BioScrip third quarter net income decreases from $5.7 million to $2.0 million

BioScrip, Inc. (Nasdaq: BIOS) today announced 2010 third quarter revenue of $441.2 million and net income of $2.0 million or $0.04 earnings per diluted share (EPS). Adjusted EBITDA for the quarter was $18.1 million.

“We are examining all aspects of our business model and we intend to improve the quality of our revenue stream and reduce our overhead structure. As a result of the Company not meeting its expectations, we have accelerated a strategic assessment of our business lines and our operating cost structure”

Third Quarter Results

• Revenue was $441.2 million;
• Adjusted EBITDA of $18.1 million compared to $8.9 million in 2009;
• Net income of $2.0 million or $0.04 EPS compared to prior year of $5.7 million or $0.14 EPS;
• Average cash balances increased $14.4 million over the second quarter, with an average balance of $64.1 million; and
• Reduced debt $2.9 million and in compliance with all debt covenants.

"Although the fundamentals of BioScrip are strong and we remain excited about the Company's ongoing prospects, we recognize that we did not meet our guidance," said Rick Smith, President and Chief Operating Officer of BioScrip. "In our Infusion/Home Health segment, we were successful in posting solid organic growth, but revenue was slightly below our expectations. On the incremental $5.2 million of revenue in this segment, an additional $1.0 million, or 20%, of Adjusted EBITDA was generated from the second quarter to the third, reflecting the strength of the higher margin home infusion therapies and the cost synergies we are realizing from the CHS acquisition. In our Pharmacy Services segment, revenue exceeded our expectations but the mix was not as strong as we anticipated. While new patient census grew, it was offset by lower-than-anticipated patient refill patterns."

Mr. Smith added, "Overall our gross profit margins were impacted by IVIG product allocations and a manufacturer recall requiring us to fill prescriptions with a higher cost product, elimination of an industry-wide brand product rebate, conversion of certain CHS patients into a long-term contractual relationship and changes in reimbursement from certain payors."

"We are examining all aspects of our business model and we intend to improve the quality of our revenue stream and reduce our overhead structure. As a result of the Company not meeting its expectations, we have accelerated a strategic assessment of our business lines and our operating cost structure," Mr. Smith concluded.

Succession Announcement

As announced earlier today, the Company appointed Rick Smith, currently President and Chief Operating Officer, as Chief Executive Officer. Rich Friedman, currently Chairman and Chief Executive Officer, will serve as Non-Executive Chairman of the Board of Directors. Both changes are effective January 1, 2011.

2010 Guidance

Based on its year-to-date results, BioScrip is withdrawing its revenue, gross profit, net income, Adjusted EBITDA and EPS financial guidance for the full-year 2010, as well as fourth quarter 2010 revenue guidance. Management intends to assess its business, operations and 2011 outlook and expects to communicate its plans in January 2011.

Results of Operations

Third Quarter 2010 versus Third Quarter 2009

Revenue for the third quarter of 2010 totaled $441.2 million compared to $333.5 million for the same period a year ago, an increase of 32.3%. Pharmacy Services revenue for the third quarter of 2010 was $329.3 million compared to $296.7 million for the prior year period, an increase of $32.6 million or 11.0%. New revenue from the recently completed acquisition of the pharmacy operations of drugstore.com was $3.6 million. Infusion/Home Health Services revenue for the third quarter of 2010 was $111.8 million compared to $36.8 million in the third quarter of 2009, an increase of $75.0 million. CHS revenues contributed $68.0 million during the third quarter of 2010. Excluding the CHS revenues, Infusion/Home Health Services revenues increased 19.1%.

Consolidated gross profit for the third quarter of 2010 was $75.4 million, or 17.1% of revenue, compared to $41.5 million, or 12.4% of revenue for the third quarter of 2009. The increase in gross profit and gross margin percentage from 2009 to 2010 is the result of the contribution from CHS during the quarter and purchasing synergies, partially offset by previously disclosed pricing concessions, delays in brand to generic conversions, product allocations and last year's AWP settlement. Sequentially, consolidated gross profit margins declined 0.7% to 17.1% primarily as a result of IVIG product allocations and a manufacturer recall which required us to fill prescriptions with a higher cost product, elimination of an industry-wide brand product rebate, conversion of certain CHS patients into a long-term contractual relationship and changes in reimbursement from certain payors versus the second quarter.

Third quarter 2010 operating profit was $12.2 million, or 2.8% of revenue, compared to an operating profit of $6.7 million, or 2.0% of revenue, for the third quarter of 2009. Operating profit in the third quarter of 2010 includes $1.3 million of amortization expense and $1.0 million of transaction, integration and severance related expenses associated with the CHS and drugstore.com acquisitions.

During the third quarter of 2010, BioScrip generated $25.7 million of segment Adjusted EBITDA, or 5.8% of total revenue. Consolidated Adjusted EBITDA includes corporate expenses, which are not allocated to the segments. This compares to $15.8 million, or 4.7% of total revenue in the prior year period. The Pharmacy Services segment generated $10.7 million of segment Adjusted EBITDA, or 3.3% of Pharmacy Services revenue. This compares to $13.2 million, or 4.5% of that segment's revenue in the prior period. The Infusion/Home Health segment generated $14.9 million of Adjusted EBITDA, or 13.4% of revenue. This compares to $2.6 million, or 7.0% of Infusion/Home Health Services revenue in the third quarter of 2009.

On a consolidated basis, BioScrip reported $18.1 million of Adjusted EBITDA during the third quarter of 2010, or 4.1% of total revenue compared to $8.9 million, or 2.7% of total revenue in the prior year period.

Interest expense in the third quarter of 2010 was $8.1 million compared to $0.4 million in the third quarter of 2009.

The Company recorded a provision for income taxes of $2.1 million for the third quarter of 2010 on pre-tax income of $4.1 million, a 51.9% effective tax rate. The increased rate results from an additional $0.3 million charge relating to a reduction in the estimated value of our state deferred tax assets. This compares to $0.5 million of income tax expense on pre-tax income of $6.2 million, a 7.5% effective tax rate for the prior year period. The 2009 tax rate was lower due to utilizing the valuation allowance against our deferred tax assets, which was reversed in the fourth quarter of 2009.

Net income for the third quarter was $2.0 million, or $0.04 per diluted share, compared to $5.7 million, or $0.14 per diluted share, in the prior year period.

Nine Months Ended 2010 versus Nine Months Ended 2009

Revenue for the nine months ended September 30, 2010 was $1.2 billion compared to $988.0 million for the comparable period a year ago. Pharmacy Services segment revenue for the nine months ended September 30, 2010 was $923.6 million as compared to revenue of $880.4 million for the same period a year ago, an increase of $43.2 million, or 4.9%. The increase for the year was primarily related to new contracts, the expansion of patients served and industry wide drug inflation partially offset by pricing concessions and last year's AWP settlement. Infusion/Home Health Services segment revenue for the nine months ended September 30, 2010 was $264.6 million, as compared to $107.6 million for the same period a year ago, an increase of $157.0 million. CHS revenues contributed $137.8 million for the nine months ended September 30, 2010. Excluding the CHS revenues, Infusion/Home Health Services segment revenue increased 17.9% over the prior year period.

Consolidated gross profit for the nine months ended September 30, 2010 was $187.8 million compared to $115.9 million for the same period a year ago. Consolidated gross profit as a percent of revenue for the nine months ended September 30, 2010 was 15.8%, compared to 11.7% for the same period of 2009.

Consolidated operating profit for the nine months ended September 30, 2010 was $19.4 million, or 1.6% of total revenue, compared to $16.1 million, or 1.6% of revenue, for the same period a year ago. Operating profit for the nine months ended September 30, 2010 includes $2.2 million of amortization expense and $7.1 million of transaction, integration and severance related expenses associated with the CHS and drugstore.com acquisitions.

For the nine months ended September 30, 2010, BioScrip generated $62.8 million of segment Adjusted EBITDA, or 5.3% of total revenue. This compares to $41.9 million, or 4.2% of total revenue for the prior year period. Pharmacy Services segment generated $31.1 million of segment Adjusted EBITDA, or 3.4% of Pharmacy Services segment revenue. This compares to $34.5 million, or 3.9% of that segment's revenue in the prior period. Infusion/Home Health segment reported $31.7 million of segment Adjusted EBITDA, or 12.0% of Infusion/Home Health segment revenue. This compares to $7.4 million, or 6.9% of Infusion/Home Health Services segment revenue, in the prior year period.

On a consolidated basis, BioScrip reported $39.2 million of Adjusted EBITDA for the nine month period ended September 30, 2010, or 3.3% of total revenue compared to $22.1 million, or 2.2% of total revenues in the prior year period.

Interest expense for the nine months ended September 30, 2010 was $19.5 million, which includes $2.3 million associated with the Company's bridge loan. Interest expense for the comparable period in 2009 was $1.5 million.

Income tax expense was $2.0 million for the nine months ended September 30, 2010 on a pre-tax net loss of $0.1 million. The income tax expense for the year is the result of the non deductible transaction expenses associated with the CHS acquisition and the revaluation of certain state deferred tax assets. This compares to a $1.2 million income tax expense on pre-tax income of $14.7 million same period a year ago.

Net loss for the nine months ended September 30, 2010 was $2.1 million, or $0.04 per share. This compares to net income of $13.4 million or $0.34 per diluted share for the same period last year.

Liquidity

On September 30, 2010, the Company had $51.0 million of cash with an average cash balance of $64.1 million during the quarter. In addition, the $50.0 million revolving credit facility remains undrawn. Free cash flow (Adjusted EBITDA less debt service, cash interest, cash taxes and cash capital expenditure) during the third quarter was $12.1 million.