Argues That Best Opportunity to Maximize Shareholder Value Is Through A Sale to A Strategic Acquirer.
RALEIGH, N.C., April 27 /PRNewswire/ -- Anchor Capital, a stockholder of BioScrip, Inc. (Nasdaq: BIOS), announced today that it has sent a letter to the Board of Directors of BioScrip in which Anchor Capital argues that BioScrip's shareholder value would be maximized through simultaneous i) cost rationalizations and ii) exploration of strategic alternatives to unlock the considerable shareholder value, with focus on a sale to a strategic acquirer.
Speaking on behalf of Anchor Capital, Clay Dunnagan explained that he believes shareholders have lost patience with BioScrip's frequent missteps causing the shares to decline 67.4% since 12/31/07. Mr. Dunnagan added that time is of the essence to improve operations and complete a transaction because BioScrip's competitors are better operated, better capitalized and better positioned.
Based on Anchor Capital's analysis of potential cost reductions and strategic acquirer synergies of at least $37 million and despite present, depressed peer group trading multiples, as set forth in an analysis included with the letter, Anchor Capital estimates that a sale to a strategic buyer could potentially yield an increase of over 325% per share from BioScrip's April 22nd closing price. Mr. Dunnagan explained that in his opinion BioScrip's current cost structure and competitive position are denying shareholders the ability to recognize maximum value for their investment. Mr. Dunnagan respectfully called on the Board to provide its view regarding a strategic sale as soon as possible.
The full text of the letter follows:
April 23, 2009
Members of the Board
c/o Barry A. Posner, Executive Vice President
100 Clearbrook Road
Elmsford, NY 10523
Dear Members of the Board:
Affiliates of Anchor Capital ("Anchor Capital") own 512,297 shares of BioScrip, Inc. ("BIOS" or the "Company") or approximately 1.3% of its outstanding common stock. We are very familiar with the challenges the Company has faced and the efforts made by its management and employees in order to participate in an increasingly competitive pharmacy services industry. High-touch, value-added service levels have been largely replaced over the past 10 years by low-touch, commoditized distribution as the industry has consolidated rapidly, making pricing and economies of scale the chief competitive factors. BIOS has attempted to maintain its market position within this consolidating industry by acquiring various competitors culminating in the 2005 purchase of Chronimed and diversifying its business to include Infusion, Retail and Mail Distribution in addition to its traditional Pharmacy Benefit Manager.
Unfortunately, BIOS has not sufficiently integrated its acquisitions and managed SG&A expenses and, therefore, faces significant near-term headwinds as it competes with more efficient, larger and better-capitalized industry players. Despite the pre-Chronimed merger promise of "significant operational cost saving synergies" from "combining like-kind functions and facilities," BIOS's acquisition program resulted in material growth in SG&A on an absolute basis and as a percentage of revenue. The failure to integrate and rationalize acquisitions is reflected in BIOS's outsized SG&A expense line of approximately $125 million in FY2008, of which we estimate that approximately $30 million is comprised of unallocated corporate overhead (during the most recent earnings call, management mentioned a $4-6 million SG&A reduction over the course of 2009, which we view as insufficient given the opportunity to cut much more and our belief that much of the reduction relates to customer losses announced in 2008).(1) Instead of paring expenses, Management has attempted to increase total revenue to drive operating margin and absolute operating profit improvement through economies of scale, which has not worked. BIOS generated FY2003 EBITDA of $22.6 million from revenue of $589 million (3.8% margin), but only $16.8 million of EBITDA in FY2008 from 2.4x more revenue of $1.4 billion (1.2% margin). Further, management's attempts to generate revenue growth despite weak margins have required funding from BIOS's credit facility due November 2010 of $50 million as of 12/31/08 at an average cost of 5.0%; not inexpensive LIBOR-based funding in the present environment. Paying down its debt and self-funding operations is another excellent reason to reduce costs aggressively. We believe significant opportunities exist to cut meaningful costs (which are detailed below) and that such reductions are the key to unlocking BIOS's significant value. The fact that the Company has not aggressively tackled its expense line has negatively impacted operating results, which we believe has generated substantial shareholder dissatisfaction. In spite of recent volatility in the healthcare sector, BIOS's share price decline has been deeper, -67.4%, and preceded the general market decline by five months; see Appendix 1.
We fear that the market has lost confidence in the current management's ability to cut costs and operate BIOS's assets at a reasonable level of profitability. Therefore, we believe shareholders' best option for value creation is a sale to a strategic buyer that is willing and able to operate BIOS's assets efficiently. Based upon publicly available information pertaining to BIOS and its competitors (specifically, data pertaining to Express Scripts' recent acquisition of WellPoint's NextRx PBM assets), and discussions we have held with industry experts and investment bankers focused on the space, we have been able to identify on a conservative basis an estimated $37 million in cost synergies that a strategic acquirer (including any of BIOS's public company peers listed in Appendix 1 and numerous privately held regional pharmacy services companies) could potentially realize in owning the business by culling redundant management positions, shifting operations to its existing systems and realizing immediately the drug purchasing and other operational scale benefits that BIOS has failed to achieve; see Appendix 2.(2) Therefore, even at present, depressed market multiples, we believe the Company's assets could be worth an incremental $315 million or more to a strategic buyer of the whole business.(3) This implies a potential valuation approximately 4.3x the current stock price.
(1) The Corporate overhead value noted is an estimate based on analyses of competing and comparable businesses' expense structures because specific Corporate operating data is not provided by the Company. One of the greatest impediments facing a potential acquirer is the lack of transparency in BIOS's financial reporting, which we have attempted to address with our enclosed analyses.
(2) This does not include additional potential annual savings from the elimination of duplicative, non-customer-facing distribution and corporate office locations, which could be material, or savings generated through increased generic substitutions and mail penetration. Further, this also does not include the potential value to a strategic acquirer of approximately $44.3 million of federal and state net operating loss carryforwards as of 12/31/08.
(3) BIOS's current market equity value is approximately $99 million.
To maximize value for all shareholders, we respectfully request that the Board:
Interestingly, upon review of BIOS's 2009 proxy statement, it appears that adjustments have been made to remove barriers to a sale of the Company. Specifically, the aggregate cash payment to the five named officers in the event of a change of control has declined by 55% to $5.3 million from $11.9 million noted in the 2008 proxy, which concession seems to be in exchange for increased equity stakes in the business granted to the management and Board during 2008. Management stock and options awards as a percentage of total compensation increased to 47% in 2008 (at extremely low per share grant values, yielding lots of shares) from 36% in 2007 (at materially higher per share grant values, yielding fewer shares), and Board compensation more than doubled (up 160%) due solely to significant stock and options awards that comprised 49% of total directors' 2008 compensation, up from 0% in 2007 and 5% in 2006. While we are pleased to see that the Company seems to be lowering the barriers to a transaction, we believe it is imperative that no time is wasted in effecting the measures we have suggested to aggressively explore all options available while there is considerable strategic interest in consolidation, as indicated by the Express Scripts acquisition of NextRx.
We believe the opportunity to improve shareholder value is substantial through a sale to a strategic acquirer. However, we believe time is of the essence to improve operations and complete a transaction because BIOS's competitors are rapidly strengthening through consolidations and most are better positioned with more favorable, cost-effective pharmaceutical distribution arrangements. We would appreciate a prompt response on behalf of the Board, and are available in the meantime to discuss our view in greater detail. I can be reached at (919) 755-0602 during normal business hours.
Clay R. Dunnagan
Disclaimer: This letter was prepared by Anchor Capital solely for purposes of illustrating Anchor Capital's position with respect to BioScrip's strategic alternatives and it may not be relied on by any other person or used for any other purpose. Any statements about BioScrip contained in this letter involve numerous and significant subjective determinations, which may or may not prove to be correct. No representation or warranty, express or implied, is made as to the accuracy or completeness of any such information and nothing contained in this letter is, or shall be relied upon as, a representation, whether as to the past or the future. This letter reflects Anchor Capital's best current judgment and reflects assumptions Anchor Capital believes to be reasonable based on currently available public information. However, this letter does not purport to address all potential alternatives, the relative merits of different alternatives or all risks, uncertainties or assumptions associated therewith. The assumptions made in connection with this letter are necessarily based on economic, market, financial and other conditions as they existed, and on the information publicly available to Anchor Capital, when Anchor Capital prepared this analysis and Anchor Capital undertakes no obligation to update or otherwise revise this analysis.
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Click here to view Appendix 2:
|SOURCE Anchor Capital|
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