Business context and reporting period
BioScrip, Inc. (the filing issuer; the document does not identify Option Care Health as the registrant) reported for the quarter and six months ended June 30, 2017. It operated as a national infusion-services provider, with 67 service locations in 27 states. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $218.1 million | $232.5 million | $435.9 million | $470.9 million |
| Gross profit / margin | $68.3 million / 31.3% | $64.2 million / 27.6% | $133.9 million / 30.7% | $128.4 million / 27.3% |
| Net loss | $29.2 million | $8.2 million | $48.6 million | $17.8 million |
| Adjusted EBITDA | $10.0 million | $10.4 million | $15.2 million | $17.8 million |
| Operating cash flow | Six-month continuing operations: use of $4.1 million | Prior-year continuing operations: use of $15.7 million |
Revenue declined 6.2% in Q2 and 7.4% in the first half. Management attributed the decline primarily to its shift toward core therapies and the impact of the Cures Act. Higher-margin therapy mix and improved product costs lifted gross margin, but Adjusted EBITDA declined year over year in both periods.
At June 30, cash and cash equivalents were $40.5 million, with $5.1 million of restricted cash; working capital was $87.6 million. Total debt carrying value was $477.4 million, versus $451.9 million at year-end 2016. Stockholders’ deficit was $63.5 million. Cash paid for interest in the first half was $22.6 million.
Material changes, outlook, and risks
- On June 29, the company refinanced prior credit facilities with $200 million of first-lien notes and $100 million of second-lien notes, and issued warrants to second-lien purchasers. The refinancing produced a $13.5 million extinguishment loss. The new notes generally mature August 2020, potentially extending to June 2022 if the 2021 notes are refinanced. First-lien interest is floating at LIBOR plus 7% (or base rate plus 6%); second-lien interest carries higher floating-rate options, including payment-in-kind options.
- Management said cash on hand and operating cash were expected to cover anticipated working capital, scheduled interest, and other needs for at least 12 months. It also cautioned that failure to execute its plans could require additional or alternative liquidity. The company had $10 million of conditional delayed-draw capacity through December 2018; scheduled principal payments on the new facilities were not required until September 2018.
- The UnitedHealthcare contract, which accounted for 22.4% of first-half 2017 revenue, was to terminate effective September 30, 2017. Management expected a negative 2017 revenue impact but a neutral 2017 Adjusted EBITDA impact, and said the unprofitable contract’s termination should benefit Adjusted EBITDA outlook going forward.
- Bad-debt expense rose to $6.2 million in Q2 from $4.3 million; the allowance for doubtful accounts was $45.7 million. Gross receivables more than 180 days old were $40.6 million at quarter-end. Immune Globulin represented 21.1% of Q2 revenue, up from 17.2%.
- Other notable items include a $0.7 million write-off of assets for a discontinued software system and a $5.8 million Walgreens arbitration award accrued as a liability. In July 2017, the court confirmed the award and denied Walgreens injunctive relief; BioScrip said it would continue to challenge the award.
- Additional risks include reimbursement changes and healthcare regulation, debt covenant and refinancing risks, customer and payer concentration, and the integration of the Home Solutions acquisition. The filing reports effective disclosure controls as of June 30, 2017.
Key facts investors should verify
- Whether the UnitedHealthcare contract ended as planned and the realized revenue and profitability effects.
- Whether operating cash flow and liquidity were sufficient under the new, higher-cost debt structure, including compliance with covenants and refinancing needs.
- Whether receivables aging, bad-debt expense, and collections improved after quarter-end.
- The outcome and any further financial exposure from the Walgreens award and other litigation.
- How the core-therapy shift and Cures Act affected revenue, gross margin, and Adjusted EBITDA in subsequent periods.