Option Care Health Inc (OPCH) 2011 Q3 法說會逐字稿

Welcome to the BioScrip third quarter 2011 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. (Operator Instructions).

As a reminder, this conference is being recorded Tuesday, November 8, 2011. I would now like to turn the conference over to Lisa Wilson. Please go ahead, ma'am.

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 website,. Rick Smith, President and Chief Executive Officer, and MJ Graves, interim Chief Financial Officer and treasurer, will host this morning's call.

The call may also be accessed through our website at bioscrip.com. A replay will be 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 21543695. An audio webcast will also be available under the Investor Relations section of the BioScrip website at www.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 and Reform Act. These forward-looking statements are based on information available to BioScrip today and the Company assumes no obligation to update such 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 subject to inherent risks and uncertainties surrounding future expectations generally, and may differ materially from actual future experience.

Risks and uncertainties that it could effect 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 in executing these efforts, our ability to leverage core competencies or maximize margins and operating cash flow, and the risks described from time to time in the Company's reports filed with the SEC, including the company's Form 10-Q for the period ended September 30, 2011, and the annual report on Form 10-K for the year ended December 31, 2010. In addition, as required by Regulation G, reconciliation of non-GAAP financial measures mentioned during our call today most comparable to GAAP financial measures can be found in Schedule 4 of today's press release. That schedule's available, as well, 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 Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone. Thank you for joining today's call.

In the third quarter, a number of the initiatives that we have been working on over the last year are reflected in our results. We continue to make ongoing progress both sequentially, as well as on a year over year basis. Patient census levels continue to build and script counts are strong as a result of our results to grow our patient base through local referral sources and our managed care relationships.

I am pleased to report $19 million of adjusted EBITDA achieved in the quarter relative to $18.1 million in the prior quarter. Our positive trends reflect the efforts of our team, and we are building forward momentum in a tough environment. Our ability to achieve new patient census results from our sales, clinical services, reimbursement, and operation teams, working closely within the communities we serve.

Overall, growth occurred in spite of a challenging economic environment impacting demand for services, acuity levels, reimbursement rates, and other short term trends affecting the companies industry-wide.

The diversification that we have in our pair mix enable us to keep making forward progress. It also helps to mitigate material exposure to budgetary pressures in any one state or specific Medicare program.

Our third quarter revenue increased sequentially from $441 million to $454 million. This reflects $12.6 million of revenue growth, achieved primarily from the pull through reference of our managed care relationships, and growth in certain oral specialty drugs.

In pharmacy services, our revenue increased 3.7% sequentially, a solid growth in oncology, MS, and arthritis drugs, and the full effect of contracts that were added late last year. This segment on enhanced performance from the operating locations, increased patient retention levels, and reduced indirect corporate support, as well as continued growth in our PVM and cash card business. This collectively resulted in a $1.3 million, or 9.2%,sequential increase in segment adjusted EBITDA.

In infusion home health services, sequential revenue increased slightly from $109.3 million to $109.6 million. While related segment adjusted EBITDA decreased $300,000, primarily due to payer and therapy mix, on a year over year basis we have been impacted by lower environments in higher acuity anti-infective therapy patients. This reflects the same trend affecting other sectors of the industry such as hospitals and physician offices. Relative to specific chronic therapies, we have seen a decrease in our IV IG patient volumes, which appears to be consistent with the industry peaks and valleys of the last 12 months. Economic pressures, increases in co-pays, and increased levels of prior authorization for IV IG therapy for managed care pairs have all had an impact.

Despite these factors, our team has increased patient census over the last seven months. As a result, we see further opportunities to improve the growth rate of our business.

Our third quarter adjusted EBITDA increase $19 million versus $18.1 million in the second quarter, a 5.3% increase. This reflects the sequential increase in revenue, and the positive impact of reducing our operating expense structure as discussed in previous quarters. We continue to show positive operating cash flow driven from tighter working capital management. We still have more work to do, but steady progress is what we're working towards.

I will now turn it over through MJ, who will take you through additional details on the financial quarter. MJ.

That thank you, Rick and good morning.

For the third quarter 2011, we reported revenues of $454 million, compared to $441.2 million in the prior year, an increase of $12.9 million, or 2.9%. The increase stemmed primarily from pharmacy services, which increased by $15.2 million or 4.6%. Before considering the impact of $18.1 million of discontinued low margin business that we discussed in prior quarters, pharmacy services revenue grew about $33.3 million or 10.7% on a year over year basis. This segment benefited from new managed care contracts, growth in oncology, arthritis, and MS therapies and industry-wide drug inflation, as well as growth in discount cash card sales.

Infusion/Home Health Services revenue for the third quarter decreased from $111.8 million in the prior year to $109.6 million in the current year, a decrease of $2.3 million or 2.1%. While we experienced growth in patient census in a majority of key therapies, segment revenue was impacted by $7.2 million reduction in anti-infectives and IV IG therapy revenue. We also absorbed $1.4 million in rate reductions associated with the transition of certain patients from out of network to contracted arrangements,and home health reimbursement cuts enacted by Medicare and Medicaid in the current year.

In total, the Medicare and Medicaid rate reduction represented less than 1% of segment revenue for the quarter.

For the third quarter, gross profit was $77.1 million,or 17% of sales, compared to $75.4 million,or 17.1% of sales, in the prior year.

Operating expenses for the quarter increased $5.9 million, from $63.2 million in the prior year, to $69.1 million in the current year. The increase includes $3.5 million of restructuring expense and $500,000 increase in acquisition, integration, severance, and other employee costs. The increase also includes a $6 million increase in broker fees, related to growth and the discount cash card business, which was partially offset by reduction in bad debt expense, as well as salary and benefit cost reductions generated by the restructuring effort. The current period restructuring charges include $1.4 million of facility rationalization costs, $1 million of third party consulting fees, $400,000 of employee severance and other benefit related costs, and $700,000 of other costs.

For the third quarter, interest expense decreased by $1.1 million, from $8.1 million in the prior year to $7.1 million in the current year. [sic]

Quarterly adjusted EBITDA is reported at $19 million compared, to $18.1 million in the prior year,an increase of $1 million or 5.3%. Addbacks to net income for the quarter included interest, taxes, amortization, and stock-based compensation expense of $13.4 million, restructuring expense of $3.5 million, and acquisition, integration, severance, and other employee costs of $1.5 million.

Net income for the quarter was $500,000 for the current year, compared to $2 million for the prior year, with an EPS of $0.01 per diluted share compared to $0.04 per diluted share in the prior year. Excluding $3.5 million of restructuring and $1.5 million of acquisition integration, severance, and other employee costs, net income was $5.7 million or $0.10 per diluted share.

During the third quarter of 2011, BioScrip generated $25.8 million of segment-adjusted EBITDA or 5.7% of total revenue, compared to $25.7 million,or 5.8% of total revenue, in the prior year. The Infusion/Home Health Services segment generated $10.5 million of segment-adjusted EBITDA, or 9.6% of related revenue. The pharmacy services segment generated $15.4 million of segment-adjusted EBITDA, or 4.5% of related revenue.

For the 9 month period ending September 30, we reported revenue of $1.3 billion compared to $1.2 billion in the prior year, an increase of $146.5 million or 12.3%.

Year to date gross margin increased from 15.8% of net revenue in the prior year to 17.3% of net revenue in the current year. Adjusted EBITDA on a year to date basis increased from $39.2 million in 2010 to $53.7 million in 2011.

Year to date net income was $1.2 million in 2011 compared to a loss of $2.1 million in 2010,with EPS of $0.02 per diluted share compared to a net loss of $0.04 per share in the prior year.

Turning now to cash flows. The company generated $39.5 million in operating cash flows on a year to date basis, compared to $5.9 million in 2010. We used $7 million of cash in investing activities, and $32.6 million in financing activities, reducing the current portion of long-term debt from $81.4 million at the beginning of the year to $52 million at September 30. We continued to have the financial flexibility to support future cash flow generation priorities and are in compliance with all debt covenants.

I will now turn the call back over to Rick.

Thanks, MJ.

As we head into the end of the year, we are moving closer to completing our strategic assessment with many of the key elements of the plan in place. The results we have achieved over the last year have provided a good foundation on which to build. We continue to evaluate our businesses and the areas where we need to invest our capital to further strengthen our competitive position. We look for opportunities to reduce our cost structure and become more efficient and effective as a healthcare service provider to make sure we are increasing our operating cash flow levels.

Overall, we are pleased with our results this quarter despite the challenging economic environment, and are excited about the momentum we are building in our key areas of focus. We believe we are positioning ourselves to take advantage of the long term demographic trends and opportunities in our industry through a combination of geographic diversification, penetration into both national and regional national managed care relationships, and focus on specific therapeutic programs. The direction of healthcare is into the home or alternate site, and BioScrip is uniquely positioned to be a high-quality, low-cost provider and a value-added partner to our referral sources, our payers, and the patients we serve. We remain confident we have the right strategy in place.

Now I'd like to open up the call for questions.

Thank you. (Operator Instructions).

Our first question comes from the line of Brooks O'Neil with Dougherty & Company. Please go ahead with your question.

Mr. O'Neil, your line is open. Please go ahead with your question.

Sorry. Good morning. I have a couple of questions.

MJ, would you mind just going back through how you calculate the $0.10 of adjusted EPS this quarter?

That is adjusted, Brooks, for the restructuring, as well as the acquisition, integration, severance, and other employee costs. You also have to consider the accelerated vesting on stock options and then the tax effect of all of that.

And where would that last item show up on the income statement? Is there -- or do you have a dollar number for that?

It's in SG&A. It's not an amount that's been disclosed separately.

Okay. I guess I understand that.

Let me just ask you about this item that seems to confuse me and everyone else probably every quarter is the tax rate. If I was looking at your income statement the right way, it looks like you had a tax rate of 36% this quarter, which was a lot higher than I expected. That's obviously on a GAAP basis. But can you just comment what's going on with the tax rate right this minute?

Yes. The tax rate is complicated because of the negative credit or the -- you know, the amortization of tax-deductible good will. If you look at it on a year to date basis, it's 15%.

Okay.

If you're looking at it for the entire year and anticipating, you know, effective tax rate for the entire year for Q4 as well as the entire year, it would probably be a little bit higher than that. As far -- higher than the 15%. Probably more, you know, in the 17% range. But the reason that we had that higher amount in the third quarter, it related to the negative credit. You know, obviously, for people on the call who are -- is not familiar about our story from last year, part of the reason we had the lower effective tax rate is the valuation reserve.

Okay.

And, yes, we'll be at a 12% to 14% minimum pretty much every quarter even while we have the valuation allowance, Brooks, because of the state taxes.

Okay. That's -- that's good.

Maybe you could just talk again a little bit about the infusion revenue. It looked to me like it came in a little bit less. I think you commented that it related to the reduction in the anti-infectives. Could we expect seasonally that business to pick back up in the fourth quarter? Or what's your outlook sort of going forward for the infusion therapy growth?

Yes. I think we -- on a year over year basis, we saw essentially the volume decrease that we had mentioned and also in that is the price decrease from moving out of network into managed care that we talked about in Q2. On a sequential basis, we have seen census grow in both the anti-infectives and the chronic therapies, as well as some of the other traditional. And so we have seen some good growth consistently organically coming from our local markets in the key therapies we've been focusing in on.

The managed care relationships that we've talked about, we've seen some good sequential growth in patient census ranging from 5% to as much as 19% in some of our plans.

And so it's -- so I think we're very happy to see the sequential growth. Our teams are working hard to get the pull-through activities. And I think just in terms of Q4 historically, it's been a strong seasonal quarter, but it also continues to be driven by what happens at the discharge, the discharge desk too.

Sure. Okay. Then maybe I'll just ask one more, then jump back into the queue.

I'm curious if I was looking at it properly and I know there are a couple of different adjustments that need to be made here, but it did look like SG&A was a little bit higher than I was expecting. And I'm curious if you feel that you're fully seeing the benefits of the cost savings initiatives you're taken, or if we can expect to see more of that flow through as we go forward?

I think included in SG&A is the -- we talked about it, we had an executive officer terminate service during the quarter.

Yes.

So that full severance plus the related effects are in the SG&A as well as some of the other costs. And so just looking at run rates, I think we're about 14% in terms of our total operating expenses as it relates to, you know, before restructuring and before some of those other items. And so I think our goal is to continue to drive our operating expenses as a percentage of revenue lower and be more efficient with our infrastructure.

Excellent. Thank you very much.

Okay.

Our next question comes from the line of Eugene Goldenberg with BB&T Capital Markets. Please proceed with your question.

Hi. Good morning, guys. Thanks for taking my questions.

Rick, I just wanted to follow up with you. On the last call you mentioned that one of your national contracts was kind of underperforming relative to your expectations. Can you perhaps give us an update on where you guys stand with that contract one quarter later?

Yes. We saw sequential patient census growth 5% in that contract. It's still not where I think it needs to be, but I think we're pushing through some of the late start to that. And our teams are focused on pull through across all of our relationships. But so positive direction, but still more work to do.

Okay. Great. And then on the bad debt side, I mean that came in much lower than we anticipated it, and it seems to be the lowest level going back to 2009. What's driving this and is this a good baseline to use going forward?I guess that's a question for MJ.

Well, we'll actually be filing the Q tomorrow and you can take a look at the language in that there's a little bit more detail. We had some favorable adjustments in Q3 based on our consistently applied methodology in pharmacy services. But we also had a bit of unfavorable on the infusion side.

So you know how it is. As far as the performance on the bad debt side, Eugene, we apply consistent methodology and it does tend to shift around and move around when you have more than 70 locations. You're going to have some do better than others from any point in time. And in this point in time we did have some outperformance on pharmacy services, and we did have some additional provision we applied for infusion.

Overall, I think that Q3 probably benefited just a bit from some of those favorable adjustments we've had. We want to continue that momentum. But you know, when you're dealing with this much volume and a bad debt rate that is that low, it's really incremental improvements from that point forward.

Okay. Great. Thanks for that color.

And then from a margin perspective, we're kind -- from an EBITDA margin perspective, we're seeing diverging trends in the pharmacy and infusion sides of the business for the past four or five quarters. We're seeing consistent improvement in the pharmacy segment, but we're seeing kind of continued degradation, if you will, in infusion on the home health side.

Can you provide additional color to that?I'm assuming part of the margin decline has to do with kind of your continued uptick into these managed care contracts. But are those primarily on the infusion side? They're also from the pharmacy side, from my understanding.

Yes. They're both. I think on the infusion side, there is some uptick there. Also, you're seeing some drag year over year from the Medicare cuts on the home health side and the 10 care. And also the provision -- additional provision for bad debt as we've gotten some aged accounts on the infusion side also as part of that drag.

The aging of some of those accounts got older than the team should have let them get. And our goal is to get that cash collected and reverse that trend.

Okay. Got it. And then MJ, I think you shared a number in the quarter. I missed it during your prepared remarks. How much of the top line was impacted by some of in network revenue --

In the remarks, I gave you, I did not give you that specific dollar amount. However, when you take a look at our filing you will see that we do disclose that we had a $1 million impact overall from the Medicare and the nursing, and then we also had less than that, but a close to that amount in the out of network impact.

Okay.

Between $0.5 million and $1 million.

Okay. And then just the last question and I'll hop back in the queue -- is how much of the three national contracts that you currently have, how much do they kind of contribute to percentage of revenue collectively, not individually, but collectively those three clients?

We don't disclose that.

That's not a number that we have disclosed up to this point, Eugene.

Okay. All right. Thank you.

All right. Thank you.

Our next question comes from the line of Mike Petusky with Noble Financial. Please go ahead with your question.

Good morning. Just a few questions.

I guess, Rick, in terms of, you know, looking out, I guess my feeling was that I had always expected the infusion home health side to grow a little bit faster than the pharmacy services. I mean is that a fair expectation -- I'm not asking for anything specific, but just generally speaking in terms of growth rates once you kind of get the impact of the discarded business and all that kind of exed out, I mean is it a fair assumption that your belief would be that infusion home health would grow faster?

Yes. Our focus, and this is, I think, a transition year. We talked in terms of bringing the organization into a managed care, national managed care environment. And at the same time, you know, we're hitting some factors where referral sources on the acute side had an impact in terms of growth levels in that area. In addition, you know, Q3 is typically sequentially flat, just given seasonality.

But I think that long term, overall, we believe and I believe that the opportunity to continue to grow the infusion part of our business quickly is available to us given the work that we've done in terms of access to managed care lines, the number of panels that we're on, and essentially establishing ourselves as a competitor and a national provider in the industry.

So I think that, you know, underneath the price increases and the year over year impacts from volume in some of our categories, we're seeing some strong growth a lot of the other therapeutic areas. We are seeing a strong growth in nutritional therapy. However, it's not the infused therapy on the TPN side as much as we would expect, just given some of the raw material shortages that some of the hospitals are seeing in terms of starting those patients on that therapy.

So I think that there are a lot of short term headwinds that we're muscling through. But I think through our access through the lives and managed care relationships and these essentially positioning of our clinical programs, we continue to see good patient census growth.

So I guess -- I guess given what you just said, then, I mean would it be a fair assumption to say that gross margins again over the next like let's say four to eight quarters should at least kind of hold in here or possibly get slightly better? I understand there's a bunch of tailwinds/headwinds, but to me it seems like if overall this piecier business is growing faster than the lower margin pharmacy services business gross margin should hold together or possibly even slightly I improve -- is that fair?

Sequentially year over year we talked about bringing the locations in from an out of network into managed care. On a sequential basis we've actually seen pricing pretty much flat and some therapeutic categories an uptick. So our goal is to continue to work on our therapy mix and also look to continue, to strengthen and improve our margin.

I think if we've got some agings that took some of our EBITDA and the segment away from us this quarter and, you know, if we get that cash collected in Q4, we hope to reverse that be trend and see an uptick. So that's another drag that given everything else, the organization's been working on, that slipped a little bit. But it's essentially something we can correct and turn around, as well.

Okay. Could you talk -- and if you mentioned this earlier, I missed it.

Did you guys talk about or could you talk about you know you identified another potential $5 million that you thought you could eventually capture, in terms of the strategic assessment. Have you guys talked about that or could you talk about that?

Yes. We're essentially, I think we stated before we're about halfway there. The facilities we brought in provided us some incremental improvement on that next incremental $5 million. So we're still chipping away at it. We're not completely there, but we're about halfway there.

So some of that should show up over the next couple, two, three quarters, something like that.

Exactly.

Okay.

And then I guess, you know, there's some news out of California a couple weeks ago regarding Medi-Cal and the proposal to cut Medicaid rates there. I mean can you just talk about that generally and I guess potential impact? I know you do do some business in California.

Yes. The thing is I said no one Medicaid state is a material exposure to us. And I think that we are looking at what happens in the courts there, given that the Hospital Association has filed another lawsuit to block it. But, you know, and we haven't calculated the estimated impact. But we believe like everything else that's going on in other states and it's just going to continue to be challenges and head winds in various areas, but we don't believe anything material to our forward progress in terms of any one particular state.

Okay.

Actually, Mike, as far as our exposure to any one single state, I think our largest exposure to one state is around 2.5%. But it's definitely under 3% and then it starts dropping very quickly. So it's maybe the top three are even above 1% and falls off very fast.

Okay. All right. That's super helpful.

Is there any chance you guys could size up the cash card business or -- or even just how much of the incremental pharmacy revenue versus the same period last yearwas attributable to the cash card business?

That's -- unfortunately, that's not a number that we're disclosing at this point in time, Mike.

All right. Okay.

Last question. MJ, could you help me?

Obviously, I appreciate what you gave in terms of the tax rate. This is always kind of a hassle in modeling you guys. Can you help out just in terms of given that most of our models go out beyond the fourth quarter? I mean what is a decent tax rate guesstimate for next year? Is it going to be closer to 15%, 20%, or is it going to be closer to, you know, fully taxed?

You know what? I would probably keep it in that 20% range, Mike.

Okay.

Obviously, as we approach year-end on the next call, I'll give you more information on that. But I would keep it probably in that 20% range.

Okay.

As you know, our valuation reserve is quite large.

Okay. All right. Hey, guys, great progress. Really good. Thanks.

Thank you.

Thank you.

(Operator Instructions).

And we have a follow-up question from the line of Brooks O'Neil, Dougherty & Company. Please go ahead with your question.

Sure. Rick, I was just curious.

We've talked in the past about the potential to increase the number of infusion pharmacies in the current level in the mid 40s to a number closer to 70. I'm curious, A, if it's still sort of a realistic target number over time, and, B, whether you've made progress so far, got some near-term plans for making progress towards that number.

In order to fully flesh out the footprint, that's about the right number, I think we're in the process, early process of putting together our pipeline of potential targets by market. But right now, it's really early in our process.

But you still think that might be a realistic goal over some next couple of years?

Over the longer term,we need to expand our infusion footprint, yes.

Yes. Okay. Thank you.

Okay.

(Operator Instructions).

Ms. Wilson, I have no further questions at this time. I will now turn the call over to you please continue with your presentation or closing remarks.

Thank you, everyone for joining us today. We look forward to talking to you soon.

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