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Omnicare Inc. (NYSE:OCR)

Q4 2011 Earnings Call

February 23, 2012 8:00 a.m. ET

Executives

Patrick Lee – VP, IR

John Figueroa – CEO

John Workman – President and CFO

Analysts

Adam Feinstein – Barclays Capital

Glen Santangelo – Credit Suisse

Jason Gurda – Leerink Swann

Lisa Gill – JPMorgan

Unidentified Analyst (Charles)

Frank Morgan – RBC Capital Markets

A.J. Rice – Susquehanna Financial

Steven Valiquette – UBS

Operator

Good morning. My name is Holly and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare’s Fourth Quarter 2011 Year End 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 today’s conference over to Patrick Lee, Omnicare’s Vice President of Investor Relations. Mr. Lee, you may begin your conference.

Patrick Lee

Thanks, Holly. 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 newly redesigned website. Also on our website, you will find fourth quarter supplemental slides and the historical data behind our cash based EPS reporting methodology, which we will follow when we report our first quarter results.

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. Good morning everyone, and thank you for joining us. Before we provide our perspective on our strong fourth quarter results and 2012 outlook, I’d like to briefly discuss our decision to allow a tender offer to acquire PharMerica to expire. Following our remarks, we’ll be happy to answer your questions.

In respect to PharMerica, while we strongly disagree with the FDCs decision to seek to block the proposed transaction, I believe we made the right decision to avoid investing significant time and money in a lawsuit to allow our tender offer to purchase all outstanding shares of PharMerica to expire.

While we believe the FDC failed to recognize the tremendous value, the combined entity would have offered the healthcare supply train, Omnicare’s business is performing well, and I believe we are well positioned to effect such change organically.

With such unique developments as OmniviewDr, which offers the first electronic prescribing solution for controlled substances in institutional settings, and Omnicare’s Proprietary Automation, which succeeds Six Sigma quality and prescription dispensing, I believe Omnicare’s actively revolutionized in quality and innovation in our industry.

One of our core operating objectives is to create more standardization across our organization in an effort to benefit both Omnicare and its customers. And with the inherent demand within our industry, due to the aging population, I believe our operationally driven orientation positions us well to accelerate the efficiency of our industry while improving health outcomes for our residents.

I believe we offer investors many important values and value drivers, including our industry-leading long-term care business, a rapidly growing specialty care group, and our strong cash flow characteristics which support our ability to fund acquisitions, invest in our underlining operations, and return capital to investors.

We intend to remain opportunistic, yet disciplined about the many opportunities in front of us in order to maintain our long-term focus on value creation for our investors. We thank the many Omnicare and PharMerica shareholders who supported our proposal as well as our employees who remained focused on executing our business objectives throughout the process.

Turning now to the quarter, we are very pleased with our solid fourth quarter results, which validates the progress our organization has made in becoming more operationally driven and customer focused. We exited the year a much stronger company, and we are now realizing the benefits in the investments we made throughout 2011.

As we look to 2012 and beyond, we believe Omnicare is well positioned to generate long-term profitability growth in both core businesses; long-term care and specialty care, while positively affecting the many stakeholders on behave of whom we run our business.

For the quarter, we generated adjusted EPS of $0.58 which represents a sequential increase of 7% and a 14% improvement over the fourth quarter of 2010. This solid quarterly performance brought our full-year 2011 adjusted EPS to $2.13, which is toward the high-end of the financial guidance we provided a year ago.

Our fourth quarter results was driven largely by a 69 basis point sequential expansion in gross margin as we leveraged a modest increase in sales to the gross profit line. As reflected in our gross margin expansion, the wave of important generic drugs with patent exclusivity has begun to take form, and we remain very excited about the opportunity generic drug introductions represent for both Omnicare and its customers.

Our 4% increase in gross profit also enabled us to make further investments in our talented employees who are critical to our success. Notwithstanding the incremental investments in the business, our fourth quarter adjusted EBITDA of $162.9 million was 10% higher on a year-over-year basis.

We also continued to generate substantial cash flow, with fourth quarter cash flow from continuing operations of $101 million, bringing the full-year number to a record $549 million, and easily out performing our guidance.

As all of you are well aware, we will be raising the profile of our company’s strong cash flow characteristics with the transition to a cash base EPS methodology beginning in 2012. While John will comment more on this, we believe this reporting methodology reinforces one of the most compelling components of the Omnicare investment story, our cash flow characteristics and potential value it brings to investors.

Moving on our operational accomplishments. Throughout 2011, we made a number of investments in organizational changes to position our long-term care group for consistent organic growth. While some may have considered this an insurmountable goal, our team felt otherwise because they understood the tremendous value of the Omnicare service platform, which revolves around our speed of generic conversion, our clinical expertise, and our robust technology offering.

Simply put, we believe these core elements maximize efficiencies for our customers. And we’ve been very successful in demonstrating the benefits of our offerings, which we believe is more value, now than ever, in light of the changing reimbursement environment.

During the fourth quarter, we continue to positively affect service levels with bed losses 27% lower sequentially and 42% lower as compared with the 2010 fourth quarter. And as we continue to see the benefits of our initiatives focused on enhancing the customer experience, we are also beginning to see traction from our recent investments in sales and marketing.

Our fourth quarter contract signings were 82% higher on a year-over-year basis. And it gives me great pleasure to share that we obtained net organic bed growth in the fourth quarter; the first such quarter that we achieved in this company in over eight years.

This mild stone event is a reflection of our team’s dedication and the progress we have made at enhancing the customer experience. While our improved performance will not always be perfectly linear quarter-to-quarter, we believe we will maintain this growth profile over the long-term.

And just as we’ve made great progress within our long-term care group, we have also laid a foundation for elevating the growth prospects for our Specialty Care group. While we made investments across all of our Specialty Care operating platforms, most of our focus has been on our fee-for-service platforms, land support services, supply chain solution services, and patient support services. These operating platforms bring diversification benefits to the company.

We also recognize that pharmaceutical utilization and development continue to migrate towards large molecule compounds and other specialty drugs for which these operating platforms are critical to insure medication adherence, lower the overall cost of care. And we have substantially improved our capability to support clients in these areas by adding additional platform and therapeutic category experts who have been instrumental in identifying new market solutions, while also positivity affecting our sales process.

And from a sales perspective, we continue to see benefits from our manufacture-focus team. Within the past six months, we have successfully transitioned programs from our two leading competitors while also benefiting from robust organic growth from our current base of manufacture clients. And we navigated through the entire year without losing a single manufacturer client.

We remain very encouraged about the performance of our Specialty Care group which now composes more than 15% of the company’s overall revenues and operating profit. As the Specialty Care market continues to grow in the 15 to 20% range, we expect our Specialty Care Group to continue to benefit from these market factors, and become an even larger component to our operations.

And with that, I’ll turn it over to John who will discuss our fourth quarter financial results in greater detail, as well as provide our financial guidance for the full-year of 2012.

John Workman

Thanks, John. Like John Figueroa mentioned, we were happy with our fourth quarter results. We have filed supplementary schedules with our press release, providing additional information which we hope helps with your analysis. We have disclosed segment data for the first time, so I’ll also comment on Long-term Care and Specialty Care.

Our specialty items were lower this quarter than a year ago, and were primarily related to, one, cost to pursue acquisitions; two, litigation and other settlement issues offset by other recoveries, and three, debt related charges including redemption costs. I will cover these later, but want to start by covering our adjusted continuing quarterly operating results.

Starting with operating Statics in the fourth quarter, which can be found Slides 5, 6 and 7. Fourth quarter scripts dispensed at $30.6 million were generally flat to the scripts dispensed in the comparable year earlier period. However, on a sequential basis, scripts were 170 basis points higher than the 30.1 million scripts dispensed in the third quarter of 2012. As we have Stated before, scripts are a meaningful measure as a driver of revenue in gross profit.

Our generic dispensing rate has continued to increase, it was at 79.3% for the quarter. We believe this continues to help lower overall healthcare cost.

With respect to beds served, we ended the fourth quarter with 1 million, 382,000 beds, which was an increase to the beds served at the end of the third quarter 2011, and we achieved net organic growth that John Figueroa mentioned.

As we start to report segment data and it is explained on Slide 5, we will only include beds served in our long-term care segment beginning with the first quarter 2012. Beds are not relevant to Specialty Care.

As you can see from Slide 7 in the supplemental deck, this number was 1 million, 10,000 beds. Net organic growth was achieved for long-term care alone, and also in total company.

As a reminder, organic bed growth is not expected to be linear by quarter, and you should expect negative organic growth in some quarters in 2012, but still year-over-year improvement. Based on working through certain receivable issues in the first quarter, we believe it may be more challenging to achieve net organic growth in the first quarter.

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.

Turning to Slide 9 and commenting on net sales and gross profit, net sales were $1 billion, 557.1 million in the fourth quarter of 2011, an 80 basis points improvement over the third quarter 2011 results.

Compared to the fourth quarter of 2010, sales increased 26.4 million or 170 basis points increase. Adjusted consolidated gross profit increased $13.6 million in the fourth quarter over third quarter 2011, and as John mentioned, the margin rate as a percent of sales improved 69 basis points.

Next, turning to SG&A expenses and other elements of the income Statement, which can also be found on Slide 9. SG&A expense was $8.6 million higher in the fourth quarter of 2011 versus the third quarter of 2011 as a result of continued investments in our employee base including sales and marketing. The provision for doubtful accounts is 1.6% of revenue for the quarter, consistent with the third quarter rate.

Receivables continue to show improvement with days sales outstanding, improving two days from the third quarter of 2011.

Interest expense was $4.1 million lower in the fourth quarter, principally related to debt reduction as we retired our remaining 2013 and 2015 bonds in the fourth quarter.

Finally, in looking at income taxes, net income and earnings per share, our income tax rate for the quarter, excluding the impact of special items was 39.5%, which is 1.25% higher than our third quarter rate, primarily as a result of certain charges that are not tax deductible.

Income from continuing operations excluding special items was $55.8 million for the quarter, or 4.2% of revenue. Earnings per share for the quarter, excluding special items, equates to $0.58 per share, a $0.04 improvement over the third quarter of 2011, and a $0.07 improvement over the fourth quarter of 2010.

Lastly, adjusted EBITDA had a nice improvement of $5.7 million over the third quarter of 2011.

Next, looking at the respective segments, which can be found on Slide 8. As we mentioned, we are breaking out segments starting this quarter. For the full-year, long-term care reflected a slight decrease in adjusted operating income on lower sales, though as a percent of sales, the rate improved 5 basis points.

In 2011, as we described previously, we invested the benefits of brand and generics to restore employee compensation towards improved customer service and long-term care. We believe these investments created the right foundation for growth in 2012 and beyond.

Next, looking at the Specialty Care group. The Specialty Care group experienced nice growth for the year with a 24% growth in revenues and 11% growth in adjusted operating income compared to 2010.

2011 was also an investment year in the Specialty Care group, as a professional operating team and sales function were put in place. The operating profit margin reflected a decline as a result of mix, and where the largest sales growth occurred. We have been Stating that this is a growth segment and we think the 2011 results demonstrate that point. Going forward, we expect strong double-digit growth in revenue and growing operating income.

Next, turning to special items. As I mentioned, special items in the quarter were fewer in number and amount from last year. The newest item relates to merger and acquisition expenses of approximately $14 million. We also incurred $10 million related to debt redemption cost from the payment of our 2013 and 2015 notes, and secondly the amortization of discount on convertible notes from the 2005 and 2010 issues that we regularly report.

The largest special item was litigation-related settlements which totaled $23 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.

Partially mitigating our special items was a $10.5 million recovery in the quarter related to prior year claims that were settled. As we have mentioned before, we believe there will likely be some additional matters that may arise against the company in the future, but we feel that the large ones are behind us.

Next, turning to the balance sheet. We continue to show strength in the quarter. Cash on hand was $583 million, including restricted cash. This balance is after redeeming an additional $150 million over 2013 and 2015 notes. Accounts receivable were $22.5 million lower than the third quarter. As mentioned earlier, day sales outstanding improved 2 days compared to the third quarter.

Inventory was higher than the end of the third quarter based on our purchasing patterns, but consistent with our year-end 2010 level.

Next, turning to cash flow, which can be found on Slide 10. Cash flow from continuing operations in the fourth quarter of 2011 was approximately $101.5 million. 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 continued interest deductions, those these will be lesser in 2012 due to our repurchase of $525 million of the 2015 instrument. These will be obvious to you as we report adjusted cash EPS going forward.

We believe the company also has modest maintenance capital requirements on on-going basis. We believe our maintenance CapEx to be $25 to $30 million annually.

For the fourth quarter of 2011, capital expenditures totalled approximately $24 million, consistent with levels spent in the third quarter. The fourth quarter was higher than normal due to monies being spent on information technology and automation, and we would expect additional funds for information technology and nursing home automation in 2012 as we increase our investment in the business to improve operations and customer service.

As discussed in our previous calls, the company plans to continue to assess the use of cash flow in 2012, and deploy that cash in the best fashion to create value for shareholders in addition to acquisitions and debt repayments. In this light, we have returned $157.3 million of our cash flow from operations to our shareholders in 2011 through dividends and share repurchases. The amount was higher than our 25% target.

As you read this morning, our Board of Directors approved a 75% increase in our dividends, an increase of $200 million in our share repurchase authorization, which will continue to allow us the ability to provide returns to shareholders.

Next, looking at the capital structure found on Slide 12, for the year we have repaid approximately $183 million of our debt, including repayment of our 2013 and 2015 notes, having partially replaced it with a bank term loan to give us added flexibility in our capital structure. Our board has now authorized total repurchases of up to $500 million of common stock from time-to-time, ending in the first quarter of 2014. We have used approximately $241 million for share repurchases, and have approximately $259 million remaining.

Next, I’d like just to comment briefly on some CMS changes. We have previously discussed the CMS short cycle rule. As a reminder, this only impacts about 2% of our total scripts when implemented on January 1, 2013.

Related to FUL pricing, commonly referred to as A&P, CMS has published multiple preliminary guidelines. We have been moving our contracts away from FUL pricing, thus limiting our exposure to approximately 3 to 4% of revenues including Medicaid.

We believe there are several errors in the amounts published and are providing the appropriate comments to CMS. Based on the knowledge we have at this time and what we believe will be the outcome based on changes to the FUL formula, we have included the expected negative impact in our 2012 guidance.

CMS also included comments in its report on Part D considering proposing their consultant pharmaceuticals be independent of the dispensing pharmacy. We do not believe this effort is good for patients and would likely increase healthcare costs to our customers. Having said this, if the separation where to occur, we would have no material financial impact on Omnicare.

Next, I’d like to turn to our 2012 outlook. As we Stated, we’d characterize 2011 as a year where we have continued to transform the company into a customer-focused and operations driven company to build a strong foundation for the future. It has been characterized by investment people and internal technology to improve customer service and approve efficiency, and two, disciplined use of cash.

In January, we provided 2012 base guidance on the same basis of 2011 which is 2.37 to 2.47 per share, a healthy increase over our 2011 results.

As previously mentioned, we will begin reporting adjusted cash EPS in the first quarter of 2012. We’re also providing additional information on our 2012 guidance. Accordingly, our 2012 guidance is as follows:

Revenue of 6.1 to $6.2 billion; remember, brand and generics will cause a revenue drop. Cash-based earnings per share are 3.10 to 3.20 per share. As a reminder, the long-term items we are adding back to live and adjusted cash earnings per share are one, amortization of intangibles and the tax benefits of second goodwill amortization and third, the benefit of our contingent interest net obligations where we are allowed to deduct close to 8% but only pay 3 ¼ or 3 ¾ %. As we have Stated previously, these items have a life of nine years or more.

For 2012, the estimated benefit from these three items is approximately $80 million after taxes. As Patrick mentioned, we have filed supplemental data on our website to provide you with historical visibility of these adjustments.

Third, in terms of guidance, cash flow from operations, 400 to $500 million excluding settlement payments. As we’ve discussed previously in 2011, there were some items in working capital and cash refunds for taxes that improved our cash flow from operations that we do not expect to repeat in 2012.

In summary, we will continue to stay focused on our capital structure and creating value per shareholders, which will include returning cash flow from operations to our shareholders. And with that, I’ll turn it back over to John Figueroa.

John Figueroa

Thanks, John. A year ago, we characterized 2011 as a year of investment that was essential to returning our company back to a growth profile. I believe we accomplished what we set out to achieve, we’ve become a stronger, more operationally driven and customer focused company that is well positioned for the future. Our success has been largely driven by our team’s commitment to our three core operating objectives; establishing consistent organic growth in our long-term care group, repositioning our specialty care group at an elevated level of growth and creating more standardization across the company. I believe these core operating objectives are paramount for our continued success as we believe we are well positioned to demonstrate solid EPS growth in 2012 while laying the foundation for growth in 2013 and beyond.

With that, operator, please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Adam Feinstein, Barclays Capital.

Adam Feinstein – Barclays Capital

Thank you. Hey, doing well. So just great job here just with the transformation, as you said at the analysts say, into a big boy company, you know. So just wanted to just follow up on a couple of things. So I guess, John, you talked about those core operating goals and it seems like you guys have made, you know, progress on all those, and really, you know, have exceeded those. So, you know, so just as you’re looking out now, you know, and, you know, I guess with the acquisition no longer in the picture, you know, as you think about the bigger long-term opportunity here, in terms of, you know, gaining market share and just in time continuing to grow the specialty business, maybe let’s talk a little bit about your thoughts in terms of just, you know, timing and just, you know, goals, now that the acquisition’s out of the equation, you know. How are you ranking the various opportunities? Sorry for the long-winded nature of the question.

John Figueroa

Yes, well, I’ll answer that in two ways, and I, and I think where you are going was, what acquisitions, or what other businesses or strategies do we have now that the PharMerica deal is behind us. And I think the second way I’ll also answer that is, you know, the operational focus that we have created here and the success that we had in 2011. How are we going to propel that in 2012 and beyond, is how I’d like to answer that question.

I think the first piece from an acquisition perspective, you know, there’s still a number of opportunities in our funnel, both in long-term care and specialty, for us to continue to look at when it comes to the acquisition front. So I don’t think that that’s going to change in any way, and I also believe that the foundation we have created with our value platform is beginning to take hold.

Fourth quarter was an exceptional quarter for us, from that perspective. We brought on a lot of new business. We had a very good retention rate, and when we talk to our customers and we survey our customers, they are beginning to identify Omnicare as a value provider. It isn’t simply a pharmacy that is a cost center. It’s a partner that brings tremendous value to their operations and, in a time when reimbursement continues to decline, that partnership is more important today than it has ever been. And we’re starting to see that value proposition being good for us in the marketplace.

So, the acquisitions will continue. We’ll be disciplined around the acquisitions in both of our businesses. But we’re going to look very hard at everything that’s in the marketplace. And I’ll also tell you that our cash position, which, if you look at the numbers, is extremely strong and unique in this marketplace, allows us the ability to really go after what we think, you know, are the best businesses out there. You know, we don’t have to simply take a business because it’s offering beds. We are looking at businesses that match our culture, that will benefit our business, that from a financial perspective, you know, we will get a return on. And we will continue with that discipline, again in both of the businesses.

The second part of that question as far as, you know, Op goals, you know, I sat down with the ops team, Jess Manson and his team, and they look for 2012 and beyond. And although we did a lot of different things in 2011, when you look at our scale, when we do something across our scale, it produces some cost savings pretty darn quickly.

And when you look at some of the areas where we can improve, one of those being STAT deliveries, we sometimes go to a customer by contract two times, sometimes three times a day. When you include STAT deliveries in some parts of the country, you know, we may actually have three deliveries a day to a pharmacy, and then two STAT deliveries, when there is an emergency or a need for some type of product to get out to that facility again. We analyze the heck out of those STAT deliveries, and we believe, in working with our customers, about a third of those STAT deliveries don’t need to be STAT deliveries, and they could wait 24 hours for a particular product.

Now the other two-thirds, it’s an emergency, we’re committed to those customers that we will deliver them. But our analysis tells us that a third of the time, it shouldn’t be done. But the cost to us is the cost to our customers, and working with them, we think we can drive out a third of our STAT delivery costs.

You know, another example, we work very closely with our partner McKesson. McKesson has a great program called (C stops), which allows us to electronically do our, our, our narcotic orders, instead of paper. When you look at the paper trail when it comes to ordering narcotics, and the labor involved in doing that, utilizing that tool in every one of our facilities will also be something that benefits our, our, our bottom line.

So, those are two examples of probably, you know, a dozen key objectives that we have going into the year, and we’re excited about that. I tell you, the other thing, and I’m sorry that this answer’s taking so long but, you know, we’re so excited about all the things that we have going on. We have done a nice job of penetrating the nursing home side of the business. We made some great headway in the assisted living side of the business. I think when we started the year, we thought we had about 15% of the (inaudible) business, and we think that that’s gone up a few points. And we want to continue to concentrate on that piece, as well as psych hospitals, potential VA facilities. We just signed a new prison contract in the Midwest. So, you know, we’ve got a lot of momentum going and we’re excited that we can grow organically, as well as the discipline with acquisitions.

John Workman

Yes, and Adam, just to add, I mean, you know, we looked at PharMerica as a reminder, because if we were running a process and we thought it was the right thing to do on behalf of our company and our shareholders, and we were very disciplined about the process. Otherwise, we probably would not have been undertaking that at the time, and focus on the things that John has mentioned. And as John mentioned, you know, we do have a lot of initiatives. You see that in some of our capital spend being ramped up, where we look to spend in IT that will allow us to consolidate systems, which again is a profit improvement opportunity for the company, as well invest in the automation, which will help solve some of the issues that John mentioned, specifically around STAT runs. So we are also continuing to invest. We did in ‘011, and we’re investing in things that we think will bring benefits in 2013 and beyond, in terms of improving profitability.

Adam Feinstein – Barclays Capital

All right, thank you guys, appreciate the detailed response.

Operator

And your next question comes from the line of Glen Santangelo - Credit Suisse.

Glen Santangelo – Credit Suisse

Hey guys, just a quick question regarding your net organic bed growth in the quarter. You know, John, you sort of out lined, you know, so many investments you made in the enhanced customer experience, can you give us sense for maybe how much you spent to date, how much more you think you need to spend because one of the concerns is obviously as you spend this money to improve the operations, it’s nice to kind of turn the bed count, but how do you maintain your margins at the same time? So, could you give us a sense of that?

John Workman

Yes, I’d be – gladly, in terms there would be investments that we made so far and will make, so, let’s describe in two buckets. The one bucket is in terms of IT systems. I think we’ve shared with you before, we have two billing dispensing systems that are very old, by putting in the new system, which we really start to see the benefits, and again, in 2013 and beyond you will see lower costs and some enhanced revenue capture, but really doesn’t affect the customer experience per se.

The other example is our automation, things like medication availability, and we’re just starting to make those types of investments. I will tell you, those investments are going to be ones that we look at in partnering with our nursing home customers because we think that also provides a lot of benefit to them, so we will be looking at expecting some of that to be a partnership with our nursing home customer from a funding mechanism, but clearly we think helps improve the relationship going forward.

The largest driver in margins is going to be the brand of generics that we experienced in 2012 And while 2012 is a great year, that benefit, you know, will lessen a bit in 2013, but it still is a significant driver because as we shared before, we expect to continue to increase our brand to generic penetration as we progress through 2014 from where it is today. And again, to remind everybody that generics are much more positive from a profit standpoint.

So we don’t see heavy investments in cash, and again, some of those are going to translate into productivity, or efficiency agreements from a cross standpoint, and the things like, OmniviewDr, which are really not a significant investment for the company, and things like automation medication availability are things that will enhance the customer service and give us more stickiness, we believe, as we move forward.

John Figueroa

Yes, Glen, I mean, I think one of the pieces of your question is, you know, we made significant investments back in the business and back into our people in 2011, and I think your question is, are you going to continue at that same level moving forward? And I think the answer is no. I mean, I think in 2011 we [inaudible] we had to invest back, we had to reset the stage to be a growth company, we’ve been all that. And I think 2012 and beyond is really, I think, being like any growth company, we continue to invest back into the company, but certainly not to the extent that we felt we had to in 2011.

I think we are in a good place, we redid our benefits for our employees, you’ve heard throughout the year all the different things that we’ve did to reinvest, and now, I think we’re a normal company moving forward with the investments that we make back into the company. With the exception of course CapEx, you know, we use to 20, 25 million in CapEx, which was grossly underfunded in my opinion and now I think our average is about 60 million, maybe a max at 70 million a year when it comes to CapEx. So, I think that is important when you are looking at the automation trail that we have, when you look at some of the innovations that we’re moving forward with, I think that will certainly pay off in the long term as well.

John Workman

And we weren’t necessarily, Glenn, underinvested in maintenance in Cap X, as John said, you know, there should have been initiatives undertaken to improve the company on some of the IT and automation in the past, and we are catching up in ’11 and ’12, and a little but in ’13 for those.

Glen Santangelo – Credit Suisse

Hey John, maybe if I could just follow up with you on one question – John, working on some of your comments regarding FULs and A&P, it kind of sounds like you built in some negative impact in fiscal ’12 for that transition, do you care to quantify that force to give us a sense of what your estimate is with respect to run that new reimbursement will start to take effect, and if it is delayed can that be a benefit obviously to your fiscal ’12 numbers?

John Workman

Well, I don’t want to put a specific number out there Glen, because we just don’t have the history of doing that. What we said is it had a mock modest negative impact on the company, I would tell you as we established our 2012 guidance, we had some anticipation we knew when we put out our 2012 guidance that it could not be effective right away just because of the timing of events. So, we have, you know, we have the expectation that that will be there in 2012, and your question, depending on the timing, if it keeps – if gets delayed a lot further, that may be a little help, but again, we expected it to be delayed somewhat as we put out our 2012 guidance.

Glen Santangelo – Credit Suisse

Okay, thanks for the comments.

Operator

And your next question comes from the line of Jason Gurda – Leerink Swann.

Jason Gurda

Good morning, congratulations on the bed growth, it’s been a while.

John Figueroa

Thank you

Jason Gurda – Leerink Swann

I want to ask you about – you talked about over the last six months winning a couple of new customers, or projects, in the specialty business. I’m curious to hear why you think your winning that business?

John Figueroa

You know, the focus on our specialty group is pretty unique, and think first of all, you know, 30 seconds of history, these are business that were run independently, you know, there was no collaboration, there was – in fact, I think you heard me say this before, there was times when some business sent out an RSP, and other specialty businesses responded to the RSP and still lost the bid. So, when you look at this business and the leaf structuring that putting it under on layer, we here who [inaudible], by the way it is his birthday today, so, we should all wish him a happy birthday – he put together a very professional team with a lot of years of experience in the specialty market. When you look at the assets we have, we have 360 degree look at servicing this area when it comes to the doctors, it comes to the patients, and it comes to the payers, and the fourth pillar, which I think is critical, is the manufacturers, what separates us we believe from the competition, is that we cater and customize programs directly from manufacturers, and specifically, for the product that is coming to market, or has already come to market, but they are looking for us to help them with 3PL model, or a custom sale in marketing program to the market. When we align ourselves with the manufacturer, we align ourselves with the manufacturer and none of the manufacturer’s competitors. That is extremely compound to the manufacturers, especially one – you know, the other options are PBMs or wholesalers, and then it’s a pretty unique position to be in, and I think we will gain a lot of leverage with that with that model.

Jason Gurda – Leerink Swann

Back at the investor, they talked about possibly doing some M&A in that area of the business, can you talk about when you would expect that to happen, or what your thoughts are at this point?

John Workman

Yes, you know, as I’ve indicated on the acquisition form, we’ve been looking at a lot of stuff, and you know, there’s a lot of – there has been some opportunity for us to by some businesses that were exciting in the beginning, but when you [inaudible] diligence and you dig a little deeper, it may not hit the same type of business case that we were hoping. And you know, we’re moving discipline around that, so we’re not going to buy assets just to buy them, if you look at the numbers in specialty, we’re pretty excited about the organic growth rate that we’ve experienced in 2012, and when you look at the next couple of years at organic growth rate, it’s pretty exciting. So, we’re going to be disciplined about it, I think you’ll see a couple of things pop, you know, over the next year, but, you know, there isn’t anything that comes to mind now that I say, wow, we have to have this asset, we are going to look deep and hard.

John Figueroa

And we have been , as John mentioned, Jason, we do continue to look in specialty care also, we understand that multiples, and we’re prepared for that, you know, they’re going to be higher than what we might pay in long term care, at least post [inaudible] due to unusual growth characteristics of the specialty care business. So, but we will remain disciplined, you know, that is our commitment to you and the shareholders.

Jason Gurda – Leerink Swann

Okay, great, thank you.

Operator

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

John Figueroa

Good morning Lisa.

Lisa Gill - JP Morgan

Good morning John and John. I had a couple of follow up questions. I think first for John Workman, if we think about the share repurchase can you maybe talk about what's in guidance for next year? I'm thinking your presentation you talked about returning 20 to 25% to shareholders, so if I did the math that would assume that share [Inaudible] should be 70 to 95 million in your guidance, is that the right way to think about it? Or is it a bigger number for 2012?

John Workman

It was in line, you know, with our practice of returning value to shareholder. As you know, Lisa, that the share price, you know, as it changes it affects the number of shares we repurchase. In a 25% is both the combination of our dividends and share repurchase program, but clearly we had the anticipation of 25%. Now had we said that don't forget there's two other elements that enter into that calculation. One is the fact that there's typically restricted stock grant to executives [Inaudible] that as the share count and as our convertible debenture continues to be in the money, that also adds a diluted share count. There are some offsetting pieces so I just caution you as you do the math to remember those elements go into that calculation also.

Lisa Gill - JP Morgan

Okay, great. And then I guess my other question would just be around you talked about reimbursement for AMP if you will, but you didn't talk about reimbursement in the Part D arena. Can either of you talk about what you're seeing right now? What your relationships are like on the Part D side. And what methodology are you using? Are you using an AWP methodology in those contracts? And is that why it won't be affected by AMP as we move forward?

John Workman

Well as you can imagine, it's always, they're challenging negotiations, you know, with Part D plans as they continue to grow and get bigger. But we had successful negotiations. What we try to do Lisa is just as you said, just as we've done on the facility side, we've been successful in moving our Part D plans away from FUL pricing. And we have an AWP model that we use there too. But it's kind of an accumulative model that establishes some floor, so we have some predictability so we're not just totally exposed. And that's both in our facilities and Part D plans. And those are an issue that as we started, you know, well over a year or more ago, start to move both the facilities and the Part D plan away from just the pure FUL [Inaudible] pricing and we think that was a smart move on our behalf.

John Figueroa

And Lisa, I would just add that as John indicated those discussions are always difficult as these payors continue to get bigger and bigger, but I will tell you we have done a nice job of developing relationships and actually articulating, you know, the value proposition that we bring in the marketplace. And I think we always lead with the fact that from a generic standpoint and the last couple of large generic launches were no different. You know, we were able to get 85% brand to generic conversion within 5 days. And when you look at the industry standard and in some cases it takes months to get to that level, but we're doing it in 5 days as a tremendous value that is driven to those payors. And you look back at the last couple of years at how focused we have been on that, the value to those payors has been extremely significant. And, you know, when we sit down and we talk about or articulate that as well as the other value we bring from an automation and information technology perspective, you know, they're pretty receptive to that and those relationships have certainly been better.

Lisa Gill - JP Morgan

And John you talked earlier about bringing on new business etcetera, I was just curious, how much of that business is actually old business? So business that Omnicare has lost over the last couple of years and now you've come back to the market with a better offering, better sales and marketing team, do you have any idea as far as how much of that, you know, you're bringing back on board versus a brand new relationship?

John Workman

That's actually a great question, and I would say about 1/3 of the new business that we brought on was a customer who did business with Omnicare and has seen and has heard our value proposition and has come back. And I think that's exciting. And I think the other 2/3 has been customers that have not given Omnicare a chance and because of the changing economic structure that they're dealing with is certainly giving us a chance to demonstrate our value proposition and how it can affect their bottom line. So I would say it's about 1/3 return with 2/3 new customers.

Lisa Gill - JP Morgan

Okay, great. That's very helpful, thank you.

Operator

And your next question comes from the line, your next question comes from the line of [Inaudible].

Unidentified Analyst (Charles)

Guys can you hear me?

John Figueroa

Yes, we can hear you fine, the operator was a little soft.

Unidentified Analyst (Charles)

Okay, great. Yes, so I just wanted to touch back on PharMerica real quick here. You know, obviously you let the [Inaudible] offer expire here, but can you just, have you formally kind of responded to the FTC? Because my understanding is if you don't the complaint stands as sort of an admission of fact. I just want to get a sense of if you guys had some formal talks with them to sort of have that sort of removed is my question.

John Figueroa

Yes, we did do all the formal process that we needed to do to officially end this with the FTC, yes.

John Workman

And respond to them Charles, respond to them accordingly.

Unidentified Analyst (Charles)

All right, great, that's good to know. So, you know, then my other question here is, you know, as we're thinking about all the initiatives that you're working on, you know, the one that really strikes me as quite interesting apart from, is the drive and automation and that was something you guys highlighted at analyst day in December, and what you're really looking at is these big jumps in what percentage of prescriptions you expect to be automated. You know, at this point is it possible to give us a sense of, you know, sort of what is, how much the incremental change, like on 100 basis points of automation, you know, would do for your cost of goods. And could you give us a sense here? I do get the sense a lot of people are saying, hey great year for generics in '12, '13 is okay, but then as you get a little bit further out, you know, that benefit starts to wane. But it seems like, you know, if you are accelerating automation that itself could drive good margins and you could just fill some, you know, give a sense there that would be helpful, thanks.

John Workman

And Charles we're not, you know, we don't want to comment on one specific item. I would say you hit up on one particular topic though, continuing to move, you know, our refills gives us an opportunity to save money, but that's only one part of it in terms of our total investment of automation. I think as we also get more established in the medication availability of putting automation in nursing homes that also provides us some opportunity, not only centralized refills, but also look at changing our network for potentially some consolidations. So those are all things that we'll be looking at as we move forward. Not to mention the accuracy in terms of the ability of those systems. I think you heard us quote statistics in the past that we're very proud that we've been able to do this with really no errors. So as John said, it's better than Six Sigma quality standards. So all of those are elements in the automation and again, we feel comfortable about not a stream that's just going to dry up all of the sudden in 2013 and beyond, we see this as a perpetual stream as we continue to invest. We have a full-time engineering department that's constantly looking at new ideas, kind of like your research and development wing in terms of relying us to improve efficiency. Not to mention, we're also doing the same thing from an IT perspective. And that's one of the things that I think Omnicare has a great opportunity to shine in as we move forward. And it will require some investments, but we think that that will continue to drive significant productivity improvements, not just in 2013, but in 2014 and many years to come.

John Figueroa

Yes, I think you look at that ALV machine, which is really kind of the best automation pieces we have from a cost perspective. We've got two more that are going in in the next 90 days. We've got another 3 or 4 in the queue to hit hopefully the 2nd half of the year. A lot of the initiatives that we have are around timing. That 2nd machine, ULV, kind of the next layer down, you know, that is going out in about a dozen locations this year and we're starting to kick off moving that a lot quicker. I think the biggest, the way I would answer your question is it's all about timing. It's all about timing and getting the technology out into the field and into our pharmacies. But I will tell you the key message at investor day and today is we are obviously experiencing a great when it comes to generics in 2012. 2013 is a good year, but I don't think it's going to be as good as 2012. What we're doing with automation is ensuring that we are being as efficient as we possibly can so that '13 is a growth year just like '12 was. You know, we're not going to take a step back and say '12 was a great generic year '13 wasn't, so, you know, we're not going to grow. That's just not going to happen to this company. And automation is one of those areas that we continue to, you know, to bring to forefront to increase our ability or to impact our ability to continue our growth scenario into '13 and beyond.

Unidentified Analyst (Charles)

Great, and if I could ask just one more question here. You know, what are the initiatives that we used to talk about is, you know, the Omnicare at home, you know, if you could give us any update on that. And is that initiative, now that you're breaking up with a specialty business does that fit better in the specialty care group or would that still be part of the long term care group?

John Figueroa

Yes, Charles, I'm impressed. You've been taking good notes. Omnicare at home is still a program that we're very excited about. We have over 200 patients on the pilot program now. I'm not sure if I mentioned that in the investor day. We started off with a small pilot with about 20 to 25 patients. That has expanded to over 200 with 3 different groups who are participating in the program. The results have been phenomenal. The comments that we're getting back from the customer base has been good. And where we're at is again, back to automation. We have some automation that's doing great for a few hundred patients, but to get into an area where we really want to make an impact, and we're talking about thousands and thousands of patients, and we are close to having that automation perfected, and I think once it does we'll come out with a program, I think, in more detail. But I will tell you I'm extremely pleased with where we're at in our timeline is that by the end of this year, you know, we think we'll have this thing ready to go to market in the bug way in 2013. Again, we're hitting on, you know, one of our business propositions that will impact '13 and beyond. Oh, and your question as where it goes, whether it's specialty or long term care. You know, right now we're kind of putting that in the incubator. It's running on its own. We have specific management that's working that model. And it'll be there, I think, for a while until we can figure out, you know, what type of business it really is. Now remember, this is a business to consumer type of model. It's a little different from what both of my current businesses do, and so we're keeping it in the incubator for now.

Unidentified Analyst (Charles)

Okay, that's helpful, thanks a lot guys.

John Figueroa

Operator?

Operator

And your next question comes from the line of Frank Morgan, RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Good morning. How are you doing today. Quick question. Just on the guidance itself, I was wondering if you could give us a sort of a qualitative list of things that we might want to consider about the quarterly progression? I think you touched on a couple things that I jotted down here kind of warning us to some of the bumpiness in the organic bed growth and my actually be negative from time to time. But you know, as we think about going into the first quarter of the year and in considering things like bumpiness of beds, generic conversions, any kind of unique cost structures that happen to change from the first quarter, is there any kind of qualitative comments you can make about the quarterly progressions over the course of the year for your guidance for ’12?

John Workman

Yes, I mean, typically, Frank, I mean, again, I don’t want to – we expect to make progress again on ’12 in terms of net-net positive in the year, but don’t misunderstand that in terms of necessarily disrupting a flow of profitability. We would expect it’s typical in our business, the first quarter is a fairly strong quarter, you know, second quarter and third quarter are a little bit weaker quarter, the second is usually a little bit softer and then the third and the fourth quarter, it’s typically similar or a little better than the fourth with the holidays. Otherwise, you’d be as strong.

Now, there has been, and again, we don’t – this doesn’t, you know, we’re not changing – we’re not updating – or guidance is consistent with what we’ve said before. There is, with the milder winter and, you know, I know, Frank, you cover the acute care hospitals and alike too, so that has impacted some of the number of discharges, but you know, we still are – we see the year getting off to a strong start and we would expect to see the quarter, the first quarter improve over the fourth quarter of 2011, consistent with our typical seasonal trends.

Frank Morgan – RBC Capital Markets

Okay, that’s good. And just one thing I wanted to clarify. I think you mentioned a $10.5 million recovery from a prior period. Was that kind of thrown in with all the stuff that you striped out to get to the adjusted number, that was not part of your adjusted calculation, that was excluded? Is that correct?

John Workman

That was also excluded. You know, we didn’t take that. It helped offset some of our settlement and litigation that we also excluded. It was about $10.5 million in the quarter, but again, that has nothing to do with the $0.58 or the $2.13 for the year, that’s not in those numbers.

Frank Morgan – RBC Capital Markets

Okay, thanks. I just wanted to make sure. thank you.

John Workman

Thank you, Frank.

Operator

And you next question comes from the line of A.J. Rice, Susquehanna.

A.J. Rice – Susquehanna Financial

Hi. It’s A.J. Rice. Two questions I guess, real quick. I know on their call, PharMerica indicated that in the fourth quarter you guys had won an 8,000-plus bed contract, a regional nursing home chain that was up for bid. Is that – I’m trying to understand, is that included in the served beds this quarter or will that be included next quarter?

John Figueroa

That actually came in the fourth quarter and just to give you a little bit of color on that, this is a customer that had half their business with our competitor, half their business with us and in the summer as reimbursement changes continued to hamper our customer base, they made a decision that they were going to go from two partners to one. So the process started a while ago and you know, they did choose Omnicare as their sole provider moving forward and that all took place – it was completed in December.

A.J. Rice – Susquehanna Financial

So that’s an incremental 8,000 beds? Is that right.

John Figueroa

No, it was about 5,000 beds or so. As indicated, we had some already, about 8,000. Yes.

A.J. Rice – Susquehanna Financial

Right. Okay, and then the other question, I appreciate all the distinct information you guys are now providing on specialty and you sort of, for the first time, are talking about operating profit and you give a full year trend down year to year. It sounds like that’s mostly business mix where the growth is. I just want to confirm that and where we are first quarter, does it look like – the fourth quarter, does it look like the full year and what are the prospects for the margin going forward in that side of the business? Should it start to improve?

John Figueroa

I don’t – I think that the one business that is experiencing the greatest growth in specialty has lower margins, A.J. So you know, I would not expect that margin rate or operating profit rate to improve as we progress through 2012. We would actually expect some degradation. What we’re expecting is nice growth in operating profits. So we’re focused on the dollars in growing operating profit and we expect to see strong growth in the operating profit and it’s going to be driven mainly by the mix. There are some parts of that business that had very high margins, some lower margins. The larger – all businesses are growing, but the largest growth is in the one with the lowest margin rates.

A.J. Rice – Susquehanna Financial

Okay. Thanks a lot.

Operator

And your next question comes from the line of Steven Valiquette, UBS.

Steven Valiquette – UBS

Good morning, John and John. Just a quick question on the 2012 guidance. As we kind of move to a more of a script base revenue model, just trying to get a feel, not specific numbers. Should we assume that prescription drugs for 2012 is maybe somewhere in the low single digit range? I’m assuming that would be positive. And then tied into that as far as the revenue per script, I’m guessing that might be down a little bit year over year given the generic factor and everything else? I just want to make sure that you guys kind of view that the same way as well.

John Workman

I think you’re right on. You know, when you look at the IMS data and you kind of see the trend; the beginning of last year was a lot higher from the forecast perspective, but when you look at it at the end of the year, it was about that 1%, 1.5% range. We think that will continue into next year and you’re absolutely right with the revenue per script. I think that comes down a bit because of generics, but as John indicated, we’re certainly still looking for some margin impact that would be slightly positive to that.

John Figueroa

I think that’s exactly right in terms of looking at it, Steve, to look at an improved gross profit dollars per script as we move through 2012.

Steven Valiquette – UBS

Okay. And then just a quick follow up to 2012 guidance. Is there an assumption you guys have made for costs related to retooling for the short-cycle dispensing in 2013? Is that a material amount you might incur in 2012 or is that not really noteworthy?

John Workman

It’s not really noteworthy. I mean, in 2013, you know, what’s going to happen is our automation is already dispensing seven days, 14 days, you know, 14 days is the requirement in short cycle so we’re equipped to do that, it just means we’re going to have a few more scripts that we have to dispense. So there’s not a lot of retooling or anything that’s necessary for that, Steve.

Steven Valiquette – UBS

Got it. Thanks, guys.

John Figueroa

Thank you, Steve. Well, thank you everyone, for joining us on the call today. We sincerely appreciate your interest in Omincare and again, thank you for getting up bright and early and listening to the call. I appreciate it very much.

Operator

Thank you for participating in today’s Omnicare’s fourth quarter 2011 year-end. You may now disconnect.

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