BIOS BioPlus Acquisition Corporation

We maintain our Neutral recommendation on BioScrip Inc. (BIOS) with a target price of $7.25.

BioScrip reported EPS of 12 cents in the fourth quarter of fiscal 2011, much better than the year-ago quarter loss of $1.25 per share. Reported results also surpassed the Zacks Consensus Estimate of 9 cents. However, the company recorded a non-cash charge of $54 million related to a deferred tax asset reserve in the year-ago quarter.

After delivering disappointing results in the last few quarters, impacted by pricing concessions on various specialty drugs, reimbursement pressures, the new industry-wide average wholesale price (AWP) standard and the overall impact of the weak economic environment, BioScrip is gradually experiencing improvement in its top line.

In the fourth quarter, Infusion/Home Health revenue increased 9.8% year over year. We are also encouraged by the increased patient census over the last 10 months, leading to a sequential improvement in the Infusion/Home Health Services sector.

More importantly, during the quarter, BioScrip decided to dispense with certain community specialty pharmacies and mail service pharmacy business assets to leading drugstore retailer Walgreen. In addition to that, Walgreen will also gain some assets of BioScrip's centralized specialty pharmacy business and traditional mail service pharmacy business that distributes prescriptions for drugstore.com (acquired by Walgreen's in June 2011). 

We strongly expect this decision of BioScrip to help the company emphasize more in its fast growing Infusion/Home Health Services segment, which has long-term growth potentials and high returns.

Pharmacy services also registered a 7.1% rise in sales (up 4.9% sequentially). The strong result in this segment was on the back of positive returns from oncology, arthritis drugs and the full effect of new contracts, which were added in late 2010.

The company is further expanding in majority of its existing markets as well as gaining entry in new and under-penetrated locations. Additionally, BioScrip is benefiting from local community strengths and access to the managed care relationships through CHS. Also its strong accessibility to specialty drugs and relationships with pharmaceutical companies are expected to drive further growth.

However, BioScrip’s highly leveraged balance sheet continues to be a drag on the bottom line and remains a key area of concern, in our view. Moreover, the Home Health industry was impacted by the reduction in Medicare reimbursement and the new face-to-face requirement. This may temper BioScrip’s sales growth going forward.

Additionally, we remain apprehensive owing to mounting competitive pressures from players like CVS Caremark (CVS), Walgreen (WAG) and AmerisourceBergen (ABC) as well as many smaller organizations that operate on a local or regional basis. Increased competition has led to lower pricing and increased rebate sharing, thereby putting severe pressure on margins.

 
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