Loss Wider than Ests, Poor Margins at BioScrip; Shares Sink - Analyst Blog

BioScrip, Inc. BIOS recently declared its first-quarter 2014 results. Adjusting for certain one-time expenses, BioScrip reported net loss from continuing operations of 17 cents per share in the quarter, much wider than the year-ago adjusted loss per share of a penny. The results also considerably lagged the Zacks Consensus Estimate of a loss of 4 cents.

Following the announcement on May 8, stock price of BioScrip slashed nearly 9% to $6.09 till yesterday's closing.             

On a reported basis, BioScrip's net loss from continuing operation was $25.4 million or loss of 37 cents per share – a huge slash from the year-ago loss of $8.4 million or loss of 15 cents per share.

Revenues in Detail

Total revenues in the reported quarter rose 32.3% year over year to $239.6 million, beating the Zacks Consensus Estimate of $223 million.

With the spin-off of substantially all of the company's Home Health business – Deaconess HomeCare, to LHC Group, Inc. last April, currently BioScrip operates through two main segments, viz. Infusion Services (92% of total revenue in the fourth quarter) and PBM Services (8%).

Segments in Detail

The company reported revenues of $221.4 million in Infusion Services, recording impressive growth of 43.4% year over year. Continued strong double-digit organic growth and the acquisitions of HomeChoice and CarePoint were the major revenue drivers in this segment.

On the other hand, revenues in the PBM Services segment came in at $18.2 million, reflecting a substantial 31.9% downfall from the prior-year quarter. The decline was due to termination of a large but low-margin contract with a PBM client in the first quarter of 2013 and decline in its discount card revenues.

Operational Update

While the cost of product revenues shot up 43.9% to $215.9 million, the cost of service revenues declined 23.7% to $23.7 million in the quarter.

Gross profit during the quarter increased 16.3% year over year to $65.1 million. However, gross margin contracted 370 basis points (bps) to 27.2% owing to decline in the higher-margin PBM Services segment. The downfall was due to the Infusion Services segment growing more rapidly than the higher-margin PBM Services segment.

Selling, general and administrative (SG&A) expenses escalated 26.3% to $59.4 million. The rise in expenditure resulted in a drag of 255 bps in adjusted operating margin, which settled at 2.4% for the reported quarter.

Financial Update

The company ended the quarter with cash and cash equivalents of $9.3 million, compared with $1 million at the end of fiscal 2013. Long-term debt was $418.7 million as on Mar 31, 2014 as against $435.5 million on Dec 31, 2013.

Guidance

BioScrip expects to report its 2014 revenues in the range of $940.0 million to $980.0 million. The current Zacks Consensus estimate of $919 million remains far below the guided range. The company expects revenues at its Infusion Services segment to continue with double-digit organic growth. The company also expects continued stability in its PBM Services segment.

Our Take

We believe Bioscrip's Infusion franchise should continue to grow via organic and inorganic means. We are encouraged to note that the company has been taking several steps to emphasize more on areas with long-term growth potential and high returns.

We believe that the recent acquisitions and sellouts will be significantly accretive to Bioscrip's top line. In this regard, we are highly optimistic about the CarePoint buyout that should improve BioScrip's long-term growth profile. Also, the divestment of its Home Health business reinforces the company's strategy to strengthen its Infusion Services business. The company has significant opportunities for growth in these two operating areas with several catalysts to accelerate growth going forward.

However, we are rather disappointed with the poor first-quarter bottom-line performance at BioScrip. Although Infusion Services business continues to grow at a healthy pace, poor performance at the PBM Services segment is weighing on the margin.

Currently, the stock carries a Zacks Rank #3 (Hold). Some of the better-ranked stocks in the broader healthcare space that warrant a look include Mead Johnson Nutrition Company MJN, Natus Medical Inc. BABY and Masimo Corporation MASI. All three stocks carry a Zacks Rank #2 (Buy).