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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2005 | ||
| OR | ||
|
o
|
PERIODIC REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number: 0-28740
BioScrip, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 05-0489664 | |
|
(State of incorporation)
|
(I.R.S. Employer Identification No.) | |
|
100 Clearbrook Road, Elmsford NY
|
10523 | |
|
(Address of principal executive offices)
|
(Zip Code) |
Registrant’s telephone number, including area code:
914-460-1600
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to section 12(g) of the
Act:
Common Stock, $.0001 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes þ
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ
No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
| o Large accelerated filer | þ Accelerated filer | o Non-accelerated filer |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
The aggregate market value of the registrant’s Common Stock
held by non-affiliates of the registrant as of June 30,
2005, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately
$214,012,152 based on the closing price of the Common Stock on
the Nasdaq National Market on such date.
On March 24, 2006 there were outstanding
37,346,838 shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for
its 2006 Annual Meeting of Stockholders to be filed with the SEC
within 120 days after the close of the registrant’s
fiscal year are incorporated by reference into Part III of
this Annual Report.
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PART I
This report contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements relate to expectations,
beliefs, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not
historical facts or that necessarily depend upon future events.
In some cases, you can identify forward-looking statements by
terms such as “may,” “will,”
“should,” “could,” “would,”
“expect,” “plan,” “anticipate,”
“believe,” “estimate,” “project,”
“predict,” “potential,” and similar
expressions. Specifically, this Annual Report contains, among
others, forward-looking statements about:
| • | our expectations regarding financial condition or results of operations for periods after December 31, 2005; | |
| • | our future sources of, and needs for, liquidity and capital resources; | |
| • | our expectations regarding general economic and business conditions; | |
| • | our critical accounting policies; | |
| • | our expectations regarding the size and growth of the market for our products and services; | |
| • | our business strategies and our ability to grow our business; | |
| • | the implementation or interpretation of current or future regulations and legislation; and | |
| • | our ability to maintain contracts and relationships with our customers; |
The forward-looking statements contained in this Annual Report
reflect our current views about future events, are based on
assumptions, and are subject to known and unknown risks and
uncertainties. Many important factors could cause actual results
or achievements to differ materially from any future results or
achievements expressed in or implied by our forward-looking
statements. Many of the factors that will determine future
events or achievements are beyond our ability to control or
predict. Certain of these are important factors that could cause
actual results or achievements to differ materially from the
results or achievements reflected in our forward-looking
statements.
The forward-looking statements contained in this Annual Report
and filed as exhibits reflect our views and assumptions only as
of the date this Annual Report is signed. The reader should not
place undue reliance on forward-looking statements. Except as
required by law, we assume no responsibility for updating any
forward-looking statements.
We qualify all of our forward-looking statements by these
cautionary statements. In addition, with respect to all of our
forward-looking statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
| Item 1. | Business |
Overview
We are a specialty pharmacy services provider that distributes
prescription drugs, coordinates customer benefits and provides
specialized therapy management services for people with certain
chronic health conditions, particularly those treated with
biotech injectable medications, as well as those afflicted with
potentially life threatening or debilitating diseases or genetic
disorders and requiring specialty medications. We work with
patients, physicians and pharmaceutical manufacturers. We also
work directly with a variety of health insurers, including
HMO’s, indemnity plans and PPO’s, managed care
organizations, other insurance companies, and, to a lesser
extent, labor unions, self-funded employer groups, government
agencies (including Medicaid and Medicare) and other self-funded
plan sponsors, as well as through third-party administrators. We
work with all of these constituents in a concerted effort to
improve clinical and economic outcomes while enhancing the
quality of life for patients who are living with chronic health
conditions.
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We were incorporated in Delaware in 1996 under the name MIM
Corporation. On March 12, 2005 we acquired all of the
issued and outstanding stock of Chronimed Inc.
(“Chronimed”) in a stock-for-stock transaction and
changed our name to BioScrip, Inc. The acquisition resulted in
an organization that is able to offer broader disease coverage,
focused therapy management, expansive national retail and mail
distribution capabilities and a pharmacy benefit management
(“PBM”) platform. We believe that the acquisition of
Chronimed resulted in an organization with increased scale,
enhanced financial capacity and a diversified customer portfolio.
Our services are organized under two operating
segments: (i) specialty pharmacy distribution and
clinical management services (collectively, “Specialty
Services”) which are provided through our community
pharmacy, infusion services, and specialty mail pharmacy
businesses; and (ii) pharmacy benefit management and
traditional mail services (collectively, “PBM
Services”).
Our Specialty Services are provided primarily to patients who
either have chronic health conditions or who are afflicted with
potentially life threatening or debilitating diseases or genetic
disorders and require specialty medications. These specialty
services include the distribution of biotech and other high cost
injectable, oral and infusable prescription medications and the
provision of pharmacy-related clinical management services,
product administration and disease state programs. Specialty
Services are also offered to physicians, in a variety of
practice and/or hospital settings, on behalf of their patients.
Many of these physicians have network affiliations with Plan
Sponsors, who in turn have a relationship with us.
Historically, our PBM Services were offered to Plan Sponsors and
were designed to promote a broad range of cost-effective,
clinically appropriate pharmacy benefit management services
through our network of retail pharmacies and our dedicated
traditional mail service distribution facility. Over the past
several years we have focused on building our Specialty Services
for strategic growth. Consequently, the PBM Services’
managed care business has decreased as a percentage of total
revenue.
As part of our business we develop and maintain existing
relationships with pharmaceutical manufacturers through a
dedicated Pharmaceutical Relations department. These efforts
have been concentrated on the creation and execution of new drug
distribution and service contracts in our core specialty
therapeutic areas, including providing those medications used
for the treatment of Cancer, Multiple Sclerosis, HIV, Immune
Deficiency and other chronic illnesses and life threatening
diseases. We believe that the specialty management services we
provide through our national mail pharmacy, community pharmacies
and infusion businesses are attractive to the pharmaceutical
manufacturer community as demonstrated by recent successes in
being selected for participation in national specialty
distribution networks for newly approved, high-cost medications.
These new contracts provide new sales and revenue opportunities
which we began to realize in 2005 and expect to continue in 2006
and beyond.
We also distribute and administer high cost specialty infusion
therapies to patients principally requiring immunological blood
products, parenteral nutrition products, and infused antibiotic
therapies. We strive to maximize therapy outcomes through strict
adherence to the clinical guidelines or protocols for a
particular prescription therapy while at the same time managing
the costs of such therapies on behalf of a Plan Sponsor or
patient. Unlike the other specialty programs, infusion patients
have their therapies administered intravenously by IV
certified nurses.
Specialty Services
We provide specialty pharmaceutical products and services
throughout the United States. Our Specialty Services segment
distributes biotech and other high-cost injectable and infusible
prescription medications, in addition to traditional tablets and
capsules, and provides clinically focused case and therapy
management programs to patients with chronic health conditions
or who are genetically impaired or are afflicted with
potentially life threatening or debilitating diseases. Our
Specialty Services segment has two distinct distribution
models: (i) local or community based distribution
through our community pharmacies, under which we dispense
medication to retail consumers at the point of sale or through
home delivery. Those patients typically have commercial
prescription drug coverage or coverage through Medicare or
Medicaid, and we are reimbursed for our prescription drugs by
pharmacy benefit managers, third party payors, Medicare or
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Medicaid; and (ii) national/regional specialty mail
distribution, under which we contract with Plan Sponsors on an
exclusive or preferred basis to dispense and ship injectable and
infusible medications directly to a patient or to the
patient’s physician for administration. Our specialty
services and programs help to improve the quality of life for
patients while managing Plan Sponsors’ drug spending
through compliance and appropriate utilization. Our software and
data management tools permit Plan Sponsors, pharmaceutical
manufacturers and physicians to: (i) better manage
healthcare outcomes; (ii) control prescription costs; and
(iii) measure cost, utilization, prescribing and other
pharmacy trends.
We have 34 specialty pharmacies that operate under the
“BioScrip” name. Our specialty pharmacies are located
in major metropolitan areas across the United States. While all
of our locations are full-service community retail pharmacies,
which carry both traditional and specialty medications and are
able to treat people with a variety of diseases and medical
conditions, we primarily focus our efforts on serving
populations with rare or uncommon conditions, including:
| • | Cancer and related conditions | |
| • | Crohn’s Disease | |
| • | Hemophilia | |
| • | Hepatitis C | |
| • | HIV/AIDS | |
| • | Multiple Sclerosis | |
| • | Organ Transplant | |
| • | Rheumatoid Arthritis |
We also distribute specialty medications through the mail. Our
mail service locations in Columbus, Ohio and San Francisco,
California, are able to mail prescriptions to patients in all
50 states.
The services we provide include:
| Distribution |
We carry a full range of prescription medications. We can
dispense nearly any prescription medication for common, acute
and chronic diseases and conditions. As a specialty pharmacy
provider, our mail and community pharmacy locations also carry
hard-to-find and very
expensive medications that other pharmacies generally will not
or cannot obtain or stock. This allows us to guarantee timely
delivery of specialty medications and differentiates us from
other retail pharmacies.
Our pharmacies also deliver medications to physicians’
offices for in-office administration. We provide the drug
product along with supplies and equipment needed for
administration. We can bill these medications directly to the
physicians or bill the patient’s insurance plan, removing
some of the administrative burden placed upon the
physician’s office.
| Billing and Coordination of Benefits |
Our pharmacies offer comprehensive billing and coordination of
benefits (“COB”) services. All of our locations are
contracted with their respective state Medicaid programs and
with Medicare. Approximately 50% of our locations are also
contracted with state AIDS Drug Assistance Programs
(“ADAPs”) and other Ryan White-funded programs. In
addition, our pharmacies are contracted with all of the major
and smaller regional pharmacy benefit management companies many
of the local, regional and national HMOs, PPO and indemnity
insurance companies; and local third party administrators and
union funds.
Our comprehensive COB services help combat a patient’s
inability to pay a
co-payment or
coinsurance which is a common cause of non-compliance with
prescribed drug therapy and prescription refills. Many of our
patients take advantage of this service to reduce their
out-of-pocket expenses
while they await reimbursement from secondary or other payors.
We will bill all potential payors for the prescription and only
charge the patient for
co-payment or
coinsurance amounts once their benefits have been exhausted.
Because
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other retail pharmacies do not typically provide COB services,
we believe it to be a major differentiator from our competitors.
All co-payments and coinsurance payments are billed and
collection efforts are diligently pursued unless approved
financial hardship exemptions are in effect.
| Professional Intervention |
Most of the diseases and conditions we support require complex,
multi-drug regimens for treatment. Some of those regimens may
include up to 20 different medications, many of which have
potentially adverse side effects and drug interactions. Our
pharmacists review every prescription presented for a patient
against that patient’s medical history, his or her past and
current medication usage, and clinical references to make sure
the therapy selected is clinically appropriate. If our
pharmacists find a potential or actual problem, they contact the
prescriber to discuss that patient’s case and alternative
medications.
Our pharmacists and clinical staff stay informed about new
medications and changing treatment protocols in our target
diseases and conditions. We regularly send information on new
medications to local prescribers to alert them, and recommend
those of their patients which may be candidates for a change in
therapy. Because most health care providers have limited time to
keep up with the rapid pace of change in medicine, we believe
that they appreciate these services.
| Patient Education |
Because of the complexity of the regimens associated with the
medications we dispense and the need to educate patients on the
importance of compliance and proper dosing and administration,
we make great efforts to help our patients and caregivers
understand how their regimen may affect their health status and
lifestyle. We routinely consult with each patient when they
receive their first prescriptions from us. We consult on, among
other things, what each medication is for, how it works, and
what potentially adverse side effects are most likely to occur.
Our goal is to fully inform each patient because failure to do
so could result in missed doses, delayed starts, and loss of
other health care treatment options in some cases. We also
provide patients with information concerning how medications
might influence their lifestyle and give them recommendations on
how to fit drug therapies into alternative schedules and travel
plans.
Our pharmacies also teach patients requiring injectable
medications self-injection techniques. Many of the specialty
medications we dispense are given by injection, either just
below the skin or into the muscle. We teach patients how to mix
their medications, how to inject them, and how to deal with any
site reactions that may occur. We often have the patient
administer their first dose in the pharmacy so they feel
comfortable with taking the medication(s) when they get home.
Our pharmacists are available by telephone in case the patient
has questions, and generally follow up by telephone within 3 to
5 days on their teaching session.
Our pharmacies also provide patients and their family members,
as well as physicians, with a broad range of written educational
materials. We create some of these items and receive others from
pharmaceutical manufacturers and not-for-profit organizations.
We promote local and national disease-related events, including
cancer awareness programs and World AIDS Day. Most of our
locations offer patient support groups for people living with
HIV/ AIDS, where they discuss new therapies, lifestyle tips and
options to improve medication adherence.
| Adherence and Persistence Management |
Adherence is defined as taking medications on a timely basis, as
and when prescribed — for example, two times a day.
Persistence is defined as taking a regimen of medications for
the length of time prescribed. Most people with the diseases and
conditions we treat struggle with both of these self-management
issues, since their medications are often difficult to take and
require months or years of use.
Because adherence and persistence are keys to achieving the
optimal results for which a medication is prescribed, our
pharmacists take a very active role in promoting and managing
them. We stress the importance of adherence and persistence
during our initial teaching sessions and with each medication
refill. We provide refill reminders, either by phone call or
e-mail, to alert people
when a prescription refill is due. We routinely
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follow up with people who do not show up on time for their
refills, alerting physicians and other health care providers
when the patient cannot be located. We back up these activities
with a nurse-based adherence management program for select
conditions that carry a higher risk of complications or
treatment failures. We believe that these services and programs
allow us to achieve adherence rates markedly above the
industry’s averages.
| Pharmacy Case Management |
We provide patients with access to our pharmacy case management
team (“PCM Team”), which is a specialized unit of
skilled professionals including Pharmacists, Registered Nurses,
Certified Pharmacy Technicians, Insurance Verification and
Reimbursement Specialists, and Customer Service Representatives.
The PCM Team is available via phone to both providers and
patients 24 hours per day, seven days per week,
365 days per year. Each PCM Team member is cross-trained in
case management as well as in each of the individual disease
states for which we have programs, in order to provide Plan
Sponsors and their Members with a variety of basic services,
including:
Prior Authorizations. We assist in developing formal
criteria and protocols for the effective management of specialty
pharmaceutical care. Criteria are established and reviewed prior
to the onset of a patient’s therapy to ensure appropriate
prescribing and utilization, thereby managing a Plan
Sponsor’s drug spend accordingly.
Infusion Therapy. We also distribute and administer high
cost specialty infusion therapies to patients principally
requiring immunological blood products, parenteral nutrition
products, and infused antibiotic therapies. We strive to
maximize therapy outcomes through strict adherence to the
clinical guidelines or protocols for a particular prescription
therapy while at the same time managing the costs of such
therapies on behalf of a Plan Sponsor or patient. Unlike the
other specialty programs, infusion patients have their therapies
administered intravenously by IV certified nurses.
Therapy Assessment and Compliance Monitoring. The PCM
Team collectively tracks the patient’s progress and
initiates reminders, reinforcements and non-compliance alerts to
both physicians and the patient. The PCM Team is responsible for
understanding compliance risks and coordinating the support
necessary to maximize the Member’s treatment.
Patient Enrollment. The PCM Team is the main point of
contact for both physicians and patients during the enrollment
process. PCM Team members are responsible for identifying
immediate patient needs, triggering important patient and
physician mailings and following through on the enrollment
process and delivery of the initial prescription.
Risk Assessment. Upon enrollment, the PCM Team assesses
each new patient to determine his or her knowledge level,
self-care ability and non-compliance risk. Depending on the
results of this assessment, patients are classified and an
appropriate monitoring program is selected and administered.
Patients are reassessed at appropriate times during their
treatment as determined by the PCM Team.
| Coordinated Medication Delivery |
Our pharmacies provide express, often same-day, delivery of
medications to a patient’s home or physician’s office.
Special handling techniques and/or refrigeration, including
shipping with dry-ice packing, are utilized in compliance with a
manufacturer’s specific shipping and handling requirements.
In addition to injectable medications, we also provide Sharps
containers, syringes and other ancillary supplies needed for the
administration of a product. Express delivery via overnight
courier is provided without additional charge to the Plan
Sponsor, patient or physician.
| Pharmacy Data Services |
Our proprietary software and data management tools permit Plan
Sponsors and drug manufacturers to access key industry measures,
pre-analyzed, updated daily and delivered through secure
internet based access. Business partners monitor these key
measures associated with their membership to review the
effectiveness
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and success of our programs and services. Pre-analyzed
information includes disease state, diagnosis, clinical
effectiveness and cost analysis. In addition we also build
custom drug measurement and reporting systems to support
specific customer projects.
| Disease Management |
We design and administer clinical programs to maximize the
benefits of pharmaceutical utilization as a tool in achieving
therapy goals for certain targeted disease states. Programs
focus on preventing high-risk events, such as asthma
exacerbation or stroke, through the appropriate use of
pharmaceuticals while eliminating unnecessary or duplicate
therapies. Key components of these programs include health care
provider training, integration of care between pharmacy and
medical health disciplines, monitoring of patient compliance,
measurement of care process and quality, and providing feedback
for continuous improvement in achieving therapy goals. The goal
of these services is to improve patient outcomes and lower
overall healthcare costs.
We offer numerous products and services for a broad number of
disease states in order to permit patients freedom of choice in
their physician’s selection of a particular prescription
product as well as control over all pharmacy and medical
expenditures in the most clinically appropriate manner. We do
not associate or promote a particular pharmaceutical
manufacturer’s products over another manufacturer’s
product within a therapeutic class unless clinically appropriate
based upon our pharmacy staff’s professional judgment, and
always in consultation with a patient’s physician.
PBM Services
We offer Plan Sponsors and third party administrators a broad
range of PBM Services designed to ensure the cost-effective
delivery of clinically appropriate pharmacy benefits. PBM
Services available to our customers include the following:
| Formulary and Benefit Design |
We work closely with our Plan Sponsors to develop customized,
flexible formularies and benefit plan designs to meet their
specific program requirements. Formulary design assists in
controlling program costs to the extent consistent with accepted
medical and pharmacy practices and applicable law, primarily
through two principal techniques: (i) generic substitution,
which involves the selection of a generic drug as a
cost-effective alternative to its bio-equivalent brand name
drug; and/or (ii) therapeutic interchange, which involves
the selection of a lower cost brand name drug as an alternative
to a higher priced brand name drug within a therapeutic
category. After a Plan Sponsor has established a formulary,
rebates on brand name drugs are typically negotiated with drug
manufacturers and are typically shared with Plan Sponsors.
Many commercial Plan Sponsors do not restrict coverage to a
specific list of pharmaceuticals and are said to have no
formulary or an “open” formulary that generally covers
all FDA-approved drugs except certain classes of excluded
pharmaceuticals, such as certain vitamins and cosmetics,
experimental, investigative or
over-the-counter drugs.
As a result of rising pharmacy program costs, however, both
public and private health plans have become increasingly
receptive to controlling pharmacy costs by creating formularies
which steer members to the lowest cost drug available with
appropriate efficacy within a given therapeutic class, other
than in cases of medical necessity or other pre-established
prior authorization guidelines. Once a Plan Sponsor decides to
utilize a “restricted” or “closed”
formulary, we actively involve our clinical staff with a Plan
Sponsor’s Pharmacy and Therapeutics Committee
(“P&T Committee”) to assist with the design of
clinically appropriate formularies in order to control pharmacy
costs. Typically, the P&T Committee consists of a Plan
Sponsor’s physicians, pharmacists and others, including
independent health care professionals. The ultimate composition
and approval of the formulary resides with the Plan Sponsor.
The primary method for assuring formulary compliance on behalf
of a Plan Sponsor is by managing pharmacy reimbursement to
ensure that non-formulary drugs are not dispensed, or dispensed
with higher co-payments, subject to certain limited exceptions.
Benefit design and formulary parameters are managed through a
point-of-sale
(“POS”) electronic claims processing system through
which real-time electronic edits
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control plan restrictions and real-time electronic messages are
transmitted to pharmacists to ensure compliance with specified
benefit design and formulary parameters before services are
rendered and prescriptions are dispensed. Overutilization of
medication is monitored and managed through quantity limitations
based upon nationally recognized standards. Step protocols,
which are procedures requiring that preferred therapies be tried
and shown ineffective before more expensive therapies are
covered, are also established in collaboration with the relevant
P&T Committee to control improper utilization of certain
high-risk or high-cost medications.
| Clinical Service |
Formularies typically identify a limited number of drugs for
preferred status within each therapeutic class to be the covered
drugs in order to treat most medical conditions appropriately.
Provision is also made for coverage of non-formulary or
non-preferred drugs, other than certain excluded products, when
documented to be clinically appropriate for a particular
patient. Since non-formulary drugs are rejected for coverage by
the real-time POS system, we employ procedures to override
restrictions on non-formulary medications for a particular
patient and period of treatment. Similarly, restrictions on the
use of certain high-risk or high-cost non-preferred formulary or
non-formulary drugs may be overridden through prior
authorization or medical necessity procedures. Non-formulary
overrides and prior authorizations are processed on the basis of
documented, clinically supported medical information and
typically are settled within 48 hours of request with
complete information. Requests for, and appeals of denials of,
coverage in those cases are handled by our staff of trained
pharmacists, pharmacy techs and board certified pharmacotherapy
specialists, subject to the Plan Sponsor’s ultimate
authority over all such requests, determinations and appeals.
Further, in the case of a medical emergency, as determined by
the dispensing network pharmacist, we will authorize, without
prior approval, short-term supplies of all medication unless
specifically excluded by a Plan Sponsor.
| Drug Usage Evaluation |
Drug usage is evaluated on a concurrent, prospective and/or
retrospective basis utilizing the real-time POS system and
proprietary information systems for multiple drug interactions,
duplication of therapy, step therapy protocol enforcement,
minimum/maximum dose range edits, compliance with prescribed
utilization levels and early refill notification. In addition,
we maintain a drug utilization review program in which select
medication therapies are reviewed and data is collected,
analyzed and reported for management applications.
| Pharmacy Data Services |
Our proprietary software and data management tools permit Plan
Sponsors and drug manufacturers to access key industry measures,
pre-analyzed, updated daily and delivered through secure
internet-based access. Plan Sponsors often monitor these key
measures associated with their membership to review the
effectiveness and success of our PBM programs. Pre-analyzed
information includes formulary management, generic substitution,
and cost savings analysis. In addition we also build custom PBM
reporting systems to support specific customer projects.
| Disease Management |
We design and administer programs to maximize the benefits of
pharmaceutical utilization as a tool in achieving therapy goals
for certain targeted diseases, such as diabetes and asthma.
Programs focus on preventing high-risk events, such as asthma
exacerbation or stroke, through appropriate use of
pharmaceuticals, while eliminating unnecessary or duplicate
therapies. Key components of these programs include health care
provider training, integration of care between medical and
pharmacy disciplines, monitoring of patient compliance, and
providing feedback for continuous improvement in achieving
therapy goals. As described more fully above under
“Specialty Services,” many of these same tools are
used in delivering specialty pharmaceutical services and
products.
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| Pharmacy Dispensing Facility |
We believe that pharmacy benefit program costs may also be
reduced through the distribution of pharmaceutical products
directly to Plan Sponsors’ Members by the use of mail
service programs through our own proprietary pharmacy dispensing
facilities. We provide mail services from fully automated
fulfillment facilities in Columbus, Ohio and San Francisco,
California. Mail service is typically provided to Members who
receive maintenance medications. The use of mail service affords
Plan Sponsors the ability to reduce cost as compared to the
often more costly retail distribution of prescription products.
| Discount Prescription Card Programs |
The above description of our service offerings principally apply
to a managed pharmacy benefit and not to cash card or discount
card programs.
We administer numerous cash card or discount card programs on
behalf of program sponsors or third party administrators. Those
cards may be a “stand-alone” pharmacy discount program
or bundled with other healthcare or other discount arrangements.
Under those discount programs, individuals enroll and are
entitled to receive a percentage discount off the retail or
“cash” price for a prescription medication. As the
administrator of these discount card programs, we manage the
program’s eligibility through our real-time electronic
claims adjudication system. There is typically no formulary
associated with these programs as they are unmanaged from a cost
perspective; also, typically, there is no benefit design either.
Sales and Marketing
In 2005, a significant focus of our sales and marketing efforts
was in uniting our operating subsidiaries under the BioScrip
brand name and informing current and prospective customers about
the merger and name change. Prior to the merger the BioScrip
brand was used for our national managed care specialty business.
We believe that these efforts will make all sales and marketing
initiatives more impactful as we build the BioScrip brand with
every communication across all of our business lines within our
segments. We have value-added products and services that we
deliver for each of our core customer groups and we actively
market to a variety of healthcare payors, pharmaceutical
companies, healthcare providers and segments of the population.
Our sales efforts are divided between a national managed care
sales effort and regional and local sales activities to
physicians, hospitals and clinics.
Information Technology
The Information Technology (“IT”) function has
completed the initial systems integration of our Minnesota and
Ohio national mail distribution centers into our Columbus, Ohio
facility. The completion of that integration has allowed our IT
function to focus now on continued automation of receiving,
fulfilling, and delivering prescriptions directly to our
patients and physicians nationwide. We have expanded the
utilization of the automated dispensing system to contain costs
and maintain accuracy rates that meet or exceed industry
standards.
The IT function is in the process of integrating seven separate
IT dispensing and billing software systems used in our community
pharmacies into one standard software solution. We currently
operate these seven systems as a result of acquiring various
pharmacies utilizing different billing and dispensing software
platforms. That integration will continue into 2006. The system
has been expanded to include
e-prescribing, which
will allow our community pharmacies to electronically receive
refill requests, refill authorizations, and new prescription
requests from referring physicians. In 2006 we will also provide
the ability for our patients to refill their prescriptions over
the phone utilizing an Integrated Voice Response System.
The PBM Services business utilizes a proprietary system that
offers exact benefit implementation and execution. Member
coverage verification, formulary compliance, claims approvals,
member co-pay and
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pharmacy reimbursement are adjudicated in real time through that
proprietary system. The system’s flexibility allows for a
variety of plan design options.
Overall, we will be making substantial IT systems investments in
2006 to improve internal control and streamline our business
processes.
Loss of Major Customers
On November 30, 2004, Value Options of Texas, Inc.
transitioned business away from our PBM Services segment.
Revenue from Value Options for the years ended December 31,
2004 and 2003 was $19.7 million and $20.8 million,
respectively. There was no revenue from Value Options in 2005.
On December 21, 2005, Centene Corporation announced the
acquisition of its own pharmacy benefits management business and
began transitioning its business to its own PBM during calendar
2006. Revenue from Centene Corporation for the years ended
December 31, 2005, 2004 and 2003 was $133.1 million,
$102.1 million and $92.4 million, respectively.
Mergers and Acquisitions
On March 12, 2005 we acquired all of the issued and
outstanding stock of Chronimed Inc. in a stock-for-stock
transaction valued at $105.3 million pursuant to which each
share of Chronimed common stock was exchanged for
1.12 shares of our common stock. We believe that the
acquisition of Chronimed resulted in an organization with
increased scale, enhanced financial capacity and a diversified
customer portfolio. To date we are continuing the integration of
Chronimed into our business with the goal of increasing cost
efficiencies and consequently stockholder value and also
enhancing customer care and satisfaction.
On October 7, 2005 we acquired all of the issued and
outstanding stock of JPD, Inc. d/b/a Northland Medical Pharmacy
(“Northland”), a community-based retail specialty
pharmacy located in Columbus, Ohio. Northland has a history of
servicing individuals that may benefit from a number of
specialty pharmacy therapies that we serve and is complementary
to our community pharmacies. Northland was purchased for
$12 million in cash, plus a potential earn-out payment
contingent on achieving certain future performance benchmarks.
On March 1, 2006 we acquired all of the issued and
outstanding stock of Intravenous Therapy Services, Inc.
(“ITS”), a specialty home infusion company located in
Burbank, California. The addition of ITS will enhance our
ability to service infusion patients on both the East and West
coasts and complements our strategic objective of expanding our
infusion operations nationally. ITS was purchased for
approximately $13 million in cash, plus a potential
earn-out payment contingent on achieving certain future
performance benchmarks.
Competition
We face substantial competition within the pharmaceutical
healthcare services industry, and the past year has seen even
more consolidation among PBMs and specialty pharmacy providers.
We expect to see this trend continue in the coming year and it
is uncertain what effect, if any, these consolidations will have
on us or the industry as a whole. In the past year, several
independent specialty pharmacy companies were acquired by the
larger nationally recognized PBM companies; Accredo Health Inc.
(by Medco Health Solutions, Inc.) and Priority Healthcare
Corporation (by Express Scripts, Inc.). The industry also
includes a number of large, well-capitalized companies with
nationwide operations and capabilities in both the Specialty and
PBM arenas, such as Caremark Rx, Inc., Express Scripts, Inc.,
Medco Health Solutions, Inc., MedImpact Healthcare Systems,
Inc., National Medical Health Card Systems, Inc. and WellPoint
Pharmacy Management, as well as many smaller organizations that
typically operate on a local or regional basis. In the Specialty
Services segment, we compete with several national and regional
specialty pharmaceutical distribution companies that have
substantial financial resources and which also provide products
and services to the chronically ill such as Caremark, ESI and
Medco.
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Some of our Specialty Services competitors are under common
control with, or are owned by, pharmaceutical wholesalers and
distributors or retail pharmacy chains and may be better
positioned with respect to the cost-effective distribution of
pharmaceuticals. Some of our primary competitors, such as US
BioService, owned by AmeriSource Bergen Corporation, and
McKesson Specialty Pharmacy, owned by McKesson HBOC Corporation,
have a substantially larger market share in many of our
specialty disease therapies than our existing market share.
Moreover, some of our competitors may have secured long-term
supply or distribution arrangements for prescription
pharmaceuticals necessary to treat certain chronic disease
states on price terms substantially more favorable than the
terms currently available to us. As a result of such
advantageous pricing, we may be less price competitive than some
of these competitors with respect to certain pharmaceutical
products. However we do not believe that we compete strictly on
the selling price of particular products in either business
segment; rather, we offer customers the opportunity to lower
overall pharmaceutical and medical costs while receiving high
quality care.
Financial Information about Segments
The following table presents revenue and income from operations
by segment. Operating segment financial information is provided
in Note 3 of Notes to Consolidated Financial Statements.
The 2005 information below includes Chronimed beginning March,
2005 and Northland beginning October, 2005. See Note 4 of
Notes to Consolidated Financial Statements.
Segment Financial Information
(In thousands)
| 2005 | 2004 | 2003 | ||||||||||
|
Revenue:
|
||||||||||||
|
Specialty Services
|
$ | 688,512 | $ | 251,487 | $ | 193,243 | ||||||
|
PBM Services
|
384,723 | 379,029 | 395,527 | |||||||||
|
Total
|
$ | 1,073,235 | $ | 630,516 | $ | 588,770 | ||||||
|
(Loss) income from operations:
|
||||||||||||
|
Specialty Services(1,2)
|
$ | (14,423 | ) | $ | 9,769 | $ | 11,899 | |||||
|
PBM Services(3)
|
(14,780 | ) | 2,525 | 4,126 | ||||||||
|
Total
|
$ | (29,203 | ) | $ | 12,294 | $ | 16,025 | |||||
| (1) | The year ended December 31, 2005 includes $6.5 million of goodwill and intangible impairment and $4.6 million of merger related expenses associated with the acquisition of Chronimed in the Specialty Services segment (see Note 4 of Notes to Consolidated Financial Statements). |
| (2) | The year ended December 31, 2005 includes a $7.1 million charge to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed merger integration period in the Specialty Services segment. |
| (3) | The year ended December 31, 2005 includes $18.6 million of goodwill impairment in the PBM Services segment. |
For the year ended December 31, 2003,
TennCare®
PBM Services revenues totaled $67.8 million. PBM Services
revenues without TennCare were $327.7 million for 2003. We
ceased providing PBM Services to TennCare Plan Sponsors on
July 1, 2003.
Government Regulation
As a participant in the healthcare industry our operations and
relationships are subject to Federal and state laws and
regulations and enforcement by Federal and state governmental
agencies. Various Federal and state laws and regulations govern
the purchase, dispensing or distribution, and management of
prescription
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drugs and related services we provide and may affect us. We
believe that we are in compliance with all legal requirements
material to our operations.
In the second quarter of 2000, we entered into a global
settlement agreement with the Office of Inspector General (the
“OIG”), within the U.S. Department of Health and
Human Services (“HHS”), and the State of Tennessee
relating to certain civil and criminal charges brought against
former officers of our predecessor company. We did not admit any
wrongdoing in the global settlement agreement but agreed to
enter into a corporate integrity agreement in order to ensure
ongoing compliance with the requirements of Medicare, Medicaid
and all other Federal health care programs. Under the terms of
that agreement, we were required to, and continue to, conduct
ongoing educational programs to inform employees regarding
compliance with relevant laws and regulations and institute a
formal reporting procedure to disclose possible violations of
law to the OIG. The OIG recently notified us that our
obligations under the corporate integrity agreement terminated.
Nonetheless, we continue to maintain a comprehensive
company-wide compliance program.
Among the various Federal and state laws and regulations which
may govern or impact our current and planned operations are the
following:
Mail Service Pharmacy Regulation. Many of the states into
which we deliver pharmaceuticals have laws and regulations that
require out-of-state
mail service pharmacies to register with, or be licensed by, the
boards of pharmacy or similar regulatory bodies in those states.
These states generally permit the dispensing pharmacy to follow
the laws of the state within which the dispensing pharmacy is
located.
However, various state Medicaid programs have enacted laws
and/or adopted rules or regulations directed at restricting or
prohibiting the operation of
out-of-state pharmacies
by, among other things, requiring compliance with all laws of
the states into which the
out-of-state pharmacy
dispenses medications, whether or not those laws conflict with
the laws of the state in which the pharmacy is located, or
requiring the
pharmacist-in-charge to
be licensed in that state. To the extent that such laws or
regulations are found to be applicable to our operations, we
would be required to comply with them. In addition, to the
extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found
to be applicable to us, they could have an adverse effect on our
prescription mail service operations. A number of state Medicaid
programs prohibit the participation in those states by
out-of-state retail or
mail service pharmacies, whether in-state or
out-of-state.
There are other statutes and regulations which may also affect
our mail service operations. The Federal Trade Commission
requires mail order sellers of goods generally to engage in
truthful advertising, to stock a reasonable supply of the
products to be sold, to fill mail orders within 30 days,
and to provide clients with refunds when appropriate.
Licensure Laws. Many states have licensure or
registration laws governing certain types of ancillary
healthcare organizations, including preferred provider
organizations, third party administrators, discount cash card
prescription drug programs and companies that provide
utilization review services. The scope of these laws differs
significantly from state to state, and the application of such
laws to the activities of pharmacy benefit managers often is
unclear. We have registered under such laws in those states in
which we have concluded that such registration or licensure is
required.
We dispense prescription drugs pursuant to orders received
through our BioScrip.com web site, as well as other affiliated
private label web sites. Accordingly, we may be subject to laws
affecting on-line pharmacies. Several states have proposed laws
to regulate on-line pharmacies and require on-line pharmacies to
obtain state pharmacy licenses. Additionally, Federal regulation
by the United States Food and Drug Administration (the
“FDA”), or another Federal agency, of on-line
pharmacies that dispense prescription drugs has been proposed.
To the extent that such state or Federal regulation could apply
to our operations, certain of our operations could be adversely
affected by such licensure legislation. Management does not
believe that the adoption of any of these internet related laws
would have a material adverse effect on our business or
operations.
Other Laws Affecting Pharmacy Operations. We are subject
to state and Federal statutes and regulations governing the
operation of pharmacies, repackaging of drug products, wholesale
distribution,
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dispensing of controlled substances, medical waste disposal, and
clinical trials. Federal statutes and regulations govern the
labeling, packaging, advertising and adulteration of
prescription drugs and the dispensing of controlled substances.
Federal controlled substance laws require us to register our
pharmacies and repackaging facilities with the United States
Drug Enforcement Administration and to comply with security,
recordkeeping, inventory control and labeling standards in order
to dispense controlled substances.
State controlled substance laws require registration and
compliance with state pharmacy licensure, registration or permit
standards promulgated by the state’s pharmacy licensing
authority. Such standards often address the qualification of an
applicant’s personnel, the adequacy of its prescription
fulfillment and inventory control practices and the adequacy of
its facilities. In general, pharmacy licenses are renewed
annually. Pharmacists and pharmacy technicians employed at each
of our dispensing locations must also satisfy applicable state
licensing requirements.
FDA Regulation. The FDA generally has authority to
regulate drug promotional information and materials that are
disseminated by a drug manufacturer or by other persons on
behalf of a drug manufacturer. In January 1998, the FDA issued
Draft Guidance regarding its intent to regulate certain drug
promotion and switching activities of pharmaceutical
manufacturers that control, directly or indirectly, a PBM. The
FDA effectively withdrew the Draft Guidance and has indicated
that it would not issue new draft guidance. However, there can
be no assurance that the FDA will not assert jurisdiction over
certain aspects of our PBM business, including the internet sale
of prescription drugs.
Network Access Legislation. A majority of states now have
some form of legislation affecting our ability to limit access
to a pharmacy provider network or remove network providers from
our PBM pharmacy network. Subject to various geographic, managed
care or other exceptions, such legislation (“any willing
provider” legislation) may require us or our clients to
admit any retail pharmacy willing to meet the plan’s price
and other terms for network participation, or may prohibit the
removal of a provider from a network except in compliance with
certain procedures (“due process” legislation) or may
prohibit days’ supply limitations or co-payment
differentials between mail and retail pharmacy providers. Many
states with any willing provider statutes also permit a Member
suspected of substance abuse or who otherwise needs oversight by
a pharmacist to be “locked into” one particular
pharmacy for the purchase of his or her prescription medicine.
Many states have exceptions to the applicability of these
statutes for managed care arrangements or other government
benefit programs. As a dispensing pharmacy, however, such
legislation benefits us, by ensuring us access to all networks
in those states.
Legislation Imposing Plan Design Mandates. Some states
have enacted legislation that prohibits Plan Sponsors from
implementing certain restrictions on design features, and many
states have introduced legislation to regulate various aspects
of managed care plans including legislation that prohibits or
restricts therapeutic substitution, requires coverage of all
drugs approved by the FDA, or prohibits denial of coverage for
non-FDA approved uses. For example, some states provide that
Members may not be required to use network providers, but that
they must instead be provided with benefits even if they choose
to use non-network providers (“freedom of choice”
legislation), or provide that a Member may sue his or her health
plan if care is denied. Some states have enacted, and other
states have introduced, legislation regarding plan design
mandates. Some states mandate coverage of certain benefits or
conditions. Such legislation does not generally apply to our
business, but it may apply to certain of our customers
(generally, HMOs and health insurers). If any such legislation
was to become widespread and broad in scope, it could have the
effect of limiting the economic benefits achievable through
pharmacy benefit management. To the extent that such legislation
is applicable and is not preempted by the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”) (as
to plans governed by ERISA), certain of our operations could be
adversely affected.
The Federal government, as well as a number of states, has
enacted legislation purporting to prohibit health plans from
requiring or offering Members financial incentives for use of
mail order pharmacies.
Anti-Kickback Laws. Subject to certain statutory and
regulatory exceptions (including exceptions relating to certain
managed care, discount, group purchasing and personal services
arrangements), federal law prohibits the payment or receipt of
remuneration to induce, arrange for or recommend the purchase of
health care items or services paid for in whole or in part by
Medicare or state health care programs (including
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Medicaid programs and Medicaid waiver programs). Certain state
laws may extend the prohibition to items or services that are
paid for by private insurance and self-pay patients. Management
carefully considers the importance of such
“anti-kickback” laws when structuring our operations,
and believes that we are in compliance therewith. Violation of
the federal anti-kickback statute could subject us to criminal
and/or civil penalties, including suspension or exclusion from
Medicare and Medicaid programs or state-funded programs in the
case of state enforcement.
The Federal anti-kickback law has been interpreted broadly by
courts, the OIG and administrative bodies. Because of the broad
scope of those statutes, Federal regulations establish certain
safe harbors from liability. Safe harbors exist for certain
properly reported discounts received from vendors, certain
investment interests held by a person or entity, and certain
properly disclosed payments made by vendors to group purchasing
organizations, as well as for other transactions or
relationships. Nonetheless, a practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to
scrutiny and challenge. In the absence of an applicable
exception or safe harbor, a violation of the statute may occur
even if only one purpose of a payment arrangement is to induce
patient referrals or purchases. Among the practices that have
been identified by the OIG as potentially improper under the
statute are certain “product conversion” or
“switching” programs in which benefits are given by
drug manufacturers to pharmacists or physicians for changing a
prescription (or recommending or requesting such a change) from
one drug to another. Anti-kickback laws have been cited as a
partial basis, along with state consumer protection laws
discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers
to retail pharmacies in connection with such programs.
Certain governmental entities have commenced investigations of
PBM companies and other companies having dealings with the PBM
industry and have identified issues concerning selection of drug
formularies, therapeutic substitution programs and discounts or
rebates from prescription drug manufacturers and whether best
pricing requirements are being complied with. Additionally, at
least one state has filed a lawsuit concerning similar issues
against a health plan. To date, we have not been the subject of
any such suit or action. We have received from time to time
subpoenas or been requested to produce documents in response to
various inquiries. There can be no assurance that we will not
receive subpoenas or be requested to produce documents in
pending investigations or litigation from time to time in the
future.
Governmental entities have also commenced investigations against
specialty pharmaceutical distribution companies having dealings
with pharmaceutical manufacturers concerning retail distribution
and sales and marketing practices of certain products and
therapies. There can be no assurance that we will not receive
subpoenas or be requested to produce documents in pending
investigations or litigation from time to time. As well, we may
be the target or subject of one or more such investigations or
named parties in corresponding actions.
We believe that we are in compliance with the legal requirements
imposed by the anti-remuneration laws and regulations, and we
believe that there are material and substantial differences
between drug switching programs that have been challenged under
these laws and the generic substitution and therapeutic
interchange practices and formulary management programs offered
by us to our Plan Sponsors, since no remuneration or other
incentives are provided to patients, pharmacists or others.
However, there can be no assurance that we will not be subject
to scrutiny or challenge under such laws or regulations, or that
any such challenge would not have a material adverse effect on
us.
On April 18, 2003, the OIG released Compliance Program
Guidance for Pharmaceutical Manufacturers (the
“Guidance”) which is designed to provide voluntary,
nonbinding guidance to assist companies that develop,
manufacture, market and sell pharmaceutical products or
biological products in devising effective compliance programs.
The Guidance provides the OIG’s view of the fundamental
elements of pharmaceutical manufacturer’s compliance
programs and principles that should be considered when creating
and implementing an effective compliance program, or as a
benchmark for companies with existing compliance programs. We
currently maintain a compliance program that includes the key
compliance program elements described in the Guidance. We
believe that the fundamental elements of our compliance program
are consistent with the principles, policies and intent of the
Guidance.
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The Stark Laws. The Federal law known as
“Stark II” became effective in 1995 and was a
significant expansion of an earlier Federal physician
self-referral law commonly known as “Stark I.”
Stark II prohibits physicians from referring Medicare or
Medicaid patients for “designated health services” to
an entity with which the physician, or an immediate family
member of the physician, has a financial relationship. Possible
penalties for violation of the Stark laws include denial of
payment, refund of amounts collected in violation of the
statute, civil monetary penalties and program exclusion. The
Stark laws standards contain certain exceptions for physician
financial arrangements.
Management carefully considers the importance of Stark II
in structuring our sales and marketing arrangements and our
operations and believes that we are in compliance therewith.
Violation of the Stark II laws could subject us to civil
and/or criminal penalties, including suspension or exclusion
from Medicare and Medicaid programs or state-funded programs in
the case of state enforcement.
State Self-Referral Laws. We are subject to state
statutes and regulations that prohibit payments for the referral
of patients and referrals by physicians to healthcare providers
with whom the physicians have a financial relationship. Some
state statutes and regulations apply to services reimbursed by
governmental as well as private payors. Violation of these laws
may result in prohibition of payment for services rendered, loss
of pharmacy or health provider licenses, fines and criminal
penalties. The laws and exceptions or safe harbors may vary from
the Federal Stark laws and vary significantly from state to
state. The laws are often vague, and in many cases, have not
been widely interpreted by courts or regulatory agencies;
however, we believe we are in compliance with such laws.
Statutes Prohibiting False Claims and Fraudulent Billing
Activities. A range of Federal civil and criminal laws
target false claims and fraudulent billing activities. One of
the most significant is the Federal False Claims Act, which
prohibits the submission of a false claim or the making of a
false record or statement in order to secure a reimbursement
from a government-sponsored program. In recent years, the
Federal government has launched several initiatives aimed at
uncovering practices, which violate false claims or fraudulent
billing laws. Claims under these laws may be brought either by
the government or by private individuals on behalf of the
government, through a “whistleblower” or “qui
tam” action.
Reimbursement. Approximately 41% of our revenues are
derived directly from Medicare or Medicaid or other
government-sponsored healthcare programs subject to the Federal
anti-kickback laws and/or the Stark laws. Also, we indirectly
provide benefits to managed care entities that provide services
to beneficiaries of Medicare, Medicaid and other
government-sponsored healthcare programs. Should there be
material changes to Federal or state reimbursement
methodologies, regulations or policies, our reimbursements from
government-sponsored healthcare programs could be adversely
affected. In addition, certain state Medicaid programs only
allow for reimbursement to pharmacies residing in the state or
in a border state. While we believe that we can service our
current Medicaid patients through existing pharmacies, there can
be no assurance that additional states will not enact in-state
dispensing requirements for their Medicaid programs. To the
extent such requirements are enacted, certain therapeutic
pharmaceutical reimbursements could be adversely affected.
Legislation and Other Matters Affecting Drug Prices. Some
states have adopted legislation providing that a pharmacy
participating in the state Medicaid program must give the state
the best price that the pharmacy makes available to any third
party plan (“most favored nation” legislation). Such
legislation may adversely affect our ability to negotiate
discounts in the future from network pharmacies. At least one
state has enacted “unitary pricing” legislation, which
mandates that all wholesale purchasers of drugs within the state
be given access to the same discounts and incentives. Such
legislation has not yet been enacted in the states where our
mail service pharmacies are located. Such legislation, if
enacted in other states, could adversely affect our ability to
negotiate discounts on our purchase of prescription drugs to be
dispensed by the mail service pharmacies.
Confidentiality, Privacy and HIPAA. Most of our
activities involve the receipt, use and disclosure of
confidential medical, pharmacy or other health-related
information concerning individual Members, including the
disclosure of the confidential information to the Member’s
health benefit plan. In addition, we use aggregated and blinded
(anonymous) data for research and analysis purposes.
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On April 14, 2003 the final regulations issued by HHS
regarding the privacy of individually identifiable health
information (the “Privacy Regulations”) pursuant to
the Health Insurance Portability and Accountability Act of 1996
(“HIPAA”) took effect. The Privacy Regulations are
designed to protect the medical information of a health care
patient or health plan enrollee that could be used to identify
the individual. We refer to this information as protected health
information (“PHI”). The Privacy Regulations apply
directly to certain entities known as “covered
entities,” which include Plan Sponsors and most health care
providers. In addition, the Privacy Regulations require covered
entities to enter into contracts requiring their “business
associates” to agree to certain restrictions regarding the
use and disclosure of protected health information. The Privacy
Regulations apply to protected health information maintained in
any format, including both electronic and paper records, and
impose extensive restrictions on the way in which covered
entities (and indirectly their business associates) may use and
disclose protected health information. In addition, the Privacy
Regulations also give patients significant rights to understand
and control how their protected health information is used and
disclosed. Often, use and disclosure of protected health
information must be limited to the minimum amount necessary to
achieve the purpose of the use or disclosure. Certain of our
businesses are covered entities directly subject to the Privacy
Regulations, and other of our businesses are “business
associates” of covered entities, such as Plan Sponsors.
Since October 16, 2003 we have been subject to compliance
with the rules governing transaction standards and code sets
issued by HHS pursuant to HIPAA (the “Transactions
Standards”). The Transactions Standards establish uniform
standards to be utilized by covered entities in the electronic
transmission of health information in connection with certain
common health care financing transactions, such as health care
claims. Under the new Transactions Standards, any party
transmitting or receiving health transactions electronically
must send and receive data in a single format, rather than the
large number of different data formats currently used. The
Transactions Standards apply to us in connection with submitting
and processing health care claims. The Transactions Standards
also applies to many of our payors and to our relationships with
those payors. We are currently in compliance with the
Transactions Standards.
In addition, in February 2003, HHS issued final regulations
governing the security of PHI pursuant to HIPAA (the
“Security Standards”). The Security Standards impose
substantial requirements on covered entities and their business
associates regarding the storage, utilization of, access to and
transmission of PHI. We are fully compliant with the Security
Standards.
The requirements imposed by the Privacy Regulations, the
Transactions Standards, and the Security Standards are extensive
and have required substantial cost and effort to assess and
implement. We will take steps that we believe are reasonable to
ensure that our policies and procedures are in compliance with
the Privacy Regulations, the Transactions Standards and the
Security Standards. The requirements imposed by HIPAA have
increased our burden and costs of regulatory compliance
(including with respect to our health improvement programs and
other information-based products), altered our reporting to Plan
Sponsors and reduced the amount of information we can use or
disclose if members do not authorize such uses or disclosures.
Consumer Protection Laws. Most states have consumer
protection laws that have been the basis for investigations and
multi-state settlements relating to financial incentives
provided by drug manufacturers to pharmacies in connection with
drug switching programs. No assurance can be given that we will
not be subject to scrutiny or challenge under one or more of
these laws.
Disease Management Services Regulation. All states
regulate the practice of medicine. To our knowledge, no PBM has
been found to be engaging in the practice of medicine by reason
of its disease management services. However, there can be no
assurance that a Federal or state regulatory authority will not
assert that such services constitute the practice of medicine,
thereby subjecting such services to Federal and state laws and
regulations applicable to the practice of medicine.
Comprehensive PBM Regulation. Although no state has
passed legislation regulating PBM activities in a comprehensive
manner, such legislation has been introduced in the past in
several states. Since we do not derive significant PBM revenues
from business in any particular state, such legislation, if
currently enacted in a state, would not have a material adverse
impact on our operations.
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Antitrust Laws. Numerous lawsuits have been filed
throughout the United States by retail pharmacies against drug
manufacturers challenging certain brand drug pricing practices
under various state and Federal antitrust laws. A settlement in
one such suit would require defendant drug manufacturers to
provide the same types of discounts on pharmaceuticals to retail
pharmacies and buying groups as are provided to managed care
entities to the extent that their respective abilities to affect
market share are comparable, a practice which, if generally
followed in the industry, could increase competition from
pharmacy chains and buying groups and reduce or eliminate the
availability to us of certain discounts, rebates and fees
currently received in connection with our drug purchasing and
formulary administration programs. In addition, to the extent
that we, or an associated business, appear to have actual or
potential market power in a relevant market, business
arrangements and practices may be subject to heightened scrutiny
from an anti-competitive perspective and possible challenge by
state or Federal regulators or private parties.
While management believes that we are in substantial compliance
with all existing laws and regulations stated above, such laws
and regulations are subject to rapid change and often are
uncertain in their application. As controversies continue to
arise in the health care industry, Federal and state regulation
and enforcement priorities in this area may increase, the impact
of which on us cannot be predicted. There can be no assurance
that we will not be subject to scrutiny or challenge under one
or more of these laws or that any such challenge would not be
successful. Any such challenge, whether or not successful, could
have a material adverse effect upon our business and results of
operations.
Employees
At March 18, 2006, we had 760 full-time,
36 part-time and 178 per diem employees, including 129
licensed pharmacists. Per diem employees are defined as those
available on an as needed basis. None of our employees are
represented by any union and, in our opinion, relations with our
employees are satisfactory.
Subsequent Events
On February 27, 2006, Henry F. Blissenbach, currently our
President and Chief Executive Officer, announced his retirement
upon the expiration of his employment contract, effective
June 30, 2006. Mr. Blissenbach will serve as a
consultant to BioScrip for one year following the end of his
contract. Following Mr. Blissenbach’s retirement,
Mr. Richard H. Friedman, our Executive Chairman, will
assume the role of interim Chief Executive Officer during our
search for a replacement for Mr. Blissenbach.
On February 28, 2006, Mr. Richard A. Cirillo, a
director since April 1998, informed Mr. Friedman that he
was resigning from our Board of Directors. Mr. Cirillo has
had no disagreements with us with respect to any matters.
Available Information
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements and other information filed by us at the
SEC’s Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call
(800) SEC-0330 for
further information on the Public Reference Room. The SEC
maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers
that file electronically with the SEC. Our filings are also
available to the public at the web site maintained by the SEC,
http://www.sec.gov.
We make available, free of charge, through our web site at
www.bioscrip.com, our reports on
Forms 10-K, 10-Q,
and 8-K, and
amendments to those reports, as soon as reasonably practicable
after they are filed with or furnished to the SEC.
We have adopted a code of business conduct and ethics for our
Company, including our directors, officers and employees. Our
Code of Conduct policy, our corporate governance guidelines and
the charters of the audit, compensation and nominating and
corporate governance committees of our board of directors are
available on our website at www.bioscrip.com.
16
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| Item 1A. | Risk Factors |
Our failure to maintain controls and processes over billing
and collecting have had and could continue to have a significant
negative impact on our results of operations and financial
condition.
In light of the consolidation of our company after the
acquisition of Chronimed on March 12, 2005 the collection
of accounts receivable remains one of our most significant
challenges and requires constant focus and involvement by
management and ongoing enhancements to information systems and
billing center operating procedures. If we are unable to
properly bill and collect our accounts receivable, our results
will be materially and adversely affected. During the fourth
quarter of 2005, we recorded a $7.1 million charge to
reflect an increase in the allowance for doubtful accounts
receivable created by lower than expected collections during our
integration of Chronimed. We have recently consolidated our
collections and cash posting functions into one location in
Minnesota, have appointed a full time project executive to drive
improvements in receivables performance, added resources to
prevent delays in cash posting, implemented new processes to
improve timeliness and accountability and are expanding our use
of automated tools to post cash in order to improve both speed
and accuracy. In addition, we implemented an improved process to
quantify and document our estimates for uncollectible accounts.
While management believes these efforts will improve
collections, there can be no assurance that any of these
controls and processes will improve our current level of
collectability in future periods.
Competition in the pharmaceutical healthcare services
industry could reduce profit margins.
The pharmaceutical healthcare services industry is very
competitive. Our competitors include large and well-established
companies that may have greater financial, marketing and
technological resources than we do.
The specialty pharmacy industry is highly competitive. Some of
our competitors are under common control with, or ownership by,
pharmaceutical wholesalers and distributors or retail pharmacy
chains and may be better positioned with respect to the
cost-effective distribution of pharmaceuticals. In addition,
some of our competitors may have secured long-term supply or
distribution arrangements for prescription pharmaceuticals
necessary to treat certain chronic disease states on price terms
substantially more favorable than the terms currently available
to us. As a result of such advantageous pricing, we may be less
price competitive than some of these competitors with respect to
certain pharmaceutical products. Our competitive position could
also be adversely affected by any inability to obtain access to
new biotech pharmaceutical products.
Over the last several years competition in the marketplace has
caused many PBMs, including us, to reduce the prices charged to
clients for core services and share a larger portion of the
formulary fees and rebates received from pharmaceutical
manufacturers with clients. This combination of lower pricing
and increased rebate sharing, as well as increased demand for
enhanced service offerings and higher service levels, have put
pressure on operating margins. In addition, some of our larger
competitors may offer services and pricing terms that we may not
be able to offer. This competition may make it more difficult to
maintain existing customers and attract new customers and may
cause us to face the risk of declining reimbursement levels
without achieving corresponding reductions in costs of revenues.
Competition may also come from other sources in the future. As a
result, we may not continue to remain competitive in the PBM
marketplace, and competition could have an adverse effect on our
business and financial results
We may fail to realize the anticipated synergies, cost
savings and other benefits expected from our acquisition of
Chronimed.
In March 2005, we acquired Chronimed for $105.3 million in
stock and are in the process of integrating this business into
our operations. While we have completed a number of aspects of
our integration, there are risks associated with completing the
remainder of that process.
Any delays encountered in the integration of Chronimed could
have a material adverse effect upon our revenues, level of
expenses, operating results and financial condition. Although we
expect significant benefits
17
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to result from the acquisition, such as increased cost savings
and incremental sales opportunities, there can be no assurance
that we will realize the full value of these anticipated
benefits.
We may continue to incur substantial expenses in connection with
the integration of Chronimed. There are a large number of
systems that we continue to integrate, including information
technology, purchasing, finance, and sales. In addition, we have
hired additional labor to improve our accounts receivable
collections. While we have assumed that a certain amount of
expenses would be incurred, we expended amounts greater than
expected during the integration planning process. Additional
factors beyond our control could further affect the total amount
or the timing of all of the expected integration expenses. These
expenses could, particularly in the near term, exceed the
savings that we expect to achieve from the elimination of
duplicative expenses and the realization of economies of scale
and cost and revenue synergies related to the integration of the
businesses.
Client demands for enhanced service levels or possible loss
or unfavorable modification of contracts with clients or
providers could pressure margins.
As our clients face the continued rapid growth in prescription
drug costs, they may demand additional services and enhanced
service levels to help mitigate the increase in spending. We
operate in a very competitive environment, and we may not be
able to increase our fees to compensate for these increased
services, which could put pressure on our margins.
Our contracts with clients generally do not have terms longer
than three years and, in some cases, are terminable by the
client on relatively short notice. Our clients generally seek
bids from other PBM or specialty providers in advance of the
expiration of their contracts. If several of these clients elect
not to extend their relationship with us, and we are not
successful in generating sales to replace the lost business, our
future business and operating results could be materially
adversely affected. In addition, we believe the managed care
industry is undergoing substantial consolidation, and another
party that is not our client could acquire some of our managed
care clients. In such case, the likelihood such client would
renew its contract with us could be reduced.
More than 58,000 retail pharmacies, which represent more than
98% of all United States retail pharmacies, participate in our
pharmacy network. However, the top ten retail pharmacy chains
represent approximately 48% of the total number of stores in our
network, and an even higher concentration in certain areas of
the United States, and over 60% of prescriptions filled in our
network. Our contracts with retail pharmacies, which are
non-exclusive, are generally terminable on relatively short
notice. If one or more of the top pharmacy chains elects to
terminate its relationship with us, our members’ access to
retail pharmacies and our business could be materially adversely
affected. In addition, many large pharmacy chains either own
PBMs today, or could attempt to acquire a PBM in the future.
Ownership of PBMs by retail pharmacy chains could have material
adverse effects on our relationships with such pharmacy chains
and on our consolidated results of operations, consolidated
financial position and/or consolidated cash flow from operations.
Pending and future litigation could subject us to significant
monetary damages and/or require us to change our business
practices.
We are subject to risks relating to litigation and other
proceedings in connection with our operations, including the
dispensing of pharmaceutical products by our mail service and
community pharmacies. A list of the more significant proceedings
pending against us is included under Part I, Item 3,
“Legal Proceedings.” While we believe that these suits
are without merit and intend to contest them vigorously, we can
give no assurance that an adverse outcome in one or more of
these suits would not have a material adverse effect on our
consolidated results of operations, consolidated financial
position and/or consolidated cash flow from operations, or would
not require us to make material changes to our business
practices. We are presently responding to several subpoenas and
requests for information from governmental agencies. We cannot
predict with certainty what the result of any such inquiry might
be. In addition to potential monetary liability arising from
these suits and proceedings, we are incurring costs in the
defense of the suits and in providing documents to government
agencies. Certain of the costs are covered by our insurance, but
certain other costs are not
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insured. Such costs have become material to our financial
performances and we can give no assurance that such costs will
not increase in the future.
We may be subject to liability claims for damages and other
expenses that are not covered by insurance.
A successful product or professional liability claim in excess
of our insurance coverage could harm our financial condition and
results of operations. Various aspects of our business may
subject us to litigation and liability for damages, including
the performance of PBM Services and the operation of our
pharmacies. A successful professional liability claim in excess
of our insurance coverage could harm our financial condition and
results of operations. For example, a prescription drug
dispensing error could result in a patient receiving the wrong
or incorrect amount of medication, leading to personal injury or
death. Our business, financial condition and results of
operations could suffer if we pay damages or defense costs in
connection with a claim that is outside the scope of any
applicable contractual indemnity or insurance coverage.
Existing and new government legislative and regulatory action
could adversely affect our business and financial results.
As a participant in the pharmaceutical healthcare services
industry, our operations are subject to complex and evolving
federal and state laws and regulations and enforcement by
federal and state governmental agencies. These laws and
regulations are described in detail at Part I, Item 1,
“Business — Government Regulation.” While we
believe we are operating our business in substantial compliance
with all existing legal requirements material to the operation
of our business, different interpretations and enforcement
policies of these laws and regulations could subject our current
practices to allegations of impropriety or illegality, or could
require us to make significant changes to our operations. In
addition, if we fail to comply with existing or future
applicable laws and regulations, we could suffer civil or
criminal penalties, including our ability to participate in
federal and state healthcare programs. In addition, we cannot
predict the impact of future legislation and regulatory changes
on our business or assure that we will be able to obtain or
maintain the regulatory approvals required to operate our
business.
Loss of relationships with one or more pharmaceutical
manufacturers and changes in payments made by pharmaceutical
manufacturers could adversely affect our business and financial
results.
We have contractual relationships with pharmaceutical
manufacturers that pay discounts on drugs dispensed from our
mail service and community pharmacies, rebates based on sales of
drugs from our mail order pharmacy and pharmacies in our network
of retail pharmacies and service fees for other programs and
services that we provide. Our business and financial results
could be adversely affected if: (i) we were to lose
relationships with one or more key pharmaceutical manufacturers;
(ii) rebates or other discounts decline due to changes in
utilization of specified pharmaceutical products by health plan
sponsors and other clients; (iii) legal restrictions are
imposed on the ability of pharmaceutical manufacturers to offer
rebates, administrative fees or other discounts or to purchase
our programs or services; or (iv) pharmaceutical
manufacturers choose not to offer rebates, administrative fees
or other discounts or to purchase our programs or services.
Failure to develop new products, services and delivery
channels may adversely affect our business.
We operate in a highly competitive environment. We
develop new products and services from time to time to assist
our clients in managing the pharmacy benefit. If we are
unsuccessful in developing innovative products and services, our
ability to attract new clients and retain existing clients may
suffer.
Technology is also an important component of our business, as we
continue to utilize new and better channels, such as the
Internet, to communicate and interact with our clients, members
and business partners. If our competitors are more successful
than us in employing this technology, our ability to attract new
clients, retain existing clients and operate efficiently may
suffer.
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The success of our business depends on maintaining a
well-secured business and technology infrastructure.
We are dependent on our infrastructure, including our
information systems, for many aspects of our business
operations. A fundamental requirement for our business is the
secure storage and transmission of personal health information
and other confidential data. Our business and operations may be
harmed if we do not maintain our business processes and
information systems, and the integrity of our confidential
information. Although we have developed systems and processes
that are designed to protect information against security
breaches, failure to protect such information or mitigate any
such breaches may adversely affect our operating results.
Malfunctions in our business processes, breaches of our
information systems or the failure to maintain effective and
up-to-date information
systems could disrupt our business operations, result in
customer and member disputes, damage our reputation, expose us
to risk of loss or litigation, result in regulatory violations,
increase administrative expenses or lead to other adverse
consequences.
The use of personal health information in our business is
regulated at federal, state and local levels. These laws and
rules change frequently and developments often require
adjustments or modifications to our technology infrastructure.
Noncompliance with these regulations could harm our business,
financial condition and results of operations.
Efforts to reduce health care costs and alter health care
financing practices could adversely affect our business.
During the past several years, the U.S. healthcare industry
has been subject to an increase in governmental regulation at
both the federal and state levels. Certain proposals have been
made at the federal and state government levels in an effort to
control healthcare costs, including lowering reimbursement
and/or proposing to lower reimbursement under Medicaid and
Medicare programs. These proposals include “single
payer” government funded health care and price controls on
prescription drugs. If these or similar efforts are successful
our business and operations could be materially adversely
affected. In addition, changing political, economic and
regulatory influences may affect health care financing and
reimbursement practices. If the current health care financing
and reimbursement system changes significantly, our business
could be materially adversely affected. Congress periodically
considers proposals to reform the U.S. health care system.
These proposals may increase government involvement in health
care and regulation of PBM services, or otherwise change the way
our clients do business. Health plan sponsors may react to these
proposals and the uncertainty surrounding them by reducing or
delaying purchases of cost control mechanisms and related
services that we provide. We cannot predict what effect, if any,
these proposals may have on our business. Other legislative or
market-driven changes in the health care system that we cannot
anticipate could also materially adversely affect our
consolidated results of operations, consolidated financial
position and/or consolidated cash flow from operations.
Prescription volumes may decline, and our net revenues and
profitability may be negatively impacted, when products are
withdrawn from the market or when increased safety risk profiles
of specific drugs result in utilization decreases.
We process significant volumes of pharmacy claims for brand-name
and generic drugs from our mail service and community pharmacies
and through our network of retail pharmacies. These volumes are
the basis for our net revenues and profitability. When products
are withdrawn by manufacturers, or when increased safety risk
profiles of specific drugs or classes of drugs result in
utilization decreases, physicians may cease writing or reduce
the numbers of prescriptions written for these drugs.
Additionally, negative media reports regarding drugs with higher
safety risk profiles may result in reduced consumer demand for
such drugs. In cases where there are no acceptable prescription
drug equivalents or alternatives for these prescription drugs,
our prescription volumes, net revenues, profitability and cash
flows may decline.
| Item 1B. | Unresolved Staff Comments |
None.
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| Item 2. | Properties |
Our executive offices are located in Elmsford, New York, and our
business offices are located in Eden Prairie, Minnesota. Our
mail operations are located in Columbus, Ohio and
San Francisco, California. Our pharmacies are located in
major metropolitan locations across the United States. We
currently lease all of our properties from third parties under
various lease terms expiring over periods extending to 2012.
Property locations are as follows:
| Corporate Offices | ||||
| Community and Infusion Pharmacies | ||||
|
Elmsford, NY Eden Prairie, MN Mail Operations Columbus, OH San Francisco, CA |
California Burbank (Infusion) Palm Springs San Diego San Francisco Sherman Oaks West Hollywood District of Columbia Washington D. C. Florida Ft. Lauderdale Miami Beach Orlando St. Petersburg Tampa West Palm Beach Georgia Atlanta Indiana Indianapolis(2) Illinois Chicago Massachusetts Boston Minnesota Minneapolis |
Missouri Kansas City St. Louis Nevada Las Vegas New Jersey Livingston (Infusion) New York Bronx Long Island Manhattan Ohio Columbus Pennsylvania Philadelphia Tennessee Memphis Texas Dallas(2) Houston Washington Seattle Wisconsin Milwaukee |
||
| Item 3. | Legal Proceedings |
Robert Unger, a shareholder of Chronimed, Inc., filed a
purported class action lawsuit in the state court of Minnesota,
Hennepin County, on August 16, 2004, naming Chronimed, Inc,
and certain of its officers and directors as defendants. He
amended his complaint on December 10, 2004, to add an
additional plaintiff and BioScrip, Inc, (under the name MIM
Corporation) as an additional defendant. The amended complaint
asserts claims against the Chronimed officer and director
defendants, who are represented by other law firms, for alleged
breach of their fiduciary duties in connection with the merger
agreement by which we acquired Chronimed in March 2005 and
alleges that we aided those alleged breaches. The amended
complaint seeks rescission of the merger and other relief. The
amended complaint was never served on us, and we have not
responded to the pleading, appeared in the lawsuit, or been
involved in any proceedings in the case. The court dismissed the
amended complaint as against the Chronimed officer and director
defendants and denied the plaintiffs’ motion to reinstate
it.
On February 14, 2005, a complaint was filed in the Alabama
Circuit Court for Barbour County, captioned Eufaula Drugs,
Inc. v. ScriptSolutions [sic]. On April 8, an
amended complaint was filed against one of our subsidiaries,
ScripSolutions. The plaintiff alleges breach of contract and
related claims on behalf of a putative nationwide class of
pharmacies alleging insufficient reimbursement for prescriptions
dispensed,
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principally on the theory that ScripSolutions, was obligated to
update its prescription pricing files on a daily, rather than
weekly, basis. ScripSolutions removed the case to the United
States Federal District Court for the Middle District of Alabama
in April 2005. The plaintiff moved to remand the action to state
court, which ScripSolutions opposed. ScripSolutions also moved
in May 2005 to dismiss the complaint on jurisdictional grounds
or to transfer the matter to a federal court in New York or
Rhode Island which the plaintiff opposed. On October 6,
2005, the District Court granted Plaintiff’s motion to
remand the case to the state court and did not decide
ScripSolutions’ motion to dismiss or transfer. The district
court did not rule on our motion to dismiss or transfer the
action and remanded the action to the Alabama State court.
ScripSolutions appealed that decision to the Eleventh Circuit
Court of Appeals. The U.S. Court of Appeals for the
Eleventh Circuit has declined to review the district
court’s remand discussion and denied our motion for
rehearing of the decision. Our time to seek further appellate
review has not yet expired. ScripSolutions has not filed an
answer to the complaint and no other proceedings have occurred.
ScripSolutions intends to deny the plaintiff’s allegations
and defend the claims vigorously. The action is one of
approximately 14 substantially identical actions commenced in
Alabama courts against Pharmacy Benefit Management companies.
The U.S. Attorney’s Office in Boston and the
Department of Justice have informed us that our subsidiary,
BioScrip Pharmacy, is a defendant in a Qui Tam lawsuit under the
federal False Claims Act filed by a whistleblower against
Serono, Inc., and several other defendants. The government has
settled the Qui Tam claims in the lawsuit with Serono, Inc., and
has not yet made a decision to intervene in the suit against
remaining defendants. No complaint has been served on us and we
have had only limited opportunity to review it as it is filed
under seal in the United States District Court for the District
of Massachusetts. The government however has invited us to
explore settlement. For purposes of settlement discussions, the
government’s estimate of damages is close to
$10.0 million, which allegedly resulted from claims for
government reimbursement made by StatScript during 1997 through
2000 for the sale of Serono’s drug Serostim. The government
alleges that these claims are tainted by data sharing and
preferred provider agreements between Serono and BioScrip
Pharmacy. According to a government attorney, as part of its
settlement, Serono agreed to pay 50% of damages allegedly
resulting from its relationships with pharmacies, which should
include 50% of the amount attributed to the StatScript sales.
American Prescription Providers (APP) also is reported to
be a defendant in the same lawsuit. Our Chronimed, Inc.
subsidiary purchased several pharmacies from APP in February
2001, after the time period at issue in the Qui Tam case.
Currently, the government is separately discussing directly with
APP settlement of the alleged APP damages of approximately
$7.5 million. It is not known at this time whether APP or
the government will take the position that we are liable for the
alleged APP damages.
The Eufaula litigation and Serono investigation are in the early
stages of their proceedings and, as such, we are currently
unable to assess the probable outcomes of these proceedings or
their respective financial impact. If either or both of these
matters were resolved adversely to us, either could have a
material adverse effect on us.
| Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders
during the fourth quarter of the fiscal year reported on in this
Form 10-K.
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PART II
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters |
Our common stock, par value $0.0001 per share (“Common
Stock”), is traded on the National Market System of The
Nasdaq Stock Market, Inc. under the symbol “BIOS.” The
following table represents the range of high and low sale prices
for our Common Stock for the last eight quarters. Such prices
reflect interdealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
| High | Low | |||||||
|
2004
|
||||||||
|
First Quarter
|
$ | 8.15 | $ | 6.81 | ||||
|
Second Quarter
|
$ | 9.80 | $ | 7.10 | ||||
|
Third Quarter
|
$ | 9.14 | $ | 5.66 | ||||
|
Fourth Quarter
|
$ | 6.95 | $ | 5.25 | ||||
|
2005
|
||||||||
|
First Quarter
|
$ | 7.01 | $ | 5.75 | ||||
|
Second Quarter
|
$ | 6.57 | $ | 5.13 | ||||
|
Third Quarter
|
$ | 7.03 | $ | 5.88 | ||||
|
Fourth Quarter
|
$ | 9.07 | $ | 5.93 | ||||
As of March 24, 2006, there were 243 stockholders of record
in addition to approximately 8,300 stockholders whose shares
were held in nominee name. On March 24, 2006 the closing
sale price of our Common Stock on Nasdaq was $7.04.
We have never paid cash dividends on our Common Stock and do not
anticipate doing so in the foreseeable future.
During the twelve months ended December 31, 2005, we did
not sell any securities without registration under the
Securities Act of 1933, as amended (the “Securities
Act”).
* * * * * * * *
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| Item 6. | Selected Consolidated Financial Data |
The selected consolidated financial data presented below should
be read in conjunction with, and is qualified in its entirety by
reference to, Management’s Discussion and Analysis and our
Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Report. The 2005 information below
includes Chronimed beginning March, 2005 and Northland beginning
October, 2005. See Note 4 of Notes to Consolidated
Financial Statements.
| December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 1,521 | $ | 2,957 | $ | 9,428 | $ | 5,751 | $ | 12,487 | ||||||||||
|
Working capital
|
67,438 | 13,967 | 20,283 | 5,101 | 9,307 | |||||||||||||||
|
Total assets
|
288,637 | 185,778 | 171,191 | 182,231 | 139,819 | |||||||||||||||
|
Capital lease obligations, net of current portion
|
— | — | 35 | 430 | 1,031 | |||||||||||||||
|
Stockholders’ equity
|
195,765 | 115,683 | 107,202 | 94,208 | 60,296 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
|
Statement of Operations Data
|
||||||||||||||||||||
|
Revenue(1)
|
$ | 1,073,235 | $ | 630,516 | $ | 588,770 | $ | 576,596 | $ | 456,646 | ||||||||||
|
Merger related expenses(2)
|
4,575 | — | — | — | — | |||||||||||||||
|
TennCare®
reserve(3)
|
— | — | — | (851 | ) | (2,476 | ) | |||||||||||||
|
Goodwill and intangible impairment(4)
|
25,165 | — | — | — | — | |||||||||||||||
|
Net (loss) income(5,6,7,8)
|
(23,847 | ) | 7,033 | 9,130 | 18,685 | 14,202 | ||||||||||||||
|
Net (loss) income per basic share
|
(0.70 | ) | 0.32 | 0.41 | 0.83 | 0.67 | ||||||||||||||
|
Net (loss) income per diluted share(9)
|
(0.70 | ) | 0.31 | 0.40 | 0.79 | 0.64 | ||||||||||||||
|
Weighted average shares outstanding used in computing basic
(loss) income per share
|
34,129 | 22,245 | 22,164 | 22,616 | 21,273 | |||||||||||||||
|
Weighted average shares outstanding used in computing diluted
(loss) income per share
|
34,129 | 22,702 | 22,640 | 23,563 | 22,289 | |||||||||||||||
| (1) | Revenue includes: TennCare® PBM Services revenue of $67.8 million, $140.2 million and $141.9 million for the years 2003, 2002 and 2001, respectively; Synagis® revenue of $13.7 million, $14.6 million and $3.7 million for the years 2003, 2002 and 2001, respectively; and Value Options revenue of $19.7 million and $20.8 million for the years 2004 and 2003, respectively. Revenue from TennCare and Synagis ended in 2003. Revenue from Value Options ended in 2004. |
| (2) | Reflects merger, integration and re-branding expenses related to the Company’s acquisition of Chronimed on March 12, 2005. |
| (3) | In 1999, we recorded $6.0 million of TennCare® reserve adjustments for estimated losses on contract receivables relating to Tennessee Health Partnership (“THP”), Preferred Health Plans and Xantus Health Plans of Tennessee, Inc. (“Xantus”). During 2001, we recorded a reserve adjustment credit of $1.0 million to reflect a favorable settlement with THP relative to the amount initially reserved in 1999. In the third quarter of 2001 and the first quarter of 2002, we recorded TennCare® reserve adjustment credits of $1.5 million and $0.9 million, respectively, as a result of the collection of the receivables reserved in 1999 from Xantus. |
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| (4) | Includes a $4.0 million charge, net of tax, related to write-off of trade names due to our rebranding strategy in the Specialty Services segment, and an $18.2 million charge, net of tax, related to goodwill impairment in the PBM Services segment. |
| (5) | Net income in 2003 includes a $0.6 million charge, net of tax, related to a settlement with our founder, E. David Corvese, and a restructuring charge of $0.9 million, net of tax. |
| (6) | Net income in 2004 includes a $0.5 million charge, net of tax, related to a global settlement with Value Options of Texas, Inc. |
| (7) | Net loss in 2005 includes a $4.3 million charge, net of tax, in the fourth quarter to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the merger integration period. |
| (8) | Effective tax rate (see Management’s Discussion and Analysis for explanation of the change in the effective tax rate). |
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||
| 19.4 | % | 38.8 | % | 40.0 | % | 20.0 | % | 6.2 | % | |||||||||
| (9) | The 2005 net loss per diluted share excludes the effect of common stock equivalents, as their inclusion would be anti-dilutive. |
* * * * * * * * *
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Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(“MD&A”) is designed to provide the reader with
information that will assist in understanding our consolidated
financial statements, the changes in certain key items in those
financial statements from year to year and the primary factors
that accounted for those changes, as well as how certain
accounting principles affect our consolidated financial
statements. The discussion also provides information about the
financial results of the various segments of our business to
provide a better understanding of how those segments and their
results affect the financial condition and results of operations
of BioScrip as a whole. This discussion should be read in
conjunction with our Consolidated Financial Statements,
including the Notes thereto, and the information discussed in
Part I, Item 1A — Risk Factors.
“Safe Harbor” Statement Under the Private
Securities Litigation Reform Act of 1995
This Report contains statements not purely historical and which
may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act, and Section 21E
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), including statements regarding our
expectations, hopes, beliefs, intentions or strategies regarding
the future. These forward looking statements may include
statements relating to our business development activities,
sales and marketing efforts, the status of material contractual
arrangements, including the negotiation or re-negotiation of
such arrangements, future capital expenditures, the effects of
regulation and competition on our business, future operating
performance and the results, benefits and risks associated with
integration of acquired companies. Investors are cautioned that
any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties; that actual
results may differ materially from those possible results
discussed in the forward-looking statements as a result of
various risks, uncertainties and other factors. You should not
place undue reliance on such forward-looking statements as they
speak only as of the date they are made, and we assume no
obligation to publicly update or revise any forward-looking
statement even if experience or future changes make it clear
that any projected results expressed or implied therein will not
be realized.
These factors include, among other things, risks associated with
risk-based or “capitated” contracts, increased
government regulation related to the health care and insurance
industries in general and more specifically, pharmacy benefit
management and specialty pharmaceutical distribution
organizations, changes in reimbursement rates from government
and private payors, the existence of complex laws and
regulations relating to our business, increased competition from
our competitors, including competitors with greater financial,
technical, marketing and other resources. This report contains
information regarding important factors that could cause such
differences.
Business Overview
We are a specialty pharmacy services provider that distributes
prescription drugs, coordinates customer benefits and provides
specialized therapy management services for people with certain
health conditions, particularly those treated with biotech
injectable medications, as well as those afflicted with
potentially life threatening or debilitating diseases or genetic
disorders and requiring specialty medications. We work with
patients, physicians and pharmaceutical manufacturers. We also
work directly with a variety of health insurers, including
HMO’s, indemnity plans and PPO’s, managed care
organizations, other insurance companies, and, to a lesser
extent, labor unions, self-funded employer groups, government
agencies (including Medicaid and Medicare) and other self-funded
plan sponsors, as well as through third-party administrators. We
work with all of these constituents in a concerted effort to
improve clinical and economic outcomes while enhancing the
quality of life for the individuals living with chronic
conditions.
On March 12, 2005 we acquired all of the issued and
outstanding stock of Chronimed Inc. (“Chronimed”) in a
stock-for-stock transaction. The companies had a shared vision
of balanced health care cost containment with better patient
outcomes and localized distribution, providing high-touch care
to the chronically ill and the acquisition resulted in an
organization that is able to offer broader disease coverage,
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focused therapy management, expansive national retail and mail
distribution capabilities and a pharmacy benefit management
(“PBM”) platform.
Our services are organized under two operating segments:
(i) specialty pharmacy distribution and clinical management
services (collectively, “Specialty Services”) which
are provided through our community pharmacy, infusion services,
and specialty mail pharmacy businesses; and (ii) pharmacy
benefit management and traditional mail services (collectively,
“PBM Services”).
Our Specialty Services are provided primarily to patients who
either have chronic health conditions or are afflicted with
potentially life threatening or debilitating diseases or genetic
disorders and require specialty medications. These specialty
services include the distribution of biotech and other high cost
injectable, oral and infusable prescription medications and the
provision of pharmacy-related clinical management services,
product administration and disease state programs. Specialty
Services are also offered to physicians, in a variety of
practice and/or hospital settings, on behalf of their patients.
Many of these physicians have network affiliations with Plan
Sponsors, who in turn have a relationship with us.
Historically, our PBM Services were offered to Plan Sponsors and
were designed to promote a broad range of cost-effective,
clinically appropriate pharmacy benefit management services
through our network of retail pharmacies and our dedicated
traditional mail service distribution facility. Over the past
several years we have focused on building our Specialty Services
for strategic growth. Consequently, the PBM Services’
managed care business has decreased as a percentage of total
revenue.
As part of our business we develop and maintain existing
relationships with pharmaceutical manufacturers through a
dedicated Pharmaceutical Relations department. These efforts
have been concentrated on the creation and execution of new drug
distribution and service contracts in our core specialty
therapeutic areas, including providing those medications used
for the treatment of Cancer, Multiple Sclerosis, HIV, Immune
Deficiency and other patients living with chronic illnesses and
life threatening diseases. The specialty management services
that we provide through our national mail pharmacy, community
pharmacies and infusion businesses are attractive to the
pharmaceutical manufacturer community, demonstrated by recent
successes in being selected for participation in national
specialty distribution networks for newly approved, high-cost
medications. These new contracts provide new sales and revenue
opportunities which we began to realize in 2005 and expect to
continue in 2006 and beyond.
We also distribute and administer high cost specialty infusion
therapies to patients principally requiring immunological blood
products, parenteral nutrition products, and infused antibiotic
therapies. We strive to maximize therapy outcomes through strict
adherence to the clinical guidelines or protocols for a
particular prescription therapy while at the same time managing
the costs of such therapies on behalf of a Plan Sponsor or
patient. Unlike the other specialty programs, infusion patients
have their therapies administered intravenously by IV
certified nurses.
We plan to grow our infusion business through a variety of
means. We believe that there are acquisition opportunities that
will expand our geographic reach, permitting us to service a
greater number of patients and Plan Sponsors under contract. We
also plan to broaden our product offering in our current
geographic service area by adding new therapies to our current
focus on immunological blood products, including our most recent
focus on patients with hemophilia. We will also work with
physicians who utilize our services to support their in-office
infusion activities.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles
(“GAAP”). In preparing our financial statements, we
are required to make estimates and judgments that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets
27
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and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. We evaluate our estimates and judgments on an ongoing
basis. We base our estimates and judgments on historical
experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Our actual results may differ from these estimates, and
different assumptions or conditions may yield different
estimates. The following discussion highlights what we believe
to be the critical accounting estimates and judgments made in
the preparation of our consolidated financial statements.
The following discussion is not intended to be a comprehensive
list of all the accounting estimates or judgments made in the
preparation of our financial statements, and in many cases the
accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, with no
need for management’s judgment in its application. See our
audited consolidated financial statements and notes thereto
which appear in Item 8 — Financial Statements and
Supplementary Data of this Annual Report on
Form 10-K, which
contain accounting policies and other disclosures required by
GAAP.
| Revenue Recognition |
We generate revenue principally through the sale of prescription
drugs, which are dispensed either through a pharmacy
participating in our pharmacy network or a pharmacy owned by us.
Revenue is generally derived under fee-for-service agreements;
however, an immaterial amount of revenue is derived from
capitated agreements. Prescription drug revenue is offset by the
rebates shared with Plan Sponsors.
Fee-For-Service Agreements. Fee-for-service agreements
include: (i) specialty and mail service agreements, where
we dispense prescription medications through our pharmacy
facilities and (ii) PBM agreements, where prescription
medications are dispensed through pharmacies participating in
our retail pharmacy network as well as through our traditional
mail service facility. Under fee-for-service agreements, revenue
is recognized either: (a) when the pharmacy services are
reported to us through the point of sale (“POS”)
claims processing system and the drug is dispensed to the
Member, in the case of a prescription filled through a pharmacy
participating in our retail pharmacy network, or (b) at the
time the drug is dispensed, in the case of a prescription filled
through a pharmacy owned by us. Fee-for-service agreements
accounted for more than 95% of our revenue for each of the years
ended December 31, 2005, 2004 and 2003.
Revenue generated under PBM agreements is classified as either
gross or net by us based on whether we are acting as a principal
or an agent in the fulfillment of prescriptions through our
retail pharmacy network. When we independently have a
contractual obligation to pay a network pharmacy provider for
benefits provided to its Plan Sponsors’ Members, and have
other indicia of risk and reward, we include payments (which
include the drug ingredient cost) from these Plan Sponsors as
revenue and payments to the network pharmacy providers as cost
of revenue, as these transactions require us to assume credit
risk and act as a principal. If we merely act as an agent, and
consequently administer plan sponsors’ network pharmacy
contracts, we do not assume credit risk and record only the
administrative fees (and not the drug ingredient cost) as
revenue.
Co-Payments; Co-Insurance. When prescriptions are filled
by our own pharmacies (that is, where we are acting as a
participating pharmacy in another PBM’s or payor’s
pharmacy network), we collect and retain co-payments or
co-insurance from Plan Sponsors’ members and record these
receipts as revenue when the amounts are collected or deemed
collectible and reasonably estimable. Conversely, when
prescriptions are filled through pharmacies participating in our
retail pharmacy networks, we are not entitled to retain
co-payments or co-insurance and accordingly do not recognize
revenue with respect to or account for retail pharmacy
co-payments or co-insurance in our financial statements. In our
capacity as a PBM, pharmacy network co-payments and co-insurance
are never billed or collected by us and we have no legal right
or obligation to receive them as they are collected by our
network pharmacies.
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| Allowance for Doubtful Accounts |
Allowances for doubtful accounts are based on estimates of
losses related to customer receivable balances. The procedure
for estimating the allowance for doubtful accounts requires
significant judgment and assumptions. The risk of collection
varies based upon the product, the payor (commercial health
insurance, government, physician), the patient’s ability to
pay the amounts not reimbursed by the payor and point of
distribution (retail, national mail). We estimate the allowance
for doubtful accounts based upon a variety of factors including
the age of the outstanding receivables and our historical
experience of collections, adjusting for current economic
conditions and, in some cases, evaluating specific customer
accounts for risk of loss. We periodically review the estimation
process and make changes to the estimates as necessary. In the
fourth quarter of 2005 we recorded a $7.1 million charge to
reflect an increase in the allowance for doubtful accounts
receivable created by lower than expected collections during the
Chronimed merger integration period.
| Allowance for Contractual Discounts |
We are reimbursed for the medications and services we sell by
Plan Sponsors. Revenues and related accounts receivable are
recorded net of payor contractual discounts to reflect the
estimated net billable amounts for the products and services
delivered. We estimate the allowance for contractual discounts,
based on historical experience and in certain cases on a
customer-specific basis, given our interpretation of the
contract terms or applicable regulations. However, the
reimbursement rates are often subject to interpretation that
could result in payments that differ from our estimates.
Additionally, updated regulations and contract negotiations
occur frequently, necessitating our continual review and
assessment of the estimation process.
| Rebates |
Manufacturers’ rebates are primarily part of our PBM
Services segment and are recorded as estimates until such time
as the rebate monies are received. These estimates are based on
historical results and trends and are revised on a regular basis
depending on our latest forecasts, as well as information
received from rebate sources. Should actual results differ,
adjustments will be recorded in future earnings. In some
instances, rebate payments are shared with our managed care
organizations. Shared rebates are recorded as a reduction of
revenue. Total rebates are recorded as a reduction of cost of
goods sold.
| Payables to Plan Sponsors |
Payables to Plan Sponsors represent the sharing of
pharmaceutical rebates with the Plan Sponsors as part of our PBM
Services segment. We estimate the portion of those pharmacy
rebates that are shared with Plan Sponsors and adjust pharmacy
rebates payable to Plan Sponsors when the amounts are paid,
typically on a quarterly basis in arrears, or as significant
events occur. These estimates are recorded based on actual and
estimated claims data and agreed upon contractual rebate sharing
rates. We adjust these estimates on a periodic basis based on
changing circumstances such as contract modifications, product
mix subject to rebates, and changes in the applicable formulary.
| Income Taxes |
As part of the process of preparing our consolidated financial
statements, we estimate income taxes in each of the
jurisdictions in which we operate. We account for income taxes
under Statement of Financial Accounting Standards
(“SFAS”) No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the use of the asset
and liability method of accounting for income taxes. Under this
method, deferred taxes are determined by calculating the future
tax consequences attributable to differences between the
financial accounting and tax bases of existing assets and
liabilities. A valuation allowance is recorded against deferred
tax assets when, in the opinion of management, it is more likely
than not that we will be able to realize the benefit from the
deferred tax assets. Deferred tax assets that will be utilized
within twelve months are classified as current assets.
In addition, we have established, and periodically review and
reevaluate, an estimated income tax reserve. This income tax
reserve is for exposures related to various Federal and state
tax matters. An accrual is
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established at the time an exposure is identified when it is
both probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. While we believe
that we have identified all reasonably identifiable exposures
and that the reserve we have established for identifiable
exposures is appropriate under the circumstance, it is possible
that additional exposures exist and that the exposures will be
settled at amounts different than the amounts reserved. It is
possible that changes in estimates in the future could cause us
to either materially increase or reduce the carrying amount of
our income tax reserve.
| Purchase Price Allocation |
We account for acquisitions under the purchase method of
accounting. Accordingly, any assets acquired and liabilities
assumed are recorded at their respective fair values. The
recorded values of assets and liabilities are based on third
party estimates and independent valuations. The remaining values
are based on management’s judgments and estimates.
Accordingly, our financial position or results of operations may
be affected by changes in estimates and judgments used to value
these assets and liabilities.
| Goodwill |
Effective on January 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses the accounting and
reporting of goodwill and other intangible assets subsequent to
their acquisition. Since adoption, amortization of goodwill was
discontinued and goodwill is reviewed at least annually for
impairment, generally in the fourth quarter.
We evaluate goodwill for impairment based on a two-step process.
The first step compares the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not impaired and the second step of the
impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the
goodwill impairment test is necessary to measure the amount of
impairment loss, if any. The second step compares the implied
fair value of reporting unit goodwill with the carrying amount
of that goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an
impairment loss would be recognized in an amount equal to that
excess.
We have two reporting units: (i) Specialty Services and
(ii) PBM Services. The fair value of the Specialty Services
segment exceeded its carrying amount resulting in no impairment
charges in fiscal year 2005. The fair value of the PBM Services
segment was less than its carrying amount, resulting in an
$18.6 million goodwill impairment charge in the fourth
quarter of 2005.
| Impairment of Long Lived Assets |
We evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived
assets, including intangible assets, may warrant revision or
that the remaining balance of an asset may not be recoverable.
The measurement of possible impairment is based on the ability
to recover the balance of assets from expected future operating
cash flows on an undiscounted basis. Impairment losses, if any,
would be determined based on the present value of the cash flows
using discount rates that reflect the inherent risk of the
underlying business. During 2005, we implemented a rebranding of
all our business lines to a single brand —
“BioScrip.” As a result of that strategy the value of
the trade names associated with our Natural Living, Inc. and
Vitality Home Infusion Services, Inc. subsidiaries has been
eliminated, and these assets have been removed from the balance
sheet. This resulted in a $5.8 million charge in the second
quarter of 2005.
In the fourth quarter of 2005 we evaluated goodwill for
impairment and recorded a charge as described above. As part of
goodwill impairment testing, we further determined that certain
intangible assets associated with customer lists were no longer
recoverable from future cash flows. This resulted in a
$0.8 million intangible impairment charge in fourth quarter
2005.
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| Accounting for Stock-Based Compensation |
We account for employee stock and stock-based compensation plans
through the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees
(“APB 25”) as permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”) and as
such, generally recognize no compensation expense for employee
stock options.
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment, which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes
APB 25, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach to estimating the fair
value of options in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized as a current period expense in the income statement
based on their fair values. Pro forma disclosure is no longer an
alternative and SFAS No. 123(R) must be adopted no
later than January 1, 2006.
We adopted the fair-value-based method of accounting for
share-based payments effective January 1, 2006. The impact
of adoption of SFAS No. 123(R) is difficult to predict
because it will depend on levels of share-based payments granted
from and after January 1, 2006. As of the date of this
Annual Report on
Form 10-K, the
impact of SFAS No. 123(R) in 2006 would be a reduction
of approximately $1.2 million in net income and $0.03
earnings per share for known grants through the date of this
report. We expect additional grants to be made during the
remainder of 2006, the impact of which is not estimable at this
time. Had we adopted SFAS No. 123(R) in prior periods,
the impact of that standard would have approximated the impact
of SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Note 2 of Notes
to Consolidated Financial Statements.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current year presentation. Such reclassifications had no
material effect on our previously reported consolidated
financial position, results of operations or cash flows.
Results of Operations
The following unaudited condensed consolidated pro forma
financial information for the years ended December 31,
2005, 2004 and 2003 has been prepared as if the Chronimed
acquisition had been consummated at the beginning of each
respective period, utilizing the purchase method of accounting,
with pro forma adjustments for amortization of intangibles
associated with the acquisition. The number of basic and diluted
shares has also been adjusted assuming we exchanged each
outstanding share of Chronimed common stock for 1.12 shares
of our common stock. We believe this information to be helpful
in gaining an understanding of future financial and operating
results and trends. In the following Management’s
Discussion and Analysis we provide discussion of both the
reported results as set forth in the Financial Statements and
the pro forma results as presented in the tables below.
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Table of Contents
Pro Forma Consolidated Results
(In thousands, except per share and percentage data)
(Unaudited)
| Year Ended December 31, 2005 | ||||||||||||||||||
| BioScrip As | Chronimed | Pro Forma | Pro Forma | |||||||||||||||
| Reported | Pre-Merger | Adjustments | Combined | |||||||||||||||
|
Revenue
|
||||||||||||||||||
|
Specialty Services
|
$ | 688,512 | $ | 114,079 | $ | — | $ | 802,591 | ||||||||||
|
PBM Services
|
384,723 | — | — | 384,723 | ||||||||||||||
|
Total revenue
|
1,073,235 | 114,079 | 1,187,314 | |||||||||||||||
|
Cost of revenue
|
956,968 | 101,155 | — | 1,058,123 | ||||||||||||||
|
Gross profit
|
116,267 | 12,924 | — | 129,191 | ||||||||||||||
|
% of Revenue
|
10.8 | % | 11.3 | % | 10.9 | % | ||||||||||||
|
Operating expenses
|
||||||||||||||||||
|
Selling, general and administrative expenses
|
96,521 | 10,498 | — | 107,019 | ||||||||||||||
|
Bad debt expense
|
12,814 | 840 | 13,654 | |||||||||||||||
|
Amortization of intangibles
|
6,395 | — | 958 | (1) | 7,353 | |||||||||||||
|
Merger related expenses
|
4,575 | 2,037 | — | 6,612 | ||||||||||||||
|
Goodwill and intangible impairment
|
25,165 | — | — | 25,165 | ||||||||||||||
|
Total operating expenses
|
145,470 | 13,375 | 958 | 159,803 | ||||||||||||||
|
% of Revenue
|
13.6 | % | 11.7 | % | 13.5 | % | ||||||||||||
|
Loss from operations
|
(29,203 | ) | (451 | ) | (958 | ) | (30,612 | ) | ||||||||||
|
Interest (expense) income, net
|
(392 | ) | 84 | — | (308 | ) | ||||||||||||
|
Loss before income taxes
|
(29,595 | ) | (367 | ) | (958 | ) | (30,920 | ) | ||||||||||
|
Income tax benefit
|
(5,748 | ) | (143 | ) | (114 | ) | (6,005 | ) | ||||||||||
|
Net loss
|
$ | (23,847 | ) | $ | (224 | ) | $ | (844 | ) | $ | (24,915 | ) | ||||||
|
Basic weighted average shares
|
34,129 | 34,129 | ||||||||||||||||
|
Diluted weighted average shares
|
34,129 | 34,129 | ||||||||||||||||
|
Basic net (loss) per share
|
$ | (0.70 | ) | $ | (0.73 | ) | ||||||||||||
|
Diluted net (loss) per share
|
$ | (0.70 | ) | $ | (0.73 | ) | ||||||||||||
| (1) | Reflects estimated amortization expense as if Chronimed was acquired at the beginning of the year |
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Table of Contents
Pro Forma Consolidated Results
(In thousands, except per share and percentage data)
(Unaudited)
| Year Ended December 31, 2004 | ||||||||||||||||||
| MIM Corp. | Chronimed | Pro Forma | Pro Forma | |||||||||||||||
| As Reported | Pre-Merger | Adjustments | Combined | |||||||||||||||
|
Revenue
|
||||||||||||||||||
|
Specialty Services
|
$ | 251,487 | $ | 589,034 | $ | — | $ | 840,521 | ||||||||||
|
PBM Services
|
379,029 | — | — | 379,029 | ||||||||||||||
|
Total revenue
|
630,516 | 589,034 | — | 1,219,550 | ||||||||||||||
|
Cost of revenue
|
562,360 | 525,511 | — | 1,087,871 | ||||||||||||||
|
Gross profit
|
68,156 | 63,523 | — | 131,679 | ||||||||||||||
|
% of Revenue
|
10.8 | % | 10.8 | % | 10.8 | % | ||||||||||||
|
Operating expenses
|
||||||||||||||||||
|
Selling, general and administrative expenses
|
50,935 | 50,767 | — | 101,702 | ||||||||||||||
|
Bad debt expense
|
1,908 | 4,163 | 6,071 | |||||||||||||||
|
Amortization of intangibles
|
3,019 | — | 4,960 | (1) | 7,979 | |||||||||||||
|
Total operating expenses
|
55,862 | 54,930 | 4,960 | 115,752 | ||||||||||||||
|
% of Revenue
|
8.9 | % | 9.3 | % | 9.5 | % | ||||||||||||
|
Income (loss) from operations
|
12,294 | 8,593 | (4,960 | ) | 15,927 | |||||||||||||
|
Interest (expense) income, net
|
(808 | ) | 280 | — | (528 | ) | ||||||||||||
|
Other income
|
— | 326 | — | 326 | ||||||||||||||
|
Income (loss) before income taxes
|
11,486 | 9,199 | (4,960 | ) | 15,725 | |||||||||||||
|
Income tax expense (benefit)
|
4,453 | 3,530 | (1,882 | ) | 6,101 | |||||||||||||
|
Net income (loss)
|
$ | 7,033 | $ | 5,669 | $ | (3,078 | ) | $ | 9,624 | |||||||||
|
Basic weighted average shares
|
22,245 | 36,609 | ||||||||||||||||
|
Diluted weighted average shares
|
22,702 | 37,204 | ||||||||||||||||
|
Basic net income per share
|
$ | 0.32 | $ | 0.26 | ||||||||||||||
|
Diluted net income per share
|
$ | 0.31 | $ | 0.26 | ||||||||||||||
| (1) | Reflects estimated amortization expense as if Chronimed was acquired at the beginning of the year |
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Table of Contents
Pro Forma Consolidated Results
(In thousands, except per share and percentage data)
(Unaudited)
| Year Ended December 31, 2003 | ||||||||||||||||||
| MIM Corp. | Chronimed | Pro Forma | Pro Forma | |||||||||||||||
| As Reported | Pre-Merger | Adjustments | Combined | |||||||||||||||
|
Revenue
|
||||||||||||||||||
|
Specialty Services
|
$ | 193,243 | $ | 487,147 | $ | — | $ | 680,390 | ||||||||||
|
PBM Services
|
395,527 | — | — | 395,527 | ||||||||||||||
|
Total revenue
|
588,770 | 487,147 | — | 1,075,917 | ||||||||||||||
|
Cost of revenue
|
520,249 | 428,889 | — | 949,138 | ||||||||||||||
|
Gross profit
|
68,521 | 58,258 | — | 126,779 | ||||||||||||||
|
% of Revenue
|
11.6 | % | 12.0 | % | 11.8 | % | ||||||||||||
|
Operating expenses
|
||||||||||||||||||
|
Selling, general and administrative expenses
|
48,920 | 46,167 | — | 95,088 | ||||||||||||||
|
Bad debt expense
|
1,713 | 3,595 | 5,307 | |||||||||||||||
|
Amortization of intangibles
|
1,863 | — | 4,960 | (1) | 6,823 | |||||||||||||
|
Total operating expenses
|
52,496 | 49,762 | 4,960 | 107,218 | ||||||||||||||
|
% of Revenue
|
8.9 | % | 10.2 | % | 10.0 | % | ||||||||||||
|
Income (loss) from operations
|
16,025 | 8,496 | (4,960 | ) | 19,561 | |||||||||||||
|
Interest (expense) income, net
|
(808 | ) | 263 | — | (545 | ) | ||||||||||||
|
Other income
|
— | 75 | — | 75 | ||||||||||||||
|
Income (loss) before income taxes
|
15,217 | 8,834 | (4,960 | ) | 19,091 | |||||||||||||
|
Income tax expense (benefit)
|
6,087 | 2,747 | (1,198 | ) | 7,636 | |||||||||||||
|
Net income (loss)
|
$ | 9,130 | $ | 6,087 | $ | (3,762 | ) | $ | 11,455 | |||||||||
|
Basic weighted average shares
|
22,164 | 36,528 | ||||||||||||||||
|
Diluted weighted average shares
|
22,640 | 37,142 | ||||||||||||||||
|
Basic net income per share
|
$ | 0.41 | $ | 0.31 | ||||||||||||||
|
Diluted net income per share
|
$ | 0.40 | $ | 0.31 | ||||||||||||||
| (1) | Reflects estimated amortization expense as if Chronimed was acquired at the beginning of the year |
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CONSOLIDATED RESULTS
| Year ended December 31, 2005 vs. December 31, 2004 |
Revenue. Total reported revenue for the year ended
December 31, 2005 increased $442.7 million, or 70.2%,
to $1,073.2 million from $630.5 million for the same
period in 2004. This increase was concentrated in the Specialty
Services segment and is primarily attributable to the
acquisition of Chronimed (discussed in Note 4 of the Notes
to Consolidated Financial Statements), the results of which are
included in our Consolidated Statements of Operations starting
March 12, 2005.
On a pro forma combined basis, revenue for the year ended
December 31, 2005 was $1,187.3 million compared to
$1,219.6 million for the same period in 2004, a
$32.3 million, or 2.6%, decrease. The discussion below
explains the primary reasons for these revenue changes in each
of our segments, Specialty Services and PBM Services.
On a pro forma basis, Specialty Services revenue for the year
ended December 31, 2005 was $802.6 million compared to
$840.5 million for the same period a year ago, a
$37.9 million, or 4.5% decrease. This decrease was due
primarily to the loss of Chronimed’s specialty pharmacy
distribution contract with Aetna that ended February 28,
2005, partially offset by growth in our community pharmacies.
Revenue from Aetna was approximately $34.1 million for the
year ended December 31, 2005 compared to
$127.7 million for the previous year. Excluding the lost
business from Aetna, Specialty Services grew 7.8%.
On a pro forma basis, PBM Services revenue for the year ended
December 31, 2005 was $384.7 million compared to
$379.0 million for the same period in 2004, a
$5.7 million, or 1.5% increase. New members from existing
contracts, as well as additional contracts, offset the
termination of certain PBM clients, the most significant being
Value Options, which terminated its contract with us effective
November 30, 2004. Revenue from Value Options and certain
other terminated PBM clients was $58.9 million in 2004. On
December 21, 2005, we were notified by a material PBM
Services’ customer, Centene Corporation, that it had
acquired its own PBM business and would be transitioning its PBM
business with us to its own PBM throughout 2006. PBM Services
revenue in 2006 is expected to decrease approximately
$150 million as Centene transitions this business
throughout the year and as a result of other contract
termination notices received at the end of 2005.
Cost of Revenue and Gross Profit. Reported cost of
revenue for the year ended December 31, 2005 was
$957.0 million compared to $562.4 million for the same
period in 2004. The total gross profit rate as a percentage of
revenue was 10.8% for both 2005 and 2004. The Specialty Services
segment gross profit rate decreased with the addition of the
acquired Chronimed specialty business, which was at a lower
gross profit rate. The PBM Services segment gross profit rate,
which is lower than Specialty Services, increased in 2005 from
2004 due to improved generic utilization and favorable rate
impact created from the loss of lower margin business in 2005.
Pro forma combined cost of revenue decreased $29.8 million,
or 2.7%, to $1,058.1 million for the year ended
December 31, 2005 from $1,087.9 million for the year
ended December 31, 2004. The pro forma gross profit rate as
a percentage of revenue increased to 10.9% for the year ended
December 31, 2005 compared to 10.8% for the same period in
2004. The PBM services gross profit rate increase in 2005
discussed above was partially offset by a lower Specialty
Services gross profit rate primarily due to higher infusion
product costs and overall lower Specialty Services payor
reimbursement rates.
We continue to experience downward reimbursement pressure in
both our Specialty Services and PBM Services segments as
healthcare costs receive increasing scrutiny at local and
national levels. In addition, the healthcare services industry
continues to consolidate, creating larger and more aggressive
competitors. In particular, we are beginning to see some of our
competitors attempt to lock us out of certain specialty pharmacy
contracts where we have been a provider in the past, which could
cause a reduction in our revenue.
Selling, General and Administrative Expenses. For
the year ended December 31, 2005, Selling, General and
Administrative expenses (“SG&A”) increased to
$96.5 million, or 9.0% of total revenue, from
$50.9 million, or 8.1% of total revenue, for the same
period a year ago. This increase in SG&A is primarily the
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result of the addition of Chronimed’s expenses starting
March 12, 2005. The pro forma SG&A discussion below
provides a more meaningful detail on year-over-year expense
increases.
Pro forma SG&A for the year ended December 31, 2005 was
$107.0 million, or 9.0% of total revenue, compared to
$101.7 million, or 8.3% of total revenue, for the year
ended December 31, 2004. The increase in SG&A primarily
is due to increased sales and marketing costs to support
BioScrip’s expanded sales force and community focused
business strategy, and increased costs for compliance with the
provisions of Section 404 of the Sarbanes-Oxley Act of
2002. The higher level of SG&A spending does not fully
reflect merger related cost savings to be realized in 2006 by
the elimination of duplicate functions, locations and other
costs associated with the integration in the second half of 2005.
Bad Debt Expense. For the year ended
December 31, 2005 we recorded bad debt expense of
$12.8 million, an increase of $10.9 million compared
to $1.9 million in 2004. The increase is the result of
increased accounts receivable due to the merger and a
$7.1 million fourth quarter charge to reflect an increase
in the allowance for doubtful accounts receivable created by
lower than expected collections during the Chronimed merger
integration period. We have added resources and are enhancing
collection processes to improve 2006 financial performance.
While we believe our efforts will improve collections
performance, there can be no assurance that it will improve in
2006 and our results could be adversely impacted. See
Item 1A. “Risk Factors” for additional
information regarding billing and collecting risks.
Pro forma bad debt expense for the year ended December 31,
2005 was $13.7 million compared to $6.1 million in
2004, an increase of $7.6 million. The increase is due to
the fourth quarter charge of $7.1 million to reflect an
increase in the allowance for doubtful accounts receivable
created by lower than expected collections during the Chronimed
merger integration period.
Amortization of Intangibles. For the year ended
December 31, 2005 we recorded amortization expense from
intangibles of $6.4 million compared to amortization
expense from intangibles of $3.0 million in 2004. The
increase in 2005 was the result of increased amortization
expense associated with the Chronimed acquisition and its
related amortizable intangible assets, which was partially
offset by the second quarter write-off of the trade name assets
associated with Natural Living, Inc. and Vitality Home Infusion
Services, Inc. due to the rebranding strategy previously
disclosed.
Pro forma amortization expense for the year ended
December 31, 2005 was $7.4 million compared to
$8.0 million in 2004, a decrease of $0.6 million. This
decrease is due primarily to the write-off of trade name assets
discussed above.
Merger Related Expenses. The year ended
December 31, 2005 includes merger related expenses of
$4.6 million. There were no merger related expenses in
2004. The merger related expenses include expenses incurred to
consolidate the acquisition of Chronimed during 2005, including
expenses incurred to consolidate to one brand, BioScrip, in the
marketplace.
Pro forma merger related expenses were $6.6 million and $0
for the years ended December 31, 2005 and 2004,
respectively, and reflect $2.0 million of merger related
expenses incurred by Chronimed from January 1, 2005 to
March 12, 2005, the date of the Chronimed acquisition, in
addition to those discussed above.
Goodwill and Intangible Impairment. The year ended
December 31, 2005 includes the write off of
$5.8 million for the trade name intangible assets
associated with Natural Living, Inc. and Vitality Home Infusion
Services, Inc. The
re-branding of all of
our business lines to a single brand, BioScrip, prompted the
write off of the existing trade name intangible assets. Also
included in 2005 are goodwill and intangible impairment charges
of $19.4 million, principally associated with the PBM
Services segment. The PBM Services impairment is the result of
the loss of the Centene contract and other related PBM Services
contracts, and its negative impact on the long term financial
outlook for the PBM Services business.
Net Interest Expense. Net interest expense was
$0.4 million for the year ended December 31, 2005
compared to $0.8 million for the year ended
December 31, 2004. Interest expense associated with our
line of credit was lower in 2005 as our average borrowing levels
were lower. Interest expense was further offset by
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interest income received on overnight investments of excess cash
and the receipt of interest on a past due receivable.
Pro forma net interest expense was $0.3 million for the
year ended December 31, 2005 compared to $0.5 million
for the year ended December 31, 2004.
Benefit from and Provision for Income Taxes. The
reported benefit from income taxes was $5.7 million for
2005 compared to a reported provision for income taxes of
$4.5 million for 2004. The effective tax rate was 19.4% in
2005 compared to 38.8% in 2004. The 2005 tax rate was impacted
by permanent differences created by specific write-offs of
intangibles of $17.4 million, which had no tax basis, and
other non-deductible items. At December 31, 2005, we had
Federal net operating loss carryforwards (“NOLs”) of
$14.0 million which begin expiring in 2017.
Net Income and Earnings Per Share. We reported a
net loss of $23.8 million, or $0.70 per diluted share,
for the year ended December 31, 2005, compared to net
income of $7.0 million, or $0.31 per diluted share,
for the same period a year ago. The decline primarily is due to
goodwill and intangible impairment charges and increased bad
debt expense, as well as increased SG&A expenses,
amortization expense and merger expenses related to the
Chronimed acquisition. The number of average diluted shares at
December 31, 2005 was 34,128,650 compared to 22,701,862 at
December 31, 2004, due to the acquisition and the related
issuance of stock.
Pro forma net loss for the year ended December 31, 2005 was
$24.9 million, or $0.73 per diluted share, compared to
pro forma net income of $9.6 million, or $0.26 per
diluted share, for the year ended December 31, 2004. The
decline primarily is due to goodwill and intangible impairment
charges, as well as increased SG&A expenses, bad debt
expense and merger expenses related to the Chronimed acquisition.
| Year ended December 31, 2004 vs. December 31, 2003 |
Revenue. Total reported revenue for the year ended
December 31, 2004 increased $41.7 million, or 7.1%, to
$630.5 million from $588.8 million for the same period
in 2003. This increase was concentrated in the Specialty
Services segment, up $58.2 million, due to the acquisition
of Natural Living, Inc. in February 2004, which added
$48.0 million in revenue, and was partially offset by
$13.7 million in revenue decline from
Synagis®.
The PBM Services segment revenue was down $16.5 million
caused by the loss of $67.8 million of
TennCare®
revenues, mostly offset by new contract growth and utilization
increases.
On a pro forma combined basis, revenue for the year ended
December 31, 2004 was $1,219.6 million compared to
$1,075.9 million for the same period in 2003, a
$143.6 million, or 13.4%, increase. The increase was
concentrated in Specialty Services, with volume growth in both
mail and community operations, including the acquisition of
Natural Living, Inc. noted above.
Cost of Revenue and Gross Profit. Total reported
cost of revenue increased 8.1% to $562.4 million from
$520.2 million for the year ended December 31, 2003.
This is commensurate with the increase in revenues experienced
in 2004.
Pro forma combined cost of revenue increased
$138.7 million, or 14.6%, to $1,087.9 million for the
year ended December 31, 2004 from $949.2 million for
the year ended December 31, 2003. This is commensurate with
the increase in revenues experienced in 2004.
Total reported gross profit for the year ended December 31,
2004 was $68.2 million representing a gross profit
percentage of 10.8%, compared to $68.5 million, or 11.6%,
for the prior year. The reduction in the gross profit percentage
reflects reimbursement pressures experienced in Specialty
Services. Within Specialty Services we were adversely affected
by pressures in our infusion business, both reimbursement
pressure and cost of goods purchasing pressure.
Pro forma gross profit as a percentage of revenue decreased to
10.8% for the year ended December 31, 2004 compared to
11.8% for the same period in 2003. The decline in gross profit
percentage reflects reimbursement pressure experienced in
Chronimed’s specialty pharmacy business from 2003 to 2004,
as well as in the infusion business as noted above.
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Selling, General and Administrative Expenses. For
the year ended December 31, 2004, SG&A expenses
increased to $50.9 million from $48.9 million, while
decreasing as a percent of revenue to 8.1% for the year ended
December 31, 2004 compared to 8.3% for the year ended 2003.
The spending increase is due to overall revenue volume growth.
Pro forma SG&A for the year ended December 31, 2004 was
$101.7 million, or 8.3% of total revenue, compared to
$95.1 million, or 8.8% of total revenue, for the year ended
December 31, 2003. The spending increase is due to overall
revenue volume growth.
Bad Debt Expense. For the year ended
December 31, 2004 we recorded bad debt expense of
$1.9 million, an increase of $0.2 million, or 11.4%,
compared to $1.7 million in 2003. The increase is
commensurate with the increase in accounts receivables.
Pro forma bad debt expense for the year ended December 31,
2004 was $6.1 million compared to $5.3 million in
2003, an increase of $0.8 million, or 14.4%. The increase
is commensurate with the increase in accounts receivables.
Amortization of Intangibles. For the year ended
December 31, 2004 we recorded amortization expense from
intangibles of $3.0 million compared to amortization
expense from intangibles of $1.9 million in 2003. The
increase in 2004 was the result of increased amortization
expense associated with the Natural Living, Inc. acquisition in
February 2004.
Pro forma amortization expense for the year ended
December 31, 2004 was $8.0 million compared to
$6.8 million for the year ended December 31, 2003. The
increase in 2004 was the result of increased amortization
expense associated with the Natural Living, Inc. acquisition in
February 2004.
Net Interest Expense. Net interest expense was
$0.8 million for each of the years ended December 31,
2004 and 2003. The average daily borrowings were consistent for
the years 2004 and 2003.
Pro forma net interest expense was $0.5 million for each of
the years ended December 31, 2004 and 2003.
Benefit from and Provision for Income Taxes. The
reported provision for income taxes was $4.5 million for
2004 and $6.1 million for 2003. The effective tax rate was
38.8% in 2004 compared to 40.0% in 2003. The 2004 tax rate was
positively impacted by state tax planning effectuated in 2004.
At December 31, 2004, we had remaining NOLs of
$16.7 million which begin expiring in 2017.
Net Income and Earnings Per Share. Net income for
2004 was $7.0 million, or $0.31 per diluted share,
compared to net income of $9.1 million, or $0.40 per
diluted share, for 2003. The decrease is principally the result
of the factors enumerated above, including the TennCare and
Synagis revenue losses. Pro forma net income for the year ended
December 31, 2004 was $9.6 million, or $0.26 per
diluted share, compared to pro forma net income of
$11.5 million, or $0.31 per diluted share, for the
year ended December 31, 2003.
Liquidity and Capital Resources
We utilize both funds generated from operations and available
credit under our Facility (as defined below) for acquisitions,
capital expenditures and general working capital needs.
For 2005, net cash used in operating activities totaled
$6.4 million compared to $3.3 million provided by
operating activities for 2004. The decrease in operating cash
flows from 2004 to 2005 was the result of increases in accounts
receivable balances of $21.5 million, inventory of
$3.6 million and decreases in accrued expenses of
$14.9 million, partially offset by the decreases in prepaid
assets of $1.2 million and increases in accounts payable of
$11.1 million and claims payable of $2.7 million.
Net cash provided by investing activities in 2005 was
$3.1 million compared to net cash used in investing
activities of $17.1 million in 2004. The change was driven
primarily by the 2004 acquisition of Natural Living, Inc.
Net cash provided by financing activities in 2005 was
$1.9 million compared to net cash provided by financing
activities in 2004 of $7.3 million due to lower borrowings
in 2005.
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At December 31, 2005, we had working capital of
$67.5 million compared to $14.0 million at
December 31, 2004. The increase in working capital
primarily is attributable to the acquisitions of Chronimed and
JPD, Inc. d/b/a Northland Medical Pharmacy
(“Northland”) in 2005.
At December 31, 2005 there were $7.4 million of
outstanding bank borrowings under our revolving credit facility
(the “Facility”) with an affiliate of Healthcare
Finance Group, Inc. (“HFG”), a $0.1 million
increase from the same period in 2004. At December 31, 2005
the Facility provided for borrowings of up to $45 million
at the London Inter-Bank Offered Rate (LIBOR) plus 2.4%,
with interest paid monthly. The Facility automatically renews
for additional one-year terms unless either party gives notice
not less than 90 days prior to the expiration of the
initial term or any renewal term, currently November 1,
2006, of its intention not to renew the Facility. The Facility
permits us to request an increase in the amount available for
borrowing up to $100 million, as well as to convert a
portion of any outstanding borrowings from a Revolving Loan into
a Term Loan. The Facility was increased from $45 million to
$65 million in March 2006 to allow for acquisitions and
general working capital needs. The borrowing base is based on
receivables balances, among other things.
The Facility contains various covenants that, among other
things, require us to maintain certain financial ratios, as
defined in the agreements governing the Facility. We have
received a waiver from HFG on a certain financial ratio (debt to
earnings before interest, taxes, depreciation and amortization)
that we were not in compliance with as of December 31,
2005, due to losses incurred in fourth quarter 2005 as a result
of goodwill and intangible asset impairment and accounts
receivable reserve charges. We were in compliance with all other
covenants.
Our daily borrowings during 2005 were $744.4 million, of
which $744.3 million was repaid during 2005. At the end of
any given month during 2005 the line of credit balance did not
exceed $14 million.
On October 7, 2005, we acquired Northland for
$12.0 million in cash. Direct expenses associated with the
acquisition were less than $0.1 million. The acquisition
was paid for with proceeds from the Facility, as well as
available cash on hand. As we continue to grow, we anticipate
that our working capital needs will also continue to increase.
Also, we intend to make substantial IT systems investments in
2006 to improve internal control and streamline our business
processes. We believe that our cash on hand, together with funds
available under the Facility and cash expected to be generated
from operating activities will be sufficient to fund our
anticipated working capital, IT systems investments and other
cash needs for at least the next twelve months.
We also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand our
business, which we would expect to fund from cash on hand,
borrowings under the Facility, other future indebtedness or, if
appropriate, the private and/or public sale or exchange of our
debt or equity securities.
At December 31, 2005, we had Federal NOLs of approximately
$14.0 million, which will begin expiring in 2017. Certain
of the NOLs are subject to limitation and may be utilized in a
future year upon release of the limitation. If the NOLs are not
utilized in the year they are available they may be utilized in
a future year to the extent they have not expired.
We expect our 2006 annual effective tax rate to be approximately
39%. This rate differs from the Federal statutory rate of 34%
primarily due to state taxes.
On February 28, 2003 we announced a stock repurchase
program pursuant to which we are authorized to purchase up to
$10 million of our common stock from time to time by
various means. As of December 31, 2005, we used, in the
aggregate, approximately $5.1 million of that
authorization. No stock was repurchased during 2005 or 2004.
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The following table sets forth our contractual obligations
affecting cash in the future:
| Payments Due in Period | ||||||||||||||||||||
| Less than | After | |||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Line of Credit
|
$ | 7,427 | $ | 7,427 | $ | — | $ | — | $ | — | ||||||||||
|
Operating Leases
|
12,789 | 3,689 | 5,478 | 3,411 | 210 | |||||||||||||||
|
Total Contractual Cash Obligations
|
$ | 20,216 | $ | 11,116 | $ | 5,478 | $ | 3,411 | $ | 210 | ||||||||||
Other Matters
| Controls and Procedures |
As of the end of the period covered by this Annual Report,
evaluations of disclosure controls and internal control over
financial reporting were performed under the supervision and
with the participation of management, including our Chief
Executive Office (“CEO”) and Chief Financial Officer
(“CFO”). Based upon these evaluations, management
believes our controls were not effective as of December 31,
2005. See Part II, Item 9A. “Controls and
Procedures” for a full discussion of the Evaluation of
Disclosure Controls and Procedures, Management Report on
Internal Control over Financial Reporting and our Management
Remediation Plan.
| Restructure |
The acquisition of Chronimed has resulted in the consolidation
of certain finance and information technology
(IT) functions. The Company’s two Rhode Island
offices, which included the finance and IT functions, have been
closed as a result of these consolidations. These functions were
fully transitioned to the Company’s Minnesota offices as of
December 31, 2005. Accordingly, there have been severance
and closure costs associated with the consolidation.
In connection with the consolidation of the finance and IT
departments as described above, on March 4, 2005 the
Company notified 67 employees that their employment with the
Company would be involuntarily terminated. All of these
terminations were the result of the purchase of Chronimed and
were expensed in the Specialty Services segment. All employees
were terminated by December 31, 2005. Severance costs of
$2.3 million were recorded in SG&A expenses for
employee separation costs in 2005, in connection with the
termination of these employees. In September and December of
2005 the two Rhode Island offices were closed, resulting in
$0.4 million of expense recorded in SG&A. We do not
anticipate any further restructuring costs associated with the
merger of Chronimed.
| Regulatory Matters |
On April 18, 2003, the U.S. Department of Health and
Human Services, Office of Inspector General (“OIG”)
released Compliance Program Guidance for Pharmaceutical
Manufacturers (the “Guidance”) designed to provide
voluntary, nonbinding guidance to assist companies that develop,
manufacture, market and sell pharmaceutical products or
biological products, including PBM’s in devising effective
compliance programs. The Guidance provides the OIG’s view
of the fundamental elements of pharmaceutical
manufacturer’s compliance programs and principles that
should be considered when creating and implementing an effective
compliance program, or as a benchmark for companies with
existing compliance programs. We currently maintain a compliance
program that includes the key compliance program elements
described in the Guidance. We believe that the fundamental
elements of our compliance program are consistent with the
principles, policies and intent of the Guidance.
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| 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Exposure to market risk for changes in interest rates relates to
our outstanding debt. At December 31, 2005 we did not have
any long-term debt. We are exposed to interest rate risk
primarily through our borrowing activities under our line of
credit discussed in Item 7 of this report. A 10% increase
in interest rates would not have a significant effect on our
interest expense. Interest rate risk on our investments is
immaterial due to our level of investment dollars. Foreign
currency exchange rate risk, commodity price risk, or other
market risks (e.g. equity price) are not present. We do not use
financial instruments for trading or other speculative purposes
and are not a party to any derivative financial instruments.
At December 31, 2005, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, claims
payable, payables to plan sponsors and others, debt and line of
credit approximate fair value due to their short-term nature.
Because management does not believe that our exposure to
interest rate market risk is material at this time, we have not
developed or implemented a strategy to manage this market risk
through the use of derivative financial instruments or
otherwise. We will assess the significance of interest rate
market risk from time to time and will develop and implement
strategies to manage that market risk as appropriate.
* * * * * * * *
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| Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of BioScrip, Inc.
We have audited the accompanying consolidated balance sheets of
BioScrip, Inc. as of December 31, 2005 and 2004, and the
related consolidated statements of operations,
stockholders’ equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in
the Index at Item 15(A). These financial statements and
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of BioScrip, Inc. at December 31, 2005
and 2004, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of BioScrip, Inc.’s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 27, 2006,
expressed an unqualified opinion on management’s assessment
and an adverse opinion on the effectiveness of internal control
over financial reporting.
| /s/ Ernst & Young LLP |
Minneapolis, Minnesota
March 27, 2006
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BIOSCRIP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except for share amounts)
| 2005 | 2004 | ||||||||||
| ASSETS | |||||||||||
|
Current assets
|
|||||||||||
|
Cash and cash equivalents
|
$ | 1,521 | $ | 2,957 | |||||||
|
Receivables, less allowance for doubtful accounts of $8,900 and
$3,240 at December 31, 2005 and 2004, respectively
|
118,762 | 65,439 | |||||||||
|
Inventory
|
25,873 | 11,897 | |||||||||
|
Prepaid expenses and other current assets
|
2,054 | 2,113 | |||||||||
|
Deferred taxes
|
11,225 | 1,666 | |||||||||
|
Total current assets
|
159,435 | 84,072 | |||||||||
|
Property and equipment, net
|
9,232 | 4,300 | |||||||||
|
Deferred taxes, net
|
— | 2,830 | |||||||||
|
Other assets and investments
|
939 | 427 | |||||||||
|
Goodwill
|
104,268 | 74,874 | |||||||||
|
Intangible assets, net
|
14,713 | 17,583 | |||||||||
|
Deferred acquisition costs
|
— | 1,702 | |||||||||
|
Total assets
|
$ | 288,587 | $ | 185,788 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
|
Current liabilities
|
|||||||||||
|
Line of credit
|
$ | 7,427 | $ | 7,303 | |||||||
|
Accounts payable
|
39,969 | 20,012 | |||||||||
|
Claims payable
|
31,402 | 28,659 | |||||||||
|
Payables to plan sponsors
|
1,695 | 2,217 | |||||||||
|
Accrued expenses and other current liabilities
|
11,454 | 11,914 | |||||||||
|
Total current liabilities
|
91,947 | 70,105 | |||||||||
|
Deferred taxes, net
|
875 | — | |||||||||
|
Total liabilities
|
92,822 | 70,105 | |||||||||
|
Stockholders’ equity
|
|||||||||||
|
Common stock, $.0001 par value; 75,000,000 shares
authorized, 37,094,252 issued and outstanding at
December 31, 2005; 40,000,000 shares authorized,
22,306,658 shares issued and outstanding at
December 31, 2004
|
4 | 2 | |||||||||
|
Treasury stock, 2,198,076 shares at cost
|
(8,002 | ) | (8,002 | ) | |||||||
|
Additional paid-in capital
|
234,958 | 131,031 | |||||||||
|
Accumulated deficit
|
(31,195 | ) | (7,348 | ) | |||||||
|
Total stockholders’ equity
|
195,765 | 115,683 | |||||||||
|
Total liabilities and stockholders’ equity
|
$ | 288,587 | $ | 185,788 | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
43
Table of Contents
BIOSCRIP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(In thousands, except per share amounts)
| 2005 | 2004 | 2003 | |||||||||||
|
Revenue
|
$ | 1,073,235 | $ | 630,516 | $ | 588,770 | |||||||
|
Cost of revenue
|
956,968 | 562,360 | 520,249 | ||||||||||
|
Gross profit
|
116,267 | 68,156 | 68,521 | ||||||||||
|
Selling, general and administrative expenses
|
96,521 | 50,935 | 48,920 | ||||||||||
|
Bad debt expense
|
12,814 | 1,908 | 1,713 | ||||||||||
|
Amortization of intangibles
|
6,395 | 3,019 | 1,863 | ||||||||||
|
Merger related expenses
|
4,575 | — | — | ||||||||||
|
Goodwill and intangible impairment
|
25,165 | — | — | ||||||||||
|
(Loss) income from operations
|
(29,203 | ) | 12,294 | 16,025 | |||||||||
|
Interest expense, net
|
(392 | ) | (808 | ) | (808 | ) | |||||||
|
(Loss) income before provision for income taxes
|
(29,595 | ) | 11,486 | 15,217 | |||||||||
|
Tax (benefit) provision
|
(5,748 | ) | 4,453 | 6,087 | |||||||||
|
Net (loss) income
|
$ | (23,847 | ) | $ | 7,033 | $ | 9,130 | ||||||
|
Basic (loss) income per share
|
$ | (0.70 | ) | $ | 0.32 | $ | 0.41 | ||||||
|
Diluted (loss) income per share
|
$ | (0.70 | ) | $ | 0.31 | $ | 0.40 | ||||||
|
Weighted average shares used in computing basic (loss) income
per share
|
34,129 | 22,245 | 22,164 | ||||||||||
|
Weighted average shares used in computing diluted (loss) income
per share
|
34,129 | 22,702 | 22,640 | ||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
44
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BIOSCRIP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(DEFICIT)
(In thousands)
| Additional | Total | |||||||||||||||||||
| Common | Treasury | Paid-In | Accumulated | Stockholders’ | ||||||||||||||||
| Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||
|
Balance December 31, 2002
|
$ | 2 | $ | (2,934 | ) | $ | 120,651 | $ | (23,511 | ) | $ | 94,208 | ||||||||
|
Exercise of stock options and other related activities
|
— | — | 911 | — | 911 | |||||||||||||||
|
Tax benefit recorded from non-qualified option exercises
|
8,021 | 8,021 | ||||||||||||||||||
|
Purchase of treasury stock
|
— | (5,068 | ) | — | — | (5,068 | ) | |||||||||||||
|
Net income
|
— | — | — | 9,130 | 9,130 | |||||||||||||||
|
Balance December 31, 2003
|
2 | (8,002 | ) | 129,583 | (14,381 | ) | 107,202 | |||||||||||||
|
Exercise of stock options and other related activities
|
— | — | 969 | — | 969 | |||||||||||||||
|
Tax benefit recorded from non-qualified option exercises
|
479 | 479 | ||||||||||||||||||
|
Net income
|
— | — | — | 7,033 | 7,033 | |||||||||||||||
|
Balance December 31, 2004
|
2 | (8,002 | ) | 131,031 | (7,348 | ) | 115,683 | |||||||||||||
|
Exercise of stock options and other related activities
|
— | — | 1,892 | — | 1,892 | |||||||||||||||
|
Tax benefit recorded from option exercises
|
— | — | 475 | — | 475 | |||||||||||||||
|
Shares issued in connection with Chronimed acquisition
|
2 | — | 101,560 | — | 101,562 | |||||||||||||||
|
Net loss
|
— | — | — | (23,847 | ) | (23,847 | ) | |||||||||||||
|
Balance December 31, 2005
|
$ | 4 | $ | (8,002 | ) | $ | 234,958 | $ | (31,195 | ) | $ | 195,765 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
45
Table of Contents
BIOSCRIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands)
| 2005 | 2004 | 2003 | |||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net (loss) income
|
$ | (23,847 | ) | $ | 7,033 | $ | 9,130 | ||||||||
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
|
|||||||||||||||
|
Depreciation
|
3,520 | 2,005 | 3,102 | ||||||||||||
|
Amortization
|
6,395 | 3,020 | 1,979 | ||||||||||||
|
Goodwill and intangible impairment
|
25,165 | — | — | ||||||||||||
|
Deferred income taxes
|
(6,032 | ) | 2,584 | 2,516 | |||||||||||
|
Tax benefit from exercise of stock options
|
476 | 479 | 8,021 | ||||||||||||
|
Non cash stock compensation
|
116 | 93 | 289 | ||||||||||||
|
Provision for losses on receivables
|
12,814 | 1,908 | 1,713 | ||||||||||||
|
Loss on disposal of fixed assets
|
465 | — | — | ||||||||||||
|
Changes in assets and liabilities, net of acquired assets:
|
|||||||||||||||
|
Receivables, net
|
(21,471 | ) | (3,818 | ) | 12,938 | ||||||||||
|
Inventory
|
(3,556 | ) | (2,559 | ) | 767 | ||||||||||
|
Prepaid expenses and other current assets
|
1,154 | 136 | (56 | ) | |||||||||||
|
Accounts payable
|
11,073 | (3,949 | ) | (445 | ) | ||||||||||
|
Claims payable
|
2,743 | 1,300 | (7,510 | ) | |||||||||||
|
Payables to plan sponsors and others
|
(522 | ) | (9,011 | ) | (12,694 | ) | |||||||||
|
Accrued expenses and other current and non-current liabilities
|
(14,915 | ) | 4,073 | (5,407 | ) | ||||||||||
|
Net cash (used in) provided by operating activities
|
(6,422 | ) | 3,294 | 14,343 | |||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Purchases of property and equipment, net of disposals
|
(5,129 | ) | (1,058 | ) | (961 | ) | |||||||||
|
Acquisitions, net of cash acquired
|
6,918 | (14,256 | ) | — | |||||||||||
|
(Increase) decrease in deferred acquisition costs and other
assets
|
1,332 | (1,764 | ) | (20 | ) | ||||||||||
|
Net cash provided by (used in) investing activities
|
3,121 | (17,078 | ) | (981 | ) | ||||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Borrowings/(repayments) on line of credit, net
|
124 | 7,303 | (4,608 | ) | |||||||||||
|
Purchase of treasury stock
|
— | — | (5,068 | ) | |||||||||||
|
Proceeds from exercise of stock options
|
1,776 | 876 | 622 | ||||||||||||
|
Principal payments on short term debt
|
— | (467 | ) | — | |||||||||||
|
Principal payments on capital lease obligations
|
(35 | ) | (399 | ) | (631 | ) | |||||||||
|
Net cash provided by (used in) financing activities
|
1,865 | 7,313 | (9,685 | ) | |||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(1,436 | ) | (6,471 | ) | 3,677 | ||||||||||
|
Cash and cash equivalents-beginning of period
|
2,957 | 9,428 | 5,751 | ||||||||||||
|
Cash and cash equivalents-end of period
|
$ | 1,521 | $ | 2,957 | $ | 9,428 | |||||||||
|
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||||||||||
|
Cash paid during the period for interest
|
$ | 613 | $ | 727 | $ | 421 | |||||||||
|
Cash paid during the period for income taxes
|
$ | 1,620 | $ | 3,349 | $ | 1,836 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
46
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF BUSINESS
| Corporate Organization |
BioScrip, Inc. (the “Company”) is a specialty pharmacy
services provider that distributes prescription drugs,
coordinates customer benefits and provides specialized therapy
management services for people with certain health conditions,
particularly those treated with biotech injectable medications,
as well as those afflicted with potentially life threatening or
debilitating diseases or genetic disorders and requiring
specialty medications. The Company works with patients,
physicians and pharmaceutical manufacturers. The Company also
works directly with a variety of health insurers, including
HMO’s, indemnity plans and PPO’s, managed care
organizations, other insurance companies, and, to a lesser
extent, labor unions, self-funded employer groups, government
agencies (including Medicaid and Medicare) and other self-funded
plan sponsors, as well as through third-party administrators.
The Company works with all of these constituents in a concerted
effort to improve clinical and economic outcomes while enhancing
the quality of life for the individuals living with chronic
conditions.
On March 12, 2005 the Company acquired all of the issued
and outstanding stock of Chronimed Inc. (“Chronimed”)
in a stock-for-stock transaction. The acquisition resulted in an
organization that is able to offer broader disease coverage,
focused therapy management, expansive national retail and mail
distribution capabilities and a pharmacy benefit management
(“PBM”) platform. The Company believes that the
acquisition of Chronimed resulted in an organization with
increased scale, enhanced financial capacity and a diversified
customer portfolio.
| Business |
The Company derives revenues by providing Specialty Services to
patients who are chronically ill, genetically impaired, or
afflicted with potentially life threatening diseases that
require injection and infusion therapies, as well as infusion
therapies and home healthcare services to patients recently
discharged from hospitals. The Company also derives revenues
from agreements to provide PBM Services, which include
prescription Mail Service, to the Members of Plan Sponsors in
the United States.
Through its
BioScrip®
specialty injectable and infusion therapy programs, the Company
distributes high-cost pharmaceuticals and provides clinically
focused case and disease management programs to Members
afflicted with chronic illnesses or genetic impairments. The
disease states or conditions for which the Company has such
programs include HIV/ AIDS, Immune Deficiency, Cancer,
Hemophilia, Multiple Sclerosis, Growth Hormone Deficiency,
Gaucher’s Disease, Rheumatoid Arthritis, Infertility,
Hepatitis C, Psoriasis, Crohn’s Disease and Transplants.
The specialty drugs distributed through the
BioScrip®
programs are dispensed and serviced from the Company’s 36
mail, infusion and community specialty pharmacy locations across
the United States.
| Basis of Presentation |
The Company’s consolidated financial statements have been
prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”).
Certain prior period amounts have been reclassified to conform
to the current year presentation. Such reclassifications had no
material effect on the Company’s previously reported
consolidated financial position, results of operations or cash
flows.
47
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
| Consolidation |
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. On March 12,
2005 the Company acquired all the issued and outstanding capital
stock of Chronimed Inc. On October 7, 2005 the Company
acquired all of the issued and outstanding stock of JPD, Inc.
d/b/a Northland Medical Pharmacy. Both acquisitions have been
consolidated since the date of purchase. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
| Use of Estimates |
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
| Cash and Cash Equivalents |
Cash and cash equivalents are carried at cost, which
approximates fair market value, and include demand deposits,
overnight investments and money market accounts, with original
maturities of ninety days or less when purchased.
| Receivables |
Receivables include amounts due from certain third party payors
and patient co-payments for pharmacies owned by the Company,
amounts due from plan sponsors under the Company’s PBM
agreements, amounts due from pharmaceutical manufacturers for
rebates, and service fees resulting from the distribution of
certain drugs through retail pharmacies.
| Allowance for Doubtful Accounts |
Allowances for doubtful accounts are based on estimates of
losses related to customer receivable balances. The procedure
for estimating the allowance for doubtful accounts requires
significant judgment and assumptions. The risk of collection
varies based upon the product, the payor (commercial health
insurance, government, physician), the patient’s ability to
pay the amounts not reimbursed by the payor and point of
distribution (retail, national mail). The Company estimates the
allowance for doubtful accounts based upon a variety of factors
including the age of the outstanding receivables and the
historical experience of collections, adjusting for current
economic conditions and, in some cases, evaluating specific
customer accounts for risk of loss. The Company periodically
reviews the estimation process and makes changes to the
estimates as necessary. In the fourth quarter of 2005 the
Company recorded a $7.1 million charge to reflect an
increase in the allowance for doubtful accounts receivable
resulting from lower than expected collections during the
Chronimed merger integration period.
| Allowance for Contractual Discounts |
The Company is reimbursed for the medications and services it
sells by Plan Sponsors. Revenues and related accounts receivable
are recorded net of payor contractual discounts to reflect the
estimated net billable amounts for the products and services
delivered. The Company estimates the allowance for contractual
discounts, based on historical experience and in certain cases
on a customer-specific basis, given its interpretation of the
contract terms or applicable regulations. However, the
reimbursement rates are often subject to interpretation that
could result in payments that differ from estimates.
Additionally, updated
48
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
regulations and contract negotiations occur frequently,
necessitating the continual review and assessment of the
estimation process.
| Inventory |
Inventory is stated at the lower of cost or market. Cost is
determined using the
first-in, first-out
method. Inventory consists principally of purchased prescription
drugs for the Company’s traditional mail and specialty
distribution operations. Included in inventory is a reserve for
expired inventory.
| Property and Equipment |
Property and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using
the straight-line method over the estimated useful lives of
assets. The estimated useful lives of the Company’s assets
are as follows:
| Asset | Useful Life | |||
|
Computer and office equipment
|
3-5 years | |||
|
Furniture and fixtures
|
5-7 years | |||
Leasehold improvements and leased assets are amortized using a
straight-line basis over the related lease term or estimated
useful life of the assets, whichever is less. The cost and
related accumulated depreciation of assets sold or retired are
removed from the accounts with the gain or loss, if applicable,
recorded in the statement of operations. Maintenance and repair
costs are expensed as incurred.
| Claims Payable |
Claims payable represent the dollar value of prescriptions
processed or “adjudicated” in the Company’s PBM
Services business that are to be reimbursed to participating
network pharmacies as of the balance sheet date. The Company is
responsible for all covered prescriptions provided to PBM plan
members processed through its network pharmacies during the
contract period. Claims are adjudicated through its on-line
adjudication system. These claims become a liability to the
Company at the point of adjudication, which is when it has
agreed that the prescription claim is valid, correctly priced
and due to the network pharmacy for a participating PBM plan
member.
| Payables to Plan Sponsors |
Payables to plan sponsors represent the sharing of
manufacturer’s rebates with the plan sponsors and, on a
limited basis, profit sharing plans with certain contracts,
primarily in the PBM Services segment.
The Company estimates the portion of those rebates that are
shared with plan sponsors and adjusts rebates payable to plan
sponsors when the amounts are paid, typically on a quarterly
basis in arrears, or as significant events occur. These
estimates are accrued based on actual and estimated claims data
and agreed upon contractual rebate sharing rates. The Company
adjusts these estimates on a periodic basis according to
changing circumstances such as changes to contracts, product mix
subject to rebates, and changes in the applicable formulary.
| Rebates |
Manufacturers’ rebates are primarily part of the
Company’s PBM Services segment and are recorded as
estimates until such time as the rebate monies are received.
These estimates are based on historical results and trends and
are revised on a regular basis depending on the Company’s
latest forecasts, as well as information received from rebate
sources. Should actual results differ, adjustments will be
recorded in future earnings. In
49
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
some instances, rebate payments are shared with the
Company’s managed care organizations. Shared rebates are
recorded as a reduction of revenue. Total rebates are recorded
as a reduction of cost of goods sold.
| Revenue Recognition |
The Company generates revenue principally through the sale of
prescription drugs, which are dispensed either through a
pharmacy participating in the Company’s retail pharmacy
network or a pharmacy owned by the Company. Revenue is generally
derived under fee-for-service agreements; however an immaterial
number of capitated agreements exist. Prescription drug revenue
is offset by the rebates shared with plan sponsors.
Fee-For-Service Agreements. Fee-for-service agreements
include: (i) specialty and mail service agreements, where
the Company dispenses prescription medications through its own
pharmacy facilities and (ii) PBM agreements, where
prescription medications are dispensed through pharmacies
participating in the Company’s retail pharmacy network as
well as the Company’s mail service facility. Under
fee-for-service agreements, revenue is recognized either:
(a) when the pharmacy services are reported to the Company
through the point of sale (“POS”) claims processing
system and the drug is dispensed to the Member, in the case of a
prescription filled through a pharmacy participating in the
Company’s retail pharmacy network, or (b) at the time
the drug is dispensed to the patient, in the case of a
prescription filled through a pharmacy owned by the Company.
Fee-for-service agreements accounted for more than 95% of
revenue for each of the years ended December 31, 2005, 2004
and 2003.
Revenue generated under PBM agreements is classified as either
gross or net by the Company based on whether it is acting as a
principal or an agent in the fulfillment of prescriptions
through its retail pharmacy network. When the Company
independently has a contractual obligation to pay a network
pharmacy provider for benefits provided to its plan
sponsors’ members, and has other indicia of risk and
reward, the Company includes payments (which includes the drug
ingredient cost) from these plan sponsors as revenue and
payments to the network pharmacy providers as cost of revenue,
as these transactions require the Company to assume credit risk
and act as a principal. If the Company merely acts as an agent,
and consequently administers plan sponsors’ network
pharmacy contracts, the Company does not assume credit risk and
records only the administrative fees (and not the drug
ingredient cost) as revenue.
Co-payments. When prescriptions are filled in a Company
owned pharmacy, the Company collects and retains co-payments
from plan sponsors’ members and records these receipts as
revenue when the amounts are collected or deemed collectible and
reasonably estimable. When prescriptions are filled through
pharmacies participating in the Company’s retail pharmacy
networks, the Company is not entitled to retain co-payments and
accordingly does not account for retail pharmacy co-payments in
its financial statements. Pharmacy network co-payments are never
billed or collected by the Company and the Company has no legal
right or obligation to receive them as they are collected by its
network pharmacies.
| Cost of Revenue |
Cost of revenue includes pharmacy claims, fees paid to
pharmacies, shipping and other direct and indirect costs
associated with pharmacy management, claims processing
operations and mail order services, offset by volume and prompt
pay discounts received from pharmaceutical manufacturers and
distributors and total manufacturer rebates.
| Impairment of Long Lived Assets |
The Company evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of
long lived assets, including intangible assets, may warrant
revision or that the remaining balance of an asset may not be
recoverable. The measurement of possible impairment is based on
the ability to recover the balance of assets from expected
future operating cash flows on an undiscounted basis.
50
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Impairment losses, if any, would be determined based on the
present value of the cash flows using discount rates that
reflect the inherent risk of the underlying business. During
2005, the Company implemented a rebranding of all its business
lines to a single brand — “BioScrip”. As a
result of that strategy the value of the trade names associated
with the Company’s Natural Living, Inc. and Vitality Home
Infusion Services, Inc. subsidiaries has been written off. This
resulted in a $5.8 million charge in the second quarter of
2005.
In the fourth quarter of 2005, as part of the Company’s
annual goodwill impairment testing, it determined that
intangible assets associated with certain customer lists were no
longer recoverable from future cash flows. This resulted in an
$0.8 million intangible impairment charge in fourth quarter
2005.
| Goodwill |
Effective on January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses the accounting and
reporting of goodwill and other intangible assets subsequent to
their acquisition. Since adoption, amortization of goodwill was
discontinued and goodwill is reviewed at least annually for
impairment, generally in the fourth quarter.
The Company evaluates goodwill for impairment based on a
two-step process. The first step compares the fair value of a
reporting unit with its carrying amount, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not impaired and the second
step of the impairment test is unnecessary. If the carrying
amount of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is necessary to measure the
amount of impairment loss, if any. The second step compares the
implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting
unit goodwill exceeds the implied fair value of that goodwill,
an impairment loss would be recognized in an amount equal to
that excess.
The Company has two reporting units — Specialty
Services and PBM Services. The fair value of Specialty Services
exceeded its carrying amount resulting in no impairment charges
in fiscal year 2005. The fair value of PBM Services was less
than its carrying amount, resulting in an $18.6 million
goodwill impairment charge in the fourth quarter of 2005,
primarily as a result of contract terminations, including the
termination of the Company’s contract with Centene
Corporation, the Company’s largest PBM Services customer.
| Lease Accounting |
The Company accounts for leasing transactions by recording rent
expense on a straight-line basis, starting on the date it gains
possession of leased property, over the expected life of the
lease. Lease terms are generally five years, with many
containing options to extend for periods ranging from one to
five years. The Company includes tenant improvement allowances
received from landlords as adjustments reducing straight-line
rent expense.
| Income Taxes |
As part of the process of preparing the Company’s
consolidated financial statements, management is required to
estimate income taxes in each of the jurisdictions in which it
operates. The Company accounts for income taxes under
SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). SFAS No. 109
requires the use of the asset and liability method of accounting
for income taxes. Under this method, deferred taxes are
determined by calculating the future tax consequences
attributable to differences between the financial accounting and
tax bases of existing assets and liabilities. A valuation
allowance is recorded against deferred tax assets when, in the
opinion of management, it is more likely than not that the
Company will not be able to realize the benefit from its
deferred tax assets.
51
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In addition, the Company has established, and periodically
reviews and reevaluates an estimated income tax reserve. This
income tax reserve is for exposures related to various Federal
and state tax matters. An accrual is established at the time an
exposure is identified when it is both probable that a liability
has been incurred and the amount of the liability can be
reasonably estimated. While the Company believes that it has
identified all reasonably identifiable exposures and that the
reserve it has established for identifiable exposures is
appropriate under the circumstance, it is possible that
additional exposures exist and that the exposures will be
settled at amounts different than the amounts reserved. It is
possible that changes in estimates in the future could cause the
Company to either increase or reduce the carrying amount of its
income tax reserve.
| Disclosure of Fair Value of Financial Instruments |
The Company’s financial instruments consist mainly of cash
and cash equivalents, accounts receivable, accounts payable and
its line of credit. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and line of
credit approximate fair value due to their fully liquid or
short-term nature. The outstanding balance on the line of credit
at December 31, 2005 was $7.4 million.
| Accounting for Stock-Based Compensation |
The Company accounts for employee stock and stock-based
compensation plans using the intrinsic value method in
accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees (“APB 25”) as permitted
by SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”), and as
such, generally recognizes no compensation cost for employee
stock options.
The Company’s compensation cost for stock option plans for
employees and directors, had it been determined in accordance
with the fair value method prescribed by SFAS No. 123,
would have been as follows for the years ended December 31
(in thousands except per share data):
| For the Years Ended December 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Net (loss) income, as reported
|
$ | (23,847 | ) | $ | 7,033 | $ | 9,130 | ||||||
|
Add: Stock award-based employee compensation included in
reported net income, net of related tax effect
|
27 | 19 | 49 | ||||||||||
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effect
|
(2,023 | ) | (3,626 | ) | (3,289 | ) | |||||||
|
Pro forma net (loss) income
|
$ | (25,843 | ) | $ | 3,426 | $ | 5,890 | ||||||
|
Earnings per share:
|
|||||||||||||
|
Basic — as reported
|
$ | (0.70 | ) | $ | 0.32 | $ | 0.41 | ||||||
|
Basic — pro forma
|
$ | (0.76 | ) | $ | 0.15 | $ | 0.27 | ||||||
|
Diluted — as reported
|
$ | (0.70 | ) | $ | 0.31 | $ | 0.40 | ||||||
|
Diluted — pro forma
|
$ | (0.76 | ) | $ | 0.15 | $ | 0.26 | ||||||
As compensation expense for options granted is recorded over the
vesting period of options, future stock-based compensation
expense may be greater as additional options are granted.
52
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of each option grant was estimated on the grant
date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
| 2005 | 2004 | 2003 | ||||||||||
|
Volatility
|
69.5 | % | 89.5 | % | 98.4 | % | ||||||
|
Risk-free interest rate
|
4.98 | % | 3.25 | % | 2.00 | % | ||||||
|
Expected life of options
|
4.5 years | 5 years | 5 years | |||||||||
|
Fair value of options
|
$3.74 | $5.30 | $4.95 | |||||||||
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective
assumptions including expected stock price volatility. Because
the Company’s employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
| (Loss) Income per Share |
Basic (loss) income per common share is based on the weighted
average number of shares outstanding, diluted income per share
is based on the weighted average number of shares outstanding,
including common stock equivalents, and diluted (loss) per share
is based on the weighted average number of shares outstanding
because the impact of common stock equivalents would be
anti-dilutive (in thousands except per share data).
| Years Ended December 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Numerator:
|
|||||||||||||
|
Net (loss) income
|
$ | (23,847 | ) | $ | 7,033 | $ | 9,130 | ||||||
|
Denominator — Basic:
|
|||||||||||||
|
Weighted average number of common shares outstanding
|
34,129 | 22,245 | 22,164 | ||||||||||
|
Basic (loss) income per common share
|
$ | (0.70 | ) | $ | 0.32 | $ | 0.41 | ||||||
|
Denominator — Diluted:
|
|||||||||||||
|
Weighted average number of common shares outstanding
|
34,129 | 22,245 | 22,164 | ||||||||||
|
Common share equivalents of outstanding stock options
|
— | 457 | 476 | ||||||||||
|
Total shares outstanding
|
34,129 | 22,702 | 22,640 | ||||||||||
|
Diluted (loss) income per common share
|
$ | (0.70 | ) | $ | 0.31 | $ | 0.40 | ||||||
| Recent Accounting Pronouncements |
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payments, which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes
APB 25, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach to estimating the fair
value of options in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative and
SFAS No. 123(R) must be adopted no later than
January 1, 2006. Had the Company adopted SFAS No
123(R) in prior periods, the impact of that standard would have
approximated the impact
53
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of SFAS No. 123 as described above. The Company
adopted the fair-value-based method of accounting for
share-based payments effective January 1, 2006. The impact
of adoption of SFAS No. 123(R) is difficult to predict
because it will depend on levels of
shares-based payments
granted from and after January 1, 2006. As of the date of
this Annual Report on
Form 10-K the
impact of SFAS No. 123(R) in 2006 would be a reduction of
approximately $1.2 million in net income and $0.03 earnings
per share for grants through the date of this report. The
Company expects additional grants to be made during the
remainder of 2006, the impact of which is not estimable at this
time.
In May 2005, FASB issued SFAS 154, Accounting Changes
and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 requires retrospective
application to prior periods’ financial statements of a
voluntary change in accounting principle unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. FASB believes that
SFAS 154 improves financial reporting because its
requirements enhance the consistency of financial information
between periods. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of SFAS 154 is
not expected to have a material impact on the Company’s
condensed consolidated financial statements.
NOTE 3 — OPERATING SEGMENTS
The Company operates in two reportable segments:
(1) Specialty Services, which is comprised of specialty
pharmacy distribution and clinical management services; and
(2) PBM Services, which is comprised of fully integrated
pharmacy benefit management and traditional mail services.
The accounting policies applied to the business segments are the
same as those described in the Summary of Significant Accounting
Policies. The 2005 information below includes Chronimed
beginning March, 2005 and Northland beginning October, 2005. See
Note 4 of Notes to Consolidated Financial Statements.
54
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment Reporting Information
(In thousands)
| For the Years Ended December 31 | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
Revenue:
|
||||||||||||
|
Specialty Services
|
$ | 688,512 | $ | 251,487 | $ | 193,243 | ||||||
|
PBM Services
|
384,723 | 379,029 | 395,527 | |||||||||
|
Total
|
$ | 1,073,235 | $ | 630,516 | $ | 588,770 | ||||||
|
Depreciation expense:
|
||||||||||||
|
Specialty Services
|
$ | 2,231 | $ | 832 | $ | 673 | ||||||
|
PBM Services
|
1,289 | 1,173 | 2,429 | |||||||||
|
Total
|
$ | 3,520 | $ | 2,005 | $ | 3,102 | ||||||
|
(Loss) income from operations:
|
||||||||||||
|
Specialty Services (1,2)
|
$ | (14,423 | ) | $ | 9,769 | $ | 11,899 | |||||
|
PBM Services(3)
|
(14,780 | ) | 2,525 | 4,126 | ||||||||
|
Total
|
$ | (29,203 | ) | $ | 12,294 | $ | 16,025 | |||||
|
Total assets:
|
||||||||||||
|
Specialty Services
|
$ | 242,657 | $ | 124,510 | $ | 103,694 | ||||||
|
PBM Services
|
45,930 | 61,278 | 66,600 | |||||||||
|
Total
|
$ | 288,587 | $ | 185,788 | $ | 170,294 | ||||||
|
Capital expenditures:
|
||||||||||||
|
Specialty Services
|
$ | 4,652 | $ | 609 | $ | 479 | ||||||
|
PBM Services
|
477 | 449 | 482 | |||||||||
|
Total
|
$ | 5,129 | $ | 1,058 | $ | 961 | ||||||
| (1) | The year ended December 31, 2005 includes $6.5 million of goodwill and intangible impairment and $4.6 million of merger related expenses (see Note 4 of Notes to the Financial Statements) in the Specialty Services segment. |
| (2) | The year ended December 31, 2005 includes a $7.1 million charge to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed merger integration period in the Specialty Services segment. |
| (3) | The year ended December 31, 2005 includes $18.6 million of goodwill impairment in the PBM Services segment. |
55
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table outlines, by segment, contracts with Plan
Sponsors having revenues that individually exceeded 10% of the
Company’s total revenues (in thousands):
| For the Year Ended | |||||||||
| December 31, | |||||||||
| 2005 | 2004 | ||||||||
|
Significant customer A
|
|||||||||
|
PBM Services:
|
|||||||||
|
Revenue
|
$ | 133,143 | $ | 102,122 | |||||
|
% of Total Revenue
|
12 | % | 16 | % | |||||
|
Significant customer B
|
|||||||||
|
PBM Services:
|
|||||||||
|
Revenue
|
$ | 113,914 | $ | 102,467 | |||||
|
% of Total Revenue
|
11 | % | 16 | % | |||||
|
Specialty Services:
|
|||||||||
|
Revenue
|
$ | 21,524 | $ | 17,153 | |||||
|
% of Total Revenue
|
2 | % | 3 | % | |||||
NOTE 4 — ACQUISITIONS
| Chronimed Inc. Acquisition |
On March 12, 2005 the Company acquired all of the issued
and outstanding stock of Chronimed in a stock-for-stock
transaction pursuant to which each share of Chronimed common
stock was exchanged for 1.12 shares of the Company’s
common stock. The results of operations of Chronimed are
included in the Consolidated Statement of Operations beginning
March 12, 2005. The acquisition of Chronimed added 28
specialty pharmacies throughout the U.S. to the
Company’s existing pharmacies and Chronimed’s
operations have been included in the Specialty Services segment.
The acquisition has been accounted for in accordance with
SFAS No. 141, Business Combinations, from the
date of acquisition.
The aggregate purchase price paid for Chronimed was
$105.3 million including direct expenses of
$3.7 million associated with the acquisition. The
14,380,551 shares of common stock exchanged and 2,612,146
stock options assumed in the acquisition were valued using the
average market price of the Company’s common stock during
the period beginning two days before and ending two days after
the revised merger agreement was announced. The purchase price
was allocated to the acquired assets and liabilities based on
management’s estimates of their fair value and an
independent valuation.
The purchase price paid for Chronimed resulted in the fair value
of assets acquired being in excess of the net asset value of the
business including both tangible assets and separately
identifiable intangible assets. Goodwill, described in
SFAS 141, Paragraph 43 as “the excess of the cost
of an acquired entity over the net of the amounts assigned to
assets acquired and liabilities assumed,” was recognized
and was consistent with the rationale for the acquisition as
follows:
| • | the opportunity to combine the companies’ individual strengths in payor contracting, physician sales, manufacturer services, clinical management and fulfillment; | |
| • | the opportunity to sell the Company’s products through Chronimed’s existing retail pharmacies; | |
| • | the opportunity to broaden the Company’s suite of disease states and customer base; | |
| • | the expansion of the Company’s retail pharmacy coverage; | |
| • | the opportunity to create significant mail-operations synergies; and |
56
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| • | the opportunity to create corporate function and other cost synergies, which will enable the combined entity to grow and improve margins. |
The following table sets forth the allocation of the purchase
price as of December 31, 2005:
Purchase Price Allocation
(In thousands)
|
Purchase price:
|
||||||
|
Value of stock exchanged
|
$ | 90,192 | ||||
|
Value of stock options assumed
|
11,370 | |||||
|
Transaction costs
|
3,696 | |||||
|
Total purchase price
|
105,258 | |||||
|
Less: net tangible assets as of March 12, 2005
|
58,316 | |||||
|
Excess of purchase price over net tangible assets acquired
|
$ | 46,942 | ||||
|
Allocation of excess purchase price:
|
||||||
|
Customer lists and trade names
|
$ | 9,560 | ||||
|
Goodwill
|
37,382 | |||||
|
Total
|
$ | 46,942 | ||||
The following table sets forth the estimated fair value of the
assets and liabilities acquired with the purchase of Chronimed:
Net Tangible Assets Acquired
(In thousands)
|
Cash and short term investments
|
$ | 20,788 | ||
|
Accounts receivable
|
42,591 | |||
|
Inventory
|
9,661 | |||
|
Prepaids and other current assets
|
1,077 | |||
|
Fixed assets
|
3,771 | |||
|
Deferred tax assets
|
2,682 | |||
|
Long term assets
|
143 | |||
|
Total assets acquired
|
80,713 | |||
|
Accounts payable
|
(5,075 | ) | ||
|
Accrued expenses
|
(13,052 | ) | ||
|
Accrued severance
|
(1,013 | ) | ||
|
Deferred tax liability
|
(3,257 | ) | ||
|
Total liabilities assumed
|
(22,397 | ) | ||
|
Net tangible assets acquired
|
$ | 58,316 | ||
The excess of the purchase price over the fair value of the
identifiable net assets and the fair value of the identifiable
intangible assets acquired was allocated to goodwill and was
assigned to the Specialty Services segment.
57
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As part of the merger, the Company consolidated Chronimed’s
Minnetonka, Minnesota mail service operations into the
Company’s higher capacity mail distribution operation in
Columbus, Ohio and closed the Minnetonka mail facility.
Severance costs of $1.0 million were included in the
purchase price. The following table outlines severance costs for
the closing of the Minnetonka mail facility that were accrued
for at March 12, 2005 and subsequently paid out by
December 31, 2005:
2005 Severance Costs — Chronimed
(In thousands)
|
Liability assumed March 12, 2005
|
$ | 939 | ||
|
Additional liability recorded
|
74 | |||
|
Payments
|
(1,013 | ) | ||
|
Ending liability at December 31, 2005
|
$ | — | ||
The following unaudited consolidated pro forma financial
information for the years ended December 31, 2005 and 2004
has been prepared assuming Chronimed was acquired as of the
beginning of 2004, utilizing the purchase method of accounting,
with certain pro forma adjustments for amortization of
intangibles. The pro forma financial information is presented
for informational purposes only and is not necessarily
indicative of the actual results had the acquisition occurred at
the beginning of each period. This pro forma financial
information is not intended to be a projection of future
operating results.
Pro Forma Statements of Operations
(In thousands, except per share amounts)
| Twelve Months Ended | ||||||||
| December 31, | ||||||||
| 2005 | 2004 | |||||||
| (Unaudited) | (Unaudited) | |||||||
|
Revenue
|
$ | 1,187,314 | $ | 1,219,550 | ||||
|
Net (loss) income
|
(24,915 | ) | 9,624 | |||||
|
Basic income (loss) per common share
|
$ | (0.73 | ) | $ | 0.26 | |||
|
Diluted income (loss) per common share
|
$ | (0.73 | ) | $ | 0.26 | |||
| Northland Medical Pharmacy Acquisition |
On October 7, 2005 the Company acquired all of the issued
and outstanding stock of JPD, Inc. d/b/a Northland Medical
Pharmacy (“Northland”), a community-based specialty
pharmacy located in Columbus, Ohio for $12 million in cash,
plus a potential earn-out payment contingent on Northland
achieving certain performance benchmarks in 2006. Northland
complements the Company’s expanding community pharmacy
model.
| Natural Living Acquisition |
On February 2, 2004, the Company acquired all of the issued
and outstanding stock of Natural Living, Inc., d/b/a Fair
Pharmacy, a specialty pharmaceutical provider located in Bronx,
New York for $15 million in cash, plus a performance-based
earn-out of $4.0 million paid after the first anniversary
of the closing. The acquisition enhanced the Company’s HIV,
Cancer and Hepatitis C disease therapies and has been
incorporated into the Company’s Specialty Services segment.
58
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Intravenous Therapy Service Acquisition |
On March 1, 2006 the Company acquired all of the issued and
outstanding stock of Intravenous Therapy Services, Inc.
(“ITS”), a specialty home infusion company located in
Burbank, California for approximately $13 million in cash,
plus a potential earn-out payment contingent on achieving
certain future performance benchmarks. The addition of ITS
enhances the Company’s ability to service infusion patients
on both the East and West coasts and complements its strategic
objective of expanding its infusion operations nationally.
NOTE 5 — RESTRUCTURING
The acquisition of Chronimed resulted in the consolidation of
certain finance and information technology (IT) functions. The
Company’s two Rhode Island offices, which included finance
and IT functions, have been closed as a result of these
consolidations. These functions were fully transitioned to the
Company’s Minnesota offices as of December 31, 2005.
Accordingly, there have been severance and closure costs
associated with the consolidation.
In connection with the consolidation of the finance and IT
departments as described above, on March 4, 2005 the
Company notified 67 associates that their employment with the
Company would be involuntarily terminated. All of these
terminations were the result of the purchase of Chronimed and
were expensed in the Specialty Services segment. All associates
were terminated by December 31, 2005. Estimated severance
costs in connection with this restructuring were recorded in
accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities
(“SFAS 146”), with the expense being
allocated over the estimated retention period of employees.
Severance costs of $2.3 million were recorded in SG&A
expenses for associate separation costs in 2005, in connection
with the termination of these associates. In September and
December of 2005 the two Rhode Island offices were closed,
resulting in $0.4 million of expense recorded in SG&A.
All of these costs have been recorded in the Specialty Services
segment.
We do not anticipate any further restructuring costs associated
with the merger of Chronimed.
2005 Restructuring Costs
(In thousands)
|
Payments to date
|
$ | (1,073 | ) | |
|
Provisions to date
|
2,172 | |||
|
Ending liability at December 31, 2005
|
$ | 1,297 | ||
NOTE 6 — GOODWILL AND INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Standard No. 141, Business
Combinations, (“SFAS 141”) and Statement of
Financial Standard No. 142, Goodwill and Other
Intangible Assets, (“SFAS 142”) which
establish accounting and reporting standards governing business
combinations, goodwill and intangible assets. SFAS 141
requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method of
accounting. SFAS 142 states that goodwill is no longer
subject to amortization over its estimated useful life. Rather,
goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. Management
assesses impairment in the fourth quarter of each year. Under
the new rules, an acquired intangible asset should be separately
recognized and amortized over its useful life (unless an
indefinite life) if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged regardless of the acquirer’s intent to do so.
59
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides a reconciliation of goodwill by
segment (in thousands):
| Specialty Services | PBM Services | Total | ||||||||||
|
Balance as of December 31, 2003
|
$ | 42,456 | $ | 18,629 | $ | 61,085 | ||||||
|
Goodwill acquired (Natural Living, Inc)
|
13,789 | — | 13,789 | |||||||||
|
Balance as of December 31, 2004
|
56,245 | 18,629 | 74,874 | |||||||||
|
Goodwill acquired (Chronimed, Northland)
|
47,924 | — | 47,924 | |||||||||
|
Purchase price adjustment (Natural Living, Inc)
|
99 | — | 99 | |||||||||
|
Goodwill impairment
|
(18,629 | ) | (18,629 | ) | ||||||||
|
Balance as of December 31, 2005
|
$ | 104,268 | $ | — | $ | 104,268 | ||||||
The Company recorded $18.6 million of goodwill impairment
in the fourth quarter of 2005 due primarily to the loss of
Centene and other PBM Services contracts. The loss of these
contracts has a significant negative impact on the long term
financial outlook for the PBM Services segment.
Portions of goodwill assigned to the Specialty Services segment
are expected to be deductible for income tax purposes.
The following table details the acquired intangible assets and
their accumulated amortization as of December 31, 2005 (in
thousands):
| As of December 31, 2005 | As of December 31, 2004 | |||||||||||||||||||||
| Weighted | ||||||||||||||||||||||
| Average Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||||
| (in months) | Amount | Amortization | Amount | Amortization | ||||||||||||||||||
|
Amortized intangible assets:
|
||||||||||||||||||||||
|
Non compete agreements
|
21.1 | $ | 4,130 | $ | (1,873 | ) | $ | 3,834 | $ | (732 | ) | |||||||||||
|
Customer relationships and other(1)
|
41.5 | 20,200 | (7,744 | ) | 14,288 | (5,896 | ) | |||||||||||||||
|
Tradename(2)
|
0.6 | 360 | (360 | ) | 2,000 | (611 | ) | |||||||||||||||
|
Total
|
$ | 24,690 | $ | (9,977 | ) | $ | 20,122 | $ | (7,239 | ) | ||||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||
|
Tradename(2)
|
$ | — | $ | 4,700 | ||||||||||||||||||
| (1) | Certain intangible assets associated with customer lists totaling $0.8 million were written off in the fourth quarter of 2005. |
| (2) | The Company has completed the process of rebranding to a single name, BioScrip, in 2005; as a result, all legacy trade names were written off in the second quarter of 2005; this writeoff totaled $5.8 million. A tradename acquired with the Chronimed purchase was valued at $0.4 million and completely amortized in 2005. |
60
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The amortization expense for the years ended December 31,
2005, 2004 and 2003 was $6.4 million, $3.0 million and
$2.0, million respectively. The estimated amortization
expense for the next five years is as follows (in thousands):
|
For the year ending December 31,
|
|||||
|
2006
|
$ | 6,455 | |||
|
2007
|
$ | 2,813 | |||
|
2008
|
$ | 1,855 | |||
|
2009
|
$ | 1,292 | |||
|
2010
|
$ | 1,150 | |||
The Company’s net intangible assets as of December 31,
2005 are composed of customer relationships and non compete
agreements associated with the acquired businesses. The adjusted
expected amortizable life of these assets ranges from two to ten
years.
NOTE 7 — RELATED PARTY TRANSACTIONS
The Company leased one of its facilities from Alchemie
Properties, LLC (“Alchemie”) pursuant to a ten-year
agreement. Alchemie is controlled by Mr. E. David Corvese,
a stockholder and former officer and director of the Company
(the “Founder”). Rent expense was approximately
$0.1 million for each of the years ended December 31,
2005, 2004, and 2003. With the relocation of the Company’s
business headquarters to Eden Prairie, Minnesota, a lease
buy-out was effected at December 29, 2005 for approximately
$0.2 million.
The Company had a consulting arrangement with one of its board
members which, in addition to customary board fees, the board
member’s company received a monthly fee to perform
consulting work predominantly related to the
TennCare®
program. Consulting fees under this contract were
$0.8 million for the year ended December 31, 2003. The
contract was terminated June 30, 2003.
One of the Company’s former board members, who resigned in
February 2006, was an employee of the Company’s primary
outside legal services firm. Fees were paid to that legal firm
of $2.1 million, $1.1 million, and $0.6 million
for the years ended December 31, 2005, 2004 and 2003,
respectively.
NOTE 8 — PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at
December 31 (in thousands):
| 2005 | 2004 | ||||||||
|
Computer and office equipment, including equipment acquired
under capital leases
|
$ | 21,804 | $ | 20,585 | |||||
|
Furniture and fixtures
|
2,486 | 1,789 | |||||||
|
Leasehold improvements
|
4,442 | 1,888 | |||||||
| 28,732 | 24,262 | ||||||||
|
Less: Accumulated depreciation
|
(19,500 | ) | (19,962 | ) | |||||
|
Property and equipment, net
|
$ | 9,232 | $ | 4,300 | |||||
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was $3.5 million, $2.0 million and
$2.0 million, respectively.
61
Table of Contents
BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 9 — LINE OF CREDIT
On November 1, 2000 the Company entered into a
$45 million revolving credit facility (the
“Facility”) with an affiliate of Healthcare Finance
Group, Inc. (“HFG”). The Facility had a three-year
term, was secured by the Company’s receivables with
interest paid monthly, and provided for borrowing up to $45,000
at the London Inter-Bank Offered Rate (LIBOR) plus 2.1%. The
facility contained various covenants that, among other things,
required the Company to maintain certain financial ratios, as
defined in the agreements governing the Facility.
Effective June 30, 2003, the Company extended the Facility
with HFG through November 1, 2006 at LIBOR plus 2.4%. The
contract governing the Facility provides for automatic one year
extensions unless either party gives notice not less than
90 days prior to the expiration of the initial term or any
renewal term of its intention not to renew the Facility. The
Facility, as extended, permits the company to request an
increase in the amount available for borrowing to up to
$100,000, as well as converting a portion of any outstanding
borrowings from a Revolving Loan into a Term Loan. On
March 1, 2006, the Facility was increased from
$45 million to $65 million. The borrowing base
utilizes receivables balances, among other things, as
collateral. Daily borrowings during 2005 were
$744.4 million of which $744.3 was repaid during 2005,
resulting in an outstanding line of credit balance of
$7.4 million as of December 31, 2005. The line of
credit balance did not exceed $14.0 million at the end of
any given month during 2005. The Company received a waiver from
HFG on a certain financial ratio — debt to earnings
before interest, taxes, depreciation and
amortization — that it was not in compliance with as
of December 31, 2005, due to the goodwill and intangible
asset impairment and accounts receivable reserve charges
incurred in fourth quarter 2005.
NOTE 10 — TREASURY STOCK
On February 27, 2003, the Executive Committee of the Board
of Directors approved a stock repurchase program authorizing the
Company to repurchase up to an aggregate of $10.0 million
of its Common Stock in open market or private transactions.
Through December 31, 2005, the Company has repurchased
799,893 shares of its Common Stock in the open market at an
aggregate purchase price of $5.1 million, pursuant to this
plan.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
| Legal Proceedings |
Robert Unger, a shareholder of Chronimed, Inc., filed a
purported class action lawsuit in the state court of Minnesota,
Hennepin County, on August 16, 2004, naming Chronimed Inc,
and certain of its officers and directors as defendants. He
amended his complaint on December 10, 2004, to add an
additional plaintiff and BioScrip, Inc, (under the name MIM
Corporation) as an additional defendant. The amended complaint
asserts claims against the Chronimed officer and director
defendants, who are represented by other law firms, for alleged
breach of their fiduciary duties in connection with the merger
agreement by which the Company acquired Chronimed in March 2005
and alleges that the Company aided those alleged breaches. The
amended complaint seeks rescission of the merger and other
relief. The amended complaint was never served on the Company,
which has not responded to the pleading, appeared in the
lawsuit, or been involved in any proceedings in the case. The
court dismissed the amended complaint as against the Chronimed
officer and director defendants and denied the plaintiffs’
motion to reinstate it.
On February 14, 2005, a complaint was filed in the Alabama
Circuit Court for Barbour County, captioned Eufaula Drugs,
Inc. v. ScriptSolutions [sic]. On April 8, an
amended complaint was filed against ScripSolutions, a subsidiary
of the Company. The plaintiff alleges breach of contract and
related claims on behalf of a putative nationwide class of
pharmacies alleging insufficient reimbursement for prescriptions
dispensed, principally on the theory that ScripSolutions, one of
the Company’s subsidiaries, was obligated to
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
update its prescription pricing files on a daily, rather than
weekly, basis. ScripSolutions removed the case to the United
States Federal District Court for the Middle District of Alabama
in April 2005. The plaintiff moved to remand the action to state
court, which ScripSolutions opposed. ScripSolutions also moved
in May 2005 to dismiss the complaint on jurisdictional grounds
or to transfer the matter to a federal court in New York or
Rhode Island which the plaintiff opposed. On October 6,
2005, the District Court granted Plaintiff’s motion to
remand the case to the state court and did not decide
ScripSolutions’ motion to dismiss or transfer. The district
court did not rule on the Company’s motion to dismiss or
transfer the action and remanded the action to the Alabama State
court. ScripSolutions appealed that decision to the Eleventh
Circuit Court of Appeals. The U.S. Court of Appeals for the
Eleventh Circuit has declined to review the district
court’s remand discussion and denied the Company’s
motion for rehearing of the decision. The Company’s time to
seek further appellate review has not yet expired.
ScripSolutions has not filed an answer to the complaint and no
other proceedings have occurred. ScripSolutions intends to deny
the plaintiff’s allegations and defend the claims
vigorously. The action is one of approximately
14 substantially identical actions commenced in Alabama
courts against Pharmacy Benefit Management companies.
The U.S. Attorney’s Office in Boston and the
Department of Justice have informed the Company that its
subsidiary, BioScrip Pharmacy, is a defendant in a Qui Tam
lawsuit under the federal False Claims Act filed by a
whistleblower against Serono, Inc., and several other
defendants. The government has settled the Qui Tam claims in the
lawsuit with Serono, Inc., and has not yet made a decision to
intervene in the suit against remaining defendants. No complaint
has been served on the Company and it has had only limited
opportunity to review it as it is filed under seal in the United
States District Court for the District of Massachusetts. The
government however has invited BioScrip to explore settlement.
For purposes of settlement discussions, the government’s
estimate of damages is close to $10.0 million, which
allegedly resulted from claims for government reimbursement made
by StatScript during 1997 through 2000 for the sale of
Serono’s drug Serostim. The government alleges that these
claims are tainted by data sharing and preferred provider
agreements between Serono and BioScrip Pharmacy. According to a
government attorney, as part of its settlement, Serono agreed to
pay 50% of damages allegedly resulting from its relationships
with pharmacies, which should include 50% of the amount
attributed to the StatScript sales. American Prescription
Providers (APP) also is reported to be a defendant in the same
lawsuit. The Company’s Chronimed, Inc. subsidiary purchased
several pharmacies from APP in February 2001, after the time
period at issue in the Qui Tam case. Currently, the government
is separately discussing directly with APP settlement of the
alleged APP damages of approximately $7,500,000. It is not known
at this time whether APP or the government will take the
position that the Company is liable for the alleged APP damages.
The Eufaula litigation and Serono investigation are in the early
stages of their proceedings and, as such, the Company is
currently unable to assess the probable outcomes of these
proceedings or their respective financial impact. If either or
both of these matters were resolved adversely to the Company,
either could have a material adverse effect on the Company.
| Government Regulation |
Various Federal and state laws and regulations affecting the
healthcare industry do or may impact the Company’s current
and planned operations, including, without limitation, Federal
and state laws prohibiting kickbacks in government health
programs Federal and state antitrust and drug distribution laws,
and a wide variety of consumer protection, insurance and other
state laws and regulations. While management believes that the
Company is in substantial compliance with all existing laws and
regulations material to the operation of its business, such laws
and regulations are subject to rapid change and often are
uncertain in their application. As controversies continue to
arise in the healthcare industry (for example, regarding the
efforts of Plan Sponsors and pharmacy benefit managers to limit
formularies, alter drug choice and establish limited networks of
participating pharmacies), Federal and state regulation and
enforcement priorities in this area can be expected to increase,
the impact of which on the Company cannot be predicted. There
can be no assurance
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that the Company will not be subject to scrutiny or challenge
under one or more of these laws or that any such challenge would
not be successful. Any such challenge, whether or not
successful, could have a material adverse effect upon the
Company’s financial position, results of operations and
cash flows. Violation of the Federal anti-kickback statute, for
example, may result in substantial criminal penalties, as well
as suspension or exclusion from the Medicare and Medicaid
programs. Further, there can be no assurance that the Company
will be able to obtain or maintain any of the regulatory
approvals that may be required to operate its business, and the
failure to do so could have a material adverse effect on the
Company’s financial position, results of operations and
cash flows.
The Company entered into a corporate integrity agreement
(“CIA”) with the Office of Inspector General (the
“OIG”) within the Department of Health and Human
Services (“HHS”) in connection with the Global
Settlement Agreement entered into with the OIG and the State of
Tennessee in June 2000. In order to assist the Company in
maintaining compliance with laws and regulations and the CIA the
Company implemented its corporate compliance program in August
of 2000. This program includes educational training for all
employees on compliance with laws and regulations relevant to
the Company’s business and operations and a formal program
of reporting and resolution of possible violations of laws or
regulations, as well as increased oversight by the OIG. Should
the oversight procedures reveal credible evidence of any
violation of Federal law, the Company is required to report such
potential violations to the OIG and the Department of Justice
(“DOJ”). The Company is therefore subject to increased
regulatory scrutiny and, if the Company commits legal or
regulatory violations, they may be subject to an increased risk
of sanctions or penalties, including suspension or exclusion
from participation in the Medicare or Medicaid programs. The CIA
expired by its term June 30, 2005 as evidenced by a letter
from the OIG confirming the expiration of the CIA.
| Operating Leases |
The Company leases its facilities and certain equipment under
various operating leases with third parties. Facility lease
terms are generally five years, the majority containing options
to extend for periods ranging from one to five years.
Approximately 45% of these leases contain escalation clauses
that increase base rent payments based upon either the Consumer
Price Index or an agreed upon schedule. New or renegotiated
leases may contain periods of free rent, or rent holidays,
ranging from one to six months. Equipment leases are generally
for periods of three to five years. The future minimum lease
payments under these operating leases at December 31 are as
follows (in thousands):
|
2006
|
$ | 3,689 | ||
|
2007
|
2,885 | |||
|
2008
|
2,593 | |||
|
2009
|
2,053 | |||
|
2010
|
1,359 | |||
|
Thereafter
|
210 | |||
|
Total
|
$ | 12,789 | ||
Rent expense for non-related party leased facilities and
equipment was approximately $4.3 million, $1.5 million
and $1.6 million for the years ended December 31,
2005, 2004 and 2003, respectively. Rent expense for related
party leased facilities was approximately $0.1 million for
each of the years ended December 31, 2005, 2004 and 2003.
All related party leases have been terminated as of
January 31, 2006.
| Capital Leases |
At December 31, 2005 the Company had no facilities or
equipment under capital leases.
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 12 — INCOME TAXES
The Company’s Federal and state income tax (benefit)
provision is summarized in the following table (in thousands):
| For the Years Ended December 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Current
|
|||||||||||||
|
Federal
|
$ | 341 | $ | 1,686 | $ | 2,620 | |||||||
|
State
|
(57 | ) | 183 | 951 | |||||||||
|
Total Current
|
284 | 1,869 | 3,571 | ||||||||||
|
Deferred
|
|||||||||||||
|
Federal
|
(4,862 | ) | 2,512 | 2,141 | |||||||||
|
State
|
(1,170 | ) | 72 | 375 | |||||||||
|
Total Deferred
|
(6,032 | ) | 2,584 | 2,516 | |||||||||
|
Total (Benefit from) Provision for Income Taxes
|
$ | (5,748 | ) | $ | 4,453 | $ | 6,087 | ||||||
The effect of temporary differences that give rise to a
significant portion of deferred taxes is as follows as of
December 31 (in thousands):
| For the Years Ended | |||||||||||
| December 31, | |||||||||||
| 2005 | 2004 | ||||||||||
|
Deferred tax assets:
|
|||||||||||
|
Reserves not currently deductible
|
$ | 7,701 | $ | 1,666 | |||||||
|
Net operating loss carryforwards
|
5,457 | 6,074 | |||||||||
|
Accrued expenses
|
1,448 | — | |||||||||
|
Payor audit accrual
|
884 | — | |||||||||
|
Capital loss carryover
|
915 | 798 | |||||||||
|
Property basis differences
|
148 | 141 | |||||||||
|
Other
|
139 | — | |||||||||
|
Subtotal
|
16,692 | 8,679 | |||||||||
|
Deferred tax liabilities:
|
|||||||||||
|
Goodwill and intangibles
|
(5,444 | ) | (2,935 | ) | |||||||
|
Subtotal
|
11,248 | (5,744 | ) | ||||||||
|
Less: valuation allowance
|
(898 | ) | (1,248 | ) | |||||||
|
Net deferred tax asset
|
$ | 10,350 | $ | 4,496 | |||||||
As of December 31, 2005 and December 31, 2004 the
Company has recorded a net deferred tax asset of
$10.4 million and $4.5 million, respectively. This
primarily consists of reserve balances which are not currently
deductible for tax purposes and net operating loss carryforwards
(“NOLs”).
The valuation allowance of $0.9 million relates to a
capital loss carryover which is not expected to be realized for
tax purposes. In 2004, $0.6 million of the balance in the
valuation allowance represented state NOLs which were not
expected to be realized for tax purposes. However, due to a
change in tax structure and
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
a result of the merger, these amounts are now expected to be
realized. Therefore, the valuation allowances relating to NOLs
have been removed in 2005.
At December 31, 2005, the Company had Federal and state
NOLs remaining of approximately $14.0 million, the majority
of which will begin expiring in 2017. At December 31, 2005
the capital loss carryforward of $2.3 million was not
expected to be utilized before expiring in 2006. Due to the
uncertainty of utilizing this item, a valuation allowance has
been established for the full amount.
As of December 31, 2005, the NOLs described above are
subject to limitation and may be utilized in a future year upon
release of the limitation. If the NOLs are not utilized in the
year they are available they may be utilized in a future year to
the extent they have not expired.
The Company’s reconciliation of the statutory rate to the
effective income tax rate is as follows (in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Tax (benefit) provision at statutory rate
|
$ | (10,062 | ) | $ | 3,905 | $ | 5,174 | ||||||
|
State tax (benefit) provision , net of Federal taxes
|
(576 | ) | 259 | 1,071 | |||||||||
|
Non-deductible goodwill
|
5,926 | — | — | ||||||||||
|
Merger related expenses
|
223 | — | — | ||||||||||
|
Change in tax contingencies
|
(744 | ) | — | — | |||||||||
|
Rate change on deferred items
|
(463 | ) | — | — | |||||||||
|
Other
|
(52 | ) | 289 | (158 | ) | ||||||||
|
Provision for income taxes
|
$ | (5,748 | ) | $ | 4,453 | $ | 6,087 | ||||||
NOTE 13 — STOCKHOLDERS’ EQUITY
| Stock Options |
The 1996 Incentive Stock Plan (the “1996 Plan”)
provided for the granting of incentive stock options
(“ISOs”) and non-qualified stock options
(“NQSOs”) to employees, directors and consultants of
the Company. Under the 1996 Plan there were
5,200,450 shares authorized for issuance. In 2001, the
stockholders approved the Company’s 2001 Incentive Stock
Plan (the “2001 Plan,” collectively with the 1996
Plan, the “Plans”). Under the 2001 Plan an additional
5,750,000 shares are authorized for issuance. As of
December 31, 2005, there remain 2,974,630 shares
available for grant under the Plans.
On March 12, 2005 the Company assumed all the option plans
from Chronimed, Inc. as part of the acquisition. The plans
assumed were the 1994 Stock Option Plan, the 1997 Stock Plan,
the 1999 Stock Plan, the 2001 Incentive Stock Plan and the 1994
Stock Option Plan for Directors. Previously granted Chronimed
options assumed by the Company in 2005 totaled 2,612,146. As of
December 31, 2005, there remain 193,342 shares
available for grant under these Plans. Vesting on the Chronimed
options was accelerated to be fully vested at the date of
acquisition.
Options granted under the Plans vest over a three-year period
and, in certain limited instances, fully vest upon a change in
control of the Company. In addition, such options are generally
exercisable for 10 years after the date of grant, subject
to earlier termination in certain circumstances. The exercise
price of ISOs granted under the Plans will not be less than 100%
of the fair market value on the date of grant (110% for ISOs
granted to more than a 10% stockholder).
The 1996 Directors Stock Incentive Plan, (the
“Directors Plan”) was adopted to attract and retain
qualified individuals to serve as non-employee directors of the
Company (“Outside Directors”), to provide incentives
and rewards to such directors and to align more closely the
interests of such directors with those of
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the Company’s stockholders. As amended, the Directors Plan
has 500,000 shares authorized, and allows for
5,000 shares per year to be automatically granted to each
Outside Director, and 20,000 NQSOs to be automatically granted
to Outside Directors upon his or her initial appointment or
election to the Board. The exercise price of such options is
equal to the fair market value of the Common Stock on the date
of grant. Options granted under the Directors Plan vest over
three years. As of December 31, 2005, options to
purchase 320,000 shares are outstanding at an average
exercise price of $6.69 and 195,000 shares under the
Directors Plan were exercisable with 180,000 shares
available for grant.
In July, 2005, the Company granted options to
purchase 1,620,950 shares at $6.00 to key employees,
subject to meeting certain financial and qualitative performance
criteria for 2005. In March, 2006, upon final review of 2005
performance, a total of 1,511,010 options were canceled against
the original grant as a result of the Company not achieving
certain performance criteria, leaving a final grant of 109,940
options. These remaining options vest over three years starting
March 2006.
As of December 31, 2005 and 2004, the exercisable portion
of outstanding options was 4,669,207 shares and
2,365,492 shares, respectively. Stock option activity under
the Plans through December 31, 2005 is as follows:
| Weighted | |||||||||
| Options | Average Price | ||||||||
|
Balance, December 31, 2002
|
3,023,596 | $ | 8.42 | ||||||
|
Granted, $5.20 — $7.95 Range
|
1,235,000 | 6.74 | |||||||
|
Canceled
|
(262,664 | ) | 9.91 | ||||||
|
Exercised
|
(136,396 | ) | 4.56 | ||||||
|
Balance, December 31, 2003
|
3,859,536 | 7.92 | |||||||
|
Granted, $7.03 — $7.95 Range
|
420,000 | 7.49 | |||||||
|
Canceled
|
(157,215 | ) | 7.63 | ||||||
|
Exercised
|
(224,831 | ) | 4.32 | ||||||
|
Balance, December 31, 2004
|
3,897,490 | 8.09 | |||||||
|
Granted, $5.29 — $8.92 Range
|
2,061,950 | 6.11 | |||||||
|
Assumed in Chronimed acquisition, $3.87 — $13.06 Range
|
2,612,146 | 7.15 | |||||||
|
Canceled
|
(2,296,908 | ) | 7.06 | ||||||
|
Exercised
|
(381,872 | ) | 4.44 | ||||||
|
Balance, December 31, 2005
|
5,892,806 | $ | 7.62 | ||||||
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The maximum term of stock options under these plans is ten
years. Options outstanding as of December 31, 2005 expire
on various dates ranging from May 2006 through December 2015.
The following table outlines our outstanding and exercisable
stock options as of December 31, 2005:
| December 31, 2005 | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||
| Average | Weighted Average | Average | ||||||||||||||||||||
| Range of Option | Options | Exercise | Remaining | Options | Exercise | |||||||||||||||||
| Exercise Price | Outstanding | Price | Contractual Life | Exercisable | Price | |||||||||||||||||
| $ 0.00 - $ 5.2 | 0 1,609,685 | $ | 3.65 | 5.4 Years | 1,403,686 | $ | 3.93 | |||||||||||||||
| $ 5.57 - $ 7.0 | 3 1,635,153 | $ | 6.35 | 7.2 Years | 929,214 | $ | 6.34 | |||||||||||||||
| $ 7.26 - $ 9.5 | 6 1,546,192 | $ | 8.55 | 7.4 Years | 1,234,531 | $ | 8.70 | |||||||||||||||
| $ 9.60 - $13.06 | 724,109 | $ | 12.00 | 4.2 Years | 724,109 | $ | 12.00 | |||||||||||||||
| $15.13 - $20.25 | 377,667 | $ | 17.75 | 6.1 Years | 377,667 | $ | 17.75 | |||||||||||||||
| 5,892,806 | $ | 7.62 | 6.3 Years | 4,669,207 | $ | 8.04 | ||||||||||||||||
| Performance Shares |
Under the Plans, the Company’s Board of Directors may grant
stock to key employees. The Board of Directors may make the
issuance of common stock subject to the satisfaction of one or
more employment, performance, purchase or other conditions. As
of December 31, 2005, the Company has 136,000 restricted
stock grants (the “Performance Shares”) that vest and
become exercisable 8 years from the date of grant. The
Company has recorded cumulative compensation expense of
$0.7 million related to these Performance Shares through
December 31, 2005 based on the fair market value at the
date of grant. Based on outstanding number of shares, the
deferred compensation expense at December 31, 2005 is
$0.1 million. The total expense recorded for 2005, 2004 and
2003 was $0.1 million, $0.1 million and
$0.2 million, respectively.
| Performance Units |
Under the Plans, the Company’s Board of Directors may grant
performance units to key employees. The Company’s Board of
Directors establishes the terms and conditions of the
performance units including the performance goals, the
performance period and the value for each performance unit. If
the performance goals are satisfied, the Company shall pay the
key employee an amount in cash equal to the value of each
performance unit at the time of payment. In no event shall a key
employee receive an amount in excess of $1.0 million in
respect of performance units for any given year. There were no
performance units granted for any period presented. As of
December 31, 2005, there were no performance units
outstanding.
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 14 — CONCENTRATION OF CREDIT RISK
The following table outlines contracts with Plan Sponsors having
revenues and/or accounts receivable that individually exceeded
10% of the Company’s total revenues and/or accounts
receivable during the applicable time period:
| Plan | |||||||||
| Sponsor | |||||||||
| A | B | ||||||||
|
Year ended December 31, 2003
|
|||||||||
|
% of total revenue
|
16 | % | * | ||||||
|
% of total accounts receivable at period end
|
* | * | |||||||
|
Year ended December 31, 2004
|
|||||||||
|
% of total revenue
|
16 | % | 19 | % | |||||
|
% of total accounts receivable at period end
|
* | 18 | % | ||||||
|
Year ended December 31, 2005
|
|||||||||
|
% of total revenue
|
12 | % | 13 | % | |||||
|
% of total accounts receivable at period end
|
* | 16 | % | ||||||
| * | Less than 10%. |
Plan Sponsor (A) is in the PBM Services segment
Plan Sponsor (B) revenue and accounts receivable is
primarily in the PBM Services segment with a lesser amount in
the Specialty Services segment
NOTE 15 — DEFINED CONTRIBUTION PLAN
The Company maintains a deferred compensation plan under
Section 401(k) of the Internal Revenue Code. Under the
plan, employees may elect to defer up to 50% of their salary,
subject to Internal Revenue Service limits. The Company may make
a discretionary matching contribution. The Company recorded
matching contributions in selling, general and administrative
expenses of $0.2 million in each of the years ended
December 31, 2005, 2004, and 2003, respectively.
NOTE 16 —
TENNCARE®
SEVERANCE AND EXIT COSTS
During 2003, in association with a cost structure review related
to the loss of the
TennCare®
PBM business the Company notified 55 employees in the PBM
Services segment that their employment with the Company would be
involuntarily terminated. As a result the Company recorded
$1.5 million of selling, general and administrative
expenses for employee separation costs, primarily severance and
contract related termination payments, in 2003. All the
employees left active payroll by October 31, 2003.
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BIOSCRIP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 17 — SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
A summary of quarterly financial information for fiscal 2005 and
2004 is as follows (in thousands):
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||
|
2005:
|
|||||||||||||||||
|
Revenue(1)
|
$ | 188,398 | $ | 286,617 | $ | 293,976 | $ | 304,244 | |||||||||
|
Gross profit
|
$ | 20,447 | $ | 30,513 | $ | 31,719 | $ | 33,588 | |||||||||
|
Net income (2,3,4)
|
$ | 1,667 | $ | (3,540 | ) | $ | 641 | $ | (22,615 | ) | |||||||
|
Basic earnings (loss) per share
|
$ | 0.07 | $ | (0.10 | ) | $ | 0.02 | $ | (0.61 | ) | |||||||
|
Diluted earnings (loss) per share
|
$ | 0.06 | $ | (0.10 | ) | $ | 0.02 | $ | (0.61 | ) | |||||||
|
2004:
|
|||||||||||||||||
|
Revenue(5)
|
$ | 148,052 | $ | 154,125 | $ | 161,498 | $ | 166,840 | |||||||||
|
Gross profit
|
$ | 16,964 | $ | 16,850 | $ | 16,734 | $ | 17,608 | |||||||||
|
Net income(6)
|
$ | 2,180 | $ | 1,946 | $ | 1,722 | $ | 1,190 | |||||||||
|
Basic earnings per share
|
$ | 0.10 | $ | 0.09 | $ | 0.08 | $ | 0.05 | |||||||||
|
Diluted earnings per share
|
$ | 0.10 | $ | 0.09 | $ | 0.08 | $ | 0.05 | |||||||||
| (1) | The Company acquired Chronimed in March 2005, and Northland in October 2005. |
| (2) | The Company recorded $0.2 million, $0.5 million, $0.6 million, and $1.5 million of charges, net of tax, related to the Chronimed acquisition and merger, in each of the first, second, third and fourth quarters of 2005, respectively. |
| (3) | In the second quarter of 2005, the Company recorded a $3.5 million charge, net of tax, for the write-off of trade name intangibles relating to its re-branding strategy. In the fourth quarter of 2005, the Company recorded $18.2 million, net of tax, in goodwill and intangible impairment charges. |
| (4) | The Company recorded a $4.3 million charge, net of tax, in the fourth quarter of 2005 to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed integration of the Company’s accounting and IT functions. |
| (5) | The Company acquired Natural Living, Inc. dba Fair Pharmacy in February, 2004. |
| (6) | In the fourth quarter of 2004, the Company recorded $0.5 million, net of tax, for a settlement with Value Options of Texas, Inc., a client in the PBM Services segment. |
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BioScrip, Inc.
Schedule II — Valuation and Qualifying
Accounts
For the Years Ended December 31, 2005, 2004 and 2003
(In thousands)
| Balance at | Charged to | ||||||||||||||||||||
| Beginning | Write-Off of | Costs and | Other | Balance at End | |||||||||||||||||
| of Period | Receivables | Expenses | Charges | of Period | |||||||||||||||||
|
Year ended December 31, 2003
|
|||||||||||||||||||||
|
Accounts receivable
|
$ | 3,126 | $ | (1,325 | ) | $ | 1,713 | $ | — | $ | 3,513 | ||||||||||
|
Accounts receivable,
TennCare®
|
$ | 357 | $ | — | $ | — | $ | — | $ | 357 | |||||||||||
|
Year ended December 31, 2004
|
|||||||||||||||||||||
|
Accounts receivable
|
$ | 3,513 | $ | (2,538 | ) | $ | 1,908 | $ | — | $ | 2,883 | ||||||||||
|
Accounts receivable,
TennCare®
|
$ | 357 | $ | — | $ | — | $ | — | $ | 357 | |||||||||||
|
Year ended December 31, 2005
|
|||||||||||||||||||||
|
Accounts receivable
|
$ | 2,883 | $ | (6,797 | ) | $ | 12,814 | $ | — | $ | 8,900 | ||||||||||
|
Accounts receivable,
TennCare®
|
$ | 357 | $ | (357 | ) | $ | — | $ | — | $ | — | ||||||||||
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, we
evaluated the effectiveness of the design and operation of our
disclosure controls. This evaluation was performed under the
supervision and with the participation of management including
our Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”). Disclosure controls are
controls and procedures (as defined in the Exchange Act
Rule 13d-15(e) and
15d-15(e)) designed to
reasonably assure that information required to be disclosed in
our reports filed under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms.
Disclosure controls are also designed to reasonably assure that
such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
The evaluation of our disclosure controls included a review of
the controls objectives and design, our implementation of the
controls and the effect of the controls on the information
generated for use in this Annual Report. Based upon the controls
evaluation, our CEO and CFO have concluded that as a result of
the matters discussed below with respect to our internal control
over financial reporting, our disclosure controls as of
December 31, 2005 were not effective.
Management Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is a process designed by, or
under the supervision of, our CEO and CFO, and effected by our
board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s financial transactions; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our revenues and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| • | Provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Management assessed our internal control over financial
reporting as of December 31, 2005, the end of our fiscal
year. Management based its assessment on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, or “COSO”. Management’s assessment
included an evaluation of such elements as the design and
operating effectiveness of key financial reporting controls,
process documentation, accounting policies, and our overall
control environment.
An internal control material weakness (as such term is defined
under Public Company Accounting Oversight Board Standard
No. 2) is a deficiency or combination of deficiencies that
results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected.
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Based on management’s assessment of internal control over
financial reporting as of December 31, 2005, we have
identified and reported to our Audit Committee the following
material weaknesses in internal control over financial reporting.
| In the area of information technology, we identified the following ineffective controls which we believe constitute a material weakness in the aggregate: |
| • | Inadequate control over segregation of duties, and restriction of employee access to application modules within the Company’s financial and operating systems, including our general ledger system; | |
| • | Lack of monitoring controls over personnel in the information technology function with access to the production databases supporting the general ledger financial data; and | |
| • | Ineffective controls over the documentation, approval, testing and migration of system changes to production environments. |
| This material weakness affects the processing of information related to all significant accounts in the financial statements and could potentially result in a material misstatement of the financial statements. | |
| In the area of revenue recognition, we identified an ineffective control which we believe constitutes a material weakness: |
| • | Inadequate system and manual controls to prevent the potential overstatement of revenue for cancelled orders and other non-standard transactions in our community pharmacies. Controls failed to detect necessary revenue adjustments that were more than inconsequential but not material. Furthermore, the failure of our controls could potentially result in revenue adjustments of a material amount. |
| In the area of accounts receivable, we identified the following ineffective controls which we believe constitute a material weakness in the aggregate: |
| • | Ineffective processes and controls to ensure timely collection efforts on past due outstanding accounts receivable; | |
| • | Ineffective processes and controls to ensure timely application of customer payments to customer accounts receivable; and | |
| • | The need for an improved process to quantify and document the Company’s estimates for uncollectible accounts receivable. |
| This material weakness affects the ability to monitor collections of accounts receivable, develop appropriate estimates of uncollectible amounts and to report accounts receivable in the financial statements at net realizable value and resulted in a material adjustment in the fourth quarter. |
As a result of the material weaknesses described in the
preceding paragraphs, our management believes that as of
December 31, 2005, our internal control over financial
reporting was not effective based on the COSO criteria.
Our independent registered public accounting firm,
Ernst & Young LLP, has issued an attestation report on
management’s assessment of the Company’s internal
control over financial reporting which is included herein.
Management Remediation Plan
Given the material weaknesses, management performed additional
analysis and procedures to ensure that our consolidated
financial statements are presented fairly in conformity with
generally accepted accounting principles. Accordingly,
management believes that the consolidated financial statements
and schedules included in this
Form 10-K herein
fairly present in all material respects our financial position,
results of
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operations and cash flows for the periods presented. We have
created and commenced implementing a remediation plan to address
the aforementioned material weaknesses.
Management believes that the aforementioned material weaknesses
result primarily from issues associated with the integration of
the information technology, accounting, collections and cash
posting functions into a single location in Minnesota following
the acquisition of Chronimed in March 2005. The integration has
required a significant amount of new hiring, training, knowledge
transfer, process redesign and policy implementation that has
impacted the control environment as of December 31, 2005.
In addition, the Company has made a number of acquisitions in
recent years that resulted in the Company operating and
maintaining a number of different information systems.
With respect to our remediation plans, we believe that the
actions noted below in information technology and finance will
remedy our material weaknesses.
| Information Technology |
We are in the process of consolidating our pharmacy operating
systems, and have already consolidated to one general ledger
system. Through consolidation we continue to focus on IT
controls. We are addressing the following items to improve our
information technology controls:
| • | Segregation of duties — We are in the process of examining each of our operating and financial systems, including the general ledger system, and will restrict access of those modules and fields to employees requiring access in order to perform their jobs with appropriate internal control. We have identified the necessary segregation of duties changes and intend to implement them in second quarter 2006. We will be implementing other changes across our pharmacy operating systems during 2006. | |
| • | General ledger data base monitoring controls — We have engaged a general ledger software consultant to create a control that will identify any changes made by any IT employee that would have access to the general ledger production data base. We expect the control to be implemented in second quarter 2006. Access to the general ledger data base is already restricted to two individuals in the IT department. | |
| • | Changes to system software — Our information technology function has implemented a new system that identifies all changes to our production software systems. This will allow us to immediately detect such changes and therefore be certain that we have the appropriate management, user and IT approvals as we install enhancements to the production environment. In addition, we have restricted the ability to make changes to our production software systems to a limited number of individuals in the IT function. |
| Revenue Recognition |
We have revised the system and manual controls in our community
pharmacies to provide greater assurance that cancelled orders
and other non-standard prescription transactions do not result
in overstatement of revenue. We have expanded our system control
reporting to identify and screen any such exception transactions
coming from our pharmacy systems, and have re-trained personnel
that are responsible for performing the manual controls
necessary to assure that these exception transactions do not
result in the misstatement of revenue. We will monitor adherence
to these system and manual controls.
As of December 31, 2005, we had multiple community pharmacy
systems — each with a unique pharmacy dispensing,
revenue transaction and receivables process. In 2006, we intend
to consolidate to one community pharmacy platform. We believe
that the consolidation of systems in our community pharmacies
will improve our control environment and reduce the likelihood
of revenue adjustments.
| Accounts Receivable |
We consolidated the majority of our collections and cash posting
functions in fourth quarter 2005 into one location in Minnesota.
We hired new resources, experienced employee turnover,
transferred knowledge from
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former employees, and created new processes. The transaction
volume exceeded our human resource capacity. To remedy the
material weaknesses in accounts receivable:
| • | We have appointed a full time project executive to drive improvements in receivables performance. | |
| • | We have added resources to prevent delays in cash posting. We assigned new leadership to manage the cash posting process. We have already implemented new processes to improve timeliness and accountability. We are expanding our use of automated tools to post cash, improving both speed and accuracy. | |
| • | We are adding personnel to increase our cash collection rates on both old and new accounts, and to resolve customer overpayments on a more timely basis. Also, we are developing an automated workflow and collection tool which we intend to implement in the second quarter for both our community and mail pharmacies that will focus our collectors’ efforts and better measure performance. | |
| • | We implemented an improved process to quantify and document our estimates for uncollectible accounts in the fourth quarter of 2005. We will continue to refine our methodology in 2006. |
Inherent Limitations on Control Systems
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, will be or have
been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
Except as noted above, there have been no changes in our
internal control over financial reporting identified in
connection with the evaluation required by
paragraph (d) of Exchange Act
Rules 13a-15 or
15d-15 that occurred
during our fourth fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting. The discussion above under
“Management Remediation Plan” describes a number of
changes we have initiated since December 31, 2005, as well
as other changes that we plan to implement in 2006, that we
believe will significantly improve our internal control over
financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of BioScrip, Inc.
We have audited management’s assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting, that BioScrip, Inc. did not maintain
effective internal control over financial reporting as of
December 31, 2005, because of the effect of:
(i) ineffective information technology controls,
(ii) ineffective controls over revenue recognition, and
(iii) ineffective controls over collecting and reserving
for uncollectible accounts receivable, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and described
in management’s assessment:
| (1) In the area of information technology, the Company identified the following ineffective controls which it believes constitute a material weakness in the aggregate: |
| a. Inadequate control over segregation of duties, and restriction of employee access to application modules within the Company’s financial and operating systems, including its general ledger system. | |
| b. Lack of monitoring controls over personnel in the information technology function with access to the production databases supporting the general ledger financial data. | |
| c. Ineffective controls over the documentation, approval, testing and migration of system changes to production environments. |
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| This material weakness affects the processing of information related to all significant accounts in the financial statements and could potentially result in a material misstatement to the financial statements. | |
| (2) In the area of revenue recognition, the Company identified ineffective controls which it believes constitute a material weakness: |
| a. Inadequate system and manual controls to prevent the overstatement of revenue for cancelled orders and other non-standard transactions in its community pharmacies. Controls failed to detect necessary revenue adjustments that were more than inconsequential but not material. Furthermore, the failure of its controls could potentially result in revenue adjustments of a material amount. |
| (3) In the area of accounts receivable, the Company identified the following ineffective controls which it believes constitute a material weakness in the aggregate: |
| a. Ineffective processes and controls to ensure timely application of customer payments to customer accounts receivable. | |
| b. Ineffective processes and controls to ensure timely collection efforts on past due outstanding accounts receivable. | |
| c. The lack of a thorough and objective process to quantify and document the Company’s estimates for uncollectible accounts receivable. |
| This material weakness affects the ability to monitor collections of accounts receivable, develop appropriate estimates of uncollectible amounts, and to report accounts receivable in the financial statements at net realizable value and resulted in a material adjustment in the fourth quarter. |
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2005 financial statements, and this report does not
affect our report dated March 27, 2006 on those financial
statements.
In our opinion, management’s assessment that BioScrip, Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, BioScrip, Inc. has not maintained effective
internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
| /s/ Ernst & Young LLP |
Minneapolis, Minnesota
March 27, 2006
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| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required by this item is incorporated by
reference from the information contained in our definitive proxy
statement to be filed with the SEC on or before April 30,
2006 in connection with our 2006 Annual Meeting of Stockholders.
| Item 11. | Executive Compensation |
The information required by this item is incorporated by
reference from the information contained in our definitive proxy
statement to be filed with the SEC on or before April 30,
2006 in connection with our 2006 Annual Meeting of Stockholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information required by this item is incorporated by
reference from the information contained in our definitive proxy
statement to be filed with the SEC on or before April 30,
2006 in connection with our 2006 Annual Meeting of Stockholders.
| Item 13. | Certain Relationships and Related Transactions |
The information required by this item is incorporated by
reference from the information contained in our definitive proxy
statement to be filed with the SEC on or before April 30,
2006 in connection with our 2006 Annual Meeting of Stockholders.
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PART IV
| Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(A) Documents Filed as a Part of this Report
| Page | ||||
|
1. Financial Statements:
|
||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
|
2. Financial Statement Schedules:
|
||||
| 71 | ||||
All other schedules not listed above have been omitted since
they are not applicable or are not required, or because the
required information is included in the Consolidated Financial
Statements or Notes thereto.
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Table of Contents
3. Exhibits:
| Exhibit | ||||||
| Number | Description | Location | ||||
| 2 | .0 | Agreement and Plan of Merger by and Among MIM Corporation, CMP Acquisition Corp., Continental Managed Pharmacy Services, Inc. and Principal Shareholders dated as of January 27, 1998 | (1)(Exhibit 2.1) | |||
| 2 | .1 | Agreement and Plan of Merger, dated as of August 9, 2004, among MIM Corporation, Chronimed Acquisition Corp. and Chronimed Inc. | (2) (Exhibit 99.1) | |||
| 2 | .2 | Amendment No. 1 dated January 3, 2005 to Agreement and Plan of Merger dated August 9, 2004 by and among MIM Corporation, Chronimed Acquisition Corp. and Chronimed Inc. | (3) (Exhibit 10.1) | |||
| 3 | .1 | Second Amended and Restated Certificate of Incorporation of MIM Corporation | (4) (Exhibit 4.1) | |||
| 3 | .2 | Amended and Restated By-Laws of MIM Corporation | (5) | |||
| 4 | .1 | Specimen Common Stock Certificate | * | |||
| 10 | .1 | Indemnity letter from MIM Holdings, LLC dated August 5, 1996 | (6) (Exhibit 10.36) | |||
| 10 | .2 | Employment Agreement between MIM Corporation and Richard H. Friedman dated as of December 1, 1998 | (7) (Exhibit 10.14) | |||
| 10 | .3 | Employment Agreement between MIM Corporation and Barry A. Posner dated as of March 1, 1999 | (7) (Exhibit 10.17) | |||
| 10 | .4 | Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 | (4) (Exhibit 10.34) | |||
| 10 | .5 | Registration Rights Agreement-V between MIM Corporation and Richard H. Friedman and Leslie B. Daniels dated July 31, 1996 | (4) (Exhibit 10.35) | |||
| 10 | .6 | Amendment No. 1 dated August 12, 1996 to Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 | (8) (Exhibit 10.29) | |||
| 10 | .7 | Amendment No 2 dated June 16, 1998 to Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 | (7) (Exibit 10.31) | |||
| 10 | .8 | Lease between Alchemie Properties, LLC and Pro-Mark Holdings, Inc., dated as of December 1, 1994 | (4) (Exhibit 10.27) | |||
| 10 | .9 | Lease Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated April 23, 1997 | (9) (Exhibit 10.41) | |||
| 10 | .10 | Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated as of April 23, 1997 | (9) (Exhibit 10.42) | |||
| 10 | .11 | Lease Amendment and Extension Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated December 10, 1997 | (9) (Exhibit 10.43) | |||
| 10 | .12 | Lease Amendment and Extension Agreement-II between Mutual Properties Stonedale L.P. and MIM Corporation dated March 27, 1998 | (9) (Exhibit 10.44) | |||
| 10 | .13 | Lease Agreement between Mutual Properties Stonedale L.P. and Pro-Mark Holdings, Inc., dated December 23, 1997 | (9) (Exhibit 10.45) | |||
| 10 | .14 | Amendment No. 1 to Employment Agreement, dated as of October 11, 1999 between MIM Corporation and Richard H. Friedman | (10) (Exhibit 10.60) | |||
| 10 | .15 | Form of Performance Shares Agreement | (10) (Exhibit 10.61) | |||
| 10 | .16 | Form of Performance Units Agreement | (10) (Exhibit 10.62) | |||
| 10 | .17 | Form of Non-Qualified Stock Option Agreement | (10) (Exhibit 10.63) | |||
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| Exhibit | ||||||
| Number | Description | Location | ||||
| 10 | .18 | Corporate Integrity Agreement between the Office of the Inspector General of the Department of Health and Human Services and MIM Corporation, dated as of June 15, 2000 | (11) (Exhibit 10.2) | |||
| 10 | .19 | Loan and Security Agreement, dated November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC | (12) (Exhibit 10.1) | |||
| 10 | .20 | Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, among MIM Health Plans, Inc., Continental Pharmacy, Inc., American Disease Management Associates LLC and MIM Funding LLC | (12) (Exhibit 10.2) | |||
| 10 | .21 | Lease Agreement, dated as of February 24, 2000, by and between American Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc. | (13) (Exhibit 10.68) | |||
| 10 | .22 | First Lease Amendment, dated as of February 24, 2000, by and between Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc. | (13) (Exhibit 10.69) | |||
| 10 | .23 | Lease Agreement, dated as of July 22, 1996, by and between American Disease Management Associates, LLC (“ADIMA”) and Regent Park Associates | (13) (Exhibit 10.70) | |||
| 10 | .24 | First Amendment of Agreement of Lease, dated as of June 15, 1999, by and between ADIMA and Five Regent Park Associates | (13) (Exhibit 10.71) | |||
| 10 | .25 | Second Amendment of Agreement of Lease, dated as of February 11, 2000, by and between ADIMA and Five Regent Park Associates | (13) (Exhibit 10.72) | |||
| 10 | .26 | Asset Purchase Agreement, dated April 4, 2001 among Continental Managed Pharmacy Services Inc., Community Prescription Service, Inc., and its Stockholders | (14) (Exhibit 10.74) | |||
| 10 | .27 | Purchase Agreement among American Disease Management Associates, L.L.C., its Members and Certain Related Partners, MIM Health Plans, Inc. and the Registrant, dated as of August 3, 2000 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed August 10, 2000) | (15) (Exhibit 4.2) | |||
| 10 | .28 | Registration Rights Agreement between the Registrant and Livingston Group LLC dated as of August 3, 2000 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed August 10, 2000) | (15) (Exhibit 4.3) | |||
| 10 | .29 | Employment letter, dated as of June 19, 2001, between MIM Health Plans, Inc and Michael Sicilian | (16) (Exhibit 10.77) | |||
| 10 | .30 | Purchase Agreement, dated as of January 9, 2002, among Vitality Home Infusion Services, Inc., Marc Wiener, Barbara Kammerer and MIM Corporation | (17) (Exhibit 2.1) | |||
| 10 | .31 | Lease Agreement, dated as of January 31, 2002, between Bar-Marc Realty, LLC, as landlord, and Vitality Home Infusion Services, Inc., as Tenant | (18) (Exhibit 10.49) | |||
| 10 | .32 | Guaranty of Lease Agreement, dated January 31, 2002, made by the Company in favor of Bar-Marc Realty, LLC | (18) (Exhibit 10.50) | |||
| 10 | .33 | Employment Letter, dated October 15, 2001, between the Company and Russell J. Corvese | (18) (Exhibit 10.51) | |||
| 10 | .34 | Amendment to Employment Agreement entered into as of September 18, 2002 by and between the Company and Barry A. Posner | (19) (Exhibit 10.50) | |||
| 10 | .35 | Amendment to Employment Agreement effective as of December 31, 2001 by and between the Company and Richard H. Friedman | (19) (Exhibit 10.51) | |||
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| Exhibit | ||||||
| Number | Description | Location | ||||
| 10 | .36 | Employment Letter, dated October 1, 2002, between the Company and James S. Lusk | (19) (Exhibit 10.52) | |||
| 10 | .37 | Third Amendment of Agreement of Lease, dated June 24, 2002, between Five Regent Park Associates and American Disease Management Associates | (19) (Exhibit 10.53) | |||
| 10 | .38 | Second Amendment and Consent, dated as of January 31, 2002, to the Receivable Purchase and Transfer Agreement, dated as of November 1, 2000 | (19) (Exhibit 10.54) | |||
| 10 | .39 | Amendment No. 3, dated as of November 25, 2002, to the Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, each of the parties named on Schedule I thereto, MIM Funding LLC and HFG Healthco-4 LLC | (19) (Exhibit 10.55) | |||
| 10 | .40 | Amended and Restated 2001 Incentive Stock Plan | (20) | |||
| 10 | .41 | Amended and Restated 1996 Non-Employee Director’s Stock Incentive Plan (effective April 17, 2002) | (21) | |||
| 10 | .42 | Amended and Restated Rights Agreement, dated as of December 3, 2002 between MIM Corporation and American Stock Transfer and Trust Company | (22) | |||
| 10 | .43 | Extension Agreement, dated as of June 30, 2003, to the Receivables Purchase and Transfer Agreement dated as of November 1, 2000, among Scrip Solutions, Inc., each of the parties named on Schedule I to the Original RPTA and MIM Funding LLC and consented to by HFG Healthco-4 LLC | (23) (Exhibit 10.1) | |||
| 10 | .44 | Extension Agreement, dated as of June 30, 2003, to the Loan and Security Agreement dated as of November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC | (23) (Exhibit 10.2) | |||
| 10 | .45 | Amendment, dated January 28, 2004, to Employment Agreement, dated as of March 1, 1999, as amended to date, by and between MIM Corporation and Barry A. Posner | (24) (Exhibit 10.44) | |||
| 10 | .46 | Amendment, dated October 13, 2003, to Employment Letter Agreement entered into as of June 19, 2001, by and between Scrip Solutions, Inc. and Michael J. Sicilian | (24) (Exhibit 10.45) | |||
| 10 | .47 | Amendment, dated September 19, 2003, to Employment Letter Agreement entered into as of October 15, 2001, by and between Scrip Solutions, Inc. and Russel J. Corvese | (24) (Exhibit 10.46) | |||
| 10 | .48 | Lease Amendment and Extension Agreement, dated August 31, 2003, by and between Scrip Solutions, Inc. and Mutual Properties Stonedale LLC | (24) (Exhibit 10.47) | |||
| 10 | .49 | Letter Agreement, dated January 28, 2004, between the Company and Alfred Carfora | (25) (Exhibit 10.1) | |||
| 10 | .50 | Amendment No. 3 to Employment Agreement, dated as of August 9, 2004, between MIM Corporation and Richard H. Friedman | (26) (Exhibit 10.1) | |||
| 10 | .51 | Amendment, dated October 28, 2004, to Employment Agreement for Barry A. Posner | (27) (Exhibit 10.2) | |||
| 10 | .52 | Amendment, dated December 1, 2004, to Employment Letter Agreement for Russel J. Corvese | (28) (Exhibit 10.1) | |||
| 10 | .53 | Lease Agreement by and between Alchemie Properties, LLC and Scrip Solutions, LLC | (29) (Exhibit 10.53) | |||
| 10 | .54 | Employment Offer Letter, dated July 18, 2005 from the Company to Gregory H. Keane | (30) (Exhibit 10.1) | |||
82
Table of Contents
| Exhibit | ||||||
| Number | Description | Location | ||||
| 10 | .55 | Employment Offer Letter, dated July 18, 2005 from the Company to Anthony J. Zappa | (30) (Exhibit 10.2) | |||
| 10 | .56 | Amendment No. 2, dated July 18, 2005, to Change of Control Severance Agreement of Anthony J. Zappa | (30) (Exhibit 10.3) | |||
| 10 | .57 | Letter Agreement, dated May 31, 2005, between BioScrip, Inc. and Alfred Carfora | (31) (Exhibit 10.1) | |||
| 10 | .58 | Second Amendment, dated as of March 1, 2006, to Loan and Security Agreement, dated as of November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC | (32) (Exhibit 99.1) | |||
| 10 | .59 | Separation Agreement between the Company and Henry F. Blissenbach | (33) (Exhibit 99.1) | |||
| 10 | .60 | Letter Agreement between the Company and Barry A. Posner | (33) (Exhibit 99.3) | |||
| 10 | .61 | Employment offer letter, dated July 18, 2005, from the Company to Brian Reagan | * | |||
| 10 | .62 | Amendment to Change of Control Severance Agreement between the Company and Brian Reagan | * | |||
| 21 | List of Subsidiaries | * | ||||
| 23 | .1 | Consent of Ernst and Young, LLP | * | |||
| 31 | .1 | Certification of Henry F. Blissenbach pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | * | |||
| 31 | .2 | Certification of Gregory H. Keane pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | * | |||
| 32 | .1 | Certification of Henry F. Blissenbach pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | * | |||
| 32 | .2 | Certification of Gregory H. Keane pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | * | |||
| (1) | Incorporated by reference to the indicated exhibit to the Company’s Registration Statement on Form S-4 (File No. 333-60647), as amended, which became effective on August 21, 1998. | |
| (2) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 9, 2004 | |
| (3) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on January 5, 2005 | |
| (4) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 17, 2005 | |
| (5) | Incorporated by reference to the indicated exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-05327), as amended, which became effective on August 14, 1996. | |
| (6) | Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2003. | |
| (7) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |
| (8) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | |
| (9) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997. |
| (10) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999. |
83
Table of Contents
| (11) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000. |
| (12) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000. |
| (13) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000. |
| (14) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. |
| (15) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 10, 2000. |
| (16) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001. |
| (17) | Incorporated by reference to the indicated exhibit to the Company’s Form 8-K filed on February 5, 2002. |
| (18) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. |
| (19) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report Form 10-K for the year ended December 31, 2002. |
| (20) | Incorporated by reference from the Company’s definitive proxy statement for its 2002 annual meeting of stockholders filed with the Commission April 24, 2002. |
| (21) | Incorporated by reference from the Company’s definitive proxy statement for its 2003 annual meeting of stockholders filed with the Commission April 30, 2003. |
| (22) | Incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 3 to the Company’s Form 8-A/ A dated December 4, 2002. |
| (23) | Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2003. |
| (24) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report Form 10-K for the year ended December 31, 2003. |
| (25) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 |
| (26) | Incorporated by reference to the indicated exhibit to the Company’s Registration Statement on Form S-4, Registration No. 333-119098 |
| (27) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on October 28, 2004 |
| (28) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on December 1, 2004 |
| (29) | Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 |
| (30) | Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 |
| (31) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on June 6, 2005 |
| (32) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 2, 2006 |
| (33) | Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 1, 2006 |
* Filed with this Annual Report on
Form 10-K
84
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 31, 2006.
| BIOSCRIP INC. | |
| /s/ Gregory H. Keane | |
|
|
|
| Gregory H. Keane | |
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title(s) | Date | ||||
|
/s/ Richard H. Friedman Richard H. Friedman |
Executive Chairman of the Board | March 31, 2006 | ||||
|
/s/ Henry F. Blissenbach Henry F. Blissenbach |
Director and Chief Executive Officer (principal executive officer) | March 31, 2006 | ||||
|
/s/ Gregory H. Keane Gregory H. Keane |
Chief Financial Officer (principal financial officer) | March 31, 2006 | ||||
|
/s/ Charlotte W. Collins Charlotte W. Collins |
Director | March 31, 2006 | ||||
|
/s/ Louis T. DiFazio Louis T. DiFazio, Ph.D. |
Director | March 31, 2006 | ||||
|
/s/ Myron Z. Holubiak Myron Z. Holubiak |
Director | March 31, 2006 | ||||
|
/s/ David R. Hubers David R. Hubers |
Director | March 31, 2006 | ||||
|
/s/ Michael Kooper Michael Kooper |
Director | March 31, 2006 | ||||
|
/s/ Richard L. Robbins Richard L. Robbins |
Director | March 31, 2006 | ||||
|
/s/ Stuart A. Samuels Stuart A. Samuels |
Director | March 31, 2006 | ||||
85
Table of Contents
EXHIBIT INDEX
(Exhibits being filed with this Annual Report on
Form 10-K)
| 4.1 | Specimen Common Stock Certificate | |||
| 10.61 | Employment offer letter, dated July 18, 2005, from the Company to Brian Reagan | |||
| 10.62 | Amendment to Change of Control Severance Agreement between the Company and Brian Reagan | |||
| 21 | List of Subsidiaries | |||
| 23.1 | Consent of Ernst and Young LLP | |||
| 31.1 | Certification of Henry F. Blissenbach pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 31.2 | Certification of Gregory H. Keane pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 32.1 | Certification of Henry F. Blissenbach pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 32.2 | Certification of Gregory H. Keane pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
86
| BioScrip, Inc. COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK CUSIP 09069N 10 8 SEE REVERSE FOR CERTAIN DEFINITIONS This is to certify that is the owner of FULLY-PAID AND NON-ASSESSABLE SHARES, PAR VALUE $. 0001 PER SHARE, OF THE COMMON STOCK OF Bioscrip, Inc. (the “corporation”) transforable on the books of the Corporation in person on by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrer Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: SECRETARY CHAIRMAN OF THE BOARD COUNTERSIGNED AND REGISTERED AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NEW YORK) TRANSFER AGENT AND REGISTRARAUTHORIZED OFFICER |
BioScrip, Inc.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A COPY
OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL
RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE,
AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH
REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
DESTROYED THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full according to
applicable laws or regulations:
| TEN COM | — | as tenants in common | UNIF GIFT MIN ACT — Custodian | |||||
| TEN ENT | — | as tenants by the entireties | (Cust) (Minor) | |||||
| JTTEN | — | as joint tenants with right of | under Uniform Gifts to Minors | |||||
survivorship and not as tenants in common
|
Act (State) |
|||||||
Additional abbreviations may also be used though not in the above list
| For value received, hereby sell, assign and transfer write | |||||||||
| PLEASE INSERT SOCIAL SECURITY OR OTHER | |||||||||
| IDENTIFYING NUMBER OF ASSIGNEE | |||||||||
| (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) | |||||||||
| shares | |||||||||
| of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint | |||||||||
| Attorney | |||||||||
| to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. | |||||||||
| Dated | |||||||||
| NOTICE: | ||||||||
| Signature(s) Guaranteed: | ||||||||
| THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. | ||||||||
This certificate also evidences and entitles the holder hereof to certain Rights as set
forth in the Rights Agreement between the Corporation and American Stock Transfer & Trust Company
dated as of November 24, 1998, as amended on December 14, 1998, May 20, 1999 and November 26, 2002
as it may be further amended from time to time (the “Rights Agreement”), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the Corporation’s
corporate headquarters. Under certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be evidenced by this
certificate. The Corporation will mail to the holder of this certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights
issued to, or held by, any Person who is, was or becomes an Acquiring Person or an Adverse Person
or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement),
whether currently held by or on behalf of such Person or by any subsequent holder, may become
null and void and nontransferable.
Exhibit 10.61
July 18, 2005
Brian Reagan
BioScrip
BioScrip
Dear Brian,
I am pleased that the BioScrip board of directors has approved the executive compensation
arrangements. I want you to be part of the future success of the company and, accordingly, am
pleased to formally extend to you this offer of continued employment with BioScrip. This offer of
employment is in accordance with the June 14, 2004 Change of Control Severance Agreement between
you and Chronimed, Inc (the “Agreement”).
I believe this offer package is fair and competitive and provides substantial opportunity for you
to share in the success of the integration process and the future growth of BioScrip. It is
intended that the arrangements discussed here are privileged communications between you, the
Compensation Committee, and myself and may not be disclosed or communicated without their consent.
Job Title and Authority
Your position would be Executive Vice President, Sales and Corporate Development. In that capacity, you would be responsible for carrying out your responsibilities as per the attached job description.
Your position would be Executive Vice President, Sales and Corporate Development. In that capacity, you would be responsible for carrying out your responsibilities as per the attached job description.
Salary, Benefits and Annual Incentives
Your total cash compensation opportunity is $368,000. It is derived as follows:
Your total cash compensation opportunity is $368,000. It is derived as follows:
Your base salary would be $230,000 per year, payable on a bi-weekly basis. I have attached a
summary of all employee benefit plans, programs and policies currently in effect and for which you
are eligible to participate, with the exception of vacation. You would continue to be eligible to
participate in those plans. You would receive four weeks of vacation time. These benefits will
remain substantially similar until at least January 1, 2006 at which time we expect to merge former
MIM and Chronimed employees into a single benefits program that would continue to be a valuable and
competitive complement to the financial package described herein.
You are also eligible to participate in BioScrip’s annual management bonus plan as long as you
remain continuously employed with BioScrip through the last date of the fiscal year on which a
bonus is based. Your BioScrip target bonus opportunity would be 40% of your base salary, or
$92,000; with an upside opportunity of up to another 20% or $46,000. Keep in mind that your 2005
bonus opportunity will be pro-rated to reflect three quarters. The Plan is based on the
achievement of corporate financial objectives as well as individual objectives; I will be
distributing to you shortly the specifics of the bonus criteria and thresholds determining bonus
entitlement.
Long-Term Incentive Compensation
To facilitate your sharing in the long-term success of BioScrip and to align your interests with those of BioScrip’s shareholders, BioScrip’s Compensation Committee has granted you 103,500 options to purchase BioScrip’s common stock, at an exercise price of $6.00 per share. As we discussed, this number represents 150% of the base grant, is subject to forfeiture in the event that certain financial performance thresholds are not met, and shall be subject to the terms and conditions of a stock option agreement that you will receive shortly. For so long as you are
To facilitate your sharing in the long-term success of BioScrip and to align your interests with those of BioScrip’s shareholders, BioScrip’s Compensation Committee has granted you 103,500 options to purchase BioScrip’s common stock, at an exercise price of $6.00 per share. As we discussed, this number represents 150% of the base grant, is subject to forfeiture in the event that certain financial performance thresholds are not met, and shall be subject to the terms and conditions of a stock option agreement that you will receive shortly. For so long as you are
| 10900 Red Circle Drive | Minnetonka, Minnesota 55343 | 952-979-3600 | www.bioscrip.com |
employed with BioScrip, you will be eligible to participate in BioScrip’s Long Term Incentive Plan.
In future years, targets will be set at the beginning of each year and a performance-based grant
will be made at the end of the year consistent with directives of the
Compensation Committee. The Company reserves the right to modify, amend or terminate the terms and provisions, thresholds
and/or benchmarks of any health or other company benefits, the bonus program, the long term
incentive compensation program or any other benefit or program generally available to you from time
to time and at any time; provided, that any such modification, amendment or termination will not
affect your entitlement to amounts or benefits to be received thereunder and no such modifications,
amendments or termination will adversely affect you for periods prior to the effective date
thereof.
Non Competition & Nondisclosure Agreement
As a condition of continued employment, you will be required to review, complete, and sign the Restrictive Covenants attached to this offer letter. The job offer and benefits described herein, shall supersede all prior or current verbal or written arrangements you have with Chronimed Inc.
As a condition of continued employment, you will be required to review, complete, and sign the Restrictive Covenants attached to this offer letter. The job offer and benefits described herein, shall supersede all prior or current verbal or written arrangements you have with Chronimed Inc.
Please note that this letter does not constitute a guarantee of continued employment for any term.
Under this offer, you will remain an “at will” employee, as you are currently, but of course,
subject to the Agreement. Under the Agreement, if you accept this offer, then, during the one year
period commencing on the date you begin performing services in accordance with this offer, if (i)
BioScrip terminates your employment without cause, (ii) you terminate your employment for Good
Reason, (iii) the Company delivers a notice of termination of the June 14, 2004 Change of Control
Severance Agreement or (iv) fails to assign said agreement to a successor employer, then you shall
be entitled to receive the severance benefit described in Section 4 of the Agreement.
Brian, I believe that BioScrip is in an excellent position to sustain and enhance its success and
growth. I would like you to be a part of that effort. Please confirm your decision as soon as
possible, but within 30 days, acknowledging your acceptance by signing, dating, and returning the
original of this letter and the enclosed forms to me. A copy is enclosed for your records.
Sincerely,
/s/ Henry Blissenbach
Henry Blissenbach
Chief Executive Officer
Chief Executive Officer
Agreed and accepted:
/s/ Brian Reagan
|
||
Name |
||
8/16/05
|
||
Date |
Please return this letter to:
Colleen Haberman
Vice President, Human Resources
10900 Red Circle Drive
Minnetonka, MN 55343
Vice President, Human Resources
10900 Red Circle Drive
Minnetonka, MN 55343
| 10900 Red Circle Drive | Minnetonka, Minnesota 55343 | 952-979-3600 | www.bioscrip.com |
Exhibit 10.62
April 8, 2005
Brian Reagan
1853 Orchard Hill
St. Paul, MN 55118
1853 Orchard Hill
St. Paul, MN 55118
Re:
|
Amendment to Change of Control Severance Agreement |
Dear Brian:
Reference is made to that certain Form of Change of Control Severance Agreement, dated as of June
14, 2004 (the “Agreement”). Capitalized terms used herein and not otherwise defined herein shall
have the meanings given to those terms in the Agreement.
This letter shall serve to amend the time in which the Company must provide you with the Offer or
Termination Advice.
The phrase “thirty (30) days after the Change in Control” contained in the last sentence of the
first paragraph of Section 1 of the agreement is hereby deleted, and substituted therefor shall be
the phrase “fifteen (15) days following the approval of the Offer by the Company’s Board of
Directors or its Compensation Committee”.
Except as modified hereby, the Agreement shall remain unmodified and in full force and effect.
Kindly signify your agreement to the foregoing by signing your name in the place indicated below.
Very truly yours,
/s/ Barry A. Posner
Barry A. Posner
Executive Vice President and General Counsel
Executive Vice President and General Counsel
Agreed to and Accepted By:
/s/ Brian Reagan
Brian Reagan
Exhibit 21
Subsidiaries of the Registrant
BioScrip PBM Services, LLC, a Delaware limited liability company
BioScrip Infusion Services, LLC, a Delaware limited liability
company
BioScrip Nursing Services, LLC, a New York limited liability
company
BioScrip Pharmacy Services, Inc., an Ohio corporation
BioScrip Pharmacy (NY), Inc., a New York corporation
BioScrip Pharmacy, Inc., a Minnesota corporation
Chronimed, Inc, a Minnesota corporation
Chronimed
Service Corporation, a Minnesota corporation
Chronimed Wholesale Inc., a Minnesota corporation
Intravenous Therapy Services, Inc., a California corporation
JPD, Inc., an Ohio corporation
Los Feliz Drugs Inc., a California corporation (inactive)
MEDgenesis Inc., a Minnesota corporation (inactive)
MIM Funding, LLC, a Delaware limited liability company
MIM IPA, Inc., a New York corporation
MIM Investment Corporation, a Delaware corporation
MIM Health Plans of Puerto Rico, Inc., a Puerto Rican corporation
Natural Living, Inc., a New York corporation
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration
Statements
(Form S-8 File
Nos. 333-107307,
333-107306,
333-123701 and
333-123704) of
BioScrip, Inc. of our reports dated March 27, 2006, with
respect to the consolidated financial statements and schedule of
BioScrip, Inc., BioScrip, Inc. management’s assessment of
the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial
reporting of BioScrip, Inc., included in this Annual Report
(Form 10-K) for
the year ended December 31, 2005.
| /s/ Ernst & Young LLP |
Minneapolis, Minnesota
March 27, 2006
Exhibit 31.1
CERTIFICATION
I, Henry F. Blissenbach, certify that:
1. I have reviewed this Annual Report on
Form 10-K of
BioScrip, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f))for the
registrant and have:
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 31, 2006
| /s/ Henry F. Blissenbach | |
|
|
|
| Henry F. Blissenbach, | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Gregory H. Keane, certify that:
1. I have reviewed this Annual Report on
Form 10-K of
BioScrip, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f))for the
registrant and have:
| (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 31, 2006 | |
| /s/ Gregory H. Keane | |
|
|
|
| Gregory H. Keane, | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BioScrip, Inc. (the
“Company”) on
Form 10-K for the
year ended December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the
“Report”), I, Henry F. Blissenbach, Chairman and Chief
Executive Officer of the Company, do hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
| (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 31, 2006
| /s/ Henry F. Blissenbach | |
|
|
|
| Henry F. Blissenbach |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BioScrip, Inc. (the
“Company”) on
Form 10-K for the
year ended December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the
“Report”), I, Gregory H. Keane, Chief Financial
Officer of the Company, do hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
| (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 31, 2006
| /s/ Gregory H. Keane | |
|
|
|
| Gregory H. Keane |