Option Care Health, Inc. (OPCH) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to BioScrip, Inc. Third Quarter Fiscal 2018 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kathryn Stalmack, Senior Vice President, General Counsel and Secretary.

Thank you, and good morning, and thanks for joining us today. BioScrip's third quarter 2018 financial results were released earlier this morning. A copy of the earnings release can be found in the Investor Relations section of our website at www.bioscrip.com. Within 2 hours of this call's completion, an audio replay will be available in the Investor Relations section of BioScrip's website. Dan Greenleaf, President and Chief Executive Officer; and Steve Deitsch, Senior Vice President, Chief Financial Officer and Treasurer, will host this morning's call. Before we get started, I'd like to remind everyone that our comments may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such forward-looking statements are based upon current expectations, and there can be no assurance that the results contemplated in these statements will be realized. Please refer to our press release and our reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements. These forward-looking statements are based upon information available to BioScrip today, and the company assumes no obligation to update statements as circumstances change. During this presentation, we will refer to adjusted EBITDA, a non-GAAP financial measure. A reconciliation to the most comparable GAAP financial measure is contained in our press release issued this morning. And now I'd like to turn the call over to Dan Greenleaf. Dan?

Thanks, Kathryn. Good morning, everyone, and thank you for joining us. This morning, I'll recap our third quarter 2018 financial results and address additional recent favorable developments. I'll then hand it over to Steve Deitsch, our Chief Financial Officer, for a more detailed discussion of our results. After that, Steve and I will be available to answer your questions. The third quarter of 2018 represents the beginning of a new chapter of organic revenue growth for BioScrip. When BioScrip acquired Home Solutions two years ago, and I assumed the leadership of the combined companies, our immediate focus was to improve the underlying profitability of the business, but I always felt confident that our organic revenue growth are at or above market rates would follow. Given the quality of BioScrip's assets and employee base, keep in mind, we consistently achieved double-digit organic revenue growth, when I led both Coram and Home Solutions. And I believe today's BioScrip is well positioned if not better as either of those two companies were. Having expanded the mix of profitable core therapies, successfully integrated Home Solutions, refinanced our senior credit facility, optimized product lines, top graded our senior leadership team and unified a formerly despaired organization under one identity and culture, we have transformed BioScrip from a turnaround into a growth story. This quarter, our revenues, excluding exited UnitedHealthcare product lines in the prior year, grew by 5%. To provide context for this accomplishment, this is the first quarter since the fourth quarter of 2015 that BioScrip achieved underlying organic revenue growth. We saw a continuation of revenue growth in October to commence the seasonally strong fourth quarter and expect that trend to continue. So what's driving our top line growth? Broadly speaking, company-wide commitment to service, quality, speed and results. I cannot say enough about the dedication of our teammates that I see each day. From the account executives and clinical liaisons in markets like Connecticut, to the patient admission representatives in Burbank, to the pharmacists in Tampa, the nurses in New York, the warehouse manager in Dallas and the Billing Center Managers in New Jersey. With the various turnaround disruptions behind us, we've been able to dedicate more time and energy to our company's mission and vision. And more specifically around sales, our sales team has benefited from new senior leadership, Harriet Booker and Rich Dennes, as well as an expanded and upgraded sales operation function plus newly appointed product line managers. We've enhanced sales training and tools, aligned incentives more effectively, layered in marketing programs and refined territory planning and mapping among other initiatives. The end result is improved sales force productivity. We continue to execute effectively in quality and outcomes, achieving unprecedented net promoter scores from patients, physicians, hospital case managers and social workers due to our consistency of onboarders -- onboarding and servicing patients. Moreover, we believe BioScrip is well positioned to capture market share in both the current and expanding home infusion market. We participate in a roughly $100 billion U.S. infusion industry, that is growing at an estimated 5% to 7%. Home infusion represents less than 15% of this market, implying a significant opportunity to gain share. The home infusion industry is accelerating the exodus of care from institutions to home, driven by lower costs and superior outcomes, delivered in patient-friendly environment that demonstrates improvement in patient satisfaction and quality of life. So why am I so excited about revenue growth? This kills very well. As we grow, we not only enjoy significant operating leverage, which we have demonstrated, we also provide ourselves with opportunities to invest, innovate, expand and lead new initiatives and alternative slide of care. This quarter, for example, we opened 2 branches of future pharmacies and 2 ambulatory infusion suites. Patients, hospitals, payers and the healthcare community continue to benefit from our commitment to reinvest in our people and our infrastructure. Moving on to another financial highlight. We achieved record third quarter EBITDA of $16.4 million, which was 25% higher than the prior year period, driven by a 510 basis point increase in gross product margin. While core revenue mix increased slightly by 10 basis points to 75.7% this quarter, we continue to maintain a longer-term target mix of 85% core, 15% noncore. We achieved all this despite the impacts of Hurricane Florence and leveling supply shortages of certain higher-margin therapies that temporarily dampened our overall margins and profitability in the third quarter. Overall, as you might expect, I am very pleased with this quarter's financial results. Moving on to some other recent developments starting with the Cures Fix. On October 31, CMS finalized its rule for the implementation of a transitional benefit payment, beginning January 1, 2019, for Medicare Part B home infusion services. We strongly disagree with CMS' interpretation of the law, and we will continue to fight together with Congress to ensure congressional intent is upheld. Based on CMS' final rule, we will continue to evaluate the future treatment of fee-for-service Medicare beneficiaries related to the 21st Century Cures Act, which primarily impacted congestive heart failure patients. Keep in mind, we plan to continue to service other governmental patients, including Medicare Advantage, Medicaid, TRICARE in the VA, given that their reimbursement methodologies are in alignment with providing appropriate care. Moreover, we maintain a diversified payer base and no-payer commercial or governmental represents more than 10% of our sales. This is in stark contrast to home health providers that have much more exposure to governmental pen stroke risk. Given our confidence in the underlying business and successful execution across the 4 pillars of our Vision 2020 strategy, we are reaffirming our previously communicated guidance of at least $75 million EBITDA in 2019. We are also excited to discuss our Vision 2020 strategy in more detail along with the tour of the branch of the future at our inaugural BioScrip Investor and Analyst Day at the Hyatt Regency in Reston, Virginia, on December 6. This event will showcase many members of our executive leadership team. And finally, another positive development. We were thrilled to appoint John McMahon as Vice President, Controller and Chief Accounting Officer of the company, effective October 19, 2018. John is a certified public accountant and has more than 25 years of accounting and finance experience, including over a decade in Principal Accounting Officer roles at publicly-traded companies, such as Heska Corporation where he was the Chief Financial Officer and Advanced Energy Industries, Inc., where he was the Corporate Controller. John's appointment rounds out what I consider to now be a best-in-class executive leadership team, regardless of healthcare -- regardless of whether being in healthcare or in the infusion industry. In conclusion, we remain as enthusiastic as ever about our ability to deliver long-term, sustainable growth and value creation to our stakeholders. With that, I'll turn it over to Steve.

Thank you, Dan, and good morning, everyone. My prepared remarks will include additional information on the company's third quarter performance and an update on our full year 2018 and 2019 guidance. Net revenue for the third quarter of 2018 was $181 million compared to $198.7 million in the third quarter of 2017, a decrease of $17.7 million or 8.9%. This decrease was driven primarily by our shift in strategy to focus on growing our core revenue mix, including the impact of the modifications to our contract with UnitedHealthcare completed a year ago. As Dan previously mentioned, during the third quarter of 2018, we achieved revenue growth of approximately 5%, excluding the impact of the UHC exit. Gross profit for the third quarter of 2018 decreased just $700,000 or 1% compared to the prior year period, primarily due to the reduction of revenue related to ASC 606 adoption and the UnitedHealthcare contract transition, which was offset almost entirely by improvements in gross profit margin. Gross profit margin for the third quarter of 2018 was 36.4%, a 510 basis point improvement compared to the prior year quarter, adjusted for the impact of ASC 606. Gross profit margin improved due to many factors, including among other things, higher core mix, supply chain improvements and formulary management. Operating expenses, excluding the impact of the implementation of ASC 606 were $50.7 million for the third quarter of 2018 compared to $47.5 million in the third quarter of 2017, reflecting increases in employee benefit expenses, professional service fees and stock-based compensation. Adjusted EBITDA for the third quarter of 2018 was $16.4 million compared to $13.1 million in the third quarter of 2017, a 25% improvement. The increase was driven primarily by the improved gross profit margin in the quarter. Restructuring, acquisition, integration and other expenses totaled approximately $900,000 for the third quarter of 2018, a $3.1 million or 77.5% reduction, driven by a reduction of restructuring, acquisition and integration activity. Net loss from continuing operations net of income taxes was $8.1 million for the third quarter of 2018 compared to a net loss from continuing operations net of income taxes of $13.1 million in the third quarter of 2017. This improvement reflected a $3.4 million increase in adjusted EBITDA, a $3.1 million decrease in restructuring, acquisition, integration and other expenses and a $0.1 million decrease in noncash expenses, including depreciation and amortization and stock-based compensation, offset by a $1.6 million increase in interest expense, resulting primarily from increased variable interest rates on our first and second lien note facilities. Cash inflow from operating activities was approximately $200,000 for the third quarter of 2018, as $13.8 million of operational cash inflow was primarily -- was partially offset by $13.6 million of interest payment, which as you remember, included our biannual bond interest payment of $8.8 million made in August. The $200,000 of operational cash inflow compares to a $4.4 million operational cash used in the prior year quarter. Operational cash flow and liquidity were impacted positively during the third quarter by the utilization of our prior strategic inventory purchases. However, continued slower collections of accounts receivable, primarily offset the positive impact in the reduction in the inventory. We expect cash balances during the fourth quarter to remain consistent or increase compared to third quarter levels as we expect to see increases of EBITDA and continue to normalize our strategic inventory purchase and cash collection trends. During October, we were pleased to see an acceleration in cash collected per day above third quarter levels. Total liquidity at September 30, 2018 was $18.9 million, consisting of cash. As Dan mentioned in his prepared remarks, given our strong revenue performance in the third quarter and the positive trends we've seen early in the fourth quarter, we are updating our full year revenue guidance to between $710 million and $720 million. We are reaffirming our previous adjusted EBITDA guidance for 2018 between $54 million and $58 million. While we anticipate 2008 revenue to be better than previously communicated, driven by improved field force effectiveness, our gross profit margins are somewhat lower than our previous expectations, driven primarily by changes in product mix and the impact of certain product shortages throughout the industry as well as some weather-related disruptions that caused temporary branch closures throughout the months of September and October. Looking to 2019, we are confident in our business and the team's ability to execute on the Vision 2020 strategy. Core revenue growth, revenue cycle optimization, supply chain efficiencies and strengthened managed care relationships will lead us to deliver a minimum of $75 million of adjusted EBITDA in 2019. That concludes our prepared remarks. Operator, we will now open up the call for questions.

[Operator Instructions]. Our first question comes from David MacDonald, SunTrust Robinson Humphrey.

First, can you just talk about -- we're hearing every payer on the planet increasingly talk about value-based care. I've heard a couple of your sizable competitors speak on their conference call about home infusion for the first time in a while. Seems like the visibility around the space and the side of care redirection opportunity has certainly been increasing. Can you just talk about kind of conversations with the payers? And it seems like a growing acknowledgment of the benefits of home infusion.

Yes, Dave, I think you're spot on. And candidly, I can't think of a conversation that we had with the payer over the last 6 months where this hasn't come up. And if you look at where we are relative to skilled nursing facilities, to hospitals, to physician offices, we are the lowest cost of care. As you know, the argument can be made pretty substantively about the fact that we have the safest place of care, and without a doubt, our Net Promoter Scores are in the neighborhood of Costco, and I suspect the other institutions that I'm talking about are probably not close to that. So if we look at cellulitis alone, which is, for those who're not familiar with this, inflammation of the skin and is a very common reason for patient to be seen in a hospital and variably discharged, the costs are -- differences are significant. So for example, in that case, it's $16,000 to be treated in an institution and $2,600 to be treated in the home. If we look at a product like REMICADE, which is used for rheumatoid arthritis, about 7% of the patient population is being seen in the home right now and 93% of them is being seen in some form of an institution. If we were to flip those numbers, Dave, from 7% to 93% to 93% 7%, the healthcare system alone on just redirecting care to the home would save $8 billion. And so, while I think like the value-based care discussions are really important, in other words, I think that outcomes and patient satisfaction matter. But I think the easier route, frankly, is just making sure that the patient is being seen in the right side of care. And if we did nothing else than that case, we'd save the -- we would save the healthcare system billions upon billions of dollars. The other piece of it that, I think, gets missed in this dialogue is the patient financial responsibility piece. And as we all know, it's not just about meeting deductibles, we all have coinsurance. And typically, that coinsurance is 20%. And 20% of $16,000 is a lot more than 20% of $2,600. So I think there is a whole level of kind of appropriate visibility and some level of fiduciary responsibility that we left the patients know that there is this differential in pricing. And again, without any -- really, as I see, it benefits for the patients.

And then Dan, can you just talk about some of the quality -- the quantifiable quality and outcome measures that you guys are measuring and bringing to the payers and talking about in terms of cost savings and patient satisfaction side of the whole gamut?

Yes, so some of them are things like, Dave, when we look at our relationship with the payers is, clearly, patient satisfaction is very important. As we mentioned, the net promoter scores. Readmission rates is something that obviously we keep close tab of and making sure that we're having a favorable impact on that. We also are evaluating things like infection rates because, again, we really believe those are significantly less than the home setting. And then there are other things like social determinants of care. I mean, this is a really big issue in terms of identifying outcomes and candidly who would be in a better position to determine that than us, when we have a nurse in the home and the nurse is sitting there evaluating the community and the condition of the people that are caring for this person or being involved in the care of this patient. There's nobody in a better position to help with that evaluation. Another area that there is a lot of interest in working with us on, too, Dave, is the medication reconciliation. I mean, this is, when you go into your home and we'll have it is that, you got all the medications hanging around and who is doing the reconciliation of that and that's also another role that we're playing in terms of just enhancing, I think, the care that is being delivered to the patients.

And then just, guys, two last questions. Steve, I was wondering, can you give us some sense -- ballpark what you would expect, what kind of free cash flow in 2019, what kind of fallout out of that $75 million pluses of adjusted EBITDA?

Well, we would expect to see a more normalized level of CapEx to start. So this year, we're going to be in the $12 million range, and I think 1% to 1.5% at the high end is the right way to think about CapEx. And then we expect to see improvements in our accounts receivable collections. As we mentioned in the prepared remarks, we saw a slowdown over the last couple of quarters. We believe all that -- all of those dollars are collectible, so we believe those will come back beginning in the fourth quarter and into 2019. And that will help us set any working capital use as the business grows organically -- continues to grow organically like we did this quarter at 5%. So I think when you think about $75 million minus CapEx, minus the slight working capital adjustment, but not as strong as what you might anticipate because we expect to see a little bit of a boomerang, I would say, from cash coming back in the next year.

Okay. And then just finally, demonstrate that the business looks like you're able to spend a little bit more money here and invest more in the core business. Can you talk a little bit about the ambulatory infusion suites and some of the suites of the future? And what type -- what our expectation should be for 2019 in terms of continuing to roll a few of these out?

Yes, I think we're going to continue to -- well, as it relates to kind of the branch in the future, I mean, that work is underway. I mean, we're going to be rolling versions of those out over the next 12 months. So we'll -- you'll continue to hear more about those. And for those of you who are planning to visit us at our Investor meeting in -- on December 6 in Reston, Virginia, we're going to get you all a tour of our brands of the future. So we're really excited about that. But Dave, those will continue. We've done some really great things with the ambulatory infusion suites. And without giving away our strategy, I think it's suffice to say that we expect to see substantive expansion in that area, not only in the utilization, which I believe will probably tossed in the industry based on what I know, but I also believe that there is significant opportunity to expand that in certain markets, which we'll be doing here in near and long term.

Our next session is from Brooks O'Neil, Lake Street Capital Markets.

I have a couple of questions too. First, Dan, you mentioned in both the press release and in your prepared comments this morning some disagreement with CMS regarding the interpretation of the Cures Fix. Could you just be more specific in what you see in CMS' disposition? And how you believe will be better to implement care for these folks?

Yes. So we're just -- so my impression of the way CMS interpreted this is they tried to fit it into a home health model. And they have not really -- they've not had a benefit for home infusion, Brooks. And as a result, their answer to everything was we need to have a nurse in the home. We need to have a nurse in the home. We need to have a nurse in the home. And that's not the way our business work. Our business -- the way our business works is that we try to get -- we try to provide patients with a mechanism that, yes, we will be taking care of you, but we also need you to be involved in your care as well. And that while we'll be working to behind the scenes and doing our pharmacy services and preparing medication for you, one of the advantages of not being in an institution is that we provide patient freedom. And that is what the CMS just doesn't understand. This is about patient freedom. This is about patient autonomy. This is about providing flexibility so that the patient can go on and lead their lives without having to be in an institution or having some nurse come into the home every day. And this is where CMS just doesn't get it, Brooks. And we're going to -- Congress gets it. I can tell you that. I can tell you every Congress person we spoke to understood the intent of what we had in mind and that what we had in mind was patient freedom. What we had in mind is patient flexibility. What we had in mind was patient autonomy. And the only thing that CMS could do was look through the hole of home health benefit. And we don't change that. We're doing something far more sophisticated than that, and we're administrating a benefit that provides 24/7 care. And what CMS doesn't want to do is pay us for the 24/7 care we're providing, and that's what the disconnect is. And clearly, Congress sees it as a disconnect as well and that CMS continues to operate independently of Congressional intent.

Yes, it's very helpful. I appreciate that. So second question. Obviously, 5%, whatever, the growth this quarter is a terrific improvement. What do you think is going to be important to drive you to that double-digit level you think might be possible for the company down the road?

Yes, Brooks. I think that I -- so first of all and foremost, we have to have the right, if you will, leadership in place. And again, Harriet provided that from an insurance standpoint. Certainly, Rich has stepped in and is doing a really great job. But it's really also around the next level down. Our Area Vice Presidents of Sales, our Regional Sale Directors, our District Sales Managers are playing a significant role in this as well, and they're actually in this week for training. But the other piece of it is just our sales operations function. If you ask me kind of what was the key change, we have a lady by -- or we have a number of people that are helping us on this front. But that was a major change, just the level of kind of focus that Harriet brought to this. And again, I think as we continue to get more sophisticated around this front, as we continue to ensure that we're compensating people for the work that needs to get done here appropriately, that we continue to focus on onboarding patients in an efficient and effective manner and getting back to referral partners and driving those Net Promoter Scores, in addition, creating partnership with hospitals and payers, I think all of those things will contribute to what I would foresee is double-digit growth. The beauty of it, Brooks, as you can imagine, just getting us to a point where we're showing year-over-year growth was a significant milestone in the evolution of this company. And it's similar to what we saw at Coram. It's similar to what we saw at Home Solutions. Kind of once you begin to bend the trend that, that momentum also helps to accelerate that move to our company that's growing on a double-digit basis.

That makes perfect sense. And then last question I had was, obviously, a lot of consolidation occurring in the health care space, specifically here, CVS with Aetna and Cigna with Express Scripts. How do you see those, if at all, impacting BioScrip and the opportunity you have in the home infusion marketplace?

It's not clear right now, frankly, Brooks. But here's what I'll say. It's a $100 billion market that's growing at 5% to 7%. The infusion market has less than 15% of that, despite the fact that we have higher Net Promoter Scores, despite the fact that we are significantly less expensive for the health care system and for the patient, despite the fact that we're getting superior outcomes. So while I see that, yes, there's noise in the marketplace, and there always will be, there is so much opportunity Brooks, that we're in control of that we believe fundamentally outweighs any of those other possibilities.

Our next question comes from Kevin Ellich, Craig-Hallum.

So first off, I know we're going to see the branch in the future, and you've talked a lot about the ambulatory infusion suite. Just wondering if you can give a little, I guess, context in terms of maybe quantifying how much growth we should see out of the shift to ambulatory infusion suite over the next couple of years.

I think it's -- the shift to ambulatory infusion suite isn't so much necessarily a growth opportunity per se. It's a business model efficiency opportunity. So in other words, we still do a fair amount of noncore, for example, Kevin. And it is the many instances in our best -- it's in our best interest to make sure that the patients that don't necessarily provide sustainable financial support to our business are being placed in facilities that keep our cost in check. And the ambulatory infusion suites offer us an opportunities in that area. So that's one. Two, delivery costs and nursing costs are generally lower. If you think about delivery costs, we're walking the product across the pharmacy and into the ambulatory infusion center. You think about 1 nurse can service 6 people versus 1, for example. We also believe there's community opportunities here, too. So for example, if we're having immunoglobulin days or rheumatoid arthritis days or -- we think there's real value from a compliance standpoint and from a patient satisfaction standpoint that, that's also something else that we see is valuable. And I will also say ambulatory infusion suite offers the patients the level of choice and flexibility. And just like anything else, like some patients may say, given everything else that's going on, I don't want you in my house. I want to have another avenue to have my care delivered. And we think the ambulatory infusion suite really helps around in terms of patient choice and flexibility.

Makes a lot of sense to me. I guess going back to your comments about the Medicare rule that came out. Wondering if you could talk about what industry -- what the industry is doing, what efforts they're making on the Hill, and if anything, legislative action NHIA can take.

Well, there's a lot going on, as you can imagine, I mean, as there have been through my first two years here. And I think we're very focused on, together with Congress, ensuring that the bill and the law is implemented as they intended. And there are several avenues we can go down that I think are important to explore. One could be a legislative fix that we've gotten. There's been talk with several Congress folks about just getting a legislative fix that doesn't give CMS any wiggle room, frankly. So that's one option. Another option is potentially sue CMS. And this is something that's not uncommon. It happens quite frequently and can be very effective when you're in situations like that where we feel that the language was not ambiguous, and we feel like we have a very strong case in that front. So that's another option. So those are the types of things at this stage that we're exploring. And again, we feel like, and I know Congress feels the same way, that the legislation was very, very clear and that for whatever reason, CMS decided to interpret it in a way that was not consistent with Congressional intent. And as you can imagine, we have a lot of support from Congress that plans to do everything they can to make sure that it's implemented in the way that they had intended.

Got it. Understood. And then switching over to maybe fees. It looks like DSO increased this quarter, you talked about slower collections. But I think you said in your prepared remarks that cash collections per day have already improved, above through Q2 levels. Could you talk about where you think DSO is going to shake out and what you guys are doing to improve cash collections?

Yes, thanks for that, Kevin. It's a major focus for everybody in the company. We've really been monitoring the cash collection situation and managing it actively. I guess first and foremost, I just wanted to say that we believe that this will slow down. It's a temporal impact that we expect to reverse itself over time. It's multifactorial is what I would tell you as well. There's no one silver bullet the board per se that I would say that's causing the slowdown in receivables. It's a complicated payer environment that we're navigating through, continuing to navigate through with the industry. But what I would tell you is the company is very focused on improvements on front end, improving our onboarding, which will decrease denials and improve the velocity of those getting out to payers. We're very focused on getting what contractually is owed to us from peers that they may not be paying right away even though the contracts dictates that it be paid. So we have our managed care team involved with those types of situations. And we've got a great revenue cycle team. We've got the best-in-class revenue cycle team that's implementing a number of other process improvements across the company. And we start each Monday morning off with a meeting where we focus all the senior leadership in the company on improving our cash collection. So it's front and center for us, and we're confident it will improve.

And I just want you to know, I mean, Kevin, I mean, the team that produce the best-in-class results at Coram are -- is here. And so I don't -- again, and I think at Coram, while we improve processes and restructured, there was a temporary slowdown. But at the end of the day, what it proved out was that the temporary slowdown actually -- again, I think there is slowdown to speed up is the term we use here. And we slow down to speed up because I think as we're seeing in October, our view is that from this point forward or even from the beginning of October forward, we expect to see the changes we made, the restructuring decisions we made to begin to bear superior fruit to what this company has historically done -- what the industry has historically done. And that's been -- that's what happened to Coram. It certainly happened at Home Solutions. And there's no reason to think that isn't going to happen here.

Got you. Like that, Dan, slow down to speed up. That's good. And then lastly, just wondering if there's any residual impacts from some of the supply constraints that you've seen in the last couple of quarters or any weather-related impacts that we should be thinking about from the hurricane.

Yes, I don't -- Kevin, I think -- I don't think so. I mean, there might be a little bit of stuff in October. But again, as you saw with our 25% increase in EBITDA year-over-year, I think we've got a team and a company that's just in a very good place to continue to expand and grow this business at better-than-market rates and don't feel as though what happened in September and October is going to have a lingering effect on the business.

Our next session comes from Brian Tanquilut, Jefferies.

So you mentioned some items have impacted gross profit to date. So I just wanted to see how you're looking for -- how do you see gross margin trending with the continuing shift of the core revenue mix? And maybe you -- where do you think you can still get the Coram rev mix over the next 12 months?

I don't know if we'll give any specific guidance on that but -- as to where that's going to end up, Kevin -- excuse me, Brian. But what I will say is that, as you could tell, we've improved gross product margin every step of the way here. And again, this quarter is no different with a 510 basis point improvement, which if you think about that, Kevin, just, it's kind of mind-boggling in terms of just how much we've improved that. We have great partnerships with manufacturers. We are very adept at managing formulary, Brian. I think Bob Roose and his team do an exceptional job as it relates to purchasing. Clearly, we have an aligned organization around that, including our -- particularly our operations team, which again has just done, with Harriet and her team, extraordinary job of formulary management. And as we decide there's a product that's on formulary, things change overnight here. And we expect our vendor and manufacturer and partner relationships to continue to expand and grow, and I expect our gross product margin will continue to expand and grow. There's nothing that suggests otherwise. And we've implemented generic formularies. We've implemented supply formularies. We've implemented an enteral formulary with Abbott that has achieved market share percent that Abbott has never achieved with anybody else or not even close to. And again, I think it just speaks to the organization's alignment, our operational team's commitment, the exceptional group of registered dietitians and our center of excellence in Norfolk that help drive these things. But I guess my point is, Brian, I don't know where it's going to end, but I don't see the end in sight.

Got it. And then, Dan, just a quick follow-up. I'm not sure if this has been asked because I jumped in the call late. And just on the interest rate exposure, how are you thinking about that and your ability to refinance over the next 12 to 18 months?

Well, I guess Steve can jump in here. Listen, Brian, I mean, this is a concern obviously for us. That being said, I mean, the best thing you can do to renegotiate your arrangement is to perform. And keep in mind, when we redid our financing the first time, and it was after the Cures Act. I mean, we literally were coming off of a $24 million reduction to our EBIT. And the time -- the EBITDA in 2016 was $32 million. So it wasn't like, hey, we're moving to a position of strength, and then we had a maturity due a year from July. And the blessing in all this, frankly, is this partnership with Ares. I mean, Ares has been -- has obviously stepped in and helped us with the debt. But they're now our fourth largest shareholder. So they continue to purchase equity, and so they're looking at it from a multitude of perspectives. And again, going into that, that was one of our objectives, was to have a partnership that yes, they're focused on the debt but they're also focused on the performance of the company. And I mentioned this before. They were integral in building out our Vision 2020 plan. They put a team here and worked together with them for 6 months. And I think we've got a -- that's why we feel, frankly, so confident about our $75 million and beyond. Because we've got such clarity around what we're trying to achieve and we've got very clear execution plans around that. So I guess at the end of the day here, Brian, we've got a great partner in Ares. They've been incredibly supportive. I suspect from June or before that of '19, when the make-whole interest payments on the first lien are behind us, that we're going to have a very robust discussion with them about how do we make sure that we're all getting the benefit of this relationship, not only on the equity side and the Vision 2020 side but also on the debt side.

Our next quarter comes from Mike Petusky, Barrington Research.

So Dan, I want to understand just a little bit better the CMS interpretation and what that actually means. So have you guys internally kind of quantified if nothing gets done and the interpretation that CMS has now is sort of what it is going forward? I mean, have you quantified how much that impacts you guys in terms of revs and EBITDA?

We did, $75 million, Mike. I'm just -- we -- given -- just given the fact the improvement and the foundation of the company, Mike, we -- it's in the $75 million number. And that's all at this point in place to -- and again, I don't mean to be so kind of hurt about this, but that's the way I look at it now. I mean, we've put all our energy and efforts into this for over two years. We think CMS unequivocally acted on its own and decided to ignore Congressional intent. And so we planned for a rainy day on this. And so our number is $75 million for next year. This year, we -- again, we've kept our commitments at $54 million, between $54 million and $58 million. And we're going to continue to fight this battle. We've got, I think, tremendous support from Congress on this because they think that CMS is out to lunch on this.

Right. So essentially, Dan, what I think I'm hearing you say is if you do get some kind of either forward reversal or some help on this interpretation that potentially is cushioned to the $75 million. I mean, that's essentially what you're saying?

I would agree with that, Mike.

All right, fantastic. I guess just jumping over real quick to the Vision 2020. As you think about the pillars there in the $40 million of incremental EBITDA that you see that's to come in over the next several years, I mean, is there kind of a cadence or a goal of, hey, we want to kind of capture $5 million to $10 million or $6 million to $8 million of that per year for the next several years? Or how do -- do you guys think about that in that way? Or how do you think about it?

We do, Mike. We definitely do. I mean, I think that if I look at the supply chain, I fully expect that we should have a goal of improving our supply chain efforts by the tune of $10 million a year. And I don't foresee that necessarily being a onetime item. I mean, we've built it in. But given how well Bob and his team have done, given how well, frankly, Harriet and her team have done in terms of implementing what we've done, given how well we've done in our -- just growing our therapy lines, particular core lines, that I just feel like that's something I'm going out on a limb a little bit, Bob's probably choking right now, but I could see that being a $10 million a year opportunity for us. And then I look at the other items like payer relations, certainly I think that will continue to evolve. And Dave brought up a great point. There's a lot of opportunity out there. And it's clear to us that the payers were saying, help us get there, and I think we really can be a very important part of the future of value-based care. So I -- what that ultimately comes out to be, I think that will continue to fold in over time. I think I've shared with you my, Mike, we've got a lot of success in getting price increases. And I think that's a reflection of the skill of our people. But I also think it's a reflection of where the industry is and where BioScrip is in many respects. A big part of this is sales growth. And there's nothing that suggests that we won't be able to continue to accelerate our sales growth, particularly in our core business. Our sales team is -- and just so you guys know, this is really -- sales is really multifactorial. And I know there's been a lot of credit given to the sales organization in terms of what it's done, but the operation team has played a significant role in this. The revenue cycle management team, particularly the intake and authorization and getting back to referral partners, played a huge role in this. And so again, I think those groups are very well aligned, and I would expect that those types of things will continue to grow and accelerate, Mike. And then amid -- we actually have 15 initiatives that are associated with Vision 2020. We highlight 4, but we also believe that the other 11 are being executed upon now as well. And we think they will be as additive to the tune of $10 million, but we also believe that they will be additive to some shape and form over time as well. And I also want to point out the other pillar is revenue cycle management. And there's nothing to suggest that we won't achieve what we set out to achieve in the first place. And that's -- certainly, operating expense in revenue cycle management matters, but the real lift in expense is improving bad debt. And Danny and his team have shown over and over and over again that they can lower bad debt by a percentage point plus. And so I guess my point on all this, and obviously, there's a lot of other people who play a role in that, Mike, but there's nothing that suggests that these things won't continue to enhance our earnings over the next 3 to 5 years.

Fantastic. Let me just take one real quick for Steve. Steve, as I look at the next 5 quarters, I only see one in which I think that it's unlikely you guys can generate kind of breakeven free cash or better. Is that -- I mean, is that a reasonable way to look at the next several quarters? I mean, I really only see the seasonally Q1 kind of -- weak Q1 seasonally as one that I don't think you can at least break even or possibly generate free cash.

Yes, I think that's the right way to think about it. Q1 is always our seasonally weakest quarter, as you know, for a variety of reasons. But when we -- you start thinking about, to Dave's question earlier when we started the call, with $75 million plus of EBITDA, and then you start normalizing a reasonable level of CapEx and a reasonable working capital headwind offset a bit by cash coming back in '19 related to '18, and of course, our cash interest payments, we're -- we'll be in a position to generating cash on a pretty regular basis each quarter. And I think, as you pointed, Q1 is a challenging quarter for us typically for 2 reasons. You also have the buy-in of bond interest payments in the first and third quarters. So you have a seasonal impact in the first quarter, but you also have bond interest payments. So both of those things make it a challenging quarter from a cash perspective.

The rest of the statement holds true?

Yes.

Ladies and gentlemen, we have reached the end of our question-and-answer session. Now I'd like to turn the call back to Dan Greenleaf for closing remarks.

All right. Thank you all for joining us today. As you can probably tell, we are very pleased with the solid momentum and the exception of our plans. Again, we beat consensus pretty significantly for, I don't know, second quarter, third quarter, fourth quarter in a row. And again, I -- we look forward to updating you again on our continued progress in March. For those of you who are going to be with us in December, we're very excited to have the opportunity to certainly showcase our management team, our best-in-class management team as well as showcase a best-in-class facility and team in Chantilly as well. And again, we look forward to also talking to you in March, when we will announce our fourth quarter 2018 financial results. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.