Provider of drugs to long-term care facilities and nursing homes, Omnicare Inc. (OCR) posted third-quarter 2013 adjusted earnings per share of 91 cents, surpassing the Zacks Consensus Estimate by a penny as well as the year-ago earnings of 86 cents.
However, the company reported a net loss (including extraordinary and one-time items) of $66.3 million or 65 cents per share, compared with a net profit of $61.4 million or 55 cents in the year-ago period. The downside was mainly on account of a litigation charge of $120 million paid in favor of a voluntary civil settlement.
Net revenues grew 5.3% year over year to $1,581 million in the third quarter, beating the Zacks Consensus Estimate of $1,552 million. Strong gains in the Specialty Care Group (SCG) coupled with continued sales and service efforts in the larger Long-Term Care Group (LTC) helped offset soft results in the hospice pharmacy business (now a part of the LTC Group).
Gross margin decreased 134 basis points (bps) year over year to 23.4% due to increased reimbursement pressure in the hospice pharmacy business, a shift in revenue mix to lower-margins specialty dispensing platform and other commercial reimbursement reductions. Selling, general and administrative (SG&A) expenses decreased 4.0% to $195.4 million in the quarter.
Net sales of the core LTC Group inched up 0.1% to $1,220 million. We note that this was the first quarter in the past six, during which Omnicare recorded revenue growth, reflecting management’s successful strategy in leveraging sales and services. Net organic bed growth also improved in the quarter. However, adjusted operating margin for this group was 13.1%, down 50 bps year over year.
Net sales of the Specialty Care Group (SCG) jumped 29% to $361 million. This segment continues to maintain its growth momentum, driven by the company’s specialty pharmacy offerings. The group’s operating margin was 8.3% in the quarter, compared with 8.9% in the prior-year quarter.
Omnicare exited the third quarter with cash and cash equivalents of $505.7 million, up 11.3% from $454.2 million as of Dec 31, 2012. Long-term debt (including notes and convertible debentures) declined 29.7% to $1,426.5 million from $2,030.0 million as of Dec 31, 2012.
Cash flows from operations for the nine months ended September 30, 2013 were $455 million versus $417 million in the comparable prior period. Year-to-date operating cash flow is pegged at $455 million, reflecting benefits from working capital improvements.
In the third quarter, OCR exchanged approximately $180 million in aggregate principal amount of its outstanding 3.75% convertible notes due 2025 for a newly issued $424 million in aggregate principal amount of new 3.50% convertible note due 2044. Additionally, the company entered into separate, privately negotiated purchase agreements to repurchase roughly $5.2 million in aggregate principal amount of its outstanding 3.75% notes due 2025 and $150 million in aggregate principal amount of its outstanding 7.75% senior subordinated notes due 2020.
In the third quarter, the company repurchased 1.7 million shares for an aggregate amount of $81 million, thereby completing the Accelerated Share Repurchase (ASR) agreement entered in the second quarter. As of Sep 30, 2013, Omnicare had $129 million of availability under its current share repurchase authorization.
Omnicare narrowed its revenue guidance range for 2013 to $6.2–$6.3 billion from $6.1–$6.3 billion. The Zacks Consensus Estimate for the full year is pegged at $6.2 billion, which coincides with the bottom end of the guided range.
Adjusted earnings per share are now expected in the range of $3.60 to $3.62 as compared with the earlier guided range of $3.56 to $3.64. The Zacks Consensus Estimate for the full year is pegged at $3.61, which stands at the mid point of the guided range.
Omnicare also narrowed its expected cash flow (excluding settlement payments) outlook range to $500–$525 million from the earlier range of $475–$525 million.
The net loss reported by OCR in its third-quarter results due to the lawsuit settlement has resulted in negative investor sentiments. This is reflected in 5.57% fall in the company’s stock to $54.23 on Oct 23.
Nevertheless, we are impressed with the encouraging third-quarter results, which beat the Zacks Consensus Estimate on both fronts. The sequential improvement in the LTC Group, Omnicare’s mainstay, and double-digit growth in SCG should propel revenue growth in the future. Moreover, generic launches in the next few quarters present potential opportunities. OCR’s direct access to manufacturers and increased exposure to the institutional pharmacy channel promises better prospects going forward.
However, Omnicare continues to rely on Medicare and Medicaid programs for a major share of its revenues. In addition, the company also needs to improve its margins.
OCR currently has a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding this company, medical services company Express Scripts Holding Company (ESRX), carrying a Zacks Rank #2 (Buy), is worth a look. Other medical product stocks that can also be considered include INSYS Therapeutics, Inc. (INSY) and Bio-Rad Laboratories, Inc. (BIO). Both the stocks carry a Zacks Rank #1 (Strong Buy).