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OCR AT A GLANCE

P/E ► 14.9 AVG EV/EBITDA ► 9.17 AVG ROA ► 3.9% AVG ROE ► 4.6% AVG Debt to Equity ► 0.939 AVG Current Ratio ► 2.95 HIGH Interest Coverage Ratio ► 3.32 AVG

 

 

 

 

 

 

Omnicare, Inc. (NYSE:OCR) is a pharmaceutical services provider for senior citizens who are live in nursing homes and assisted-living centers in the United States and Canada. The company is the largest service provider to long term care facilities (LTC) in both beds, with 1.4 million in 47 states^[1] and revenue, with $6.22 billion in 2007^[2]. Its pharmacies provide prescription drugs and pharmaceutical consulting services to geriatric institutions located within a 150-mile radius. Omnicare has used its relationships with nursing homes to serve as a contract research organization (CRO) to conduct clinical trials in 27 countries for pharmaceutical and biotechnology companies. In the next three years, Omnicare will see an increase in generic drugs that will benefit the company. The expiration of several key patent drugs that is used in the elderly committees, including anti-psychotics and Alzheimer medication, will allow distributors to generate both higher profit margins and higher total sales by volume. In addition, changes in health care policy--especially Medicare Part D--can result in larger volume of drugs being purchased. Omnicare benefits from the legislation because the majority of its clients are elderly covered under both Medicaid and Medicare, and the company is now able to negotiate separately with private plans paying higher prices.

Even during the 2007-2008 economic slowdown, Omnicare still reported a revenue growth of 4% in third quarter of 2008, up from same time in 2007^[3], since the company earns higher margins on generic drugs than prescription drugs. In addition, all the baby boomers have reached the age where prescription and generic drugs are becoming increasingly more important. And as of 2008, senior citizens over 65 account for 12.7% of the United States population^[4]. Because of the aging population, the demands for pharmaceutical drugs and LTC facilities have been on a increase and will continue for decades.

Over the last three years, Omnicare has suffered a series of set backs involving legal issues. Most notably, the company was charged with Medicaid fraud for deliberately switching patients to drugs that generated better margins for Omnicare^[5]. One particular case in 2006 resulted in Omnicare having to pay out $49.5 million for drugs they overcharged to elderly^[6].

Company Overview

Started in 1981, the company has since risen to be the largest provider in pharmaceuticals for senior citizens in long term care facilities, independent communities, and etc. in both beds provided, and by revenue generated. In 2005, Omicare became the top pharmaceutical service provider for senior citizens after it bought NeighborCare Inc. for approximately $1.8 billion dollars. As of 2007, Omnicare provides 1.4 million beds in 47 states and employs over 15,000 employees.

The Company is divided into two divisions: The Pharmacy Service segment and the Clinical Research segment

Business and Financial Metrics

Omnicare Revenue and Net Income 2005, 2006, 2007^[7]

• Between June 2008 and July 2008, Omnicare reported $1.6 billion in third quarter sales - a 4% increase from this time last year (2007).^[8]. Their pharmacy services sales increased due to the drug price inflation and growth in the specialty pharmacy services. Omnicare's adjusted operating profit also increased to $173.3 million as compared with $146.9 million earned this time last year. Operating profit showed improvement because the increasing availability and use of generic drugs and improved performance in the hospice pharmacy.
• As of Sept. 2008, Omnicare provided LTC facilities and other assisted home with 1,432,000 beds. 67,000 patients were served under the patient assistance programs of Omnicare's pharmacy service business. The number of beds served had been on a slight decline. In Sept., the company voluntarily foregone 9,300 beds owing to pricing or payment issues^[9].
• In fiscal year 2007, Omnicare recorded $6.02 billion in total sales from the pharmaceutical segment, down from $6.32 billion in 2006. Their overall performance decreased by 4% due to the declining number of beds and contract dispute with assisted living facilities^[10].

Growth through Acquisitions

Omnicare started to operate in healthcare services in 1981. The company grew substantially through acquisition of other pharmaceutical businesses and service providers in the last two decade. Many major acquisitions came in the latter part of the '90 and have since continued through 2008. It has, in total, acquired approximately 50 companies with its latest acquisition coming in July 2008.

Coromed Inc.

Jan. 1997, Omnicare acquired Coromed Inc., a contract research organization which provided comprehensive clinical drug development, biotech, medical consulting, and others, for $40 million^[11]. This was the beginning of Omnicare's CRO division, which at the time provided the company with the opportunity to compete in the rapidly growing market of biotech research.

American Pharmaceutical Services Inc.

Jan. 2002, Omnicare bought most of American Pharmaceutical Services Inc. for $97 million in an auction. The company made a bid for American Pharmaceutical's assets in a bankruptcy proceeding of Mariner Post-Acute Network (American Pharmaceutical's parent company) in Delaware^[12]. The acquisition of the company expanded the services that Omnicare Inc. already provided to nursing homes and assisted-living resident by 32 pharmacies in 15 states.

NeighborCare

July 2005, Omnicare acquired rival NeighborCare to create a pharmaceutical behemoth after four previously failed attempts. NeighborCare rejected four different bids from Omnicare starting from June 2004, including a $1.33 billion bid, before settling to sell for $1.55 billion^[13]. This acquisition cemented Omnicare as the largest provider of pharmaceutical care to LTC and elderly. Omnicare's nationwide pharmaceutical network expanded to 47 states and the District of Columbia, and their bed count increased by four million.

Business Segments

Pharmacy Services (97% of Revenue)

OCR 2007 Annual Report^[14]

Omnicare pharmaceutical segment oversees all aspects of the distribution process, from acquisition to administration^[15]. They purchases prescription and non-prescription medication according to physician orders, and delivers them to skilled nursing facilities (SNFs), assisted living facilities (ALF’s), retirement centers, independent living communities, hospitals, hospice, other healthcare settings and service providers in both U.S. and Canada. OCR operates on a unit-of-use drug distribution system, designed so that patients take the right dose, at the right time. This differs from common prescriptions filled by retail pharmacies such as CVS (CVS) or Walgreen Company (WAG), which usually sells medicine in a bottle or in bulk. Additional service, Omnicare provides computerized medical record-keeping and third-party billing for residents in these facilities.

Aside from the basic coverage, Omnicare also provides services to meet specialized needs for long-term care patients. For example, Omnicare provides intravenous (IV) products and services or many home and hospice, in addition to the long-term care facilities. OCR LTC facilities include an unique "Outcomes Algorithm Technology," that quickly identify any inappropriate treatment so pharmacist can react quickly to under treatment or over treatment^[16]. For retirees, employees and dependents who have drug benefits under corporate-sponsored healthcare programs, the company provides pharmaceutical case management services.

Clinical Research (3% of Revenue)

Omnicare's contract research organization (CRO) segment provides biotechnology, product research and development for the pharmaceutical, medical device and diagnostic industries in 30 countries. The company has decided to increase CRO with emphasis on biotech^[17]. The importance of Omnicare's CRO segment is to forge working relations with other biotech and pharmaceutical manufactures. They used their relationships with nursing homes to serve as a contract research organization (CRO) to conduct clinical trials for these pharmaceutical and biotechnology companies. They are also the leading industry in geriatrics research, which focuses on the well-being and new drug development for the elderly. Like many other CROs, Omnicare processes an experienced therapeutic program that focuses on major health concern, such as cardiovascular and musculoskeletal, in senior citizens.

Key Trends and Forces

Aging Population increase need for Health Care and LTC

In the United States, an aging population known as the baby boomers have all surpassed 44 with some turning 62^[18]. These baby boomers account for 25% of the U.S. population, disregarding the 12.7% who are already over the age of 65. It has been noted that the consumption pattern for these baby boomers are drastically different than the average consumer today. Their consumption average of consumer products are higher than the younger generation. In 2007, the Bureau of Labour Statistic reported 74.7% of health care related drugs were purchased by adults over the age of 55^[19]. The U.S. Census Bureau estimate by 2040, the number of senior citizens age 65 and over will double to 80 million^[20]. In the United States, senior citizens over 65 face a 40% chance of enlisting in a nursing home for Long Term Care services^[21]. This in turn benefits Omnicare because it is known for being the largest provider for LTC facilities and senior citizens.

Consumer Spending Pattern on General Products from BLS 2007 ^[22]

Patent Expiration Benefit Omnicare

Omnicare, being an LTC pharmacies, benefits from expired patent drugs entering the generic market. When a drug is on patent, LTC pharmacies are reimbursed by Medicare through the Average Wholesale Price benchmark (benchmark used to negotiate reimbursement rates)^[23]. Thus when a drug enter the generic market, Omnicare is able to deal with different suppliers of the same drug and buy it for the lowest possible price.

Many drugs have already gone generic in 2008 and more patent are expiring in 2009 and 2010. The most important of these drugs are antipsychotic (Janssen Pharmaceutical - Risperdal), antiepileotic (GlaxoSmithKline, Abbott Laboratories, etc. - Anti-psychotics) and Alzheimer's medication (Pfizer - Aricept), in which over 50% of Omnicare's clients are being treated with^[24]. It is estimated, in Credit Suisse report, that at least $16 billion of patent drugs in just these three categories alone are expected to join the generic market^[25].

New Medicare Legislation to Benefit Omnicare

On Jan. 1, 2006, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) went into effect. The whole health care industry itself will undergo dramatic transition. The new Part D covers all senior citizens who qualify for both Medicaid and Medicare (dual eligible), much of the nursing home and LTC facility population^[26]. Instead of being price takers of state Medicaid for drugs and dispensing, Omnicare are now able to negotiate separately with all private Part D plans^[27]. As the largest provider for senior citizens (majority covered under Part D), Omnicare has been able to get better prices from private plans than what it was recieveing under Medcaid^[28].

Legal Troubles Over Corporate Practice & Law Suits

In 2006, Omnicare was ordered to pay the Federal Government and 43 states $49.5 million for prescription drug fraud allegations^[29]. The company switched patients to drugs with better margin, but continue to overcharge Medicaid by millions of dollars.

In the same year, the State of Michigan was paid $52.5 million over a Medicaid related fraud^[30]. Specialized Pharmacy Services Inc., a subsidiary of Omnicare, was charged with fraudulent Medicaid billing by the state. Omnicare voluntarily settled the matter quickly to avoid expensive and time-consuming litigations.

All together in 2006 and 2007, Omnicare paid out $142 million dollars in lawsuit allegations.

Market Share & Competiton

In 2007, Omnicare Inc. and PharMerica Corp., were the main providers of institutional pharmacy services in the United States. The two companies accounted for 95% of the total revenue generated in the industry, totaling approximately $7.3 billion. Omnicare's $6.02 billion in revenue accounted for 80% of the total market share, and PharMerica's $1.2 billion accounted for the other 15%. The remaining 5% of valued is shared by companies such as Chem Rx (the third largest competitor at 4% total market share).

• PharMerica Corporation - Omnicare's biggest competition accounting for $1.2 billion in revenue in 2007 (15% of industry total)^[31]. Formerlly operating in connection with Kindred Healthcare Inc and Amerisourcebergen Corp., PharMerica Corporation began operating independently as of Aug. 2007. Unlike drug retail stores, Walgreen Company and CVS Caremark, PharMerica Corporation provides the same services as Omnicare: management pharmaceutical services to LTC facilities. Much smaller than Omnicare Inc., PharMerica Corporation operates 115 institutional pharmacies in 40 states and provides services to 86 hospitals^[32].

• Chem Rx Corporation - The third largest provider of institutional pharmaceutical services, Chem Rx generated $317 million in revenue in 2007^[33]. The company uses a "third party delivery system" to provide for approximately 65,000 beds in 400+ institutions.

Market Share 2007^[34][35]

References

1. ↑ NY Times 2008
2. ↑ OCR 2007 Pg. 58-59
3. ↑ Alpha 2008
4. ↑ Alpha 2008
5. ↑ Medical News 2006
6. ↑ NY Times 2006
7. ↑ SEC 2008
8. ↑ Alpha 2008
9. ↑ [1]
10. ↑ OCR 2007 OCR 2007 Pg. 58-59
11. ↑ Omnicare Coromed. Jan 1997.
12. ↑ Omnicare Buying American Pharmaceutical. Dec 2001.
13. ↑ Omnicare Buys NeighborCare. July 2005.
14. ↑ OCR 2007 10-K, Pg. 59-60
15. ↑ OCR Medications 2008
16. ↑ OCR Consulting 2008
17. ↑ CRO 2008
18. ↑ Alpha 2008
19. ↑ BLS, 10-K, Pg.1
20. ↑ CS 2008, Link 2
21. ↑ [2]
22. ↑ BLS, 10-K, Pg.1
23. ↑ Credit-Suisse 2008 Pg.09
24. ↑ Credit-Suisse 2008, Pg.10
25. ↑ Credit-Suisse 2008, Pg. 09
26. ↑ Medicare 2006
27. ↑ Alpha 2006
28. ↑ Alpha 2006
29. ↑ Medical News 2006
30. ↑ Market Watch 2006
31. ↑ Business Week 2008
32. ↑ Business Week 2008
33. ↑ SEC 2008
34. ↑ Business Week 2008
35. ↑ Business Week 2008