Apria Healthcare Group Inc. Q1 2008 Earnings Call Transcript

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 |  About: Apria Healthcare Group Inc. (AHG)
by: SA Transcripts

Apria Healthcare Group Inc. (AHG) Q1 2008 Earnings Call May 1, 2008 11:15 AM ET

Executives

Larry Higby - Chief Executive Officer

Chris Karkenny - EVP and CFO

Analysts

Gary Lieberman - Stanford Group

Darren Lehrich - Deutsche Bank

Ralph Giacobbe - Credit Suisse

Donald Hooker - UBS

Gary Taylor - Citigroup

Bill Bonello - Wachovia

Art Henderson - Jefferies and Company

Operator

Welcome to Apria Healthcare's first quarter Earnings Call. We're now ready to begin the call.

Before I turn it over to Apria's Chief Executive Officer, Mr. Larry Higby. (Operator Instructions)

I would like to turn the call over to Mr. Larry Higby, Chief Executive Officer. Mr. Higby, you may begin.

Larry Higby

Thank you. Good morning and welcome to Apria Healthcare's first quarter 2008 earnings conference call. This is Larry Higby, Apria's Chief Executive Officer. And with me this morning is Chris Karkenny, our Chief Financial Officer.

I will lead off this morning by reviewing highlights of our first quarter that relate to our 2008 strategy, including progress on the Coram integration, and a few comments as to our view of the situation in Washington and Medicare's competitive bidding program. Chris will then take you through the detailed first quarter financial performance, and we will conclude with the question-and-answer session.

And as always, let me start with the disclaimer. This conference call may include statements regarding anticipated future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Results may differ materially as a result of the risk factors included in the company's filings with the Securities and Exchange Commission and other factors over which the company has no control. We advise listeners to review the risk factors discussed in our press release this morning and in periodic filings we make with the SEC.

Having said that, the first quarter of 2008 was characterized by 35% net revenue growth including the Coram acquisition. Revenue was $528 million compared to $391 million in the first quarter of 2007. Net income was $20.8 million or essentially flat when compared to the first quarter of 2007.

Year-over-year, two of our three primary service lines grew in the quarter. Respiratory therapy grew 2.5% or 3.4% when adjusted for payment cuts, and infusion services grew 190%, including Coram.

Within the respiratory therapy service line, home oxygen revenues grew 4%, which is in the range we expected. And in fact, our oxygen and CPAP patient census both reached new record highs in the first quarter.

In the infusion service line, our traditional home infusion therapy patient census, which is primarily TPN or total parenteral nutrition and antibiotic therapy, grew 12.1% year-over-year, while the specialty therapy patient census grew 14.1% during the same period. This includes IVIG factor and Alpha-I as well as other specialty biotech products.

These numbers represent Apria and Coram's combined infusion business.

Growth in these two primary service lines was unfortunately offset by declines in two areas; first, in the lower margin home medical equipment category, which was primarily driven by the Deficit Reduction Act, reduction in the rental period, the elimination of Medicare semiannual service and maintenance fees and our de-emphasis of this service line.

The second negative impact was in what is becoming the low-margin inhalation therapy category, where Medicare payment and coverage changes for certain drugs resulted in a decline. While expected, the decline in inhalation therapy revenue did reduce the overall growth rate for the company and particularly our respiratory therapy line.

Another growth area in the first quarter was that our Medicare Advantage managed care fee-for-service business, which grew 23% for our RT/HME and enteral year-over-year.

As we have discussed on previous calls, the government provided incentives for managed care organizations to remain in and expand their presence in the Medicare Advantage program. With over 2,000 managed care contracts nationwide, Apria is well-positioned to take advantage and take care of patients who move to Medicare Advantage programs from traditional Medicare.

Our overall strategy and plan for 2008 remains unchanged. It is: One, to continue to improve sales results; two, integrate Coram into our organization effectively; three, enhance our customers' overall service experience with Apria; and four, drive additional cost savings initiatives via technology and process improvements.

I would like to take a minute to highlight a few accomplishments from the first quarter that relate to these objectives for the year. First, the Coram integration is proceeding as planned. The marketplace has responded very favorably to the combination of Apria and the Coram businesses.

We have maintained our focus on running the business despite a lot of integration activity at the field level. We are pleased with the progress we have made.

Highlights of the integration plan include the following. One, the recent appointment of Dan Greenleaf as President of the Infusion business. Dan joins us with a solid history of success in the pharmaceutical business. And as planned, John Arlotta will leave the organization in June. And I want to thank him for his strong focus and leadership during the early months of our integration. He has done a great job.

Two, the sales and operations management structure was finalized in the first few weeks after the acquisition was completed, and the team is solidly in place. Three, the field sales organization for the infusion business is completely integrated with 310 sales positions in place, 91%-plus of those already filled.

Four, over two-thirds of the 21 overlapping pharmacy locations have been integrated. Five, an information technology platform decision has been finalized and work has begun to migrate to one common IT system for the infusion business.

Six, the purchasing synergies we established at the outset of the transaction are on track, and related purchasing synergies are in place going forward. Lastly, the transition of Coram's enteral nutrition business to the Apria IT platform has been successfully completed.

Another major element of our strategy for 2008 and frankly for future years is to continue driving cost savings and productivity initiatives through process improvements and technology enhancements.

In the respiratory and home medical equipment division's logistics function, there were improvements in both the supply chain and distribution functions compared to the same quarter last year. Ongoing improvements were realized in route optimization, miles driven per delivery and delivery frequency.

Respiratory therapist productivity also tended up in the first quarter due to improved scheduling and routing of the in-home patient visits as well as the increased use of our innovative CPAP clinic model. We will continue to drive these and other initiatives throughout the year in order to continue leveraging our cost structure and minimizing the effect of fuel cost increases.

Turning to an update on government reimbursement, the primary area of focus right now is on the implementation of the first round of competitive bidding. In March, the Centers for Medicare and Medicaid Services or CMS held a press conference to announce the average weighted savings it expects to achieve from competitive bidding, which is 26%.

As I have said before, the company's total net revenues that are subject to competitive bidding in the first 10 markets represents less than 2% of our total revenue. The estimated impact of the new rates in the first 10 markets represents a potential $6 million revenue reduction in the second half of this year, of which $4 million was included in our guidance.

This is before accounting for any volume growth, which CMS data estimates could be a 100% or greater for winning bidders in each market.

As you know, one reason we acquired Coram was to diversify our payer and therapy mix so that Medicare respiratory therapy represents a smaller portion of our overall business. Before the Coram acquisition, Medicare represented 29% of our net revenues, and that has dropped 26%; while respiratory therapy, which was 67% of our therapy mix, has dropped to approximately 52%.

As you know, many problems with the bid process have come to light. And as a result, the House and Senate requested CMS provide detail briefings, which were held last week. [Philstar] pressed CMS for answers about the criteria its contractor used to select the winners, why it has disqualified over 62% of all bidders and what they did to ensure that almost $3 million beneficiaries who are impacted in the first 10 competitive bidding markets will continue to have access to quality homecare services and products?

The House Ways and Means Committee announced that it is scheduled to hearing on competitive bidding for next week.

We remain concerned about five primary flaws in the competitive bidding program. One, CMS selected winners who have never had a physical presence in a competitive bidding market and others who cannot possibly service the entire competitive bidding market, which is the basic requirement for the program.

The bid prices of those who bid speculatively or recklessly are calculated as part of single payment amount and CMS has no plans to recalculate these single payment amounts, despite the fact that many of those bids will never be fulfilled.

There is absolutely zero transparency surrounding the bid selection and single payment calculation process, which is difficult to comprehend from an administration that espouses the need for maximum transparency in the healthcare system in America.

Four, due to the CMS rule that grandfathering will not be allowed for enteral nutrition or diabetic supplies, over 120,000 Medicare beneficiaries may be forced to find another provider mid-therapy, sometime between May and June 30th.

And five, it is becoming clear as the list of winners in each competitive bidding area is revealed. The Medicare beneficiaries who have multiple home-care needs, which are most of them, will indeed have to obtain those services from multiple providers causing multiple bills and multiple monthly copays to keep track of.

The American Association for home-care and numerous other patient advocacy organizations are pressing Congress and CMS for a delay in the implementation of round one and, or round two of competitive bidding in order to allow time for CMS to fix these major flaws with the program.

The second major area of the government's focus right now is on inhalation therapies where it has imposed or announced a series of cuts in either reimbursement or coverage. These cuts have impacted and will impact the entire industry this year. Inhalation therapy revenue currently represents less than 4% of our total company revenue with Coram included. And with the cuts we expect it to represent even less in the future.

Unfortunately, it is Medicare beneficiaries with chronic obstructive pulmonary disease or COPD, who will suffer the most from these latest changes. Since the recent local coverage decision or LCD will effectively eliminate patient access to two frequently prescribed drugs, DuoNeb and Xopenex on July 1st.

Prescribing physicians will have to find alternatives to these drugs for thousands of Medicare beneficiaries nationwide. Various patients and provider advocacy groups are currently evaluating their legal, legislative and regulatory options, in an attempt to rationalize the government's approach to covering these drugs. Since the government has already overachieved its saving goals for these Part-B drugs, we believe it is now practicing medicine, and will find its coverage decision to be ill-advised over both the short and long-term.

Despite all these changes in government reimbursement, because of our combination of both managed care and traditional business, and our diversified service mix, Apria's market position in the United States will continue to remain strong. Again, managed care now represents approximately 68% of our net revenues versus 65% before the Coram acquisition and Medicare represents approximately 26% of our revenue stream today, versus 29% before the acquisition.

With that, I'll now turn it over to Chris Karkenny, our Chief Financial Officer. Chris will review the financial highlights for the quarter and comment on the remainder of 2008. Chris?

Chris Karkenny

Thank you, Larry. I'll begin by discussing the income statement and move to liquidity and capital. As reported earlier today, overall sales for the first quarter 2008 were $528 million, up 35.1% over first quarter of 2007.

Turning over to the respiratory therapy revenue, this segment grew by 2.5% year-over-year. The growth in revenue dollars in the three months ended March 31st, 2008 resulted primarily from an increase in revenue from the rental and sales continuous positive and bi-level airway pressure devices and related supplies, an increase in oxygen equipment rental revenue and increase in ventilator equipment rental.

Adjusted from Medicare reductions of $2.4 million respiratory revenues increased 3.4% year-over-year sequentially the first quarter of 2008 was down 1.1% compared to the fourth quarter of 2007 reflecting reductions in Medicare reimbursement for respiratory drugs and lower results in the CPAP and BiPAP compared to exceptionally strong fourth quarter growth on these product lines.

In the first quarter infusion therapy revenue grew 190.7% over the first quarter of 2007. This increase is due to the Coram acquisition which closed in December 2007. First quarter 2008 infusion therapy revenues increased 67.5% over the fourth quarter of 2007. We've realized $1 million of net synergies through March 31, 2008. Lastly the lower margin HME and other revenue category decreased 2% year-over-year and decreased 4.6% sequentially. The declines were primarily due to the payment changes mandated by the deficit reduction act and the new regulations issued by CMS in mid 2007 concerning complex rehabilitation.

Turning to gross margin, gross margin was 61.1% for the first quarter of 2008 as compared to 65.6% for the first quarter of 2007. The decline in gross margin is due to the change in the mix of our business to be more weighted to home infusion therapy service line which has a lower gross margin in the home respiratory therapy service line and home medical equipment service lines. This decline was expected as a result of our acquisition of Coram in December 2007. In addition, our purchasing department is continued to secure a favorable pricing as a continued commitment to ongoing cost savings.

Turing to bad debt, for the first quarter of 2008, bad debt expense was 2% compared to 2.5% in the first quarter of 2007 and 2.1% for the fourth quarter of 2007. The first quarter results are inline with our expectation range. Our revenue management team continues ability to effectively payer changes, and purpose on patients pay receivables has resulted in stabilizing the day sales outstanding, which were at 49 days in the first quarter of the same as a year ago and up one day compared to the fourth quarter of 2007. The one day increase is related to the Coram acquisition where the infusion line of business has a historically higher DSO. We continue to focus on this area and we'll keep you updated as to the future progress.

Selling, distribution, and administrative costs. SD&A expenses were 50.9% of revenue compared to 52.8% for the first quarter of 2007 and 51.9% of revenue in the fourth quarter 2007. As we mentioned in our fourth quarter earnings call, we expected our SD&A ratio to trend lower as Coram becomes a larger percentage of Apria's overall business. This is primarily due to the lower cost associated with the distribution system for the infusion business.

Going into some more detail, selling, distribution, and administrative expenses increased by $62.2 million for the three months ended March 31, 2008 over the corresponding period in 2007. Laboring related expenses increased $40 million, of which $37 million was in our home infusion therapy service line primarily related to our Coram acquisition in December 2007. Other operating costs increased $22 million of which $17 million was in our home infusion therapy service line primarily related to the acquisition of Coram again.

The remaining increases were primarily due it to the increase in delivery costs which the primary factor here was fuel in addition to vehicle lease costs, initial expenses related to the cost saving program initiatives, and costs incurred in support of enterprise wide information system projects offset by decreases in general and professional liability insurance expenses and a decrease in incentive compensation expense.

Net income and earnings per share. Turning to this area net income for the first quarter declined 0.4% from the first quarter of 2007 to $20.8 million or $0.47 per share which despite reimbursement cuts is the same as our first quarter 2007 results of $0.47 per share. EBITDA for the first quarter 2008 was $77.8 million compared to $72.9 million for the first quarter of 2007.

Sequentially the first quarter of 2008 EBITDA was down 2.8% compared to the fourth quarter EBITDA of $80.1 million. The anticipated decline was due to respiratory drug payment cuts and planned investments in IT infrastructure.

Now turning to liquidity and capital. Free cash flow for the first quarter of 2008 was $7.1 million compared to the first quarter of 2007 free cash flow of $12.2 million. Both free cash flow and EBITDA are non-GAAP financial measures. Please refer to our press release posted on our website for reconciliation schedules.

Total capital expenditures were $41.5 million or 7.9% of revenues this quarter compared to $32.7 million or 8.4% of revenues in the first quarter 2007. The year-over-year increase in capital expenditures of $8.8 million is primarily related to the additions to our information systems hardware and software.

The results for the quarter were in line with our overall expectations, as our free cash flow typically increases throughout the latter part of the year.

Turning to our debt structure now, we paid down a net $15 million on our revolver during the first quarter. I would also like to mention that we have paid down an additional $20 million on the revolver since the quarter-end. As a result of these payments, our debt outstanding is $389 million on our revolver and $250 million on our 3-3/8 convertible notes.

Additionally, during the quarter, our credit rating on the revolver improved from BB+ to BBB. And as a result, our borrowing rate on the revolver is now LIBOR plus 62.5 basis points from LIBOR plus 100 basis points.

Now turning to days inventory on hand or DIOH, at quarter-end, these were 38 compared to 36 in the fourth quarter 2007. The DIOH increase primarily relates to the increase in the inventory balances.

As noted in our press release, recent development affecting Medicare reimbursement for certain respiratory drugs will negatively impact the company's revenue by an additional $12 million. This brings the total respiratory drug revenue reductions to $24 million for the full year.

As a reminder though, $12 million was already in our initial guidance. It is not possible, however, to determine whether the additional reimbursement changes in combination with our operating results for the remainder of the fiscal year will cause the company to change its previously announced 2008 guidance ranges for revenue growth, cash flow and earnings per share.

Now, with that, I'll turn the call back over to Larry.

Larry Higby

Thank you, Chris. We're now prepared for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Gary Lieberman from Stanford Group. Your line is open.

Gary Lieberman - Stanford Group

Thanks. Good morning.

Larry Higby

Hi, Gary.

Gary Lieberman - Stanford Group

I was hoping maybe we should pick up on the last comment that Chris made just in terms of the $12 million from the respiratory impact in conjunction with the other operating results. I guess that means that there is some incremental benefit or pickup on other operating results. Could you maybe elaborate more on that?

Chris Karkenny

At this point, it's too early to tell how the remainder of the year is going to turn out. So, that's why we mentioned that we would not be going into the guidance and all.

Gary Lieberman - Stanford Group

Okay. But I mean just to try to get some more color there, if there was no combination with other operating results, is there or some kind of EPS impact that $12 million would equate to?

Chris Karkenny

No, sir, there was nothing in combination with our operating results. Certainly, there would be a negative impact. Anytime there is a reduction, there is a negative impact. But the other piece, as we mentioned, there are certain areas as Larry talked about on the addition or the reimbursement cuts, there are potential increases in revenue from some of the competitive bidding areas. And it's too early to tell how that's going to shape out in the remainder of the year.

Larry Higby

Well, with a lot of the initiatives we have underway right now, we just want to see how they develop throughout the year. We're really optimistic about them right now.

Gary Lieberman - Stanford Group

Okay. And then I guess just in terms of --.

Larry Higby

Also with the combination, as I mentioned in my remarks, of the integration between Coram and Apria, expect to be able to continue to have the strong purchasing power in the marketplace.

Gary Lieberman - Stanford Group

Okay. And then maybe just a follow-up on competitive bidding in terms of some of the efforts that the industry is pursuing in Washington. It sounds like there is a push to get competitive bidding part 1 and/or part 2 delayed. Is there, I guess, some sort of pay for that the industry would propose in terms of overall rates or some other kind of proposal that would still save money, but might go about it somewhat differently?

Larry Higby

I think there are a number of options being considered. And to try and suggest one is going to better than the other. I think it's probably premature. I just sort of go through what's theoretically possible.

I think it is certainly risky in an election year to begin cutting benefits and changing Medicare programs for large numbers of beneficiaries. And I think both parties and all the branches of government are pretty well aware of that.

I think when this thing happened, they had no idea of the firestorm that was going to be created, not just among the provider community, but I think the one that's yet to be seen among the beneficiary community as they are forced to try and figure out four or five different people to supply their needs in any individual home.

In addition to that, it is clear, if you talk to either congressmen or senators who have competitive bidding markets in their area or do not, that a lot of the rules that were supposedly going to be followed have not been followed. So, I think Congress will probably err on the side of conservatism.

We ultimately think that the competitive bidding probably is going to prevail even if there is a delay and have really structured our company and our delivery systems and our cost structure to be able to not only survive, but thrive in competitive bidding markets, and we will do so.

So, we think that the real issue, and if you listen to my remarks, primarily focuses around the way the program is currently being administered in the first 10 markets. That needs to be cleaned up or you will have a nationwide disaster on your hands.

Gary Lieberman - Stanford Group

Great. Thanks a lot.

Operator

Our next question comes from Darren Lehrich with Deutsche Bank. Your line is open.

Darren Lehrich - Deutsche Bank

Thanks. Good morning and thanks for taking my questions. I guess a few things here. First, just on the Coram integration process, I think you mentioned the number of pharmacy consolidations, and I missed what you said. Can you remind us exactly what you said there and what do you expect to see from that consolidation in terms of savings?

Larry Higby

Yes, currently, we have 21 overlapping pharmacies and 15 of those have already been integrated. So we're already starting to see the synergy pluses out of those pharmacies. We have the balance to go, which I think is six. So, we made progress here considering we've only been at it for four months and really have a good integration model.

Everything is going to be very strong. The way we're doing it, we are hardly missing a beat in those pharmacies. So, that's working well. We will then have the largest pharmacy network in the United States. Obviously, when that's completed with not only I think what is it, 80, 80-plus pharmacies serving infusion and another 200 pharmacies serving inhalation therapy.

Darren Lehrich - Deutsche Bank

Great. And then just the migration of the IT systems, it sounds like you are in a process where you selected a vendor and you have a timeline there. Can you just share with us what exactly that timeline is and whether you have begun that or are you just selecting the vendor at this point?

Larry Higby

Gary, I think your first point maybe a little off. Let me clarify it. We've selected a platform. The platform we selected actually was the Coram legacy platform.

Darren Lehrich - Deutsche Bank

Okay.

Larry Higby

That's going to be improved over the next few months, but this means we really only have a very few number of people that we have to retrain before they are operating on the Coram system. And so, that's going to be a real plus for us rather than having gone out and bought a whole new system that we have to train all the 2,000 people on.

Darren Lehrich - Deutsche Bank

Okay. And then the timeframe for that just as you integrate that?

Larry Higby

It will be integrating over the next year or so. So, we are going to make sure we get it right. We want to do some upgrades to the Coram system before we get into the real heavy migration on that.

Because we have such a trained workforce, though, on both sides of the fence, the Coram people are operating today just fine on their system. The Apria people are operating this one on their system. But we need to do the roll-ups. We need to do the billing. That's working just fine today.

So, this is a real upside for us as we move ahead. We just want to make sure it gets right. But it will not involve retraining all 2,300 employees.

Darren Lehrich - Deutsche Bank

Okay. And then the last thing I have in Coram is just specialty mix. Can you just talk to that and what you are seeing in terms of your pipeline there as you have gone out to the market now with Coram?

Larry Higby

The pipeline continues to be strong. We're very optimistic about that. A lot of new drugs are now coming down the pipeline. I think the thing that's been surprising to us in terms of a positive way even more so, though, is the performance of the CPI Group. This is the group that does trials and they are in the process of signing up a number of drug trials that we think, longer term, will lead to successful expansion of our infusion business.

Darren Lehrich - Deutsche Bank

Okay, and then if I could just switch.

Larry Higby

I just would say everything is right on with the expectations we have when we talked to you a quarter ago.

Darren Lehrich - Deutsche Bank

Specialty still about half of the mix. Okay. And then just competitive bidding, I do have a couple of questions for you. Can you comment about the first 10 MSAs whether you won any, being offered any contracts, what are you saying there?

Larry Higby

The answer is yes we have been offered contracts. But there is I would say a negotiating process going on now between on a lot of major suppliers and the government. I'm very confident that by the time the dust settles, we will have positions in those markets. We think are worth being in and be able to service our patients in those markets that we are current serving.

There are some product lines, that if you look at the bidding levels they are just ridiculous. And I would guess that in some of those markets, we will continue to serve all the product lines that we do today for Medicare patients. However, because in everyone of the competitive bidding markets, our presence is so large in managed care, we will continue to offer a full line of products for our managed care customers.

Darren Lehrich - Deutsche Bank

Okay. And then as far as the respiratory therapy drug cuts and the LCD impact, what are your plans for fulfilling prescriptions that physicians are sending to you? Obviously, it's not economical under the LCD or at least, it doesn't seem that way. Can you just give us your comments on what we should expect out of that?

Larry Higby

I don't think you are going to be able fulfill a prescriptions for Xopenex or DuoNeb. I think you are going to have to ask people find another supplier for that because the way the LCD is looking right now. There simply no way that anybody can economically, even on a breakeven basis, be able to provide those two drugs. As I said in my remarks, I think this is the government practicing medicine, rather than administering a healthcare program.

Darren Lehrich - Deutsche Bank

Do you expect your managed care relationships to use that LCD as a benchmark for what they want to do?

Larry Higby

No. They are fully aware that. And they know what the cost of these drugs are. And we don't think that's going to be that much of an issue. The other interesting thing is Medicaid does provide adequate compensation for those drugs. So this is a just part of the strangeness that we've seen lately out of CMS, where they sort of romped ahead without really thinking through policy.

Darren Lehrich - Deutsche Bank

All right. My last question for Chris, and I'll jump, is the just the fuel impact. Can you decide that for us in terms of year-over-year basis point impact on margins?

Chris Karkenny

You know, the interesting thing as we've talk about logistic area, the fuel the cost are increasing and its just under $1 million of the impact. But we're doing a really good job on logistics and amounting and scheduling. So that's taking a big dent of that impact out. So that's the benefit of having our national platform with the logistics centers we have.

Larry Higby

If I could add a little corollary onto that, despite the fact that business grew, our mileage actually went down during the first quarter.

Darren Lehrich - Deutsche Bank

So if you offset more than half of that 1 million?

Larry Higby

I don't know if we've offset more than half of it, but we've offset a significant portion of it, and we'll continue as these initiatives that I talked about earlier. And maybe in the next quarter we'll see if we can give you an update on that, continue to roll out. It's going to have more and more of in fact in terms of curtailing the upside you're seeing on a price per gallon.

Darren Lehrich - Deutsche Bank

Okay. Thanks very much

Operator

Our next question comes from Ralph Giacobbe with Credit Suisse. Your line is open

Ralph Giacobbe - Credit Suisse

Good morning thank you. Just going back to the guidance. It sounds like its still too early to make changes, but I guess should we still continue to think of Coram at breakeven, or maybe is it accretive at this point and sort of an offset to some of the respiratory med cuts?

Chris Karkenny

No, Hi good morning Ralph.

Ralph Giacobbe - Credit Suisse

Morning

Chris Karkenny

On the Coram side we're still, as we mentioned, on a neutral throughout the year. It's too early to tell, as we mentioned. We're just getting everything underway. We have to see how the integration rolls out, and as we mentioned it's really the back half of the year where the synergies come out

Ralph Giacobbe - Credit Suisse

Okay. That's fair and then I guess. all the color around Coram was helpful but I guess just generally speaking where are we in the process of the integration? Are we 30% there? 50% there? I mean just a general ballpark.

Larry Higby

Well I think we have a number of integration teams that are working on various parts of the business. The sales force is 100% done. The pharmacy area is two-thirds done. We're just getting started on the IT platform, so you are going to see it move in various directions. We're in the middle of a major study on purchasing right now. So we've made, I think, very good progress certainly ahead of our timeline. But we still have a lot of areas that we need to do additional work on and have additional upside.

I think the important thing is we're not really operating two companies anymore. Apria effectively from the customer or the patients' perspective has been integrated with Coram and is operating as one company in the infusion business. We are making calls as one company on customers, repurchasing as one company and these sorts of things I think are going to have, as Chris said, real benefit during the second half of the year.

Ralph Giacobbe - Credit Suisse

Okay that's helpful and just staying on the competitive landscape of the home infusion base. Obviously there is been a lot of consolidation activity with Walgreens, Medco, DaVita, I think a private equity guy as well. Can you just talk about the competitive landscape? Are things changing, are you seeing, more competition, more aggressiveness from some of these players etcetera?

Larry Higby

No, I think because of the fact that Coram is the largest company in the home infusion space, and the only one offering services in all 50 states. Plus the fact that we have that ability to offer that kind of total platform to all of our managed care customers, we have really seen, frankly, gains going on here in starting, as opposed to increased competition.

Ralph Giacobbe - Credit Suisse

Okay, and then just my last question. Do you have a revenue, the actual revenue number of maybe like the other respiratory product segment? Do you break out that at all?

Chris Karkenny

We don’t break that out, Ralph.

Ralph Giacobbe - Credit Suisse

Okay. And in your release, you sort of said the growth was positive, any more color on that? I mean are we talking about low single digits?

Chris Karkenny

I am going to have to research that one.

Ralph Giacobbe - Credit Suisse

Okay, that's fine. I am guessing it's because of the inhalation therapy that you are talking about, the cuts on that side. Is it the reason why that business is down?

Larry Higby

No.

Ralph Giacobbe - Credit Suisse

Okay. All right, great. Thank you.

Operator

Our next question comes from Donald Hooker with UBS. Your line is open.

Donald Hooker - UBS

Great. Good Morning everyone. Thank you for taking my question. You guys talk about this additional $12 million of hits. And I think, if I am not mistaken, it was $12 million last quarter too, so I guess that's 24. So that's all just respiratory? So the competitive bidding, if there is any kind of downside there, will be incremental?

Chris Karkenny

That's correct.

Donald Hooker - UBS

Is that correct. Okay. Got you. And you are thinking that, and from Larry's comment, that's $6 million.

Chris Karkenny

About $6 million. Yes.

Larry Higby

And that's before any --

Donald Hooker - UBS

Volume gains?

Larry Higby

Gains in volume?

Chris Karkenny

Right.

Donald Hooker - UBS

Got you. No, just to be clear, I appreciate that. And then just another sort of quantitative question if you can, and if I missed it earlier in your commentary I apologize. In the first quarter, is there way for you to quantify that sort of the hit in terms of the inhalation drugs and the DME rental caps?

Chris Karkenny

On the RT Meds drugs for the first quarter was about $800,000.

Donald Hooker - UBS

Okay.

Operator

Our next question comes from Gary Taylor with Citigroup. Your line is open.

Gary Taylor - Citigroup

Hi good morning guys.

Chris Karkenny

Good morning, Gary, welcome back.

Larry Higby

Nice to see you.

Gary Taylor - Citigroup

Thank you. I am not sure I followed, I think people are trying to ask the question, and I apologize if I'm just not understanding, but maybe just help me this way. On the respiratory therapy revenue line, which was down sequentially. Usually, I think that number is usually up and they were strong, no flu and respiratory incidents. So there was probably a little seasonality against you, but I don't there were drug cuts that take effects till April 1. So could you just help me on sequentially, why that one was down about $3 million?

Chris Karkenny

Sequentially, on the respiratory side, we had an exceptionally strong fourth quarter on a lot of the areas. And let me give you some color here. The ASP reductions on January 1, there was a change in that, where Medicare paid lower ASP for the most common inhalation therapies.

Gary Taylor - Citigroup

Just a normal quarterly updates flowing through, right?

Chris Karkenny

Yes. And that those were probably the primary driver there.

Gary Taylor - Citigroup

When you talk about the $12 million hit from the potential change in the DuoNeb reimbursement and uncertainty about how to quantify that, are we to assume that there is negotiations with the manufacturer just in terms of whether there is going to be any ability to continue to provide that?

And, Larry, I heard you make one comment that sounded like maybe that was not the case. And I wasn't sure if I was connecting the correct two dots.

Larry Higby

There is continuing effort obviously to deal with the manufacturers. Right now, I would have to say the gap between what the manufactured pricing is versus the reimbursement is being contemplated under the local coverage decision.

It's a pretty big gap, and we're pessimistic that that gap can be bridged for those drugs that I mentioned, Gary. And that's why we felt that was important to highlight what we felt would be the full effect of not being able to fill those prescriptions during the second half of the year.

Gary Taylor - Citigroup

And is there any updates on some of the longer acting inhalation drugs like Brovana? I think the other one is Perforomist or maybe mispronouncing that, which obviously have higher reimbursement. But is there any evidence that the docs are seeing any significant uptake there? And I assume you provided both of those?

Larry Higby

The docs are fairly interested in that. The problem is it's going to be a slow client, because of the fact that you have to have a doc to first of all test you on one of the existing generics or on albuterol and write a prescription saying that that's been tried for this patient and it doesn't work. Therefore, I am prescribing Brovana or some of these other drugs that you're talking about.

We think there will be migration in that direction, but we think the migration is going to slow because of the sort of testing period you have to go through first.

Gary Taylor - Citigroup

Generally, you would be providing any of those drugs though if the physicians are willing to prescribe.

Larry Higby

Sure, we provide them today.

Gary Taylor - Citigroup

Yes. My last question, did you ever talk about an estimate for, I think in '09 we go to 80 MSAs, and what percentage of your revenue is exposed to the July '09 MSAs?

Larry Higby

The answer to that is no, and the reason is because we don't know what the 80 MSAs are going to be.

Gary Taylor - Citigroup

The list is there.

Larry Higby

And there is a lot of jockeying going on right now during, particularly in Senate Finance Committee on where that's going to be. As you know, the Senate is fundamentally a rural institution, and it has very little interest in rolling out competitive bidding to any of its markets.

So, I would say that we're going to have to wait see how that comes out. Obviously, once we get the markets we will be able to provide you with some sort of a look at that.

Remember, though, that there are over 300 SMSAs in the country. And so, even with that, you'll still have a lot of Medicare patients. Even after you go through the 80, you will not be a part of competitive bidding.

Chris Karkenny

And, Gary, just a follow-up on the Medicare cuts. We talked about the respiratory drug cuts, but as we are aware, there is a couple of other Medicare cuts that were affecting the first quarter, and they would be the policy change for Medicare respiratory assist devices, the RADs, in which they are moved into the cap rental category and capped to 13 months.

The other one is the reduction in Medicare cap rental period for CPAP and RADs, which began in 2007. And the final piece is the elimination of the semiannual Medicare service and maintenance fee for the cap rental respiratory equipment.

Gary Taylor - Citigroup

Most of those impact your year-over-year comp, but not sequential, I think.

Chris Karkenny

That is correct.

Gary Taylor - Citigroup

And some of those will anniversary next quarter?

Chris Karkenny

That's correct.

Gary Taylor - Citigroup

Okay. Thank you.

Operator

(Operator Instructions)

Our next question comes from Bill Bonello with Wachovia. Your line is open.

Bill Bonello - Wachovia

Hi, guys. Just going to maybe beat a dead horse. It seems like we have been dancing around the question on the $12 million, and I am just not totally clear. Are you saying you just can't predict how that would fall to pretax? I guess that you are saying you can't predict where your EPS will end up for the year because of all the moving parts. But I mean should we think of that as 12 million falling to pretax, 60% of that falling to pretax? I mean how do we sort of gauge that?

Chris Karkenny

On the $12 million, if were to drop straight through, that will be a $7 million pretax number.

Bill Bonello - Wachovia

Larry Higby

Okay. How is that? How do you go from $12 million to $7 million? Is that because of drug mix shift or something?

Chris Karkenny

It's the drug mix shift and then the COGS as well.

Bill Bonello - Wachovia

Okay. That's what I meant. Okay. And then just, if you don't offer these drugs, is there any risk that instead of just getting a lower profit on the existing patients that you just lose them all together?

Larry Higby

I suppose there is some for those drugs, although they are going to have a hard time finding those drugs anywhere, particularly if there are homebound patient who is relying on delivery, using a nebulizer in this sort of thing.

You can always lose some patients, but I think if you look at most homecare providers who are providing these drugs, I don't think they will be providing them given the current margin structure going forward in the second half of the year.

Bill Bonello - Wachovia

Okay. And then just on the guidance and just trying to be clear, are you saying that for now you are sticking with your guidance or you sort of in essence suspending it and saying we really have no idea what we are going to earn?

Chris Karkenny

I don't think we are saying we have no idea. I think we are saying that right now, it's too tough to predict, because we do give out annual guidance and we're only one quarter into the year. We have to see how our operating results perform, also see how the competitive bidding rolls out, continue to monitor the integration. There is a lot of pieces.

Bill Bonello - Wachovia

But we shouldn't necessarily be looking at it as, hey, you are reaffirming it right now. You are saying we still think we can make these numbers. It sounds like you are more saying, gosh, there is just too many moving parts to really have a number, but that's not true. Are you saying as of now that's still our guidance?

Chris Karkenny

As of now, it's too difficult to determine what's going to happen in the operating results for the remainder of the year. But right now, we don't have enough information to determine if we need to change the guidance.

Bill Bonello - Wachovia

Okay. And then just the final question and in some of this, I guess, is the Medicare impact. But you mentioned all the different things that sort of impacted revenue for Medicare year-over-year. And I thought, but I may have heard it wrong, I thought you had said a total impact of $2.4 million, but what was sort of the total? Is that what you said or what was the total Medicare impact?

Chris Karkenny

What was the question again, Bill. Can you repeat that please?

Bill Bonello - Wachovia

Yes, I am trying to understand what the total decrease in revenues from changes in Medicare reimbursement across the company on a year-over-year basis for the quarter was?

Chris Karkenny

So, for the quarter, it was $822,000 on the respiratory drugs. In addition, the CPAP/BiPAP changes were about $1.4 million. Then you had between the nebulizers and the other respiratory changes just under $200,000. So, it's $2.4 million for the respiratory side.

Bill Bonello - Wachovia

Okay. I though that's what you had said. You added $138 million of incremental revenue year-over-year and just $6.6 million of incremental EBITDA. And if I gave you that $2.4 million back, I mean even then the sort of marginal profit that you're adding is really, really low. And I am just trying to understand why that is?

Chris Karkenny

I think on the pieces we talk about earlier in some of the script there is we talked about some of the areas in HME category where the DRA reduction and the de-emphasis. We've also got some additional IT expenses we talked about. We talked about some fuel costs as well that were increasing and then also some of the upfront cost for some of the cost saving initiatives that will roll out the benefits if there is a rollout through the later part of the year.

And just getting back to the guidance question, I think, Bill, maybe another way to answer that is all else being the same, that $12 million additional reduction would not affect. We'd still be in the range for our revenue guidance with that $12 million change.

Bill Bonello - Wachovia

Okay. And your EPS guidance also?

Chris Karkenny

That's the only one I am going to comment on at this point.

Bill Bonello - Wachovia

Okay. And then I lied, I'm going to ask one last question, if I can. Larry, you commented on sort of the Washington outlook regarding competitive bidding, et cetera, but there is certainly a lot of talk coming out of the Senate about another fairly substantial cut to respiratory reimbursement. And what are your thoughts are on that?

Larry Higby

Well that thought has been around now for three years, and we sort of faced this every year. I think if you look at the direction and trend in terms of what's happening in the city Senate Finance Committee, they continue to come back and really focus in on a smaller doc fix. And as the doc fix number becomes smaller, the need for additional cuts certainly goes down.

I think in addition to that, the Senate is not unaware of the problem that have been put forth in competitive bidding. And I m not sure there going be very interesting sort of entering in those waters right now. While they are trying to understand get the competitive bidding piece right, by going with it across the board cut.

So, my guess is that they are going to move very cautiously. And I guarantee you there will be nothing. Doesn't seem to moving in the direction of may be not having a cut, I would say the answer there is yes

Bill Bonello - Wachovia

Thank you

Operator

Our next question comes from Art Henderson with Jefferies and Company. Your line is open.

Art Henderson - Jefferies and Company

Hi good morning. As I recall, your operating cash flow guidance for the year was did you give that 95 to 105 previously in your last call?

Chris Karkenny

Yeah free cash flow guidance was 95 to 105.

Art Henderson - Jefferies and Company

That's free cash flow guidance. Is that similar to you suspending that effectively like the EPS number or at least a wait and see approach?

Chris Karkenny

We haven't changed any of our guidance today.

Art Henderson - Jefferies and Company

Okay. But you are not reaffirming it though.

Chris Karkenny

That's correct

Art Henderson - Jefferies and Company

Okay. All right.

Chris Karkenny

I mean, it's too early in the year to tell. We are only one quarter underway there.

Art Henderson - Jefferies and Company

Okay. I think I understand you are saying. Larry, just on a more positive note, the Medicare home infusion benefit and the possibility of getting that. Is there anything going on in Capitol Hill related to that?

Larry Higby

Yes. The National Home Infusion Association has been reconstituted as full time health now, has the support of many major players across the United States in home infusion, including ourselves and I believe, Walgreens. And I think there is a significant effort that's going to be mounted, to have home infusion included in any of the new benefits, as healthcare gets restructured here probably during 2009. The numbers are overwhelming. The problem that you have got in today's congress, is the fact that you can't count savings in one area. In other words, people not having to stay in the hospital against the cost of the program and having people doing infusion at home. But if you talk to any doctor, any physician or any healthcare professional, they will tell you that the congress could save a lot of money, by instituting a home infusion benefit. Probably, the proof of the pudding is the fact that managed care has been doing this for years and indeed continues to expand the benefit, as new drugs come on, that can now be done at home.

So, I would say that clearly, there is going to be increased pressure over the next couple of years for that to be the case and of course that's an upside for Coram.

Art Henderson - Jefferies and Company

Right now, how would you characterize, what size of the market are you dealing with in infusion business with Coram and your traditional legacy infusion business? And if a Medicare benefit were to be added, would that effectively double the size of the attainable market?

Larry Higby

Well, we would certainly increase it by a very significant number. To say double the size of it, we would probably be a little irresponsible; because there would certainly be occasions when infusion will need to continue to be done in a hospital setting. But the outpatient hospital setting is one that is very costly and frankly not good for patients to have to tromp your way through a hospital to get infusion. There are some types of infusion that need to be done in hospital when you are staying there. But it will mean a significant increase in the overall marketplace in terms of home infusion.

Art Henderson - Jefferies and Company

Okay. That's helpful and then one last question for Chris, on the revolver, have there been any more efforts to consider fixing that with some longer term debt?

Chris Karkenny

We are still evaluating what the best course of action is. A variety of options available to us and we feel comfortable that we will be able to refinance that over the next couple of months.

Art Henderson - Jefferies and Company

Couple of months. Okay. Thanks very much.

Operator

Our next question comes from Donald Hooker with UBS. Your line is open.

Donald Hooker - UBS

Hey guys, just a quick follow-up. Looking out in the future, I think Chris, in the past you mentioned that the respiratory pharmacy business generates about $3 million of EBITDA a quarter. I think there was a while back, I'm not sure, is that still about true?

Chris Karkenny

We don't comment on the respiratory, we don't break those numbers out.

Donald Hooker - UBS

Then I guess what I'm trying to get at is, I'm wondering how much more downside there is, if there is more in that business going out. Is it pretty much down in terms of kind of where you think the respiratory pharmacy is going to go?

Chris Karkenny

Where the cuts are?

Donald Hooker - UBS

Yeah.

Chris Karkenny

As we mentioned earlier, its getting difficult and difficult to provide the drugs to the patients. And as Larry mentioned, the CMS folks are getting into figuring out healthcare as opposed to just being administrators. Also commenting on the overall -- you bring up the cuts. I just wanted to comment to make sure there has been a couple of questions on the cuts, and just year-over-year, the overall cuts were $2.4 million on the respiratory revenue sector. And then on the HME side, there was another approximately $600,000. So the total for the year-over-year cuts was $3 million.

Donald Hooker - UBS

Got you, okay. And one last question and I'll jump off. This call is getting long. I think Larry mentioned that you guys were sort of positioning your business to driving the competitive bidding environment? Just out of curiosity, what kind of actions you are talking to position yourselves that way?

Larry Higby

Well, I think we've consistently put together a low cost operating and delivery model and we going to continue to do so. So that we can compete very effectively in those markets. One of the reasons, so many of these little mom and pops were able to exist, is because they only did Medicare and only did Medicare respiratory therapy. And the margins on that business come to down to a more realistic level. We've been working on those margins and below those margins, in some cases in managed care for years. So, we're pretty well positioned to be in those markets.

Secondarily, whether we get the Medicare bid or not in every market, and certainly we don't want the bids for some of the product categories in some of these markets. We're going to be a major force in those markets, because we have such a large managed care presence. And we've got markets here in California, where we have 50% market share in managed care. So, we're going to be there and whether or not we get every bid for every product or not, and I am very confident that we'll get those product categories we need and the pricing we need to thrive in those markets.

Donald Hooker - UBS

Got you. Thanks. I'll let you all go. Appreciate your time.

Operator

Our next question comes from Darren Lehrich. Your line is open.

Darren Lehrich - Deutsche Bank

Thanks. I do have a follow-up. I guess, I'm sufficiently confused about what you're saying with regard to guidance. So I think one more stab. Are you withdrawing what you've previously put out there? Is that what you're doing or you're just changing the impact from this $12 million and essentially not changing anything else?

Chris Karkenny

That's right. I mean, what we're doing right now, its not yet possible to determine. But the additional reimbursement changes that we mentioned. We have to take in combination the operating results of the company for the remainder of the year. And right now, it's too early to tell whether that will cause to us change our guidance, which as previously announced.

Darren Lehrich - Deutsche Bank

Okay, so that previously announced guidance isn't being withdrawn, based on what you are doing today?

Chris Karkenny

That's correct.

Darren Lehrich - Deutsche Bank

Okay. Very good, thanks.

Operator

There are no further questions at this time.

Larry Higby

Okay. Thank you very much. We look forward to seeing you in 90 days.

Operator

Thank you for joining Apria's earnings call. You may disconnect at this time.

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