Infusing a Fragmented Market

Infusing a Fragmented Market

One way for a business to expand is buying up smaller competitors to create a regional or national play in a fragmented industry. The plan can help build a brand that provides for better recognition over smaller competitors, but it can also be ripe with problems of consolidating numerous businesses with different cultures.

In the home care and infusion sector, BioScrip has begun the process of acquiring companies that provide alternate-site and home infusion therapy for patients with complex, acute and chronic illnesses. With an aging population, the expectations for all types of therapies provided outside expensive medical centers are expected to continue growing. The U.S. Census Bureau expects the over-65 population to double over the next 45 years while research suggests that the home infusion market is fragmented with no clear leader. With an aging population and estimates that the treatment costs for drug therapy at home are 80% lower than a traditional inpatient setting, demand for infusion services should continue growing.

BioScrip recently completed the CarePoint Partners acquisition, which boosts home infusion services to approximately 100,000 patients annually. Previously, the company had already acquired HomeChoice Partners and InfuScience in the last year. The stock has been under serious pressure for the last couple of months, but the opportunity for consolidating the industry still provides incentives for long-term investors.

Rolling up the industry
BioScrip has made three significant acquisitions to consolidate the industry in the last year with the previously mentioned CarePoint Partners, HomeChoice Partners, and InfuScience.

CarePoint Partners added services for around 20,500 patients at 28 sites of service in nine states in the East Coast and Gulf Coast regions. The deal added roughly $160 million in annual revenue for a net cost of $178 million.

HomeChoice Partners was purchased for $73 million with an additional $20 million in incentives based on reaching certain performance milestones. The deal adds services for 15,000 patients annually at 14 infusion pharmacy locations in nine states. During the first five months up to June 30, the HomeChoice business generated $26.7 million in revenue recorded by BioScrip.

Back on July 31, 2012, InfuScience was acquired for $38 million in cash with the potential to increase to $41 million based on results of operations during the next two years. The company focused on providing alternate site infusion services through five centers located in Minnesota, Nebraska, Virginia, South Carolina and Georgia. For the first six months of 2013, InfuScience provided revenue of $23.1 million and income from operations of $2.6 million for BioScrip.

Disappointing guidance
Consolidating a fragmented industry is a great concept, but ultimately investors want those moves to generate positive outcomes. On the Q2 earnings call, the company guided to the previous revenue and EBITDA ranges, but the CFO suggested that the base business would be at the lower end of the original guidance. Investors became clearly concerned that the process wasn't going as planned sending the stock down to below $9 after trading above $17. The guidance range of $830 million to $865 million and adjusted EBITDA in the range of $67 million to $73 million stands though.

The important part is that the infusion business appears strong with 20% organic growth disclosed on the earnings call while the smaller PBM business has struggled with the decision to cut a low-margin business and marketing partners temporarily cutting back on expenses. Most importantly, the infusion business saw a 200 basis point increase in gross profit margins and strong adjusted EBITDA growth to 9.1% of revenue, compared to 7.2% of revenue in the prior year period.

Fragmented stocks
The sector is so fragmented that it is difficult to even find a comparative stock for analysis. PharMerica offers a company that owns 12 infusion centers, but it obtains the bulk of its revenues from institutional pharmacy services at health care facilities. Amedisys offers a specialist in the home health care sector, yet it focuses primarily on services including skilled nurses, home health aides, and physical therapy.

Both of these stocks are stuck with razor thin margins and even lower multiples questioning whether BioScrip will be able to expand its home services margins enough to even justify the current valuation.

Amedisys cared for 120,000 patients in the latest quarter and is busy consolidating or selling around 50 home care and hospice centers. With expectations that home health will receive a 1.5% cut to Medicare reimbursements in 2014, the company wants to reduce costs in nonperforming centers. With income from continuing operations in Q2 2013 declining 38% from last year to only $5.4 million, the company faces a tough business being a low-cost solution.

PharMerica continues to see better trends in its business with especially strong earnings from the home infusion segment. The company plans to grow a national footprint in this area with goals to open around five to eight markets per year. Due to attractive fundamentals in home infusion, it plans to pursue more deals in that area. The pharmacy business though saw a reduction in prescriptions dispensed and revenue per prescription.

Bottom line
Lately, BioScrip has seen solid results from the consolidation of three home infusion providers, yet investors were not satisfied with the results. The stock has dropped 50% and based on reasonable comparable companies in the home health sector, one has to wonder if the margins will ever justify a higher valuation. Investors will be keen to watch the margin situation in the Q3 report. Stronger margins in the home infusion segment might suggest that the leverage of the consolidated units will provide enough margin to push the stock higher.

Amedisys faces a tough road in a segment where the government wants to squeeze out costs. PharMerica confirms that the home infusion segment is more attractive providing for evidence that BioScrip might be the better investment as a pure provider. Long term, the aging population and market dynamics suggest the ability to grow won't be a problem -- the only doubt is the ability to generate satisfactory margins.

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