Lisa Carlton-Wilson - President-Investor Relations R. Carter Pate - Director Richard M. Smith - President, Chief Executive Officer & Director Jeffrey M. Kreger - Chief Financial Officer, Treasurer & Senior VP Chris Luthin - Senior Vice President, Chief Operating Officer, BioScrip, Inc..

Brooks Gregory O'Neil - Dougherty & Co. LLC William Bishop Bonello - Craig-Hallum Capital Group LLC Dana R. Hambly - Stephens, Inc..

Ladies and gentlemen, thank you for standing by. And welcome to the BioScrip Second Quarter 2015 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. As a reminder, this conference is being recorded on Monday, August 10, 2015.

I would now like to turn the conference over to Lisa Wilson, Investor Relations for BioScrip. Please go ahead, Ma'am..

Good morning and thank you for joining us today. By now, you should have received a copy of our press releases issued this morning. If you have not received them, you may access them through the Investor Relations section at our website at bioscrip.com.

Rick Smith, President and Chief Executive Officer, will host this morning's call along with Carter Pate, Member of the Board of Directors. On the call for the Q&A portion are Jeff Kreger, Senior Vice President, Chief Financial Officer and Treasurer; Chris Luthin, Chief Operating Officer; and Scott Davido, Chief Implementation Officer.

The call may also be accessed through our website at bioscrip.com. A replay will be available shortly after the call and will remain available for the period of two weeks. Interested parties can access the replay by dialing 800-633-8284 in the U.S. and 402-977-9140 internationally and entering access code 21773453.

An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com. Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act.

Such forward-looking statements are based upon current expectations and there can be no assurance that the results contemplated in these statements will be realized.

Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press releases and our annual and quarterly reports filed with the SEC.

These forward-looking statements are based on information available to BioScrip today and the company assumes no obligation to update statements as circumstances change. During this presentation, we will refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, and adjusted earnings per diluted share.

A reconciliation of such measures to the most comparable financial measures is contained in our most recent press release issued this morning, which can be obtained from our website at bioscrip.com. And now, I would like to turn the call over to our Board Member, Carter Pate.

Carter?.

Thank you, Lisa. Good morning everyone and thanks so much for joining us today. My name is Carter Pate, one of BioScrip's independent directors and Chair of the Audit Committee. In light of the significant announcements that the company made today, the board has asked me to briefly address the investor community.

Since March of this year, BioScrip has strengthened its board of directors, adding four new independent directors to its seven-member board. The new directors who have joined me on the board include Dave Golding, Michael Goldstein and Chris Shackelton. The new members include persons with industry, operational and financial turnaround experience.

What we found in our brief time is a company with significant potential and a strong core business, but that needs rapid and effective changes to its cost structure and financial flexibility. We've identified and engaged a leadership team that we are confident we'll be able to implement the board's plan.

Our objective is to quickly and effectively drive meaningful change at BioScrip to improve the company's financial and operational performance and enhance value for the shareholders. Now with so many moving parts, our board will play an active role in overseeing the future of the company. And we are committed to achieving a successful outcome.

As part of our efforts, the board has formed a financial improvement implementation committee of which I am the chair. The committee will oversee the initiatives announced today in relation to our financial improvement plan.

But everyone in this organization from top to bottom will be held accountable for our progress in achieving the goals of our plan. Now, on a parallel path today, we also announced that the board will be working with the company's financial advisor, Jefferies, to evaluate a range of strategic alternatives.

These alternatives could include among others sales of noncore assets, transitioning additional noncore infusion patient service activities to alliance partners, or a potential sale or merger of the company.

Now, importantly this announcement will not necessarily result in a transaction or any changes to our financial improvement plan and we do not intend to disclose developments regarding our exploration of strategic alternatives unless and until the board makes a final decision.

Now the company has brought in Chris Luthin, who we announced has been appointed Chief Operating Officer. Chris has significant infusion and pharmacy operating experience, having started his career in the Caremark division, and brings more than 25 years of experience to BioScrip.

He has been with BioScrip since the spring, and previously served as SVP of Field Finance. As Chief Operating Officer, his primary and immediate focus will be on BioScrip's accounts receivable collection and its cash performance.

Now also, the company has engaged FTI Consulting, and we will be working with Scott Davido, a financial specialist who will act as the company's Chief Implementation Officer in connection with this financial improvement plan.

Scott has a solid proven record in turnaround management at healthcare companies, among others, and will be in charge of the implementation and execution of our plan, with the support of Rick and the entire executive management team.

Now including Chris and Scott, the company hired five new executives in this second quarter underscoring the urgency of the board's commitment to BioScrip's successful turnaround.

The additional new leaders include Jeffrey Kreger as our Chief Financial Officer; Britt Jeffcoat as Controller and Chief Accounting Officer; and Kathryn Stalmack as our General Counsel. Each individual has significant experience and expertise in their relevant areas of focus and a proven track record of driving results.

Now on behalf of our entire board, we evaluated every option and course of action, and we are confident in management's ability to quickly deliver on the financial improvement plan.

I'd like to now turn the call over to Rick Smith to both talk about this quarter's results and to walk you through the key elements of our plans to improve profitability and growth profile of BioScrip as an infusion services provider. Rick, I'll turn it over to you..

Thank you, Carter, and good morning, everyone. First, I will start by giving a brief overview of BioScrip and our operating environment. Next, I will give an update on our financial results for the second quarter of 2015.

Then as Carter mentioned, I will discuss the actions we are taking to enhance our financial flexibility and position BioScrip as a pure-play infusion services provider. BioScrip operates in an attractive market with favorable industry dynamics and positive fundamentals.

In particular, market forces, developing patient management technologies and the aging U.S. population are driving significant growth opportunities for home health service providers. As the need for affordable healthcare increases, healthcare providers are collaborating and seeking ways to lower costs and report improved outcomes.

These factors are driving the migration of facility-based services into the home care setting. Our company has over 30 years of experience in serving the post-acute marketplace.

We have a comprehensive clinical portfolio of core Infusion Services and licensure to service all 50 states that will allow us to continue to capitalize on these industry trends. In addition, the more than $10 billion infusion market is highly fragmented, which provides meaningful opportunity for BioScrip as a pure-play infusion services provider.

As the healthcare landscape has been changing, we've focused in recent years on simultaneously stabilizing our noncore businesses, while also growing our core Infusion Services platform through a clinically-focused and customer-orientated model.

We have taken a number of steps to focus on the core Infusion business, including the sale of our legacy specialty and mail service pharmacies in 2012, the sale of the home health services business in 2014, today's announcement that we have reached an agreement to sell the PBM business to ProCare Rx, and our plan to sell or transition nine core patient service activities we have accumulated with the acquisitions to alliance pharmacy providers.

While we focus on high growth core Infusion Services, we realize we must be more aggressive in reducing our cost structure. Once our actions are complete, we expect to be a smaller, more focused organization with significantly improved profitability, better prospects for profitable growth, and improved operating cash flow performance.

Our core Infusion business is strong. In the second quarter, we continued with continued organic growth, particularly in nutrition and our core therapies. Our patient census and the therapies that are supported by our Center of Excellence clinical programs continued to see solid progression. Our same-store organic growth was solid year-over-year.

We reported a net loss from continuing operations of $243.2 million or $3.60 loss per diluted share. This compares to a loss of $18.6 million or $0.27 loss per diluted share in the second quarter of 2014.

Our Q2 GAAP results include a $238 million pre-tax goodwill impairment charge due to the decline of the company's stock price and related market at capitalization. For the six months ended June 30, 2015, the company used approximately $42.1 million in net cash from continuing operating activities.

As of June 30, 2015, the company's cash balance is $1.2 million, and outstanding long-term debt remains unchanged from the prior quarter at $418.9 million. Our cash collection levels each month have been consistent with a slight increase from the beginning of the year.

The actions we have commenced as part of our financial improvement plan are expected to reduce cash expenditure levels and are focused on generating positive operating cash flow. We also obtained an amendment to our senior credit facility to adjust the company's covenants for the actions we are announcing today.

The amendment allows for greater flexibility on leverage covenant through early 2017, facilitating additional time and access to liquidity to implement and execute our financial improvement plan.

As of August 10, 2015, the company has approximately $54.4 million of liquidity, which is comprised of $22.6 million of cash and $31.8 million of undrawn capacity available on its revolving credit facility. This does not include the estimated net proceeds from the sale of PBM.

Now I'd like to focus on the operational financial initiatives announced today to reduce costs, improve margins, and reorganized structure around a more focused core Infusion business. The market and overall strength of our Infusion business gives us confidence that staying focused on core Infusion Services will drive value for shareholders.

As Carter noted at the beginning of this call, the board is committed to affecting meaningful change and progress through the active oversight of the future of the company and the implementation of our financial improvement plan.

And I look forward to working closely with our board and all of the new members of our management team to implement our plan. Heading into 2015, we expected to achieve $9 million in gross cost savings incremental to the $15 million in gross cost savings achieved in 2014.

Given the new initiatives announced as part of the strategy today, we're updating our timeline and our savings target. We now expect to achieve $35 million to $40 million in annualized net savings over the next 12 months. This updated plan takes into the remainder of any savings to be realized in 2015.

Our current plan dramatically removes costs, realigns the organization and calls for the sale of noncore assets. With new members on our board taking an active role and with enhanced management team, specifically the addition of Chris Luthin and Jeff Kreger among others, we are confident in our ability to meet these targets.

The elements of our cost reduction plan include reducing head count by 12%, which will result in $90 million in total savings. We will be consolidating our corporate functions into our Eden Prairie, Minnesota office and closing Elmsford, New York by the end of 2015.

We will be selling or transitioning certain chronic noncore infusion patient service activities to various alliance partners. These noncore assets were generally not profitable and represent approximately $239 million of annual revenue and expected net cost savings of $4 million.

As you recall, we were implementing productivity improvement measures in nursing and pharmacy as part of the incremental $9 million in savings we expected to achieve in 2015. The transition of revenue as part of selling or shifting certain chronic non-core infusion therapies will effectively accomplish these savings through reduced operating costs.

We'll also be reducing corporate expenses including professional fees, telecom and information system-related costs and further improving efficiency and supply chain programs, reducing other controllable expenses and implementing operating improvement initiatives and field operations.

Finally, we are continuing cash collections, reimbursement initiatives to support cash flow. We see potential upside from collecting old accounts receivable through a number of payer projects.

We continue to improve our intake processes, our patient co-pay collection tools and our commercial billing technologies in order to improve our reimbursement performance. I'd like to next talk about our divestiture that we announced today.

We've entered into an asset-purchase agreement to sell the PBM business to ProCare Rx, a privately held pharmacy benefit manager, for $25 million in cash. We expect to use this additional capital to pay down debt and support working capital needs. The PBM transaction is expected to close in the third quarter, subject to customary closing conditions.

The PBM represents approximately $66 million of annual revenue. As you may know, the PBM business was a legacy business we inherited when BioScrip was formed in a merger in 2005 of Chronimed and MIM Corporation. The PBM business is not core to our operations as we continue to focus on Infusion Services.

We conducted an exhaustive process and believe this sale is a positive outcome for PBM and BioScrip, and represents maximum value for this business. In addition, we are pursuing the divestiture of certain other non-core assets and we'll update you all further if and when we have news to announce.

The noncore business lines have created distractions to the original strategic plan of BioScrip. We have been building a strong core Infusion platform through organic growth and through our acquisitions. We expect that our focus on the higher growth core Infusion business will drive increased profitability through a more streamlined organization.

We expect that the higher core mix will have a positive impact on both our gross margin and EBITDA margin profile. As a result of these initiatives for the full year 2016, the company is providing EBITDA guidance of between $50 million and $60 million. Expected revenues for the full year 2016 are projected to be between $730 million and $760 million.

This was a challenging quarter. The board and the management are taking swift and meaningful action to create shareholder value. We are focused on the job at hand, delivering superior customer care and driving shareholder value by focusing on our core Infusion platform, reducing costs and enhancing BioScrip's financial flexibility.

With that, I'll open the call for questions..

Thank you. And our first question comes from the line of Brooks O'Neil with Dougherty & Company. Please proceed..

Good morning. I was a little surprised I guess to say that there were additional write-downs on the bad debt. So, could you provide us with an aging schedule? And in particular obviously we're focused on the older AR.

How much over 360 days, how much close to 360 days, et cetera?.

Yeah, Brooks, hey, this is Jeff Kreger. Good morning..

Good morning..

Good morning. Our filing this afternoon will have the comparative aging schedule Q2 June 2015 as compared to the year-end 12/31. We've not made all the improvement that we expect. I think by year-end, we'll have a lot of our processes reengineered around our billing and collections and our intake processes.

There has been incremental change from year-end till now. For example, prior to bad debt reserves, our gross days are down three days from 75 days at year-end to now 71 days. As a reminder, at the end of 2013, those were 78 days. So, we continue to have incremental improvement in our gross DSO.

Chris Luthin, as Rick mentioned in his opening remarks -- one of his key areas of focus is going to be around the decentralized intake process we have and the billing and collections process that comes out of that.

Chris, you want to add a little bit of color as to the reengineering efforts you're putting into place?.

Sure, Jeff. Good morning, everyone.

In my brief tenure with the company, I've been working very closely with the existing reimbursement team, and we're closely working with the field out in the branches to ensure that our intake is much cleaner, so our ability to bill is much improved, and that we can really improve our timing and collectability of all our accounts receivable.

We have a good three or four initiatives, I'm beginning to really analyze that will be able to be impactful in a significant way as we move forward..

That's good.

I guess, what I'm curious about, maybe both of you could chime in, maybe Carter could chime in as well is, at this point, we've had a relatively steady stream of AR write-downs, and I'm just curious if you think we're at the end of that now or do you think we should expect more in Q3 and Q4?.

Brooks, I think by the end of the year, we'll be through our reengineering process around AR intake billing and collections. And I think we'll have a much better understanding of the entire situation by the end of the year..

Okay. I get it. Secondly, I'm curious – I guess, the way I calculated, adjusted, adjusted – I don't know how many adjustments we need, but let's just say those two Infusion segment EBITDA around $12.7 million, which is clearly better than what it was in the first quarter.

I'm curious if anybody is willing to suggest that we could see further improvement in Q3 and Q4 or you think the bulk of the improvement we should expect to look for in 2016?.

We've got this 12-month very aggressive cost reduction plan that Rick outlined, the margins that we're showing in our slide deck we've put out on page nine, you've probably seen that, Brooks, shows a 7.4% EBITDA margin, that's net of our 4% corporate overhead costs.

So, if you were to add that back, I mean, you're talking around the 12% Infusion Services margin because that's without the PBM business. We'll enjoy that margin. For the 2016 year, that's the guidance we're putting out. We're not giving guidance for 2015 because it is a transitional year, so hopefully that addresses your question there..

Yeah.

And then I guess on a related topic, I just want to be clear, it says in the press release, EBITDA, not adjusted EBITDA or any other thing, is that what you really mean, EBITDA?.

It is. Yes..

Okay.

And then I guess the last question I have and I'll turn it over is, can you help us just sort of generally or ballpark estimate, what do you think the mix of chronic and core therapies will be sort of once you off-load this big bolus of non-profitable chronic therapy and what the profile of the two sides of the Infusion business might look like once it's cleaned up if you will?.

Yeah. This is Rick, Brooks. The core mix on a pro forma basis will be approximately 43%, potentially looking – yeah, about 43%..

And do you think that could have a margin profile like we've thought about historically on that side?.

It already has it. It's just been hidden by this bolus of chronic noncore infusion revenue..

And then just help me to understand what you think the chronic piece will look like, just in a general sense, roughly what kind of an EBITDA margin do you think it could have?.

Well the EBITDA, I think our focus with regard to that will be primarily the chronic blood IVIG subcu and the hemophilia, and so that will have a lower gross margin profile as we've discussed prior, but clearly higher than essentially what we're looking to transition ourselves in the $239 million bucket..

Okay. Thank you..

Thank you. And our next question comes from the line of Bill Bonello from Craig-Hallum. Please proceed..

Great. Hey. Thanks, guys. Just some follow-up. The first thing I guess is, I just want two follow-ups to the questions that Brooks was asking. The first one is when we think about the AR, Brooks talked about sort of the adjusted, adjusted results.

So, I just want to make sure the $2.5 million of – or negative $2.5 million of EBITDA, that assumes the full $15 million of bad debt as does the $4 million of Infusion EBITDA or how do we think about that?.

Yeah. That's exactly right, Bill. Exactly as you stated it is correct..

Okay.

And just a stab at what sort of ex-charge, I mean, is a run rate bad debt really $7 million or is it probably – will you just tell us?.

Well, we've got modeled in the $50 million to $60 million EBITDA range that we're providing guidance for, for 2016 for next year, we've got modeled in about 3.2% of bad debt.

So, we think we'd like it to be lower than that, but I think that by the end of the year, the expense rate for bad debt that we're going to experience as a company is going to be about 3.2%..

Okay.

And then what – if I understand you right, what you're saying is in Q3 and Q4, we just don't know, is you're putting processes in, maybe there's some more cleanup, et cetera, so just can't necessarily count on that as being the go-forward range yet?.

That's exactly right..

Okay. So, that's helpful. Then the second question is Brooks asked Rick what can we expect the core business to be at the levels we've talked about, and Rick you said it's already there.

Just for those of us that might be in the dark, can you tell us what the -sort of EBITDA margin on that core business is today?.

Well, it's essentially north of where essentially the – as Jeff Kreger built up the market, essentially pro forma, Infusion segment of 12%, or so, of EBITDA on a combined basis, the core Infusion adjusted EBITDA margins are higher than that level. And so they clearly have a stronger contribution to the bottom line..

Right.

Any chance somebody would be willing to actually give a number?.

I think it's north – it's a blend – essentially, the mix is made up of essentially five different therapies with different margin profiles and payer profiles. But, essentially, the product gross profit margins on those therapies have been consistent over the last three years in terms of that profitability.

And so we would expect that those would continue..

Okay..

Bill, I'm sure you've looked at it, but I'd direct you to slide nine in our deck, and in there you can see as we removed the chronic business, we've labeled that noncore asset divestitures.

As we remove that chronic business which is losing money for us, and it's about 20%-ish, 25% of our business, it tends to dilute the margin of this much more desired core business.

And again, if you look at slide nine, to me it's fairly clear, we've tried to show it clearly to our investor community, but that gets us back to that 7.4% fully-loaded EBITDA margin. And of course the overhead being 4%, you can kind of do the math there..

Okay.

And the 7.4% fully loaded is still with the mix of sort of 40%-some core and the remainder chronic, post transition or whatever?.

Yes. Correct..

Okay. Okay. Good. That's extremely helpful. Then just outlook for cash burn, should we think of the $22.6 million of cash on the books as a level that you can build from from an operating perspective? Obviously, you've got the PBM money coming in.

Are you benefiting to some degree from timing of working capital flows?.

No, I don't know that I'd target that as the amount we'll typically have in our bank account. We may; we may not. But I prefer to look at it this way. Our liquidity, currently, is solid. It's necessary for the go-forward business. We've got $54.4 million of liquidity today.

The combination of $22.6 million cash in our balance sheet, plus the $31.8 million of capacity in the revolver, all of that's before any proceeds from the PBM sale, which, on a gross basis, those proceeds will be $25 million, of course minus broker fees and professional fees to sell the business.

We feel that we have very ample liquidity to go forward and execute our financial improvement plan as described by Carter and Rick..

In addition, the costs that we're taking out we would expect to have a positive impact on operating cash flow..

We believe operating....

Okay. So....

Go ahead..

Yeah, go ahead. Sorry..

So, you don't see any need for diluted financing at this point?.

No, we don't..

Okay. That's helpful. And then just on the $35 million to $40 million of annual cost savings, that obviously includes you said a portion of the $9 million.

How do we think about sort of relative to Q2 results? I mean, is it pretty much $35 million to $40 million incremental to the Q2 run rate or how should we think about that?.

That's exactly it. It's $35 million to $40 million over the next 12 months incremental to that Q2 run rate, after adjusting out the bad debt that we talked about, the $8.6 million (30:09) we described..

Yes. Okay. Okay. And after adjusting out the bad debt. Yeah. Right. So from the Q2 less the bad debt charge..

That's right..

Okay. That's great.

And then, just on the non-core Infusion business, any visibility into where you're at with that? I mean, I assume you have a decent degree of confidence given the fact that you put it into the press release, but any sense of sort of timing, what degree of certainty you have on the ability to transition that business?.

We have a high confidence and we have actions underway to essentially effect that change. And so, clearly, we have to work with other third parties, but we're moving with great deal of urgency in ensuring that we get that action taken care of..

Okay.

And then just on that two, just to be clear, and then you said it was money losing, EBITDA negative on that business?.

Well, it's a net. So, some of the business is profitable, contributing, and we have others that on a fully burdened basis are not as profitable given our purchasing scale or lack thereof. So, essentially, the floor is on a net basis in terms of looking at the different therapy line..

Okay. But I guess what I'm getting at is the $4 million of cost savings, that's a net improvement. It's not offset by some EBITDA loss.

It should be a net improvement to EBITDA?.

Correct; that's a net improvement..

Okay. Perfect. That's great. Thank you very much for taking all those questions..

Thank you..

Thank you, Bill..

Thank you. And our next question comes from the line of Dana Hambly with Stephens, Inc. Please proceed..

Thanks. Good morning. Just on that slide nine, you outlined the six different buckets.

Most of them seem pretty straightforward, but are there any in there that we should be thinking you have less confidence in being able to achieve or there's things that are beyond your control in any of those buckets?.

No. We don't think there's anything beyond our control. We've given the range of $50 million to $60 million. We were very confident, of course, in the targeted workforce reduction. And as you march across the slide to the right, each of those have degrees of difficulty, but we're confident in our aggressive cost reduction plan.

And we're operating with a great deal of urgency around this. And we expect, over the next 12 months, that $35 million to $40 million of cost savings to be captured..

Okay, great. And then could you just remind us on the covenants. I think it was 7.25.

Is that the max leverage? And I think you said that was extended through the first quarter of 2017 now, is that correct?.

Yeah, you've got that roughly right. We had 7.25 leverage through Q1 of 2016 previously. We now have the 7.25 through Q2 of 2016, plus they've raised the leverage ratio to 6.5 for quarters Q3 of 2016 through Q1 of 2017. That 6.5 leverage is up from what was previously 4.5 dropping to 4..

Okay..

So, the banks have shown a great deal of confidence in our financial improvement plan and the company's underlying core business..

Okay. All right.

And then on the revolver, did you borrow $40 million or so since the end of the quarter?.

Yeah. We've got $38 million outstanding under the revolver currently. We've done that on purpose to give ourselves some liquidity..

Okay..

In terms of cash and bank versus capacity on the revolver, we did that with the full blessing of the banks. And we talked to them about the reasoning for doing so upfront. Our payables are at term today, so we're not behind on our EP at all. It was just a strategy approach for liquidity for the organization..

Okay. Thanks for that.

And then last for me, just on the selling of the $239 million of the chronic, does that hurt in any way kind of the referral sources you get, just any kind of disruption that would have on the existing business going forward?.

No. None of this is tied to the – some of this is essentially, as I said, were accumulated through the acquisitions that we've made as well as through other initiatives. And so, they're not tied to any core infusion referral source. Some of these have been in the organization or the predecessor organizations for a number of years.

And so, with each of our payers that have a captive subsidiary we have, those are alliance partners of our. So, we believe that collaborating with them in the marketplace will not at all hurt our abilities from a referral source perspective..

Okay. Thanks very much..

Okay. Thank you..

Thank you. I'll now turn the call back over to Rick. Please go ahead..

Thank you so much. Thank you for joining us today. Just as I stated, we have already begun taking significant actions that will adjust the revenue portfolio and we will reduce cost. We're highly focused on the task on executing our plan and committed to shareholder value creation. We look forward to updating you on our continued progress. Thank you..

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..