Filed Pursuant to Rule 424(b)(3)

Registration No. 333-167669

 

Offer to Exchange

Up to $225,000,000 aggregate principal amount

of our 101/4% Senior Notes due 2015

(which we refer to as the new notes)

and the guarantees thereof which have been registered

under the Securities Act of 1933, as amended,

for a like amount of our outstanding

101/4% Senior Notes due 2015

(which we refer to as the old notes)

and the guarantees thereof.

 

The New Notes:

 

The terms of the new notes are substantially identical to the old notes, except that some of the transfer restrictions, registration rights and additional interest provisions relating to the old notes will not apply to the new notes as a result of the exchange and registration contemplated by this exchange offer.

 

 

The Exchange Offer:

 

 

The exchange offer involves risks. See “Risk Factors” beginning on page 15.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is July 13, 2010.

 

Table of Contents

 

 

This prospectus incorporates important business and financial information about us that is not included in or delivered with this prospectus. This information is available without charge to security holders upon written or oral request to BioScrip, Inc., 100 Clearbrook Road, Elmsford, NY 10523, Attention: Corporate Secretary, telephone number (914) 460-1600.

 

In order to obtain timely delivery, you must request the information no later than August 5, 2010, which is five business days before the expiration date of the exchange offer.

 

Each broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act of 1933, as amended, which we refer to as the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities. We have agreed to use our best efforts to keep the registration statement of which this prospectus forms a part effective and to amend and supplement this prospectus in order to permit this prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the new notes. We have also agreed that we will make a reasonable number of copies of this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

 

Industry and Market Data

 

We have obtained the market and competitive position data used throughout this prospectus from our own research, surveys or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data, and we do not make any representation as to the accuracy of such information. Similarly, we believe our internal research is reliable, but it has not been verified by any independent sources.

 

Trademarks and Service Marks

 

This prospectus may include trade names and trademarks of other companies. Our use or display of other parties’ trade names, trademarks or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, the trade name or trademark owners.

 

Cautionary Note Regarding Forward-Looking Statements

 

This prospectus contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar forms of these words and expressions. The forward-looking statements contained in this prospectus reflect our current views about future events, are based on assumptions, and are subject to known and unknown risks and uncertainties. These forward looking statements may include, but are not limited to:

 

 

Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements, including the factors listed below. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Certain of these are important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements, including, but not limited to:

 

 

 

The forward-looking statements contained in this prospectus reflect our views and assumptions only as of the date of this prospectus. The reader should not place undue reliance on forward-looking statements. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Risk Factors” beginning on page 15. We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

SUMMARY

The Exchange Offer		We are offering to exchange $1,000 principal amount of the new notes, which have been registered under the Securities Act, for each $1,000 principal amount of the old notes, which have not been registered under the Securities Act. We issued the old notes on March 25, 2010.
		In order to exchange your old notes, you must promptly tender them before the expiration date (as described in this prospectus). All old notes that are validly tendered and not validly withdrawn will be exchanged. We will issue the new notes on or promptly after the expiration date.
		You may tender your old notes for exchange in whole or in part in denominations of $2,000 and integral multiples of $1,000 in excess thereof.
Registration Rights Agreement		We sold the old notes on March 25, 2010 to Jefferies & Company, Inc., the initial purchaser. Simultaneously with that sale, we signed a registration rights agreement with the initial purchaser relating to the old notes that requires us to conduct the exchange offer.
		Subject to certain limitations, you have the right under the registration rights agreement to exchange your old notes for new notes. The exchange offer is intended to satisfy such right. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your old notes.
		For a description of the procedures for tendering old notes, see “The Exchange Offer — Procedures for Tendering Old Notes.”
Consequences of Failure to Exchange		If you do not exchange your old notes for new notes in the exchange offer, you will still have the restrictions on transfer provided in the old notes and in the indenture that governs both the old notes and the new notes. In general, the old notes may not be offered or sold unless registered or exempt from registration under the Securities Act, or in a transaction not subject to the Securities Act and applicable state securities laws. We do not plan to register the old notes under the Securities Act. See “Risk Factors — Risks Related to the Exchange Offer — If you do not exchange your old notes for new notes, your ability to sell your old notes will be restricted.”
Expiration Date		The exchange offer will expire at 5:00 p.m., New York City time, on August 12, 2010, unless we extend it. In that case, the expiration date will be the latest date and time to which we extend the exchange offer.
		See “The Exchange Offer — Expiration Date; Extensions; Amendments.”
Conditions to the Exchange Offer		The exchange offer is subject to customary conditions, some of which we may waive. For more information, see “The Exchange Offer — Conditions to the Exchange Offer.”

Procedures for Tendering Old Notes		If you hold old notes through The Depository Trust Company, or DTC, and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC. See “The Exchange Offer — Procedures for Tendering Old Notes.” If you are not a DTC participant, you may tender your old notes by book-entry transfer by contacting your broker, dealer or other nominee or by opening an account with a DTC participant, as the case may be. By accepting the exchange offer, you will represent to us that, among other things:
		• any new notes that you receive will be acquired in the ordinary course of your business;
		• you are not engaging in or intending to engage in a distribution of the new notes and you have no arrangement or understanding with any person or entity, including any of our affiliates, to participate in the distribution of the new notes;
		• if you are a broker-dealer that will receive new notes for your own account in exchange for old notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of the new notes; and
		• you are not our “affiliate” as defined in Rule 405 under the Securities Act, or, if you are an affiliate, you will comply with any applicable registration and prospectus delivery requirements of the Securities Act.
Withdrawal Rights		You may withdraw the tender of your old notes at any time before the expiration date. To do this, you should deliver a written notice of your withdrawal to the exchange agent according to the withdrawal procedures described in the section “The Exchange Offer — Withdrawal Rights.”
Exchange Agent		The exchange agent for the exchange offer is U.S. Bank National Association. The address, telephone number and facsimile number of the exchange agent are provided in the section “The Exchange Offer — Exchange Agent,” as well as in the letter of transmittal.
Use of Proceeds		We will not receive any cash proceeds from the issuance of the new notes. See the section “Use of Proceeds.”
United States Federal Income Tax Consequences		Your exchange of the old notes for new notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. Accordingly, you will not recognize any taxable gain or loss as a result of the exchange. See the section “Material United States Federal Income Tax Considerations.”

Issuer		BioScrip, Inc.
Securities Offered		$225.0 million aggregate principal amount of 101/4% Senior Notes due 2015.
Maturity Date		October 1, 2015.
Interest Rate		We will pay interest on the new notes at an annual interest rate of 101/4%.
Interest Payment Dates		We will make interest payments on the new notes semi-annually in arrears on each April 1 and October 1, beginning on October 1, 2010. Interest will accrue from the issue date of the old notes.
Guarantees		The new notes will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our existing and future direct and indirect domestic restricted subsidiaries, including all of our domestic subsidiaries in existence on August 13, 2010.
Ranking		The new notes and the guarantees will rank equal in right of payment with all of our and the guarantors’ future senior unsecured indebtedness and rank senior in right of payment to all of our and the guarantors’ future subordinated indebtedness. The new notes and the guarantees will be effectively subordinated to our and the guarantors’ existing and future secured indebtedness, including the indebtedness under the New Credit Facility.
Optional Redemption		On or after April 1, 2013, we may redeem some or all of the new notes at the redemption prices set forth under “Description of Notes — Optional Redemption,” plus accrued and unpaid interest to the date of redemption. Prior to April 1, 2013, we may redeem up to 35% of the aggregate principal amount of the notes (including new notes and old notes) at the premium set forth under “Description of Notes — Optional Redemption,” plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings. In addition, we may, at our option, redeem some or all of the new notes at any time prior to April 1, 2013, by paying the “make whole” premium set forth under “Description of Notes — Optional Redemption.”
Change of Control Offer		If we undergo a Change of Control (as defined in “Description of Notes — Certain Definitions”), the holders of the new notes will have the right to require us to purchase their new notes at a price in cash equal to 101% of their principal amount thereof, plus accrued and unpaid interest to the date of purchase.

Asset Sale Proceeds		Upon certain Asset Sales (as defined in “Description of Notes — Certain Definitions”), we may be required to use the net proceeds to offer to purchase new notes at 100% of their principal amount, plus accrued and unpaid interest to the date of purchase.
Certain Covenants		The indenture governing the new notes, among other things, limits our ability and the ability of our domestic restricted subsidiaries to:
		• incur or guarantee additional indebtedness or issue certain preferred stock;
		• transfer or sell assets;
		• make certain investments;
		• pay dividends or distributions, redeem subordinated indebtedness or make other restricted payments;
		• create or incur liens;
		• incur dividend or other payment restrictions affecting certain subsidiaries;
		• issue capital stock of our subsidiaries;
		• consummate a merger, consolidation or sale of all or substantially all of our assets; and
		• enter into transactions with affiliates.
		These covenants will be subject to a number of important exceptions and qualifications. See “Description of Notes — Certain Covenants.”
Book-Entry Form		Initially, the new notes will be represented by one or more global notes in definitive, fully registered form deposited with a custodian for, and registered in the name of, a nominee of DTC.
No Public Market		The new notes will not be listed on any securities exchange or included in any automated quotation system.

																						Three Months Ended
		Fiscal Year Ended December 31,																				March 31,
		2005(1)				2006(2)				2007				2008				2009				2009				2010
		(In thousands, except ratios and per share amounts)
Statement of Operations Data:
Revenue(3)		$	1,072,895			$	1,151,940			$	1,197,732			$	1,401,911			$	1,329,525			$	325,749			$	335,068
Cost of revenue			956,519				1,033,884				1,060,717				1,259,741				1,171,703				289,759				296,150
Gross profit		$	116,376			$	118,056			$	137,015			$	142,170			$	157,822			$	35,990			$	38,918
Merger related expenses(4)			4,575				58				—				—				1,774				—				5,040
Selling, general and administrative expenses			96,630				115,258				120,147				125,202				131,946				30,327				36,354
Bad debt expense			12,814				12,443				5,119				4,667				8,636				1,380				3,650
Amortization of intangibles			6,395				6,538				2,898				1,936				—				—				176
Goodwill and intangible impairment(5)			25,165				—				—				93,882				—				—				—
Interest expense, net			392				3,018				3,270				2,711				1,920				594				3,169
(Loss) income before income taxes		$	(29,595	)		$	(19,259	)		$	5,581			$	(86,228	)		$	13,546			$	3,689			$	(9,471	)
Tax (benefit) provision			(5,748	)			19,030				2,264				(12,196	)			(40,553	)			404				(2,302	)
Net (loss) income(6)(7)		$	(23,847	)		$	(38,289	)		$	3,317			$	(74,032	)		$	54,099			$	3,285			$	(7,169	)
Net (loss) income per basic share			(0.70	)			(1.03	)			0.09				(1.93	)			1.39				0.08				(0.18	)
Net (loss) income per diluted share			(0.70	)			(1.03	)			0.09				(1.93	)			1.36				0.08				(0.18	)
Weighted average shares outstanding used in computing:
basic (loss) income per share			34,129				37,304				37,647				38,417				38,985				38,709				40,825
diluted (loss) income per share			34,129				37,304				38,491				38,417				39,737				38,787				40,825

																						Three Months Ended
		Fiscal Year Ended December 31,																				March 31,
		2005(1)				2006(2)				2007				2008				2009				2009				2010
		(In thousands, except ratios and per share amounts)
Balance Sheet Data (at period end):
Cash and cash equivalents		$	1,521				—				—				—				—				—			$	37,245
Receivables, less allowance for doubtful accounts			127,880				135,139				128,969				158,649				151,113				144,612				179,212
Inventory			25,873				33,471				33,598				45,227				51,256				39,040				60,406
Property and equipment, net			9,232				10,409				11,742				14,748				15,454				14,714				22,514
Working capital			67,488				37,023				49,213				58,844				91,078				63,210				178,766
Line of credit			7,427				52,895				33,778				50,411				30,389				36,114				—
Deferred tax asset valuation allowance establishment or reversal(7)			—				(25,664	)			—				—				44,839				—				—
Total assets(5)			298,629				305,456				296,822				246,957				287,220				227,177				714,563
Total debt			7,427				52,895				33,778				50,411				30,389				36,114				319,318
Stockholders’ equity			195,765				161,833				166,203				95,537				155,793				99,566				256,288
Other Data:
Ratio of earnings to fixed charges(8)			—				—				2.71	x			—				8.06	x			7.21	x			—
Pro forma ratio of earnings to fixed charges(8)(9)																			1.41	x							—
Net debt(10)			5,906				52,895				33,778				50,411				30,389				36,114				282,073
EBITDA(11)			(19,288	)			(5,387	)			15,941				(77,124	)			20,499				5,394				(4,642	)
Adjusted EBITDA(11)			(14,713	)			(2,800	)			18,945				(72,539	)			25,692				6,170				2,685

(1)		Includes Chronimed, Inc. beginning March 2005.
(2)		Includes Intravenous Therapy Services, Inc. beginning March 2006.
(3)		Certain PBM customer contracts ended in or prior to 2007. Revenue related to these contracts was $154.8 million, $76.8 million and $15.0 million in 2005, 2006 and 2007, respectively. Revenue in 2008 includes Competitive Acquisition Program, or CAP, revenue of $71.2 million. The CAP program ended December 31, 2008. Revenue in 2008 also includes UHC HIV/AIDS and solid organ transplant services of $116.6 million from contracts which ended in the first half of 2009. 2009 revenue includes $23.3 million related to these UHC HIV/AIDS contracts.
(4)		Expenses in 2009 and the three months ended March 31, 2010 reflect merger and integration expenses related to our acquisition of CHS on March 25, 2010. Expenses in 2005 and 2006 reflect merger, integration and re-branding expenses related to our acquisition of Chronimed, Inc. on March 12, 2005.
(5)		2005 includes a $6.6 million charge related to write-off of non-compete agreements, trade names and customer lists due to our rebranding strategy in the Specialty Pharmacy Services segment, and an $18.6 million charge related to goodwill impairment in the Traditional Pharmacy Services segment. 2008 includes a $90.0 million charge related to an impairment of goodwill and a $3.9 million charge related to the write-off of intangible assets.
(6)		2005 includes a $4.3 million charge, net of tax, to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the integration period following our acquisition of Chronimed, Inc.
(7)		2006 includes a $25.7 million income tax charge for the establishment of a valuation allowance recorded against deferred tax assets. 2009 includes a $44.8 million tax benefit relating to the reversal of the valuation allowance on deferred tax assets.
(8)		Calculated as income (loss) before income taxes, plus fixed charges, divided by fixed charges. Fixed charges include interest costs incurred and estimated interest within rental expense. Earnings before taxes were insufficient to cover fixed charges by $30.0 million, $22.3 million and $88.9 million for the fiscal years ended December 31, 2005, 2006 and 2008, respectively. Earnings before taxes were insufficient to

		cover fixed charges by $12.6 million for the three months ended March 31, 2010 and by $16.9 million for the three month pro forma period ended March 31, 2010.
(9)		Reflects the ratio of earnings to fixed charges after giving effect to the Transactions.
(10)		Net debt is defined as total debt less cash and cash equivalents.
(11)		EBITDA represents net income before interest expense, net, tax benefit provision, and depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted for acquisition and integration related costs (excluding finance fees), bad debt expense associated with the termination of the CAP program on December 31, 2009, a civil settlement with the U.S. Office of The Inspector General, or OIG, and stock-based compensation expense.
		EBITDA and Adjusted EBITDA are supplemental measures of our performance and our ability to service debt that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures of our liquidity.
		Our measurement of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. We have included information concerning EBITDA and Adjusted EBITDA in this prospectus because we believe that such information is used by certain investors as one measure of a company’s historical ability to service debt. We believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA and Adjusted EBITDA when reporting their financial results. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
		EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:
		• they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
		• they do not reflect changes in, or cash requirements for, our working capital needs;
		• they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
		• although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
		• they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; and
		• other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
		Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only for supplemental purposes. Please see our financial statements, including the related notes, as well as the unaudited pro forma combined financial information of BioScrip, contained or incorporated by reference into this prospectus.

		The following tables reconcile our net income to EBITDA and Adjusted EBITDA for the periods presented:

																						Three Months Ended
		Fiscal Year Ended December 31,																				March 31,
		2005				2006				2007				2008				2009				2009				2010
		(In thousands)
Net (loss) income		$	(23,847	)		$	(38,289	)		$	3,317			$	(74,032	)		$	54,099			$	3,285			$	(7,169	)
Interest expense, net			392				3,018				3,270				2,711				1,920				594				3,169
Tax (benefit) provision			(5,748	)			19,030				2,264				(12,196	)			(40,553	)			404				(2,302	)
Depreciation and amortization			9,915				10,854				7,090				6,393				5,033				1,111				1,660
EBITDA		$	(19,288	)		$	(5,387	)		$	15,941			$	(77,124	)		$	20,499			$	5,394			$	(4,642	)
Acquisition and integration related costs, excluding finance fees			4,575				58				—				—				1,774				—				5,040
Bad debt expense related to CAP contract termination			—				—				—				—				—				—				1,483
OIG settlement			—				—				—				795				—				—				—
Stock-based compensation expense			—				2,529				3,004				3,790				3,419				776				804
Adjusted EBITDA		$	(14,713	)		$	(2,800	)		$	18,945			$	(72,539	)		$	25,692			$	6,170			$	2,685

 

Any investment in the new notes involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to invest in the new notes. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations would suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.

 

Risks Related to Our Business

 

We may not realize the anticipated benefits of our acquisition of CHS because of integration difficulties.

 

Integrating the operations of the businesses of CHS successfully or otherwise realizing any of the anticipated benefits of the merger with CHS, including anticipated cost savings and additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration challenges could seriously harm our financial condition and results of operations.

 

Realizing the benefits of the merger will depend in part on the integration of information technology, or IT, operations and personnel. These integration activities are complex and time-consuming and we may encounter unexpected difficulties or incur unexpected costs, including:

 

 

We may not successfully integrate the operations of the businesses of CHS in a timely manner, and we may not realize the anticipated net reductions in costs and expenses and other benefits and synergies of the merger with CHS to the extent, or in the time frame, anticipated. The anticipated net reductions in costs and expenses are projections that are uncertain, and are based on assumptions and preliminary information which may prove to be inaccurate. In addition to the integration risks discussed above, our ability to realize these net reductions in costs and expenses and other benefits and synergies could be adversely impacted by practical or legal constraints on our ability to combine operations.

 

If we are unable to manage our growth profitably after the merger is completed, our business and financial results could suffer.

 

Our future financial results will depend in part on our ability to profitably manage our growth on a combined basis with CHS. Management will need to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems. We expect to spend approximately $3.0 million of integration-related capital expenditures in the first 12 months after completion of the merger and to incur $5.0 million of integration-

related expenses during that 12-month period. If the integration-related expenses and capital expenditure requirements are greater than anticipated, or if we are unable to manage our growth profitably after the merger, our financial condition and results of operations may suffer.

 

A shortage of qualified registered nursing staff and other caregivers could adversely affect our ability to attract, train and retain qualified personnel and could increase operating costs after the merger.

 

Our business relies significantly on its ability to attract and retain caregivers who possess the skills, experience and licenses necessary to meet the requirements of its patients. We compete for personnel with other providers of the services we provide. Our ability to attract and retain caregivers after the merger will depend on several factors, including our ability to provide these caregivers with attractive assignments and competitive benefits and salaries. There can be no assurance that we will be successful in any of these areas. In addition, there are occasional shortages of qualified healthcare personnel in some of the markets in which we operate. As a result, we may face higher costs to attract caregivers and we may have to provide them with more attractive benefit packages than originally anticipated, either of which could cause our profitability to decline. Finally, if we expand our operations into geographic areas where healthcare providers historically have unionized or unionization occurs in our existing geographic areas, we cannot assure you that negotiating collective bargaining agreements will not have a negative effect on our ability to timely and successfully recruit qualified personnel. If we are unable to attract and retain caregivers, the quality of our services may decline and we could lose patients and referral sources.

 

Subject to certain limitations, the Former CHS Stockholders and certain former optionholders of CHS may sell our common stock beginning September 26, 2010, which could cause our stock price to decline.

 

The shares of our common stock that the Former CHS Stockholders and certain former optionholders of CHS received in connection with the merger with CHS are restricted, but such Former CHS Stockholders and former optionholders may sell the shares of our common stock under certain circumstances. We have entered into a stockholders’ agreement with the Former CHS Stockholders and certain former optionholders of CHS, pursuant to which we have agreed to register their shares of our common stock with the SEC in order to facilitate sales of those shares. The sale of a substantial number of our shares by such parties or our other stockholders within a short period of time could cause our stock price to decline, making it more difficult for us to raise funds through future offerings of our common stock or acquire other businesses using our common stock as consideration.

 

The continuing pressure on the global credit and financial markets could materially and adversely affect our business and results of operations.

 

The ongoing global financial crisis continues to result in severely diminished liquidity and credit availability, volatility in consumer confidence, declines in economic growth, increases in unemployment rates and an ongoing uncertainty about market stability. The effect of these actions could reduce enrollment in governmental programs or benefits available to be enrolled.

 

Limited or expensive access to credit could also reduce the ability of the patients we serve to pay deductibles and co-insurance. Higher unemployment rates and significant employment layoffs and downsizings may lead to lower numbers of patients enrolled in employer-provided plans. The adverse economic conditions could also cause employers to stop offering, or limit, certain healthcare coverage, or the program designs associated with the coverage, as an employee benefit or cause them to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs, leaving the patient’s ability to pay in question and increasing the likelihood that compliance to drug therapies will be interrupted.

 

During an economic downturn, federal and state budgets could be adversely affected, resulting in reduced or delayed reimbursements or payments by the federal and state government healthcare coverage programs in which we participate, including Medicare, Medicaid and other federal or state assistance plans, and changes adversely affecting our revenues and financial results could be implemented to agreements already negotiated with the government. Government programs could also slow or temporarily suspend payments on Medicaid obligations, negatively impacting our cash flow and increase our working capital needs and interest payments.

Competition in the pharmaceutical and home healthcare services industries could reduce profit margins.

 

The pharmaceutical and home healthcare services industries are very competitive. Our competitors include large and well-established companies that may have greater financial, marketing and technological resources than we do.

 

The specialty pharmacy industry is highly competitive. Some of our competitors are under common control with, or ownership by, pharmaceutical wholesalers and distributors, MCOs, PBMs or retail pharmacy chains and may be better positioned with respect to the cost-effective distribution of pharmaceuticals. In addition, some of our competitors may have secured long-term supply or distribution arrangements for prescription pharmaceuticals necessary to treat certain chronic disease states on price terms substantially more favorable than the terms currently available to us. As a result of such advantageous pricing, we may be less price competitive than some of these competitors with respect to certain pharmaceutical products. Our competitive position could also be adversely affected by any inability to obtain access to new biotech pharmaceutical products.

 

Changes in industry pricing benchmarks could adversely affect our financial performance.

 

Contracts with our clients generally use certain published benchmarks to establish pricing for the reimbursement of prescription medications dispensed by us. These benchmarks include average wholesale price, which we refer to as AWP, wholesale acquisition cost, which we refer to as WAC, and average manufacturer price. Most of our contracts utilize the AWP benchmark.

 

As a result of the settlement of class-action lawsuits brought against First DataBank and Medi-Span, effective September 26, 2009, First DataBank and Medi-Span agreed to reduce the mark-up factor applied to WAC, on which AWP is based, from 1.25 to 1.20 for the approximately 1,400 drug codes that were the subject of the lawsuits. These AWP publishers also similarly reduced the mark-up factor on all other national drug codes on which they had marked up AWP. This voluntary reduction affected approximately 18,000 national drug codes. First DataBank and Medi-Span also have indicated that, within the next two years, they will discontinue publication of AWP information. In response to this change, a number of PBMs and third-party payors made adjustments to existing contracts with network pharmacy providers in order to preserve the economic structure of those agreements. The majority of the state Medicaid agencies and certain national health insurers did not make any such adjustments, the consequence of which is lowered reimbursement levels. The impact of the AWP settlement was to reduce our gross margins beginning in the fourth quarter of 2009. We estimated the impact of this change on our revenues and gross margins to be approximately $6.8 million on an annual basis.

 

Client demands for enhanced service levels or possible loss or unfavorable modification of contracts with clients or providers could pressure our margins.

 

As our clients face the continued rapid growth in prescription drug costs, they may demand additional services and enhanced service levels to help mitigate the increase in spending. We operate in a very competitive environment, and we may not be able to increase our fees to compensate for these increased services, which could put pressure on our margins.

 

Our contracts with clients generally do not have terms longer than three years and often may be terminated by the client on relatively short notice. From time to tome, our clients will generally seek bids from other PBM or specialty providers in advance of the expiration of their contracts. If several of these clients elect not to extend their relationship with us, and we are not successful in generating sales to replace the lost business, our future business and operating results could be materially and adversely affected. In addition, we believe the managed care industry is undergoing substantial consolidation, and another party that is not our client could acquire some of our managed care clients. In such case, the likelihood such client would renew its contract with us could be reduced.

 

There are approximately 56,000 retail pharmacies in the United States. All major retail chain pharmacies and a vast majority of independent pharmacies participate in our pharmacy network. The top ten retail pharmacy chains represent approximately 65% of the total number of stores and over 80% of prescriptions filled in our network. Our contracts with retail pharmacies, which are non-exclusive, are generally terminable

on relatively short notice. If one or more of the top pharmacy chains elects to terminate its relationship with us, our members’ access to retail pharmacies and our business could be materially adversely affected. In addition, many large pharmacy chains either own PBMs today, or could attempt to acquire a PBM in the future. Ownership of PBMs by retail pharmacy chains could have material adverse effects on our relationships with such pharmacy chains and on our consolidated results of operations, consolidated financial position and/or consolidated cash flow from operations.

 

Existing and new government legislative and regulatory action could adversely affect our business and financial results.

 

We are subject to numerous federal, state and local laws and regulations. See “Government Regulation” in this prospectus. Changes in these regulations may require extensive changes to our systems and operations that may be difficult to implement. Untimely compliance or noncompliance with applicable laws and regulations could adversely affect the continued operation of our business, including, but not limited to: imposition of civil or criminal penalties; suspension of payments from government programs; loss of required government certifications or approvals; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; or loss of licensure. The regulations to which we are subject include, but are not limited to, Anti-Kickback laws; federal and state self-referral laws; the Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA; regulations of the U.S. Food and Drug Administration, or FDA, U.S. Federal Trade Commission and U.S. Drug Enforcement Administration; and regulations of various state regulatory authorities. In that regard, our business, financial position and results of operations could be affected by one or more of the following:

 

 

Pending and future litigation and governmental inquiries or investigations could subject us to significant monetary damages and/or require us to change our business practices.

 

We are subject to risks relating to litigation and other proceedings in connection with our operations, including the dispensing of pharmaceutical products by our mail service, wholesale operations infusion services and community pharmacies. See “Business — Legal Proceedings” in this prospectus for a list of material proceedings pending against us. We can give no assurance that an adverse outcome in one or more of

these suits would not have a material adverse effect on our results of operations, financial position and/or cash flow from operations, or would not require us to make material changes to our business practices. We are presently responding to several subpoenas and requests for information from governmental agencies. We confirm from time to time while responding to these subpoenas and requests that we are not a target or a potential subject of those investigations and requests, but we cannot predict with certainty what the outcome of any of the foregoing might be. In addition to potential monetary liability arising from these suits and proceedings, we are incurring costs in the defense of the suits and in providing documents to government agencies. Many of the current pending claims and associated costs are covered by insurance, but certain other costs are not insured, such as deductibles on each claim and claims outside the scope of our insurance coverage. There can be no assurance that such costs will not increase and/or become material in the future. Pending and future litigation and governmental inquiries or investigations could subject us to significant monetary damages and/or require us to change our business practices.

 

We may be subject to liability claims for damages and other expenses that are not covered by insurance or which exceed our coverage.

 

A successful product or professional liability claim in excess of our insurance coverage could harm our financial condition and results of operations. Various aspects of our business may subject us to litigation and liability for damages, including the provision of PBM services and the operation of our pharmacies. For example, a prescription drug dispensing error could result in a patient receiving the wrong or incorrect amount of medication, leading to personal injury or death. Our business, financial condition and results of operations could suffer if we pay damages or defense costs in connection with a claim that is outside the scope or exceeds the coverage of any applicable contractual indemnity or insurance coverage.

 

We purchase substantially all of our pharmaceutical products from one vendor and a disruption in our purchasing arrangements could adversely impact our business.

 

We purchase substantially all of our prescription products, subject to certain minimum periodic purchase levels and excluding purchases of therapeutic plasma products, from a single wholesaler, AmerisourceBergen Drug Corporation, which we refer to as ABDC, pursuant to a prime vendor agreement. The term of this agreement extends until August 2014, subject to extension for up to two additional years. Any significant disruption in our relationship with ABDC, or in ABDC’s supply of products to us, would make it difficult and possibly more costly for us to continue to operate our business until we are able to execute a replacement wholesaler agreement. There can be no assurance that we would be able to find a replacement wholesaler on a timely basis or that such wholesaler would be able to fulfill our demands on similar financial terms. If we are unable to identify a replacement on substantially similar financial terms, our results of operations, financial condition and cash flows may be materially adversely affected.

 

Loss of relationships with one or more pharmaceutical manufacturers and changes in payments made by pharmaceutical manufacturers could adversely affect our business and financial results.

 

We have contractual relationships with pharmaceutical manufacturers that provide discounts on drugs dispensed from our mail service and community pharmacies, and pay service fees for other programs and services that we provide. Our business and financial results could be adversely affected if:

 

 

Failure to develop new products, services and delivery channels may adversely affect our business.

 

We operate in a highly competitive environment. We develop new products and services from time to time to assist our clients. If we are unsuccessful in developing innovative products and services, our ability to attract new clients and retain existing clients may suffer.

 

Technology is also an important component of our business as we continue to utilize new and better channels to communicate and interact with our clients, members and business partners. If our competitors are more successful than us in employing this technology, our ability to attract new clients, retain existing clients and operate efficiently may suffer.

 

The success of our business depends on maintaining a well-secured business and technology infrastructure.

 

We are dependent on our infrastructure, including our information systems, for many aspects of our business operations. A fundamental requirement for our business is the secure storage and transmission of personal health information and other confidential data. Our business and operations may be harmed if we do not maintain our business processes and information systems in a secure manner, and continually maintain and improve the integrity of our confidential information. Although we have developed systems and processes that are designed to protect information against security breaches, failure to protect such information or mitigate any such breaches may adversely affect our operating results. Malfunctions in our business processes, breaches of our IT systems or the failure to maintain effective and up-to-date IT systems could disrupt our business operations, result in customer and member disputes, damage our reputation, expose us to risk of loss or litigation, result in regulatory violations, increase administrative expenses or lead to other adverse consequences.

 

Problems in the implementation and conversion of our new pharmacy system could result in additional expense.

 

We have committed significant financial and other resources to migrate to a new pharmacy dispensing, clinical management and accounts receivable management system designed to streamline our business processes, provide improved data reporting, data management and scalability and improve cash posting, billing and collections. Delays in the implementation of this system could result in higher operating costs, additional charges for system design changes or delays in the execution of our strategic plan due to our inability to scale our current operating systems.

 

Our failure to maintain controls and processes over billing and collecting could have a significant negative impact on our results of operations and financial condition.

 

The collection of accounts receivable is a significant challenge and requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating procedures. If we are unable to properly bill and collect our accounts receivable, our results could be materially and adversely affected. While management believes that controls and processes are satisfactory, there can be no assurance that accounts receivable collectability will remain at current levels.

 

Efforts to reduce healthcare costs and alter healthcare financing practices could adversely affect our business.

 

During the past several years, the U.S. healthcare industry has been subject to increased governmental regulation at both the federal and state levels. Certain proposals have been made at the federal and state government levels in an effort to control healthcare costs, including proposing to lower reimbursement under Medicaid and Medicare programs. These proposals include “single payor” government funded health care and price controls on prescription drugs. If these or similar efforts are successful our business and operations could be materially adversely affected. In addition, changing political, economic and regulatory influences may affect healthcare financing and reimbursement practices. If the current healthcare financing and reimbursement system changes significantly, our business could be materially adversely affected. Congress recently enacted

sweeping legislation to reform the U.S. healthcare system. See “Government Regulation” in this prospectus. In addition, the Obama administration has submitted a 2010 federal budget that emphasizes maintaining patient choice, reducing inefficiencies and costs, increasing prevention programs, improving coverage portability and universality, and improving quality of care. Health reform and administration budget proposals may also increase government involvement in healthcare providers’ reimbursement under Medicare and Medicaid, or otherwise change the way in which our clients do business. Plan Sponsors may react to this environment and the uncertainty surrounding it by reducing or delaying purchases of clinical services, cost control mechanisms and other related services that we provide. We cannot predict what effect, if any, these proposals may have on our business. Other legislative or market-driven changes in the healthcare system that we cannot anticipate could also materially adversely affect our results of operations, financial position and/or cash flow from operations.

 

Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, when products are withdrawn from the market or when increased safety risk profiles of specific drugs result in utilization decreases.

 

We process significant volumes of pharmacy claims for brand-name and generic drugs from our mail service and community pharmacies. When products are withdrawn from the market, or when increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these higher-risk drugs. In cases where there is no acceptable prescription drug therapeutic equivalent or generic alternative for these prescription drugs, our prescription volumes, and thus our revenues, profitability and cash flows, may decline.

 

The loss of a relationship with one or more Plan Sponsors could negatively impact our business.

 

Where we do not have preferred or exclusive arrangements with Plan Sponsors, our contracts for reimbursement with Plan Sponsors are often on a perpetual or “evergreen” basis. These evergreen contracts are subject to termination by a Plan Sponsor’s written notice. The required notice varies by contract and is typically 30 to 90 days. Depending on the amount of revenues generated by any single Plan Sponsor or more than one Plan Sponsor in the aggregate, one or more terminations could have a material and adverse effect on our results of operations and financial performance.

 

Network lock-outs by health insurers and PBMs could adversely affect our financial results.

 

Many Plan Sponsors and PBMs continue to create exclusive specialty and other networks which limit a member’s access to a mail service facility or network of preferred pharmacies. To the extent our pharmacies are excluded from these networks, we are unable to dispense medications to those members and bill for prescriptions to those members’ insurance carriers. If Plan Sponsors and PBMs continue to pursue this strategy and we are locked out from dispensing specialty medications to members of exclusive networks, our financial condition and results of operations could be adversely affected.

 

Our issuance of common stock in the merger will increase the risk that we could experience an “ownership change” in the future that could significantly limit our ability to utilize our net operating losses.

 

As of March 31, 2010, BioScrip had net operating losses, or NOLs, for U.S. federal income tax purposes of approximately $18.0 million. Our ability to utilize our NOLs to offset future taxable income may be significantly limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. In general, an ownership change will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year would be increased by the amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in a prior year.

We did not experience an ownership change upon the issuance of common stock in the merger. However, the issuance of common stock in the merger, together with other issuances of common stock during the applicable three-year period, could cause an ownership change under Section 382 of the Code. As a result, the issuance of our common stock in the merger will increase the risk that BioScrip could experience an ownership change during the three-year period following the merger.

 

Risks Related to the New Notes

 

The significant indebtedness incurred to complete the acquisition imposed operating and financial restrictions on us which, together with the resulting debt service obligations, may significantly limit our ability to execute our business strategy and increase the risk of default under our debt obligations.

 

We incurred an aggregate of approximately $325.0 million of indebtedness (not including up to $50.0 million that would also be available under the Revolver) in connection with the acquisition. The terms of the New Credit Facility require us to comply with certain financial covenants, including a maximum total leverage ratio and a minimum fixed charge coverage ratio. In addition, the terms of our new indebtedness also include certain covenants restricting or limiting our ability to, among other things:

 

 

These covenants may adversely affect our ability to finance future operations or limit our ability to pursue certain business opportunities or take certain corporate actions. The covenants may also restrict our flexibility in planning for changes in our business and the industry and make us more vulnerable to economic downturns and adverse developments.

 

Our ability to meet our cash requirements, including our debt service obligations, will be dependent upon our ability to substantially improve our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are or may be beyond our control. In addition, the New Credit Facility has interest payments that are subject to variable interest rates and are therefore dependent upon future fluctuations in interest rates, which are beyond our control. We expect to use cash flow from operations to pay our expenses and amounts due under the new notes and our other outstanding indebtedness. We cannot provide assurance that our business operations will generate sufficient cash flows from operations to fund these cash requirements and debt service obligations. If our operating results, cash flow or capital resources prove inadequate, or if interest rates increase significantly, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt and other obligations. If we are unable to service our debt, we could be forced to reduce or delay planned expansions and capital expenditures, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our failure to generate sufficient operating cash flow to pay our debts or to successfully undertake any of these actions could have a material adverse effect on us.

 

In addition, the degree to which we may be leveraged as a result of the indebtedness incurred in connection with the merger or otherwise could:

 

 

 

The new notes are not secured by our assets or those of our guarantor subsidiaries.

 

The new notes and the related guarantees are our and our guarantor subsidiaries’ general unsecured obligations and are effectively subordinated in right of payment to all of our and our guarantor subsidiaries’ secured indebtedness and obligations, including all indebtedness under the New Credit Facility. If we become insolvent or are liquidated, or if payment under any of the instruments governing our secured debt is accelerated, the lenders under those instruments will be entitled to exercise the remedies available to a secured lender under applicable law and pursuant to the instruments governing such debt. Accordingly, our secured indebtedness and obligations, including all indebtedness under the New Credit Facility, is effectively senior to the new notes to the extent of the value of the collateral securing that indebtedness. In that event, because the new notes and the guarantees will not be secured by any of our assets, it is possible that our remaining assets might be insufficient to satisfy claims of holders of the new notes in full or at all.

 

As of March 31, 2010, we had approximately $100.0 aggregate principal amount of secured indebtedness outstanding under the New Credit Facility. Additionally, under the terms of our prime vendor agreement with ABDC, we granted ABDC a secured lien in all of our inventory as well as the proceeds thereof. Any additional borrowings pursuant to our existing or future credit facilities would also be secured indebtedness, if incurred. Although the indenture governing the new notes contains limitations on the amount of additional indebtedness that we may incur, under certain circumstances the amount of such indebtedness could be substantial and, under certain circumstances, such indebtedness may be secured indebtedness.

 

Despite our substantial indebtedness, we may still incur significantly more debt. This could exacerbate the risks associated with our substantial leverage.

 

We may be able to incur substantial additional indebtedness, including additional secured indebtedness, in the future. Although the indenture governing the new notes and the New Credit Facility contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions, including secured debt, could be substantial. The New Credit Facility permits, among other things, revolving credit borrowings of up to $50.0 million. Adding additional debt to current debt levels could exacerbate the leverage-related risks described above.

 

To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness, including the new notes, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. A significant reduction in our operating cash flows resulting from changes in economic conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations.

 

We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under the New Credit Facility or otherwise in an amount sufficient to enable

us to pay our indebtedness, including our indebtedness under the New Credit Facility and the new notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the new notes, on or before the maturity of the debt. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

 

If we default on our obligations to pay our indebtedness, we may not be able to make payments on the new notes.

 

Any default under the agreements governing our indebtedness, including a default under the New Credit Facility, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the new notes and substantially decrease the market value of the new notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in the New Credit Facility and the indenture governing the new notes), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the New Credit Facility could elect to terminate their commitments thereunder, and cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the New Credit Facility or holders of other indebtedness to avoid being in default. If we breach our covenants under the New Credit Facility or any other indebtedness and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the New Credit Facility or such other indebtedness, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

The new notes may impose significant operating and financial restrictions, which may prevent us from pursuing our business strategies or favorable business opportunities.

 

Subject to a number of important exceptions, the indenture governing the new notes and the New Credit Facility may limit our ability to:

 

 

Consequently, the restrictions contained in the indenture governing the new notes and the New Credit Facility may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. Additionally, the terms of the New Credit Facility require us to comply with certain financial covenants, including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We cannot assure you that we will meet those tests or that the lenders under the New Credit Facility will waive any failure to meet those tests.

A breach of any of these covenants or the inability to comply with the required financial ratios could result in a default under the New Credit Facility or the indenture governing the new notes, as applicable. If any such default occurs, the lenders under the New Credit Facility and the holders of the new notes may elect to declare all of their respective outstanding debt, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the New Credit Facility also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we were unable to pay such amounts, the lenders under the New Credit Facility could proceed against the collateral pledged to them. We will pledge a substantial portion of our assets to the lenders under the New Credit Facility. In such an event, we cannot assure you that we would have sufficient assets to pay amounts due on the new notes. As a result, you may receive less than the full amount you would otherwise be entitled to receive on the new notes.

 

We may not be able to satisfy our obligations to holders of the new notes upon a Change of Control or Asset Sale.

 

Upon the occurrence of a Change of Control, holders of the new notes will have the right to require us to purchase the new notes at a price equal to 101% of the principal amount of such new notes, plus any accrued and unpaid interest to the date of purchase. See “Description of Notes — Repurchase at the Option of Holders — Change of Control.”

 

In addition, upon the occurrence of an Asset Sale, holders of the new notes may, under certain circumstances, have the right to require us to purchase a portion of the new notes at a price equal to 100% of the principal amount of such new notes, plus any accrued and unpaid interest to the date of purchase. See “Description of Notes — Repurchase at the Option of Holders — Asset Sales.”

 

We cannot assure you that, if a Change of Control offer or Asset Sale offer is made, we will have available funds sufficient to pay the Change of Control purchase price or Asset Sale purchase price for any or all of the new notes that might be delivered by holders of the new notes seeking to exercise the Change of Control put right or Asset Sale put right. If we are required to purchase new notes pursuant to a Change of Control offer or Asset Sale offer, we would be required to seek third-party financing to the extent we do not have available funds to meet our purchase obligations. There can be no assurance that we will be able to obtain such financing on acceptable terms to us or at all. Accordingly, none of the holders of the new notes may receive the Change of Control purchase price or Asset Sale purchase price for their new notes. Our failure to make or consummate the Change of Control offer or Asset Sale offer, or to pay the Change of Control purchase price or Asset Sale purchase price when due, will give the holders of the new notes the rights described in “Description of Notes — Events of Default and Remedies.”

 

In addition, the events that constitute a Change of Control or Asset Sale under the indenture governing the new notes may also be events of default under the New Credit Facility. These events may permit the lenders under the New Credit Facility to accelerate the debt outstanding thereunder and, if such debt is not paid, to enforce security interests in our specified assets, thereby limiting our ability to raise cash to purchase the new notes and reducing the practical benefit of the offer-to-purchase provisions to the holders of the new notes.

 

The trading prices of the new notes will be directly affected by our ratings with major credit rating agencies, the prevailing interest rates being paid by companies similar to us, and the overall condition of the financial and credit markets.

 

The trading prices of the new notes in the secondary market will be directly affected by our ratings with major credit rating agencies, the prevailing interest rates being paid by companies similar to us, and the overall condition of the financial and credit markets. It is impossible to predict the prevailing interest rates or the condition of the financial and credit markets. Credit rating agencies continually revise their ratings for companies that they follow, including us. Any ratings downgrade could adversely affect the trading price of the new notes or the trading market for the new notes, to the extent a trading market for the new notes

develops. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future.

 

A subsidiary guarantee could be voided if it constitutes a fraudulent transfer under U.S. bankruptcy or similar state law, which would prevent the holders of the new notes from relying on that subsidiary to satisfy claims.

 

The new notes will be guaranteed by our domestic restricted subsidiaries. The guarantees may be subject to review under U.S. federal bankruptcy law and comparable provisions of state fraudulent conveyance laws if a bankruptcy or another similar case or lawsuit is commenced by or on behalf of our or a guarantor subsidiary’s unpaid creditors or another authorized party. Under these laws, if a court were to find that, at the time any guarantor subsidiary issued a guarantee of the new notes, either it issued the guarantee to delay, hinder or defraud present or future creditors or it received less than reasonably equivalent value or fair consideration for issuing the guarantee and at the time:

 

 

We cannot be sure as to the standard that a court would use to determine whether a guarantor subsidiary was solvent at the relevant time, or, regardless of the standard that the court uses, that the issuance of the guarantees would not be voided or that the guarantees would not be subordinated to other debt. If such a case were to occur, the guarantee could also be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the guarantor subsidiary, the obligations of the applicable guarantor subsidiary were incurred for less than fair consideration. A court could thus void the obligations under the guarantee, subordinate the guarantee to the applicable guarantor subsidiary’s other debt or take other action detrimental to holders of the new notes. If a court were to void a guarantee, you would no longer have a claim against the guarantor subsidiary. Sufficient funds to repay the new notes may not be available from other sources, including the remaining guarantor subsidiaries, if any. In addition, the court might direct you to repay any amounts that you already received from or are attributable to the guarantor subsidiary.

 

Each subsidiary guarantee contains a provision intended to limit the guarantor subsidiary’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer. This provision may not be effective to protect the subsidiary guarantees from being voided under fraudulent transfer law.

 

Our subsidiary guarantors may be unable to fulfill their obligations under their guarantees.

 

The ability of our subsidiary guarantors to make any required payments under their guarantees depends on our future performance, which will be affected by financial, business, economic, and other factors, many of which we cannot control. Such subsidiaries’ businesses may not generate sufficient cash flow from operations in the future and their anticipated growth in revenue and cash flow may not be realized, either or both of which could result in their being unable to honor their guarantees or to fund other liquidity needs. If such subsidiaries do not have enough money, they may be required to refinance all or part of their then-existing debt, sell assets, or borrow more money. They may not be able to accomplish any of these alternatives on terms acceptable to them, or at all. In addition, the terms of existing or future debt agreements, including the New Credit Facility and the indenture governing the new notes, may restrict such subsidiaries from adopting any of these alternatives. The failure of our subsidiaries to generate sufficient cash flow or to achieve any of

these alternatives could materially and adversely affect the value of the new notes and the ability of such subsidiaries to pay the amounts due under their guarantees, if any.

 

Risks Related to the Exchange Offer

 

If you do not exchange your old notes for new notes, your ability to sell your old notes will be restricted.

 

If you do not exchange your old notes for new notes in the exchange offer, you will continue to be subject to the restrictions on transfer described in the legend on your old notes. The restrictions on transfer of your old notes arise because we issued the old notes in a transaction not subject to the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer to sell the old notes if they are registered under the Securities Act and applicable state securities laws or offered or sold pursuant to an exemption from those requirements. If you are still holding any old notes after the expiration date of the exchange offer and the exchange offer has been consummated, you will not be entitled to have those old notes registered under the Securities Act or to any similar rights under the registration rights agreement, subject to limited exceptions, if applicable. After the exchange offer is completed, we will not be required, and we do not intend, to register the old notes under the Securities Act. In addition, if you do exchange your old notes in the exchange offer for the purpose of participating in a distribution of the new notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. To the extent old notes are tendered and accepted in the exchange offer, the trading market, if any, for the old notes would be adversely affected.

 

Your ability to transfer the new notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the new notes.

 

There is no established public market for the new notes. We do not intend to list the new notes on any securities exchange or automated quotation system. We cannot assure you that an active market for the new notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt, such as the new notes, has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the new notes. We cannot assure you that the market, if any, for the new notes will be free from similar disruptions, and any such disruptions may adversely affect the prices at which you may sell your new notes.

 

Purpose and Effect of the Exchange Offer

 

We have entered into a registration rights agreement with the initial purchaser of the old notes. Under the registration rights agreement, we agreed, among other things, to:

 

 

A copy of the registration rights agreement has been filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 31, 2010, which report is incorporated by reference elsewhere in this prospectus. See “Incorporation of Certain Documents” and “Where You Can Find More Information.”

 

The new notes will have terms substantially identical to the old notes except that the new notes will not contain terms with respect to transfer restrictions and registration rights and additional interest payable in the circumstances described below. Old notes in an aggregate principal amount of $225,000,000 were issued on March 25, 2010.

 

In addition, pursuant to the registration rights agreement, under the circumstances set forth below, we will file a shelf registration statement with respect to the resale of the old notes and we will use our commercially reasonable efforts to cause the shelf registration statement to be declared effective on or prior to October 22, 2010, and to keep the shelf registration statement effective until the earlier of March 25, 2012 and the date that all old notes covered by the shelf registration statement have been sold as contemplated in the shelf registration statement or there cease to be any outstanding old notes. These circumstances include if:

 

 

 

The registration statement of which this prospectus forms a part was filed in compliance with our obligations under the registration rights agreement. We will incur additional interest expense if, among other things:

 

 

 

Each holder of old notes that wishes to exchange such old notes for transferable new notes in the exchange offer will be required to make the following representations:

 

 

In addition, each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with secondary resales of new notes and cannot rely on the position of the SEC staff set forth in “Exxon Capital Holdings Corporation,” “Morgan Stanley & Co., Incorporated” or similar no-action letters. See “Plan of Distribution.”

 

Resale of New Notes

 

Based on interpretations of the SEC staff set forth in no-action letters issued to unrelated third parties, we believe that new notes issued in the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by any exchange note holder without compliance with the registration and prospectus delivery provisions of the Securities Act, if:

 

 

Any holder who tenders in the exchange offer with the intention of participating in any manner in a distribution of the new notes:

 

 

If, as stated above, a holder cannot rely on the position of the staff of the SEC set forth in “Exxon Capital Holdings Corporation” or similar interpretive letters, any effective registration statement used in connection with a secondary resale transaction must contain the selling security holder information required by Item 507 of Regulation S-K under the Securities Act.

 

This prospectus may be used for an offer to resell, for the resale or for other retransfer of new notes only as specifically set forth in this prospectus. With regard to broker-dealers, only broker-dealers that acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the new notes.

Please read the section captioned “Plan of Distribution” for more details regarding these procedures for the transfer of new notes. We have agreed to use our best efforts to keep the registration statement of which this prospectus forms a part effective and to amend and supplement this prospectus in order to permit this prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the new notes. We have also agreed that we will make a reasonable number of copies of this prospectus available to any selling holders of the new notes or broker-dealer for use in connection with any resale of the new notes.

 

Terms of the Exchange Offer

 

Upon the terms and subject to the conditions set forth in this prospectus, we will accept for exchange any old notes properly tendered and not withdrawn prior to the expiration date. We will issue a like principal amount of new notes in exchange for each $2,000 principal amount of old notes surrendered under the exchange offer. We will issue $1,000 integral multiple amount of new notes in exchange for each $1,000 integral multiple amount of old notes surrendered under the exchange offer. Old notes may be tendered only in denominations of $2,000 and integral multiples of $1,000 in excess thereof.

 

The form and terms of the new notes will be substantially identical to the form and terms of the old notes except the new notes will be registered under the Securities Act, will not bear legends restricting their transfer and will not provide for any additional interest upon our failure to fulfill our obligations under the registration rights agreement to file, and cause to become effective, a registration statement. The new notes will evidence the same debt as the old notes. The new notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding old notes. Consequently, both series of notes will be treated as a single class of debt securities under the indenture.

 

The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.

 

As of the date of this prospectus, $225,000,000 aggregate principal amount of the old notes are outstanding. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.

 

We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and the rules and regulations of the SEC. Old notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the indenture relating to the old notes.

 

We will be deemed to have accepted for exchange properly tendered old notes when we have given oral notice (which is subsequently confirmed in writing) or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the new notes from us and delivering new notes to such holders. Subject to the terms of the registration rights agreement, we expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption “— Conditions to the Exchange Offer.”

 

Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees, or transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than those transfer taxes described below, in connection with the exchange offer. It is important that you read the section labeled “— Fees and Expenses” below for more details regarding fees and expenses incurred in the exchange offer.

 

Expiration Date; Extensions; Amendments

 

The exchange offer for the old notes will expire at 5:00 p.m., New York City time, on August 12, 2010, unless we extend it in our sole discretion.

In order to extend the exchange offer, we will notify the exchange agent orally or in writing of any extension. We will notify in writing or by public announcement the registered holders of old notes of the extension no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date.

 

We reserve the right, in our sole discretion:

 

 

Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by written notice or public announcement thereof to the registered holders of old notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose such amendment in a manner reasonably calculated to inform the holders of old notes of such amendment, provided that in the event of a material change in the exchange offer, including the waiver of a material condition, we will extend the exchange offer period, if necessary, so that at least five business days remain in the exchange offer following notice of the material change. If we terminate this exchange offer as provided in this prospectus before accepting any old notes for exchange or if we amend the terms of this exchange offer in a manner that constitutes a fundamental change in the information set forth in the registration statement of which this prospectus forms a part, we will promptly file a post-effective amendment to the registration statement of which this prospectus forms a part. In addition, we will in all events comply with our obligation to make prompt delivery of new notes for all old notes properly tendered and accepted for exchange in the exchange offer.

 

Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by issuing a timely press release to a financial news service.

 

Conditions to the Exchange Offer

 

Despite any other term of the exchange offer, we will not be required to accept for exchange, or exchange any new notes for, any old notes, and we may terminate the exchange offer as provided in this prospectus before accepting any old notes for exchange if in our reasonable judgment:

 

 

In addition, we will not be obligated to accept for exchange the old notes of any holder that has not made:

 

 

 

We expressly reserve the right, at any time or at various times on or prior to the scheduled expiration date of the exchange offer, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any old notes by giving written notice of such extension to the registered holders of the old notes. During any such extensions, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange unless they have been previously withdrawn. We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder promptly after the expiration or termination of the exchange offer.

 

We expressly reserve the right to amend or terminate the exchange offer on or prior to the scheduled expiration date of the exchange offer, and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions to termination of the exchange offer specified above. We will give written notice or public announcement of any extension, amendment, non-acceptance or termination to the registered holders of the old notes as promptly as practicable. In the case of any extension, such notice will be issued no later than 9:00 a.m., New York City time on the business day after the previously scheduled expiration date.

 

These conditions are for our sole benefit and we may, in our sole discretion, assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any or at various times except that all conditions to the exchange offer must be satisfied or waived by us prior to acceptance of your notes. If we fail at any time to exercise any of the foregoing rights, that failure will not constitute a waiver of such right. Each such right will be deemed an ongoing right that we may assert at any time or at various times prior to the expiration of the exchange offer. Any waiver by us will be made by written notice or public announcement to the registered holders of the notes and any such waiver shall apply to all the registered holders of the notes.

 

In addition, we will not accept for exchange any old notes tendered, and will not issue new notes in exchange for any such old notes, if at such time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939, as amended.

 

Procedures for Tendering Old Notes

 

Only a holder of old notes may tender such old notes in the exchange offer. If you are a DTC participant that has old notes which are credited to your DTC account by book-entry and which are held of record by DTC’s nominee, as applicable, you may tender your old notes by book-entry transfer as if you were the record holder. Because of this, references herein to registered or record holders include DTC.

 

If you are not a DTC participant, you may tender your old notes by book-entry transfer by contacting your broker, dealer or other nominee or by opening an account with a DTC participant, as the case may be.

 

To tender old notes in the exchange offer:

 

 

Participants in DTC’s ATOP program must electronically transmit their acceptance of the exchange by causing DTC to transfer the old notes to the exchange agent in accordance with DTC’s ATOP procedures for transfer. DTC will then send an agent’s message to the exchange agent. With respect to the exchange of the

old notes, the term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that:

 

 

Delivery of an agent’s message will also constitute an acknowledgment from the tendering DTC participant that the representations described below in this prospectus are true and correct and when received by the exchange agent will form a part of a confirmation of book-entry transfer in which you acknowledge and agree to be bound by the terms of the letter of transmittal.

 

In addition, each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See “Plan of Distribution.”

 

Guaranteed Delivery Procedures

 

If you desire to tender outstanding notes pursuant to the exchange offer and (1) time will not permit your letter of transmittal, certificates representing such outstanding notes and all other required documents to reach the exchange agent on or prior to the expiration date, or (2) the procedures for book-entry transfer (including delivery of an agent’s message) cannot be completed on or prior to the expiration date, you may nevertheless tender such notes with the effect that such tender will be deemed to have been received on or prior to the expiration date if all the following conditions are satisfied:

 

 

The notice of guaranteed delivery may be sent by hand delivery, facsimile transmission or mail to the exchange agent and must include a guarantee by an eligible guarantor institution in the form set forth in the notice of guaranteed delivery.

 

Book-entry Transfer

 

The exchange agent will make a request to establish an account with respect to the old notes at DTC for purposes of the exchange offer promptly after the date of this prospectus; and any financial institution participating in DTC’s system may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent’s account at DTC in accordance with DTC’s procedures for transfer.

 

Withdrawal Rights

 

Except as otherwise provided in this prospectus, you may withdraw your tender of old notes at any time before 5:00 p.m., New York City time, on the expiration date.

To withdraw a tender of old notes in any exchange offer, the applicable exchange agent must receive a letter or facsimile notice of withdrawal at its address set forth below under “— Exchange Agent” before the time indicated above. Any notice of withdrawal must:

 

 

We will determine in our sole discretion all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal. Our determination will be final and binding on all parties. Any old notes withdrawn in this manner will be deemed not to have been validly tendered for purposes of the exchange offer. We will not issue new notes for such withdrawn old notes unless the old notes are validly retendered. We will return to you any old notes that you have tendered but that we have not accepted for exchange without cost as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn old notes by following one of the procedures described above at any time before the expiration date.

 

Exchange Agent

 

We have appointed U.S. Bank National Association as exchange agent for the exchange offer of old notes.

 

You should direct questions and requests for assistance and requests for additional copies of this prospectus to the exchange agent addressed as follows:

 

By mail:

 

U.S. Bank National Association

Corporate Trust Services

Attn: Specialized Finance

60 Livingston Avenue

St. Paul, MN 55107

 

By facsimile:

 

(651) 495-8158

Confirm: 1-800-934-6802

Attention: Specialized Finance

 

Questions:

 

1-800-934-6802

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitations by telephone or in person by our officers and regular employees and those of our affiliates.

 

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.

 

Our expenses in connection with the exchange offer include:

 

 

 

Transfer Taxes

 

We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

 

If satisfactory evidence of payment of such taxes is not submitted, the amount of such transfer taxes will be billed to that tendering holder.

 

Consequences of Failure to Exchange

 

Holders of old notes who do not exchange their old notes for new notes under the exchange offer, including as a result of failing to timely deliver old notes to the exchange agent, together with all required documentation, will remain subject to the restrictions on transfer of such old notes:

 

 

In addition, holders of old notes who do not exchange their old notes for new notes under the exchange offer will no longer have any registration rights or be entitled to liquidated damages under the registration rights agreement.

 

In general, you may not offer or sell the old notes unless they are registered under the Securities Act, or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the old notes under the Securities Act. Based on interpretations of the SEC staff, new notes issued pursuant to the exchange offer may be offered for resale, resold or otherwise transferred by their holders, other than any such holder that is our “affiliate” within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holders acquired the new notes in the ordinary course of the holders’ business and the holders have no arrangement or understanding with respect to the distribution of the new notes to be acquired in the exchange offer. Any holder who tenders old notes in the exchange offer for the purpose of participating in a distribution of the new notes:

 

 

After the exchange offer is consummated, if you continue to hold any old notes, you may have difficulty selling them because there will be fewer old notes outstanding.

Accounting Treatment

 

We will record the new notes in our accounting records at the same carrying value as the old notes, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer.

 

Other

 

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take.

 

We may in the future seek to acquire untendered old notes in the open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.

 

This exchange offer is intended to satisfy our obligations under the registration rights agreement. We will not receive any proceeds from the exchange offer. You will receive, in exchange for old notes tendered by you and accepted by us in the exchange offer, new notes in the same principal amount. The old notes surrendered in exchange for the new notes will be retired and cancelled and cannot be reissued. Accordingly, the issuance of the new notes will not result in any increase of our outstanding debt or the receipt of any additional proceeds.

 

The following unaudited pro forma combined financial information has been prepared to assist you in your analysis of the financial effects of the Transactions. The unaudited pro forma combined financial information was prepared using the historical audited and unaudited statements of operations of BioScrip and CHS. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and accompanying notes of BioScrip and CHS incorporated by reference into this prospectus.

 

The accompanying unaudited pro forma combined financial information gives effect to the merger with CHS, including a purchase price of $236 million in cash, which was used to retire approximately $129.0 million of CHS debt and to pay approximately $14.6 million in merger-related expenses incurred by CHS. As of the closing date, the fair value of the BioScrip common stock was $91.6 million and the fair value of the warrants and options was $12.3 and $2.8 million, respectively. Total amounts paid to execute the merger with CHS were $349.8 million. The pro forma adjustments reflect estimates of the fair value of assets and liabilities acquired which may be adjusted during the measurement period allowed under generally accepted accounting principles and, as such, the fair values and their resulting pro forma adjustments are still considered preliminary. The effect of the changes to the pro forma statement of operations could be material. The unaudited pro forma financial information is not necessarily indicative of the combined results of operations that might have been achieved for the dates or periods indicated, nor is it necessarily indicative of the results of operations that may occur in the future.

 

The unaudited pro forma combined statement of operations for the twelve months ended December 31, 2009 assumes that the merger with CHS took place on January 1, 2009 and combines BioScrip’s and CHS’s audited consolidated statements of operations for the twelve months ended December 31, 2009.

 

The unaudited pro forma combined statement of operations for the three months ended March 31, 2010 combines BioScrip’s unaudited consolidated statement of operations for the three months ended March 31, 2010, which includes six days of operating results of CHS for the period after completion of the merger, and the unaudited results of operations of CHS for the period January 1, 2010 through March 25, 2010, the date the merger was consummated.

BIOSCRIP, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

 

 

See accompanying notes to unaudited pro forma combined financial information including Note 6

for an explanation of the preliminary pro forma adjustments

BIOSCRIP, INC.

 

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

 

 

See accompanying notes to unaudited pro forma combined financial information including Note 6

for an explanation of the preliminary pro forma adjustments

BIOSCRIP, INC.

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

 

On January 24, 2010, the Company entered into the Merger Agreement with CHS Holdings, Inc. (formerly known as Camelot Acquisition Corp.), CHS and the Former CHS Stockholders. CHS was at that time a privately held company that is a leading provider of home infusion and home nursing services and products to patients suffering from chronic and acute medical conditions. Pursuant to the Merger Agreement, at the effective time of the merger, CHS merged with the Merger Sub. As a result of the merger, the separate corporate existence of CHS ceased and CHS Holdings, Inc. continues as the surviving corporation of the merger and as a wholly-owned subsidiary of the Company.

 

On March 25, 2010, upon consummation of the merger, the Company:

 

 

 

The unaudited pro forma combined financial information is based on the historical financial statements of BioScrip and CHS and prepared and presented pursuant to the regulations of the SEC regarding pro forma financial information. The 2010 unaudited pro forma combined financial information includes CHS’s unaudited statement of operations for the period from January 1, 2010 through March 25, 2010, the date the merger was consummated. BioScrip historical financial information includes the unaudited statement of operations for the three months ended March 31, 2010, which includes six days of operating results of CHS for the period after completion of the merger.

 

The pro forma adjustments include the application of the acquisition method under Accounting Standards Codification (ASC) Topic 805, Business Combinations, with respect to the merger. ASC Topic 805 requires, among other things, that identifiable assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. ASC Topic 805 also allows a measurement period during which fair values may be assessed after the acquisition date.

 

Under ASC Topic 820, Fair Value Measurements and Disclosures, “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be unrelated buyers and sellers in the principal or the most advantageous market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

 

Total merger-related transaction costs incurred by BioScrip were $22.3 million through March 31, 2010, which includes approximately $13.4 million of costs associated with the issuance of debt. Under ASC Topic 805, merger-related transaction costs not associated with the debt, such as advisory, legal, valuation and other

BIOSCRIP, INC.

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION — (Continued)

 

professional fees, are excluded from components of consideration and are expensed in the periods in which the costs are incurred. Transaction costs associated with the issuance of debt are amortized over the life of the debt.

 

The unaudited pro forma combined statement of operations for the twelve months ended December 31, 2009 includes merger related transaction costs of approximately $1.8 million incurred by BioScrip. The unaudited pro forma combined statement of operations for the three months ended March 31, 2010 includes merger related transaction costs of approximately $5.0 million and finance related fees of approximately $2.25 million incurred by BioScrip during the three months ended March 31, 2010.

 

The historical consolidated financial information has been adjusted in the unaudited pro forma combined financial information to give effect to pro forma events that are (1) directly attributable to the merger, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. The pro forma financial information does not reflect revenue opportunities and cost savings that we expect to realize after the merger with CHS. No assurance can be given with respect to the estimated revenue opportunities and operating cost savings that are expected to be realized as a result of the merger with CHS. The pro forma financial information also does not reflect non-recurring charges related to integration activity or exit costs that may be incurred by BioScrip or CHS in connection with the merger.

 

Certain CHS amounts have been reclassified to conform to BioScrip’s method of financial presentation. These reclassifications had no effect on previously reported net income. There were no material transactions between BioScrip and CHS during the periods presented in the unaudited pro forma combined financial information that would need to be eliminated.

 

 

Upon completion of the merger, BioScrip began a detailed review of CHS’s accounting policies and procedures. As a result of that review, BioScrip has reclassified certain expenses between cost of revenue and selling, general and administrative expenses. The impact of the reclassification was immaterial to the statement of operations. BioScrip may identify additional differences between the accounting policies and procedures of the two companies that, when conformed, may have a material impact on the future operating results. Further differences from unifying the accounting policies of the combined companies may be identified before BioScrip’s quarterly report on Form 10-Q for the three months ended June 30, 2010 is filed and are not reflected in adjustments to pro forma combined financial information at this time.

 

 

The consideration transferred to effect the merger and the aggregate purchase price to be allocated is presented in the table below.

 

BIOSCRIP, INC.

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION — (Continued)

 

 

The following is a discussion of the adjustments made in connection with the preparation of the unaudited pro forma combined financial information. Each of these adjustments represents very preliminary estimates of the fair values of CHS’s assets and liabilities and periodic amortization of such adjustments to the extent applicable.

 

The following is a preliminary estimate of the assets acquired and the liabilities assumed by BioScrip upon the merger, reconciled to the consideration transferred:

 

 

Goodwill:  Goodwill is calculated as the excess of fair value of the consideration as of the merger date expected to be transferred over the values assigned to the identifiable assets acquired and liabilities assumed. Goodwill is not amortized but rather is subject to an annual impairment test.

 

Intangible assets:  Intangible assets acquired include trademarks, trade names, customer relationships and certificates of need which were valued at their current fair value as of the date of acquisition.

 

Income taxes:  No adjustments to the tax basis of CHS’s assets and liabilities are expected as a result of the merger.

 

 

(A) Reflects the elimination of CHS acquisition and integration expenses incurred in the periods presented.

 

(B) Amortization of intangible assets adjustments:

 

BIOSCRIP, INC.

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION — (Continued)

 

(C) Interest and deferred financing costs adjustments:

 

 

BioScrip funded the cash component of the merger consideration and repayment of CHS long-term debt by issuing the old notes and entering into the New Credit Facility. The old notes accrue interest at 10.25% per annum and the Term Loan accrues interest at a base rate or Eurodollar rate plus an applicable margin of 3.0%, with the base rate and Eurodollar rate having a floor of 3.0%. As of May 31, 2010, the Term Loan accrued interest at 6.0% per annum.

 

A change of one percentage point in the rates associated with the Term Loan would result in a change of approximately $1.0 million per annum to the pre-tax pro forma earnings. Costs incurred in connection with the issuance of merger related debt will be deferred and amortized over the term of the debt. The amount of these costs was $13.4 million as of March 31, 2010.

 

(D) Reflects the income tax effects of pro forma adjustments at the expected combined statutory rate. Fifty percent of the integration expenses are assumed to be non-deductible for income taxes and are excluded from the pro forma adjustment tax effect.

 

(E) Reflects the elimination of CHS preferred stock dividends.

 

Overview

 

We are a leading national provider of specialty pharmacy and home care products and services that partners with patients, physicians, hospitals, healthcare payors and pharmaceutical manufacturers to provide clinical management solutions and delivery of cost-effective access to prescription medications. Our services are designed to improve clinical outcomes for chronic and acute healthcare conditions while controlling overall healthcare costs. As of May 31, 2010, we had a total of 127 locations in 27 states plus the District of Columbia, including 32 community pharmacy locations, 32 home nursing locations, three mail service facilities and 60 home infusion locations, including 17 contract affiliated infusion pharmacies.

 

On March 25, 2010, we acquired CHS, a privately held leading provider of home infusion and home nursing products and services to patients suffering from chronic and acute medical conditions. Our acquisition of CHS created one of the largest independent specialty pharmacy and home infusion providers in the United States, with a national network of specialty and home infusion pharmacies and services with over 120 points of service in 27 states plus the District of Columbia. As a result of the acquisition, we expect to cross-sell all of our pharmacy service offerings and our homecare services, enabling accelerated pull-through opportunities with our existing payors, as well as the addition of more than 450 payor relationships from CHS. The acquisition also significantly expands our national footprint with the addition of a strong regional and local management team. In addition to broadening our clinical services organization and expertise, the acquisition of CHS also increases our focus on higher margin therapies. As we integrate CHS into our operations, we expect to expand our overall profit and operating margins. In connection with our acquisition of CHS, we issued $225.0 million aggregate principal amount of the old notes and entered into the New Credit Facility.

 

Below is a brief discussion of our business and operations as reported in our financial statements on a segment basis. Immediately upon consummating the acquisition of CHS, we began integrating the operations of CHS into BioScrip. We believe that our operations, organizational structure and related segment reporting may change as a result of the acquisition. We are currently evaluating how to review and evaluate the operating performance of and allocate resources to the operating units following the acquisition of CHS.

 

Prior to our acquisition of CHS, we historically operated in two primary segments — Specialty Pharmacy Services and Traditional Pharmacy Services. Through our Specialty Pharmacy Services segment, we deliver comprehensive support, dispensing/distribution of specialized pharmaceuticals, patient care management, data reporting and a range of other complex therapy management services to patients with certain chronic health conditions or multiple conditions. Specialty drugs are high-cost injectable, infusible, inhalable or oral drugs that require special handling (such as refrigeration) or compounding prior to administration, and sometimes require close professional monitoring during the course of administration and often throughout treatment. Our pharmacies are full-service, carrying both traditional and specialty medications and able to treat patients with a variety of medical conditions. We believe that care management programs deliver superior clinical outcomes through enhanced medication compliance and patient retention, as has been demonstrated in third-party clinical studies.

 

In our Traditional Pharmacy Services segment, we mainly provide traditional mail order pharmacy fulfillment, and to a lesser extent we administer prescription discount card programs and fully-funded pharmacy benefit management services. These services are marketed to plan sponsors and are designed to promote cost-effective, clinically appropriate pharmacy services through our mail service distribution facility. Prescription discount card programs are administered on behalf of commercial Plan Sponsors, typically TPAs, whereby revenue is derived on a per claim basis from the dispensing network pharmacy.

 

Through our home health business, most of which we acquired from our acquisition of CHS, we provide home infusion therapy, respiratory therapy and home medical equipment, skilled nursing and therapy visits, private duty nursing services, rehabilitation services, hospice and medical social services to patients primarily in the eastern United States in the home through our home health locations. Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community- and home-based care environment. Our core services are provided in coordination with and under

the direction of the patient’s physician. Our home health professionals, including pharmacists, nurses, respiratory therapists and physical therapists, work with the physician to develop a plan of care suited to the patient’s specific needs. Whether in the home, physician office, ambulatory infusion center or other alternate site of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, HIV/AIDS, cancer, iron overload, multiple sclerosis, organ transplants, rheumatoid arthritis, immune deficiencies and congestive heart failure.

 

Our Strengths

 

We believe that our company has a number of competitive strengths, including:

 

Attractive Independent and Local Competitive Position with Significant National Platform and Infrastructure

 

As of May 31, 2010, we had a total of 127 locations in 27 states plus the District of Columbia, including 32 community pharmacy locations, 32 home nursing locations, three mail service facilities and 60 home infusion locations, including 17 contract affiliated infusion pharmacies. Our model combines local presence with effective, comprehensive clinical programs for multiple therapies and all delivery technologies (oral, injectable and infusible). We also have the capabilities and payor relationships to distribute specialty pharmaceuticals to all 50 states. We have more than 1,000 MCO relationships and are one of the few home health and specialty pharmacy providers that can offer a truly national, integrated and comprehensive approach to MCOs, which generally favor fully integrated vendors who can provide high-touch specialty pharmacy solutions to their patients.

 

Diversified Payor Base with Limited Reliance on Government Payors

 

On a combined basis, approximately 71% and 67% of our pro forma revenue for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively, was from non-government payors. Additionally, although Medicare and Medicaid represent a larger percentage of our overall revenues as a result of our acquisition of CHS, we believe that we further diversified our overall business exposure to revenue concentration, as our overall exposure to Medicare and Medicaid is diversified among various therapies and conditions, thereby minimizing risk in any one therapy area. Regarding commercial payors, no single payor represented more than 13% of our pro forma revenue for either the year ended December 31, 2009 or the three months ended March 31, 2010, with the top five payors comprising 31% of our pro forma revenue for both the year ended December 31, 2009 and the three months ended March 31, 2010. Most of our top payors, including the top payor, are PBMs, which have a diversified base of end users. Our diverse range of disease-state therapy regimens offered through our clinical management programs allows us to further mitigate reimbursement risk. We believe that our historical under-penetration of the Medicare and Medicaid markets provides us with significant opportunities for growth with limited risk.

 

Effective Care Management Clinical Programs that Produce Positive Clinical Outcomes

 

We have diversified, comprehensive and effective clinical programs across numerous therapeutic areas, including: chronic kidney disease; Crohn’s disease; deep vein thrombosis; Gaucher’s disease; growth hormone deficiency; hemophilia; Hepatitis C; HIV/AIDS; immune deficiency; infertility; multiple sclerosis; oncology; osteoarthritis; psoriasis; rheumatoid arthritis; organ transplant; ulcerative colitis; respiratory syncytical virus; infection control; and nutrition abnormalities. We have clinical programs that are designed to improve patient adherence and retention. We handle all specialty pharmaceutical delivery technologies, oral, injectable and infusible. We believe that we have earned a positive reputation among all of our stakeholders — patients, physicians, payors and pharmaceutical manufacturers — by providing superior service and favorable clinical outcomes. We believe that our independent platform provides the specialty pharmaceuticals and the necessary programs and services for better and more efficient clinical outcomes for our clients.

Attractive and Diversified Therapeutic Coverage within the Home Infusion Market

 

Our infusion business provides high value traditional infusion therapies with accompanying clinical management and home care. Our infusion product offerings and services are designed to treat chronic conditions, such as total parenteral nutritional, cancer and hemophilia, which comprise over 19% of our pro forma infusion revenue for both the year ended December 31, 2009 and the three months ended March 31, 2010, and have significantly higher margins than our specialty infusion products and services. In addition to the long-term treatment associated with these chronic conditions, these conditions require ongoing caregiver counseling and education regarding patient treatment and ongoing monitoring to encourage patients to comply with the prescribed therapy, including programs for enteral and total parenteral nutrition and pediatric infusion. Our clinical management programs offer a number of multiple disease-state therapy regimens, increasing the number of opportunities to cross-sell services and technologies.

 

Experienced Management Team with Recognized Financial Sponsor Support

 

We have a strong and well-respected management team with a diverse background in the healthcare industry, with a common focus on the specialty pharmacy and home infusion industries. The team also has prior experience at leading healthcare companies such as OptionCare, Coram Healthcare, Hemophilia Resources of America, Caremark and Walgreens. Combined, the team has over 200 years of relevant industry experience and over 75 years of combined tenure at BioScrip. Our President and Chief Operating Officer, Richard Smith, has over 17 years of home health experience in increasingly senior positions at various public and private healthcare companies, and is overseeing the integration of the CHS platform into our existing network. After the acquisition, several key members of the CHS management team have continued with our company and will support achievement of our long-term strategic goals. Also following the acquisition, the Former CHS Stockholders beneficially own approximately 30% of our common equity (inclusive of warrants and options), and Kohlberg is the largest single beneficial owner of our shares. Upon completion of the acquisition, Kohlberg appointed two members to our Board of Directors. Kohlberg is a leading U.S. private equity firm.

 

Our Strategy

 

Since our acquisition of CHS, our management has been implementing both its strategic plan as well as a detailed merger integration plan to achieve and expand the synergistic benefits of the acquisition. Management has also commenced executing on its plan to seize organic revenue growth opportunities by cross-selling products and services through our expanded geographic footprint and payor contract base. Our long-term goal is to be the leading independent provider of specialty pharmacy and home health services in the United States. We intend to achieve these goals and objectives as follows:

 

Continuing to Focus on Core High-Value Therapies

 

We will continue to focus on delivering high value therapies, such as anti-infective, total parenteral and enteral nutrition therapies, as well as expanding our portfolio of high-value chronic therapies. We have significant clinical experience in managing patients afflicted with these conditions, which we deliver on a local basis to patients in their homes due to the complexity and frequency of pharmaceutical administration and need for continued professional monitoring. In other cases, where appropriate, we deliver oral, injectable and infusible products on a national or regional basis.

 

Continuing to Operate a Local Clinical Model that Emphasizes Customized Care Management

 

Our infusion branches utilize a coordinated team approach, comprised of nurses, therapists and pharmacists designed to administer locally and monitor the medical care of our patient population that frequently suffers from chronic diseases. These local teams provide customized patient care management, which we believe assures patient responsiveness to their plan of care, better quality care and a personal touch that our patients have come to expect.

Focusing on the Integration of CHS’s Business

 

Our team has extensive experience managing and integrating infusion businesses. We have worked closely with CHS’s former management to implement a seamless transition through a detailed, cross-functional integration plan led by Richard Smith, our President and Chief Operating Officer. We believe that the complexity of a systems integration is mitigated by the fact that all of our and CHS’s infusion locations use the same clinical management and accounts receivables software and that the reimbursement, pharmacy and clinical teams are experienced working with that software. We have not experienced, and do not anticipate, any systems disruption or patient disruptions, because no facilities will be merged except for a small BioScrip satellite branch. Local CHS businesses continue to operate under their brands used prior to the acquisition, and field operations will be left intact. This strategy is intended to minimize revenue risk and disruptions to our business.

 

Achieving Cost Synergies and Targeting Cross-Selling Opportunities

 

We anticipate cost savings synergies and margin expansion from the acquisition of CHS. By combining our and CHS’s platforms, we intend to eliminate significant overlap and redundancy in corporate overhead and infrastructure in order to achieve annualized cost savings of approximately $5.0 million. We also have begun combining CHS’s purchasing volume with our purchasing volume, leveraging the increased scale of our operations, purchasing volume and medication distribution in order to achieve contractual annualized cost of revenue synergies of approximately $3.0 million. In addition to these cost savings, we believe that there are potential significant synergies that can be achieved through up-selling and cross-selling products and services, as described below.

 

Leveraging Our Combined Relationships with National MCOs

 

Our business requires us to maintain strong relations with local and regional referral sources, patients and managed care payors. We intend to leverage our collective current relationships, geographic coverage, clinical expertise and reputation, as well as corporate infrastructure, regulatory expertise and contacts, in order to expand our relationships with national MCOs and pursue national contracts with these organizations. Our sales and marketing strategy focuses on continuing and ultimately expanding these relationships. Additionally, we have begun to focus on organic revenue growth opportunities by cross-selling products and services through our expanded geographic footprint and payor contract base. In addition to BioScrip’s more than 600 payor relationships, we gained over 450 new MCO relationships through our acquisition of CHS. These new contracts will increase our opportunity to cross-sell all services on a national level and showcase clinically proven care management programs, which we believe will accelerate pull-through opportunities as new treatment and pharmaceutical technologies become available. CHS also offers clinical disease management for home care therapies, providing the opportunity to enhance our relationships with, and make the combined company attractive to, MCOs. As a result of the acquisition, we have approximately 140 sales representatives and over 1,000 MCO relationships.

 

Selectively Pursuing Acquisitions of Other Independent Home Infusion Therapy Providers in Contiguous and Other Strategic Markets

 

We believe that a substantial portion of the home infusion market consists of small, independent home infusion providers, and we believe that industry dynamics in the currently fragmented home infusion market favor consolidated providers and the operational efficiencies that come with scale. Following the integration of CHS, we plan to selectively pursue strategic add-on acquisitions of other independent home care providers with established track records in markets contiguous to our existing operations. We believe acquisitions in contiguous markets can be efficiently integrated into our existing operations and added to our existing managed care contracts and payor and patient platforms.

Post-Acquisition Accounting Treatment

 

The aggregate consideration paid by us in connection with the merger was provisionally allocated to CHS’s assets and liabilities based on their fair values, with any excess being treated as goodwill. These amounts are subject to change as additional information on asset and liability valuations becomes available. We have consolidated CHS’s assets, liabilities and results of operations with our assets, liabilities and results of operations after the consummation of the merger.

 

Products and Services

 

Pharmacy Services

 

Specialty Pharmacy Services

 

Specialty Pharmacy Services are provided locally through our BioScrip community pharmacies for patients requiring infused medications either in the home or at a variety of sites including our ambulatory treatment centers and regionally through our infusion pharmacies.

 

We own and operate 95 specialty pharmacies, which include community pharmacies, mail order pharmacies and infusion pharmacies. While all of our locations are able to carry both traditional and specialty medications and are able to treat people with a variety of diseases and medical conditions, we focus on serving patient populations with chronic and acute health conditions, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The patients we service typically have prescription or medical drug coverage through commercial insurance, Medicare, Medicaid and/or other governmental programs, and we are primarily reimbursed by the patient’s insurer at a contracted rate or our “usual and customary” rate for the specific drug and/or service provided to the customer. Our Specialty Pharmacy Services programs are designed to optimize the therapeutic outcomes for patients while achieving Plan Sponsors’ and/or pharmaceutical manufacturer’s program goals. These goals include appropriate utilization of therapies, improved patient compliance and adherence rates, reduced expenditures through discounted drug rates and utilization reporting. Our software and data management tools permit Plan Sponsors, pharmaceutical manufacturers and physicians to: (i) access utilization data to manage better healthcare outcomes and (ii) measure cost, utilization, prescribing and other pharmacy trends.

Medication Dispensing and Distribution.  We carry a full range of prescription medications and are able to dispense nearly all prescription medications for acute and chronic diseases and conditions. As a specialty pharmacy provider our mail and community pharmacy locations carry high cost, hard to find and hard to handle medications that are generally more expensive or more complex than medications carried by retail or traditional pharmacies.

 

Special shipping and handling techniques in compliance with a manufacturer’s specific requirements are often employed, including refrigerated shipping with dry-ice packs. When necessary, we provide the drug product along with supplies and equipment needed for administration.

 

Our pharmacies also deliver medications to physicians’ offices for patient in-office administration. The majority of our business is patient-specific dispensing, whereby we receive a prescription for a medication and bill the appropriate party or parties for reimbursement of the drug, which may include Plan Sponsors, manufacturers and/or the patient. In some instances we deliver drugs on a wholesale basis directly to qualified healthcare professionals or institutions, including physicians and in some cases other specialty pharmacy providers or wholesalers.

 

Billing and Coordination of Benefits.  Our pharmacies offer comprehensive billing, patient reimbursement and coordination of benefits, which we refer to as COB, services under both a patient’s pharmacy and medical benefits. Our pharmacy locations are contracted with nearly all federal and state governmental benefit programs including Medicare, Medicaid, and state benefit programs such as AIDS Drug Assistance Programs, as well as other Ryan White-funded programs. In addition, our pharmacies participate in most of the pharmacy networks, as well as with MCOs directly.

 

Our comprehensive COB services help patients with multiple sources of insurance and/or government assistance handle complex insurance billing and reimbursement challenges. Retail pharmacies and many of our competitors in the specialty pharmacy arena do not typically provide COB services; we believe providing these services differentiates us from our competitors. We facilitate comprehensive assistance to patients through third party sources in order to identify financial assistance programs and obtain funding for patients who are unable to afford their out-of-pocket expenditures, including co-payments. We also work with a variety of assistance organizations and pharmaceutical manufacturers to obtain this type of funding on behalf of our patients. Co-payments and coinsurance payments are diligently pursued for collection as required unless approved financial hardship exemptions are in effect.

 

Specialty Therapy Management.  We design and administer clinical programs to maximize the benefits of pharmaceutical utilization as a tool in achieving pharmaceutical therapy goals for certain targeted disease states. Our programs focus on preventing high-risk adverse events through the appropriate use of pharmaceuticals while eliminating unnecessary or duplicate therapies. Key components of these programs include patient education and training, integration of care between pharmacy and medical health disciplines, monitoring of patient compliance, measurement of the care process and quality, and providing feedback for continuous improvement in achieving therapy goals. The goal of these services is to improve patient outcomes and lower overall healthcare costs.

 

Our bioscripcare^tm patient care programs are designed to address the changing nature of chronic patient care by providing the optimal structure of patient care through consistent assessment and intervention, ongoing education and patient support, and adherence and persistence management, which results in improved patient quality of life and outcomes. Also, as part of our normal business operations for refill management, we initiate monthly telephonic interactions with patients during which we gather robust data intended to improve patient specific and, in general, overall health outcomes.

 

Our programs incorporate Healthcare Effectiveness Data and Information Set, National Committee for Quality Assurance measures and Disease Management Association of America: The Care Continuum Alliance guidelines. Measurement, analysis, as well as improvement and repetition are key components of our regular program reviews. Our programs remain dynamic through our focus on continual improvement. Some of the components of the programs are described below:

 

Most of the disease states and conditions for which we dispense medications require complex, multi-drug regimens for treatment, many of which have potential or actual adverse side effects and adverse drug interactions. Our pharmacists review prescriptions presented for a patient against that patient’s medical history, his or her past and current medication usage, and clinical references known to us in order to insure that the therapy selected is clinically appropriate. If our pharmacists find a potential or actual problem they contact the prescriber or patient to discuss that patient’s case and alternative medications.

 

Our pharmacists and clinical staff stay informed about new medications and changing treatment protocols which are utilized in our target disease states and conditions.

 

 

Due to the complexity of the regimens associated with the medications we dispense and the need to educate patients on the importance of compliance and proper dosing and administration, we make great efforts to help our patients, including their caregivers, understand how their drug regimen may affect their health status and lifestyle. We routinely consult with each patient when they receive a prescription from us. We consult on what each medication is for, how it works, and what adverse side effects are most likely to occur, as well as potential interactions between or among multiple medications. Our goal is to fully inform each patient in order to prevent missed doses, delayed starts, and loss of other healthcare treatment options in some cases. We also provide patients with information concerning how medications might influence their lifestyle and give them recommendations on how to fit drug therapies into alternative schedules and travel plans.

 

With respect to injectible specialty medications we dispense, which we teach patients how to prepare their medications for administration, how to inject themselves, and how to deal with any reactions that may occur. We often have the patient administer their first dose in the pharmacy so they gain comfort and confidence in taking the medications when they get home. Our pharmacists are always available by telephone for patient questions.

 

Our pharmacies also provide physicians, patients and their caregivers with a broad range of written educational materials. We create some of those materials and receive others from pharmaceutical manufacturers and not-for-profit organizations. We promote local and national disease-related events.

 

 

“Adherence” is defined as taking medications on a timely basis, as and when prescribed — for example, twice daily. “Persistence” is defined as taking a regimen of medications for the length of time prescribed. People with the diseases and conditions we treat often struggle with both of these self-management issues, because their medications are often difficult to take and require months or years of use.

 

Adherence and persistence are key factors in achieving optimal medication effectiveness and our pharmacists and professional staffs are active with patients, caregivers and physicians in an effort to ensure the highest success rates. From the start of therapy and throughout a patient’s treatment cycle we continually impress upon the patient the importance of adherence and persistence through initial teaching sessions and ongoing communications with each medication refill. We provide refill reminders to alert people when a prescription refill is due or to take their daily medication regimen. We proactively contact patients in instances of missed refills and alert physicians and other healthcare providers when the patient cannot be located. We reinforce these activities with nurse-based adherence management and therapy optimization programs for select conditions that carry a higher risk of complications or treatment failures. The management methodology applied to each specific therapy constantly evolves to reflect such things as new available treatments, revised treatment guidelines, and other market developments. Since the inception of these programs, we have observed results that indicate the achievement of higher compliance rates as compared to industry averages and other documented and available metrics.

Traditional Pharmacy Services

 

Our Traditional Pharmacy Services business consists mainly of traditional mail order pharmacy fulfillment, and, to a lesser extent, prescription discount card programs and integrated PBM services. These services are designed to offer employers, MCOs, TPAs, and other Plan Sponsors cost-effective delivery of pharmacy benefit plans including the low cost distribution of mail services for plan members who receive traditional maintenance medications. Traditional Pharmacy Services available to our customers include the following:

 

Mail Order Pharmacy Dispensing.  Our traditional mail service pharmacy provides patients with medications, primarily via home delivery from our national distribution center located in Columbus, Ohio. Customers may order prescriptions by mail, phone or Internet, while ensuring accuracy. For our partners, mail service provides enhanced formulary compliance capabilities as well as the ability to utilize appropriate generic medications, all designed to help save money for Plan Sponsors and patients while maintaining high levels of patient satisfaction.

 

Prescription Discount Card Programs.  We administer numerous cash card or discount card programs on behalf of consumer marketing organizations and, to a lesser extent, other Plan Sponsors. Those cards may be “stand-alone” pharmacy discount programs or bundled with other healthcare discount arrangements. Under those discount programs, individuals who present a discount card at one of our participating network pharmacies or who order medications through one of our mail service pharmacies receive prescription medications at a discounted price as compared to the retail or “cash” price.

 

Clinical Services, Formulary and Benefit Design.  We work closely with our Plan Sponsors to offer formularies and benefit plan designs that meet their specific program requirements. Formulary design assists in controlling program costs to the extent consistent with accepted medical and pharmacy practices and applicable law, primarily through three principal techniques: (i) tiered co-pay or percentage coinsurance designs, which provide lower co-pays for formulary preferred medications and higher co-pays for non-preferred medications, or charge a percentage of the prescription price to the member at different percentages based on the preferred or non-preferred status of a drug; (ii) generic substitution, which involves the selection of a generic drug as a cost-effective alternative to its bio-equivalent brand name drug; and/or (iii) therapeutic interchange, which involves the selection of a lower cost brand name drug as an alternative to a higher priced brand name drug within a therapeutic class. Formulary rebates on brand name drugs are negotiated with drug manufacturers based on the drug’s preferred status and are typically shared with Plan Sponsors. We do not manage a rebate program on our own. Rather, our rebates are managed and administered by a third party vendor.

 

Many commercial Plan Sponsors do not restrict coverage to a specific list of pharmaceuticals and are said to have no formulary or an “open” formulary that generally covers all drugs approved by the FDA except for certain classes of excluded pharmaceuticals, such as certain vitamins and cosmetics, experimental, investigative or over-the-counter drugs. Other Plan Sponsors utilize a “restricted” or “closed” formulary. We actively involve our clinical staff with a Plan Sponsor’s Pharmacy and Therapeutics Committee, which we refer to as the P&T Committee, to assist with the design of clinically appropriate formularies in order to control pharmacy costs. Typically, the P&T Committee consists of a Plan Sponsor’s physicians, pharmacists and others, including independent healthcare professionals. The ultimate composition and approval of the formulary resides with the Plan Sponsor. The primary method for assuring formulary compliance on behalf of a Plan Sponsor is by managing pharmacy reimbursement to ensure that non-formulary drugs are not dispensed, or dispensed with higher co-payments, subject to certain limited exceptions. Closed formularies typically identify a limited number of drugs for preferred status within each therapeutic class to be the preferred drug agent in order to treat most medical conditions appropriately. Provision is also made for coverage of non-formulary or non-preferred drugs, other than certain excluded products, when documented to be clinically appropriate for a particular member. Since non-formulary drugs are rejected for coverage by our real-time point of sale system, we employ procedures to override restrictions on non-formulary medications for a particular member and period of treatment when necessary.

 

Drug Usage Evaluation.  Drug usage is evaluated on a concurrent, prospective and/or retrospective basis utilizing our real-time point of sale system and information systems for multiple drug interactions, duplication of therapy, step therapy protocol enforcement, minimum/maximum dose range edits, compliance with prescribed utilization levels and early refill notification. In addition, we maintain a drug utilization review

program through which select medication therapies are reviewed and data is collected, analyzed and reported for management applications. At the request of Plan Sponsors our clinical pharmacy team also provides clinical reviews of a patient’s prescription history and medical condition, and our clinical pharmacist provides analysis and recommendations for the patient’s future treatment.

 

Pharmacy Data Services.  Our proprietary software and data management tools permit Plan Sponsors to access key industry measures, which are updated daily and delivered through secure internet-based access. Plan Sponsors often monitor these key measures associated with their members in order to review the effectiveness and success of our Traditional Pharmacy Services programs. In addition, we also build custom reporting systems to support specific customer projects.

 

Home Health

 

Home Infusion Therapy

 

We are a leading provider of home infusion therapy services in the United States. Home infusion therapy involves the preparation, delivery, administration and clinical monitoring of pharmaceutical treatments that are administered to a patient via intravenous (into the vein), subcutaneous (into the fatty layer under the skin), intramuscular (into the muscle) and intra-spinal (into the membranes around the spinal cord) methods. These methods are employed when a physician determines that the best outcome can be achieved through utilization of one or more of these therapies provided through one or more of the routes of administration described above.

 

Diseases commonly requiring infusion therapy include infections that are unresponsive to oral antibiotics, cancer and cancer-related pain, dehydration and gastrointestinal diseases or disorders that prevent normal functioning of the gastrointestinal tract. Other conditions treated with infusion therapies may include chronic diseases such as congestive heart failure, Crohn’s disease, hemophilia, immune deficiencies, multiple sclerosis, rheumatoid arthritis, growth disorders and genetic enzyme deficiencies, such as Gaucher’s or Pompe’s disease.

 

Our home infusion therapy services primarily involve the intravenous administration of medications treating a wide range of acute and chronic conditions, such as infections, nutritional deficiencies, various immunologic and neurologic conditions, pain and palliative care and cancer. Our services are usually provided in the patient’s home, but may also be provided at out patient clinics, the physician’s office or at one of our ambulatory infusion centers. We receive payment for our home health services and medications pursuant to provider agreements with government sources, such as Medicare and Medicaid programs, MCOs and other commercial insurance.

 

We provide a wide array of home infusion therapy products and services to meet the diverse needs of physicians, patients and payors. The therapies most commonly provided are listed below:

 

 

Patients generally are referred to us by physicians, hospital discharge planners, MCOs and other referral sources. Our medications are compounded and dispensed under the supervision of a registered pharmacist in a pharmacy clean room. The therapy is typically administered in the patient’s home by a registered nurse or trained caregiver. Depending on the preferences of the patient or the payor, these services may also be provided at one of our ambulatory infusion centers, a physician’s office or another alternate site.

 

We currently have relationships with a large number of MCOs and other third party payors to provide specialty pharmacy products and services, including infusion therapy services. These relationships are provided primarily at a local or regional level. A key element of our business strategy is to leverage our relationships, geographic coverage, clinical expertise and reputation in order to gain national contracts with payors. Our infusion services contracts typically provide for us to receive a fee for preparing and delivering medications to patients in their homes. Pricing is typically negotiated in advance on the basis of AWP minus some percentage of contractual discount, or ASP, plus some percentage of contractual discount, which is the typical means of negotiating pricing in the industry. In addition, we typically receive a per diem payment for the service component of care provided to patients in connection with infusion services and a visit rate for the associated skilled nursing provided.

 

Home Nursing

 

We conduct our home nursing and therapy services operations through licensed and Medicare-certified agencies. Our healthcare professionals provide medically necessary healthcare services to adult and pediatric patients in their homes, including those suffering from chronic and acute illnesses, those in recovery from surgical procedures and those who require monitoring or care for other reasons. Our key services and program offerings are skilled nursing; wound care; oncology nursing and infusion nursing; rehabilitation services, which includes physical therapy; occupational therapy and speech language pathology; medical social services; and home health aid services. Our services are provided by trained nurses, physical, occupational and speech therapists, infusion specialists, wound care specialists and social workers. Our home nursing offerings also include private duty nursing care, in which our nurses provide services on an hourly or shift basis, and intermittent nursing care, in which our nurses provide services on an irregular basis or for a limited period of time. Our nurses provide medical care to these patients through pain and symptom management, wound treatment and management, medication management, infusion therapy services, skilled assessment and observations of patients through home visits and telemonitoring and education to patients and family caregivers.

Our typical home nursing location employs registered nurses, licensed practical nurses, physical, occupational and speech therapists, infusion specialists and wound care specialists. Most of our home nursing services are provided to beneficiaries of government sponsored programs. The majority of our skilled home nursing services are reimbursed by Medicare, based on the “prospective payment system” rates per episode, which vary by the complexity of patient condition. Typically, we receive predetermined payment based on a 60-day episode of skilled nursing care, assuming the nurses have made a minimum of five visits to the patient during that period. Our pediatric and adult private duty nursing services are generally billed on an hourly basis and are reimbursed primarily through one of a number of MCOs contracted by the TennCare program to administer these services on behalf of state residents who qualify for such benefits. TennCare is our largest Medicaid customer. The services are reimbursed on a per diem basis based on pre-established guidelines and payment schedules.

 

Suppliers

 

Effective August 25, 2009, we entered into a prime vendor agreement with ABDC under which we purchase from ABDC substantially all of our prescription products, subject to certain minimum periodic purchase levels and excluding purchases of therapeutic plasma products and products under which we are the preferred or the exclusive distributor of a product purchased directly from a manufacturer. Under the prime vendor agreement, we also participate in ABDC’s PRxO Generics^tm Program and purchase from ABDC a specified percentage of our requirements for generic pharmaceuticals. Pricing of pharmaceutical products under the agreement is generally based on published WAC, less certain discounts, rebates and other adjustments that vary with the type of products being purchased. As a result of our acquisition of CHS, we entered into an amendment to the prime vendor agreement to modify the scope of the security interest in the collateral granted under the prime vendor agreement to provide ABDC with a lien on our and our subsidiaries’ inventory, accounts and proceeds. Also in connection with the acquisition, Jefferies Finance LLC, as agent for the first priority secured parties, and ABDC entered into an intercreditor agreement pursuant to which ABDC has subordinated the lien securing our obligations under the prime vendor agreement to the liens securing the New Credit Facility.

 

Information Technology

 

In each of the last three years, our investment in information technology has increased as we continue to upgrade our core infrastructure and systems. In 2009, we continued our focus on the migration to a new integrated accounts receivable, pharmacy dispensing and clinical management system for the specialty pharmacy business. We believe that this new system will yield increased efficiencies and improved controls when dispensing or transferring prescriptions and provide improved data and management reporting. The new system, in conjunction with other information technology infrastructure improvements, will enhance our product and service offerings to payors, physicians and pharmaceutical companies. In 2010, we continue to focus on migrating to our new platform, as well as leveraging new technology solutions to transform how we interface with our patients, referral sources and valued partners.

 

We bill payors and track all of our accounts receivable through computerized billing systems. These systems allow our billing staff the flexibility to review and edit claims in the system before they are submitted to payors. Claims are submitted to payors either electronically or through the mail. We utilize electronic claim submission whenever possible to expedite claim review and payment, and to minimize errors and omissions.

 

Sales and Marketing

 

We have approximately 140 sales representatives and over 1,000 MCO payor relationships. Our sales and marketing efforts are focused on payors, manufacturers, patients and physicians, and are driven by dedicated managed markets, pharmaceutical relations and physician sales teams. Our sales and marketing strategies seek to develop strong relationships with key referral sources, such as physicians, hospital discharge planners, case managers, long-term care facilities and other healthcare professionals, primarily through regular contact with the referral sources. Contracts with healthcare payors, including MCOs, are an integral component for sales

success. Additionally, contracting with pharmaceutical manufacturers for distribution and management services for newly approved and/or marketed specialty medications continues to contribute to our revenue growth.

 

Intellectual Property

 

We own and use a variety of trademarks, trade names and service marks, including BIOSCRIP, BIOSCRIPCARE, SCRIPMINE, SCRIP PHARMACY, ADIMA, SCRIP PBM, INFOSCRIP, MD STAR, CRITICAL HOMECARE SOLUTIONS, CHS CRITICAL HOMECARE SOLUTIONS, INFUSION PARTNERS, Infusion Care, INFUSION SOLUTIONS, INC., INFUSION CARE SYSTEMS, NE-HT, WILCOX HOME INFUSION and Deaconess HomeCare, each of which has either been registered at the state or federal level or is being used pursuant to common law rights.

 

Competition

 

We believe we have been able to successfully compete based on our reputation, the strength of our growing presence in the eastern United States and our ability to effectively market our services at the national, regional and local levels and that these factors place us in a strong position against existing and potential competitors.

 

Pharmacy Services

 

We face substantial competition within the pharmaceutical healthcare services industry and the past year has seen even more consolidation among PBMs, specialty pharmacy providers and pharmaceutical wholesalers. We expect to see this trend continue in the coming year and it is uncertain what effect, if any, these consolidations will have on us or the industry as a whole. The industry also includes a number of large, well-capitalized companies with nationwide operations and capabilities in the specialty services and PBM services arenas, such as CVS Caremark Corporation, Express Scripts, Inc., Medco Health Solutions Inc., Walgreen Company, Apria Healthcare Group Inc. and many smaller organizations that typically operate on a local or regional basis. In the Specialty Pharmacy Services business, we compete with several national and regional specialty pharmaceutical distribution companies that have substantial financial resources and which also provide products and services to the chronically ill such as CVS Caremark, Express Scripts, Medco Health Solutions and Walgreens.

 

Some of our Specialty Pharmacy Services competitors are under common control with, or are owned by, pharmaceutical wholesalers and distributors or retail pharmacy chains and may be better positioned with respect to the cost-effective distribution of pharmaceuticals. Some of our primary competitors, such as US Bioservices, an AmerisourceBergen Specialty Group company, may have a substantially larger market share in many of our specialty disease therapies than our existing market share. Moreover, some of our competitors may have secured long-term supply or distribution arrangements for prescription pharmaceuticals necessary to treat certain chronic disease states on price terms substantially more favorable than the terms currently available to us. As a result of such advantageous pricing, we may be less price competitive than some of these competitors with respect to certain pharmaceutical products. However, we do not believe that we compete strictly on the selling price of particular products or services in either of our pharmacy services businesses; rather, we offer customers the opportunity to lower overall pharmaceutical and medical costs through therapy management while receiving high quality care.

 

Home Health

 

We believe that competition in our home infusion business lines is based on quality of care and reputation. Our national competitors include Option Care, Inc. (a subsidiary of Walgreen Co.), Apria Healthcare Group Inc. (which includes its subsidiary, Coram, Inc.), Critical Care Systems, Inc. (a subsidiary of Medco Health Solutions, Inc.) and Omnicare, Inc. Within each market, however, our main competitors continue to be local independent providers, as the industry remains highly fragmented. There are only a small number of regional competitors, none of which we believe are currently a competitive threat within our geographic service areas.

The home nursing market also tends to be dominated by local providers. With respect to our home nursing services, we compete primarily with Gentiva Health Services, Inc., Almost Family, Inc., Amedisys, Inc. and LHC Group, Inc. on a national level. The home nursing segment is highly fragmented with many competing local providers in our areas of service.

 

Properties

 

Our executive offices are located in Elmsford, New York, and we maintain corporate offices in Eden Prairie, Minnesota and Conshohocken, Pennsylvania. Our mail service operations are located in Columbus, Ohio; Lake Success, New York; and Burbank, California. Our community pharmacies are located in numerous major metropolitan locations across the United States. We currently lease all of our properties from third parties under various lease terms expiring over periods extending through 2019, in addition to a number of non-material month-to-month leases. Our property locations are as follows:

 

 

 

 

Legal Proceedings

 

The sellers of a company, Northland Pharmacy, acquired by a BioScrip subsidiary are claiming a right to additional purchase price of at least $5.64 million in connection with an earn out provision in the stock purchase agreement regarding the acquisition. The sellers, named DiCello, first sued in federal court in Ohio in July 2007, but the court stayed the case and directed arbitration of the disagreement by the accounting firm KPMG, LLP, as the stock purchase agreement provides. We deny owing the sellers any additional purchase price. The parties have made extensive filings as directed by the arbitrator and are waiting for either the

arbitrator’s decision or instructions as to further proceedings in the matter. We are confident in our position and do not believe an adverse ruling is likely; however, there can be no assurance that an adverse ruling will not be rendered. If the arbitrator rules in favor of DiCello, such ruling could have a material adverse effect on our business, operations or financial position.

 

On March 31, 2009, Professional Home Care Services, Inc., or PHCS, which is one of the subsidiaries we acquired through our acquisition of CHS, was sued by Alexander Infusion, LLC, a New York-based home infusion company, in the Supreme Court of the State of New York. The complaint alleges principally breach of contract arising in connection with PHCS’s failure to consummate an acquisition of Alexander Infusion after failing to satisfy the conditions to PHCS’s obligation to close. Alexander Infusion has sued for $2.5 million in damages. We believe Alexander Infusion’s claims to be without merit and intend to continue to defend against the allegations vigorously. Furthermore, under the Merger Agreement, subject to certain limits, the Former CHS Stockholders agreed to indemnify us in connection with any losses arising from claims made in respect of the acquisition agreement entered into between PHCS and Alexander Infusion.

 

On September 18, 2008, a complaint was filed in federal court in New Mexico, naming BioScrip Pharmacy Services, Inc., a subsidiary of ours, as a defendant. The action is captioned Hope Huerta as Next Friend and Parent of Blanca M. Valdez, a minor v. Spectrum Chemicals and Laboratory Products, et. al., 1:08-cv-00853 (D. NM). The complaint alleges that our and the other defendants’ actions are responsible for alleged injuries to the plaintiff due to the administration of medication that allegedly had been recalled by the manufacturer, Spectrum Chemicals, and was dispensed by us. The complaint asserts various tort causes of action, including but not limited to, strict products liability and negligence, breach of warranties and violations of New Mexico statutes. The complaint seeks unspecified money damages, including punitive damages. We have answered the complaint denying the material allegations. We intend to deny the allegations and defend the action vigorously. We have filed a motion for summary judgment and are awaiting the court’s ruling.

 

Employees

 

As of June 9, 2010, we had 2,294 full-time, 139 limited full-time, 180 part-time and 1,039 per diem employees, including 278 licensed pharmacists. Limited full-time employees work 30 hours per week. Per diem employees are defined as those available on an as-needed basis. None of our employees are represented by any union and, in our opinion, relations with our employees are satisfactory.

 

The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. The healthcare regulatory landscape is also subject to frequent change. Laws and regulations in the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. Moreover, our business is impacted not only by those laws and regulations that are directly applicable to us but also by certain laws and regulations that are applicable to our payors, vendors and referral sources. While our management believes that we are in substantial compliance with all of the existing laws and regulations applicable to us stated below, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry, federal and state regulation and enforcement priorities in this area may increase, the impact of which cannot be predicted. There can be no assurance that we will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon our business and results of operations. In addition, the new health reform legislation enacted in March 2010 will have considerable but uncertain impact on the financing and delivery of health care and conceivably could have a material adverse effect on our business.

 

Among the various federal and state laws and regulations which may govern or impact our current and planned operations are the following:

 

Medicare and Medicaid Reimbursement

 

Many of the products and services that we provide are reimbursed by Medicare and Medicaid and are therefore subject to extensive government regulation. Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older and for some disabled persons with certain specific conditions. The Medicare Program currently consists of four parts: Medicare Part A, which covers, among other things, inpatient hospital, skilled nursing facility, home nursing and certain other types of healthcare services; Medicare Part B, which covers physicians’ services, outpatient services, items and services provided by medical suppliers, and a limited number of prescription drugs; Medicare Part C, which generally allows beneficiaries to enroll in private healthcare plans (known as Medicare Advantage plans); and Medicare Part D, established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which we refer to as the Medicare Modernization Act, which provides for a voluntary prescription drug benefit.

 

The Medicaid Program provides medical benefits to groups of low-income individuals, some who may have inadequate or no medical insurance. Although the federal government establishes general guidelines for the program, Medicaid is a state administered program and each state sets its own guidelines regarding eligibility and covered services, subject to certain minimum federal requirements.

 

Congress often enacts legislation that affects, positively or negatively, the reimbursement rates of Medicare providers and that also may impact Medicaid providers. Generally, Medicare provider payment modifications occur in the context of budget reconciliation; however, Medicare changes also may occur in the context of broader healthcare policy legislation, including the healthcare reform legislation recently enacted currently under consideration by Congress. In the last five years, Congress has reduced Medicare reimbursement for various providers, including Medicare Part A certified home health agencies, and Medicare Part B suppliers. Recent legislation that has affected our Medicare reimbursement rates for home infusion therapy and Medicare reimbursement rates for home health includes primarily the Medicare Modernization Act and the Deficit Reduction Act of 2005, which we refer to as the Deficit Reduction Act.

 

Approximately 29% and 33% of our pro forma revenues for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively, were derived directly from Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide benefits to managed care entities that provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, our direct reimbursements from government-sponsored healthcare programs, as well as services fees that relate indirectly to such reimbursements, could be adversely affected. In addition, certain state Medicaid programs

only allow for reimbursement to pharmacies residing in the state or in a border state. While our management believes that we can service each company’s current Medicaid patients through existing pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs. To the extent such requirements are enacted, certain therapeutic pharmaceutical reimbursements could be adversely affected.

 

Medicare Parts B and D.  We receive reimbursement for infusion therapy under both Medicare Part B and Medicare Part D. In connection with the enactment of the Medicare Modernization Act, CMS promulgated a substantial volume of new regulations implementing the federal government’s Voluntary Prescription Drug Benefit Program, known as Medicare Part D. CMS has attempted to clarify issues regarding coverage of infused drugs under Medicare Part D and the relationship with existing coverage under Medicare Part B. In certain cases, both Medicare Parts B and D will cover identical infused drugs. CMS has stated that coverage is generally determined by the diagnosis and the method of drug delivery. For example, parenteral nutrition is covered under Medicare Part B for patients with a non-functioning digestive tract. In all other situations, Medicare Part D covers parenteral nutrition. Confusion regarding the appropriate coverage of infusion therapy could adversely affect our business.

 

Under Medicare Part D, the ingredient costs and dispensing fees associated with the administration of home infusion therapies are covered under Medicare. Under Medicare Part B, no separate administration reimbursement is available. For eligible Medicare beneficiaries, the cost of equipment and supplies associated with infused covered Medicare Part D drugs will continue to be reimbursed on a limited basis under Medicare Part A or Part B, as applicable, and the cost of professional services associated with infused covered Medicare Part D drugs will continue to be reimbursed on a limited basis under Medicare Part A. For beneficiaries who are dually eligible for benefits under Medicare and a state Medicaid program, Medicaid covered infused drugs will be reimbursed under individual state coverage guidelines if coverage is denied by Medicare.

 

Both the OIG and CMS continue to issue guidance with regard to the Medicare Part D program and compliance with related federal laws and regulations by Part D sponsors and their subcontractors. The receipt of federal funds made available through this program may be subject to compliance with these new regulations as well as the established laws and regulations governing the federal government’s payment for healthcare goods and services. There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D program and these risks could negatively impact our business in future periods.

 

Current Medicare Reimbursement for Home Health Agencies.  Home health agencies, including ours, are reimbursed under the Medicare program on a prospective payment system. Home health services include: