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Friday, September 15, 2006

A Play For Home Health Services Sector- Option Care (OPTN)

By Yaser Anwar, CSC of Equity Investment Ideas

OPTN provides home infusion pharmacy services and specialty pharmacy services in the United States. It offers various home infusion therapies to patients with acute or chronic conditions for treatment at home or in a physician’s office, as well as at the company’s ambulatory infusion centers. OPTN has 53 owned and managed locations & 65 franchised locations in the US. (Y! Finance)

OPTN is growing almost twice as fast as its competition. OPTN reported results for the quarter on June 30, 2006. Revenue was $158 million for the 2nd Q, a 32% increase vs $119 million in 2nd Q 05. Home infusion and specialty pharmacy services revenue increased 36% and 32% respectively compared to the prior year period. That’s almost twice its sector's average increase & the shares are trading at a multiple of 20, reasonable given its quarterly revenue growth of 30%.

OPTN took the following positive steps in spurring its business:

Signing a 3 year exclusive agreement with Blue Cross Blue Shield of Michigan & Blue Cross Network (BCBSM) to provide specialty pharmacy services to its 4.7 million members.

Re-signed the MedImmune distribution agreement for Synagis which OPTN expects to grow 15% to 20% next season.

Re-aligned field operations to focus on productivity at all fronts including sales, process improvement and asset management.

Accomplished the divestitures of non-strategic home health agencies.

Completed the integration of all acquisitions consummated this year. Improved sales and profitability of start-up operations & cash flow.

UBS recently upgraded the shares & OPTN is in accumulation mode by IIs, which have just increased their share ownership by 7% during the past few months. Both are good indicators of coming appreciation of the Option Care's stock.

Clinical labs have been able to increase sales through sustainable, in my view, price increases and have benefited from an increase in tests per requisition. Dialysis services received a 1.6% rate increase from Medicare in 2006, its second in about five years.

I think that most services offered by these companies, including home health care, rehabilitation services, clinical laboratory services, and dialysis, have been benefiting from private pay rate hikes and favorable demographic trends.

For the longer term, I think the expanding population and a faster growing subgroup aged 50 and older will continue to spur demand for health care services. OPTN is a clear beneficiary in this trend.

Disclosure: I do not own OPTN

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