Business context and reporting period
This is BioScrip, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017—not a filing under the name Option Care Health, Inc. BioScrip described itself as a national infusion-services provider operating 66 locations in 27 states. Results cover the three and nine months ended September 30, 2017, compared with the same 2016 periods.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $198.7 million | $224.5 million | $634.6 million | $695.5 million |
| Gross profit | $67.2 million | $62.6 million | $201.1 million | $191.0 million |
| Gross margin | 33.8% | 27.9% | 31.7% | 27.5% |
| Net loss | $12.5 million | $11.3 million | $61.1 million | $29.0 million |
| Adjusted EBITDA (non-GAAP) | $13.0 million | $3.5 million | $28.2 million | $21.3 million |
For the nine months, operating cash use was $4.3 million from continuing operations and $10.9 million including discontinued operations. Investing activities used $10.0 million; financing activities provided $44.3 million. Cash and cash equivalents were $33.0 million at quarter-end, with another $5.0 million restricted as collateral. Working capital was $81.1 million.
Total debt was $478.6 million at September 30, 2017, versus $451.9 million at December 31, 2016. The debt structure included $200 million of first-lien notes, $100 million of initial second-lien notes, and $200 million principal of 8.875% senior notes due 2021; reported carrying amounts differ from principal. First- and second-lien notes generally mature August 2020, with maturity extension to June 2022 conditional on refinancing the 2021 Notes before August 2020. The second-lien notes carry high floating-rate interest, with options to capitalize some interest.
Material changes versus prior period
- Revenue fell 11.5% in Q3 and 8.8% for the nine months. Management attributed the decline to its shift toward core therapies, the Cures Act, and the UnitedHealthcare contract transition.
- Despite lower revenue, gross profit and margin improved, which management attributed to a higher-margin therapy mix and lower prescription-drug costs from supply-chain improvements.
- Net losses widened, especially year to date, with higher interest expense, depreciation and amortization, and a $13.5 million debt-extinguishment loss. Q3 interest expense was $13.2 million versus $9.3 million a year earlier.
- Adjusted EBITDA increased, which management attributed to improved gross margin and restructuring. This is a company-defined non-GAAP measure and is not a substitute for GAAP results.
- UnitedHealthcare represented 21.0% of nine-month revenue, compared with 24.8% in 2016; the contract, subject to certain provisions, terminated effective September 30, 2017.
Outlook, commentary, risks and unusual items
Management said cash on hand and expected operating cash flow should fund anticipated working capital, scheduled interest, and other cash needs for at least 12 months; it also cited up to $10 million of conditional delayed-draw capacity. The company cautioned that failure to execute its plans could require additional liquidity, and said there was no assurance it could raise capital if needed. No specific revenue or earnings guidance was provided.
In June 2017, BioScrip refinanced prior credit facilities with new secured note facilities. The refinancing generated a $13.5 million extinguishment loss and involved first- and second-priority liens on substantially all company and subsidiary assets. The company reported $18.0 million fair value for warrants issued with the second-lien facility; changes in fair value affect earnings. Preferred-stock dividends also reduce amounts attributable to common shareholders.
Key business risks include reimbursement reductions and regulatory changes, payer contract losses, collection delays and bad debts, supplier and competitive pressures, debt service and covenant compliance, and successful integration of Home Solutions. Immune Globulin products accounted for 21.3% of Q3 revenue. The Walgreens non-compete dispute was settled after an arbitration award of $5.8 million; the company paid the settlement in August 2017. A separate derivative lawsuit was dismissed, but plaintiffs appealed; the company said loss exposure could not be reasonably estimated. For Home Solutions government receivables, BioScrip recorded a $0.9 million liability; on October 4, 2017, it agreed to defer final measurement to December 31, 2017 in exchange for a $0.5 million payment credited against any amount owed.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is BioScrip, Inc.’s 2017 10-Q, not a filing labeled Option Care Health, Inc.
- Track the financial and operational effect of the UnitedHealthcare contract termination and other payer transitions.
- Assess whether improved gross margins and Adjusted EBITDA can persist as revenue declines, and review the reconciliation of non-GAAP EBITDA.
- Review debt terms, cash interest burden, covenant headroom, maturities, and conditions on the $10 million delayed draw.
- Monitor cash conversion, receivables aging and allowances, and the final Home Solutions government-receivables settlement.
- Follow the derivative litigation appeal, reimbursement and regulatory developments, and any need for additional financing.