Executives
Cheryl D. Hodges - Sr. VP and Secretary
Joel F. Gemunder - President and CEO
David W. Froesel, Jr. - Sr. VP and CFO
Analysts
Lisa Gill - JPMorgan
Melissa Jaffe - Merrill Lynch
Charles Rhyee - Oppenheimer & Co.
Adam Feinstein - Lehman Brothers
Jason Gurda - Bear Stearns
Robert Willoughby - Banc of America Securities
David Veal - Morgan Stanley
Eric Gommell - Stifel Nicolaus
Omnicare, Inc. (OCR) Q4 FY07 Earnings Call February 28, 2008 11:00 AM ET
Operator
Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2007 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 Instruction].
Thank you. Ms. Hodges, you may begin your conference.
Cheryl D. Hodges - Senior Vice President and Secretary
Thanks, Celeste. Good morning, everyone, and welcome to Omnicare's fourth quarter and year-end 2007 earnings conference call. Here today from Omnicare are Joel Gemunder, President and CEO; Dave Froesel, Senior Vice President and Chief Financial Officer; and myself, Cheryl Hodges, Senior Vice President, Investor Relations.
Before we begin, let me remind you that as we conduct this call various remarks that we make concerning our expectations, predictions, plans and prospects constitute forward-looking statements as a result of a variety of factors including those identified in this morning's news release and in our various filings with the SEC. You are also cautioned that any forward-looking statement reflects management’s current views only and that the company undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future.
For simplicity's sake and to focus on what we believe are the best indicators of our operating performance, we will discuss the results today excluding special items and reimbursable out-of-pocket expenses in all periods. A reconciliation of this non-GAAP information has been attached to our press release and is also available on our website under supplemental financial information on the Investors page.
With that, let me turn the call over to Joel.
Joel F. Gemunder - President and Chief Executive Officer
Thank you, Cheryl, and good morning everyone. Thanks for joining us today to discuss our fourth quarter and full-year 2007 results. Today, we are going to focus our remarks largely on comparisons between the fourth quarter of 2007 and the third quarter of 2007 because we believe these sequential results provide the most meaningful gauge of our recent performance and set the stage for discussing our 2008 guidance, which we will do a little later in the call.
Now, it goes without saying that 2007 was a challenging year for us and for our entire industry as we continue to deal with the major secular chances affecting our business, notably the continuing evolution of the Medicare Part D and concomitant major shift toward generic drugs. As you know, for the fourth quarter we reported an adjusted net loss of $0.03 per share, which includes $94 million pretax or $0.50 per share relating to an incremental charge to increase our allowance with doubtful accounts. That aside, we were pleased that our fourth quarter results showed continued stable performance.
Moreover, our fourth quarter operating cash flow continued strong bringing our full-year operating cash flow to over $505 million, above our guidance for the year. And as I just mentioned and as you have undoubtedly seen in our press release, we did reassess our allowance for doubtful accounts in the fourth quarter in light of some recent developments and determined that it would be advisable to add an incremental $94 million to our allowance to doubtful accounts. Dave will provide more color on this in a moment, but for now I would just make a couple of points.
First, much of this charge related directly… or indirectly to Medicare Part D and its impact on the business. Second, at 1.5% of our annual sales is incremental provision. It is proportional to that taken by one of our competitors last quarter and demonstrates yet another of the adverse economic impacts this major change in care systems has brought to bear. And last, this is an incremental reserve and not a write-off. While prudence dictates that we increase the reserve from an accounting standpoint, we are committed to making every effort, including the exercise of our legal options to collect fees and all monies owed to us. At this juncture, however, the incremental provision will serve to maintain our balance sheet strength. Total revenues for the fourth quarter were nearly $1.56 billion, up from 1.54 billion in the third quarter, despite a nominally lower number of beds served sequentially in our pharmacy business. The increase in sales reflects the fourth quarter impact of acquisitions made right in the third quarter as well as drug price inflation and an overall increase in the number of prescriptions dispensed.
And of course, the sales increase is really better than these net numbers indicate due to the impact of generics as well as continuing declines in certain branded drugs such as Procrit, Aranesp, and Avandia, as well as the inclusion of a high level of flu vaccines in the third quarter of 2007. We ended the quarter at a 1,392,000 beds, down 4,000 beds sequentially. But as we pointed out in the press release, embedded in that number are approximately 4,000 beds from which we voluntarily withdrew due to pricing or payment terms we would not meet or facilitates that flat-out closed.
That said, as you know, during 2007, we have been focused on initiatives that we believe will drive net bed growth. And while it is not yet quite where we wanted to be, I want to point out that the net bed attrition for the full year 2007 was 14,000 beds versus 46,000 beds in 2006, reflecting an improvement of nearly 70%.
During the fourth quarter, customer retention continued to improve. Our growth losses were down sequentially by roughly 4% making the third consecutive quarter. I should say morphing the third consecutive quarter of improvement. For the full year, our gross losses improved by 16% versus 2006. In addition to the efforts of our pharmacy operating staff, we saw real success in our specialized customer retention team, which from December 2006 through December 2007 saved approximately 14,500 beds and preserved $75 million in annualized sales and this represents an improvement in retention of more than 1% annually both -- in both beds and pharmacy services. For the last three months, this team has saved more than 5,700 beds and $30 million in annualized sales. So it looks as though the process here is ramping up. That's brought in the service by our national sales force and pharmacy operation staff that were essentially even with the third quarter. Overall, beds signed by our sales force and operating personnel during quarter will lower sequentially as was also the case in the fourth quarter of the previous year.
Looking at the productivity of the sales was alone, bed timings ramped up 23% sequentially and this was accomplished despite the fact that nearly 69% of the sales force had been here less than one year. He has nearly 60% of the beds signed in the quarter was signed by his sales people active for less than one year. So we believe that the sales management changes that we have made, the increased quality of the new sales force and enhanced training are starting to gain traction.
On the acquisition front, our fourth quarter was lower as in the third quarter due in part to the timing of these transactions. And as we've noted before the acquisition business is a bit lumpy. For the full-year 2007 however, beds acquired was 70% higher than those acquired in 2006, reflecting in part the impact of Medicare Part D on smaller institutional pharmacies.
Turning now to the cost side, we continued to make progress in controlling and reducing the payroll and delivery cost in our pharmacy business. Even with the increase in sales, our payroll, temporary labor and delivery costs taken together declined on an absolute level producing the 2% decline in our overall cost per script on a sequential basis. And with the productivity initiatives we have in place for 2008, we would expect to gain further leverage here. Partially offsetting these margin gains with some unfavorable variances in gross margins relating largely to the impact of lower purposes and utilization of certain drugs and lowering that along with the impact of the late third quarter acquisitions, which come in at lower margins until the synergies can be achieved.
Now of course the UnitedHealth matter continues to impact results. The differential in rates between the originally negotiated contracts with United and the [indiscernible] provider concept we now operate on [indiscernible] specific here totaled 34.8 million or $0.19 per share in the quarter, which is up about 1.8 million or $0.01 a share sequentially, but up $13 million or $0.07 per share versus the fourth quarter of 2006. For the full-year of 2007, the impact of the differential and rates was nearly 131 million or $0.67 per share versus 68 million or $0.35 per share in 2006.
And it is important to note that the differential in rates has widened in 2007 versus 2006 causing a further diminishing in earnings for 2007,related largely to the net [ph] pricing on generics under the specific contract. And as we noted in our press release the cumulative impact of this differential in rates since April 2006 has negatively impacted sales and operating profit by nearly 199 million or $1.02 per diluted share. As you are aware, this matter is constantly the subject of litigation against United, pending in Federal Court in the Northern district of Illinois and we are currently wrapping up fact discovery and depositions, and a trial date has been set for October 14 of 2008. We continue to believe our antitrust and fraud plans are strong and we're looking forward to pursuing these claims on behalf of our shareholders and the residents we serve.
One final comment relating to the pharmacy business. We’ve continued to make progress in the ramp-up of our repackaging activities outsourced to Cardinal Health at the end of the third quarter. Cardinal was doing about 30% of the planned volume representing 17 of our largest volume units in those products. And today we are up to about 60% of planned volume and the repackaging of 40 large volume products. Given this progress, we believe we are on our track to be at the planned capacity by mid-year 2008, which will allow us to increase productivity and gradually begin to reduce the incremental repackaging cost we've been experiencing in our local pharmacy operations.
And as you know, we've also worked to broaden our growth platform by entering adjacent markets. While full-year sales growth in our hospice pharmacy business was robust and we saw census remain relatively even during the fourth quarter compared to the third, as expected operating margins in both periods continued to be hampered by competitive pricing as well as patient mix issues. While sales and EBITDA for the fourth quarter were relatively even sequentially in our specialty pharmacy business, the full-year 2007 saw a double-digit sales growth and widening EBITDA margins.
And lastly, our CRO business, as you know, can be highly variable quarter-to-quarter based on project flow. And this was certainly true of the fourth quarter where on a sequential basis revenues and operating profit were relatively flat sequentially, but on an annual basis however revenue growth was nearly 12% and operating profit was at 17%. New business awarded in the fourth quarter was at the highest quarterly level all year, keeping backlog near its all-time high. The year 2007 has been a productive year for our CRO business operationally as well with the addition of new clients, particularly among biotech, specialty and virtual pharma companies, that made their expansion of capacity in India and more recently the opening of two new offices in Beijing and Shanghai.
With that, Dave, I will turn it over to you.
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Okay. Thanks, Joel. As Joel mentioned, we continued to operate in a difficult environment this year. And our view is that when going through any major changes to our business, a solid balance sheet and strong cash flow are critical to the ability of the company to adapt and grow again. To that end, we made cash flow a major priority this year and as you can see from this quarter's and full year's results, we made substantial progress on this front.
In the fourth quarter of 2007, we generated $74.3 million in operating cash flow. This brought the full-year operating cash flow to a record $505.5 million, and this was above the top-end of the range of cash flow guidance we gave last quarter, which was $460 million to $500 million, which in itself had been raised twice before. So despite the volatility in earnings for the year, the cash flow was consistently strong.
We were also pleased to see a little more stability in our adjusted earnings on a sequential basis. Our total adjusted EBITDA for the quarter was $59.5 million, despite the $94 million incremental provision for doubtful accounts in the fourth quarter. Aside from this incremental provision, our EBITDA was even sequentially with the third quarter. So clearly, cash collections and reduced working capital needs drove our cash flow performance for the quarter as they did throughout the year.
Turning to our balance sheet, as Joel noted, we did conduct a comprehensive review of our allowance for doubtful accounts for the fourth quarter, particularly in light of recent customer bankruptcies and other litigation issues related to among other things the collection of past due receivables. Then too, we revised our assessment of the administrative and payment issues associated with Medicare Part D, particularly around the ageing of co-pays and rejected claims and as a result modified our policy with respect to payment authorization for dispensed medications under Part D and other payers. And at the end of the day we concluded that it was necessary to take a charge of $94 million in the quarter to increase our allowance for doubtful accounts, bringing the full-year bad debt expense to $214 million.
Our net receivables at December 31, 2007 declined by over $88 million sequentially, which of course reflects the impact of the incremental provision for doubtful accounts, partially offset by the growth in sales and the additional receivables added from acquisitions made at the end of the fourth quarter. Our DSOs at the end of December are at 84 days, down five days sequentially, also reflecting the same factors. As we've mentioned in the past, much of the increase in accounts receivable during 2006 was largely attributable to the transition to Medicare Part D and the shift in payer mix along with certain nursing home facility accounts.
During the quarter, we continued to step-up our collection efforts across all payer types. At the end of December 2007, our existing rejected claims under Medicare Part D from the 2006 transitional year stood at approximately $21 million on a gross basis before any allowance for doubtful accounts. At the end of December 2007, we also had co-pays outstanding, again on a gross basis, of $39 million of which $19 million related to 2006. We and our entire industry are continuing to seek solutions, particularly on the co-pay issues, through CMS and PDPs to resolve these issues on a retrospective and prospective basis, and our company is also pursuing legal actions to resolve some of these issues.
With respect to inventories our overall days on hand in the fourth quarter of 2007 were flat with the third, owing largely to continued penetration of generic drugs and improved management of our inventory levels, partially offset by fourth quarter acquisition inventories.
Capital expenditures for the fourth quarter 2007 totaled $12.2 million, roughly $2 million lower than the third quarter. For the full-year, capital expenditures came in at $45.3 million or about $14 million higher than full-year 2006, but favorable to the $50 million targets we gave the earlier in the year. The increasing capital expenditures in 2007 is primarily associated with the receipt of automation equipment related to the Omnicare Full Potential Plan. We see a higher level of spending continuing through 2008 as refund the Omnicare Full Potential Plan. Our expectations are the CapEx will be approximately $60 million in 2008, of which $40 million relates to the Full Potential Plan and $20 million for maintenance CapEx.
Maintaining the strong balance sheet has also been a high priority this year. We ended the year with nearly $278 million in cash and this is after paying down approximately $150 million in debt during the year. As a result our total debt-to-capitalization at year-end stood at approximately 46.2%, representing a 230-basis point improvement over year\-end 2006 and on a net debt basis it's about 43.7%. So despite the challenging environment over the past two years, we continue to maintain our financial strength and flexibility.
So with that, I'll now turn it over to Cheryl.
Cheryl D. Hodges - Senior Vice President and Secretary
Thanks, Dave. The spirit [ph] of focusing on more recent performance, the fourth quarter 2007 sales in our pharmacy services segment of approximately $1.51 billion were up about 1.3% from the third quarter of 2007 and representing the first quarterly sequential increase in sales we've seen all year. The sequential sales increase is somewhat understated as the third quarter included flu vaccine of about $8 million, while the fourth quarter included only $3 million.
Fourth quarter revenues benefited from acquisitions done at the end of the third quarter, a 1.7% sequential increase in the number of prescriptions dispensed and drug price inflations. Partially offsetting this growth was a lower number of beds served, a continuing decline in certain branded drugs that faced utilization challenges this year such as the anemia-related drugs, and of course the increased penetration of generics.
Our payer mix for the fourth quarter was Part D at 41%, Medicaid at 10%, private pay, third-party and facilities at 43% and 6% other. For the full-year the payer mix was Part D at 42%, Medicaid at 10%, private pay third party and facility at 43% and 5% other. At December 31, 2007, we served long-term care facilities and other chronic care settings comprising 1,392,000 beds, a net decrease of 4000 beds sequentially and 14,000 or about 1% year-over-year. Joel has already provided some detail around those numbers.
Revenue per bed for the fourth quarter was $1,082, up 1.2% above the $1,069 in the third quarter. Revenue per bed for the full year came in at $4,316 per bed versus $4,449 in 2006, lower by about 3%, reflecting again increasing penetration of generics as well as lower utilization of certain branded drugs.
Sales of EPO-related drugs used for anemia were down about $2 million sequentially and $17.4 million for the full year, reflecting largely the decline in scripts and decline in dosage level per script that we have been experiencing since the weight based dosing guidelines were published. The decline between the third and fourth quarters is the lowest we’ve seen all year. So it looks like this trend may be leveling out now. While Avandia, the subject double black box warning this year saw a decline in sales of roughly $7 million through the full year, the decline in the fourth quarter was only $1 million sequentially. Moreover, these sales declines are being offset somewhat by these migration of these patients to other drug such as Actos, metformin, or insulin as well as by dosage increases in these and other diabetic drug.
IV sales for the quarter totaled 66.6 million, up about 2.4% sequentially, bringing total IV sales for the year to roughly $273 million. There is typically an uptick in acuity in the fourth quarter versus the third, although CDC data would suggest that there really was not much of a flu season present in the last three months of 2007. That seems to be changing now with the strong incidence of the flu in nursing homes currently appearing in many geographic areas as evidenced by very strong sales of tamiflu and antibiotics at the moment.
Adjusted pharmacy EBITDA was 76.1 million despite the $94 million incremental provision for doubtful accounts in our pharmacy business. Aside from this incremental provision, adjusted EBITDA for the fourth quarter was up sequentially, largely in line with the sales increase and reflects margin maintenance at third quarter levels.
Our CRO business, excluding reimbursable out-of-packet expenses, had revenues for the fourth quarter of $41 million, essentially even sequentially. For the full year, revenue of $163.4 million was up 12%. For the fourth quarter of 2007, our CRO recorded operating profit at 3.6 million, also essentially even with the third quarter. EBITDA 4.1 million for the quarter followed a similar pattern and represented 10% of adjusted revenues. For the full-year 2007, operating profit of $13.1 million was up 70% and EBITDA of $15 million was up 55% and represented 9.2% of adjusted revenue.
At December 31, 2007, our book-to-bill ratio stood at 1.88, reflecting a high level of new business gains in the fourth quarter. Moreover, our backlog stood at $314.3 million, a slight increase sequentially and near its all time high.
With that, I will turn it back over to Joel.
Joel F. Gemunder - President and Chief Executive Officer
Well, thank you, Cheryl, and thank you, Dave to place the past year in context. I should note that the impact of Medicare Part D on our industry and in our business, cannot be underestimated. The direct and indirect effects of this made some change in payer sources have had a substantial impact, both operational and financial, on the long-term care pharmacy industry and of course on our company.
Bottom line, we in the industry have and continue to shoulder a considerable burden in the form of time, effort, resources and capital to make part D workable for our customers under residential care. We have attained significant increases in operating expenses made necessary by the complex and burgeon-some administrative and payment issues and reimbursement procedures of the piece. And the opportunity for us dealing with these issues on other aspects of the business should not be ignored. We have seen buildups in accounts receivable from co-pays and rejected claims, which in turn have resulted in the much higher level of expenses associated with our allowances with doubtful accounts. And of course, we would not be enduring these substantial costs to our earnings related to United were it not for Part D. And then too, we have been impacted by the tremendous shift occurring from brands to generic drugs and the paucity of new drug introductions. And while there are benefits here to it to be sure, the actions and reactions of the participants in the system, particularly on the Medicare Part D, have affected pricing, purchasing and inventory trends. And while this is the environment we have been managing through, we have been keenly focused on executing on strategies internally to adapt to the factors affecting our business, to address company specific issues and to control what can be controlled. A number of initiatives have been underway this year and I’ve already mentioned some of them. And while not major contributors to our earnings in 2007, we believe they set the stage for stabilization as we head into 2008. So let us focus on the year ahead.
I am going to organize my comments around those factors and assumptions associated with our 2008 guidance. We have a number of major items that can have a positive impact on our financial performance for 2008. First is the introduction of new generic drugs that are significant in the long-term care marketplace. Notably in 2008, we expect to see generic versions of drugs such as Risperdal, our number three drug, Depakote, and Trileptal introduced joining Fosamax and protonix, which have already gone generic in February. Risperdal alone represents over 200 million of our annual pharmacy sales, and its late June launch will have a very salutary effect on profitability. How much impact is depended on whether exclusivity is granted for one manufacturer or whether the product is launched by multiple manufacturers. Market intelligent says that multiple manufacturers will launch, but that is up to the court. And I would also add that when factoring in the dollar weighting and the timing of generic launches, the benefit will be very weighted toward the second half of the year. In fact, in the case of Risperdal Johnson & Johnson has eliminated rebates during the first half of 2008, given the imminent generic launch. But under either launch scenario, we believe the increase in gross profit in the second half will more than make up for the absence of rebates, so full-year margins and dollars of gross margin should be up under either scenario.
As an aside, approximately 67% of our scripts overall are generic today, and nearly 69% under Part D. So with the launches of these major drugs in 2008, we see that the percentage is continuing to rise. And while these generic introductions will improve gross margin it will lower sales. That said, we see much of the sales impact is being offset by drug price inflation.
Second, we had the dual reassigned and PDP renegotiations for 2008. As we discussed last call, due to the PDP bidding process for 2008, a substantial number of duly eligible beneficiaries were to be reassigned largely out of United and Humana plans and randomly distributed among others in certain regions of the country. We began to see this phenomenon occurring in January, although to date we have seen only about half the movement of duals that we expected to see move to other plans. And while we believe the random assignment process is complete, those beneficiaries who actually self-selected a plan at any time over the past three years were not automatically reassigned by the government. Rather, these folks had to proactively choose a plan and pay the premium to remain in their current plan. So it may require some time for such situations to be rectified. And some of these people may be in Medicare Advantage plans where reassignment is not applicable. All that is by the way of saying, we believe there may be further migration, but we're not certain today exactly when or even how much.
As an aside, I would also add that the incremental administrative difficulties that we have anticipated to arise from the reassignment have yet to materialize. Our daily rate of rejected claims spiked up only in the first few weeks of January, as it did last year when there was no reassignment and has quickly dropped off to a daily norm of just under 3%.
Then too, we have completed our PDP renegotiations for 2008. Many of our plans just rolled over from 2007 to 2008 as it is. We renegotiated only a handful of contracts, and on balance was one notable exception related to special circumstances, we did not see a significant movement. In fact, when looking at the combined impact of our renegotiations, and the dual reassignments, even at its current rate the net impact is moderately favorable.
Next is bed growth. As you know, we have put strategies in place to reverse the trend in net bed loss. And as I noted earlier, we have made some progress here in 2007. With respect to customer retention. As I mentioned, gross losses improved by 16% in 2007 versus 2006. In large part, this relates to the success of our new customer retention group and as we walk into 2008 we have doubled the size of this team.
On the sales side, we have revamped and increased the size of the sales force and segmented some of their activities towards certain areas of the market where we believe we may have been under-represented. And we will expand the size of the sales force further as conditions warrant. We have also dedicated resources to further penetrating the assisted-living market, an opportunity I have discussed in previous calls. And we are both doing all of the efforts with greater resources placed in the expansion of our product offerings particularly in technology. For example, we are already making strides with our Vicura electronic medical records system and we are placing greater marketing resources behind our broad product offering so that there is greater awareness as the technology that we have had in place for some time as well as other ancillary services we provide for our clients.
On the acquisition front, we continue to see a robust pipeline for 2008 in additional institutional pharmacy acquisitions and we plan to look at opportunities to broaden our reach into adjacent markets. Net-net, we are planning to return to modest net bed growth from all sources including acquisitions in 2008. One caveat here is that we intend in ten year to forego business where pricing or payment terms are not acceptable and which in the end is the right thing to do for our business. Longer-term, we believe we will also see enhanced net bed growth as a result of the Omnicare Full Potential Plan.
Now with respect to the Omnicare Full Potential Plan, we continue to make progress. We plan to continue to drive best practices across the organization with respect to hub-and-spoke way, all 31 hubs or regional support centers are in some stage of development with nine already beginning to process refills or perform order entry for certain of their local pharmacies.
We have taken delivery of a total of eight pieces of equipment from MTS, of the 25 we plan to receive. And the first ALV generation tool, a proprietary technology, is scheduled to arrive early in March, I believe next Thursday is the date. And implementation finite with document imaging technology is in its final phase and we will begin the rollout phase in early March as well.
So generally speaking, we continue to do the ultimate pretax savings from the Full Potential program in the 100 million to $120 million range on an annualized basis. And as we are now moving more heavily into the implementation phase however, we can see that the timing of achievement of those savings will likewise spill over into 2009 owing to the timing of completion of facility build outs extending beyond original schedules. And we are finding that some of the automation technology that we are utilizing is taking more time upon delivery to be validated and to run into rated capacities. So while we expect to take delivery of all equipment by the end of 2008, it may take a bit longer for it all to be running at planned capacity. Accordingly, we’ve built in more modest savings in this project in the back half of the year.
Another consideration here is that we will operate with duplicate staffing in some areas as the transition of functions is completed. We are going to attempt to call out these duplicative costs for you, but they’re going to be included in our earnings. Yet another factor is savings from strategic sources. We have incorporated savings from strategic sourcing or non-drug purchasing effects. To date annualized savings of $22 million have been negotiated on behalf of the company and we are forecasting to build upon that number in 2008. Next is centralized repackaging. I noted earlier that we expect to be at planned full capacity by mid-year 2008, which should improve our efficiency in the second half of the year, and last is growth in the adjacent markets. We see solid growth in our hospice pharmacy and specially pharmacy services business in 2008. Our CRO business we believe will grow in line with market growth and continue to leverage its cost structure and we should see even stronger international growth, given the resources that we have placed in India and China.
Mitigating some of these positive contributions to growth in 2008 is price and compressions in several areas. First, in the burgeoning generic world the PDPs along with Medicaid and commercial insurers have a great ability to reduce prices by establishing an adjusting max on generic drugs. The timing and amount of these actions is often unpredictable. So in some cases we have negotiated contractual limits on downward pricing. Secondly, we have seen some competitive price pressures in the market on the Part A side. So we have factored some of that in too, and third we are involved in litigation with a large customer whose recent payments pattern will yield us lower revenues until this matter can be resolved. The co-pay issue, which continues in 2008, will also yield us lower revenue unless clear resolution is on hand.
Moreover, as I mentioned earlier, we will have a full-year impact of the decreased utilization of certain branded drugs such as the anemia drugs for example. And last, as I alluded to you earlier, we endeavor to maintain discipline around pricing and payment policies and as we do so we risk the loss of some business but the long-term health of our business benefits not just our shareholders but our customers and their residents as well. So putting this all together and bearing in mind the major influence of exogenous factors on our business this year, we see sales in 2008 coming in at 6.1 billion to 6.2 billion. We see operating cash flow or 2008 coming in the range of 300 to 375 million and diluted earnings per share as adjusted with special items are expected to be in the range of $1.65 to a $1.95.
Now, we’ve realized that this is a wide range. In part this is necessitated by the limited visibility that continues to exist around the complexities of Medicare Part D. Moreover, the unpredictability of brand to generic conversion both in pricing and in timing necessitates a broad view and core challenges can be a wild card. It should be noted that we have not factored any impact from the AMP or the first data bank cases as we simply do not know what the outcome will be in order we have sufficient information to make any type of intelligent protection of the impact if any on our business, nor have we factored in any favorable outcome of the United matter.
One last word about our guidance. The quarterly progression of 2008 will be extremely skewed towards the second half of the year. In fact, the diluted earnings share as adjusted for special items for the first quarter will likely be in the mid-30s with a 5% to 10% of sequential improvement in the second quarter owing to a number of factors including in the absent of rebates on Risperdal as well as some volume based reductions on other drugs such as the anemia drugs for example. We are also feeling the impact of the max [ph] that have already been put into place in the first quarter. And as I referenced earlier, we will see lower revenues and profits on a large account owing to their recent payment pattern as well as co-pays in 2008, and also our favorable fourth quarter tax rate will return to a more normalized level in the first quarter.
We then would expect a significant ramp up in the third quarter owing to the factors we've discussed today. Predominantly, the weighting of the benefit of generics this year, particularly Risperdal, the timing of hub-and-spoke savings, and the improved productivity from centralized repackaging among others. Clearly, there are lot of moving parts here many of which are highly unpredictable and can swing big in both directions. We are giving you our best thinking currently and obviously we will update you as we move forward.
Permit me to make one final comment. Back in 2006, when Medicare Part D was in its initial implementation. I remember speaking to all of you on a conference call and I referred to Part D as a fee change that would have far reaching implications for our industry and for Omnicare. Two years later fee change seems like an understatement. In retrospect it was when combined with the tremendous shift occurring from branded to generic drugs, more like a Perfect Storm, and this has been a period that has tested all of us at Omnicare and in the face of unprecedented complexities and overnight changes in our business we have responded with innovation and integrity and have created new ways of doing business new billing centers, new distribution systems, new technologies while never losing sight of fulfilling our mission of providing quality pharmaceutical care for our nation’s seniors.
We have created over nearly 27 years a company that I believed is unmatched in our industry. Thanks to the inherent strength of our scale and platform, we are weathering this change. We're focused where we should be and where you our investors want us to be focused on providing quality care for the nation’s real elderly and growing our franchise and on positioning the company to deliver shareholder value.
And now, I'll get off my soapbox and open the call to questions.
Question and Answer
Operator
[Operator Instructions]. Your first question comes from the line of Lisa Gill with JPMorgan.
Lisa Gill - JPMorgan
Good morning. Joel, when you talk about this wide range within the guidance, I understand you talked about it being a lot of it backend loaded generics and some other things, but can you just talk may be just a little bit more about what some of the swing factors are on the positive or the negative side?
And then secondly, within that when you talked about the dual eligibles that you anticipated moving away from United to other plans and they haven't done so yet. Do you still anticipate that they'll move or was there some selection process that they could've potentially had stayed with United and Humana?
Joel F. Gemunder - President and Chief Executive Officer
Let me take the… you asked two questions and let me take the second part first. We believe that the reallocation process was a valid one and that many of these patients were reassigned. We have noticed in the industry from trade sources that others have observed the same phenomenon that was expected… that expected and reassignments have not shown up in the numbers. We expected to see in our business about a drop from about… in United for example from about 36% to 14% and it's now running at around 24%, which is a positive movement for us, but we believe not a complete one. Now, whether it's a function of MAPD patients, whether it's a function of patients who have decided to pay co-pay and stay where they are. That is a stretch for me and… or is it that they haven't been… patients have just been timely paralyzed by a… haven't done anything and it takes a while for the plans to move them out. I think they have to build them for the co-pay three times if I remember correctly and then remove them for the plan. So it may take several months for this to happen. But I think this is an industry-wide phenomena, I know other pharmacies from the trade have indicated that they have observed the same phenomenon and I think that it will take a little bit more time for this to sort out. But it has been thus far a positive development for us although more moderate than we would have hoped.
Now, coming back to the first part of you question. You asked what are the negative factors and --.
Lisa Gill - JPMorgan
What are the swing factors--
Joel F. Gemunder - President and Chief Executive Officer
Swing factors, so I think I'll ask Dave Froesel, our Chief Financial Officer, to run through that and I may jump in from time to time add color to it.
Lisa Gill - JPMorgan
That would be great, thank you.
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Okay. Hi, Lisa. With respect to the full year, some of the big swing factors are as follows. First as Joel mentioned earlier, with respect to the PDPs, the commercial Insurers and Medicaid, we continue to see adjustments in reimbursement downward primarily through the active macking [ph]. And with respect to Medicaid, there is one example, which you may already know. Governor Schwarzenegger signed legislation to reduce Medicaid reimbursement in the State of California by 10% effective July 2008.
Second is we continue to see competitive price pressure in the market with respect to Medicare Part A business, both with respect to renewals and new opportunities and it's primarily coming from small local providers and in some cases regional or larger providers.
Third, in 2008 we will yield lower revenues with respect to co-pays though not substantial and basically what I'm talking about, Lisa, we're taking a view in 2008 in some cases where you have co-pays of $1 or $2, it doesn't make sense from a cost versus benefit standpoint to spend the time to chase some of those down.
Fourth, as Joe mentioned, we currently are involved in litigation with a large customer whose unfortunately recent payment pattern will cause us to record lower revenues in 2008 until this issue is resolved.
And fifth, our effective tax rate for the full-year 2007 was approximately 38% before special items, and our forecasted tax rate for the full-year 2008 is approximately 39.5%.
Now, on a positive side as Joel mentioned, big swing factors primarily impacting the company in the second half of the year are the impact of certain branded drugs going generic such as Risperdal, Depakote and others combined with in the second half of the year some benefits we expect to see from the Full Potential program.
Cheryl D. Hodges - Senior Vice President and Secretary
I think the other variability in the ends of the range are how successful we're in bed growth, how successful we're in reducing costs related to repackaging and some of the factors. So I think it reflects the ends of different assumptions within those activities.
Joel F. Gemunder - President and Chief Executive Officer
Well, one factor we should also mention is that J&J, I think I mentioned in my talk, has eliminated rebates on Risperdal effective January 1 for the entire industry. In other words, they are trying to improve their net yield on that growth prior to patent expiration. And this was a drug where we generate over $200 million in annual volume. It is not chicken feed, it is a significant issue for us, which we have to whether. However, the benefits of the generic convergence beginning in late June will probably more than offset this. So we have to swallow the loss in rebate in the first half of the year and benefit in the second half.
Lisa Gill - JPMorgan
Just so I understand this correctly, on the PDP commercial Medicaid max side, well, there is still pressure there on max reimbursement, generics are still more profitable for you than the branded…?
Joel F. Gemunder - President and Chief Executive Officer
Absolutely, but I think I can point out to you, we did this analysis a couple of weeks ago and I think it is still correct as of today. If you look at what the PDPs have done on max in the first quarter, I think that cost us about $0.015 or a little bit more than that in our numbers, just that alone. So it is... we clearly haven't reached a stability point. It's my personal belief that the PDPs are not being well policed by CMS particularly as one… as the administration comes to a close. And I'm not saying it’s like Dodge City used to be, but it’s not well policed at the moment and I think we'll get through that and we will return fairly quickly to a stable effective. Prior authorizations have also gone up about 25% in 2008, which is creating an additional burden on everyone in the industry to work those prescriptions through so that our patients can get the drugs that they require. So that's the PDP time slide so far.
Lisa Gill - JPMorgan
Okay, great. Thank you very much for the details.
Operator
Your next question comes from the line of Melissa Jaffe with Merrill Lynch.
Melissa Jaffe - Merrill Lynch
Hi, how are you guys doing?
Cheryl D. Hodges - Senior Vice President and Secretary
Good.
Joel F. Gemunder - President and Chief Executive Officer
Great.
Melissa Jaffe - Merrill Lynch
So your cash flow guidance for $300 million to $375 million for next year, is that a sustainable level relative to the earnings save do you think?
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Yes, this is Dave Froesel. The $300 million to $375 million for 2008 I feel very comparable with at this point in time. And as the last year in 2007, I... we'll provide an update to that guidance at end of each quarter.
Melissa Jaffe - Merrill Lynch
Okay, great. And then, when could we expect the pace of debt repayment to pick up?
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Good question. It’s in fact… I already authorized this week we will pay down another $50 million in debt tomorrow and we will look at by the end of March, and if we can afford to pay down some incremental debt by the end of March I plan on doing that.
Melissa Jaffe - Merrill Lynch
Okay. And then, as the CapEx from [inaudible] potential plan moderate, you may be going to 2009?
Joel F. Gemunder - President and Chief Executive Officer
Melissa, David and I believe that we should be running our debt for the long run at about 35% of total capitalization. We are at around 46% now. We were in the 50s. We've brought it down and I think it's actually around 42% on a net basis. But we'd like to see it around 35% where we get comfortable. And it's certainly moving in that direction. Cash flow is a very important part of what we do… and there is an old saying in our industry, I can remember people telling that when I was just a young person coming up in business that companies grow on their income statements, but they survive on their balance sheets, and we certainly haven't lost sight of that.
Melissa Jaffe - Merrill Lynch
Great. Thanks.
Operator
Your next question comes from the line of Charles Rhyee with Oppenheimer.
Charles Rhyee - Oppenheimer & Co.
Yes, hi. Thanks for taking the question. Just wanted a little more color on the $94 million incremental increase in the reserve. Could you give us a little more sense on the breakdown between how much of that was the customer bankruptcy versus the age receivables and then within the age receivables how much was perhaps related to 2006 and how much maybe was related to 2007?
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Okay. Sure. This is Dave, I will answer that question. The way I look at the $94 million additional provision for allowance for doubtful accounts is as follows. It can be easily segregated or broken into three major buckets. The first bucket, which represents about one-third of the charge, is associated with accounts in litigation and/or bankruptcy. For example, public information is out there regarding a very large customer of ours in the State of Connecticut referred to as Haven Eldercare. They've been a customer of ours for many, many years. And they filed bankruptcy in the fourth quarter, and unfortunately the money was expended on funds for investments with the country western singer, Travis Tritt records and some estate homes amongst some other expenditures. So we with the State of Connecticut and other federal state authorities are going after that money.
Joel F. Gemunder - President and Chief Executive Officer
That’d be quite a diversification of the money.
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Right. Also as we disclosed in our 10-Qs this year, we are in litigation with a large national privately held provider, which we reserved some of that, but of particular note, the percentage we reserved with respect to the total receivable is very small.
The second bucket is we did an exhaustive analysis… was performed with respect to co-pays for 2006 and 2007 and to a lesser extent we did some cleanup associated with some old rejected clients. But the majority of that second bucket is respect to co-pays primarily all '06 and part of '07. And the third and the last bucket, as Joel has previously stated, the company is taking a more strict view or policy with respect to ensuring a payer source is identified prior to dispensing drugs. And as a result, some customers, they may view this policy as change unacceptable, and as you may know I'm particularly speaking with respect to Part A revenues and receivables. So as a result, we evaluated our risk of collection associated with a number of these regional customers and chose in some cases to conservatively reserve some of those balances based on a policy change. So those are the three major buckets.
Charles Rhyee - Oppenheimer & Co.
Great. Thanks a lot for the comments.
Operator
Your next question comes from the line of Adam Feinstein with Lehman Brothers.
Adam Feinstein - Lehman Brothers
I guess it's a follow-up on the bad debt question first. Maybe it would just be helpful, if you think about future run rates, it was about in 2% I guess is what you characterize as normalized, but I just want to get some more clarity there. Do you think going forward we'll continue to see that number grow under Part D? Is it just a number that will continue to move higher?
And then just with respect to your policy, I was just curious if you can, Dave, maybe provide a little bit more detail, is there particular day metric that you fully reserve at so just any more clarity there?
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
Okay. Good question, Adam. With respect to our outlook for 2008 with respect to bad debt as a percent of sales, which you mentioned in 2007 was approximately 2%, our view currently is we intend to make progress in that area and we expect to make some progress in the first half of '08 and more progress in the second half of '08, so hopefully it's going to come down.
Joel F. Gemunder - President and Chief Executive Officer
Yes, Adam, one of the things we've done, we've recognized that given the increasing, shall we say, turbulent… mild increase in turbulence that we've noted in the market, we've decided to beef up our efforts at… in collection and we are adding staff to help us do that so that we can police this aspect of our business more carefully then.
David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer
And also, based on our new policy that I previously mentioned, basically no authorization for payment, no shipments, that will also have a direct favorable impact on our bad debt expense, meaning it will not sit in our receivables and age over time, which then we end up having to recognize through bad debt expense.
Adam Feinstein - Lehman Brothers
All right, and then a follow up question here. I guess, Joel, in the last week you’ve made some… you’ve added some very strong members to your Board. I was just curious if you would comment on that. Is there anything in terms of the company going forward? Are we going to see additional changes? I guess just any comments in terms of some of the recent activity at the Board level.
Joel F. Gemunder - President and Chief Executive Officer
Well, this is a situation that is the result… I know it look sudden and precipitous, but it is really the result of planning that’s been going on for a while. Mr. Hutton, our Chairman, who I’ve been with and associated with one way or another for some 45 years is now I think will be 89 in a month or two and has decided that it's time for him to step down and to work exclusively… well not exclusively, but give more time to his philanthropic efforts. He is still the Chairman of another company and when you get to that age it is kind of a natural thing for him to want to dial down his activities. And we knew this was coming. So we have been searching for qualified people that can give us some more a young active Board, and we certainly have that in [inaudible] Ubben and Shelton. We've agreed to add one more Director on the Board and we are searching for that individual today, but the average age to the Board has come down quite a bit.
Mr. Shelton, Benny Shelton, as you know is a very, very capable executive who has built single-handedly the third largest hospital chain in America, which was just told. That was Triad, and we expect him to be an excellent and active participant in the Board. And Mr. Ubben I've known now for four, five, six months and we noticed noted that the... had become a significant owner of our shares and when we met and chatted I thought he would be an excellent addition to our Board and we welcome him and we value his advice. And I think we're coming around to a Board, which all of us and in the management like… not that we have... the Board controls the management, not the other way around, but we're very happy with these changes then we're looking forward to a very fruitful future with our new Board.
Adam Feinstein - Lehman Brothers
Okay. Thank you very much.
Operator
Your next question comes on the line of Jason Gurda with Bear Stearns.
Jason Gurda - Bear Stearns
Good morning. Over the last two years, there has been a fairly significant decline in margins. I am curious how you're thinking about acquisitions as well as the overall growth strategy has sort of changed as the overall industry environment has deteriorated.
Joel F. Gemunder - President and Chief Executive Officer
I'm not sure, could you rephrase your questions if… I want to answer it, but I just want to be sure I get your drift.
Jason Gurda - Bear Stearns
I am just wondering, as the sort of economics of the business have worsened and it looks like particularly with Risperdal in the first quarter, but maybe some other drugs in the past that rebates are playing less of...
Joel F. Gemunder - President and Chief Executive Officer
No, actually it is interesting. The margins in the overall weather that come down largely for two factors; one, the unfettered ability for some of these PDPs to put it in max at their pleasure is creating a little bit of a… more turbulence in margin maintenance efforts as we have to scramble much harder, we have to work our suppliers harder, we have to look to our scale and take our cost down to be the lowest cost provider. But the companies we acquire have the same issues, only more so. Now, what we are saying, as the synergies increase and they make these acquisitions for us even more acceptable than there would be ordinarily and they tend to increase the availability of companies for sale, because they find that the cost of readapting systems, changing computers, getting pre-adjudication to maintain their pricing appropriately and coupled with increased pharmacist salaries are just the kind of things that they get to the point with. I can see them saying, at age, when they get up into late middle age of saying, you know, I think it is a bad time for us to get that condo and book it and we see increasingly that coming to our table more and more. So I don't think that that’s a real struggle.
Now, it is true that our margins have hedged down a little bit and we are struggling now to get them restored and we hope we’ll be making some progress with that as we move into hub-and-spoke. A lot of the margin… a part of it of course is coming from the matching of gloves when we have to stay up with the game so to speak by getting out there and being certain that we are able to offset as much as this as possible by growing our suppliers.
And secondly, the thing that has impacted margins has been the very, very significant increase in the administrative burden we have in dealing with co-pays, quantity limits, refill too soon and all sorts of tripwires that the PDPs have put in place to in affect limit the number of prescriptions because that's how you make money. You get a premium and you sell fewer scripts and you make more money and if you are going get a 1000 calls an hour or [inaudible] in New Stafford to take 500, you're going to improve your net yield if you are a PDP. So these are costs that we have to develop and we’ve had to develop clinical information standards… invention standards, I should say, where we've have our top clinical people working on these [inaudible] to clear them so that our patients can get the drugs that they need.
And I could give you a case in point. We are now beginning to see something of a mini epidemic of flue in certain parts of the country in our nursing homes, and for a significant amount of time… well, let me go back a step. The drug that really works on these patients is tamiflu and while the CBC has indicated that the correct dosing period is 14 days, many of the PDPs were dealing with… have limited that to 10 days and that has… or even fewer days, eight days to ten days, and we have found that that is creating a serious problem and we are pushing the… have gone through efforts to CMS to get some relief fund for the benefit of our patients. But that's kind of the things that has is done, and that of course increases our cost as we strive to work through these issues. So those things have pushed on margins down. But I believe that we are going to see increasing stability. We're coming to the end of an administration. There will be a new administration one sort or other and I think we can look forward to a quiet period when we will get some increased stability in that process, which I don't really see… which we’re hopeful will come, because I don't really see it right now.
Jason Gurda - Bear Stearns
Okay. Do you know why it seems that Omnicare, at least margin-wise, has been harder hit and maybe some of your publicly traded peers by the Medicare change?
Joel F. Gemunder - President and Chief Executive Officer
I don't… you’ll have to be more specific because our margins are quite a bit higher than any of our competitors and…
Jason Gurda - Bear Stearns
I meant the change.
Joel F. Gemunder - President and Chief Executive Officer
I think you will have to be a little bit more specific. I want to answer your question, Jason, but I need to have you address it with more specificity.
Jason Gurda - Bear Stearns
No, I understand. I was just referring to the change in margins where they are currently related to—
Joel F. Gemunder - President and Chief Executive Officer
Well, if your margins are… let's take a hypothetical example. I am not referring to anybody in real life. If one of our competitors has a margin of 2% and we have a margin of 10% and our margin goes from 10% to 9.9% and theirs it goes from 2% to 2.1%, I don't consider that much of a change. I just call that normal variation depending on how we're moving our infrastructure around and how they're dealing with theirs. If you could point something out to me I would be.. I would…
Jason Gurda - Bear Stearns
I don't want to drag out this. I was just thinking of the 200-basis point decline in margin?
Joel F. Gemunder - President and Chief Executive Officer
[inaudible] your wife. I can't answer a question unless I know. I'm happy to answer it, but give me something to bite into.
Jason Gurda - Bear Stearns
Okay, just a final question. Is… your new guidance, is that a component of management compensation at all for the year?
Joel F. Gemunder - President and Chief Executive Officer
If you look at our profit statements this year, you'll see that they aren’t going to be any bonuses for our top management and there aren't going to be any bonus and there weren't any bonuses last year either. I and our Board are pretty stringent about that. When we have a good year and our results are excellent, we do well. When they don't, we don't do well and we go without, and that's just the way it is. We suffer when we don't, when the ball doesn't go in the hole no matter how carefully we key it up. It's just the way of life in this company. We succeed if the company succeeds and we… if we don't… if the ball doesn't go in the hole we go hungry as it were. And I think I can say that our guidance reflects the best thinking we can give you about our business. I think you’ll have to agree that as we went through our analysis that we shared with you this morning that it was carefully thought through and we rated out as… about as carefully as we know how based on everything we know about our business and the environment in which we operate.
I will say that this year particularly the exogenous factors, the outside factors are playing a much greater role than we would normally expect, particularly with things like… we have Risperdal, Fosamax, and Depakote, which are three blockbuster drugs, which are all going off patent, two of them in the latter part of the year, Fosamax I think just went off, and that has a very significant impact on what we're doing, the max over which we have no control. And California has put through the legislature and the Governor has signed it in the law, put through a 10% across the Board cut in health care. I don't know whether they are going to be able to make that stick or not, but we have to assume that they will. And these are elements that are outside of our control, not to say that we aren't working to eliminate any cost that we think we can do without and… to lower our costs and alter our system.
For example, we are putting into effect this Monday our document imaging system, which we’re beginning to install across our entire enterprise and this is going to give us the ability to… workforce balancing where throughout our organization… on border entry, which is a big upfront cost for the company, we will be able to move products automatically. We will be able to move to any available operator within our entire system. So it is going to cut down… over time it's going to cut down. The timing should improve our scheduling so that we have fewer late runs. It is just... it's the lynchpin for the success of our program and Full Potential and it is an enterprise-wide system for pharmacy and it is something that didn't exist before and we have been working with one of the major providers for some time now to get it done. It is now done. We are out of the planning stage. We are out of the testing stage. It starts to go live on Monday as we start to install these things around the country. And these are some of the things we do to bring down our cost and give us a relative advantage wherever we can find it.
Jason Gurda - Bear Stearns
Okay. Well, good luck in '08 and I hope you guys end up having a much better year.
Joel F. Gemunder - President and Chief Executive Officer
Jason, thank you very much for the kind words.
Operator
Your next question comes from the line of Robert Willoughby with Banc of America Securities.
Robert Willoughby - Banc of America Securities
Joel, I guess it's hard to justify why acquisitions were the best return solution for your cash over the past in the least couple of years here and maybe certainly looking forward. Is there not a greater physical responsibility to repurchase some shares at this level or even approach the dividends?
Joel F. Gemunder - President and Chief Executive Officer
Bob, we could sit there and we could argue that, but I would differ with you up to... certainly up to this point. If we live as an industry and something that approaches a monopsony. A monopsony is the opposite of monopoly in which... in a monopoly the buyer has all the power, I mean the seller has all the power. In this case, the buyer, the government has all the buying power. They set the pricing and we have to live with what they say. Now, the only way you can cope with maintaining margins, acceptable margins in a situation like that is to get cost control, to bring your cost down. And the only way you can really do that effectively over long periods of time is to build scale. And that's what we do. You need scale to get effective cost control, to be able to afford to put in systems that take cost out. So I would respectfully disagree that heretofore the ability for us to build the scale, I think was the most important thing for the company to do.
Now, as we go forward our cash and the way we operate… our cash has competing uses and we try to get it to the most important use. What we compared against is filing it back into the business for future growth. We look at acquisitions, we look at paying down debt, and we look at purchasing our stock. We have to decide among those competing uses for our cash. I just said that we think that at quarter one four times EBITDA and debt that we think that's a little… that we have to work at bringing that down and that our Board believes that's of paramount importance and that's what we are doing.
Now, there may come a time when we think that our debt is appropriate and then we will look at our debt-to-total-cap and then we will make some other decisions. But right now, we believe that the most important element for our company is, one, to maintain the scale and to improve it so that we can afford to bring down our cost to "stay in the game" so to speak. This is a scale business, without scale you cannot be successful in long term care pharmacy in my opinion because you cannot achieve the cost savings you need to offset the pricing power that the government and its agents have in this industry.
Robert Willoughby - Banc of America Securities
Well, Joel, I would agree, but what impact would it have if you pulled out of the acquisition market for a year? I mean your competitors, the people you are buying would clearly be devastated. I mean is there not an opportunity to grow faster organically backing away…?
Joel F. Gemunder - President and Chief Executive Officer
I think I spent, Bob, a significant amount of time this morning and let me see if I can make it even more clear. We are spending a lot of money. I have no limit on payroll, put into our selling efforts. As a matter of fact, we told our Sales Vice President to double now the retention team as quickly as possible and we will be adding now I think additionally to our sales force. We... I think I mentioned that 60% of our new signings are coming from people on the South, those that have been with us for less than a year. They now appear to be trained and now I think we can step up the training by adding more to it.
We watch our payroll very carefully and we put new people on with a medicine dropper, but in the area of sales there is no limit now. It's an open book and we can add as many people as we think we can manage and train. And I think we are doing exceedingly well. Our retention… for example, our retention team is now running at about 2000 to 3000 beds a month in saves. These are accounts that we would otherwise have lost and that is running at about 2% improvement in retention, which is very significant. And we are putting more and more dollars of people into that process because what we get to our size the denominator is more important than the numerator, and we think that that's probably the best dollars we spent is adding it to our either sales or retentive business. And it's a complete open book for me. I would spend as much money as we possibly can spend without having people trip over each other's feet to get to that point.
Robert Willoughby - Banc of America Securities
That's the answer, Joel, to my question. I think that's the logical course of action. I just didn’t exactly see why the acquisitions above and beyond that are necessary. That's it from me.
Cheryl D. Hodges - Senior Vice President and Secretary
Okay. Thank you.
Joel F. Gemunder - President and Chief Executive Officer
Thank you. I'm happy to have with... why don’t you call me offline sometime and we’ll continue the discussion.
Robert Willoughby - Banc of America Securities
Sure.
Cheryl D. Hodges - Senior Vice President and Secretary
Thanks, Bob.
Operator
Your next question comes from the line of David Veal with Morgan Stanley.
David Veal - Morgan Stanley
Thanks. I'm just looking back, we're all kind of excited about the potential contribution from zocor and zoloft at one point, but the inventory issues and also the early macking from the PDPs sort of nipped that in the bud. Joel, I'm just wondering what safeguards you have in place both in the inventory side and contractually that might help recurrence of that for some of these new generics like Risperdal?
Joel F. Gemunder - President and Chief Executive Officer
Well, that's a great question. As a matter of fact, we had a little session about that last week. And it is our... we're following this one like gold coins and we're watching our inventory in every single location. We have planned to bring our inventory on hand down. We now have the ability to monitor it almost daily in each of our pharmacies and we have put a system and to do that ever since we had that unfortunate incident several… as early as last year. We will have almost day-to-day inventories of Risperdal when late June comes up. And we are trying to get as high a conversion and a most effective conversion we can get in the fastest possible time. I would like to see 100% conversion the day it goes generics, but they tell me there are free states, California, Texas and Ohio, which have, I guess you would call them rebate relationships with the manufacturers, which tend to slowdown that process. But putting that aside, I would look for as near 100% conversion that we can get and we will not. And we have processes in place now. I'm assured that we will not allow that inventory to build. The inventories will be drawn down. We are very aware that Risperdal is a very expensive drug and we do not want it sitting around aging into obsolescence.
David Veal - Morgan Stanley
And on the PDP side, do you have confidence that you won't see the kind of aggressive macking that you did on those two?
Joel F. Gemunder - President and Chief Executive Officer
I can't speech for the PDPs, but we're... I believe if not the largest buyer, one of the top two or three of the large buyers in the country of Risperdal. I think we buy about of course somewhere between 13% and 15%, maybe even a little bit more as well as the Risperdal made in this country, something like that, and I'm not exactly sure, but it's in that range. And we will be very, very careful buyers of the product and we hope that we're fairly certain that it will… can't… you never say never, but we believe that our… we will see a significant improvement in our margin on that particular drug.
David Veal - Morgan Stanley
Great. That's helpful. Thank you very much.
Cheryl D. Hodges - Senior Vice President and Secretary
Okay. I think we have time for one more.
Operator
Your final question comes from the line of Eric Gommell with Stifel Nicolaus.
Eric Gommell - Stifel Nicolaus
Thanks for taking my question. I’m going to switch gears here just a little bit and talk about your… the competitive environment. Are you seeing an uptick in nursing home operators that are kind of taking the institutional pharmacy business in-house again? I think a couple of years ago we saw some of that and I thought it kind of had waned, but I'm curious especially given the myriad of issues administratively, the complexity of the business, if you could talk a little bit about whether you’re seeing an uptick of that or if that’s actually leveled off?
Joel F. Gemunder - President and Chief Executive Officer
Well, there are always people coming in and exiting the business. Our acquisition plate is very full at the moment. But you are right, I would say uptick is… if you want to put… limiting it to a tick, it's a small, but noticeable change, we see that from time to time on it. And I can't explain to you why it happens. It could be that people think that now that they are PDPs, things are stable and they'll be able to get in and make some money. It could be that what nursing home margins get pinched or increases are hard to come by, they look to ancillaries to augment their income and as always the graph is greener approaching the south. It looks like everything is easy for the guy who doesn't have to do it and what normally happens if these folks come into the market, they stay for a couple of years, they don't… they are disappointed by their lack of particular success and they exit the market by selling out the people like ourselves and others, or they just pull up shop. That happens… it's a cyclical thing. That’s happened before, Eric, as you know, and will probably happen again for as long as this business continues to exist. That’s part of the process of renewal and it gives us the opportunity to buy some of these companies with say whose expectations have not measured up to their original projections. Although it's not… as a result have not measured up to their expectation to be more correct, way to say it.
So the answer to your question is, we see it around from time to time. It is not a major trend. It is a kind of a… a mini kind of a thing, but we have seen it from time to time in places with usually with small privately-owned mini chains, where that's going to happen.
Eric Gommell - Stifel Nicolaus
Great. Thanks.
Cheryl D. Hodges - Senior Vice President and Secretary
Okay. With that, everybody, we thank you for being here and we'll talk to you next quarter. Thank you.
Operator
This concludes today's conference call. You may now disconnect.
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