Option Care Health, Inc. (OPCH) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the BioScrip Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, August 8, 2011. I would now like to turn the conference over to Lisa Wilson, Investor Relations for BioScrip. Please go ahead.

Good morning, and thank you for joining us today. By now, you should have received a copy of our press release issued this morning. If you have not received it, you may access it through the Investor Relations section at our website. Rick Smith, President and Chief Executive Officer; and MJ Graves, Interim Chief Financial Officer and Treasurer, will host this morning's call. The call may be accessed through our website at bioscrip.com. A replay will be available shortly after the call. Interested parties can access the replay by dialing (800) 633-8284 in the U.S. and (402) 977-9140 internationally and entering access code 21533779. An audio webcast will also be available under the Investor Relations section of the BioScrip website at www.bioscrip.com. Before we get started, I would like to remind everyone that any statements made on the call today or in our press release that express a belief, expectation or intent, as well as those that are historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. These forward-looking statements are based on information available to BioScrip today, and the company assumes no obligation to update such statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results to differ materially from such statements. Forward-looking statements are subject to inherent risks and uncertainties surrounding future expectations generally and may differ materially from actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize annual cost savings associated with any restructuring or cost-reduction efforts, the impact of members of management in executing these efforts, our ability to leverage core competencies or maximize margins and operating cash flow and the risks described from time to time in the company's report filed with the SEC, including the company's Form 10-Q for the period ended June 30,2011 and annual report on Form 10-K for the year ended December 31, 2010. In addition, as required by Regulation G, reconciliation of non-GAAP financial measures mentioned during our call today most comparable to GAAP financial measures can be found in Schedule 4 of today's press release. That schedule is available as well on our website under the link to News found in the About Us section of our homepage at bioscrip.com. And now I would like to turn the call over to Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone. Thank you for joining today's call. In the second quarter, we continued to execute on key elements of our strategic plan and to improve our competitive position as a national provider of Infusion and Pharmacy Services. Our second quarter adjusted EBITDA increased to $18.1 million versus $16.6 million during the first quarter, an increase of 8.7%. Sequential revenue increased from $439.3 million to $441.4 million, which reflects $12.9 million of sequential revenue growth, as we replaced $10.8 million of Q1 revenue represented by the discontinuation of $5.4 million of lower margin business in our Pharmacy Services segment, as well as $5.4 million relating to the completion of the Synagis season. We continue to reduce expenses in targeted areas, generate positive operating cash flows and reduce our bank debt another $4 million. MJ will provide more detail on the financial results. However, I'd like to highlight a few key items. Revenue increased $29.4 million or 7.1% year-over-year. This includes an 8.8% increase in Pharmacy Services and a 2.5% increase in Infusion/Home Health. Adjusted EBITDA was relatively flat at $18.1 million, as compared to $18.4 million in the prior year. It grew from $16.6 million in the prior quarter. Net loss for the quarter was $2.3 million but this included $3.9 million in restructuring charges and $4.8 million, in connection with an agreement in principle with the United States Attorney's Office in Minneapolis. Before giving effect to these 2 items, earnings per share was $0.10 per share. Regarding Infusion/Home Health, we're pleased to see the transformation to a national provider taking place. We are seeing year-over-year patient volume growth, as well as consistent revenue growth in the therapies we are targeting. Offsetting this is the anticipated rationalized pricing declines related to shifting patients from out-of-network to contracted relationships. We also discontinued $2.2 million of prior year Infusion revenue due to unacceptable pricing levels. Taking this into account, our organic infusion growth was 6.3%. The Home Health industry was impacted by the 2011 cut in Medicare reimbursement and the new face-to-face requirement. However, given that our Medicare Home Health exposure is less than 2% of consolidated revenue, the impact for us was not significant. For the quarter, compared to prior year, the impact of these 2 changes was $1.1 million; $500,000 related to reimbursement cut, and $600,000 related to a census disruption. Our Home Health team is looking to mitigate the impact of these changes with an increase in patient census and improved operating efficiencies. Operating expenses in the second quarter were up $4.9 million over the first quarter. This is primarily due to the $4.8 million charge, in connection with an agreement in principle with the United State's Attorneys Office in Minneapolis. The matter primarily involved issues related to incomplete reimbursement documentation and delays in resolving overpayments made to us by the government and due back to the government. Under the agreement in principle, the government including Medicare and all Medicaid agencies, will release the company from all liability relating to the matters at issue. We're pleased to have reached the resolution, ensuring that our compliance culture, training, practices and procedures are effective and of the highest priority everyday at BioScrip. Importantly, the resolution of this legacy issue allows us to move forward without distraction or further liability. Switching gears to our strategic assessment. Restructuring efforts continued unabated in the second quarter. We realized an additional $3 million in annualized restructuring savings this quarter versus the last. We expect to realize additional cost reductions in the second half through a rationalization of our facilities. We also anticipate a lower level of restructuring expenses pursuant to our initial plan, the second half of this year, as a substantial percentage of the actions have been completed. Our primary strategic focus at BioScrip has not changed. Driving profitable organic revenue growth throughout the company, increasing our operating cash flow generation levels and reducing our debt. We also look at selected acquisitions to expand our footprint. Our ability to achieve strong new patient census comes from our excellent sales, clinical services, reimbursement and operations teams. As we head into the second half of the year, we strive to continue expanding our referral relationships and patient census levels. With that, I will turn it over to MJ, who will take you through additional details on the financials for the quarter.

Thank you, Rick, and good morning. For the quarter, we reported revenue of $441.4 million compared to $412 million from the same period a year ago, an increase of $29.4 million or 7.1%. Infusion/Home Health services revenues for the second quarter was $109.3 million compared to $106.7 million in the prior year. An increase of $2.7 million or 2.5%. Pharmacy Services revenue for the second quarter was $332.1 million compared to $305.4 million for the prior year, an increase of $26.7 million or 8.7%. For the second quarter, gross profit increased to $76.2 million compared to $73.5 million in the prior year, an increase of $2.7 million or 3.7%. The company's gross profit margin decreased to 17.3% from 17.8% in the prior year, primarily as a result to the changes in the patient mix and movement of certain out-of-network patients to contracted relationships. SG&A for the quarter was $57 million, down from $59.1 million in the prior year, primarily due to the reduction in employee costs and other savings achieved through the efforts of our restructuring program. Operating expenses increased by $11.7 million from $60 million in the prior year to $71.7 million in the current year. As Rick mentioned, we recorded a $4.8 million charge related to the settlement with the U.S. Attorney's Office in Minneapolis. In addition, we incurred $3.9 million in restructuring charges, consistent with the progress of our strategic assessment. The company's income from operations, including the effect of the restructuring and legal settlement charges, was $4.5 million compared to $13.5 million in the prior year. For the second quarter, interest expense was $7.2 million compared to $8.2 million in the prior year. The lower year-over-year interest expense reflects the company's refinancing activities in December 2010. Net loss for the second quarter was $2.3 million or $0.04 per share compared to $3.1 million or $0.06 per diluted share in the prior year. Excluding the $8.7 million impacts of legal settlement and restructuring charges, net income was $5.5 million or $0.10 per diluted share. During the second quarter of 2011, BioScrip generated $25 million of segment adjusted EBITDA or 5.7% of total revenue compared to $26.3 million or 6.4% of total revenue in the prior year. Fusion Home Health generated $10.9 million of segment adjusted EBITDA or 10% of our related revenue. The Pharmacy Services generated $14.1 million of segment adjusted EBITDA or 4.2% of related revenue. On a consolidated basis, BioScrip reported adjusted EBITDA of $18.1 million or 4.1% of total revenue compared to $18.4 million or 4.5% of total revenue in the prior year. Turning now to our cash flows. Net cash generated from operating activities in the second quarter totaled $6.7 million compared to $500,000 of cash provided by operating activities in the prior year. From a balance sheet perspective, we continue to have the financial flexibility to support future cash flow priorities and are in compliance with all of our debt covenants. Our total borrowings under the revolving credit facility had decreased from $81.2 million at year end to $48.1 million, as of June 30, 2011. To give you an update on the progress of our strategic restructuring, I'm going to highlight a few key items. On a sequential basis, BioScrip reported adjusted EBITDA of $18.1 million or 4.1% of revenue versus $16.6 million or 3.8% of revenue in the prior quarter. Operating expenses increased from $66.8 million to $71.7 million, reflecting the restructuring and settlement charges noted earlier. Excluding the restructuring and legal settlement charges, operating expenses represented 14.3% of revenue in the current quarter, as compared to 14.9% in the prior quarter. We continue to improve the quality of our receivables, with the decrease in accounts receivable days outstanding from 42.3 at December 31, 2010, to 41.8 at June 30, 2011. In the first quarter, we've realized a $23.6 million reduction in inventory, as a result of certain supply chain process improvements. In the second quarter, an additional $2.4 million in inventory reduction was achieved. I will now turn the call back over to Rick.

Thanks, MJ. Overall, we are pleased with our results and the progress we've made this quarter, and we look forward to realizing the benefits of our continued implementation of our strategic plan. We believe we are -- have the right strategy in place and have a bright future ahead of us over the coming quarters. We look to continue to grow our business and rightsize our cost structure. With that, I'd like to open up the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Brooks O'Neil from Dougherty & Company. Brooks O'Neil - Dougherty & Company LLC: I have a couple of questions. I guess, first, I'd like to start off with, could you refresh our memory about the benefits of moving from out-of-network to in-network? Obviously, you're seeing some decline in reimbursement, which, at least, on paper, doesn't seem positive. So what's going on there?

Within out-of-network means you don't have a contracted relationship, so the availability of patient census on an ongoing basis is limited. And also, I think, from a -- what we've seen also is from a payer perspective, a desire to eliminate out-of-network providers and essentially move all of their patients and services into contracted providers wherever possible. And so a number of our -- the legacy businesses, on both sides of the house prior -- essentially had substantial out-of-network relationships. And so for the strength and opportunities to continue to grow this business for many years, we essentially tucked a number of our locations into contracted relationships. Brooks O'Neil - Dougherty & Company LLC: So that -- the United, the Aetna, the Humana. Those kinds of things?

Correct. Brooks O'Neil - Dougherty & Company LLC: Okay. Secondly. I guess, you clearly pointed to optimism regarding the second half of the year, which frankly, I share. But you would you mind -- I mean, obviously, some of it was contained in your prepared remarks, but what are some of the big things that you'd say, give you some reasons for optimism for the second half?

I think, what we're seeing is good progress. Clearly, there are different pockets of headwinds, as we talked about. But I think the fact that we are in these contracted relationships, the opportunities for access to members and continued census, we believe, if we continue to execute, will bode well for us in terms of our organic growth in patient census levels. I think the strength in the Pharmacy Services side reflects a lot of work that has been done over the last couple of years, in terms of getting part of that business into direct managed care relationships as well, and so we're seeing the positive effects there. We've seen some good organic growth in targeted areas with the Infusion business. And that work needs to continue to occur. And we believe that we have some good opportunities to continue to build on the first half of this year. Brooks O'Neil - Dougherty & Company LLC: Good. And I guess, if I understand it correctly, we're beginning to see some of the benefits of some of the cost-reduction efforts you've had, but we might see a little bit more of that in the second half as well?

Yes. As we talked about the -- a number of the initiatives that were identified, essentially occurred in late Q1 and into Q2. We also have other costs that we expect to see, primarily from the rationalization of the corporate space that we had talked on the last call. Offsetting this is some investments in the field related to services and physicians to service the high levels of patient census. So we do have some investments also in our managed care organization that I talked about in prior quarters as well. But as it relates to the targeted cost reductions, we're very much on plan with those items that we had identified. And we expect to continue to evaluate all areas of the company, as we've said before. That essentially, as we look at the patient revenue generation, patient service, cash collections and other areas critical to continue to grow the business. Brooks O'Neil - Dougherty & Company LLC: Great. And then MJ mentioned that it's likely we'll see reductions in any restructuring charges in the second half. I mean, generally speaking, can you give us just a feel for sort of the order of magnitude we should expect in that area in the second half?

Well, we had more in consulting fees as a component of the restructuring charges, Brooks, in the first half of the year. As you'll see in the quarterly filing that we'll make tomorrow, on a year-to-date basis, we've had $5.2 million in restructuring charges, and over 1/2 of that, $2.7 million, was in consulting fees. We also had about $1.5 million in severance and about $1 million in other expenses. So those costs, like the consulting, the biggest piece of that, we've completed that part of it. As Rick mentioned, we will have some facility rationalization cost in the second half of the year, and we may have a little bit more in severance charges. But the biggest pieces of that, we probably incurred. These consultants, they always charge you so much. Speaking as a consultant, I can throw that out there. Brooks O'Neil - Dougherty & Company LLC: There you go. All right. One last question. I appreciate the additional insights. Obviously, one thing investors are worried about is reimbursement pressures, particularly in government programs. Can you just summarize what you see in terms of the reimbursement outlook for say, the next 6 months or so?

I think, yes, in the Home Health, it's pretty wide public -- widely publicized, but as we stated is -- the Home Health impact related to the overall consolidated revenue is a small percentage. And while we've -- clearly, we've been impacted slightly by those changes. We believe that -- and there's been some disruption from the face-to-face. We believe that there's opportunities to improve and increase census. And we -- continually, we look at our operating structures within that segment of the business. And so I think that sort of -- I think there's more on plan potentially for next year in that area, offset by the demographics that are coming away of the industry. I think in the rest of the businesses, we're seeing opportunities in the Infusion side. Legislation's been reintroduced to cover the full Medicare Infusion benefit. And so hopefully, that can bode well for the -- going into 2012 or in'10 subsequent years. But I think given where pressures are on hospitals and other areas, opportunities to drive them into Homecare, we believe, still, is very strong, given our lowest cost of service, but also high levels of clinical capabilities and programs that essentially can be effective in servicing the pressures building in the government.

Our next question is from the line of Kyle Smith from Jefferies. Kyle Smith - Jefferies & Company, Inc.: Rick, you just mentioned legislation introduced about the Medicare home infusion benefit. And I know we'd seen that introduced repeatedly over the past years. Is there anything that you're seeing or hearing that would suggest that this might be the year it finally gained some traction and moves forward?

I think last week, AARP gave a huge boost of support and endorsed the effort. I also think that based on opportunities to demonstrate an effective service model that is in place today is an opportunity for some immediate cost savings and efficiencies without giving up on clinical services and outcomes and patient's quality of life. And so I think that given the budget pressures, the opportunity to push something through in that area, I think, has a higher percentage or probability of success. We, still, as an industry, need to do our grassroots efforts to get the word out and to educate. But I think this might be a good window for -- there might be some success there. Kyle Smith - Jefferies & Company, Inc.: Okay. Well, best of luck with that. In terms of the calling of unprofitable business, is that something where we've completely moved past the chunky phase, and it's going to just be the day-to-day blocking and tackling of your business and looking for things that may be need to be tweaked? Or should we be anticipating possibly some multimillion dollar additional reductions, as we go forward over the course of 2011?

I think that there might be a little bit legacy in prior quarters in the prior year. But I think our focus is -- we've called a lot of it sequentially quarter-to-quarter. And so Q1 in the Pharmacy Services side, we had mentioned there's a little bit of a tail, and so the total from Q4 was about $21 million that we had identified that was going to leave. Everything else, we're staying focused on, continuing to build our relationships and position in the Pharmacy Services segment. And then on the Infusion side, we've essentially settled into our contracted relationships, and now the focus is on pull-through and increasing patient census and positioning within each of our markets. Kyle Smith - Jefferies & Company, Inc.: Okay. Great. And MJ, great work on the working capital front, significant dollars pulled out of inventories. We saw a little bit of incremental here in the second quarter. Are there any areas, as you look out there now, where there's some potential for further gains in working capital, or is that story largely over?

We'll continue to put a focus on the receivables. We're placing more investment on the front end of the process, which I think, any smart and prudent provider will be trying to do. It's a challenging environment, but we've got great teamwork between operations and the reimbursement team. So we feel like there is more opportunity there. Inventory, we probably have it at its ideal point right now. We have gained quite a bit in operating cash flow from better managing the inventory profits, both in supply-chain initiatives and some system improvement. But I do see more opportunity on the receivables side, and I think we'll see that in the second half. Kyle Smith - Jefferies & Company, Inc.: Okay, fantastic. And I know you haven't been giving guidance. But at one point, I recall the comment that the path forward wasn't necessarily going to be linear. Yes, there might be some -- I took that as there might be some instances, where we take 2 or 3 steps forward and then one step back. Since the fourth quarter, your EBITDA sequentially improved both in the first and second quarter. Should we -- is there anything we should be aware of to keep from getting ahead of ourselves and setting expectations for the third and fourth quarter? Or do you feel that you really got the wind at your backs right now?

Our focus is really on continuing to execute on our plan, and so our objective is to continue to make the progress in a steady fashion. The opportunities we see is if we can continue to execute and make the progress that we've made the first 2 quarters, then I think we'll continue to make progress the rest of the year. And so we're still executing parts of our strategic assessment, strategic plan and those pieces, and so we're very much focused on sequential improvement and also dealing with the challenges that are thrown at us, as well. Kyle Smith - Jefferies & Company, Inc.: Okay. Good luck with that. Last question for me. I noticed that you added a breakout of products versus services revenues in the earnings release. I don't think it got much focus in the prepared remarks. Is there anything that we should be focusing in on that? Should we expect to see that breakout going forward? And how should we be thinking about the dynamics between those 2 lines in each of your segments?

You will be getting that going forward. The reason we did it this period is because we triggered the 10% threshold, which requires the breakdown between the product and the service revenue. It's a little challenging in our business to do that classification from the standpoint. So much of the reimbursement we get, it can be per diem, it can be a lump sum reimbursement, what have you. I think, probably the initial few quarters, I would begin to pay attention to that and monitor it as we go throughout the year. But from our standpoint, we really continue to put the focus on both the total gross profit margin that we receive from the various funds of therapy but also the contribution margin. So we don't hone in and focus as much specifically on the product versus the service component, because in some cases, it could be, as you know this in Pharmacy, you may have a 1% or 2% gross profit margin on certain products, but it could be that you have a 18% or 20% gross profit margin on the related service. So that's why we don't put too much emphasis on that.

And our last question is from the line of Mike Petusky from Noble Financial.

A few questions. I guess, in terms of the -- you spoke about rationalization of Pharmacy and also the corporate space, I mean, are those Q3 events, second half events? And do you have that dialed in any more than just that is coming?

Yes -- no, it's actually really the corporate facilities we have talked about, so it wasn't Pharmacy. So it's primarily the corporate facilities that we had talked about in prior calls. And so I think, we -- our expectations is that we will get out of at least one and potentially 2 of our 3 corporate locations by the end of the third quarter. And so you'll most likely see that come through in Q3, to the extent that we're able to vacate those. And so that is, essentially, what we're talking about in terms of rationalization. Also, in the quarter, we returned some square footage back to the landlord in our Eden Prairie corporate headquarters too. So just, essentially, re-evaluating the space that we have today in our need and continuing to trim unnecessary cost.

Okay. All right. I guess, I'm referring on the rationalization process. Okay. So can you talk about, obviously, in the short-term, you may be giving up a little bit in terms of pricing on these national contracts, but can you talk about United and Aetna and Humana? I mean, are these things ramping the way you'd like? Or are they close to ramping the way you like? Or are they kind of lagging?

I think that, for the most part, they're ramping the way we like. We have some more work to do on one of the payers, it got late in the game but -- so we like the positioning we have in regard to our placement in these plans. And I -- and we've still have more work to do in terms of our competitive positioning. But I think that again the direction is I think to reduce panel providers and -- at the local level and especially the other networks. And so I think being on the national panel provides us a good opportunity for access to members under these contracts.

And I had hoped you guys might start giving out some disease state data. Do you have anything anecdotally you could share, or as far as which disease states were strong or not strong?

I think, we didn't have that ready for communication, but I think as we've talked again before on the Pharmacy Services side, our oncology continues to grow in strong 20% level. We've seen some new drugs come on this year in terms of the MS category that has been strong for us. And also, a lot of our growth, as we've talked about, has been driven by some of the new direct managed care relationships we've put in place over last year that has benefited us so far this year, especially the second quarter.

You think that you guys will start to break that stuff out maybe in the next quarter or 2?

Yes. We definitely are looking at it. We just -- yes, we've committed to providing that level of additional information. We'll definitely take a look at it.

Yes, part of the hold back on that, Mike, is really more competitive. So we are evaluating that, and we'll see what we can do.

Okay. All right. I guess, one of the previous questioners tried to get at this a little bit. But I guess let me ask a more pointed question. Is the expectation internally there that Q3, in terms of top line and Q4 after that will be sequentially higher than Q2? Or that -- or are there things going on inside the business that would make that not the case?

Yes. I think that gets into guidance. I think that, as we said before, our focus is continuing to execute on our plan and essentially look to continue to grow patient census in areas that we're focused on. And so I think if we continue to make progress the way that we had the first 2 quarters, then I think the rest of the year will result in good shape for us as well. And so clearly, we have, our own internal budget that has some objectives of ours to accomplish, and we -- if that goes off, then I think we'll make some good progress.

I'm showing no further questions at this time. I'd like to turn the conference back to you.

Okay. Thank you. Thank you, everyone for joining our call today. I'd like to conclude by once again thanking our employees and the entire team at BioScrip for the work that they do everyday, servicing our customers and our patients. And have a good day. Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you, all, for your participation, and we ask that you please disconnect your lines. Thank you, everyone, and have a good day.