Prescription for Success

This was originally sent to subscribers of TheStreet.com Stocks Under $10 on March 24 at 2:55 p.m. EST. For more information on this newsletter, click here.

Many investors are scrambling to come up with good strategies to play the rising costs of prescription drugs and medical treatment in general. Unfortunately, most of these investors are focused only on mega-cap companies such as UnitedHealth Group(UNH Quote) and Pfizer(PFE Quote).

This has created a compelling opportunity to invest in shares of BioScrip(BIOS Quote). The company, a small drug distributor and pharmacy benefits manager, should deliver strong earnings growth in 2006, thanks to a recent merger and growing end-market demand for specialty pharmaceutical products.

Shares were recently trading at $6.63, and we believe the stock could trade into the double-digits in the coming 12 months. Even so, we aren't adding BioScrip to the model portfolio because we already have exposure to the health care sector with two other existing positions. Also, on March 16, the company announced it was delaying its 10-K filing because it needed more time to complete its internal accounting processes. BioScrip said there will be a few one-time charges in its fourth-quarter 2005 earnings report, which should be out by the end of the month.

Headquartered in Elmsford, N.Y., BioScrip was formed through the $108 million merger of MIM Corp. and Chronimed, a deal that closed in March 2005. The combined company makes money through two businesses, a pharmaceutical benefits manager (PBM) and specialty management and distribution services.

The market for BioScrip's specialty management and distribution services segment, which distributes medications to patients with chronic medical conditions such as AIDS, cancer and multiple sclerosis, is growing larger as the U.S. population ages. According to research firm Sterne, Agee & Leach, about 3 million Americans live with a condition treated by specialty drugs that can cost anywhere from $12,000 to $200,000 annually.

The drug distribution market is highly competitive. Low-margin suppliers and tightening financial reimbursements from the government and insurers can squeeze returns of many of the distributors, which makes cost-savings, even small ones, the possible difference between a profit and a loss. This is what makes the merger of MIM and Chronimed so crucial to BioScrip's success.

Founded in 1985, Chronimed was a drug distribution company that operated some 30 pharmacies under the name StatScript throughout the U.S. Its counterpart, MIM, also distributed pharmaceutical products such as drugs through its relationships with large health care providers and insurance companies.