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BioScrip Inc. (NASDAQ:BIOS)

Q1 2014 Results Earnings Conference Call

May 8, 2014 8:30 AM ET

Executives

Lisa Wilson - Investor Relations

Rick Smith - President and CEO

Hai Tran - Chief Financial Officer

Analysts

Brooks O’Neil - Dougherty & Company

David MacDonald - SunTrust

Brian Tanquilut - Jefferies

Mike Petusky - Noble Financial

Dana Hambly - Stephens

Kyle Smith - Jefferies

Operator

Welcome to the BioScrip First Quarter 2014 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Friday, May 09, 2014. I would now like to turn the conference over to Lisa Wilson, Investor Relations for BioScrip. Please go ahead, ma’am.

Lisa Wilson

Good morning and thank you for joining us today. By now, you should have received a copy of our press release issued yesterday. If you have not received it, you may access it through the Investor Relations section of our website.

Rick Smith, President and Chief Executive Officer; and Hai Tran, Chief Financial Officer, will host this morning’s call. The call maybe also be accessed through our website at bioscrip.com. A replay will be available shortly after the call and will remain available for a period of two weeks. Interested parties can access the replay by dialing (800) 633-8284 in the U.S. and (402) 977-9140 internationally and entering access code 21715187. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com.

Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and 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. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press release and our annual and quarterly reports filed with the SEC. These forward-looking statements are based on information available to BioScrip today and the company assumes no obligation to update statements as circumstances change.

During this presentation, we will refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted earnings per diluted share. A reconciliation of such measures to the most comparable GAAP financial measure is contained in our press release issued yesterday and which can also be obtain from our website at bioscrip.com.

And now, I would like to turn the call over to Rick Smith. Rick?

Rick Smith

Thank you, Lisa. Good morning, everyone. And thank you for joining us to discuss our results for the first quarter of 2014. We apologize for the delay in issuing our results yesterday evening and appreciate the patience in this regard. I’m pleased to report a strong start to the year, with a 32.3% year-over-year increase in consolidated revenues, primarily driven by 43.4% year-over-year growth in infusion.

While part of our growth is due to a full quarter of contributions from HomeChoice and CarePoint Partners, our organic growth in higher margin core therapies once again increased by 20% year-over-year on a pro forma basis. Our Infusion platform is benefiting from an enhanced scale we built in 2013.

Overall, this segment delivered double-digit growth during the quarter, making us one of two companies in our industry to consistently achieve this target. We have seen growth from our expanded physician and payor relationship, as well as a successful integration of overlapping location. In addition, our de novo locations are starting to make contributions to our topline.

Also in the first quarter, we completed the sale of our Home Health segment to LHC Group, which allowed us to pay down debt and enhance our focus on developing our core business and capturing additional market share. At the same time, we are seeing the results of the cash collection initiatives we began in Q4 of last year.

We have been focused on the fundamentals of our business, while specifically driving stronger organic growth and strengthening cash flow and these efforts are contributing to a positive performance. Our acquisitions are settling in and are beginning to show their strength.

We have talked before about near-term revenue dyssynergies from our acquisitions. Typically, we see two to three quarters of impact from out-of-network patients being brought into network to our contract.

Once the acquired teams are integrated, trained and utilizing our payor relationships, organic revenue growth from the acquired platform starts to build with good sequential strength in the targeted core therapies.

InfuScience and HomeChoice are now fully integrated into our footprint and are meeting their operating target. On an LTM basis, HomeChoice is generating revenue that is 17% higher than our acquisition model and continues to meet the 12% to 14% EBITDA contribution range we have targeted.

We continue to make progress on the integration of CarePoint and expect to realize additional gross profit and operating expense synergies during the second and third quarters as that process moves forward.

The CarePoint employees are contributing to our growth and strategic positioning in each market. We are on track to complete our integration of CarePoint early in the second half of this year.

Going forward, we intend to continue building our leadership position in Infusion Services by leveraging our enhanced scale, resources and relationships. We have promising opportunities to increase our sponsorships and alliances with different payors and hospital systems, which rely on our clinical management programs to reduce costs associated with the site of service and transitional care programs.

We believe market trends towards lower healthcare costs will continue to support our efforts to drive strong organic growth. As I mentioned, we’ve been focused on building a solid cash foundation to self-fund our operations and reduce our debt levels. With that in mind, we’ve been working aggressively since last quarter to increase our reimbursement and cash collection efforts.

As you may recall, last year we rollout Phase 1 of a cash collection incentive plan to decrease the days sales outstanding at all of our locations. In addition to compensation incentive, we also derived creative ways to motivate cash collections at the personnel level, including awarding T-shirts of green, gold and platinum colors to teams that meet various DSO targets.

We have awarded several of our locations gold T-shirts for achieving DSO levels below 40 days. We have designated platinum for achieving a DSO level below 30 days. We have one branch that has earned that distinction this quarter and other locations are making progress towards that milestone.

These initial efforts are delivering promising results. In the third quarter of 2013, average monthly cash collections were approximately $56 million, now they are $70 million. Cash collections in April were up by approximately $27 million compared to September of 2013 just before we launched the program. Building on this success, we have now launched Phase 2 of our reimbursement incentive plan which focuses on collecting higher levels of our accounts over 90 days of aging.

While our operating expenses have increased in connection with these initiatives, the successful execution of our plan is delivering significant value and we expect operating expenses to decline in the second half of the year as we continue to successfully reduce our accounts receivable balances and eliminate other costs from the systems.

We believe as the progress our teams are making will result in strengthened cash flow and reduced bad debt levels this year. Our operating results have also been strengthened by our company-wide profit improvement plan. We are taking steps to realize process improvements, acquisition synergies and other efficiencies that will streamline our operations and maximize our productivity.

During the quarter, we continued to take advantage of the scale we’ve created in 2013. We have renegotiated many direct and indirect supply agreements, insurance programs, delivery programs and have begun to reduce multiple acquired lease obligations. There are more areas we’ve identified that will be implemented in the second and third quarters of this year that we expect will increase profitability and operating margin.

As a result of our recently completed integration of all of our infusion locations on to the single operating platform, we are starting to move work to regional and central shared-service locations, which will allow us to increase our operating leverage going forward.

Turning briefly to PBM Services, revenues and EBITDA for this segment were stable this quarter. We are taking steps to support the performance of this business, while also actively monitoring its ability to contribute over the long term.

Overall I do believe 2014 is going to be a great year for BioScrip. Our team members have come together to make our organization more successful and focused than ever. We are one team, one company and our combined efforts will make us even stronger. We are providing outstanding clinical care to patients and are strengthening our relationships on a local, regional and national level.

With the Home Health acquisition now complete and our cash collection efforts yielding positive results, we will also have greater financial flexibility to execute our plan. We are focused on driving continued strong organic growth and increased profitability and accelerating our Infusion strategy during the balance of this year.

With that, I’ll now turn the call over to Hai.

Hai Tran

Thank you, Rick and good morning. As a reminder, before we review our first quarter financial performance, we have changed the operating reportable segments of the company to Infusion Services and PBM Services, as a result of the completed sale of BioScrip’s Home Health business on March 31, 2014.

BioScrip’s financial statements concerning Home Health are presented as discontinued operations on the consolidated statement of income for the three months ended March 31, 2013 and 2014 and are excluded from the results of continuing operations of BioScrip. In addition to new segment reporting, the financial statements reflect continuing versus discontinued operation classifications for all periods presented.

In reviewing our financial performance, we will focus primarily on continuing operations. We also reported adjusted earnings per diluted share and this excludes the same elements in calculating adjusted EBITDA and also takes into account the impact of acquisition-related intangible amortization as noted in our press release. With that for the first quarter 2014, we reported revenues from continuing operations of $239.6 million compared to $181.1 million in the prior year period, an increase of $58.5 million or 32.3%.

The Infusion Services segment revenue increased 43.4% primarily driven by the addition of HomeChoice Partners and CarePoint Partners as well as double-digit organic growth, which excludes these acquisitions. The strong growth in Infusion revenue was offset by a 31.9% decrease in revenue year-over-year in the PBM Services segment.

Gross profit for continuing operations was $65.1 million compared to $56 million for the same period in 2013, an increase of $9.1 million or 16.4%. Gross profit as a percentage of revenue decreased to 27.2% from 30.9% in the first quarter of 2013.

The increase in gross profit dollars was due to growth in revenue in Infusion business, offset by a decrease in the PBM Services segment. The decrease in consolidated gross profit margin percentage was driven primarily by the decline in the higher margin PBM Services segment.

SG&A for the first quarter was $59.4 million, a $12.4 million increase over the prior year. SG&A for the first quarter as a percentage of total revenue was 24.8%, compared to 26% in the prior year period. The increase in SG&A expenses were primarily due to the inclusion of HomeChoice Partners and CarePoint Partners and certain costs associated with supporting the growth and the volume from our businesses such as additional investment in our reimbursement resources to improve cash collection.

Total operating expense in the first quarter of 2014 was $76.6 million. Operating expenses for Q1 of 2014 included $6.5 million of acquisition and integration expense and $4.6 million of restructuring and other expense. Operating expenses for the first quarter of 2014 also include a favorable change in fair value contingent considerations of $2.2 million, offset by a $2 million increase in bad debt provisions related to acquisition integration disruption.

Interest expense in the first quarter of 2014 increased to $10.5 million compared to $6.5 million in the prior year. The company reported a loss from continuing operations net of income taxes of $25.4 million for the quarter, compared to a net loss of $8.4 million in the prior year.

Income from discontinued operations net of income taxes was $100,000 in the first quarter of 2014, compared to $300,000 in the first quarter of 2013. Consolidated net loss for the quarter was $25.3 million or $0.37 per diluted share, compared to consolidated net loss of $8.1 million or $0.14 per diluted share for the same period in 2013.

BioScrip’s reported adjusted EBITDA from continuing operations of $9.1 million, compared to $10.2 million in the prior year. Adjusted EBITDA from the Infusion Services segment increased by $2.9 million or 24.7% as compared to the prior year, offset by continued weakness in the non-core PBM Services segment, which delivered $4.5 million less in adjusted EBITDA than the prior year period.

Adjusted EBITDA also included a $2.2 million favorable adjustment to the valuation contingent consideration, offset by $2 million increase in the bad debt provision related to acquisition integration disruption. Adjusted EBITDA was further impacted by $1.4 million of increased investment in reimbursement resources in the form of overtime, temporary labor, collection incentives and third-party professional fees.

On Schedule 5, you can also see that the company reported adjusted loss per share from continuing operations of $0.13 per diluted share in Q1 of 2014, compared to adjusted earnings per share of $0.02 per diluted share in Q1 of 2013.

Turning to cash flows. For the three months ended March 31, 2014, the company used $24.5 million of net cash from continuing operating activities compared to cash used of $14.1 million in the three months ended March 31, 2013. The increase in cash used in operating activity is primarily due to increase in working capital to support the growth of Infusion business, an increase in accounts receivable, primarily due to the integration of Infusion acquisitions and the decrease in PBM Services segment.

As of March 31, 2014, the company’s tax balance was $9.3 million and it had $418.7 million of outstanding debt. On March 31, 2014, the company completed the sale of substantially all of its Home Health business to LHC Group, Inc. for a total deal value of approximately $60 million. The company used the net proceeds to pay down a portion of this outstanding debt. Capital expenditures for the first quarter were $3.1 million.

As highlighted in our earnings release, we have made meaningful progress on our cash collections. The organization focus and initiatives are yielding results as consolidated cash collections grew from $53 million in December 2013 to $79.8 million in April of 2014.

Average monthly cash collected has increased by approximately 26% from the third quarter of 2013 to the first quarter of 2014. One measure of effectiveness in our cash collection efforts is to compare cash posted versus billed revenue from the previous 60 days. In September of 2013, that metric was 92%.

In March of 2014 that metric was 104%, showing good progress in our collections effort. Consistent with our goal of operating cash flow breakeven in the second quarter of 2014, we had nothing drawn on our $75 million revolving credit facility at the end of the first quarter as well as, as of this morning.

We have provided 2014 revenue and adjusted EBITDA outlook. And as indicated in our release, we believe 2014 revenue will be in the range of $940 million to $980 million and 2014 adjusted EBITDA will be in the range of $55 million to $60 million. This outlook assumes Infusion Services segment revenue continues to yield double-digit organic revenue growth.

Consolidated gross profit margin percentage is forecast to decline from 2013 due to the sale of the Home Health Services business, the decline in the PBM Services segment gross profit margin and the mix of business as the lower gross profit margin Infusion Services segment is on pace to grow faster than the higher margin PBM Services segment.

The Infusion Services segment adjusted EBITDA margin percentage is targeted to be approximately 10% by the fourth quarter of 2014. Seasonality in Infusion services segment in the fourth quarter typically generates the highest adjusted EBITDA of the year and the first quarter typically generates the lowest adjusted EBITDA of the year.

Continued stability is expected in our PBM Services segment from adjusted EBITDA perspective, consistent with first quarter performance. And corporate overhead is projected to continue to be less than $8 million per quarter.

We expect to grow from our first quarter run rate adjusted EBITDA primarily due to contributions from seasonality in the Infusion business as previously stated, continued double-digit organic growth in Infusion, increasing contribution from our CarePoint asset as we continue to integrate the acquisition and additional cost reductions, as Rick highlighted.

With that, I’ll turn the call back to Rick.

Rick Smith

Thank you, Hai. Operator, open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question coming from the line of Brooks O’Neil with Dougherty & Company. Please proceed with your question.

Brooks O’Neil - Dougherty & Company

Good morning guys. I have a number of questions. I’ll try to keep it short and sweet. First, I was hoping you could give us some color on the mix of business in the Infusion segment between the acute and the chronic and give us some color on, kind of, what’s happening trend wise in terms of that mix?

Rick Smith

Good morning, Brooks. This is Rick. We actually saw very strong as I mentioned on my call, in my comments, the core Infusion continued to be very strong.

Brooks O’Neil - Dougherty & Company

Yes.

Rick Smith

We saw year-over-year 20% growth in the core. It represents 35% of our total Infusion revenue during the quarter and essentially, we have seen a couple things. One is, the Synagis revenue which goes away in Q2 and Q3, was up from Q4 a little bit. And then also, we saw some chronic growth coming due to site of service and some other initiatives that essentially we would expect would continue.

We still believe that the new starts in the patient service in the core therapies came out of the gate in Q1 very strong, sequentially even to Q4 which Hai had mentioned is a seasonally strong quarter for us with the home discharges for the holidays. And we believe that what we’re seeing early in Q2 that trend has continued, which is good. So I think that as I stated, we feel good about the programs we’ve put in place. The initiatives and the focus of our sales team and operating team, our field team to continue to present our programs and position our programs.

We believe that the second half of the year, the rest of the year, a lot of the site of service initiatives we talked about last year started to build some momentum last year. But we think that, we actually believe that pace will accelerate in terms of moving patients into the home care space for chronic infused therapies.

Brooks O’Neil - Dougherty & Company

That’s good. So do you still think that you talked about, I think, HomeChoice being, growing above expectations and achieving the 12% to 14% margin. Do you still believe you can get CarePoint and hopefully the rest of the business along those lines as well?

Rick Smith

Yes. Yes. We have -- SharePoint as we’ve talked about before there was some upfront dyssynergies relative to contracts. The asset purchase structure essentially delayed some things and some billings and also some small local contracts that took a little bit more time to convert over.

Brooks O’Neil - Dougherty & Company

Yes.

Rick Smith

But we are actually seeing from the merged sites with our legacy locations as well as the CarePoint locations are starting to gain some nice momentum. And so it’s the same thing we saw with HomeChoice, it’s the same thing we saw with InfuScience and even CHS back in 2010, when we bought that asset two to three quarters of settling in coordination, training and aligning with our clinical programs.

And then, I think the success with InfuScience now is showing some very strong organic growth. Our legacy business is showing some nice growth in a number of areas. And then also HomeChoice, just with the result of their strong clinical capabilities and leveraging our programs and relationships that have really done a great job to bring the leadership of that organization that joined us and continues to lead that those branches.

Brooks O’Neil - Dougherty & Company

Right. Let me just ask one or two more and then I’ll hop off. But can you just tell us a little bit about the challenges on the cash collections side? I mean, my sense is you’re doing business primarily with established health insurance companies that you would think realistically are going to pay their bills, if they’re properly presented. So help us to understand exactly who you’re trying to get the money from and sort of what the timeframe is you think you can get that AR down to, let’s call it a more reasonable level?

Hai Tran

Our payors are representative of our payor mix, right, from Medicare, Medicaid to commercial managed care organizations. In terms of our efforts on the cash collections side, Brooks, we focused on this intensely. We kind of view this down two paths. On one path is that we had to get at the aged AR, some of which are dependent on increase and were delayed due to the asset structure of the acquisition, which caused delays in us receiving our provider numbers, our VIM numbers and therefore, the AR sits on the books as unbilled until such time that we can bill it and so that had caused some of the aging, right. So that’s one factor that we’ve got to get at the aged AR. But the other path and the area where we focused on initially most intensely is fixing the front-end of the process, right.

Remember, when we’re bringing in all these acquisitions, each of which performs intake and patient on-boarding in a slightly different way. It could cause some big variations on the back end from a billing and collections perspective. So we spend a lot of our time and efforts over the last few months focused on standardizing the front end and streamlining the front end and we’ve seen some meaningful improvements. And that’s what yielded the benefits to us here in terms of the improved cash collections. And then I think now that we’ve got the front end improved, our intensity and our focus gets at the aged AR as well to bring that down. And that’s something that we expect to have meaningful impact over the next couple quarters.

Brooks O’Neil - Dougherty & Company

Great. Hai, you talked in your prepared remarks about some of the factors that are going to drive adjusted EBITDA from the $9 million or $10 million you reported here in Q1, towards that $55 million that you’re guiding to on the lower end for the year. Can you -- are you willing to put any kind of metrics numbers sort of assumptions around some of those factors? Like, I think you mentioned the seasonality, the synergies from CarePoint, the benefits of the double-digit organic growth and some additional cost savings. Can you help us just frame sort of the magnitude of what those might be and how they get you from the $10 million to $50 million or $55 million?

Hai Tran

Yeah. Sure. So one way to look at the numbers is we’ve got $9 million in adjusted EBITDA. The run rate’s about $36 million annually, right. And then off of that run rate you should expect contributions I mentioned from seasonality, which we estimate could be anywhere from $3 million to $4 million as a lift off of that run rate. We also look at organic growth as we continue to deliver on double-digit organic growth. That should give us an additional lift of anywhere from $5 million to $7 million in adjusted EBITDA off of the run rate.

And when you look at the synergies that we expect to continue to yield from CarePoint, as we go through the integration for the balance of the year here, that could be anywhere from $6 million to $7 million or so of contribution. And lastly, when you look at the additional cost reductions, as Rick mentioned, we’re well underway in terms of getting some of the costs. Our target is anywhere from $5 million to $7 million.

Brooks O’Neil - Dougherty & Company

That’s very, very helpful. Last question for me at least, is obviously, we saw the infusion segment margin, or adjusted EBITDA margin be somewhat below what honestly I was hoping to see. And could you just talk, are you seeing any kind of pricing pressure in any of the categories or diseases, the states or is it just sort of the mix of business that’s driving in some of the other factors you’ve talked about already?

Hai Tran

Yeah. I think some of it is -- some of it clearly makes -- we said, although our core has grown nicely, the chronic has grown very nicely as well. And the chronic businesses -- like we said historically, it’s not bad business, right. It provides nice recurring revenue albeit at lower margins. But if it has a nice drop through, it’s not a business we’d turn away. So mix is driving some of the margin percentages. Obviously the dollars continue to grow nicely. And then on the operating expense, we clearly have to get at more of the cost cuts. We have to get at more of the synergies to drive our operating expenses down. And I think that’s how we’re going to get there in terms of leverage throughout the year.

Brooks O’Neil - Dougherty & Company

That’s great. Thank you very much.

Hai Tran

Thanks, Brooks.

Operator

Thank you. Our next question coming from the line of David MacDonald with SunTrust. Please proceed with your question.

David MacDonald - SunTrust

Hey, guys. Just a couple things. First, just on cash flows, I was wondering if we could dig a little bit deeper. Hai, can you give us a sense in 1Q, kind of, what the cash flow trends look like? I mean, how much better was cash collection in say, March than they were in January? Then secondly, can you guys tell us specifically when Phase II was launched in terms of going after the AR over 90 days and then I have a few follow-ups?

Hai Tran

Yes. I mean, I’ll answer the second question first. I think in terms of the aged AR, I mean, we have launched it. One of the things we’re building out is what we call a SWAT team here to focus only specifically on aged AR. I think there was a little bit of initial delays in terms of our ability to hire the resources. But we are well underway and that’s a focus of ours. So we think that we are going to be able to get at that fairly quickly here, right. So that’s certainly something that we’re going to be focused on over the next couple of quarters and we expect to have some meaningful improvements as a result of that, right.

And then in terms of the -- your question about cash collection and the improvements by month, March was meaningfully better than January. We’re talking about anywhere -- and February -- if you look at the infusion segment alone, cash collections in March were almost -- were north of 10% better in March than they were in January and February. So we’re seeing some meaningful upward trends there.

Rick Smith

David, this is Rick. We stated, I think on the year end call in February that in some instances we had just received some of the licenses and the billing permits through the CarePoint acquisition. And that we had started to drop bills and we would expect that cash to come in. And even though it aged during the quarter, as Hai mentioned previously, that cash is starting to flow and our first week of May actually has stepped up even from our [Technical Difficulty]. We’re continuing to hit it. Our teams are very excited in terms of the cash craze too as we call it. It’s been launched in Q2. And we report weekly to our teams in terms of the progress we’re making. There’s a lot of good excitement around getting that gold T-shirt.

Hai Tran

Yeah. And I think as I highlighted in my prepared remarks, Dave, we have nothing drawn on our revolver right now. I mean, our goal is to really try not to draw on it, except for timing differences through around payments and that’s what we’re working hard towards. Additionally our CapEx has also come down as you saw in the first quarter. It was $3.1 million from CapEx, which is, on a run rate basis in line with what we’ve communicated to our investors.

David MacDonald - SunTrust

Okay. And then guys, just a couple quick follow-ups on cash flow. In terms of some of the front end standardization, can you just give us some kind of hard examples? Is this basically standardization of the coding and billing upfront? So you’re not having -- you’re having a smaller number of bills kicked back to you, which then go into the AR bucket, et cetera? And have you done anything in terms of, if there’s changes in say, provider numbers or whatever, things to streamline that? And then I just wanted to confirm that the target for 2Q is cash flow breakeven. Is that correct?

Hai Tran

Yes. The target is definitely cash flow breakeven. That’s what we’re striving towards.

Rick Smith

And then on the front end process the intake, it’s really about -- essentially, we’ve done a lot of retraining given all the new employees that have come into our organization. We’ve upgraded the system to new applications, so essentially ensuring that the process essentially is standardized across all 84 -- 81 locations. And so, that essentially is just getting everyone running through the same process and utilizing now the same system to where we have visibility to the activity going on.

And so it’s also a focus on collecting documentation upfront faster than we have, as a result of the disruption of the integration of the acquisition. So we know that in terms of, as I mentioned in our prepared remarks, that essentially getting below 40 days or 30 days DSO is possible being on the same system and essentially enabling to drop that cash more timely, the bills more timely.

As a result of the training and the focus, where a lot of building activity last year took place in the second half of the month. We’ve actually moved it closer to essentially billing as quickly as possible during the month, so that distribution starting the cash collections cycle through the front end training process has also been accelerated. So we are --

Hai Tran

And I think Rick’s comment there about pacing is important and visibility is important. One of the biggest things we’ve focused on was putting in place measurements throughout the entire process, so that we can track where the bottlenecks are. And it’s done wonders in terms of being able to measure performance by locations around specific measurements.

So for example, our bills that are pending, waiting for documentation don’t sit out there too long. Once documentation has been received there, it doesn’t sit unbilled for too long, right. So those are ways that we’ve utilized systems and processes to be able to garner visibility and drive higher throughput, therefore faster bills, cleaner bills and better collections on the back end.

David MacDonald - SunTrust

Okay. And then guys, just a couple more, on HomeChoice, did you say that HomeChoice now that it’s integrated, that the revenues are running 17% higher than what your internal estimates were at the time you closed the deal or just a little bit more detail there? And then secondly, can you help us with what percentage of your revenue is still out-of-network currently?

Rick Smith

I did say that. The growth in HomeChoice in terms of the organic growth, leveraging that platform and our payor relationships and programs has grown quite nicely. InfuScience has done the same. And then the opportunities that we see, is continuing to replicate that in the CarePoint acquisition and can you repeat the second question, please?

David MacDonald - SunTrust

Just out-of-network percentage, Rick, how much of your current exposure still left there?

Rick Smith

We have a very small percentage of non-contracted business. All of the CarePoint business and all the acquired business have been moved into our contracts. So we do not take the patients in most cases, unless we have even an individual letter of agreement, relative to getting paid for our services. So, I think we continue -- if we don’t have a contract, our managed care team, essentially our local team seeks to get a contract and pull those patients in.

Hai Tran

Yeah. So, Dave, we’ve already experienced the dyssynergies. We’re just coming off of those loads, right.

David MacDonald - SunTrust

Okay. And guys just last question, look, over the last 12 to 18 months you’ve added a pretty significant amount of bulk to the company via acquisition and organic growth? And I know that pricing has not historically been a tailwind, have you reached a point where your scale is such that potentially you can go back -- start going back to some of your managed care customers and potentially look for modest escalators in these contracts as you start to renew them?

Rick Smith

I think there are opportunities as we -- as I said before, there are significant amount of value that our company provides in terms of lowering healthcare costs, I mean, the stimulation. So we believe there is opportunity to create some nice mutually beneficial relationships with our customers that will enhance our margins.

And one of the things I want to talk about on a year-over-year basis, our drug margins essentially are stable. They are flat with a year ago, so we’ve not seen any degradation on drug margin.

David MacDonald - SunTrust

And by mutually beneficial, Rick, I would assume you’re talking about something like shared savings. If you guys do a good job driving down costs, there’s a potential to get additional bonuses, or better pricing, something like that?

Rick Smith

Yes.

David MacDonald - SunTrust

Okay. Thanks, guys.

Rick Smith

Thank you.

Operator

Thank you. Our next question is coming from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Tanquilut - Jefferies

Hey, good morning.

Rick Smith

Good morning.

Brian Tanquilut - Jefferies

Hey, guys, thank you for all the detail on the acquisitions and stuff. But just wanted to ask if you don’t mind sharing with us, what the synergy level is or was in Q1 for CarePoint and how you expect the progression of that getting to where it breaks even over the course of the year?

Hai Tran

Yes. I mean, I think, it’s already -- I think we’re well on our way. I think we’re close to getting back to where our expectations are, right, which is annualized revenue of about $160 million. So as Rick mentioned, it takes a couple three quarters to get back there and we saw that in the fourth -- we saw most of it in the fourth quarter. We’ve come back off of lows in the fourth quarter for CarePoint and we’re seeing nice revenue growth from that asset right now.

Brian Tanquilut - Jefferies

And then Hai, from a margin perspective, I mean, you put out the guidance of trying to get to 10% margin by year-end. If you don’t mind just, because obviously we’re coming off of a pretty low base in Q1. So if you don’t mind just walking us through -- and I know you gave us the bridge through earnings but if you don’t mind just walking as to how you envision the margins expanding and what the drivers are for that to get there aside from your CarePoint of course.

Hai Tran

Yes. I mean, I think, those are exactly the same drivers. Because, CarePoint, we can get them to 12% to 14% margins by the end of the year, as we’ve done with our other acquisitions, that’s going to be a healthy contributor to margin expansion, right. If you look at seasonality, because we have the fixed infrastructure the fact that you just loading on more volume on top of a fixed infrastructure, the marginal volume is dropping through at a higher rate by the end of the fourth quarter. You talked about scale as well. And as you can see, we can continue to keep our corporate overhead relatively flattish, then we will get some operating leverage from the scale.

And then the cost reductions are going to be a combination of some elements that might be cost of goods sold, for example like shipping and what not and some elements that are going -- which will enhance our gross profit, as well as some elements that are going to impact operating expenses, for example leveraging our central services, as Rick alluded to. So all of those items I highlighted, although they are bridges from a dollars perspective off of our run rate. They also are contributors and enhancements to where our current margins are today.

Brian Tanquilut - Jefferies

And then as I think about the transition from Q1 to Q2, you had $1.4 million in, let’s put it, temporary expenses, how should I think about that, whether it grows a little more or does it flatten out in Q2, or does it go down?

Hai Tran

Yes. I mean, I think that investment will continue through the second quarter. Our goal is to focus on the fundamentals, right, continue to deliver double digit organic growth, continue to get our cash back to a steady state, right, focus on the age they are, focus on cash flow generation and getting to operating cash flow breakeven in the second quarter. That’s our focus, right. And we believe we can do that in the second quarter as well. We are going to be well on our way and back on track in the second half of the year.

Brian Tanquilut - Jefferies

And then just going back to your comments on leveraging the platform, what do you think is driving the organic growth here and I guess, what I’m trying to get to is, is this a sustainable level of organic growth going forward, because it’s pretty healthy at least from my computation? So what drove the -- put it, close to 15% organic growth in Q1 and why do you think that keeps going for the next, let’s say, two to three years?

Rick Smith

I think as we’ve talked about the enormous tailwinds that are essentially finding this industry and the clinical programs that we’ve established, the managed care relationships and also the household relationships. So within each market, we are seeing our clinical programs enabling us to grow our patient census levels, our new starts and total patient service. Number of patients, high percentages of the patients we bring on service are actually on service for multiple months, so there is a large retention percentage related to the therapies that we are seeing. At the same time, the site of service initiatives that we have talked about before, the ability to move patients to alternate site or into the home, with the clinical services in pharmacy, nursing and nutritional support, that our organization has built now through acquisitions and retaining infrastructure from some of the legacy business.

We’ve essentially made the investments to position ourselves to support this growth. So we believe that the programs that we have created, the investments in our clinical expertise, the training of our clinicians and essentially presenting those opportunities. And also, we’ve talked about the fact that we approach our customers from a solutions focus, so we are able to plug-in any level of services that meet our customers’ needs and enable a strong opportunity to drive savings over existing utilization levels by essentially allowing us to apply our expertise and move patients into the lowest cost side of service.

Brian Tanquilut - Jefferies

Rick, have you seen any change in the industry dynamics since CVS bought Coram?

Rick Smith

I think that we have -- I think there are just a lot of initiatives that payors are working on. We believe that our independence being the largest independent in the industry and the scale we have, the pulpit we have provided, I think enables us an opportunity to present solutions that are unique to our two largest competitors. And I think that we can create solutions to where the roles are assigned upfront and the objectives of the programs and the initiatives are clearly defined and clearly measurable to achieve the objectives. So I think that -- so we’ve seen some level of that notice being given to us. And again, we’re able to deliver some good solutions.

Brian Tanquilut - Jefferies

Then last question for me, Hai, on the PBM, it seems like the revenue ramp was pretty good sequentially. Is this the right margin to think of now and the right revenue run rate? Or how should we think about the dynamics there?

Hai Tran

Yes. I mean, I think, as I highlighted, the EBITDA run rate is probably what we expect it to be for the rest of the year, fairly stable at those levels. The revenue will change a little bit and that’s due to some mix of business. We actually obviously -- we expect to see another decent revenue quarter in the PBM segment in the second quarter. However, the back half of the year, we expect top-line revenue from the PBM to shrink somewhat, because we have one funded PBM client who is splitting their business among a couple, a few providers. And so we are going to lose some of that. But again, that’s the funded PBM side, which is much lower margin, that will be offset by some growth that we are seeing on our discount card business. So net, net, revenue in the back half of the year is going to be slightly lower, it’s going to be a little bit lower than in the first half of the year but EBITDA trends should be fairly stable.

Brian Tanquilut - Jefferies

Got it. Thanks, guys.

Hai Tran

Thank you.

Operator

Thank you. Our next question is coming from the line of Mike Petusky with Noble Financial. Please proceed with your question.

Mike Petusky - Noble Financial

Good morning.

Hai Tran

Good morning, Mike.

Mike Petusky - Noble Financial

I guess, Hai, what’s your expect -- or what’s baked into your assumptions in terms of EBITDA contribution for the year from CarePoint?

Hai Tran

Well, I mean, we don’t give that guidance out specifically, Mike, but that is all baked into our guidance, right. And part of it is that going to be around timing of the synergies. As I highlighted, I think we gave a range of what we expect in terms of additional contributions from CarePoint, as we ramp throughout the year, as we get through the integration when we felt that urge.

Mike Petusky - Noble Financial

Okay. So what was the contribution -- I mean, the incremental…

Hai Tran

I think I said the incremental synergy contributions from CarePoint as we continue to integrate throughout the year ought to be an additional $6 million to $7 million off of our Q1 run rate.

Mike Petusky - Noble Financial

Right. But what was the Q1 run rate?

Hai Tran

We don’t give out specifics on our acquisitions. I mean, I will highlight back to the fact that by the time we get to the end of our integration period, Mike, we fully expect CarePoint to be 12% to 14% margin, right. The middle of that range, multiplied against $160 million would imply a business that’s generating annualized approximately $20 million a year.

Mike Petusky - Noble Financial

Right. I’ll give one more shot, more or less than $2 million contribution in EBITDA in the first quarter?

Hai Tran

More.

Mike Petusky - Noble Financial

Okay. All right. Great. All right. So on the gross margin percentage, as well as the SG&A percentage, I wasn’t even within spitting distance in terms of my modeling and I was just wondering if you could give us a little bit of help going forward, I mean, do you -- at one point, I think, you guys expected gross margin percentage to be 30-ish, is a better estimate on that more in the high 20s, is SG&A kind of hold at this level as a percentage of revenue, how -- any help you can give on this would be great?

Hai Tran

Yeah. I think that once again a lot of it is dependent on the mix, right, as Rick indicated in his comments, we’re seeing some really healthy growth in our chronic therapies, as well as healthy growth on our core therapies. So it’s not just one at the expense of the other.

And so if that’s the case then, I would expect that margin -- gross profit margin for the Infusion business is going to be a little more moderate than we had expected, right. It’s going to be tempered by the mix of business, right. So I think that getting in the high 20s is probably a good assumption, right, for us but at the end of the day it will be highly dependent on mix as we go throughout the year.

The other thing I’d highlight on the trends in the business as well is bear in mind we had about $10 million of Synagis in the first quarter, as Rick indicated, that goes away and in the second quarter, it will be replaced effectively by what we believe to be higher margin therapy and so you already see a sequential improvement in the therapies just from that alone, right.

But, with that said, because from a pure revenue perspective, we do expect revenues to ramp throughout the year, although, the sequential ramp in Infusion revenue from Q1 to Q2 will be more modest due to the fact that Synagis goes way.

Mike Petusky - Noble Financial

Okay. and just on the SG&A, I mean, do you expect kind of mid-20s going forward or…

Hai Tran

On the, yeah, I mean, I think once again, I mean, I think it depends on the timing of the cost reductions. We -- our goal is to get at -- the cost reductions down. Some of that and so some of that will depend on the length of the engagement of some of our consulting partners we brought to get in at our business reengineering as well, which rolls up the SG&A, but yeah, we do expect the second half of the year at least SG&A to come down from where we are in the first half of the year.

Mike Petusky - Noble Financial

Okay. All right. And then Rick, did you say that organic growth was 20% or did I mishear that, did you guys give us specific figure for organic growth in Infusion for the quarter?

Rick Smith

Well, it was organic, the core organic growth was over -- was 20% pro forma essentially it was -- and it was -- on total it was…

Hai Tran

Double.

Rick Smith

… in double digits.

Mike Petusky - Noble Financial

Okay. Can you, I mean, can you get any more specific on the total.

Rick Smith

Yes.

Mike Petusky - Noble Financial

I guess, I’m trying, essentially, what I’m to get to is what the contribution was from CarePoint in terms of revs and what the organic growth was?

Rick Smith

The organic growth was between 10% and 15%.

Mike Petusky - Noble Financial

Okay. If that’s the case, it doesn’t look like the revenue dyssynergies from CarePoint were that significant, I mean, if it’s only 10% to 15%, it looks like the revenue dyssynergies were fairly modest, is that something…

Rick Smith

Yes. Yeah. I think that’s what I stated, Mike, is that we came off the lows in the fourth quarter and the first quarter we’re seeing a bounce back a we fully expect that to continue to grow off of the space.

Mike Petusky - Noble Financial

Right. Okay. All right. And then just bouncing back to the question around the $1.4 million and temporary staffing overtime, etcetera, continues into Q2, do we get to a point this year and that does fall off or mostly fall off or is that probably something that should just be kind of thought of as baked in throughout 2014 and maybe falls off down the road?

Rick Smith

Yeah. Some of it’s going to fall off but we’re not going to put a time limit on it, Mike, because, once again our focus is getting at the aged they are and improving our cash processes and our cash flow.

So to me, it’s a worthwhile investment, if you look at the improvement on a cash on cash basis not an EBITDA basis but on a cash on cash basis that expenditure returns very nicely for us, right. And so we’ll continue to make those investments until we see stability and we’ll really have brought our aged they are down to the level that we believe is steady state.

Mike Petusky - Noble Financial

Okay. All right. That’s all I’ve got. Thank you.

Hai Tran

Thank you.

Rick Smith

Thanks.

Operator

Thank you. Our next question coming from the line of Dana Hambly with Stephens. Please proceed with your question.

Dana Hambly - Stephens

Yeah. Good morning. Thank you. Rick, could you, on the organic growth, could you venture, I guess, as to what percent of that is just the market growing and what percentage are you guys taking share?

Rick Smith

Well, I think the market itself is probably in the 7% to 8% range on the core therapies and I think, as a result of our presence in our relationships as in our clinical programs is enabling us to get pull-through that at higher levels.

Dana Hambly - Stephens

Okay. That’s good. Is there any reason to believe that that just the market growth can’t sustain kind of high single digits for the next couple years?

Rick Smith

No. I think in light of the Healthcare Reform the exchanges and just more covered, I think that growth will be there and I think also, I think, referral activities will start coming from non-traditional sources. So I think hospitals will not necessarily be the primary source of referral in this industry down the road. I think it will continue to come from alternate sites of referrals and also potentially diverting patients from even taking up a hospital bed and into home care, the home Infusion services.

Dana Hambly - Stephens

Okay. That’s helpful. And then, Hai, if I take your first quarter revenue and annualize it, I’m getting to the midpoint of your guidance already. And I know you lose Synagis after the first quarter but it sounds like you still are expecting the sequential ramp into 2Q and then certainly into the second half of the year. So I’m just trying to understand how we could possibly get to something like $940 million in revenue?

Hai Tran

Yes. Once again, I mean I think we’re being a little bit conservative there but part of it as well as you recall, I mentioned that the PBM business revenue. The PBM segment revenue is going to decline in the second half of the year as well, right.

Dana Hambly - Stephens

Okay.

Hai Tran

So that’s going to be a headwind from a revenue perspective.

Dana Hambly - Stephens

Got it. All right. That makes sense. And then on the bad debt expense, the incremental $2 million, is that truly a one time and should we back that down into the remaining quarters or is kind of $6 million or so in bad debt a good run rate for the rest of the year?

Hai Tran

Yeah. We’re doing everything we can to get at the aged AR. That is the -- that’s the focus of literally every call I’ve been on for the last couple of months, right. And so our ardent desire is that we stop the aging. And one of the promising things that we see is the fact that we’ve improved the front end materially and because of that, we know that there’s not more stuff aging. There’s less stuff aging into the older bucket, right, which is good.

So that means that we’ve trying to staunch that leakage so to speak. And so we’re doing everything to make sure that we get at aged AR. Some of it will improve just naturally because as Rick mentioned we had delays in billing and our aging is based on date of service, right.

So basically, an invoice could sit in our organization for 90 days or more before we even have the ability to bill it, right. So it’s already aged 90 days, right. And so then we bill it and from the payor perspective, they say, wait a second, I just got it. I might take 30 to 45 days to pay. So already it’s aging over 100 days, that invoice and so some of it will improve naturally as we continue to flush out some of the integration disruptions. And then that will improve the aging by itself.

Dana Hambly - Stephens

Okay. So it sounds like it’s going to stay at kind of elevated levels for the next quarter or so. And then get materially better second half or later in the year and then certainly into 2015? Is that a fair way to think about it?

Hai Tran

Yes.

Dana Hambly - Stephens

Okay. And then, just the last one, the end of quarter debt balance that does reflect the pay down from the home health sale?

Hai Tran

It does.

Dana Hambly - Stephens

Okay. Thank you.

Hai Tran

Thank you.

Operator

Thank you. Our last question coming from the line of Kyle Smith with Jefferies. Please proceed with your question.

Kyle Smith - Jefferies

Hi guys. Thanks for let me getting under the wire here. Just a couple of real quick ones, Dana hashed out a lot of the questions about bad debt. But were there any sort of what you would characterize as one-time charges to bad debts in the quarter? I know you had $5.6 million, I believe it was in the fourth quarter. If there’s an additional charge in the first quarter, that would be helpful to know?

Hai Tran

Yeah. I mean, that’s $2 million, like I said the $2 million incremental, we highlighted specific to locations that were impacted by the acquisition. So we hope those are more one time in nature.

Kyle Smith - Jefferies

Great. And then, if I heard you correctly, you had $77 million of cash collections in the month of April? If you multiply that by three, that’s pretty close to where your revenues, net of bad debts are. Is that something where we should expect maybe in the second quarter to see collections potentially pop a little bit higher and do you regain some ground or should we be assuming that you’re now back to basically a steady state and some of the under collections of the fourth quarter and first quarter are just gone forever? How should we be thinking about that?

Hai Tran

We’re not satisfied with where we’re at. We want to continue to improve that. As I said, the metric I highlighted in terms of cash posted versus billed revenue. We want to continue to see whether we can strive to consistently stay up above 100%. If that’s the case we’re calling back the aged AR and that’s our goal.

Kyle Smith - Jefferies

Okay. That’s your goal. So you’re confident you be able to achieve that, it’s just the magnitude is still something to be seen?

Hai Tran

Yes.

Kyle Smith - Jefferies

And then the last question that I have is I noticed that the acquisition and integration expenses and the restructuring expenses were both sequentially higher in the quarter. Given the CarePoint was I believe June of last year, are these things that we should expect to see start to tail down pretty quickly over the next few quarters or are your initiatives going to drive these expenses for a few more quarters?

Hai Tran

No. They ought to come down. I think this would probably be one of the highest quarters and then they’ll come down but they will be further, right. There’s going to be some restructuring charges as we continue to optimize the platform here over the next couple of quarters as Rick mentioned. Some of the cost reduction initiatives are going to cause some additional restructuring charges. As we approach the finalization of the integration of CarePoint by the third quarter, then it drops off dramatically.

Kyle Smith - Jefferies

Okay. So it sounds like maybe both will stay little bit elevated in the second quarter. The acquisition integration probably drops off really quickly, the restructuring might have a longer tail?

Hai Tran

Yes.

Kyle Smith - Jefferies

Okay. Great. Thank you very much.

Operator

Thank you. Mr. Smith, I will now turn the call back to you. Please continue with your closing remarks.

Rick Smith

Great. Thank you everyone for joining us today on our call. And to our BioScrip team, thank you so much for your great work. Have a great day everyone.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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Source: BioScrip's (BIOS) CEO Rick Smith on Q1 2014 Results - Earnings Call Transcript
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