PharMerica Corporation Q4 2008 Earnings Call Transcript

Feb. 6.09 | About: PharMerica Corporation (PMC)

PharMerica Corporation (NYSE:PMC)

Q4 2008 Earnings Call

February 6, 2009 10:00 am ET

Executives

Teri Hartlage – Vice President of Finance

Greg Weishar – Chief Executive Officer

Mike Culotta – Chief Financial Officer

Berard Tomassetti – Senior Vice President and Chief Accounting Officer

Analysts

Glen Santangelo – Credit Suisse

Brendan Strong – Barclays Capital

Frank Morgan – RBC Capital Markets

Albert Rice – Soleil Securities

Constantine Davides – JMP Securities

Eric Gommel – Stifel Nicolaus

Robert Willoughby – Banc of America

Mike Petusky – Noble Research

Operator

Welcome to the fourth quarter and year-end 2008 PharMerica Corporation Earnings Conference Call. My name is Latrice, and I'll be your coordinator for today’s conference. (Operator Instructions). At this time, I would now like to turn the presentation over to your host for today's call, Ms. Teri Hartlage, Vice President of Finance. Please proceed.

Teri Hartlage

Good morning and thank you for joining us for the 2008 fourth quarter and year-end conference call for PharMerica Corporation. On the call with me today are Greg Weishar, Chief Executive Officer, Mike Culotta, Executive Vice President and Chief Financial Officer, and Berard Tomassetti, Senior Vice President and Chief Accounting Officer.

Before beginning our remarks regarding the fourth quarter and year-end results, I would like to make a cautionary statement. During the call today, we will make forward-looking statements about our business prospects and financial expectations. We want to remind you that there are many risks and uncertainties that could cause our actual results to differ materially from our current expectations.

In addition to the risks and uncertainties discussed in yesterday's press release and in the comments made during this conference call, more detailed information about additional risks and uncertainties may be found in our SEC filings, including our annual report on Form 10-K. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. PharMerica assumes no obligation to update these matters discussed on the call.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on our fourth quarter and year end 2008 financial results press release. We have made available to you our press release and our 10-K filed with the SEC. In addition, this webcast will be on our website along with the transcript from this call.

I would now like to turn the presentation over to Greg.

Greg Weishar

Welcome everyone. As always, we are pleased to have the opportunity to discuss our company's results today, and we thank you for your attendance. Before I get started with the financial highlights, let me remind you that from a comparative financial standpoint the combined businesses of KPS and PharMerica LTC were merged on July 31, 2007. Therefore, the results for the year ending December 31, 2007, represent the results of operations and cash flows of KPS for those full 12-month periods and PharMerica LTC effective August 1, 2007.

Yesterday evening, we released our fourth quarter and year-end results and we filed our 10-K. The diluted earnings per share for the year were $0.17 and our diluted loss per share was $0.18 for the quarter. Integration, merger-related costs, and other charges represented $8.9 million or $0.20 diluted loss per share for the quarter and represented $26.7 million or $0.53 diluted loss per share for the fiscal year. We took an impairment charge for intangible assets of $14.8 million or $0.30 diluted loss per share for the fiscal year and the quarter. Excluding the integration, merger-related costs and other charges, the impairment charge, and the effect of a favorable tax ruling, our diluted earnings per share totaled $0.26 for the quarter and $1.00 for the year. Our total revenues were $480 million during the quarter, and we dispensed approximately 10 million prescriptions in that period.

Looking at EBITDA, our adjusted EBITDA was $23.9 million for the quarter, giving us a 5% adjusted EBITDA margin. Fourth quarter 2007 adjusted EBITDA was $22.1 million, and the fourth quarter EBITDA margin was 4.5%, so we saw a nice improvement in both the EBITDA growth and margin growth quarter over quarter. Cash flow remained strong. We generated a solid $24 million in the fourth quarter of 2008 and $66 million for the year ended December 31, 2008.

Looking back over the year, a big takeaway from our first full year of operations is that we are seeing greater consistency in our financial results as we consolidate our pharmacies and streamline our operations. Fiscal 2008 adjusted EBITDA was $92.5 million compared to $67.9 million for fiscal 2007 on a combined basis.

We are also very proud that we’ve decreased our EBITDA leverage. The EBITDA leverage ratio has fallen from 3.1 times adjusted EBITDA at our inception to just under 2 times adjusted EBITDA at December 31, 2008. We are seeing major improvements not only in the income statement but also our balance sheet. As of today, we have completed all of our planned pharmacy consolidations. We still have about 15 legacy KPS locations to convert to our standard pharmacy operating platform, but we will move slowly on this. If it takes 2 or 3 years, that’s okay. Our focus in 2009 will be improving customer service, growing revenues, and building our acquisition program.

Now, let me turn to sales. Our sales pipeline is growing in both volume and quality. As we have stated before, we had virtually no pipeline or for that matter a sales organization at the time we merged. We are encouraged by the progress we’re making as our pipeline grows, and we think we are going to be seeing increased productivity there. The sales cycle remains longer than normal, but now that we have finished the pharmacy consolidations and the merger is behind us, we expect improved sales productivity. In fact, we are looking for our best sales effort in the last several years.

As I mentioned in the earnings release, I’m very proud that we were able to hold client retention and customer satisfaction ratings steady during the merger. To be sure, we had some challenges along the way, but our customers were patient with us, and they see how our new company is striving to meet their needs. We emerged from our first full year a stronger, more viable competitor.

Let me say a few words about our 2009 business focus. We see opportunities for improving our company in the following areas: Customer service, capturing scale opportunities, improving the quality and consistency in pharmacy service, accelerating our acquisition program, and driving organic growth. We are optimistic about what we see for the future. To be sure, there are always challenges. For example, bad debt remains an ongoing challenge, particularly in times of economic downturns, but we are optimistic. Cash flow is king during these times, and I want to assure our stockholders that we are spending capital wisely and diligently.

Our client service organization has improved significantly, and its adjunct client service center while still in its formative stage is getting great reviews from our clients and customers. We are very encouraged with this early progress and believe that this service unit will significantly improve the customer experience and be a long-term source of differentiation for our company.

We’re reviewing all operating processes to capitalize on our scale opportunities and investing in our pharmacies to improve the quality and consistency in our core pharmacy services. As we have discussed previously, we believe acquisitions are a key part of our long-term growth strategy, and I’m happy to say that Mike and his team have made solid progress in developing an acquisition pipeline. We are increasingly confident of our opportunities here and have been very pleased with the results of our initial acquisition in the fourth quarter of 2008. We will continue to be disciplined buyers and look only to pay fair value.

Our industry has not been as impacted by the business downturn as much as other segments of the healthcare industry, nor for that matter the overall pharmacy industry. We don’t see that changing. The vast majority of our patients are in skilled nursing facilities and are fully covered by either Medicare part D, Medicaid, or other third party plans. They do not pay co-pays or deductibles. We do see the potential for increased receivables, however, as some nursing home operators may be impacted by Medicaid payment delays, which we are servicing, for instance in California, and the liquidity challenges in capital markets. However, on balance we believe our exposure to the recession is manageable and significantly less than the pharmacy industry as a whole. So, in summary, we have completed another successful quarter and made solid progress for the year. I think our employees can look back with great satisfaction on their many accomplishments. The success of the past 18 months will serve as a springboard for 2009. We are well equipped to tackle the challenges in the coming years.

Our operating strategy continues to be one of execution and consistency. I trust our continued progress has not gone unnoticed to our shareholders. I believe we are showing that we can execute our business strategies and drive shareholder value. The groundwork we have laid this past year coupled with a solid plan for 2009 will bring us continued success. We are in an industry with strong fundamentals and will remain in a position of marked strength.

I will now turn this over to Mike to discuss the financial results in more detail.

Michael J. Culotta

Let’s spend a few minutes on the results of our operations. We have several sections in the MD&A of our 10K. The first section is based on the fiscal year results of 2008 compared to the historical fiscal years of 2007 and 2006. Remember, as Greg mentioned, all results prior to August 1, 2007, only include KPS. PharMerica LTC’s results are included after that date. The other sections of MD&A are comparisons of the fourth quarter of 2008 to the fourth quarter of 2007 and comparison of fourth quarter 2008 to the third quarter of 2008, a sequential quarter comparison. We believe this is useful to you, the investors and analysts.

As you recall, we also furnished an 8-K on November 8, 2007, that combined the operations of KPS and PharMerica LTC, which included certain statistical data. Throughout these discussions, we have obtained information from this source in our previous earnings calls. Let’s now discuss our revenue trends and matrix.

As Greg has previously stated, our fourth quarter revenues were $479.7 million. This is a decline of $12.5 million over fourth quarter of 2007 and a decline of $6.5 million from the sequential third quarter. Our prescriptions dispensed were $10 million this quarter compared to $10.04 million in the third quarter and $10.06 million in the quarter fourth of 2007.

Customer licensed beds under contract at the end of the quarter were 322,376 or a decline of approximately 3200 from the third quarter of 2008. Our institutional revenues per script were $46.59 this quarter compared to $46.95 for the third quarter of 2008 and $47.51 for the fourth quarter of 2007.

Let’s now turn to the cost of goods sold and gross margins. Our total gross profit was $71 million for this quarter or $6.84 per prescription dispensed compared to $70.3 million from the third quarter or $6.72. The increase in gross profit and gross profit prescription dispensed was attributable primarily to the synergies from the consolidations resulting in reduced labor and related cost. Our fuel surcharges were only $200,000 in the fourth quarter of 2008 and approximately $1.1 million in the third quarter of 2008. These items were reduced by decreases in the cost of drugs as we continued to see brand to generic changes and synergies from earlier consolidations and further reduction in our costs and scaling of certain pharmacies for which the consolidation had been completed.

For the fourth quarter of 2007, gross profit was approximately $75.1 million or $7.16 per prescription dispensed. The decrease over comparative quarters was due to less rebates, higher costs associated with closing pharmacies, and contract re-pricing as well as lower margins in the hospital segment due to the lower number of contracts. Rebates were $11.9 million in the fourth quarter of 2008 compared to $12.1 million in the third quarter of 2008 and $12.4 million in the fourth quarter of 2007.

Selling, general, and administrative expenses include functions such as pharmacy, regional and operations management, IT billing, and collection function, legal, HR, finance, and others. It also includes certain costs such as provision for doubtful accounts. SG&A costs were $52.3 million or 10.9% of revenues for the fourth quarter of 2008 compared to $50.5 million or 10.4% of revenues for the third quarter of 2008. The largest increase within labor related and other costs which was primarily related to the third quarter benefit related to the health insurance reimbursement, increases in Workers’ Compensation, and incentive compensation.

We continue to be very focused on driving costs down. Selling, general, and administrative expenses were $60.2 million in the fourth quarter of 2007. Overall, SG&A increased due to costs of being a public company, but decreased as a result of staff downsizing and other cost reduction measures as we continue to challenge all of our costs and processes.

Our provision for doubtful accounts was as follows: $6.8 million or 1.4% of revenue in the fourth quarter of 2008 and $7.2 million or 1.5% of revenues in the third quarter of 2008. The provision for doubtful accounts was $5.5 million in the fourth quarter of 2007.

The company’s adjusted EBITDA for the fourth quarter, as Greg had mentioned, for 2008 was $23.9 million, compared to $25.1 million in the third quarter of 2008. Again, we were impacted favorably in the third quarter by the $2.1 million employee benefits reduction, as it related to the reimbursement of overcharges for health insurance claims. The adjusted EBITDA was $22.1 million in the fourth quarter of 2007. Again, as Greg has previously stated, the adjusted EBITDA for the year was $92.5 million compared to $67.9 million on a combined basis for the year 2007.

We continued to focus on operational efficiencies, cash collections, cost controls and completing our integration processes as well as improving existing processes. Our adjusted EBITDA margins 5% in the fourth quarter of 2008 compared to 5.2% in the third quarter of 2008 and 4.5% for the fourth quarter of 2007. Of course, this is all exclusive of integration, merger related costs, and other charges and the impairment on intangible assets. During the fourth quarter of 2008, we recorded a pre-tax impairment charge related to customer relationship intangibles of $14.8 million, which negatively impacted diluted earnings per share for the quarter and year by $0.30.

Turning to the balance sheets and cash flows, our DSOs were 42 days. We continually evaluate the net realizable value of our receivables and client payment patterns. Our allowance as a percentage of accounts receivable is consistent. Our 10-K in the section on critical accounting estimates describes in detail our processes here. As it relates to inventory, our turns have increased and we have reduced the levels as we have consolidated pharmacies. Our leverage ratio is now below 2.0, which our borrowing interest rate as of today is only LIBOR plus 0.75 or 1.2%. You will note that we have continued improving on our covenant ratios.

As Greg previously stated, our cash flows from operations for the quarter were $24 million and for the year ended December 31, 2008, were $65.7 million. It is very interesting to note here that our cash flow per diluted share in 2007 was $1.70 and our cash flow per diluted share in 2008 was $2.18. We are very proud of our efforts here. In addition, our return on invested capital has gone from 5.1% to 7.3% in just over one year.

In our press release, we have provided our guidance for 2009. Our free cash flow in 2008 was $43.6 million, and we are expecting free cash flow to be between $58 million and $61 million dollars in 2009. The company is expected to pay minimal state taxes. All free cash flow will be used for future acquisitions. Our guidance does not include any future acquisitions. Remember that in the first quarter, our employee benefits will increase from the fourth quarter by approximately $2.4 million to $2.8 million because of the resetting of FICA, FUDA, SUDA, and the 401K. We have a sizeable workforce making over the limits of these taxes and benefits. As we have previously stated, we will probably net organic volume loss over first part of the year and see growth later in the year as sales should increase and retention holds.

Greg Weishar

As we stated before we continue to see opportunities ahead of us and are pleased with the progress we’ve made to date. We remain optimistic about the prospects of our industry, it is essential to provide the medication needs of the frail and elderly and that will only grow as population ages. We believe we are on track to achieve our targets and continue to see solid growth in 2009 and beyond, and we are focused on both internal and external growth and will continue to drive our business to more profitability.

Once again, I thank you for your interest in our company and now I will turn it over to Latrice to begin our Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Glen Santangelo with Credit Suisse.

Glen Santangelo – Credit Suisse

I just had a couple of quick questions. The first was on some of your Medicare part D re-negotiations this year. I know it was not that big for you but could you give us a sense for maybe what your experience was as you went to those renegotiations and have you embedded lower pricing assumptions in your 2009 guidance as a result of those renegotiations?

Greg Weishar

I think they went pretty much as planned. We fought hard and held our rates fairly steady. We had to give up a concession here or there in clusters ongoing mix that we see as a result of the bill moving from one plan to another, but in our 2009 assumptions, we are generally pretty solid with regards to what our contracts are for 2009, and there will be a little bit of diminishment of margin there, but very, very, very minimal.

Glen Santangelo – Credit Suisse

Were those the first resets post the implementation in 2006?

Greg Weishar

You might want to call them that. We have had ongoing discussions with the PDPs ever since then, but I would not call these a major reset. I expected a little more focus by the PDPs on our segment this year than we received.

Glen Santangelo – Credit Suisse

Maybe if I could just ask one follow-up question. Obviously, you know the big contract that is on everyone’s mind is Golden Living. The contract is set to expire 3/31/2009. Could you give us an update on timing and maybe the status of that contract, given the magnitude of it?

Greg Weishar

I think we will probably be coming out with some information on that in the next couple to three weeks. Obviously, the contract is coming due, and both of us are actively in discussions on that contract, so Glen, I just really would not want to say any more than that, other than I think in the next couple of weeks or so, we should have some information that we can share with you on that.

Glen Santangelo – Credit Suisse

Okay, thanks for the update.

Greg Weishar

You bet.

Operator

Our next question comes from the line of Brendan Strong with Barclays Capital.

Brendan Strong – Barclays Capital

Maybe just first of all, a follow-up on the last question regarding the service contract, in terms of your guidance, and I am not asking for specifics, but I am curious if you assumed any decline in the pricing on that contract in your guidance for 2009.

Greg Weishar

We would not be in a position to want to discuss one contract profitability over another, Brendan.

Brendan Strong – Barclays Capital

Maybe just a question on synergies. You guys have already surpassed $30 million in synergies you had initially outlined. I’m curious if you have any thoughts on what more there is to come there in 2009?

Greg Weishar

Well, originally, if you recall, we were, and Mike can chip in here, at 90,000 feet, we had $30 million in synergies that was our goal. We believe we’re north of $40 million and that we have currently realized at least $30 million of the $40-$42 million, and we think by the end of this year in 2009, we will have captured virtually all the synergies that we set out to capture at the point of the merger; however, we are always looking at saving money and improving the way we operate. We think that lower cost does not equal lower quality, and typically when you take cost out of the business, you are taking labor out of the business, which means you are improving quality as well. We are confident that we have achieved $40-$42 million in synergy as a result of our integration efforts and as a result of some of the other types of restructuring that we have done in the organization.

Brendan Strong – Barclays Capital

Maybe just one last related question in regards to the inefficiencies you guys have discussed. I think those were around $6 million in 2008, and I think those were separate from the synergies, and I am curious how those might go away over the next year or two.

Michael J. Culotta

When Greg just mentioned in terms of the synergies we are achieving and some of the items he said we should see the remaining portion of that, it is exactly that. It is “those inefficiencies.” We did run about $6.3 million, and let us just give you all a bit of flavor, roughly about $900,000 in Q1, about $1.6 million in Q2, about $2.6 million in Q3, and dropping to $1.1 million in Q4. So, we will still see a little bit more of that in the first quarter, maybe a tad into the second quarter, but all of those inefficiencies that have run through our EBITDA, we should see that all turn in 2009, so again that is part of our increase that Greg talked about.

Operator

Our next question comes from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan – RBC Capital Markets

I was wondering if you talk a little bit about what is driving the increase in the number of the scripts per bed. Is that more a function of something that is going on with the remaining portfolio or is it something that is happening as you lose beds? Is that is what is influencing that number and then secondly, on the gross margin per script, the growth there, how much would you attribute that growth to generics versus all of the other cost savings in the synergies that you have in place?

Gregory S. Weishar

That was a lot. Repeat the first part of the question please.

Frank Morgan – RBC Capital Markets

The first one was just that the increase in the number of scripts dispensed per bed that you are seeing, what is the biggest driver there? Is it more of a function of something that is going on with the remaining portfolio, the ongoing portfolio, or is that being influenced by the beds that you lost? In other words, did you get rid of a bunch of beds that have real low usage? I am just trying to figure out what is driving the growth in scripts per bed and wondering how much that can grow?

Gregory S. Weishar

Frank, part of it is that we are seeing higher acuity relating to those, the patients we have, and also higher percentages that we are seeing in the skilled nursing side of our business there, and also some of the loss of outs that we have. We have concentrated pretty heavily on in terms of our sales force is really driving the sale in the SNF arena, in that area.

Frank Morgan – RBC Capital Markets

Do you feel that the out business is not panning out to be as good a business as you might have thought it would have been, with the advent of the part B?

Gregory S. Weishar

I would not say that. I would say more the penetration rate in an assisted living facility is usually not high as a skilled nursing facility.

Frank Morgan – RBC Capital Markets

What would that penetration normally be on assisted living? How much lower? Do you have multiple pharmacy operators in assisted living whereas in SNF you may just have one pharmacy?

Gregory S. Weishar

No. In a majority of assisted living facilities, because the patients are mobile, a lot of them tend to go to the retail store and so the penetration in a SNF is pretty much all the patients there, so if the SNF is running about 80% to 90% in census, we would get the majority of that if not all of it. In an assisted living facility, it would be something under 50% typically.

Frank Morgan – RBC Capital Markets

Looking at the gross margin per script growth there, how much of that is attributable to things like generics versus the underlying cost savings and synergies that you are putting in place?

Mike J. Culotta

Well, I would say there was a little bit that we did see in terms of the brand to generic but a lot of that, as we talked about the inefficiency starting to decline, we are starting to see the productivity improve, so again a lot of that relates to, we are seeing lower salaries and wages and benefits in that line item.

Operator

Our next question comes from the line of A.J. Rice with Soleil Securities. Please proceed.

AJ Rice – Soleil Securities

Mike, on the revenue per script, if I calculated this right is down about 1.9%, which is not out of the ordinary. Can you break that out a little bit, how the generic mix has shifted and impacted that versus what you’re seeing in branded pricing?

Mike J. Culotta

Well, I think AJ one of the items that we did is when we filed an 8-K on the Kindred contract, and when you take a look at the impact on that, that alone has about $0.25 on our revenue per script from third to fourth quarter.

AJ Rice – Soleil Securities

Any comment on generic mix and so forth.

Mike J. Culotta

You got a little bit of that, but I wouldn’t say a large dollar amount at this point in time. I think you’ll probably start seeing it more in the first quarter.

AJ Rice – Soleil Securities

Last quarter you commented on the Risperdal impact in the third quarter. Any comment on fourth and how that’s incorporated in your guidance going forward?

Mike J. Culotta

Yes. It’s pretty much similar to what we thought, somewhere around $750,000 for the last half of the year. We should see a little bit spike up because part of that 6-month period, although technically it came out and said it wasn’t under exclusivity, there was really only one manufacturer that went to at that point, so we’re starting to see a little bit better pricing starting in the first quarter.

AJ Rice – Soleil Securities

Lastly, you gave some sort of specific commentary around how you expect served beds to trend over the course of ’09. Can you guys flush that out a little more as to what is your thinking behind the nature of the trends? It sounds like similar amounts to what we’ve seen in the lateral part of second part of ’08 and the first half of ’09 and then moderating decline in the third quarter and an actual turnaround in the fourth. What are some of the things to give you confidence that that’s what the trend line looks like or gives you that sense and that’s what the trajectory is?

Mike J. Culotta

The first thing is that we’ve really done a lot. We’ve completed the consolidation, so we believe that that’s really steadied everything that’s out there in terms of our pharmacies. We closed 26 pharmacies. There will be one more that just got closed about a week ago, so we will have completed all that, so we believe there is a lot of stability there. We’re also working in a lot of enhancement in terms of our AS400, what we have there, so we have a lot of tools going forward for our sales force to be able to get out there and do some more selling, so again the lifecycle was a little bit longer, a lot longer than we had anticipated. It does take awhile, some of these are a longer term contracts, so that’s what we are looking at. So again the pipeline, as Greg mentioned, is strong and solid. We’ll probably still have a little bit of net negative growth in the first of the year and hopefully turn that around in the latter part of the year.

Operator

(Operator Instructions). Our next question comes from the line of Constantine Davides with JMP Securities.

Constantine Davides – JMP Securities

I just wanted to address the systems consolidation that you have ahead of you, and how should we think about the trajectory there, Greg, over the next couple of years and exactly what is the next level of synergies that would be made available once that’s completed?

Gregory Weishar

We are not waiting for that, Constantine. We are not waiting for the finalization, the systems integration piece, to just shoot for synergies. We have roughly 80 to 85 pharmacies that we have the ability to bring scale to, but the systems integration piece. This could go really fast or it could go 2- to 3-year period. The reality is that it’s a little bit more difficult to change a system out of a pharmacy than it is close one and take the business and move it to another pharmacy, so we don’t want to set a high level of expectation regarding what our timeline is because again this year we are focused on growth. We are focused on stabilization of our business in terms of our customers, and we don’t want our customers to be worrying about not doing business with us because we have consolidations going on and that kind of thing, so we are kind of putting that under the background. Back to the synergy piece, the things that we are looking at are centralized order processing which is not necessarily the best model at all, but it is basically centralized order processing where we are centralizing medical records as an example. We have medical records personnel in every pharmacy roughly, not every pharmacy but most pharmacies, and we want to centralize all of that, and we want to capture scale just like we have in the clinical consulting business. We pulled all the clinical consultants out of the pharmacy, and now we have an organizational structure where we have the clinical consultants focused around a management structure with goals and productivity goals. As an example, we’ve improved our productivity from roughly 750 beds to 1100 beds with regards to our clinical consultants, and that’s beds per month, so we think that there is still a number fertile areas that we will begin the work on actually this year, and those are running the business now. Certainly, these are synergies as a result of us having a larger footprint and more volume in each pharmacy, but we are looking to this running the business now, Constantine. I don’t if that answers your question. I hope so.

Operator

Our next question comes from the line of Eric Gommel with Stifel Nicolaus.

Eric Gommel – Stifel Nicolaus

You talked about Medicaid payment slowdowns and the credit market is tough. Does that have any impact on your acquisition targets? Do you think that spurs more institutional pharmacies to think about selling and then another piece to that is your customers, your nursing home customers, does that help retention? Are your nursing home customers likely to stay with you as a provider because you have an existing relationship? I was just curious what you think about that, and also how do some of the issues going on right now impact valuation of the institutional pharmacy targets out there?

Gregory Weishar

There are three parts to that question. One and three I think are very close together, so I would say yes to what you are saying. I think we are starting to see a lot more activity in terms of acquisitions and folks trying to do something with the credit markets. It’s very difficult to right now to borrow money as everybody well knows, and yes it is having an impact. I think everybody is becoming very realistic in terms of purchase prices and things of that nature, so I think people are understanding that. They are understanding the weighted average cost of capital and things of that nature, so again we are seeing positive things in that area. As far as the second question, I would say mainly from the standpoint that there are certain states right now that are having some difficulties. I think 43 states out of 50 are at a deficit and could have potential problems. You have seen what California and their problems have had, so it has created a little bit of slowdown in some cases of the payment patterns, and I would say that from that regard we are working with our customers very much when those things do occur, so we are working very much with our clients and customers to help them during these times.

Operator

The next question comes from the line of Robert Willoughby with Banc of America.

Robert Willoughby – Banc of America

Can you give us any color on what the one deal you did in the quarter did for you? It’s a sizable one I thought, yet it was hard for us to see exactly what it contributed.

Mike J. Culotta

Robert, one of the things that was very interesting is if you look at the acquisition footnote, I think note two, if I’m not mistaken there is a pro forma back there, and I think that pulls out the impairment charge that’s in there, so if we would have had that acquisition from the beginning of the year, it would have been $0.05 more accretive, so it was a very good deal for us from that standpoint.

Robert Willoughby – Banc of America

Have you guys closed anything actually since then or just activity you see but nothing closed?

Mike J. Culotta

Nothing closed but a lot of activity.

Robert Willoughby – Banc of America

On a different question, you obviously have one larger competitor out there, but have you seen any nontraditional competitors making inroads into your business? Anything new on that landscape?

Gregory Weishar

I think the local and regional folks have capitalized to some degree on some of this activity as a result of part D. They positioned themselves, so the regional folks are not making inroads with the exception of you have certain things in western Pennsylvania, certain players out there that are slogging out it, fighting it out amongst the regionals, but I think really if you look at who we’re losing business to and who we’re getting business from, net-net, there is not any large regional or larger competitor that’s particularly damaging our business. It’s really two things, number one, people bringing it in house which we saw quite a bit of activity in various stages of progress over ’07 and ’08 and really that was a major piece of the losses that we had. The assisted living business, we’ve put less emphasis on that, and we are also seeing that the assisted living business is tending to go to local providers because they believe that they might be able to get better service, which by the way is a very difficult piece of the segment for us to make money in, as well, so we’ve seen debt losses as a result of that, so those are the kind of places we’re losing the business to, the local provider who is typically serving an assisted living facility and also the folks bringing it in house.

Robert Willoughby – Banc of America

You don’t see the non-traditional PBMs or retailers or wholesalers sniffing around your franchise?

Gregory Weishar

Well, they sniff, but they are not really prepared to do business given the fact that our business has certain barriers of entry, and certainly for any major push by one of the larger players, the PBMs, we have to have consulting services, we have to have special packaging, we have to have the logistics piece, and they typically just don’t have the three components. Now, we do see Walgreen’s being aggressive with one of their subsidiaries and driving towards the assisted living space, and I think it’s called Senior Care, and they’ve made some progress. I think you can look at what they’ve done, but again that’s not on the SNF side, that’s really pecking away with a national provider in Denver, I believe they are, with regards to the assisted living space.

Operator

(Operator Instruction). The next question comes from the line of Mike Petusky with Noble Research.

Mike Petusky – Noble Research

I thought I heard you guys say you expect bed growth to pick up in the second half, is that right?

Gregory Weishar

Yes.

Mike Petusky – Noble Research

That’s pre any acquisitions that you guys might do, correct? That’s organic?

Gregory Weishar

That’s correct, organic growth.

Mike Petusky – Noble Research

The guidance, and I wasn’t clear about it, and I know you guys don’t want to discuss this a lot, and you will discuss it more in a few weeks, but on the Golden Living, should I assume that the guidance assumes whatever active discussions you guys have been having, your best guess of what reality will be in terms of ’09 as opposed to looking at it in a static way based on the previously signed contract. Is it fair to say you guys have assumed in your guidance your best guess of what reality will be?

Gregory Weishar

That’s a fair assumption.

Operator

There are no further questions in queue at this time, so at this time I would like to turn the call back over to Greg Weishar, Chief Executive Officer, for closing remarks.

Gregory Weishar

We won’t go into any more remarks, but I do thank you for your interest in our company. Thank you for being here and taking time to listen to our call.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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