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Following a significant boost in BioScrip Inc.‘s ((BIOS - Analyst Report)) top line, triggered by balanced growth across its segments, we have upgraded our recommendation on BioScrip to Neutral.

In the first quarter 2011, BioScrip came up with better-than-expected results, reflecting strong contributions from the Critical Homecare Solutions (CHS) acquisition and positive organic growth. EPS, excluding one-time items, came in at 5 cents, beating the Zacks Consensus Estimate of a break-even result and the year-ago quarter loss per share of 18 cents.

A healthy double-digit revenue growth resulted in a 98% year-over-year jump in gross profit. As a result gross margin during the quarter expanded by 600 basis points (bps) (to 17.6%). In addition, while there were higher selling, general and administrative expenses, adjusted operating margin increased by 334 bps to 4.1% during the quarter.

The company has started to expand its footprint nationally based on  the CHS acquisition. Following this acquisition, BioScrip was able to access a huge number of infusion patients with a strong potential for future growth. CHS is gradually helping the company to integrate across the majority of the existing markets as well as gain entry in new and under -penetrated locations. Additionally BioScrip is taking advantage of the local community strengths, as well as access to the managed care relationships through CHS.

In addition, after a few disappointing quarters, BioScrip is gradually gaining traction in its organic division. In spite of the existing reimbursement pressure, the company showed strong results in the pharmacy segment impacted by positive returns from drugstore.com, new managed care contracts and cash card business.

Thus the company is in a perfect position to leverage its strong clinical reputation for growth. Also its strong accessibility to specialty drugs and relationships with pharmaceutical companies are expected to drive growth further.

BioScrip’s strong presence in the infusion and home health market should help sustain growth. The company is relatively well diversified across several key disease areas including immunology, multiple sclerosis, and oncology. Moreover, BioScrip has favorable managed care relationships on a national basis.

However, BioScrip’s highly leveraged balance sheet continues to be a drag on the bottom line which remains key area of concern, in our view.

Additionally, we remain apprehensive owing to mounting competitive pressures from players like CVS Caremark ((CVS - Analyst Report)), Medco Health Solutions (), Walgreen ((WAG - Analyst Report)) and AmerisourceBergen ((ABC - Analyst Report)) as well as many smaller organizations that operate on a local or regional basis. Increased competition has led to lower pricing and increased rebate sharing, thereby pressurizing margins. Also the reimbursement issues are adversely affecting the company's performance going ahead.

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