We maintain our Neutral recommendation on BioScrip Inc. (BIOS) with a target price of $5.50.
BioScrip reported EPS of 1 cent in the third quarter of fiscal 2011, down 75% year over year. However, after deducting the impact of restructuring charges, severance and other employee costs, adjusted EPS came in at 10 cents during the quarter, beating the Zacks Consensus Estimate by a penny.
After delivering a few disappointing quarters, impacted by pricing concessions on various specialty drugs, reimbursement pressures, the new industry-wide average wholesale price (AWP) standard and the overall impact of the weak economic environment, BioScrip is gradually experiencing improvement in its top line.
During the third quarter, the company witnessed a 7.1% year-over-year upsidein overall revenues. Pharmacy services segment registered a 4.6% rise in sales (up 3.7% sequentially) to $344.5 million. The strong result in this segment was on the back of positive returns from oncology, arthritis drugs and the full effect of new contracts, which were added in late 2010.
Moreover, improved performance from the operating locations, increased patient retention levels, reduced indirect corporate support and continued growth in PBM and cash card business also contributed to the growth in this segment. Currently, the company is perfectly positioned to leverage its strong clinical reputation for growth.
Moreover, under the present scenario where direction of healthcare is merging with home or alternate site, BioScrip is uniquely acting as a high-quality, low-cost provider and a value-added partner to its referral sources, payors and patients. Further, its strong accessibility to specialty drugs and relationship with pharmaceutical companies are expected to drive further growth.
Based onthe Critical Homecare Solutions (CHS) acquisition, BioScrip emerged as a prominent player in the Infusion and Home Health business. Lower volumes of higher-acuity anti-infective therapy patients led to a 2.1% year-over-year decline in revenue from Infusion/Home Health Services. However, the relative effect from the sector perspective remained negligible as lower trend of hospitals and physician office visits are affecting the overall industry.
We are also encouraged by the increased patient census over the last 7 months leading to a sequential improvement in the Infusion/Home Health Services sector. BioScrip is presently able to access a huge number of infusion patients with strong potential for future growth.
The company is integrating through majority of the existing markets as well as gaining entry in the new and under penetrated locations.Additionally, BioScrip is benefiting from local community strengths and access to the managed care relationships through CHS.
Also its strong accessibility to specialty drugs and relationships with pharmaceutical companies are expected to drive further growth.
BioScrip’s strong presence in the infusion and home health market should help sustain growth. The company is relatively well diversified across several key disease areas including immunology, multiple sclerosis and oncology.
However, BioScrip’s highly leveraged balance sheet continues to be a drag on the bottom line, which remains a key area of concern, in our view. Moreover, the Home Health industry was impacted by the reduction in Medicare reimbursement in 2011 and the new face-to-face requirement. This may temper BioScrip’s sales growth going forward.
Additionally, we remain apprehensive owing to mounting competitive pressures from players like CVS Caremark (CVS), Walgreen (WAG) and AmerisourceBergen (ABC) as well as many smaller organizations that operate on a local or regional basis. Increased competition has led to lower pricing and increased rebate sharing, thereby putting severe pressure on margins.
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