Omnicare Lags Estimates - Analyst Blog

Leading pharmaceutical care provider, Omnicare Inc. (OCR) reported second-quarter 2010 adjusted (excluding one-time expenses) earnings per share of 48 cents, lower than the Zacks Consensus Estimate of 62 cents and the year-ago earnings of 64 cents.

Revenues

Revenue was $1519.1 million, down 1.4% year over year, and lower than the Zacks Consensus Estimate of $1,539 million.

Segment-wise

The Pharmacy Services segment generated sales of $1,491.8 million in the second quarter, down 0.5% year over year. Segment revenues were slightly lower on a year-over-year basis largely due to higher utilization of generic drugs, lower prescription volumes due to a fall in occupancy rates, reduced utilization trends and a lower number of beds served. These factors were partly offset by inflation in drug pricing and growth in the specialty pharmacy operation.

Omnicare dispensed 29,762,000 prescriptions in the second quarter, down 3.8% year over year. As of Jun 30, 2010, the company serviced long-term care facilities, including chronic care settings, of about 1,353,000 beds, down 2.2% from the year-ago period.

The Contract Research segment had sales of $27.4 million in the second quarter, down 32.8%. Second-quarter figures for both 2010 and 2009 contained reimbursable out-of-pocket expenses of $3.3 million and $5.2 million, respectively. Consequently, adjusted revenues of $24.0 million came in lower than $35.6 million in the year-year period.

Margins

Adjusted operating profit at the Pharmacy Services segment was $142.8 million in the second quarter, down 13.9% year over year. The drop in segment operating profit was a result of the ill effects of lower prescription volumes and operational efficiencies, a fall in reimbursement rates and more competitive pricing. These factors were partly countered by additional utilization of higher-margin generic drugs, inflation in drug prices, and productivity enhancement steps, most importantly the Omnicare Full Potential Plan.

Adjusted operating loss at the Contract Research segment was $1.7 million, down from a profit of $1.6 million in the year-ago period. Its backlog, as of Jun 30, 2010, was $139.8 million.

Balance Sheet and Cash Flow

Cash flow from continuing operations was $35.3 million in the reported quarter, down from $141.5 million in the year-ago quarter. Included in the 2010 figure was a payment of $37.9 million for a settlement reached in November 2009, and $7.3 million toward premium associated with the early redemption of 6.75% notes.

Omnicare had cash and cash equivalents of $394.9 million, as of Jun 30, 2010, up 44.3% year over year. Long-term debt (including notes and convertible debentures) was sizeable at $2.2 billion, approximately flat on a year-over-year basis. Total debt-to-capital ratio, as of June 30, 2010, was 36.0%, down from 37.2% in the year-ago period. It also authorized a fresh $200 million share repurchase program during the second quarter.

Outlook

Due to weakness in prescription volumes and the Contract Research segment, Omnicare reduced its adjusted earnings per share, for 2010, to a range of $2.00 to $2.10 from $2.60 to $2.70 earlier. The company also expects operating cash flow in the range of $400 to $450 million for 2010 (excluding legal settlements and premium payments).

Omnicare is a market leader in an industry that is essential to serving the needs of the long-term care population. The company has reduced costs and increased efficiency through its Full Potential Plan. However, the beneficial effects are partly offset by pressure from reimbursement cuts.

Longer term, the company will be able to offset some of these reimbursement cuts through better purchasing. Generics coming to market in the next few quarters present a substantial profitability opportunity due to Omnicare’s higher exposure to the institutional pharmacy channel than in past years.
 
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