September 28, 2011 - 8:19am EST by
2011 2012
Price: 5.50 EPS $0.42 $0.60
Shares Out. (in M): 54 P/E 13.5x 9.0x
Market Cap (in $M): 293 P/FCF 14.0x 6.8x
Net Debt (in $M): 273 EBIT 52 65
TEV (in $M): 566 TEV/EBIT 10.8x 8.7x

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10-K Description of Business  
We are a national provider of pharmacy and home health services that partners with patients, physicians, hospitals, healthcare payors and pharmaceutical manufacturers to provide clinical management solutions and the delivery of cost-effective access to prescription medications and home health services. Our services are designed to improve clinical outcomes to patients with chronic and acute healthcare conditions while controlling overall healthcare costs. As of December 31, 2010, we had a total of 112 locations in 29 states plus the District of Columbia, including 31 community pharmacy locations, 33 home nursing locations, three mail service facilities and 45 home infusion locations, including two contract affiliated infusion pharmacies.    
Our Infusion/Home Health Services segment consists of our legacy home infusion business combined with the home infusion and home health service businesses obtained in the CHS acquisition.  The infusion services provided in this segment includes home infusion therapy, respiratory therapy and durable medical equipment.  Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes.  Through the home health services reported under this segment, we provide skilled nursing and therapy visits, private duty nursing services, rehabilitation services, hospice and medical social services to patients primarily in their home.
Our Pharmacy Services segment consists of our traditional and specialty pharmacy mail operations, community pharmacies, prescription discount card programs and integrated pharmacy benefit management ("PBM") services.  The DS Pharmacy Inc. ("DS Pharmacy") business acquired in July 2010 is included in this segment.  These segment services are designed to offer patients and other customers cost-effective delivery of traditional and specialty pharmacy products and services.  The services also include care management programs customized to each patient's care plan in coordination with the patient's physician.   
Original rationale for CHS acquisition still intact if as of yet unproven
Bios added some more traditional drugs like anti-infectivess and nutrition therapies to their existing treatments so they now offer acute and chronic
Ability to cross-sell specialty pharmacy
Access to 450 direct payor relationships
High concentration of US population in CHS areas makes combined entity more attractive to HMO''s
Home Infusion is a secular story while other segments play a supporting role
$5-6b industry growing at 6-7% and fragmented so ripe for consolidation which BIOS can take more aggressive advantage of as they delever.  That growth rate has upside given the aging population and rising cost of in-facility care.  In-home infusion can be 10% of the cost of administering drugs in a hospital.  Organically BIOS business has recently seen patient volume increases. The revenues (excluding low margin business that was discarded) in q2 grew 6.3% organically (adjusted for discarded low-margin revs) as more patients came through from the contracts signed with Aetna, United Healthcare and Humana.  BIOS will  fill in their footprint in a cost effective and accretive way to better service their payor's members needs.  For a detailed list of the types of therapies administered see the following link in the 10-k (page5)
Home Health Services...This is effectively a nursing business that management says is necessary to support infusion. Not great scale here and more reimbursement pressure (latest mandated decrease in per-diem was 3%) and competes with Gentiva, Amedisys, Almost Family and other local players.  
Pharmacy Services is small in scale and competes against much bigger, better funded players like Medco, Express Scripts, CVS/Caremark.  Management has resisted selling this business as these locations are essential to preparing the drugs in a sterile environment before they are ultimately administered in the home.  This network of nursing and pharmacy locations is no doubt attractive to large payors as well which makes signing contracts with BIOS attractive.  Some of these drugs can generate a miniscule 1-2% gross margin but enable the 18-20% gross margins on the service side.  Management has improved this segment's performance and it has been a source of cash flow with minimal working capital requirements.  The pointed out in a recent presentation that 13 of their stores lost money last year and this year none are unprofitable thanks to changes in staffing and better expense management.
New Management
Rick Smith took over as CEO in November of 2010 after serving as COO. He has many years of experience in this industry, having worked at Optioncare (which was ultimately acquired by Walgreens at 15x EBITDA in 2007) and Coram Healthcare.  So far, he has spearheaded a turnaround aimed at reducing costs, squeezing more cash out of the balance sheet and growing the core infusion business.  The last couple of quarters the company has seen revenue growth with declining SG&A resulting in a significant  improvement in profitability.
The CFO, MJ Graves came from Kohlberg (the previous owner of CHS) and she used to work at CHS as CFO from 2006 until the buyout so she knows the business intimately.  She provides straight answers to questions and one quarter into her tenure there have been noticeable and significant improvment in several key financial metrics.  The guy she replaced left for personal reasons.
Cost Savings Plan
Late in 2010, management put in place a realignment plan that aimed to save $15mm/yr and said there could be $5mm more in the works.   The bulk of the savings will come from facility consolidations/relocations in addition to cutting back on headcount and benefits.  $3mm of those cuts flowed through in q2 and all of it will be seen in 2012.  This is a welcome development as SG&A outpaced revenues for several years prior to the management change.  The 10-k lists three corporate locations in NY, PA and Minnesota so seems like pretty low-hanging savings opportunity.  They have said they would be out of one of those facilities by q3 and they have already reduced square footage in Minnesota.
Improved Corporate governance
Although there are still board members in place that were there under the previous CEO, it is comforting to know that two Kohlberg representative are now on the board more actively minding their investment of almost 16mm shares/warrants which they received when they sold CHS to Bioscrip.
Deleveraging will add to shareholder value
As of June 2011, BIOS had approximately $273mm of net debt , or 4.5x 2011e EBITDA.  The improvements in working capital (mostly inventory management) have helped to generate $36mm in cash from operations ytd which has reduced debt by a combined $33mm in q1 and q2.  They have revolver capacity of $150mm with 48mm drawn down from 54mm in q1.  Assuming a smaller improvement in working capital going forward, most likely from the receivables account, BIOS should generate $50mm in FCF over the next two years, most of which will be used to further reduce debt.  I am assuming they can knock 2 days off the DSO in this timeframe which would improve cash flow by 24mm.  A $43.4mm NOL will also help shield income from taxes for some time.  It is not unreasonable to assume the debt levels can reach under 3.0x EBITDA given the organic growth in the business and cost savings.
At some point, refinancing the $225mm 10.25% unsecured bonds could also become an option as cash flow is proven.  Every 100bp lower in rates equates to $.04/share in savings to the bottom line.
Cheap Valuation
Infusion businesses on any scale are pretty scarce.  The combined legacy BIOS and CHC were doing $73mm in trailing 12month EBITDA in 2009 so it is not at all unrealistic to see a number in the $80's when the cost savings are figured into the picture.  Trades at 7x that level with a positive demographic tailwind and plenty of growth opportunity.
                                         2011e                 2012e
EBITDA                              62                       80
Capx                                 11                       11
Cash Taxes                       (1)                       (1)
Cash Interest                   (27)                     (25)
FCF                                   23                       43
 per share                           $.42                      $.60
On my estimates BIOS is cheap on EBITDA, EPS and FCF.  A base case scenario assumes that in two years with lower debt and an $80mm EBITDA run rate at a multiple of 9.0x (assumes the CHS multiple holds), the business would be worth $9/share for a 67% return (30% compounded).  Below are several scenarios reflectigng varying degress of success with the turnaround.  The upside case is $5.50/share and downside of $2.20, so 2.5:1 the upside.
                                                                                                                                              Multiple                     Price/share
$80mm EBITDA, debt goes to 3.0x EBITDA and rev growth of 5-7% continues                      10-11x                      $11.00
$80mm EBITDA, debt goes to 3.5x EBITDA and growth of 5-7% continues  (base)                9-10x                        $9.00
$70mm EBITDA, debt stays flat and growth is less than 5-7%                                               8-9x                          $6.00
$60mm EBITDA, debt stays flat, growth is stagnant, something goes wrong                         7.5x                          $3.30
M&A multiples Reflecting the fragmented nature of the industry and long term growth tailwind from an aging population, the deals in the PBM and other healthcare services space have averaged 14x EBITDA and 1.1x EV/Sales pre-2008.  The range has been as low as 7x EBITDA (BIOS buy of Chronimed) and as high as 30x (Magellan buying ICORE in 2006).  More recently Express offered 10x EBITDA for Medco which had contract renewal issues so given the hostory of these deals and BIOS unique position as a national infusion player.
Asset value
What would BIOS be worth if they were to more aggressively sell off non-core assets and businesses like the PBM and mail order operations.  My guess is they could become debt-free but they would likely sacrifice growth in infusion services without control of the locations and the nurses.  That scenario therefore gets a lower end multiple of 8x on a residual $40mm of EBITDA for infusion and some cash to get a value of $6.60, still higher than the current price.
Only one analyst covers the name after Piper dropped it in early 2011 so reason to believe it is inefficiently priced.
-Medicare reimburement rates decline faster than expected  (combined reprsents 15% of revenue so not terrible)
-Financial leverage becomes magnified with any operational hiccups
-Reliant on AmerisourceBergen as exclusive drug supplier through 2012


-deleveraging of balance sheet
-further cost cuts
-accretive acquisitions 
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