We are maintaining our Neutral recommendation on BioScrip Inc. (BIOS) with a target price of $7.25.

BioScrip reported a loss of 4 cents per share from continued operations in the first quarter of fiscal 2012, wider than the year-ago quarter loss of 2 cents. Reported results also missed the Zacks Consensus Estimate of break-even results.

Earlier in 2010, BioScrip initiated a strategic assessment of its business and operations based on which the company started focusing on its fast growing Infusion/Home Health Services segment. As a result, on May 4, 2012, BioScrip divested certain Pharmacy Services assets including pharmacy mail operations and community retail pharmacy stores to Walgreen Co. (WAG) for $225 million, including approximately $161 million in cash and retention.

Based onthe huge potential of the Infusion Services business leading to persistent growth of BioScrip in this segment (up 18.9% year over year to $109.1 million in the last reported quarter), the company has taken a strategic initiative to focus more on this rising sector. The company recently repositioned certain assets of its pharmacy business and redirected the resources of the divested business to support the existing Infusion services business.

We are encouraged by the company’s decision to invest in the Infusion and Home Health industry where it has a strong presence and enjoys competitive advantages. Our views are also buoyed by the estimates of the National Home Infusion Association (‘NHIA’), which stated that the alternate-site infusion therapy sector currently represents $9-$11 billion per year in US health care expenditure.

Further, formerly, BioScrip’s Pharmacy Services segment included community pharmacy stores, mail, traditional especially pharmacy mail and PBM and Cash Card services. However, after the recent sale of the assets to Walgreen, the company now has only the PBM services and cash card business left with it.

Nevertheless, the company is hopeful about the continued growth in PBM and cash card business. The company expects revenue in the range of $100-$105 million for fiscal 2012. We remain optimistic about BioScrip’s PBM growth and think that the company is perfectly positioned to leverage its strong clinical reputation for growth.

However, BioScrip’s highly leveraged balance sheet continues to be a drag on the bottom line and remains a key area of concern, in our view. Moreover, the Home Health industry was impacted by the reduction in Medicare reimbursement and the new face-to-face requirement. This may temper BioScrip’s sales growth going forward.

Additionally, we remain apprehensive owing to mounting competitive pressures from players like CVS Caremark (CVS), Express Scripts (ESRX) as well as many smaller organizations that operate on a local or regional basis. Increased competition has led to lower pricing and increased rebate sharing, thereby putting severe pressure on margins.

BioScrip currently maintains a Zacks#3 Rank, which translates into a short-term Hold rating.

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