Business context and reporting period
This summary covers BioScrip, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The filing identifies BioScrip—not Option Care Health—as the registrant. BioScrip operated Infusion Services and PBM Services after selling substantially all of its Home Health Services business on March 31, 2014. The Home Health business sale generated approximately $60.6 million in cash, a portion of which was used to repay debt.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $244.0 | $190.6 | $730.4 | $544.0 |
| Gross profit / margin | $65.0 / 26.6% | $61.7 / 32.3% | $195.5 / 26.8% | $175.4 / 32.2% |
| Loss from continuing operations, net | $(37.6) | $(23.8) | $(81.4) | $(41.4) |
| Net loss | $(38.7) | $(34.1) | $(83.8) | $(51.1) |
| Net loss per share | $(0.57) | $(0.53) | $(1.23) | $(0.81) |
| Consolidated Adjusted EBITDA | $(12.6) | $11.4 | $7.6 | $32.5 |
Revenue growth was led by Infusion Services: segment revenue increased 32.6% in Q3 and 40.9% for the nine-month period. Management attributed growth to organic volume, acquisitions and, in Q3, the new hepatitis C drug Sovaldi. PBM Services revenue declined 22.4% in Q3 and 20.1% year to date, mainly reflecting lower discount-card business. Gross margin fell as the revenue mix shifted away from comparatively higher-margin PBM business and infusion receivable reserves increased.
At September 30, 2014, cash and cash equivalents were $0; working capital was $80.0 million, versus $62.6 million at December 31, 2013. Total debt was $423.3 million, including $4.5 million drawn on a $75 million revolving facility; approximately $70.5 million remained available. The company reported $418.4 million of long-term debt and $4.9 million current debt. Nine-month cash used in operating activities was $31.7 million overall, including $26.7 million from continuing operations. Investing activities provided $45.9 million overall, including $57.7 million of proceeds from discontinued operations; financing activities used $15.2 million. Interest expense was $9.6 million in Q3 and $29.2 million for nine months.
Material changes versus prior periods
- Q3 and nine-month revenue rose substantially, but losses widened and Adjusted EBITDA weakened, turning negative in Q3.
- Q3 bad-debt expense was $26.1 million, versus $3.6 million a year earlier; nine-month expense was $41.0 million, versus $10.3 million. The company recorded $23.1 million of Q3 reserve adjustments, including $19.9 million for doubtful accounts and $3.2 million for contractual adjustments, primarily on aged infusion receivables. The nine-month incremental reserve adjustments were approximately $28.7 million.
- Receivables over 180 days increased $23.0 million from year-end. The allowance for doubtful accounts rose to 18.7% of receivables from 9.4%. Management said collections of billed revenue returned to historical Infusion Services levels in Q3, while acknowledging difficulty collecting aged balances following acquisition-related billing and integration disruptions.
- Interest expense increased, partly reflecting debt incurred to fund the CarePoint acquisition. The company issued $200 million of 8.875% senior notes due 2021 and used proceeds, together with Home Health sale proceeds, to repay revolving and term debt.
Outlook, commentary, risks and unusual items
- Management expected operating cash generation and available revolver borrowings to fund anticipated working capital, IT investments, scheduled interest and other needs for at least the next 12 months, based on historical levels. No specific earnings or revenue guidance was provided.
- Acquisition integration disrupted billing, credentialing, claims processing and collections. Management was still testing remediation of the related accounts-receivable-reserve control weakness; disclosure controls were deemed ineffective as of September 30, 2014. A separate weakness involving contingent-consideration calculations was reported remediated.
- CarePoint sellers may dispute the company’s conclusion that an earnout target was not met. BioScrip retained a $5.0 million contingent-consideration liability; arbitration could result in a further $5.0 million expense or reversal and income of $5.0 million.
- A PBM cash-card processor had stopped paying amounts due; approximately $6.8 million was subject to arbitration, with no reserve recorded.
- A securities class action concerning alleged disclosures about the legacy pharmacy business and PBM segment remained pending; the company said it could not estimate a possible loss. The separate government and state settlement over legacy medication distribution required $15.0 million plus interest in installments; claims covered by the agreements were dismissed, but certain government administrative actions were not precluded.
- Other risks include reimbursement and regulatory changes, customer and payer concentration, debt and covenant obligations, acquisition integration, and ongoing restructuring. UnitedHealthcare represented approximately 22% of revenue; Medicare represented 11% in Q3 and 12% for the nine-month period.
Most important facts for investors to verify
- Whether the receivables reserve estimates are adequate and whether aged balances can be collected; review subsequent collections and the fourth-quarter control testing.
- Whether Infusion Services can sustain organic growth and restore margins and positive Adjusted EBITDA after reserve charges.
- Liquidity, debt covenant compliance, interest burden and access to the revolver, given zero cash at quarter-end.
- Outcomes of the CarePoint earnout arbitration and the $6.8 million PBM processor collection arbitration.
- Developments in the securities litigation and any remaining costs or contingencies related to the legacy pharmacy settlement.