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Omnicare's 2Q Earnings Beat; Guides Up

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Provider of drugs to long-term care facilities and nursing homes Omnicare Inc. posted second quarter 2013 adjusted (excluding one-time expenses) earnings per share of 90 cents. The result surpassed the Zacks Consensus Estimate of 87 cents as well as the year-ago earnings of 83 cents.

Reported net income, which includes extraordinary and one-time items, in the quarter was $52.2 million (or 48 cents per share), up 179.1% year over year.

During the reported quarter, the company disposed certain assets of its non-performing Medical Supply Services business for $28.8 million.


Net sales increased 2.2% year over year to almost $1,570 million in the second quarter, beating the Zacks Consensus Estimate of $1,530 million.

Effective from the second quarter, the company began to report its hospice pharmacy business under the Long-Term Care Group (LTC). Net sales of the LTC Group were $1,222 million in the quarter, down 2.6% year over year. The sequential improvement reflects higher sales of low-cost generic drugs in the market. We note that this was the first quarter in the last six, during which Omnicare recorded net organic bed growth.

Net sales of the Specialty Care Group (SCG) jumped 25% to $347 million. This was driven by the company’s specialty pharmacy offerings.


Gross margin improved 20 basis points (bps) year over year to 24.1% in the second quarter. Adjusted operating margin (excluding one-time items) increased 30 basis points on a year-over-year basis to 11.1% in the quarter.

Adjusted operating income from continuing operations for LTC Group grew 4.4% year over to $165.1 million, while the same for Specialty Care Group jumped 21.6% to $29.9 million in the quarter.

Balance Sheet, Cash Flow and Other

Omnicare exited the second quarter with cash and cash equivalents of $535.4 million, down 5.2% year over year. Long-term debt (including notes and convertible debentures) declined 21.4% year over year to $1,591.5 million.


Omnicare raised its guidance for 2013 based on the company’s strong results in the first half of the year. For 2013, Omnicare anticipates revenues between $6.1 billion and $6.3 billion (earlier $6.1 billion-$6.2 billion). The Zacks Consensus Estimate for the full year is pegged at $6.2 billion, which lies within the guided range.

Adjusted earnings per share (from continuing operations) are expected in a range of $3.56 to $3.64 (earlier $3.47 to $3.57). The Zacks Consensus Estimate for the full year is pegged at $3.57, which stands at the lower end of the guided range.

Omnicare also raised its expected cash flow (from continuing operations) to the range of $475 million to $525 million from $450–$500 million.

Our Take

We are impressed with the encouraging second-quarter results and the raised guidance for 2013. The sequential improvement in the LTC Group, Omnicare’s mainstay, and double-digit growth in SCG should propel revenue growth in the future. Omnicare has shown modest improvement in margins, attributable to the introduction of new generics and cost containment efforts.

Moreover, generic launches in the next few quarters present a major opportunity due to Omnicare’s direct access to manufacturers and current greater exposure to the institutional pharmacy channel than in the past couple of years. However, the company continues to rely on Medicare and Medicaid programs for a major share of its revenues.

The stock carries a Zacks Rank #2 (Buy). Other healthcare stocks such as Healthways , MedAssets and Express Scripts Holding (ESRX - Free Report) are worth considering. HWAY and MDAS carry a Zacks Rank #1 (Strong Buy), while ESRX carries a Zacks Rank #2 (Buy).

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