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BioScrip Inc. (NASDAQ:BIOS)

Bank of America Merrill Lynch 2012 Health Care Conference Transcript

May 17, 2012 3:40 PM ET

Executives

Rick Smith – President and CEO

Analysts

Unidentified Analyst

…this afternoon for, I guess, last but not least for our final presentation of the conference. But with the final presentation we have Rick Smith, the President and CEO of BioScrip. Thank you, Rick for joining us…

Rick Smith

Thank you.

Unidentified Analyst

…and let’s take it away.

Rick Smith

Okay. Good afternoon. Here is a Safe Harbor for your information. The BioScrip has been going under series of steps of transformation over the last 15 months. As of for 2011 our total revenue size is about a $1.8 billion in revenue and as part of our transformation we had made a decision to sell certain parts of our business that represent about a $1.2 billion revenue is more in the areas of our specialty pharmacy and legacy community, specialty pharmacy retail stores, and our traditional mail business.

What we have, last is essentially the focus area and that is Home Infusion, which based on our Q1 2012 revenue about $109 million, a Home Health segment that we acquired through the acquisition of CHS about $16.7 million represented for the quarter. And then one of the remaining segments of our Pharmacy Services is PBM and Cash Card legacy business that generate about $30 million in revenue for Q1 as well.

Our focus now and as we’ve talked about is, is really to becoming national platform in Home Infusion, a lot of the efforts that we’ve essentially put in place over the last couple of years is really to position ourselves from a contracting perspective and also to expand our infusion footprint.

And so we believe that opportunities with the cash that we raise from the sales of the division, as well as the contracts we have through the payor relationships on the national. We have good opportunity to execute on our plan to expand our footprint and also our presence in many markets that we currently do not have location.

We think that there has been a lot of effort and lot of work over the last 15 months to get us to where we are, continue make progress in the infusion side and now significant amount of focus and urgency to rapidly get to our objective.

On Infusion Home Health side through our various companies and locations we have over nearly 30 years of infusion expertise. We have national scope. We have national contracts. We do have national reach. And then within certain markets we have 45 infusion pharmacies that we access to serve the local market within two and half to three hour radius.

We also picked up to CHS location, 32 Home Health agencies, primarily clustered in Mississippi and in Tennessee, and then some additional Home Health agencies in various states related attached to our home infusion business.

We have over 1000 managed care relationships and we are one of three or four providers on all of the national except for Wellpoint. Over the next six to 18 months as part of our strategic focus and expansion plan we look to add six to 18 -- add 20 to 35 infusion pharmacies over this period and expect also as a complementary part of our expansion to expand our Home Health licenses as we expand our infusion pharmacy footprint.

And so with all that we’ve been position ourselves in over the last couple years, we believe that we are focused on markets segments where we believe we have a distinct competitive advantage.

On the PBM services, this was formerly the Pharmacy Services segment that included community pharmacy stores, [special] mail, traditional, especially pharmacy mail and then also PBM and Cash Card services.

We have now just a PBM services segment which is then renamed from the Pharmacy Services segment. We completed the sale of the assets on May 4th just about over a week ago. Total deal value is approximately $225 million and then we’ve essentially used the net proceeds for debt reduction and then focus on infusion -- expanding our infusion footprint.

The PBM services and Cash Card, we said at the beginning of the year that we estimated this division will do about $100 million to $105 million for the year. And it give us some good cash flow, does not require lot of human capital mostly technology and other services, and so we essentially look to use the cash flow from this business to redeploy into our infusion expansion, as well as helping us to fund the transition of the corporate infrastructure from the sales of two division.

And in terms of positioning us for the future, our focus is to continue broadening relationships we have in our existing marketplaces and at the same time look to leverage the contracted lives we have as we enter new market to attach to what we believe could be existing revenue stream for us entering in new market.

We look to enter in new market either through a de novo startup or through an acquired entity. Our opportunities that we see as we look to pay within four to six times of trailing EBITDA multiple for acquisitions and if we don’t believe financing at our appropriate levels than we would essentially begin with a fresh de novo startup in that market, and so currently we have three de novo pharmacies in new markets that are in various stages of beginning to break ground and begin the life insuring the construction process.

We believe that with our managed care relationships and the management team that we have on staff. We have a good opportunity to successfully expand our footprint quickly and at the same time, continue to grow the existing locations fairly strong in the 7% to 9% range on the organic revenue side.

Our focus in terms of comments we’ve made to street has been really to take look at Q4 clean run rate. We close the deal on May 4th. We have some exciting infrastructure that we need to move out of the organization. We have some overlapping corporate infrastructure that also is burdening the continued operations and so we’ve got some work to do now that the sales over to get that overhead and corporate infrastructure out.

And at the same time continue to grow our infusion businesses to the targeted levels, certainly hit Q4, our margins, our revenue and our EBITDA contribution levels are at the targeted level.

So we feel good that we’ve got a very clear focus. We’ve got number of our team that just freed up about 60 hours a week that can be 100% dedicated now to the infusion strategic initiative and we believe that we are in the marketplace that the demographics are going to come our way and we’ve got the clinical skill set, cost structure and the competitive element that enable more business coming and more patients being service in the home site setting.

So in terms of our focus, again it’s to redirect that which will be resources focused on infusion expansion and infusion growth. We’ve looked to refocus our couple of mail facility. Columbus, Ohio was our central mail and specialty pharmacy location.

We’re going to take about a third of that infrastructure and create and refocus it for to support the infusion business. We’ve also build an infusion pharmacy. It’s one of our de novo locations to service the lives that we already have under contract in the state of Ohio within the region and then also some of our national plans that have lives in that market place.

We also have great success in New York, which had a stronger overlap between specialty and infusion. And so that is a market that needs to rebuilt and refocused with 100% infusion focus. And then essentially, a core focus was to improve the margin as to focus on the margin mix that have a high level of clinical service, need reps around it to ensure us competitive advantage but also the desire that will be in excess, we’re looking to target growth over the rest of the year into 2013.

And so it’s really continuing to stay focused on executing into our plan and over the next couple of quarters, we’ll continue provide updates in terms of the streamlining of operation.

As we look at the decisions that we made in terms of transforming a company, we see a significant amount of industry dynamics driving growth in the Home Infusion and Home Health side, the current estimated sides of the infusion industry is about $9 billion to $11 billion market.

There are some that would estimate that’s growing to 5% to 6% range. However, there is a significant amount of opportunity we believe of patients infused in physician offices and in hospitals, outpatient centers or other facilities that could actually result in a much larger current state of the industry today.

And we believe that based on demographics, moving away of the industry that this market could be $15 billion to $20 billion over the next 5 to 10 years. Just given the cost advantage that we have and in terms of handling these complex patients outside the walls of the hospital.

And so we also believe that there will be growth in our Home Health industry. There continue to be some pricing pressure of those that are 100% Medicare certified agencies. We have about 50% exposure to Medicare in that division, small division, our goal for the Home Health side is really to have it flat to slightly up in terms of revenue and also to potentially be flat to slightly up on the EBITDA side.

So we think that we can mitigate any exposure that we currently have and also start to move that mix to more of a managed care concentration as we expand on infusion footprint. We have in the infusion side a lower cost profile as it relates to one tenth of the cost of the hospital stay.

In terms of the advantage, managed care has recognized the advantage of home infusion over the last 15 years and as result of that success, CMS has been directed with net back to look at this in terms of potential expansion of home infusion coverage under Medicare.

And so this is a very fragmented market as well 700 to 1000 free standing infusion pharmaceutical there. We compete with not only physician offices that are doing infusion services but also some hospital systems that have captive Home Infusion and Home Health divisions as part of their system.

Again, we think that the aging population, essentially multiple therapies that a number of these patients experience both in a chronic and acute events will bring a higher level of clinical need, clinical coordination in the services that we provide.

We believe that based on the pressures, reimbursement pressures that hospitals are facing, essentially a greater level of -- essentially what patients are admitted to take up a bad day. And I think given the clinical capabilities of our pharmacists and nurses, the opportunity to manage more complex patients in the Home Care alternation site setting will be continued to be recognized by the hospital in the payor community as well as the physicians.

And so we believe that we are in a good position, uniquely positioned and a number of our nurses and pharmacists have advanced certifications. Our pharmacists typically are the most advanced, trained in the industry given the complexities that they need to handle and our nurses are typically ICU or critical care unit nurses with advanced infusion certification.

This is our current footprint today. And as you look, we are concentrated in the Midwest to the north east and south east. And so we believe that there is significant opportunities for us to expand our footprint and attach to lives that we don’t have a presence in the state to service.

And so we believe that there is significant opportunities for us as we expand with essentially a clean slate or fresh piece of paper that to go in with -- what we believe could be a variable cost model initially and more of a -- having sport type of strategy to limit our fixed cost infrastructure in new markets that we enter as well.

We do have national scope. We are able to service on 50 states and so there is a still a level of chronic support that can be done from various locations and still have national coverage.

So with that, our industry has grown over the last 35 years and companies like ours primarily facilitator of care. We are in extension of the physician into the patient’s home.

We are the partner in terms of executing on the care plan. We are monitoring labs on behalf of the physician. We are communicating. We are adjusting tier plans. We are also providing clinical programs of great breadth and width that enable the physician to essentially treat a number of different patients on different therapy with excellent service, clinical care and outcomes.

The reimbursement expertise that we have in our company and incrementally in each market enables us to facilitate a quick start and an opportunity to educate the patient and their insurance coverage, their benefits structure and insurer also that we’re going to get paid for our services.

And so we also from a payor perspective, that same level of clinical expertise, the programs that we bring to the market in order to take care of the members and service them with the highest levels of service possible, also bringing that education to support consistency and clinical execution service levels in all the locations and then also consistency and accuracy in billing for our services according to contract.

In addition, for patients we become an extension of their family, either for a short period of time of seven days to six weeks. So for life, depending on their condition in relationship we have in the disease state. And so we provide a significant amount of support education, training to patients to caregiver the family members as well as the reimbursement expertise that we bring to the marketplace.

And we do all of well for the first three event, clearly are able to demonstrate clinical executions on the out-pharma for existing technologies in the marketplace, as well as new that are essentially being plan to bring to the market as well.

And how much time I have. (Inaudible)

Unidentified Analyst

Okay.

Rick Smith

I think we’ll take any question

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

Rick Smith

So we have over 120 sales representatives on the Street. And we call on physician as well as research planners in the hospitals that are in the communities in which we are located.

Unidentified Analyst

So as a follow-on, if the hospital or the physician is also providing those services, how do you I guess capture that service?

Rick Smith

I think sometimes this industry has seen hospitals, capitate hospital, infusion companies and sometimes service levels are not as strong as could be in sometimes physician relationships with those hospitals are not a 100%. So there is still opportunity even in those situations.

And in some situations that our physicians have Home Infusion, so sometime some of the acute as well as the chronic pieces, the opportunity is still have discharges and referrals from the physician that are available to us.

Unidentified Analyst

And on the Home Infusion side of the business, is the primary care manage care?

Rick Smith

Yeah.

Unidentified Analyst

Okay. Can you start talking about what the pricing environment is?

Rick Smith

The -- we -- this industry over the last, I’d say, 10 years, it’s been pricing pressure on lead products, IVIG and it’s really the quite strong and constant. And so given the utilizations of IVIG over the years, it’s really been an area that as I can send exposed to constant pricing pressure.

Unidentified Analyst

(Inaudible)

Rick Smith

So it’s Home Infusion, we don’t look to buy any Home Health agencies. We look to essentially apply for a license chip in any new markets we would enter. Certainly, the Home Infusion.

Unidentified Analyst

Okay. And you also mentioned the professionals are administrating the Home Infusion business. I assuming you have the different employee base, that’s doing the home health rights probably have lesser specialize customers?

Rick Smith

Yeah. Yeah. And there are some instances where some agencies are home health, nurses are trained for administration of some infusion therapy. So primary is it -- it’s the difference skill.

Unidentified Analyst

Okay. So I imagine they really isn’t much in terms of cost synergies that may you just capturing more of that I guess the revenue opportunities with the given patient?

Rick Smith

We believe that long-term we haven’t taken advantage of it but there could be some opportunities for certain therapies to take advantage of the cost synergies that could be available to us.

Unidentified Analyst

For just to follow [Mark’s] question, maybe it’s the right way, but if you look your step 9% growth guide, you should develop prices. Their pricing mechanical isn’t more volume, or is it the therapies or is it all the above?

Rick Smith

It’s primarily volume.

Unidentified Analyst

Primarily volume.

Rick Smith

Yeah. There is a lot of inflation. And I think we anticipating that there -- in different market and different payers, we see some pricing pressure in IVIG ratio. It’s a large book of our business. So we believe if we can grow volume, you can give volume through manage true relationships in our favorite organization that 7% and 9% would be a good number.

Unidentified Analyst

Okay. To the extent on the managed care, on the care side, how competitive that, I’m sure its very competitive, have the dynamic changed around landscape in terms of managed care contracting?

Rick Smith

No. I mean once you have the contracted the competition begins at the local level. Because every managed care contract, even in national managed care contract is a license to hunt. And so if you can’t provide good service or you have the best most reliable at the local market, then you don’t get a second chance sometime. So it’s really all of our focusing hard on the local service levels to your referral sources.

Unidentified Analyst

And just to the -- do transactions well, cash of 155%. Was that right? And then working capital …?

Rick Smith

Yeah. Net 64%. So that was over $100 million of receivables that and the payables include expensive related to that.

Unidentified Analyst

And you recoverable what timeframe?

Rick Smith

So we’ve brought in late last year and most of Q1 about 60 outside resources to help our staff that that supported that business. And so our expectations are we would make a big dent in that collection activity in first 90 day product to sell.

Unidentified Analyst

Yeah. And presumably you have the bulk of it by the end of the year?

Rick Smith

Goal is to have it all wrapped up by the end of the year.

Unidentified Analyst

And just to take a step forward from our liquidity perspective in acquisitions, are you going to stick with your -- kind of core competency infusion of the acquisition side, would you -- with that liquidity would you step outside infusion or look at other?

Rick Smith

No. We are going to plan to be buoyant, very buoyant just focused 100% on infusion expansion. If we believe the 20, 35 locations is critical, in order to built the national platform. And so we’ll stay very focused. So we still have some inefficiency on the infusion side that need to be taken care and so we need to be very much focused on infusion number.

Unidentified Analyst

And that the 20 or 35 would be call all in costs going to the growth cost of opening up those locations?

Rick Smith

So I think de novo is about 300,000 in terms of TI built in the clean room and then we estimate another 300,000 related to staffing and working capital investment. So we build up the revenue stream and then expect that within a six month period, we can get it to EBITDA break-even and then positive as well.

Unidentified Analyst

Okay. Any questions from the audience, right now? I have couple more and in terms of capital liquidity, you see you make fees data purposes, potential buyback, revolver and acquisition by other growth?

Rick Smith

Yeah. We have plan at the end of Q1. We had about $60 million and banked it outstanding, we look to essentially deal with that bank facility in the second quarter, early third. And then we also estimated the time that we -- opportunity to take that $60 million of our bond, we will take a look at that. And then also -- and then remaining amount would be redeployed into our infusion expansion.

Unidentified Analyst

Okay. Any other questions in the audience? Okay. Let’s go.

Unidentified Analyst

(Inaudible) again, it seems like a pretty high organic growth rate and you talk about that four to six multiple range, a little bit lower that just because these are mom-and-pops that command smaller multiples or is there a fair amount of margin compression?

Rick Smith

No. We believe that the range we want to stand. And so we believe that given our manage care liabilities under contracts that if we take discipline in that range then we would look to essentially acquire, because that would be the fastest opportunity to enter market and also just bring more growth.

But if we can’t then that as we look forward to three de novo’s, we could financing that and that was within the range that we wanted and also the high quality to get essentially invest in that marketplace.

Unidentified Analyst

And that’s a pre-synergy multiple rate?

Rick Smith

Yeah.

Unidentified Analyst

I think that -- thank you very much.

Rick Smith

Thank you everyone for joining this conference.

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Source: BioScrip's CEO Presents at Bank of America Merrill Lynch 2012 Health Care Conference (Transcript)
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