Executive
Mike Moran - Chairman, President & Chief Executive Officer
Russ Fichera - Chief Financial Officer
Rich Cockrell - Investor Relations
Analyst
Mark Arnold - Piper Jaffray
Mike Petusky - Noble Research
Steve Anderson -Venator Capital Management
Allion Healthcare Inc. (ALLI) Q4 2008 Earnings Call March 4, 2009 5:00 PM ET
Operator
Good afternoon. My name is Angelina and I will be your conference operator today. At this time, I would like to welcome everyone to the Allion fourth quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. Mr. Cockrell, you may begin your conference.
Rich Cockrell
Thank you and welcome to the Allion Healthcare’s fourth quarter 2008 conference call. Today we’ll review the results that were announced early today in a press release. If you have not received that press release feel free to access at via www.allianhealthcare.com and access the Investor Relation side.
Today’s conference call will include prepared remarks by Mike Moran, Allion’s President and Chief Executive Officer and Russ Fichera, Chief Financial Officer. Our conference call this afternoon will include forward-looking statements about our business, including guidance on future plans, revenues and earnings.
These statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. More information about potential risk factors may be found under the heading risk factors in our annual report on Form 10-K for the year ended December 31, 2007 and our quarterly report on Form 10-Q for the quarter ended September 30, 2008, both of which have been filed with the SEC.
Also, quarterly results discussed on this call may reflect adjustments for expenses related to the Biomed acquisition and other related adjustments. Please refer to the non-GAAP reconciliation of these metrics contained in our earnings release issued this afternoon and available as Exhibit 99.1 to our current report on Form 8-K filed today with the SEC.
I’d now like to turn the call over to Mike Moran, our Chief Executive Officer. Go ahead, Mike.
Mike Moran
Thank you Rich and good afternoon everyone. Thank you for joining us today to discuss Allion Healthcare’s fourth quarter and full year 2008 financial results. After some opening comments, I’ll turn the call over to Russ Fichera for a financial update and then we will open up the call for questions.
2008 was another very stronger year for Allion Healthcare. We again delivered solid organic growth from our HIV specialty pharmacy platform, as well as we completed a transformational acquisition of Biomed, which diversified both our revenue and our payor mix. As we enter 2009, we believe that our national integrated specialty pharmacy platform is well positioned to take advantage of market opportunities that we see.
In the fourth quarter of 2008 our net revenues increased by more than 50% to $97 million and our net income more than doubled to $3.1 million, when compared to 2007 Q4 results. Our total 2008 results; were equally as strong with revenues increasing to more than $340 million and adjusted EBITDA of more than $25 million.
Our financial and operation teams were able to integrate Biomed’s operations into Allion seamlessly and achieve better than anticipated results across our business lines, but focusing on resources and efforts on specific disease states and niche opportunities; we believe we’ve shown that we can provide strong clinical differences to our patients and customers, which translate into the positive financial performance.
Our Specialty HIV pharmacy and disease management model had an outstanding year. With strong organic growth and two large community partnerships established on the West Coast, we believe our model will continue to deliver on both the revenue and EBITDA lines. Our commitment to both intercity clinics and state governments, were HIV has been ravaging people for years has positioned us as a leader in developing a treatment model for patients living with this diseases.
Patients need adherence tools, packaging and expert pharmacist to deal with this diseases and our clinical and cost outcome evaluations continue to demonstrate we’re the best in what we do. By having our clinical teams focus on one disease state, we believe we can share information about new treatment options and reacts to market conditions across the country better and if we’re asking our clinical teams to treat multiple disease states.
We also believe the pharma will begin to see us as the right partners to treat patients with HIV across the country and assist us in reaching more clinics and patients. I’d also like to update you on the progress we’re making on our two new partnerships. Our Lifelong alliance in Seattle has done an excellent job on educating the community about the services and commitment to patient clear, we jointly provide to this market.
We have a strong marketing and clinical team in place with Brad, Tess, Eric and Andrew, increasing the flow of new patient referrals and we are now seeing new patients on a daily basis.
We’ve had state and local politicians and Executive Directors tour the new Seattle facility and packaging machine capabilities and we consistently hear the same comments; that the clinical capabilities and the combination of HIV medication and nutritional delivery is something that every patient in Seattle should be on. As we see a steady increase in the number of new patients treated and signing up for our services in Seattle, we are very positive about the 2009 expectations for lifelong.
In San Francisco, our relationship with Under One Roof has also begun to show early positive results. Our clinical team of Randy, Roger, Michael, as well as Mercedes’, have been strong inroads in the community. The potential in San Francisco is one we are clearly focused on taking advantage of and we are bringing more agencies into our community resource space and creating local awareness in raising the bar on clinical services for HIV adherence in San Francisco.
As people begin to realize that we were the only HIV pharmacy to support the Tenderloin area with our local presence and full services, they want to work with us to expand patient awareness and adherence throughout the whole city and Bay Area. We have high expectations for strong growth within the San Francisco market during 2009.
We also continue to move forward with discussions across the country with other large AIDS service organizations and plan to add additional partnerships during 2009. We are also involved in a national multi site clinical evaluation of Nutraplete with Galea Life Sciences. We currently have patients on service in Miami and California and should have several hundred patients on service in Seattle over the next few months.
We believe that our exclusive relationship with Galea, which we completed early on in their product development cycle, will begin to drive new patients towards this year, and we are also excited about the results, both patients and physicians as seeing with its nutritional product.
Our Biomed Specialty Infusion platform continues to perform better than we anticipated. Through the first nine month of performance since we acquire them, Biomed has grown to a $100 million company focused on a niche business with excellent clinical services and customer support.
We believe that people can now understand what a great and unique team of people we acquired and are now partnered with. The operational and reimbursement management team of Janet and Renee in Philadelphia along with sales management group Joe, Ryan, Peter and Hardy across the country have developed a leading clinical service model, focused on several high touch and high service clinical condition.
By educating physicians and patients about the full service clinical model and the experienced reimbursement team, the sales group has shown they really understand the market and can deliver strong organic growth in this model. We believe they are fully integrated into our financial and operating reporting systems and look for a solid 2009 performance from Biomed.
We have also begun to work on an expanded project with a pharmaceutical partner on a Hepatitis C project and are treating patients co-infected with HIV. We have discussed that as many as 40% of inner city patients are believed to be co-infected and most have not yet been treated for Hepatitis C.
We are working to educate both physicians and patients about treatment options and because we are looking to treat patients that are co-infected. We believe our inner city distribution model and HIV expertise, should position us to benefit from this relationship. To be clear, we are currently treating some patients and co-infected now. However, this will be a new joint marketing and education program with pharmacy partner.
Finally, a few comment on the reimbursement climate. As many of you by now may know, a federal judge has again blocked the purposed Medi-Cal cut of 5% of pharmacy services that were to take place in the month of March or April of 2009. We have been and will continue to work hard to demonstrate that cutting medication reimbursement or specific diseases base will increase overall costs for the system. We continue to work hard in both the state and federal level to differentiate our clinical and business model and hope to serve as partial answer for the diseases states we currently serve with new administration.
Finally, I’d like to thank all that employees that I do not have time to mention on the call today across country. We are very fortunate to have such dedicated and focused people working with us. It is only as a result of their efforts that we have achieved such positive financial results and are so well position for a very strong 2009.
I’d now like to turn the call over the Russ Fichera, for a more in-depth review of our financial results.
Russ Fichera
Thanks Mike and good afternoon. As Mike reported, net sales for the quarter increased 52% to $97 million, compared to $64 million in the same quarter of last year. We had another quarter, where both business segments generated strong organic growth was over 14% year-over-year growth from our Specialty HIV segment and a $2.3 million or 11% sequential increase from our specialty infusion segment, which contributed $24.2 million in net sale.
The year-over-year revenue growth of our Specialty HIV unit was equally impacted by an increase in both the number of prescriptions filled and revenue per script. Sequential growth in our Specialty Infusion unit came from both major product lines with our Blood Factor and IVIG mix maintaining Q3 levels of 61% and 33% of net sales respectively.
Gross profit came in at $17.4 million or 18% of net sales. The increase over the 14% reported for the same quarter of last year reflects the higher gross margins generated by our Specialty Infusion business. Sequentially, gross profit as a percentage of revenues approximated Q3 2008 levels.
For the coming quarter, SG&A increased by approximately $3 million to $9.8 million or 10.2% of revenue from the $6.7 million or 10.6% of revenue reported for the same period in 2007. The increase from the same period in 2007 was principally related to the addition of our Specialty Infusion business. The decrease as a percentage of revenue was due in part, to the higher legal expenses in the prior period, principally related to the Oris litigation.
We do not expect to realize any cost efficiencies as a result of the Biomed acquisition. Our adjusted EBITDA for the quarter increased to $7.6 million from $2.2 million for the same period in 2007. Our Specialty Infusion division added $4.3 million to the current quarter and continues to operate ahead of the earn-out threshold, which was set at $14.8 million.
At December 31, 2008 we had $18.4 million in cash and cash equivalent. Given the uncertainty in the credit markets, we did not pay down any amounts outstanding under our revolver, which remain at $17.8 million as of December 31, 2008. Our LIBOR based interest rate on our senior debt was under 5% as of the end of the year and was averaging over 6% for the entire fourth quarter.
For the year, $4.4 million in cash was provided by operation. Operating cash was negatively impacted by the payment of the settlement of the Oris litigation case and the working capital required to funding growth of our business including a $12 million increase in accounts receivable in 2008.
Accounts receivable days sales outstanding increased from a historical average of 25 to 27 days, to approximately 43 days due to the acquisition of Biomed’s receivables, which have a longer payment cycle than the Specialty HIV receivable. DSO increased sequentially by less than two days over the 41 days reported for the third quarter of this year.
Approximately half of that sequential increase in DSO resulted from a greater mix of the Specialty Infusion revenues. Net income for the fourth quarter was $3.1 million or $0.12 per share, compared to $1.1 million or $0.06 per share for the same period in 2007.
Calendar year 2009 guidance was provided in our press release, which included net sales in a range of $400 million to $450 million and earnings per diluted share in a range of $0.48 to $0.50. This guidance includes our net estimate of a proposed 1% and 5% Medi-Cal rate reduction recently announced by the State of California and the dilutive effect related to the Biomed earn out. The guidance also assumes a 42% effective tax rate.
This concludes my remarks and I’ll turn the call back over to Mike.
Mike Moran
Thanks, Russ and at this time we’d be prepared to take any questions that people might have Rich.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Mark Arnold - Piper Jaffray.
Mark Arnold - Piper Jaffray
I just wanted to start and I know you guys have gone through this with me before both online and offline, but the Biomed earn out payment, it’s going to happen here not to distant future. Can you maybe walk through what in your guidance? How you have expected to make that payment in terms of stock cash or debt?
Russ Fichera
Sure, Mark, it’s Russ. We estimate earn out will be somewhere in the $30 million to $40 million range. Under our agreement, any earn out less than $42 million gets paid half in stock and half in cash and/or debt, depending on the working capital availability. Our estimates assume that one half of the year and that will be paid at approximately 2 million shares. As you may recall our agreement calls for the conversion to shares at a collar of $8 to $10 per share, we’re assuming the other half gets paid with subordinated debt.
Mark Arnold - Piper Jaffray
Russ, can you just go back to that portion for a second. So, 2 million shares, the assumption there is at what was the collar again?
Russ Fichera
$8 to $10, so, I mean $8 bucks is the maximum amount of shares that can be issued collar.
Mark Arnold - Piper Jaffray
Okay, great and then the other half you said, right now cash or debt, but in giving your cash position, is it likely you guys will have to do some portion at least in some sort of debt security?
Russ Fichera
Yes, we’re thinking that way.
Mark Arnold - Piper Jaffray
Then Mike, your mentions both the Seattle and San Francisco partnerships in your prepared remarks, are there any metrics you can provide us in terms of number of patients or kind of the estimated? Anything you can provide us on the ramp up, more specifically in Seattle, but both on Seattle and San Francisco that we can look at in terms of gauging, where you are in progress on that so far?
Mike Moran
Sure, I mean in Seattle, Mark, I think we’re significantly into triple digits of patients on service right now, and that is actually picking up on a nice basis. There are 700 or 800 patients coming through the walk-in clinic that we’ve been talking to now for a couple of months and we’re seeing a steady flow of those patients, transferring their prescriptions over. As we said, we’ve had a lot of outside regional people coming into take a look at the packaging and see what’s available for them. So, we feel really pretty good about where it’s tracking up.
As we mentioned a little bit talked with Galea about getting patients up in the Seattle market, which is very focused on attrition involved in a clinical evaluation and they’re pretty committed that they’re going to get an additional couple of hundred patients that we’re not yet treating to come on board that will be getting both their HIV medications and beginning to take the new Nutraplete product. So, we’re obviously very pleased with what’s happened in Seattle.
We have a good team in place up there and I think we should have some pretty good visibility at the next quarter, but we’ve got a significant base of patients on service now. In San Francisco, which is the numbers on that high yet, but we are again seeing a steady flow of new patients coming into the new site we put down into the Castro district and using the community resource room.
So, where we know exactly what the number is, we just unfortunately can’t give out specific numbers without doing a lot more work on it, but feel pretty comfortable that you can use a significant triple digit number for Seattle.
Mark Arnold - Piper Jaffray
Then you mentioned Nutraplete. Does your guidance have any assumptions for pricing increases on the HIV side in 2009? How should we look at Nutraplete or similar types of products in terms of what they will do to your revenue per script here over the next year?
Mike Moran
I’ll answer and then I’ll let Russ to answer. I mean, I see the Nutraplete as a nutritional product that; because we’re the only ones and have got exclusive distribution rights, what we’re finding is that some of the doctors beginning to see it’s a much more HIV focused product.
Our upside on that product is really, it’s not a high revenue dollar and it’s not a great margin product, but it allows us to bring over more patients with HIV meds. So it’s not, the Nutraplete in my mind is not going to change the script count or revenue per patient, it will simply allow us to increase our numbers of patients by having something different to offer them.
Mark Arnold - Piper Jaffray
Okay.
Russ Fichera
Mark, this is Russ. In terms of pricing, revenue per script, I think that grew somewhere between 4% to 5% in ’08; we think that will continue to perform that level.
Mark Arnold - Piper Jaffray
Just a couple of other small ones here; Russ, is there anything that would describe or explain the depreciation and amortization kind of drop in that line item in the quarter?
Russ Fichera
Yes, we made an adjustment in the fourth quarter, taking about $5 million or so of purchase price out of intangibles after finalizing the accounting of it and moved it to goodwill. So, we took back some of the accumulated amortization and adjusted amortization going forward.
Mark Arnold - Piper Jaffray
That’s from bio Biomed?
Russ Fichera
Yes, I’m sorry.
Mark Arnold - Piper Jaffray
Then just one last one, as we think about you talked about Medi-Cal in your prepared remarks, but can you just remind me of the timing and the process related to the renewal of your supplemental reimbursement in New York?
Russ Fichera
Sure the New York is actually, we believe we’re certified and good through September of this year. So, the California one usually renews itself in July and the New York one would renew itself in September of this year.
Mark Arnold - Piper Jaffray
The process for that is legislative, can you just remind of how that process works?
Russ Fichera
Sure, we’ve had the New York since ’04 and then it place since July of ’04. So where we still it’s a annual renewal as we have gone through this process four or five times now that we’ve had different clinics come up with us they’ve shown pretty positive clinical outcomes to the state. The state has looked at the program. No one else has attempted to qualify for it. So, it’s part of the budget process they have simply included these specialty pharmacy program and renewed it.
Since the savings of state is realizing are significantly greater than the cost of continuing the program. So, as we enter May and June in New York goes through its budget process which they’ve preliminary started now. We are contacting and working with the budget process to again make sure that we get that renewed.
Operator
Your next question comes from of Mike Petusky - Noble Research.
Mike Petusky – Noble Research
Let me ask a question about the assumptions you’re making on Medi-Cal. Are you assuming in your guidance that this went into effect March 1 or did go into effect March 1, and then forward? Is that what the assumption is?
Russ Fichera
Yes, what we had assumed was that and we’re obviously trying to be conservative looking at with the budget issues in California that they had two different budget cuts on the pharmacy side for straight medication. The HIV medications were scheduled to be reduced by 5% across the board, either March 1 or April 1 and for other ancillary medications, there was also a pending 1% cut.
What happens and I think; you might have seen this federal judge that had overturned it last August, again as issued a stop order against the state from reducing any reimbursement cuts on these medications effective. So there won’t be any cut and sort of orders stands right now.
I think what we’ve tried to do is take a conservative approach and say that, if you look at the revenues we have in California that a Medi-Cal, the HIV side is approximately $58 million to $60 million, where we’re anticipating a pending 5% cut and our $9 million of other medications that would have had pending a 1% cut. We look that how we would have been able to mitigate some of that reimbursement cut and it included that in our guidance.
Obviously, with California being prevented from implementing those cuts, should that holds for the whole year, we would have obviously potential upside in our numbers, but being conservative, we have left the guidance including that cut as if it had taken place March or April 1.
Mike Petusky - Noble Research
I checked on this and the opinion of most of the folks that follow this issue on California thus probably doesn’t even comeback for review until the back half of the year and the opinion of one persons that follow this very closely, so this probably goes to the California Supreme Court and doesn’t even comeback until 2010 at the earliest, but okay so, if essential then there maybe $0.05 or $0.06 of potential upside if this does not in fact occur in 2009, is that about right, Russ or Mike?
Russ Fichera
I’d say, Mike when we look at this. I’ll take it two points, when we looked at this order, it’s obviously very favorable and it’s inline with what we believe should have happened is that. The order says that the California attempted to make a budget cut for financial reasons and didn’t comply with state and federal statutes that they have to show no harm will come to patients.
Since they didn’t do that, it’s going to be hard for them to overturn that cut in the short term. I think it’s probably fair to assume as we looked at our guidance that we would have been able to mitigate potentially half of that impact.
So, taking the whole $0.06, $0.05 upside maybe a little overreaching I think if there is no budget cut and everything worked the way we want, you could probably take half of that as a potential upside. With this economy, we just decided to wait a couple of months, make sure things get settled out and then we could address it down the road, but we obliviously feel pretty good about them making that cut.
Mike Petusky - Noble Research
Okay and I don’t know if you guys can show any light no this, but essentially in terms of your segment assumptions are you assuming basically kind of low double digit growth and HIV kind of 10% or slightly better than 10% of that kind of the assumption here.
Russ Fichera
That’s pretty good Mike.
Mike Moran
Yes, we’ve been that way before, so I think that we build this up Mike, we look that all the different regions and that have shown kind of double digit growth and would assume that would still be there.
Mike Petusky - Noble Research
That the timing for the earn out payment is that June 30 or is that at sometime in the second quarter?
Russ Fichera
Sometime in July.
Operator
Your next question comes from Steve Anderson - Venator Capital Management.
Steve Anderson -Venator Capital Management
I just had two kind of follow-up questions from the line question that was going on. First of all, when you said down of $0.05 to $0.06 in Medi-Cal and then you take into consideration some factors that mitigate a part of that. I was wondering, what type of mitigating factors that you wouldn’t go through with them now that’s been reversed at this point in time?
Mike Moran
I wouldn’t say that we wouldn’t go through that I think we look pretty hard and saying “Okay, if California was able to put a 5% cut in place”, how would be manage...
Steve Anderson -Venator Capital Management
Was it along cost cutting lines or that’s where I’m trying to get the clarity I guess.
Mike Moran
I think it would be probably more there were some I mean we always looking at ways that we could reduce some of our cost across business lines. Obviously, I think that we would still continue to try to mitigate different things that we would have, but if they cut the reimbursement there were such things is maybe reduce the amount of packaging you do the certain patients, if they weren’t going to get paid for it. Those are things that we would not now have to do.
So, if you getting pay to do special services, you want to make sure you still would be doing them. So, we would not be able to mitigate all of the cuts that we would have in place, but would be California prevented from earnings the budget cuts go through now, obviously we think we have potentially some upside. As we just kind of want to remain conservative and now let things get ahead of us, so we do feel really good about it.
Operator
Your final question comes from Nicholas Jansen - Raymond James.
Nicholas Jansen - Raymond James
Just quick on the allergenics, do you have anything factored in with that, with respect to your guidance and how is that unit ramping up faster than expected or is take a little time to show this pharma guys kind of what you can offer? Thanks.
Mike Moran
I think the answer to it is, that we have not put any significant revenue upside I think the first relationship coming out of the pharma that we announced a little bit of today, where we’re working with one of the Hep C manufacturers in a projects, where they’re going to helping us to educate physicians and we’ll up them educate physicians on co-infected treatment position within the HIV group is the first kind of positive results we’ve had from the allergenics group so that would not be of the separate line item we think that something that will be able to drive some business across our individual business unit lines. We’re not factoring in a separate revenue line yet from allergenics.
Operator
At this time, there are no further questions.
Rich Cockrell
Well, thank you very much for being on the call today. Of course, if you have any other questions feel free to call me or Mike or Russ directly. Thank you very much and have a great afternoon.
Mike Moran
Thank you everybody and great day
Operator
This concludes today’s conference call. You may now disconnect.
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