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  • 10-K (Feb 19, 2013)
  • 10-K (Feb 23, 2012)
  • 10-K (Feb 24, 2011)
  • 10-K (Feb 25, 2010)
  • 10-K (Feb 26, 2009)

 
Quarterly Reports

 
8-K

 
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Omnicare 10-K 2010
form10-k_2009.htm
 
 

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF>
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
 
Commission File No. 1-8269

OMNICARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
31-1001351
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
OMNICARE, INC.
1600 RIVERCENTER II
100 EAST RIVERCENTER BOULEVARD
COVINGTON, KENTUCKY  41011
(Address of Principal Executive Offices)
859-392-3300
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
 
 
Name of Each Exchange on which Registered
 
 
Common Stock ($1.00 Par Value)
New York Stock Exchange
4.00% Trust Preferred Income Equity Redeemable
 
 
Securities issued by Omnicare Capital Trust I and
    guaranteed by Omnicare, Inc.
New York Stock Exchange
Series B 4.00% Trust Preferred Income Equity
 
 
Redeemable Securities issued by Omnicare Capital
    Trust II and guaranteed by Omnicare, Inc.
New York Stock Exchange
 


 
 

 

Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes  x  No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes  o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer      x                              Accelerated filer                           o
Non-accelerated filer        o                              Smaller reporting company           o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes  o  No x
 
Aggregate market value of the registrant’s voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange Composite Transaction Listing on the last business day of the registrant’s most recently completed second fiscal quarter (i.e., June 30, 2009) ($25.76 per share):  $2,985,243,000.
 
As of January 29, 2010, the registrant had 120,280,652 shares of Common Stock outstanding.
 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Omnicare, Inc.’s (“Omnicare”, the “Company” or the “Registrant”) definitive Proxy Statement for its 2010 Annual Meeting of Stockholders, to be held May 25, 2010, are incorporated by reference into Part III of this report.  Definitive copies of Omnicare’s 2010 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the Company’s fiscal year.

 
 

 

 
2009 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
 
PART I
 
 
PAGE
 
Item 1.
Business                                                                                                             
 4
Item 1A.
Risk Factors                                                                                                             
29
Item 1B.
Unresolved Staff Comments                                                                                                             
43
Item 2.
Properties                                                                                                             
44
Item 3.
Legal Proceedings                                                                                                             
45
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                             
49
 
Additional Item - Executive Officers of the Company                                                                                                         
49
 
PART II
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
 
51
Item 6.
Selected Financial Data                                                                                                             
53
Item 7.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
 
56
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk                                                                                                             
95
Item 8.
Financial Statements and Supplementary Data                                                                                                             
96
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
 
169
Item 9A.
Controls and Procedures                                                                                                             
169
Item 9B.
Other Information                                                                                                             
170
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
170
Item 11.
Executive Compensation                                                                                                             
170
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
 
171
Item 13.
Certain Relationships and Related Transactions, and
Director Independence
 
171
Item 14.
Principal Accountant Fees and Services                                                                                                             
171
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
172
 
 

 
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As used in this document, unless otherwise specified or the context otherwise requires, the terms “Omnicare,” “Company,” “its,” “we,” “our” and “us” refer to Omnicare, Inc. and its consolidated subsidiaries.
 
PART I
ITEM 1. – BUSINESS
 
Background
 
Omnicare was formed in 1981.  Today, Omnicare is a leading pharmaceutical services company.  We are the nation’s largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term healthcare institutions.  Our clients include primarily skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), retirement centers, independent living communities, hospitals, hospice, and other healthcare settings and service providers.  Omnicare is also a provider of specialty pharmaceutical products and support services.  Omnicare provides its pharmacy services to long-term care facilities as well as chronic care and other settings comprising approximately 1,377,000 beds, including approximately 68,000 patients served by the patient assistance programs of its specialty pharmacy services business.  The comparable number at December 31, 2008 was approximately 1,390,000 (including 68,000 patients served by the patient assistance programs of the specialty pharmacy services business).  We provide our pharmacy services in 47 states in the United States (“U.S.”), the District of Columbia and in Canada at December 31, 2009.  As well, Omnicare provides operational software and support systems to long-term care pharmacy providers across the United States.  Omnicare’s contract research organization provides comprehensive product development and research services for the pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostic industries in 31 countries worldwide.
 
In the second quarter of 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the disposal group”) that are non-strategic in nature.  The disposal group, historically part of Omnicare’s Pharmacy Services segment, primarily represents ancillary businesses which accompanied other more strategic assets obtained by Omnicare in connection with the Company’s institutional pharmacy acquisition program.  The results from continuing operations for all periods presented have been revised to reflect the results of the disposal group as discontinued operations, including certain expenses of the Company related to the divestiture.
 
We operate in two business segments.  The Company’s primary line of business, Pharmacy Services, provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services, data management services and medical supplies to SNFs, ALFs, retirement centers, independent living communities, hospitals, hospice, and other healthcare settings and service providers.  Pharmacy Services purchases, repackages and dispenses pharmaceuticals, both prescription and non-prescription, and provides computerized medical record-keeping and third-party billing for residents in these facilities.  We also provide consultant pharmacist services, including evaluating monthly patient drug therapy, monitoring the drug distribution system within the nursing facility, assisting in compliance with state and federal regulations and providing proprietary clinical and health management programs.  In addition, our Pharmacy Services segment provides a variety of other products and services, including intravenous medications and nutrition products (infusion therapy services), respiratory therapy services, medical supplies and equipment, clinical care planning and financial software information systems, electronic medical records systems, pharmaceutical informatics services, pharmacy benefit management services, retail and mail-order pharmacy services, pharmaceutical care management for hospice agencies and product support and distribution services for specialty pharmaceutical manufacturers.  We also provide pharmaceutical case management services for retirees, employees and dependents who have drug benefits under corporate-sponsored healthcare programs.  Since 1989, we have been involved in a program to acquire providers of pharmaceutical products and related pharmacy management services and medical supplies to long-term care facilities and their residents.  Additional information regarding acquisitions is presented at the “Acquisitions” note of the Notes to our 2009 Consolidated Financial Statements, included at Item 8 of this Filing.  The Pharmacy Services segment has no operating locations outside of the U.S. and Canada.  The Pharmacy Services segment comprised approximately 97% of the Company’s total net sales during each of the three years ended December 31, 2009, 2008 and 2007.
 
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Our other business segment is contract research organization services (“CRO Services”).  CRO Services is a leading international provider of comprehensive product development and research services to client companies in the pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostics industries.  Our CRO Services segment provides support for the design of regulatory strategy and clinical development of pharmaceuticals by offering individual, multiple, or comprehensive and fully integrated services including clinical, quality assurance, data management, medical writing and regulatory support for our client’s drug development programs.  As of December 31, 2009, our CRO Services segment operated in 31 countries around the world.  The CRO Services segment comprised approximately 3% of the Company’s total net sales during each of the three years ended December 31, 2009, 2008 and 2007.
 
Financial information regarding our business segments is presented at the “Segment Information” note of the Notes to our 2009 Consolidated Financial Statements, included at Item 8 of this Filing.
 
Pharmacy Services
 
We purchase, repackage and dispense prescription and non-prescription medication in accordance with physician orders and deliver such prescriptions to long-term care facilities for administration to individual residents by the facilities’ nursing staff.  We service long-term care facilities typically within a radius of approximately 150 miles of our pharmacy locations and maintain a 24-hour, seven-day per week, on-call pharmacist service for emergency dispensing and delivery, and for consultation with the facility's staff or attending physician.
 
Upon receipt of a prescription, the relevant resident information is entered into our computerized dispensing and billing systems.  At that time, the dispensing system checks the prescription for any potentially adverse drug interactions, duplicative therapy or resident sensitivity.  When required and/or specifically requested by the physician or patient, branded drugs are dispensed, and generic drugs are substituted in accordance with applicable state and federal laws as requested by the physician or resident.  Subject to physician approval and oversight, and in accordance with our pharmaceutical care guidelines, we also provide for patient-specific therapeutic interchange of more efficacious and/or safer drugs for those presently being prescribed.  See "The Omnicare Geriatric Pharmaceutical Care Guidelines®" below for further discussion.
 
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We utilize a unit-of-use drug distribution system.  This means that our prescriptions are packaged for dispensing in individual doses.  This differs from prescriptions filled by retail pharmacies, which typically are dispensed in vials or other bulk packaging requiring measurement of each dose by or for the patient.  Our delivery system is intended to improve control over pharmaceutical distribution and patient compliance with drug therapy by increasing the accuracy and timeliness of drug administration.
 
In conjunction with our drug distribution system, our computerized record keeping/documentation system is designed to result in greater efficiency in nursing time, improved control and reduced waste in client facilities, and lower error rates in both dispensing and administration.  We also furnish intravenous administration of medication and nutrition therapy and respiratory therapy services, medical supplies and equipment and clinical care planning and software support systems.  We believe we distinguish ourselves from many of our competitors by also providing proprietary clinical programs.  For example, we have developed a ranking of drugs based on their relative clinical effectiveness for the elderly and by cost to the payor.  We use these rankings, which we call the Omnicare Geriatric Pharmaceutical Care Guidelines®, or Omnicare Guidelines®, to more effectively manage patient care and costs.  In addition, we provide health and outcomes management programs for the large base of elderly residents of the long-term facilities we serve.
 
Consultant Pharmacist Services

Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care.  The Omnibus Budget Reconciliation Act of 1987 ("OBRA of 1987") implemented in 1990 sought to further upgrade and standardize care by setting forth more stringent standards relating to planning, monitoring and reporting on the progress of prescription drug therapy, as well as overall drug usage.  In addition, the Centers for Medicare & Medicaid Services (“CMS”) issued revised guidelines to surveyors of long-term care facilities which, effective December 18, 2006, expanded the scope and detail in which surveyors are assessing pharmacy services at facilities, including consultant pharmacy services (discussed later herein).  We provide consultant pharmacist services, which help clients comply with the federal and state regulations applicable to nursing homes.  The services offered by our consultant pharmacists include:
 
·  
monthly medication regimen reviews for each resident in the facility to assess the appropriateness and effectiveness of drug therapies, including a review of the resident's current medication usage, monitoring drug reactions to other drugs or food, monitoring lab results and recommending alternate therapies, dosing adjustments or discontinuing unnecessary drugs;
·  
monitoring and monthly reporting on the appropriateness of drug usage;
·  
participation on the pharmacy and therapeutics, quality assurance and other committees of client facilities, as well as periodic involvement in staff meetings;
·  
development and maintenance of pharmaceutical policy and procedures manuals; and
·  
assistance to the nursing facility in complying with state and federal regulations as they pertain to drug use.
 
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We have also developed a proprietary software system for use by our consultant pharmacists.  The system, called OSC2OR® (Omnicare System of Clinical and Cost Outcomes Retrieval), enables our pharmacists not only to perform their functions more efficiently, but also provides the platform for consistent data retrieval for health and outcomes management.
 
Additionally, we offer specialized consulting services, which help long-term care facilities enhance care and reduce and contain costs, as well as to comply with state and federal regulations.  Under these consulting services, we offer:
 
·  
data required for OBRA and other regulatory purposes, including reports on usage of chemical restraints known as psychotropic drugs, antibiotic usage (infection control) and other drug usage;
·  
contribution to plan of care programs, which assess each patient's state of health upon admission and monitor progress and outcomes using data on drug usage as well as dietary, physical therapy and social service inputs;
·  
counseling related to appropriate drug usage and implementation of drug protocols;
·  
on-site educational seminars for the nursing facility staff on topics such as drug information relating to clinical indications, adverse drug reactions, drug protocols and special geriatric considerations in drug therapy, and information and training on intravenous drug therapy and updates on OBRA and other regulatory compliance issues; and
·  
nurse consultant services and consulting for dietary and medical records.
 
The Omnicare Geriatric Pharmaceutical Care Guidelines®
 
In June 1994, to enhance the pharmaceutical care management services that we offer, Omnicare introduced to our client facilities and their attending physicians the Omnicare Geriatric Pharmaceutical Care Guidelines® (“Omnicare Guidelines®”).  We believe the Omnicare Guidelines® is the first drug formulary ranking drugs by disease state according to their clinical effectiveness independent of their cost, specifically designed for the elderly residing in long-term care institutions and the community.  The Omnicare Guidelines® ranks drugs used for specific diseases as preferred, acceptable or unacceptable based solely on their disease-specific clinical effectiveness in treating the elderly.  The Omnicare Guidelines® takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population residing in facilities and for those living independently.  The clinical evaluations and rankings are developed exclusively for us by the University of the Sciences in Philadelphia (formerly the Philadelphia College of Pharmacy), an academic institution recognized for its expertise in geriatric long-term care.  The Omnicare Guidelines® is extensively reviewed and updated at least annually by the University of Sciences in Philadelphia, taking into account, among other factors, the latest advances as documented in the medical literature.  In addition, the Omnicare Guidelines® provides relative cost information comparing the prices of the drugs to patients, their insurers or other payors of the pharmacy bill.
 
7

 
As the Omnicare Guidelines® focuses on health benefits, rather than solely on cost, we believe that use of the Omnicare Guidelines® assists physicians in making the best clinical choices of drug therapy for the patient in a manner that is cost efficient for the payor of the pharmacy bill.  Accordingly, we believe that the development of and compliance with the Omnicare Guidelines® is important in lowering costs for SNFs operating under the federal government’s Prospective Payment System (“PPS”), Prescription Drug Plans under Medicare Part D (see further discussion in this Filing, including the “Government Regulation” caption below), and state Medicaid programs, managed care and other payors, including residents or their families.
 
Health and Outcomes Management
 
We have expanded upon the data in the Omnicare Guidelines® to develop health and outcomes management programs targeted at major categories of disease commonly found in the elderly, such as congestive heart failure, stroke prevention, Alzheimer’s disease, fracture prevention and pain management.  These programs seek to identify patients who may be candidates for more clinically efficacious drug therapy and to work with physicians to optimize pharmaceutical care for these geriatric patients.  We believe these programs can enhance the quality of care of elderly patients while reducing costs to the healthcare system, which arise from the adverse outcomes of sub-optimal or inappropriate drug therapy.
 
Outcomes-Based Algorithm Technology
 
Combining data provided by our proprietary systems, the Omnicare Guidelines® and health management programs, our pharmacists seek to determine the best clinical and most cost-effective drug therapies and make recommendations for the most appropriate pharmaceutical treatment.  Since late 1997, we have augmented their efforts with the development of proprietary, computerized, database-driven technology that electronically screens and identifies patients at risk for particular diseases and assists in determining treatment protocols.  This system combines pharmaceutical, clinical and care planning data and screens the data utilizing algorithms derived from medical best practice standards, allowing our pharmacists to make recommendations to improve the effectiveness of drug therapy in seniors, including identifying potentially underdiagnosed and undertreated conditions.  We offer similar evidenced-based predictive modeling technology to assist hospice agencies in the management of pharmaceutical care for their patients.
 
Pharmaceutical Case Management
 
Combining our clinical resources, including the Omnicare Guidelines® health and outcomes management programs and our comprehensive database of medical and pharmacy data, we are providing pharmaceutical case management services to community dwelling retirees, employees and dependents who receive drug benefits under employer-sponsored healthcare programs.  Because seniors living independently are often under the care of multiple practitioners with no coordination of prescribing, this population is highly susceptible to drug-related problems.  Omnicare Senior Health Outcomes addresses this need through programs designed to reduce unnecessary and inappropriate drug use, to add necessary drug therapy according to current practice standards for certain at-risk groups and to make therapeutic interventions in accordance with the Omnicare Guidelines® and health management programs.  These services are provided on behalf of large corporate employers sponsoring healthcare benefits, including prescription drug benefits, that seek to protect the safety and quality of healthcare for their retirees, employees and dependents while containing or reducing their costs.
 
8

 
Ancillary Services
 
We provide the following ancillary products and services:
 
Infusion Therapy Products and Services. With cost containment pressures in healthcare, SNFs and nursing facilities (“NFs”) are increasingly called upon to treat patients requiring a high degree of medical care and who would otherwise be treated in the more costly hospital environment.  We provide intravenous (or infusion therapy) products and services for these client facilities as well as hospice and home care patients.  Infusion therapy consists of the product (a nutrient, antibiotic, chemotherapy or other drugs in solution) and the intravenous administration of the product.
 
We prepare the product to be administered using proper equipment in an aseptic environment and then deliver the product to the nursing home for administration by the nursing staff.  Proper administration of intravenous ("IV") drug therapy requires a highly trained nursing staff.  Upon request, our consultant pharmacists and nurse consultants provide an education and certification program on IV therapy to assure proper staff training and compliance with regulatory requirements in client facilities offering an IV therapy program.
 
By providing an infusion therapy program, we enable our client SNFs and NFs to admit and retain patients who otherwise would need to be cared for in a hospital or another type of acute-care facility.  The most common infusion therapies we provide are total parenteral nutrition, which provides nutrients intravenously to patients with chronic digestive or gastro-intestinal problems, antibiotic therapy, chemotherapy, pain management and hydration.
 
Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable medical supplies, including urological, ostomy, nutritional support and wound care products and other disposables needed in the nursing home environment.  In addition, we bill Medicare directly for certain of these product lines for patients eligible under the Medicare Part B program.  As part of this service, we determine patient eligibility, obtain certifications, order products and maintain inventory at the nursing facility.  We also contract to act as billing agent for certain nursing homes that supply these products directly to the patient.
 
Other Services. We provide clinical care plan, financial software and electronic medical records systems for long-term care facilities, as well as operational software systems for long-term care pharmacies.  We provide comprehensive pharmaceutical care services for hospice patients.  We also offer respiratory therapy products, durable medical equipment along with pharmacy benefit management, retail and mail-order pharmacy services, and distribution and product support services for specialty pharmaceuticals.  We also have a pharmaceutical informatics service to capitalize on our unique geriatric pharmaceutical database, by providing a unique offering of Omnicare’s broad-based long-term care data to augment the pharmaceutical industry’s ability to monitor performance in the long-term care channel.  We continue to review the expansion of these as well as other products and services that may further enhance the Company’s ability or that of its clients to provide quality healthcare services for their patients in a cost-effective manner.
 
9

 
Contract Research Organization
 
Our CRO Services segment provides comprehensive product development and research services globally to client companies in the pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostics industries.  CRO Services provides support for the design of regulatory strategy and clinical development (phases I through IV) of pharmaceuticals by offering individual, multiple, or comprehensive and fully integrated services including project management, clinical monitoring, quality assurance, data management, statistical analysis medical writing and regulatory support for our clients' drug development programs.  As of December 31, 2009, the CRO Services segment operated in 31 countries, including the U.S.
 
We believe that our involvement in the CRO business is a logical adjunct to our pharmacy business and serves to leverage our assets and strengths, including our access to a large geriatric population and our ability to appropriately collect data for health and outcomes management.  We believe such assets and strengths can be of value in developing new drugs targeted at diseases of the elderly and in meeting the Food and Drug Administration's (“FDA’s”) geriatric dosing and labeling requirements for all prescription drugs provided to the elderly, as well as in documenting health outcomes to payors and plan sponsors in a managed care environment.
 
Product and Market Development
 
Our Pharmacy Services and CRO Services businesses engage in a continuing program for the development of new services and for marketing these services.  While new service and new market development are important factors for the growth of these businesses, we do not expect that any new service or marketing efforts, including those in the developmental stage, will require the investment of a significant portion of our assets.
 
Materials/Supply
 
We purchase pharmaceuticals through a wholesale distributor with whom we have a prime vendor contract at prices based primarily upon contracts negotiated by us directly with pharmaceutical manufacturers. We also are a member of industry buying groups, which contract with manufacturers for discounted prices.  We have numerous sources of supply available to us, including buying directly from manufacturers in certain cases, and have not experienced any difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of our business.
 
Patents, Trademarks, and Licenses
 
Our business operations are not dependent upon any material patents, trademarks or licenses (see further discussion of licenses in the “Government Regulation” caption below).
 
Seasonality
 
Our business operations are not significantly impacted by seasonality.
 
10

 
Inventories
 
We seek to maintain adequate on-site inventories of pharmaceuticals and supplies to ensure prompt delivery service to our customers.  Our primary wholesale distributor also maintains local warehousing in most major geographic markets in which we operate.
 
Competition
 
The long-term care pharmacy business is highly regional or local in nature and, within a given geographic area of operations, highly competitive.  We are the nation's largest provider of pharmaceuticals and related pharmacy services to long-term care institutions such as SNFs, NFs, ALFs, retirement centers and other institutional healthcare facilities.  Our largest competitor nationally is PharMerica Corporation.  In the geographic regions we serve, we also compete with numerous local and regional institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies.  We compete in these markets on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, technology and professional support we offer.
 
Our CRO Services business competes against other full-service CROs and client internal resources.  The CRO industry is highly fragmented with a number of full-service CROs and many small, limited-service providers, some of which serve only local markets.  Clients choose a CRO based on, among other reasons, reputation, references from existing clients, the client's relationship with the CRO, the CRO's experience with the particular type of project and/or therapeutic area of clinical development, the CRO's ability to add value to the client's development plan, the CRO's financial stability and the CRO's ability to provide the full range of services on a global basis as required by the client.  We believe that we compete favorably in these respects.
 
Backlog
 
Backlog is not a relevant factor in our Pharmacy Services segment since this segment’s products and services are sold promptly on an as-ordered basis.
 
Our CRO Services segment reports backlog based on anticipated net revenue for services or projects, yet to be provided, that have been authorized by the customer through signed contracts, letter agreements and certain verbal commitments.  Once work begins on a project, net revenue is recognized as the work is completed.  Using this method of reporting backlog, at December 31, 2009, backlog was approximately $205.3 million, as compared with approximately $302.9 million at December 31, 2008.  Backlog may not be a consistent indicator of future results of our CRO Services segment because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years.  Additionally, projects may be delayed or terminated by the customer, or indirectly delayed by regulatory authorities.  Moreover, the scope of work can be increased or decreased during the course of a project.
 
 
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Customers
 
At December 31, 2009, our Pharmacy Services segment served long-term care facilities and other chronic care and other settings comprising approximately 1,377,000 beds, including approximately 68,000 served by the patient assistance programs of its specialty pharmacy business, in 47 states in the U.S., the District of Columbia and in Canada.
 
Our CRO Services segment operates in 31 countries, including the U.S., and serves a broad range of clients, including many of the major multi-national pharmaceutical and biotechnology companies, as well as smaller companies in the pharmaceutical, biotechnology, nutraceutical and medical devices industries.
 
No single customer comprised more than 10% of consolidated revenues in 2009, 2008 or 2007.
 
Financial information with respect to geographic location is presented at the “Segment Information” note of the Notes to our 2009 Consolidated Financial Statements, included at Item 8 of this Filing.
 
Government Regulation
 
Institutional pharmacies, as well as the long-term care facilities they serve, are subject to extensive federal, state and local regulation.  These regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities.  In addition, our CRO Services are subject to substantial regulation, both domestically and abroad.  We continuously monitor the effects of regulatory activity on our operations.
 
Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within the state be licensed by the state board of pharmacy.  At December 31, 2009, we had pharmacy licenses, or pending applications, for each pharmacy we operate.  In addition, many states regulate out-of-state pharmacies as a condition to the delivery of prescription products to patients in their states.  Our pharmacies hold the requisite licenses applicable in these states.  In addition, our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances.
 
Client long-term care facilities are also separately required to be licensed in the states in which they operate and, if serving Medicaid or Medicare patients, must be certified to be in compliance with applicable program participation requirements.  Client facilities are also subject to the nursing home reforms of the Omnibus Budget Reconciliation Act of 1987 (“OBRA of 1987”), as amended, which imposed strict compliance standards relating to quality of care for nursing home operations, including vastly increased documentation and reporting requirements.  In addition, pharmacists, nurses and other healthcare professionals who provide services on our behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct.
 
Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain registration, repackaging and labeling requirements on entities that repackage drugs for distribution, other than pharmacies that repackage in the regular practice of dispensing or selling drugs directly to patients.  A drug repackager must register with the FDA as a repacker, and with the relevant states as a drug wholesaler and/or repackager.  A drug repackager is subject to FDA inspection for compliance with relevant Current Good Manufacturing Practices ("CGMPs").  We hold all required registrations and licenses, and we believe our ongoing repackaging operations are in substantial compliance with applicable federal CGMP requirements and state wholesaler requirements.  In addition, we believe we comply with all relevant requirements of state and federal laws for the transfer and shipment of pharmaceuticals.
 
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Drug Pedigree Regulations.  Federal and state laws impose "drug pedigree" regulations on wholesale distributors.  These regulations, in certain circumstances, require the wholesale drug distributor to maintain, and provide to pharmacies, a history of the transactions in the chain of distribution of a given drug lot from the manufacturer to the pharmacy.  Effective December 2006, the FDA has implemented pedigree regulations pursuant to the Prescription Drug Marketing Act of 1987, as amended by the Prescription Drug Marketing Act of 1992.  In early December 2006, the federal District Court for the Eastern District of New York issued a preliminary injunction, enjoining the implementation of certain of the FDA pedigree regulations, in response to a case initiated by secondary distributors.  The federal Court of Appeals for the Second Circuit affirmed this injunction on July 10, 2008.  On December 18, 2008, the parties filed a joint motion to stay discovery based upon a bill pending in Congress that if passed would have rendered the issues in the case moot.  The parties also agreed to an administrative closing of the file until December 31, 2009.  In late December 2009, the parties extended this administrative closing until at least September 30, 2010; however, either party may re-open the file at any time before this date.  We cannot predict the ultimate outcome of this legal proceeding or potential Congressional action in this area.  In addition, it is anticipated that other states will enact drug pedigree requirements in the future.  Supply chain laws and regulations could increase the overall regulatory burden and costs associated with our distribution business and could adversely affect our results of operations and financial condition.  We believe we are in compliance with federal and state regulations currently in effect.  These regulations, however, may be interpreted in the future in a manner inconsistent with our interpretation and application.
 
State Laws Affecting Access to Services. Some states have enacted "freedom of choice" or "any willing provider" requirements as part of their state Medicaid programs or in separate legislation.  These laws may preclude a nursing facility from requiring their patients to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the nursing home.  Limitations such as these may increase the competition which we face in providing services to nursing facility residents.
 
Medicare and Medicaid. The long-term care pharmacy business has long operated under regulatory and cost containment pressures from state and federal legislation primarily affecting Medicaid and, to a lesser extent until 2006, Medicare.  We had historically received reimbursement from the Medicaid and Medicare programs, directly from individual residents or their responsible parties (private pay), long-term care facilities and from other payors such as third-party insurers.  Effective January 1, 2006, Omnicare experienced a significant shift in payor mix as a result of the prescription drug benefit under Medicare Part D (“Part D”).
 
 
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The table below represents our approximated payor mix (as a % of annual sales) for the last three years ended December 31,:
 
           
2009
 
2008
 
2007
Private pay, third-party and facilities (a)
     
42%
 
43%
 
42%
Federal Medicare program (Part D & Part B) (b)
     
44%
 
42%
 
43%
State Medicaid programs
       
9%
 
10%
 
11%
Other sources (c)
       
5%
 
5%
 
4%
 
Totals
       
100%
 
100%
 
100%
                     
(a)
Includes payments from SNFs on behalf of their federal Medicare program-eligible residents (Medicare
 
Part A) and for other services and supplies, as well as payments from third-party insurers and private pay.
(b)
Includes direct billing for medical supplies under Part B totaling 1% in each of the 2009, 2008 and 2007
 
years.
                 
(c)
Includes our contract research organization.
             
 
For those patients who are not covered by government-sponsored programs or private insurance, we generally directly bill the patient or the patient's responsible party on a monthly basis.  Depending upon local market practices, we may alternatively bill private patients through the nursing facility.  Pricing for private pay patients is based on prevailing regional market rates or "usual and customary" charges.
 
The Medicaid program is a cooperative federal-state program designed to enable states to provide medical assistance to aged, blind or disabled individuals or members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services.  State participation in the Medicaid program is voluntary.  To become eligible to receive federal funds, a state must submit a Medicaid "state plan" to the Secretary of the Department of Health and Human Services (“HHS”) for approval.  The federal Medicaid statute specifies a variety of requirements which the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration.  We are participating in state Medicaid programs.
 
Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid.  First, states are given authority, subject to certain standards, to limit or specify conditions for the coverage of particular drugs.  Second, federal Medicaid law establishes standards affecting pharmacy practice.  These standards include general requirements relating to patient counseling and drug utilization review and more specific standards for SNFs and NFs relating to drug regimen reviews for Medicaid patients in such facilities.  Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid patients.  Among other things, regulations establish "upper limits" on payment levels.  Legislation enacted in February 2006 changed the calculation of these so-called upper limits (see below).  In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs that may affect our operations.
 
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On December 18, 2006, CMS issued final updated Guidance to Surveyors on Long Term Care regarding the survey protocol for review of pharmacy services provided in long-term care facilities participating in the Medicare and Medicaid programs.  The guidelines expanded the areas and detail in which surveyors assess pharmacy services at the facility, including ordering, acquiring, receiving, storing, labeling, dispensing and disposing of all medications at the facility; the provision of medication-related information to health care professionals and residents; the process of identifying and addressing medication-related issues through medication regimen reviews and collaboration between the licensed consultant pharmacist, the facility and other healthcare professionals; and the provision, monitoring and use of medication-related devices.  The guidelines also emphasize the important role of consultative services of pharmacists in promoting safe and effective medication use through the coordination of all aspects of pharmacy services provided to all residents within a facility.
 
The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over, or who are disabled.  The Medicare program currently consists of four parts: Medicare Part A, which covers, among other things, inpatient hospital, SNF, home healthcare 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 specifically designated prescription drugs; Medicare Part C, established by the Balanced Budget Act of 1997 (“BBA”), which generally allows beneficiaries to enroll in managed care programs instead of the traditional Medicare fee for service program; and Medicare Part D, established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), which established a prescription drug benefit that became effective on January 1, 2006 (discussed below).
 
The Medicare program establishes requirements for participation by providers and suppliers.  Pharmacies are not subject to such certification requirements.  SNFs and suppliers of medical equipment and supplies, however, including our supplier operations, are subject to specified standards.  Failure to comply with these requirements and standards may adversely affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries.
 
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs.  These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency.  We believe that our billing practices materially comply with applicable state and federal requirements.  However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.
 
The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding reductions, all of which may adversely affect our business.  Payments for pharmaceutical supplies and services under the Medicare and Medicaid programs may not continue to be based on current methodologies or remain comparable to present levels.  In this regard, we may be subject to payment reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs.  In addition, numerous state governments are experiencing budgetary pressures that may result in Medicaid payment reductions and delays in payment to us or our customer nursing facilities.
 
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In addition, if we or our client facilities fail to comply with applicable reimbursement regulations, even if inadvertently, our business could be adversely impacted.  Additionally, changes in reimbursement programs or in regulations related thereto, such as reductions in the allowable reimbursement levels, modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid and Medicare expenditures, could adversely affect our business.
 
Referral Restrictions. We have to comply with federal and state laws which govern financial and other arrangements between healthcare providers.  These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under federal healthcare programs.  We are also subject to the federal physician self-referral statute, which prohibits physicians from referring Medicare and Medicaid patients for certain “designated health services,” including outpatient prescription drugs, durable medical equipment, and enteral supplies and equipment to an entity if the referring physician (or a member of the physician’s immediate family) has a “financial relationship,” through ownership or compensation, with the entity.  Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs.  Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from the federal programs and/or other state-funded programs.
 
Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare, Medicaid and other federal healthcare programs for false claims, improper billing and other offenses.
 
In addition, a number of states have undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including programs containing incentives to pharmacists to dispense one particular product rather than another.  These enforcement actions arose under state consumer protection laws which generally prohibit false advertising, deceptive trade practices, and the like.
 
We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.  These laws may, however, be interpreted in the future in a manner inconsistent with our interpretation and application.
 
Healthcare Reform and Federal Budget Legislation. Over the years, federal legislation has resulted in major changes in the healthcare system, which significantly affected healthcare providers.  In 1997 Congress mandated a prospective payment system (“PPS”) for reimbursement to skilled nursing facilities (“SNFs”) for their Medicare-eligible residents during a Medicare Part A-covered stay.  Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services, including pharmacy services.  PPS initially resulted in a significant reduction of reimbursement to SNFs.  Although some of the reductions were subsequently mitigated, the PPS fundamentally changed the payment for Medicare SNF services.
 
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In recent years, SNFs have received the full market basket inflation increase to annual rates.  For fiscal year 2009, beginning October 1, 2008, SNFs received a 3.4 percent inflation update that increased overall payments to SNFs by $780 million.  However, for fiscal year 2010, beginning on October 1, 2009, payments to SNFs were reduced by 1.1 percent, or by $360 million to SNFs overall, compared to fiscal year 2009 levels.  While the payment levels reflect a 2.2 percent market basket inflation update, that amount was more than offset by a 3.3 percent ($1.050 billion) adjustment intended to recalibrate case mix weights to compensate for increased expenditures resulting from refinements made in January 2006.  These or other reimbursement changes could have an adverse effect on the financial condition of the Company’s SNF clients, which, in turn, could adversely affect the timing or level of their payments to Omnicare.
 
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which included a major expansion of the Medicare prescription drug benefit under a new Medicare Part D.
 
The Part D drug benefit permits Medicare beneficiaries to enroll in prescription drug plans offered by private entities which provide coverage of outpatient prescription drugs (collectively, “Part D Plans”).  Part D Plans include plans providing the drug benefit on a stand-alone basis (known as “prescription drug plans”, or “PDPs”) and Medicare Advantage plans providing drug coverage as a supplement to an existing medical benefit under that Medicare Advantage plan (known as “MA-PDs”).  Medicare beneficiaries generally have to pay a premium to enroll in a Part D Plan, with the premium amount varying from plan to plan, although the Centers for Medicare and Medicaid Services (“CMS”) provides various federal subsidies to Part D Plans to reduce the cost to beneficiaries.  Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”) have their prescription drug costs covered by the Medicare drug benefit, unless they elect to opt out of Part D coverage.  Many nursing home residents Omnicare serves are dual eligibles.  In 2009, approximately 43% of Omnicare’s revenue was derived from beneficiaries covered under the federal Medicare Part D program.
 
CMS provides premium and cost-sharing subsidies to Part D Plans for dual eligible residents of nursing homes.  Such dual eligibles are not required to pay a premium for enrollment in a Part D Plan, so long as the premium for the Part D Plan in which they are enrolled does not exceed the premium subsidy, nor are they required to meet deductibles or pay copayment amounts.  Further, all dual eligibles who do not affirmatively enroll in a Part D Plan are automatically enrolled into a PDP by CMS on a random basis from among those PDPs meeting CMS criteria for low-income premiums in the PDP region, unless they elect to opt out of Part D coverage.  Such dual eligible beneficiaries may select a different Part D Plan at any time through the Part D enrollment process.  Also, dual eligibles who are qualifying covered retirees under an employer or union-sponsored qualified retiree prescription drug plan (plans which offer an alternative to Part D coverage supported by federal subsidies to the plan sponsor) will be determined to have elected not to enroll in a Part D Plan, unless they affirmatively enroll in a Part D Plan or contact CMS to indicate they wish to be auto-enrolled.  In sum, dual eligible residents of nursing homes are entitled to have their prescription drug costs covered by a Part D Plan, provided that the prescription drugs which they are taking are either on the Part D Plan’s formulary, or an exception to the plan’s formulary is granted, subject to prior authorization or similar utilization management requirements for certain drugs.  CMS requires the formularies of Part D Plans to include the types of drugs most commonly needed by Medicare beneficiaries and to offer an exceptions process to provide coverage for medically necessary drugs.
 
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The Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan.  The Company has entered into such agreements with nearly all Part D Plan sponsors under which it will provide drugs and associated services to their enrollees.  The Company continues to have ongoing discussions with Part D Plans and renegotiates these agreements in the ordinary course.  Further, the proportion of the Company’s Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans, Part D Plan consolidation and other factors.  As such, reimbursement under these agreements is subject to change.
 
Moreover, as expected in the transition to a new program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays owed by Part D Plans for dual eligibles and other low income subsidy eligible beneficiaries.  As of December 31, 2009, copays outstanding from Part D Plans were approximately $16 million, relating to 2006 and 2007.  The Company is pursuing solutions, including legal actions against certain Part D payors, to collect outstanding copays, as well as certain rejected claims.  Participants in the long-term care pharmacy industry continue to address these issues with CMS and the Part D Plans and attempt to develop solutions.  Among other things, on January 12, 2009, CMS finalized a change in its regulations requiring Part D Plan sponsors to accept and act upon certain types of documentation, referred to as “best available evidence,” to correct copays.  Similarly, on October 22, 2009, CMS published proposed rules that would make numerous changes to the regulations governing Part D, including certain Part D Plan payment rules and processes.  Language in the preamble to the proposed rule suggests that Part D Plans would be required to correct and pay copay amounts within 45 days of receiving complete information for the copay reconciliation.  However, until a final rule is issued and all administrative and payment issues are fully resolved, there can be no assurance that implementation issues associated with the Part D drug benefit will not adversely impact the Company’s results of operations, financial position or cash flows.
 
For Medicare beneficiaries covered under a Medicare Part A stay, the Company receives reimbursement for drugs provided to such residents from the SNFs, in accordance with the terms of the agreements it has negotiated with each SNF.  The Company also receives reimbursement from the state Medicaid programs, for those Medicaid beneficiaries not eligible for the Part D program, including those under age 65 who are not disabled, and for certain drugs specifically excluded from Medicare Part D.
 
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CMS has issued subregulatory guidance on many aspects of the Part D program, including the provision of pharmaceutical services to long-term care residents.  CMS has also expressed some concerns about pharmacies’ receipt of discounts, rebates and other price concessions from drug manufacturers.  For 2007 and 2008, CMS instructed Part D Plan sponsors to require pharmacies to disclose to the Part D Plan sponsor any discounts, rebates and other direct or indirect remuneration designed to directly or indirectly influence or impact utilization of Part D drugs.  The Company reported information specified by CMS with respect to rebates received by the Company for 2007 and the first quarter of 2008 to those Part D Plans which agreed to maintain the confidentiality of such information.  In November 2008, CMS suspended collection of the long-term care pharmacy rebate data from Part D Plan sponsors for calendar years 2008 and 2009.  Instead, CMS developed its plan to collect different non-rebate information to focus plan attention on network pharmacy compliance and appropriate drug utilization management.  The final Part D reporting requirements for calendar year 2010 include instructions for Part D Plans to report to CMS the number and cost of formulary versus non-formulary prescription drugs dispensed in the aggregate by each long-term care pharmacy and by all retail pharmacies as a group in the Part D Plan’s service area.  CMS also issued a memorandum on November 25, 2008 reminding Part D Plan sponsors of the requirement to (1) provide convenient access to network long-term care pharmacies to all of their enrollees residing in long-term care facilities, and (2) exclude payment for drugs that are covered under a Medicare Part A stay that would otherwise satisfy the definition of a Part D drug.  The Company will continue to work with Part D Plan sponsors to ensure compliance with CMS’s evolving policies related to long-term care pharmacy services.
 
On July 15, 2008, Congress enacted the "Medicare Improvements for Patients and Providers Act of 2008” (“MIPPA”).  This law includes further reforms to the Part D program.  Among other things, as of January 1, 2010, the law requires that long-term care pharmacies have between 30 and 90 days to submit claims to a Part D Plan.  As of January 1, 2009, Part D Plan sponsors must update the prescription drug pricing data they use to pay pharmacies at least every seven days.  The law also expands the number of Medicare beneficiaries who are entitled to premium and cost-sharing subsidies by modifying previous income and asset requirements, eliminates late enrollment penalties for beneficiaries entitled to these subsidies, and limits the sales and marketing activities in which Part D Plan sponsors may engage.  On September 18, 2008, CMS published final regulations implementing many of the MIPPA Part D provisions, and the agency published another interim final rule with comment period on January 16, 2009 implementing additional MIPPA provisions related to drug formularies and protected classes of drugs.  Additional legislative proposals are pending before Congress that could further modify the Part D benefit, including proposals that could impact the payment available or pricing for drugs under Part D Plans.  The Company cannot predict at this time whether such legislation will be enacted or the form any such legislation would take.  The Company can make no assurances that future Part D legislation would not impact its business.
 
Moreover, CMS continues to issue guidance on and make other revisions to the Part D program.  The Company is continuing to monitor issues relating to implementation of the Part D benefit, and until further agency guidance is known and until all administrative and payment issues associated with this massive program are fully resolved, there can be no assurance that the impact of the Part D rules, future legislative changes, or the outcome of other potential developments relating to its implementation on our business, results of operations, financial position or cash flows will not change based on the outcome of any unforeseen future developments.
 
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The MMA also changed the Medicare payment methodology and conditions for coverage of certain items of durable medical equipment prosthetics, orthotics, and supplies (“DMEPOS”) under Medicare Part B.  Approximately 1% of the Company’s revenue is derived from beneficiaries covered under Medicare Part B.  The changes include a temporary freeze in annual increases in payments for durable medical equipment from 2004 through 2008, new clinical conditions for payment, quality standards (applied by CMS-approved accrediting organizations), and competitive bidding requirements.  Only suppliers that are winning bidders will be eligible to provide competitively bid items to Medicare beneficiaries in the selected areas, and winning bidders will be paid based on the median of the winning suppliers’ bids for each of the selected items in the region, rather than the Medicare fee schedule amount.
 
In mid-2007, CMS conducted a first round of bidding for 10 DMEPOS product categories in 10 competitive bidding areas, and announced winning bidders in March 2008.  In light of concerns about implementation of the bidding program, in MIPPA Congress terminated the contracts awarded by CMS in the first round of competitive bidding, required that new bidding be conducted for the first round, and required certain reforms to the bidding process.  Among other things, the law requires CMS to rebid those areas in 2009, with bidding for round two delayed until 2011.  The delay is being financed by reducing Medicare fee schedule payments for all items covered by the round one bidding program by 9.5 percent nationwide effective January 1, 2009, followed by a 2 percent increase in 2014 (with certain exceptions).  The legislation also includes a series of procedural improvements to the bidding process.  CMS published an interim final rule with comment period to implement the MIPPA competitive bidding changes on January 16, 2009, and on April 17, 2009 announced that it is proceeding with implementation of the January 16, 2009 rule after a brief delay.  Bidding for the new round one of the program began October 21, 2009, and ended December 21, 2009.  Contract suppliers are expected to be announced in June 2010, and the program is scheduled to go into effect January 1, 2011.  The Company participated in the new bidding process for round one.  There is no assurance that the Company will be a successful bidder in the DMEPOS competitive bidding process, or that reimbursement levels established through the bidding process would not adversely impact the Company’s results of operations, cash flows, or financial condition.
 
CMS requires all existing DMEPOS suppliers to submit proof of accreditation by a deemed accreditation organization by September 30, 2009.  MIPPA codifies the requirement that all suppliers be accredited by September 30, 2009 and extends the accreditation requirement to companies that subcontract with contract suppliers under the competitive bidding program.  The Company’s DMEPOS suppliers are accredited.
 
On January 2, 2009, CMS published a final rule requiring certain Medicare DMEPOS suppliers to furnish CMS with a $50,000 surety bond, although the required bond amount will be higher for certain “high-risk” suppliers with previous adverse legal actions.  A separate surety bond will be required for each National Provider Identifier obtained for DMEPOS billing purposes, with limited exceptions.  CMS did not establish exceptions from the bond requirement for pharmacies or for nursing facilities that bill for Medicare DMEPOS services provided to their own residents.  The Company has secured surety bonds for its DMEPOS suppliers.
 
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With respect to Medicaid, many states are facing budget pressures that could result in increased cost containment efforts impacting healthcare providers.  States have considerable latitude in setting payment rates for nursing facilities.  States also have flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver.  Although these waiver programs generally exempt institutional care, including nursing facilities and institutional pharmacy services, some states do use managed care principles in their long-term care programs.  The Deficit Reduction Act (“DRA”), enacted in 2006, also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process, and includes a demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes.  Such initiatives could increase state funding for home and community-based services, while prompting states to cut funding for nursing facilities.  No assurances can be given that state Medicaid programs ultimately will not change the reimbursement system for long-term care or pharmacy services in a way that adversely impacts the Company.
 
The DRA also changed the so-called federal upper limit payment rules for multiple source prescription drugs covered under Medicaid.  Like the current upper limit, it only applies to drug ingredient costs and does not include dispensing fees, which will continue to be determined by the states.  First, the DRA redefined a multiple source drug subject to the upper limit rules to be a covered outpatient drug that has at least one other drug product that is therapeutically equivalent.  Thus, the federal upper limit is triggered when there are two or more therapeutic equivalents, instead of three or more as was previously the case.  Second, effective January 1, 2007, the DRA changed the federal upper payment limit from 150 percent of the lowest published price for a drug (which is usually the wholesale acquisition cost) to 250 percent of the lowest average manufacturer price (“AMP”).  Congress expected these DRA provisions to reduce federal and state Medicaid spending by $8.4 billion over five years.  On July 17, 2007, CMS issued a final rule with comment period to implement changes to the upper limit rules.  Among other things, the final rule: established a new federal upper limit calculation for multiple source drugs based on 250 percent of the lowest AMP in a drug class; required CMS to post AMP amounts on its Web site; and established a uniform definition for AMP.  Additionally, the final rule provided that sales of drugs to long-term care pharmacies for supply to nursing homes and assisted living facilities (as well as associated discounts, rebates or other price concessions) are not to be taken into account in determining AMP where such sales can be identified with adequate documentation, and that any AMPs which are not at least 40% of the next highest AMP will not be taken into account in determining the upper limit amount (the so-called “outlier” test).  However, on December 19, 2007, the United States District Court for the District of Columbia issued a preliminary injunction that enjoins CMS from implementing provisions of the July 17, 2007 rule to the extent that it affects Medicaid reimbursement rates for retail pharmacies under the Medicaid program.  The order also enjoins CMS from posting AMP data on a public Web site or disclosing it to states.  As a result of this preliminary injunction, CMS did not post AMPs or new upper limit prices in late December 2007 based upon the July 17, 2007 final rule despite its earlier planned timetable, and the schedule for states to implement the new upper limits has been delayed until further notice.  
 
 
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Separately, on March 14, 2008, CMS published an interim final rule with comment period revising the definition of multiple source drug set forth in the July 17, 2007 final rule.  In short, the effect of the rule will be that federal upper limits apply in all states unless the state finds that a particular generic drug is not available within that state.  CMS also noted that the regulation is subject to the injunction by the United States District Court for the District of Columbia to the extent that it may affect Medicaid reimbursement rates for pharmacies.  On October 7, 2008, CMS published the final version of this rule, adopting the March 2008 interim final rule with technical changes effective November 6, 2008, although it continues to be subject to an injunction to the extent that it affects Medicaid pharmacy reimbursement rates.  Moreover, MIPPA delayed the adoption of the DRA’s new federal upper limit payment rules for Medicaid based on AMP for multiple source drugs and prevented CMS from publishing AMP data before October 1, 2009.  To date, CMS has not issued a new rule or published such AMP data.  Therefore, at this time upper payment limits continue to be determined under the pre-DRA rules.  With the advent of Medicare Part D, the Company’s revenues from state Medicaid programs are substantially lower than has been the case previously.  However, some of the Company’s agreements with Part D Plans and other payors have incorporated the Medicaid upper limit rules into the pricing mechanisms for prescription drugs.  Until the litigation regarding the final rule is resolved and new upper limit amounts are published by CMS, the Company cannot predict the impact of the final rule on the Company’s business.  Further, there can be no assurance that federal upper limit payments under pre-DRA rules, CMS adoption of a revised rule under the DRA, Congressional action, or other efforts by payors to limit reimbursement for certain drugs will not adversely impact the Company’s business.
 
MIPPA also seeks to promote e-prescribing by providing incentive payments for physicians and other practitioners paid under the Medicare physician fee schedule who are "successful electronic prescribers."  Specifically, successful electronic prescribers are to receive a 2 percent bonus during 2009 and 2010, a 1 percent bonus for 2011 and 2012 and a 0.5 percent bonus for 2013; practitioners who are not successful electronic prescribers are penalized by a 1 percent reduction from the current fee schedule in 2012, a 1.5 percent reduction in 2013, and thereafter a 2 percent reduction.  CMS has announced that to be a successful electronic prescriber and to receive an incentive payment for the 2009 e-prescribing reporting year, an eligible professional must report, using a qualified e-prescribing system, one of three e-prescribing measures in at least 50% of the cases in which the measure is reportable by the eligible professional during 2009.  CMS has issued detailed guidelines on the specifications for qualified e-prescribing systems.  The Company is closely monitoring developments related to this initiative, and will seek to make available systems under which prescribers may submit prescriptions to the Company's pharmacies electronically so as to enable them to qualify for the incentive payments.
 
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009.  This $790 billion economic stimulus package includes a number of health care policy provisions, including approximately $19 billion in funding for health information technology infrastructure and Medicare and Medicaid incentives to encourage doctors, hospitals, and other providers to use health information technology to electronically exchange patients’ health information.  The law also strengthens federal privacy and security provisions to protect personally-identifiable health information.  In addition, the legislation increases Federal Medical Assistance Percentage (“FMAP”) payments by approximately $87 billion to help support state Medicaid programs in the face of budget shortfalls.  The law also temporarily extends current Medicaid prompt payment requirements to nursing facility and hospital claims, requiring state Medicaid programs to reimburse providers for 90 percent of claims within 30 days of receipt and 99 percent of claims within 90 days of receipt.  The Obama Administration has issued a variety of guidance documents and regulations to implement the new law.  Congress is also considering extending the temporary Medicaid provisions as part of legislation designed to spur job creation, although such legislation has not been enacted to date.  The Company is reviewing the implementation of the law and assessing the potential impact of the various provisions on the Company.
 
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Two other recent actions at the federal level could impact Medicaid payments to nursing facilities.  The Tax Relief and Health Care Act of 2006 modified several Medicaid policies including, among other things, reducing the limit on Medicaid provider taxes from 6 percent to 5.5 percent from January 1, 2008 through September 30, 2011.  On February 22, 2008, CMS published a final rule that implements this legislation, and makes other clarifications to the standards for determining the permissibility of provider tax arrangements.  Provisions of the rule were repeatedly delayed; currently enforcement is delayed until June 30, 2010.  Second, on May 21, 2007, CMS published a rule designed to ensure that Medicaid payments to governmentally operated nursing facilities and certain other health care providers are based on actual costs and that state financing arrangements are consistent with the Medicaid statute.  CMS estimates that the rule would save $120 million during the first year and $3.87 billion over five years, but Congress blocked the rule through April 1, 2009.  The American Recovery and Reinvestment Act of 2009 expresses the sense of Congress that the Secretary of Health and Human Services should not promulgate the provider cost limit rule, citing a ruling by the United States District Court for the District of Columbia that the final rule was “improperly promulgated.”
 
Broader changes in federal healthcare policy have been proposed by President Obama and are currently under consideration by Congress.  The House of Representatives approved a sweeping health reform bill, H.R. 3962, the Affordable Health Care for America Act, on November 7, 2009.  The Senate approved its version of the measure, H.R. 3590, the Patient Protection and Affordable Care Act, on December 24, 2009.  Both bills seek to expand access to affordable health insurance through insurance market reforms, the establishment of health insurance “exchanges” through which individuals and small businesses can purchase qualified insurance coverage, and expansion of the Medicaid program.  The House version of the bill also would establish a public health insurance option to compete with private health insurers.  Among many other things, both versions of the legislation include significant reimbursement cuts to Medicare providers, including skilled nursing facilities, although details vary between the plans.  In addition, the House bill would require the Secretary to negotiate Medicare Part D drug prices directly with pharmaceutical manufacturers and remove deadlines for long-term care pharmacies to file Part D claims, while both versions would require Part D plans to develop utilization management techniques to reduce prescription drug waste in long-term care facilities. The reform plans also would increase the Medicaid drug rebate level paid by pharmaceutical manufacturers and expand the drugs that are subject to such rebates.  Congressional leaders and the Administration have been working to develop a compromise bill reconciling differences between the two approaches, but it is unclear at this time whether a bill will be enacted this year, and if so, which provisions will be included in such a bill.
 
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In order to rein in healthcare costs, the Company anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies.  Given the debate regarding the cost of healthcare, managed care, universal healthcare coverage, and other healthcare issues, the Company cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on its business.  Further, the Company receives discounts, rebates and other price concessions from pharmaceutical manufacturers pursuant to contracts for the purchase of their products.  There can be no assurance that any changes in legislation or regulations, or interpretations of current law, that would eliminate or significantly reduce the discounts, rebates and other price concessions that the Company receives from manufacturers or that otherwise impact payment available for drugs under federal or state healthcare programs, would not have a material adverse impact on the Company’s overall consolidated results of operations, financial position or cash flows.  Longer term, funding for federal and state healthcare programs must consider the aging of the population; the growth in enrollees as eligibility is potentially expanded; the escalation in drug costs owing to higher drug utilization among seniors; the impact of the Medicare Part D benefit for seniors; the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the entire Medicare program.  Given competing national priorities, it remains difficult to predict the outcome and impact on us of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs.  Further, Medicare, Medicaid and/or private payor rates for pharmaceutical supplies and services may not continue to be based on current methodologies or remain comparable to present levels.  Any future healthcare legislation or regulation impacting these rates may materially adversely affect the Company’s business.
 
Contract Research Organization Services. The clinical services performed by our CRO Services are subject to various regulatory requirements designed to ensure the quality and integrity of the data produced as a result of these services.
 
The industry standard for conducting clinical testing is embodied in the good clinical practice ("GCP") and Investigational New Drugs ("IND") regulations administered by the FDA.  Research conducted at institutions supported by funds from the National Institutes of Health ("NIH") must also comply with multiple project assurance agreements and guidelines administered by the NIH and the HHS Office of Human Research Protection.  The requirements for facilities engaging in pharmaceutical, clinical trial, supply preparation, labeling and distribution are set forth in the GMP regulations and in GCP guidelines.  The U.S. and European Union (“EU”) also recognize the Guidelines for Good Clinical Practice adopted by the International Conference on Harmonization (“ICH”).  GCP, IND and CGMP regulations, and ICH guidelines, have been mandated by the FDA and the European Medicines Evaluation Agency (the "EMEA") and have been adopted by similar regulatory authorities in other countries.  GCP, IND and CGMP regulations, and ICH guidelines, stipulate requirements for facilities, equipment, supplies and personnel engaged in the conduct of studies to which these regulations apply.  The regulations require that written, standard operating procedures ("SOPs") are followed during the conduct of studies and for the recording, reporting and retention of study data and records.  To help assure compliance, our CRO Services has a worldwide staff of experienced quality assurance professionals who perform the specific responsibility or responsibilities needed for each project, such as
 
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negotiation of clinical trial agreements, data management, safety reviews, study monitoring, data auditing, or regular inspections of testing procedures and facilities, and any combination of these responsibilities.  The FDA and other regulatory authorities require that study results and data submitted to such authorities are based on studies conducted in accordance with GCP and IND provisions.  We may provide services that invoice one or more of these requirements, which include:
 
·  
complying with specific regulations governing the selection of qualified investigators;
·  
obtaining specific written commitments from the investigators;
·  
disclosure of financial conflicts of interest;
·  
verifying that patient informed consent is obtained;
·  
instructing investigators to maintain records and reports;
·  
verifying drug or device accountability; and
·  
permitting appropriate governmental authorities access to data and study sites for their review and inspection.
 
Records for clinical studies must be maintained for specific periods for inspection by the FDA, EU or other authorities during audits.  Non-compliance with GCP or IND requirements can result in the disqualification of data collected during the clinical trial and may lead to disqualification of an investigator or debarment of a CRO if found to be responsible for the violative conduct.
 
Clinical study sponsors who engage a CRO for one or more CRO Services could be affected by the CRO’s failure to comply with applicable laws and regulations.  For example, a sponsor’s studies could be terminated, study data could be called into question and disqualified, or the review of a sponsor’s pending applications could be suspended.  Therefore, a CRO could be subject to contractual and civil claims by sponsors for such failure.  Failure to adequately monitor a study as part of CRO Services could also affect the FDA’s ability to monitor the safety of human subjects participating in clinical trials if, for example, the CRO fails to monitor an investigator who does not properly record or report to clinical study sponsors adverse events.  Therefore, we could be subject to civil claims from sponsors or subjects who might be injured during the study as a result of such failure.
 
CRO Services' SOPs related to clinical studies are written in accordance with regulations and guidelines appropriate to a global standard with regional variations in the regions where they will be used, thus helping to ensure compliance with GCP.  CRO Services also generally complies with a reasonable interpretation of the ICH Guideline for GCP, EU GCP regulations and U.S. GCP regulations for North America.  In addition, we believe that our CRO Services take into account the requirements of the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which covers many clinical trial sites, and that our CRO Services employees have been trained to meet the standards of this legislation.
 
Although we believe that we are in compliance in all material respects with federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
 
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Health Information Privacy, Security and Transaction Practices. The Company, along with the healthcare industry in general, is impacted by federal legislation known as HIPAA.  HIPAA mandates, among other things, that the Company comply with national standards for the exchange of health information in electronic form, in an effort to enhance the efficiency and simplify the administration of the healthcare system with respect to certain common healthcare transactions (the “Transaction Standards”).  HIPAA requires the Company to establish and enforce privacy policies and procedures relating to its uses and disclosures of health information and to provide certain rights to individuals as to their personal health information (the “Privacy Standards”).  HIPAA also requires the Company to adopt security practices and procedures for the physical, electronic and administrative safeguarding of health information (the “Security Standards”).  The Company, along with most other health care providers and third party payors, has been required to comply with the Transaction Standards and the Privacy Standards since 2003, and with the Security Standards since 2005.  While HIPAA ultimately is designed, in part, to reduce administrative expenses within the healthcare system, the law has resulted in some costly changes for the industry.  The Company believes it is compliant with the Transaction Standards as to HIPAA-regulated electronic transactions, and is not experiencing any HIPAA-related claims processing problems.  The Company has policies and procedures in place to adhere to the relevant organizational structure provisions of the Privacy Standards in order that the Company’s business units and divisions may use and disclose health information as permitted within the organization.  In addition, the Company has implemented policies and procedures designed to comply with the other requirements of the Privacy Standards.  As required by the Privacy Standards and the Security Standards, Omnicare has appointed a privacy and security officer.  The Privacy Standards require healthcare providers like Omnicare, to provide a notice describing patient’s privacy rights and the Company’s privacy practices to all of the patients to whom we provide healthcare products or services and to provide patients certain rights as to their health information.  Omnicare’s Employee Retirement Income Security Act health benefit plans are also subject to the applicable requirements of HIPAA in the course of plan operations.  In January 2004, the federal government published a rule announcing the adoption of the National Provider Identifier (“NPI”) as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions.  Compliance with this rule was required as of May 23, 2007.  The Company has obtained the NPIs for its locations as they have become due.  In addition to HIPAA, the Company works to ensure that it adheres to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those which furnish greater privacy protection for the individual than HIPAA.  Such laws include, but are not limited to, laws that, in general terms, require organizations that maintain personal information of individuals, such as their social security numbers and driver’s license numbers, to notify each individual if their personal information is accessed or acquired by an unauthorized person.  Significant penalties are provided by most states for violation of these laws.  State and federal regulations designed to prevent or mitigate financial and medical identity theft are expected to increase and the Company will be required to comply.  In addition, there can be no assurance that the loss or improper exposure of personal data by the Company will not adversely impact the business and prospects of the Company nor result in possible civil litigation by customers and affected individuals.
 
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On January 16, 2009, HHS published a final rule adopting new code sets to be used by the public and private sectors for reporting diagnoses and inpatient procedures in health care transactions under HIPAA, effective October 1, 2013.  Specifically, the rule adopts the International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) for diagnosis coding, and the International Classification of Diseases, Tenth Revision, Procedure Coding System (“ICD-10-PCS”) for inpatient hospital procedure coding.  HHS expects adoption of the new code sets to support value-based purchasing, enhance payment accuracy, and result in significant savings to the health care system.  The Company will need to modify its billing software and claims processing systems to accommodate these changes.  The second final rule published January 16, 2009 adopts updated versions of the HIPAA standards for certain electronic health care transactions, including the pharmacy claims transactions standard.  The rule also adopts a standard for Medicaid pharmacy subrogation transactions, a process through which State Medicaid agencies recoup payments for pharmacy services in cases where a third party payer has primary financial responsibility.  The compliance date for implementing the pharmacy transaction standard and Medicaid pharmacy subrogation standard is January 1, 2012.  The Company is assessing the impact of the new code sets and transaction standards on its operations.
 
The Federal Trade Commission (“FTC”) in conjunction with other federal agencies has published a final rule implementing provisions of the Fair and Accurate Credit Transactions Act of 2003 which required, among other things, that “creditors” with “covered accounts” implement a written plan to identify and detect indicators of identity theft (referred to in the FTC’s final rule as “red flags”) and to take steps to prevent or mitigate identity theft.  The enforcement date for compliance with the final rule, originally November 1, 2008, has been extended by the FTC on several occasions; the current enforcement deadline is June 1, 2010.  Civil monetary penalties can be assessed against a creditor who fails to comply with the Final Rule.  Omnicare, like most health care providers, is a “creditor” within the meaning of the Final Rule and maintains “covered accounts”.  The Company has established a plan to identify, detect and respond to indicators of identity theft from its information systems and expects to satisfy all the requirements of the Final Rule on or before the compliance deadline.
 
The scope of the Company’s operations involving health and other personal information is broad and the nature of those operations is complex.  Although we believe the Company’s contract arrangements with healthcare payors and providers and our business practices are materially in compliance with applicable federal and state electronic transmission, privacy and security of health information laws, the requirements of these laws, including HIPAA, are complicated and are subject to interpretation.  In addition, state regulation of matters also covered by HIPAA, especially the Privacy Standards, is increasing, and determining which state laws are preempted by HIPAA is a matter of interpretation.  Failure to comply with HIPAA or similar state laws could subject the Company to loss of customers, litigation by or on behalf of individuals, denial of the right to conduct business, civil damages, fines, criminal penalties and other enforcement actions.
 
Moreover, the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, includes a number of provisions to strengthen federal privacy and security provisions to protect personally-identifiable health information.  Among other things, the law applies HIPAA security provisions and penalties to business associates of covered entities; requires certain notifications in the event of a security breach involving protected health information; restricts certain unauthorized disclosures and sales of health information; clarifies treatment of certain marketing activities; and strengthens enforcement activities.  Many of the implementation requirements associated with these provisions are being detailed through regulations.  For instance, on August 24, 2009, the Department of Health and Human Services issued an interim final rule with comment period to implement the provision requiring notification of breaches of unsecured protected health information, effective September 23, 2009.  The Company currently is assessing the potential impact of these new privacy and security provisions on its operations and is taking steps to assure that the Company is in material compliance with these new privacy and security provisions in a timely manner.  Omnicare cannot predict at this time the costs associated with compliance, or the impact of the new requirements on the Company’s results of operations, cash flows or financial condition.
 
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Compliance Program. The Office of Inspector General (“OIG”) has issued guidance to various sectors of the healthcare industry to help providers design effective voluntary compliance programs to prevent fraud, waste and abuse in healthcare programs, including Medicare and Medicaid.  In addition, the Company and its operating units are subject in the ordinary course of business to audit, compliance, administrative and investigatory reviews by federal and state authorities covering various aspects of its business.  In 1998, Omnicare voluntarily adopted a compliance program to assist us in complying with applicable government regulations, and the Company continues to maintain and support its compliance program.  In 2009 the Company entered into an amended and restated corporate integrity agreement which succeeds the Company’s prior corporate integrity agreement entered into in 2006 and which requires, among other things, that the Company maintain and augment its compliance program in accordance with the terms of the agreement.
 
See “Risk Factors” and “Legal Proceedings” at Items 1A and 3, respectively, of this Filing for further discussion.
 
Environmental Matters
 
In operating our facilities, historically we have not encountered any major difficulties in effecting compliance with applicable pollution control laws.  No material capital expenditures for environmental control facilities are expected.  While we cannot predict the effect which any future legislation, regulations or interpretations may have upon our operations, we do not anticipate any changes regarding pollution control laws that would have a material adverse impact to Omnicare.
 
Employees
 
At December 31, 2009, we employed approximately 15,200 in our continuing operations, persons (including approximately 1,500 part-time employees), of which approximately 14,600 are located within, and approximately 600 outside of, the U.S.
 
Available Information
 
We make available, free of charge, on or through our Corporate Web site, at www.omnicare.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”).  Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C., 20549.  Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.  Information that we file with the SEC is also available at the SEC’s Web site at www.sec.gov.
 
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We also post on our Corporate Web site the following corporate governance documents and committee charters:
 
·  
Corporate Governance Guidelines
·  
Code of Business Conduct and Ethics
·  
Code of Ethics for the CEO and Senior Financial Officers
·  
Audit Committee Charter
·  
Compensation and Incentive Committee Charter
·  
Executive Committee Charter
·  
Nominating and Governance Committee Charter
 
Copies of these documents are also available in print to any stockholder who requests them by writing our Corporate Secretary at:
 
Omnicare, Inc.
1600 RiverCenter II
100 East RiverCenter Boulevard
Covington, Kentucky  41011
 
 
ITEM 1A. – RISK FACTORS
 
Risks Relating to Our Business
 
If we or our client facilities fail to comply with Medicaid and Medicare regulations, our revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.
 
Historically, prior to Part D, approximately one-half of our pharmacy services billings were directly reimbursed by government sponsored programs (including Medicaid and, to a lesser extent, Medicare).  Beginning January 1, 2006, the prescription drug benefit under Part D became effective.  As a result, we experienced a shift in payor mix (as a % of annual sales) in 2006, such that payments under Part D now represent approximately 43% of total Company revenues for the year ended December 31, 2009.  In particular, Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”), including the nursing home residents we serve whose drug costs were previously covered by state Medicaid programs, now have their outpatient prescription drug costs covered by the Medicare drug benefit.  In 2005, the year immediately preceding Part D, approximately 46% of our revenue was derived from beneficiaries covered under state Medicaid programs.  Under the Part D benefit, payment is determined in accordance with the agreements we have negotiated with the Part D Plans.  The remainder of our billings are paid or reimbursed by individual residents, long-term care facilities and other third party payors, including private insurers.  A portion of these revenues also are indirectly dependent on government programs.
 
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The table below represents our approximated payor mix (as a % of annual sales) for the last three years ended December 31,:
 
           
2009
 
2008
 
2007
Private pay, third-party and facilities (a)
     
42%
 
43%
 
42%
Federal Medicare program (Part D & Part B) (b)
     
44%
 
42%
 
43%
State Medicaid programs
       
9%
 
10%
 
11%
Other sources (c)
       
5%
 
5%
 
4%
 
Totals
       
100%
 
100%
 
100%
                     
(a)
Includes payments from SNFs on behalf of their federal Medicare program-eligible residents (Medicare
 
Part A) and for other services and supplies, as well as payments from third-party insurers and private pay.
(b)
Includes direct billing for medical supplies under Part B totaling 1% in each of the 2009, 2008 and 2007
 
years.
                 
(c)
Includes our contract research organization.
             
 
The Medicaid and Medicare programs are highly regulated.  The failure, even if inadvertent, of us and/or our client facilities to comply with applicable regulations could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs.  As previously disclosed in “Government Regulation” at Item 1 of this Filing, our client long-term care facilities are required to be certified to be in compliance with requirements pertaining to participation in the Medicare and Medicaid programs.  Facilities are surveyed for compliance with these program requirements.  On December 18, 2006, CMS issued final updated Guidance to Surveyors on Long Term Care regarding the survey protocol for review of pharmacy services provided in long-term care facilities participating in the Medicare and Medicaid programs.  The guidelines expanded the areas and detail in which surveyors assess pharmacy services at the facility, including ordering, acquiring, receiving, storing, labeling, dispensing and disposing of all medications at the facility; the provision of medication-related information to health care professionals and residents; the process of identifying and addressing medication-related issues through medication regimen reviews and collaboration between the licensed consultant pharmacist, the facility and other healthcare professionals; and the provision, monitoring and use of medication-related devices.  The guidelines also emphasize the important role of consultative services of pharmacists in promoting safe and effective medication use through the coordination of all aspects of pharmacy services provided to all residents within a facility.  While the Company has extensive policies and procedures involving the provisions of pharmacy services and consulting pharmacist service to long-term care facilities, there can be no assurance that the increased requirements and the enhanced focus on pharmacy services by government surveyors will not have an adverse impact on the Company's clients or on the Company's businesses.  In addition, our failure to comply with applicable Medicare and Medicaid regulations could subject us to other penalties.
 
 
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Continuing efforts to contain healthcare costs may reduce our future revenue.
 
Our sales and profitability are affected by the efforts of healthcare payors to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements.  Any changes which lower reimbursement levels under Medicare, Medicaid or private pay programs, including managed care contracts, could reduce our future revenue.  Furthermore, other changes in these reimbursement programs or in related regulations could reduce our future revenue.  These changes may include modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicare, Medicaid or third party expenditures.  In addition, our profitability may be adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the net prices on the products we obtain from them.
 
Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us.
 
Over the years, federal legislation has resulted in major changes in the healthcare system, which significantly affected healthcare providers.  Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services furnished during a Medicare-covered stay, including pharmacy services.  PPS initially resulted in a significant reduction of reimbursement to SNFs.  Congress subsequently sought to restore some of the reductions in reimbursement resulting from PPS.  Although some of the reductions were subsequently mitigated, the PPS fundamentally changed the payment for Medicare SNF services.
 
In recent years, SNFs have received the full market basket increase to annual rates.  For fiscal year 2009, beginning October 1, 2008, SNFs received a 3.4 percent inflation update that increased overall payments to SNFs by $780 million.  However, for fiscal year 2010, beginning on October 1, 2009, payments to SNFs were reduced by 1.1 percent, or $360 million to SNFs overall, compared to fiscal year 2009 levels. While the payment levels reflect a 2.2 percent market basket inflation update, that amount was more than offset by a 3.3 percent ($1.050 billion) adjustment intended to recalibrate case mix weights to compensate for increased expenditures resulting from refinements made in January 2006.  These or other reimbursement changes could have an adverse effect on the financial condition of the Company’s SNF clients, which could, in turn, adversely affect the timing or level of their payments to Omnicare.
 
Similarly, the Medicare Part D prescription drug benefit significantly shifted the payor mix for our pharmacy services.  Effective January 1, 2006, the Part D drug benefit permits Medicare beneficiaries to enroll in Part D Plans for their drug coverage.  Medicare beneficiaries generally have to pay a premium to enroll in a Part D Plan, with the premium amount varying from plan to plan, although the Centers for Medicare & Medicaid Services (“CMS”) provides various federal subsidies to Part D Plans to reduce the cost to beneficiaries. Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”) have their prescription drug costs covered by the new Medicare drug benefit, unless they elect to opt out of Part D coverage.  Many nursing home residents Omnicare serves are dual eligibles, whose drug costs were previously covered by state Medicaid programs.  In 2009, approximately 43% of Omnicare’s revenue was derived from beneficiaries covered under the federal Medicare Part D program.
 
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The Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan.  We have entered into such agreements with nearly all Part D Plan sponsors under which we provide drugs and associated services to their enrollees.  We continue to have ongoing discussions with Part D Plans and renegotiate these agreements in the ordinary course.  Further, the proportion of our Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans, Part D Plan consolidation and other factors.  As such, reimbursement under these agreements is subject to change.
 
Moreover, as expected in the transition to a program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays owed by Part D Plans for dual eligibles and other low income subsidy eligible beneficiaries.  As of December 31, 2009, copays outstanding from Part D Plans were approximately $16 million relating to 2006 and 2007.  The Company is pursuing solutions, including legal actions against certain Part D payors, to collect outstanding copays, as well as certain rejected claims.  Participants in the long-term care pharmacy industry continue to address these issues with CMS and the Part D Plans and attempt to develop solutions.  Among other things, on January 12, 2009, CMS finalized a change in its regulations requiring Part D Plan sponsors to accept and act upon certain types of documentation, referred to as “best available evidence,” to correct co-pays.  Similarly, on October 22, 2009, CMS published proposed rules that would make numerous changes to the regulations governing Part D, including certain Part D Plan payment rules and processes.  Language in the preamble to the proposed rule suggests that Part D Plans would be required to correct and pay copay amounts within 45 days of receiving complete information for the copay reconciliation.   However, until a final rule is issued and all administrative and payment issues are fully resolved, there can be no assurance that implementation issues associated with the Part D Drug benefit will not adversely impact our results of operations, financial position or cash flows.
 
CMS has issued subregulatory guidance on many aspects of the Part D program, including the provision of pharmaceutical services to long-term care residents.  CMS has also expressed some concerns about pharmacies’ receipt of discounts, rebates and other price concessions from drug manufacturers.  For 2007 and 2008, CMS instructed Part D Plan sponsors to require pharmacies to disclose to the Part D Plan sponsor any discounts, rebates and other direct or indirect remuneration designed to directly or indirectly influence or impact utilization of Part D drugs.  The Company reported information specified by CMS with respect to rebates received by the Company for 2007 and the first quarter of 2008 to those Part D Plans which agreed to maintain the confidentiality of such information.  In November 2008, CMS suspended collection of the long-term care pharmacy rebate data from Part D Plan sponsors for calendar years 2008 and 2009.  Instead, CMS developed its plan to collect different non-rebate information to focus plan attention on network pharmacy compliance and appropriate drug utilization management.  The final Part D reporting requirements for calendar year 2010 include instructions for plans to report to CMS the number and cost of formulary versus non-formulary prescription drugs dispensed in the aggregate by each long-term care pharmacy and by all retail pharmacies as a group in the Part D Plan’s service area.  CMS also issued a memo on November 25, 2008 reminding Part D Plan sponsors of the requirement to (1) provide convenient access to network long-term care pharmacies to all of their enrollees residing in long-term care facilities, and (2) exclude payment for drugs that are covered under a Medicare Part A stay that would otherwise satisfy the definition of a Part D drug.  The Company will continue to work with Part D Plan sponsors to ensure compliance with CMS’s evolving policies related to long-term care pharmacy services.
 
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MIPPA includes further reforms to the Part D program.  As of January 1, 2009, the law also requires Part D Plan sponsors to update the prescription drug pricing data they use to pay pharmacies at least every seven days. As of January 1, 2010, the law requires that long-term care pharmacies have between 30 and 90 days to submit claims to a Part D Plan.  The law also expands the number of Medicare beneficiaries who will be entitled to premium and cost-sharing subsidies by modifying previous income and asset requirements, eliminates late enrollment penalties for beneficiaries entitled to these subsidies, and limits the sales and marketing activities in which Part D Plan sponsors may engage, among other things.  On September 18, 2008, CMS published final regulations implementing many of the MIPPA Part D provisions, and the agency published another interim final rule with comment period on January 16, 2009 implementing additional MIPPA provisions related to drug formularies and protected classes of drugs.  Additional legislative proposals are pending before Congress that could further modify the Part D benefit, including proposals that could impact the payment available or pricing for drugs under Part D Plans. We cannot predict at this time whether such legislation will be enacted or the form any such legislation would take.  We can make no assurances that future Part D legislation would not adversely impact our business.
 
Moreover, CMS continues to issue guidance on and make revisions to the Part D program.  We are continuing to monitor issues relating to implementation of the Part D benefit, and until further agency guidance is known and until all administrative and payment issues associated with the transition to this massive program are fully resolved, there can be no assurance that the impact of the Part D rules, future legislative changes, or the outcome of other potential developments relating to its implementation on our business, results of operations, financial position or cash flows will not change based on the outcome of any unforeseen future developments.
 
The MMA also changed the Medicare payment methodology and conditions for coverage of certain items of DMEPOS under Medicare Part B.  Approximately 1% of our revenue is derived from beneficiaries covered under Medicare Part B.  The changes include a temporary freeze in annual increases in payments for durable medical equipment from 2004 through 2008, new clinical conditions for payment, quality standards (applied by CMS-approved accrediting organizations), and competitive bidding requirements.  Only suppliers that are winning bidders will be eligible to provide competitively bid items to Medicare beneficiaries in the selected areas, and winning bidders will be paid based on the median of the winning suppliers’ bid for each of the selected items in the region, rather than the Medicare fee schedule amount.
 
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In mid-2007, CMS conducted a first round of bidding for 10 DMEPOS product categories in 10 competitive bidding areas, and announced winning bidders in March 2008.  In light of concerns about implementation of the bidding program, in MIPPA Congress terminated the contracts awarded by CMS in the first round of competitive bidding, required that new bidding be conducted for the first round, and required certain reforms to the bidding process.  The law requires CMS to rebid those areas in 2009, with bidding for round two delayed until 2011.  The delay is being financed by reducing Medicare fee schedule payments for all items covered by the round one bidding program by 9.5 percent nationwide effective January 1, 2009, followed by a 2 percent increase in 2014 (with certain exceptions).  The legislation also includes a series of procedural improvements to the bidding process.  CMS published an interim final rule with comment period to implement the MIPPA competitive bidding changes on January 16, 2009, and on April 17, 2009 announced that it is proceeding with implementation of the January 16, 2009 rule after a brief delay.  Bidding for the new round one of the program began October 21, 2009, and ended December 21, 2009.  Contract suppliers are expected to be announced in June 2010, and the program is scheduled to go into effect January 1, 2011.  We participated in the new bidding process for round one.  There is no assurance that we will be a successful bidder in the DMEPOS competitive bidding process, or that reimbursement levels established through the bidding process would not adversely impact the Company’s results of operations, cash flows, or financial condition.
 
With respect to Medicaid, many states are facing budget pressures that could result in increased cost containment efforts impacting healthcare providers.  States have considerable latitude in setting payment rates for nursing facility services.  States also have flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver.  Although these waiver programs generally exempt institutional care, including nursing facilities and institutional pharmacy services, some states do use managed care principles in their long-term care programs.  The DRA also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process, and includes a demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes.  Such initiatives could increase state funding for home and community-based services, while prompting states to cut funding for nursing facilities.  No assurances can be given that state Medicaid programs ultimately will not change the reimbursement system for long-term care or pharmacy services in a way that adversely impacts the Company.
 
The DRA also changed the so-called federal upper limit payment rules for multiple source prescription drugs covered under Medicaid.  Like the current upper limit, it only applies to drug ingredient costs and does not include dispensing fees, which will continue to be determined by the states.  First, the DRA redefined a multiple source drug subject to the upper limit rules to be a covered outpatient drug that has at least one other drug product that is therapeutically equivalent.  Thus, the federal upper limit is triggered when there are two or more therapeutic equivalents, instead of three or more as was previously the case.  Second, effective January 1, 2007, the DRA changed the federal upper payment limit from 150 percent of the lowest published price for a drug (which is usually the wholesale acquisition cost) to 250 percent of the lowest average manufacturer price (“AMP”).  Congress expected these DRA provisions to reduce federal and state Medicaid spending by $8.4 billion over five years.  On July 17, 2007,
 
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CMS issued a final rule with comment period to implement changes to the upper limit rules.  Among other things, the final rule: established a new federal upper limit calculation for multiple source drug based on 250 percent of the lowest AMP in a drug class; required CMS to post AMP amounts on its Web site; and established a uniform definition for AMP.  Additionally, the final rule provided that sales of drugs to long-term care pharmacies for supply to nursing homes and assisted living facilities (as well as associated discounts, rebates or other price concessions) are not to be taken into account in determining AMP where such sales can be identified with adequate documentation, and that any AMPs which are not at least 40% of the next highest AMP will not be taken into account in determining the upper limit amount (the so-called “outlier” test).  However, on December 19, 2007, the United States District Court for the District of Columbia issued a preliminary injunction that enjoins CMS from implementing provisions of the July 17, 2007 rule to the extent that it affects Medicaid reimbursement rates for retail pharmacies under the Medicaid program.  The order also enjoins CMS from posting AMP data on a public Web site or disclosing it to states.  As a result of this preliminary injunction, CMS did not post AMPs or new upper limit prices in late December 2007 based upon the July 17, 2007 final rule despite its earlier planned timetable, and the schedule for states to implement the new upper limits has been delayed until further notice.  Separately, on March 14, 2008, CMS published an interim final rule with comment period revising the definition of multiple source drug set forth in the July 17, 2007 final rule.  In short, the effect of the rule will be that federal upper limits apply in all states unless the state finds that a particular generic drug is not available within that state.  CMS also noted that the regulation is subject to the injunction by the United States District Court for the District of Columbia to the extent that it may affect Medicaid reimbursement rates for pharmacies.  On October 7, 2008, CMS published the final version of this rule, adopting the March 2008 interim final rule with technical changes effective November 6, 2008, although it continues to be subject to an injunction to the extent that it affects Medicaid pharmacy reimbursement rates. Moreover, MIPPA delayed the adoption of the DRA’s new federal upper limit payment rules for Medicaid based on AMP for multiple source drugs and prevented CMS from publishing AMP data before October 1, 2009.  To date, CMS has not issued a new rule or published such AMP data.  Therefore, at this time upper payment limits continue to be determined under the pre-DRA rules.  With the advent of Medicare Part D, our revenues from state Medicaid programs are substantially lower than has been the case previously.  However, some of our agreements with Part D Plans and other payors have incorporated the Medicaid upper limit rules into the pricing mechanisms for prescription drugs.  Until the litigation regarding the final rule is resolved and new upper limit amounts are published by CMS, we cannot predict the impact of the final rule on our business.  Further, there can be no assurance that federal upper limit payments under pre-DRA rules, CMS adoption of a revised rule under the DRA, Congressional action, or other efforts by payors to limit reimbursement for certain drugs will not adversely impact our business.
 
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009.  This $790 billion economic stimulus package includes a number of health care policy provisions, including approximately $19 billion in funding for health information technology infrastructure and Medicare and Medicaid incentives to encourage doctors, hospitals, and other providers to use health information technology to electronically exchange patients’ health information.  The law also strengthens federal privacy and security provisions to protect personally-identifiable health information.  In addition, the legislation increases Federal Medical Assistance Percentage (“FMAP”) payments by approximately $87 billion to help support state Medicaid programs in the face of budget shortfalls.  The law also temporarily extends current Medicaid prompt payment requirements to nursing facility and hospital claims, requiring state Medicaid programs to reimburse providers for 90 percent of claims within 30 days of receipt and 99 percent of claims within 90 days of receipt.  The Obama Administration has issued a variety of guidance documents and regulations to implement the new law.  Congress is also considering extending the temporary Medicaid provisions as part of legislation designed to spur job creation, although such legislation has not been enacted to date.  Omnicare continues to review the implementation of the law and assess the potential impact of the various provisions on the Company.
 
35

 
Two other recent actions at the federal level could impact Medicaid payments to nursing facilities.  The Tax Relief and Health Care Act of 2006 modified several Medicaid policies including, among other things, reducing the limit on Medicaid provider taxes from 6 percent to 5.5 percent from January 1, 2008 through September 30, 2011.  On February 22, 2008, CMS published a final rule that implements this legislation, and makes other clarifications to the standards for determining the permissibility of provider tax arrangements.  Provisions of the rule were repeatedly delayed; currently enforcement is delayed until June 30, 2010.  Second, on May 21, 2007, CMS published a rule designed to ensure that Medicaid payments to governmentally operated nursing facilities and certain other health care providers are based on actual costs and that state financing arrangements are consistent with the Medicaid statute.  CMS estimates that the rule would save $120 million during the first year and $3.87 billion over five years, but Congress blocked the rule through April 1, 2009.  The American Recovery and Reinvestment Act of 2009 expresses the sense of Congress that the Secretary of Health and Human Services should not promulgate the provider cost limit rule, citing a ruling by the United States District Court for the District of Columbia that the final rule was “improperly promulgated.”
 
Broader changes in federal healthcare policy have been proposed by President Obama and are currently under consideration by Congress.  The House of Representatives approved a sweeping health reform bill, H.R. 3962, the Affordable Health Care for America Act, on November 7, 2009.  The Senate approved its version of the measure, H.R. 3590, the Patient Protection and Affordable Care Act, on December 24, 2009.  Both bills seek to expand access to affordable health insurance through insurance market reforms, the establishment of health insurance “exchanges” through which individuals and small businesses can purchase qualified insurance coverage, and expansion of the Medicaid program.  The House version of the bill also would establish a public health insurance option to compete with private health insurers.  Among many other things, both versions of the legislation include significant reimbursement cuts to Medicare providers, including skilled nursing facilities, although details vary between the plans.  In addition, the House bill would require the Secretary to negotiate Medicare Part D drug prices directly with pharmaceutical manufacturers and remove deadlines for long-term care pharmacies to file Part D claims, while both versions would require Part D plans to develop utilization management techniques to reduce prescription drug waste in long-term care facilities. The reform plans also would increase the Medicaid drug rebate level paid by pharmaceutical manufacturers and expand the drugs that are subject to such rebates.  Congressional leaders and the Administration have been working to develop a compromise bill reconciling differences between the two approaches, but it is unclear at this time whether a bill will be enacted, and if so, which provisions will be included in such a bill.
 
36

 
In order to rein in healthcare costs, the Company anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies.  Given the debate regarding the cost of healthcare, managed care, universal healthcare coverage, and other healthcare issues, the Company cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on its business.  Further, the Company receives discounts, rebates and other price concessions from pharmaceutical manufacturers pursuant to contracts for the purchase of their products.  There can be no assurance that any changes in legislation or regulations, or interpretations of current law, that would eliminate or significantly reduce the discounts, rebates and other price concessions that the Company receives from manufacturers or that otherwise impact payment available for drugs under federal or state healthcare programs, would not have a material adverse impact on the Company’s overall consolidated results of operations, financial position or cash flows.  Longer term, funding for federal and state healthcare programs must consider the aging of the population; the growth in enrollees as eligibility is potentially expanded; the escalation in drug costs owing to higher drug utilization among seniors; the impact of the Medicare Part D benefit for seniors; the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the entire Medicare program.  Given competing national priorities, it remains difficult to predict the outcome and impact on us of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs.  Further, Medicare, Medicaid and/or private payor rates for pharmaceutical supplies and services may not continue to be based on current methodologies or remain comparable to present levels.  Any future healthcare legislation or regulation impacting these rates may materially adversely affect the Company’s business.
 
 
On October 4, 2006, the plaintiffs in New England Carpenters Health Benefits Fund et al. v. First DataBank, Inc. and McKesson Corporation, CA No. 1:05-CV-11148-PBS (United States District Court for the District of Massachusetts) and defendant First DataBank, Inc. (“First DataBank”) entered into a settlement agreement relating to First DataBank’s publication of average wholesale price (“AWP”).  AWP is a pricing benchmark that is widely used to calculate a portion of the reimbursement payable to pharmacy providers for the drugs and biologicals they provide, including under State Medicaid programs, Medicare Part D Plans and certain of the Company’s contracts with long-term care facilities.  The settlement agreement would have required First DataBank to cease publishing AWP two years after the settlement became effective unless a competitor of First DataBank was then publishing AWP, and would have required that First DataBank modify the manner in which it calculates AWP for over 8,000 distinct drugs (“NDCs”) from 125% of the drug’s wholesale acquisition cost (“WAC”) price established by manufacturers to 120% of WAC until First DataBank ceased publishing same.  In a related case, District Council 37 Health and Security Plan v. Medi-Span, CA No. 1:07-CV-10988-PBS (United States District Court for the District of Massachusetts), in which Medi-Span is
 
37

 
accused of misrepresenting pharmaceutical prices by relying on and publishing First DataBank’s price list, the parties entered into a similar settlement agreement.  The Court granted preliminary approval of both agreements, but later after hearing various objections to the proposed settlements, indicated that it would not approve them.  On May 29, 2008, the plaintiffs and First DataBank filed a new settlement that included a reduction in the number of NDCs to which a new mark-up over WAC would apply (20% vs. 25%) from over 8,000 to 1,356, and removed the provision requiring that AWP no longer be published in the future.  First DataBank also agreed to contribute approximately $2 million to a settlement fund and for legal fees.  On July 15, 2008, Medi-Span and the plaintiffs in that litigation also proposed an amended settlement agreement under which Medi-Span agreed to reduce the mark-up over WAC (from 20% to 25%) for only the smaller number of NDCs, the requirement that AWP not be published in the future was removed, and Medi-Span agreed to pay $500,000 for the benefit of the plaintiff class.  First DataBank and Medi-Span, independent of these settlements, announced that they would, of their own volition, reduce to 20% the mark-up on all drugs with a mark-up higher than 20% and stop publishing AWP within two years after the changes in mark-up are implemented (in the case of First DataBank) or within two years after the settlement is finally approved (in the case of Medi-Span).  On March 17, 2009 the Court approved the proposed settlements, with a modification by the Court requiring that the change in mark-ups take place 180 days after the order approving the settlements is entered.  The Court entered an order approving the settlements on March 30, 2009.  While several entities appealed the Court's order to the United States Court of Appeals for the First Circuit, on September 3, 2009 the Court of Appeals upheld the settlements.  First DataBank and Medi-Span implemented the changes in AWP on September 26, 2009.
 
The Company has taken a number of steps to prevent or mitigate the adverse effect on the Company’s reimbursement for drugs and biologicals which could otherwise result from these settlements. For most state Medicaid programs reimbursing under an AWP formula, the Company is currently being reimbursed under old rate formulas using the new AWPs published in accordance with the settlements, resulting in lower reimbursement under these programs.  There can be no assurance that the First DataBank and Medi-Span settlements and associated unilateral actions by First DataBank and Medi-Span, or actions, if any, by the Company’s payors relating to AWP, will not have a further adverse impact on the Company’s results of operations, financial position or cash flows. (See Management’s Discussion and Analysis of Results of Operation and Financial Condition – “Pharmacy Services”.)
 
If we fail to comply with licensure requirements, fraud and abuse laws or other applicable laws, we may need to curtail operations, and could be subject to significant penalties.
 
Our pharmacy business is subject to extensive and often changing federal, state and local regulations, and our pharmacies are required to be licensed in the states in which they are located or do business.  While we continuously monitor the effects of regulatory activity on our operations and we currently have pharmacy licenses for each pharmacy we operate, the failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued operation of our business.  We also are subject to federal and state laws imposing registration, repackaging and labeling requirements on certain entities that repackage drugs for distribution; state and federal laws regarding the transfer and shipment of pharmaceuticals; and “drug pedigree” provisions requiring wholesale drug
 
38

 
distributors to document a history of the transactions in a drug lot’s chain of distribution. The long-term care facilities that contract for our services are also subject to federal, state and local regulations and are required to be licensed in the states in which they are located.  The failure by these long-term care facilities to comply with these or future regulations, or to obtain or renew any required licenses, could result in our inability to provide pharmacy services to these facilities and their residents.  We are also subject to federal and state laws that prohibit some types of direct and indirect payments between healthcare providers.  These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services.  Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion from the Medicaid, Medicare and other federal healthcare programs.
 
Our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances.  The Drug Enforcement Administration (“DEA”) has recently increased scrutiny and enforcement of long-term care pharmacy practices under the federal Controlled Substances Act.  We believe that this increased scrutiny and, in some cases, stringent interpretation of existing regulations, effectively changes longstanding practices for dispensing controlled substances in the long-term care facility setting.  We have been required to modify the controlled substances dispensing procedures at certain of our pharmacies to comply with the regulations as currently interpreted by the DEA.  Heightened enforcement of controlled substances regulations could increase the overall regulatory burden and costs associated with our pharmacy services.  There can be no assurance that this heightened level of enforcement, or any fines or other penalties resulting therefrom, will not materially adversely affect our results of operations or financial condition.
 
We expend considerable resources in connection with our compliance efforts.  We believe that we are in compliance in all material respects with state and federal regulations applicable to our business.  However, we cannot assure you that government enforcement agencies will agree with our assessment, or that we would not be subject to an enforcement action under applicable law.  Moreover, Congress is considering health reform legislation that could expand federal health care fraud enforcement authorities.  The Company cannot predict at this time the costs associated with compliance with any such laws, if enacted.
 
Federal and state laws that protect patient health and other personal information may increase our costs and limit our ability to collect and use that information.
 
 
Our Company and the healthcare industry generally are required to comply with the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system.  Many states have similar laws with which the Company is also required to comply.  HIPAA required the Department of Health and Human Services (“HHS”) to adopt standards for electronic transactions and code sets for basic healthcare transactions such as payment and remittance advice (“Transaction Standards”); privacy of individually identifiable healthcare information (“Privacy Standards”); and security (“Security Standards”), as well as standards for unique identifiers for providers, employers, health
 
39

 
plans and individuals; and for governmental enforcement of the requirements of HIPAA.  In many of our operations, we are a healthcare provider, a “covered entity” under HIPAA, and therefore required to comply in our operations with these standards and subject to significant civil and criminal penalties for failure to do so.  In addition, such failure to comply could result in loss of customers and/or contractual liability to our customers.  We also provide services to customers that are healthcare providers themselves and we are required to provide satisfactory written assurances to those customers, in the form of contractual agreements, that we will provide our services in accordance with the requirements of the Privacy and Security Standards.  Failure to comply with these contractual agreements could lead to loss of customers, contractual liability to our customers, or, direct action by the federal government, including penalties.  We believe that we are compliant with the HIPAA Transaction Standards, the Privacy Standards and the Security Standards, as each is currently in effect.  In addition, in January 2004, CMS published a rule announcing the adoption of the National Provider Identifier (“NPI”) as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions.  We have obtained the NPIs for our locations as they have become due.  On January 16, 2009, HHS published two rules (1) adopting new code sets to be used by the public and private sectors for reporting diagnoses and inpatient procedures in health care transactions under HIPAA, effective October 1, 2013; and (2) adopting updated versions of the HIPAA standards for certain electronic health care transactions, including the pharmacy claims transactions standard, effective January 1, 2012.  We are assessing the impact of the new code sets and transaction standards on our operations.  We believe we fully comply with HIPAA and similar state requirements; however, at this time we cannot estimate if future changes, if any, to the cost of compliance of the HIPAA and similar state standards will result in an adverse effect on our operations or profitability, or that of our customers.
 
Like many health care providers, Omnicare maintains personal information of or concerning its patients.  Such information, which has common elements with health information regulated under HIPAA and state medical privacy laws but is not identical to health information, is subject to increasing state and federal regulation designed to prevent or mitigate the effects of financial identity theft, defined as wrongfully gaining credit or other financial benefit using another’s financial identity, and medical identity theft, defined as wrongfully obtaining medical care using another’s insurance coverage identity.  Laws of most states in which the Company operates require that individuals be notified of a breach of the security of their personal information, so that they can take steps to protect themselves from identity theft.  The Company expects this expansion of the scope of security breach notification laws to continue at the state and the federal levels.  Moreover, the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, includes a number of provisions to strengthen federal privacy and security provisions to protect personally-identifiable health information.  Among other things, the law applies HIPAA security provisions and penalties to business associates of covered entities; requires certain notifications in the event of a security breach involving protected health information; restricts certain unauthorized disclosures and sales of health information; clarifies treatment of certain marketing activities; and strengthens enforcement activities, including authorizing civil actions by state attorneys general to enjoin violations of HIPAA and to obtain damages, including penalties, on behalf of residents of the state.  Many of the implementation requirements associated with these provisions are being detailed in regulations.  For instance, on August 24, 2009, the Department of Health and Human Services issued an interim final rule with comment period to implement the provision requiring notification of breaches of unsecured protected health information.  The rule is effective September 23, 2009.  The Company currently is assessing the potential impact of these new privacy and security provisions on its operations and is taking steps to assure that it is in material compliance with these new privacy and security provisions in a timely manner.  Omnicare cannot predict at this time the costs associated with compliance, or the impact of the new requirements on the Company’s results of operations, cash flows or financial condition.
 
40

 
Like most health care providers, the Company was required by the FTC to have in place, by May 1, 2009, a written plan to identify and detect indications of identity theft (so-called “red flags”) and to respond appropriately to prevent and mitigate identity theft.  The enforcement date for compliance with the final red flag rule, originally November 1, 2008, has been extended by the FTC on several occasions; the current enforcement deadline is June 1, 2010.  Implementation of systems within the Company to comply with these laws and operational compliance carries with it costs and administrative burdens.  Failure to comply carries with it the risk of significant penalties and sanctions from regulatory authorities as well as possible civil litigation from affected individuals or the facilities in which they reside.  Further, there can be no assurance that improper exposure of personal information of the individuals it serves to third parties will not have an adverse impact on the business and prospects of the Company.
 
Omnicare has substantial outstanding debt and could incur more debt in the future. Any failure to meet its debt obligations would adversely affect Omnicare’s business and financial condition.
 
At December 31, 2009, Omnicare’s total consolidated long-term debt (including current maturities) accounted for approximately 35.2% of its total capitalization.  In addition, Omnicare and its subsidiaries may be able to incur substantial additional debt in the future.  The instruments governing Omnicare’s current indebtedness contain restrictions on Omnicare’s incurrence of additional debt.  These restrictions, however, are subject to a number of qualifications and exceptions, and under certain circumstances, Omnicare could incur substantial additional indebtedness in compliance with these restrictions, including in connection with potential acquisition transactions.  Moreover, these restrictions do not prevent Omnicare from incurring obligations that do not constitute debt under the governing documents.
 
The degree to which Omnicare is leveraged could have important consequences, including:
 
·  
a substantial portion of Omnicare’s cash flow from operations will be required to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, dividends or general corporate or other purposes;
·  
Omnicare’s ability to obtain additional financing in the future may be impaired;
·  
Omnicare may be more highly leveraged than its competitors, which may place it at a competitive disadvantage;
·  
Omnicare’s flexibility in planning for, or reacting to, changes in its business and industry may be limited; and
·  
Omnicare’s degree of leverage may make it more vulnerable in the event of a downturn in its business or in its industry or the economy in general.
 
41

 
Omnicare’s ability to make payments on and to refinance its debt will depend on its ability to generate cash in the future.  This, to a certain extent, is subject to general economic, business, financial, competitive, legislative, regulatory and other factors that are beyond Omnicare’s control.
 
We cannot assure you that Omnicare’s business will generate sufficient cash flow from operations or that future borrowings will be available under its credit facilities in an amount sufficient to enable Omnicare to pay its debt or to fund its other liquidity needs.  Omnicare may need to refinance all or a portion of its debt on or before maturity.  We cannot assure you that Omnicare would be able to refinance any of its debt, including any credit facilities, on commercially reasonable terms or at all.
 
We are subject to additional risks relating to our acquisition strategy.
 
One component of our strategy contemplates our making selected acquisitions.  Acquisitions involve inherent uncertainties.  These uncertainties include our ability to consummate proposed acquisitions on favorable terms or at all, the effect on acquired businesses of integration into a larger organization, and the availability of management resources to oversee the operations of these businesses.  The successful integration of acquired businesses will require, among other things:
 
·  
consolidation of financial and managerial functions and elimination of operational redundancies;
·  
achievement of purchasing efficiencies;
·  
the addition and integration of key personnel; and
·  
the maintenance of existing business.
 
Even though an acquired business may have experienced positive financial performance as an independent company prior to an acquisition, we cannot be sure that the business will continue to perform positively after an acquisition.
 
We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, and tax contingencies.  We have policies and procedures to conduct reviews of potential acquisition candidates for compliance with healthcare laws and to conform the practices of acquired businesses to our standards and applicable laws.  We also generally seek indemnification from sellers covering these matters.  We may, however, incur material liabilities for past activities of acquired businesses.
 
We cannot be sure of the successful completion or integration of any acquisition, or that an acquisition will not have an adverse impact on our results of operations, cash flows or financial condition.
 
 
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We operate in highly competitive businesses.
 
The long-term care pharmacy business is highly regionalized and, within a given geographic region of operations, highly competitive.  Our largest competitor nationally is PharMerica Corporation.  In the geographic regions we serve, we also compete with numerous local and regional institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies.  While we compete on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, pharmaceutical technology and professional support we offer, competitive pressures may affect our profitability.
 
Our contract research organization, or CRO business, competes against other full-service CROs and client internal resources.  The CRO industry is highly fragmented with a number of full-service contract research organizations and many small, limited-service providers, some of which serve only local markets.  Clients choose a CRO based upon, among other reasons, reputation, references from existing clients, the client’s relationship with the organization, the organization’s experience with the particular type of project and/or therapeutic area of clinical development, the organization’s ability to add value to the client’s development plan, the organization’s financial stability and the organization’s ability to provide the full range of services required by the client.
 
We are dependent on our senior management team and our pharmacy professionals.
 
We are highly dependent upon the members of our senior management and our pharmacists and other pharmacy professionals.  Our business is managed by a small number of key management personnel who have been extensively involved in the success of our business, including Joel F. Gemunder, our President and Chief Executive Officer.  If we were unable to retain these persons, we might be adversely affected.  There is a limited pool of senior management personnel with significant experience in our industry.  Accordingly, we believe we could experience significant difficulty in replacing key management personnel.  Although we have employment contracts with our key management personnel, these contracts generally may be terminated without cause by either party.
 
In addition, our continued success depends on our ability to attract and retain pharmacists and other pharmacy professionals.  Competition for qualified pharmacists and other pharmacy professionals is strong.  The loss of pharmacy personnel or the inability to attract, retain or motivate sufficient numbers of qualified pharmacy professionals could adversely affect our business.  Although we generally have been able to meet our staffing requirements for pharmacists and other pharmacy professionals in the past, our inability to do so in the future could have a material adverse effect on us.
 
ITEM 1B. – UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
 
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ITEM 2. – PROPERTIES
 
We have facilities including offices, distribution centers, warehouses and other key operating facilities (e.g., institutional pharmacies, etc.) in various locations within and outside of the U.S.  As of December 31, 2009, we operated a total of 248 facilities, 8 of which we owned, while the remaining were leased.  The owned facilities are held in fee and are not subject to any material encumbrance.  We consider all of these facilities to be in good operating condition and generally to be adequate for present and anticipated needs.
 
   
Pharmacy
 
CRO
         
Total
   
Services
 
Services
 
Corporate
 
Total
 
Square
U.S. State/Country
 
Facilities
 
Facilities
 
Facilities
 
Facilities
 
Footage
                     
 Alabama
 
 2
         
 2
 
 17,949
 Arizona
 
 4
         
 4
 
 25,985
 Arkansas
 
 2
         
 2
 
 22,800
 California
 
 13
 
 2
     
 15
 
 261,827
 Colorado
 
 3
         
 3
 
 25,199
 Connecticut
 
 3
         
 3
 
 71,700
 District of Columbia
         
 1
 
 1
 
 1,073
 Florida
 
 9
     
 1
 
 10
 
 129,471
 Georgia
 
 2
 
 1
     
 3
 
 28,220
 Idaho
 
 2
         
 2
 
 7,826
 Illinois
 
 8
         
 8
 
 206,096
 Indiana
 
 4
         
 4
 
 127,924
 Iowa
 
 4
         
 4
 
 33,324
 Kansas
 
 1
         
 1
 
 10,000
 Kentucky
 
 6
     
 2
 
 8
 
 377,409
 Louisiana
 
 3
         
 3
 
 29,867
 Maine
 
 2
         
 2
 
 20,613
 Maryland
 
 15
         
 15
 
 233,372
 Massachusetts
 
 5
         
 5
 
 50,929
 Michigan
 
 5
         
 5
 
 60,133
 Minnesota
 
 1
         
 1
 
 28,255
 Mississippi
 
 1
         
 1
 
 4,175
 Missouri
 
 6
         
 6
 
 113,569
 Montana
 
 1
         
 1
 
 3,500
 Nebraska
 
 1
         
 1
 
 9,772
 Nevada
 
 2
         
 2
 
 23,033
 New Hampshire
 
 1
         
 1
 
 22,400
 New Jersey
 
 6
         
 6
 
 120,237
 New Mexico
 
 1
         
 1
 
 9,454
 New York
 
 8
 
 1
     
 9
 
 165,724
 North Carolina
 
 6
         
 6
 
 72,815
 Ohio
 
 15
         
 15
 
 387,505
 Oklahoma
 
 2
         
 2
 
 46,405
 Oregon
 
 2
         
 2
 
 36,410
 Pennsylvania
 
 14
 
 1
     
 15
 
 542,132
 Rhode Island
 
 1
         
 1
 
 10,000
 South Carolina
 
 4
         
 4
 
 53,188
 South Dakota
 
 1
         
 1
 
 8,960
 Tennessee
 
 4
         
 4
 
 100,184
 Texas
 
 12
         
 12
 
 95,497
 Utah
 
 3
         
 3
 
 48,306
 Vermont
 
 1
         
 1
 
 5,000
 Virginia
 
 10
         
 10
 
 127,784
 Washington
 
 11
         
 11
 
 77,280
 West Virginia
 
 2
         
 2
 
 25,084
 Wisconsin
 
 5
         
 5
 
 81,340
 
 
44

 
 
   
Pharmacy
 
CRO
         
Total
   
Services
 
Services
 
Corporate
 
Total
 
Square
Country
 
Facilities
 
Facilities
 
Facilities
 
Facilities
 
Footage
                     
Argentina
     
 1
     
 1
 
 4,930
Australia
     
 1
     
 1
 
 4,079
Belgium
     
 1
     
 1
 
 4,251
Canada
 
 1
 
 1
     
 2
 
 2,908
China
     
 2
     
 2
 
 5,280
Czech Republic
     
 1
     
 1
 
 2,723
France
     
 1
     
 1
 
 4,871
Germany
     
 3
     
 3
 
 51,850
Hungary
     
 1
     
 1
 
 1,940
India
     
 2
     
 2
 
 14,800
Japan
     
 1
     
 1
 
 744
Phillippines
     
 1
     
 1
 
 435
Poland
     
 1
     
 1
 
 2,577
Russia
     
 1
     
 1
 
 1,841
Singapore
     
 1
     
 1
 
 2,260
South Korea
     
 1
     
 1
 
 592
Spain
     
 1
     
 1
 
 1,346
Taiwan
     
 1
     
 1
 
 890
Ukraine
     
 1
     
 1
 
 377
United Kingdom
     
 1
     
 1
 
 9,590
   
 215
 
 29
 
 4
 
 248
 
 4,078,010
 
ITEM 3. - LEGAL PROCEEDINGS
 
On May 18, 2006, an antitrust and fraud action entitled Omnicare, Inc. v. UnitedHealth Group, Inc., et al., 2:06-cv-00103-WOB, was filed by the Company in the United States District Court for the Eastern District of Kentucky against UnitedHealth Group, Inc., PacifiCare Health Systems, Inc., and RxSolutions, Inc. d/b/a Prescription Solutions, asserting claims of violations of federal and state antitrust laws, civil conspiracy and common law fraud arising out of an alleged conspiracy by defendants to illegally and fraudulently coordinate their negotiations with the Company for Medicare Part D contracts as part of an effort to defraud the Company and fix prices.  The complaint seeks, among other things, damages, injunctive relief and reformation of certain contracts.  On June 5, 2006, the Company filed a first supplemental and amended complaint in which it asserted the identical claims.  In an order dated November 9, 2006, a motion by defendants to transfer venue to the United States District Court for the Northern District of Illinois was granted, but a motion to dismiss the antitrust claims was denied without prejudice, with leave to refile in the transferee court.  On January 16, 2009, the United States District Court for the Northern District of Illinois granted a motion for summary judgment filed by the defendants.  On January 21, 2009, the Company filed a Notice of Appeal of the judgment and the related orders to the United States Court of Appeals for the Seventh Circuit.  On June 9, 2009, the Company filed its appellate brief in the Seventh Circuit Court of Appeals.  On July 10, 2009, defendants filed their appellate brief, and on July 23, 2009, the Company filed its reply brief.  The Seventh Circuit Court of Appeals heard oral argument on the matter on November 13, 2009 and thereafter took the appeal under submission.
 
45

 
On January 8, 2010, a qui tam complaint, entitled United States ex rel. Resnick and Nehls v. Omnicare, Inc., Morris Esformes, Phillip Esformes and Lancaster Ltd. d/b/a Lancaster Health Group, No. 1:07cv5777, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court.  The U.S. Department of Justice and the State of Illinois have notified the court that they have declined to intervene in this action.  The complaint was brought by Adam Resnick and Maureen Nehls as private party “qui tam relators” on behalf of the federal government and two state governments.  The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that Omnicare acquired certain institutional pharmacies at above-market rates in violation of the Anti-Kickback Statute and applicable state statutes.  The Company has not been served with the complaint in this action.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.
 
As previously disclosed, the U.S. Attorney’s Office, District of Massachusetts had been investigating allegations under the False Claims Act, 31 U.S.C. (§) 3729, et seq. and various state false claims statutes in five qui tam complaints (Maguire, Kammerer, Lisitza and two sealed complaints) concerning the Company’s relationships with certain manufacturers and distributors of pharmaceutical products and certain customers, as well as with respect to contracts with certain companies acquired by the Company.  The complaints in these cases, which have been dismissed with prejudice by the relators pursuant to the settlement described below (including the two sealed complaints, which have now been unsealed as part of the settlement), alleged that the Company violated the False Claims Act when it submitted claims for name brand drugs when actually providing generic versions of the same drug to nursing homes; provided consultant pharmacist services to its customers at below-market rates to induce the referral of pharmaceutical business; accepted discounts from drug manufacturers in return for recommending that certain pharmaceuticals be prescribed to nursing home residents; accepted rebates, post-purchase discounts, grants and other forms of remuneration from drug manufacturers in return for purchasing pharmaceuticals from those manufacturers and taking steps to increase the purchase of those manufacturers’ drugs; made false statements and omissions to physicians in connection with its recommendations of those pharmaceuticals; substituted certain pharmaceuticals without physician authorization; accepted payments from certain generic drug manufacturers in return for entering into purchase arrangements with them; acquired certain institutional pharmacies at above-market rates to obtain contracts between those pharmacies and nursing homes; and made a payment to certain nursing home chains in return for the referral of pharmaceutical business.
 
On November 2, 2009, the Company entered into a civil settlement agreement, without any finding of wrongdoing or any admission of liability, finalizing a previously disclosed agreement in principle, under which the Company has agreed to pay the federal government and participating state governments $98 million plus interest from June 24, 2009 (the date of the agreement in principle referenced above) and related expenses to settle various alleged civil violations of federal and state laws.  The settlement agreements release the Company from claims that the Company allegedly violated various federal and state laws due to the Company having allegedly made a payment to certain nursing home chains in return for the referral of pharmaceutical business; allegedly provided consultant pharmacist services to its customers at rates below the Company's cost of providing the services and below fair market value to induce the referral of pharmaceutical business; allegedly accepted a payment from a generic drug manufacturer allegedly in exchange for purchasing that manufacturer’s products and recommending that physicians prescribe such products to nursing home patients; and allegedly accepted rebates, grants and other forms of remuneration from a drug manufacturer to induce the Company to recommend that physicians prescribe one of the manufacturer’s drugs, and the rebate agreements conditioned payment of the rebates upon the Company engaging in an “active intervention program” to convince physicians to prescribe the drug and requiring that all competitive products be prior authorized for the drug’s failure, where the Company failed to disclose to physicians that such intervention activities were a condition of it receiving such rebate payments.
 
46

 
The Company denies the contentions of the qui tam relators and the federal government as set forth in the settlement agreement and the complaints.  A substantial majority of states in which the Company does business are expected to participate in this settlement.  In addition, the Department of Justice has advised the Company that it has no present intention of pursuing an investigation and/or filing suit under the False Claims Act against the Company with respect to allegations in the qui tam complaints that, during 1999-2003, pharmaceutical manufacturers named as defendants in the complaints made payments to the Company in return for the Company recommending and/or purchasing such manufacturers' drugs.
 
Pursuant to stipulations of dismissal executed in connection with the settlement agreement, the five complaints were dismissed.  As part of the settlement agreement, the Company also entered into an amended and restated corporate integrity agreement (“CIA”) with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 2, 2009.  Pursuant to the CIA, the Company is required, among other things, to (i) create procedures designed to ensure that each existing, new or renewed arrangement with any actual or potential source of health care business or referrals to Omnicare or any actual or potential recipient of health care business or referrals from Omnicare does not violate the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b) or related regulations, directives and guidance, including creating and maintaining a database of such arrangements; (ii) retain an independent review organization to review the Company’s compliance with the terms of the CIA and report to OIG regarding that compliance; and (iii) provide training for certain Company employees as to the Company’s requirements under the CIA.  The requirements of the Company’s prior corporate integrity agreement obligating the Company to create and maintain procedures designed to ensure that all therapeutic interchange programs are developed and implemented by Omnicare consistent with the CIA and federal and state laws for obtaining prior authorization from the prescriber before making a therapeutic interchange of a drug have been incorporated into the amended and restated CIA without modification.  The requirements of the CIA are expected to result in increased costs to maintain the Company’s compliance program and greater scrutiny by federal regulatory authorities.  Violations of the corporate integrity agreement could subject the Company to significant monetary penalties.  Consistent with the CIA, the Company is reviewing its contracts to ensure compliance with applicable laws and regulations.  As a result of this review, pricing under certain of its consultant pharmacist services contracts will need to be increased, and there can be no assurance that such pricing will not result in the loss of certain contracts.
 
47

 
On February 2 and February 13, 2006, respectively, two substantially similar putative class action lawsuits, entitled Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26 (“HOD Carriers”), and Chi v. Omnicare, Inc., et al., No. 2:06cv31 (“Chi”), were filed against Omnicare and two of its officers in the United States District Court for the Eastern District of Kentucky purporting to assert claims for violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and injunctive relief.  The complaints, which purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through January 27, 2006, alleged that Omnicare had artificially inflated its earnings by engaging in improper generic drug substitution and that defendants had made false and misleading statements regarding the Company’s business and prospects.  On April 3, 2006, plaintiffs in the HOD Carriers case formally moved for consolidation and the appointment of lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act of 1995.  On May 22, 2006, that motion was granted, the cases were consolidated, and a lead plaintiff and lead counsel were appointed.  On July 20, 2006, plaintiffs filed a consolidated amended complaint, adding a third officer as a defendant and new factual allegations primarily relating to revenue recognition, the valuation of receivables and the valuation of inventories.  On October 31, 2006, plaintiffs moved for leave to file a second amended complaint, which was granted on January 26, 2007, on the condition that no further amendments would be permitted absent extraordinary circumstances.  Plaintiffs thereafter filed their second amended complaint on January 29, 2007.  The second amended complaint (i) expands the putative class to include all purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, (ii) names two members of the Company’s board of directors as additional defendants, (iii) adds a new plaintiff and a new claim for violation of Section 11 of the Securities Act of 1933 based on alleged false and misleading statements in the registration statement filed in connection with the Company’s December 2005 public offering, (iv) alleges that the Company failed to timely disclose its contractual dispute with UnitedHealth Group, Inc. and its affiliates (“United”), and (v) alleges that the Company failed to timely record certain special litigation reserves.  The defendants filed a motion to dismiss the second amended complaint on March 12, 2007, claiming that plaintiffs had failed adequately to plead loss causation, scienter or any actionable misstatement or omission.  That motion was fully briefed as of May 1, 2007.  In response to certain arguments relating to the individual claims of the named plaintiffs that were raised in defendants’ pending motion to dismiss, plaintiffs filed a motion to add, or in the alternative, to intervene an additional named plaintiff, Alaska Electrical Pension Fund, on July 27, 2007.  On October 12, 2007, the court issued an opinion and order dismissing the case and denying plaintiffs’ motion to add an additional named plaintiff.  On November 9, 2007, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Sixth Circuit with respect to the dismissal of their case.  Oral argument was held on September 18, 2008.  On October 21, 2009, the Sixth Circuit Court of Appeals generally affirmed the district court’s dismissal, dismissing plaintiff’s claims for violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as affirming the denial of Alaskan Electrical Pension Fund’s motion to intervene.  However, the appellate court reversed the dismissal of the claim brought for violation of Section 11 of the Securities Act of 1933, remanding the case to the district court for further proceedings, including application of the rule requiring plaintiffs to allege fraud with particularity to their Section 11 claim.  On November 3, 2009, plaintiffs filed a motion in the Court of Appeals seeking a rehearing or a rehearing en banc with respect to a single aspect of the Court's decision, namely, whether the federal rule requiring pleading with particularity should apply to their claim under Section 11 of the Securities Act.  On December 16, 2009, that petition was denied, and on January 13, 2010, that Court issued its mandate by which the Section 11 claim was remanded to the district court for further proceedings consistent with the decision and order of October 21, 2009.
 
48

 
Information pertaining to other Legal Proceedings involving the Company is further discussed in the “Commitments and Contingencies” note of the “Notes to Consolidated Financial Statements” of this Filing.
 
Although the Company cannot predict the ultimate outcome of the matters described in the preceding paragraphs other than as disclosed and elsewhere in this Filing, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Company’s consolidated results of operations, financial position or cash flows.
 
As part of its ongoing operations, the Company is subject to various inspections, audits, inquiries and similar actions by governmental/regulatory authorities responsible for enforcing laws and regulations to which the Company is subject, including reviews of individual Omnicare pharmacy's reimbursement documentation and administrative practices.
 
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY
 
Our executive officers of the Company at the time of this Filing are as follows:
 
           
First Elected to
Name
 
Age
 
Office (1)
 
Present Office
             
Joel F. Gemunder
 
70
 
President and Chief Executive Officer (2)
 
May 20, 1981
             
Patrick E. Keefe
 
64
 
Executive Vice President and Chief Operating Officer (3)
 
January 16, 2007
             
John L. Workman
 
58
 
Executive Vice President and Chief Financial Officer (4)
 
November 18, 2009
             
W. Gary Erwin
 
57
 
Senior Vice President - Professional Services (5)
 
September 28, 2006
             
Leo P. Finn III
 
51
 
Senior Vice President - Strategic Planning and Development (6)
 
August 15, 2005
             
Cheryl D. Hodges
 
57
 
Senior Vice President and Secretary
 
February 8, 1994
             
Beth A. Kinerk
 
41
 
Senior Vice President - Sales and Customer Development (7)
 
May 26, 2009
             
Jeffrey M. Stamps
 
50
 
Senior Vice President - Pharmacy Operations (8)
 
May 26, 2009
             
Mark G. Kobasuk
 
52
 
Vice President - General Counsel (9)
 
June 20, 2006
 
49

 
(1)
Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors, which follows the annual meeting of stockholders.
(2)
Mr. Gemunder was appointed Chief Executive Officer of the Company on May 21, 2001, having served as the President and a principal executive officer of the Company since 1981.
(3)
Mr. Keefe was appointed Executive Vice President and Chief Operating Officer on January 16, 2007. From August 2005 – January 2007, Mr. Keefe served as Executive Vice President – Global Markets.  From February 1997 until August 2005, he served as Executive Vice President – Operations, and from 1994 to 1997 as Senior Vice President of Operations.  Prior to that time, Mr. Keefe joined Omnicare in 1993 as Vice President of Operations.
(4)
Mr. Workman was appointed Executive Vice President and Chief Financial Officer on November 18, 2009.  From 2004 to 2009, Mr. Workman served as Executive Vice President and Chief Financial Officer of HealthSouth Corporation.  Prior to joining HealthSouth Corporation, Mr. Workman served as Chief Executive Officer of U.S. Can Corporation where he also served as Chief Operating Officer and Chief Financial Officer during his six year tenure.  Before that he spent more than 14 years with Montgomery Ward & Company, Inc., serving in various capacities within the company’s financial organization, including Controller, Chief Financial Officer and Chief Restructuring Officer.  Mr. Workman began his career with the public accounting firm KPMG, where he was a partner.
(5)
Dr. Erwin was appointed Senior Vice President – Professional Services on September 28, 2006.  From July 2000 – September 2006, Dr. Erwin served as Vice President – Health Care Systems Programs and President of Omnicare Senior Health Outcomes.  Prior to that time, Dr. Erwin served Omnicare as Vice President – Health Systems Programs.  Before joining Omnicare in 1997, Dr. Erwin served as Vice President for Professional Programs, and Professor of Clinical Pharmacy, Philadelphia College of Pharmacy and Science.  In addition, he was on the faculty at the University of Georgia, where he specialized in geriatric pharmacotherapy and long-term care.
(6)
Mr. Finn was appointed Senior Vice President – Strategic Planning and Development on August 15, 2005.  From May 1997 – August 2005, Mr. Finn served as Vice President – Strategic Planning and Development.  From 1995 to 1997, he served as Regional Vice President of Operations for the Company’s Illinois, Iowa, and Wisconsin pharmacy operations.  Prior to that time, Mr. Finn joined Omnicare in 1990 as Vice President of Business Development.
(7)
Ms. Kinerk was appointed Senior Vice President – Sales and Customer Development on May 26, 2009.  From August 2006 – May 2009, Ms. Kinerk served as Vice President – Customer Development.  Before joining Omnicare in 2005, Ms. Kinerk served a Vice President of Sales for NeighborCare, Inc. (“NeighborCare”) from 2004 - 2005.  Prior to joining NeighborCare, Ms. Kinerk served as Director of Sales for Innovatix from 2001 – 2004.  Prior to that time, Ms. Kinerk served as Eastern Division Sales Manager for NCS Healthcare, Inc.
 (8)
Mr. Stamps was appointed Senior Vice President – Pharmacy Operations on May 26, 2009.  From February 2007 – May 2009, Mr. Stamps served as corporate Vice President and Senior Vice President – Field Operations for the Company’s Pharmacy Operations Group.  From August 2005 until February 2007, he was corporate Vice President and Senior Vice President of the Central Division of the Pharmacy Operations Group.  From 2001 until August 2005, he was Senior Regional Vice President – Eastern Region of the Pharmacy Operations Group.
(9)
Mr. Kobasuk was appointed Vice President – General Counsel on June 20, 2006.  Mr. Kobasuk was a partner of Taft, Stettinius and Hollister LLP from 1998 until June 2006.
 
50

 
PART II
 
ITEM 5. - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Price Range of Common Stock; Holders of Record
 
Our Common Stock is listed on the New York Stock Exchange, and the following table sets forth the ranges of high and low closing prices during each of the calendar quarters of 2009 and 2008.
 
   
2009
   
2008
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 29.33     $ 22.06     $ 24.79     $ 15.59  
Second Quarter
  $ 28.22     $ 23.85     $ 26.32     $ 18.18  
Third Quarter
  $ 27.23     $ 22.52     $ 32.61     $ 24.03  
Fourth Quarter
  $ 24.71     $ 21.47     $ 29.09     $ 19.71  
 
The number of holders of record of our Common Stock on January 29, 2010 was 2,311.  This amount does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks.
 
Stock Performance Graph
 
The following graph compares the cumulative total return for the last five years on a $100 investment (assuming dividend reinvestment) on December 31, 2004 in each of the Common Stock of the Company, the Standard & Poor’s 500 Stock Index and the S&P 500 Health Care Index.
 
 
 
 
51

 

   
December 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
Omnicare, Inc.
  $ 100.00     $ 165.59     $ 112.03     $ 66.34     $ 81.03     $ 70.83  
S&P 500
    100.00       104.89       121.46       128.13       80.73       102.08  
S&P 500 Health Care Index
    100.00       106.48       114.50       122.84       94.84       113.53  
 
Dividends
 
On February 11, 2010, the Board of Directors approved a quarterly cash dividend of $0.0225, for an indicated annual rate of $0.09 per common share for 2010, which is consistent with annual dividends paid per common share for the 2009 and 2008 years.  It is presently intended that cash dividends on common shares will continue to be paid on a quarterly basis; however, there can be no assurances as future dividends are necessarily dependent upon our future earnings and financial condition and other factors not currently determinable.
 
Stock Repurchases
 
A summary of Omnicare’s repurchases of the Company’s common stock during the quarter ended December 31, 2009 is as follows (in thousands, except per share data):
 
Period
 
Total Number of Shares Purchased (a)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number (or Approximate Dollar Value) of Shares that Must Yet Be Purchased Under the Plans or Programs
 
October 1 - 31, 2009
    1     $ 22.53       -       -  
November 1 - 30, 2009
    25       21.92       -       -  
December 1 - 31, 2009
    43       24.40       -       -  
Total
    69     $ 23.48       -       -  
 
(a)
 
During the fourth quarter of 2009, the Company purchased 69 shares of Omnicare common stock in connection with its employee benefit plans, including purchases associated with the vesting of restricted stock awards. These purchases were not made pursuant to a publicly announced repurchase plan or program.
 
 
Additional information regarding our equity compensation plans is included at Items 8 and 12 of this Filing.
 
 
52

 

ITEM 6. - SELECTED FINANCIAL DATA
 
The following table summarizes certain selected financial data and should be read in conjunction with our consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included at Items 8 and 7, respectively, of this Filing.  All amounts disclosed herein relate to the Company’s continuing operations unless otherwise stated.
 
Five-Year Summary of Selected Financial Data
                             
Omnicare, Inc. and Subsidiary Companies
                             
(in thousands, except per share data)
                             
   
For the years ended and at December 31, (as adjusted)
 
   
2009 (d)
   
2008 (d)(i)
   
2007 (d)(i)
   
2006 (d)(i)
   
2005 (d)(i)
 
INCOME STATEMENT DATA:(a)(b)
                             
Net sales (c)
  $ 6,166,209     $ 6,205,715     $ 6,100,394     $ 6,366,548     $ 5,201,362  
                                         
Income from continuing operations
  $ 234,816     $ 144,526     $ 101,984     $ 168,430     $ 222,768  
Discontinued operations (d)
    (22,893 )     (4,053 )     (2,379 )     1,788       2,918  
Net income
  $ 211,923     $ 140,473     $ 99,605     $ 170,218     $ 225,686  
                                         
Earnings (loss) per common share data - Basic (e):
                                       
Continuing operations
  $ 2.01     $ 1.23     $ 0.85     $ 1.42     $ 2.15  
Discontinued operations (d)
    (0.20 )     (0.03 )     (0.02 )     0.02       0.03  
Net income
  $ 1.81     $ 1.20     $ 0.83     $ 1.44     $ 2.18  
                                         
Earnings (loss) per common share data - Diluted (e):
                                       
Continuing operations
  $ 2.00     $ 1.22     $ 0.84     $ 1.38     $ 2.07  
Discontinued operations (d)
    (0.19 )     (0.03 )     (0.02 )     0.01       0.03  
Net income
  $ 1.80     $ 1.19     $ 0.82     $ 1.39     $ 2.09  
                                         
Dividends per common share
  $ 0.09     $ 0.09     $ 0.09     $ 0.09     $ 0.09  
Weighted average number of
                                       
common shares outstanding:
                                       
Basic
    117,094       117,466       119,380       118,480       103,551  
Diluted
    117,777       118,313       121,258       122,536       108,804  
                                         
                                         
BALANCE SHEET DATA (at end of period):(a)
                                       
Cash and cash equivalents
  $ 275,709     $ 214,668     $ 274,200     $ 137,631     $ 210,935  
Working capital (current assets less current liabilities)
    1,599,558       1,730,904       1,803,990       1,872,427       1,360,391  
Goodwill
    4,273,695       4,211,221       4,300,484       4,183,326       3,987,797  
Total assets
    7,324,104       7,450,245       7,583,370       7,387,126       7,145,124  
Long-term debt (excluding current portion), net of swap (f)(i)
    1,980,239       2,352,824       2,416,131       2,525,067       2,266,577  
Stockholders' equity (f)(i)
    3,875,993       3,654,869       3,540,823       3,427,022       3,218,971  
                                         
OTHER FINANCIAL DATA:(a)
                                       
Net cash flows from operating activities from continuing operations
  $ 482,349     $ 436,156     $ 501,850     $ 110,845     $ 261,344  
EBITDA from continuing operations(g)
    582,141       513,080       452,605       589,784       592,267  
Net cash flows used by investing activities from continuing operations
    (144,280 )     (283,786 )     (194,446 )     (125,590 )     (2,645,539 )
Capital expenditures(h)
    (30,865 )     (59,606 )     (42,828 )     (29,969 )     (23,675 )
Net cash flows from financing activities from continuing operations
    (275,929 )     (208,706 )     (173,747 )     (59,638 )     2,511,999  
 
See the related notes to Five-Year Summary of Selected Financial Data on the following pages.
 
53

 
(a)
Omnicare, Inc. (“Omnicare” or the “Company”) has had an active acquisition program in effect since 1989, which impacts the comparability of the Company’s results.  See the “Acquisitions” note of the Notes to Consolidated Financial Statements for additional information concerning acquisitions.
(b)
The following aftertax charges/(credits) are included in net income for the years ended December 31 (in thousands):
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Call premium and write-off of unamortized debt issuance costs (1)
  $ -     $ -     $ -     $ -     $ 20,364  
Restructuring and other related charges (2)
    18,038       21,871       17,300       18,758       11,760  
Litigation and other related charges (3)
    53,589       68,724       26,380       100,507       -  
Repack matters (3)
    (705 )     3,940       10,669       21,232       -  
Acquisition and other related co