沃博聯公司 (WBA) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to the fourth-quarter and year-end 2006 Option Care Inc. earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Raj Rai, President and Chief Executive Officer. Please proceed, sir.

Good morning, everyone and thank you for joining our fourth-quarter and 2006 year-end conference call. Also joining me on the call are Paul Mastrapa, our Chief Financial Officer and Joe Bonaccorsi, our legal counsel.

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 Leticia Carrillo at 847-229-7731 and it will be faxed to you promptly.

Please be advised in keeping with 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 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 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 assessments 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 will now discuss the key highlights for the quarter and Paul will discuss the results in detail later in the call. I am pleased to announce our year-end results. For the fourth quarter of 2006, we reported a record $194 million in revenues, an increase of 36% from the fourth quarter of 2005. The increased growth resulted from acquisitions completed in 2006, the launch of Blue Cross Blue Shield of Michigan specialty pharmacy contract and better than expected Synagis sales, which grew 62% from last year. For the year, our revenues grew to a record $659 million or 31% from 2005.

I'm pleased with our performance and accomplishments for 2006. Let me now summarize some of the key highlights for 2006. We signed and implemented two contracts with specialty pharmacy services with Blue Cross Blue Shield of Michigan and Blue Care Network and Excellus BlueCross BlueShield and Univera Healthcare. This resulted in the addition of 6 million covered lives under contract.

We completed four acquisitions of home infusion businesses. This resulted in an addition of four new pharmacies and consolidation of two locations with our existing pharmacies. We also accomplished the divestitures of non-strategic home health agencies and finally, we realigned our field operations to focus on sales and increased productivity.

Looking into 2007, we expect the sales momentum to continue with specialty pharmacy business. We are investing in sales and marketing activities around the recently signed contracts and existing contracts where we have opportunities to increase contract penetration and cross sell our two businesses, home infusion and specialty pharmacy services.

In addition, we are adding resources towards a product management focus to effectively market our services for long-term chronic infusible therapies such as nutrition, IVIG, hemophilia and congestive heart failure. We feel such investments are necessary to sustain a double-digit growth rate long term.

We're also actively pursuing our acquisition strategy to expand our presence into new markets and consolidation opportunities in existing markets. Our targets include franchises, independent and hospital-based home infusion pharmacies. We continue to maintain a strong cash position to provide capital infusion for executing our strategy.

In addition to revenue growth, we continue to seek opportunities to lower our cost of goods and services and make process improvements. We have initiatives in place to lower our costs in pharmaceutical spend, driving distribution efficiencies, improving cash flow, centralizing administrative functions such as cash applications and patient collections.

To summarize, we believe the year 2007 could be a breakthrough year for us as we are getting closer in delivering a unique model that would position a health plan to effectively transition their members from an inpatient setting to the home, an outpatient treatment facility to an ambulatory infusion center and from a retail pharmacy to a mail order specialty pharmacy resulting in tremendous cost savings. We believe this will set us apart from our competitors and build a strong foundation for growth opportunities. I will now turn the call over to Paul for his comments.

Good morning. We are pleased with our record revenue for the fourth quarter of $194 million, a 36% increase from the $142 million reported in the fourth quarter of 2005. This growth continues to be driven by our strong organic growth, incremental sales resulting from our acquisition activities and the successful launch of the Blue Cross Blue Shield of Michigan contract, as well as strong Synagis growth, which increased to 9.5% of total revenues for 2006 as compared to 7.5% for 2005.

Overall, our organic growth accelerated to 25% for the fourth quarter, which included 33% for specialty pharmacy services and 9% for infusion services.

On a GAAP basis, net income from continuing operations increased 4% for the fourth quarter to $6.7 million or $0.19 per diluted share compared to $6.5 million or $0.19 per diluted share for the fourth quarter of 2005.

Included in the prior year fourth-quarter results from continuing operations is a net gain of $0.03 per diluted share primarily due to a large gain from the settlement of a franchise agreement. Excluding this prior year gain, diluted earnings per share from continuing operations was $0.19 for the fourth quarter, an increase of 19% from $0.16 per diluted share for the prior year period.

For the 12 months ended December 31, 2006, revenue increased 31% to $659 million. GAAP net income from continuing operations was $22.6 million or $0.64 per diluted share, an 8% increase from the $20.9 million or $0.61 per diluted share for 2005.

The Board of Directors declared a dividend of $0.02 per share for the fourth quarter of 2006. The dividend is payable on March 19, 2007 to stockholders of record as of March 5, 2007.

Overall gross profit for the fourth quarter was 24.9% as compared to 29.6% for the prior year quarter. Of this 417 basis point decline, half relates to the reduction from the prior year in other revenues, which has no direct cost. Other revenue declined due to the large franchise settlement gain. The remaining decline in overall gross profit is due to a shift in mix towards specialty pharmacy services, which increased to 64% for the fourth quarter as compared to 57% for the prior year period.

Within our service lines, specialty pharmacy services gross profit declined to 13.4% for the fourth quarter compared to 14.5% for the quarter ended December 31, '05 due to the incremental revenues at a lower margin from the launch of the Blue Cross Blue Shield of Michigan specialty mail order contract. Infusion services gross profit was stable at 44% for the fourth quarter.

SG&A declined to 16.2% as a percent of revenues as compared to 19.4% in the prior year quarter as a result of the shift in mix towards high-volume specialty services. As previously discussed, included in our fourth quarter is approximately $0.01 per share, in implementation cost related to the Blue Cross Blue Shield of Michigan contract. The provision for doubtful accounts was consistent with the prior year at 2.1% of revenues.

As of the end of the year, our balance sheet remains very strong. During the fourth quarter, we used $1.1 million in operating cash flow due to the working capital requirements associated with the incremental revenues resulting from the launch of the Synagis season and the Blue Cross Blue Shield of Michigan contract. We invested $1.3 million in a small acquisition in Southern California and ended the year with $16.4 million of cash and short-term investments. Days sales outstanding at the end of the fourth quarter were 56 days, a decline of three days as compared to 59 days as of the end of last year.

Moving into 2007, we remain very excited with our future organic growth opportunities resulting from positive industry fundamentals, new contracts and acquisition opportunities, which we believe will further strengthen Option Care as an industry leader.

Looking first at revenues. Our expectations are $785 million to $815 million for 2007 driven by 8% to 10% organic growth for our base infusion and specialty revenues and a minimum of $80 million in revenues from the Blue Cross Blue Shield of Michigan contract. I expect other revenues to be approximately $7.5 million with the decline from the prior year due to a reduction in recognized franchise gains and lower royalties resulting from our acquisition of franchises and franchise expirations.

Based on these revenues, I expect overall gross profit to range from 24% to 25%. Within our service lines, I expect infusion gross profit to remain consistent at approximately 44% and specialty pharmacy gross profit to range between 12% and 13%.

I would like to highlight that as we report 2007 results, we intend to break out our specialty pharmacy revenues between specialty infused therapies, which are delivered locally through our 59 pharmacy locations, and specialty distribution, which includes the revenues of our high-volume facilities in Michigan and Florida due to the different growth rates in margin characteristics of these services.

I expect the revenue split between these two services to be approximately 50-50 with the gross margin ranging from 19% to 20% for our specialty infusion services and approximately 6% for our specialty distribution services. I expect total operating expenses to be between 18% and 19% of revenues, which includes increased sales and marketing investments targeting chronic infused and injectable therapies of roughly $0.02 per share in 2007. Operating income should be approximately 6% and our income tax rate at slightly over 39%.

I expect operating cash flow to range between $27 million to $30 million and capital expenditures of approximately $11 million. This translates into diluted earnings per share of $0.73 to $0.78 and our estimates do not include any acquisitions or significant new specialty contracts.

Now, I'll ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS) David MaDonald, SunTrust.

A couple of questions. First of all, Paul, when you talked about the guidance, you talked about it not including any additional meaningful contracts. Can you give us a sense of what is going on out there in terms of appetite from other providers and also has the noise around Caremark, CVS, Express potentially caused some people to rethink and maybe give you guys a more serious look than maybe you were getting originally? Then I have a couple of follow-ups, but one question I had is does the guidance include any cross-sell within Blue Cross Blue Shield of Michigan into infusion?

Let me address these questions. First of all, your question relating to the PBMs and the appetite of the market, with the health plans, look at other providers as a choice, there is definitely a (technical difficulty) to it. As you saw with our two contracts that we launched, one, we took it away from one large PBM. The other one we were added as a secondary provider to another PBM.

We have a good pipeline of RFPs that may be coming out in the future in 2007. So they might not result in revenues or new contracts awarded, but I think it will be more for 2008 than 2007. We're definitely seeing more and more activity there. What was your second question?

Does the guidance include any cross-sell of specialty into the Blue Cross Blue Shield of Michigan book?

In terms of our revenue range on guidance, the higher end of the revenue range includes some additional cross-sell primarily on the specialty side of the business as you know. There's really two other areas that we're focusing on with Michigan. One is helping them support the addition of office space, distribution of medication and then also trying to provide a more effective service for meds that are currently going through retail, as well as even through potentially other benefits such as a home care benefit.

In terms of the infusion side of it, we see that as something that we are going to be focused on. We really don't have that factored into our guidance. I think that would be upside in 2007, but again it is an important initiative for us, as Raj mentioned, as we really talk about how we build really that comprehensive scope of services that our model enables with these health plans.

Okay and then a couple of other questions. Just in terms of one thing that you talked about on the cost containment side is better purchasing. Can you give me a sense as you guys get bigger what you are seeing or your ability to push back and can you also remind us when your wholesaler contract is up for renewal and what you think in terms of ability to maybe squeeze a little bit better pricing there?

On the pharmaceutical spend, David, we are looking mostly at the generics and possibly the med/surg or the medical supplies that we provide. That is where the opportunity is going to be for us to squeeze some margin. The specialty -- that is going to be a challenge specifically because we are selling a lot of single source injectable drugs where there is very little opportunities to get improved margin from the manufacturer.

As for the wholesaler contract, we have been with our current wholesaler for many years. We have some time left with that agreement, but we are always looking at other opportunities.

That agreement expires, David, I think in the middle of 2008. However, we do have a termination provision in the agreement. So from our perspective, as we continue to scale the Company, we continue to go back and make sure that we're getting the best price in the market.

Okay and then just last question in terms of some of the targeted initiatives to some of the higher margin infusion products, can you just give us a sense of what those will look like and then on the sales and marketing investments, how many sales folks will be added, just some quantification of what is going on there?

On the specialty front, let me just address the sales and marketing initiative there. We have access to a lot of lives through contracts, which are not [meant to be] exclusive, so we felt that we needed to add a salesforce, which will comprise of about seven people nationwide and they will work with our local infusion salespeople to look at cross-selling opportunities, but they will be more focused on specialty injectable drugs.

Then what we're bringing into a corporate office is a more product management focus and some of the initiatives are going to be in the chronic therapies, such as IVIG, hemophilia and nutrition where obviously we get longer-term patients and we really need to have a product management focus there. So we will be hiring key product managers, around three or four, by the end of this year and they will specifically focus on working with the salesforce and helping them target physicians, manage their opportunities and so on, so forth and working with different manufacturers.

Okay, thanks, guys. Congratulations.

Brooks O'Neil, Dougherty & Company.

Good morning, guys. I have a couple questions also. First, can you just give us a sense for where you feel you are at right now with the Blue Cross Michigan implementation and if you got any benefit at all from the Excellus contract or will that be something we'll see later in the year?

This is Paul. The first phase of the Blue Cross Blue Shield of Michigan contract, which we completed during the fourth quarter, was the implementation of the mail-order specialty side of that contract and that was in essence a book of business that was transitioned from Medco to us. So that is what we have -- we have completed that and now we are focusing and working with Blue Cross on the other components of the program that I mentioned earlier. I'm sorry, Brooks, your second question?

Did you pick up any business from Excellus in the fourth quarter? Is that all an '07 event?

That is all '07, Brooks.

Great. Secondly, infusion growth you mentioned was 9%. I know there could be some upside if you could pick up some Michigan business, but is 9% the rate you would expect to see infusion growing?

As I mentioned in our guidance, on an organic basis, I see a range of 8% to 10% for infusion. The upside to that -- taking it up to the upper end of our guidance or beyond are really a couple things. One, the implementation of some of our sales and marketing initiatives in particular around product management and then two, driving more exclusive relationships with these payors, these expanded payor relationships like I talked about with Blue Cross of Michigan.

Part of what we have to do to differentiate our services is build more and more therapy-specific expertise, which is why we are investing in these product management opportunities. So ideally what we start seeing in the back half of '06 -- or '07 is an acceleration of that infusion growth. Then as we get into '08, we start really seeing the benefit of these investments.

That is great and that is very helpful. As it relates to Synagis, obviously a terrific quarter here in the fourth quarter. We should continue to see a benefit from Synagis' repositioning, relaunch in the first quarter and then maybe again in the fourth quarter this year?

For 2007 -- actually 2006, we ended up with about $63 million in Synagis revenues. My expectations for Synagis for 2007 are about 15% to 20% growth. We will see a continued increase from the base of $25 million of Synagis revenues that we had in the fourth quarter in the first quarter, but some of that again is some of the acquisitions that we completed this year that had fairly good-sized Synagis revenues.

Okay. As it relates to the guidance, if I did the math right, it looks like you are suggesting 14% to 21% earnings growth for 2007 sort of a range. Is that a range you would be comfortable with longer term as well?

Well, there are a lot of moving parts in that longer term. We are -- what we don't have included in our estimates are any acquisitions and we are going to continue to do acquisitions and we are very pleased with our acquisitions performance from the portfolio that we acquired at the beginning of last year. I would expect to continue to see more acquisitions. We're not including them in our guidance. Based on the size and the impact of those could be [dispensed] specifically on the transaction. So ex acquisitions, I see a good opportunity to accelerate our organic growth rate with some of the investments that we're doing not only on the infusion side of the business, but also on the specialty side of the business and our internal focus around cost management is driven to also improve the leverage on those incremental revenues. So we will continue to talk more about '07 or '08 as we go throughout the year.

Sure. That is helpful. Then just one last one. Other revenue this quarter, can you just let me know what that was and specifically was there a big component that had no cost associated with it or is it something else this quarter?

Sure. Other revenue for the most part is royalties, some administrative fees that we recognize as revenues from our group purchasing organization, as well as -- in there, we also had a couple of small franchise terminations, which were cash terminations and then to some extent, we also could have some other revenue associated with some manufacturer service programs that we provide.

So it was fairly high margin, but maybe not --?

Our other revenue for the most part is 100% gross profit.

Okay, thanks a lot.

Gregg Haddad, First Analysis.

Good morning, thank you. Could you comment a little on the reimbursement environment broadly, the AWP litigation, recognizing the settlement, of course has not yet been executed, but any update on your processes there? Also with respect to Medicare fee-for-service reimbursement and any other comments you would be willing to provide on reimbursement generally?

Gregg, I'm going to have Joe Bonaccorsi, the legal counsel, who has been watching that issue closely. Joe, do you want to give some comments?

As far as the progress of the AWP litigation, it is hard to predict with a high degree of certainty when it is going to be finally resolved, but based on our review of the court docket and the activity that is taking place given the complexities of the class certification and the number of parties that are going to be involved, we don't expect a final resolution to occur until sometime late '07 or even into '08. There is not going to be any immediate impact or concern. As far as our reaction to it and the steps we are taking, Paul is involved in that progress.

As we talked about last quarter, we are viewing this as an opportunity to overall strengthen our contract structure. In any new contract amendment or new contracts, we are specifically including language around directly addressing this issue if it ends up coming to pass. For example the Excellus contract, we have specific language in there that -- and that's [in suggested] a discount if there is this change to AWP. So we continue to move forward.

As I mentioned in the fourth quarter, about 10% of our contracts are specifically tied to First DataBank and we are working with those payers to address this issue as it comes up. What we are generally finding, at least preliminary in our conversations, is payers understand the issue. It affects a lot more than their home infusion book of business. It affects their entire portfolio of pharmacy contracts and they understand that the issue needs to be addressed.

As a backdrop, we also -- our contracts are structured with termination provisions, which gives us leverage in order to help negotiate those rates. We are going to continue to watch it closely, but our overall goal this year is really strengthen our contract portfolio.

Also on the Medicare fee-for-service environment, the legislation that was introduced last summer, any update there?

No, there is no update on that front.

Okay, good. Thank you. With respect to Tysabri, Biogen showed some what appears to be some good growth in that respect. Any meaningful impact for you there yet or anything you foresee improving for 2007?

We haven't really seen much business for Tysabri as it is a very closely monitored product and mostly administered in the physician offices, so we haven't seen a movement to our business.

Thank you. Then last one I have is on bad debt and I may have missed this in your discussion on guidance; I apologize. But with respect to 2007 bad debt expectations, any perspective you can provide there?

I expect it to remain consistent with 2006, actually slightly below at about 2%. We ended '06 at 2.1%. I expect about 2% for '07.

Thanks very much.

Ricky Goldwasser, UBS.

Good morning. A couple of questions. First of all, in terms of IVIG pricing, what are you assuming in your guidance? Are you assuming a basically flat pricing environment on a year-over-year basis? Also how many of your franchise agreements are up for renewal this year and of these, how many do you view as interesting acquisition opportunities?

In terms of IVIG, as we have said, we see that market as being stable from a pricing standpoint and a margin profile. We saw that in 2006 once we anniversaried really the IVIG issue after the first quarter and we continued -- our expectations are that that market continues to remain stable. We're continuing to work closely with three primary manufacturers and so far, we feel that that market will remain stable.

Then in terms of our franchise agreements, we have six franchises that come up -- that have expiration dates in 2007. Those represent about $800,000 or so a year of royalties and those are factored into our guidance. In terms of those that are -- could be potential acquisition opportunities, I usually don't like to identify those individually, but we will continue to look at franchises that are in markets that we view as strategic and consider acquisition opportunities again depending on the desires of the franchise owner.

So without naming names, are any of these six in strategically interesting or attractive markets for you?

Of these -- again, prefer not to answer that specifically to these six that are coming up for renewal.

Okay. Thank you.

Melissa Mullikin, Piper Jaffray.

Good morning. A quick question just to clarify on the SG&A guidance. You said that would include about $0.02 related to your sales and marketing initiatives, so that includes the seven or so new salespeople and the four to five -- I'm sorry -- three to four new product managers that you'll be bring on?

That is correct.

Are you bringing those on in Q1?

The specialty salesforces is in Q1 and the product managers will be throughout the year.

Okay. Then can you -- on the Q3 and Q4 call, you were able to give us a little bit of indication as to the Excellus potentially coming on board. Do you have any other similar contracts that you see in the near-term horizon coming up in Q1 or Q2?

There are some RFPs out there, but will not have any impact in '07. Those are mostly for launch in '08.

They are all '08 start dates?

Yes.

Okay. That is all I had for now. Thanks.

Mitra Ramgopal, Sidoti & Company.

Good morning, guys. Just a couple of questions. First, I think, Paul, in terms of the guidance for '07, I think the margins, especially pharma, is around 12%, 13% and I think that has been trending down relative to previous years. Do you see that as being the floor here?

Well, as I also mentioned, Mitra, what you should expect in 2007 is that we start splitting out revenue of our specialty business between -- that's what we're calling specialty infusion or our locally delivered, more higher touch specialty services and specialty distribution, which is primarily out of the distribution of our Michigan and Florida businesses or distribution centers.

The margin profile that I see within those categories is about 19% to 20% on the specialty infusion and approximately 6% on the specialty distribution. Part of the reason why we are doing that is one, with a large contract such as Michigan, we are going to see a big shift in revenues towards these lower margin mail order type of services at a 6% margin, which will give clarity then to the overall change in gross margin. Does that make sense?

Yes, that definitely helps. Also if you can just give us a sense of how far along you are in terms of the additional investments you've been making regarding automation, etc.?

The automation is happening as we speak right now. We have identified the companies that are going to help us with the automation and we expect that some time by the middle of the second quarter we will be complete, middle or towards the end of second quarter we will be complete with that project.

We are really excited about the expansion of our capabilities there. Part of our goal here is to really have the showcase pharmacy that will again help us win additional contract opportunities.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Arthur Henderson, Jefferies & Co.

Good morning. Just a couple of questions. Paul, could you remind me what IVIG is now as a percentage of your revenue?

Sure. For 2006, IVIG was about 8% of revenues.

And the Excellus contract, how much is that going to add to revenue in '07?

We don't see that as a major revenue source in '07. Again, I think long term it is an '08 event. We are not an exclusive provider. (indiscernible) they only have another provider and now we're starting to get the business up (indiscernible) close to 40 new patients with the contract and it will be a gradual (technical difficulty).

Okay. As I recall last year when you guys were talking about your franchises and you had enumerated how many you had in mind as ones that you wanted to acquire and I want to say that that was somewhere around eight to ten, somewhere in that range. How many of those franchises have you acquired so far?

Arthur, we have said that there were about 8 to 10 large franchises that we wanted to acquire and that was at that time and now, we've got a few more in the pipeline, a handful more, that we would like to acquire and those are in markets with a larger population base. We do have a lot of franchises in smaller rural markets, which I think after we are done acquiring those handful, we might look at some of those. But in the immediate near future, we're looking at -- there's quite a handful of franchises that we have currently discussed.

Most of the original target list, Art, that we talked about, we have acquired.

Okay. You have acquired most of those. So when you talk about a handful, are you talking about like five?

Yes.

Is that something you expect to do like over the next couple of years or is it something longer than that?

We are in negotiations with them and it could happen this year; it could happen early next year.

On your specialty business, I know, Paul, you mentioned that you were talking about 8% to 10% infusion and specialty pharmacy growth, excluding I guess the $80 million coming from the Blue Cross Blue Shield of Michigan contract. Can you break that out between infusion and specialty, what you are expecting those to grow?

The infusion, as you can see from our historical growth rates, has ranged in that 8% to 10%. Occasionally, we have exceeded 10%, but it has been in that band fairly consistently. Specialty has some sensitivity to Synagis. Synagis has been a strong growth driver for us, but as I look at it for the year, I do see a consistent 8% to 10% growth range on that specialty side of the business.

Has that stepped down just a bit? As I recall, I mean obviously you're working off of a bigger base now, but was that growing at a faster rate historically as I recall?

Yes, it was. We had some contract implementations in the past and then we started to aggressively pursue Synagis as a big source of revenue. So there was an acceleration going back a few years ago with growth rates on specialty. You are right, now, obviously we have a much larger base and so the growth profile is lower than what it was in the past.

Now when I think about -- you are obviously going to break out those two segments, specialty infusion, specialty distribution. Can you give us a sense as to what those are going to grow at individually? It sounds like the specialty distribution is really going to be accelerating because of the Blue Cross Blue Shield of Michigan contract?

I would look at that 8% to 10% range being in terms of our guidance for that infusion and that specialty infusion range. The upside, as I'd say, to that guidance, as I mentioned earlier, is our investments we're making in sales and marketing, as well as in product management, which does target certain higher margin therapies that are in our specialty infusion category. That's number one.

Number two, what will also help accelerate that is as we deepen our relationships, for example, with Blue Cross of Michigan, some of that is going to fall more on a higher touch specialty model versus not just in specialty distribution. Does that make sense?

Yes. Okay, so for now, you would want us to just sort of look at that as like both 8% to 10% growers?

Right.

And really the investments that so we're talking about are to accelerate -- are partially -- one, are going to accelerate the specialty distribution side of the business as we're seeing with Michigan. The secondary effects of that are accelerating the specialty infusion and ultimately the infusion side of that.

Where you cross-sell.

Exactly. The Michigan model is something to keep very focused on. As Raj mentioned earlier in his comments, that's really the model that we see, is '07 being our breakthrough year, really building that unique capability that we believe is going to add a significant amount of value to payers.

Last question and then I will get back in the queue. Didn't hear you guys talk any more about your joint ventures. How many joint ventures do you have now and are there any in the pipeline for '07?

Yes, we have two joint ventures that we signed back in 2005. We have about three to four in the pipeline right now, and our goal this year is to close two more.

Close two of those three to four?

Yes.

Thanks a lot.

Jeff Allen, Silvercrest Asset Management.

Good morning, guys. Paul, you touched on this briefly, but I was just wondering if you could give us some color on the Blue Cross Blue Shield of Michigan contract and where you are in terms of starting up the infusion side of that relationship? As the infusion side of that ramps up, I was just wondering whether you thought it would fall more on the specialty infusion side or would it be the infusion, infusion side of the infusion business?

Let me answer that question. We are already contracted with Blue Cross of Michigan for home infusion services in the state of Michigan, because we have a pretty good footprint in that state. What really the goal was to get that relationship expanded with the new relationship that we developed on specialty pharmacy, (indiscernible) there is a cross-sell opportunity. So we are currently doing business with them in infusion, and really the goal would be to go back and ask for more business in the near future.

Our first goal was to get the specialty pharmacy, the mail order contract implemented which is done, so the timing is right now and then we are going to have discussions about that. The other thing that is going to happen is that we will have an opportunity to increase scale with chronic infusible therapies that Paul mentioned, like the hemophilia and the IVIG, which are longer-duration therapies and have higher margins than your typical mail order specialty business. So we will keep you informed, but we are actively pursuing those discussions with Blue Cross.

Any color you can give us in terms of maybe by the end of '07, a proportion of Blue Cross Blue Shield of Michigan revenues that would be infusion related.

Hard to give any guidance on that at this point. We will keep you informed when we know something, but at this point we don't have any visibility to those numbers.

The big part of our focus, and I would again see that as helping us get to the upper end or potentially even over, in terms of our growth rate expectations on infusion.

Just as a metric, Blue Cross has close to 4 million lives in the state of Michigan, so that's really the opportunity.

Fair enough, thank you.

Michael Minchak, JPMorgan.

Most of my questions have been answered, but I did have a couple more. First, just to drill down a little more on the specialty margins. On the third-quarter call you had indicated that you expected the specialty margins to be flat to down sequentially, flat to slightly down, and fourth quarter did come down a bit lower. Just wondering what had changed relative to that previous assumption. Was it the mix of the lower-margin specialty distribution business, or was it the speed with which you implemented that contract?

It is really the implementation of the Michigan contract.

So it occurred at a faster rate than you had previously anticipated?

It ended up -- even though it started October 1, the contract, we started really seeing active patients coming onboard toward the later part of October, and then it ramped up fairly quickly in November and December.

Secondly, on the infusion business, I think we generally see some seasonal pickup in the fourth quarter. You were flat sequentially. Is there something unique that drove that?

No, I think we were slightly up in the fourth quarter.

On a sequential basis?

On a sequential basis, right.

Third, can you give us an update on the COO position? Are you actively seeking someone to fill that spot?

Not at the moment.

Great, thanks.

(OPERATOR INSTRUCTIONS) David MacDonald, SunTrust.

Just a couple of follow-ups. You may have addressed this earlier, but I missed it. Any update on Medicare in terms of them just trying to get their arms around a benefit that makes a little bit more sense, and what are kind of next steps on that front?

Could you just repeat the question, please?

Just, Raj, any update on Medicare? I mean, you have obviously got a benefit in place that is clearly a broken benefit, but any progress on moving forward towards something that would actually cover the supplies and the services?

There is a bill that was introduced, a bipartisan bill, but there is no movement on that and we don't expect to see anything this year.

Okay. Two other questions. One, on the acquisition side, and this is kind of acquisitions of non-franchises, any appetite to potentially ramp up the size of some of those? Are there any larger acquisitions out there that you guys are looking at to maybe add a bigger block of business in one deal?

There are some regional and some smaller national [players] that we could possibly look at. We are right now at the size and scale where smaller acquisitions that (technical difficulty) they don't really move the needle and we do definitely have visibility in our pipeline on some of these companies that could be potentially acquired. So the answer is yes.

Okay. Then last question just in the fourth quarter, it seems as though the flu season was not all that strong and we have seen a pickup in Q1. Is that consistent with what you guys are seeing on the infusion side?

That is correct and specifically look at some markets like the Midwest and Northeast where there was definitely an impact on the infusion business because of the flu season.

Have you seen that acceleration in Q1 as the weather has gotten a lot nastier?

Yes.

Okay, thank you.

Melissa Mullikin, Piper Jaffray.

One quick follow-up and I apologize if you addressed this already, but can you just give us a little bit more color as to the actual automation initiatives that you are putting in place? Are those ones that are in the stores, is it something more centralized, something related to AR cash posting, that sort of thing? Can you just give us a little color as to that?

The automation is pertaining to our pharmacy distribution in terms of automating the infrastructure there and what that means is you will have, for example for expensive, oral chemotherapy drugs, we will have a counting machine, so you are not manually counting them. We are seeing as part of our mail order specialty offering, we are seeing an increase in utilization of our oral chemotherapy drugs. So that is one aspect of it.

The second aspect of it is as we get more prescriptions, we will need to automate things like putting like conveyor belts and (indiscernible) support that are integrated with our dispensing systems. So that is where the -- those are the two aspects of the automation within our specialty distribution.

So it is really to replace existing manual functions, so should this timeline get pushed back or anything like that, you would still have a parallel manual function still in place should something go wrong with the automation?

Absolutely.

Thank you.

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I would like to thank everybody for joining our call and we look forward to having a conversation with you at the end of our first quarter. Thank you again.

Thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation and you may now disconnect. Have a good day.