BIOS BioPlus Acquisition Corporation

Specialty pharmacy services provider, BioScrip Inc. (BIOS) reported a loss of a penny per share from continued operations in the third quarter of fiscal 2012, flat year over year. However, adjusting for certain one-time items, earnings per share (EPS) came in at 7 cents, which breezed past the Zacks Consensus Estimate of a loss of a penny per share but was in line with the year-ago adjusted EPS. Total revenue in the reported quarter stood at $170.4 million, up 27.3% year over year and exceeding the Zacks Consensus Estimate of $160 million.

Earlier in May 2012, BioScrip sold certain Pharmacy Services assets including the pharmacy mail operations and the community retail pharmacy stores to Walgreen (WAG). Following the divestiture, BioScrip restructured its operating segments from Infusion/Home Health Services and Pharmacy Services into three new operating divisions: Infusion Services, Home Health Services and PBM Services.

In the reported quarter, solid revenue growth was attributable to a 39.5% rise in Infusion Services revenue to $125.9 million, and a 4.2% increase in PBM Services segment revenue to $27.1 million, partially offset by a 1.4% decline in the company’s Home Health Services segment revenues to $17.3 million. Reimbursement reductions from Medicare and the state of Tennessee TennCare program resulted in the year-over-year decline in the Home Health Services segment.

In the reported quarter there was a 48.2% increase in cost of product revenues ($85.6 million) combined with a 19.3% rise in cost of service revenues ($26.7 million). Also, shift in the therapy mix in the Infusion Services segment, as well as a decrease in home health reimbursement rates from certain government payers led to a huge 603 basis points (bps) contraction in gross margin to 34.0% in the quarter.  Selling, general and administrative expenses during the quarter surged 10.5% to $46.8 million resulting in a 184 bps drag in adjusted operating margin for the quarter to 6.6%.

BioScrip exited the quarter with $67.2 million of cash and cash equivalents. Year-to-date operating cash flow was $56.9 million compared with $7.0 million in the comparable year-ago period. This was due to the collection of accounts receivable retained after the asset sale, net of accounts payable paid related to those businesses.

In the reported quarter, BioScrip acquired Illinois-based privately held InfuScience, Inc., a provider of alternate site infusion pharmacy services. The acquisition price was $38.3 million in cash. However, it could increase by an additional $3 million within 1 year of the acquisition, depending on the performance of the acquired body. In 2011, InfuScience generated $40.0 million in annual revenues.

Outlook

BioScrip reiterated its fiscal 2012 revenue guidance of $660–$690 million. However, currently the company is evaluating hurricane Sandy’s impact on the performance of its Northeast region.

Our Take

While the company demonstrated strong sales growth during the quarter, the huge pressure on margins was a matter of concern. However, we believe that the asset sale will help BioScrip to emphasize more on areas with long-term growth potential and high returns. With favorable demographic trends, including an aging population in the U.S., the company is optimistic about the future prospects of the home health industry.  Additionally, we believe that the recent acquisition improves the company’s position in the Infusion and Home Health industry where it has meaningful strength and competitive advantages. According to the National Home Infusion Association (“NHIA”), U.S. health care expenditure in the alternate-site infusion therapy segment currently represents $9–$11 billion a year.

BioScrip retains a short-term Zacks #3 Rank (Hold). Over the long term, we have a ‘Neutral’ recommendation on the stock.

 
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