沃博聯公司 (WBA) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Option Care, Inc. fourth-quarter and year-end 2005 earnings conference call.

My name is Jen and I will be your coordinator for today.

At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded for replay purposes.

I would now like to hand the presentation over to your host for today's conference, Mr. Raj Rai, CEO.

Please proceed, sir.

Good morning and thank you for joining our call.

Also participating on the call with me is Rick Smith, our President and Chief Operating Officer, and Paul Mastrapa, our Chief Financial Officer.

By now you should have a copy of the press release issued by the Company this morning.

If you have not received it, please call Leticia Carrillo at 847-229-7731 and it will be faxed to you promptly.

Please be advised in keeping with the SEC Reg.

FD guidelines, this call may be accessed by webcast through Option Care's website at www.OptionCare.com.

Any remarks that Option Care may make about future expectations, plans and prospects for Option Care constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements.

Such forward-looking statements involve important risks and uncertainties that could significantly affect anticipated results in the future and accordingly such results may differ from those expressed in any forward-looking statements made by us on our behalf.

These risks and uncertainties and other important factors are discussed in Option Care's annual report on Form 10-K for the year ended December 31, 2004 which is on file with the SEC.

Option Care anticipates that subsequent events and developments may cause its estimates to change or it may elect to update these forward-looking statements at some point in the future.

Option Care specifically disclaims any obligations to do so.

I will now give the highlights for the quarter;

Rick and Paul will give the updates on operations and key financial highlights later in the call.

As announced in our press release issued this morning, we reported $144 million in revenues for the fourth quarter or a 28% growth from the same quarter in 2004 and over half a billion in revenues for the year or 22% growth from 2004.

In the fourth quarter we saw a strong surge in sales all across the therapies; in particular Synagis which grew about 70%.

Let me summarize the milestones achieved so far this year -- or last year, sorry.

We made eight acquisitions, five franchise businesses and three independent pharmacies; completed two hospital joint ventures; started a stand-alone ambulatory treatment center in Florida; we planned four startups in Phoenix, Jacksonville, Orlando and Orange County; and have obtained allocation on all IVIG products from various manufactures.

We are very pleased with our accomplishments as these will further enhance our growth prospects in the future.

As we move forward in 2006 we'll continue to focus on cross selling home infusion and specialty businesses.

We remain focused on establishing alliances with managed care organizations, biotech manufacturers and PBMs to drive growth in our specialty pharmacy business and opportunities that exist with Medicare Part D. We are cautiously optimistic about the potential impact of Part D to our business.

We have aggressively launched a sales and educational campaign around Part D to various referral sources.

The results of our efforts are so far as follows.

We have obtained contracts with a vast majority of MAPDs and PDPs for home infusion services in the markets we do business in.

Approximately 30 to 40% of the referrals that we have received so far are being either rejected or are pending due to formulary and eligibility issues.

We believe these issues stem from enrollment and PDP systems.

We expect these percentages to decline as PDPs work through their system glitches.

The majority of the referrals coming through are dual eligibles and some are straight Medicare.

We continue to work with our industry association through some of these challenges that come with the implementation of a massive undertaking with a program like Part D that affects over 40 million beneficiaries.

Acquisitions will continue to play a major role in the growth of our Company in 2006 and beyond.

We have about $50 million on hand to fund future transactions.

We have a number of acquisitions in the pipeline which we plan to close in the near future.

We are also excited about the opportunities in hospital joint ventures.

In addition, we'll go live with our four startups in the first quarter of 2006.

We expect these startups will break even sometime in the third quarter.

With our plans to grow our base business coupled with some acquisitions we are projecting total revenues to be in the range of $580 to $610 million and earnings per share before the impact of options expense to be in the range of $0.70 to $0.76.

Before I turn the call to Rick, I'm pleased to announce that the Board of Directors has approved a $0.02 per share cash dividend for the fourth quarter.

Rick?

Good morning.

As we've seen in the past year in the year-over-year performance, our clinical and marketing programs continue to produce same-store growth for us year-over-year and the acquired locations strengthen our leadership position in these focus areas as well.

We increased census in areas of anti-infectives, nutrition, heart failure and chemotherapy on the infusion side.

We also produced increased census in all of our specialty pharmacy areas, especially Synagis.

We have increased the number of our internal centers of excellence in nutrition, hemophilia and heart failure in addition to other programs.

We are currently preparing our locations for certification in anticipation of the relaunch of Tysabri later this year.

During 2005 we did a substantial amount of work with our payor organization to position our Company for 2006.

In addition to the Medicare Part D and MAPD plans we have contracted with, we also enhanced our referral positions within our united national relationship and increased our opportunities with our national Aetna relationship.

We also strengthened our contract relationships with many of the Blue organizations and their alliances during the year to achieve more business in 2006.

We are also working on other national agreements that we hope to have signed and implemented later this year.

As a result of the consolidation of many of the organizations in our industry, we are being invited mid-term to potentially participate in specialty programs where the provider panel was previously full.

We believe that we will see more opportunities during the year for additional specialty contracts as many plans seek independent specialty pharmacies to assist in achieving their strategic goals.

We believe we are in the leading position to cross sell our infusion and our specialty pharmacy capability.

We believe that our local footprint of infusion pharmacies gives us a competitive advantage in the marketplace compared with some of our competitors.

We look to build on the accomplished work we did in 2005 in the ambulatory treatment area by seeking more volume through our centers both attached to our offices and the freestanding model we created during 2005.

We believe we have positioned ourselves very well here as we have worked with many payors during 2005 to amend or create contracts that have generated a special fee schedule for the ambulatory treatment centers.

In the specific areas of operation we have secured IVIG products to meet our current needs for the majority of 2006, we have secured contract pricing and, subject to market conditions or changes in AWP, we do not anticipate changes to margins in this area as of the current time.

We continue to work with other manufacturers and our other vendors to continue to enhance our purchasing programs.

We continue to enhance our back-end systems capabilities in both infusion and the specialty division to improve our operating effectiveness and improve our capabilities.

As mentioned before, we have added paperless medical record technology to our locations to improve productivity and enhance customer service levels.

And finally, we continue to assess our operating processes to ensure we are taking steps to operate each location at the highest level of efficiency.

As such we have launched a formal business process improvement program to achieve our goals in this specific area.

I will now turn the call over to Paul for the financial highlights.

Good morning.

For the fourth quarter revenue was $144 million, a 28% increase from the $113 million reported in the fourth quarter of 2004.

Overall same-store growth was 9% for the fourth quarter, net income increased 26% to $6.7 million or $0.20 per share as compared to $5.3 million or $0.16 per share for the comparable period last year.

For the 12 months ended December 31, 2005 revenue increased 22% to $506 million; net income was $22.7 million or $0.67 per diluted share, a 20% increase from the $18.9 million or $0.58 per diluted share in 2004.

Included in our fourth-quarter earnings is a net $0.02 gain detailed as follows -- a $3 million or $0.05 per share gain related to our Fort Myers, Florida franchise agreement resulting from our acquisition of the franchise.

This gain was offset by $2 million or $0.03 per diluted share of expenses primarily associated with the transition costs of our acquired home health agency in Portland, Oregon; professional fees associated with tax restructuring initiatives and acquisitions not completed; and the impact of business interruption in our Miramar, Florida facility due to hurricane Wilma.

Overall our earnings per share for 2005 of $0.67 includes $0.08 per share in net gains related to franchise acquisitions during the year and a large franchise termination settlement.

Consistent with the Company's dividend policy, the Board of Directors declared a dividend of $0.02 per share for the fourth quarter of 2005.

The dividend is payable on March 24, 2006 to shareholders of record as of March 10, 2006.

Our growth remains very balanced across our therapy portfolio.

With respect to our specialty pharmacy services same-store growth was 9% for the fourth quarter; however, the Blue Cross Blue Shield of Florida contract represents a significant portion of our specialty sales.

This contract is growing slowly due to the mature nature of the contract and the fact that we are more dependent on the plan's enrollment levels as compared to the underlying growth dynamics of the specialty market.

Outside the Blue Cross contract our specialty services grew at 13% on a same-store basis.

We continue to realize particularly strong gains in RSV or Synagis to asthma, arthritis, hemophilia, IVIG and arthritis therapies.

We also realized solid growth for home infusion services which increased organically by 9% for the fourth quarter.

This growth continues to be driven by sales and marketing initiatives targeting managed care organizations as well as the local market referral sources.

Our growth continues to also be very balanced across our therapy portfolio.

Other revenue was $6.1 million for the fourth quarter, the increase from last year was primarily due to the $3 million franchise termination fee resulting from our acquisition of Fort Myers.

We're very pleased with the launch of our joint ventures in Portland, Oregon and Columbus, Ohio.

However, while we have management agreements in place to guide the operations of these ventures, the 50-50 ownership requires us to account for them under the equity method with our share of the profitability included in other income and the overall financial results not consolidated into our financial statements.

In addition, we did acquire a home health agency as part of the Portland joint venture transaction.

We realized transition losses with this business and are exploring strategic alternatives for this operation.

We do not expect any impact to our joint venture as a result.

We're also pleased with our progress on startups.

We were operational during the fourth quarter in all our target locations.

While we expect these operations to positively impact earnings for 2006, we do expect to incur some startup losses early in the year.

Overall gross profit for the fourth quarter increased to 29.7% compared to 27.8% for the prior year quarter.

This increase is due to the franchise termination revenue as well as the higher mix of infusion services which increased to 39.5% of revenue as compared to 36.8 for the fourth quarter of last year primarily as a result of the acquisitions completed during 2005.

Within our service line infusion services gross profit increased slightly to 43.9% for the fourth quarter compared to 43.5% for the prior year.

Specialty pharmacy services gross profit declined to 14.5 for the fourth quarter compared to 15.8 for the quarter ended December 31, '05.

This decline in specialty gross profit is primarily due to a combination of reduced margins for IVIG therapy and a higher mix of Synagis which has a lower margin than the composite margin offset by a favorable mix towards higher margin specialty therapies resulting from our 2005 acquisition.

As we have discussed throughout 2005, while we have realized strong growth from IVIG, its rising cost impacted earnings by approximately $0.13 for the year compared to our original expectations.

We expect the IVIG margins to remain stable for 2006 at current levels.

The SG&A increased to 19.4% of revenues compared to 17.8 in the prior year quarter as a result of the shift in mix towards our infusion services which requires greater infrastructure as well as corporate investments to effectively support our strategic initiatives.

In addition, SG&A was also impacted by the tax restructuring expenses.

These expenses were incurred to implement a more efficient tax structure which is expected to lower our effective tax rate for 2006 by 1%.

Our balance sheet remains very strong; we've utilized 55 million during 2005 to fund acquisition activities and ended the fourth quarter with $49 million of cash on hand and short-term investments to fund future growth.

Operating cash flow for the quarter was negative $3 million due to the working capital requirements associated with the start of the Synagis season and of our Las Vegas acquisition.

Finally, days sales outstanding were 59 days at the end of the quarter, an increase of four days from December 31, '04.

This increase in DSOs is primarily due to the shift in revenues towards infusion which averages a longer collection cycle.

For 2006 we expect revenues to range from $580 million to $610 million and earnings per diluted share to range from $0.70 to $0.76.

These estimates exclude the implementation of stock option expensing as required by FAS 123R.

On January 1, 2006 Option Care adopted this new accounting standard that requires the Company to recognize expense associated with share-based compensation arrangements including stock options.

In the aggregate the Company expects the 2006 pretax impact to be approximately $2.8 million or $0.05 per share net of tax.

This expense will be reflected in SG&A.

Now I'd like to ask the operator to open the call to questions.

(OPERATOR INSTRUCTIONS).

Art Henderson, Jefferies & Co.

Good morning.

Hello?

(OPERATOR INSTRUCTIONS)

We lost a questioner, operator.

Art Henderson, Jefferies & Co.

Sorry about that.

Good morning.

Relative to what you were paying for IVIG before 2005 before the spike, how much more are you paying for it now just kind of on a percentage basis increase relative to where you were before?

We're paying approximately 50% more.

And you've locked in -- Rick, did I hear you say you locked in 100% of your inventory this year?

For the bulk of the year we have contractually locked in our inventory and our pricing levels based on our current uses today.

And how much of your total revenue comes from IVIG?

Our total revenue for the year was around 8%.

Okay, total revenue 8%.

And as far as your guidance is concerned, can you kind of give us what your gross margin and EBITDA margin assumptions are there?

I'd expect overall gross margins to actually increase slightly from our actual result in 2005, Art.

And the particular driver there is really just the increasing mix towards our infusion business as we get a full year effect of all the acquisitions that we completed in 2005.

Okay.

From an EBITDA perspective I'd actually expect to see -- from a guidance perspective a reduction in EBITDA margin.

And the particular driver of that is just we're not assuming any franchise-related gains which are included in '05.

Okay, so as far as how to think about your SG&A for the year, should it be basically taking the fourth quarter and annualizing it out?

Is that kind of --?

In contrast to the gross profit margin, which we would on a composite basis expect to go up, SG&A also goes up because of that increasing mix of our infusion business on a year-over-year basis.

Okay.

And then we'll also see some impact to that as it relates to FAS 123R expenses coming through.

Okay.

And then lastly, you've talked about acquisitions of both franchises and independent pharmacies and I'm wondering -- you talked about having 50 million.

Do you have some idea of what you're thinking about spending this year in terms of acquisitions?

Sure, we're obviously very active in acquisitions.

If you look at 2005 we're completing on average a couple of transactions a quarter and they are a pipeline of both franchises and independents as Raj had mentioned.

You know, our pipeline is very attractive.

We expect to continue.

I don't see anything materially changing the pace that we've been running.

Now we may do less, we may do more, but overall I feel pretty confident with -- that our pace will continue at the levels that we've seen in '05.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS) Greg Haddad, First Analysis.

With respect to your specialty revenue, the significant growth you achieved in Synagis, is that something you expect to continue during the March quarter of 2006?

We would expect there would be no change in the direction that the peak of the season comes during the first quarter of the calendar year.

So we would clearly expect that trend to continue from past seasons.

Good, thank you.

Following from that, it appears that the specialty revenue excluding Synagis during the December quarter was potentially down slightly or flat versus the September 2005 quarter.

Are there any reasons or factors causing somewhat of a slowdown with respect to your specialty revenue growth ex-Synagis?

We were impacted some by the hurricane destruction in Florida, which has higher revenue amount associated to it, but low amount in terms of profitability.

That would be really the primary driver.

The growth also, the 70% growth that Raj shared, includes acquisitions.

So the same-store growth as I mentioned was 9% for our specialty business and 13% outside of the Blue Cross of Florida contract.

Good, thank you.

With respect to the $3 million fee associated with the acquisition of the Fort Myers franchise, is that a termination fee that is similar to termination fees you booked in other acquisitions earlier this year?

It is.

It relates to the accounting pronouncement that requires us on an acquisition with a pre-existing business relationship, that we have to account for those transactions separately.

So we will.

As we continue to do acquisitions of franchises in the future, to the extent that they have terms remaining on their franchise agreement, we will see additional gains moving forward.

But again, we are very clearly disclosing those gains.

Right, but in prior quarters it didn't appear that you treated them as onetime items as you have this quarter, this termination fee.

Is there something that you're thinking about differently in that respect, or a different perspective now?

I wouldn't call them onetime, but in reviewing the year we had a gain associated with our St. Cloud franchise.

We did have a large termination outside of settlement, outside of an acquisition, with a franchisee that we had relationship issues with, and that happened in the second quarter which we discussed.

Then we had another one with Las Vegas.

So there has been no really change to the treatment of these.

Okay, thank you.

One last question, on your guidance that you mentioned that the guidance does not include termination fees, does it include any new acquisitions in 2006 or just the impact of 2005 acquisitions that will roll into 2006?

It includes both.

It includes the acquisitions that we have done in 2005, and then in some level of acquisition activity that is going to happen in the near future, the acquisitions that we are currently actively working on are included in it, but not -- significant acquisitions are not factored in.

Thank you very much.

(technical difficulty) Avondale Partners.

Good morning.

Can you hear me?

Yes.

What was the other revenue that was in addition to that termination agreement?

Is the profit margin on the remaining other revenue nearly 100% as it is in those terminations?

In terms of other revenue, we have royalties, we have some revenues associated with our software subsidiary which we did sell during the fourth quarter, and then the revenue associated with the franchise termination.

So there was nothing unusual in there, outside of the franchise termination.

Given that the software sale occurred, should we expect other revenues aside from any of these unusual items to be relatively small going forward, Paul?

Yes.

Okay.

Then it looked like the tax rate was down a little bit.

Was there anything unusual going on there?

No, the tax rate, probably the most significant thing is impacted by our tax-exempt investments.

So it just depends on interest rates and the level of tax-exempt investments that we have.

We do expect as I talked about in my script, we did implement some tax restructuring initiatives, actually accelerated them during the fourth quarter to get them done before the year.

We expect that actually to lower our tax rate by 1% to approximately 37% in '06.

That is good.

Then are you seeing anything different as it relates to the government, as it relates to home infusion and any willingness to make adjustments relative to the Medicare program, particularly -- obviously on the service fees?

Actually, at this point, there is no change that has occurred.

But as we go through the implementation of Part D, I think the conclusion would be that the services that we provide, it's not just the pharmaceutical distribution.

It comes with a package deal along with the service, and I think that real addition is going to come because there is some level of disruption in services, because obviously we can't bill for two Medicare or two (indiscernible) agents; we cannot bill for the services.

So, Raj, do you think there is a possibility you could see some type of service fee in Medicare during 2006?

We do get paid the service fee from the state Medicaid people who are dual eligible.

We are getting paid if you're billing the PDPs for the drug, what we're billing for services to directly to Medicare.

But in the event it is a straight Medicare patient, unfortunately we have to bill the patient for those services.

I'm not saying that Medicare will make a change or mandate a change, but I think give it some time.

I think things could change.

Perhaps a greater recognition today that the current approach is sub-optimal?

That is correct.

That is good.

Congratulations, that is great.

Thank you very much.

John Ransom, Raymond James.

Could you talk about your expectations for bad debt expense in '06?

Do you think it'll be higher with the mix shift toward infusion?

Thanks.

For '06, I would expect it to be around 2% overall.

That is actually fairly close to where we were in the fourth quarter.

We do see a push-up in that for a couple reasons.

One, the large increase in Synagis revenue which tends to be reserved at the 2% rate.

And also with some of our acquisition, we take more of a conservative bad debt position early on, integrating the business to make sure that we aren't surprised by any exposures.

So I would expect moving forward around 2%.

Secondly, this is something we talked about last quarter, but we are seeing the PBMs with pretty explosive growth in specialty, and you guys are a little bit lighter.

Do you feel like there is some structural marketshare shift issues out there that are outside the realm of your ability to influence?

I think some of the steps PBMs took a couple years ago has impacted that.

I think that as I mentioned in my script, we're seeing some opportunities where as a result of the consolidation, we are being invited into -- present to be part of the panel, because the parties have combined and the plan wants some competition in their panels and some alternative sources of service.

So I think 2006 should present, we think, some opportunity for some new relationships and some new business in the specialty area.

There is opportunity to work with some of the PBMs that don't have special capability.

Right.

Are you seeing anything out there in the pipeline that has got you particularly excited for the next 18 months?

There is the potential for Tysabri to make a comeback, and I think that would be -- we are keeping our fingers crossed.

I would say that's the one drug that is making us more (indiscernible).

Okay, thanks a lot.

Ricky Goldwasser with UBS.

Good morning.

A few follow-up questions.

First, on IVIG margins, I noted you talked about the fact that the environment has stabilized.

Just if you can give us some more color on the margin side.

Are margins going back to where they were at the end of '04, or are margins going to be in line with what you have seen at the end of '05, but they are just not further deteriorating?

Sure, Ricky.

Our expectation is that margins don't go back to where they were in 2004.

We think that this market has grown substantially and has consolidated with, for example, with the Accredo/Medco combination.

Any improvement on the supply side, due to the -- on the manufacturer's side of the equation?

Any improvement in pricing that we do get we think is going to be very quickly reflected on the revenue side.

So I wouldn't expect any improvement back to 2004.

I think we are at a stable base case.

Then moving on to your comments on the Part D, the question there is when you build your '06 guidance, are you factoring in any impact on SG&A as a result of Part D?

Also on the DSO side, you talked about what could drive DSOs up next year.

You mentioned Synagis, an acquisition.

Are you also factoring in additional bad debt expense from that Medicare population, the patients that you're trying to collect from?

No.

You bill electronically the claims for Part D (indiscernible) their claims are billed.

So you expect to get your monies faster with those claims.

We have not factored in any increase in SG&A or bad debt with the business.

In the duly eligibles, it is pretty consistent to our previous experience in working with those patients at the state level, except we're now just splitting the billing for the drug and the services between the state and the PDP.

On the patients' side, we expect a very, very small impact of actually patients willing to pay what can be very large expenditures for our services, which goes back to we think some of the longer-term dynamics that could possibly affect us as potentially this benefit doesn't become realized for the straight Medicare population.

And you mentioned that so far your experience has been positive on the dual eligibles, with Medicaid actually stepping up and paying the services share?

Yes, that's correct.

We did see some disruption in January, which was very public on the retail side of just the eligibility issues, but that fairly cleared up by the beginning of February.

Well, there's eligibility issues that we saw, then we also saw there were drugs that we provide under home infusion were not in the formularies.

So there is a process in place, a grievance process, where you go and get an approval.

And to have that drug put into formulary is at the physician's request, so that takes time.

So those are the kinds of things that we were seeing in terms of disruption.

As I said before, every time you implement a program like this, it's not going to be a smooth ride.

There are going to be challenges, but I'm hoping that in the next five or six months, I think things will get better.

Okay.

Then lastly on the acquisition front, you mentioned that you have factored into guidance acquisitions that you expect to close in the near-term.

Shortly, yes.

Can you quantify how many acquisitions are factored into guidance, and (indiscernible) understand.

Just a handful, Ricky.

These are not going to be very significant in nature.

Since they were in the pipeline and we are in final stages of completing those transactions, we had to put those numbers in.

Okay, thank you.

Follow-up question from Art Henderson, Jefferies & Co.

On the specialty pharmacy side, you talked about the growth being -- same-store growth being about 9%.

Is that a number we should use going forward, given your comments on the Blue Cross/Blue Shield sort of maturity level?

Yes, I would look at around that 10% level.

Around 10%.

Then not to beat a dead horse on the acquisitions that are in the guidance, but can you give me some sense as to how much dollar amount you're talking about here, Raj?

In terms of the acquisitions?

Yes.

Hard to quantify that right now.

These are just a handful of acquisitions.

Are they small, are they big, first-quarter acquisitions?

They could be towards the end of first quarter, yes.

End of first quarter.

Are they small or big ones?

They are small.

Independent pharmacies or franchises?

A combination of both.

A combo of both.

And then beyond that, you are not factoring in any --?

No.

No, okay.

Okay, all right.

Thanks.

Greg Haddad, First Analysis.

Just a couple of follow-ups.

With respect to -- you have talked about Medicare Part D, but with respect to Medicare Advantage there has been obviously some significant growth in enrollment and plans.

Is that having any meaningful impact on your business at this point?

Not at the moment.

Do you expect to see more development in that respect?

I think so.

I think we are now actively marketing our capabilities to such plans, but I think you need to give it some time in terms of just the whole education part of it would be to the Medicare beneficiaries.

Thank you.

Late last year, I believe you established a joint venture in India doing some back-office outsourcing.

Can you provide us with some perspective on how that is going and how you see that developing?

Sure, this is an initiative that we entered into as a joint venture with a large India-based company.

Our objective here is to try and look at how we can leverage offshore resources to improve some of our core operations, in particular, for example, our reimbursement processing.

We launched it with a couple of pilot sites towards the later part of the third quarter and are now expanding it to some multiple locations.

This is a process, Greg, that we are in a learning mode and we are understanding how to really impact the benefit or these resources to support our branch operations and help them be more (indiscernible) and help support growth.

So you have to look at this joint venture as a backup unit for our billing and reimbursement resources that exist here, so that we can have a 24/7 operation.

As Rick mentioned, we have got to look at how do we do things differently and more efficiently.

This is, I think, an example of some of the initiatives that we are starting to enter into.

Specifically, it will be more feasible as we continue to roll out our Web-based platform.

Greg, I don't know if we have mentioned -- most of the big payors are doing the same, doing the reverse.

Basically, they're doing the claims processing option.

Great, thank you.

One last brief one.

In terms of the $2 million of expenses you described hitting the quarter, were those primarily in SG&A expense or all in SG&A expense, or some of that hit cost of revenue?

Some of it hit cost of revenue.

Great, thank you.

David MacDonald, SunTrust.

A couple of questions.

First of all, you mentioned kind of like some expanded opportunities in the managed care arena.

You mentioned UnitedHealth, Aetna, some of the Blues plans.

Can you give us some sense, are those expanded relationships or renegotiations that kind of start January 1 of '06, or just some color there?

We've had national agreements with both those entities we've mentioned, United and Aetna.

We have taken some steps to move ourselves into a preferred position in terms of strengthening the relationship.

So we have seen not a major increase but a noticeable increase in referral activity, just given what we have done on the relationship side.

We had a national agreement with Aetna prior, but we needed to do some things in different markets to ensure that that agreement was being followed before we could get all the pull-through necessary based on the understanding and the structure of that relationship.

So, essentially, that is something that we look to drive more revenue for us and more opportunity in 2006.

Rick, when you look at where the referrals are coming, are the bulk of those on the infusion side?

It is pretty much -- those specific areas are the infusion side.

We have opportunities -- we are seeing some specialty drugs come through, those agreements as well, at the local level.

And then we have identified some opportunities to work -- increase our specialty presence and pull through with both organizations as well, in terms of what we have done over the past year with respect to the contracting.

On the Blues organization, we've seen increased opportunity to strengthen our relationships there and see some opportunity to see some specialty drugs for a number of the Blues organizations that we did some work with the second half of last year.

Raj, just a follow-up on Part D. I know when we were checking down in Washington, some of the issues originally trying to implement the benefit was difficulty getting information out of the hospitals to do an appropriate cost benefit analysis.

What about that potentially changes, or is it just a case where the government needs to see Part D for six months or so to get a sense of where the costs are relative to what it could be in the home setting, or any color you got there?

Home infusion sort of is a proven business model to managed care organizations.

They use it more effectively than the government does, so anecdotally I can tell you, we do save money.

You don't really have to pay for room and board charges or skilled nursing facility charges when you are at home, and the therapy that we provide can safely be administered at home.

Yes, it was hard to ascertain or get the data in terms of what CMS needed, but it is an established fact; we are doing business with hundreds of managed care organizations.

Raj, I know at the beginning of '05, I think there were 12 key franchises that were generating probably 60 to 70% of the franchise network EBITDA.

How many of those have been bought?

Is that number five have been bought, and there's maybe another seven still out there, or give us some sense there?

Four.

On the IVIG contracting, it sounds like all of your product is now contracted directly.

Is that contract negotiated on January 1 so if incremental product comes to the market during '06, any type of cost of goods sold improvement would be more of an '07 event?

Late 2005 agreements, some were multiyear, and so depending on production capacity of the different manufacturers, we would hope to see continued stabilization throughout 2006.

And then in 2007, we would -- right now, it is too early to project.

I think you have seen the vagaries as to what happens on the production side, can impact the market.

And if organizations need to start chasing plasma, then you can also see an impact that's not necessarily foreseeable until it comes to(indiscernible).

So I think for right now in 2006, our view is that we look to be stable with what we have and look for opportunities to improve that throughout the year.

I guess just last question, Raj.

Express ends up buying priority, and they have got an infusion capability, and Corum has added some folks and it sounds like are trying to get it going there.

Have you guys seen any real change in the competitive environment at all?

Is there anyone out there competing for acquisitions, or are you guys still the only game in town other than the local mom-and-pops?

Is that still your biggest competitor out there?

Yes, but there is some private equity money chasing acquisitions, and we see some competition from big retail giants like Walgreens trying to enter the space with acquisitions.

Okay, thank you.

Jeff Allen with Silvercrest Asset Management.

Good morning.

Paul, could you please just tell us the bad debt allowance on the balance sheet?

6.1 million.

Also on the DSOs, you said that the increase in DSOs is due to the shift towards infusion, which I guess in turn is really due to the acquisitions that you did in the middle of last year.

So I was just wondering if you could comment on sort of the same-store DSOs?

Sure.

I mean, first of all, on the infusion side, the shift in mix towards -- as a result of the acquisition is really just increasing the level of more major medical claims that we're filing, versus through our Ann Arbor and our Miramar facility, we tend to bill more through a pharmacy benefit and have a very quick turnaround on those claims.

So as that mix shifts more towards that local major medical, we will see an upward trend.

And DSOs on that side of the business could be anywhere, depending on the location and the payor mix, could be anywhere from 60 to 80 days.

So it is a higher on average DSO.

In terms of acquisitions, the only one that I mentioned in terms of our fourth-quarter results was our Las Vegas acquisition, which actually did not include the purchase of AR.

So we are funding the working capital for that during the fourth quarter, which had a negative effect, obviously, on our operating cash flow.

Is it possible to comment on the same-store DSOs?

Our same-store DSOs, we haven't seen any significant change as a result of the acquisitions.

Okay, thanks.

Anne Barlow with Sterne, Agee.

Good morning.

Just a couple of questions.

Going back to guidance, I'm assuming you're not including the reintroduction of Tysabri at this point.

No.

Any idea as to what you guys think the impact would be as far as overall patient volume and revenues, that type of thing?

Related to Tysabri?

Yes.

I think it's too early to call.

I think really can't get out of the gate until they receive FDA clearance again, and so we will have to see once it gets back on the market what that impact could be.

But you guys are ready more or less to handle it?

I mean, you've taken care of the internal needs if it comes back on the market?

We're working on it.

Just kind of go back and give us an update on the joint ventures.

I know you got two up and running this past year.

Any plans for additional ones this year?

And I know you have got the four start-ups coming online looks like in the first quarter.

Any other plans for those the rest of the year?

Sure, in terms of the update on the joint ventures, we are really pleased with the two that we have launched.

As we talked about on our last call, I view these as our two pilot facilities.

We're really cutting our teeth on how to build and generate the value in these relationships, and so far we're off to a really good start.

These are not consolidated.

We are really, Anne, right on the line of either consolidating or not.

While they are 50-50 joint ventures, we do control them through a management agreement.

So as we look forward into next year, we are working on additional joint ventures, which we expect to complete additional joint ventures.

They're not included in our guidance, and frankly the impact in the first year of operations I would view as very minimal because of the equity share part of that strategy.

There will be more of, again, kind of startups like we have in other market we are doing by ourselves.

So there is a good possibility of aligning with the hospital system that -- you know, we don't have local presence.

We're just going to do a scratch chart and build it up from ground zero.

Okay.

What about start-ups?

Start-ups, they are all functional and operational in the first quarter.

I mean, are you looking at any others in the back part of the year?

Not at the moment, no.

I think we wanted to get into some markets that we didn't have presence in, and instead of investing large amount of capital, we looked at these markets where I think we can quickly jump start the business.

So at this point, we have no other plans.

Great, thanks.

Brooks O'Neil, Avondale Partners.

I just wanted to follow up on Anne's questions on Tysabri.

Have they said anything in particular to you that has given you the confidence to be investing money in anticipation of them coming back to the market with that product?

No.

I mean, we are not investing significant dollars.

We basically did a lot of work on the first launch of the drug and prepared ourselves, and I think we are just reading the same news reports you probably are.

So we are anticipating that we should be prepared, our network should be prepared, and just updating our clinical staff again in terms of the drug and our field.

So they can only tell us as much as they can tell us, and so we just want to be ready.

Okay, thanks a lot.

Mitra Ramgopal, Sidoti.

A couple questions, guys.

In terms of your existing product lines on both home infusion and specialty pharma, ex-Synagis do you see any meaningful shift within?

No.

With regards to IVIG, any other product lines that you are concerned could have pricing impact, not necessarily the same magnitude?

Nothing that we are seeing, Mitra.

So far, we are expecting more of a stable margin picture through '06.

Pretty much across the board.

Yes.

Finally, I think you had mentioned acquisitions, but added about $0.08 to '05 numbers; is that correct?

No, actually I think that was the net effect of the franchise-related gains.

Okay, so if we X that out, then we get the true number?

That is correct.

Finally, in terms of the stock options expense, the $0.05, that is pretty similar to what we would see in '05?

That's correct.

Okay, thanks.

As there are no further questions in the queue, I'd like to turn the presentation back to Mr. Rai for closing remarks.

Thank you for joining our call.

We look forward to our next call, and thanks for all your patience and support.

Ladies and gentlemen, thank you for your participation in the conference.

This concludes the presentation and you may now disconnect.

Have a good day.