Recently, we downgraded BioScrip (BIOS) to Underperform with a target price of $4.50.
BioScrip posted a disappointing quarter based on higher costs and tax. Although revenues grew at double-digit, driven by the CHS acquisition, the organic growth was below expectation.
BioScrip has been witnessing several challenges that led to lower-than- expected revenues and a disappointing margin. Despite the effort of the sales team to generate revenues from new patients, the retention level fell below expectations due to softer patient reorder pattern. Moreover, pricing pressures in some parts of the business impacted revenue per patient and consequently, gross margins.
The Infusion/Home Health segment saw a $1.4 million drop in gross margin based on various manufacturer issues related to intravenous immunoglobulin (IVIG) products and conversion of certain CHS patients from an out-of-network billing relationship to a long-term contractual relationship.
Moreover, changes in reimbursement from certain payors and product recall by a manufacturer for which the company had to fill prescriptions with higher cost product also affected margin. In the Pharmacy Services segment, margins were negatively impacted by approximately $1 million as certain drugs were paid at lower rates by some PBMs and the suspension of an industry-wide rebate on branded drugs during the third quarter of 2009.
On top of these issues, the highly leveraged balance sheet continues to be a drag on the bottom line. BioScrip has funded its acquisition of CHS by raising $325 million of debt (excluding the new $50 million revolving credit facility), thereby leading to a rise in interest expenses.
During the quarter, the company recorded interest expenses of $8.1 million compared to $0.4 million for the third quarter of 2009. Long-term debt level at the end of the third quarter remained at $314.8 million.
The company’s debt service capacity is contingent upon its ability to generate significant cash flows from operations, which may not be sustainable. Cash flows from operations declined 58% year over year during the first nine months of 2010.
BioScrip has been struggling to stabilize its business in the past few quarters. The company plans to re-assess its business operations to focus better on 2011. Consequently, the company has withdrawn its outlook. Based on the various uncertainties being witnessed by BioScrip at present, we would recommend investors to avoid the stock for the time being.