Bioscrip Home Infusion Unit Could be an M&A Remedy

NEW YORK (The Deal) -- Bioscrip (BIOS)  has been divesting assets for a year now, but the health services company could find itself a target for both large strategic and financial players because of the strength of its in-home medicine business, according to industry sources.

"All the likely suspects that touch that channel could be interested," explains Ross Muken an analyst at ISI Group Inc.

Elmsford, N.Y.-based Bioscrip provides in-home infusion services that involve the use of equipment by administering personnel who visit a patient's homes to distribute medication intravenously. Bioscrip also has a pharmacy-benefits management business, but that only makes up about 10% of its total revenue.

Muken added that private equity buyers could enter the picture and acquire Bioscrip to serve as a platform for other deals in the space. Currently, it's been PE-backed platform companies doing rollups in the industry, including Excellere Partners LLC-backed Advanced Infusion Services and KRG Capital Partners LLC-backed Home Solutions, that have also been doing roll-ups in the industry.

"[Infusion services] is a very fragmented industry, but it is clearly a vertical that some of the players have made a priority," he explained.

Meanwhile, the largest strategic players in the infusion space that could be interested in Bioscrip are Walgreens (WAG)  and CVS Caremark (CVS) , according to Muken and other industry sources.

While it's not clear exactly when Bioscrip began evaluating its strategic options -- the company said Aug. 11 that it would continue to evaluate alternatives but didn't specify when it started the process -- speculation has been flying around Bioscrip for some time.

Muken believes the curiosity about Bioscrip likely started shortly after CVS announced Nov. 27 that it would acquire Coram LLC from Apria Healthcare Group Inc. for about $2.1 billion.

"They were Bioscrip's largest pure-play competitor," Muken said of Coram, adding that the deal highlighted the desire by pharmacy companies to dig further into home-health services space.

Over the years, Bioscrip has "expanded rapidly into the home infusion space," added Brooks O'Neil, an analyst at Dougherty & Co. LLC.

That centerpiece of that expansion came on June 17, 2013, when Bioscrip announced it had acquired Jacksonville, Fla.-based CarePoint Partners Holdings LLC and its subsidiaries for $223 million in cash.

"My gut tells me they are going to continue to grow and then eventually sell the business," Oneil said. "If you look at [Bioscrip CEO Richard M. Smith's] track record, he is a turnaround guy. He knows how to sell companies."

Judging by Bioscrip's recent financial results and its M&A activity, that turnaround is already in action.

For the second quarter ended June 30, Bioscrip's infusion business posted $230.5 million in revenues, a 48% year-over-year increase. The PBM business, meanwhile, contributed $16.6 million, or just a 1.8% increase year-over-year.

Bioscrip's Smith, who didn't return calls seeking comment, has worked in various capacities at the company over the past eight years. But since he grabbed the role of CEO in January 2011, the company has been actively divesting business units.

In February 2013, the company sold its home health business, known as Deaconess HomeCare, to LHC Group Inc. for $60 million in cash. A year earlier, on Feb. 2, 2012, the company sold its specialty-pharmacies business for up to $285 million in cash and debt to Deerfield, Ill.-based Walgreens.

According to industry sources, deals in the home-health space can attract Ebitda multiples from 10 to 16 times, depending upon the services provided.

Dougherty's O'Neil said Bioscrip's in-home business, which supplies an integral niche service in the market, could go for between 15 and 16 times Ebitda.

According to an Aug. 6 note from Jefferies & Co. analyst Brian Tanquilut, Bioscrip is expected to have total Ebitda of about $51.5 million for the year ended Dec. 31, 2014. The home infusion segment, which is expected to contribute about 92% of overall revenue, will likely have about $47.9 million in Ebitda, pinning a value on that division as high as $766 million.

Tanquilut has put a price target of $11 per share for Bioscrip as a whole, which reflects about 18 times the entire company's projected Ebitda.

But if Bioscrip is sold in its current state, it may be a tough pill for buyers to swallow given that the company still owns a small, albeit profitable, PBM business that's not synergistic with the home-infusion unit.

As a result, O'Neil and Muken agree that Bioscrip may need to sell off the PBM business before it's taken out as a whole.

"Bioscrip shareholders would love them to sell this business," O'Neil said. "I think their stock would go up almost regardless of what they get for it."

He pinned a value on the PBM division at between $40 million and $50 million, or about 7 times its projected Ebitda of between $6 million and $7 million.

"Investors are very frustrated with the business, but on the flip side, there are going to be buyers out there," O'Neil said. "[Management has been] waiting for the business to stabilize and our sense is, it's probably stable."

Sources believe another alluring element of the infusion business is that it's insulated from federal funding reimbursement shifts and the fragmented nature of the industry.

"The infusion space is something that is only about 10% dependent on federal reimbursement, which makes it a much more attractive business," said O'Neil. "Unlike other parts of the healthcare space where federal funding is an issue, we don't see that fear with Bioscrip."

Muken feels a PE buyer is more likely for the company than a strategic one.

"I suspect that the strategics are after more transformative deals," he said. "While I don't think Bioscrip is a bad business or a bad fit for the big guys, I just think its numbers are a rounding error for some. There are plenty of other opportunities for private equity to come in and roll up more of these smaller infusion practices through Bioscrip."

Bioscrip declined comment. CVS and Walgreens didn't respond to calls.

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