Matt Dexter - Deputy General Counsel Dan Greenleaf - President and CEO Steve Deitsch - CFO and SVP

Brooks O'Neil - Lake Street Capital Markets Dave MacDonald - SunTrust Brian Tanquilut - Jefferies Mike Petusky - Barrington Kevin Ellich - Craig-Hallum Marc DuBois - Venor Capital Nelson Obus - Wynnefield

Good morning, and welcome to the BioScrip Third Quarter 2017 Results Call. My name is Chiquita, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions] At this time, I'd like to turn the show over to Matt Dexter, Deputy General Counsel. Please go ahead.

Good morning and thank you for joining us today. By now, you should have received a copy of our press release issued this morning. If you have not received it, you may access it through the Investor Relations section of our Web site. Dan Greenleaf, President and Chief Executive Officer, and Steve Deitsch, Senior Vice President, Chief Financial Officer and Treasurer, will host this morning's call. The call may be accessed through our Web site at www.bioscrip.com. A replay will be available two hours after the call's completion and will remain available for a period of two weeks. Interested parties can access the replay by dialing 855-859-2056 in the U.S. and entering access code 1115410. An audio webcast will also be available for 30 days following the call in the Investor Relations section of the BioScrip Web site at www.bioscrip.com. Before we get started, I would like to remind everyone that many of our comments may contain forward-looking statements within the meaning of the Private Securities Litigation 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. Please refer to our press release and our reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements. 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 adjusted EBITDA, a non-GAAP financial measure. A reconciliation to the most comparable GAAP financial measure is contained in our press release issued this morning, which can be obtained from the Investor Relations section of our Web site at www.bioscrip.com. And now, I would like to turn the call over to Dan Greenleaf. Dan?

Thanks, Matt. Good morning, everyone, and thank you for joining us. This morning, I will be providing an update on the third quarter performance, an update on our 2017 outlook and thoughts on future opportunities that lie ahead for BioScrip. Steve Deitsch, our Chief Financial Officer, will then provide additional financial details on the quarter and 2017 guidance. The third quarter of 2017 marked the one-year anniversary of the Home Solutions acquisition and also my leadership of BioScrip. The company accomplished much in the past year, while overcoming significant headwinds. Namely, during the fourth quarter of 2016 and the first quarter of 2017, the company successfully completed the integration of Home Solutions with annualized synergies exceeding our internal targets. Effective January 1 of 2017, the company had to manage the negative impact of the 21st Century Cures Act, which resulted in a $24 million reduction in earnings. The company was able to offset those reimbursement reductions with savings initiatives. During the second quarter of 2017, we refinanced our senior credit facility, providing the company superior operational and financial flexibility to execute the turnaround plan and during the third quarter of 2017 we completed the transition away from certain elements of the United Healthcare contract, exiting unprofitable business lines, both core and non-core, while maintaining certain core therapy lines of business. Finally, during the third quarter of 2017, our teammates in business faced and overcame challenges posed by both Hurricane Harvey and Hurricane Irma. In the face of these challenges and headwinds, our teammates worked together to drive the company to become a healthy business with strong fundamentals and we have produced sequential improvements in adjusted EBITDA during each quarter of 2017. As a reminder, the first quarter was $5.2 million, the second quarter was $10 million and the third quarter was $13 million. Third quarter year-to-date adjusted EBITDA was $28.2 million, 32% ahead of the prior year, and normalizing with the Cures reimbursement cuts and prior year non-cash earnings, adjusted EBITDA has increased over $30 million year-to-date. Our adjusted EBITDA growth is converting to cash, with third quarter year-to-date operational cash flow in excess of $34 million, a $36-million improvement over the prior year. These adjusted EBITDA and cash flow metrics are the direct result of our dedicated teammates whose heroic efforts drove these results and much improved business financials. Our business is sound and poised to take advantage of the significant opportunities that exist in today's dynamic infusion markets. Now, more specifics on the company's third quarter. I am pleased with our company's third quarter performance, where we increased our core product revenue mix to a record 75%, compared to 65.8% a year ago, up almost 15 percentage points from the second quarter of 2016 prior to the acquisition of Home Solutions. Our adjusted EBITDA of $13 million was more than 3.5x the prior year amount. Adjusted EBITDA margin for the quarter was 6.5%, a 490 basis point improvement over the prior year and a 410 basis point improvement over the first quarter of 2017. Finally, our third quarter operational cash flow improved $19.6 million over the prior year to $15.6 million, and was the second consecutive quarter where BioScrip delivered operational cash flow in excess of $15 million. Revenue of $198.7 million declined $19.4 million sequentially from the second quarter of 2017, with the decreases primarily reflecting the exit of the United Healthcare product lines, both core and non-core. Disruption from hurricanes and United Healthcare contract transition decreased revenue by an estimated $10 million during the quarter. Hurricanes impacted 12 of our branches, which represent approximately 25% of our branch count. Extreme weather related disruption ranged from [Technical Difficulty] weeks in certain impacted markets. We also experienced field force disruption at the high-end of our expectations, related to the transition of over 5,500 United Healthcare patients off our census during the third quarter. Our sales and operations team spent considerable time during the third quarter helping transition these 5,500 patients to other providers. A more profitable core revenue mix in the third quarter, coupled with continued supply chain improvements, drove our gross profit margins to a record 33.8%, a 590 basis point improvement over the prior year, with gross profit margins exiting the quarter approaching 37%. These improvements occurred despite the Cures-related reimbursement reductions. Our focus on optimizing our infrastructure and controlling operating expenses continued into the third quarter as well. Work force optimization was again a focus. We ended September with a 20% leaner BioScrip work force, as compared to the date of the Home Solutions acquisition. Our work force optimization and rationalization efforts are largely complete, but we will continue to drive productivity initiatives throughout the organization. With regard to guidance, we now see 2017 revenue in the $805 million to $810 million range, reflecting the $10 million negative impact on third quarter revenue from both hurricanes and the United Healthcare transition. This revenue guidance also reflects adjustments to the estimated fourth quarter revenue due to these third quarter disruptions. These events continued to influence our core revenue growth in October, as they resulted in fewer new patients coming onto our census to begin the fourth quarter. October 2017 revenue was approximately $60 million, including a 77% core revenue mix, largely consistent with the run rates exiting the third quarter. Extrapolating October revenue per day to the remaining fourth quarter business days would yield 2017 revenue of approximately $805 million, the low-end of our guidance range. As a reminder, except for certain retained core therapies, we completed the United Healthcare exit by September 30, 2017. Our sales force and operations teams are no longer contending with the distractions from the hurricanes and patient transition issues. We're also revising our adjusted EBITDA outlook to $42 million to $44 million to reflect our third quarter results and our updated revenue outlook for 2017 and the disruptions associated with the hurricanes and United Healthcare. Now, turning to a legislative update for progress on the Cures fix. On July 25, 2017, the U.S. House of Representatives passed H.R. 3178, the Medicare Part B Improvement Act of 2017, what I refer to as the Cures fix. This proposed legislation provides for transitional reimbursement for services beginning January 1, 2019. This bill is an important milestone towards improving Medicare patient access to home infusion therapies. The next step for the Cures fix is passage of the bipartisan bill in the U.S. Senate, Senate bill 1738, authored by senators Johnny Isakson and Mark Warner. Support for this bipartisan bill continues to grow, with 22 U.S. senators co-sponsoring. As a Colorado-based company, we greatly appreciate the bipartisan support from both [Technical Difficulty] U.S. senators, Michael Bennet and Cory Gardner. The Cures fix will be a significant improvement for patients, our referral partners and the health care system. Finally, update on core initiative successes to-date, core initiative opportunities in the future and a few thoughts on the dynamic infusion market. Our core initiatives have yielded great successes to date, increasing core revenue mix, driving operational efficiencies, accelerating revenue collections, and increasing employee effectiveness, engagement and empowerment. As I mentioned earlier, we are on our way to our goal of 85% core revenue mix, posting a record 75% core mix in the third quarter, ahead of our internal expectations. Our core revenue mix exiting the third quarter was close to 77%. We expect our core revenue growth to accelerate with the revised United Healthcare relationship and our reorganization effort is largely complete. We have a number of initiatives under way to accelerate core revenue, including sales force effectiveness, patient outcomes data, patient redirection efforts, partnering with payers and hospital and improved patient onboarding times. We look forward to providing our partners with clinically validated data highlighting the efficacy and cost efficiency of home infusion care and in the future we expect to drive better than market core revenue growth. Operating efficiencies are also on track, and we will achieve the previously communicated $40 million of annualized Home Solutions synergies and other cost improvements. Revenue cycle management, including patient onboarding, continues to make improvements. We recently launched a new tool which measures new patient verification times on a daily basis, giving us important data to improve referral source satisfaction. Finally, with respect to our core initiatives, our teammates have been the driving force behind the noted improvements in our year-to-date business performance. BioScrip is the largest independent pure-play home infusion company in an estimated $12 billion U.S. market growing at 5% to 7% annually. Home infusion today represents just over 10% of the total U.S. infusion market and we believe we are well positioned to capitalize on further home infusion market expansion as health care transitions out of higher cost settings and into the home, which has lower cost, superior outcomes, higher degrees of patient satisfactions and better quality of life. BioScrip has the infrastructure and the team in place to execute on this large and exciting opportunity. I'd like to now turn the call over to our Chief Financial Officer, Steve Deitsch.

Thank you, Dan, and good morning, everyone. My prepared remarks will include additional information on the company's third quarter performance and 2017 guidance. Revenue from continuing operations for the third quarter of 2017 was $198.7 million, compared to $224.5 million in the third quarter of 2016, a decrease of $25.8 million, or 11.5%. This revenue decrease resulted from the company's shift in strategy to focus on growing its core revenue mix, including contract changes with United Healthcare, which were completed as of September 30, 2017, the impact of the Cures Act, and disruption from the hurricanes and United Healthcare contract transition, partially offset by the accretive impact of the Home Solutions acquisition and core growth. Our revenue mix is currently 75% core and 25% non-core, with core mix increasing 9.2 percentage points above our 65.8% core revenue mix from a year ago. Core product mix also increased 190 basis points sequentially from the second quarter of 2017. Gross profit for the third quarter of 2017 increased $4.6 million, or 7.3%, compared to the prior year, on a $25.8 million lower revenue base, reflecting the impact of higher core product mix due to our core strategy, including the United Healthcare contract transition and supply chain improvements. Gross profit margin for the third quarter of 2017 was 33.8%, 590 and 250 basis point improvements compared to the third quarter of 2016 and the second quarter of 2017 respectively. Operating expenses were $54.2 million for the third quarter of 2017, a $4.8 million or 8% reduction compared to the third quarter of 2016. Our 20% more efficient BioScrip workforce was the primary driver of this improvement. Adjusted EBITDA for the third quarter of 2017 was $13 million, compared to $3.5 million in the third quarter of 2016, with the increase driven by the aforementioned improvements in gross profit and operating expenses. Hurricanes Harvey and Irma, as well as disruptions related to the United Healthcare contract transition decreased adjusted EBITDA by an estimated $3 million in the quarter. Restructuring and integration expenses totaled $4 million for the third quarter and $11.1 million year-to-date. These costs primarily reflected workforce rationalization efforts, which have led to a 20% leaner BioScrip workforce in place at the end of the third quarter, as compared to the Home Solutions acquisition date and a 7.2% leaner workforce as compared to the end of the second quarter of 2017. Labor savings are one of the key contributors to the $11 million or 17% reduction in operating expenses in the third quarter of 2017, as compared to the fourth quarter of 2016, the first full quarter of operations including Home Solutions. Net loss from continuing operations net of income taxes was $12.4 million for the third quarter of 2017, compared to $11.1 million in the third quarter of 2016, reflecting a $10.3 million net increase in non-cash expenses, including gain on dispositions, depreciation and amortization, change in fair value of equity-linked liabilities, change in fair value of contingent consideration, stock-based compensation and a $3.8-million increase in interest expense, offset partially by a $9.5 million increase in adjusted EBITDA, a $3 million decrease in restructuring and integration expenses, and a $0.4 million decrease in income tax expense. Cash use from operations for the third quarter of 2017 was $0.3 million, including $15.6 million of operational cash flow, offset by $15.9 million of interest payments, including $8.9 million of biannual bond interest payments. The $15.6 million of operational cash flow, compared to a $4 million use in the prior year quarter, represents a $19.6 million improvement over the prior year. Cash use from operations for the first three quarters of 2017 was $4.3 million, including $34.1 million of operational cash flow, offset by $38.5 million of interest payments, including both $8.9 million biannual bond interest payments, totaling $17.8 million. The $34.1 million of operational cash flow, compared to a $2.3 million use in the prior year-to-date period, represents a $36.4 million improvement over the prior year. The company's cash balance decreased $7.5 million during the third quarter of 2017 to $33 million. The decrease was the result of the operating cash use of $0.3 million, capital expenditures of $0.7 million, cash use from discontinued operations of $5.6 million, including a previously accrued settlement payment from discontinued operations and a net financing use of $0.9 million. Total liquidity at September 30, 2017, was $43 million, which included $10 million of additional borrowing capacity under our senior credit facility. Now I will provide some comments on our updated guidance for 2017. Our revenue guidance incorporates third quarter results, including the impacts of the hurricanes and the United Healthcare transition disruption, as well as its estimated impact on our fourth quarter revenue. Third quarter sales promotional efforts were impacted by the hurricanes and the United Healthcare transition, resulting in fewer new patients coming onto our census to begin the fourth quarter. Taking these factors into account, our updated 2017 full year revenue guidance is $805 million to $810 million. The company now expects full year 2017 guidance for adjusted EBITDA in the range of $42 million to $44 million, reflecting third quarter results and the impact of our updated revenue guidance for 2017. We expect 2017 restructuring and integration expenses in the $11.5 million to $12 million range. That concludes our prepared remarks. Operator, we will now open up the call for questions.

[Operator Instructions] And your first question comes from the line of Brooks O'Neil. Brooks O'Neil: Good morning. I have a number of questions. It appears, if I'm doing the math properly, like $170 million is a reasonable estimate for revenue in the fourth quarter. I'm curious if you view that as a reasonable run rate number, or if there are some lingering effects of United Healthcare in that number. And then, sort of on a related topic, I wonder if you would comment at all about efforts to grow revenue from that kind of a number in 2018 and what you see as a likely prospect.

Great. Thanks, Brooks. This is Steve. Regarding your question on revenue, our guidance for the fourth quarter is $170 million to $175 million. And as Dan highlighted in his prepared remarks, our October revenue, which was after the completion of the United Healthcare contract transition, was $60 million. And that was consistent with the run rate that we saw exiting the third quarter. So we've seen stabilization going into the fourth quarter, consistent revenue levels with what we saw exiting the third quarter and if you extrapolate the day rate that we saw for the month of October to the fourth quarter, it yields the low end of our guidance range of $170 million. And I'll turn the question to Dan for the revenue acceleration potential.

Yes. Brooks, thank you for -- and good to hear from you. Brooks, I think we laid it out pretty clearly what this year looked like for us from -- the fourth quarter was integration of -- last year was the integration of Home Solutions, the first quarter was having to deal with the significant reductions and reimbursement as a result of the 21st Century Cures Act, the second quarter we spent nearly four months on refinancing activities, and then in the third quarter, we finalized the transition. And there was obviously overlay on all those things. And so, my view of the world is, Brooks, is that I think this company has -- at the end of the day, has done a remarkable job. I just look at -- if you look at operating cash, you look at EBITDA growth, you look at where the company is on a core percentage basis, I think it's way ahead of plan. Now, that being said, obviously we see the next horizon for this company as improving our revenue growth and Brooks, I haven't gone on record to say what our revenue growth will be in 2018, but like I've made it clear to people at Quorum, our compounded annual growth rate for 5 years was 12.5%. When we were in the process of selling Home Solutions, our revenue growth was in the neighborhood of 15% to 18%. And Brooks, my expectations are, given that this is really our first clean quarter since I've been here, this is the first time that we've been able to tell people that we're not doing force reductions. And if I look at the other items that we've spent a lot of time focusing on this past year, like how do we enhance the referral partners' experience and we do that predominantly through enhancing our verification and intake times and making the company easier to do business with. And then, we've got some really, really amazing tools that we're going to be launching for our sales team over the course of the fourth quarter and first quarter, which I'm really not at liberty to talk about because they are game changing. And I feel very good about kind of where we are given what we've gone through. And if I look at the retained core revenue for the year, Brooks, it's largely been flat quarter-over-quarter. It hasn't declined. The declines we saw were largely a function of three things: one was clearly United, the second was we have seen decreases in our non-core, which we're -- obviously is a real focus of ours, and then thirdly, there was collateral damage associated with the United agreement. I looked at the hospital relationships we've had, and there's been -- and I look at the products that are mostly promotionally sensitive, which tend to be antibiotics and if I look at the declines, that's where we saw most of it. So, Brooks, I feel like we're in a great position. This team here has a tremendous track record of growing top line. And I don't want people to forget just how much we've gone through. We've taken out 20% of the workforce since I started. And despite all that, we've produced results that are in excess of anything this company, as a home infusion company, has even come remotely close to achieving. Brooks O'Neil: Just think all that's great, and I appreciate all that color. So I'm also curious: Obviously you talked about exiting, I think, October with a higher gross margin in the 37% range.

Correct. Brooks O'Neil: How do you envision that gross margin progression sort of going forward? Do you expect it to have that come down some as we enter 2018, and then keep moving up or what's your outlook for gross margin?

Brooks, I mean, just look at the improvements. I mean, if you -- prior to me joining, when the company was in the 26% range. And we've seen an 1,100-basis-point improvement this year, 1100 basis point, despite losing $24 million of earnings from the 21st Century Cures Act. Brooks, we are just -- I think this team is doing a remarkable job on supply chain. The company is doing a remarkable job on driving 85/15. It's doing a remarkable job of renegotiating arrangements with payers. It's doing a fantastic job with formulary management. And there's opportunity also in gross profit in the areas of both nursing and delivery. So Brooks, I don't think this is the end of it. I see the day, and again, this is aspirational Dan talking where we're going to be at 85% core, we're going to have 40% gross profit margins and there's nothing that in my mind -- I mean, you just look at the facts. Look at 26% to 37% despite Cures. And there's nothing that, in my mind, at least at this stage, would suggest that that trend won't continue. Brooks O'Neil: Great. I have two more quick questions. Obviously, there's been a lot of commentary in the last month or so about Aetna and Anthem as it relates to relationships with CVS. Can you just comment, in a general sense at least, about your relationships with those two significant payers?

Well, there's one, Aetna. So I would share with you that our relationship with Aetna remains extremely strong. We're one of four providers in their network. They've been a real leader in the notion of redirection programs, Brooks, and I think we feel that we have a very high-quality relationship with Aetna. And as you know, most of this was done to navigate around the threat of Amazon coming into the drug distribution business. That being said, I mean, I thought one of the interesting things that came out of some of the Wall Street Journal articles this weekend was the fact that this emphasis on, we've got to find other places to care for patients outside of hospital systems and skilled nursing facilities and physician offices. And if I look at the market, which, for the home infusion, as we indicated, is about 12% or $12 billion, the infusion market is closer to $100 billion. And again, the commentary that, again, it's just continuing to accelerate and continuing to get emphasis, is that we need sites of care where it's less expensive for the health care system, it's less expensive for the patient, the patient is in a safer environment and the patient satisfaction and quality of life scores are superior to any institutional setting. And Brooks, I think, for me, I look at this and I look at the commentary, and I just say, this is more of, leaving the Amazon issue aside, it just underscores the opportunity that BioScrip has as the only independent national provider in this space. And I just think it puts more wind in our sails and it makes a stronger claim to the claims that we're making, is that the place the patient should be seen in the general ward of the future is going to be the home. Brooks O'Neil: I agree with that 1000%. Any comment on Anthem? I'm sorry, just to follow up.

Yes. I think it's -- again, I think the bigger issue there is, what is CVS going to do now? What is Anthem going to do now? And I don't know if that's -- if that agreement's going to stay in place. I think if I'm Anthem, and again, I'm not the CEO of Anthem, it seems like an odd relationship given that they've just purchased Aetna. Brooks O'Neil: Yes, okay. So the last question: Sorry, but I'm hoping Steve would just give us a little feel for what he expects CapEx, interest expense and taxes to look like in 2018. And thank you very much for taking my questions.

Well, Brooks, for 2018, we're not ready yet to give you guidance on any elements for 2018. But what I can tell you is that going into the fourth quarter, we expect to see continued levels of cash that we've been generating the past couple of quarters. So we expect the fourth quarter to be a good cash quarter, particularly when you consider that we don't have the settlement payment or -- the one-time settlement payment that we had in the third quarter and also we don't have any biannual bond interest payments in the fourth quarter. So we should exit the year strong with respect to cash. Brooks O'Neil: Okay. Thank you very much.

Thanks Brooks.

And your next question comes from the line of David MacDonald from SunTrust.

Good morning guys.

Hey, Dave. How are you?

Can you spend a quick minute just on United? I mean, I would assume with United now off the books, that you guys have a fair amount of kind of vacant capacity. And is there any reason to think that you're not able to significantly accelerate the growth from these levels, just given that that is now freed up?

Yes. I think that's right. And I think there's been a lot of capacity also has several different layers, Dave. One is the mental capacity of our team, because there's been -- obviously this has been highly disruptive in terms of patient transition, so certainly that's part of it. I think there's also been significant disruption because we've done literally risks every quarter, Dave, and people know they've been coming, and we have taken out 20% of the workforce. And I really believe this is a significant opportunity now, Dave, to really hit the reset button on sales and revenue growth. And I agree with you. I think we have capacity. There's been a couple regions that have been seriously more disrupted than others, and if we just correct those regions, Dave, things look very bright from a revenue standpoint.

So that kind of ties in, Dan, into my second question. Do you guys expect census to be at a relatively normalized level by the end of the fourth quarter, kind of exiting 4Q?

Yes, what do you mean by normalized, Dave?

I mean, it sounds like census has taken a hit here.

Yes. You've got it, Dave. I don't really see anything else. I mean, I think it's -- frankly, it's the first time that we can say, all systems go here.

Okay. And then, just wanted to follow up on Brooks' questions from earlier about the gross margins. Is there anything in the third quarter that's kind of one-time or an extra benefit, or is 37 a pretty good number to think about?

I think it's a rock solid, I mean, again, rock-solid number, Dave. I mean, you look at when we originally put the two companies together, Home Solutions and BioScrip; PwC came in and estimated that the supply chain savings were going to be in the neighborhood of $3 million, we're tracking to $31 million right now, Dave. And I look at what we're doing with formulary. I mean, if we look at immunoglobulin therapy alone, Dave, we've improved our gross product margin on that therapy alone by $7 million. And there's no reason to think that can't continue to improve. So, and then you look at, well, what's $7 million? At 6.5% of EBITDA, that's $100 million of revenue that we would have had to grow by. And Dave, there are opportunities like that everywhere. Every time -- there is not -- frankly, Dave, and again, I don't want to overstate this, but Bob Roose, our Chief Procurement Officer, who's done just a remarkable job, and Alex Schott, who runs that department, who's done a remarkable job, too. There isn't something new every other week. And that's kind of how this has gone this year. And what I find fascinating is Bob's the same procurement officer that was in place a year ago. And you just see when you get a guy like this who can unleash his time, talents and treasures in the right direction about what's possible. And keep in mind, Dave, there's five things that drive gross profit margin. Number one is 85/15, and you see that's going to continue to accelerate, right?

Yes.

Second thing is payer arrangements, working very hard, where we have payer agreements or deficiencies, to improve that. The third thing that impacts that is obviously supply chain and I just gave you an example of what's happening there. And supply chain obviously includes formulary management. And the other two areas that we haven't done as good a job on is nursing cost and delivery. And we see that there is percentages there to be had. So we feel really good about -- if you look at those five things that impact gross profit margins, we think there's opportunity in all five.

Okay. Just two questions left. One, just to touch on the nursing cost piece you just talked about, where are we right now in terms of percentages around ambulatory infusion centers, and where do you think that could go because I would imagine that's something that could meaningfully help your nursing costs.

You got it. And delivery costs, Dave, because you're just -- you're walking across the pharmacy. So yes, I mean, we've taken it from about 15% of nursing hours to 25%, and our goal is to get somewhere between 30% and 40% of our nursing hours that are going to be associated with the ambulatory infusion suites.

Okay. And then, just last question: Just on Cures, I was wondering if you could give us any more detail. I mean, Dan, how should we think about this in terms of what type of -- what piece of legislation this could be potentially be attached to, what your recent conversations have gone like? I mean, just any update or any color you have there.

Yes. I mean, I think it's going to be CHIPs or either the Medicare bill. I mean, it's going to be one of those two things that it gets attached to.

Okay. Thanks very much guys.

Yes. Thanks Dave.

And your next question comes from the line of Brian Tanquilut from Jefferies.

Hey. Good morning, guys.

Hi, Brian.

Good morning. As I think about the core mix growth, obviously, the key to the story here, how should I think about your view on this core mix of 50 to 100 basis points per month on growth in core? Is that still the relevant number for 2018?

Yes. I mean, I think that's a good question. I certainly think that there's no reason to believe we can't be in the plus 80% in 2018. Brian, obviously, if we accelerate the growth of products like higher revenue products like immunoglobulin therapies, Orencia, Remicade and factor, that number will -- that percentage will move faster. And, but again, just based on the trends, Brian, I certainly believe that we'll be in the 80s in 2018. How close to 85, I -- we haven't finished finalizing our budgeting process, but again, you just -- you see the improvement here from 65.8% to, really, 77%, if you think about an exit rate. And again, I don't see anything that's kind of slowing that train down, and I think, Brian, if you look at a lot of our hypothesis on this, they're playing out. When you look at the EBITDA growth from over a year ago, from 1.6% to 6.5%, and you look at what 85/15 is doing in terms of unlocking the value of this organization and clearly that's something we're going to continue to incentivize people on. It's something we're going to hold people accountable to. And it's something that we're going to constantly measure and also make sure we're training our people up so that they can deliver on those percentages. So, Brian, I think there's no reason to think, just given the trends, that they won't continue. Will they continue at the velocity that they have historically, I really can't comment on that.

No. That's fair. Hey, Dan, is there anything you can talk about in terms of the partnerships, in terms of partnerships where you can get payouts of shifting patients to the home setting?

I mean, the big opportunities there, frankly, are with the hospitals and with the payers. But I mean, there isn't a payer out there that we've talked to that this isn't on their radar screen. How do we redirect patients to the home? How do we get patients in a less-expensive setting? How do we get patients in a place where their co-insurance is less? We get those patients in a safer place. We get those patients in a place where their satisfaction levels are higher. Let's talk about cellulitis. We've done some really interesting analysis on this. And if you look at a hospital stay, it's about $15,000 to care for a patient in a hospital. It's about $2,600 in the home. But the big piece here and the breaking news piece is, we've done a hospital allocation analysis around this therapy and we estimate the hospitals lose $2,000 per patient; $2,000 per patient. The issue the hospitals have is that they're measuring, sometimes, the wrong things. They're looking at length of stay. And a length of stay, it just doesn't give a clear picture of just how much this is costing the hospital. So that's data that's relatively new, that we're launching into the marketplace and we've got the support, the data to I think to establish those kinds of baselines. And as we get this message out, which, again, I think has been largely -- has been understood, but not well documented. I think the possibility of these types of things, Brian, are just going to continue to expand. And again, there isn't a payer or a hospital system that isn't talking to us about these things.

I appreciate those comments, Dan. Last question from me. As I think about Aetna, and obviously there's a lot of speculation on what they're going to do with CVS, but if you don't mind just kind of helping us out as we think about what your exposure is there and what your thoughts are in terms of what could happen to your business with them in case that deal goes through.

Yes. I just can't really comment on that right now. Again, Brian, I'm just not in a place to comment on it. That deal hasn't gone through. I think its even speculation that there's a deal, although it looks like there is one. Clearly, they've done it for the purposes of Amazon. Our relationship with Aetna has never been better and that -- we're really focused on what that means to us in the short-term and medium-term. And I think regardless of what happens there, Brian, as you've seen, what we've done with United, we are well positioned.

Sounds good. All right. Thanks guys.

Thank you.

And your next question comes from the line of Mike Petusky with Barrington.

Good morning, guys.

Hey, Mike.

Hi. So, I don't think I caught this, if you mentioned it, but how much of the business from -- you've talked about United Healthcare and obviously transitioning that business out, but how much of the higher margin business did you actually end up keeping? I know at one time it was thought to be $25 million, $30 million, something like that.

Yes. Well, it's going to be higher than that. It's going to be probably, above $40 million. And of that $40 million, 95% of that's core. So it's become an arrangement that was unattractive to one that's, I think, reasonably attractive now. Makes sense for us business-wise. And again, they've been a really good partner. I just underscore that. I mean, they have been a really good partner throughout this and we can -- we look forward to continuing our relationship with them.

Okay, great. And then, in terms of driving additional gains on gross margin outside of the core mix, you guys mentioned working hard on reimbursement on some of the contracts, nursing costs. I mean, where is the easiest dollars to get at in terms of driving that, outside of core mix shifts?

Yes. Again, it goes back to 85/15 in supply chain. I mean, those are the two biggest drivers. And even before I joined, it was interesting, is that we had a couple of regions that were already at 85/15, and -- yes. Brian? Mike. Sorry, Mike. I'm getting -- they're slipping me notes. But, and in those regions, we were seeing, already, gross profit margins above 40%. So don't forget that almost regardless of anything else you do, 85/15 pretty much gets you there. Supply chain, again, there's just -- there's opportunities every other week. There's still lots of opportunity to improve our formulary, whether that be immunoglobulin formulary or enteral formulary or supply chain -- or supply formulary. So we're -- we continue to see opportunities there. The areas that we really, I will say this, that we haven't made as much progress on, although we've taken our UPS utilization from the low 40s to above 60 now, which is -- so all of our deliveries we measure in terms of how much are being sent out through small parcel, and we've made some massive improvements there, there's no question, Mike. But clearly, there's opportunities to improve our delivery cost and clearly there are additional opportunities to improve our nursing cost. And if I look at where I think that there's opportunities that we really haven't made as much progress on, those would be the two.

Okay. All right, great. And then, I guess, in terms of, with the cash flows stable -- continuing to stabilize and improve, how close are we in terms of you guys getting active again in terms of maybe putting a couple more dots on the map, M&A?

Mike, it's a good question. We've been through so much over the last four quarters, and that being said, Mike, I think we're going to remain opportunistic. I mean, I think obviously there's -- we have very little and I think you and I have talked about this before. I mean, we virtually have nothing from the Louisiana Purchase and the Oregon Territory. So we have six branches east of the Mississippi, three in Texas and three in California. So clearly, that's a big opportunity. That all being said, Mike, I got to tell you, there are so much opportunities in the markets we're currently in, though. And I don't want to lose sight of the fact that we've got -- it's -- what I talked about with Dave, about it's full steam ahead, it's head down and let's drive the hell out of the markets we're in currently. And we see massive opportunities there. So I don't -- as much as I want to expand and as much as I believe in de novos and I also see opportunities, potentially, opportunistically for M&A, the bigger opportunity for us right now is to just drive the hell out of what we got right now. And I really believe we can just -- where we're going and what we're going to have, we're going to beat the pants off the competition.

All right, sounds good. And one quick one for Steve. The bad debt expense popped up a little bit in the quarter, I guess, any commentary around that, and then, any commentary kind of on the look at Q4 and going forward?

Yes, sure, Mike. Thanks for the question. So, if you look at our bad debt expense historically over the past several quarters, we've been in the 3% to 3.3% range. We did dip down a little bit in the second quarter, driven by some improved collections and also the way our algorithm works in our bad debt expense model. But we collected, as you can see in our results, we had a good cash collections quarter. We're making good progress there, continuing to make good progress on the front-end with denials and also working past due receivables. We've put in place a number of additional initiatives within the organization to lower denial rates on the front-end and then collect past due receivables more effectively. But that 3.2% for the quarter is pretty consistent with where we've historically been, just below where we were at in the second quarter because of the -- an improvement that we had. So we, as we go into the fourth quarter, we expect to not see any blips in that and we expect to continue to make progress in terms of cash collections. Dan talked about accelerating our patient onboarding process. What that will also do is help the quality of our onboarding process, which will reduce denials and lower bad debt expense. And obviously a major focus for us, to lower bad debt, because beyond the gross margin initiatives that Dan mentioned, one of our key areas for opportunity is in revenue cycle management and bad debt expense management.

Okay. So you had previously said that certainly longer term, 2.5% is something that's achievable. I mean, is that still the view?

It is. That's right.

And I don't see any reason either. I mean, Mike, I just -- I've worked at companies where we've been at that rate. And I see the progress that the revenue cycle management team and the patient onboarding teams are making and also the relationships that we have with our payers, because they play a big role in terms of getting paid as well. And in terms of, if there's something that's an outlier or something that's been delayed, all those things are factoring into my belief that there's no reason to think we couldn't get there. And again, but Steve runs this department, so I think he can do better.

Okay. Guys, thanks a lot. I appreciate it.

Thanks Mike.

And the next question comes from the line of Kevin Ellich with Craig-Hallum.

Good morning. Thanks for taking the question. A lot have been -- a lot of them have been answered…

Hey, Kevin.

Hey, Dan. Love how you put the pressure on Steve, noting -- I'm sure he can live up to it.

Yes, he knows. He laughs because it's like, so what?

Yes, I'm used to that. So it's...

Exactly. So, the only thing I wanted to touch on is, now that United's largely done, I guess, what are you doing -- and I might have missed this before, but -- what are you doing to drive growth with the other payers?

I mean, I think the -- so let me say this. The real opportunity is in what we're doing on our patient onboarding times, and making ourselves the unequivocally easiest company to do business with. And what we know, Kevin, is that the degree of referral source satisfaction is the number one thing we can do to drive additional referrals. And how you do that, frankly, is you make the onboarding experience easy. So a lot of -- let me point that out, because that's why Steve and his team are spending so much time focused on that. Now, that being said, I can't name specific payers, but we are working very closely with them on redirection efforts. And we're identifying patients where we're saying that this patient should get out of the hospital sooner. And then as we, again, begin to show our outcomes, Kevin, that story even gets stronger.

Great. No. That's helpful. I will follow-up the rest offline with you guys. Thanks.

Okay. Thanks Kevin.

And your next question comes from the line of Marc DuBois with Venor Capital.

Hey, guys. Just had a couple questions. For the first one, like, if we start from your prior EBITDA guidance at the midpoint of $50 million and we go to the new guidance midpoint of $43 million, so the $7 million delta, I assume $3 million can be attributed to the hurricane, but what about the $4 million? Like, what was the driver around that?

So Marc, the way we think about it, and the way we framed up our guidance for the year. And we talked about this on our second quarter call, there was equal probability for $45 million to $50 million to $55 million given all of the variations that we -- in different areas of the company that we were managing, including the most complex area, the United Healthcare transition. And so, when you look at the updated revenue guidance and the updated EBITDA guidance, it reflects the hurricane impact, to be sure. But, it also reflects the disruption from the United Healthcare transition at the high-end of our expectations. So it was a complex process to work through, with a number of changes along the way in terms of which therapies would be included, which ones would be excluded and when you work through that in the field, it creates confusion with the sales force, it creates confusion with the operations teams and also the referral partners. And so we had planned for a level of disruption at varying levels and it happened that it was more complex than we had anticipated, but or at the high end of our range, I should say. What I would tell you is that we exited that contract, despite the complexity and modified it in a way that is at the high-end of our expectations in terms of the quality of the arrangement going forward. So, the investment and complexity was significant to get where we began the fourth quarter, but what we ended up with was a very, very high-quality contract going forward.

Yes. And Marc, what I looked at, we looked at our -- what happened sequentially at our retained business and the single -- the biggest product or -- that was impacted the most was antibiotics. And the reason I bring that up, Marc is, it's the one that's most promotionally sensitive. So it -- when I look at our retained business, that's the one, for example, that was impacted the most. And that really underscores the disruption that occurred and the extra disruption that occurred as a function of the United transition.

Understood. And then, just to follow up on the United contract. I think before you guys had mentioned almost $50 million of kind of business that you would keep with them. I kind of view that as Bucket 1. And then Bucket 2 is some of the potential out-of-network business. Like, can you comment on, has any of that thought process changed, or where that stands?

I'm sorry, Marc. Could you please repeat that?

I think before, you guys had mentioned keeping roughly $50 million of profitable business with United. I think of that as Bucket 1 and Bucket 2 is kind of the potential for out-of-network business going forward. Can you comment on where that stands or how you guys are thinking about that?

Yes. What we had said originally, Marc, was that we'd be in excess of $35 million. What we're saying now is that number's in excess of $40 million and probably closer to $45 million, I think I would share with you. Now, that being said, I mean, we've really never spent any time focusing on out-of-network, Marc. It's just not our model. Obviously, we will not actively pursue that. I mean, we have an important relationship with United. It's a $45 million relationship and it's an attractive relationship at multiple levels. And it's not our goal, unless it comes to us opportunistically, would we drive or push for things out of network.

Got it, that's helpful. And then, so, Q4, the implied EBITDA margin looks to be roughly, like, 9%-ish. And obviously you guys ended full year 2016 kind of a little above 3%. So like, when we think of, kind of, run rate going forward, as you guys think about 2018, is that 9% to 10% EBITDA margin a reasonable run rate to think of?

Yes. I mean, we've given no -- Marc, again, we've given no direction on that. But again, you look at how we've progressed from the first quarter to the third quarter, you look at the year-over-year progression, you do the 37. I think on the low end, I would say in the fourth quarter we'd be at 8%. And that's kind of how we're thinking about it.

Got it. And one last question, so for the quarter, EBITDA of 13, if you back out the hurricane, you get to 16. What was that number excluding Cures?

What was -- can you repeat that, Marc? I didn't understand your question.

What would EBITDA have been excluding the Cures impact?

So the Cures impact is a $6-million quarterly impact.

It's, again, $24 million of EBITDA a year.

Right. And we'll annualize out of that comp in the first quarter of 2018.

Okay. So, it's helpful. Thank you, guys.

It just gives you a sense of just, if we were able to put that $24 million back, what this company would look like this year, Marc.

Yes.

Thank you.

[Operator Instructions] And our next question comes from the line of Nelson Obus with Wynnefield.

Yes. I just wanted to just true up one number here. On the bridge from the $60 million loss from operations to the consolidated EBITDA of $28 million for 9 months, you have an $11.2 million restructuring, acquisition, integration and other expenses number. And then, in the press release, you point out that the restructuring expenses, which are part of that would be, say, $11.5 million to $12 million in 2017. So the question is, of that $11.1 million that's part of a bigger bunch but includes restructuring, how much of that is restructuring and how much more restructuring will we see that will affect cash flow in Q4?

So, hello, Nelson, thanks for the question.

Good morning, Nelson.

Hi.

So the predominant value of that $11.1 million is restructuring and we expect that to decrease significantly as noted in our updated guidance at full year, $11.5 million to $12 million. And that restructuring was driven predominantly by the different activities that we've made in the first quarter, second quarter and third quarter to optimize the workforce, where we've reduced and improved the overall efficiency of the workforce from the day of the acquisition by 20%.

Nelson, we've taken 430 people out. Yes. I mean, that's the restructuring cost.

Yes. And most of that's done. There's not a big tailwind like before.

Yes, right.

Yes, and as a result, we'll see -- because I know Steve's getting this, but it really drops off in the fourth quarter.

Right. Significantly.

From a governance perspective, is Coliseum owed a Board seat?

I mean, that -- I don't know how that --

I think that's an important question. I mean, they sold an enormous -- my thought is, you don't have a shareholder like that on the Board, sell that kind of a position without asking a lot of questions about whether it makes sense for that organization to continue to have Board representation. Dan, you ought to know that. I mean, it was a very, very bad -- just a very bad thing to see. I can't think of a Board member selling that much. Raised a whole lot of questions. So I think that the shareholders should know whether or not they're entitled to a Board seat, and if they're not, I think the Board should --

They do. Yes. And they do have the right to nominate a director. I mean, and -- by virtue of the preferred stock holdings, Nelson.

That's what I mean. Okay.

And I'll say this. I know this part of it's frustrating, but on the other hand, Chris and Coliseum have been really good Board members, and I just want you to -- I mean, this is multi-factorial, and I just, again, I understand and appreciate your commentary.

Well, look. I don't think there's any place on the Board for someone like this, selling that much equity. That's just my concern. The other thing that I want to bring up here is that the stock sold down significantly in front of this quarter, a meaningful drop in percentage, which was -- started, maybe, when Coliseum hit the tape. And you guys inherited a horrible shareholder messaging situation. And I can't for the life of me grasp why you didn't preannounce in the face of this decline. It may have been people simply figuring out that the quarter wouldn't be good because of what was going on. But then, I think you have a responsibility to come out and even if you can't be positive about exactly what the effects were to get that out of the way, because the market hates uncertainty. And I thought, it's kind of interesting, initially the stock actually went up today. I don't understand -- now it's getting clobbered a little, but I don't understand why you wouldn't preannounce to get some sense of what was going on, because I don't think it helped your credibility.

Nelson, it's Steve. So, obviously, complex questions. We considered a lot of different ways to manage the disruption that we saw in the third quarter. We wanted to see, obviously, how October began to progress. But it's a complex factor, a number of multiple factors that we're considering. We made the decision that we did and we're happy where we're at with the company and where we're going into the fourth quarter.

Yes. And again, I just want to remind people that this is the best quarter from an infusion standpoint the company's ever had, Nelson.

Yes, well, that's not my point. My point is that you --

Yes. My point is, we've had a rock solid third quarter by anybody's -- we're up over 3x where the company was the third quarter a year ago. We've moved our EBITDA percent from 1.6% to 16.5%. We improved operating cash flow by $34 million year-over-year. Any metric you look at, Nelson, I just want to be clear, that [Technical Difficulty] hit the freaking ball out of the park.

Right. So, all I'm saying is [Technical Difficulty]….

And there are no further audio questions at this time.

You didn't --

I think he got -- I think Nelson must have gotten disconnected. Anyone else in the queue? Operator, is there anyone else in the queue, or is Nelson back on?

There are no further audio questions at this time.

Okay, sorry. I mean, I don't know how come it dropped, but okay. All right, folks, well, thank you all for joining today. We're pleased with the solid momentum in the execution of our plans and we look forward to updating you on our continued progress. Thank you.

And this does conclude today's conference call. You may now disconnect.