HOUSTON, Aug. 14 /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 services companies, reported revenue of $753.4 million, EBITDA of $52.9 million, net loss of $0.4 million and operating cash flow of $70.6 million for the quarter ended June 30, 2007. For the six months ended June 30, 2007, the Company reported revenue of $1,485.4 million, EBITDA of $89.8 million, Adjusted EBITDA of $110.1 million, net loss of $16.0 million and operating cash flow of $94.4 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 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, 2007, US Oncology reported EBITDA of $53.0 million, net income of $2.4 million and operating cash flow of $70.6 million. For the six months ended June 30, 2007, US Oncology reported EBITDA of $102.8 million, Adjusted EBITDA of $110.2 million, net income of $4.5 million and operating cash flow of $106.9 million. Differences between the results of Holdings and US Oncology, as well as selected balance sheet data, are reconciled in this press release.
US Oncology Holdings Second Quarter Highlights * EBITDA for the second quarter of 2007 was $52.9 million, compared to $66.6 million for the second quarter of 2006 and $36.9 million for the first quarter of 2007. The increase from the first quarter of 2007 is due primarily to a $12.9 million loss on early extinguishment of $250.0 million floating rate notes of US Oncology Holdings, Inc. and a $7.4 million impairment and restructuring charge relating to two markets during the first quarter. Excluding these charges, Adjusted EBITDA for the first quarter of 2007 was $57.2 million. * Cash provided by operations was $70.6 million in the second quarter of 2007, compared with $47.5 million in the same period in 2006 and $23.7 million in the first quarter of 2007. * In the second quarter of 2007, our network grew by 45 net physicians. This includes 15 net physicians under comprehensive services agreements, of which 10 are related to new markets in New York and Ohio, and 32 physicians in a group in Illinois that joined the network under an oncology pharmaceutical services agreement. Since June 30, 2007, agreements with 22 physicians have become effective and those physicians are now practicing as part of our network. Key Factors Impacting Second Quarter Results * Affiliated practices continued to adopt expanded service offerings for their patients, such as image guided radiation therapy ("IGRT") and intensity-modulated radiation therapy ("IMRT"). These offerings improve patient care by enhancing the precision of radiation delivery while reducing treatment side effects and related toxicities. At June 30, two integrated cancer centers were under construction and one of those has begun providing patient care in July, 2007. * Pharmaceutical services revenue continued to increase as a result of the addition of OPS customers since the second quarter of 2006 and increased distribution volume. * As a result of studies that called into question the appropriateness of supportive care drugs used to treat cancer-induced anemia, in the first quarter of 2007, the U.S. Food and Drug Administration (the "FDA") issued a public health advisory outlining new safety information, including revised product labeling, about erythropoiesis-stimulating agents ("ESAs"). As a result of the FDA warnings, we experienced reduced utilization of such drugs compared to both the second quarter of 2006 and the first quarter of 2007. In addition, the Centers for Medicare & Medicaid Services ("CMS") issued a national coverage decision ("NCD") on July 30, 2007 that goes significantly beyond the limitations of the FDA warning and is expected to lead to a significant decline in utilization of ESAs by oncologists, including those affiliated with US Oncology (see further discussion under "Contingencies and Risks").
Dale Ross, Chairman and Chief Executive Officer stated, "Although demand for oncology services remains high, Federal reimbursement continues to decline. Despite this challenging operating environment, revenues in each of our operating segments increased over both the preceding quarter and the same period in prior year. Our revenue growth is supported by increased visits in our medical oncology services segment and increased treatments in our cancer center services segment, as well as, growth in physicians affiliated under both our comprehensive services and oncology pharmaceutical services agreements."
"Our ability to achieve revenue growth in this environment validates our strategic vision that successful oncology practices must grow within their local market, diversify the therapies and services offered to patients and operate efficiently. Our continued ability to attract new affiliations evidences the market's confidence that we can help oncology practices navigate through current issues while positioning themselves for future growth."
"We remain committed to our long-term strategy of receiving differentiated reimbursement for evidence-based medicine and operating efficient practices even through these challenging times. In that context, we continue to invest in the expansion of Lean Six Sigma principles, implementation of evidence-based pathways and expansion of our electronic medical record system throughout affiliated practices. In addition, during the quarter, we expanded our field-based management resources to further assist existing affiliated practices with operational management and to facilitate integration of new practices. Furthermore, we continue to support expansion of our national capabilities in areas such as specialty pharmacy, billing and collection services and development of payer services. These resources will allow us to provide valuable support in a complicated operating environment."
Ross continued "We will continue to invest in these initiatives, even if they compromise our short-term financial performance. The healthcare system is moving away from simply reimbursing for medical services as commodities to rewarding top-tier providers that can demonstrate the high quality and cost-effectiveness of the care they provide. We are embracing this change by continuing to support integrated outpatient care and continued development of more efficient delivery systems."
Results of Operations
The Company operates and manages its business through four operating segments. The table below compares the results of the second quarter of 2007 to the results of the corresponding period of the prior year and the preceding quarter (in millions). Q2 Q2 % Q1 % 2007 2006 Change 2007 Change Revenue Medical oncology services $522.8 $516.1 1.3 $521.9 0.2 Cancer center services 89.4 80.6 10.9 84.3 6.0 Pharmaceutical services 573.5 484.9 18.3 541.4 5.9 Research and other 14.0 12.2 14.8 13.0 7.7 Eliminations(1) (446.3) (404.4) 10.3 (428.6) 4.1 Total $753.4 $689.4 9.3 $732.0 2.9 Operating income Medical oncology services $19.9 $36.0 (44.7) $24.8 (19.8) Cancer center services 24.7 19.4 27.3 20.0 23.5 Pharmaceutical services 20.2 19.7 2.5 21.1 (4.3) Research and other 0.1 1.5 (93.3) 0.3 (66.7) Corporate costs(2) (33.7) (32.3) 4.3 (30.3) 11.2 Impairment and restructuring charges(3) - - - (7.4) nm(4) Total $31.2 $44.3 (29.6) $28.5 9.5 EBITDA Medical oncology services $19.9 $36.0 (44.7) $24.8 (19.8) Cancer center services 34.5 29.3 17.7 29.5 16.9 Pharmaceutical services 21.4 21.4 - 22.4 (4.5) Research and other 0.2 1.5 (86.7) 0.5 (60.0) Corporate costs(2) (23.1) (21.6) 6.9 (20.0) 15.5 Loss on debt extinguishment(3) - - - (12.9) nm(4) Impairment and restructuring charges(3) - - - (7.4) nm(4) Total $52.9 $66.6 (20.6) $36.9 43.4 Adjusted EBITDA(3) $52.9 $66.6 (20.6) $57.2 (7.5) Net income (loss) $(0.4) $8.6 nm(4) $(15.6) (97.4) Operating cash flow $70.6 $47.5 48.6 $23.7 197.9 (1) Eliminations represent the sale of pharmaceuticals from our distribution center (pharmaceutical services segment) to our practices affiliated under comprehensive service agreements (medical oncology segment). (2) Corporate costs relate primarily to general and administrative expenses in support of our network. (3) Loss on early extinguishment of debt of $12.9 million and impairment and restructuring charges of $7.4 million (of which $3.1 million relates to the cancer center services segment and the remainder is classified as a corporate cost) in the first quarter of 2007 are excluded from Adjusted EBITDA for the first quarter of 2007. (4) Not meaningful.
Medical Oncology Services
In the second quarter of 2007, medical oncology services revenue increased $6.7 million, or 1.3 percent and EBITDA decreased $16.1 million, or 44.7 percent, compared to the second quarter of 2006. The revenue increase reflects an increase in daily visits. The EBITDA decrease is due primarily to a reduction in management fees attributable to management fee revisions described below. Compared to the first quarter of 2007, medical oncology services revenue increased $0.9 million, or 0.2 percent, and EBITDA decreased $4.9 million, or 19.8 percent, from the prior quarter. The EBITDA decrease from the first quarter is due primarily to management fee reductions, primarily to support efficiency in our pharmaceutical services segment, and lower drug margins associated with the reduced utilization of supportive care drugs.
The company's management fees are comprised of reimbursement for expenses we incur in connection with managing a practice, plus a fee that is typically a percentage of the affiliated practice's earnings before income taxes. Our agreements also provide for performance-based reductions in our percentage-based fee that are intended to encourage disciplined use of capital and efficient pharmaceutical ordering and management practices. Certain management agreements have been recently amended, including during the second quarter of 2007, to provide a platform for long-term financial improvement of the practices' results, to encourage practice growth and efficiency, and to streamline certain more complex service agreements.
A program to promote continued support of initiatives in our pharmaceutical services segment became effective July 1, 2006. As of that date, we began reducing management fees paid to the Company by affiliated practices based upon compliance with distribution efficiency guidelines established by the Company and the profitability of the pharmaceutical services segment. For the second and first quarters of 2007, the management fee reduction amounted to $6.3 million and $4.2 million, respectively. This program was not in effect during the second quarter of 2006 and, as such, no management fee reductions were recognized in that period.
Cancer Center Services
Cancer center services revenue was $89.4 million and EBITDA was $34.5 million for the second quarter of 2007, representing increases of 10.9 percent and 17.7 percent, respectively, over the second quarter of 2006. These increases reflect a 4.1 percent increase in radiation treatments and diagnostic radiology procedures over the same period in the prior year, which were partially offset by reduced Medicare reimbursement for diagnostic radiology services effective January 1, 2007. Both revenue and EBITDA increased at a rate in excess of treatment volumes as a result of expanding services in advanced targeted radiation therapies, such as image guided radiation therapy ("IGRT") and brachytherapy administered by network physicians, which are reimbursed at higher rates than conventional radiation therapy.
Cancer center services revenue increased 6.0 percent and EBITDA increased 16.9 percent from the first quarter of 2007 reflecting a 1.0 percent increase in technology-based treatments over the prior quarter and the continued expansion of advanced targeted radiation therapies.
Pharmaceutical Services
Pharmaceutical services revenue was $573.5 million, an increase of $88.6 million over the second quarter of 2006. The revenue increase is primarily due to increases associated with our existing network of physicians, along with the net addition of 145 physicians affiliated through comprehensive service and oncology pharmaceutical services ("OPS") agreements since the close of the second quarter of 2006. Pharmaceutical services EBITDA was $21.4 million for both the second quarter of 2007 and 2006 as higher revenues were offset by lower drug margins, on a per physician basis, related to supportive care drugs used to treat cancer-induced anemia, as stated earlier, and start-up losses associated with our specialty pharmacy business.
Pharmaceutical services revenue in the second quarter of 2007 increased 5.9 percent and EBITDA decreased 4.5 percent from the first quarter of 2007. Similar to the comparison above, the revenue increase is attributable to physician affiliations and was offset by lower drug margins specifically related to supportive care drugs.
Corporate Costs
Corporate costs, which represent general and administrative expenses, excluding stock-based compensation, were $23.1 million in the second quarter of 2007, compared to $21.6 million in the second quarter of 2006 and $20.0 million in the first quarter of 2007. Corporate costs in the second quarter of 2007 were $1.5 million higher than the comparable period in 2006 and $3.1 million over the first quarter of 2007 due primarily to increased costs in the current period related to personnel, marketing and meetings, and investments being made in an expanded regional infrastructure to support and implement strategic initiatives.
Net Income (Loss)
Net loss for the second quarter of 2007 was $0.4 million which represents a decrease of $9.0 million compared to the second quarter of 2006 and an increase of $15.2 million compared to the first quarter of 2007. The decrease compared to the second quarter of 2006 reflects reductions in income before income taxes of $18.5 million, due to higher interest expense associated with the $175.0 million of increased borrowings at the end of the first quarter of 2007 along with the results of operations discussed above. The net income increase over the first quarter of 2007 reflects the loss on early debt extinguishment of $12.9 million and impairment and restructuring charges of $7.4 million incurred in the first quarter of 2007 which were partially offset by second quarter reductions in income before income taxes, due to the results of operations discussed above, and higher interest expense.
The Company expects Adjusted EBITDA for fiscal year 2007 to be between $200 million to $210 million. Adjusted EBITDA excludes $20.3 million related to charges in the first quarter of 2007 for the loss on extinguishment of debt and impairment and restructuring costs in two markets. 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 generated $94.4 million in cash from operations during the first six months of 2007 compared to using $80.7 million for the same prior year period. The increase in operating cash flow was primarily due to working capital investments, made during the first half of 2006, for inventory and accounts payable at the Company's distribution center as well as increased receivable collections during the current year.
During the second quarter of 2007, cash provided by operations was $70.6 million compared to $47.5 million in the second quarter of 2006. The increase over the prior year period reflects the lower payments for inventory purchases during the current quarter as compared to the prior year when the company continued to invest working capital in its distribution initiatives.
During the first quarter of 2007, cash provided by operations was $23.7 million compared to $70.6 million in the second quarter of 2007. The improved operating cash flow is attributable to higher semi-annual interest payments in the first quarter of 2007 and improved receivable collections in the second quarter of 2007.
As of August 10, 2007, the Company had $165.2 million of cash and investments, along with availability under its revolving credit facility of $136.6 million.
Development
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. In the second quarter of 2007, our network grew by 45 net physicians. This includes 15 net physicians under comprehensive services agreements, of which 10 are related to new markets in New York and Ohio, and 32 physicians in a group in Illinois that joined the network under an oncology pharmaceutical services agreement. As of June 30, 2007, 41 physicians had executed contracts to join our network under new or existing comprehensive services agreements, 16 of whom have become part of the network since June 30, 2007.
At June 30, 2007, 17 physicians had executed agreements under the OPS model that will become effective in the current year. Since June 30, 2007, six of these physicians have started purchasing pharmaceutical products and services from the Company and an additional 12 physicians have executed OPS agreements.
In addition, a joint venture with a large healthcare system commenced operations in July, 2007.
Contingencies and Risks
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. The Company remains in litigation with this practice regarding termination of its service agreement. As a result of the practice's alleged breaches of that agreement and the litigation, the Company was unable to collect payments on receivables owned by us and other amounts owed by the practice on a timely basis. At June 30, 2007, the total amount owed to us for those receivables of $22.5 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 unpaid management fees and any other damages, fees and expenses that we incurred as a result of terminating this 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 one to two 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 are cooperating fully with the DOJ.
During March 2007, the Company became aware that it and one of its affiliated practices are the subject of allegations that the practice may have engaged in activities that violate the Federal False Claims Act. These allegations are contained in a qui tam complaint, commonly referred to as a "whistle-blower" lawsuit. The details of this suit are not publicly available or disclosable at the current time since qui tam complaints are filed on a confidential basis with a United States federal court. The DOJ is in the early stages of its investigation, and as such, has not made a decision on the merits of the whistle-blower's claim. The Company intends to continue to investigate and vigorously defend itself against any and all such claims, and the Company continues to believe that it conducts its operations in compliance with law. Based upon its present understanding of the nature and scope of the claim and investigation, the Company does not expect this claim to have a material adverse effect on its operations or financial condition. This claim and investigation are in their early stages, and our expectation could change as we receive more information.
As discussed previously, on July 30, 2007, CMS issued a national coverage decision establishing criteria for reimbursement by Medicare for ESA usage which is expected to lead to a significant decline in utilization of these drugs by oncologists, including those affiliated with US Oncology. Consequently, the NCD is expected to adversely impact the revenues and operating income of the Company, particularly in its medical oncology and pharmaceutical services segments, as well as reduce cash flow available for debt service and capital expenditures. The Company is evaluating the potential long-term financial impact of the NCD which it expects to complete in several weeks. As part of the Company's evaluation of the impact of the NCD, the Company will need to re-evaluate the recoverability of certain management service agreement intangible assets or goodwill; such re-evaluation may result in a material impairment of these assets in the third quarter of 2007.
Additionally, the Company's Senior Secured Credit Facility (the "Facility") includes covenants that are assessed quarterly, based on the prior four quarters' EBITDA (as defined by the Facility), and become more restrictive over time. Based upon its current estimates, the Company believes it can maintain compliance with these restrictive covenants through June 30, 2008, but intends to seek an amendment to the Facility prior to that date.
The Company and US Oncology will broadcast the 2007 second quarter financial results by conference call on Tuesday, August 14, 2007 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 1,122 physicians operating in 442 locations, including 90 radiation oncology facilities in 38 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, such as reimbursement for ESAs, the final NCD regarding ESAs, 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, including whether such payers adopt coverage guidelines regarding ESAs that are similar to Medicare coverage, 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, modifications to, and renegotiation of, existing economic arrangements, 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, 2006, 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 term "EBITDA" and "Adjusted EBITDA". EBITDA is earnings before interest, taxes, depreciation and amortization (including amortization of stock compensation) and minority interest expense. EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Adjusted EBITDA is EBITDA before loss on early extinguishment of debt and impairment and restructuring charges. These measures are derived from relevant items in the Company's GAAP financial statements. A reconciliation of EBITDA to net income (loss) and operating cash flow is included in this release.
The Company 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 as a key indicator to evaluate liquidity and financial condition, both with respect to the business as a whole and with respect to individual sites in the US Oncology network. Adjusted EBITDA is useful to investors as it eliminates certain amounts that are unusual in nature and not currently expected to be part of the Company's ongoing operational performance. The Company's senior secured credit facility also requires that it comply on a quarterly basis with certain financial covenants that include Adjusted EBITDA as a financial measure. Management believes that EBITDA and Adjusted EBITDA are useful to investors, since they provide investors with additional information that is not directly available in a GAAP presentation.
As a non-GAAP measure, EBITDA and Adjusted EBITDA should not be viewed as alternatives to the Company's GAAP financial statements, but should be read as a supplement to, and in conjunction with, the Company's GAAP financial statements. US ONCOLOGY HOLDINGS, INC. KEY OPERATING STATISTICS (unaudited) Q2 Q2 % Q1 % 2007 2006 Change 2007 Change Physician Summary: Medical oncologists 695 666 4.4% 685 1.5% Radiation oncologists 148 139 6.5 148 - Other oncologists 49 43 14.0 44 11.4 Total CSA physicians 892 848 5.2 877 1.7 OPS physicians 230 129 78.3 200 15.0 Total physicians 1,122 977 14.8 1,077 4.2 Daily Operating Statistics: Medical oncology visits (1) 10,040 9,603 4.6 9,806 2.4 Radiation treatments/ diagnostic scans (2)(4) 3,651 3,506 4.1 3,614 1.0 Daily Same Store Statistics: Medical oncology visits (1) 9,937 9,603 3.5 9,806 1.3 Radiation treatments/ diagnostic scans (2)(4) 3,501 3,377 3.7 3,466 1.0 Other Statistics: Radiation oncology facilities(3)(4) 90 91 (1.1) 90 - PET systems 35 30 16.7 34 2.9 New patients enrolled in research studies during the period 708 642 10.3 761 (7.0) Accounts receivable days outstanding 35 37 (5.4) 37 (5.4) Operating days 64 64 - 64 - Notes to Key Operating Statistics: (1) Medical oncology visits include information for practices affiliated under comprehensive service agreements only, and do not include the results of OPS practices. (2) Represents technology-based treatments, including IMRT treatments and diagnostic scans, provided through our integrated cancer centers and radiation-only facilities. (3) The first and second quarter of 2007 includes 79 integrated cancer centers and 11 radiation-only facilities. The second qu
