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BIOS > SEC Filings for BIOS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BIOSCRIP, INC.

Form 10-Q for BIOSCRIP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K") filed with the U.S. Securities and Exchange Commission ("SEC"), as well as our Unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this report.

This report contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include, but are not limited to:

our expectations regarding financial condition or results of operations in future periods;

our future sources of, and needs for, liquidity and capital resources;

our expectations regarding economic and business conditions;

our expectations regarding potential legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs;

our expectations regarding the size and growth of the market for our products and services;

our business strategies and our ability to grow our business;

the implementation or interpretation of current or future regulations and legislation, particularly governmental oversight of our business;

our ability to maintain contracts and relationships with our customers;

sales and marketing efforts;

status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;

future capital expenditures;

our high level of indebtedness;

our ability to make principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility and other debt agreements;

our ability to hire and retain key employees;

our ability to successfully execute our succession plans;

our ability to execute the recommendations of our strategic assessment and consultations;

other risks and uncertainties described from time to time in our filings with the SEC.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. This report contains information regarding important factors that could cause such differences. These factors include, among other things:

risks associated with increased government regulation related to the health care and insurance industries in general, and more specifically, home health providers and pharmacy benefit management organizations;

our expectation regarding the interim and ultimate outcome of commercial disputes, including litigation;

unfavorable economic and market conditions;

reductions in federal and state reimbursement for our products and services;

delays or suspensions of Federal and state payments for services provided;

efforts to reduce healthcare costs and alter health care financing;

effects of the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, which amended PPACA, and the related accountable care organizations;

existence of complex laws and regulations relating to our business;

our ability to successfully expand our infusion business;

achieving financial covenants under our credit facility;

availability of financing sources;

declines and other changes in revenue due to the expiration of short-term contracts;

network lock-outs and decisions to in-source by health insurers including lockouts with respect to acquired entities;

unforeseen contract terminations;

increases or other changes in the Company's acquisition cost for its products;

increased competition from competitors having greater financial, technical, reimbursement, marketing and other resources could have the effect of reducing prices and margins;


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the level of our indebtedness may limit our ability to execute our business strategy and increase the risk of default under our debt obligations,

introduction of new drugs can cause prescribers to adopt therapies for existing patients that are less profitable to us; and

changes in industry pricing benchmarks could have the effect of reducing prices and margins.

You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Business Overview

We are a leading national provider of pharmacy, home health services and pharmacy benefit management ("PBM") services that partners with patients, physicians, hospitals, healthcare payors and pharmaceutical manufacturers to provide clinical management solutions and the delivery of cost-effective access to prescription medications and home health services. Our services are designed to improve clinical outcomes to patients with chronic and acute healthcare conditions while controlling overall healthcare costs. As of the filing of this report, we had a total of 78 locations in 23 states plus the District of Columbia, including 44 home infusion locations, two contract affiliated infusion pharmacies and 32 home nursing locations.

Our platform provides broad service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, a patient's physician. Our home health professionals, including pharmacists, nurses, respiratory therapists and physical therapists, work with the physician to develop a plan of care suited to our patient's specific needs. Whether in the home, physician office, ambulatory infusion center or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, pain management, multiple sclerosis, organ transplants, bleeding disorders, rheumatoid arthritis, immune deficiencies and heart failure.

Segments

As a result of the Company entering into the Asset Purchase Agreement with respect to the Pharmacy Services Asset Sale (described below), the Company reevaluated its segments in accordance with the provisions of Accounting Standards Codification ("ASC") Topic 280, Segment Reporting ("ASC 280"). Based on its review, the Company changed its segments from "Infusion/Home Health Services" and "Pharmacy Services" to its new segments: "Infusion Services", "Home Health Services" and "PBM Services". These three new segments reflect how the Company's chief operating decision maker reviews the Company's results in terms of allocating resources and assessing performance.

The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of self-injectable therapies.

The Home Health Services operating and reportable segment provides services including the provision of skilled nursing services and therapy visits, private duty nursing services, hospice services, rehabilitation services and medical social services to patients primarily in their home.

The PBM Services operating and reportable segment consists of integrated PBM services, which primarily consists of discount cash card programs. The discount cash card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at one of our participating network pharmacies or who order medications through one of our participating mail service pharmacies receive prescription medications at a discounted price compared to the retail or "cash" price. In addition, in our capacity as a pharmacy benefit manager, we have fully funded prescription benefit programs where we reimburse our network pharmacies and third party payors in turn reimburse us based on Medi-Span reported pricing for those claims fulfilled for their plan participants.

Strategic Assessment and Acquisition


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In the fourth quarter of 2010, we commenced a strategic assessment of our business and operations. This assessment focused on expanding revenue opportunities and lowering corporate overhead, including workforce and benefit reductions and facility rationalization. As a result, corporate salaries and benefits decreased and those resources were redeployed to sales and operations to support growth.

In addition to addressing corporate overhead, the strategic assessment examined our market strengths and opportunities and compared our position to that of our competitors. As a result of the assessment, we focused our growth on investments in the Infusion and Home Health Services segments and elected to enter into a Pharmacy Services Asset Sale with respect to the sale of certain assets, rights and properties relating to our traditional and specialty pharmacy mail operations and community retail pharmacy stores.

We are exploring strategic alternatives to maximize shareholder value going forward, including deploying the proceeds of the Pharmacy Services Asset Sale and our other assets in seeking business acquisition opportunities. We have reduced the revolving credit facility, and other options that we may consider include redeeming a portion of the unsecured notes and reinvesting certain proceeds in the Infusion Services and Home Health Services segment, subject to the terms of our revolving credit facility and the indenture governing our the senior unsecured notes. There can be no assurance, though, that we will be able to identify or ultimately execute on any future business acquisition opportunities or other strategic transactions.

On July 31, 2012, we acquired InfuScience, Inc. ("InfuScience") for a cash payment of $38.0 million. The purchase price could increase to $41.0 million based on the results of operations during the 24 month period following the closing. InfuScience acquires, develops and operates businesses providing alternate site infusion pharmacy services. The acquisition has added five infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.

Divestiture

On February 1, 2012, we entered into a Community Pharmacy and Mail Business Purchase Agreement (the "Asset Purchase Agreement") by and among Walgreen Co. and certain subsidiaries (collectively, the "Buyers") and the Company and certain subsidiaries (collectively, the "Sellers") with respect to the sale of certain assets, rights and properties (the "Pharmacy Services Asset Sale") relating to our traditional and specialty pharmacy mail operations and community retail pharmacy stores.

On May 4, 2012, pursuant to the terms of the Asset Purchase Agreement, we received approximately $158.8 million at closing, including the value of inventories on hand attributable to the operations subject to the Pharmacy Services Asset Sale. Based on events related directly or indirectly to the Buyers' retention of certain business after the closing, the Company has also received approximately $740,000 and may receive up to an additional $15.0 million in additional purchase price or be required to refund up to approximately $6.4 million of cash received to the Buyers. Gain associated with contingent consideration in both cases has not been recorded in the results of discontinued operations as of September 30, 2012. The purchase price excluded all accounts receivable and working capital liabilities relating to the operations subject to the Pharmacy Services Asset Sale, which were retained by us. Approximately $18.6 million of these net assets remained at September 30, 2012, and we anticipate the collection of these balances during the remainder of the year.
As a result of the Pharmacy Services Asset Sale, we recognized a pretax gain of $100.0 million, net of transaction costs of $5.6 million, during the three months ended June 30, 2012. We also recognized approximately $0.3 million and $13.3 million of impairment costs, employee severance and other benefit-related costs, facility-related costs and other one-time charges as a result of the transaction in the three months and nine months ended September 30, 2012, respectively, resulting in a net effect of approximately $86.7 million. The transaction included the sale of 27 community pharmacy locations and certain assets of three community pharmacy locations and three traditional and specialty mail service operations, which constituted all of our operations in the community pharmacy and mail order lines of business. Two mail order locations which were not transferred as part of the Pharmacy Services Asset Sale have started providing infusion pharmacy services. We are evaluating whether to convert some of the community pharmacy locations not sold to provide infusion pharmacy services. All of the assets of the components of the businesses being transferred are included in discontinued operations on the accompanying Consolidated Balance Sheets as of December 31, 2011. On May 4, 2012, the carrying value of the assets included in the Pharmacy Services Asset Sale was as follows (in thousands):


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Inventory                                 $ 30,560
Prepaid expenses and other current assets      299
Total current assets                        30,859
Property and equipment, net                  1,592
Goodwill                                    11,754
Intangible assets, net                       2,503
Total assets                              $ 46,708

The operating results of the traditional and specialty pharmacy mail operations and community pharmacies for the three and nine months ended September 30, 2012 and 2011 are summarized below. These results include costs directly attributable to the components of the businesses which were divested. Operating expense includes bad debt expense of $4.6 million and $8.0 million for the three and nine months ended September 30, 2012 associated with receivables retained from the divested business. This compares with $0.6 million and $5.0 million bad debt expense for the three and nine months ended September 30, 2011. It also includes $2.2 million and $3.3 million for the three and nine months ended September 30, 2012 associated with the cost of collecting the retained receivables. Interest and income tax expense has also been allocated to discontinued operations. These adjustments have been made for all periods presented. Depreciation expense was no longer incurred on fixed assets included in the disposal group as of February 1, 2012, the date we entered into the Asset Purchase Agreement.

                                 Discontinued Operations Results
                                          (in thousands)

                                                Three Months Ended           Nine Months Ended
                                                   September 30,               September 30,
                                                2012          2011          2012          2011

Revenue                                      $     289     $ 320,191     $ 466,828     $ 938,480

Gross profit                                 $     315     $  23,429     $  30,353     $  73,726

Operating expense                                 $9,163       $19,834       $57,800       $64,829

Gain on sale, before income taxes            $       -     $       -     $ 100,012     $       -

(Loss) income from discontinued operations,
net of income taxes                          $ (10,931 )   $     882     $  64,448     $   4,152

Regulatory Matters Update

Approximately 30% and 33% of revenue for the three and nine months ended September 30, 2012, respectively, was derived directly from Medicare, state Medicaid programs or other government payors. Also, we provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Medicare Part D, for example, is administered through managed care entities. In the normal course of business, the Company and our customers are subject to legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs.

State Medicaid Programs

In 2011 and 2012, increased Medicaid spending, combined with slow state revenue growth, led many states to consider and institute measures aimed at controlling spending growth. Spending cuts have taken many forms including reducing eligibility and benefits, eliminating certain types of services, and provider reimbursement reductions. In addition, some states are moving beneficiaries to managed care programs in an effort to reduce costs.

No single state Medicaid program represents greater than 4% of our consolidated revenue for the three and nine months ended September 30, 2012, respectively, and no individual state Medicaid reimbursement reduction to us as a provider is expected to have a material effect on our Unaudited Consolidated Financial Statements. We are continually assessing the impact of the


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state Medicaid reimbursement cuts as states propose, finalize and implement various cost-saving measures. We incurred a 4.25% reimbursement rate cut in 2011 from TennCare, the state of Tennessee Medicaid program, for certain home health services, and incurred a second 4.25% TennCare reimbursement rate cut in the Home Health Services segment effective January 1, 2012. In May 2012, the second rate cut was adjusted to 2.50%, which was retroactively effective beginning January 1, 2012. These reimbursement rate cuts decreased revenue by $0.2 million and $1.0 million for the three and nine months ended September 30, 2012 versus prior year.

Many states are considering reducing rates or making other changes to their programs to cut spending in 2012. The states are in various stages of the legislative and regulatory process, including some states that have passed rate reductions. Given the reimbursement pressures, we continue to improve operational efficiencies and reduce costs to mitigate the impact on results of operations where possible. In some cases, reimbursement rate reductions may result in negative operating results, and we would likely exit some or all services where rate reductions result in unacceptable returns to our shareholders.

Medicare

Federal efforts to reduce Medicare spending have continued in 2012. Congress first passed the Patient Protection and Affordable Care Act ("PPACA"), and the Health Care and Education Reconciliation Act of 2010, which amended PPACA. In August 2011, Congress passed a deficit reduction agreement that created a committee tasked with proposing legislation to reduce the federal deficit by November 23, 2011. Because the committee did not act, automatic cuts to Medicare providers of 2% are scheduled to go into effect in 2013. It is not possible to estimate at this time how such cuts would affect our results of operations, but we do expect reimbursement pressures to continue. Thus far, we have been impacted by the Centers for Medicare and Medicaid Services ("CMS") rule revisions which reduced reimbursement rates applicable to the home health division of our business. In November 2010, CMS issued a final rule to update and revise Medicare home health rates for calendar year 2011. The final rule decreased the reimbursement base rate for 2011 by 5.22%. This reduction resulted in a decrease in our Home Health segment revenue and gross profit by approximately $1.9 million for the year ending December 31, 2011. In October 2011, CMS issued a final rule to update and revise Medicare home health rates for calendar year 2012. Our estimates suggest that the 2012 final rule will reduce our Home Health segment revenue and gross profit by $1.8 million on an annual basis compared to 2011 assuming no changes in the mix or volume of patients that we serve. CMS has issued a proposed rule for home health agency reimbursement for 2013 that would result in a 0.1% decrease in reimbursement. We cannot predict whether the final rule will retain this payment reduction.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.

We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. There have been no changes to critical accounting estimates in the three months ended September 30, 2012. For a full description of our accounting policies please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

Results of Operations

The following discussion is based on the Unaudited Consolidated Financial Statements of the Company. It compares our results of operations for the three and nine months ended September 30, 2012 with the prior year results of operations.


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                                                   Three Months Ended September 30,
                                                            (in thousands)
                                              2012                     2011              Change
Revenue                              $ 170,365                $ 133,829                $  36,536
Gross profit                         $  58,004      34.0  %   $  53,635      40.1  %   $   4,369
Income from continuing operations    $   3,386       2.0  %   $   4,332       3.2  %   $    (946 )
Interest expense, net                $   6,497       3.8  %   $   6,528       4.9  %   $     (31 )
Loss from continuing operations,
before income taxes                  $  (3,111 )    (1.8 )%   $  (2,196 )    (1.6 )%   $    (915 )
Loss from continuing operations, net
of income taxes                      $    (605 )    (0.4 )%   $    (334 )    (0.2 )%   $    (271 )
Income (loss) from discontinued
operations, net of income taxes      $ (10,931 )    (6.4 )%   $     882       0.7  %   $ (11,813 )
Net income (loss)                    $ (11,536 )    (6.8 )%   $     548       0.4  %   $ (12,084 )



                                                Six Months Ended June 30,
                                                     (in thousands)
                                              2012                     2011              Change
Revenue                              $ 481,899                $ 396,241                $ 85,658
Gross profit                         $ 164,567      34.1  %   $ 156,817      39.6  %   $  7,750
Income from continuing operations    $  10,140       2.1  %   $  13,980       3.5  %   $ (3,840 )
Interest expense, net                $  19,705       4.1  %   $  19,375       4.9  %   $    330
Loss from continuing operations,
before income taxes                  $  (9,565 )    (2.0 )%   $  (5,395 )    (1.4 )%   $ (4,170 )
Loss from continuing operations, net
of income taxes                      $  (6,921 )    (1.4 )%   $  (2,989 )    (0.8 )%   $ (3,932 )
Income from discontinued operations,
net of income taxes                  $  64,448      13.4  %   $   4,152       1.0  %   $ 60,296
Net income                           $  57,527      11.9  %   $   1,163       0.3  %   $ 56,364

Revenue. Revenue for the three months ended September 30, 2012 was $170.4 million compared to revenue of $133.8 million for the three months ended September 30, 2011.

Infusion segment revenue for the three months ended September 30, 2012 was $125.9 million, compared to revenue of $90.2 million for the same period in 2011, an increase of $35.7 million, or 39.6%. Product revenue increased $35.5 million, or 39.4%, as a result of overall volume growth combined with $6.6 million of additional revenue related to the acquisition of InfuScience, Inc. Service revenue increased $0.2 million, or 8.3%, as a result of a related increase in the volume of infusion nursing visits on the portion of the product revenue which required these services.

Home Health Services segment revenue for the three months ended September 30, 2012 was $17.3 million, compared to revenue of $17.6 million for the same period in 2011, a decrease of $0.3 million, or 1.4%. This change in service revenue resulted from a decrease in Medicare home health rates for the calendar year 2012 and TennCare's decrease in reimbursement rates as of July 31, 2011 and January 1, 2012.

PBM Services segment revenue for the three months ended September 30, 2012 was $27.1 million, compared to revenue of $26.0 million for the same period in 2011, an increase of $1.1 million, or 4.1%. This increase in service revenue was due primarily to an increase in volume.

Revenue for the six months ended September 30, 2012 was $481.9 million, compared to revenue of $396.2 million for the nine months ended September 30, 2011.

Infusion segment revenue for the nine months ended September 30, 2012 was $346.0 million, compared to revenue of $271.8 million for the same period in 2011, an increase of $74.2 million, or 27.3%. Product revenue increased $73.4 million, or 27.6%, as a result of overall volume growth. Service revenue increased $0.8 million, or 12.1%, as a result of a related increase in the volume of infusion nursing visits on the portion of the product revenue which required these . . .

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