Omnicare, Inc., Q4 2008 Earnings Call Transcript

Omnicare, Inc. (OCR)

Q4 2008 Earnings Call

February 26, 2009, 11:00 a.m. ET

Executives

Cheryl Hodges – SVP, IR

Joel Gemunder – President and CEO

Dave Froesel – SVP and CFO

Analysts

Lisa Gill – J.P. Morgan

Adam Feinstein – Barclays Capital

Glen Santangelo – Credit Suisse

A. J. Rice – Soleil Securities

Frank Morgan – RBC Capital Markets

Alan Fishman – Thomas Weisel Partners

Alex Douglas – Goldman Sachs

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 Omnicare's Fourth 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.

I would now like to turn the call over to Ms. Cheryl Hodges. Please go ahead, ma'am.

Cheryl Hodges

Thanks, Regina. Good morning, everyone, and welcome to Omnicare's fourth quarter and full year 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 Gemunder

Thank you, Cheryl, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full-year results, and our outlook for 2009.

We were pleased to report adjusted diluted earnings per share for the fourth quarter of $0.66, ahead of both the prior-year quarter, and ahead of the street consensus. Moreover, we are gratified to note that these results cap off a year in which we well exceeded initial expectations, and we believe position the company for continued profitable growth.

Now as we look in to the fourth quarter, we continued to benefit from the generally positive trends in the pharmaceutical marketplace, as well as strong operational performance across our organization.

Importantly, we produced sequential bed growth during the quarter, continued to make progress in our productivity and cost reduction initiatives, including the Full Potential Plan and saw robust growth in our specialty pharmacy services business.

Sales of $1.6 billion in the fourth quarter of 2008 were higher than in the fourth quarter of 2007. We saw a substantial improvement in adjusted EBITDA and operating income, both in dollars and in margins over the comparable prior year quarter, even aside from the impact of the incremental provision for bad debts we recognized in the fourth quarter of 2007.

With respect to our year-over-year sales growth, we benefited from drug price inflation, which was in the neighborhood of 7% or so on branded drugs, as well as the increase use of certain higher acuity drugs and biologic agents in our institutional pharmacy business, and growth in our specialty pharmacy services. These factors more than offset the impact on sales of generics, a lower net number of beds serves, and reductions in utilization and/or reimbursement for certain drugs.

As I mentioned a moment ago, we generated a sequential increase in the number of beds served in the fourth quarter of 2008, when we ended December serving 1,435,000 beds, including 58,000 beds inpatient assistance programs. And this compares favorably to the 1,432,000 beds served at the end of September, which included 67,000 patients in patient assistance programs.

The sequential growth in beds served was achieved despite about 5,300 beds voluntarily foregone for pricing or payment issues, as well as facility closures or sales.

And furthermore, the number of beds that were foregone was lower than by more than 40% sequentially, which reflects the progress we have made in trimming marginal business. While we remain cognizant and of our clients' financial condition, especially in the current economic environment, it is reassuring to see that there were fewer of these terminations during the quarter.

The sequential bed growth, we achieved in the fourth quarter is attributable to our focus on and the investments made in improving our sales and retention efforts.

Looking first at retention, I'm pleased to say that excluding beds foregone, our annualized retention rate of 94.3% in the fourth quarter of 2008 was up 150 basis points sequentially, and 270 basis points over the comparable prior year quarter. We lost fewer beds in the fourth quarter of 2008 than in any quarter during the last three years. So clearly, our investments in enhancing service levels and retention efforts are paying off.

In fact for 2008, the number of beds retained, including renewals of at risk accounts by our specialized customer retention team, was approximately 48,000, representing roughly $250 million in annualized revenue.

With respect to new beds added the contribution from acquisitions was lighter sequentially owing to the lumpy nature of that activity. We continued to have a solid pipeline and that we are actively working.

Beds added are brought in to service through the efforts of our sales force and operating personnel were up 17% sequentially, and 22% versus the fourth quarter of 2007. Reaching a productivity level last attained two years ago. Moreover, new contract signings continued at a rate well above 2007 levels.

On a year-over-year basis, fourth quarter contract signings, excluding national accounts, were up 39%. For the full year, signings on this basis were over 30% higher in 2008, which reflects the progress we have made in increasing the size and quality of our sales force, as well as improving the selling effectiveness of our operating staff.

Gross margins expanded for the third consecutive quarter, cresting over 26% of sales, and as we discussed last quarter, there were several generic launches important to the geriatric marketplace in the second half of 2008.

In the fourth quarter, we saw generics launch for Keppra, Razadyne ER and Mia-calcium, among others. Our generic dispensing rate or percentage of total scripts that were generic, increased 90 basis point sequentially from 70.6% to 71.5%, and that is up nearly 500 basis points over the fourth quarter of 2007.

With respect to cost, our purposing organization is doing an exceptional job in reeling in costs. They are buying smarter as generics grow in importance to our total drug spend, and are continuing to make in-roads with the branded drugs as well.

The positive impact from generics in combination with these efforts helped to offset the adverse effect of reimbursement reductions under the new Federal Upper Limits or FULs, which were instituted for certain generic drugs during September and November of 2008.

Moreover, as you recall, we developed a strategic sourcing initiative in early 2008 with the objective of negotiating $40 million in annual savings on non-drug purchases. We made further progress with this objective during the fourth quarter and met our goal of $40 million in negotiated savings, some of which benefited the 2008 P&L and the remainder will benefit 2009 as the new contracts are implemented.

We continue to make progress in the outsourcing of our centralized packaging activities. Production volumes have continued to ramp up, particularly as we have increased both the capacity and targeted output from this operation, and as a result we believe we'll see productivity in our pharmacies improve further in 2009.

I should also note that savings from the Full Potential Plan continue to contribute to our financial results, even while we are still actively adding automation equipment, building out-hub pharmacies and working our way up the learning curve with the new technologies.

I'll provide more color on our progress in a moment. But here, I will just say that in the fourth quarter, we saw a total contribution of approximately $6.5 million or $0.03 a share, up about 33% sequentially and that brings with our annualized run rate of savings to $26 million pre-tax.

As I mentioned earlier, a significant contributor to our growth this year has been our specialty pharmacy services business. And their performance in the fourth quarter was again strong. In fact, Advanced Care Scripts or ACS, which we acquired in mid-July, generated outstanding growth.

I mentioned on our last call that based on third quarter results, ACS was running at an annualized volume of $272 million. But with fourth quarter results now in, it is running at an annualized rate of nearly $300 million.

On our hospice pharmacy business, it continued to make significant progress during the quarter. On a sequential basis, we have reported double digit operating profit improvements, despite relatively even sales volumes.

A number of actions undertaken to approve the operating efficiency of this business are clearly taking hold, and although the hospice pharmacy market has faced both competitor pricing and patient mix issues, we believe the realignment of its cost structure has strengthened its competitive position.

And lastly with respect to our CRO businesses, which continued to collectively account for about 3% of Omnicare's total sales and adjusted operating profit, earnings were ahead of the third quarter as well as the prior-year quarter.

And while revenues were relatively even to up modestly, our operating margin was up nearly 200 basis points sequentially, and 325 basis points versus the fourth quarter of 2007, demonstrating tight cost management expense control in this highly variable business.

And now to give you some insight in to our cash flows and financial positions, I would like to turn the call over to Dave.

Dave Froesel

Thanks, Joel. As Joel mentioned, our businesses continued to perform well in the fourth quarter, which is reflected not only in our positive earnings growth, but also in our strong cash flow and strengthened financial position.

In the fourth quarter of 2008, we generated operating cash flow of $106.3 million, up 43% versus the prior-year period. Our most recent expectations for 2008 cash flow from operations were in the range of $400 million to $450 million, and our fourth quarter performance put us near the upper end of that range at $438 million for the full year.

Also, as you may recall, during 2008, we made one extra payment to our primary drug wholesaler, because of the way the calendar fell, resulting in an additional cash outlay of approximately $65 million. Had 2008 been a normal calendar year for us, we would have produced an amount of operating cash flow similar to the record level of just over $500 million that we achieved in 2007.

We generated free cash flow, which we define as operating cash flow less CapEx and dividends, of more than $366 million for 2008. And as it relates to net income, our free cash flow was more than two times our GAAP earnings, and nearly 1.5 times our adjusted earnings, demonstrating the quality of our earnings.

Looking at our working capital, our net receivables balance at year end 2008 was lower than both the prior quarter and the prior year period balances.

Fourth quarter DSOs were relatively flat sequentially at 79 days, but down five days versus the prior year period. During the year, we added resources and heightened our focus on collections. And of course, given the economic environment, we are closely monitoring the situation, but we have yet to see any worsening in our collections experience.

Fourth quarter bad debt expense at $28.7 million was relatively flat sequentially, but down on a year-over-year basis, even aside from the incremental bad debt provision of $94 million taken in the fourth quarter of 2007.

Bad debt expense as a percent of sales for the fourth quarter at 1.8% also showed improvement over the prior year. And we expect our bad debt expense to continue to show improvement in 2009, as we implement the Full Potential Plan.

With respect to inventories, our days on hand in the fourth quarter of 2008 were higher by two days sequentially, but essentially even with the fourth quarter of 2007. We expected to see some temporary volatility in the inventory balances from quarter-to-quarter, as we have transitioned prescriptions from our local pharmacies to the hub pharmacies. But as the dust settles, we expect the inventory balances to be reduced.

Overall, our adjusted return on committed capital improved for the second consecutive quarter, exceeding 35% in the fourth quarter, and improvement sequentially of nearly 700 basis points.

With respect to fourth quarter uses of cash, we funded approximately $25 million in cash outlays for acquisitions, including deferred payments from prior period acquisitions. We also funded capital expenditures of about $14.1 million in the fourth quarter of 2008, up about $2 million from the same period of 2007, and about $4.4 million lower sequentially.

For the full year, CapEx was $61 million, which was about what we had expected. Of this full-year spend roughly $35 million relates to the infrastructure investments we are making to support the Full Potential Plan, while the remaining $26 million was for maintenance CapEx.

For 2009, we see CapEx at $40 million, of which $15 million relates to the Full Potential Plan and the remainder for maintenance CapEx.

We also used cash in the fourth quarter to strengthen our balance sheet. We paid down $39.1 million in debt during the quarter, and ended the year with $217 million in cash, and no borrowings on our $800 million revolver.

Our total debt to total capitalization at the end of 2008 was approximately 44.4%, down 100 basis points sequentially, and 210 basis points lower than year-end 2007. And on a net debt basis, we ended the year at 42.3%.

With respect to our debt, in the first quarter of 2009, we will be required to retrospectively adopt the recently issued FASB staff position APB 14-1. Under this approach, when issuers of convertible debt instruments that may be settled in cash recognize interest expense in subsequent periods, they must separately account for the liability and equity components of the instrument in a manner reflecting the entities non-convertible debt borrowing rate on the instruments issuance date.

This new rule will pertain to both of our convertible issues, and we expect this new methodology will result in incremental non-cash interest expense of approximately $28 million, or roughly $7 million per quarter in 2009. We intend to call this out in our P&L and adjust it out as a special item from our guidance and adjusted earnings. Again, this will have no bearing on periodic cash flows.

In addition to APB 14-1, beginning in 2009, we are also required to adopt statement of a Financial Accounting Standard 141R, which requires us to begin expensing all acquisition related costs as incurred, rather than capitalizing such costs as legal, appraisal, advisory, and accounting fees, restructuring costs relating to the acquired entity, and any post closing adjustments to any estimated contingent purchase price consideration.

We will also highlight these costs in a separate line on our income statement to aid comparability of our operating results. And given the fluctuating level of activity inherent in our acquisition program, we will exclude FAS 141R cost as a special item from our guidance, and adjusted earnings.

Lastly, as you can see, once again from our fourth quarter results, our tax rate moves around a bit due to tax planning initiatives and other changes in state tax methodologies and other items. We do expect our full year tax rate for 2009 to be higher than in the fourth quarter, or in the range of 37.5% to 38% for the full year, versus 36.8% in the fourth quarter of 2008, as adjusted for special items. And it may again, fluctuate from quarter-to-quarter.

To summarize, in 2008, we strengthened our balance sheet, generated strong cash flow, and returned to year-over-year earnings growth. As we look to 2009, despite the challenging economic environment, we believe Omnicare is positioned to continue as a strong cash flow generator, and to maintain the financial strength and flexibility necessary to pursue its growth plans.

With that, I'll turn it over to Cheryl.

Cheryl Hodges

Thanks, Dave. Looking at our performance by segment, sales in our pharmacy services business of approximately $1.55 billion for the fourth quarter of 2008 were essentially even sequentially but up by about $41 million or 2.7% versus the same quarter last year.

The increase in fourth quarter sales from the year earlier period was largely driven by ongoing drug price inflation on branded drugs, growth in our specialty pharmacy business including the acquisition of Advanced Care Scripts, as well as the increased use of certain higher acuity drugs and biologic agents.

These factors more than offset the impact of an increased generic mix on sales, reductions in utilization and/or reimbursement for certain drugs, and a lower net number of beds served.

Our payer mix for the fourth quarter was consistent with the third, Part D at 40%, Medicaid at 10%, private pay third-party and facilities at 45%, and 5% other. At December 31, 2008, we served long-term care facilities as well as chronic care and other settings comprising 1,435,000 beds including 68,000 beds served under patient assistance programs.

Our overall revenues per bed for the fourth quarter were $1,081, up about 4% from the prior-year quarter, and essentially even with the third quarter of 2008. The year-over-year increase reflects largely the growth in our specialty pharmacy services, including Advanced Care Scripts, which carries a higher revenue per script than we typically see overall in our pharmacy business.

The addition of these revenues, along with the contribution of drug price inflation and the increased utilization of certain higher acuity drugs and biologics, more than offset the impact of a greater generic mix on our sales, along with reductions in utilization or reimbursement for certain drugs. The year-over-year decline in EPO related drugs was consistent with our forecast, and we were pleased to see that that decline was much smaller in the fourth quarter.

Equally important, we continued to see increased use of certain high acuity drugs, such as low molecular weight heparins and injectable antibiotics, as well as biologic agents such as Avonex and Copaxone for Multiple Sclerosis, and cancer drugs such as Gleevec and Tarceva.

IV sales for the fourth quarter totaled $62.1 million, which was consistent with the third quarter of 2008, and down about $4.5 million versus the 2007 fourth quarter. We did not see much of an uptick in acuity related to the flu season in the fourth quarter, which can drive IV sales higher, and the current CDC data indicates we're experiencing a relatively mild incidence of the flu this year.

Adjusted pharmacy EBITDA reached 12.9% of sales, or $199.7 million for the fourth quarter of 2008. This reflects a sequential increase of 2% and a much more significant increase versus the prior-year quarter, even aside from the incremental provision for bad debt.

Both comparative increases were largely the result of our growing contribution from generic drug price inflation, our productivity and cost reduction initiatives, which include savings attributable to the Full Potential Plan, and sequential margin expansion in our specialty and hospice pharmacy businesses.

Our CRO business, excluding reimbursable out of pocket expenses, had fourth quarter revenue of $42.2 million, which was essentially even sequentially, but up nearly 4% from the prior year quarter. Adjusted operating profit, however, of $5.2 million was up nearly 15% sequentially, and up 44% from the 2007 fourth quarter. Adjusted EBITDA of $5.7 million for the quarter followed a similar positive trend, and represented a 13.5% margin.

Lastly, at December 31, 2008, our book-to-bill ratio was at 1.2 to 1, and our backlog stood at $303 million.

Now I'll turn the call back over to Joel for his concluding remarks.

Joel Gemunder

Well, thank you, Cheryl, and thank you, Dave. Ladies and gentlemen, our goals at the start of 2008 were to stabilize the business, restore growth, and enhance profitability. While we had a number of obstacles to overcome, including challenges associated with Part D, a rapidly changing pharmaceutical marketplace, a declining number of beds served and the implementation of a revolutionary process, re-engineering our business model, we made progress on every front, all while laying the foundation for growth. In fact, we began realizing this growth as we reported year-over-year earnings increases in each of the last two quarters of 2008.

Throughout 2008, we invested heavily in our growth plans. We completed the ACS acquisition and others, expanded our sales and retention efforts, enhanced marketing resources, and of course continued to invest in the Full Potential Plan. We also returned $100 million from shareholders through the completion of our share repurchase program. Even with all of this, we ended 2008 with an even stronger financial position than where we began. So all in all, it has been a busy and productive year.

Now, before I get in to our expectations for 2009, I want to address a couple of topics that are important to Omnicare to our shareholders. The first issue is our outstanding lawsuit with United Health Group. As most of you know the US District Court in Illinois granted united summary judgment motion in mid-January 2009.

I'm not going to speculate on the rationale for a decision like this, but I will note that it contradicts the views of the company and our legal advisors. And needless to say, we filed a notice of appeal on January 21. So, we are determined to continue our case on behalf of our shareholders and the residents we serve.

The second issue I would like to briefly address is the legislative and regulatory environment. Clearly, the new Obama Administration has healthcare reform as a priority, as evidenced by its inclusion of several healthcare investments in the economic stimulus bill, as well as the administration's proposed 10 year healthcare expansion plan. We're encouraged by the $87 billion stimulus to save Medicaid programs, which we believe may help alleviate state budgetary pressures.

And our customer base will also benefit from prompt pay requirements for Medicaid and the elimination of cuts to the hospice payments. And while we await further clarity with respect to the new proposals, we remain committed to work successfully with the administration and with the Congress to protect the interest of the frail elderly.

Now, as I return to Omnicare's business outlook for the year ahead, I want to provide you with some of the drivers of our 2009 forecast. So let's address generics first. While 2009 is not expected to be a big year in generic drug launches as 2008 for the generic market, we do anticipate continuing to reap the benefits for us and for our customers of the generic activity that occurred in the second half of 2008.

In addition, we expect roughly 20 relevant drugs to potentially launch as generics in 2009, including Depakote ER and Sprinkle, Topamax, Keppra liquid and 1000 milligrams tablets, Respirigo (ph). So, we see our generic mix continuing to rise. As a result, gross profit is expected to increase on the higher margin lower priced drugs.

Moreover, in 2009 and for the first time in a long time, we anticipate several new branded drug introductions, subject of course to the FDA's approval timeline. These are for chronic conditions common in the patients we serve, and these potential introductions include new approaches to treat type 2 diabetes and oral agents for an array of cardiovascular conditions including Atrial Fibrillation, Prevention of Deep Vein Thrombosis, and acute coronary syndrome.

While not factored in to our guidance, we are already in discussions with brand pharmaceutical companies to determine how best these new drugs will fit in to treatment protocols.

Likewise, we believe we'll continue to see increased utilization of high acuity drugs and biologic agents in our institutional pharmacy business, as these drugs become more mainstream in prescribing. With respect to drug price inflation, we saw inflation on branded drugs in the neighborhood of 7% in 2008, and to date, in 2009, we have not seen any significant change that would suggest near-term softening of prices. So for now, we see a continuation of the level of branded drug price inflation.

Next is bed growth. Over the last 18 months or so, we have put in new sales management, nearly doubled the size of the sales force and initiated programs to enhance the sales effectiveness of both our sales team and operating management. The results in 2008 were encouraging, but we believe even better performance is possible.

We are already seeing a sharp increase in new contract signings in the first seven weeks of 2009, versus the same period of last year. We believe our current team has the motivation to build on the recent successes, and we plan to add to the sales force in certain geographic areas, where opportunity warrants.

In looking at retention, we're very pleased with our ability to retain high-quality business at an improving rate. The results of our specialized retention team continue to merit the expansion of this initiative, and we will add incremental capacity here in 2009, as well as corporate specialized customer service and retention training for our field operating management.

We also plan to continue our acquisition program where we can add larger chunks of business at once, and given the synergies we can generate, at very attractive returns. So in sum, we believe we have the pieces in place to show continued improvement in 2009.

We also expect growth in our specialty pharmacy businesses. Obviously, we'll have a full year's result for ACS, but all of our specialty businesses should benefit from continued development and commercialization of biologics. And while we may see some dislocation among biotech companies who are under-funded, it is also apparent that this sector is attractive to large pharma as a source of new products in their pipelines.

And then too, we plan to capitalize on the growth opportunities we saw in the ACS transaction, including further expansion in MS and oncology, as well as exploring new therapeutic areas such as rheumatoid arthritis. We also anticipate 2009 growth in specialty coming from new services in the area of risk management and safety monitoring of existing products, for which we are see a growing demand.

Coming off of 2008, our hospice pharmacy business is expected to see better performance on the top line, which will be highly leveraged given the actions taken to increase productivity and reduce costs last year. So we believe we should see operating profit growth here as well.

And with respect to our CRO business, we are continuing to see solid growth in our biotech business owing to some large contract wins at the year end 2008. We are, however, seeing some softness in other areas of the CRO business, and are responding with tight cost management and productivity initiatives.

So for 2009 in our CRO business, overall we expect moderately lower revenues, but moderately higher operating profit and margins.

On the cost side, we will be continuing our productivity and cost reduction initiatives, as they pertain to drug purchasing and inventory management. Strategic sourcing of non-drug expenditures will also continue, in 2009 we'll see the flow-through of some 2008 initiatives, as well as new initiatives undertaken this year.

Our goal for new 2009 initiatives at $25 million in annualized negotiated savings, and of course there is the Full Potential Plan. We believe 2009 will be another important year as the contribution to earnings is expected to accelerate, especially in the second half of the year, but before I get in to any more detail on our expectations for the program, we would like to give you just a brief update.

At this time last year we had just begun to receive automation equipment, today we have 36 pieces of automation equipment, or 86% of the total installed. 32 are currently in active production, we are gradually ramping up capacity but this equipment is already processing at a rate of 1,300,000 cards and boxes per month, with both the on demand 2 and ALV capacity running ahead of targeted levels.

And the accuracy of these machines is particularly impressive. I am told by our engineers that our proprietary ALV automated technology has processed over 3 million prescriptions to date with zero dispensing errors. And this has not only garnered the approval of state pharmacy boards but that of our customers as well. So, we are moving ahead in consolidating prescription refills from the local pharmacies to the hubs as quickly as possible.

On the front end, we have evolved from the planning stage one year ago to having 41 pharmacies equipped with document imaging. And as a reminder, this digital imaging software eliminates much of the paper-intensive nature of the business, while creating exportable work load balancing from one operation to another.

To date, 22 out of our 30 hubs are completely renovated, and 20 are providing either front or back end activities for 53 local pharmacies, and we are seeing a reduction in our cost per script in these areas. We have also completed 9 of the 10 regional back offices or billing and collection centers, and we're finding that centralized billing centers are billing claims on a more timely and accurate manner, and this cuts down both receivables and the potential for bad debt, not to mention increasing customer satisfaction. Bottom line, a lot of progress has been made over the past year.

Let me add that we're proud to have increased our customer retention rate, even while we have undertaken this massive operational overhaul, giving us confidence in the longer-term goal of the Full Potential Plan, which is net customer growth.

For 2009, we look to significantly ramp up implementation. By the end of the third quarter, hub technology installation and the infrastructure on hub service areas are expected to be largely complete. By the end of the year, we believe we will have achieved a run-rate approximately equal to the lower end of our range of $100 million to $120 million in targeted annual savings.

Our savings estimate for 2009 are included in our guidance, and now mitigating some of these positive contributions to 2009 performance is pricing compression in certain areas. Having completed our PDP negotiations for 2009, and having seen nearly two months of 2009 claims under annual reassignment of dual eligible, we now see how this process is affecting our results.

We have seen fewer plans participating in Part D, and some consolidation among those that remain. Strictly looking at our renegotiations as we stated previously, many plans rolled over as is, and a handful of contracts were renegotiated with results basically in line with our expectations.

Inexorably linked however, is the reassignment of dual eligible where approximately 23% of our Part D residents were potentially moved to different plans. And whether by random assignment or by the government or voluntary selection, we are seeing this major movement occur, and the contribution of renegotiation and reassignment together yielding modestly lower reimbursement under Part D this year. The financial ramifications are, of course, somewhat random.

For example, last year the net impact of the reassignment and renegotiations taken together was positive. Financial ramifications aside, we belief random assignment without cognizance given to actual drug use and coverage required for that beneficiary is not good medicine. So, we have already set a legislative priority for ourselves this year to seek solutions to this issue. But for 2009 we have factored in what exists today.

Our guidance also considers additional max or reimbursement reductions on generic drugs that will occur in the ordinary course. And while this may impact profitability of these drugs over the short run, we still expect to generally realize greater profitability from these generics than we did from their branded counterparts.

In 2009, we will also see a full year of the impact of the late 2008 FULs I mentioned earlier, as one additional but smaller list than January.

Putting all of this together, we expect sales in 2009 to be in the neighborhood of $6.4 billion, modestly higher than in 2008, reflecting largely the impact of generic drugs. Operating cash flow for the full year is expected to be in the range of $475 million to $525 million.

Further, we expect growth in earnings per diluted share as adjusted for special items of 18% to 27% in 2009, resulting in full year adjusted earnings in the range of $2.50 to $2.70 per diluted share. These adjusted earnings exclude the impact of the accounting rules Dave mentioned earlier regarding the treatment of interest on convertible debt and the accounting per acquisition related expenses and liabilities, as well as other special items.

One last word on guidance. The quarterly progression we see in 2009 will be somewhat skewed towards the latter portion of the year, particularly as we expect the Full Potential Plan savings to kick in.

We expect the first quarter to be relatively even to down slightly from the fourth quarter of 2008, owing to a higher projected tax rate, and to 1.3 fewer billing days. We believe earnings will ramp up modestly from there, with progressively higher sequential increases in the last two quarters of the year.

And lastly, I want to say that we believe the relative economic resiliency of our industry, coupled with favorable democratic trends positions the long-term care pharmacy business well, even in the current environment. We have a committed organization that is entirely focused on growing our business for our shareholders, our customers and the patients we both serve.

So, now ladies and gentlemen, we'd be happy to open it up and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Lisa Gill with J.P. Morgan.

Lisa Gill – J.P. Morgan

Thanks very much and congratulations on the great numbers for the fourth quarter. Joel, as we look at the stock trading today, and with the Obama stimulus package out now and well as the budget out this morning, what is potentially in either one of those that would impact Omnicare as we look forward?

And secondly, as we think about rebates, we haven't talked about rebates in a long time, but where do you stand with CMS around your ability to continue to garner rebates from the pharmaceutical manufacturers. And along the lines of rebates also, can you maybe give us some thoughts around Wyeth and Pfizer coming together and if that will have any impact on your ability to negotiate rebates with them?

Joel Gemunder

Let start me start with your second question first, because I remember it better than the first part. When it comes to rebates, particularly in conversations with Pfizer, we just had Pfizer out here just a few days ago, and we believe the environment with Pfizer has improved markedly from where it was before, and we are reasonably optimistic that our relationships both financial and otherwise will improve during the year.

Now coming back to the issue of rebates, you are all aware or should be aware of the Waxman proposed thinking on rebates, and which the President appears to have adopted. Now I having been on this call, I haven't been able to see what the latest business budgets pronouncements, but as we understand and having had extensive conversations with the staffers at Waxman at Congressman Waxman's office, we believe that what he is after is to recapture the rebates that were formally given by large pharma manufacturers to Medicaid for the inclusion of their products or for access to their products on Medicaid formularies.

We believe a certain portion of these rebates were lost to Medicaid, as the shift to Part D occurred. And the thought here is to recapture these rebates, and as I understand it, the rebates will go back to they are proposing that the rebates go back to approximately where they were before the Part D program began.

Now when this program began give you a little history when this program began some years ago, it created the tradeoff was rebates for access to Medicaid formularies. And that meant that there was relatively open access, which was much better for patients because they got the drugs they needed, but it also had the impact of increasing competition in the market, and was a favorable factor in generating rebates, rather than the other way around.

So that is the history of it, and we remain, we believe this will be certainly have no adverse impact on us, based on our current thinking, without having the benefit of reading the details. You have to remember that the devil is in the details, so we are --

Lisa Gill – J.P. Morgan

I definitely agree that the devil is in the details, but on the surface it sounds to me like what you are saying is that previously Medicaid got some greater portion of rebates from big pharma and now they want to go back to big pharma and get a bigger portion of those rebates.

So, would the concern around someone like an Omnicare be that big pharma is going to then look at a pool of rebates and try to fix their pool, and say well if we have to pay Medicaid more, we have less dollars to give to players like Omnicare? Or is it more along the lines of when they look at this, they are going to be scrutinizing rebates more going forward? Do you have any thoughts on that, Joel?

Joel Gemunder

Well, pharmaceutical manufacturers always scrutinize their rebates and put their money where they think it is going to do them the most good, and in our case it has to do with the ability, and rebates are based, all the legal decisions of which I'm aware tend to base the rebates on the ability to move market share from less acceptable drugs to more acceptable drugs, and within preferred drugs from higher-cost drugs to lower-cost drugs.

That's what we do, and that is a benefit to big pharma, and we have not seen rebates deteriorate. It's just part of doing business. It's part of the business, in this industry. We don't share the concern of some that rebates will see a significant deterioration.

On the other hand, let's remember, when a drug goes from a branded status to a generic status, those rebates disappear, and then you are dealing with the marketplace for purposing generic drugs, and we think we do a pretty good job in that place. And I call out to you that today almost 72% of our generics are 72% of our scripts are generic, and that percentage will definitely increase in 2009, so in a sense, we have a cushion against any untoward development on the rebates, but more and more our purchasing savings are coming from the generic side of the house than the branded side of the house. What was the first part --

Lisa Gill – J.P. Morgan

No, I was just asking about the stimulus as well as the budget today. Is there anything else potentially that would be in there that could have any kind of negative impact for Omnicare in any way?

Joel Gemunder

I haven't read the bill, except there are a few little blurbs that hit the press late last night. And one of the elements which we believe will be quite favorable to us is the intention of the new administration to increase the speed at which generics become available in the market. And doesn't take a genius to figure out that since the government is now the major payer for the drugs that they would like to see drugs in the generic status, because it's less expensive for the government.

Lisa Gill – J.P. Morgan

Right.

Joel Gemunder

So, I think that's a plus.

Lisa Gill – J.P. Morgan

Right and I agree. And everything I have seen, we're virtually on the same page, but I'm just wondering what I'm perhaps missing with the stock down almost 14% today, and with the only new piece of news that's out there is obviously your guidance, which was better than expectations, and then secondly, the Obama budget, so I guess we'll have to go through it in more detail, but I appreciate all of the comments.

Joel Gemunder

Right. If you are asking me why the stock is down, you would have a better idea than I would. We gave you the E but where is the P.

Lisa Gill – J.P. Morgan

My guess is only that it is something within the budget or some concerns around rebates, which we just discussed, and it sounds to me like things are pretty status quo, so I appreciate all of the comments.

Joel Gemunder

Certainly, we're very comfortable with where we are with our rebate structures. Rebates, really, are part of the buy-sell, and the spread in the marketplace. And whether large pharma sets out a lower initial spread and more rebates to move share to discriminate among its purchasers to give better prices to those who can move market share, or whether they eliminate the rebates and put those rebates in to a lower wholesale acquisition cost or WAC, is something that each company decides for itself. It doesn't have the same kind of mythical appearance as many people who are not involved day-to-day in this industry seem to accord it.

Lisa Gill – J.P. Morgan

Okay.

Joel Gemunder

It's just part of the spread between purchasing and the price, so we are able to receive in reimbursement.

Lisa Gill – J.P. Morgan

Great. Thank you again for the comments.

Joel Gemunder

Thank you.

Operator

Your next question comes from Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Okay. Thank you. Good morning.

Joel Gemunder

Good morning.

Adam Feinstein – Barclays Capital

Maybe just to follow up on that last question just for a second, and then move on to something else, I guess in the Obama budget on page 127 when you get a chance to look later, there is a savings here that are outlined for, related to Medicaid rebates.

And besides just talking about the Medicaid programs getting higher rebates, it also talks about extending the rebates and having the government collect rebates on behalf of the managed care plans. There aren't any details. It just outlines that.

What is your thought in terms of how that would impact you guys, or maybe there wouldn't be any impact from that, but just from hearing that, sorry to put you on the spot, but we're just seeing this also, but if the government were to collect rebates on behalf of managed care plans, do you think that would have any impact on you guys?

Joel Gemunder

I think that would certainly make it more certainly disrupt the PDP's operations, based on what you said. Now I want to caution everybody that you are asking me to comment on something I haven't seen.

Adam Feinstein – Barclays Capital

Sure.

Joel Gemunder

And I can't factor in the context in which you are saying this, but if the government gets the rebates on behalf of the PDPs, then the government either has to adjust the reimbursement the PDPs get, or the PDPs margins shrink to a point where some of them will exit the market. That's just simple, it's not even economics, it's arithmetic.

So I think, Adam we just have to see what the flesh is on the bones that are being chatted about now, because if you take away a spread on distribution of anything, the distribution won't move. There has to be enough of a spread to move product into distribution, covering the cost of doing so, so I can't comment on that.

I do think that if the rebates are collected by Medicare, then the PDPs would either have to receive more compensation from the government in administrative fees or some other structure to compensate them for that loss, or else there would be a no economic incentive to remain in that business. All right. I'm now kind of over-emphasizing the obvious.

Adam Feinstein – Barclays Capital

Sure. Okay. I appreciate your feedback there and maybe we can follow-up after everyone has had a chance to go through the data. And maybe just switching gears, one of the things that stood out in the quarter was the generic dispensing rate as you mentioned moving up, relative to the third quarter. So besides Risperdal just curious in terms of other products that may have driven that also?

Joel Gemunder

The generic dispensing rate?

Adam Feinstein – Barclays Capital

Yeah --

Joel Gemunder

Yeah, there were quite a few products that came on generic later in the year and in the fourth quarter. I have our expert here. Dan, why don't you tell me, tell them some of the names of the products in addition to Risperidone that went in to the public market.

Dan Maloney

Of late fourth quarter we had Keppra, in November we had Razadyne ER in November. Mia-calcium launched late December. We had a couple of additional smaller products that also launched late in the year as well. Boslow was one example. Diamox was another. And then obviously beginning of the first quarter of this year, early we have seen Depakote ER, Depakote Sprinkle, and just yesterday Risperdal M, and we expect Topamax, which is a pretty significant drug for us late in the first quarter. So there's quite a bit of activity right now.

Adam Feinstein – Barclays Capital

Great. That's very helpful. And just my final question and I'll get back in the queue here, so just would you anticipate a similar type of increase throughout 2009, I guess, considering some of the products launched in the first quarter? So do you think we'll continue to see a similar type of an increase in your mix of branded versus non-branded?

Joel Gemunder

Yes, there will be fewer new introductions this year than was the case in 2008. However, and importantly, most of the introductions that occurred in 2008 occurred late in the year. Most of them occurred in the end of the third quarter and primarily in the fourth quarter, so we're going to have the follow through in to 2009 of those introductions.

So that, plus the 20 or so branded products, which we think we think will come in to generic usage this year, and sometimes are a little difficult to predict exactly the timing, but we are thinking is, we believe that we will see a good year this year, increase generic utilization relative to 2008.

Adam Feinstein – Barclays Capital

Great. Okay. Thank you very much. Appreciate your comments.

Operator

Your next question comes from Glen Santangelo with Credit Suisse.

Glen Santangelo – Credit Suisse

Yeah hey Joel, can I just ask a regulatory question, just a little bit of a different way. If you go back to 2006 when the government implemented Medicare Part D, did you see an increase in your rebates at that time? Because I guess the concern here is that the government wants to recapture where the Medicaid programs want to recapture some of those rebates, and they have to come from somewhere, and so I think it would help if we had a better understanding of where those dollars went in '06.

Joel Gemunder

Well I certainly don't, I don't believe at the time that we suffered any significant diminution there any rate when Part D came in. I don't think that was the case at all. The only diminution of branded rebates we see is when a drug goes generic or is about to go generic. You'll recall last year that J&J discontinued its rebate on Risperdal several months before the drug actually went generic, but that's part of the generic process, but we haven't seen with the advent of Part D, any remarkable change in our rebate structure.

Glen Santangelo – Credit Suisse

Okay. So it's been relatively flattish, is that a fair way to characterize it?

Joel Gemunder

Look, I'm sorry, somebody was mumbling something to me, and I didn't catch, I would ask you if you would be kind enough to repeat that question.

Glen Santangelo – Credit Suisse

Yeah, I was just kind of curious over the last two to three years, have you seen; you kind of answered my question. You haven't seen any material change either positively or negatively in your rebate dollars, is that a fair characterization?

Joel Gemunder

I think I can get to what, yes, we have not seen any change, any institutional change in our rebate structure, save for the fact that drug rebates cease when a drug goes generic, and it is replaced by your ability to buy the drug and your increased margin on the lower-priced drug.

Glen Santangelo – Credit Suisse

Okay. Thanks, Joel. That's what I was driving at. I was just really trying to understand that with the change in the reimbursement rules a couple of years ago, that didn't have any impact on your rebate structure.

Joel Gemunder

No, it didn't and if I could throw an overture dictum here, what happens I think in this marketplace, is there was a significant amount of rebates with the advent of Part D that Medicaid lost. And those part of that amount that Medicaid lost but only a part of that of those rebates that were no longer flowing to Medicaid were given to the PDPs. The remainder of it went back to pharma.

Glen Santangelo – Credit Suisse

Okay.

Joel Gemunder

And now there is a push on to recapture that element of those, quote, lost rebates, unquote. And that is what I believe to the best of our judgment at this time is what is going on here.

Glen Santangelo – Credit Suisse

Got you, okay. So just to kind of follow that with a follow-up question. One of the big things impacting your 2009 guidance was your negotiation with the Part D plans this kind of winter. Could you maybe elaborate a little bit on those kinds of discussions? Did you see any material change in your pricing with those Part D or those PDP plans, and then --

Joel Gemunder

I would have to say that they, that the changes we saw, the predominant changes we saw were not in the renegotiation of pricing. The changes which we saw, which were slightly adverse were the reassignment of 23% of our Part D patient population to other plans, most of which was done by this random assignment program. And it just happened to fall in to plans where the reimbursement wasn't as good as the plans they exited from.

The year before, it worked the other way. It's kind of a catchers catch can, and we believe that the random assignment structure, which is geared to avoid adverse selection, I believe on the part of the PDPs, is not good medicine. Particularly for the frail elderly who are sometimes in one plan where they have 9 of the 10 drugs they are on covered to another plan where they are assigned to randomly, where they may have only three or four drugs of which they need covered.

And it creates a large increase in our administrative burden to work with those PDPs to try to obtain clearance to get those drugs for those patients.

We think that whole system needs to be reviewed, and it is kind of senseless, it seems to me, to reassign over 2 million dual eligibles every year to new plans. And many of these people are cognitively impaired and have any idea as to why they are moving from plan to plan, don't really have much to say about it. So I think that's one of the areas where people are looking that reform or spending some time to improve those systems.

Glen Santangelo – Credit Suisse

Okay. Thanks for the comments.

Joel Gemunder

Thank you.

Operator

Your next question comes from A. J. Rice with Soleil.

A. J. Rice – Soleil Securities

Thanks. Not to beat this thing completely, because I do want to ask you a couple of questions about the business and the quarter now and the outlook. But, I mean it sounds like, Joel, your position would be, based on the little bit you've heard, is that they are trying to get rebates that used to go to Medicaid, they basically are going to go, this is part of their effort to go either the drug companies or to some degree the Medicare advantage or PDP plans, rather. And say, look, you got to give us a little bit more of a break here, and that they are going to try to extract that from there, and your initial reaction would be it shouldn't really affect your ongoing relationship or what you're getting paid for from the drug companies to do what you do?

Joel Gemunder

Yes, A.J. that's our current believe that's what we believe the situation to be. But you have when you look at your statement, I believe it is appropriate to divide it into two pieces.

First with respect to pharma, the tradeoff, the quid pro quo has always been, you pay the rebates, and the rebates that were formerly paid prior to Part D were very close, I haven't seen the final data that has come out yet, but my understanding is they are almost right on the money, as to where the rebates for branded drugs were before. I think in the old system, they were 22.5%, and now they are the talk is somewhere around 21%?

A. J. Rice – Soleil Securities

Right. Right.

Joel Gemunder

Big pharma pays those rebates in order to gain access to Medicaid formularies.

A. J. Rice – Soleil Securities

Right.

Joel Gemunder

That's the quid pro quo, and that's strictly between pharma and Medicaid. Now, that is helpful to us because it reduces the amount of prior authorizations for which we incur a very heavy administrative burden. Because if I think 25 or 30 or even higher percentage of drugs are covered under prior auths, we need to staff with highly capable, clinically trained people to work with those PDPs to clear those prior auths, which is really kind of a trip wire to providing those drugs, and as a result, this will eliminate a lot of those costs.

Secondly, the part of your question when it comes to the PDPs, taking rebates from the PDPs, the PDPs operate on a spread. In many cases PDPs other than the MHPDs are finding this business or certainly parts of it, and certain geographic locations, to be undesirable as businesses for them, and they are exiting those markets.

The number of PDPs in the 34 regions is shrinking, and there is consolidation amongst the PDPs that are in that market. We are observing that.

So if you take away the rebates, which you should consider to be part of their compensation, some other compensation has to be substituted to give them whatever margin they need to remain in that business, otherwise they'll exit the business and the PDP system will trip to the point where it's no longer a major functioning entity.

That's just simple arithmetic. I don't see that as deep thought.

A. J. Rice – Soleil Securities

Right. Right exactly. All right. I'll try to ask you about your free cash flow. It looks like to me you are looking at probably $400 million plus for '09.

You got cash on the balance sheet of $215 million, and at the Investor Day you said the priority was to pay down your bank debt. I can't really break out, I don't think from the release where you stand with respect to that today, so how much is outstanding on that line, and then maybe talk about the priorities for cash flow, that excess cash flow, over the course of the year? Where do you see that getting spent?

Joel Gemunder

A.J., that's a very good question, and it's a question we've given quite some thought to. The first priority above all is to pay down the debt.

We have as you say, roughly $200 million at the end of the year in cash, we expect to generate, say we said 475 to 525 this calendar year. Say that's you split the difference and call it $500 million, that gives us $700 million, we have about $40 million in CapEx, and about $11 million in dividends, so that's --

So we have to subtract the $60 million from that $700 million, so we have $640, we have $400 million of debt left to pay off by July of 2010. We can certainly do it, assuming that for the first half of 2010 we get another $250 million in, so we're comfortable there. We don't see any danger of our not having the internal resources to pay it off.

A. J. Rice – Soleil Securities

Sure.

Joel Gemunder

What we have to give some consideration to as we go on during the year is what we're intend to do with acquisitions and so on. But we have hedged our cash flow carefully, and we don't chase butterflies with it. We know what we have to do and paying down our bad debt is a top priority for the Company's cash flow.

A. J. Rice – Soleil Securities

Okay. All right. And then in terms of AR days, I guess sequentially you were flat. I think Dave mentioned are stable versus third quarter levels, and now at one point there was discussion about the possibility to extract maybe long-term 10 more days, maybe a little more even out of the current run rate of DSOs. Can you just update us if you think you still have that ability to do it --

Joel Gemunder

I'm going to let Dave talk about that, because that's something he thinks about every day.

David Froesel

Yes, A.J. what we're forecasting or budgeting is to show improvement in the DSO in 2009, down from that 79 days that you saw in the third quarter and the fourth quarter. So we expect some nice improvement there, maybe in the range of 2, 3, 4, 5 more days depending on collection efforts across the country.

A. J. Rice – Soleil Securities

Okay. And then just a finally on the served bed growth, you talked around it a little bit, is it are you guys willing to sort of say over the next year, where you think you'll end up on the served beds? I mean are we looking at if it's similar to where it is today, that's a success, or are we going to be up 3% --

Joel Gemunder

Well, hopefully, we'll show improvement, but where I have to say one swallow doesn't make a summer. I'll be more confident if I had two quarters or three of increased net bed growth. It's a function of three things.

Add bed additions, which we are very comfortable with at the rate at which we're going, and I might add that there's an inventory of beds which lie between signing and going live, pending the expiration of prior contracts, and that is a very significant number. I believe that's in the 25,000 bed range. So depending on how best we're able to transit that inventory from signing to go live, we only report to you go live revenue beds. We don't report out signings as you can't factor them in to your revenues. So we are confident on our signings.

The losses we see our retention rates are improving, so that's a plus. Acquisitions are really the wild cards, because that's the third element in the equation, and that is a little lumpy. So understanding that, we are cautiously optimistic that we will see an improvement this year over where we were last year, but I can't say for absolute certainty that we won't have one quarter where it doesn't go up. It largely depending on when these acquisitions come in, because an acquisition can add or detract a couple of thousand beds from the total.

A. J. Rice – Soleil Securities

Sure. Okay. That sounds good. Thanks a lot.

Joel Gemunder

Thank you.

Operator

Your next question comes from Frank Morgan with RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Good morning, I'll ask a question on the line of the cash flow. I was curious, Joel, you talked about the plan, the random auto assignments to the new plans, and 23% of your patient base. I'm curious, any concerns there about collections or -- excuse me -- not collections, but just timing or slowdown of collections because of this reassignment --

Joel Gemunder

No. No the PDPs -- well, you have a slight change, some PDPs pay it in 35 days, some pay it in 40 days, but that's not material. And the government is ultimately good for the money.

There is an issue unit to from PDP to PDP in their policy with respect to co-pays and rejected claims, but we don't see that as an overwhelming situation. We're working our way through the co-pay and rejected claims process with PDP by PDP, and I think we're making I would say good progress there.

Frank Morgan – RBC Capital Markets

Okay. One other question, and I'll hop. I know this is running long. But in terms of your guidance, how much do you have embedded in the 2009 guidance for the Full Potential Plan? And then also if you could talk about the impact of this whole FUL rollout in 2009, how that also impacts the sequential earnings progression.

Joel Gemunder

What rollout?

Cheryl Hodges

FULs.

Joel Gemunder

We have factored the FULs in for the full year. We never kid ourselves on that. We know what it is. We know what its likely to be, and where and I think we've done a very good job in estimating that and providing a cushion in our thinking for the FUL situation.

With respect to the rollout of the Full Potential Plan, at the end of the year, we're running at about $26 million of annualized contribution. That is going to increase, and I think we'll see a significant increase in that amount this year. Mostly in the last half of the year, as the automation is completed, and the spokes transfer products to the hubs, where we can get the savings.

I can't say exactly how much it is, we have a number in mind, but we have I would rather report that out quarter-by-quarter as we see what it actually is. Because we're dealing with a whole host of factors in build-outs and installation of automation and training of people, and so on. So our policy has been that we report out the amount of the contribution from the Full Potential Plan in each quarter, and I think we'll continue to do that.

Frank Morgan – RBC Capital Markets

Okay. Thanks.

Operator

Your next question comes from Alan Fishman with Thomas Weisel.

Alan Fishman – Thomas Weisel Partners

Hi, Joel, it sounds like you have a lot of new beds in the pipeline from the sales efforts. Could you talk a little bit about how, now that you have, nearing completion on the Full Potential Plan, how you are changing the sales force structure, at least how the sales force is going out and signing up new beds.

Joel Gemunder

We're doing a number of things. The sales force is now headed by a very capable executive. Our training has improved significantly. That's a major factor in our process, and not only have we improved the training of these people, we try to hire the best people available and we give them extensive training.

We have also trained all of our regional operating people in the sales process, which is quite a chore, taking a pharmacist, who many of whom know very little about anything in commerce, and training them to be effective sales have an effective sales mentality, but I'm amazed at how well that has progressed during the company. And I think we're going to see as time goes on, an increasing effectiveness of the investment we've made in that training.

Alan Fishman – Thomas Weisel Partners

Are you adding more --

Joel Gemunder

You have seen it already because they are able to augment significantly the effectiveness of our dedicated sales force, so it increases the effectiveness of team selling, and it's leading to a significant increase in our signings. As we reported out, we had a 39% increase in our signings in the fourth quarter. That doesn't just happen by happenstance. It happens because of the cumulative impact of the training that we've given our people.

Alan Fishman – Thomas Weisel Partners

Now, are you adding salespeople? And if so --

Joel Gemunder

Absolutely.

Alan Fishman – Thomas Weisel Partners

Are you changing geographies? How are you adding them?

Joel Gemunder

We do a very careful analysis as to where we put people, because we have to put them in markets where they have an ability to succeed. That is to say, enough business, potential business in that market for them to get, and we have done, without trying to be too specific about it, we've done a pretty good job at that.

I'm very comfortable with what we've done on the sales side. Both with our dedicated sales force, with our retention people, which I am very pleased with, and with our operating units, who are now much more aware of the sales process and as the need to be customer sensitive, and effective in that process than had been the case previously.

Alan Fishman – Thomas Weisel Partners

Great. Thanks.

Cheryl Hodges

Okay, Regina, I think we have time for one more question.

Operator

Your last question will be from the line of Randall Stanicky with Goldman Sachs.

Alex Douglas – Goldman Sachs

Good morning, this is actually Alex Douglas for Randall. I just have a quick question on generic pricing. We have heard commentary from some of our generic manufacturers that generic pricing is actually holding up better this year than years past. So just wondering if that's something that you are seeing, and whether there would be any implications for your margins from just the sourcing side?

Joel Gemunder

I'm going to answer the question this way. We are very comfortable with our performance in the generic markets. We have done a very, very good job, and I think our margins are where we expect them to be. We don't see any deterioration in our margin structures, because we're unable to buy effectively.

Alex Douglas – Goldman Sachs

Have you assumed essentially stable margins on generics in '09 relative to '08?

Joel Gemunder

I'm not sure I understand, it's almost a question that defies an answer, because when a drug goes generic, you have, if it goes in to an exclusivity, the margins are less than when it becomes available to the general market, in most cases.

Sometimes it works the other way around, depending on how much of it we buy, but all I can say, it's different for different drugs, but we don't, if I look to drug-to-drug and what we're purchasing drug for drugs on an apples-to-apples basis, at least in our case, we haven't noticed any deterioration in our spreads or in our ability to purchase that drug. In other words, I'm not saying, if we buy a drug for $2, I'm not seeing it go up to $2.20 or $2.30.

Alex Douglas – Goldman Sachs

Okay. That's helpful, thanks.

Joel Gemunder

Thank you.

Cheryl Hodges

All right, everyone. Thank you for joining us today and we look forward to speaking with you soon. Good-bye.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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