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Executives

Patrick Lee – VP, IR

John Figueroa – CEO

John Workman – President and CFO

Analysts

Frank Morgan – RBC Capital Markets

Lisa Gill – JPMorgan

Robert Jones – Goldman Sachs

Brendan Strong – Barclays

Jason Gurda – Leerink Swann

Robert Willoughby – Banc of America

A.J. Rice – Susquehanna Financial

Adam Feinstein – Barclays

Steven Valiquette – UBS

Glen Santangelo – Credit Suisse

Omnicare, Inc. (OCR) Q2 2011 Earnings Call July 26, 2011 9:00 AM ET

Operator

Good morning. My name is Maryann and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare’s Second Quarter 2011 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) I would now like to turn the call over to Patrick Lee, Omnicare’s Vice President of Investor Relations. Mr. Lee, you may begin your conference.

Patrick Lee

Thanks, Maryann. Good morning, ladies and gentlemen, and thank you for joining us today. With me on the call today are, John Figueroa, Chief Executive Officer and John Workman, President and Chief Financial Officer.

Before we begin, let me remind you that during this call, we will make remarks that constitute forward-looking statements. Actual results may differ as a result of a variety of factors including those identified in our earnings release and 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 in the future.

For simplicity sake and the focus on what we believe are the best indicators of our operating performance, we will discuss results from continuing operations and we’ll also exclude special items for all periods in our discussion today. A reconciliation of this non-GAAP information has been attached to our earnings release and is also available on our Web site. Also on our Web site, we have posted supplemental slides, which are intended to accompany our remarks this morning.

Before turning the call over to John, I would like to remind analysts to limit themselves to one question and one follow-up during our question-and-answer session so others may ask their questions. With that, it is my pleasure to turn the call over to John Figueroa.

John Figueroa

Thanks Patrick, and good morning to all of you who joined us on the call today. I'd like to begin this call by providing my thoughts on our second quarter performance and the key highlights driving the business, John will then discuss the second quarter financial results in greater detail and also provide an update to our 2011 guidance that includes our more favorable cash flow expectations, following our remarks, we’ll be happy to answer your questions.

I’m pleased to report that during the second quarter, we continue to progress toward our objective of becoming a stronger operations driven company. We generated' adjusted EPS of $0.50, once again exceeding the street consensus estimate, although slightly lower sequentially reflecting the seasonably softer period in terms of utilization levels. Of course, this was in line with our prior comments about the quarter.

The highlight for the quarter was again our cash flow generation. We demonstrated sound financial discipline yielding strong cash flows, while adhering to a very diligent capital allocation program entered on optimizing returns.

For the quarter, we generated approximately $137 million in cash flows from operations, which brings our year-to-date total to $281 million, marking the strongest cash flow performance in the first six months of any year in our 30-year history. I believe our strong cash flow continues to be the most compelling yet undervalued aspect of the Omnicare story, because it enables us to create significant value for our shareholders.

Turning now to our operating performance, few items stand out. The lower utilization levels within our long term care business that we had anticipated, pharmaceutical market dynamics and additional progress made towards enhancing the overall customer experience evidenced by improved retention.

First, with respect to utilization. As you may recall, we began the year with script volumes benefiting from the new RUG-IV reimbursement rules, which were intended to lower healthcare cost by transitioning certain clinically complexed patients from a high cost treatment center to a lower cost alternative.

While I believe acuity levels continue to benefit from this dynamic in the second quarter, overall utilization was weaker sequentially as expected due to reduced occurrences of the flu and other circumstances in the elderly population generally common in colder months.

We also saw a continuation of many of the pharmaceutical factors that have been impacting results for the past several quarters, namely, a further increase in generic drug utilization. Our team continued to be very effective at converting residents to newly launched generics with our generic dispensing rate, expanding another 60 basis points to 78%.

I believe we have the highest generic conversion rates in the long-term care industry, largely because our sophisticated direct sourcing program provides us with more attractive opportunity and the added incentive to drive penetration of generic drugs. And because of this unique opportunity, I believe it incents Omnicare and we are aligned with our customers as well. Where we benefit from generics, our payers, customers and patients do as well.

Regarding customer retention and growth, we made additional progress during the quarter especially with respect to customer retention. We have been very candid with our employees, customers and shareholders that our focus has been on enhancing service in an effort to create customers for life. And I am very pleased at how well our organization is being this objective.

Our redefined organizational structure continues to have a favorable impact on our long-term care group, providing greater consistency in service delivery, while enabling our most effective operators to have a greater impact on the business. I also believe we are beginning to bridge the communication gap between what new and existing customers know about the services we provide.

Historically, new Omnicare customers have the most insight into newly launched services. As I believe, there was a greater focus on adding new customers and retaining the existing customer base, however, we are changing that mindset. And I’m pleased to say that our existing customers have more real-time information about the many great services we provide than ever before, and we continue to see signs that customer sentiment is improving.

In fact, our annualized customer retention rate expanded another 130 basis points sequentially and 300 basis points on a year-over-year basis to 93.7%, as we close in on our long-term objective of at least 95% customer retention.

And just as I am very pleased with our progress in improving customer retention, I am equally excited about the opportunity to increase our organic sales results. While improvement in this area has not come at the same rate as we’ve seen with customer retention and performance has been variable, we have begun to lay the foundation for an integrated sales and marketing program centered on effectively communicating our value proposition.

Along those lines during the second quarter, we appointed Tim Canning from McKesson to the newly created role of Chief Marketing Officer. Since joining Omnicare, Tim has been focused on strategically redesigning and relaunching our go-to market message to allow our sales force to maximize its effectiveness.

As we develop a consistent market message and fully capture our industry leading offering, we will also begin to increase our sales footprint in certain attractive markets.

Improving our sales performance is essential for us to meet our goal of net organic bed growth, and I believe we are investing in the appropriate areas to ensure that our sales results begin to show the same type of improvement we’ve demonstrated with customer retention.

Shifting gears to our Specialty Care Group, we continued to make substantial progress. We’re organizing this business under one group in order to capitalize on strategic and operational synergies across our five platforms. And those five platforms are Specialty Pharmacy, Third-Party Logistics, Brand Support Services, Patient Assistance Programs and Disease Management for end-of-life care.

During the quarter we hired a sales leader for the group, Amid Jane [ph], who will be responsible for establishing opportunities with new and existing biopharmaceutical companies.

As with our long-term care business, I believe we have a significant opportunity to improve our selling effectiveness for our Specialty Care Group, and we are redefining our message to better express the breadth of services we provide across our Specialty Care platforms. This business has been growing rapidly, and the second quarter was no exception.

I believe we have much more opportunity ahead as the market continues to shift in favor of specialty drugs and the biopharmaceutical companies continue to migrate towards partners whose businesses are fully aligned with theirs.

And now, I’ll turn it over to John, who will cover our second quarter financial results in greater detail, as well as address our full-year 2011 outlook. John?

John Workman

Thank you, John. We are pleased with our second quarter results. We have filed supplement reschedules with our press release providing additional information. Our special items were lower this quarter than a year ago and were primarily related to one, litigation-related settlements; two, acquisition-related cost; and three debt [ph] related charges. I will cover these later, but want to start by covering our continuing quarterly operating results.

Starting with operating statistics that can be found on Slide 5 and 6, second quarter scrip to spend to 30.4 million were 2% higher as compared with 29.8 million scrips dispensed in the comparable year earlier period. On a sequential basis, scrips were 1% lower than 30.7 million scrips dispensed in the first quarter. As John Figueroa mentioned, the first quarter is seasonally a stronger quarter, as cold weather typically creates more admissions among the elderly.

With respect to beds served, we ended the second quarter with 1,376,000 beds served, which was down 1% from the beds served at the end of the first quarter 2011, an increase of 1.7% over the number of beds served at the end of the second quarter of 2010.

Our long-term care beds were down 11,000 beds sequentially or 85 basis points generally comparable to the loss in long-term beds experienced in the first quarter. We continued to see improvement in our customer retention rate, which was 93.7% for the quarter.

As John Figueroa mentioned, our progress on the organic sales front is progressing a little slower than retention, but we believe we’ll gain momentum as we close in on net organic growth. Our generic dispensing rate has continued to increase, which is consistent with lowering overall health care cost.

Turning to the income statement, consistent with past practice, we believe the most appropriate comparison for the quarter is on a sequential basis excluding special items. And as I've mentioned previously, have provided supplemental schedules to facilitate the comparison that I will reference during my comments.

During the quarter, our Board of Directors approved a plan to divest our medical supply GPO, Tidewater. Accordingly, the results of operations reflect Tidewater as a discontinued operation for all periods and the discussion that follows is as if Tidewater were not in any of our results. Tidewater was profitable and constitute approximately a $0.01 per share in the first quarter as originally presented.

Looking at net sales and gross profit, which can be found on Slide #7, net sales were higher by $30.3 million or 2% in the second quarter of 2011 from the first quarter 2011 results. Adjusted consolidated gross profit increased 1.4 million in the second quarter with a margin rate as a percent of sales declined 34 basis points. There is the impact in the aforementioned seasonally lower scrip count that we usually see after the first quarter.

The second quarter also included fourth quarter impact from our 2011 merit increases, compared to the first quarter, which had only partial month inclusion. As we have mentioned previously, we are reinvesting the benefit of our brand and generic conversions into our employee base.

Next, turning to SG&A expenses and other elements of the income statement, which could be found on Slide #8. SG&A expense was 2.3 million higher in the second quarter of 2011 versus the first quarter of 2011, primarily as a result of compensating increases. As a percent of sales, SG&A declined 10 basis points from the first quarter of 2011 and from the second quarter of 2010, despite the full quarter impact of the merit increase.

The provision for doubtful accounts was 1.6% of revenue for the quarter, consistent with the percent in the first quarter. Receivables continue to show improvement with Day Sales Outstanding or DSO improving one day from the first quarter of 2011 and three days from the fourth quarter of 2010.

Interest expense was basically flat to the first quarter despite a reduction in debt during the quarter. We unwound a fixed to floating rate swap in the second quarter, causing a short-term higher effective rate than in the first quarter. The termination of this swap provides more flexibility, as we consider our financing alternatives.

Finally, in looking at income taxes, net income and earnings per share, which can also be found on Slide #8, our income tax rate for the quarter excluding the impact of special items was 37.3%, slightly higher than the first quarter. Income from continuing operations excluding special items was 57.6 million for the quarter or 3.7% of revenue.

Adjusted earnings per share for the quarter excluding special items equate to $0.50 per share. We purchased approximately 1.3 million additional shares in the second quarter of 2011. The average purchase price was 31.54 per share.

Turning to special items, they were both pure in number and (inaudible) in amount than a year ago. The largest item was litigation-related settlements, which totaled 19.8 million. The provision considers the state of discussions on various regulatory and other matters that have previously been mentioned in our disclosures including the DEA investigation.

As we have mentioned before, we believe there will be some additional matters that may arise against the company in the future, but we feel the large ones are behind us.

The second largest item of 6 million was primarily the amortization of discount on convertible notes. We also incurred minor debt redemption costs related to repayment of our 2013 notes. The final and remaining special item in the category of others primarily acquisition-related costs.

Turning to the balance sheet, we continue to show strength in the quarter. Cash on hand was $524 million including restricted cash. This balance is after redeem $50 million of the 2013 notes and spent approximately $41 million on share repurchases in the quarter.

Accounts receivable are approximately 24 million lower than the first quarter. And as mentioned earlier, DSO improved one day compared to the first quarter. Inventory was approximately $19 million lower than the end of the first quarter.

Turning to cash flow, which can be found on Slides 9 and 10, cash flow from continuing operation in the second quarter of 2011 was 136.9 million. The second quarter benefited from the lower working capital of receivables and inventory in the second quarter, primarily influenced by brand and generic conversion. We also added $23 million Federal Tax refund that benefited the second quarter.

As we have mentioned previously, the company benefits from a lower effective cash tax rate as a result of the amortization of goodwill for tax purposes and the contingent into deduction though these will be lesser in 2011 due to our repurchase of 525 million of the instrument.

The company also has modest capital requirements on an ongoing basis. For the second quarter of 2011, capital expenditures totaled 9.7 million. As we have mentioned before, we believe annual maintenance CapEx requirements to be approximately 30 million per year.

However, we may spend some additional funds on information technology in 2011 and 2012 as we increase our investment in the business to improve operations and customer service. You can see some portion of this increase in our year-to-date amounts.

As we mentioned on our previous calls, the company plans to continue to assess the use of cash flow in 2011, and deploy that cash in the best fashion to create value for shareholders in addition to acquisitions and debt repayments.

In this slide, we returned 45.8 million of our cash flow from operations to our shareholders in the second quarter through dividends and share repurchases representing 33.5% of our cash flow from operations. As we have stated before, our target is 25% and we are ahead of that target on a year-to-date basis.

Next, turning to capital structure, which can be found on Slide #11. As you are aware, we completed a refinancing in the fourth quarter of 2010. Combined with our refinancing earlier in 2010, we have successfully pushed out $750 million for about 10 years, as we move to improve upon our strong capital base.

Later in 2011 or early 2012, we expect to address a portion of the 1.1 billion coming due in 2015 to further push our maturities. We have also repurchased 175 million of our 2013 bonds in 2011.

Our Board has authorized the repurchase of up to 300 million of common stock from time-to-time over the two years ending in the third quarter of 2012. We have used approximately 171 million per share repurchases and have approximately 129 million of the total amount available.

Next, turning to the discontinued operation section of the income statement, during the second quarter, we divested our medical supply GPO asset. We did not believe that the GPO was a strategic debt with the direction Omnicare was headed. This business was profitable and was sold to MHA.

As the GPO arose out of an earlier acquisition for accounting purposes, we required to push down some portion of goodwill on the cell. This created a book loss but an economic and tax gain.

We also trued up the CRO disposition that was also completed in the second quarter. Working capital adjustments and tax adjustments trigger an additional loss beyond that recorded in the first quarter.

Finally, turning to the 2011 outlook and beyond which can be found on Slide #12, as we stated in our year-end call, we would characterize 2011 as the year where we continue to transform the company into a customer-focused and operations-driven company to build a strong foundation for the future. It will be characterized by investment and people, and internal technology to improve customer service and improve efficiency and the disciplined use of cash.

With this as a backdrop, we now believe our 2011 guidance to be revenue of $6 billion to $6.1 billion. Remember, overall brand and generics will cause a revenue decline.

On earnings per share, excluding special items, we expect to be in 205 to 215 per diluted share range. We are maintaining this guidance though we dispose our profitable GPO business, which generated a penny per share in the first quarter, if annualizes amount would have been $0.04 per share.

And lastly, cash flow from operations were increasing from $400 million to $450 million excluding settlement payments from the previous guidance of $375 million to $425 million.

In thinking about 2011, we believe the second half will generate higher EPS than the first half. Reasons include cycling of the payroll restoration from 2010; branded generic conversions in the second half of the year, fewer bed losses and acquisitions. Having set the foundation solidly in 2011, we believe 2012 will return the company to solid double-digit growth in EPS.

Factors influencing this include, brand to generic benefits in 2012, which both are good for Omnicare and healthcare cost overall; the benefit of bed loss retention program due to improved customer service, efficiency in operations and a growth of Specialty Care. We will continue to stay focused on our capital structure and creating value for shareholders, which will include returning cash flow from operation to our shareholders.

With that, I will turn it back over to John Figueroa for concluding remarks.

John Figueroa

Thanks, John. Earlier in the year, I characterized 2011 as a year of investment essential to becoming a stronger operator and positioning the company for long-term profitable growth. As we progress through the first half of the year, I believe we have begun to build the framework to ensure we are successful with our long-term objectives.

I am pleased with our progress and we are running ahead of schedule. But I also recognize we have to go even further to meet our three core operating initiatives. Those initiatives are establishing consistent organic growth in our Long-Term Care group, repositioning our Specialty Care group for an elevated level of growth and creating more standardization across the company.

As I look out to the back half of the year, I believe we will continue to gain momentum in these areas, contributing to improve operating results and better positioning the company to reap the benefits of the more and many growth drivers in the years ahead.

And with that, operator, please open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Frank Morgan of RBC Capital Markets.

John Figueroa

Hi, Frank.

Frank Morgan – RBC Capital Markets

How are you doing?

John Figueroa

Doing great.

Frank Morgan – RBC Capital Markets

A couple questions; first on, just an update on the opportunities to utilize new technology in the nursing homes, these first dose dispensing that lately you’ve been testing, you talked about having tested in the marketplace. Just an update on how that’s going and do you think that might be a viable solution to some of the customer services used? And then secondly, just the ability to move more volume through your hubs. I know that something you’ve talked about recently. Can you give us an update on how well that’s progressing and where you think that ultimately could play out? Thank you.

John Figueroa

Yes. Thanks, Frank. On both of those fronts, I’m really excited about the progress we’ve made. We still continue to move forward in evaluating, we’ve narrowed it down to two companies, where we have begun some work in utilizing the technology out in the field.

As we’ve indicated before, we think by the end of this year we will probably have some good, hard pilots working with some data being generated where we hope to have some impact some point in 2012. So we’re on schedule with the analysis, with the evaluations, we’re getting very close to making some final decisions as to whether or not we go with one particular technology or possibly two, but I do believe that by the end of the year we will have some hard pilots, some hard data to evaluate.

The second question regarding the hubs, we’ve talked about moving a number of refills over the hubs because that’s why we have our largest cost advantage, and so far, in the first six months of the year, we’ve moved more than 2% to the hubs. If you recall, we were in the low-50s, I don’t know the exact numbers, but I believe we started the year at about 49% of all scrips being done in the hubs, and last quarter was about 52%, and now we’re getting close to about 54%.

Frank Morgan – RBC Capital Markets

Do you characterize the service-related issues and the retention issues? What moves the needle more? Is it the potential from this first dose dispensing technology or is just the basic blocking, tackling, the day-to-day interactions you have with your customers? What help the most? Thanks.

John Figueroa

I think it’s both, but I think the basic blocking and tackling has really been the biggest result for our retention increases that we’ve seen over the last six months to nine months. Going back to the basics from the service perspective, listening to our customers, being in front of our customers and ensuring that we are providing the best possible service has been the biggest reason for our attention. I think when we solve that first dose issue, we will see an additional benefit to retention, but what we have seen thus far has been really getting to the basics.

John Workman

And I would add, Frank, that remember, the first dose is also getting more important as there are more Med-A [ph] patients or the short-stay patients coming into the nursing home, being driven by their reimbursements. So the fact that we’re working proactively with national accounts too, I think is a big plus in that direction, it’s helping to solve an overall issue relative to the nursing homes.

Frank Morgan – RBC Capital Markets

Thank you.

John Workman

Thank you.

Operator

Your next question comes from the line of Lisa Gill of JP Morgan.

Lisa Gill – JP Morgan

Thanks, good morning, John and John. How are you? Just a couple of questions here; first, can we just maybe discuss bed losses retention? How is it tracking versus your expectations? The beds came in a little bit below our expectations. I’m just wondering if there were some beds that perhaps you walked away from or is the retention going a little bit slower, so that would be my first question? And then my second question is just if we look at the revenue coming in, again better than our expectation with beds being down, can you maybe just explain to us is it higher acuity levels within those beds? Is it specialty? Maybe just help us to understand what we’re seeing on a revenue per bed basis or overall scrip basis?

John Figueroa

I’ll take the first one and I’ll ask John to take the second one. As far as the bed loss, we’re actually ahead of schedule, I think to be at better than 93% after the second quarter, we feel pretty good about that. As far as the actual bed losses for the second quarter, that’s still I think close to 35% better than it was prior year. So we’re really, I think attacking that problem very aggressively.

Now I’ve also been pretty consistent, the beds aren’t going to improve by number quarter-after-quarter, this entire year we will improve substantially. But we’ll have a couple of quarters I think where you see a little bit of an increase or a little bit of a decrease, so that didn’t bother me at all. I think from a percentage standpoint that’s what I’m looking at, and we’re getting closer to that 95% retention number, which we think is critical.

I think we were a little short, our retention numbers, very, very happy with. Bringing on new business, we had some very, very high goals for the second quarter and we fell slightly short of new business coming into the quarter, but I think the strong funnel that we have, the strong message that we have, the hiring of the Chief Marketing Officer to help us with that message, we should see some good, new business, new ads coming on to the second half of the year, and that has been our plan pretty consistent for the outlook.

John Workman

I think I agree with John that we’re gaining momentum, we see now we have volume divisions, one was very close to a breakeven in the quarter and we expect were some continued progress. Relative to the revenues, to your point, revenues were higher, and I guess outside your expectations that we’re driven, Specialty had a nice increase specifically in ACS, Advanced Care Scripts, and remind you that that is a fairly low gross margin business, but had a nice revenue increase. Drug price inflation continues also to drive some revenue again albeit at slightly lower margins. So those would be the two kinds of issues that drove a little bit higher sales than what might have been expected.

Lisa Gill – JP Morgan

And I guess just one last question, John Workman. If we look at the guidance range, can you maybe just help us understand what some of the expectations are to get towards the upper end of the range, as we get into the back half of the year?

John Workman

On EPS?

Lisa Gill – JP Morgan

Yes, on EPS.

John Workman

Okay, on EPS, it’s primarily going to be the timing of some of the brand to generic conversions. Relative to our expectations, if those come out a little sooner and we continue to convert very quickly to generics, which we’ve grown our experience in the first half of the year that should lend us towards the higher end of EPS. Continued focus on efficiency, some of the comments earlier about continue to move that refill up, those are all going to be the key components at least in terms of hitting the higher end of the range.

On cash flow, you didn’t ask that question, but cash flow, it’s going to be driven primarily by the earnings, and there are some items in the first half that have been fairly favorable from working capital though we expect some progress, perhaps not as strong on working capital in the second half and will be opportunistic, relative to buying, occasionally, we will buy inventory when it’s opportunistic and will improve margin, so some of that may occur in the second half.

Lisa Gill – JP Morgan

Okay, great. Thank you very much for the comment.

Operator

Your next question comes from the line of Robert Jones of Goldman Sachs.

Robert Jones – Goldman Sachs

Thanks for the question. Just staying with the bed count, obviously, you guys talked about the progress you’re making towards your goal of 95% retention. You talked a little bit about organic growth. It didn’t look there were any beds acquired in the quarter. I know there’s a little bit of a change in strategy here. Can you maybe just give us an update on how you’re thinking about acquiring beds and maybe what the criteria is going forward?

John Figueroa

I think as we’ve indicated all along that we were going to be very disciplined about the acquisitions that we make and I think the first half of the year, you’re right. We’ve looked at a number of potential acquisitions and I think the funnel and the opportunity for us to move forward with some of those will present themselves in the second half of the year. But we’re not chasing acquisitions or chasing beds just to chase beds, as perhaps we have in the past.

We have a very disciplined approach to make sure that it’s the right acquisition, it’s the right market for growth, and it’s the right business, that from compliance and regulatory perspective these companies are good and well-run companies. And as I’ve indicated, it’s taken some time to, I think narrow the list to those that we are very excited about and I think you’ll probably see some more movement in the second half of the year and beyond.

John Workman

Just remember, Robert, they don’t flow just equally across the quarters and they kind of comment in pieces. ‘010 was a great example. We had minor acquisitions and then in late in Q3, we closed CCRx, and so those are going to come and flow, as those opportunities present themselves. But again, I think we have a very strong pipeline also.

John Figueroa

I think other good news, Robert, is that because we’re Omnicare, we do have the opportunity to look at just about everything that’s out there. Our phone does ring pretty consistently, and we’re pretty excited about some of the things that are coming up.

Robert Jones – Goldman Sachs

No, no, that makes sense. And I guess this is my follow-up on Specialty, I was hoping you give a little bit more detail around the integration. I guess specifically, as you look across the portfolio, obviously, things like RxCrossroads are important, but are there pieces in that business that you’re still in the process of considering a strategic versus non-strategic? And then is there any thought maybe, John Workman, going forward about providing or disclosing more financial detail around Specialty?

John Figueroa

I’ll answer the first part and then I’ll turn it back over to John. But as far as those businesses are concerned they are distinct businesses. You look at RxCrossroads and the way they present their offerings to manufacturers and the value of that business is really directly attributed to the manufacturer relationship, and that has been a very, very strong piece of the Specialty business and we continue to believe that, that will grow at much faster than market moving forward.

The Specialty business is another business that I think is growing very well. We’re very excited about the results in the second quarter, however, lower margin than some of our other businesses in Specialty as well as Long-Term Care. However, very strategic in nature, and one that we continue to see just nice, organic growth there.

The third biggest platform that we have is around the hospice piece of the business, excelleRx, and that’s probably one area that has been a little bit slower growth than the other two, but still substantial for us moving forward.

So to answer your question, the three big platforms here I think are still very strong businesses, we anticipate that they’re going to grow as expected, and all of them I think are critical to the entire group success moving forward. So the long answer is no. There really isn’t anything in this portfolio that we would look at and say, “Gosh, it doesn’t make sense.” In fact, all the platforms look pretty good from a growth perspective.

John Workman

As to the second question, Robert at some point in time, it will become a segment, it’s not there yet in terms of the way that we run the business, but it’s progressing towards that. And clearly, as we get into ‘12, you’re going to see segment results. I think as we end the year, we probably giving a little bit more visibility into the components of that, but it kind of ties with how we ran the business, we’re just not quite at that segment data yet. We still have some cost that are really not in that division, and we’ll be looking to separate those as we kind of end 2011 and give you a little bit more visibility into it.

Robert Jones – Goldman Sachs

Okay, that’s all the questions.

Operator

Your next question comes from the line of Brendan Strong of Barclays.

John Workman

Good morning, Brendan.

Brendan Strong – Barclays

I’d like to go back to the revenue question a little bit, because I just want to understand it better, because in fact, you guys reported 2.4% revenue growth and there were no acquisitions in the quarter, and I think it’s got to be one of the strongest revenue numbers you guys have done in years. So, is there something else in there that’s driving the revenue? Was there something related to the united contract that’s helping? It seems like the revenue be is really about revenue per scrip increasing sequentially, that’s like first half of the question. And second half of it would be, if you just take an annualized revenue in the quarter you’d be deal with your guidance, so what’s the view on or the reason for revenue kind, I guess, in guidance trending down later this year?

John Figueroa

There are a number of things that impacted it. Certainly, you look at some of the generic conversions and even despite the generic conversions, we had a pretty good quarter from a revenue perspective. I think one of the biggest reasons is the specialty piece of our business that continues to grow even faster than we anticipated. So that’s probably one of the biggest factors. John, I don’t know if you want to talk about –

John Workman

No, I think it is specialty drug price inflation, Brendan again, it’s a little bit stronger and I think that help drive some of the revenue piece, that doesn’t translate necessarily to strong margin dollar because that’s the weaker margins. As to the second half of the year, the part of that’s going to be as we switch to generic drugs, they’re going to be less of a sales dollar amount than the brand of equivalent and those are more back-end loaded as we end 2011. So that’s how we’re factoring in some drop, if you will based on that brand and generic conversion.

Brendan Strong – Barclays

And then just again on guidance, as you look at the first half of the end, you guys have talked about the back half of the year being stronger. Is there a reason why you guys aren’t taking up the low end of the range? Is there something else that may offset that? Or are you guys in fact disappoint, maybe end up being closer to the higher end of the range?

John Workman

That’s a good question. One thing I will point out is we kept our guidance and you’ve heard us mention that we disposed of the GPO which generated about a $0.01 a share in Q1, which would equate to $0.04 on an annual basis and when we gave our original guidance, we expected GPO to be there all year. So, in essence, by confirming guidance, that’s $0.04 that we’re absorbing and keeping within the same guidance range. So, I hope that answers the question. We’ll drive on the factors in the second half, but the second half, you have some brand to generic conversion that will help the second half, in response to the earlier question, and we do expect some acquisition activity in the second half will also contribute to that EPS.

John Figueroa

Yes, Brendan, I think one of the bigger issues as we look at the second half, we are very confident on where we’re at and how we’ll perform, I think the only thing that we would be worried about is the timing of the generics, because there is a number of launches that we expect in the third quarter and fourth quarter that if the timing changes on some of those, it could affect our EPS number, but we’re extremely confident of the range.

Brendan Strong – Barclays

Great, thank you.

Operator

Your next question comes from the line of Jason Gurda of Leerink Swann.

John Workman

Good morning.

Jason Gurda – Leerink Swann

Can I just follow-up on that last question? Could you give us the specific drugs that you may be concerned about the timing slipping on the generic conversions?

John Workman

If you look at the supplemental deck that we published today, we’ve broken out in the appendix the drugs that we expect, the one that went in Q2, and you can see in Q3 and Q4, we’ve kind of profiled with the patent expires, and some of those are a little bit more significant. I will focus, Lipitor was big perhaps across the industry, it’s not quite as big relative to Omnicare, but some of the other drugs like Zyprexa are going to be kind of key drugs for us in the second half.

Jason Gurda – Leerink Swann

Do you know what date Zyprexa give the date that it’s actually expected to be offered generically?

John Figueroa

I believe in November, Brendan. I will tell you most of these drugs are pretty well good to go, but there’s always that risk. Anytime you have a brand to generic conversion and generic introduction. For example, we just saw Arixtra launched on Friday, that was a surprise launch and it could very easily go the other way with a drug that’s projected to go generic, so there’s always a risk there but I’ll say that as we look out in the back half of the year, we feel pretty good about the important drugs coming off of that.

Jason Gurda – Leerink Swann

That’s helpful. And then another question I’ll ask you is a little bit theoretical. Just curious any comments that you can give. There’s been some news reports indicating that your competitor has put itself up for sale. And so my question, which is theoretical is if PharMerica was in the process of being sold piecemeal, let’s say pharmacy by pharmacy, do you have any idea what percentage of their pharmacies that you think you could buy without having concerns about market share issues?

John Figueroa

I think it’s probably best and it’s our company policy that we don’t speculate on any rumors that are taking place in the marketplace and I think this is probably one that I even theoretically wouldn’t want to speculate as far as piecemeal or anything that has to do with that rumor. So I don’t know how to answer it.

John Workman

The only other thing, Jason that you could do is if you want to look at the state-by-state breakdown, which is public information in the 10-K, you can kind of see where we have a heavy concentration, where the two of us are heavily concentrated and those in which we’re not, that’s not the right detailed analysis, but it give you some feel.

Jason Gurda – Leerink Swann

Yes, okay, thank you.

Operator

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

Robert Willoughby – Banc of America

John, shouldn’t we see proceeds from divestitures line item somewhere on the cash flow statement?

John Workman

It is, and I don’t think you’ve seen the full 10-Q yet, but it’s done in investing activities, it’s not in cash flow from operations. So the numbers we quoted are don’t include those, and you’ll see there’s a separate line on the 10-Q divestiture of businesses is broken out.

Robert Willoughby – Banc of America

And what is that? Can you spoil the surprise for me? What were the proceeds from the divestitures?

John Workman

Yes, in the quarter, it’s only about 11 million.

Robert Willoughby – Banc of America

And that’s the CRO and the GPO?

John Workman

Yes, they’re not big numbers, that was the working capital pieces. And there’s also a tax, an unusual part of the GPO divestiture was we had a book loss, because we had to push down goodwill, yet we had economic and tax gain so we had to pay taxes on that. That’s all netted against that number.

Robert Willoughby – Banc of America

Okay, perfect, thank you.

Operator

Your next question comes from the line of A.J. Rice of Susquehanna Financial.

A. J. Rice – Susquehanna Financial

Hi everybody. You alluded to the prepared remarks, but I just was curious, obviously, there’s a lot of discussion in the Long-Term Care area about the possibility of RUG-IV recalibration. Can you give us some flavor, maybe that’s a complete non-event for you guys, but do you think that the RUG-IV update that came out last October has had any impact on your business and whether the kind of recalibration they’re talking about, would that have any impact if it does the deal go through?

John Figueroa

We really don’t think it has impact to our business. I think what we saw with RUG-IV was there was certainly an increase in census with a number of our customers and that hasn’t changed much. I think there’s certainly a lot of talk about what’s going on with reimbursement with our customer base, but even if that is enacted in any different way than it is today, we still believe that the census and bed count will remain the same. We believe very strongly that that is the best method to take care of these elderly folks in this setting. We believe that it is cost-effective for the government and we believe that the program will continue and that will not affect our business.

John Workman

I would say that’s still attractive business for the nursing homes. Even with some kind of reduction in the reimbursement, I think there’s a feeling that it would typically come in lesser than what might have been offered. And secondly, is the whole issue of concurrent therapy perhaps being put back on the table, which would help nursing homes. We do not gain any one-time benefit, we had no increases to the fact that they have higher reimbursement nor do we expect decreases if their reimbursement is reduced, we still think that’s fairly attractive business for the nursing homes, not only from the revenue and profitability standpoint, but also from the collectability standpoint.

John Figueroa

And keep in mind, A.J., we have been a source of savings for the nursing homes over the last several years has branded drugs come off patents, not only does that benefit Omnicare, but it benefits our customers. As we look out over the next couple of years, a third of branded drugs are going to come out of the system and you're going to have new generics. That’s going to be some pretty significant savings for our customers.

A. J. Rice – Susquehanna Financial

It’s a good point, okay. Maybe just one other follow-up, I haven't heard you guys talk much lately about Part D plan re-contracting. Can you just remind us how that flows? Is there a period or time during the year when a lot of those contracts get redone or is it sort of evergreen at this point and other opportunities there for you as if you go through that process?

John Workman

They’re typically on average duration close to three years and some come up each year. You know what’s going on that industry. There’s being some further consolidation and there are negotiations. Every time one is coming up, it’s a negotiation between a big player, I guess the benefit we have is we're also a big player, and we control basically half of that Long-Term Care market, which is important from our perspective. I would characterize that as slightly flat. We do get some changes periodically when the reassignments occur, and you get some patients that may move to a lower reimbursement setting based on moving from one Part D player to the other, but those are not gigantic in nature. But I would say that it’s basically a fairly stable environment at this point in time, but it clearly has come down over the years than what it was when the program was enacted.

A. J. Rice – Susquehanna Financial

All right, thanks a lot.

Operator

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

John Workman

Good morning, Adam.

Adam Feinstein – Barclays

Thank you. Hey, good morning everyone. Just maybe questions I have for John Figueroa. Maybe just, you’ve been there now for two quarters. So just coming into the role, just your thoughts now relative to coming into the role, what’s been the biggest surprises for you both positive or negative, just curious to get your thoughts now with two quarters under your belt?

John Figueroa

Yes, it’s only been two quarters. I teased everybody around here that it’s sort of like dog years. We’ve got so much going on and a lot of work to do that it sometimes feel that way, but it’s been an awful lot of fun. I’ll tell you, the biggest surprise, positive surprise that I have had is, when you look at this business and you look at everything that we have attempted to do in the last six months and coming into this business fresh, I was concerned about the talent. And the biggest surprise that I’ve seen is that the talent within this organization is extremely strong. And when you look at all the different layers of management in all of the pharmacies that I visited and the folks who run those pharmacies, we have some very, very good talent in the field. When I look at the Specialty business, we have some of the best folks within the Specialty industry running that business.

So I’ve been extremely pleased with the talent base at all levels of this organization, and I think it’s simply just doing things a little bit better, a little bit smarter, and we will leverage that talent the way we need to, so that is probably my biggest positive surprise. I would say that the negative surprise has been, this has been a company that's existed for 30 years, and there's a number of folks within the organization or processes within the organization that we have done for a long time, and so many acquisitions that we have had that some parts of the country do things differently than other parts of the country.

And we are moving as quickly as we can to create efficiencies with standard SOP’s to become a more efficient and operationally-driven company. And I want to see more progress in that faster, and I continue to push the team, and they continue to respond to meet those demands. So, that's probably just my own issue with patients as we continue to evolve and move forward, but I think we will increase our sense of urgency and create more value quicker, and that's what I'm looking for in the second half of the year.

Adam Feinstein – Barclays

Okay. I appreciate your feedback there. Let me just follow-up a question here. So, this question about Part D. You mentioned some of the consolidation taking place at the (inaudible) this week and others, so how do you guys think about the implications for you guys with the Part D plans getting bigger, I was just curious if you have any thoughts in terms of, if there’s any impact for Omnicare.

John Figueroa

Yes, I think as John indicated, about a third of our contracts come up every year. We have to sit down and renegotiate. Certainly, as we look at all the major players in the contracts that we have in place with those folks, they are all very similar in nature. And we feel pretty good about the position we're in. When Omnicare negotiates with these contracts, we are representing some great efficiencies. In size and efficiencies, I think Patrick talked about the generics equation, that quite frankly, we should get paid for, we are the quickest to move generics into the marketplace than anybody else in the industry. Matter of days to get that done for our customer base whereas in the past that actually took months to convert.

So, that economic equation I think is a value to a number of players, not only our customers, but payers as well. And those advantages as well as our size and scale allow us we believe to negotiate from a position of strength. And as we look at some of these things that are going on across the industry, we immediately look at the current contracts in place, and I would tell you that we don’t have a concern at this point based on the fact that many of these contracts are pretty similar.

Adam Feinstein – Barclays

And just a final question from me for John Workman. Maybe just a question about bad debt expense in terms of managing that and I know that you guys break out the receivable aging and by the different buckets but just curious to hear what’s going on there and just any (inaudible) thoughts.

John Workman

We’re continuing, one of the things that’s also hampered us a little bit, Adam is practice of the past two and that’s not having standard process or actually giving some of our people in the billing collection some of the tools that they need. And we’re adding those as we move ahead and I think that you’re continuing to see progress in our day sales outstanding we made some more progress in Q2. We’ve made a fair amount of progress since the end of the year. I think that bad debt expense 1.6% is probably a fairly stable number for us relative to the types of accounts that we have.

And remind you that the national accounts and the Part D overall, make up a little bit lesser per cent than maybe some of our competitors who have maybe a heavier concentration national account because your typical exposure is on some of the facility pay or on the private pay piece of this, so I think 1.6 is kind of about the right run rate.

Adam Feinstein – Barclays

Thank you, guys.

Operator

Your next question comes from the line of Steven Valiquette of UBS.

Steven Valiquette – UBS

Thanks. Another couple of questions on the bed account. You guys mentioned in the slide that the 8.7% sequential improvement. I'm guessing, it’s on a gross loss basis, but I just kind of struggle every quarter to figure out the gross debt adds and losses since other public competitor does disclose that. I’m trying to get a sense whether you guys are maybe more willing to provide that each quarter or are you disclosing it, I'm just missing it, I’m just trying to get some color on your thoughts around either disclosing or not disclosing the gross adds and losses of each quarter?

John Figueroa

Yes, Steve, we disclosed the net amount which is what we are most focused on, we do breakout acquisitions because our goal is really to get to net organic bed growth, so that's why you're kind of seeing that net number. We typically talk in our remarks about what we're seeing on the retention front and the sales side, so we give you a color around that, but our goal is really that net number, we’re not kind of focused as much on the gross number.

John Workman

And some of this involves how we deal with specific accounts and sometimes you have part of account, sometimes not. So it can get a little confusing. The only thing I would say is that if you want a back end of the number, we’re giving you retention rate, so you kind of figure out what we lost and then we’re giving you the net number, so you kind of get a feel for that flow, if you will.

Steven Valiquette – UBS

Okay, and one other quick one. You, guys touched on M&A and I know you’re a little hesitant to want to talk about PharMerica, but I guess my only question on that, regardless of whether PharMerica is for sale or not, it sounds like based on your comments that may be in general, that's an asset that you would not rule out as a target right off the bat do the TC [ph] issue. Is it correct to at least make that statement?

John Figueroa

I'm not even sure I want to confirm or deny that –

Steven Valiquette – UBS

That’s fair.

John Figueroa

We don't talk about that.

Steven Valiquette – UBS

Okay, I won't pressure you on that then. All right. Thanks a lot.

John Figueroa

Thank you.

Operator

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

John Figueroa

Hi, Glen.

John Workman

Good morning.

Glen Santangelo – Credit Suisse

Good morning. Hey, I just want to follow-up with you on margins a little bit. And I think you touched on various points on the call but John, can you maybe elaborate a little bit more in gross margins this quarter because I would have thought kind of given the uptick in the generic dispensing rate, I thought we would have thought it was just all a little bit better gross margins and then given that you kind of restored some of the wages that the company I would have thought that it was higher SG&A and so gross margin came in a little bit lower than I thought where SG&A as a percentage of revenues also came in lower kind of offsetting that, so if you could just give us a little sense for kind of what happened in the quarter, I'd appreciate it?

John Workman

Yes, and one of the things is just a couple of focal points, one of which is you saw the strip count was down sequentially, we are a leveraged business, that's typically a seasonal event that happens if you go back and look it's not uncommon and that's going to call some margin deterioration just because of the leverage model that we have in the hub-and-spoke network. But having said that, the first quarter had also the benefit of brand to generic conversions and the profitability, as they also existed in Q2. The difference is Q1 only had basically a partial month of the myriad increase and whereas the second quarter has a full three month impact.

Now to your other question, when we look at the mirrored increase, it's about two-thirds of that cost ends up in cost of sales and about a third in SG&A. And on the SG&A side, so that kind of comes back to looking at the two key drivers on the margin are the seasonality issue with the lower scrip because elderly patients have more admissions typically in Q1 and then secondly, the full quarter impact of the mirrored increase. We still have the items we talked about before driving some of the sales in Specialty, especially ACS that has a low gross profit margin and drug price inflation, and those are going to be there each quarter, they are probably a little stronger in Q2 than they might have been in Q1 in that regard, so that puts a little bit of the pressure, but the two big drivers are seasonality and the full quarter impact of merit increase.

On SG&A, we were able to, as a percent of sales anyway offset that mirrored increase through gain in some of the other efficiencies. I think we've talked about before. We are bringing legal, tax in-house, we have a legal group now and a tax group, so we're starting to see some of the benefits of bringing those in-house that are helping us to offset the mirrored increase in the SG&A line and manage that as a percent of sales.

Glen Santangelo – Credit Suisse

That's very helpful, thanks. Then kind of just one follow-up along those margins, clearly, the company’s restoring some wages and trying to improve customer service at the same time with an eye towards improving bed retention. I just kind of curious how you guys kind of manage that conflict, because I could see how you could completely stem the bed losses by spending money, but I'm sure you're trying to counter balance that with margins and how you kind of think about that relationship?

John Workman

I think the fact that our retention rate went up 130 basis points, and if you apply that to our bed base, I just think about it mathematically that you’re going to get some very strong gross profit dollars from retaining those beds. You can figure out, you can see our volume or revenue per scrip or you can even calculate a revenue per bed and then look at that as the gross profit dollars is as the gross profit margin rate which were quite gross profit dollars, we’re getting some pretty strong returns relative to the investments that we’re making.

John Figueroa

I think the concentration back to our employees and doing the right thing and basically investing in them has been the theme for 2011. And I think we’ve done all the right things in the first half of the year, we think a lot of the efficiencies and a lot of the investments that we’ve made internally in the business will begin to pay off in the second half of the year and beyond. So, I think we’re seeing the right numbers and to John’s point the impact on the gross profit dollars has really been something that we’re looking at and excited about.

Glen Santangelo – Credit Suisse

I appreciate that. Maybe I just ask one last follow-up and then I’ll jump off. It sounds like we’re kind of coming near the end on all the legal charges. Maybe if you can just give us a sense for where the relationship maybe stands with the United and kind of how that situation is kind of evolve and then I’ll stop there? Thanks.

John Workman

That one’s old, United litigation is over. And I think we’ve commented last quarter, we’re not going to comment specifically about contracts, but I think we’ve re-established that relationship and moving forward all the issues about the litigation piece are gone. What remains are, if you look at our 10-Q, there’s a lot of disclosures in there about contingencies and a lot of those are remnants of things that occurred in the past, and with Aly Kayne, our General Counsel, now he’s working through those items and cleaning them up. I think the important point is, we think that big things are behind us at this point in time.

John Figueroa

And I would just add that, I believe we have a very good and strong relationship with United now that we have established over the last few months. As John indicated, we have a contract moving forward that I think both organizations are happy with, and we feel pretty good about that. I think the other comment I would make regarding your question from a legal perspective, I think the big things are behind us, I think we're certainly continuing to wind down the docket of legal issues that we inherited, and we feel pretty good, and you can see the special items compared to prior year. Big stuff is behind us, we continue to move forward, we know things will continue to pop up, but we feel pretty good about where we're at.

I’d also mention that our new Compliance or Chief Compliance Officer, Kathleen McGuan who has been with us on an interim basis will be with this organization full time, we will be announcing that soon, and I think the amazing job that she has done in revamping our compliance programs and structure is really helping us tremendously, where we can look forward and feel pretty good about lower litigation issues than we had in the past.

Glen Santangelo – Credit Suisse

Okay. Thanks for the details, guys.

Operator

That is all the time we have for questions today. I would like to turn the call back over to our speakers for any closing remarks.

John Figueroa

Yes, I just certainly want to thank everybody for joining us on the call today. We sincerely appreciate your interest in Omnicare and look forward to talking to you all again soon.

Operator

Thank you for participating in today's conference. You may now disconnect.

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