US Oncology, Inc. Reports Third Quarter 2010 Operating Results

THE WOODLANDS, Texas, Nov. 4, 2010 /PRNewswire/ -- US Oncology, Inc. (“US Oncology” or “the Company”), reported revenue growth in the third quarter of 2010 of 4.3 percent to $940.7 million from $901.5 million in the same period in 2009. Adjusted EBITDA of $55.7 million in the third quarter of 2010 decreased from $62.1 million in the same period in 2009 (see definition of Adjusted EBITDA in “Discussion of Non-GAAP Information” in this release).

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McKesson Merger

On November 1, 2010, the Company executed a definitive agreement whereby McKesson Corporation (“McKesson”) will purchase all outstanding shares of US Oncology. A copy of the release can be accessed from the Company’s website through the following link: Click here for Announcement

Highlights for the third quarter are as follows:

Third Quarter 2010 Highlights vs 2009

• Experienced our largest physician development quarter ever, resulting in network physician growth of 82 physicians compared to prior year with current quarter physicians starting under Comprehensive Strategic Alliances (“CSA”) and Targeted Physician Services (“TPS”) of 36 and 59, respectively
• New cancer patients per day increased to 633 in the third quarter of 2010 from 624 in the prior year quarter; however total patient visits per day decreased to 11,735 from 11,838 and radiation treatments/diagnostic scans per day decreased to 3,614 from 3,850 over the same period
• Drug margins declined compared to the third quarter of 2009 due to shifting payer mix and increasing drug costs
• Healthcare Informatics achieved committed project revenue of nearly $12 million to be delivered in the fourth quarter of 2010 and fiscal 2011
• Increased patients enrolled in research studies and trials open for enrollment by 12.5 percent and 24.4 percent, respectively, over the third quarter of 2009
• Initiated a direct supply agreement with a major manufacturer to provide pharmaceuticals to our affiliated physician network which is expected to increase annual EBITDA by approximately $10 million
• Days sales outstanding reduced to 29 days at September 30, 2010 from 30 days at September 30, 2009

Chairman and Chief Executive Officer Bruce Broussard stated: “We’re very excited to be joining McKesson. The combination of the two organizations will allow us to provide an expanded offering for one of the fastest-growing, most dynamic segments in the healthcare industry. The unified organization will bring together the collective expertise of McKesson and US Oncology to provide oncology customers access to expanded clinical depth and expertise, leading technologies, including the iKnowMed and Lynx® technology platforms, and best-in-class distribution capabilities. In addition, it will bring deep practice management expertise and consultative capabilities that will help independent community specialists to thrive in the changing healthcare environment. We see this as a win for McKesson, a win for US Oncology, a win for our customers and a win for cancer patients throughout the country.

Our exciting news is combined with our mixed results for the third quarter. We had robust growth in our physician affiliations and informatics businesses pipeline, while experiencing a slowing of same market patient volumes. We experienced our largest physician development quarter in our history with network physician growth of 82 physicians compared to prior year, including 36 current quarter physicians starting under Comprehensive Strategic Alliance (CSA) and 59 under Targeted Physician Services agreements.

Our Healthcare Informatics business achieved committed project revenue of nearly $12 million this quarter, and we increased the number of patients enrolled in clinical research trials by 24.4 percent. We were excited to announce that US Oncology Research recruited its 1,000th patient to a Phase I trial. The team has been helping investigators conduct new agent Phase I trials in community-based oncology since 2005. In addition, our affiliated physicians continue to receive public recognition for their work. This quarter, Dr. Nicholas Vogelzang, of Comprehensive Cancer Centers of Nevada, was honored with the prestigious Eugene P. Schonfeld Award and Lecture by the Kidney Cancer Association.

Patient numbers continue to be down across the market, and we experienced a decrease of 4.5 percent in our cancer center services revenue due to a decline in radiation treatments and diagnostic scans following a trend of patients foregoing treatment and healthcare overall.

We remain steadfast and continue to believe that we are on the right track. We believe that our investments will pay off and we will continue to be patient and persistent in building our network, our brand and increasing patient volume. We remain excited about our future and our position in the industry.”

Medical Oncology Services

Medical oncology services revenue increased by $5.3 million, or 0.9 percent, to $615.6 million in the third quarter of 2010 as compared to the same period in 2009 primarily due to a 1.4 percent increase in new cancer patients and a 2.0 percent increase in total new patients, as well as an increase in physicians within specialties providing services with higher reimbursement such as surgery. New patient growth was particularly strong in September 2010, which is expected to positively impact visits in the fourth quarter of 2010. Revenue growth associated with higher volumes was partially offset by lower reimbursement due primarily to lower utilization by members of commercial health plans as well as the impact of a generic alternative for Eloxatin becoming available in the third quarter of 2009.

Adjusted EBITDA decreased to $18.0 million from $19.1 million, or by 5.8 percent, primarily due to lower reimbursement associated with a changing payer mix (as discussed above) as well as the impact of drug costs increasing prior to reimbursement increases from governmental and commercial payers. These factors were partially offset by the benefit of lower drug costs for the generic alternative for Eloxatin as compared to the third quarter of 2009 when the generic alternative was available for only a portion of the period.

As generic drugs are introduced to the market, earnings temporarily increase because drug costs decline significantly but reimbursement tied to Average Sales Price (“ASP”), including Medicare, remains at the branded price for a period of approximately six months. However, after ASP-based reimbursement adjusts, earnings with respect to a generic drug are typically significantly lower than the earnings from a branded pharmaceutical. In the case of Eloxatin, a patent lawsuit was settled in April 2010 requiring pharmaceutical companies to stop selling the drug in generic form after June 30, 2010. We acquired a significant amount of the lower cost generic alternatives prior to July 1, which we expect will provide enough inventory to meet the needs of our practices into early 2011. As a result, we avoided having to purchase the branded drug upon reentry after July 1 at a higher price.

Cancer Center Services

Cancer center services revenue decreased by $4.5 million, or 4.5 percent, to $95.0 million and Adjusted EBITDA decreased $3.5 million, or 9.9 percent, to $31.9 million in the third quarter of 2010 as compared to the same period in 2009. The decrease in revenue reflects a 6.1 percent decline in radiation treatments and diagnostic scans reflecting trends toward lower use of health services by commercially-insured patients (as discussed above), as well as the conversion of some practices to TPS arrangements and normal physician turnover within existing practices, competition in certain markets and the use of advanced treatment options which require fewer sessions than conventional radiation. As discussed above, increased new patient visits late in the third quarter of 2010 are expected to result in additional radiation treatments and diagnostic scans during the fourth quarter. The revenue decrease associated with lower treatment volumes was partially offset by the continuing shift toward advanced therapies which include intensity modulated radiation therapy (“IMRT”), image guided radiation therapy (“IGRT”) and stereotactic radiosurgery (“SRS”), which are reimbursed at higher rates. During the third quarter of 2010, IMRT represented 28 percent of total radiation treatments compared to 26 percent for the same period in 2009.

Adjusted EBITDA decreased by $3.5 million from the same period in 2009 due primarily to the revenue decline discussed above. However, Adjusted EBITDA declined by approximately $1.0 million less than revenue reflecting the Company’s Lean Six-Sigma initiatives to improve practice efficiency and focused operating cost reductions. In the third quarter of 2010, our network operated 122 linear accelerators, 37 positron emission tomography systems (“PET”) and 65 computed tomography systems (“CT”), which represents decreases of two linear accelerators and two PET units from the third quarter of 2009 due primarily to practices converting to a TPS arrangement which purchased their medical assets from us upon conversion.

Pharmaceutical Services

Pharmaceutical services revenue in the third quarter of 2010 increased by $59.4 million, or 9.2 percent, to $704.8 million as compared to the same period in 2009. The revenue increase is primarily due to 66 net additional medical oncologists affiliated through CSA and TPS arrangements since the third quarter of 2009.

Pharmaceutical services Adjusted EBITDA was $22.4 million for the third quarter of 2010 compared to $25.4 million in the same period of 2009. The EBITDA decrease reflects investments supporting our United Network strategy, lower GPO fees primarily due to generic purchasing and lower margins on TPS arrangements. Informatics earnings also decreased from the third quarter of 2009 due, in part, to increased sales force and marketing investments which contributed to committed project revenue of nearly $12 million at the end of the third quarter that is expected to be delivered in the fourth quarter of 2010 and fiscal 2011.

Research and Other Services

Research and other services revenue in the third quarter of 2010 was $20.0 million, an increase of $2.8 million compared to the same period in 2009, as the current period includes revenues from our new contract research organization that started generating revenues at the end of 2009, as well as revenues associated with our recent acquisitions of CURE Media Group and NexCura.

Adjusted EBITDA in the third quarter of 2010 was $1.8 million, an increase of $1.6 million from the third quarter of 2009 due to the revenue growth associated with the businesses discussed above as well as lower investments associated with developing business initiatives, such as Innovent and our physician web portal, which are beginning to mature. During the third quarter of 2010, our research network enrolled 792 patients across 97 clinical trials as compared to enrolling 704 patients in 78 clinical trials in the third quarter of 2009. The increase in both patient enrollment and open clinical trials reflect the commitment to providing patients access to a network of physicians specializing in Phase I-IV oncology clinical trials, and a wide variety of cancer specialties.

Corporate Costs

Corporate costs, which represent general and administrative expenses excluding stock-based compensation, were $18.4 million in the third quarter of 2010 compared to $18.0 million in the third quarter of 2009. This increase is primarily related to higher marketing and branding costs associated with our UNITED campaign which launched in May 2010, which were partially offset by lower professional fees associated with 2009 consulting costs related to accelerating the Company’s growth strategies.

Impairment and Restructuring Charges

Impairment and restructuring charges are summarized in the table below (in millions):

During the third quarter of 2010 and 2009, we recognized severance charges of approximately $3.1 million and $4.1 million, respectively, related to employee separations of 66 personnel primarily within our corporate headquarters.

Net Loss Attributable to the Company

Net loss attributable to the Company for the third quarter of 2010 was $3.2 million compared to net loss of $0.9 million in the same period in 2009. The increase in net loss from prior year is primarily due to lower EBITDA (described above), which was partially offset by a $3.7 million loss on early extinguishment of debt in the third quarter of 2009 associated with replacing our revolving credit facility.

Cash Flow and Working Capital Management

Cash used in operations during the third quarter of 2010 was $2.2 million compared to $62.5 million generated from operations for the same period in 2009. The $64.7 million decrease reflects payments for pharmaceuticals which were higher during the third quarter of 2010 due in part to large purchases to obtain availability of certain generic product into early 2011 as well as working capital investments required under a new direct drug supply agreement (as further described below). In addition, cash paid for interest increased by approximately $24.2 million due to the timing of interest payments related to the Company’s term loans under its senior secured credit facility and its $300 million senior notes which were refinanced in June 2009. The impact of these items was partially offset by higher receivable collections. Accounts receivable days declined to 29 days as of September 30, 2010 from 30 days as of September 30, 2009. In addition, collections from Medicare increased during the third quarter of 2010 as claims that were held or paid at lower rates in June 2010 were resolved during the third quarter after Congress acted to temporarily reverse the reduction in reimbursement for physician services.

During the second quarter, we received notice from one of our largest pharmaceutical distributors that our current arrangement would be cancelled and renegotiated effective September 20, 2010. Consequently we assessed all options to provide our physician network with products obtained through this distributor, and executed an agreement to obtain these products directly from the manufacturer. We believe this relationship will aid in our physician aggregation strategy through improved purchasing economics and strengthen our commercial relationships for other strategic initiatives.

We expect that our liquidity will be reduced by approximately $120 million based upon the manufacturer’s payment terms and minimum inventory requirements. However, we anticipate our EBITDA will increase by approximately $10 million as a result of improved economics under the new arrangement.

As of November 3, 2010, the Company had liquidity of approximately $157.1 million, including cash and investments of approximately $67.5 million and availability under its revolving credit facility of $89.6 million.

Contingencies and Risks

A proposed Risk Evaluation and Mitigation Strategy (“REMS”) for ESA was filed by ESA manufacturers with the U.S. Food and Drug Administration (“FDA”) in August, 2008 and became effective on March 24, 2010. The REMS is focused on ESA prescribing guidelines and includes additional patient consent/education requirements, medical guides and physician registration requirements. The REMS also outlines additional procedural steps that will be necessary for qualified physicians to order and prescribe ESAs for their patients.

Prescribing patterns may continue to change now that the REMS has been in effect for several months, a possible impact of which could be further significant reductions in ESA utilization. During the third quarter of 2010 however, operating income attributable to ESAs administered by our network of affiliated physicians remained relatively stable at $5.3 million compared to $5.6 million in the third quarter of prior year.

We continue to believe that we are well-positioned throughout healthcare reform. We also continue to believe that increased government spending required by the legislation, coupled with existing and growing federal budget deficits, will create future reimbursement pressures on providers as the government attempts to slow spending increases in healthcare and other entitlement programs.

Increased responsibilities of private payers would increase pressure to reduce unit payments to providers from the private sector. These cost reduction pressures and incentives around Accountable Care Organizations (“ACOs”), would also increase competitive pressure on US Oncology from hospitals. While the reform legislation itself is neutral to positive for US Oncology, its failure to substantively address intensifying systemic cost and financing issues creates further pressure on us to implement our strategic plans aimed at these issues. In addition, changing benefit plan designs that increase the patient’s financial responsibility for care, may reduce overall demand for services provided by oncologists, including those affiliated with US Oncology.

In late 2009, The Centers for Medicare and Medicaid Services (“CMS”) announced payment rates under the 2010 physician fee schedule which included a 21.3 percent reduction under provision of the Sustainable Growth Rate (“SGR”) formula. Historically, Congress has intervened to prevent significant reductions in reimbursement rates. Most recently The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962), which was signed into law June 25, 2010, delayed the payment reduction until November 30, 2010 and included a 2.2 percent increase in the conversion factor for services provided from June 1, 2010 through November 30, 2010. H.R. 3962 also included rate change adjustments related to the Geographic Practice Cost Index retroactive to services provided beginning January 1, 2010. If reimbursement under H.R. 3962 were to remain in effect until December 31, 2010, EBITDA for the current year would increase by approximately $3.0 million as compared to reimbursement in effect prior to passage. The SGR remains scheduled to reduce by 21.3 percent effective December 1, 2010. If Congress fails to act and avert this reduction, approximately $1 million of the potential H.R. 3962 increase would not be realized in 2010. However, we expect that Congress, in the long run, will continue to act to avert the SGR cut with a flat or marginally higher conversion factor.

As previously disclosed, during the first 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. Also, as previously disclosed, the Company is currently involved in litigation with a formerly affiliated practice in Oklahoma. In addition, as previously disclosed, the Company and an affiliated practice have received a request for information from the Federal Trade Commission and a state Attorney General relating to an antitrust investigation of a recent transaction in which a group of physicians joined the affiliated practice. There were no material developments in these matters during the third quarter of 2010 or through the date of this release.

As previously disclosed, on July 29, 2009 the Company received a subpoena from the U.S. Attorney’s Office, Eastern District of New York, seeking documents relating to its contracts and relationships with a pharmaceutical manufacturer and its business and activities relating to that manufacturer’s products. In October 2010, we were notified that the Company’s obligations under the subpoena have been satisfied, and the matter is considered closed at this time. We cannot assure you that the US Attorney’s Office would not reopen the matter at a future date.

Results of US Oncology Holdings, Inc.

The results of US Oncology exclude those of its parent company, US Oncology Holdings, Inc. (“Holdings”). US Oncology conducts all substantive operations and, with the exception of nominal administrative expenses and items related to capitalization, the results of Holdings are substantially identical to those of US Oncology. Holdings reported Adjusted EBITDA of $55.6 million, net loss of $16.1 million and operating cash outflow of $12.1 million for the third quarter of 2010. The operating results of US Oncology and Holdings are reconciled below (in millions).