沃博聯公司 (WBA) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your second quarter 2006 Option Care earnings conference call.

My name is Gina.

I'll be your conference coordinator today.

At this time, all lines are in a listen-only mode and towards the end of the conference call, we will take some questions. (OPERATOR INSTRUCTIONS).

At this time, I'll turn the call over to your host, Mr. Joe Bonaccorsi.

Please procedure, sir.

Good morning.

This is Joe Bonaccorsi, General Counsel and Secretary for Option Care.

Thank you for joining our second quarter 2006 conference call.

Also participating on the call are Raj Rai, our President and CEO, and Paul Mastrapa, our Chief Financial Officer.

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

If you have not received it, please call [LaKeisha Carrillo] at 847-229-7731 and she will promptly faxed it to you.

In keeping with SEC Reg FD guidelines, this call may also be accessed through by webcast through Option Care's Web site 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 purposes of the 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, 2005, which is on file with the SEC.

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

Option Care specifically disclaims any obligation to do so.

I will now turn the call over to Raj for his comments.

Thank you, Joe.

Good morning everyone.

As announced in the press release issued this morning, we reported a record $158 million in revenues for the second quarter, a 32% growth from the same quarter in 2005.

Our results reflect our ability to successfully mitigate the loss of Synagis revenue, with higher organic growth from home infusion and specialty pharmacy services, coupled with acquisitions completed this year.

As we discussed in our first quarter conference call, we saw a turnaround in our home infusion revenues in the second quarter, which were lower than expected in the first quarter due to some disruption cause with the implementation of Part D, especially with the dual eligibles.

Let me now give you an update on Blue Cross/Blue Shield of Michigan contract.

As we announced earlier, we have secured an inclusive agreement with Blue Cross/Blue Shield and Blue Cross network of Michigan to provide mail-order specialty pharmacy services to its 4.7 million members in Michigan.

In addition, we will distribute specialty medications to physicians on an optional basis, increase our home infusion business, as well as give us an opportunity to bring patients to our ambulatory infusion centers.

This is a great opportunity for our organization as it validates our model of providing pharmaceutical care to patients at home or in other alternate site settings, such as physician offices or ambulatory infusion center, in addition to the cross-sell that exists between home infusion and specialty pharmacy services.

As you may recall, we have a similar relationship with Blue Cross/Blue Shield of Florida.

We have already begun the implementation of this contract and expect to go live by October 1 of this year.

This is a major undertaking for our organization and it will involve hiring new personnel, applying technology, and expanding our pharmacy infrastructure.

We expect to generate a minimum of $80 million in annual revenues from this contract.

We will provide all the services from our specialty distribution facility in Ann Arbor Michigan.

We are excited about this opportunity to work with a prestigious organization like Blue Cross/Blue Shield of Michigan.

We will provide you with more updates in our next conference call with the progress that we make.

We are continuing to see growing interest from other health plans that seek to embrace our model to achieve an optimum solution for specialty in home infusion pharmacy services.

We're confident in obtaining additional contracts in the near future.

As I had mentioned in our last conference call that there were a lot of concerns last year with increased competition in specialty pharmacy space with consolidation and entrance of bigger players like PBMs with scale and size.

On the contrary, we see this as an advantage as we are now being seen as a viable option, with independent and unique distribution platform.

I am also please report that we have been selected by Elan and Biogen Idec to distribute TYSABRI.

We're currently working on launching the drug.

We are the only national home infusion and specialty policy company to have been selected for the distribution.

In addition, we re-signed with MedImmune who distributes Synagis.

Last season was extremely successful, and we look forward to the next season.

We expect 15% to 20% growth for Synagis next season.

In the second quarter we completed the acquisition of one of our largest franchises in New Jersey.

This acquisition compliments the earlier acquisition Home Care in New York.

We have essentially integrated all acquisitions completed this year and the second quarter, as well.

We continue to build a robust acquisition pipeline and are currently evaluating potential targets.

With the departure of Rick Smith, I have assumed all day-to-day responsibilities.

Since that time, I have realigned the home infusion field operations into three areas.

Regional sales and operations.

This team will focus on day-to-day management of our home infusion pharmacy.

This team will have the responsibility to drive local physician, hospital and managed care pull-through sales.

In addition, the teams will be responsible for improving cash flow and clinical outcomes.

With the realignment, we have consolidated our regional structure from six regions to four.

The second team is going to focus on strategic operations.

This team will focus on process improvement, asset management, internal audit, troubleshooting, systems compliance, etc.

The third team will focus on startups.

And I'm pleased to report that with this focus, we have seen substantial progress in sales and profits from the start up in the second quarter.

We expect to be breakeven by the end of the third quarter.

I also wanted to inform you that last month we successfully divested out of two non-strategic and unprofitable home health businesses.

I'm pleased with the outcomes of the actions taken so far in the short period of time.

All these steps were taken to re-energize sales, to improve our profitability and increase the cash flow.

With a strong balance sheet and new managed care opportunities, I believe we are well positioned for growth in 2007 and beyond.

I will now turn the call over to Paul who will provide commentary on financial highlights for the quarter.

Thanks, Raj, and good morning.

We're pleased with our record revenue for the second quarter of $158 million, a 32% increase from $119 million reported in the second quarter of 2005.

This growth continues to be driven by our strong organic growth as well as the incremental sales resulting from our acquisition activities which we launched early last year.

Our organic growth of 12% for the second quarter included growth of 14% for specialty pharmacy services and 9% for home infusion.

We remain excited with our future organic growth opportunities, as well as our acquisition pipeline as we continue to build Option Care into an industry leader.

On a GAAP basis, net income from continuing operations increased 12% for the second quarter to $5.4 million, compared to $4.8 million for the second quarter of 2005.

For the six months ended June 30, 2006 revenue increased 30% to $313 million.

GAAP net income from continuing operations was $10.5 million, an 11% increase from $9.5 million in 2005.

The Board of Directors declared a dividend of $0.02 per share for the second quarter of 2006.

The dividend is payable on August 28, 2006 to stockholders of record as of August 14.

Our reported diluted earnings per share from continuing operations were $0.15 for the quarter ended June '06, compared to $0.14 for the comparable period last year.

Included in the second quarter of '06 results from continuing operations is a net $0.01 per share loss from special items detailed as follows.

A $1.2 million, or $0.02 per share gain related to franchise settlements resulting from our acquisition of the New Jersey franchise and the mutual termination of our franchise in Michigan.

This gain in the second quarter was offset by a 1.4, or $0.03 per diluted share of expenses related to facility consolidations as a result of our acquisition activities in New York and Chicago, legal fees, expenses related to an investment in asset tracking system, and the disposal of a home health operation in Phoenix.

In comparison the second quarter of 2005 included in net gain of $0.03 per diluted share primarily due to a large franchise termination settlement.

Prior to the impact of these special items for the second quarter of 2006 pretax income was $8.9 million, or $0.16 per diluted share, an increase 48% from $6 million, or $0.11 per diluted share for the prior year second quarter.

We are also pleased with our margins for the second quarter.

Overall gross profit of 29.2% was consistent with the prior year quarter.

However prior to the impact of our other revenue, which has very little direct cost, total gross profit increased 90 basis points to 27.6%, as compared to 26.7% for the prior year quarter.

This increase is due to a higher mix of home infusion revenues, as well as improved margins within our service lines.

Infusion services gross profit increased to 44.4% for the second quarter, compared to 43% for the prior year, primarily due to lower drug costs resulting from our purchasing initiatives and favorable therapy mix.

Specialty pharmacy services gross profit increased to 15.5% for the second quarter, compared to 15.2% for the second quarter ended June 30, '05.

This increase in specialty gross profit is primarily due to a favorable mix toward higher margin therapies, as well as the stabilization of IVIG margins on a comparative basis.

Selling, general and administrative expenses declined to 20.3% of revenues, compared to 20.4% in the prior year quarter.

This decline was in spite of the special items increasing SG&A during the second quarter and the start-up cost associated with the launch of four new facilities late last year.

While the start-ups improved from their first quarter results, they still impacted earnings by approximately $0.01 per diluted share for the second quarter.

We are on track however for the start-ups to break even by the end of the third quarter.

The provision for (indiscernible) accounts increased to 2.2% of revenues from 1.8% for the prior year.

This increase is primarily due to a shift in mix towards our local revenues, which are reserved at higher rates.

We are also pleased with our operating cash flow for the second quarter of $11.5 million.

We also invested $17.5 million in acquisition -- acquisition and ended the quarter with $19.4 million of cash and short-term investments on hand to fund future growth.

Days sales outstanding improved to 58 days at the end of the second quarter, a decrease of one day from the previous quarter.

Finally we completed the sale of the Portland Home Health Agency at the end of July and expect minimal impact from discontinued operations during the third quarter.

As we move into the third quarter and considering the seasonality of the infusion business and the lack of Synagis revenues, the Company expects diluted earnings per share from continuing operations of approximately $0.16 prior to the implementation costs of the Blue Cross/Blue Shield of Michigan contract, which are expected to range from $0.01 to $0.02 per diluted share for the third quarter.

These implementation costs relate to facility expansion, automation investments, consulting support for system enhancements and patient transfer, recruiting and training, cost equipment, and marketing materials.

Depending on the speed of implementation, we may see additional costs in the fourth quarter.

For the full year 2006, we are increasing revenue estimates to a range of $630 million to $640 million, as compared to previous estimates of $580 million to $610 million.

This increase is driven by better than expected sales of Synagis, incremental revenue associated with the Blue Cross/Blue Shield of Michigan contract, and the New Jersey acquisition completed during the second quarter.

We are also narrowing our diluted earnings per share from continuing operations to a range of $0.65 to $0.67.

This full-year '06 estimate includes the impact of Option expense and the implementation costs of the Blue Cross/Blue Shield of Michigan contract and excludes any additional acquisitions.

Now, I would like to ask the operator to open the call to questions.

(OPERATOR INSTRUCTIONS).

David MacDonald, SunTrust Robinson.

Raj, I don't know if you can answer this until the contract is implemented, but can you give us some sense of what the potential cross- selling opportunity could be with the infusion business with the Michigan contract and is also fair to think that we could see some acquisition activity or some start-ups in markets like Detroit, Flint, some of the bigger cities in the Michigan area?

And then I've got a couple of follow-ups.

Sure.

There is definitely a cross-sell opportunity because it's our understanding that Blue Cross wants the implemented specialty pharmacy (technical difficulty) will focus on the home infusion aspect of the business and the relationship that we already have with Blue Cross.

So I think it will be premature to say what we should expect from home infusion at this point, but we definitely have a dialogue going with Blue Cross for those services.

And as far as your other question on startup and acquisition, we have got pretty good coverage.

We are servicing the entire Detroit Metro area.

We have capability of providing services in the Grand Rapids area, Kalamazoo, so you know the key spots in Michigan are pretty well covered.

And then, Raj, is there any opportunity as you realign some of the field operations to knock outs some cost and some people?

Is that part of what the margin improvement that we're seeing and is there an opportunity to potentially to eliminate some more folks there?

We did some cost reduction, so I'm thinking back there is going to be in third quarter, but again it was not a huge cost reduction.

It was more of realignment and refocus, and we should see the impact of that for example in startups, where we would be a profit improvement and we may break even by the end of the third quarter.

And then the last question, I guess you know you guys talked about a little bit of better purchasing in terms of benefits.

As you guys continue to tack on some of these bigger contracts and get bigger just in terms of revenues and volumes, should we expect to see potentially some incremental purchasing benefits?

Well, you know a lot of drugs that we're going to provide under (technical difficulty) Michigan contract, but they are single (technical difficulty) so less opportunity there to see some improvement, but as we grow our infusion business, definitely we see on generics the possibility of improving our market.

And then, Paul, I was wondering if you could give us a sense, ballpark, what your expectations are for cash from operations for the year?

Cash flow from operations I'd expect to be somewhere around, depending on how fast the Blue Cross of Michigan contract grows, somewhere between $20 million to $25 million.

(technical difficulty) Piper Jaffray.

Just had a quick question on the Blue Cross/Blue Shield of Michigan.

I recall you mentioning in your opening remarks that there was going to be some hiring of more personnel in the facility to help with the implementation.

I guess when do you plan on hiring those if they are not hired already, and when do you plan on ramping those up?

Actually the process has begun, as we speak.

So we should see you know the addition of new personnel in mid to late August, so we are putting in to place for (indiscernible) people and getting them up to --

How many approximately do you see bringing on for that?

Based on what we see right now about 10 to 12 people and then ramping up in the fourth quarter.

And that would be in the Ann Arbor facility strictly?

That is correct.

One more follow.

I see you brought on a few -- I wanted to see how many managed care contracts you actually brought on this year and what the pipeline looked like for '07 and how many of those you expect to become official in '07.

Well, right now, you know I want to see if Blue Cross/Blue Shield of Michigan is the big contract that we signed.

And so we are currently in discussions about our health plans and we hope to see that.

We will get a few more before the end of the year.

Would you anticipate one, maybe two, at the most?

At least one.

And one more follow up.

On the facility consolidation, Paul, maybe you can give a little more clarification on, do you see a few more of these happening the remainder of the year or in the beginning of '07, and what you expect for that primarily.

We don't see anything else coming.

These specifically related to transactions we have done.

We bought, for example, the Chartwell transaction gave us overlap here in Chicago with existing facilities that we had, so we ended up consolidating our facilities into the best location here in Chicago and had a reserve for the write off of a lease due to that consolidation.

We also had a small facility in New York that we merged in with our Trinity acquisition, so it really related to those specific transactions.

If we do additional transactions in the future where there are consolidation opportunities, then we may see more of those in the future but nothing is planned.

You don't plan to do any just strictly based on cost saving; the past was primarily due to realignment than to clarify.

We will look at both.

We look acquisitions as a combination of expansion opportunities into new markets and, if we can strengthen a position in the local market and consolidate and pick up some cost structure, we will consider that as well.

And we have done both over the course of the last year and a half.

So we may see more of those.

Okay.

Great.

I will go back in queue.

Ricky Goldwasser, UBS.

A couple of questions.

Firstly, on your revenue guidance you have upped guidance by between $30 million to $50 million.

Is the -- was any percent of the additional revenue already accounted for to date and what will be realized in the second half of '06?

I'm not sure I understand your question, Ricky.

Can you clarify that?

The question is the $30 million to $50 million in additional revenues guidance, is this all second half of '06, or some of it was already realized in the first half of '06 and now you just have more confidence, given the additional -- the new contract and New Jersey acquisition?

I understand.

Some of it is in the second quarter as well as just our improved visibility as well as the Blue Cross contract.

Okay.

And then of the $80 million for the Blue Cross contract, is it a return run rate, or is this kind of your expectation for '07?

We are mandatory on the mail-order side of that contract so the $80 million relates to what we estimate being the volume on a mail-order business that will fairly rapidly come to us.

The upside opportunity will be as we continue to roll out additional parts of the program, including direct-to-physician office distribution, as well as other ambulatory treatment centers, etc.

So who should we model the $80 million as the run rate for the fourth quarter or for 1Q '07?

Right now I would suggest modeling the $80 million as '07.

We will be ramping up -- we'll focusing on our ramp-up in the fourth quarter on the mail-order transition and then as we get through that, the fourth quarter, we should have better clarity around what some of the revenue opportunities in '07 could look like and we will update guidance then.

And then on Synagis, and I know you're looking for 15% to 20% growth on Synagis for the next season, can you just remind us what was Synagis' growth last season?

I think it was extremely robust for historical levels.

We grew almost 70% for the season and, you know, that was -- we had a very strong Synagis season last year.

There are some -- the market is expanding in terms of distributors.

I believe Caremark is going to become a distributor again in the next season, but we feel very confident in the 15% to 20% rate, where we currently stand for next season.

And then just touching on IVIG pricing, I think you mentioned that you're seeing margin stabilization on year-over-year.

So can you just kind of comment kind of on a sequential environment?

Are you seeing stabilization or is it improving and then also just if you can touch on the Medicare reimbursement.

I know the Medicare reimbursement actually increased early in the quarter.

Are you seeing any kind of similar activity on the commercial side as well?

I consider -- I would characterize the IVIG market as continuing to be very stable for us, both from a pricing perspective with payers and from a cost perspective.

We have continued to get additional allocations to support our growth, but are very cautious in watching the market very closely to make sure that it remains stable and so far I've no change to the expectation.

In terms of the change to the Medicare fee schedule, that really doesn't affect us, Ricky.

That's more for the physician office.

Okay.

And that's not -- you don't expect to see that also spilling over to the commercial side?

At least not --

I would love to see it, but I don't expect it.

And just lastly on the additional allocation on IVIG, so the additional allocation that you still can -- the margin on that is kind of similar to the margin that you were able to obtain for the base business.

That's correct.

It's very stable.

I think as we go through the rest of year, kind of a quarterly basis, the comparative on the IVIG market is similar to what we saw in the second quarter are going to be consistent.

Brian Tanquilut, Jefferies.

I just want to touch on the margins.

Last quarter you mentioned that you sort of expected infusion margins to settle down at about 43.5% and this quarter we are in the 44% range.

So I was just wondering if you can give further details of that and maybe sort of a comment on where we should expect infusion margins to settle?

Sure.

You know we have had two very good quarters of infusion margin in the 44% to 43% range.

If I look back over the last five years, our infusion margins have been very stable at approximately 43%.

We did see some shift in -- some positive shift in mix due to our targeted sales initiatives in the second quarter.

That helped us, as well some purchasing opportunities that we leveraged as well.

So you know I think for the year, we're probably end up slightly higher, although I would be hesitant to say that, you know, due to potential natural shifts in mix in the infusion business that we're going to stay at the 44% range, but I do expect us to be for the year based on where we have been in the last couple of quarters, somewhere between 43.5% to 44%.

And also the factor for improvement margin which you know shift from quarter-to-quarter is based on the mix of acute versus more chronic patients in the infusion business.

Got you.

Now on the Blue Cross/Blue Shield Michigan contract, I was just wondering how big is the Synagis penetration in that contract?

Is Synagis a big drug for that book of business?

It's not.

It's not.

And then, Paul, just a quick question on the other revenue that was booked.

I was wondering what explains the sequential jump in other revenue because I was thinking that it should normally be declining when you are buying back your franchisees.

Sure.

That relates to the franchise gains that I talked about.

It was approximately, in terms of revenue, it was approximately 1.4 of revenue related to New Jersey, as well as we did have an actual cash termination fee related to one of our franchisees in Michigan.

So those are our non-recurring stock basically?

That's right.

And last question, where do think we should be looking -- in terms of the organic growth rate long-term, what should we be looking at now that you have posted a pretty solid organic growth rate to Q2, and Q1 was also solid because of Synagis.

I mean, long-term, what should we be looking for?

If I would look a little more short-term, I would expect us to be at around the 10% range during the third quarter.

For the fourth quarter, and I will exclude Michigan in these numbers, because obviously that is going to be a substantial amount of organic growth.

I would expect us to see an increase in our specialty growth rate with the launch of the Synagis season, again the 15% to 20% growth rate on Synagis, I think we will pull up sort of that average mix of sort of around 10% to 15% on our non-Synagis book of business.

Got you.

Thanks, guys.

Bill McKeever, Merrill Lynch.

I had a question on the TYSABRI contract.

As a distributor what sort of margins do think you'll get on that business?

Will it be higher or lower than what you have now?

It will be in the range of the margins for products like Synagis at the end of the day.

And can you give us an update on your joint ventures with hospitals, and have you thought about doing any joint ventures with large oncologist groups, given that they are sort of struggling under the new reimbursement of ASP plus 6%?

Well, I don't know if he can do joint ventures with physicians which I don't think would be legal because of the (indiscernible) issues, but we are focused on doing business with oncologist in terms of if they have an overflow of patients or they have business that they can't make money on, we can do chemotherapy in our ambulatory infusion suites or in the patient's home.

So we take on those patients.

And we have seen a steady growth in our chemotherapy business over the last year and a half.

As well as other joint ventures are concerned, we are focused on selling our capabilities to large academic institutes.

We have done two hospital JVs.

We have work in the pipeline right now.

In fact, we should see some activity from.

Gregg Haddad, First Analysis.

With respect to your guidance for the year, just doing the math on the quarters, your guidance seems to imply that the December quarter will result in EPS at the low-end sort of in the $0.20 to $0.21 range, which would be up fairly substantially from here.

Can you provide any perspective on what will drive that level of growth?

Sure.

First we are going to be hitting the third quarter with implementation costs of Michigan.

As of now, we expect those to be neutral in the fourth quarter.

Second is the fourth quarter is when we see a combination of two things.

The seasonal expansion of our infusion as well as non-Synagis specialty business, with our specific programs around, for example, Home for the Holidays, coupled with the launch of the Synagis season, which we expect to be very robust.

And then third, with the startups also getting back, getting on track to break even per our expectations and hopefully contributing in the fourth quarter, you know we feel comfortable that we will be in that range.

And then on the reimbursement environment, I think Amgen commented recently that it is seeing more commercial payers move to an ASP model versus AWP.

I think as much as 25% of the business, anyway.

Can you comment on whether you're seeing trends in that direction and potential implications, if any, that you see from that?

Well, we have seen some health plans, some Blue Cross health plans to move DSP, but when we go and contract with them, we try to equate it, balance it with what our reimbursement was under the average wholesale price so that we don't get a margin -- now I think where there is bigger movement is on the physician reimbursement side, and that is where Amgen was talking about in the conference call is the reimbursement to the physician changing rapidly on the [PST] scenario.

Thank you.

And finely on Medicare proposals for '07 reimbursement on home health whatnot, any positive, negative implications for you from that?

There is a new bill that was introduced recently, actually last month which purported to expand the coverage of home infusion and that is really by the implementation of Part D because there have been issues where a patient has not been -- a Medicare patient has not been able to access their therapy because of the constraints of either a retail pharmacy or a long-term care pharmacy to provide the PDP providing services.

So to tell you the confusion and the access issues that are driving the introduction of this new bill in the -- we're hopefully expanding the coverage under Part B which was always our stance, to begin with.

As an industry, the NHIA -- you know we believe that Medicare does have the ability to expand Part B coverage without legislative intervention.

I think the industry association, which we support, is trying to use legislative direction to help us get that expanded coverage of the home infusion under the Part B. And we believe that is the appropriate place for home infusion in a Medicare environment.

Mike MaGuire, FTN Midwest.

Just a couple of quick follow-ups, on the Michigan contract, can you guys just us some perspective on how competitive that RFP was and additionally in terms of the current pipeline, you know average size of the contract relative to Michigan, roughly the same, or was Michigan an outlier in terms of total potential revenues?

Michigan definitely isn't outlier in terms of potential because of the size and scope of -- the health line itself, the number of (indiscernible) in the state of Michigan from the RFP perspective, yes it was competitive but at the end of the day we wanted the contract because of the local residents in the Michigan, the relationship that we already had in terms of home infusion, but also the breadth and scope of our services that not only had specialty pharmacy, home infusion, and the ambulatory treatment center, so I think those are the key factors in my opinion.

It was not about just about pricing.

Sure.

And just again, on the RFP side, it sounds like perhaps there'd be some potentially maybe slightly smaller, but could be higher margin potentially, higher accretion out of those current deals.

Is that a fair way to look at it?

Yes.

And then just quickly on the specialty margins, this has already been asked, but just on a year-over-year basis, Paul, I mean you look at some incremental margin accretion and the specialty franchise -- I know IVIG is becoming old news here, but is there anything outside of the product portfolio that is helping that margin ramp year-over-year, and is that -- can we expect that going forward outside of the Synagis seasonality?

I would characterize the margin profile overall as stable.

And it really has to do more with a shift in mix that we are seeing on the specific products that we sell.

In particular with our acquisition activity, our acquisition activities include a portion of specialty business that is delivered at a local level that tends to be a higher margin than some of our other more centralized, centrally distributed specialty products.

So it is more a shift in mix.

We haven't seen -- the specialty market is very competitive.

I wouldn't expect to see any margin expansion on any specific therapy -- on the therapy level.

And then just finally, kind of a broad question, but with all the activities and the investments in acquisitions, obviously ramping up the Michigan contract, it would appear that going into '07 -- I know you can't talk specific numbers, but it would appear there would certainly be some incremental operating leverage when we get on the back half of some of these cost investments, looking at '07 relative to '06, and just kind of curious your thoughts there, if you can just make a comment or two in terms of SG&A leverage, etc.

Well I think your overall comment is right.

I mean our focus if I look back at the last year and a half, our focus has been very much on scaling the Company with acquisitions and joint ventures.

With some of the realignment that Raj spoke to, we are starting to focus our efforts as much on growth as on really looking at some process improvements.

And now with the increased size, we have got opportunities in many areas, from purchasing to -- it continues to be more competitive and drive down our cost of drugs, cutting our business horizontally, and looking at ways that we can be more efficient on things like asset tracking systems that we're implementing, procurement systems, human resource management, many, many areas that we are now starting to focus on.

And part of the realignment was to put a team in place to help really drive some of those changes.

So it is too early to talk about what that will mean, but that is a focus of ours that has started in -- I would say it is more the beginning part of this year that we will start seeing the benefit of in '07.

Mitra Ramgopal, of Sidoti.

Just a couple of quick questions.

In terms of the guidance you have provided $0.06 -- $0.07 what is the options expense impact?

Options expense I would expect to be about $0.04 to $0.05 for the year.

And secondly in terms of looking at the -- you mentioned evaluating a number of acquisition targets.

Are you planning on using the cash you have along with cash flow or are you prepared to sort of leverage the balance sheet further?

You know our focus right now is not on, I would say, on aggressive acquisitions you know -- and I'd expect with our organic cash flow in the third quarter of what we have.

We have enough to fund acquisition activities without accessing the facility.

Our shorter term focus is on launching the Michigan contract opportunity and if the right opportunity comes along, we will pull the trigger on it and we are evaluating certain opportunities.

That is if they would fit in that mid to smaller size.

Anne Barlow, Stern Agee Leach.

Most of my questions have been answered.

Just a couple of quick follow-ups.

You know I noticed the top end of the range got tightened by about $0.04 and I know $0.02 is implementation.

Any color on the rest of the tightening?

Well, I don't think so.

I mean some of the -- our range was larger at the start of the year as we weren't sure how fast acquisitions would kick in and organic growth rates, etc.

So I would say nothing specific.

It is just an improved visibility that we have currently towards the back half of the year.

And just quickly on the personnel front, I know, Raj, you have been doing double duty.

Is there any plan to expand senior management, replace Rick or are you going to continue in your role right now?

I expect to continue in the senior role, but as we see more opportunities with managed care, we would evaluate looking to bring some more people in.

Gregg Haddad, First Analysis.

I just had a couple of follow-ups.

On TYSABRI are you also doing infusion for TYSABRI or is it limited to position office distribution at this point?

It is going to be both, Gregg.

We have our ambulatory treatment center so we will have the credential to provide infusion in our facilities, so but then we will also have the opportunity to provide the drug and support --nursing support to physicians, so both ways.

And then on the expenses that you characterized in the -- as special other expenses, I think the $550,000 for the June quarter here and 200 odd some last year.

Can you provide any perspective on the ongoing nature of those types of expenses into the remainder of year?

Sure.

I wouldn't expect to see any of those kinds of expenses.

Breaking down at least the number of this year, it was about $150,000 of that $550,000 was related to the home health operation that we -- in Phoenix that we have discontinued.

We also -- about $20,000 was related to an asset tracking investment that actually we think in '07 is going to result in some operating leverage.

And then there was some unusual legal fees that we had in the quarter that we wouldn't expect to be recurring.

Dave McDonald, SunTrust.

Just wanted to follow-up on the House bill.

And I know right now there are four folks who are sponsoring that.

I guess two questions.

One, do you know if there are other folks who have kind of signed onto that since it was proposed and then also is there any chatter about a potential accompanying Senate bill and then can you guys just walk me through how it would go from you know the House and the Senate to implementation?

Dave, it's premature to comment on that. (indiscernible) so we will have to give it sometime.

I guess the question I have, Raj, is how do you guys foresee or how does NHIA foresee this potentially being done without any congressional interaction?

Well, I mean if you take a look at the people who sponsored the bill, obviously they are quite influential and so with said we hope to get more traction.

So they could go straight to CMS and CMS could act at that point?

That is really our hope.

(OPERATOR INSTRUCTIONS).

Operator, if there are no other questions, let me just thank everybody who were on the call today.

We had a good quarter and we look forward to speaking again in our next conference call.

Thank you for joining us.