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On Jul 2, we downgraded our long-term recommendation on BioScrip Inc. (BIOS - Analyst Report) to Neutral from Outperform as we believe reimbursement pressure and margin headwinds soured the company’s positive momentum. This provider of infusion, home healthcare and pharmacy benefit management (PBM) services carries a Zacks Rank #3 (Hold).

Why the Downgrade?

The company’s PBM business witnessed another quarter of downfall due to lower revenue from discount cards and decreased funded PBM business. Further, BioScrip posted sizeable margin contractions due to escalating costs and expenses. Reimbursement cuts also adversely affect the company’s financial results.

In our view, reimbursement pressure and margin headwinds are looming concerns for BioScrip. Further, the company operates in a tough competitive landscape in the presence of stalwarts like Walgreens (WAG - Analyst Report) and CVS Caremark Corporation (CVS - Analyst Report).

In the first quarter of 2013, BioScrip’s adjusted EPS of a penny missed the Zacks Consensus Estimate of $0.02. Moreover, losses widened as net loss from continuing operations of $7.5 million or a loss of 13 cents per share in the first quarter was worse than the net loss of $2 million or 4 cents per share in the year-ago quarter.

Despite the lukewarm start to 2013, we believe that BioScrip stands to gain from attractive market dynamics and strong presence in the infusion business. The company’s strategy of selective acquisitions and regional expansion also boost confidence.

The recent announcement of the takeover of Ohio-based CarePoint Partners Holdings is another upside as it is expected to improve BioScrip’s growth profile.  The long-term earnings growth of the company is presently pegged at 20.5%.
 
However, the dearth of any near-term catalyst warrants caution.

Other Stocks to Consider

While we remain on the sidelines for BioScrip, we are positive about Herbalife Ltd. (HLF - Snapshot Report) doing well. The stock carries a favorable Zacks Rank #1 (Strong Buy).

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