BioScrip, Inc. Q4 2007 Earnings Call Transcript

Mar.19.08 | About: BioScrip, Inc. (BIOS)

BioScrip, Inc. (NASDAQ:BIOS)

Q4 2007 Earnings Call

March 4, 2008 10:00 am ET

Executives

Craig Allison - Director of Corporate Communications

Richard Friedman - Chairman and Chief Executive Officer

Stanley Rosenbaum - EVP and Chief financial Officer

Analysts

Brooks O’Neil - Dougherty & Company

Glenn Garment - Broadpoint Capital

Bill Nasgovitz - Heartland Fund

Mark Arnold - Piper Jaffray

Operator

Welcome to the fourth quarter and year end 2007 earnings results conference call. (Operator Instructions) I would now like to turn the conference over to Craig Allison, Director of Corporate Communications. Please go ahead, sir.

Craig Allison

Welcome to BioScrip fourth quarter and year end conference call. Joining us today are Richard Friedman, Chairman and Chief Executive Officer, and Stanley Rosenbaum, EVP and Chief Financial Officer.

If you have not received it yet, you may find today’s press release on the company’s website at www.BioScrip.com under the investor section.

Before we begin I would remind all the listeners that throughout this call we may make statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Including statements regarding the intent, belief or current expectations of the company, its directors or officers with respect to the future operational performance of the company and the operational and financial impact that certainly would have gotten the programs and customers account on the company.

Investors are cautioned that any such forward-looking statements are not guarantees as future performance or the successful execution of the companies’ strategic plan and involved with risks and uncertainty. All the results may differ materially from those in the forward-looking statements as a result of various factors. Important factors that could cause some of the differences described above or described in the companies periodic filings with the Security and Exchange Commission including its annual report. I direct you to these documents to understand that the current business environment and its associate list.

Earnings before interest, taxes, depreciation, amortization and option expense, EBITDAO, is a non-GAAP financial measure as defined under US Securities and Exchange Commission Regulation G. As required by Regulation G BioScrip has provided a reconciliation of this measure to the most comparable GAAP financial measure in the earnings press release disseminated this morning.

This information is available under the investor section of the BioScrip website www.BioScrip.com. Today’s call will consist of opening comments from Richard Friedman, a financial review of the quarter and the 2007 year-end results by Stanley Rosenbaum followed by a short summation by Richard Friedman and then we will conclude with a brief question and answer session.

I will now turn the call over to Richard Friedman. Please go ahead.

Richard Friedman

Thank you Craig and good morning everyone. By all accounts BioScrip had a successful year and our fourth quarter results are indicative of the successful execution of our strategic initiatives.

In 2007, we solidified our foundation to give us the ability to grow. We upgraded our management team. We repaired our collection procedures. We tapped the first critical steps to improve our systems and successfully eliminated our stocks material weaknesses. We significantly increased our specialty services revenues. We implemented a specialty service model that provides our customers greater value. We enhanced our relationships with payers and manufacturers. We dramatically improved our industry reputation and most importantly, we returned to profitability and as a result increased BioScrip’s market capitalization benefiting all of our share holders.

Our focus on a service driven approach, specialty pharmacy management is resulting in positive outcomes for our customers. Our programs are generating interest and recognition among stakeholders who need effective and proven product and service offerings for the management of certain chronic conditions. This recognition has positively impacted our results and will continue to do so in the future.

As importantly, our programs are differentiating BioScrip from our competitors and from commodetized specialty drug distribution. Our strategy has paved the way for successful sales efforts which are driving growth…

These efforts have produced new revenue from preferred distribution and service agreements with manufacturers, managed care contracts for specialty pharmacy services, community sales initiatives, Medicare’s competitive acquisition program and diffusion services.

Our service first philosophy has set the stage for stronger relationships and performance. By focusing on the individual patients’ therapy and disease we have shown we can produce quantifiable health and financial outcomes for our customers. Our proprietary bioScrip care specialty care management programs are being marketed as part of our specialty pharmacy service offering and are being well-received by the payer and manufacturing markets. These services have become more critical as many manufacturers now evaluate and assess their contracted specialty vendors based on performance criteria such as adherence, compliance, and other patient management matrix.

BioScrip’s management services continue to produce results, consequently ratings from manufacturers demonstrates superior performance compared to our many competitors. These results create increased revenues and new business opportunities. We continue to strategically expand our infusion services across the country.

These expansion efforts include more aggressively marketing our home infusion and nursing services, the build up of infusion pharmacy capabilities in select markets that are conducive to growth based on population, mix and current BioScrip business, and the development of an ultimate site of care model to address the economic inefficiencies of infusing certain infusion therapies in the home, physician office and hospital settings. The robust pipeline of infusion administered drugs should provide attractive growth potential for this specific model. Additionally, we recently opened an infusion pharmacy and treatment site in Capital Beach, Florida and we have began marketing infusion services in Las Vegas leveraging our free existing pharmacy location. We are in the process of opening an ambulatory infusion center in Mid-Hudson Valley, New York.

We also executed the contract with Active Care network, the country’s largest national infusion and injectable network that provides ultimate sites of care for drug administration. The relationship will provide opportunities for BioScrip to market management programs, to payers and manufacturers, where we can help to provide more convenient access to sites of care, utilization management and clinical oversight to help control cost.

Active Care has thousands of contracted sites nationally. Financially, we continue to make significant strides for the quarter we have generated net income up $2.5 million or 6% per share on revenues of $309 million. EBITDAO was $5.9 million; fourth quarter 2007 specialty service revenue increased 10.4% to almost $257 million over the prior year.

These improvements are primarily due to additional revenues associated with preferred drug distribution arrangements with manufacturers. Specialty contracts with payers and Medicare’s competitive acquisition program. For the 12-month period ending December 31st 2007, net income was $3.3 million or 9 cents per share compared to a net loss of $38.3 million or about $1.03 per share for 2006.

For 2007, specialty services revenue increased 12.4% to $974 million. Our collections have improved dramatically over the past year, which means we have been able to reduce our average debt outstanding and we have been able to continue to reduce our bad debt expense as a percentage of revenues.

I will now turn the call over the Stan for the review of both financial statements.

Stanley Rosenbaum

Thank you Rich, the total revenue for the fourth quarter as of 2007 was $309.2 million as compared to $292.1 million for the same period a year ago. Fourth quarter 2007 specialty services revenue was $256.7 million, an increase of $24.2 million with 10.4% over the same period last year primarily due to revenue associated with preferred drug distribution arrangements with manufacturers, new business resulting from managed care contracts and specialty pharmacy services and Medicare’s competitive acquisition program.

Fourth quarter 2007 PBM Services revenue is $52.4 million a decrease of $ 7.1 million or 11.9% as compared to the fourth quarter of 2006. This declining revenue is primarily due to the loss of previously reported PBM customers. Gross Profit for the company in the fourth quarter of 2007 grew by $5.9 million to $36.2 million or 11.7% total revenue from $30.3 million with 10.4% of total revenue for the comparable period of 2006.

This resulted to an increase of 130 basis points in our overall gross margin primarily due to favorable sales mix and improved drug acquisition process. Fourth quarter 2007 company expenses, increased $500,000 to $33.1 million with 10.7% of total revenue as compared to $32.6 million or 11.2% of total revenue for the fourth quarter of 2006. The increase reflects higher compensation cost arising from the companies improved performance. Offsetting this, we have significant improvement in bad debt expense of $2.7 million and lower amortization of intangibles of $1.2 million.

Interest expense for the quarter has improved by $318,000 as the company continues to reduce its debt through improved collections and increased profitability. Our fourth quarter tax of benefit $59,000 represent our provision per taxes on the amortization of long life assets, generally referred to as the major credit which was more than off set by the favorable settlements of certain state tax liabilities.

As a result of the above, the company’s debt income was $2.5 million representing an increase of $30.6 million of last year’s loss of $28 million. It should be noted that BioScrip established a non-cash reserve of $25.7 million against its deferred tax assets primarily associated with its net operating loss carryforward in the fourth quarter and the last quarter of 2006. Excluding this reserve, the company’s lost for the 4rth quarter of 2006 was $2.3 million or 6 cents per share.

Our EBITDAO increased by $43.6 million to $5.9 million in the fourth quarter of 2007. Turning to the full year results, our net income was $3.3 million or 9 cents per share compared to a net loss of $38.3 million or $1.03 per share for the same period a year ago. Our 2006 net income was negatively affected by the previously mentioned reserve against down deferred tax asset. Revenues increased $45.8 million to approximately $1.2 billion from 12 months ended December 31st 2007. From $1.15 billion reported in the same period of last year, despite the loss of $61.8 million of revenues associated with certain PBM customers. Specialty revenue increased 12.4%, so $974.2 million for this 12-month period ended December 31st 2007 from $866.6 million recorded on the same period a year ago.

As in the fourth quarter, the increase reflects high revenues associated with preferred drug distribution agreements, new managed care contracts and competitive acquisition program. Our gross margins just increased from 10.2% to 11.4% with $19 million. This improvement is essentially due to the mix of replacing lower margin PBM business with higher margin specialty business as well as improved drug acquisition cost. In the full year, total offering expenses decreased by $6.1 million to $128.2 million essentially due to a lower bad debt provision of $7.3 million and lower amortization of the tangibles of the $3.6 million, which is partially offset by increased compensation cost essentially of result of the company’s improved performance.

As a result, our pre-tax income for the 12 months of 2007 shows an improvement of $24.8 million over the comparable period of a year ago. Our 12-month EBITDAO totaled $18.9 million dollars representing a $21.8 million increase over the same period of the year ago. Turning now to our balance sheet December 31st a borrowing under our current credit facility were down to $33.8 million, an improvement of $19.1 million from December 31st 2006, at December 31st availability under the facility was $41.3 million and as of yesterday availability was approximately $34.3 million.

Over the past year significant improvements have occurred in both our DSO and inventory base on hand. Our DSO has improved approximately four days and our inventory base on hand is lower despite the increase of inventory to manage necessary to support the increased and specialty services revenue.

I am pleased with our overall financial performance and I will now turn the call back to Rich.

Richard Friedman

Thanks Stan. Overall 2007 was very meaningful for BioScrip, we committed to attaining performance goals and we achieved them. We outline new objectives and we met them. We continued to become a stronger company. Our service-first philosophy, sets the stage for stronger relationships and performance by focusing on patient’s therapy, disease and utilization management, we provide valuable expertise from managing chronic conditions.

Bottom line, our programs’ improved compliance and adherence which possibly impacted to patients’ health and financial returns for payers, a perfect example of this type of program involves our contract with United Healthcare as we previously reported, United Healthcare rewarded BioScrip, a contract to provide HIV AIDS, a transplant pharmacy services to its approximately 26 million plan members nationwide. We remain committed to delivering customer and shareholder value.

I thank you for your attention and we will now open the lines for questions. Operator?

Question-and-Answer Session

Operator

Our first question comes from the line of Mark Arnold, from Piper Jaffray. Please proceed with your question.

Mark Arnold - Piper Jaffray

Good morning guys, it is a nice quarter. I just have a few questions, I guess on gross margins I would assume we will continue to see some further improvement as you continue to add these service components to what you offer your customers and I guess to that point without giving guidance on it, what are some of the factors that caused that number to kind of jump around quarter-to-quarter here in the next year? I know in 2007 you got a really nice year over year improvement and you mentioned some of the key things driving that but it did bounce around a little bit as we look forward in the next year what are some of just the facts that could cause that to jump around a bit again?

Richard Friedman

Good morning, Mark. First of all the margin moves around slightly based upon the mix of the products obviously the infusion business is higher and some of the medical distribution has lower, as we improve the service side it has to become the larger percentage down the road which will hopefully will of the next number of years and obviously service will have higher margins than strictly a distribution model, but I am not sure you are going to see the full impact of that increase in margins actually for years to come when the service side becomes a more significant question of the total of the company.

I think as we try to expand the infusion therapy so as typically have higher margins, but I think more important than the gross without a doubt is going to be the operating income why I think what you are seeing and what this company is all about is going to be taking advantage of the leverage we now have. As we pick up more revenues you are going to see more and more of the margins fall down to the bottom line and I think that is pretty exciting for us right now. Stan, you want add to that?

Stanley Rosenbaum

Well you said that as we have our operating expenses under control now, whatever the margins that fall through our new sales contracts at the gross margin line will fall right to the operating income line so that while our gross margins may move around we certainly expect that our operating margins will increase in the future.

Mark Arnold - Piper Jaffray

Okay. You answered my second question without me even asking it so I will just move on I know sometimes many people spend too much time focused on this and it is not that significant a piece to your business today, but do you have any update just on where the bidding on that program stands looking forward here and when you expect to hear whether you maintain that contract?

Richard Friedman

[inaudible] did not allow. We understand there are number of others who are looking to participate. I will comment, just an update, we have seen an incredible increase in the utilization of the number that we have and we are almost up to the same level as we will…when we entered the year but the number we utilize are significantly higher.

I think as more companies look to get into this, it is not going to be sporting what is already there because as you said it is a great customer, but it is not that significant. What I am looking for is to see greater marketing coming out of CMS and if there are any other vendors that would be affected in ‘09 I would love for them to start marketing after the physician community to get the message out even greater.

What we are seeing is that some of the specialties increase utilization because the CAP program actually works and the more that we have out there more marketing these programs I think it is going to benefit everyone.

Mark Arnold - Piper Jaffray

Just one last question, you mentioned the Active Care network contract, pardon me for my ignorance of this that something that was announced earlier and I am just maybe new to the story here, I am not familiar with that but is that a new contract?

Richard Friedman

Yes, it was not announced earlier in fact we used to…sure

Mark Arnold - Piper Jaffray

Can you…I was just…could you elaborate a little bit more on that I thought that was very interesting.

Richard Friedman

Yes. Well, what this is, it is effectively a network that was put together across the United States they have anywhere between 6,000 and 8,000 different sites of care that BioScrip to utilize rather than putting money into bricks and mortar model for over the country. It will supplement what we have and we believe that the collaborative relationship will be rewarded for both organizations, but what it does do is gives us the sides to be able to deal with both the manufacturer partners as well as the managed care partners. Utilizing their sites of care in order to handle our business, so we think it is a great addition, we are looking forward to an incredible partnership between both the organizations.

Mark Arnold - Piper Jaffray

Great! Thank you very much.

Richard Friedman

And, Mark, as I said, it is a nationwide which is critical for us.

Operator

Alright. The next question comes from Brooks O’Neil from Dougherty & Company. Please proceed with his question.

Brooks O’Neil - Dougherty & Company

Good morning. I have a few questions as well guys, perhaps you could give us a little bit more detail on the impact of the united contract in the fourth quarter results and what do you think the outlook there might be for 2008?

Richard Friedman

Sure. We are not going to give numbers but we will say this; when we rewarded the United contract the fact that it was August of 2007. The existing vendor at that time still had run outs to do and it was still getting 90 days supplies. The benefits change became effective in 2008.

So therefore, we continue to see ramp up. I will tell you today, it is right on track of where we believed it would be at this time of the first quarter, but in terms of revenue in the fourth quarter was fairly well.

Brooks O’Neil - Dougherty & Company

Okay. That is very encouraging and I guess I would say… I think we have talked a little bit registering that 2007 about the possibility of securing additional contracts like the one you got with United, do you still feel like that the possibility for sometime this year?

Richard Friedman

Well I was at the crystal ball but, what I can tell you is that our programs are being accepted in the market place. I see it everyday with knows that were talking to both on the manufacturing side and as well as on the payers side. What we do is we manage, it is an individual therapy we look at the disease stage, we have touch points, we have shown better retention, adherence, everything through as we continue to manage.

If companies, if managed care organizations wants to help control cost for the chronically ill I believe our programs are an answer. As manufacturers want to do more, I think BioScrip is the answer. We are away from the commoditization of the specialty side we managed, and united is unique in its size, but that is not to say that we are not going to have success in the coming years because of our model. I think we will. I think people who are interested in helping to control cost do a better job of managing the chronically ill. I think the BioScrip care program, the MB star program, our programs and quite frankly our people; we have upgraded people as you know the past year I think we are well position to take care of what is happening in this industry.

Brooks O’Neil - Dougherty & Company

That is great! Do you guys think that the PBM business is stabilized in here at this point or we had a place where in a runway basis and on be about where set out?

Richard Friedman

Yes. I would think if that is true and we lost 17 in over the ‘05, ’06 period and the Solarex run out this year. We are unaware of any other changes to our PBM business at this stage.

Brooks O’Neil - Dougherty & Company

Okay, good. How do you guys feel about the acquisitions or do you think acquisitions are important to the growth of the business for you or not a big factor for 2008?

Richard Friedman

It is a great question. Historically, we have not done great in the integration but we have upgraded our management team I feel more confident today with the people. It is really the integration prospects a key to any good acquisition. There are some terrific companies out there but if you cannot put them together well it does not pay to go do it. I will tell you that organically the company is doing fine, but there maybe some assets out there that could work and fit in with what we are trying to do. So I am not saying that we are going to be doing that and I am not saying what I am going to be doing and we will look, but I want to make sure that there is a strong management team and the integration process is put in place so that as we go forward and if we decide to go do one that will ready to go do it.

Brooks O’Neil - Dougherty & Company

I think that makes a lot of sense. Let me just say two more quick detailed questions with one Stan you mentioned the resolution on some state tax issues. Can you just refresh our memory if there are any additional opportunities like that, that are still out there?

Richard Friedman

Not as related to these states…it was state tax issues that we settled in ’07? And we had a benefit on that on the fourth quarter, if you remember we have adopted 1048 on January 1st and we’re required to set certain reserves on some state tax issues, we have resolved those later in the year and that is why it is the favorable benefit on the fourth quarter.

Brooks O’Neil - Dougherty & Company

Okay. Do you have any update on when you might be able to reverse that date of credit?

Richard Friedman

Well, the bank of credit exist forever but what you are saying is can we revise the valuation reserve.

Brooks O’Neil - Dougherty & Company

Right, sorry, sorry.

Richard Friedman

That is okay…

Brooks O’Neil - Dougherty & Company

I am not an accountant so I…

Richard Friedman

Well that is okay. It is not an easy thing to understand but even for us accountants but the same criteria that required us to set up the reserve will be used in determining the reversal of that reserve and amongst those are 12 cumulative quarters of profits, six consecutive quarters of profits and an outlook going forward that says we will utilize the NOLs as we go forward. As you know there is always ’05 and 06’

With ’05 and ‘06 being huge losses I would not expect that to happen in 2008.

Brooks O’Neil - Dougherty & Company

That is great, and then maybe can you give us any update on the IT projects that you are involved with in and how those are coming along?

Richard Friedman

Sure. As you know, this year we eliminated on material weakness that was the number one issue on IT among other things that will have a significant impact on our audit going forward. We have also upgraded our general ledger system this year and that has gone smoothly and that is up running and we have selected [inaudible] and as you will notice when you look at our balance sheet we would spent some money on the fourth quarter as we started to implement this system. This is the implementation will occur over the next 18 months. We will be facing the implementation and to date we are right on track as to our plan.

Operator

Our next question comes from the line of Glenn Garment from Broadpoint Capital; please proceed with your question.

Glenn Garman - Broadpoint Capital Inc.

Thanks, Good morning guys. I have a couple of quick questions, Stan, can you give us the operating income at the segment level or do we need to wait for the K?

Stan

You have to wait for the K we are still making some adjustments.

Glenn Garman - Broadpoint Capital Inc.

Okay. Alright.

Richard Friedman

We will still making allocation issues off of the corporate expenses. That will be filed on Friday.

Glenn Garman - Broadpoint Capital Inc.

Okay. Alright, fair enough. And then with respect to the gross margin that was down a little bit sequentially, is it that some seasonality,, is that synergies or just some other mix shift going on there?

Richard Friedman

It is a mix issue.

Glenn Garman - Broadpoint Capital Inc.

Okay, and then…I am sorry?

Richard Friedman

It is a mix issue.

Glenn Garman - Broadpoint Capital Inc.

Okay, and then Richard, how many infusion sites today and how many do you see the company adding in 2008?

Richard Friedman

We have five infusion sites today plus a number of offices where we put sites into physicians’ offices. It is kind of a well, with the Active Care network. I think that is a great opportunity for us. We are going to be looking at sites, first I realize we said earlier that we are all in businesses...I think there is plenty of opportunity with all locations as an example in San Francisco, we may have an opportunity in Miami, and we may have an opportunity. We also the contract that we just signed were opening up in New York with a very prestigious group up there should do very well, and hope it will do very well for us.

So we are walking at opportunities as we go around but we are going to be concentrating where we are first and we believe that we could use our existing locations and also it is a benefit design model for the payers that will drive our volume. They are not going to be one off for the patient so when it will be going into the payers talking to them about the benefit to sites and that we have a national presence and able to handle them on the national basis. So it is not just going to be the one off that has kind of been historical but it is now going to be the payers on the nationwide basis.

Glenn Garman - Broadpoint Capital Inc.

Okay. That is all for now and I know you do not breakout infusion revenue, Rich, but is it your infusion business growing faster than your specialty business as a whole?

Richard Friedman

No.

Glenn Garman - Broadpoint Capital Inc.

Okay. Thanks for the comments.

Operator

Our next question comes on line of Bill Nasgovitz, from Heartland Fund. Please proceed with your question.

Bill Nasgovitz - Heartland Fund

Good morning, nice progress, congratulations.

Richard Friedman

Alright. Good morning, Bill.

Bill Nasgovitz - Heartland Fund

Say I might have missed this. Did you get some EBIDTA guidelines here for 2008?

Richard Friedman

No. No you did not miss anything.

Bill Nasgovitz - Heartland Fund

Would you like that opportunity?

Richard Friedman

No. I will not. We have made tremendous progress over the past year and our job is to just keep it going. We have a lot of good things going on but we have decided not to put out the guidelines.

Bill Nasgovitz - Heartland Fund

Well, looking at a longer term, what kind of gross margins do you think is possible, looking out to two or three years, Rich? You are at last count, it was 11 what, 11 unchanged?

Richard Friedman

Yes. I cannot tell you Bill, as I had said earlier I am really concerned much more about the operating income the percentage there, I think we could drive that number off significantly, I think that quite frankly the gross profit line…you are going to see different mixes on the service revenue side as that continues to grow that is going to have a higher margin. I see that on the specialty distribution side, it is probably going to remain where it is somewhat, but the leverage of this company today being able to bring down 50% and 60% of the gross profit or variants or more stands out settle or more by the way, down to the operating income line is what is critical to this company and as we are able to really move that up. I think more and more is going to hit the bottom line and if he has adjust going to go up. So it is tough to predict the gross profit because it is really market driven as opposed to watch driving that line, but I do see opportunities in infusion, I do see opportunities on the service side. On strictly the distribution side, I see that flat going forward so there are plenty of opportunities out there but it is exciting for me to see more and more fall down to the bottom.

Bill Nasgovitz - Heartland Fund

Okay. That was helpful.

Operator

Our next question is a follow up question from the line up Mr. Mark Arnold. Please proceed with your question.

Mark Arnold - Piper Jaffray

I just wanted to follow up again on the Active Care network, just so I understand that right as it relates to those infusion sites. Those are typically going to be in a physician’s office where the physician would bill for an admin fee and would you guys then bill for the drug component?

Richard Friedman

Yes. It is going to be into some physicians’ office but that is a small percentage. It is actually many different sites that it is clinics, it is AIC, it is all across the board where BioScrip effectively leases out the chair in order to perform the sites or credentials, the physicians or nurses all credentials, it fits the therapy that we are doing, BioScrip provides the drug and it is effectively a least type of set up for BioScrip.

Operator

There are no further questions at this time; I will now turn the conference back to you.

Richard Friedman

Well, thank you very much. BioScrip again continues to make progress; our initiatives are the right ones we look forward to updating you again on our next conference call. Thank you for your participation and have a great day.

Operator

Ladies and gentlemen, and that concludes the conference call for today, we thank you for your participation and may I ask you to please disconnect your line. Have a great day everyone.

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