Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, November 8, 2011. I would now like to turn the conference over to Lisa Wilson. Please go ahead, ma'am.

Good morning, and thank you for joining us today. By now, you should have received a copy of our press release issued this morning. If you have not received it, you may access it through the Investor Relations section at our website. Rick Smith, President and Chief Executive Officer, and MJ Graves, Interim Chief Financial Officer and Treasurer, will host this morning's call. The call may also be accessed through our website at bioscrip.com. A replay will be available shortly after the call. Interested parties can access the replay by dialing (800) 633-8284 in the U.S. and (402) 977-9140 internationally and entering the access code 21543695. An audio webcast will also be available under the Investor Relations section of the BioScrip website at www.bioscrip.com. Before we get started, I would like to remind everyone that any statements made on the call today or in our press release that express a belief, expectation or intent as well as those that are historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. These forward-looking statements are based on information available to BioScrip today, and the company assumes no obligation to update such statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties which may cause the company's results to differ materially from such statements. Forward-looking statements are subject to inherent risks and uncertainty surrounding future expectations generally and may differ materially from actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize annualized cost savings associated with any restructuring or cost reduction efforts; the impact of members of management in executing these efforts; our ability to leverage core competencies or maximize margins and operating cash flow; and the risks described from time to time in the company's reports filed with the SEC, including the company's Form 10-Q for the period ended September 30, 2011, and the annual report on Form 10-K for the year ended December 31, 2010. In addition, as required by Regulation G, reconciliation of non-GAAP financial measures mentioned during our call today most comparable to GAAP financial measures can be found in Schedule 4 of today's press release. That schedule is available as well on our website under the link to News found in the About Us section of our homepage at bioscrip.com. And now I would like to turn the call over to Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone. Thank you for joining today's call. In the third quarter, a number of the initiatives that we have been working on over the last year are reflected in our results. We continue to make ongoing progress, both sequentially as well as on a year-over-year basis. Patient census levels continue to build and script counts are strong as a result of our efforts to grow our patient base through local referral sources and our managed care relationships. I'm pleased to report $19 million of adjusted EBITDA achieved in the quarter relative to $18.1 million in the prior quarter. Positive trends reflect the efforts of our team, and we are building forward momentum in a tough environment. Our ability to achieve new patient census results from our sales, clinical services, reimbursement and operation teams working closely within the communities we serve. Overall, growth occurred in spite of a challenging economic environment, impacting demand for services, acuity levels, reimbursement rates and other short-term trends affecting the companies industry-wide. The diversification that we have in our payor mix has enabled us to keep making forward progress. It also helps to mitigate material exposure to budgetary pressures in any one state or specific Medicare program. Our third quarter revenue increased sequentially from $441 million to $454 million. This reflects $12.6 million of revenue growth, achieved primarily from the pull-through efforts of our managed care relationships, growth in certain oral specialty drugs. Pharmacy Services. Our revenue increased 3.7% sequentially, with solid growth in oncology, MS and arthritis drugs and the full effect of contracts that were added late last year. This segment saw enhanced performance from the operating locations, increased patient retention levels and reduced indirect corporate support as well as continued growth in our PBM and cash card business.…

Thank you, Rick, and good morning. For the third quarter of 2011, we reported revenues of $454 million compared to $441.2 million in the prior year, an increase of $12.9 million, or 2.9%. The increase came primarily from Pharmacy Services, which increased about $15.2 million, or 4.6%. Before considering the impact of $18.1 million of discontinued low-margin business that we discussed in prior quarters, Pharmacy Services revenue grew by $33.3 million, or 10.7%, on a year-over-year basis. This segment benefited from new managed care contracts; growth in oncology, arthritis and MS therapies; and industry-wide drug inflation as well as growth in discount cash card sales. Infusion/Home Health Services revenue for the third quarter decreased from $111.8 million in the prior year to $109.6 million in the current year, a decrease of $2.3 million, or 2.1%. While we experienced growth in patient census in a majority of key therapies, segment revenue was impacted by a $7.2 million reduction in anti-infective and IVIG therapy revenue. We also absorbed $1.4 million in rate reductions associated with the transition of certain patients from out-of-network to contracted arrangements and home health reimbursement cuts enacted by Medicare and Medicaid in the current year. In total, the Medicare and Medicaid rate reductions represented less than 1% of segment revenue for the quarter. For the third quarter, gross profit was $77.1 million, or 17% of sales, compared to $75.4 million, or 17.1% of sales, in the prior year. Operating expenses for the quarter increased $5.9 million, from $63.2 million in the prior year to $69.1 million in the current year. The increase includes $3.5 million of restructuring expense and $500,000 increase in acquisition, integration, severance and other employee costs. The increase also includes a $6 million increase in broker fees related to growth in the discount cash card…

Thanks, MJ. As we head into the end of the year, we are moving closer to completing our strategic assessments, with many of the key elements of the plan in place. The results we have achieved over the last year have provided a good foundation on which to build. We continue to evaluate our businesses and the areas where we need to invest our capital to further strengthen our competitive position. We look for opportunities to reduce our cost structure and become more efficient and effective as a healthcare service provider to ensure we are increasing our operating cash flow levels. Overall, we are pleased with our results this quarter despite the challenging economic environment and are excited about the momentum we are building in our key areas of focus. We believe we are positioning ourselves to take advantage of the long-term demographic trends and opportunities in our industry through a combination of geographic diversification, penetration into both national and regional managed care relationships and focus on specific therapeutic programs. The direction of healthcare is into the home or alternate site, and BioScrip is uniquely positioned to be a high-quality, low-cost provider and a value-added partner to our referral sources, our payors and the patients we serve. We remain confident we have the right strategy in place. Now I'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Brooks O'Neil with Dougherty & Company. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: I have a couple of questions. MJ, would you mind just going back through how you calculate the $0.10 of adjusted EPS this quarter?

That is adjusted, Brooks, for the restructuring as well as the acquisition, integration, severance and other employee costs. We also have to consider the accelerated vesting on stock options and then the tax effect of all of that. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: And where would that last item show up in the income statement? Is there -- or do you have a dollar number for that?

It's in SG&A. It's not an amount that's been disclosed separately. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Okay. I guess, I understand that. Let me just ask you about this item that seems to confuse me, and everyone else, probably, every quarter is the tax rate. If I was looking at your income statement the right way, it looks like you had a tax rate of 36% this quarter, which was a lot higher than I expected. That's obviously on a GAAP basis, but could you just comment what's going on with the tax rate right this minute?

Yes. The tax rate is complicated because of the naked credit or the amortization of tax-deductible goodwill. If you look at it on a year-to-date basis, it's 15%. If you're looking at it for the entire year and anticipating an effective tax rate for the entire year for Q4 as well as the entire year, it would probably be a little bit higher than that. As far -- higher than the 15%, probably more in the 17% range. But the reason that we had that higher amount in the third quarter, it related to the naked credit. Now, obviously, for people in the call who are as not familiar about our story from last year, part of the reason we ad the lower effective tax rate is the valuation reserve. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Okay. That's helpful.

Yes. It will be at a 12% to 14% minimum pretty much every quarter, even while we had the valuation allowance, Brooks, because of the state taxes. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Okay, that's good. Maybe you could just talk again a little bit about the infusion revenue. It looked to me like it came in a little bit less. I think you commented that it's related to the reduction in the anti-infectives. Could we expect seasonally that business to pick back up in the fourth quarter? Or what's your outlook sort of going forward for the infusion therapy growth?

Yes, I think we -- on a year-over-year basis, we saw essentially the volume decrease that we had mentioned, but also in that is the price decrease from moving out-of-network into managed care that we talked about also in Q2. On a sequential basis, we have seen census grow in both the anti-infective and the chronic therapies as well as some of the other traditional. And so we have seen some good growth consistently organically coming from our local markets in the key therapies we've been focusing in on. The managed care relationships that we've talked about, we've seen some good sequential growth in patient census, ranging from 5% to as much as 19% in some of our plans. And so it's -- so I think we're very happy to see the sequential growth. Our teams are working hard to get the pull-through activities. And I think just in terms of Q4, historically, it's been a strong seasonal quarter, but it's also -- continues to be driven by what happens at the discharge, the discharge desk, too. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Sure, okay. And then maybe I'll just ask one more and then jump back into the queue. I'm curious, if I was looking at it properly, and I know there are couple of different adjustments that need to be made here, but it did look like SG&A was a little bit higher than I was expecting. But I'm curious if you feel you're fully seeing the benefits of the cost savings initiatives you've taken or whether we can expect to see more of that flow through as we go forward?

I think included in SG&A is the -- we talked about we had a executive officer terminate service during the quarter. So that full severance plus the related effects are in the SG&A as well as some of the other costs [ph], and so on a -- just looking at run rates, we're -- I think we're about 14% in terms of our total operating expenses as it relates to -- before restructuring and before some of those other items. And so I think our goal is to continue to drive our operating expenses as a percentage of revenue lower and be more efficient with our infrastructure.

Our next question comes from the line of Eugene Goldenberg with BB&T Capital Markets. Eugene Goldenberg - BB&T Capital Markets, Research Division: Rick, just wanted to follow up with you. On the last call, you mentioned that one of your national contracts was kind of underperforming relative to your expectations. Can you perhaps give us an update kind of where you guys stand with that one contract one quarter later?

Yes, we saw a sequential patient census growth of 5% in that contract. It's still not where I think it need it needs to be, but I think we're pushing through some of the late start to that. And our teams are focused on pull-through across all of our relationships, but -- so it's positive direction, but still more work to do. Eugene Goldenberg - BB&T Capital Markets, Research Division: Okay, great. And then on the bad debt side. I mean, that came in much lower than we anticipated, and it seems to be the lowest level going back to '09. I mean, what's driving this? And is this a good baseline to use going forward? I guess this is a question for MJ.

Yes. We'll actually be filing the Q tomorrow, and you can take a look at the language in that. There's a little bit more detail. We had some favorable adjustments in Q3 based on our consistently applied methodology in Pharmacy Services, but we also had a bit of unfavorable on the infusion side, so you know how it is. As far as the performance on the bad debt side, Eugene, we apply consistent methodology. And it does tend to shift around or move around. When you have more than 70 locations, you're going to have some do better than others from any point in time. And at this point in time, we did have some outperformance on Pharmacy Services, and we had some additional provision that we applied for infusion. Overall, I think that Q3 probably benefited just a bit from some of those favorable adjustments we've had. We want to continue that momentum. But when you're dealing with this much volume and a bad debt rate that is that low, it's really incremental improvement from that point forward. Eugene Goldenberg - BB&T Capital Markets, Research Division: Okay, great. And then from a margin perspective, we're kind of -- from an EBITDA margin perspective, we're seeing diverging trends in Pharmacy and the Infusion sides of the business for the past 4 or 5 quarters. I mean, we're seeing consistent improvement in the Pharmacy segment, but we're seeing kind of continued degradation, if you will, on the Infusion and the Home Health side. But can you just -- can you provide any additional color to that? I mean, I'm assuming part of the margin decline has to do with kind of your continued uptick into these managed care contracts. But are those primarily on the Infusion side? Or they're also from the specialty Pharmacy side from my understanding.

Yes, they're both. I think on the infusion side, there is some uptick there. I think also, you're seeing some drag year-over-year from the Medicare cuts on the home health side and the TennCare, but -- and also the additional provision for bad debt, as we've gotten some aged accounts on the infusion side, also is part of that drag that we -- I think the aging of some of those accounts got older than the team should have let them get, and our goal is to get that cash collected and reverse that trend. Eugene Goldenberg - BB&T Capital Markets, Research Division: Okay, got it. And then, MJ, I think you shared a number in the quarter. I missed it during your prepared remarks. How much of the top line was impacted by some -- in-network revenue migration?

In the remarks I gave you, I did not give you that specific dollar amount. However, when you take a look at our filing, you'll see that we do disclose that we had a $1 million impact overall from the Medicare and the nursing. And then we also had less than that, but close to that amount in the out-of-network impact, between $0.5 million and $1 million. Eugene Goldenberg - BB&T Capital Markets, Research Division: Okay. And then just the last question and I'll hop back in the queue is how much -- the 3 national contracts that you currently have. How much do they kind of contribute as a percentage of revenue collectively? Not individually, but collectively, those 3 clients?

That's not a number that we have disclosed up to this point, Eugene.

Our next question comes from the line of Mike Petusky with Noble Financial.

Just a few questions. I guess, Rick, in terms of looking out, I guess my feeling was that I'd always expected the Infusion/Home Health side to grow a little bit faster than the Pharmacy Services. I mean, is that a fair -- I mean, I'm not asking for anything specific, but just generally speaking, in terms of growth rates, once you kind of get the impact of the discarded business and all that, kind of ex that, I mean, is it a fair assumption that your belief would be that Infusion/Home Health would grow faster?

Yes, our focus -- this is, I think, a transition year. We talked in terms of bringing the organization into a managed care -- national managed care environment. And at the same time, we're hitting some factors, where our referral sources on the acute side have a impact in terms of growth levels in that area. In addition, Q3 is typically sequentially flat, just given seasonality. But I think that long-term, overall, we believe and I believe that the opportunity to continue to grow the Infusion part of our business quickly is available to us, given the work that we've done in terms of access to managed care lives, the number of panels that we're on, and essentially establishing ourselves as a competitor and a national provider in the industry. So I think that underneath the price increases and the year-over-year impacts from volume in some of our categories, we're seeing some strong growth in a lot of the other therapeutic areas. We are seeing a strong growth in nutritional therapy. However, it's not the Infusion therapy and the PBM side as much as we would expect, just given some of the raw material shortages that some of the hospitals are seeing in terms of starting those patients on that therapy, so -- and a lot of short-term headwinds that we're muscling through. But I think through our access to the lives through our managed-care relationships and the essentially position [ph] of our clinical programs, we continue to see good patient census growth.

Okay. I guess, given what you just said, then, I mean, would it be a fair assumption to say that gross margins again over the next, like, level, I'd say 4 to 8 quarters, should that at least kind of hold in here or possibly get slightly better? I understand there's a bunch of different tailwinds, headwinds. But to me, it seems like if overall, this piece of your business is growing faster than the lower-margin Pharmacy Services business, gross margin should kind of hold together or possibly even slightly improve? I mean, is that fair?

Sequentially, I mean, year-over-year, we've talked about the -- bringing the locations into -- from an out-of-network into managed care. On a sequential basis, we've actually seen pricing pretty much flat, and in some therapeutic categories an uptick. So our goal is to continue to work on our therapy mix and also look to continue to strengthen and improve our margin. I think if we've got some agings that took some of our EBITDA in the segment away from us this quarter. And if we get that cash collected in Q4, we hope to reverse that trend and see an uptick. So that's another drag that, given everything else the organization has been working on, that slipped a little bit. But it's essentially something we can correct and turn around as well.

Okay. Could you talk -- if you mentioned this early, I missed it. Did you guys talk about or could you talk about -- you identified another potential $5 million that you thought you could potentially capture, I guess, in terms of the strategic assessment. Have you guys talked about that? Or could you talk about that?

Yes, we're essentially -- I think we've stated before, we're about halfway there. The facilities we brought in provided us some incremental improvement on that next incremental $5 million. So we're still chipping away at it. We're not completely there, but we're about halfway there.

Okay. So some of that should show up over the next couple 2, 3 quarters, something like that?

Exactly.

Okay. And then, I guess, there's some news out of California a couple of weeks ago regarding Medi-Cal and the proposal to cut Medicaid rates there. I mean, can you just talk about that generally and, I guess, the potential impact? I know you do, do some business in California.

Yes, I think, as I said, no one Medicaid state is a material exposure to us. And I think that we are looking at what happens in the courts there, given that the hospital association has filed another lawsuit to block it, but -- and we haven't calculated the estimated impact, but we believe, like everything else that's going on in other states, there's just going to continue to be challenges and headwinds in various areas. But we don't believe anything material to our forward progress in terms of any one particular state.

Actually, Mike, as far as our exposure to any one single state, I think our largest exposure to one state is around 2.5%, but it's definitely under 3%, and then it starts dropping very quickly. So it's maybe the top 3% or even above 1%, and then it falls off very fast.

Okay, all right. That's super-helpful. Is there any chance you guys could size up the cash card business? Or just how much of the incremental pharmacy revenue versus the same period last year was attributable to the cash card business?

Unfortunately, that's not a number that we're disclosing at this point in time, Mike.

All right, okay. Last question, MJ, could you help me -- obviously, I appreciate what you gave in terms of the tax rate. This is always kind of a hassle in modeling you guys. Can you help out just in terms of, given that most of our models go out beyond the fourth quarter, I mean, what is a decent tax rate guesstimate for next year? I mean, is it going to be closer to 15%, 20%? Or is it going to be closer to fully taxed?

You know what, I would probably keep it in that 20% range, Mike. Obviously, as we approach year end on the next call, we'll give you more information on that, but I would keep it probably in that 20% range. As you know, our valuation reserve is quite large.

[Operator Instructions] And we have a follow-up question from the line of Brooks O'Neil, Dougherty & Company. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Sure. Rick, I was just curious. We've talked in the past about the potential to increase the number of infusion pharmacies from a current level in the mid-40s to a number closer to 70. I'm curious, A, if that's still sort of a realistic target number over time and, B, whether you've got -- made progress so far, got some near-term plans for making progress towards that number.

Yes, in order to fully flesh out the footprint, that's about the right number. I think we're in the process, early process, of putting together our pipeline of potential targets by market. But right now, it's really early in our process. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: But do you still think that might be a realistic goal over some -- next couple of years?

Over the longer term, we need to expand our infusion footprint, yes.

[Operator Instructions] Ms. Wilson, we have no further questions at this time. I will now turn the call back over to you. Please continue with your presentation or closing remarks.

Okay. Thank you, everyone, for joining us today, and we look forward to talking to you soon.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.