BioScrip, Inc. Form 10-Q Summary
Entity and period: The supplied filing is BioScrip, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013, not a filing under the name Option Care Health, Inc. Financial amounts below are in U.S. dollars; “Q3” refers to the three months ended September 30 and “nine months” to the nine months ended September 30.
Business context
BioScrip provided home infusion, home health and pharmacy benefit management (PBM) services. Its strategy emphasized expansion in infusion and home health, following the 2012 sale of its traditional and specialty mail and community pharmacy operations. In 2013, it acquired HomeChoice and CarePoint, expanding its infusion business.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $208.9 million | $170.4 million | $598.7 million | $481.9 million |
| Gross profit | $68.7 million | $58.0 million | $196.9 million | $164.6 million |
| Gross margin | 32.9% | 34.0% | 32.9% | 34.1% |
| Continuing-operations net loss | $22.4 million | $0.6 million | $38.2 million | $6.9 million |
| Net loss / income including discontinued operations | $34.1 million loss | $11.5 million loss | $51.1 million loss | $57.5 million income |
| Consolidated Adjusted EBITDA (non-GAAP) | $12.1 million | $11.6 million | $35.6 million | $29.0 million |
- Q3 revenue rose 22.6%; nine-month revenue rose 24.2%. Infusion revenue growth, reflecting acquisitions and organic volume, was partly offset by lower PBM revenue.
- Infusion revenue increased 38.8% in Q3 and 40.3% for the nine months. PBM revenue fell 41.0% and 30.5%, respectively, primarily following termination of a large, low-margin client and lower discount-card volume. Home Health revenue rose 4.5% and 6.6%.
- Gross profit dollars increased, but gross margin declined as lower-margin infusion revenue made up a larger share of revenue. Q3 SG&A was $58.0 million (27.8% of revenue); nine-month SG&A was $166.8 million (27.9%).
- Q3 results included a $15.9 million loss on extinguishment of debt. Nine-month acquisition and integration expenses were $13.0 million, compared with $1.8 million in 2012.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was negative $38.3 million, including negative $25.4 million from continuing operations. Investing cash flow was negative $298.8 million, mainly reflecting $285.0 million of acquisition spending. Financing cash flow was positive $275.0 million, including $118.6 million of net stock-offering proceeds and $377.3 million of proceeds from new credit facilities, partly offset by $237.4 million used to retire the senior notes.
- Cash was zero at September 30, 2013, compared with $62.1 million at December 31, 2012. Working capital was $88.6 million, down from $127.2 million.
- Reported debt was $415.6 million, comprising $400.0 million of term loans, $15.0 million drawn on a $75.0 million revolving facility, and $0.6 million of capital leases. The new facilities bear floating interest; the reported rate was approximately 6.5%. The term loans mature in 2020 and the revolver in 2018. The term loans require quarterly amortization beginning December 31, 2013.
- Management expected operating cash flow, available revolver borrowings and remaining unused offering proceeds to fund anticipated needs for at least 12 months, based on historical levels. The filing does not provide a specific earnings or revenue forecast.
Material changes, outlook and risks
- CarePoint closed on August 23 for $211.1 million in cash at closing; $10.0 million was withheld subject to a product gross-profit condition. HomeChoice was acquired in February for $72.9 million, with potential additional consideration. The acquisitions materially increased goodwill, assets and debt; preliminary purchase-price allocations could change.
- BioScrip replaced its 10.25% senior notes with secured credit facilities and recorded a $15.9 million extinguishment loss. The facilities are secured by substantially all company and subsidiary assets. Revolver financial covenants apply if usage exceeds 25% of available capacity; the term loans are not subject to financial covenants.
- A civil government investigation into the divested legacy specialty pharmacy business remained unresolved. BioScrip accrued $15.0 million, but said additional loss was reasonably possible and the ultimate outcome and timing could not be predicted. Paying the full amount, if incurred, could require lender consent.
- A securities class action filed September 30 alleged misleading disclosures concerning the legacy business. BioScrip denied wrongdoing, intended to defend the case, and could not estimate a loss range.
- Management noted continuing integration and execution risks, elevated leverage, reimbursement and regulatory uncertainty, and possible PBM margin pressure from pharmacy-chain contract renegotiations. It also identified potential goodwill impairment risk; the annual impairment test was expected in the fourth quarter.
- Government programs directly accounted for approximately 24% of Q3 and nine-month revenue. The filing said the 2% Medicare sequestration reduction had not yet had a significant impact, while the proposed 2014 home-health payment rule would reduce payments by 1.5% if adopted as proposed.
Important facts for investors to verify
- Whether acquired businesses deliver expected integration benefits, growth and margins, and whether provisional purchase accounting or contingent consideration changes.
- Cash conversion and working-capital needs, particularly receivables growth, given zero reported cash and negative operating cash flow.
- Debt service capacity, revolver availability, covenant headroom, floating-rate exposure and any lender consent requirements.
- Outcome and potential financial impact of the government investigation and securities litigation, including whether losses exceed the $15.0 million accrual.
- PBM contract and volume trends, reimbursement developments, and the fourth-quarter goodwill impairment assessment.