Ladies and gentlemen, thank you for standing by. And welcome to the Option Care Health Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Chief Financial Officer, Mike Shapiro. Thank you. Please go ahead, sir.

Thanks Bridget. Good morning and thank you for joining us for the Option Care Health Third Quarter Earnings Call. I am joined this morning by John Rademacher, Chief Executive Officer of Option Care Health. Before we begin, please note that during the call we will make certain forward looking statements that reflect our current views related to our future financial performance, future events and industry and market conditions. These forward looking conditions are subject to risks and uncertainties that could cause actual results to differ materially from our comments. We encourage you to review the information in the reports we file with the SEC regarding the specific risks and uncertainties. You should also review the section entitled forward-looking statements in this morning's press release. During the call, we'll use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that I'll turn the call over to John.

Thank you, Mike. And good morning, everyone. And thank you for joining us on what is our first earnings call as one organization. By now hopefully you have seen our press release sharing our results for the third quarter. On behalf of the entire leadership team and the over 6,000 team members of Option Care Health, I'm thrilled to share an update on our efforts to integrate and set the standard for alternate site infusion therapy. Overall, I am very pleased with the progress we have made. And I'm very proud of how our two businesses have come together in a short timeframe to begin building a truly extraordinary organization as one team with a unified purpose. I want to spend a few minutes reviewing the high-level financial results before revisiting the merits of the merger and providing an update on the progress over the past 90 days. Mike will walk you through the financial results for the quarter in a bit more detail. But I do want to reiterate that as a result of the merger on August 6, our performance as released this morning represents a full quarter of Option Care and incorporates legacy BioScrip results from the date of the merger through the end of the quarter. So the results as reported do not represent full quarter's results as a merged enterprise. While we are not providing pro forma results for the quarter, we'll try to frame the results on a comparable full quarter basis where possible. Net revenue for the quarter was $615.9 million representing a 24.7% growth over prior year on a reported basis. On a comparable basis, net revenue was up 2.3%. This is lighter than our historical results, but given the level of disruption over the past 90 days, as we've integrated two…

Thanks John. Again before I comment on the specific results for the third quarter, I want to reiterate John's earlier comments regarding the reported results. In our disclosures today, we are reporting the financial results for Option Care Health for the third quarter which is comprised of legacy Option Care results for the entire third quarter and BioScrip from August 6 prospectively. All historical results in our disclosures are Option Care standalone as mandated by the accounting standards. We'll do our best to provide high level comparative contact estimating results for a full quarter where possible in our comments. For the third quarter, net revenue of $615.9 million represents reported growth of 24.7% or approximately 2.3% on a comparable basis. As John mentioned earlier and as we've anticipated as we talked openly about our synergy capture efforts, integrating the commercial organizations generated some disruption in our revenue in the quarter. However, we are encouraged that we are in the later innings of the commercial integration and remain confident in our longer-term top-line expectations as a unified organization. Regarding revenue, recall that we deduct our provision for bad debt and recognize both positive and negative contractual adjustments to arrive at net revenue. As we brought the two enterprises together, we have harmonized our accounting policies and practices including our reserve methodology for bad debt and contractual revenue adjustments. We employ a conservative reserve methodology that objectively assessed its reserve requirements based on historical collection and for the quarter we have reserved 3.9% based on those criteria in the reported results. Note that as we unified the bad debt and contractual policy across the entire book, this has had an impact on the net revenue result as reported. In the reported results, we estimate that the policy has resulted in a $9…

[Operator Instructions] Our first question comes from the line of David MacDonald with SunTrust. Your line is open.

Hey, good morning, guys. Couple of quick questions. Mike, just first on the bad debt, can you kind of segment that out a little bit? We look at the 3.9 should we think about kind of legacy BIOS probably being in the 5% range and BioScrip in the 3% range. Is that a fair way to think about it? And then secondly, would you expect cash flow to be kind of normalized in the fourth quarter when we look at it? Then I got one or two more.

Sure, you bet, Dave. Yes, like as we harmonize the bad debt, again as you know, this is a relatively subjective area and it's -- there is a level of subjectivity and judgment, but as we bring it together the policy that we've established is relatively consistent with what we historically deployed. I think the way you're thinking about it is directionally correct in terms of the impact on the specific books. But again, as we think about it going forward, it's really one aging going forward and one hindsight analysis as we accrue going forward. As it relates to cash flow, again, look, we're very encouraged that excluding the disbursement outflow very encouraged that we are effectively generating cash excluding that one-time catch-up. So that gives us some wind in the sails as we go into the fourth quarter as we continue to look to fund the integration through cash generation. Again, we are not in a position to provide specific guidance for the fourth quarter, but clearly we feel good about our ability to fund the integration.

And, Mike, just on back on the cash flow is that kind of $9 million a relatively clean quarter? Does that $15 million kind of capture all of the, what one-time stops you've got the negative $6 million the quarter and then $15 million of what would consider one-time so as $9 million a fairly clean quarter in terms of how to think about it?

Yes. You are thinking about it right, Dave. We, one of the first things we wanted to do is get caught up which again as I mentioned gives us a chip to play as we engage with our procurement partners. So getting caught up gives us a better platform from which to collaborate with them. So you should definitely think about the catch -up as more of a one-time item in nature.

Okay. And then just two last questions, the first one you just touched on that's obviously a little bit more difficult have a constructive conversation with your vendors when your own money. So can you talk a little bit about the goodwill that you think that creates and the opportunity to kind of drive that into a more positive relationship? And then secondly, when you look at the kind of best of both initiatives, I was wondering if you could highlight a couple of areas where BIOS was candidly outperforming and some of the things that BIOS was doing that will be integrated into the best practices?

Yes. Dave, it's John. So let me start with the vendor platform and really what we've done with procurement. As you outlined, the ability to get caught up and to really have a platform to then start having more concrete conversations, it was an imperative out of the blocks and as Mike had outlined that was front and center something that we look to do. It has created the opportunity for us to sit down with many of the key vendors to start to look at not only taking the best contract, but start thinking about how we use our scale as a competitive advantage and more importantly, how we can make certain that we are maximizing the opportunities that are there. So the first order of magnitude was around taking that contract and applying that into the procurement. And as we get through that we're now starting to move into thinking about what renegotiation and realignment can be around those key vendors. As for the best of both question, yes, really excited about the way the teams are working together. Honestly, it is in so many ways better than expected when you had two organizations that were competitors against each other day to day in the marketplace, you're always a little bit leery around bringing them together. And I would tell you the team has responded very well to that. Some of the things that we took as real best practices from the BioScrip side, look, they're focused around driving growth on an organic basis and focusing around the entire organization, looking at the opportunities to sell from the speed to be focused around driving the top line is something that we've embedded across the organization. With Harriet Booker as the as Chief Operating Officer, there are some best practices within the way that the BioScrip team was leading their operations that we have started to pull through. And some of it is to in various ways eliminate some of the bureaucracy that we had as an Option Care organization. And being a little bit more nimble and responsive to the needs of the market based on that. And so pleased with the progress to date on both of those. And I really pleased with the team's willingness to be open minded and really look at how do we take the best and take a one plus one and make it greater than two.

And guys just last question, in your prepared remarks; I want to make sure I get this number right. I think you said as part of the field sales harmonization 45% of folks are focused on a new territory. Can you just give us a sense of once this kind of settles down and everyone's in their seat and it sounds like that's largely done, how big an expansion of the footprint you're able to attack from a sales standpoint, given the increased resources that you have with the combined company?

Yes. So and yes to just put a period on that so 45% of our field sales organization have some new structures, so some of them have some new accounts within their existing territory. And other have with re-talking of the districts have new territories in which they are covering. And so we knew that was going to be disruptive, but as I think we had talked about before there was significant amount of overlap you had situations where we would have resources in the same hospital or resources calling on the same referral sources. And so it really gives us an opportunity to reach that back and realign the resources. In general, we believe that we can get about 15% or 20% expansion in our coverage with the realignment of those resources. Now, we're not going to embed a resource into every hospital. We go through a criteria of establishing the size of the hospital, the number of beds; the number of discharges in the way that we align those resources. But we really believe that there's an opportunity as we start to build and grow this forward that our frequency and reach will expand in that, let's call 15% to 20% range.

Our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is open.

Good morning, guys. It's nice to start with a new company and the new structure and new team. So I'm excited for you. I guess the first one historically guys adjusted EBITDA margin has been a key topic for BioScrip investors. I recognize all the moving parts and I thought maybe we should start there and just talk a little bit about refreshing people's memory about why your adjusted EBITDA margins are lower than the historical BioScrip margins. And was wondering if you can make any attempt to kind of talk about year-over-year comparisons on each side of your business specifically? Are you seeing margin expansion or contraction on the Option Care side on the BioScrip side and recognize that's going to be less and less sort of relevant going forward. But I'm just curious where we're starting today.

Sure, you bet, Brooks. Thanks for the question. So again one of the distinct differences is as we try to articulate over the last few months since announcing the merger. There is a difference in the revenue book and basis for the organizations. On the legacy Option Care side, again, we've invested in a portfolio of limited distribution therapies, which are somewhat finite in terms of the patient population. Again, many times these are orphan populations or smaller patient cohorts. We find these to be attractive complementary therapies that they're a more efficient therapy class to collaborate with biopharma as they bring these to market. They do admittedly have a lower margin profile again because we're bearing the exorbitant cost of the therapy and our revenue. So whereas these are efficient therapies to treat strategically. They're very complimentary for our chronic therapy portfolio. They do have a negative impact on the gross margin rate, still attractive gross margin dollar but from a rate perspective that has had a lowering effect on our EBITDA margin overall. When you really normalized for the limited distribution and high cost chronic therapies, the EBITDA margins are relatively comparable from the start. On the -- in response from John's comment, we made a number of investments in technology and infrastructure. On our side, we are seeing EBITDA expansion but again, Brooks, the further we get into the integration it becomes much more challenging to really talk to EBITDA margins on either side. But the bottom line is, again, back to why we're excited about the merger and integrating these two organizations is the tremendous cost synergy opportunity, which frankly the best way to articulate it that is by demonstrating to you the EBITDA margin expansion over the next several quarters.

Absolutely. I get that totally. So I appreciate all that color. I have two more just quick ones. One, there was quite a bit of commentary or discussion during the quarter about pressures relative to IDIG. Can you just give us an update on sort of your perspective on where you're at in the cycle or with that particular therapy?

Yes. Brooks. Thanks. It's John. We feel that we're in a really strong position in the relationships that we have across multiple manufacturers and providers of the product. So, yes, it is tight, yes, there are constraints within the supply lines associated with that. But we've been pretty nimble in our ability to manage that effectively and we do have -- we're clinically appropriate. We do have alternatives that we can provide to patients and to prescribers in the marketplace. So we operate with a center of excellence that really focuses around managing that patient population effectively. We work proactively with our referral sources in the prescribing physicians to really get a best match of a product to the patient based on availability and clinical efficacy. So we really believe that that gives strength for us as an organization is something we're going to continue to work closely as we move forward with our procurement and developing those deeper relationships with the vendor partners to make certain that we have access to the products and services.

And Brooks, it's Mike. The one thing I'd add is this is an area where scale absolutely matters. You've been following the IG market for years. You know that this is an environment where it's subject to product disruption and shortages from time to time and given our procurement strategy which is to primarily procure these with direct relationships through manufacturers, with the scale that we have and again now that we're caught up and we have more amicable relationships, this gives us the strength to weather some of those disruptions probably a little bit better than many in this space.

Yes. That's great. I totally get that. Last question, obviously, there was some commentary or Medicare related legislation this week. I'm just curious that my sense is clearly the CMS is still reluctant to give you guys full and fair reimbursement for infusion services. Curious if you have any commentary about where you stand now and where you think this is going to ultimately play out going forward?

Yes. Brooks, yes, a lot of commentary this week and if anything CMS just reaffirmed what has been their historic position around an infusion day in the way that they're looking to reimburse home infusion. We didn't -- we weren't caught by surprise on that. We expected that that was going to be their position given that that has been their message up to this point. We're continuing to vigorously fight this. I mean we are in partnership with NHIA, continue to look at all alternatives to do that. We do not believe that the current structure and reimbursement scheme is fair in the value that we're able to deliver through that process. And so we're looking at all available ways to influence and then more importantly to get a better outcome on that from the lawsuits that has been filed against HHS and CMS all the way to working with members of Congress to get better legislation that's more definitive with this language around that. So we'll continue to fight the fight on this because we believe we're on the right side of the argument. We offer high quality, appropriate cost care in a setting in which patients want to be served. And quite frankly, we believe that CMS and the beneficiaries would benefit in lowering cost and better outcome. So we will continue to fight that fight.

Cool. I get that. I just want to clarify; I think I mean my own sense is it's all upside from here. There's absolutely no downside in the current posture from CMS, right?

Correct. At this point in time, we have --there's nothing in our numbers that would -- that we have put for the upside on that. So anything that would move in a favorable way would be something that would be upside for us.

Our next question is from Brian Tanquilut with Jeffries. Your line is open.

Hey, guys. Jason Plagman for Brian. Just wanted to ask if the numbers and the growth and synergy targets you laid out in the proxy, any material changes from those so far that now that you're a couple months into the integration. Just wondering if anything has changed from your thoughts prior to the deal closing?

Hey, Jason. It's Mike. No, again, as we mentioned, obviously, it's early innings but very encouraged with the progress over the last couple of months. As we've tried to convey a high degree of confidence in at least $60 million of net synergies. And I'd characterize our confidence as high or higher than when we closed the merger. So good first, as John mentioned, it's early. There's a lot ahead of us. There's some complexity over the next 18 to 24 months, but encouraging progress thus far.

Great and then. Just wondering what reaction you've heard since the deal closed from your clients and your referral sources given, how they're viewing the combined organization in their ability to partner with the combiner organization?

Yes. Jason. It's John. I think in general it has been positively received in many instances the breadth of the product portfolio that now we can bring; the clinical expertise that is available when you look at the combined organization. And what we can bring to the equation as well as we've talked before about taking the best of both around the efficiencies in effective way to onboard patients and bring that ahead. So, in general, I'd say it's been very positively received. The reach we have when you look at the national platform is something that is extremely helpful. And in many of those situations especially with some of the major academic medical centers or where you have medical tourism, if you want to think of it that way of, patients that are traveling from large distances to receive care at one of the settings. Our ability to help with that transition no matter where that patient may reside is also a benefit that we can bring, given the size and scale of our platform.

And our last question comes from the line of Mike Petusky with Barrington Research. Your line is open.

Hey, guys. Good morning. Thanks for doing the call and taking the questions. So I guess when you guys just looking ahead, when you guys do give guidance, have you guys sort of dialed in yet how or is it full year, is it quarterly, is it going to be sort of revenue adjusted EBITDA, is there going to be more to it? Have you guys thought about how the cadence of the, I guess the cadence or the coverage of the guidance and then the important metrics you want to provide?

Yes. Mike, it's Mike. We're still refining that. I think we're generally going to provide annual expectations. Naturally, we'll be providing revenue and an adjusted EBITDA. How far beyond that we go? We're still refining but we'll provide annual guidance on our fourth-quarter call and Q1.

Okay, great. And then just in terms of synergies that I know it's super early, but as you sort of gets a few quarters into the integration efforts. I mean will you guys provide sort of a quantification or just items that, hey, we've now chucked off this issue or this issue -- have you guys thought about how you're going to sort of communicate that either quantitatively or just I guess qualitatively?

Yes. We're absolutely committed to providing updates on [Technical Difficulty] Hey, Mike.

Yes.

Hey, apologies for that. We had little bit telecommunications challenge.

No problem. Sometimes I ask questions that make executives who want hang up; they normally do, go all the way and do that. Thanks. Yes. I just ask along the lines of synergy updates and if you're going to provide quantification of that or just items that you've chucked off.

Yes. My apologies again. Yes, we're committed to providing updates. Again, as we get further away from the merger date it becomes a little bit more difficult to quantify, but we're absolutely going to provide updates on our progress. Again, how granular we are getting in the dollars, again, the best way to show evidence of the synergies through is the meaningful EBITDA margin expansion. And so we'll do our best to provide you with feedback on our progress.

Okay and then just last one. And I may have missed this, you may have spoken to this earlier, but other than debt pay down which is obviously a big deal in terms of whatever free cash you guys generate. What other capital allocation priorities you see? I mean is with 96% or 97% coverage whatever you guys have, I mean is M&A actually something that you guys need to look at or could you just speak to besides debt pay down capital allocation priority. Thanks.

Yes. So this is John. I think as we're looking at the priorities as you say for at this point in time adding additional pharmacies is not necessarily on the top of our list. We've got a lot to do with integration of what we have and making certain that we maximize the value there. We certainly want to make our priorities around looking for near adjacencies that may make sense. We have, as we had outlined before we have some CapEx that we're going to need to deploy for bringing everything up to the same high standards and making certain that we as an organization are leveraging that technology platform across all of the facilities as we move ahead. So there is some use of the dollars within that that we would say, but I would say from a priority perspective, certainly, we having cash on the balance sheet and really making certain that we get through the integration is first and foremost including the CapEx associate with that. And then I'd say, we're always looking for opportunities for near adjacencies that could be complementary to what we do in the business.

But nonetheless, Mike again, and just to reaffirm some of the comments we made that it's early but our confidence in the free cash flow potential of this enterprises is as strong as ever. And we think that that's a key tenet of the merger. And as John said, I think near term it was fund the integration makes sure we've got adequate liquidity and we'll look at the different alternatives down the road.

Our next question is from Richard Close from Canaccord. Your line is open.

Great. Thanks for the questions. Congratulations on the merger. Jumped on the call late, a little late here, but just curious if there's anything to call out in the fourth quarter. I understand you're not giving guidance, but is there anything we should think about with the fourth quarter in terms of our modeling efforts?

Yes, Richard. As you mentioned, we're just not in a position to be providing any specific guidance. I think some of the subjective comments we've made is obviously we're encouraged having gotten to the later stages of the commercial integration, which again getting that most of that disruption behind us is encouraging. Obviously, we're in full swing on pursuing the synergies across both the procurement effort, as well as driving the spending savings. So again encouraged by the near term and again as John mentioned, our critical priority is with the commercial organization driving the top-line acceleration. So again beyond that there's not a lot that we can provide around thoughts on how to model out the fourth quarter.

Okay and then maybe bigger picture, obviously, you still in the early days here but any thoughts with respect to what you think the long-term growth and maybe aspirational margin targets are for the company?

Yes. I mean the way we think about it again, we think that the near-term driving the synergies that will manifest in a route in a meaningful expansion on the EBITDA margin. Then again, as we've articulated our expectations going forward, we see this enterprises one that with top line in the mid single digits delivering two 2x to 3x bottom line earnings leverage is something that frankly we think is a realistic expectation. And so over time, we think that leads this enterprise into an EBITDA margin in high single digits with very strong cash flow potential. End of Q&A

Thank you. And I'm not showing you any further questions. So I'll now turn the call back over to John Rademacher for closing remarks.

Yes. Thanks Bridget. Thank you everyone for joining us this morning. And as I hope you hear from our commentary, we are really excited about the progress that we've made and more importantly about the potential that the business has as we look forward. So with that, we'll look forward to providing further updates as we get into fourth quarter earnings released in the first quarter. And so thanks everyone for your time and participation this morning. And hope everyone has a great day. Take care.

Ladies and gentlemen, that does conclude the program. You may now disconnect.