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BioScrip, Inc. (NASDAQ:BIOS)

Q2 2008 Earnings Call Transcript

July 31, 2008 10:00 am ET

Executives

Craig Allison – Director of Corporate Communications

Richard Friedman – Chairman and CEO

Stanley Rosenbaum – EVP, CFO and Treasurer

Scott Friedman – EVP of Sales and Marketing

Analysts

Mark Arnold – Piper Jaffray

Brooks O'Neil – Dougherty & Company

Amit Sanghrajka [ph] – KinaRoss Capital Management [ph]

Mike Petusky – Noble Research

Bill Nasgovitz – Heartland Funds

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip, Inc. second quarter 2008 earnings conference call. (Operator instructions)

It is now my pleasure to turn the conference over to Mr. Craig Allison, Director of Corporate Communications with BioScrip. Please go ahead, sir.

Craig Allison

Welcome to BioScrip's second quarter conference call. Joining us today are Richard Friedman, Chairman and Chief Executive Officer; Stanley Rosenbaum, EVP and Chief Financial Officer; Scott Friedman, EVP Sales & Marketing; and Phil Keller, VP Finance. If you have not received it yet, you may find today's press release on the company's web site at www.bioscrip.com under the investors’ section.

Before we begin, I will remind all 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 among other things the intent, belief or current expectations of the company, its directors or its officers with respect to the future operational performance, the profitability or lack of profitability of certain customers, and the achievements of cost savings initiatives of the company.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. Important factors that could cause such differences are in the company's periodic filings with the Securities and Exchange Commission.

Earnings before interest, tax, depreciation, amortization and option expense, EBITDAO, is a non-GAAP financial measure as defined under U.S. 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 web site, www.bioscrip.com.

Today's call will consist of opening comments from Richard Friedman, a financial review of the quarter by Stan Rosenbaum, followed by a short summation by Richard Friedman. 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. Good morning and thank you for joining us today to review BioScrip’s second quarter results. This morning I am going to discuss the highlights of the quarter, our strategic growth drivers that have contributed to our performance and provide an update on the progress we are making at both the sales and financial [ph] levels. After that I will turn the call over to our CFO, Stan Rosenbaum, who will walk you through the company’s financials.

For the second quarter 2008 BioScrip achieved consolidated revenues of $348.4 million, operating income of $3.4 million, EBITDAO of $5.9 million and net income of $0.04 per diluted share. We are poised to continue capturing ongoing growth opportunities and remain confident that the investments we have made to correct the system’s challenges that we faced are nearly behind us. We will use this quarter as a new starting point as we execute on our strategic goal of delivering consistent returns and increasing shareholder value.

Regarding the second quarter’s performance, Specialty Services’ revenues grew to $298.2 million representing an increase of 25.2% over the prior year. Our record sales growth is a direct result of the strategy we implemented in early 2007, one which focuses on patient care and increasing the depth of service we provide as a specialty organization.

During this quarter contributions from new contracts as well as growth from our core therapeutic areas including oral oncolytics reinforce our business model, focusing on improving the quality of care among product populations. Adherence and compliance are two key areas, which can directly impact quality of life and lead to overall lower medical costs. We're confident that these services combined with our operational assets including mail, community, and infusion pharmacies are key components necessary to deliver the results needed by the payers, pharma companies, patients, and physicians that we service. Industry trends clearly point to effective therapy and patient management as creating improved results for healthcare stakeholders as opposed to pure price discounting. BioScrip is without question in a leading position to succeed in this environment.

Turning to CAP, we have decided not to resign with CMS as a CAP vendor for the 2009 renewal term. Accordingly, without program modifications we believe that the reimbursement risks create an unacceptable profit risk to our business. Importantly although our revenue will decrease an estimated $70 million annually based on the first six months of 2008 we expect a favorable impact to operating income in 2009. Last quarter we began the process of identifying and streamlining certain processes and work flows to minimize the potential impact from changes in pricing. We established operational controls to provide us with real time analysis in order to prevent the situations that we experienced in the first quarter. You may recall that we instituted these measures in response to the external factors that adversely affected last quarter's financial results. Our model is solid and we continue to expect our overall sequential sales to trend upward throughout the balance of the year and that BioScrip will continue on its growth course.

I will now turn the call over to Stan.

Stanley Rosenbaum

Thanks, Rich. Total revenue for the second quarter of 2008 was $348.4 million, an increase of $53.7 million or 18.2% over second quarter of 2007. Our Specialty Service business grew $60.3 million or 25.3% over the comparable period in 2007. This increase in specialty represents higher revenue with managed care contracts, preferred distribution arrangements and increases in the Competitive Acquisition Program or CAP.

Our PBM services segment had revenue of $50.3 million, a decrease of $6.5 million primarily due to the loss of a previously announced PBM customer.

Gross profit for the quarter was $35.7 million or 10.3% of sales. This compares to $32.9 million or 11.2% from the comparable period in 2007. The increase in gross profit dollars is essentially due to higher sales. As previously mentioned in prior calls, the decline in margin percentage is essentially due to payer mix.

Operating expenses for the quarter of $32.4 million is $2 million higher than prior year, essentially due to higher compensation related expenses. Accordingly, income from operations was $3.4 million or $900,000 greater than the second quarter of 2007.

Interest expense declined $180,000 lower due to lower rates.

Income tax expense is essentially unchanged from prior year. As a result of these items we are reporting a net income of $1.6 million or $0.04 per diluted share as compared to the prior year of $500,000 or $0.01 per share.

EBITDAO improved $1.4 million to $5.9 million. Compared to the first quarter of this year our revenue increased $21 million or 6% reflecting higher sales in our new contracts ramp up of existing business and CAP.

Gross profit improved $3.4 million to 10.3% or $35.7 million as a result of higher sales and a normalization of margins associated with the first quarter cost increases. The company has taken measures to monitor vendor cost increases and changes in reimbursement rates including daily reviews of pricing files to ensure timely and accurate billings following cost increases.

Operating expenses were up slightly from the first quarter. As a result of the gross profit increase of $3.4 million, $3.2 million fell through to pretax income. On a year-to-date basis, revenue was up $85.9 million or 14.4% over the first half of 2007. Specialty Services was up $102.5 million primarily due to an increase in managed care contracts, preferred distribution arrangements and CAP. This was partially offset by lower PBM service revenues essentially as a result of losing certain customers previously reported.

Our net income for the first half of 2008 was $1.1 million or $0.03 a share as compared to a net loss of $900,000 or $0.02 a year ago.

Turning now to the balance sheet, our DSO has improved from 43.6 days at December 31, 2007, to 42.2 days at June 30, 2008. Inventory improved from 11.4 days at December 31, 2007, to 9.6 days at June 30, 2008. Our borrowings under our credit facility at June 30, 2008, were $19.8 million. The lower overall borrowings and increased levels of accounts payable at June 30, 2008, was primarily due to the timing of certain vendor payments at the end of the quarter.

The company continues to make progress on its new system implementation. We are scheduled to begin our pilot program in one store on September 1st. If all goes well we with begin the rollout to more stores in the fourth quarter. The company has made considerable progress from the first quarter and expects continued profitability.

I will now turn the call back to Rich.

Richard Friedman

Thank you, Stan. After the end of the quarter we retained Insight Communications, a healthcare related investor relations firm headed by Lisa Wilson and her partner Bill Wanton [ph]. We selected Insight to work with us due to their strong background in the healthcare services industry. We planned to work with them to communicator our investment message to the broader universe of institutional investors with the ultimate goal of increasing shareholder value. We will now open the lines to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Mark Arnold from Piper Jaffray. Please go ahead.

Mark Arnold – Piper Jaffray

Very nice quarter guys. Let me just start with the CAP business. You haven't broken out CAP revenues for a while and unless you've decided not to sign that new contract, can you give us a sense of what the revenue loss will be for 2009?

Richard Friedman

Sure. Good morning, Mark. Yes, I just said that a little while ago but it is going to be approximate, based upon our run rate in the second quarter it is about $70 million.

Mark Arnold – Piper Jaffray

Great. And then do you think anybody is going to sign this contract given the unprofitable nature?

Richard Friedman

Mark, it's up to – as I said on the last quarter that we really wanted some modifications made to those contracts and the modifications weren’t made. So it is going to be up to the individual companies to go ahead and do this. I really believe that the government has an incredible opportunity on Medicare Part B with a few modifications that they need to make, but until they do that it is going to be up to the individual companies. We just believe the risk is too great.

Mark Arnold – Piper Jaffray

Any chance that the comeback begging with the structural changes if nobody signs this in the coming months?

Richard Friedman

I would hope they will but I don't know.

Mark Arnold – Piper Jaffray

Then, just on the United Health contract, obviously that is the big growth driver for this year. I know you guys haven't given any specific guidance but can you give us a sense of where we are in the ramp up, you know, in Q2 are you maybe 25% on the way there, 50%, just any sense of how far along you are with that so we can get a maybe a better sense of how strong the back half of the year could be?

Richard Friedman

Sure, I would be happy to. Just understand this, United is a driver but we have significant other business, which are fairly large drivers outside the United. At this point in time we really are pleased with the performance under the contract, however, I believe that we're going to continue to grow but it is going to be at more moderate levels going forward. So we're pleased with the performance to date but it will continue to grow but it will be at moderate levels. Scott, do you want to add anything to that?

Scott Friedman

No, I think that is consistent. Hi Mark. I think what you have said is consistent with more moderate levels than we have seen. It's been about a year since the program has been implemented and has contributed less. That is accurate.

Mark Arnold – Piper Jaffray

Okay. And then just one final one on maybe if you could just give us an update on the infusion business. Anything that you could be doing there that could have a positive impact on results later this year and specifically any update on the Active Care network relationship?

Richard Friedman

Sure. We continue to expand our footprint and we have plans to expand the footprint for our infusion business. We actually have a few exciting programs going on, one actually related to transplant type business and use of IVIG. So we're pretty excited about where that is going. In terms of the Active Care network, we continue to work with them. We have nothing to announce at this point. I will tell you that the expansion of infusion at our Las Vegas community pharmacy is performing extremely well and based upon the performance at our existing pharmacy, we will be rolling out infusion to other locations. We are leveraging our sales organization in order to take advantage of that. So, we're pretty excited about where infusion is today.

Mark Arnold – Piper Jaffray

Great. I'm looking forward to hearing where those locations are. Great quarter guys, thanks.

Richard Friedman

Thank you, Mark.

Operator

(Operator instructions) Our next question comes from the line of Brooks O'Neil from Dougherty & Co. Please go ahead.

Brooks O'Neil – Dougherty & Company

But that's Dougherty & Company, thank you. I have a number of questions for you guys. I guess I will start of first by asking you Stan, perhaps if you believe the cost controls exhibited in both the first and second quarter on an absolute dollar basis can be maintained through the balance of the year.

Stanley Rosenbaum

Yes I do.

Brooks O'Neil – Dougherty & Company

I think that's great. Secondly, do you plan to exit Medical [ph] in response to the 10% cut and if so would that be a margin-enhancing move or a margin-diminishing move?

Stanley Rosenbaum

I think we're in a wait and see position here. We still don't understand what they're doing. We don't know what this is for – the next two months, three months, or permanent situation. So we're going to continue to monitor this going forward as we said in our press release it is less than 2% of our sales. We'll keep you posted as we know more.

Brooks O'Neil – Dougherty & Company

Do you think you make money there Stan?

Stanley Rosenbaum

Currently we do.

Brooks O'Neil – Dougherty & Company

Okay. I mean at a 10% percent diminished reimbursement.

Stanley Rosenbaum

Yes, we probably do.

Brooks O'Neil – Dougherty & Company

Okay, if I read the release properly you won't be involved with Aetna in 2009 so that business goes away as well?

Stanley Rosenbaum

That is correct.

Brooks O'Neil – Dougherty & Company

And then I guess historically I have been a big believer that you might find other parts of the business that are worth exiting that would reduce revenues but could essentially enhance your profit margin profile. You have seen any of those areas and do you have any additional plans. By the way I strongly applaud your move in the CAP program. I think that is absolutely the right thing to do.

Richard Friedman

Thanks Brooks. Like CAP if we believe that a business or a contract does not make sense for us, we will exit it. And we're comfortable with the businesses we have today and how they are performing. So there's no plan at all to exit anything that we have.

Brooks O'Neil – Dougherty & Company

Okay, and then let's see her. Perhaps, you mentioned just a little bit about some of the new Specialty Service programs but maybe you can give us just a little bit more color on what exactly are you doing, what are the areas perhaps without necessarily naming any clients maybe you could give us a feel for the revenue and the margin impact of the business that you have signed today, what you think it might be going forward?

Richard Friedman

Well, talking about the services we're going to stay away from the revenue and margin impact. But Scott why don't talk about services.

Scott Friedman

Hi Brooks it is Scott. We've talked in the past about it. You are familiar with some of our BioScrip care programs and the patient management initiatives that we began last year and while we've seen success as of late and a lot of interest among – primarily among manufacturers today but the patient management and disease focus therapy programs on a standalone basis. So whether it be contracting for patient specific studies within areas like HIV, like oncology, like MS. In addition (inaudible) as a result of FDA RiskMAP requirements, but handling reimbursement, triaging of patient referrals, managing registries and databases, operating patient assistance programs we're really seen a pickup in our activity primarily as a result of the increases and investments we have done on the patient therapy management side.

Richard Friedman

Brook one other point is that in the programs that we do manage, when we look at adherence and compliance, we run at extremely high levels. So we're excited about what we're doing as I said earlier. This is much more than strictly drug discounting, patient management we believe, therapy management, patient management is the way to control costs in the future. And I believe that BioScrip is situated well to take advantage of that.

Brooks O'Neil – Dougherty & Company

I agree with that a 1000%. I am just curious. Scott mentioned that the manufacturers have been kind of early customers for some of those programs, do you see on the horizon the potential that you could win business from a payer from Health Insurance Company for some of these programs?

Richard Friedman

I think that's a long-term goal. I think that where the market stands right now there is obviously a lot to prove with outcomes, we have begun to do that. I think the manufacturers are the most likely early purchasers of these types of things. We saw it – we've seen it taking place. And you know, there's managed care interest but I think the biggest opportunity short term are going to be with Pharma but the long term intent is that these are marketable and saleable to both Pharma and managed care.

Brooks O'Neil – Dougherty & Company

That is good. Stan I asked you a few weeks ago about the Tysabri impact. There've been some reports that sales of Tysabri specifically have been accelerating sharply in the market place; can you just comment on whether you're saying any impact specifically from the drug?

Richard Friedman

I am going to let Scott answer that question. All right Brooks.

Brooks O'Neil – Dougherty & Company

Yes.

Scott Friedman

We have seen Tysabri is growing and we show Tysabri, and it is one of the drugs that we have relationships with the manufacturers. We are a – we do participate in the MS space, it is one of the drug we focus on and we're seeing growth in that area as well as others. So it has performed.

Brooks O'Neil – Dougherty & Company

That is great and then I think I heard you say that they in your formal remarks up front, but can you just confirm that the United contract in general is performing the way you thought it might specifically contributing incremental growth margin dollars without incurring significant incremental operating expenses?

Richard Friedman

It is performing exactly as expected.

Brooks O'Neil – Dougherty & Company

That's great. Okay, thank you very much.

Richard Friedman

Thank you, Brooks.

Operator

(Operator instructions) Our next question comes from the line of Amit Sanghrajka [ph] from KinaRoss Capital Management [ph]. Please go ahead.

Amit Sanghrajka – KinaRoss Capital Management

On the balance sheet that I see the accounts receivable at 146 versus $129 million but the doubtful account allowances are the same. Can you explain just why that's the case?

Richard Friedman

We review our accounts receivable bad debt reserve every quarter. We were in several different models. We continue to see tremendous success in collecting old and fully reserved or written off receivables in the past.

Amit Sanghrajka – KinaRoss Capital Management

Okay. And then what is the long term like revenue growth rate in terms of like your gross profit margins, it is tough to get a fix on what these really are going to be, do you guys have any – you know, expectation of what you're looking for in the next one to two to three years?

Richard Friedman

I am sorry we were just talking, but the other part of your question is the growth in the receivables side and as Stan reported earlier we saw the decline in the DSOs but the increase in receivables is strictly as a result of the increase in the revenues.

Amit Sanghrajka – KinaRoss Capital Management

Okay, and you guys have looked through the credit aspect of that and you're comfortable with keeping the doubtful allowance generally the same despite the 14% bump during the mid year?

Richard Friedman

Yes.

Stanley Rosenbaum

We're very comfortable with our bad debt reserve because during every single quarter we have detailed reviews. We're very comfortable where we're right now.

Amit Sanghrajka – KinaRoss Capital Management

Okay, as far as your long term revenue growth rate and the gross profit margins, I mean how'd you guys feel, what is your – when you look into the long term in the business where are you looking at in terms of revenue growth rates and what the gross profit margin should ultimately score out to be?

Richard Friedman

As we said at the end of the first quarter (inaudible) conference call, our existing business will run in the mid 10 range of gross profit and percentage and that future business will in fact be at lower margins. So that while we expected our margins may be in the low to mid 10s our overall profitability will be higher because we will drop that to operating income.

Amit Sanghrajka – KinaRoss Capital Management

But you were talking about $130 million say in run rate operating expenses. So if you're on the same track for say doing $1.3 billion in revenues, you guys don't really have much whether [ph] in case any of these profit margins in something like CAP gets renegotiated to lower margins then you are not making any money.

Richard Friedman

Now let's take a look at it and that is not true. When we're going forward and the businesses we look at first the all we're going to talk about the SG&A of holding SG&A constant. What we see going forward is for the balance of the year we're going to see in every quarter based on our business, there's going to be some slight quarterly fluctuations depending upon product and payer mix. On an annual basis, we see the margins in the low to mid 10s. There may be some business like the service business that maybe a little bit higher, there may be some distribution business that is a little bit lower. But what we are proving and Stan said it earlier we see it with the United contract and we're going to see it with other contracts that come in. The SG&A on a dollar basis should remain somewhat constant. We're concentrating heavily on increasing operating income as a percentage of revenues. So we're very conscious of the profitability on the gross profit line. We're very, very conscious on operating expenses and the ability to drive more down to the operating income line. So there may be some fluctuations depending upon mix, but no matter what business we take in if it is going to be a little bit lower or a little bit higher we're going to see significant portions of that falling right down to the bottom line increasing operating income as a percentage. So the concentration on the gross margin line is extremely important. The concentration on the operating income line is extremely important.

Amit Sanghrajka – KinaRoss Capital Management

I understand that, but my point is say if you are at $1.35 billion first this year you're going to lose the $27 million in that line. You said that can be offset in terms of profitability with the CapEx. Say (inaudible) business goes away so you were back to around $1.3 billion. If you grow that 10% hereon whatever $1.43 billion dollars and if that additional growth comes at a lower gross profit margin, you factor in, say you keep SG&A, all your operating expenses completely constant including your bad debt expense and stuff like that $130 million, you've got basically $13 million in operating income. So my question is do you still feel this SG&A, you are going to have to grow revenues tremendously over the next few years to really generate significant operating profit. And so if that SG&A scaled to high for this business and do you think maybe a strategic buyer might find more value in this than what we can find as an individual company?

Richard Friedman

No. I believe that when you exit some of the businesses there is going to be correlating cost that comes out as well. When you exit the CAP business obviously your margins are going to go pick up. I think that what you're going to find is any – in the CAP business alone when you take that out it is going to hit profitability, you are right. Offsetting that will be loss on the Aetna side, but we still see significant growth. So everything being equal you're going to have a reduction of your SG&A cost related to the exiting of those businesses be addition and the margin related to the new business will more than offset that bringing it more down to the bottom line.

Amit Sanghrajka – KinaRoss Capital Management

So do you guys have a target operating income margin type of thing that will go by? How is one to evaluate whether this is successful in the next couple of years, I mean is it just – I mean what is the benchmark?

Richard Friedman

Our goal of the number of years going forward is to significantly increase from where we're now and the measurement factor quite frankly, and I think it is a great question, is going to be increasing on the operating income line as a percentage and you know over the coming years we want to see that to get to a pretty significant amount. The question is where could it get to and that is something that right now I'm not willing to share because we have to work on it to more internally but our goal is to drive that operating income line as a percentage of revenues significantly higher.

Amit Sanghrajka – KinaRoss Capital Management

Okay, let us say in 2003 you had operating income margins of 2.7% or so. Is that something achievable you think, is that what stretching it, I mean once you have taken that. And that was when you guys, it was like a $588 million business as MIM.

Richard Friedman

You know, numbers in those ranges going out a few years from now I can't say we're going to get there in the next year or two years but I think goals of getting up into that range make sense.

Amit Sanghrajka – KinaRoss Capital Management

Okay, and finally just last question on this PBM business that continues it is only – it seems like the only profitable segment, I mean, do you guys plan to keep this because the revenue, it doesn’t seem it is much of a focus, I mean, why not consider spending at all for getting rid of it?

Richard Friedman

We have – the PBM business consists of a few different areas. One is the traditional mail business; the other is the card business. The traditional mail business is running at the same facility as our specialty business. It is a business that makes sense for us. It is growing our EBITDAO for us and it does not make sense for us to exit that business.

Amit Sanghrajka – KinaRoss Capital Management

And then lastly what is your take on the current stock price across you know, management what are their thoughts?

Richard Friedman

The current stock price.

Amit Sanghrajka – KinaRoss Capital Management

Yes, in terms of value and things like that?

Richard Friedman

It is obvious. You know, I think the price is low.

Amit Sanghrajka – KinaRoss Capital Management

I am just curious because it was so obvious you would think there will be more insider buying but there is really hasn’t been much going on in conflict with Board members or any management members. So that was just why I was just curious. In fact in the last Form 4, I think the general counsel decided to sell, but I know it is margin call but you know you should these shares at $2 or so. So I just wanted to get a better take on what your thoughts were?

Richard Friedman

That is a fair question. The general counsel had a settlement type of situation that it could not avoid. We have been in a blackout period. I think you saw one of our directors bought recently. The company right now and the directors are reviewing stock ownership guidelines for management as well as the board itself. And I think that management, as a whole believes that it is an opportunity.

Amit Sanghrajka – KinaRoss Capital Management

Okay, all right. Thank you very much.

Richard Friedman

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Petusky from Noble Research. Please go ahead.

Mike Petusky – Noble Research

Good morning. A couple of questions. It sounds like it has been said at least by the previous questioner, but it doesn’t really square up with your release that CAP mitigates Aetna. I mean it mitigates it but it actually doesn’t. It is not a complete offset. Is that correct?

Richard Friedman

That is correct. There are other cost savings that we have that’ll – such as a new freight contract that we have negotiated will offset that.

Mike Petusky – Noble Research

What percentage of – I guess the CAP savings actually offsets Aetna, is it half or is it a quarter, what is the breakdown between other initiatives and CAP as far as mitigating Aetna?

Richard Friedman

We don’t talk about specific profitability associated with contracts, certain contracts.

Mike Petusky – Noble Research

Okay, all right. Let me – I know someone had drilled down a question Brooks asked earlier because I think it is a key one. It actually seemed like he was drilling down you know, essentially plotting you guys as I do for you know separating yourselves from CAP unless they come back to you with better terms. And then you seem to be going down the track of trying to get a sense of if the other contracts, other pieces of business that were mature that also were unprofitable as you disclose CAP was and it sounded like you guys said that there weren’t, are you actually saying that among truly mature contracts that they aren’t any unprofitable pieces of business that maybe might not be better left by the wayside?

Richard Friedman

We are constantly reviewing all of our contracts to see whether or not they are profitable and when they are not, we have exited over the last year at least 2 or 3 contracts worth about $4 to $5 million that we found that were unprofitable. So, it is a constant review that we go through here.

Mike Petusky – Noble Research

So, as far as you know that CAP was the only unprofitable piece of business.

Richard Friedman

That is correct.

Mike Petusky – Noble Research

All right, great thanks guys. Congratulations. Great quarter.

Richard Friedman

Thank you.

Operator

Our next question comes from the line of Bill Nasgovitz from Heartland Funds. Please go ahead.

Bill Nasgovitz – Heartland Funds

Good morning guys.

Richard Friedman

Good morning, Bill.

Bill Nasgovitz – Heartland Funds

Just (inaudible) – congratulations by the way we are making progress. So that is terrific, but I really think again long-term shareholders have been buffeted around here so much. I think you really owe us as soon as possible some definition in terms of where this company is going and in profitability, but there has been numerous questions to it and it would be good for the Board to sit down with management and say okay we are shooting for this level of gross profit or operating profit whatever way you want to look at it, return on investment – it will be nice to get back to 2.7% operating margins, wouldn’t it Stan?

Stanley Rosenbaum

Yes, it would.

Bill Nasgovitz – Heartland Funds

Don’t you think shareholders need that clear definition?

Richard Friedman

Yes, I will agree with you and that is something that we are working on Bill.

Bill Nasgovitz – Heartland Funds

Okay, well the sooner the better.

Richard Friedman

As you have recommended in the past we have taken to heart as you know, and we responded in kind. We are working right now, we are looking at ’09 what that means, but also be clear what I said earlier. We said on an annual basis we see margins in the low to mid 10s. We also said that we expect the operating expense line to remain constant and in some of the businesses when we exit them we will be taking out the comparable costs. So, you know, our goal clearly is we are not satisfied with where the operating income is as a percentage, and we are working quite hard to get to that path. We put in controls as a result of what happened in the first quarter. We put in system controls. We have daily reviews of what is going on, preventing that that occurred in the first quarter. We believe over the long-term that we are going to get to those levels. What I can’t tell you today and you are right, we do have an obligation to report over what period of time we believe we could get there. So, I hear you load and clear and we will respond in kind.

Bill Nasgovitz – Heartland Funds

Okay, terrific. And then just on the store count, I might have missed this earlier if you discussed, what is the game plan in terms of the stores just to refresh my memory, just the highlights. How many do we have today? Where are we going to be in a year or year and a half?

Richard Friedman

Okay, we have 36 stores today. We opened one recently as we talked about in the past at Westchester, New York. Right now, Tom Ordemann who runs our Community Pharmacy is in fact looking at a few other locations. If everything goes well, we expect to have a few more into ’09. We go very slow with this. You know, as you know, we don’t have the capital structure to open up as many as we would prefer doing, but we look at every market, the stores that we will open up will most likely be in the vicinity of teaching hospitals, where there is a great population, where there is a lot of transplant business, where there is a lot of specialty business, and it seems like the model that we have at least put in place in Westchester seems to be working well. So, we are looking hard at this and then we will report on that in our upcoming quarters.

Bill Nasgovitz – Heartland Funds

Okay, thank you.

Operator

Our next question is a follow-up question from the line of Amit Sanghrajka from KinaRoss Capital Management. Please go ahead.

Amit Sanghrajka – KinaRoss Capital Management

Just one more thing. For the specialty services, can you guys in the future break out all the different things over the confusion of the specialty pharmacies because that is – it is difficult to understand what is going on when there are some many components there?

Richard Friedman

You know, the truth is that it really is – when you take a look at the model and the model is a service model with distribution. That you could do services without distribution but when you take a look overall, you are providing our customers with the ability of a central service to manage the patient that manage the therapy which is primarily coming out of a Columbus, Ohio, facility. The drug distribution side of that could come out of many different locations. So, it really looks more like one and what we are trying to do is the model of the ability to get it on a local basis from community with our pharmacies helping to manage the patient by getting involved with Pharma on a local basis giving them the ability to handle whether it is delivered in infusion, delivered by injectables or orals really doesn’t make a difference. So trying to segregate a service side from a distribution side it is all part of the same, like for infusion it has nursing as well as drug cost. For some of our business it has the management of the therapy as well as the distribution side. It is all kind of interrelated even as part of the some of the contracts. So, clearly if it is strictly a service without distribution and it is only labor, clearly the margins will look higher because you don’t have a drug related to it. So, you know, going forward we will see where the margins end up if it is a strictly service model without any distribution you are obviously going to see higher margins, but you probably won’t see as high a volume as you get on the drug side. So, you know it is something that we will continue to report on the contracts and the businesses we do, but to break it out is going to be pretty difficulty.

Amit Sanghrajka – KinaRoss Capital Management

And just have you guys ever over the past few years, I mean given the growth in that Specialty Services business, as any buyer ever approached you guys. It is something where this looks like it would have value to someone. Has there ever been anyone approaching you guys whether it is a strategic or financial buyer?

Richard Friedman

We are not going to comment on that.

Amit Sanghrajka – KinaRoss Capital Management

No.

Richard Friedman

I am not going to comment on that.

Operator

Thank you. Mr. Friedman, there are no more questions at this time. You may continue with your presentation or closing remarks.

Richard Friedman

Thank you so much. We appreciate the interest and we appreciate everybody attending the call. Thank you.

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