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BioScrip Remains Neutral

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We are maintaining our Neutral recommendation on BioScrip Inc. (BIOS - Free Report) with a target price of $8.00.

BioScrip reported a loss of 7 cents per share from continued operations in the second quarter of fiscal 2012, wider than last year's loss of 3 cents.

Adjusting for certain one-time items in both periods, the loss per share was 2 cents; considerably lagging the year-ago adjusted earnings per share (EPS) of 10 cents. The loss was also a penny wider than the Zacks Consensus Estimate.

Total revenue was $155.9 million, up 18.5% year over year and exceeding the Zacks Consensus Estimate of $154 million.

Earlier in 2010, BioScrip initiated a strategic assessment of its business and operations. Based on its findings, the company started focusing on its fast-growing Infusion/Home Health Services segment.  As a result, in 2012, BioScrip divested certain Pharmacy Services assets, including pharmacy mail operations and community retail pharmacy stores, to Walgreen Co. (WAG) for $225 million, including approximately $161 million in cash and retention.

Based on the huge potential of the Infusion Services business, which led to BioScrip’s persistent growth in this segment,, the company has shifted its focus to this rising sector. It therefore repositioned some of its pharmacy business assets and redirected the resources of the divested business to support the existing Infusion Services business.

Moreover, in keeping with its strategy to expand its Infusion footprint to new places, the company acquired InfuScience in July this year. InfuScience is a provider of alternate site infusion pharmacy services.

We are encouraged by the company’s decision to invest in the Infusion and Home Health industry, where it has a strong presence and enjoys competitive advantages. Our optimism is buoyed by the estimates of the National Home Infusion Association ('NHIA'), which stated that the alternate-site infusion therapy sector currently represents $9 billion to $11 billion per year of the total U.S. health care expenditure.

The company is also hopeful about the continued growth in Pharmacy Benefit Management (PBM) and cash card businesses. It expects revenue in the range of $100 million to $105 million for fiscal 2012. We remain optimistic about BioScrip’s PBM growth and believe that the company is perfectly positioned to leverage its strong clinical reputation for growth.

However, big players like CVS Caremark (CVS - Free Report) and Express Scripts (ESRX - Free Report) , as well as many other smaller organizations that operate on a local or regional basis, are increasing the competition. This makes us cautious about the stock.

We note that increased competition has led to lower pricing and increased rebate sharing, thereby putting severe pressure on margins. Moreover, the Home Health industry was impacted by the reduction in Medicare and Medicaid reimbursements, which we think could temper BioScrip’s sales growth going forward. BioScrip currently maintains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

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