Option Care Health Inc (OPCH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the BioScrip 2011 fourth quarter and year-end conference call. All participants are in a listen only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Friday, March 11, 2011. It is now my pleasure to turn the conference over to Ms. Lisa Wilson, Investor Relations for BioScrip. Please go ahead.

Good morning and thank you for joining us today for our 2010 fourth quarter and year-end results conference call. 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 website. Rich Smith, President and Chief Executive Officer and MJ Graves, Interim Chief Financial Officer will host this morning's call. The call may be accessed through the website at BioScrip.com. A replay will available shortly after the call. Interested parties can access the replay by dialing 800-633-8284 in the US and 402-977-9140 internationally, and entering access code 21511570. An audio webcast and replay will also be available under the Investor Relations section of the BioScrip website at BioScrip.com.

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 Reform Act. These forward-looking statements are based on information available to BioScrip today, and the Company assumes no obligation to update statements if 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 subject to inherent risks and uncertainties surrounding future expectations generally, and may differ materially from actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize annualized cost savings associated with any restructuring or cost reduction efforts, the impact of members of management executing these efforts, our ability to leverage core competencies, or maximize margins or operating cash flow, and the risks described from time to time in the Company's reports filed with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 2010. Now I would like to turn the call over to Rick Smith. Rick?

Thank you Lisa. Good morning everyone, and thank you for joining today's call. 2010 was a year of challenges as the business did not perform to our expectation. Despite the substantial success of the CHS acquisition, its integration and performance as part of BioScrip, and the balance of our business during the year, revenue margins were impacted by pricing concessions on various traditional mail drugs, reimbursement pressures in pharmacy services, the industry-wide AWP settlement, and the overall impact of the weak economic environment.

As a result, we commenced a strategic assessment of our business lines, and our overhead structure to position BioScrip for the future. Importantly, we commenced a significant review of our corporate overhead, as it is clear that we can be leaner. For the full year of 2010, BioScrip generated $84 million of combined segment adjusted EBITDA. Diluting that cash flow is corporate overhead, which amounted to $35 million during the year. I would note that the 2010 results only reflect three quarters of CHS, which contributes approximately $10 million of segment adjusted EBITDA per quarter.

While there are important corporate support services provided to the field operations, we believe there are significant opportunities to reduce our corporate overhead, and this is one of our top priorities for 2011. As we have previously stated on our update call in January, we have identified $15 million in annualized savings thus far. We have already implemented the majority of the steps necessary to achieve these savings, and we will begin to see the benefits in Q1 2011. Approximately 50% of the savings has come from corporate headcount reductions, with the remainder coming from changes in benefit plans that cover all employees.

We fully anticipate reporting additional cost savings from these areas, such as the consolidation of corporate offices, process improvements and the outsourcing of some of our transaction based processing. We are also focusing on completing many system upgrades that will allow us to retire legacy systems and with eliminate related maintenance costs. I look forward to providing you with details as we continue to make progress.

Our biggest achievement in 2010, which won't show up in the numbers is the seamless completion of the CHS integration. This transaction enhanced our competitive position in infusion services, giving us the foundation from which to expand our footprint nationally, and giving us access to a greater number of patients, and a platform for future growth. CHS has been successful, because we have been able to integrate them into our existing markets, and gain entry to new ones, take advantage of the local community strengths, as well as access to their managed care relationships. Today, BioScrip is a formidable competitor in the infusion industry.

We recognize that meeting the needs of our patients and delivering to them a high-touch quality service is vital to our business, and we have sharpened our focus on the businesses that will deliver enhanced value to shareholders. This segment currently represents 25% of revenue, but we expect it to comprise a greater portion of BioScrip's overall business mix going forward. Last year, we implemented a new patient-driven model, which we refer to as our Centers of Excellence model, aimed at improving patient adherence, compliance, and retention. One of the benefits of the program is increased profitability, and we are already seeing the pull-through benefits of this service model.

Additionally, our pharmacy services segment continues to grow sequentially, showing important increased growth in oncology, MS, and our cash card business. This segment has historically generated positive returns, and continues to leverage its strong clinical reputation for growth. We have solid pharma relationships, access to specialty drugs, strong clinical capabilities, and also added a new regional managed care contract, which commenced on October 1st. However, consistent with the strategic assessment, we are being more disciplined with our activity and pursuing opportunities that produce a strong return on investment. Thus far, we've identified $10 million to $15 million of fourth quarter low margin revenue on the pharmacy services side, that we will not be pursuing going forward. We anticipate that this will have a positive impact on our gross margin.

As a result of the actions taken to date, we are entering 2011 with an enhanced focus and are better positioned for growth. We believe there are significant opportunities for our Company to improve operating performance and cash flow generation. Our primary focus would be to drive profitable revenue growth in both the infusion, home health, and pharmacy services segment. We continue to remain committed to the management of the chronically ill, and believe we have a clear path forward to rationalize costs structure, review revenue sources, and business lines.

Lastly, we will not be providing guidance today, as we believe it is premature at this time. As we talked about in January, we are working on key metrics to provide you with the transparency on the business but there is more work to do, and I anticipate many moving parts in the first half of this year. With that I will turn the call over to MJ. MJ?

Thank you Rick, and good morning. For the fourth quarter 2010, we reported revenues of $450.4 million, compared to $341.6 million for the same period a year ago, an increase of $108.8 million or 31.9%, primarily as a result of the CHS acquisition.

Pharmacy services revenue for the fourth quarter of 2010 was $337.8 million, compared to $300.9 million for the prior year, an increase of $36.8 million or 12.2%. Infusion home health services revenue for the fourth quarter was $112.6 million, compared to $40.6 million in the prior year, an increase of $72 million. CHS revenue contributed $69.4 million during the fourth quarter of 2010. Excluding the CHS revenue, infusion home health services revenue increased 6.3%, or $2.6 million. For the fourth quarter, gross profit was $72.6 million, or 16.1% as a percentage of revenue; compared to $41.9 million, or 12.3% as a percentage of revenue in the prior year. The margin improvement was primarily the result of the CHS acquisition. On a sequential basis, consolidated gross margin decreased from 17.1% in Q3 to 16.1% in Q4, primarily due to the timing of certain vendor rebates, and new managed care contracts that are expected to draw future patient volumes.

SG&A for the quarter was $60 million compared to $37.6 million for the prior year. The increase in SG&A was primarily due to $20.2 million related to CHS, as well as an increase in brokers fees related to growth in our prescription discount cash card business. Keep in mind that the infusion home health services segment operates at a higher operating expense ratio to revenue than the pharmacy services segment, due to higher labor costs associated with the delivery of patient care.

Total operating expenses for the quarter was $76.2 million, compared to $42.6 million in the prior year. 2010 operating expense included certain charges that had a cumulative impact of $9.2 million on the operating results for the quarter. These charges include a $3.9 million legal settlement related to the 2005 Northland acquisition,$3.5 million in restructuring expense, $1.3 million to fully reserve the remaining cap receivables, and $0.5 million related to acquisitions, integration, and severance expenses. As a result of these charges, the Company's loss from operations increased from $0.7 million in the prior year to $3.6 million in the fourth quarter of 2010.

For the fourth quarter, interest expense was $8.1 million, in addition, fourth quarter non-operating expenses included a $9.6 million loss on the extinguishment of debt, related to the term loan that was refinanced and converted into a $150 million revolving line of credit facility in December 2010. Additionally, the Company took a $54 million non-cash charge to fully establish a reserve against our deferred tax asset. Net loss for the fourth quarter was $67.1 million or $1.25 per share, compared to net income of $40.7 million or $0.99 per diluted share in the prior year. During the fourth quarter of 2010, BioScrip generated $21.4 million of segment adjusted EBITDA or 4.7% of total revenue, compared to $14.5 million or 4.2% of total revenue in the prior year.

The pharmacy services segment generated $9.6 million of segment adjusted EBITDA or 2.8% of segment revenue and infusion home health segment generated $11.8 million of adjusted EBITDA or 10.4% of segment revenue. On a consolidated basis, BioScrip reported adjusted EBITDA of $10 million or 2.2% of total revenue, compared to $3.6 million or 1% of total revenue in the prior year. Consolidated adjusted EBITDA excludes the impact of the $9.2 million of charges I previously noted.

For the year ended December 31, 2010, we reported revenues of $1.6 billion, and a net loss of $69.1 million, or a loss of $1.37 or share. This compares to revenues of $1.3 billion and net income of $54.1 million, or $1.36 per diluted share for the full year of 2009. Gross profit was $260.4 million, compared to $157.8 million for 2009. As a percentage of revenue, gross profit increased to 15.9% in 2010 from 11.9% in 2009. Operating profit was $15.8 million, or 1% of total revenue, compared to $15.5 million or 1.2% of revenue in fiscal 2009. 2010 operating profit reflects $10.6 million of price concessions granted in the prior year to a major customer. And $17.7 million of charges related to acquisition, integration and severance expenses. Legal settlement expense, restructuring expense, and the cap bad debt expense.

2010 interest expense was $27.6 million. The Company also incurred a $9.6 million loss on the extinguishment of debt related to the refinancing of the Company's credit facility in December. Segment adjusted EBITDA was $84.2 million, or 5.1% of total revenue. This compares to $56.4 million or 4.2% of total revenue for the prior year. Net of corporate costs, BioScrip reported adjusted EBITDA of $49.2 million, or 3% of total revenue, compared to $25.7 million or 1.9% of total revenues in the prior year. It should be noted that 2010 results only reflects CHS operating results, beginning with the March 26, 2010 acquisition date.

Turning now to our cash flows. In 2010, net cash used in operating activities totaled $21.4 million compared to $22.7 million of cash generated by operating activities for 2009. This decrease in cash provided by operating activities was primarily the result of an increase in working capital requirements, as well as an increase in cash paid for interest on the senior secured facility and unsecured bonds. Since year-end working capital requirements have been reduced by a $14 million reduction in inventory. As discussed, in late December, the Company amended its credit facility to convert its $100 million term loan and $50 million revolver into a $150 million revolver.

This amended facility provides us with better terms and financial flexibility, and putting greater borrowing power to support future cash flow priorities. We are in compliance with all of our debt covenants, and our total draws under the facility has decreased from $81.4 million at year-end to $53 million as of the end business yesterday. Now, I will turn the call back over to Rick.

Thanks MJ. 2010 was a challenging year. I believe we are taking the steps that will position BioScrip for the future. With the addition of CHS and our ongoing strategic assessment, I feel very confident that this Company is headed in the right direction.

We have a diverse business mix, and are well-positioned in the healthcare services sector. We have significant resources, deep capabilities and a strong commitment to our patients and the healthcare communities we serve. We recognize that consistent execution is required for this Company to realize its full potential, something we plan to achieve. With that, I would like to open the lines for questions. Operator?

(Operator Instructions).Our first question is coming from the line of Brooks O'Neil with Dougherty & Company. Please go ahead.

Good morning, I have a number of questions. I guess the good first one I start off with is looking at the gross margin line, Rick and MJ. It is 16.1% a reasonable run rate gross margin in your mind, or are you thinking that with the changed business mix you can return that to a higher level and I guess a corollary to that is, are you seeing margin pressure in the infusion/CHS side of the business or has it just been the more traditional specialty pharmacy parts?

I think that as MJ mentioned, there's opportunities in terms of rebates, in terms of the more normalized throughout the year. That clearly has a positive impact on margin. I think as we look at the business mix, going forward, we would look to optimize and increase our gross margin. And at the same time, Brooks we did essentially rollout the Aetna contract and so on some of the blood products, some of the national pricing is lower than traditional home infusion markets. Typically, we are seeing some stability, significant stability and consistency across our traditional infusion mix and margins as well. So, there was, I think as we look forward to 2011, we anticipate that margins will definitely come up.

Great, and you still the opportunity to significantly expand the traditional home infusion nutrition therapy. Antibiotics, et cetera, both by expanding into the stores -- the specialty stores as well as opening new locations and taking advantage of other opportunities?

Yes. We are 100% focused from our infusion sales force and our clinical team, our operations team, to increase our market share on the traditional home infusion therapies. We also, as we have talked about before have opened up three new infusion pharmacies attached to three of our community stores in the Midwest. And we will look to continue to take advantage of opportunities in other markets to also cost-effectively plant new flags for home infusion capabilities.

Okay, good, and moving down the line, looked to me like a relative to my model that G&A expense was $4 million or $5 million higher than I expected. I am just curious, to what extent some of the cost savings initiatives may not have been reflected in that, and how quickly you think you could get that number down from $60 million to something, hopefully a lot lower.

None of the cost savings were reflected in Q4. The other thing that we had mentioned, was there was an amendment to one of our cash card broker fees, marketing arrangements. That went into effect in November. That essentially resulted in about $2.5 million of that increase. It was a necessary investment, given the growth and the opportunity that we see particularly with this one firm as well as a couple of others, that are driving significant growth in the cash card business. So we look to see that will essentially be absorbed in the second part of 2011. As the revenue continues to grow from our cash card business related to those marketing efforts. So that -- essentially -- more of an indirect variable selling expense.

One of the things --

I guess I'm curious, if MJ or you could give us any feel for where you stand relative to your covenants, both at year-end and kind of as you start looking at into 2011. Do you feel like you have a lot of room or are we -- are we walking the precipice here?

I will answer that for you, Brooks. But actually before I do, I want to give a little bit of follow-up to your last question and Rick's response. I just wanted to add the interesting thing about Q4 to keep in perspective, is we've made so much investment in Q4 in different areas of the Company where the cost of all of that effort went into Q4, but all the benefits are going to start to be seen in the first quarter and second quarter of this next year. This is all from the debt refinancing. We had $9.6 million of cost related to extinguishment of that debt. Restructuring costs you know all of the cost regulated to a valuation of those plans to get those put in place.

And the cash card brokers fees like Rick mentioned is a very high gross component of the business right now that we are very excited about it. Q4 is a big investment quarter, but we are excited about the outlook for 2011. Moving into 2011 and the debt covenants, just to let you know, under the new credit facility you probably have seen we have three key covenants. They include the fixed charge ratio the minimum liquidity, the AR turnover and the fixed coverage and for all of these, we are in compliance at the end of the year, we're in compliance today, we have plenty of room under those, so we feel comfortable about continuing to be able to meet those covenants.

Great, I will ask one or two more quick ones, I appreciate that MJ. As you look at the mix of business that you have now, should we anticipate the sale or absolute close of any significant part of the Company at this time?

No. Essentially we are, we've got the business -- our focus as we said, and I said in my remarks, we've got good strength on the pharmacy services side. We've got good strength on the infusion home side, continues to grow. Both segments generate significant about of cash flow and segment EBITDA. We've got some good opportunity we believe to operate more efficiently and also at the same time ensure that we are dropping more of that cash to the bottom line and improve our cash flow generation and operating cash flow contributions as well.

Okay good, and last question I have is just related to the reserves for the taxes. How will that impact financial statements for 2011? I remember talking with Stan Rosenbaum a lot about naked credits and whatnot and I want to make sure I have a good sense for how we should view the tax aligned for this year?

Actually puts us in a very clean position going forward as you can imagine, Brooks. Unfortunately, tax rules, both on the federal income tax reporting side of things as well as for book purposes, they don't always follow practical realities, unfortunately. We all know this especially as we prepare our own personal tax returns, coming up in April. The rules that apply to the NOLs and deferred taxes in this situation, they are very black and white and they do not allow very much room for judgment at all. There are not very many subjective factors in this consideration.

Unfortunately, we had to go ahead and establish the tax allowance reserve this year, primarily because of the fact that even though we have brought in the valuation allowance last year as income, this year we had to put it right and write it off all over again. And the reason was primarily because you look at the NOL and recovery period, you had to measure that, and since 2010, we had additional tax losses primarily because of the unexpected acquisition costs, transaction costs related to CHS and restructuring costs. It is really the NOL and that recovery period that drops that.

We're not concerned about it, and it has nothing to do with goodwill or impairment of goodwill. It's completely separate measurements. What we'll see going forward is an extremely low effective tax rate going through for book purposes.

Our next question is coming from the line of Mike Petusky with Noble Research. Please go ahead.

I'm not sure I completely follow the last piece of the explanation. What is a good tax rate going forward if we're modeling this in 2011?

Probably 11% or 12%. And, the big piece of that is the driver is really the state taxes.

Okay. That would essentially match up with cash taxes as well?

Yes, because it is primarily the state.

I want to talk about gross margin and some of the factors that you have cited on the third-quarter conference call. Rick, can you talk about the things that I remember. The IBIG product allocation issue, you had a decrease in heart failure therapy due to the new ventricle-assist device. You had some of out-of-network to in-network transition on the Aetna contract. Can you just talk about what you're seeing there? How much of that continues to deteriorate?Just speak to that?

Actually. Part of the Q3, Q4, what impacted a little bit, if you remember there is a recall of Actigam, of Actipharma in Q3 -- late Q3. Some of that revenue essentially -- some of that product was returned, so we reversed the revenue in Q4. So there is about $1.1 million impact on the IBIG side there. We did see product mentioned that was put on allocation in Q3, became more available in Q4, so there was a mitigation of that Q3 impact into Q4 and so we saw some positive direction there, as well. And as part of our focus on traditional therapies, we have put a significant amount of training and focus on widening the markets in which we essentially offer the --that therapy and as we mentioned on the call, there are essentially many potential customers and patients that still essentially qualify for the drug therapy and that regimen. So, our program actually has stabilized in Q4, and we expect that we'll see some growth in 2011.

Okay so are you saying that -- that new batch that is not continuing to have an impact there is that what you're essentially saying?

We thought initially but I think we are hearing noise at the people at cover the manufacturers that some of those centers may not make money at the reimbursement side. I think that -- we have always known or we have always believed that clearly even with the application of that technology, there always will be candidates for the services that we provide, and so I think our focus is to continue to drive our center of excellence models in the areas that we talked about in all of our locations. So if we focus on being experts in all of our markets and the opportunity to drive strong organic growth given our managed care contract access, and all of our markets, we will have enhanced our opportunities for margin improvement, revenue growth and EBITDA contribution.

And the out-of-network billings in-network, has that kind of run its course, or are you still in the midst of that?

We saw that in Q4 as Aetna went live.The traditional margin under the national agreements are consistent with other regional local managed care players. I think given our large concentration in the blood product space, when you bring other branches into those contract pricing, you have that affect. We did see some of that in Q4, and we expect that as we run our course.

And then, jumping back to the $15 million in annual savings you have identified. Is that about it, as much as you can find in terms of the strategic review?

I think -- as we said in January, we expect to find more. And I think that we're-- as I mentioned, there are some areas that we have been looking at and it continues. It is a top priority for us. I believe there is as much as another $5 million that we can get after towards the second half of the year. And so our goal is to identify the most effective way to continue to be more efficient in terms of a leaner corporate structure. So the benefits of the cash flow generated the field level drops into our bank account.

Okay and you -- I believe said you had implemented the majority of the initiatives around the $15 million. I would assume that really should start to hit in a material way in the first quarter and certainly the first half. Is that fair to say?

You'll see some impact to that. Yes you will see some portion of that in Q1. Some of it took effect in this quarter. And then, you will see a fuller benefit of that in Q2 and subsequent quarters.

Okay. Around these two areas that I am asking about. Is it fair to say gross margin of 16.1%, 16.2% should be the low watermark for the next few quarters in that essentially that $60 million of SG&A should be the high water mark relative to the next two quarters, is that a fair way to think about this?

I think that is fair -- we have to be a little cautious because we have said that we are not going to provide guidance and Rick will actually hit me if I start providing guidance when we say we would not provide guidance.

Move a couple steps away from him, then.

I will move to the other side of the table on this. From where we sit today and evaluating everything. I would say that it is fair. Of course, it always depends on a number of things, but based on where we are in the business, I think that is reasonable.

Okay that is good.

I am sitting on the other side of the table now.

The one thing, Mike too, is the SG&A will essentially -- clearly the cost reductions will come out of there. At the same time though, the SG&A, the increase in brokerage cost will be reflected in SG&A and that is more of selling expense and it does up, which we anticipate it will if you related to increased revenue, which is nice and good volume for us.

Okay. Then on the -- he said $10 million to $15 million of low margin revenue that you would be dumping. Does most of that start or did it start at January 1 or is that kind of slowly go away over time?

Essentially mid this quarter.

Mid this quarter. And you think that is all you can identify, I actually expect when you look at your contracts it might be more than that. Is that about it or do you expect more?

We still have more work to do. And, we are being very deliverant in terms of that work and analysis. So, we anticipate that we will find some other opportunities during the first half of this year. As well as the essentially identify areas where we will apply our resources and our focus for growth.

Okay, I guess that's all I got for right now. Thank you.

Our next question is coming from the line of Wayne Anglace with Delaware Investments. Please proceed with your question.

Hello. Thank you for taking my questions this morning. Did I hear correctly that the outstanding balance on the revolver is now down to $53 million from the $81 million that was at year-end?

Yes. That is correct.

Could you just explain to me. It looks to me like you finish the year with not a lot of cash on the balance sheet. And I am trying to figure out where the $30 million -- I'm sorry, not the $30 million but where the $28 million discrepancy is coming from.

Where it came from? Well, one thing to keep in mind, Wayne, is that under the terms of the new revolver, we are going to have zero cash on the balance sheet moving forward. The way that revolver works, cash is applied to it everyday. So the revolver balance will move every single day, based on working capital needs. It does go up and down quite a bit, from week to week and a lot of that depends on the timing of our very large payments to our direct wholesaler. So if you look at it in a certain point in time it might pop up $20 million or $30 million and then it comes back down again. Still on average it's dropped from the $80 million to $60 million or below and right now it is at $53 million.

One of the big factors like I mentioned, our inventory balances have come down about $14.2 million as of last week. The other thing that we are putting a lot of focus on accounts receivable. So, the combination really are focusing on those two areas alone. Has had a significant impact on the borrowing needs of the Company.

Okay great, so in it's essence a working cap movement that is going to fluctuate and it could be anywhere $30 million quarter to quarter.

Yes it will fluctuate that averages down below the $60 million level. Even though we are at $53 million today I would tell you that's a lower point but the average has been around $60 million. So, we clearly improved by about $20 million.

Wayne, this is going to this facility and asset base it really provided us a more effective use of our cash that was on the balance sheet in the short period, given that we were able to also negotiate a lower interest rate on the facility and, the ability to take excess cash and pay down the debt and save the interest cost and re-borrow when needed to pay our wholesaler with a large driver of going back to this type of structure for the Company.

Okay great, thanks for that explanation, I think I just have one or two other quick ones. Do the covenants allow for the debt extinguishment that you incurred in the fourth quarter to be added back to EBITDA?

Yes, I believe so. I am trying to recall the specific basket, but I think so.

Okay, okay, and then my last question would be, it seems like bad debt has been creeping up over the course of 2010. Could you give us a little bit of color around what's causing that and then what you think your expectation is around 2011?

Well one of the things--

I know that could touch on the thing of guidance but--

Sure. As far as bad debt expense when you look at it on the face of income that statement. Do keep in mind that bad debt includes that charge that we took to fully reserve the cap bad debt and that alone was about $1.3 million. We did take a very hard look at the receivables including the bad debt reserves and contractual reserves at the end of the year. We looked at the trends. There was a lot of hard work done through the year to make sure that the accounts were in good order. Rodney Rice, who leads that side of the business is doing a great job, he's been with the Company for over 14 months now, he firmly has his hands around all sides of the business. So I don't think feel like we have any surprises lurking at all. He's done a great job at just making sure that everything is cleaned up and well-reserved.

The (inaudible) thing, is when you look at what the Company achieved in 2010 with the full integration of CHS. The integration went so well that you're not hearing about it. That is the wonderful thing. And, if you look at the success in terms of just DSO alone, the DSO for the Company was 45 days in March of last year. And in December, it was 45.5 days. I think we are in really good shape going forward. Rick and I have both talked to Rodney about what he sees. I've gone through the detailed analysis performed by the finance team of the reserve needs. We fine-tuned our reserve methodology this year to be a little bit more conservative but it's really just taking into effect kind of the window look as far as the minimum and maximum need. So I think we're in very good shape.

Okay so that -- that maybe third quarter 2010 was probably more indicative over what we can expect on a go forward basis ? Is that fair to

I would recommend -- looking back because of the fact that you have that cap charge in the fourth quarter.

Yes.

Like I said, that would not represent a run rate for our expectation.

Okay great, that should do it for me, so thanks very much for answering my questions.

Thanks a lot, Wayne.

Our next question is coming from the line of Glenn Garmont with ThinkEquity, please go ahead.

Thanks. Just a couple of quick ones here and I'm sorry if I missed this. The sequential decline in the infusion home health EBITDA, what was that is attributed to again?

Well, there are a couple of things on a sequential basis. The key thing to focus on really is that we had a conversion of some of the out-of-network contracts to the in-network contracts. And that conversion did have an impact on the gross margins for the business. But at the same time we are expecting -- this is national contracts -- will have a big impact on patient volumes going forward. So that was one of the biggest things, that was affecting infusion itself. Another thing that impacted it was rebates from our vendors.

And the way some of our most material vendor contracts work, there's actually a measurement that has to be achieved, and it's a yes/no, you meet it or you don't meet it type measurement, and that measurement occurred in the third quarter of the year. So it's not one of these--it's not an accrual that we can actually say we anticipate and grew 112 each month. We have to wait until we get that benchmark before it can be approved. We saw a benefit of that in Q3. But, we don't have that benefit in Q4, so that affected the margins as well.

There is a little bit of impact in the 16.1% blended. That does have to do with just the mix of the business in fourth quarter. We did have a delayed onset of the flu season. And on top of that, antibiotics were a little bit weak in the fourth quarter but we are seeing that come back around.

Okay that's helpful. And MJ, did you quantify and or could you remind of what the rebate was in 3Q?

The rebate impact from Q3 to Q4 was a $3.1 million decrease.

Okay. Okay, great, that is helpful.

That is pure timing, Glenn, that does not have to do about the rebate that is going away.

Right, right. Okay, fair enough. And then, how much of your revenue is drug card revenue at this point?

It's a small percentage.

Okay, but it sounds like-- it sounds like you're incrementally more excited about that opportunity. Why is that, what is the opportunity there exactly?

We are not incrementally excited, I think it's been an area of the business that grows and has been growing as a result of the uninsured and the fact that more marketing organizations utilize our PBM network, our pharmacy network to essentially put cards out there. It has been one of the factors of increase in our SG&A. So we talk about just--and I think it is some of the key metrics that we have been putting together is really to provide more information in the future around the different areas of the business. But it's primarily the fact that it is an increased level of our SG&A that we talked about. With this one amendment, the increase in the brokerage fees in Q4 that will be mitigated and absorbed as the growth in that revenue that occurs in future periods.

Okay, understood. And then, shifting topics, Rick, how many of your pharmacies are equipped for infusion at this point?

We've got about 51 of our total. About 45 owned and another six in the different stores.

Six in the --

Some of our community stores.

Right. So the legacy BioScrip community stores, right?

Correct.

Okay and there is opportunity there for incremental infusion suites in additional locations?

Subject to the market location, yes. So we just added three where it made sense and we could cost effectively put some assets in there to access the acute infusion patients off of our managed care agreements in those markets. And leveraging also the clinical strength and reputation of those local stores as well. So, then we will continue to look at as the markets we've identified to expand into in 2011 whether or not it makes sense for us to leverage a community store or plant a flag brand-new, in the community.

Okay. All right, and then my last question again, getting back to the $10 million $15 million of lower margin revenue that you will be getting pursuing here, in 2011,is that -- is that specific customers, is it therapies? Any more detail there would be helpful.

No. It is primarily the different therapies. But it's just something that they stop the structure, it really doesn't make sense for us to spend our time in that area. So, it is really -- it takes activities away from one area that was not that productive and we can redirect those into other areas in higher margins and contribution opportunity.

Right okay, great, thanks very much.

Thank you.

(Operator Instructions). Our next question is a follow-up question coming from the line of Mike Petusky from Noble Research. Please go ahead.

Yes, just a handful more. Can you comment on, now you're five months into the Aetna -- the new Aetna contract, how is that ramping, kind of in line with initial expectations behind, and had can you speak to that?

Yes. In my view, we are never at the level of performance that we should be. And so I think that there's more pull-through opportunities. We've increased our focus as I mentioned in terms of all of our markets and all of our traditional programs. But I think that we -- and we don't typically speak to accounts but I think we are -- our object is we can definitely grow -- grow at a faster clip. And be able to take market share, given the licenses and the hunt on the national, local level.

And then also I want to ask about, I know a piece of business that has lagged is Drugstore.com, can you speak to if that is picked up, what is the revenue on Drugstore.com? I think you disclosed that in the third quarter. Where was the revenue in the fourth?

It didn't materially bump up as much. It's a good business, the profitability is still falling through as expected on the margin that we expected. I think just the delay in closing the deal essentially, took some momentum of the level we expected to get on the ramp. We are working with them on marketing programs and leveraging different programs we have and they have to essentially build the revenue up. But, it clearly was essentially flat per month with a Q3 level.

So around $3.5 million thereabout? For the quarter?

A little bit more than that. Just under $6 million.

It actually grew $1.8 million for the quarter.

Okay, okay. All right and then, on the CHS, you guys talked about possibly uncovering some revenue synergies between legacy BioScrip and CHS, can you speak to that, or are you finding ways to work together ?

Yes, as we mentioned, part of the revenue synergies was really the opportunities in terms of patients that we were turning down prior to the acquisition that they had contract on and we were able to take advantage of those during the year. And essentially we were able to -- essentially drive more patient census through their platform and their payers that would get referred in from some of our markets.We have also seen that their local sales force is taking advantage our expertise on the transplant side and the orals. And so there has been some opportunities that we have seen the CHS people reach out to our specialty side to generate a more combined service offering to patients and their communities.

Is there any way to quantify any of that, is that worth a couple of million dollars, less than that? More?

It is a little bit more than that during the year in terms of the contribution. I mean a nice organic opportunity. I think we will see more opportunities for us to continue to take advantage of their location, their relationships. We've seen, a number of their branches offer our specialty side some oncology relationships that have turned into some revenue, and so I think we will see further opportunities in 2011 to continue to take advantage of relationships on both sides of the Company.

Okay a couple more real quick. You mentioned headcount reduction, is there much severance likely to be associated with that in Q1 or Q2?

There will be some tail yet of it. But, we haven't quantified the full effect yet.

Will it be less than this quarter's, hopefully?

I think approximately. We will have to take a look at the full amount.

Okay. Just last question. You guys had some litigation from way back when break again here recently. Can you speak about other rats in the woodpile in terms of old deals gone bad or anything lurking out that, can you speak to that?

I think that there's two on the CHS side and we don't think have any merit and we disclosed in our prior filings. And so--But, we are--those are primarily the ones that we have disclosed, that we are aware of.

What's the financial risk associated with those?

Actually we have indemnification, I know, on one of them. Maybe even both but I know one for sure we do. So, it's not something that we have been concerned about from the standpoint of having a probable loss.

Okay.

The insurance covers the second one. The first one, is covered by indemnification from the sellers and it is covered by the group.

Okay. All right thank you.

Thank you.

Mr. Smith, there are no further questions at this time I will now turn the call over back to you.

Great, thank you operator, and thank you everyone for your time today. As we have said before, we have a diverse business mix and we believe we are well-positioned to grow this Company. We continue to tap our significant resources, our deep capabilities and leverage that strong commitment to our patients and healthcare communities that we serve. So we believe that we have taken the necessary steps so far we will continue to take the necessary steps to improve the profitability, the revenue generation and cash flow generation of the Company. And, we will talk to you on the next call, thank you.

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