Option Care Health Inc (OPCH) 2012 Q4 法說會逐字稿

Welcome to the BioScrip 2012 fourth-quarter and year-end earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, March 12, 2013.

I would now like to turn the conference over to Amy Raskopf. Please, go ahead, ma'am.

Good morning. Thank you for joining us today. By now, you should have received a copy of our press release issued yesterday after the close of market. 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 Hai Tran, Chief Financial Officer, will host this morning's call. The call may be accessed through our website at BioScrip.com. A replay will be available shortly after the call and will remain available for a period of two weeks. Interested parties may access the replay by dialing 800-633-8284 in the US and 402-977-9140 internationally, and entering access code 21648877. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at BioScrip.com.

Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. Such forward-looking statements are based upon current expectations. There can be no assurance that the results contemplated in these statements will be realized. Actual results may differ materially from such statements, due to a number of factors and risks, some of which are identified in our press release and our annual and quarterly reports filed with the SEC.

These forward-looking statements are based on information available to BioScrip today. The Company assumes no obligation to update statements as circumstances change. During this presentation, we will refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted earnings per diluted share. A reconciliation of such measures to the most comparable GAAP financial measure is contained in our press release issued yesterday after the close of market, which can be obtained from our website at BioScrip.com.

Now, I would like to turn the call over to Rick Smith. Rick?

Thank you. Good morning, everyone. Thank you for joining today's call. 2012 was a year of continued progress and momentum for BioScrip, as we accomplished a significant number of our key objectives toward repositioning the Company to focus on the Infusion and Home Health segments. This process started in 2011 with the commencement of our strategic assessment. In May of 2012, we sold our legacy Mail and Community Pharmacy businesses. We rapidly deployed the net proceeds from the sale of these assets into the InfuScience acquisition in late July and the HomeChoice acquisition early last month. We now have 60 Infusion pharmacies including 42 ambulatory Infusion centers. We feel confident that we will have 70 to 80 total Infusion pharmacy locations by the end of 2013. During 2012, we also closed and consolidated facilities, repositioned two specialty Mail pharmacies into Infusion pharmacies and eliminated excess corporate infrastructure while expanding our clinical programs and services. As a result, BioScrip today is a more competitive and highly differentiated Company.

We have taken the steps necessary to take advantage of the shifting industry trends toward the provision of care in the home or at alternate sites of administration. For the fourth quarter, total Company revenue increased 14.2% year-over-year to $180.7 million. The main driver continues to be Infusion revenue, which demonstrated strong results at $135.6 million, up 32.4%, mainly due to volume gains. Gross profit for the quarter was $60.4 million, or 33.4% of revenue, compared to $58.6 million or 37% in the prior year. As we discussed on our third-quarter call, we were impacted by Hurricane Sandy at our Northeast operations. As expected, during the fourth quarter, we witnessed a significant disruption in discharge levels and start of therapies, which had a negative effect on our expected Q4 revenue levels, especially given that Q4 is typically the strongest acute therapy quarter of the year.

We expect some continued impact in the first quarter. The good news is that we invested heavily in our team's being at discharge points at the hospitals before, during and after the storm to assist in transitioning patients. While the uncertainty of clean water and stable power to affected areas caused disruption in hospital discharge activities, our team created enormous amounts of goodwill with many hospitals and we are seeing greater access to these facilities as a result. In addition, new revenue programs and relationships in the same markets that were scheduled to start in Q4 but were delayed due to Sandy, are coming online and are expected to add to 2013 organic growth levels.

Despite this temporary disruption, our performance this quarter reflects our ongoing progress in executing our strategy. With the recent closing of the HomeChoice transaction, we are pleased to have access to 14 new pharmacy locations and 11 new markets. We are on track with the integration of HomeChoice into our operation. In addition, our InfuScience acquisition is performing as expected. We are pleased with the revenue and EBITDA contribution in the quarter. We expect InfuScience to increase its contribution to revenue growth and earnings this year. We also continue to evaluate a robust pipeline of acquisition opportunities that are consistent with our strategy, to expand our Infusion footprint nationally and to enhance our product and service offerings.

As we continue to build awareness of our clinical capability, our solutions for patients, payers, manufacturers and physicians, we believe we will see opportunities to continue to drive our organic growth. Recently, we were awarded Gattex, a limited distribution drug for the treatment of adult patients with short bowel syndrome, who are dependent on parental support. We also remain focused on our Home Health business, which is of significant value as we build our offering of transitional care services to physicians, hospitals and patients. The importance here is the strength of our clinical program and our ability to integrate and cross-sell them into our Infusion programs and provide alternate sites of service. On a stand-alone basis, the Home Health segment saw an increase in patient volumes resulting in sequential operating improvement.

Before I turn the call over to Hai, I want to reiterate the strength and momentum we are building and look forward to reporting our continued progress. Hai?

Thank you, Rick. Good morning. As a reminder, before we review our fourth-quarter financial performance, we have changed the operating and reportable segments of the Company to Infusion Services, Home Health Services and PBM Services. In addition to new segment reporting, the financial statements reflect continuing versus discontinued operations classification for all periods presented. In reviewing our financial performance, we will focus primarily on the continuing operations. This quarter, we will also begin reporting adjusted earnings per diluted share, which takes into account the same elements in calculating adjusted EBITDA and also adjusts for the impact of acquisition-related intangible amortization, as noted in our press release.

With that, for the fourth quarter of 2012, we reported revenue from continuing operations of $180.7 million, compared to $158.3 million in the prior year period, an increase of $22.5 million or 14.2%. Infusion Services segment revenue increased 32.4%, primarily driven by overall volume growth, as well as the addition of the InfuScience business, offset by the impact of Hurricane Sandy on the Northeast market. The remaining change in revenue growth stemmed from a 6.5% increase in the Home Health Services segment, offset by a decline in the PBM Services segment. The increase in the Home Health Services segment was primarily due to volume growth and offset by the previously discussed reimbursement reduction of Medicare and the state of Tennessee, TennCare program. The decline in our PBM segment was primarily due to lower volume in the funded PBM business and a decrease in discount card revenues, as a result of the previously disclosed fee reduction that was implemented at the end of 2011.

Gross profit for continuing operations was $60.4 million, compared to $58.6 million for the same period in 2011, an increase of $1.8 million or 3.1%. Gross profit as a percentage of revenue decreased to 33.4%, from 37% in the fourth quarter of 2011. The increase in gross profit was due to revenue growth in the Infusion and Home Health Services business. The decrease in gross profit margin percentage primarily related to mix of therapy in the Infusion Services segment and a decrease in Home Health reimbursement rates. SG&A for the fourth quarter was $49.1 million, a $6.1 million increase over the prior year. SG&A for the fourth quarter, as a percentage of total revenue, was 27.1%, flat with the prior year. The increase in SG&A expenses was primarily due to the inclusion of InfuScience and certain costs associated with supporting the growth and volume from our businesses, such as additional employee-related expenses.

Total operating expense increased from $47 million in the fourth quarter of 2011 to $57.2 million in the current quarter, a $10.2 million increase. Operating expenses for Q4 of 2012 included $2.2 million of acquisition and integration expenses and $1.4 million of restructuring and other expenses, compared to a negligible amount in the prior year period. Interest expense in the fourth quarter 2012 increased slightly to $6.4 million compared to $6.2 million in the prior year. The Company reported a loss from continuing operations net of income taxes of $1.4 million for the quarter, compared to net income of $2.6 million in the prior year. Net income from discontinued operations net of income taxes was $8.6 million in the fourth quarter of 2012, compared to net income of $4.1 million in the fourth quarter of 2011.

Consolidated net income for the quarter was $7.2 million or $0.12 per diluted share, compared to consolidated net income of $6.7 million or $0.12 per diluted share for the same period in 2011. BioScrip reported adjusted EBITDA from continuing operations of $12.1 million compared to $14.9 million in the prior year and $11.6 million in the third quarter, a 4.3% sequential quarterly improvement. On Schedule 5, you can also see that the Company reported adjusted EPS of $0.04 per diluted share in the fourth quarter of 2012, compared to adjusted EPS of $0.07 per diluted share in the fourth quarter of 2011.

Turning to cash flows. The Company generated $49.9 million in net cash from continuing operating activity, compared to $3.1 million provided by operating activities in 2011, an increase of $46.8 million. This increase was mainly due to the collection of accounts receivable, retained after the Pharmacy Services asset sale, net of accounts payable related to those businesses. Our cash balance at the end of the fourth quarter was $62.1 million. The Company had no outstanding borrowings under the revolving credit facility as of December 31, 2012.

As indicated in our earnings release, we are projecting revenue growth of 25% to 30% or a range of $830 million to $865 million for 2013. We are initially targeting adjusted EBITDA of $67 million to $73 million. The range of adjusted EBITDA reflects the ongoing impact of Hurricane Sandy in the first quarter of 2013, as well as the estimated impact of competitive bidding. Additionally, revenue and adjusted EBITDA for 2013 may be impacted by therapy mix, the lurking effects of Hurricane Sandy on the Northeast market beyond the first quarter, additional acquisitions, our de novo activities and the timing and earnings contribution from the integration of HomeChoice.

With that, I'll turn the call back to Rick.

Thank you, Hai. Operator, we'll take any questions.

(Operator Instructions)

Brooks O'Neil, Dougherty & Company.

I have a couple questions. First, Rick, I think you mentioned some of the ways that Sandy impacted Q4, but is there any way you could quantify -- for example, in terms of the impact on adjusted EBITDA, what the impact of Sandy might have been in Q4?

Yes. So Brooks, that was a good question. We did a lot of analysis around this. Really, when we looked at the impact of Sandy, it falls into essentially three categories. The first category is kind of the direct cost itself, it's the extra cost of overtime or part-time employees working full-time or some incentive bonus to get some folks back into our branches, post-Sandy. That was kind of the smallest amount from a quantification perspective. I think the second, is very specific initiatives that were tied to volume. Payer initiatives, in particular, that were specifically pushed out into 2013 due to the storm in the fourth quarter. Then the last category, which is the largest category, is an impact in our referral network which Rick really provided some insight into.

In that regard, I think that -- we approached this in terms of utilizing in multiple methodologies. But the one that probably makes the most sense, and I can highlight for you here, is just looking at the seasonality of the business. If you look at our Northeast market -- going back to last year, for example, and seeing what that Northeast market did from a sequential growth perspective from the third quarter to the fourth quarter, that growth was kind of in the mid to high teens sequentially. If you looked at it, in terms of what happened this year in 2012, the [cash] in 2012 in terms of sequential growth for the Northeast market, the growth that we realized was in the low single-digits. So there was a significant difference in sequential growth in that market between what happened this -- in 2012 versus 2011 and that would translate into millions of dollars.

That's very helpful. Could you just say as you look at the business, primarily in that region so far this year, what are you seeing out there now?

We saw essentially a little bit slow uptake still -- some hospitals just came online that were closed in February. But what we're seeing is the area is starting to rebuild in terms of momentum and essentially the discharge activity. So we're -- that's why we stated based on what we see in the opportunities for 2013, there's nothing that was permanently gone, just disrupted. Our team is out in the markets, in the hospitals and essentially gaining access, as well as the programs that got delayed, that I mentioned and Hai mentioned, are now coming online late Q1 that we anticipate to see some contribution the second quarter and the rest of the year.

Good. Obviously, you're projecting very strong revenue growth for 2013. I think it's a bit higher than I was modeling. You're also projecting very strong adjusted EBITDA growth at the midpoint, I guess 70% over 40%, which is tremendous. But could you just elaborate a little bit on factors that you think might impact or might restrict your adjusted EBITDA growth as it parallels the revenue growth in 2013.

Yes, I mean, I think that what we try to highlight in the outlook section gets right at that question, Brooks. I think that clearly we benefit from the acquisition here. We get full year of InfuScience coming in. We'll have some contribution obviously from the HomeChoice acquisition, on top of the recovery from Sandy and then the organic growth on top of that. But in terms of the risk and the opportunities, I think therapy mix is always going to have an impact. Both could be positive, as well as negative from a margin percentage perspective. I don't think it's negative since our ability to create operating leverage so long as we can still grow the dollars at the gross profit line. The lingering effects of Sandy we've talked about. We believe that's primarily the first quarter. But we'll have a better sense as we move along here.

Then the other opportunities for us are things like additional acquisitions that may impact the number, de novos that might -- if we decide to move beyond the eight that we've got kind of in our pipeline right now that would be a bit of a drag for us. Or -- but that could be offset by better performance from the eight that we're bringing online. Then the integration of HomeChoice is also a variable for us. To the extent that we do better than I think what I guided to, which was on the last call, 9 to 12 months to fully integrate, then I think that we'll clearly have some upside there.

That's great. Then, just one last question. I'm curious, I think you mentioned in the press release, the impact of competitive bidding. You might have also mentioned it here. Could you just highlight what's going on with competitive bidding? How it might impact the Company in 2013?

The second round of competitive bidding essentially goes into effect in July. There are 91 competitive bid areas that were put forth. So we believe that any impact will be not material. We also were successful in terms of the bid levels in a number of the CBAs. But we still need to get contracts negotiated and awarded, so that there's more work to be done there. Again, we could provide an update on the next call.

Good. But I guess if I'm hearing you correctly, you think possibly it might turn out to be a positive factor for you with growth in those markets where you've secured some new business?

Where we would have continued access to those patients, would enable us an opportunity to continue to service existing patients and perhaps add more as a result of that potential award.

Sure. Okay. That's great. Congratulations on a great quarter. I'm looking forward to 2013.

David MacDonald, SunTrust.

Had a handful of questions. First, Hai, can you just run us through the organic growth number on the Infusion side? When I back out what I think InfuScience contributed in the quarter, the organic growth still looks enormous despite Sandy. Can you just run us through those numbers. I want to make sure that I'm not thinking about anything wrong.

Yes. I think what we stated was that Infusion Services grew by 32% year-over-year. I think Sandy -- I'm sorry, InfuScience, what we said was it's about a $40 million a year business. If you take one quarter of that, that's $10 million of growth that would be attributable to InfuScience. When you back that out of the numbers, you're still seeing north of 20% growth on that business. I think we are getting some -- continue to get some traction on the growth side. We are getting the benefit of, as Rick mentioned, the site of service initiatives that are kind of percolating through the industry here and tough for us to quantify specifically how much of it is that, but clearly we're benefiting from that, given the strong growth. The only thing is that -- but with that comes kind of mix challenges. Because a lot of the stuff that comes over from a site of service perspective are kind of the chronic therapy first as opposed to the acute therapy. Those are kind of the puts and takes when we look at the growth numbers.

Hai, I'm just curious, are you guys seeing any difference in the organic growth rates in markets where you have both a Home Health and Home Infusion capability relative to markets where you just have standalone Home Infusion?

We are -- we're actually starting to incorporate that, David. It's early in the process, but we're actually combining that in terms of the management of the acute patients in terms of some of the transitional care management programs that we've put in place. We've got, on the Home Health side, 13 community hospitals that we've been working with and have had good initial success in reducing re-admissions by about 15%. So a lot of these are complex heart failure patients, post-surgery patients that need both the Home Infusion and the Home Health capabilities that we can bring. So where we do have both of those capabilities in those same markets, we're able to bring those clinical management programs together.

Okay. Then just quickly, Rick, I was wondering if you could touch just briefly on the pipeline. You talked about 70 to 80 pharmacies targeted by the end of 2013. Could you give us a sense of how you look at that in terms of de novos coming on, potential acquisitions, et cetera? I know how many de novos you guys have in the pipeline, but just any additional color on the pipeline would be helpful.

Our primary focus is on acquisitions, in order to get those into the market quickly and bring the relationships with them. To the extent that we need to fill in an area that may serve as a spoke, then we'll look at a de novo model which is essentially is how we look at the eight -- some of the eight today. At the same time, we have an opportunity if we can't find a suitable candidate to acquire, we'll essentially begin a search for a leased facility to build and get it into the market quickly. At the end of the year, we feel very comfortable based on what we've done so far in a short period of time that to add another 10 to 20 will not be difficult for us given the number of properties that could be out there, as well as the number of facilities that we could lease and get started with a buildout from a de novo perspective.

Okay. Then just one final question, guys. Brooks mentioned competitive bidding, but one area that I've been getting questions on is AWP versus ASP. This issue's been out there forever. Rick, I was just wondering if you could provide a little bit of color on -- do folks understand that the AWP wraps up services and drug reimbursement, et cetera, just any additional color on that, quote, issue, would be helpful.

Sure. Yes, if the you're looking at referencing I think the letter that was put out by part of HHS -- the Part B analysis was very narrow in terms of analysis as it only focused in on the drug aspect in terms of referencing how other parts of Part B drugs are reimbursed. However, the structure of the Part B services for Home Infusion encompass clinical services, supplies and overall clinical management of those acute patients, primarily heart failure and other acute patients. So the industry has lived with an ASP or an AWP and even a MAC pricing structure in the managed care environment and that is related to the drug.

However, the additional recognition of services for clinical management through the per diem and then also the nursing -- additional nursing reimbursement is something that essentially provides the opportunity to bring patients home at one-tenth of the cost of an inpatient stay. The industry has been working extensively -- the industry association, in educating Congress, NHHS, in terms of getting a full Infusion benefit passed. So that work continues. But I think the analysis that was recently done was very narrow and really didn't incorporate all levels of services with these acute chronic patients.

(Operator Instructions)

Dana Hambly, Stephens.

The acquisition pipeline sounds like it remains strong, plenty of stuff out there. I'm curious if you're seeing any pressure -- upward pressure on multiples. I know at least one other public company had announced an acquisition of a Home Infusion platform not that long ago. Just seeing if that's impacting multiples?

No, we're not seeing that yet, Dana. I mean, I think at the end of the day -- HomeChoice like you said -- we've done two now in the last six months, where they are platform type acquisitions. What we've always said is for larger platform type acquisitions on kind of an effective multiple, we should be in the 6 to 8 times. We're able to do that for both of those opportunities. When we're looking at the smaller opportunities in our pipeline, I think that we clearly see that four to six times is still in play there.

Okay. Great. Then on the acquisition integration -- 9 to 12 months, could you just go over kind of what the biggest hurdles are there for you? The lessons you're learning? As you fold in some of these bigger platforms going forward, do you think we could come in six to nine months, three to six months, something like that?

Sure, I mean, I think as we continue to build our core competencies around the acquisition platform and the integrations of those acquisitions -- as we continue to template our processes, I think we'll get increasingly better at that, absolutely. I think obviously in terms of lessons learned, this is a people business. So it's all about the people for us. So being able to put in place good effective incentives, making sure the culture fits which is where we spend a lot of time actually upfront on the acquisition, because we're very, very much a clinically focused, flexible, high touch model here. We want to make sure that the folks that we're bringing on are equally focused on clinical excellence, equally focused on outcomes. So that we minimize the turnover from the culture shock that can arise due to any acquisition.

So that's probably where we spend a lot of time and our focus and our energies on. The integration itself, it's just working the process. It's making sure that we load up the contracts and take advantage of our purchasing scale. It's making sure that we identify upfront and early, those resources that may be transitional in nature as opposed to a more permanent nature. It's making sure that we've identified kind of the opportunities on sales front as we make our national contracts available to these acquisition -- to the markets where these acquisitions have a presence. So that's just kind of working the process. As we get better at it and we have a more disciplined and repeatable process, I think that you should see the integration time line come down.

Okay. Great. But from an operational standpoint, if an acquisition -- a good fit presented itself right now, you don't think you'd be hindered because you're working on the HomeChoice?

No.

Okay. Then, just last one from me. Rick, you mentioned something in your prepared remarks about Gattex? You had been awarded Gattex. I just wasn't sure what that was all about.

A new limited distribution drug that has targeted towards short bowel syndrome. Given our clinical programs in nutritional support, we were one of a handful of providers to essentially incorporate that into care plans for nutritional support patients.

Mike Petusky, Noble Financial.

Just a couple of questions. Hai, on the gross margin, I think at one time a number of us were thinking that maybe you guys would make material progress in terms of the gross margin percentage. But now it sounds like maybe the gross margin stays somewhat flat or maybe slightly up. Can you just talk about maybe over the next few quarters what that looks like going forward, just in rough terms?

Yes. I mean, I think the assumption if you did the -- if you kind of extrapolated from the guidance we gave, we do expect some gross margin improvement. A lot of that is just the impact of the acquisitions, actually and the associated -- that only because they have two reasons that they will improve our gross margins. First, not only do they have better mix than we do; therefore, when we incorporate them, they'll improve our gross margins. But they'll also provide greater purchasing leverage, when we go back to our providers to renegotiate our cost of goods sold there. So that's what you're seeing. One of the -- what you're alluding to, Mike, is I think one of the things that maybe we didn't anticipate as well this year in 2012, was the impact of the site of service -- volume from the site of service and the growth in the associated chronic therapies which does impact our gross profit margin percentage. So what you've heard me say and I think what I said before to many of the folks -- investors on the call here and others, is that for us, I believe it's fundamentally an operating leverage opportunity. That so long as we bring in good volume that's growing the gross profit dollars, the gross profit margin percentage might fluctuate due to therapy mix, okay? Or the mix of acquisitions that we bring on-board. But if we do a good job growing the gross profit dollars, we'll be able to generate some operating leverage as we scale the infrastructure -- or take advantage of the infrastructure.

Okay. So really what I was getting at, though, at one time I think there was talk that maybe gross margins could go as high as 36%, 37%. I'm now thinking it's a much more modest improvement. Is that a fair way to look at it?

Yes, that's right.

All right. Great. In terms of just how this year lays out, I'm assuming due to some of the factors that you listed, overhang from Hurricane Sandy, et cetera, that probably Q1's your low watermark and sequentially better from there. Is that a fair way to think about 2013?

That's correct, Mike. I think you'll have some modest sequential improvement from Q4 to Q1. Then it will ramp from there.

Okay. Then, just a final question. In terms of your revenue guidance, if we were just thinking about the PBM segment, I mean, should we be thinking roughly kind of $100 million, $110 million, something in there in terms of the revs for the year?

Yes.

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

Oh, great. Thank you, operator. Thank you everyone for your time today. Also, thank you to all the BioScrip employees for their contributions and dedication to our customers and our patients. We keep building great awareness in the marketplace, so thank you for that. Thank you everyone. Have a great day.

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. Have a great day.