BIOS Disappoints, Withdraws Outlook - Analyst Blog

BioScrip Inc. (BIOS) reported an EPS of 4 cents in the third quarter of 2010, falling below both the Zacks Consensus Estimate of 9 cents and the year-ago quarter's 14 cents. However, revenues were $441.2 million, higher than the Zacks Consensus Estimate of $433 million and 32.3% above the year-ago quarter.

BioScrip reports under two segments – Pharmacy Services and Infusion/Home Health Services with revenues of $329.3 million (up 11% year over year) and $111.8 million (up 203.8%), respectively, during the quarter. The huge growth in Infusion Services was driven by $68 million contribution from Critical Homecare Solutions Holdings (CHS), which was acquired in March 2010. CHS is a leading provider of home infusion and home health agency services to patients suffering from chronic and acute medical conditions. Excluding the CHS revenues, Infusion/Home Health Services revenues increased 19.1% annually and 5% sequentially.

Of the $107.7 million increase in revenues, $68 million was attributable to the CHS acquisition and $3.6 million to the recently acquired pharmacy operations of drugstore.com. The remaining increase was due to organic growth, partially offset by the loss of a low-margin pharmacy benefit manager (PBM) customer, pricing concessions in the Pharmacy Services segment and the AWP settlement in September of 2009.

Gross profit during the reported quarter was $75.4 million (with 17.1% margin), compared to $41.5 million (with 12.4% margin) in the year-ago period. Of the $33.9 million increase in gross profit, $31.4 million was the result of the CHS acquisition. Excluding the acquisition, BioScrip's overall margins declined due to the above mentioned factors. The company also suffered from elimination of an industry-wide rebate on branded drugs.

Gross margins were also impacted by various manufacturer issues related to intravenous immunoglobulin (IVIG) products, bringing certain CHS patients from an out-of-network billing relationship into a long-term contractual relationship, changes in reimbursement from certain payors and product recall by a manufacturer, for which the company had to fill prescriptions with higher cost product.

Selling, general and administrative expenses during the third quarter were $55.9 million, up 73% compared to the year-ago period. The increase is primarily due to the consolidation of CHS business, investment in sales organizations, higher expenses associated with cash card business as a result of increased commissions and the impact of increased commission rates to one of its card brokers.

Excluding the effect of acquisitions, organic revenue growth was disappointing. In addition, declining margins, higher interest and tax payments led to a greater decline in EPS. While interest expenses surged to $8.1 million from $0.4 million, taxes were higher due to state-deferred tax assets. BioScrip witnessed softer patient reorder patterns and pricing pressure in some parts of the business, impacting revenue per patient and consequently, gross margins.

Outlook

Subsequent to the dismal performance during the quarter, BioScrip has withdrawn its full year outlook and has decided to review its business and cost structure. The company will be providing its fiscal 2011 outlook in January next year.

BioScrip also changed its top management under which the existing chairman and CEO, Rich Friedman, will serve as non-executive chairman of the board of directors effective January 1, 2011. The current president and COO, Rick Smith, will take over as the next CEO.