Lisa Wilson Richard M. Smith - Chief Executive Officer, President, Chief Operating Officer and Director Hai V. Tran - Chief Financial Officer, Senior Vice President and Treasurer

Brooks G. O'Neil - Dougherty & Company LLC, Research Division Andrew L. Jones - Stephens Inc., Research Division Michael John Petusky - Noble Financial Group, Inc., Research Division

Ladies and gentlemen, thank you for standing by, and welcome to the BioScrip Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, November 8, 2012. I would now like to turn the conference over to Lisa Wilson, Investor Relations from 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 release issued yesterday after the close of market. If you have not received it, you may access it through the Investor Relations section at our website. Rick Smith, President and Chief Executive Officer; and Hai Tran, Chief Financial Officer, will host this morning's call. The call may be accessed through our website at bioscrip.com. A replay will be available shortly after the call. Interested parties can access the replay by dialing (800) 633-8284 in the U.S. and (402) 977-9140 internationally and entering access code 21607843. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at www.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 important factors and risks, which are identified in our press release 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 these statements as circumstances change. During this presentation, we will refer to non-GAAP financial measures such as EBITDA and adjusted EBITDA. A reconciliation of such measures to the most comparable GAAP financial measure is contained in our press release issued yesterday after the close of market, which can be obtained from our website at bioscrip.com. And now, I would like to turn the call over to Rick Smith. Rick? Richard M. Smith: Thank you, Lisa. Good morning, everyone. Thank you for joining today's call. The third quarter marked another significant quarter of growth at BioScrip, stemming mainly from continued sequential improvement in our Infusion segment. Our performance this quarter reflects our ongoing progress in executing upon our strategic goals and our focus toward our objectives of driving margin improvement, profitability and cash flow generation. For the third quarter, total company revenue increased 27.3% year-over-year to $170.4 million. The main driver was Infusion revenue, which demonstrated strong results at $125.9 million up 39.6%, mainly due to volume gains. Gross profit for the quarter was $58 million or 34% of revenue compared to $53.6 million or 40% in the prior year. I will discuss the financial details shortly. During the third quarter, we executed on several initiatives aimed at growing our business. For example, in late September, we brought together over 350 field leaders and sales representatives at our national sales meeting. Our goal was to continue to educate our organization on our targeted sales, operational and clinical initiatives as we position ourselves for 2013. The meeting was successful and as a result, our organization is highly energized and motivated to execute on our growth plans. Also, as we outlined on our last call, we closed our consolidated facilities where appropriate and reorganized our sales and operations teams while eliminating redundant positions. While we still have more work to do, we've made substantial progress in improving our profitability. In addition to organic growth, we've been expanding through opportunistic acquisitions. Recently, we completed the InfuScience acquisition, a provider of alternate site infusion pharmacy services with 5 locations. We are pleased about the positive contributions this business has made to our clinical programs and institutional relationships. We continue to evaluate a robust pipeline of acquisition opportunities that are consistent with our strategy to expand our infusion footprint nationally and to enhance our product and service offerings. In addition, we have 9 de novo pharmacies in various stages of development, including opening our first one this week in the Chicago market. Now let me turn to some details regarding our infusion segment. Third quarter revenue grew both on a sequential and year-over-year basis. We continue to see industry-driven site of service initiatives move chronic infusion therapies into the home or alternate site settings. On a sequential basis, segment revenue growth for Infusion was $15 million, an increase of 13.5%. Adjusted EBITDA in this segment increased sequentially by $1.9 million or 23.7%. Next, moving to Home Health. Our expectation for this business remains relatively flat for the year due to rate cuts and reduced patient census. However, we saw increased revenue and adjusted EBITDA in Q3 versus Q2 and believe we can continue to see gradual improvement in this segment. We are focused on continuing to leverage this asset to contribute to Infusion sales as we position ourselves for 2013. Before I turn the call over to Hai, I want to reiterate the strength and momentum we are building and look forward to reporting on our continued progress. Hai? Hai V. Tran: Thank you, Rick, and good morning, everybody. As a reminder, before we review our third quarter financial performance, we have changed the operating and reportable segments of the company to Infusion Services, Home Health Services and PBM Services. In addition to new reporting segments, the financial statements reflect continuing versus discontinued operations classifications for all periods presented. In reviewing our financial performance, we will focus primarily on the continuing operations. For that, for the third quarter of 2012, we reported revenue from continuing operations of $170.4 million compared to $133.8 million in the prior-year period, an increase of $36.5 million or 27.3%. This increase was primarily driven by growth in the Infusion Services segment, which accounted for $35.7 million of the $36.5 million revenue increase or a 39.5% gain over the same period last year. The increase of the combination of organic growth, as well as the addition of InfuScience business. The remaining $1 million of revenue growth was from an increase in the PBM Services segment offset by a slight decline in the Home Health Services segment. The increase in the PBM Services segment was volume driven and the performance in the Home Health Services segment was impacted by previously discussed reimbursement reductions from Medicare and the state of Tennessee TennCare program. Gross profit for continuing operations was $58 million compared to $53.6 million for the same period in 2011, an increase of $4.4 million or 8.2%. Gross profit as a percentage of revenue decreased to 34% from 40.1% in the third quarter of 2011. The increase in gross profit was due to growth in revenue in the Infusion and PBM Services business. The decrease in gross profit margin percentage primarily related to the mix of therapies in the Infusion Services segment. On a sequential basis, gross profit margin percentage for each of our segments improved, but the consolidated gross profit margin percentage sequentially remained relatively flat. This is because Infusion Services grew at a higher rate than PBM Services, which has a higher gross profit margin percentage. SG&A for the third quarter was $46.8 million, a $4.4 million increase over the prior year. SG&A for the third quarter as a percentage of total revenue was 27.5%, down from 31.6% in the prior-year period. The increase in SG&A expenses were primarily due to the inclusion of InfuScience and certain costs associated with supporting the growth in volume from our businesses, such as additional employee-related expenses. Bad debt expense increased from $3.1 million or 2.3% of revenue in the prior year to $3.4 million or 2% of revenue in the current year. Total operating expense increased from $49.3 million in the third quarter of 2011 to $54.6 million in the current quarter, a $5.3 million increase. This represents expense growth of 10.8%, of revenue growth of 27.3%. Operating expenses for the third quarter of 2012 included $438,000 of restructuring expense compared to $1.8 million in the prior-year period. Interest expense in the third quarter of 2012 was $6.5 million consistent with the prior year. The company reported a loss in continuing operations net of income taxes of $600,000 for the quarter, compared to a loss of $300,000 in the prior year. Loss from discontinued operations net of income taxes was $10.9 million in 2012 relative to income of $900,000 in 2011. Net loss for the quarter was $11.5 million or $0.20 per diluted share compared to net income of $500,000 or a penny per share. BioScrip reported adjusted EBITDA from continuing operations of $11.6 million compared to $11.7 million in the prior year and $9 million in the second quarter, a 28.9% sequential quarterly improvement. These results were driven by the impact of gross profit previously described and by an increased cost allocation to the Infusion Services segment of certain corporate resources that support the growth of the business. As we've discussed, these costs will continue to be rationalized over the coming months. Turning to cash flows. The company generated $56.9 million in net cash from continuing operating activities compared to $8.8 million provided by operating activities in 2011, an increase of $48.1 million. This increase was mainly due to the collection of accounts receivable retained after the Pharmacy Services asset sale, net of accounts payable related to those businesses. Our cash balance at the end of the third quarter was $67.2 million. The company had no outstanding borrowings under the revolving credit facility at December 30, 2012. As indicated in our earnings release, the company believes that it is tracking towards its target annualized revenue guidance of $660 million to $690 million, and its target annualized adjusted EBITDA range of $62 million to $65 million in the fourth quarter of 2012. This outlook reflects our current revenue trend, the impact of our delivery activities and the integration of our recent acquisition. With that said, Hurricane Sandy did affect our northeast region and we are in the process of assessing the extent of the near-term impact. With that, I'll turn the call back to Rick. Richard M. Smith: Thanks, Hai. I'll now open the lines for questions. Operator?

[Operator Instructions] And our first question comes from the line of Brooks O'Neil. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: I have a couple of questions. I guess, first, I'm just curious, obviously, it's still early but could you just comment on what kind of impact you're seeing related to the Sandy impacts in the northeast and how you think that might affect the business during the fourth quarter? Hai V. Tran: It is too early to kind of put a range on it, Brooks. Obviously, it depends on how quickly our referral sources can recover from that. I think some of the dynamics that we're seeing in the market are episodes whereby we're in the hospitals looking for discharges to the home and what we're hearing in some instances are that given the lack of power in the home setting in the region, given the questions around the quality of the water, that the number of discharges have been impacted, right. And so those are some of the elements, the repercussions from the storm that we're working through right now. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Good. That's helpful. We've been talking for a number of quarters about the transition you guys are trying to make following the sale of a big chunk of the business to Walgreen's. Could you just help us to understand as you think about it, what impacts that transition had on the third quarter and what is likely to change in the fourth quarter and beyond that could result in strengthening profit performance in particular? Richard M. Smith: It's Rick. We've stated all along that the first 3 quarters of the year would reflect transitional cost elimination as well as the improvement in mix as some of the therapies that were held onto the first half of the year were related to the businesses that were sold. And so we continued to move that out. Those types of activities were accomplished during the third quarter. We continue to assess our cost structure. Earlier in the year, we had stated that some of the costs that were retained and moved over to the Infusion business would be assessed throughout the year in terms of the contribution to the remaining business. And so we continue to assess and look at areas of cost reduction and infrastructure efficiency. And so we would expect that some of those steps that we continue to take during the third quarter will be reflected in the fourth quarter and into 2013. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Good. So Rick, maybe you could just amplify a little bit more. As it relates to the lower margin therapies and the sort of the continuation program you had, is it fair to say that that's basically done now and that we should be looking at a more -- you could put in quotations, "a more normalized infusion therapy mix of business" in the fourth quarter and beyond? Richard M. Smith: Yes. For the most part -- well, essentially everything that we had stated was related to the one accommodation to the customer was essentially accomplished as we stated it would be. And then some of the site of service mix has moved into the industry as we talked about in the chronic infusions. But I think that we're seeing ways to essentially manage that as well as drive the core growth, which is the targeted areas we want to focus in on and grow and continuously healthy growth in Q4 and into 2013. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Good. So that's one other thing I want to ask you about. Obviously, you guys are showing tremendous growth in the Infusion business. Can you just talk a little bit more about what's driving that and how sustainable you think that is as you look forward into the new year? Richard M. Smith: Well, I think that the core growth has been very strong. It's double-digits. The other traditional infusion therapies have been strong. The chronic infusion therapies that we've talked about all year since Q1 has been through site of service initiatives, whether it's through payors, whether it's through hospitals buying physician practices, that's causing displacement of essentially sites of service to infuse these patients. And so the chronic infusion therapies have seen their way to home or through alternate site ambulatory infusion centers, and we would expect that that would continue. And so every year that begins results in different benefit designs and benefit structure. So we've seen more than -- more growth than we expected coming into 2012 and that has continued. And we've been a beneficiary of that because of the number of managed-care lives we have under contract. And so it continues to be a strong asset of ours and attribute and we continue to look for the appropriate site of service to improve profitability on servicing all the patients that come through our intake centers. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Great. And then I'll just ask one more then I'll hop off. I was hoping you could give us a little bit of an update on your activity as it relates to de novo development of new pharmacies, sort of what -- where you think you are now and where you might be going forward? And then sort of what the cost of the new pharmacy is? What the ramp might look like if it followed the normal pattern? Richard M. Smith: I think we had stated earlier that we were at 3 at the end of Q1, and now we're at 9 with 1 in the Chicago market that opened up this week. And so that -- we had estimated, prior to that, anywhere between 60, 90 days it would take in order to get a pharmacy up and running. Primarily, the gaining factor is licensure depending on the state of the community we're in. And so Chicago took about 90 days from site identification, build out and licensure to get it open. And so that's been an extension now of our Moline, Illinois location. We've had sales assets in that market, and so while we have stated before that we expect the breakeven and profitability to take up to 9 months to a year, I think that is something that we're still consistently expecting and hope for a faster acceleration in terms of profitability. But right now, I think that's where we set our model to. And then different markets that we have de novos in process may take a little bit longer just because of the state and licensure time periods in which they get going. But we have various -- in our de novos we have various stages. Some are just pure satellite often existing infusion brands, some of it is just building a clean room inside one of our other locations and others are essentially fresh start. And so we expect that the range of the CapEx is anywhere from $250,000 to $0.5 million with incremental $250,000 to $500,000 working capital and cost to get it started and running through that 12 months period.

Our next question comes from the line of Drew Jones. Andrew L. Jones - Stephens Inc., Research Division: Just first question on InfuScience. I guess you guys have had about 3 months now post-integration. Could you give us an update what those revenue run rates have looked like and kind of what the -- how the mix has been altered at all, just kind of an update there? Hai V. Tran: Yes. I mean, I think that they had a more favorable mix. I think we indicated that when we announced the acquisition last quarter, and the mix is coming in kind of as expected in terms of the revenue. Revenue is also coming in as we expected. I think we mentioned about a $40 million run rate annualized and that's exactly what we're seeing today. So the integration is going well and on track and we -- it is performing as expected. Andrew L. Jones - Stephens Inc., Research Division: Great. And then just thinking about the acquisition pipeline. How big of a motivating factor is a potential change in tack [ph]? Is that something we think about for your sellers or no? Richard M. Smith: It depends on the structure of the seller. But I think on an individual basis, in the one-off acquisition discussions, the year end has been a motivating factor in terms of discussions of bringing property to market. In some other parties that we've talked to, it really hasn't been a factor at all. Andrew L. Jones - Stephens Inc., Research Division: And just looking -- obviously, great margin expansion, 3Q EBITDA margin expansion, as you guys kind of guided towards. As we look to 4Q, it should be something in excess of that, as we're thinking of these -- the transaction costs continue to roll off. Are we talking 2X in terms of expansion, or... Hai V. Tran: Yes. I mean, I think in terms of the fourth quarter, one of the things that we've always said is that this year, our focus is on continuing to deliver sequential improvement, right? And I think that's clearly what we're going to be focused on in terms of what the numbers will look like going from Q3 to Q4 as well. Even despite the impact of Sandy, right, that our commitment -- regardless of the impact of Sandy, we still are going to deliver healthy sequential improvement from Q3 to Q4 from both the top line as well as bottom line perspective. Andrew L. Jones - Stephens Inc., Research Division: Okay. And I guess -- so that was my last question, was just seasonality reminder, but it sounds like you just addressed it there. Unless there's anything else you want to touch on there? Hai V. Tran: No. I think you're absolutely right. You're looking at it right. We will have some -- it's always puts and takes, right? You will have some margin pressure because you got lower margin synergies hitting us in the fourth quarter, but that's going to be offset by kind of our continued focus and diligence around rationalizing the cost base.

Our next question comes from the line of Mike Petusky. Michael John Petusky - Noble Financial Group, Inc., Research Division: Forgive me if I cover a little bit of ground that may have been covered previous [ph]. I was temporarily distracted early in the Q& A, and I'm sorry. Did you guys characterize what your expectations around the ability to close other deals, say over the next 3 to 6 months? I mean, did you guys touch on that or no? Hai V. Tran: No. I mean, I think that we will reiterate what we said, right, which is the pipeline is robust, very robust. And we think that there are going to be really good opportunities for us to really expand our footprint, which is important to us strategically as we complete our national platform here, as well as pick up good management teams and operations that really complements our existing infrastructure today. Michael John Petusky - Noble Financial Group, Inc., Research Division: I see. Let me just try to drill down on that a little bit, and to the extent you can amplify on the subject. So are there other deals that you guys are currently in meaningful discussions where their sized kind of $25 million, $50 million in annualize revenue or better? I mean, are there sizable assets out there that you guys are in a meaningful discussions? Hai V. Tran: Mike, all my discussions are meaningful, buddy. But the reality of it is that we are. We're always looking at opportunities. I mean, I think the nice thing is I think the market recognizes and understands that if an asset is going to be kind of put up for sale, they know that BioScrip is going to be inquisitive and would be interested in taking a look, right? So I think that -- but what we're seeing is a lot of deal flow in terms of opportunity knocking on our door and giving us a chance to take a hard look, and some of them are in various stages of conversation. Richard M. Smith: Right. And Mike, just to add do that, we've stated consistently our objective is to add. We started the year, by the end of 2013 to have 35 additional infusion pharmacies in place and on the map under the BioScrip flag. And with the InfuScience acquisition, we picked up 5 locations in strong critical markets for us. We picked up 5 teams, management teams at the local level and -- that had strong relationships, strong capabilities and track records. And essentially, our goal and objective is to now finish off the footprint by the end of 2013 with the additional 30, including taking into account the fact that we've got the 9 de novos in markets that also fit our objectives in terms of our overall goals. So we -- our goal is to identify a way and a path to get the full footprint on a national level in place as soon as possible. But clearly, by the end of 2013, we will have a full national footprint. Hai V. Tran: Right. And I think that when you're looking at the goals that Rick outlined and where we want to be headed, that acquisition is clearly a key part of our initiative here, our strategic initiative. Michael John Petusky - Noble Financial Group, Inc., Research Division: I just want to make sure I understand it. So Rick, in your scorecard, if you're talking about 35, you would say 35 minus the 5 with InfuScience, minus 9 with de novo, so roughly, approximately 20 in your view over the next, say, 12 to 15 months? Richard M. Smith: Well, end of 2013, yes. So definitely. Michael John Petusky - Noble Financial Group, Inc., Research Division: All right. And again, forgive if you've touched on this. But when I kind of look at this and at what you guys said about the growth of Infusion essentially outstripping the growth of PBM and what that may mean for gross margin, to me it sounds like that maybe previous commentary about gross margins in the 36%, 37% range maybe need to be dialed back a bit. And maybe the SG&A, at least relative to my modeling, maybe SG&A is the bigger driver in the next quarter or 2 in terms of overall margin improvement. Is that fair? Hai V. Tran: Yes. I mean, I think, as I mentioned, on a sequential basis, the gross profit margins for all of our segments improved, right? And improved meaningfully. It's just that -- it just so happens that when we set out the targets at the beginning of the year, that rate of growth on our -- we didn't expect the rate of growth on our Infusion business that we're seeing, right, relative to the PBM Services business. So that mix shift, it does, optically at least, makes it look like we're maybe not making as much progress as we actually are on a consolidated basis. However, with that said, from a pure modeling perspective, operating leverage clearly is a key driver here in terms of our continued sequential improvement in terms of delivering the EBITDA growth as well as EBITDA margin growth that we're projecting. Michael John Petusky - Noble Financial Group, Inc., Research Division: Right. But I mean -- again, and maybe there's more specifics than you want to provide, but if I'm looking at gross margin for Q4 and even into early next year, it probably should look more like 34%, 35% and not 36%, 37%, correct? For the next couple of quarters? Hai V. Tran: I mean, I think that the way we've been looking at our margins is I'm focused -- our guidance is I'm focused on revenue and I'm focused on EBITDA, right? And I think I have to get into the details of the model before I can really talk about the gross profit margins. And that's not -- just not something we've talked about.

[Operator Instructions] And our next question comes from the line of Kyle Smith.

This is actually Nick Baos [ph] on behalf of Kyle. Just 2 quick questions. Understood that with your shift in mix you're going to have slightly lower margins. But previously, when you were talking about your outlook and had stated a range of $62 million to $65 million annualized EBITDA, you had said it did not include the InfuScience acquisition. Did I understand correctly this time that your comments -- in your comments that now it does? Hai V. Tran: No. I mean, I think when we gave the guidance what we said was -- the last quarter we said we increased our revenue guidance, right, to reflect the InfuScience acquisition. And what we also stated however, was that we would reiterate our EBITDA guidance primarily because with an acquisition of that size it takes time to integrate it. And I think what most of the analysts have done is assume that the full contribution, which we stated at about 12% to 14% EBITDA margins on a $40 million business, would really have the impact in 2013 on a full year basis.

Right, and those still are the rate margins to think about? Hai V. Tran: That's correct.

There are no further questions from the phone lines at this time. I will now turn the call back to Mr. Smith. Richard M. Smith: Okay. Great. Thank you for your time today and thanks to all the BioScrip employees for their contributions and dedication to our customers and patients. Thank you, everyone.

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.