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We have reiterated our Neutral recommendation on Omnicell (OMCL - Analyst Report) with a target price of $15.00.

Omnicell reported EPS of 4 cents in the second quarter of fiscal 2012, lower than the year-ago quarter EPS of 8 cents. The Zacks Consensus EPS for the second quarter of 2012 was 6 cents.

However, excluding the impact of certain one-time items associated with the MTS acquisition, the adjusted EPS for the quarter came in at 13 cents. Revenues in the reported quarter increased 23.6% year over year to $75.4 million, exceeding the Zacks Consensus Estimate of $73 million.

Omnicell’s recent acquisition of MTS Medication helped the company to step into the non-acute care market, where MTS is a major player. The acquisition brings on board MTS Medication’s automated medication adherence packaging equipment and consumables for the non-acute care segment, helping Omnicell, to emerge as a leading provider of medication management solutions for both the acute and non-acute care settings.

Therefore, the acquisition will have a significant impact on Omnicell’s business, as reflected in its revised guidance for 2012. Omnicell raised its 2012 adjusted EPS guidance to the range of 75−81 cents from its previous full-year adjusted EPS guidance of 67−72 cents. The acquisition also drove management’s revenue expectation to the range of $307−$315 million from the earlier range of $263−$267 million.

The company primarily operates in a niche automated medication distribution industry and stands to benefit from favorable demographic trends, regulatory environments, and lack of nursing staffs. As the information technology market is growing by leaps and bounds with increasing investment by healthcare companies and gradual modernization of the healthcare system, the demand for automated healthcare management systems has also been on the rise.

In order to capitalize on the opportunity in this segment, Omnicell introduced its next-generation G4 product platform last year. This G4 platform is cost effective and complies with increasingly stringent regulatory requirements.

Furthermore, the company is on a deal winning spree, especially after the launch of G4. We consider Omnicell’s recent announcement of G4 expansion at New Jersey-based Hackensack University Medical Center and the University of South Alabama Health System.

Additionally, Omnicell aims to expand into the international market given the fact that the international market is less than 1% penetrated with very few hospitals adopting medication control systems.

However, margin headwinds and limited capital spending remain concerns. Hospital purchases remain a bigger challenge for the small community hospitals than the big ones due to financial constraints.

Moreover, the reimbursement mix has also affected endowments income, further affecting hospital spending capabilities. While the company has won some new deals in larger hospitals, the market continues to be affected by the economy and adverse credit conditions.

Omnicell also faces intense competition in the medication management and supply chain solutions market from major players such as CareFusion Corporation (CFN - Analyst Report) and McKesson Automation (MCK - Analyst Report). The company currently retains a short-term Zacks #3 Rank (Hold).

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