Business context and reporting period
The supplied filing is BioScrip, Inc.’s Form 10-K for the fiscal year ended December 31, 2011—not a filing under the name Option Care Health. BioScrip operated two segments: Infusion/Home Health Services and Pharmacy Services, providing pharmacy, infusion, nursing and related healthcare services.
After a strategic assessment, management prioritized investment in Infusion/Home Health and agreed in February 2012 to sell its community pharmacy and traditional and specialty mail operations to Walgreens.
Financial results and key metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1,818.0 million | $1,638.6 million |
| Gross profit / margin | $312.3 million / 17.2% | $260.4 million / 15.9% |
| Operating income / margin | $37.5 million / 2.1% | $15.8 million / 1.0% |
| Net income (loss) | $7.9 million | ($69.1 million) |
| Net cash from (used in) operations | $27.0 million | ($21.4 million) |
| Working capital at year-end | $71.7 million | $50.1 million |
- Revenue increased 10.9%. Infusion/Home Health revenue was $451.0 million, up 19.6%; Pharmacy Services revenue was $1,367.0 million, up 8.4%.
- Segment Adjusted EBITDA was $45.4 million for Infusion/Home Health and $58.0 million for Pharmacy Services; consolidated Adjusted EBITDA was $73.5 million. These are non-GAAP measures.
- Year-end debt was $293.5 million, including $63.8 million outstanding on the revolving facility, $225.0 million of 10.25% senior unsecured notes and capital leases. Cash and cash equivalents were reported as zero. The revolver had a $150 million maximum commitment, subject to borrowing-base and other limits.
- Interest expense was $28.3 million. Capital expenditures were $9.4 million; net cash used in investing activities was $9.9 million.
- Fourth-quarter 2011 revenue was $483.3 million, gross profit $81.8 million and net income $6.7 million, versus $450.4 million, $72.6 million and a $67.1 million net loss, respectively, in fourth-quarter 2010.
Material changes versus the prior period
- Gross profit and margin improved, reflecting the CHS acquisition and growth in discount cash-card programs. The acquisition also contributed to year-over-year Infusion/Home Health growth; excluding its incremental first-quarter contribution, that segment’s revenue increased 2.8%.
- Operating cash flow improved by $48.4 million, mainly from lower working-capital needs and higher earnings adjusted for noncash items. Receivables nevertheless increased, and receivables more than 180 days old rose to $29.6 million from $19.5 million.
- Net income improved from the prior-year loss, when results included a $47.7 million tax expense—principally a deferred-tax valuation allowance—and a $9.6 million debt-extinguishment loss.
- Restructuring expense rose to $8.9 million from $3.5 million. Management reported $7.7 million lower salaries and benefits in 2011 from restructuring, with the full savings impact expected in 2012.
Outlook, risks, contingencies and unusual items
- Proposed asset sale: The February 2012 Walgreens agreement provides for approximately $170 million at closing, including inventory, plus up to $60 million contingent on specified retention-related events. BioScrip would retain pre-closing accounts receivable and related working-capital liabilities; the filing estimated those retained net assets at approximately $55 million. The sale was subject to closing conditions; management expected a second-quarter 2012 closing, and antitrust clearance had been received.
- Sale proceeds were expected to be used, subject to debt terms, to reduce revolver borrowings, potentially redeem some unsecured notes and/or reinvest in Infusion/Home Health. Management said available liquidity and operating cash flow were expected to cover anticipated needs for at least 12 months, based on historical levels.
- Management anticipated continued patient-volume growth from managed-care contracts, while noting that contracted reimbursement rates had reduced revenue per patient and pressured margins. It cited opportunities to improve product mix to mitigate margin pressure.
- Reimbursement pressure remained significant. Medicare home-health rate changes reduced 2011 segment revenue and gross profit by about $1.9 million; management estimated another $1.8 million annual reduction in 2012, assuming unchanged patient mix and volume. Tennessee Medicaid rates had been cut, and California Medicaid reductions were subject to litigation. Potential 2013 Medicare cuts were also noted.
- Other principal risks include high debt and financial covenants, government reimbursement and regulatory changes, pharmacy pricing-benchmark uncertainty, reliance on AmerisourceBergen as the principal drug wholesaler, collection risk and competition. A major commercial pharmacy-network relationship represented about 11% of 2011 revenue and 21% of year-end receivables.
- A $4.8 million expense and liability was recorded for a proposed resolution of a qui tam matter and government investigation; final documents, court approval and resolution of additional relator and counsel claims remained outstanding. A separate home-infusion contract suit sought $3.5 million; no liability was accrued because loss was not considered probable.
- Management warned that completing the sale could trigger additional restructuring costs, asset write-downs, severance, bonuses or accelerated contractual payments. Failure to complete it could also harm customer and employee relationships and leave transaction costs without the expected benefit.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the issuer and filing identity: the supplied 10-K is for BioScrip, Inc., despite the request naming Option Care Health.
- Check whether the Walgreens transaction closed, the final consideration received, any contingent payment earned, and how proceeds were allocated under debt documents.
- Review post-sale revenue, margins, cash flows and liquidity, including the effect of losing Pharmacy Services revenue and the retained receivables.
- Track aged receivables, collection experience and the adequacy of the doubtful-account allowance.
- Verify the final resolution and total cash cost of the qui tam matter and monitor the other disclosed litigation.
- Assess actual reimbursement changes, compliance with credit-facility covenants and debt repayment progress.