Omnicare Inc. Q3 2008 Earnings Conference Call Transcript

Omnicare Inc. (OCR)

Q3 FY08 Earnings Call

October 30, 2008, 11:00 AM ET

Executives

Cheryl D. Hodges - Sr. VP, IR

Joel F. Gemunder - President and CEO

David W. Froesel, Jr. - Sr. VP and CFO

Analysts

Jason Gurda - Leerink Swann

Lisa Gill - JPMorgan

Glen Santangelo - Credit Suisse

Bryan Sekino - Barclays Capital

Charles Rhyee - Oppenheimer & Co.

Melissa Jaffe - Merrill Lynch

Chris Rigg - Soleil Securities

Randall Stanicky - Goldman Sachs

Aaron Gornin - Bank of America Securities

Presentation

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicare Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Cheryl Hodges you may begin your conference.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Thanks, Regina. Good morning everyone and welcome to Omnicare’s Third Quarter 2008 earnings conference call. Here today from Omnicare are Joel Gemunder, President and CEO, Dave Froesel, Senior Vice President and Chief Financial Officer and myself Cheryl Hodges, Senior Vice President, Investor Relations.

Before we begin let me remind you that as we conduct this call various remarks that we make concerning our expectations, predictions, plans and prospects constitute forward-looking statements as a result of a variety of factors including those identified in this morning’s news release and in our various filings with the SEC.

You are also cautioned that any forward-looking statements reflect management’s current views only and that the company undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future.

For simplicity sake and to focus on what we believe are the best indicators of our operating performance, we will discuss our results today excluding special items and for the CRO business reimbursable out-of-pocket expenses in all periods.

A reconciliation of this non-GAAP information has been attached to our press release and is also available on our website under supplemental financial information on the Investors page.

With that let me turn the call over to Joel.

Joel F. Gemunder - President and Chief Executive Officer

Thank you Cheryl and good morning everyone. Thanks for joining us today to discuss our results for the third quarter of 2008 and the outlook for the balance of the year. It is certainly an understatement to say that it is an historic time in the markets and in the world economies.

So, we are particularly pleased to report that adjusted earnings for the third quarter beat consensus expectations by $0.12 per share or by more than 24% and the prior quarter by $0.15 or 33%.

Clearly these results were well above even our own expectations and while we did see stronger than expected trends in the pharmaceutical marketplace generally, we saw better than anticipated performance in the number of operational areas.

So, we are encouraged by these [inaudible] of continued stabilization and progress in our initiatives to enhance growth and profitability in our business. With the results for this quarter we have returned to year-over-year growth.

Sales of $1.6 billion in the third quarter of 2008 were 4% ahead of the third quarter of 2007. Operating income was up 19% and adjusted earnings per diluted share of $0.61 were up 39% from the $0.44 earned in the 2007 third quarter.

This of course was driven by a strong step up in our sequential results with sales up 3%, operating profit up 23% and diluted earnings per share up 33% from last quarter. We saw improvement up and down the P&L.

Sales were higher gross margins widened by 110 basis points. SG&A came down as a percent of sales and bad debt expense remained in line. So operating and EBITDA margins expanded 150 and 160 basis points respectively. And while we had slightly higher interest expense, we also benefited from a full quarters impact of our stock repurchase program, which we completed in the second quarter.

Now, let me touch on some of the highlights. First our sales growth both on a year-over-year as well as on a sequential basis was attributable to some key trends in the pharmaceutical marketplace namely drug… strong drug price inflation on branded drugs and increased utilization of higher acuity drugs and biologics.

And importantly exceptional growth in our specialty pharmacy services business including notably the acquisition of Advanced Care Scripts in mid July. These factors more than offset the impact of increased penetration of generic drugs modestly lowered net bed served and a reduction in the utilization and reimbursement of certain drugs. As noted in our press release we served 1,432,000 beds at the end of September including 67,000 patients under the patient assistance programs.

On the surface this is an overall net decline of 6,000 beds sequentially half of which is attributable to the natural volatility in patient assistance programs. The remaining net bed decline of 3,000 represents a 67% improvement over the June quarter. But this doesn’t tell the whole story.

During the quarter, a total of 9,300 beds will voluntarily foregone for pricing and payment terms or represent facilities sold or closed. Had we not given up these beds or lost them due to factors outside of our control we would have been in positive territory by over 6,000 beds.

So, we continue to make progress on our initiatives to restore net bed growth. Important to our results for the quarter the number of beds served including renewals of at risk accounts by our specialized customer retention team for the third quarter was approximately 12,200 beds and represents roughly $53 million in annualized revenues. This brings the year-to-date total retained by this team in 2008 to 41,000 beds and about $211 million in annualized revenue saved equal to 4.6% of total pharmacy services revenues over this period.

Moreover beds added are brought into service for the quarter were up 12% sequentially and that their highest level in the last four quarters. Also acquisition activity was robust adding a substantially higher number of beds than in the second quarter and reaching its highest quarterly level this year.

We are also encouraged is that new contract signings are continuing to outpace our performance last year. Excluding national accounts, which can be lumpy contract signings by our sales force and pharmacy operating staff combined were up 33% versus the third quarter of last year reflecting a large measure and encouraging year-over-year improvement in the quality, size and productivity of our sales force.

Our gross margins moved in a positive direction for the second consecutive quarter due primarily to the impact of the increased use of generic drugs. And as you know, several new generics important in the geriatric marketplace were launched this quarter including Risperidone, which is generic Risperdal, divalproex or generic Depakote ER and lamotrigine the generic version of Lamictal just to name a few.

As a result our generic dispensing rate or percentage of total scripts that were generic increased 190 basis points sequentially from 68.7% to 70.6% and that is up 510 basis points since the third quarter of last year. As with all generic launches, the impact of these introductions was to immediately lower our sales as we provide lower cost drugs for payors and patients.

But our cost of the drug also dropped and given our size and scale we were successful in negotiating favorable pricing on generic Risperdal of which we are a very large purchaser as well as on a number of other generic drugs. We are also successful in our conversion rates particularly on Risperdal to Risperidone.

Typically we are at or above a 90% conversion rate from brand to generic within four weeks of launch. With Risperdal, we cut that time essentially in half bringing savings to payors and reducing our costs as quickly as possible. Also benefiting both our cost of sales and SG&A is the progress, we are making in strategic sourcing or effective purchasing of non-drug items.

As you know about a year ago, we initiated the Strategic Sourcing Initiative with a goal of negotiating $40 million in savings in 2008. We are pleased to note that not only are we on track in achieving that target for negotiated savings, but we are now also seeing the benefit of the actual savings flow into the P&L, as these agreements are implemented.

We also continue to move forward in the outsourcing of a portion of our packaging activities. During the quarter, we completed the installation and validation of the additional equipment we put into place last quarter to accommodate planned capacity and the number and quantity of drugs packaged as well as to allow bingo card production there.

We have been ramping up the number of products and the volumes on this new equipment so that by year end; we will begin to see higher productivity, as we migrate these activities out of our local pharmacy. We are also pleased to note that during the quarter the progress, we made in the "Omnicare Full Potential" Plan contributed to incremental earnings of approximately $0.01 per share versus the second quarter and I have more to say on this later on.

We have also broadened our growth platform by entering adjacent markets and this strategy really paid dividends this quarter. Outstanding growth in our specialty pharmacy business was in evidence this quarter with both sales and operating profit increasing sequentially as well as year-over-year and in fact was ahead of expectations.

The performance of this business along with the specialty pharmacy industry’s favorable growth outlook led us to expand our presence here with the acquisition of Advanced Care Scripts or ACS, which we completed in mid July. This is the first time that we have included ACS in our results and ACS was a significant factor driving our overall sales growth for the quarter and performed more favorably than projected.

Based on the results for the third quarter of 2008, ACS sales are running at the annualized rate of $272 million up about 15% from the annualized run rate of $237 million based on the June 2008 quarter. So, we have already begun to see a number of revenue synergies and growth opportunities, as a result of this acquisition.

ACS enhances our service offerings in neurology and oncology two of the largest therapeutic classes in the specialty arena and we can in turn expand ACS’s revenue opportunities in the other 11 therapeutic areas actively served by our existing specialty pharmacy business.

We also look forward to building on the strategic fit that we see between our specialty pharmacy and our CRO businesses to develop a one-stop shop outsourcing approach to provide clients particularly biotech companies with customized solutions in the development, commercialization, safety monitoring and risk management of their products and we see this as a differentiating factor that we believe will resonate with our customers.

Our hospice pharmacy business continued to show improved performance. As we have discussed over the last several quarters, this business has faced both competitive pricing and patient mix issues. Our action plan including addressing both top line and past issues revenues have stabilized and operating margins improved by 150 basis points sequentially contributing favorably to Omnicare’s overall increase in operating profit.

And lastly with respect to our CRO businesses, which combined account for about 3% of Omnicare’s total sales and adjusted operating profit. Performance here was relatively steady with the second quarter and is continued to show solid year-over-year growth. Given the events of the past month or so, we have seen as much interest in our balance sheet strength and capital resources as we have in our earnings and the news is good here as well.

So, I would like now to turn the call over to Dave Froesel, our Chief Financial Officer to give you an update in this area.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Thanks, Joel. As Joel already mentioned we are continuing to see stabilization and improvement in our business and this is reflected in our cash flow as well. Our cash flow from operations for the third quarter of 2008 of approximately $103 million also tracked well with our expectations.

If you look back, you will note that our cash flow in the quarter was lighter than normal for a quarter, when we do not have semiannual interest payments. This is due solely to the calendar. We pay our primary drug wholesaler on a weekly basis specifically on Tuesdays.

Normally there are 13 Tuesdays in a quarter, but this quarter there were 14 resulting in one extra payment of approximately $65 million. This is a phenomenon that will not occur again until 2013. If we had not been required to make that payment our cash flow for the quarter would have approximated more normal levels.

Moreover, we continue to see our cash flow for the full year 20 08 coming in at $400 million to $450 million. With respect to receivables our overall receivables balance was up modestly on a sequential basis owing largely to the acquisition of Advanced Care Scripts. But on a year-over-year basis our receivables balance at the end of the third quarter was down nearly $90 million or about 6%.

Our DSOs at the end of September were at 79 days down two days sequentially and down 10 days since September 2007. In part this reflects the charge we took in the fourth quarter of 2007 as well as progress made in collections.

Our bad debt expense for the third quarter totaled $28.9 million down $1.5 million versus the same quarter of 2007 and up about $3.1 million sequentially. You will recall that last quarter, we had the net benefit of some recoveries of previously uncollected co-pays and rejects arising both in the normal course and as a result of favorable outcomes of certain litigation and arbitration activities we initiated with the PDPs in order to collect these amounts particularly from the 2006 Part D transitional year.

Actually as a percent of sales, our bad debt expense in the third quarter was 1.8% which was roughly even with the second quarter adjusting for the benefit of these recoveries and down from 2% in the third quarter of 2007. So we are making progress here. As an aside at September 30th, 2008 our co-pays outstanding from PDPs up about $22 million relating to the 2006 and 2007 years improved $5 million from the $27 million outstanding last quarter, as we continue our efforts to recover these amounts.

With respect to inventories in the third quarter of 2008, our days on hand were 32 days or about even sequentially and down two days year-over-year. I would like to emphasize here that while we often discuss the impact of generics on sales and profits, we should not forget that there is a favorable cash flow benefit here as working capital both receivables and the inventory are reduced as generic penetration increases.

With respect to uses of cash, we funded approximately $110 million in cash outlays for acquisitions, which includes deferred payments from prior period acquisitions during the quarter. Well over half of this amount funded the acquisition of Advanced Care Scripts with the remainder paying for institutional pharmacy acquisitions that with the synergies we believe, we can achieve have the potential to produce attractive returns on capital.

We also funded capital expenditures of about $18.5 million in the third quarter of 2008 up about $4.3 million from the same period of 2007 and about $2.5 million sequentially. These increases largely reflect ongoing expenditures for automation technology, IT infrastructure and leasehold improvements related to the "Omnicare Full Potential" Plan.

We continue to see CapEx at $60 million for the year of which $40 million relates to the "Omnicare Full Potential" Plan and $20 million from maintenance CapEx. After funding this higher level of acquisition activity and CapEx, we ended the quarter with $196.5 million in cash on the balance sheet and no borrowings on our $800 million revolver.

Our current ratio stood at 3.7 to 1 and our total debt to total capitalization stands at approximately 45.4% down approximately 80 basis points versus year end 2007 and on a net debt basis we are at 43.5%. With respect to our debt, let me point out that we have no significant maturities until July 2010, when $400 million is due under our Term A loan.

The interest rate, we pay on this loan as well as the revolver, where we do have an outstanding balance is based on LIBOR or the prime rate our choice. So it is interesting to note that in these unusual financial market circumstances, we have the flexibility to manage our interest cost.

Lastly as we have discussed before, our tax rate is likely to move around a little on a quarterly basis due to tax planning initiatives or other changes in state tax methodologies. Our tax rate in the third quarter was similar to the second quarter and down about 180 basis points from the third quarter of last year, which obviously benefited the growth in earnings per share on a year-over-year basis. At this point, we would expect the fourth quarter tax rate excluding special items to be at or around 37%.

To summarize as we see it, we are working through many of the issues that confronted us over the last two years. We have been focused on maintaining a strong balance sheet and managing our cash flow and we have returned to year-over-year earnings growth, as we face a challenging economic climate in the U.S. it is important to note that as evidenced by our results Omnicare is a solid cash flow generator. It has a strong balance sheet and the financial strength and flexibility to pursue its growth plans.

So, with that I will turn it over to Cheryl.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Thanks, Dave. Looking at our performance by segment, sales in our Pharmacy Services business of approximately $1.55 billion for the third quarter were up by about $63 million or 4.3% versus the same quarter last year sequentially Pharmacy Services sales were up $55 million or 3.7%.

Strong sequential results reflect continuing robust drug price inflation related to brand drugs, the increased use of certain higher acuity drugs and biologic agents as well as sequential growth in specialty pharmacy services most notably the acquisition of Advanced Care Scripts. These factors more than offset the impact of increased generics on sales, reductions in utilization and reimbursement for certain drugs and a lower number of beds served.

Our payor mix for the third quarter was Part D at 40%, Medicaid at 10% private pay third-party and facilities at 45% and 5% other. At September 30th, 2008 we served long term care facilities as well as chronic care and other settings comprising 1,432,000 beds including 67,000 patients served under patient assistance programs in our specialty pharmacy services business.

Our overall revenues per bed for the third quarter were $1084 up about 6% from the prior year quarter and up about 4% from the June 2008 quarter. This reflects largely the growth in our specialty pharmacy services including the addition of Advanced Care Scripts, which carries a higher revenue per scripts than we typically see overall in the pharmacy business.

The addition of these revenues along with the contribution of strong drug price inflation and the increased utilization of higher acuity drugs and biologics more than offset the impact of generics on sales, which of course is magnified this quarter with the introduction of generic Risperdal, Depakote and others and reductions in utilization or reimbursement on certain drugs.

Just to comment on the EPO related drugs Procrit and Aranesp that we have been discussing over the past year. Sales of these drugs continue to erode dropping again by about $2.9 million or 10% sequentially. On a year-to-date basis sale of these drugs are down roughly $7.5 million or 25%. More than offsetting this decline were increases in utilization of certain high acuity drugs including anticoagulants such as Lovenox, antibiotics such as Vioxx for resistant infections as well as a number of biologic agents used for progressive diseases such as multiple sclerosis, rheumatoid arthritis and cancer and also new drugs to treat common chronic conditions such as diabetes. Also the move back to OxyContin as the branded drug also continued to increase sales.

IV sales for the third quarter totaled $62 million down about $1 million from the second quarter of 2008 and down about $3 million versus the prior year. Sales here bear watching as new rules went into effect October 1st relating to the elimination of hospital reimbursement for conditions acquired during hospitalization that were not present upon admission.

Anecdotally, we are seeing in some areas early admissions to nursing homes related to these often high acuity diagnoses, which could ultimately, we believe have a solitary impact on our IV sales. Adjusted pharmacy EBITDA of $195.8 million for the third quarter 2008 was up 18.5% sequentially and 16.9% versus the prior year quarter benefiting largely from the impact of generic drugs on margins drug price inflation, productivity and cost reduction initiatives and sequential margin expansion in our specialty and hospice pharmacy businesses and as well as lower bad debt expense on a year-over-year basis.

Our CRO business excluding reimbursable out-of-pocket expenses had revenue for the third quarter of $43.2 million up 6.4% versus the prior year quarter. Adjusted operating profit for the CRO business of $4.5 million in the quarter was up 19% versus the third quarter of 2007.

Adjusted EBITDA of $5 million for the quarter followed a similar pattern and represented 11.6% of adjusted revenues. Lastly, at September 30th 2008 our book-to-bill ratio was at 1.3 to 1 and our backlog stood at 328 million up 5% versus the prior year.

With that I will turn it back over to Joel for his concluding remarks.

Joel F. Gemunder - President and Chief Executive Officer

Thank you, Cheryl and thank you, Dave. Before taking your questions I would like to wrap up with a few final thoughts and our outlook for the balance of the year. With respect to the legislative and regulatory front in healthcare things are relatively quiet awaiting the outcome of the election.

And while we make no predictions on the outcome and recognize that either new administration will have a host of priorities, we are committed to working effectively with the new administration and the Congress to protect the interest of the frail elderly.

With respect to Medicare Part D for the balance of the year, things seemed relatively stable. Of course, we still see and correctly assess co-pays on prescriptions with dual eligible patients and we and our entire industry continue to work with CMS and the PDPs and members of Congress to seek solutions to this issue.

And we continue to work through the litigation and arbitration actions, we initiated with a number of PDPs to have them repay to us the funds inappropriately withheld on co-pays. It is the time of the year now to consider Part D plan participation and rates for 2009. Many of our plans have rolled over as it is and for others we are now in the midst of negotiations for 2009, we are re now in active discussions, so it is too early to make any projections about them.

And then two, we expect to see another substantial reassignment of dual eligibles into different plans again this year as a result of the bidding process by the PDPs for 2009 and we really can’t handicap the financial impact of these activities today either. First as I just indicated the rates and rather [ph] financial terms for certain plans in 2009 are not yet completely known.

Second we don’t know precisely which plans these patients will land in as yet and some portion of them will self select new plans. So, there is a number… there are a number of moving parts, but once we have a better idea on the outcomes here we will factor them into our guidance for 2009.

Relative to Part D and litigation, our results continue to be impacted by the end result yet unresolved matter with the United Health. Our lawsuit against United is pending in Federal Court in the Northern District of Illinois, as you may know the start of the trial on October 14th was continued at the request of United. A status conference has been scheduled for the first week of December at which time, we hope to see a new trial date set for early next year.

The differential in rates between the originally negotiated contract with United and the Any Willing Provider Contract we now operate under with PacifiCare totaled $25 million pre-tax for the quarter or about $0.13 per diluted share.

Cumulatively since April 2006 the impact of differential rates has negatively impacted sales and operating profits by approximately $272 million pre-tax or $1.39 per diluted share. We believe that antitrust and fraud plans are strong and we are looking forward to pursuing these plans on behalf of our shareholders and the residents we serve.

Now clearly a majority, a major priority for us for the balance of 2008 and 2009 is the implementation of the "Omnicare Full Potential" Plan. So, let me just give you a brief update on that. All 30 hubs are regional support centers are in some stage of development. 17 hubs have finished construction or renovation up from 12 last quarter and the remainder continue in various phases of the construction process. Today 19 hubs are in the beginning stages of processing refills or performing order entry for 48 local pharmacies.

The delivery of equipment continues to roll forward. MTS has now delivered 21 of the 25 planned pieces of equipment and we are seeing productivity ramp up on many of them. We have also now taken delivery of 12 auto label and verify our ALV [ph] generation II machines up from seven last quarter and you will recall this equipment uses our proprietary technology and prepackaged unit dose cards or boxes. We are in the validation, testing and performance qualification phase of many of these installations and I am pleased to report that we are now processing live scripts from five ALV locations.

We have also been proceeding with the rollover of our proprietary integrated document imaging technology to all of our pharmacies and hubs that began in March. We have installed document imaging in 37 locations and are continuing to move forward with the installation, training and ramping up productivity on this important component of the plan.

As I mentioned earlier, we are encouraged by the indications of efficiency and cost savings realized in the third quarter. We expect to see further improvements in the fourth quarter. We continue to see the ultimate pre-tax savings from the Full Potential Plan in the $100 to $120 million range on an annualized basis and as we have mentioned on past calls, we believe the timing of the achievement of those savings will be extended into 2009 owing among other things to the timing of the completion of facility build outs.

We believe that this type of issues, aren’t to be expected from an endeavor of this magnitude and we believe, we are making substantial progress over a relatively short time period. So, to conclude, I would like to make a few comments relating to our outlook on the remainder of the year. Clearly we exceeded our previous guidance for the third quarter for the reasons I have discussed earlier.

And as we look to the fourth quarter, we see drug price inflation and the utilization trends related to certain higher acuity drugs and biologics continuing. With that said we also expect to see reduced utilization of certain drugs including the EPO agents as well as reduced reimbursement associated with some MAC and recently FUL implemented adjustments.

With respect to generics overall however we see incremental benefits in our results. With respect to Risperidone, as you are probably aware it is no longer in an exclusivity period and several of the manufacturers are beginning to gradually provide product to the market, which it ultimately impacts pricing and costs further.

You will recall as we said on our last two quarterly conference calls that we had worked hard to narrow the differential and pricing on the exclusivity and non-exclusivity status by obtaining favorable pricing early on this particular drug, while in exclusivity as well as on other generics. So, much of the benefit has already been factored into our ongoing results.

That said we did not see the generic launch of Depakote Sprinkle or Risperdal M to hit the market in the third quarter as originally expected. We believe but cannot be absolutely sure that we will see these hit in the fourth quarter along with other anticipated fourth quarter launches such as Keppra, Razadyne ER and Razadyne ER and PhosLo among others. All told we expect our generic dispensing rate to increase in the quarter and with it an incrementally positive impact with payors and patients as well as a favorable impact on our own costs.

We also believe, we will see a continued positive contribution from the ACS acquisition and additional savings from strategic sourcing as well as from the Omnicare Full Potential Plan. So, accordingly we are raising our guidance for the full year diluted earnings per share for 2008, as adjusted for special items to $2.09 to $2.11 per share and this of course implies a range of $0.62 to $0.64 per diluted share excluding special items for the fourth quarter.

With the strategies, we have in place and the progress we have seen to-date, we believe that we are well positioned for the remainder of 2008 and heading into 2009. Of course we are not in a position to provide guidance for 2009 at this juncture. 2009 earnings represent a complex algorithm dependent upon drug price inflation, brand to generic conversions and the ongoing favoring impact on earnings from the mix shift towards generic drug, the achievement of savings under the Full Potential Plan and other cost reduction and productivity initiatives as well as the outcome of PDP negotiations, reassignments and any potential changes to the PDP and MAC FULs or State Medicaid reimbursement.

We also need to go through our rigorous budgeting process and on balance, let me say that we believe the outlook for 2009 is positive and expect to be in a position to provide our specific guidance, when we announce our fourth quarter earnings. For now, let me close by reminding you that even in this economic climate the Institutional Pharmacy business is not typically subject to the variances in consumer demand. We provide an essential service for which payment for the vast majority of cases is funded.

Further demographics should dictate ongoing demand and lastly Omnicare has proven to be a strong cash flow generator and we have a solid balance sheet providing us financial resources and flexibility. So, our focus remains on the issues driving our business. Those that will provide continued stabilization and growth; reduced costs, increased productivity and above all restore shareholder value.

And now, I would be happy to take your questions.

Question and Answer

[Operator Instructions] Your first question comes from the line of Jason Gurda with Leerink Swann.

Jason Gurda - Leerink Swann

Good morning. Thank you.

Joel F. Gemunder - President and Chief Executive Officer

Good morning.

Jason Gurda - Leerink Swann

I wanted to start out with your SG&A line. The expense came in I think particularly since you did the acquisition and bad debt was up sequentially significantly better than expected. Is that part of the cost savings program, the $40 million that you had talked about this year or is that more of the Full Potential Plan? I was just curious what was going on there?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Sure. This is Dave Froesel. Great question. We are benefiting from the non-drug purchasing $40 million annualized program both on the SG&A line and within gross profit. And also as you may understand, as we continue to do acquisitions such as Advanced Care Scripts during the third quarter and some smaller institutional pharmacies, we inherent their SG&A expenses so that’s kind of what’s in the mix.

Jason Gurda - Leerink Swann

Okay. Another question and Joel, I know you talked about that there was a whole bunch of issues obviously going to impact 2009 numbers. But I was wondering, if you could give us a sense for at least your expectations for profitability on some of the newer generic drugs over the next few quarters meaning you already had described?

How you are able to get a little bit better pricing or the purchasing the price during the exclusivity period so that’s going to mean that there is less of an increase maybe during the initial multi-source period. But I’m thinking like several quarters out should we expect that remains flat increases, decreases is there any sense that you could provide on that?

Joel F. Gemunder - President and Chief Executive Officer

Let me say first of all I would like to characterize the first part of your question by saying because we are able to move our purchasing advantages upscale forward and get the benefit of lower prices a little bit earlier than ordinarily that’s not because we are just big it’s because we are able to negotiate effectively on a number of products with the manufacturers, thereby giving us at them some added benefits.

They get the benefit of assurances of steady production rates. We get the assurances of somewhat lower prices. So, now we have and some day I will show it to you when I am retired if that ever happens that we have a very detailed analysis partly based on past history and partly based on computer models of how a drug will behave when it goes generic.

And I think we have plotted these out for at least the end of 2009 and we think that we will… that we are comfortable let me say that with where we should be on a number of these drugs throughout the balance of 2009.

We are going to see some little tailing off of the net profitability as we get into the third and fourth quarters of next year. On the other hand, there are new drugs coming on that will take up that slack and move us on balance significantly ahead of where we are at this point.

And it is not something that I can just spit out. It’s hundreds of pages of 50 lines per page and 30 columns per page of analysis on these things and we spend a lot of time studying that because it’s an important factor in our business. But it’s not the only factor.

We are getting this was the quarter in which all of our units, all of our operating units were aligned the star [ph] seem to be aligned for our benefit this quarter and all of our businesses were running either equal to or ahead of expectations, so that had an impact.

And we are as I said on balance positive for our outlook in 2009. Although there are a multitude of factors, we have to consider and balance and run sensitivities on so that we can be certain to give our best estimates of how we will come out in next year.

Jason Gurda - Leerink Swann

Okay. Thank you. That’s very helpful and great quarter.

Joel F. Gemunder - President and Chief Executive Officer

Thank you very much, Jason.

Operator

Your next question comes from the line of Lisa Gill with JPMorgan.

Lisa Gill - JPMorgan

Thanks very much and good morning. Joel I know that you talked about a number of factors for next year. But clearly one of the biggest ones is the renegotiation around Medicare Part D. My guess would be that you are probably in the middle of those negotiations at this point. Can you just at least give us some ideas of what the plans are looking for if there is any changes, around the benefit or how your relationships will work?

And then secondly, if you could maybe just give us some thoughts around the specialty pharmacy business. You gave us a lot of detail about what happened. But when we think about Medicare Part D, is there also an opportunity to sell specialty into that book of business? Can you talk about maybe the opportunity to sell it into the commercial book of business and some of the responses you are getting from the planned sponsors around your specialty pharmacy offering? Thank you.

Joel F. Gemunder - President and Chief Executive Officer

Well those are a lot of questions and let me start with the first one. With respect to the negotiations with Part D again it’s a very complex issue. We see Humana for example dropping out of the dual eligibles entirely through the reassignment program. They bid in a way that would assure them that they would have no dual eligibles in 2009.

Other plans have rebate relationships with pharmaceutical companies that cause them to adapt their formularies and their pricing differently. There is no standard way of measuring what the PDPs will do. Each company is a unique organic individual entity and has to be negotiated with a calculus of pluses and minus for each of us until we get to the right to an acceptable… mutually acceptable structure for next year.

So, I wish I could give you an answer. We are a couple of months early on that. But I hope that as the year draws to a close we will have a much, much better understanding of how that will shake out.

Lisa Gill - JPMorgan

Can I just ask it maybe just a little bit of a different way? I think there is some concern in the markets given what happened with United that perhaps some others would try to do what United did. So I just want to get comfort that you are in the process of negotiating something for 2009 and that we won’t fall into another situation, where someone tries to find a loophole and reimburse you less than you truly deserve.

Joel F. Gemunder - President and Chief Executive Officer

Our negotiators who do that are shaking their head no.

Lisa Gill - JPMorgan

Okay, good. I am glad to hear that.

Joel F. Gemunder - President and Chief Executive Officer

So look, I don’t have a crystal ball. I can’t look into the hearts of people and determine what they will or will not attempt to do. We are very straight up and straight dealing kind of an organization and people are straight with us.

We are straight with them and we try to reach a bargain and almost all bargains are based on assessing the other sides’ interest and ours and coming to a point, where we can reach something that we can both live with. Somebody once told me really a good deal is a deal where nobody is happy, but nobody wants to walk away from it and I think that’s potentially correct.

Now, let me move into a more exciting area and that is the area of specialty pharma. The answer to your question is very definitely, yes. Many of these products are going into Part D and are going in a major way. As I said our ACS business grew from an annualized rate of $237 million at the end of the…. if you took the second quarter and annualized it we didn’t own it in the second quarter. And if you took the third quarter and annualized it, it would be $272 million and that’s a pretty rapid growth quarter-to-quarter.

So they are doing very well. Right now they are in a limited number of areas oncology and neurology particularly MS. But we are expanding the categories which they serve. We are expanding the relationships with some of these manufacturers, who have the specialty drugs and we are in many ways able to get a significant synergies between our ACS business, our new business and our existing specialty pharmacy business in RxCrossroads.

So we think the outlook in that area is very exciting. It is a major growth driver for the company and we will be anxious to develop that company and give it whatever resources they need because we see that as a major growth area for the company.

And let me give you just a couple of numbers off the top of my head, I believe in 2007, if my memory serves me correct the total U.S. drug industry spend both for brand and then generic drugs was about $287 billion, if I remember correctly.

And by next year just as a rough benchmark next year of 2009 and 2010 will be somewhere between $75 and $90 billion on specialty pharmaceuticals. So you are saying that this is not a small market. This is a very, very large market and growing at a very rapid pace as the focus in pharmaceuticals moves from small molecule drugs to large molecule drugs namely proteins and that is a very positive development in the industry.

I think we are there with a very significant stake in this market perhaps not the absolute largest, but large enough to be an effective competitor in this market and we are going to give it all the resources and attention that it deserves.

Lisa Gill - JPMorgan

Can you just remind me I think that you are the only player in the institutionalized setting that really truly has these capabilities; right? I mean, when you talk about being a large player you are comparing yourself to some of the other standalone? But for institutional pharmacy you are the largest in the industry; is that correct?

Joel F. Gemunder - President and Chief Executive Officer

I will say, if you measured it by beds of revenues that would be correct.

Lisa Gill - JPMorgan

Okay great. Thank you for all the comments. I appreciate it.

Joel F. Gemunder - President and Chief Executive Officer

Operator

Your next question comes from the line of Glen Santangelo with Credit Suisse.

Glen Santangelo - Credit Suisse

Hi, Joel. Just a couple of quick questions. I am trying to think about Q4 relative to what we seen in Q3 and just tell me if I am thinking about this correctly. I mean clearly this quarter you had Lamictal, Depakote and Risperdal all kind of come on intraquarter. And then intraquarter, you did the Advanced Care Scripts deal and I believe in your prepared remarks there you highlighted three additional generics coming on in the fourth quarter.

So, as I think the how your business might proceed sequentially here shouldn’t you get a bump here from having those things that I just mentioned for the full 90 days in addition to those three incremental generics? Am I thinking about that correctly?

Joel F. Gemunder - President and Chief Executive Officer

You are but that’s not the whole issue. We have learned by sometimes difficult lessons that there are a whole host of factors in that algorithm. We have to consider for example what will be the trend in MACs. I think we have got a pretty good handle on that for the balance of the year.

There were some surprises. There were FULs, Federal Upper Limits instituted by Medicare and just in the last month or so, which have an impact and we have had to consider that and factor that into our thinking. There are… we don’t know when in the fourth quarter these drugs Depakote Sprinkle, Risperdal, and Keppra will come out. We had originally thought they would be out around the first of November and now it looks as if they will be out perhaps the middle of November.

And all of these things each day that there is a delay. It results in lost margin and lower pricing for the payors. So, it’s an interesting factor and one in which we have to keep on top of everyday and I must say this we have spent a lot of money to develop our software and our abilities to be able to gauge with a high degree of accuracy what happens to every product on the market with respect to price changes by all the PDPs and other third parties.

And also we are able at the same time to monitor on a daily basis any changes in the cost of these products. In other words prices offered by the various and Sundry manufacturers, GPOs and what not and we get daily AWP changes. So, all of these factor into margins and they are constantly updated so that we have a much better idea of what’s happening to us compared for example to where we were two years ago. Our information capabilities today on that score are light years ahead of where we were two years ago.

Glen Santangelo - Credit Suisse

Joel. I appreciate that. And maybe if I could just ask one follow-up on the United situation. It seems like United cost you by my calculation $0.13 in earnings again this quarter.

Joel F. Gemunder - President and Chief Executive Officer

I didn’t hear that. Your voice broke up.

Glen Santangelo - Credit Suisse

I am sorry. It seems like United cost you according to my calculations $0 .13 in this quarter. One concern I hear from investors and I am curious to get your response is people are nervous that you are potentially pushing too hard on your largest customer with the United contract expiring at the end of this year, is there a potential here for United to ultimately just walk away at some point try to source the business someplace else. How is that relationship evolving given kind of the outstanding litigation between the two parties?

Joel F. Gemunder - President and Chief Executive Officer

All right. Well let me say put to you that the law is very clear that there is at bottom [inaudibe] as they say in Paris and Any Willing provider any provider can get a contract from any PDP and it’s… Any Willing provider price. And so, and since we are currently down below that area where other much smaller providers I don’t think that gives us… I don’t think United will break the law.

I would be very shocked, if that happened. I think they are a law abiding company with respect to government issues. What does that… what they did, we think that they have violated the antitrust laws with respect to our company. We think they have as we have said many times we are alleging that they violated the antitrust laws. We are alleging that there is… we are victims of a fraud perpetrated on us by them.

But I don’t think, United takes on the Federal Government directly. So that’s what I mean by that. And I think that I am not worried about that particularly and it’s a case of as I have said many times we are both very large providers in this market and both of us have a responsibility to the patients we serve. So it’s not to disrupt their wellbeing of the frailest members of our society.

Now coming back to whether or not we are pushing them too hard? The question is who is pushing whom? And I just don’t I grew up as rather modest circumstances in the Bronx and we learned pretty quickly in the Bronx if you don’t stand up for your rights you get trampled and we are standing up for our rights.

Glen Santangelo - Credit Suisse

Okay. Thanks for the comments. I appreciate it.

Operator

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Bryan Sekino - Barclays Capital

Hi good morning. This is Bryan Sekino [ph] on behalf of Adam Feinstein here. I was wondering if you could kind of comment on we have seen some decreases in occupancy in nursing homes, LTACs living facilities. Can you provide us with a bit of an update regarding how this is impacting your business?

Joel F. Gemunder - President and Chief Executive Officer

That’s an interesting point because I don’t think we are seeing that. In fact I think we are seeing in some areas just the opposite. As you know and there is a new rule that went into effect October 1st which said essentially that the government Medicare will no longer reimburse hospitals or I don’t know if LTACs are going to involve in this. But they will no longer reimburse hospitals for cases, which are attributable to nosocomial infections that are hospital acquired infections.

So, there is a tendency we believe that we will see a growing tendency and we are anecdotally beginning to see this in certain states particularly some of the northeastern states, where the weather is turning cold, where some of these patients were seeing an increase in admissions of Medicare patients into our facilities as hospitals no longer get reimbursed for treating those patients in the hospitals. So there is a tendency to move them as soon as possible into another treatment setting. So I think, we haven’t seen it yet. Of course it’s still early in the season.

Bryan Sekino - Barclays Capital

Okay. So you would kind of say that that dynamic is kind of offsetting

Joel F. Gemunder - President and Chief Executive Officer

Well I can’t say that we are seeing a reduction in admissions. As a matter of fact I think at our market in our nursing home clients there is a very significant spread between the reimbursement that Medicare provides and the reimbursement that many State Medicaid authorities provide and it’s roughly it could be as much as a three to one differential in reimbursement.

So many intelligent nursing homes are moving towards a higher quality mix meaning a higher proportion of Medicare patients, which means more downloads from hospitals because the reimbursement is better and you lessen your dependence on State Medicaid authorities, which offer also lower reimbursement and in some states like California they are under pressure.

So it’s a factor that we just haven’t seen. Now whether or not it’s covering us… the other factor that you mentioned I can’t say, but I think at this stage we haven’t seen it.

Bryan Sekino - Barclays Capital

Okay. Thank you. And just one last question. We also noticed that revenue per bed increased significantly in the quarter. Can you comment on this how this dynamic --

Joel F. Gemunder - President and Chief Executive Officer

Yeah. Well I am going to let Cheryl talk about that because she keeps those records.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Right as we indicated earlier one of the biggest reasons of course is the fact that we have ACS revenues in there, which have much higher revenue per patient per prescription than you see in the general institutional pharmacy business. You also have the benefit of the very strong drug price inflation that we have seen as well as the growth in some of the higher acuity drugs and biologic agents that are being used. So those have all tended to drive the revenue per bed up.

Joel F. Gemunder - President and Chief Executive Officer

Also I would say that we are seeing increasingly higher utilization of biologics. That is to say biotech drugs for patients that are very expensive and very effective drugs such as Enbrel, Glivec, Tarceva, Betaseron and so on. And also the shift from OxyContin as a generic drug to a branded drug also had an impact on our revenues per bed. So what we are seeing creep into our mix is the increased utilization of biotech drugs, which is having a positive impact on our revenues per bed.

Bryan Sekino - Barclays Capital

And then you see that continuing into 2009 and kind of offsetting the increased utilization of generics?

Joel F. Gemunder - President and Chief Executive Officer

Well so far yes. I don’t see anything that’s slowing that down and you should bear in mind that this is happening on top of retrograde movement in the EPO drugs so that the trend is really even stronger than it appears.

Bryan Sekino - Barclays Capital

Okay. Thanks a lot.

Operator

Your next question comes from the line of Charles Rhyee with Oppenheimer.

Charles Rhyee - Oppenheimer & Co.

Yeah. Thanks for taking the questions here. Just a couple of quick follow-ups. First regarding that last one and the increasing use of biotech drugs. Just to be clear are we talking about higher utilization of biotech drugs through your specialty pharmacy business because you mentioned some such as Betaseron for multiple sclerosis. Is that dispensed through what we consider the traditional institutional pharmacy?

Joel F. Gemunder - President and Chief Executive Officer

Yeah. We are seeing that certainly in our specialty pharmacy business but also we are seeing it in our institutional pharmacy business to an increasing extent and this is a significant development in the company and it applied, I must remember, who are these drugs being used for? At least of older people consume more than half of all of the drugs consumed in America and it’s as drugs that are like Glivec and Tarceva, and Betaseron these are drugs that are used quite commonly in the elderly population, when you have good disease management programs and compliance with therapy, which you get in the institutional setting.

Charles Rhyee - Oppenheimer & Co.

Great. Maybe just switching gears getting back to the issue on generics. Obviously it seems like you have benefited here from the launch of Risperdal and a couple of others. Can you give us a sense of what your generic fill rate in the quarter was and also have you seen I think, Mylan and Apotex are supposed to launch generic versions as well. You look at the weekly scripts it seems they are starting to trickle here in October. Have you started to see meaningful supply from these manufacturers as well?

Joel F. Gemunder - President and Chief Executive Officer

I would say, you used the word trickle and I think that’s probably not a bad word. We are beginning to see Apotex has some product, which is slowly coming into the market. Mylan also has some product coming into the market. I think you are correct in that assumption. Yeah I think we are beginning to see more property…. availability is still what I would consider limited.

Charles Rhyee - Oppenheimer & Co.

Okay. And then the generic fill rate in the quarter?

Cheryl D. Hodges - Senior Vice President, Investor Relations

It was 70.6%.

Joel F. Gemunder - President and Chief Executive Officer

Yeah. I think we mentioned that it was 70.6% up from 68.7 %.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Correct.

Joel F. Gemunder - President and Chief Executive Officer

Last year.

Cheryl D. Hodges - Senior Vice President, Investor Relations

No. Last quarter

Joel F. Gemunder - President and Chief Executive Officer

Last quarter.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Okay sorry if I missed that .And then lastly Joel you mentioned in the beginning new contract signings they were up 33% year-over-year. Can you give a sense what the quarter… the sequential improvement was?

Joel F. Gemunder - President and Chief Executive Officer

I think that was flat to down a little bit. We don’t look very much on a sequential basis for the third quarter because it’s the big vacation quarter. Sales people are off on vacations. We have our big management meeting, which takes a week out of the quarter during that time and clients are off on vacation.

So we look more to the second quarter and the fourth quarter when we look at sequential growth. I think, we were off just a little bit sort of I don’t have those numbers in front of me. But I would say signing I don’t know, what they might have been off 10-12% something like that.

Charles Rhyee - Oppenheimer & Co.

Okay. And then lastly, I think you mentioned the benefit we are getting from the Full Potential Plan in the current quarter was up a penny. Can you give a sense on within the guidance for 4Q are we still looking for another penny or so or is it maybe starting to incrementally increase here?

Joel F. Gemunder - President and Chief Executive Officer

I think we are estimating that we might get another penny perhaps two maybe a third. We had about a penny in the second quarter so that gives us $0.02 contribution for the third quarter and maybe a little bit more in total for the fourth quarter. We are ramping up as quickly as we can.

But we can’t turn on the juice until all the machines are in and at working and even when you get them in they have to be go through an acceptance process, which takes several weeks per machine to do. So, you get it ramped up to acceptable production levels.

But I must say we are very pleasantly surprised that we have had as few problems as we have in getting this equipment working. When you design equipment to do something which has never been done before and you put it in and hold your breath and it works it’s really a pleasant thing particularly for company that is not known for its strong product development. We don’t do much metal bending in this company and to see it workout well for us is something of a pleasant surprise.

Charles Rhyee - Oppenheimer & Co.

Great. Thanks for the comments, guys.

Joel F. Gemunder - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Melissa Jaffe with Merrill Lynch.

Melissa Jaffe - Merrill Lynch

Hi. Good morning.

Joel F. Gemunder - President and Chief Executive Officer

Good morning.

Melissa Jaffe - Merrill Lynch

I should, guess, I should say good afternoon. Do you guys get any benefit from lower fuel costs on your SG&A line in Q3?

Joel F. Gemunder - President and Chief Executive Officer

Your ears must be burning because we have just been going through a series of meetings on that. We have renegotiated most of our carrier contracts and most of our business is now done with outside carriers and our contracts had negotiated rates and rates on fuel surcharges dependent upon the price of gasoline. So as the price of gasoline went up, it cost us a little more although we had caps on how much we would accept as a surcharge irrespective of the increase in price.

And we do have a lowering of our cost as the price of gasoline goes down, which is down now somewhere around $2 to $2.25 the last time I looked. So we have seen the price of gasoline really drop essentially in half and we are seeing some benefits from that in our cost structures.

Melissa Jaffe - Merrill Lynch

Okay. And can you remind us what percentage of revenue your delivery costs are?

Joel F. Gemunder - President and Chief Executive Officer

Somewhere between high 2% and 3%.

Melissa Jaffe - Merrill Lynch

Okay. Great. And then just one last question. Of that sort of 45% bucket of private pay self-pay and other can you give us a rough idea of how much is actually private pay or out-of-pocket?

Joel F. Gemunder - President and Chief Executive Officer

Private pay would be somewhere give you a ballpark 5% to 10%.

Melissa Jaffe - Merrill Lynch

5% to 10%. Okay. Great. Thanks a lot.

Joel F. Gemunder - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of A. J. Rice. Rice with Soleil Securities.

Chris Rigg - Soleil Securities

Hi good morning. It’s actually Chris Rigg filling in for A.J. I was wondering if you could provide a little bit… provide us with some more color on the day sales outstanding and the receivables. As we think about where you are today where do you think you are going to be a year from now and how do you think you are going to get there?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Sure this is Dave Froesel. What we have told the folks in the past that our goal within a year or more from now is to get down to the right around 70 or low 70s. And we are going to get there through a combination of initiatives associated with enhancing our billing operations.

We are going to be adding continuing to add more infrastructure in terms of collectors both on the nursing home facility side and on the private pay. And we are going to tighten up in some cases our credit terms and we are going to pull the trigger a little bit faster in terms of when accounts go past due on us and just overall pay a lot, lot more attention to it and it’s something we need to do during these difficult times. But we are confident that we can get into that 70 or low 70s within the next year or so.

Chris Rigg - Soleil Securities

Okay. And then are there any sort of large blocks of receivables anything from United that’s still outstanding from the Part D rollout or even some of the beds that you have voluntarily foregone over the last few quarters? Is there anything of size that would be of note that people, do you think, they would be interested?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

There is no large blocks of receivables out there other than we continually mention that we have some co-pays of around $22 million still outstanding from 2006 and 2007. But what’s important to note is that all of the 2006 co-pays, which are about half of that $22 million are fully reserved on our balance sheet within our allowance for doubtful accounts.

Chris Rigg - Soleil Securities

Okay.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

And with respect to the 2007 co-pay the other half they are about half reserved and we are continuing our negotiations, arbitration efforts associated with the PDP in terms of these issues.

Chris Rigg - Soleil Securities

Okay. And then one thing we have been hearing or concern we have been hearing question however you want to describe it is that sort of given the seize up in the credit markets that some of the one-off nursing home or smaller nursing home chains might be essentially using you guys as a bank more than ever. Have you seen anything recently that might validate that assumption?

Joel F. Gemunder - President and Chief Executive Officer

No. but it doesn’t mean we don’t that’s not a concern for us and we are beefing up our credit collection functions. We just talked about that yesterday to be certain that we stay with the situation as it develops. But we haven’t and you can see our receivable days are down so we haven’t seen it yet. But that doesn’t mean that we won’t and we are increasing our vigilance in that area so that we can stay current with it.

Chris Rigg - Soleil Securities

Okay. Great. Thanks a lot for the color.

Operator

Your next question comes from the line of Randall Stanicky with Goldman Sachs. Randall please check to see if you have your phone on mute.

Randall Stanicky - Goldman Sachs

I’m sorry I did. Just a couple quick ones. Dave I may have missed it but can you help us understand why a boost in P&L outlook doesn’t necessarily translate into increase in cash flow guidance for the year in this case?

Joel F. Gemunder - President and Chief Executive Officer

Can you…

Cheryl D. Hodges - Senior Vice President, Investor Relations

Could you repeat the question--

Joel F. Gemunder - President and Chief Executive Officer

Repeat the question and talk into the phone that you are breaking up over our end here.

Randall Stanicky - Goldman Sachs

Sure. I was just wondering if you could help us understand why a boost in P&L outlook for the year doesn’t necessarily translate into higher cash flow guidance for the year in this case?

Joel F. Gemunder - President and Chief Executive Officer

Oh. Dave?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Sure that’s a great question. What we continually look at as we move through the year particularly the second half of the year and more particularly the fourth quarter as you know the branded drug companies have been aggressively raising prices and in a lot of cases they raise their prices toward the end of the year more particularly in the beginning of next year. So we like to be opportunistic at that time. So we plan on doing some selective buying in that case which--

Joel F. Gemunder - President and Chief Executive Officer

I didn’t get that. I am not sure I understood what this question was.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Why was the earnings increasing the cash flow is it.

Randall Stanicky - Goldman Sachs

That’s what it.

Joel F. Gemunder - President and Chief Executive Officer

There is a very simple reason. In the fourth quarter we have a major interest payment due and it impacts our cash flow in that quarter.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Well. Yes we have about an extra $50 million of interest in the fourth quarter but that’s factored into our overall $400 to $450 million in guidance. And it’s a simple question was earnings are going to be up $0.62 to $0.64 versus the $0.61. It’s a moderate improvement over the third quarter.

Joel F. Gemunder - President and Chief Executive Officer

Well. Right and as we set up our hubs we have 31 hubs so it has to be inventory. So for a while you are going to see a significant increase in our inventories before we drawdown the inventories and our spokes. So there is something of an increase in working capital that’s required temporarily for a quarter or two until we bring down the inventories in our hubs.

So you can’t match it exactly. You have to staff it in one location and then let it drawdown in the spoke. So, for awhile you are going to see it’s doubling up in inventories for a short period.

Randall Stanicky - Goldman Sachs

Got it. That’s exactly the detail I was looking for. And then secondly on the CRO operating environment, I guess, more and most specifically are you seeing any delays in pharma outsourcing, their R&D projects? Is there any slowdown in the total RFP volume? You were seeing any commentary with this regard would be helpful.

Joel F. Gemunder - President and Chief Executive Officer

I was just looking at that the other day and we haven’t seen our breakage is not noticeably different than it’s been all year say. I can’t even anecdotally, I can’t find any change. But that’s not to say there is no volatility in it. But there is no clear pattern of increased breakage.

Now I should point out that our business is a little bit different than the larger CROs. A lot of our business is with small biotech companies and with the virtual pharma at smaller companies if you are a one product company that we have got one product we are not going close it down. Whereas in the larger accounts you can delay product and that’s not to say we don’t have larger accounts we do.

But it’s not an overwhelming percentage of our business because we have a lot of other midsize business and smaller company business and we do a lot of things like data management is a big part of our business, which is not given to as significant variation in business and revenues.

Randall Stanicky - Goldman Sachs

Okay .Thanks a lot for the detail.

Joel F. Gemunder - President and Chief Executive Officer

Thank you.

Cheryl D. Hodges - Senior Vice President, Investor Relations

I think we have time for one more question.

Operator

Your last question will come from the line of Robert Willoughby with Bank of America Securities.

Aaron Gornin - Bank of America Securities

Hi. This is Aaron Gornin for Robert today. Just a question for you. I know you haven’t… you won’t comment on the ‘09 experience. But just in terms of…

Joel F. Gemunder - President and Chief Executive Officer

We haven’t had it yet.

Aaron Gornin - Bank of America Securities

Exactly. Just in terms of guidance for the CapEx are we… should we expect anything untoward in terms of the CapEx for next year or is it going to continue to kind of be allocated according to the kind of division that you saw this year between the cost savings program and maintenance CapEx?

Joel F. Gemunder - President and Chief Executive Officer

I think we are going to see in terms of totals I think we see our CapEx go down next year significantly because the major investments w have made in equipment will be largely completed by the end of the year and the build outs will be largely completed by some time early in the year maybe first if possibly the end of the first quarter something like that maybe it will rollover a little bit.

But we also think that our maintenance CapEx will go down because we are going to have fewer needs and fewer spokes as time goes on. So the need to do maintenance and leasehold improvements and that sort of thing and the kind of equipment that you need and a spoke will be reduced because we are going to have fewer outcomes. So I think looking forward we think that that will be a positive for our cash flow.

Aaron Gornin - Bank of America Securities

Okay great. Thank you.

Joel F. Gemunder - President and Chief Executive Officer

Thank you.

Cheryl D. Hodges - Senior Vice President, Investor Relations

Okay. Thanks everyone for joining us today. We appreciate your interest

Operator

This concludes today’s Omnicare Third Quarter 2008 Earnings Conference Call. Thank you for participating. You may now disconnect. .

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