BioScrip, Inc. — Form 10-Q for the quarter ended September 30, 2016
Reporting context: The filing identifies the registrant as BioScrip, Inc. (not Option Care Health, Inc.). BioScrip operated a single Infusion Services segment. Prior-year PBM results are presented as discontinued operations, so comparisons primarily reflect continuing operations.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $224.5 million | $247.2 million | $695.5 million | $738.5 million |
| Gross profit / margin | $62.6 million / 27.9% | $65.2 million / 26.4% | $191.0 million / 27.5% | $195.0 million / 26.4% |
| Net loss | $11.3 million | $16.8 million | $29.0 million | $281.3 million |
| Adjusted EBITDA (non-GAAP) | $3.5 million | $6.0 million | $21.3 million | $6.8 million |
Q3 revenue fell 9.2%, and nine-month revenue fell 5.8%, primarily from lower patient service volumes in the lower-margin chronic business. Gross margin improved in both comparison periods. Management attributed lower bad-debt expense to improved collections; nine-month 2016 expense also included a $2.3 million benefit from a change in the doubtful-account estimate. Adjusted EBITDA declined in Q3 with revenue, but increased for the nine months, which management attributed mainly to restructuring, lower corporate overhead, and a focus on infusion services. Adjusted EBITDA is a company-defined non-GAAP measure.
- Cash flow: For the nine months, continuing-operations operating cash flow was negative $32.5 million; total operating cash flow was negative $38.5 million. Investing cash outflow was $71.4 million, including $67.5 million for Home Solutions. Financing activities provided $97.2 million, including $83.3 million net equity-offering proceeds. Cash declined $12.7 million to $2.8 million.
- Liquidity: Working capital was $18.5 million, down from $30.9 million at December 31, 2015. At quarter-end, reported available revolver capacity was $31.4 million, of which $16.4 million remained subject to an alternate leverage test; letters of credit were $4.6 million.
- Debt: Reported total debt was $436.2 million, net of $13.3 million of deferred financing costs. Debt included $39.0 million drawn on the revolver, $213.3 million in term loans, and $196.5 million in 2021 Notes. Stated rates were approximately 7.75% on revolver borrowings, 6.50% on term loans, and 8.875% on the Notes. Nine-month net interest expense was $28.2 million.
Material developments and unusual items
- BioScrip acquired substantially all assets and assumed certain liabilities of Home Solutions on September 9, 2016. Consideration was estimated at $93.6 million: $67.5 million cash, $9.9 million in closing shares, assumed capital-lease obligations, and $15.8 million fair value of contingent consideration. Purchase accounting remained provisional. Home Solutions contributed $6.0 million revenue and $0.7 million net income during the quarter.
- The acquisition’s contingent equity may result in approximately 3.1 million and 4.0 million additional shares upon separate stock-price or change-of-control conditions. The transaction also depended on stockholder approval of a charter amendment to increase authorized shares; failure to obtain approval could constrain equity issuance and potentially require cash settlement under contractual provisions.
- BioScrip completed a $83.3 million net common-stock offering in June 2016, issuing 45.2 million shares. Series C preferred stock had a $73.4 million liquidation preference at quarter-end and accrued dividends at 11.5% annually, subject to reduction based on specified EBITDA levels.
- Q3 results included a $3.0 million gain from selling the Hepatitis C business. Restructuring, acquisition, integration and other expense was net $2.4 million; this included a $4.6 million gain from reducing contingent consideration, partly offset by acquisition and other costs. The 2015 comparison included goodwill impairment of $13.9 million in Q3 and $251.9 million for the nine months.
Outlook, risks and contingencies
Going concern and covenants: BioScrip was in compliance with its debt leverage covenant at September 30, 2016, but forecast likely noncompliance as covenants tighten in 2017. Management was working with lenders and evaluating amendments or waivers. Failure to obtain relief could trigger default and acceleration of credit-facility and senior-note obligations; the company said it lacked sufficient cash to repay them and disclosed substantial doubt about its ability to continue as a going concern. No formal earnings guidance is provided in the filing.
Management also cited reimbursement and regulatory uncertainty, payer audits and delayed payments, competition and pricing pressure, customer and supplier concentration, and acquisition integration risks. UnitedHealthcare represented 24.0% of Q3 revenue; Medicare represented 10.5%. Walgreens’ contract dispute remained in alternative dispute resolution, and a derivative action was ongoing; the company said it could not reasonably estimate potential losses in those matters. The securities class action settlement received final court approval in June 2016.
Key facts for investors to verify
- Whether lenders amended or waived the covenants and the company’s subsequent covenant headroom and liquidity.
- Whether the charter amendment was approved, and the resulting treatment of Series C preferred shares and Home Solutions contingent equity.
- Home Solutions integration progress, final purchase-price allocation, and whether expected synergies and higher-margin therapy growth materialized.
- Revenue trends in chronic therapies, gross-margin durability, collections and receivables quality.
- Updated status and potential financial exposure from the Walgreens and derivative litigation, as well as reimbursement and regulatory changes.