HOUSTON, Aug. 8 /PRNewswire/ -- US Oncology Holdings, Inc. (“Holdings” or the “Company”), the parent company of US Oncology, Inc. (“US Oncology”), one of the nation’s largest cancer care services companies, reported revenue of $689.4 million, EBITDA of $66.6 million and net income of $8.6 million for the quarter ended June 30, 2006. For the six months ended June 30, 2006, the Company reported revenue of $1,391.2 million, EBITDA of $128.0 million and net income of $16.2 million.
The results of Holdings include those of US Oncology, its wholly-owned subsidiary, through which all operations are conducted. The results of operations and the financial position of Holdings are substantially identical to those of US Oncology, with the exception of nominal administrative expenses and items related to the capitalization of Holdings. For the quarter ended June 30, 2006, US Oncology reported EBITDA of $66.6 million and net income of $12.4 million. For the six months ended June 30, 2006, US Oncology reported EBITDA of $128.1 million and net income of $23.9 million. Differences between the results of Holdings and US Oncology, as well as selected balance sheet data, are reconciled in this press release.
“In the second quarter, we continue to see strong demand for our services. Compared to the same period in 2005, the total number of new patients seeking care at affiliated practices within the network increased by six percent. We also experienced strong growth from our integrated cancer care centers,” said Dale Ross, chairman and CEO of US Oncology. “In addition to the growth in demand for patient care services in the network, we are also experiencing relatively stable managed care reimbursement rates. We believe this is the result of our focus on our strategic initiatives, such as electronic medical records, standardized clinical pathways, and Six Sigma process improvement programs. Our efforts have been well received by both local and national payers as a financially responsible and transparent path to effectively delivering technologically-advanced, high quality cancer care to all patients.”
In addition to the strong local market presence, US Oncology also progressed in strengthening its national leadership as an oncology services company. “Our distribution business made strong contributions to our financial performance this quarter and as we launch our specialty dispensing and mail order capabilities, we fully expect those contributions to continue to grow,” said Ross. “We also further expanded our offering of oncology services through the addition of AccessMed, which adds reimbursement hotline and patient assistance programs to the existing suite of comprehensive services we offer to pharmaceutical and biotechnology manufacturers. The reimbursement expertise of AccessMed provides us with the ability to centralize the appeals process for our affiliated practices and facilitates financial assistance for patients to obtain the oncology pharmaceutical products they need.”
US Oncology Holdings Second Quarter Highlights * EBITDA for the second quarter of 2006 was $66.6 million, compared to $59.4 million for the second quarter of 2005 and $61.4 million in the first quarter of 2006. Compared to the first quarter of 2006, the Company experienced EBITDA growth across all operating segments. Compared to the second quarter of 2005, the Company had increased EBITDA in both the cancer center services and the pharmaceutical services segments, partially offset by declining Medicare reimbursement for pharmaceuticals in the medical oncology services segment. * During the quarter ended June 30, 2006, cash provided by operations was $47.5 million compared to $128.2 million used in the first quarter. The second quarter improvement reflects strong receivable collections, the completion of working capital investments at the distribution center, and the first quarter semi-annual interest payments that occur each year. * During the first six months of 2006, 45 physicians began practicing as part of the US Oncology network. For the same period, departures consisted of 35 physicians comprising our last large net revenue model practice and 27 separations primarily due to physician retirements. Excluding the net revenue practice termination, the US Oncology network increased by 18 physicians during the first six months of 2006. * As of June 30, 2006, 55 physicians had executed agreements to join the US Oncology network. 50 of these physicians are expected to begin practicing during the remainder of 2006 and five physicians are expected to begin practicing during 2007. * At June 30, five integrated cancer centers were under construction and expected to begin providing patient care during 2006. In July, the Company opened a new integrated cancer center in North Carolina that will contribute beginning with the third quarter results of operations.
“US Oncology has strategically expanded its service offerings to become a diversified oncology services company. We have pursued a diversification strategy that expands the treatment therapies that our affiliated practices can offer cancer patients, and at the same time, capitalizes on the national scale of our network and relationships with pharmaceutical manufacturers,” said Ross. “As a result of this strategy we have experienced solid growth from our cancer center and pharmaceutical services. Today, cancer center and pharmaceutical services represent nearly 60 percent of our EBITDA, an increase of over 30 percent from 2002. For investors, this diversification of our business provides growth opportunities, despite recent changes in Medicare reimbursement for medical oncology services.”
Results of Operations
The Company operates and manages its business through four operating segments. The table below compares the results of the second quarter 2006 to the results of the corresponding period of the prior year and the preceding quarter (in millions). Q2 Q2 % Q1 % 2006 2005 Change 2006 Change Revenue Medical oncology services $516.1 $461.7 11.8 $528.4 (2.3) Cancer center services 80.6 73.6 9.5 79.0 2.0 Pharmaceutical services 484.9 72.2 571.6(B) 481.8 0.6 Research and other 12.2 13.2 (7.6) 12.6 (3.2) Eliminations (A) (404.4) --- nm(D) (400.1) 1.1 Total $689.4 $620.7 11.1 $701.7 (1.8) EBITDA Medical oncology services $36.0 $42.3 (14.9) $31.8 13.2 Cancer center services 29.3 26.1 12.3 28.5 2.8 Pharmaceutical services 21.4 9.8 118.4(B) 20.5 4.4 Research and other 1.5 (0.1) nm(D) (0.9) nm(D) Corporate costs (C) (21.6) (18.7) 15.5 (18.5) 16.8 Total $66.6 $59.4 12.1 $61.4 8.5 Net income $8.6 $5.5 56.4 $7.6 13.2 (A) Eliminations represent the sale of pharmaceuticals from our distribution center (pharmaceutical services segment) to our practices affiliated under comprehensive service agreements (medical oncology segment). (B) The distribution center began operations in the third quarter of 2005, and accordingly no sales to affiliated practices occurred in the first six months of 2005. (C) Corporate costs relate primarily to general and administrative expenses in support of our network. (D) Not meaningful. Medical Oncology Services
Medical oncology services revenue increased 11.8 percent over the second quarter of 2005, while EBITDA decreased 14.9 percent from the same period. The revenue increase reflects growth in our network of medical oncologists and the resulting increase in medical oncology visits, as well as growth in pharmaceutical revenue throughout the network. The EBITDA decrease is primarily attributable to average sales price (“ASP”) reimbursement under Medicare that was effective January 1, 2005 and modifications to the Medicare Demonstration Project, which provides payments for certain data relating to physician evaluation and management of patient care, that were effective January 1, 2006. ASP-based reimbursements decreased approximately 1.7 percent since June 30, 2005, increased approximately 0.7 percent during the second quarter of 2006 and, based on rates published by Centers for Medicare and Medicaid Services, will increase another 0.7 percent in the third quarter of 2006.
Medical oncology services revenue decreased 2.3 percent from the first quarter of 2006 while EBITDA increased 13.2 percent from the same period. The revenue decrease is due to the separation of our last remaining large net revenue model practice in April 2006 which was partially offset by same store pharmaceutical revenue growth. The EBITDA increase is attributable to slightly higher ASP-based reimbursement rates as well as lower drug costs during the quarter.
The involvement of affiliated practices in our medical oncology services segment is important to the success of our pharmaceutical services segment. To promote continued support of initiatives in this area, starting in the third quarter of 2006, we will reduce the management fees paid by affiliated practices based upon profitability of the pharmaceutical services segment and compliance with distribution efficiency guidelines established by the Company. On a pro forma basis, this would have reduced EBITDA in the medical oncology services segment for the second quarter of 2006 by $4.0 million.
Cancer Center Services
Cancer center services revenue was $80.6 million and EBITDA was $29.3 million for the second quarter of 2006, representing increases of 9.5 percent and 12.3 percent, respectively, over the second quarter of 2005, reflecting the clinical acceptance of new technology. Technology-based treatments provided in our integrated cancer centers increased 3.3 percent, on a same- store basis, over the second quarter of 2005.
Second quarter cancer center services revenue increased 2.0 percent over the first quarter of 2006 and EBITDA increased 2.8 percent over the same period.
Pharmaceutical Services
Pharmaceutical services revenue was $484.9 million, an increase of $412.7 million over the second quarter of 2005. The increase is due to sales by the distribution center and growth in revenue from practices affiliated through oncology pharmaceutical services (“OPS”) agreements and from services provided to pharmaceutical manufacturers.
Pharmaceutical services EBITDA was $21.4 million for the second quarter of 2006, an increase of $11.6 million over the comparable prior year period, reflecting increased revenue for the current quarter.
Pharmaceutical services revenue in the second quarter of 2006 was consistent with the preceding quarter. In the current period, EBITDA increased $0.9 million due to distribution performance rebates earned during the quarter.
Net Income
Net income for the second quarter of 2006 was $8.6 million, an increase of $3.1 million from the second quarter of 2005 and $1.0 million from the first quarter of 2006. When compared to both periods, the EBITDA improvement in the second quarter of 2006 was partially offset by higher interest expense reflecting increased interest rates for our floating rate debt. Compared to the second quarter of 2005, income tax expense increased $0.7 million reflecting the increase in income before taxes associated with our current operating results.
The Company also reconfirmed its previously announced guidance that it expects fiscal year 2006 EBITDA will be approximately $250 million to $260 million. This estimate is a forward-looking statement and is subject to uncertainty. The reader should refer to the Company’s cautionary advice regarding forward-looking statements appearing elsewhere in this news release and in the Company’s filings with the Securities and Exchange Commission.
Cash Flow
The Company used $80.7 million in cash for operations during the first six months of 2006 compared to generating $81.1 million in the same prior year period. The decrease in operating cash flow was primarily due to working capital investments of $113.0 million during the first quarter of 2006, principally for inventory and accounts payable at the Company’s distribution center.
During the quarter ended June 30, 2006, cash provided by operations was $47.5 million compared to $128.2 million used in the first quarter. The second quarter improvement reflects strong receivable collections, first quarter investments in working capital for the distribution center, and semi- annual interest payments did not recur in the second quarter.
During July 2006, the Company successfully closed a $100.0 million incremental term loan under its existing senior secured credit facility. A portion of the net proceeds from the term loan was used to repay $40.0 million of borrowings under the Company’s revolving credit facility that were outstanding immediately prior to the funding. The remainder will be used for working capital and general corporate purposes. As of August 4, 2006, the Company had $124.6 million of cash and investments, and availability under the revolving credit facility of $137.6 million.
Development and Strategic Investments
One of the Company’s ongoing objectives is to expand our network by affiliating with practices in new or existing markets, recruiting physicians into existing affiliated practices and entering into joint ventures. During the second quarter of 2006, agreements were signed with 34 physicians to begin practicing in our network. Also during the quarter, 22 physicians started practicing as part of our network.
During the second quarter of 2006, the Company entered into a joint venture with United Hospital in St. Paul, Minnesota, to provide radiation oncology services, which began operations on August 1. In July, 2006 the Company opened an integrated cancer center in Asheville, North Carolina.
Also in July, the Company acquired AccessMed, Inc. a provider of oncology- focused reimbursement support and related consulting services to pharmaceutical manufacturers located in Overland Park, Kansas for $32.5 million. The acquisition will expand the scope of services provided to pharmaceutical manufacturers and augment the reimbursement support services US Oncology provides to its affiliated physicians.
“Our research network continues to lead the industry in the design and implementation of clinical trials of new therapies for cancer patients, and to increase the access of patients to these trials,” said Ross. “For the third year in a row, two practices in our network were awarded the ASCO Clinical Trial Participation Awards for their contributions to clinical research. We are very proud of this national recognition.”
Legal Proceedings
On April 18, 2006, the Company terminated its net revenue model comprehensive service agreement with a 35-physician practice in Oklahoma, as a result of alleged breaches of that agreement by the practice. The practice accounted for 4.6 percent and 2.3 percent of the Company’s revenue and EBITDA, respectively, for the first quarter of 2006, and was the last remaining large practice managed under the net revenue model. In connection with the separation, the Company expects to sell to the practice the cancer centers and associated clinical equipment, furniture, and fixtures used by that practice during the third quarter of 2006. The Company is currently involved in litigation with this practice regarding the service agreement. As a result of the practice’s alleged breaches of that agreement and the litigation, the Company was unable to collect on a timely basis payments on receivables owned by us and other amounts owed by the practice. Pursuant to a court order, we collected $10 million of these amounts during the second quarter of 2006. At June 30, 2006, the total amount owed to us of $24.3 million is reflected on our balance sheet as other assets. We intend to pursue our claims, including claims for those amounts owed to us, as well as any costs and expenses that we incur as a result of any termination of the service agreement. We also intend to defend against the practice’s allegations that we breached the agreement and that the agreement is unenforceable. As with any complex litigation, the process necessary to resolve this claim may take as long as two to three years.
During the fourth quarter of 2005, we received a subpoena from the United States Department of Justice’s Civil Litigation Division (“DOJ”) requesting a broad range of information about us and our business, generally in relation to our contracts and relationships with pharmaceutical manufacturers. We are in the process of responding to the subpoena and intend to cooperate fully with the DOJ. There have been no material changes to the inquiry or the process of responding to the inquiry.
The Company and US Oncology will broadcast the 2006 second quarter results by conference call on Tuesday, August 8, 2006 at 9:00 A.M. Central Daylight Time. The archived replay of the event will be available through the News Center on the Company’s Web site (http://www.usoncology.com ).
About US Oncology, Inc.
US Oncology, headquartered in Houston, Texas, is one of the nation’s largest cancer treatment and research networks. US Oncology provides extensive services and support to its affiliated cancer care sites nationwide to help them expand their offering of the most advanced treatments and technologies, build integrated community-based cancer care centers, improve their therapeutic drug management programs and participate in many of the new cancer-related clinical research studies. US Oncology is affiliated with 977 physicians operating in 392 locations, including 90 radiation oncology facilities in 34 states.
This news release contains forward-looking statements, including statements that include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” or similar expressions and statements regarding our prospects. All statements other than statements of historical fact included in this news release are forward-looking statements. Although the Company believes that the expectations reflected in such statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such expectations are subject to risks and uncertainties, including the Company’s reliance on pharmaceuticals for the majority of its revenues, the Company’s ability to maintain favorable pharmaceutical pricing and favorable relationships with pharmaceutical manufacturers and other vendors, concentration of pharmaceutical purchasing and favorable pricing with a limited number of vendors, prescription drug reimbursement and other reimbursement under Medicare (including reimbursement for radiation and diagnostic services), reimbursement for medical services by non-governmental payers and cost-containment efforts by such payers, other changes in the manner patient care is reimbursed or administered, the Company’s ability to service its substantial indebtedness and comply with related covenants in debt agreements, the Company’s ability to fund its operations through operating cash flow or utilization of its existing credit facility or its ability to obtain additional financing on acceptable terms, the Company’s ability to implement strategic initiatives, the Company’s ability to maintain good relationships with existing practices and expand into new markets and development of existing markets, the Company’s ability to complete cancer centers and PET facilities currently in development and its ability to recover investments in cancer centers, government regulation and enforcement, increases in the cost of providing cancer treatment services and the operations of the Company’s affiliated physician practices. Please refer to the US Oncology Holdings, Inc. filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2005, and subsequent filings, for a more extensive discussion of factors that could cause actual results to differ materially from the Company’s expectations.
Discussion of Non-GAAP Information
In this release, the Company uses the terms “EBITDA” and “Adjusted EBITDA.” EBITDA is earnings before interest, taxes, depreciation and amortization (including amortization of stock compensation) and minority interest expense. Prior to the first quarter of 2006, minority interest expense was treated as a reduction to EBITDA. Adjusted EBITDA excludes compensation expense associated with the Company’s long-term incentive plan incurred during the first quarter of 2005. EBITDA and Adjusted EBITDA are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are derived from relevant items in the Company’s GAAP financials. A reconciliation of EBITDA and Adjusted EBITDA to net income and operating cash flow is included in this release.
Management believes EBITDA is useful to investors in evaluating the value of companies in general, and in evaluating the liquidity of companies with debt service obligations and their ability to service their indebtedness. Management uses EBITDA, among other financial measures, to evaluate liquidity and financial performance, both with respect to the business as a whole and with respect to individual sites. Our senior secured credit facility also requires that we comply on a quarterly basis with certain financial covenants that include EBITDA as a financial measure. Adjusted EBITDA excludes certain items because management believes excluding these items provides a better representation of our ongoing operations.
US ONCOLOGY HOLDINGS, INC. KEY OPERATING STATISTICS (unaudited) Q2 Q2 % Q1 % 2006 2005 Change 2006 Change Physician Summary: Medical oncologists 666 629 5.9% 690 (3.5)% Radiation oncologists 139 129 7.8 140 (0.7) Other oncologists 43 45 (4.4) 44 (2.3) Total CSA physicians 848 803 5.6 874 (3.0) OPS physicians 129 141 (8.5) 138 (6.5) Total physicians 977 944 3.5 1,012 (3.5) Daily Operating Statistics (D): Medical oncology visits (A) 9,603 9,357 2.6 10,051 (4.5) Radiation treatments/ diagnostic scans (B) 3,506 3,367 4.1 3,564 (1.6) Daily Same Store Statistics (D): Medical oncology visits (A) 9,419 8,837 6.6 9,372 0.5 Radiation treatments/ diagnostic scans (B) 3,311 3,205 3.3 3,343 (1.0) Other Statistics: Radiation oncology facilities (C) (D) (E) 90 91 (1.1) 92 (2.2) PET systems 30 28 7.1 29 3.4 New patients enrolled in research studies during the period 642 943 (31.9) 646 (0.6) Accounts receivable days outstanding 37 39 (5.1) 40 (7.5) Notes to Key Operating Statistics: (A) Medical oncology visits include information for practices affiliated under comprehensive service agreements only, and do not include the results of OPS practices. (B) Represents technology-based treatments, including IMRT treatments and diagnostic scans, provided through our integrated cancer centers. (C) The first quarter and second quarters of 2006 include 82 and 78 integrated cancer centers and 10 and 12 radiation-only facilities, respectively. The second quarter of 2005 includes 81 integrated cancer centers and 10 radiation-only facilities. (D) Radiation treatments/diagnostic scans and facilities do not include cancer centers operated by unconsolidated joint ventures in which the Company or an affiliated practice has a financial interest. (E) Radiation oncology facilities at June 30, 2006 exclude 4 cancer centers operated by a 35-physician net revenue model practice whose management service agreement was terminated on April 18, 2006. US ONCOLOGY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands) (unaudited) Three Months Three Months Ended Ended June 30, March 31, 2006 2005 2006 Product revenue $445,203 $394,507 $455,892 Service revenue 244,215 226,170 245,851 Total revenue 689,418 620,677 701,743 Cost of products 422,047 377,753 438,313 Cost of services: Operating compensation and benefits 113,355 105,131 116,682 Other operating costs 65,837 59,941 66,800 Depreciation and amortization 17,885 17,203 16,034 Total cost of services 197,077 182,275 199,516 Total cost of products and services 619,124 560,028 637,829 General and administrative expense 22,210 19,393 19,078 Depreciation and amortization 3,790 4,091 3,800 645,124 583,512 660,707 Income from operations 44,294 37,165 41,036 Other expense: Interest expense, net (29,714) (26,879) (27,458) Minority interest expense (610) (45) (525) Income before income taxes 13,970 10,241 13,053 Income tax provision (5,354) (4,701) (5,482) Net income $8,616 $5,540 $7,571 US ONCOLOGY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands) (unaudited) Six Months Ended June 30, 2006 2005 Product revenue $901,095 $762,707 Service revenue 490,066 442,558 Total revenue 1,391,161 1,205,265 Cost of products 860,360 728,761 Cost of services: Operating compensation and benefits 230,037 203,309 Other operating costs 132,637 119,150 Depreciation and amortization 33,919 32,868 Total cost of services 396,593 355,327 Total cost of products and services 1,256,953 1,084,088 General and administrative expense 41,288 34,808 Compensation expense under long-term incentive plan --- 14,507 Depreciation and amortization 7,590 9,322 1,305,831 1,142,725 Income from operations 85,330 62,540 Other expense: Interest expense, net (57,172) (47,590) Minority interest expense (1,135) (898) Income before income taxes 27,023 14,052 Income tax provision (10,836) (6,347) Net income $16,187 $7,705 US ONCOLOGY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, 2006 2005 Cash flows from operating activities: Net cash provided by (used in) operating activities $(80,706) $81,097 Cash flows from investing activities: Proceeds from sale of property and equipment 1,197 --- Acquisition of property and equipment (37,519) (41,468) Investment in subsidiary (750) --- Payments in affiliation transactions (3,165) (3,765) Proceeds from sale of real estate interests in joint venture --- 900 Proceeds from contract separation --- 1,807 Net cash used in investing activities (40,237) (42,526) Cash flows from financing activities: Proceeds from senior floating rate notes --- 242,800 Proceeds from other indebtedness --- 13,245 Payment of dividends on preferred stock --- (200,015) Payment of dividends on common stock --- (49,985) Repayment of term loan (1,000) (15,912) Repayment of other indebtedness (3,499) (4,358) Issuance of stock --- 899 Distributions to minority shareholders (876) --- Contributions from minority shareholders 482 --- Proceeds from exercise of options 34 --- Net cash used in financing activities (4,859) (13,326) (Decrease) increase in cash and equivalents (125,802) 25,245 Cash and equivalents: Beginning of period 125,838 120,400 End of period $36 $145,645 US ONCOLOGY HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) (unaudited) June 30, December 31, 2006 2005 ASSETS Current assets: Cash and
