沃博聯公司 (WBA) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2006 Option Care, Inc. earnings conference call.

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

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

We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

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

I would now like to turn the call over to Mr. Joe Bonaccorsi, Legal Counsel.

Please proceed, sir.

Good morning and thank you for joining our third-quarter 2006 conference call.

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

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

If you have not received it, please call Leticia Carrillo at 847-229-7731], and she will promptly fax a copy to you.

Please be advised in keeping with SEC Reg FD guidelines, this call may also 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 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 or 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 now turn the call over to Raj Rai to discuss the key highlights for the quarter.

Thank you, Joe, and good morning, everyone.

I will now discuss the key highlights for the quarter, and Paul will discuss our results in detail a little bit later in the call.

As announced in the press release we issued this morning, we reported $153 million in revenues for the second quarter, representing a 25% growth from the same quarter in 2005.

In the third quarter we saw strong growth trends across all markets we serve.

Our revenue increased despite the loss of Synagis revenue and fewer referrals during the summer months for home infusion services.

We expect to see the momentum carry over in the fourth quarter, where historically the business tends to pick up due to higher discharges from hospitals during the holiday season.

Our Synagis relaunch is off to a good start as well.

Early indications are pointing toward a 15% to 20% growth from the last season, in line with our earlier projections.

Some of the key operational highlights of the third quarter are as follows.

Realignment of our operations have resulted in improved operational efficiencies and increased opportunities for leverage.

We divested out of nonprofitable home health agencies.

Our four startups in Phoenix, Kansas City, Jacksonville and Orange County, in aggregate, are at breakeven levels.

We successfully launched the Phase I of our specialty pharmacy agreement with Blue Cross/Blue Shield of Michigan.

Let me now discuss the Blue Cross/Blue Shield of Michigan contract implementation in detail.

I'm pleased to announce that we went live in filling prescriptions for Blue Cross/Blue Shield of Michigan members on October 1.

This was the implementation of the first phase of our contract.

As discussed in the second quarter conference call, we are on track to generate $80 million in revenues in 2007 from this contract.

We expect to have fully implemented this phase by the end of this year.

Prior to going live, we made investments in expanding our infrastructure in the third quarter.

These investments include hiring and training of new personnel in customer service, compliance management and billing.

In addition, we installed a state-of-the-art telephone system to enhance our call center technology.

We expect to deploy a redundant data center by the end of this year in Green Bay, Wisconsin.

We are also in the process of expanding our distribution facility to automate the dispensing of oral solids.

This is due to the fact we have seen approvals of some biotech drugs that have oral formulations in the recent past and expect to see some more in the near future.

We also expect to see the automation completed sometime in the first quarter of 2007.

These investments, although essential for our contact implementation with Blue Cross, will pave the way to absorb new opportunities in the future.

We expect to begin implementing the second phase of this contract sometime in the first quarter of 2007, which would include statewide home infusion services, hemophilia, and ambulatory infusion centers.

We will keep you informed on the progress in our fourth-quarter conference call.

We have another contract opportunity that is expected to close sometime in the fourth quarter of this year.

We're in the final stages of negotiations with the health plan with over 2 million lives, and expect to go live on January 1 of 2007.

On the acquisitions front, we continue to build a robust pipeline and expect to close a transaction in this quarter.

With the good momentum from the current quarter and new business opportunities, we expect to have a strong fourth quarter, which will establish a solid foundation for 2007.

I would not like to discuss an important matter that has made headlines recently and has implications for the entire pharmacy services industry.

As most of you may know, publisher of average wholesale prices, First DataBank, announced that it has agreed to a tentative settlement with plaintiffs in a lawsuit that alleges the Company colluded with a prescription drug wholesaler to artificially raise the average wholesale prices of prescription drugs to increase profits.

First DataBank is one of the publishers of AWPs, which are used by insurers and state Medicaid programs to determine how much they reimburse pharmacies who are dispensing drugs for their members and beneficiaries.

Under the proposed settlement terms, which is not final and requires approval by a federal court judge, First DataBank has agreed, among other things, to reduce the AWP's (indiscernible) drugs by 5 percentage points.

We understand that any approved settlement requiring such changes will not become effective until the second or third quarter of 2007.

Let me now give you some facts about our pricing methodology.

We predominantly use average wholesale prices as a benchmark to negotiate pricing on a wide variety of pharmaceuticals.

The sources of AWPs are as follows.

First, First DataBank; second, Red Book; third, [Meditrend]; and finally, proprietary AWPs, which may be a blend of various published AWPs.

Furthermore, we have contracts that are based on maximum allowed cost, or MAC, list prices, and to a lesser degree, average selling price, or ASP.

How do these changes impact us?

First, we see a little impact with the government bills that represent about 20% of our total revenues.

Medicare uses proprietary AWPs, which are frozen to 2004 rates.

The majority of the state Medicaids use either MAC pricing or a unit cost of a given pharmaceutical.

There are a handful of state Medicaids that use First DataBank as a source of AWPs.

The remaining 80% of our revenues are derived from contracts with health insurers, PPAs, worker compensation companies, self-insured companies, acute care facilities, long-term care facilities and patients.

The pricing methodology ranges from a discount of AWP from a variety of sources, ASP, MAC and/or a discount of a predetermined list price.

A small portion of such contracts are tied directly to First DataBank.

All such contracts have been negotiated in good-faith terms and have a provision of an out clause, typically with a notice period that ranges between 30 to 120 days.

In many instances, the contracts are silent on the source of AWPs, giving us the ability to choose a source other than First DataBank.

Option Care has had a practice of negotiating into its third-party payer contracts provisions allowing automatic adjustments to pricing methodology, and in others, the right to renegotiate pricing in order to ensure that our pricing stays in line with the original intent and pricing originally negotiated.

As an example, we were successful in the recent past in renegotiating pricing in all our contracts as a result of HIPAA, and subsequently unbundling of the nursing charges as they pertain to (indiscernible).

In summary, we expect minimal impact from any First DataBank AWP changes.

However, we are in the process of identifying any contracts that may be impacted by such changes.

We have plans in place to negotiate language and pricing definitions that will eliminate the potential impact of (indiscernible) reduction and overall profitability from such contracts.

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

Paul?

Thanks, Raj, and good morning.

Where pleased with our record revenue for the third quarter of $153 million, a 25% increase from the $122 million reported in the third 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 10% for the third quarter included growth of 10% for specialty pharmacy services and 9% for home infusion.

We remain excited about our future organic growth opportunities resulting from positive industry fundamentals, new contracts and acquisitions, which we believe will transform Option Care into an industry leader.

On a GAAP basis, net income from continuing operations increased 6% for the third quarter to $5.2 million, or $0.15 per diluted share, compared to $4.9 million, or $0.14 per diluted share, for the third quarter of 2005.

As highlighted during our second-quarter call, our third-quarter results include $0.01 per diluted share in costs associated with the implementation of the Blue Cross/Blue Shield of Michigan contract.

Also included in the third quarter of 2005 results was a franchise settlement gain of $0.01 per share due to the acquisition of our Las Vegas, Nevada franchise.

Prior to the impact of these special items, diluted earnings per share was $0.16 for the third quarter of 2006, an increase of 23% from $0.13 per diluted share for the prior-year period.

For the nine months ended September 30, 2006, revenue increased 28% to $465 million.

GAAP net income from containing operations was $15.8 million, or $0.45 per diluted share, a 10% increase from the $14.4 million, or $0.42 per diluted share, in 2005.

The Board of Directors declared a dividend of $0.02 per share in the third quarter of 2006.

The dividend is payable on December 6, 2006 to stockholders of record as of November 22nd, 2006.

Overall gross profit for the third quarter was 29.1% as compared to 29.9% for the prior-year quarter.

However, prior to the impact of our other revenue, which has very little direct cost, total gross profit increased 30 basis points to 28.3% as compared to 28.0% for the prior year.

This increase is primarily due to higher mix of home infusion revenues.

Infusion services gross profit increased to 44% for the third quarter compared to 42.3% for the prior year, primarily due to lower drug costs resulting from our purchasing initiatives and favorable therapy mix.

Specialty Pharmacy Services' gross profit declined to 16.0% for the third quarter compared to 17.1% for the quarter ended September 30, 2005.

This decline in Specialty gross profit is primarily due to an unfavorable contract mix within our Managed Care Specialty Services.

Specifically, within our Blue Cross/Blue Shield of Florida portfolio, we've seen rapid growth of PPO product lines, resulting in overall year-over-year growth of 25% in revenues for this payer.

However, this incremental business is at a lower margin than the average.

Our Specialty margins were also impacted by direct costs associated with the implementation of Blue Cross/Blue Shield of Michigan contract.

Regarding IVIG, we continue to see stable margins on a comparative basis.

SG&A declined to 20% of revenues as compared to 20.8% in the prior year quarter.

Excluding the Blue Cross/Blue Shield of Michigan implementation costs, SG&A expenses totaled 19.8% of revenues, or a 1% reduction from the prior-year period.

The provision for doubtful accounts increased to 2.3% of revenues from 1.8% for the prior-year quarter.

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

Our balance sheet and cash flow remain very strong.

Operating cash flow for the quarter was $8 million.

We invested $5 million in contingent consideration for our prior-period acquisition during the third quarter, and ended the quarter with $21.7 million in cash and short-term investments.

Days Sales Outstanding remain stable from the end of 2005 at 59 days.

Finally, we completed activities associated with our discontinued operations during the third quarter.

Moving into the fourth quarter, we expect revenues to expand due to the seasonality of infusion services, the start of the Synagis season, and the launch of the Blue Cross/Blue Shield of Michigan contract.

As a result. the Company expects diluted earnings per share from containing operations of approximately $0.19.

This estimate includes an additional $0.01 per diluted share in the fourth quarter for the remaining Blue Cross/Blue Shield of Michigan implementation costs, due to the slower-than-expected ramp-up of the contract.

We continue to expect this contract to generate a minimum of $80 million of revenue for 2007.

For the full year of 2006, the Company expects revenue of approximately $645 million, and diluted earnings per share from continuing operations of approximately $0.64, which includes $0.02 per diluted share in implementations cost for the Michigan contract.

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

(OPERATOR INSTRUCTIONS) John Ransom of Raymond James Associates.

Good morning.

I'm having trouble taking you off the speaker.

Do you have a sense when you are going to know more about the AWP issue as it pertains to your outlook for 2007?

In other words, when do you think you might know when the negotiations have gotten to a point where you can give more comfort on that point?

I think we are, John, beginning to go through that exercise right now with certain peers, that we know we -- the timing is right in terms of a contract negotiation.

So we will have the languages built in as we go through the revisions with the contracts.

But I think it's going to be a process from now until maybe by end of first quarter that we should be complete with this exercise.

Okay.

So now through first quarter.

And Raj, if you looked at all of your contracts, what percent of the revenue are you very comfortable that is going to be a nonissue and what percent of the revenue where you think you may have some work to do from a negotiating standpoint?

Well, what we know right is the government payers, we feel very comfortable, which is about 20% of our business, that this will potentially be a nonissue.

As I mentioned in my prepared remarks on AWP, the government uses a different AWP or different methodology in determining the unit price of a given pharmaceutical.

So we know for sure that those types of contracts, that we would not have any issue with the AWP.

Okay.

Hard to ascertain right now, but we have a substantial portion of our agreements that are not based on First DataBank.

And there is a big part of our contract portfolio where the language is silent on what is the exact source of AWP.

So we have the flexibility to review the different source of AWP in those agreements.

But I think we will be comfortable in giving more color on this by the end of first quarter.

John, this is Paul.

An important point to consider is we are coming off of a fairly fresh exercise, due to the HIPAA requirement of standardized coating with infusion, of really going back to all of our infusion payers and opening up the contract to restructure the pricing methodologies.

And in this case, it really had to do more around the per diems and billing for nursing business, which used to be bundled and are now separated.

And we went through that in a very organized, methodical fashion prior to the implementation date of HIPAA requirements without really any change in our pricing.

So it entails a coordinated effort with our Managed Care folks, an education tool in the hands of our Managed Care folks, educating payers on these issues, and then ultimately contract amendment.

So I don't see this as being -- as being that different from a recent experience, which really resulted in the neutral effect for us.

Sure.

And lastly, as you guys -- as Medicaid moves to AMP, and who knows -- we understand that's probably been delayed, but what are your thoughts about AMP and dispensing fees?

Or is that not how your contracts are going to work under Medicaid?

No, not at the moment.

I don't think that has any implication to what we do.

Okay, thank you.

Anne Barlow with Sterne.

Good morning.

A couple of quick questions.

First, looking at 2007, any idea, Paul, what the situation for IVIG will be for you guys?

Have you entered into anything as far as negotiations or forward contracts for '07?

Yes.

Anne, it's Raj.

Let me answer the question.

We have agreements that were just signed recently with the major manufacturers of IVIG.

So we have an allocation assigned to us for 2007 and feel very comfortable with that.

In addition, we have agreements with certain GPOs that allows us, again, more allocations.

So we feel pretty covered looking into 2007 that we have enough for our (indiscernible).

Okay, great.

Another question, just any idea on the goals for startups over the next 12 to 18 months, aside from the four that we've talked about -- Phoenix, Kansas City?

I don't think that we have right now any plans to do startups in the near future.

We do have some work cut out for us to get these four startups up and running, in terms of looking at growth opportunities and (indiscernible) these businesses.

Acquisitions would probably be more something that we will be looking at rather than doing startups.

And notice the tax rate was a little bit different this quarter.

What should we look for going forward?

I would look at it to stay at about 39%.

All right, thanks.

[Tom McGann] of Piper Jaffray.

Good morning, gentlemen.

A quick question -- two parts, I guess.

I see you raised revenue guidance a little bit for the year, but you also lowered EPS below your range previously.

And I guess two parts to that.

One, why was the revenue guidance raised outside of that range?

And two, it looks like there's going to be a little gross margin erosion throughout the remainder of the year.

And I guess if you could characterize that change a little bit for us?

Sure.

The increase in revenue relates to primarily to the Blue Cross Michigan contract, now that we've launched it and we have better visibility into how that is going to ramp.

You know, as well as now that we're seeing, with the start of the Synagis season, have better visibility around Synagis.

And overall, the indicators in our business for the fourth quarter are strong.

What is impacting us for the full year is really there's the incremental $0.02 of the implementation costs for Michigan, which would put us into -- excluding those costs -- into the middle range of our previously discussed guidance of $0.65 to $0.67.

So are you seeing a better Synagis forecast than you did prior in the year?

Based on some of the stuff you said in previous comments, Paul, it would seem like that is that case.

Yes, the guidance that we have previously talked about was 15% to 20% growth, and we are seeing it well within that range; if anything, toward the upper end of that range.

Okay, great.

And one last housekeeping question.

I couldn't decipher the share count for the quarter.

Did you have a final share count?

I do.

For the third quarter, our share count was 35,460,000 shares, compared to the 2005 count of 34,000,679.

Year-to-date basis, it's 35,310,000 shares for '06, as compared to 34,231,000 shares.

Okay, great.

Thanks, guys.

Mitra Ramgopal of Sidoti.

Just a couple of questions.

In terms of the implementation costs we saw in the second half of this year, is that pretty much all gone as we look out to '07?

Yes, we don't expect any substantial implementation costs.

We are going to be -- in early '07, as Raj mentioned, we are going to be moving the central pharmacy to a facility that we are building.

So we will have some moving costs associated with that facility.

But nothing like I'd expect in the back half of this year directly related to the contract.

And many of the costs specifically relate to contracting support services to really onboard this high volume of patients, which will go away.

So at this point, under the existing book of business I don't expect any substantial costs.

Just to follow up on that, I think Raj alluded to a fairly sizable contract you guys expect to sign soon.

And again, looking out to '07, should we look for associated costs of getting that contract going?

Mitra, this is Raj.

The contract, as I said, is in final negotiations as we speak.

The contract would not be exclusive; it will be a semi-exclusive agreement.

And it will be a slow ramp-up, so we don't expect having similar expenditures in terms of the implementation of the contract.

Okay.

And if you can give us --

Just to follow up on that point.

We also viewed, with this opportunity with Michigan, really the opportunity to build this state-of-the-art specialty pharmacy distribution facility.

So part of the implementation costs do relate to us investing to be able to support additional contracts.

So I wouldn't expect -- again, as a percentage of volume, I wouldn't expect anywhere near the kind of investment for future contracts.

Okay.

And then again on the investment front, with regards to upgrading your systems and technology, etc., nothing unusual again for '07?

We are in the final stages of our planning for '07, and we'll talk more about that in our fourth-quarter call in February.

Okay.

And finally, if you can just maybe have some comments with regards to the consolidation we're seeing in the industry, more specifically, Caremark, CVS -- any thoughts on that?

I think obviously that combination is going to be pretty substantial in terms of pharmacy distribution capabilities.

As it stands right now, we aren't seeing any slowdown in the kinds of growth opportunities for us.

I can't comment on what happens three, four years from now, but at this point, I think we are sitting in a pretty comfortable position and having potential access to new contract opportunities.

Okay, thanks.

Gregg Haddad of First Analysis.

Thank you, good morning.

With respect to bad debt expense, you commented earlier regarding the mix shift on the local revenues being somewhat more predominant.

But your bad debt rate here is at a high for the year.

Is there any perspective you can provide on how you continue to see that trending, particularly in light, perhaps, of the Blue Cross of Michigan contact implementation?

Sure.

Actually, with Michigan, I would expect to see the bad debt rate overall decline due to the nature of that contract, how we adjudicate those claims.

I mean, how we will be reconciling receivables, we don't have an expectation that that contract would have a similar bad debt exposure.

So those incremental revenues with Michigan will be at a lower rate.

Now, with Synagis' growth, which tends to be more of a local contract product for us, that typically is reserved at our local rates, which tend to be a higher as compared to our centralized Specialty business.

So again, the organic growth of our more centralized Specialty business would have a lowering effect on our composite bad debt rate.

I'll give more guidance to that -- for the expectation for '07 in our fourth-quarter call.

Sure, thank you.

And one other question.

Blue Cross of Florida you mentioned earlier was that contract having, it appears, a more meaningful impact on your Specialty margin rate.

And it looks like the contract has been growing in the high teens this year.

Is that something you expect to continue for the balance of the year in terms of the growth rate, as well as the margin impact?

I do.

We have seen growth in the PPO side of the business, which is at a lower margin.

And in particular, we've also seen on the HMO side of our business a reduction in covered lives.

So we are seeing a mix shift that I would expect to carry on into the back half of this year.

Thank you.

David MacDonald with SunTrust.

Good morning, guys.

I have a couple of questions.

Raj, first on the AWP issue.

You talked about a lot of things that could happen, but from a practical standpoint here, I believe you guys have 90-day outs in your contracts.

If a payer becomes problematic, what options do they have?

I mean, I (technical difficulty) to imagine any other payer or any other provider would also need to adjust their contracts.

So realistically, is this going to have any impacts on you guys at all?

And then I have a couple of follow-ups.

David, our services are designed to mitigate health care costs.

And obviously, there is a need for our service; otherwise, we wouldn't be in existence.

So if there is an issue with a payer in terms of a potential price negotiation or renegotiation, obviously, if it doesn't make any sense for us, we have the ability to walk away.

And as I mentioned and I prefaced all our commentary on AWPs, that we have negotiated a contract in good faith terms.

And obviously, it's an impact, if changes happen, we have the flexibility of not doing business.

Raj, to that point, is there any -- I mean, I've got to imagine there is very few meaningful contracts where there's even a provider in those markets who have as big a network or even have the infusion and specialty capabilities that you have.

Is that an accurate statement?

That is an accurate statement.

With the size and scale that we have, if we can't provide the service, then I'm pretty sure that a smaller independent provider would not be able to survive.

Okay.

And then on the Blue Cross/Blue Shield of Michigan contract, I realize its kind of early days.

But can you talk about potential opportunity to pick up some infusion business there?

And then on this new contract that you guys sound like you are pretty close on, would we expect that to be more specialty heavy, more infusion heavy, or kind of look like your overall book of business?

Let me comment on the Michigan contract.

That contract obviously is going pretty well for us right now.

And as part of our agreement with the health plan, we have opportunities to work with them specifically on home infusions.

Other projects would include hemophilia and setting up ambulatory infusion centers.

So it will give us a fairly unique model, actually, with the Managed Care entity.

So, yes, definitely we have that opportunity going into 2007.

But the first leg of the contract was to get the main order specialty pharmacy up and running, so that is what we are doing right now.

Once that is accomplished, then we will move on to the second leg.

As far as the other contract opportunity, it is really coming from our relationship with that particular payer with home infusion services.

So we do a lot of business with them on home infusion, and now we are going to get the specialty pharmacy business.

So as you can see now, both the businesses are feeding off each other pretty well for us.

Okay.

And then on Blue Cross/Blue Shield of Michigan, Raj, I believe you guys have three infusion locations in the state of Michigan.

Do you feel pretty comfortable with that coverage or is there a need for a startup or an acquisition?

We cover the major populated markets in Michigan.

The only presence that we don't have is in the Upper Peninsula of Michigan.

And either we could find a network provider to subcontract with or potentially set up a location there.

Okay, and then last question.

On the Blue Cross/Blue Shield of Florida contract, I guess I don't really get why mix shift from Managed Care to PPO is driving the top line so strongly.

Are the PPO customers just heavier utilizers or kind of what is going on there?

What is going on there is we're really seeing a shift in their lives, away from HMO productlines towards PPO productlines, which is just increasing our revenue mix towards (multiple speakers).

The others aspect of the growth is they have been -- Blue Cross has been moving business away from other providers over to us.

As you know, in PPO, the members have to be given a choice.

But we have seen more business coming to our way.

Because we already know the physicians who are prescribers under the HMO, they are moving the prescription over to us.

Okay.

Thanks very much, guys.

Ricky Goldwasser, UBS.

Good morning.

Can you comment on what percent of the drugs on the First DataBank (indiscernible) list are specialty drugs that actually apply to your business?

And then also, a quick follow-up on the startups.

Have the startups turned a profit yet?

Yes, in aggregate, these startups are generating -- they are breakeven, okay?

But they were breakeven in the quarter?

Yes, that is correct.

And do you expect them to, in aggregate, turn a profit in the fourth quarter?

That is correct.

And your first question regarding the drugs in the First DataBank, there is a substantial portion of drugs that we provide that could be impacted.

Okay.

So now the question is really what percent of your contracts -- which I understand you are working (indiscernible) -- what percent of your contracts don't have provisions that allow you to switch to a different data provider?

Ricky, we have over 500 contracts with different insurers and payers.

I don't think that we can give you an exact percentage at this point as to what payers have an out clause.

But in our initial review of our major contract that we derive a substantial amount of revenues from, we don't see that as an issue.

Ricky, the key point is the language in our contract is geared towards allowing us the ability to renegotiate if there is an unanticipated change in the underlying fundamentals of the contract.

In almost all instances, we have termination provisions that range, as Raj previously mentioned in his remarks, anywhere from 30 to 120 days.

So we have the ability to renegotiate based on these issues.

We are not concerned about needing to live with a reduction in pricing if we choose -- without a choice.

Right.

And then I guess the question -- I think, Raj, you commented before that some of these contracts also allow you to choose your data provider of choice.

That is correct.

Because again, a big part of these contracts are silent on the source of AWP, if you will.

So that, we have -- in those contracts, we have the flexibility to move away -- in the event First DataBank goes away and publishing data [begins].

Okay.

And can you comment on what percent of your contracts currently do rely on First DataBank AWP rather than a different data provider?

Where we are right now, under 10% of our Managed Care contracts have a specified AWP of First DataBank.

Thank you.

Art Henderson with Jefferies & Company.

Hi.

Not to beat this AWP issue to death, but following off of Ricky's question, you are saying that under 10% of your contracts or under 10% of your revenue?

10% of contracts.

Okay.

Now, I guess I just don't understand how this couldn't have an impact on you.

If you decide to move to another data provider, presumably those other data providers were at a lower price point anyway than where First DataBank was on their numbers.

Am I not correct in that?

No, we see parity -- again, it depends on the drug, but we see parity with the different sources.

So even despite the increase that occurred back in '02 when they moved the numbers up, based upon what this whole settlement was about -- I mean, my understanding was say, for example Thomson's Red Book was still at those old levels.

So I just don't understand how that couldn't have some degree of impact on your business.

I mean --

Again, payers understand how AWPs function, and understand there are different levels of AWP.

Our industry has taken into account those issues with either a blended AWP, MAC-based pricing, or even to a lesser degree, even ASP-based pricing.

If you look back at our reported margins, we really didn't see any change in margins in 2001, 2002, 2003.

So there clearly wasn't a windfall at that point in time for us.

And with every negotiation, the pricing is obviously something that -- on what is the source and what is the margin is something very important that we focus on.

Art, if I may understand your question better.

What you're saying is that in the event -- even if you move over to a different source, there might be a change in pricing from what you were originally billing.

In those instances, we would definitely renegotiate the discount of the new AWP so that we are made whole.

And your sense so far is that Managed Care payers are willing to do that?

Absolutely.

We have contracts today that specify, for example, Red Book at a lesser discount.

So it's understood -- I mean, again, these are published data sources.

There is no surprises here.

Okay.

One other question.

You talked about your procurement of IVIG.

How is your pricing looking on that?

The pricing has gone up very, very minimally.

I don't have the average price per gram.

And it's not even noticeable.

Okay.

So not a material increase at all?

Yes.

Okay.

And then lastly, on your specialty pharmacy margins, obviously continuing to see some erosion in those margins due to maybe therapy mix or what not.

But looking to the fourth quarter, last year we saw about 14.5% gross margins in that business.

Presumably, with Synagis kicking in and given the margin characteristics of that particular drug, we should expect to see gross margins less than where they were last year.

Is that safe to assume?

I think they will be slightly less.

Again, depending on how fast Michigan grows, they will be slightly less to almost about even with last year.

Okay.

All right, thank you.

John Ransom with Raymond James.

Just a quick question about the pipeline.

Is there anything coming down the pike from the biotech side that you guys are particularly excited about?

Yes, John, there are a couple of drugs that we think we will have an opportunity to distribute.

They are mostly in the oncology area.

And could be another oral solid that we might get a distribution agreement with.

Okay.

I guess my second point, if you look at the back half of this year, 19 and 15, that's $0.34.

And then you add back, what -- $0.03 for Michigan costs, which won't recur next year.

So you are at a $0.37 run rate for the back half, so you are kind of at a 74% run rate -- $0.74 run rate for next year.

And I know you've got one quarter with Synagis, one quarter without Synagis.

Is there anything in the back half of this year relative to next year that we need to think about, or is that the right way to think about your earnings run rate?

John, I think the key thing to consider is our Synagis season on a quarterly basis peaks in our first quarter.

And then we obviously don't have -- we have the costs, which you mentioned, associated with Michigan, but we don't have the incremental revenue and the profitability associated with that contract.

So those will all items that we will discuss in detail in February.

And that is when you plan to issue your '07 guidance?

That is right.

So, you don't want to do that today?

Time is not in favor of doing that today.

Okay.

All right.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Constantine Davides with SIG.

Thanks, good morning.

Just a couple of questions.

First, on the infusion side, margins have held up or even expanded pretty nicely year to date.

Can you just give a little bit more color about some of the drivers at work there and if this is kind of the run rate we should be thinking about heading into Q4?

And then second, Paul, what was the after-tax options expense in the quarter?

Sure.

In terms of infusion margins, we've seen a benefit of, to some extent, some lower pricing on some drugs, the drug purchasing initiatives, and then also some mix shift.

I'd expect us to stay in that 44% range, based on what I'm seeing so far through the rest of this year.

Furthermore, in terms of our purchasing, a key initiative for us is to continue to leverage our strength with lowering our drug costs.

And we are aggressively looking at all of our spend, challenging every contract with the increased size that we've been able to generate through organic growth and acquisitions, to continue to look to lower them.

So actually, again, when I talk about '07, I'll give expectations on that.

But for the time being, I do see us steady in that 44% range.

In terms of after-tax options expense, it ended up being about $0.01 a share; roughly about $600,000 pretax for the quarter.

Thank you.

At this time, there are no further questions.

I would like to turn the call back to Raj Rai for closing remarks.

Thank you, everyone, for joining the call.

We look forward in speaking with you again at our year-end conference call in February.

Thank you once again.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.