Business context and reporting period
This is BioScrip, Inc.’s Form 10-K for the fiscal year ended December 31, 2018—not a standalone Option Care Health filing. BioScrip provided home and alternate-site infusion services through 68 locations in 27 states. The filing reports annual results and unaudited fourth-quarter data.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $708.9 million | $817.2 million |
| Gross profit | $243.0 million | $269.2 million |
| Gross margin | 34.3% | 32.9% |
| Operating income | $10.9 million | $2.3 million |
| Net loss | $51.7 million | $64.2 million |
| Adjusted EBITDA | $45.1 million | $45.0 million |
| Cash from continuing operations | Used: $20.0 million | Provided: $5.6 million |
FY 2018 interest expense was $57.4 million. At year-end, cash was $14.5 million, working capital was $67.4 million, and reported total debt was $504.7 million; debt at face value was $517.8 million. Stockholders’ deficit was $144.0 million. Management said cash on hand and operating cash flow were expected to cover anticipated working capital, scheduled interest and other needs for at least 12 months.
Fourth-quarter 2018 revenue was $183.6 million, gross profit was $62.1 million and net loss was $15.4 million. In fourth-quarter 2017, these were $182.6 million, $70.2 million and $2.0 million, respectively.
Material changes versus prior period
- Annual revenue declined 13.3%, primarily reflecting the UnitedHealthcare contract transition effective September 30, 2017, lower volumes in some product lines, and first-quarter 2018 weather-related branch closures.
- Adoption of ASC 606 reduced 2018 reported revenue and gross profit by $29.9 million by presenting estimated price concessions and retroactive adjustments as reductions to revenue rather than bad-debt expense. Without ASC 606, the filing says revenue would have been $738.8 million and gross profit $272.9 million.
- Gross margin improved to 34.3%, supported by a higher mix of core therapies and lower drug costs. Adjusted EBITDA was essentially flat despite lower revenue.
- Operating cash flow deteriorated as collections weakened: accounts receivable rose to $114.9 million from $85.5 million, while cash fell by $24.9 million. The company cited a temporary reduction in collection rates.
- Debt increased, including a $10 million second-lien draw and $7.8 million of capitalized second-lien interest. Interest expense rose 10.3%.
Outlook, risks and unusual items
- Management identified the 2016 Cures Act’s reductions in Medicare reimbursement for certain infusion drugs as materially negative to revenue and profitability. Temporary Medicare Part B transitional payments began in 2019; the planned clinical-services payment was scheduled to take effect in 2021.
- Liquidity and refinancing are significant risks. First- and second-lien facilities were scheduled to mature in August 2020, subject to extension if the 2021 notes were refinanced; $200 million of 8.875% unsecured notes mature in 2021. First-lien amortization was scheduled to begin in September 2019. Floating-rate debt exposed the company to rate increases; a 1 percentage-point increase was estimated to raise annual interest expense by about $3.4 million.
- Other key risks include reimbursement delays and audits, payer-contract and referral-source losses, dependence on AmerisourceBergen as its primary wholesaler, regulatory and compounding-pharmacy requirements, competition, and execution of cost and collection initiatives.
- The company reported no additional goodwill impairment in 2018; goodwill was $367.2 million. Its 2018 tax expense was $0.6 million, and a $148.5 million valuation allowance remained against deferred tax assets.
- On March 14, 2019, BioScrip entered a definitive merger agreement with Option Care. BioScrip shareholders were expected to own approximately 20% of the combined company; committed financing was intended to repay BioScrip’s first- and second-lien facilities and 2021 notes at closing. The transaction was expected to close by year-end 2019, subject to completion.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management said a material weakness identified in 2017 had been remediated by December 31, 2018.
Important facts for investors to verify
- Confirm the merger’s completion, final terms, closing date and actual treatment of BioScrip’s debt.
- Track cash collections, accounts-receivable aging and operating cash flow, especially given the 2018 cash use and higher receivables.
- Review debt maturities, covenant compliance, refinancing capacity and interest-rate exposure.
- Assess the net effect of Medicare reimbursement changes and payer-contract transitions on revenue, margins and patient volumes.
- Distinguish ASC 606 presentation effects from underlying collections and operating performance when comparing periods.