I state the key components of our strategic assessment, let me review key aspects of the plan we provided in early 2009. In early 2009, I stated that we needed to direct the focus of this Company towards higher-margin revenue and a higher level of operating cash flow generation. We stated we would focus our Company on expanding our infusion footprint and our infusion revenue. As a result of our focus and of making higher-margin revenue a critical priority, we announced in the second quarter of 2009 that we had been awarded a national home infusion agreement with UHG. In this new contract recognize our clinical strengths in home infusion and allowed us access to managed care lives in essentially any market in the country. Therefore, we achieved a critical element of our plan that ensured both access to increased home infusion revenue and support for geographic expansion.

We did not stop there, as we simultaneously identified CHS as the next strategic step in the transformation of our Company. We spent a considerable amount of time in the fall and winter working on bringing CHS into the Company. A significant amount of effort was invested to ensure a successful integration of CHS to have a solid foundation on which to continue to transform our Company. Therefore, we have achieved a significant transformation in the strategic positioning of BioScrip over the last 22 months. We now need to accelerate a review of the entire business and move to an overhead structure appropriate for our business going into 2011.

Now let me turn to the immediate priorities and critical plans as we close out 2010 and focus on 2011. The transition to my new role as CEO has begun. I have already commenced a strategic assessment to include taking immediate steps to rationalize our cost structure, a review of our current revenue sources and business lines, continued transformation of BioScrip towards higher-margin therapies and revenue supported by strong and consistent clinical programs and building a customer service organization that maximizes the retention value of our chronic patients.

One of the things that we recognize at BioScrip is the need to do a better job communicating with the investment community. Based on our year-to-date results, BioScrip is no longer confident in its outlook. Therefore, we are withdrawing revenue, gross profit, net income, adjusted EBITDA and EPS financial guidance for the full year 2010 as well as the fourth-quarter 2010 revenue guidance. In the future our focus will be on providing more transparency and driving consistent and predictable results. After we complete our assessment, we will share the metrics we plan to use to measure the progress we're making in our business. We have a sense of urgency in maximizing the value of this platform. Therefore, we are targeting an update during January of 2011. In the meantime our focus is to finish this year strong.

Ultimately, our goal for 2011 is set the framework for profitability, improve operating cash flow generation and determine the long-term positioning of the BioScrip platform. This is an exciting time to be leading BioScrip, and I look forward to the opportunity to move the Company forward and achieve our strategic goals. With that, I will turn the call over to Stan.

Thanks, Rick. Today, we reported revenues of $441.2 million from the third quarter of 2010, as compared with $333.5 million for the third quarter of 2009. Of the $107.7 million increase, $68 million was attributable to the CHS acquisition, and the balance of the increase was due to organic growth partially offset by the previously disclosed items, including the loss of a low-margin PBM customer, pricing concessions in our Pharmacy Services segment and the AWP settlement in September of 2009.

The current quarter also includes $3.6 million of revenue associated with the drugstore.com acquisition. Gross profit for the third quarter was $75.4 million, or 17.1%, compared to $41.5 million, or 12.4% in 2009. Of the $33.9 million increase, $31.4 million was the result of the acquisition of CHS. Excluding CHS, overall margins declined as a result of the previously disclosed pricing concession, the AWP settlement as well as an industry-wide rebate that we had previously received on a branded drug.

Operating expenses for the quarter were $63.2 million, an increase of $29.3 million over the same period a year ago. Of this amount, $22.1 million relates to incremental expenses from the CHS acquisition, which includes $1.1 million of bad debt provision and $826,000 of amortization of intangibles relating to purchase accounting on the CHS acquisition. In addition, expenses associated with our cash card business increased $1.5 million as a result of increased commissions paid on increased card sales as well as the impact of increased commission rates to one of our card brokers. Wages associated with the previously discussed investment in our sales organization increased $1.2 million. Transaction, integration and severance costs associated with the acquisition of both CHS and drugstore.com totaled $1 million, and we had an increase in our bad debt expense of $1.8 million in our BioScrip legacy business.

Amortization expense in the third quarter totaled $1.3 million, which includes $500,000 related to drugstore.com. We now anticipate amortization of intangibles to be $1.6 million in the fourth quarter and around $5.4 million in 2011. Our bad debt expense was $5.3 million, or 1.2% of revenue, an increase of $2.9 million, of which $1.1 million was related to the acquisition of CHS. We have told you in the past that bad debt expense should approximate 1% of revenue, and this quarter it ran 1.2%. The Company made a year-to-date adjustment between our contractual allowance reserve and our bad debt expense of approximately $900,000. There was no net impact on the P&L with this adjustment. Without this adjustment, bad debt expense would have been at the 1% level.

On a year-to-date cases, excluding the first-quarter provision for cap, our bad debt expense was running at 0.9%. Adjusted EBITDA for the quarter was $18.1 million. Pro forma net income, which excludes the transaction-related costs, was $2.7 million, or $0.05 a share.

Let me give you a quick update on the cap receivable. Our current net receivable balance is approximately $1.6 million. During the quarter we collected $600,000, and we continue to aggressively pursue the money due us.

Interest expense for the quarter was $8.1 million. We recorded a provision for income taxes of $2.1 million for the third quarter against pre-tax income of $4.1 million, a 51.2% effective tax rate. This increased rate is a result of adding an additional $300,000 charge relating to a reduction in the estimated value of our state deferred taxes -- assets -- our deferred tax assets.

Turning now to our balance sheet, as of September 30, 2010, the Company had $50.9 million of cash with an average cash balance in the quarter of $64.1 million. This represents an increase of $14.4 million over the second quarter. In addition, the $50 million revolving credit facility remains undrawn. Free cash flow, which we define as adjusted EBITDA less debt service, cash interest, cash taxes and cash CapEx during the quarter was $12.1 million. During the second and third quarter, we have generated free cash flow of $26.2 million. We are in compliance with all our debt covenants. I would also like to point out that October 1 we made a $12 million interest payment on our bonds. Liquidity remains strong. Our DSOs improved by two days over the second-quarter levels. In addition, we reduced our debt by $3.2 million in the quarter.

Operator, with that we will now open the lines for questions.

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

Good morning, I have a number of questions. I guess the first one I'd like to ask is, I'm hoping you can just provide a little bit more color about your decision to remove any guidance here midway through the fourth quarter. I guess the question I have specifically is, are you expecting a significant deterioration in your operating performance in the fourth quarter, or are you just doing this for another reason? Hello?

One moment, please. Ladies and gentlemen, your conference call will resume momentarily. One moment, please. (technical difficulty). Ladies and gentlemen, thank you; your conference is now resuming.

Rick?

Sorry about that, can you repeat the question, Brooks?

Sure. In the simplest terms, my question is, are you expecting a significant deterioration in operating performance in the fourth quarter? And, is that the reason you removed guidance at this late date in the year? Or is there any insight you can give us related to what your expectation from an operating performance is in the fourth quarter would be helpful.

We continue to see and expect sequential growth into the fourth quarter and finishing the year strong in the areas that we have previously communicated. And I think, given where we looked at the year-to-date results, we decided to essentially pull back guidance and essentially commence a strategic assessment to prepare us and position us for 2011. I think that we are seeing very positive developments in the Infusion/Home Health segment. We continue to see growth in the Pharmacy Services segment. But we need to essentially look at what's happening in reorder plans, the [repo] patterns of patients. And so it's important for us to essentially step back and do a complete review of our business.

Yes; I 100% support that. I guess my personal bias is, cut everything that isn't significantly profitable on the revenue side and cut all expenses that are in any way marginal on the expense side, and you will have a pretty good business opportunity going forward. So I'm excited about that. I just ask you a couple more quick questions.

Obviously, the gross margin in total was significantly down sequentially. Do you think that could stabilize here, or do you think we should expect that the gross margin will continue to deteriorate over the next few quarters?

As we reported, on the Infusion side there was an unexpected allocation of IVIG product in the subcu area that we felt we were going to have access to, and it was not available. And we expect that there will still be limited availability, although we have been able to move some patients onto that drug -- going -- continuing into the fourth quarter. And so we would expect some time through the fourth quarter or by the end of the year and going into 2011 we'll have -- hopefully, there will be enough product to service the patient population that we had targeted it for.

And then also, on the managed care side that we talked about, the out-of-network patients on the CHS side, that was in particular therapies that, long-term, the opportunity to give the CHS platform access to greater managed care lives through the United and the Aetna agreements enable us an opportunity to continue to look forward to 2011 and building up those margins as well.

We also talked about heart therapy patients. I think, as a result of some physicians in some markets producing and essentially performing procedures implementing or implanting a left ventricle assistance device has essentially changed prescribing patterns in a few markets. But we don't see a significant trend in that area. But that we would expect through organic growth in our clinical programs, we will look to continue to build census in all of our higher-margin therapy.

Okay, that's helpful, and then just maybe one or two more -- if I recall correctly, last year you guys received a rebate in the third quarter from your pharmaceutical distributor. Could you tell us if you received a similar rebate this year and, if so, what dollar amount was the rebate?

Yes, we did receive it; it's $1.2 million.

Okay, thank you. And then just maybe lastly, I'm just curious. I have some sense that the tax rate was maybe materially higher than we were looking for, although I don't believe, at the net-net level, it would have changed your EPS materially. But could you just tell us what was going on with the tax rate this quarter?

Hi, Brooks, it's Phil; I'll take this one. With the acquisition of CHS, the value of our deferred tax assets or future tax deductions has just changed a little bit. We are -- in some of the key operating states that we have working, we are going to shift these future tax deductions into states that have lower tax rates, thereby reducing the value of those assets. A little counterintuitive because you would expect these rates as you lower your tax rates to get a benefit. But because these are future deductions, they will have less value in the future, so we took about a $300,000 charge to reflect that reduced value.

Okay, thank you very much, I understand that.

Kyle Smith, Jefferies & Co.

Hi, good morning. The first question is around this IVIG availability. Is this something that's affecting your competitors in a similar fashion to you, or are you being differentially affected and losing market share (multiple speakers) as a result?

No -- we're still servicing the patients. We're essentially servicing with a higher-cost drug, and I think the introduction of the new product was not at the production levels that a number in the industry expected. And so, depending on the allocation by the manufacturer, some of our competitors may have ended up with more product versus us. But we are not losing -- we don't believe we are losing market share as a result of it, we're just having to use an alternative product at a higher cost.

Okay, and then in terms of the performance in the third quarter versus the guidance that you've withdrawn, obviously there was a fairly significant ramp in the earnings of the business baked into the original guidance and you're coming in very significantly south of that. I just wanted to get a sense, as we go through these various drivers that you felt in the quarter, which of them were surprises? Because I would think that the conversion of CHS patients into the long-term contractual relationship, probably some of the payor reimbursement reductions were already signaled to you when we had our last earnings call. So which of these items were the ones that caught you by surprise in the quarter versus things that may have been negative that you were anticipating previously?

I think -- clearly, the IVIG essentially was, we were -- without notice, essentially -- putting orders in, we were given notice early in the quarter that the product was not available as expected. The actual -- the reimbursement change, the MAC, was actually -- it showed up mid-Q3. And so essentially that was not expected, based on a review of 30 drugs by a couple -- the PBMs.

And then on the branded drug, the lost rebate, that is in the transplant area, and it is a product that the physicians and patients long-standing were not comfortable in terms of converting to a generic product. So that we expect to be a timing difference, but we had hoped to see a little bit stronger conversion levels going into the quarter than we were able to experience. But essentially, those were a couple of the primary areas of high-dollar amounts that were unexpected.

And then the about $300,000 related to the heart failure in the quarter was unexpected, primarily as a result of these new procedures being performed in a couple of the markets where we saw a high-margin group of patients essentially come off service during the quarter as well.

Okay, so then drilling into a couple of these, so the $300,000 impact on the heart failure side, you said due to new procedures being performed in some markets. Is this something that we should expect to see spread to other markets over the next couple of quarters and magnify that impact?

We are anticipating that, based on the specific clinical factors of these particular patients where it's appropriate for this procedure, I think some physicians may opt to perform the procedure versus prescribe the therapy. And so we are not seeing it essentially in all the markets. We've seen it crop up in a couple of the markets, and so it's something that we are expecting to continue to watch. But at the same time, we are looking to grow census in this clinical program as well.

Is there a cost advantage for the procedure versus the drug or an efficacy advantage, just so I can understand what's going on here?

I think, for mobility, I think for putting the device itself, for some of those patients, it is helpful to them.

Okay, then, with the MAC change, you said that showed up mid-quarter, so we should be seeing a full-quarter impact of that in the fourth quarter. What's the dollar amount around that incremental that should be showing up in the fourth quarter?

That was about $500,000.

Mark Arnold, Piper Jaffray.

A lot of my questions have been answered, but I guess I have a few, still. The gross margins, particularly on the Pharmacy Services side -- so, with the reimbursement changes and some of the mix changes, should we expect that we are going to see that number be lower going forward here, not just in the fourth quarter but into next year as well?

Well, we are essentially providing a -- commenced a strategic assessment of our business lines, and so we are taking a hard look at our operational structure. And so -- and that essentially encompasses all parts of the business, including the Pharmacy Services side.

Okay, and then as it relates to that, is there a possibility that small infusion acquisitions becomes a higher priority, given your cash balance and the fact that you guys have the ability to do that now going forward here to kind of drive higher-margin growth?

I think we had talked about, once we integrated CHS and looking towards 2011, that continued geographic expansion was part of our plans. And so, I think we will have more to report on in January, when we come back to you.

Okay, one last question from me -- yesterday, McKesson announced that they were acquiring US Oncology. Does that create -- or what does that mean for BioScrip inside of the specialty space, and also just opportunities that might create for you with potential customers?

We've got a very strong oncology practice and clinical programs. We have very strong relationships that continue to expand with oncology offices. And so we can offer a full suite of clinical services for patients for both in-office as well as in infusion, injectable and oral technologies. And so, we don't anticipate that there will be any disruption to that business line for us, in light of the McKesson/US Oncology announcement.

Glenn Garmont, ThinkEquity.

Thanks, good morning. Rick, regarding the assessment of the cost structure and the revenue lines, I realize it's early in the process, but you've been there for a little bit. Can you give us a sense for how much revenue is potentially vulnerable, potentially not contributing? Could this be a $1 billion revenue company at a -- more profitable on the margin when we come out the other side of this review? Just sort of a ballpark estimate.

And then, can you give us a sense for -- you mentioned you're going to be providing, I think, an update in January. Can you give us a sense of what you will be telling us? Will that be just an update in terms of where you stand on this assessment? Will that be actual financial guidance for the year? Any additional detail there would be helpful as well.

Well, I think we've commenced our strategic assessment, as we said. We've got a great many assets. The ability to essentially serve patients with all technologies -- oral, infusion, injectable -- make us very competitive in the marketplace. The objective of the strategic assessment is to look at what we believe could occur in different areas of the business, in 2011 and future years, and also take a deep dive into our cost structure, given that now that we have acquired CHS and the opportunity to look at the entire platform a year later, essentially, and look at where we can drive some aggressive operating efficiencies and reductions in costs that we believe do not add to revenue or the strategic direction of the Company.

And then on the update that you are providing in January, will that be just kind of where you stand on the assessment, or will that include some form of guidance?

It will be an update as to what metrics we're going to measure ourselves going into 2011, and essentially we'll provide the results of the assessments that we are undergoing.

[Brandon Austin], [Venator] Capital Management.

Hey, guys, tough quarter -- a lot of guys have asked the same question a bunch of different ways; I just want to ask it in a way that's maybe clear to me. With regards to the gross margin pressures you guys had and all these sort of cost pressures, the rebate and everything, were those pressures in effect for the full quarter, or did they only start halfway through the quarter? I'm just trying to -- try to maybe multiply your last month by three, so to speak, to figure out [what the fourth] quarter looks like to you guys going forward.

I think we talked about when the different impacts of the gross negative margin impacts appeared. So I think we stated that we saw the allocation of the product impact us early in the quarter, same with the rebate, and then we got visibility to the MAC kind of mid-quarter.

And so in terms of thinking about your gross margin going forward, when you are looking at your costs of running the business, is that mainly looking at a cost from a gross margin standpoint? Is there nothing we can do about the gross margin? Are all the extra fat that you're looking to trim -- is that all in the SG&A line?

We're looking at continuing to drive a focus on higher-margin-revenue therapies, and then essentially continue to look at how we operate above the gross margin line because we do have personnel costs, clinical costs, operating costs, delivery costs that are part of that gross margin in different parts of the business. And then below the gross margin line in SG&A and other operating overhead structures, all areas of the cost line are being targeted for opportunity.

So you are looking at product mix as well?

We're looking at product mix as well.

Okay, thanks, guys.

Mike Petusky, Noble Research.

What did you guys -- I didn't quite catch -- what did you guys say the revenue associated with drugstore.com was?

$3.6 million.

Okay, was that materially lower than you guys were hoping for?

The $2.4 million, we essentially received about 5000 patients, the initial cut over in transition during the first month. Our focus was essentially getting through the bolus of the patients that they sent over. And essentially we saw that, as a result of that, we were not able to get to the marketing programs that we had forecasted that we would be able to essentially begin with drugstore in terms of a marketing initiative. And so that -- so, we did not have a chance to do that in the quarter.

Okay, what is that? I mean, what does that mean as far as going forward? Does that stuff start to kick in over the next three months, six months, a year?

We look to get to the level based on the initiatives we originally set out for ourselves there. I think the important thing is that the operations contributed the operating income that we expected for the first two months of operations. And so gross margins were close to what we expected. We increased our service levels in order to ensure that the patients got their drugs on time. And then I think that, going into this next quarter, we'll continue to focus in on opportunities to grow the business back to the levels we expected.

Okay, and could you just -- I don't know who was speaking at this point, but everybody was talking faster than I could write. You guys seem to say that the contracts that you had hoped would start at the beginning of October started. Could you just, I guess, confirm that for me?

Yes. The specialty pharmacy agreement that we stated on our second-quarter call that we said would start October 1 did start. And then we also assigned the national Aetna infusion agreement, and that went effective October 1 as well.

Okay, all right. And then, Rick, I think you said in response, I think, to Brooks' question, that you expected sequential growth in Q4 and that you expected to finish strong. When you say sequential growth, are you talking top line? Are you talking EBITDA? Are you talking EPS? What are you actually saying there?

We are focused on -- we were referencing the revenue growth. We are continuing to focus in on operating improvements in all areas of the business.

Okay, so essentially, you are committing to sequential revenue growth, or essentially projecting that EPS and EBITDA are not included in those comments? Is that right?

We've just been talking to the sequential revenues that -- we would -- essentially is not providing guidance for Q4.

Do you, by any chance, have the year-over-year comparisons by disease state -- MS, oncology, iron overload, etc. -- that you have traditionally provided?

Yes. We -- primarily in the oncology space, especially stronger drug, we're over 58% in the limited Revlimid area. We actually saw a number of our HIV categories grow in the 7% to 16% level, and we saw strong growth year-over-year with Stelara for psoriasis. So that essentially produced a nice return for us.

We also saw, actually, in some of the refill patterns in the quarter, Exjade was actually down year-over-year, slightly. So that, we would hope, would come back for us. But that was one area that historically has been a consistent grower, but that was softer than we saw in prior quarters.

Okay, then just trying to understand the tax rate, and maybe you guys got to this and I just didn't quite catch it. But the tax rate going forward -- does that go more to a 40%, 41%? Or are we going to be kind of elevated for the next several quarters? Do you have any guidance there?

Sure. Our tax rate long-term is going to be in the 41% to 42%.

What about for Q4?

Q4 should be around that same rate. We will have a discrete item or a one-time benefit in Q4 relating to some FIN 48 liabilities rolling off. So, that will reduce the effective tax rate slightly.

Okay, so it may be a little less than 41% is what you're saying?

I said it would be in the lower end of the 41%.

Okay, all right, I guess that's all I've got, thanks.

Kyle Smith, Jefferies & Co.

One question was you mentioned the guidance for 2010. But you've also been giving longer-term guidance to get leverage down by half over a three-year time period, which I guess is now more like two years. Are you standing by that, or withdrawing that as well?

We are withdrawing all of the future guidance at this point in time. However, we will give you an update in January as to what that will be.

And then one other, on --

I should also point out, Kyle, that we are reducing our leverage in terms of paying down our debt as we go forward here. And we do (multiple speakers) we paid down over $3 million in long-term debt this quarter.

Yes, and built your cash, so the net leverage was definitely down sequentially, absolutely. And one of the drivers of that -- actually, it feeds into my other question -- it looks like working capital was a nice source of cash in the third quarter this year. Last year, it was a use of cash in the third quarter. Is there anything unusual going on, on that front, that might reverse in the fourth quarter and shoo some of that cash back up? Or, are you fairly comfortable with your working capital levels as we sit now?

We are very comfortable with where we sit right now.

This is Rick -- on the future leverage level, out of our strategic assessment, the whole purpose of it is to identify how we position this platform for maximizing operating cash flow generation. And so, clearly, out of that strategic assessment, we will be essentially continuing to generate cash out of the platform in order to continue to delever the Company.

Kyle, I will remind you that we did make a $12 million interest payment on October 1.

Yes, yes, I did catch that. So basically, I think the take-away that you're trying to communicate here is that your commitment to de-leveraging has not changed. But as you go through the strategic assessment, you are suspending any forward-looking statements. They may be reinstated, maybe not, based on how that review plays out. Correct?

That is correct or.

(Operator instructions). Pat Pace, Citadel Securities.

Great, thank you. I guess I'm just confused on the IVIG issue. How much of the change was due -- I think it was Octapharma that had a product recall during the quarter, versus -- you also mentioned the subcu delay, which I think is the Talecris product. So which one is it, and is it one more than the other that was causing the issues for you?

Net-net, out of both categories, it was about $500,000.

Okay, and I guess, in terms of magnitude of price, how much more is your blended price for IVIG this quarter versus -- I mean, or I guess, on a percentage basis versus, let's say, second quarter?

I think the $500,000 was reflective of the change.

I guess you could help me more by -- maybe what percentage of your Infusion revenues was IVIG?

We don't typically give that.

All right, and then I guess this heart failure procedure that cut into your revenues in that category -- what device was this that was new that was being used this quarter in a couple of your markets?

It's a left ventricle assist device that we essentially have started -- really, essentially saw the procedure being performed in a couple of markets.

Okay, so like -- okay. And then in terms of, just to be clear on your guidance or your lack of guidance, you guys seem to commit to sequential revenue growth. But I just want to understand that you're not committing to sequential EBITDA growth. Is that correct?

We've got a strategic assessment underway; we're looking at our cost structure. And so we know that through the revenue programs and initiatives that we have put in place, we expect to see sequential growth in finishing the year 2010.

Okay, thank you.

Thank you; Mr. Smith, there are no further questions at this time. I'll now turn the conference back to you. Please continue with your presentation or closing remarks.

Okay, well thank you, everyone, for joining our call. We look forward to coming back to you in January of 2011 with an update on our strategic assessment. And, until then, essentially, if there's any further questions, you know how to reach us through Lisa or through Joel Frank; thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines.