BioScrip Posts Wider-than-Expected Q2 Loss on Poor Margins

BioScrip, Inc. BIOS recently declared its second-quarter 2014 results. Adjusting for certain one-time expenses, BioScrip reported net loss from continuing operations of 10 cents per share, much wider than the year-ago adjusted loss per share of 4 cents. The results also considerably lagged the Zacks Consensus Estimate of a loss of 5 cents.

On a reported basis, BioScrip's net loss from continuing operations was $18.6 million or loss of 27 cents per share – a huge slash from the year-ago loss of $8.9 million or loss of 14 cents per share.

Revenues in Detail

Total revenue in the reported quarter rose 43.8% year over year to $247.1 million, breezing past the Zacks Consensus Estimate of $233 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 (93% of total revenue in the second quarter) and PBM Services (contributing for the rest).

Segments in Detail

The company reported revenues of $230.5 million in Infusion Services, recording impressive growth of 47.8% year over year. Continued strong double-digit organic growth and the acquisition of CarePoint Partners were the major revenue drivers in this segment.On the other hand, revenues in the PBM Services segment came in at $16.6 million, reflecting a marginal 1.8% increase from the prior-year quarter.

Operational Update

While the cost of product revenues shot up 57.4% to $161.7 million, the cost of service revenues surged 70.1% to $20.1 million in the quarter.

Although gross profit during the quarter increased 13.1% year over year to $65.4 million, gross margin contracted 708 basis points (bps) to 26.4%. The increase in gross profit was the result of organic growth and the acquisition of CarePoint Partners, offset by a decline in the PBM Services segment. On the other hand, the downside in margin 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 13.8% to $57.2 million. The rise in expenditure resulted in a drag of 106 bps in adjusted operating margin, which settled at 3.3% for the reported quarter.

Financial Update

The company ended the quarter with cash and cash equivalents of $1.5 million, compared with $1 million at the end of fiscal 2013. Long-term debt was $418.7 million as on Jun 30, 2014 as against $435.6 million on Dec 31, 2013.

Guidance

BioScrip provided an update to its fiscal 2014 revenue guidance. The company expects to report its 2014 revenues at the upper end of its earlier projected range of $940.0 million to $980.0 million. The current Zacks Consensus estimate of $964 million remains below the current projection. 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 further 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 Partners 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 another poor 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 #5 (Strong Sell). Although we hold a bearish sentiment for BioScrip at the moment, some of the better-ranked stocks in the broader medical space that warrant a look are Abaxis, Inc. ABAX, Alere Inc. ALR and Hospira Inc. HSP. All the three stocks carry a Zacks Rank #2 (Buy).