Omnicare Inc. - Analyst/Investor Day

| About: Omnicare Inc. (OCR)
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Omnicare Inc. (NYSE:OCR) December 9, 2011 8:00 AM ET


Nitin Sahney - Executive Vice President and President of Specialty Care Group

Unknown Executive -

John G. Figueroa - Chief Executive Officer and Director

Jeffrey M. Stamps - Executive Vice President and President of Long-Term Care Operations

John L. Workman - President and Chief Financial Officer


Adam T. Feinstein - Barclays Capital, Research Division

Unknown Analyst

Brendan Strong - Barclays Capital, Research Division

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Lisa C Gill - JP Morgan Chase & Co, Research Division

John G. Figueroa

Good morning. We'll talk about some greater transparency. Throughout the year, we've been talking a lot about the business and some of the great things that we do namely around cash flow and certainly around the specialty opportunity, you'll see some greater transparency that we will be kicking off moving forward. We'll talk about some future growth opportunities and as I've indicated before, we'll get into some Q&A.

Let me start off the conversation by talking about creating value. When we are in Cincinnati talking about this business, it always starts with value creation and how we are focused on growth and creating value for our constituencies and it starts with our 2 core businesses: Making sure that we are growing those businesses in every aspect, whether it's the top line, our profitability or efficiencies. We have to create value in every category of those businesses. The last 2 pieces of this slide, I think, are extremely important and I thank as the day continues, you'll begin to see and understand why we are excited about those things. The cash flow generation of this company is fantastic. And as we went into the year, we knew we had a good cash flow platform, but as we become better operators, the cash flow opportunity certainly became better through the year and it's something that we continue to be focused on. And then, of course, allocating our capital in the right places to ensure that this company not only creates immediate value but the long-term growth as well.

Let me take a second to talk about the 30-year evolution of our company. This is our 30th year in business, our 30-year anniversary. Very exciting for us to kind of look back and see how this company has grown, but more importantly, I think, plant that flag and talk about how we evolve over the next 30 years. So quick 5-minute discussion about our history, and I think it's important to understand how we move forward.

When this company started 30 years ago, the focus was on acute care facilities, actually providing us some pharmaceutical services in the hospital marketplace. That quickly evolved into a number of other strategies, mainly the institutional setting or the long-term care setting. Since then, we've had a number of acquisitions and a number of businesses that we moved into that began to serve, not only the long-term-care patient, but other services within long-term care and other services within healthcare. I think if you look at the business today, you would see that we touched manufacturers in a big way. Physicians, nurses, caregivers, patients, we have a wider breadth of services that we are providing and I think that's a key component to our growth moving forward. Here's the timeline of the 30 years, there certainly had been some changes, some major acquisitions to give us the footprint that we have today. I guess what I would tell you is 2010, 2011 were years of transition, years of looking at the tremendous assets that we have, structuring the company in a way that we believe will continue to foster growth. And then, of course, if you look at the purple box with 2012 to 2015, looking forward over the next 3 years, we will continue to be focused on the long-term care group and the growth that, that business brings us but the specialty care group growth, I think, is a new factor moving forward that we anticipate will be growth that's exceeding market which will certainly be great for Omnicare.

Okay, so if you look at where we're at today, this is the third quarter year-to-date numbers. So it's not a year forecast, these are actual numbers after 3 quarters of the year. You can see how the business is divided. The long-term care business still representing the core piece of our business moving forward but as you'll learn today, the growth projections from a revenue perspective, much, much higher on the specialty side. We like the spaces that we're in. You have all been following our long-term care business for quite some time. I think, as you see there and see in specialty, you'll get a good feel for why we're excited about that business.

Okay, so what has been the foundation of our success for the last 30 years and certainly over the last 12 months? We have a differentiated offering with clinical expertise in the areas that we function in. We have localized services. One of the things that we have learned in this business is as large as you may get, at the end of the day, it's a very local business. And you have to compete at a local level and you have to demonstrate on that local level that you can service that customer with their particular needs. It's one of the things that Omnicare has done over the past year and certainly one of the effects of that has been improving our retention. We've also talked a lot this year about reinvesting into our employees, not only from a pay structure and a benefit structure, but certainly reinvesting in their training, reinvesting in technology to help make their jobs easier. And a lot of that investment that went in this year, we'll begin to see some of the fruits of those investments over the next couple of years. I think in order to change the culture, you also have to identify around some core principles and some shared principles that are lived by the executives all the way throughout the organization to every employee that we have. And we have transformed that culture around 4 concepts: excellence in everything that we do; integrity in everything that we do; ensuring that service is key to our business and key to the constituents that we serve; and of course, compassion. What's amazing about these 4 categories is that we did a survey of our employees, over 15,000 employees to talk about what is it about Omnicare that keeps you here. What is it about Omnicare the gets you excited to wake up every morning and these were the 4 words that our employees came back to us on to express who we are and how we move forward. I say that because that compassion piece is key. When you look at the 15,000 employees that we have, the majority of those employees are actually doing services that touch a patient. And we're extremely proud of the fact that we have that responsibility within healthcare and showing compassion for those patients we serve is a key element of our culture.

So let may change to the industry growth dynamics quickly. As you've seen before, if you look at the aging demographics of our country, it certainly is a slide that gets me excited, that as Americans get older and get into the health care system, we believe that there's going to be a stronger need for the services that we provide in the long-term care area. And certainly, the disease states that we are currently in with specialty, you're also seeing as the population gets older, they're more susceptible to some of the disease states that we service. So as the years continue, you will definitely see a spike in needs. I think the other thing that's exciting, no matter what you look at in healthcare, there are 2 components of healthcare that people get excited about. And they're excited because it is a growth pattern that is undeniable. The first one is the generic drug market. We certainly have understood that over the last few years as more and more brands have gotten off of patent and the generic wave continues. If you look at 2012 and beyond, we're seeing an even greater increase in generics coming to market. And you can see by 2015, we estimate that generic market share will be, I think that's says 86.8% on that slide. We're excited to be one of the most efficient companies when it comes to generics in healthcare, and certainly the unique platform that we have in our space. We are the only company in long-term care that buys generics directly and that certainly gives us, we believe, a buying advantage, again, in one of the fastest-growing areas in healthcare.

The second one is specialty drugs and again, I think you're going to get excited to hear what our operators have to say about their businesses, but when you look at the specialty drug utilization and total prescriptions, again by 2015, you see a pretty large escalation of those prescriptions and being in that business, we think, is certainly an advantage.

Here's a slide that kind of shows the rise in new generic introductions by year. So as I talk about the fact that we have a good 2012 ahead of us, we certainly also continue to see a projected generic dispensing rate continue over the next 3 years. A benefit to everybody in the supply chain except maybe the brand name manufacturer. I think the other thing that's important to note when we talk about generics and generics being an important part of our business, and the unique part of our business because we buy directly, this slide is extremely important. We always, from the very first day of the generic is launched, make better gross profit margin and gross profit dollars with the generic compared to the brand. Not only the first day it's launched but throughout the life of that generic drug, that is true. Now if not buying generics directly, it's very difficult, if impossible, to make that statement. So we feel very good as we look at the dynamics of the generic market moving forward.

Okay, so let's talk about transitioning to an operations-driven company. You heard me say that, I think the first week that I was on the job. That the key to the success of this company is making sure that we are operationally driven, that we are creating efficiencies with our platform, with our network. And if we could do that, we could keep our business and do that, we would certainly be a growth company. So we focused on 3 core operating objectives: to establish consistent organic growth within long-term care. That means we keep our business and we build a sales and marketing team that brings new business to our platform and we've been pretty successful this year in doing that. Repositioning specialty care group for elevated growth. You're going to see some numbers there that I know excite me about what we have done this year and the projection of what we believe we can do in this space. And of course, creating more standardization across the company. You've also heard me say that as I walk through our 160 facilities or so, if I walked into my facility in Maine, it seems to operate a heck of a lot differently than if I walked in the facility in Sacramento. And as an operator myself, it was difficult for me to understand that. And we have worked very hard this year and we've got a lot of work to continue to do to make sure that the operations are standardized. That they are, in my opinion, 60% to 70% of what we do and every one of those facilities should be exactly the same and maybe 20%, 30%, some unique services that we provide in that local area. And we're getting there and every time we create something of standardization, it improves our cost, it creates efficiencies and it makes us a better company and I'm excited about what we've accomplished this last year.

Okay, we talked about customer retention. Our goal at the beginning of this year was to retain 95% of our customers. I think the last statistic that we've shown you, it's somewhere like 93.7%. We're excited about the momentum that we have created over this last year. We'll see how the fourth quarter goes but I will tell you we continue to project good things regarding this goal and certainly great to see that we've made some headway with our customers and they're staying with us. And investments made to accelerate our sales. We put new sales people out in the field. I think we have something like 40 people selling across the country now at the beginning of the year, I think it was 12 people. We've hired a new Chief Marketing Officer and marketing team and what's key about this is telling the Omnicare story. When you tell the Omnicare story, when you talk about our unique value propositions, you know we normally do pretty darn well from a competitive standpoint. Putting all that together, again, we're starting to see some great momentum in bringing new business to our company.

Operating efficiencies, we have become extremely disciplined about benchmarking everything, Insourcing key functions with our company. We've established a corporate HR team for the first time, corporate legal team, corporate tax team. All stuff that was outsourced prior to this team coming together, we brought all of that in and it has been a tremendous success year one. We're also talking about quality at the Six Sigma level in that area. Technology improvements and John and Jeff will talk a lot about some of our proprietary technology and our investments that we're making here, but we've made some great headway this year in that area. And as we continue to deploy this automation, it is not only great for the customer, it certainly creates efficiencies in our network that gets us excited as well.

Going back to organic bed loss and retention. I love this slide because it's a great slide that demonstrates the scoreboard that we look at every single day and we report to you every quarter on the improvements that we have made in keeping our customers. I think that bottom line says it all, almost 50%. We have stopped almost 50% of our losses year-over-year. And as I've indicated, we continue to get better in this category so I can hardly wait to see what we do over the next few quarters.

Specialty care group and I'm just going to show you this one slide because this is the easy one. All the detail, I will be leave to Nitin. But if you look at this slide, there's really 3 core businesses that he's going to talk about today, that top circle is the specialty pharmacy. Great piece of our business, it is the largest revenue piece of this business, lowest margin but highest revenue. And then you see some circles around on this slide that talk about unique services that we provide for manufacturers. Now, this would be lower revenue because it's fee-for-service but much higher margin. And then that last circle, you see is the disease management of end of care life. Again, where we have #1 market share in that hospice category. So I'm just going to tease that a little bit but leave the details for Nitin. So we have repositioned long-term care. And we've repositioned the specialty care group. We put a number of executives in place. We made investments in some new facilities and some automation. We have a better understanding of our competition in every category and how to compete and win. We have established some new platforms and as we built that base for specialty care, we anticipate that we're going to be better competitors next year and continue to pick up market share in this ever-growing area of healthcare. One thing I want to make sure everybody understands before I turn it over to the team, our specialty care group is unique and different from the long-term care group. So a lot of questions that we've had through the year is, well, how big can specialty be? Because all you're talking about is specialty prescriptions for your long-term care patients, right? And that's wrong. They're completely separate businesses. That specialty pharmacy, the specialty services for manufacturers compete in the market all on their own for those patients, for those manufacturers, for those docs and it doesn't have anything to do with long-term care. Now there's some efficiencies within our corporation that we can leverage from a cost perspective and sometimes, we will pick up a specialty script with our long-term care patients. We do that and we do that well, but you do need to look at these businesses as separate entities and I think you can get a better feel for these businesses, but Nitin will explain what we've done this year and why we feel pretty good about moving forward.

A slide about our scale. We are, we believe, the most effective network in the industry. We have a system where we have our own distribution center which allows us to buy generics directly. We can feed those to our 30 hub pharmacies which are very large pharmacies and then they, of course, take care of, on average, 3 or 4 local pharmacies. So that network has been a very good network for us. The network that we've called hub-and-spoke for a number of years. As we reevaluated that this year, we like the position of our hub-and-spoke. We like the investments that we made in hub-and-spoke. We're going to talk a little bit about that, but what it has allowed us to do even more so is bring additional volume onto our scale which improves our costs and efficiencies every time we bring more volume to the table. And even though that's true, I will also tell you that we will remain very disciplined on looking at acquisitions and the right companies to put onto our scale and move forward. With that being said, the one quick update around PharMerica and please understand, we're limited to talking about this and hopefully, we don't have any questions about this because there isn't much I could say about the process here other than what I'm about to say which is I still believe that this is an excellent fit. I think it answers a lot of questions, certainly a call to reduce healthcare costs in our country, certainly the ability to reduce cost in our particular industry. You're going to hear a lot about our automation and we believe the cost advantages that we have in our network and putting some manual processes into our facilities we believe has some benefit and that scale will certainly increase the service offerings that we can provide our customers. So we also believe that combining these companies is now. We've just had 2 launches of generics over the last 30 days, Zyprexa, and you all know that Lipitor went off the patent. Oh, by the way, third day into that conversion with Lipitor and we are at 80% conversion after 3 days. So we continue to get better and better about that. But in conjunction with PharMerica, I think you can understand the sooner this happens, we believe the better because there's a generic wave out there that we certainly want to have impact on.

Okay, so we talked about value creation at the beginning of my presentation. I want to end with that because that's what it's all about and that's what we're going to be concentrating on every day we go to work. So with that, let me kick it off to the experts, and let me introduce John Workman, again, who's going to walk through some of that value creation and the financials of the business.

John L. Workman

Thank you, John. I'm going to start by talking about some of the metrics of the company and if you look at the metrics here and these are things that we track pretty consistently, you can see that scripts have been fairly consistent despite an overall slight decline in beds and this does include beds for acquisition. On the other hand, generic dispensing rate has continued to grow each quarter and is currently near 80% of the volume of scripts. You saw an earlier slide that by 2015, we expect to be at about 85%. We've also been making steady progress in our retention rate and we're getting close to the 95% retention rate that we've expressed as our desired performance or even better.

Next turning to some financial results. You can see that sales show some fluctuations. Those are going to be influenced by factors such as brand to generic conversions, since the generic revenue is going to be less than the branded equivalent. There's a mix of specialty versus long-term care that also can influence that sales line and we do have some slight seasonality in our business. Typically, the first quarter and fourth quarters are going typically to be stronger quarters than the second and third. Adjusted gross profit has been fairly flat until the third quarter of 2011. And we did see a nice increase, both in dollars and rate, at the end of the third quarter. EBITDA, with no surprise, has kind of followed the trends in gross profit and you can see that also had a nice uptick in the third quarter of 2011. Adjusted EPS has been about $0.50 to $0.55 per quarter. For the last 5 quarters with Q3 of 2011 being one of the first quarters where we're actually seeing a year-over-year improvement which is a nice trend and one that we expect to continue.

Looking at the third quarter and hitting some of the highlights. We've continued to narrow our organic net bed loss. As I've mentioned earlier, gross profit EBITDA and net income show both improvement sequentially and year-over-year. Cash flow from operations, and you're going to hear a lot about that concept today, has continued to be very strong and we've continued our approach of returning value to shareholders by returning some of that cash flow from operations.

Next, I want to talk about cash flow. We're really proud of this slide. As you can see so far in 2011, we've improved our cash flow from operations year-over-year, each and every quarter. In fact, the 3 quarters combined for 2011, our record cash flow generation capability in the 30-year history of Omnicare. So it's something we're really proud of and something that I think is a very strong foundation of Omnicare. You can also see from this chart there's a strong correlation between the EBITDA we generate and our free cash flow. Our free cash flow here reflects a reduction for both the CapEx, as well as dividends and looking at this number so -- but you can see again, very strong correlation between the results of operations. The same correlation exists with net income. Our cash flow from operations is going to be significantly higher than our reported net income. If you look at some of the reasons, there's a strong correlation between our EBITDA and cash flow, we have significant intangible amortization. Our cash tax rate is very low and our maintenance CapEx is relatively modest dollar amount. We would gauge that to be on the maintenance CapEx of about $25 million to $30 million a year. If you combine all of these together and look at that free cash flow as a percent of our market capitalization, we're looking at a yield of approximately 14%, which we think is a very strong yield from a free cash flow generation standpoint.

Continuing to focus on cash flow, this pie chart reflects the significance of different items that are below the EBITDA line. And you can also see the equivalent income and EPS impact on a pro forma basis. So if you look at this pie chart and dissecting it just a little bit, you can see that the blue piece being the amortization of goodwill and the tax deduction that we get, the purple being the amortization of intangibles and the green being that tax impact of the contingent interest and debt obligation. I'm going to talk a little bit about those in a moment. I think the other significance is these are very long term in nature. If you look at the average duration of these, it's well over 9 years. So this is something that Omnicare will have for quite some time. And as we replenish through either refinancing activities or additional acquisitions, we have the ability to add to these. So what we're going to start doing is reporting a cash-based EPS reporting. As part of our efforts, this is something that we want to do to improve visibility to the company but we think it allows you a little bit more insight into our performance and we're going to begin reporting adjusted cash EPS in 2012. To arrive at adjusted cash EPS, we're going to be adding back some items. Intangible asset amortization, which is consistent with the way many companies who started reporting cash EPS are doing. Something that's unique to Omnicare is looking at our cash tax rate. And our cash tax rate is driven down significantly by a couple of items. One of those is the fact that the goodwill, when we acquire a company, it's deductible for tax purposes. So we get the benefit of that tax deduction that's typically over a 15-year amortization and that has a significant impact in terms of ability to generate additional cash flow. The second is the added tax deduction we receive on our contingent interest debt obligation. As a reminder, we paid the stated coupon rate, which is 3 1/4% or 3 3/4%, but we will in fact, get an 8% deduction on those same obligations. So there is an additional tax shield from those elements.

Well, I'm going to show you some numbers in 2011 that's being tapped down somewhat in 2011 because of our refinancing event that we did in late 2010. Starting in 2014 and beyond, this number will start to grow in significance as a result of that refinancing. We, again, think these are things that will make sense, that are long term in nature and will be the benefit in terms of the shareholders. Many of you have asked for this, and so we're trying to be responsive to the request of the shareholders. We also think it gives you a little bit more visibility into the company. We feel comfortable, again as I said, with moving to this measure because of the long-term nature of it and the fact that as we look at additional activities, it in fact may grow. And lastly, it's really correlated with the way we think about the business. So when we look at our business, what we always focused on that cash flow generation capability so this also is much more consistent with the way that the team here operates the company day to day. So we believe it's an important measure.

And now to give you some ideas to the significance. If you look at that pro forma impact of the results and adding back of the amortization of intangible assets, the tax deductibility of the goodwill amortization and the additional tax deduction from the continued interest debt obligation, looking on the pro forma basis for the first 3 quarters, this would equate to $0.51 a share, which added to our $1.55, but it's almost 1/3 or 30% increase in our reported EPS. We're going to continue to report EPS in a conventional manner but again we're going to start reporting cash EPS because we think it's a significant component of Omnicare and one that will be around for some time.

This is also an important slide. When we stay with the cash flow theme, because they have significant amount of cash flow that Omnicare generates, we tend to be very disciplined about our capital allocation process. As mentioned earlier, maintenance CapEx is relatively minor, at $25 million to $30 million a year. We have told you and we're starting to see the impacts of that. We will be spending about $20 million more per year, some starting in '11 continuing for the next couple of years as we invest in IT an additional element about automation. You're going to hear a little bit more about automation in Jeff's presentation today. We're also excited about that opportunity and that's going to also have a little more CapEx expenditure as we move forward. We view the other 3 elements: return to shareholders, acquisitions and debt reduction. All is very important alternatives. We have targeted 25% of the cash flow from operations being returned to shareholders, and looking at the other categories, we typically generally spend equal amounts across all 3 of those. I would make one comment, if we are successful on the PharMerica transaction, we would expect to use some of the additional cash flow because again, we were focused on cash flow. So whatever we do is going to be focused on improving cash flow. We would expect you to be seeing some of that extra cash flow go into debt reduction that we might incur as a result of the transaction. Remind everybody we have enough cash to do it, but having said that, you know it's not something we would look at financing our long-term assets for short-term borrowings and so we're likely to put in some form of long-term debt.

This slide shows you that the 25% we've targeted is returned to shareholders. We're well ahead of that in 2011. And we've returned over 44% for the first 9 months and a significant increase over the 2010 piece. We're also focused on creating a capital structure that's going to be significant and be there for the long term. And so a lot of the actions we've taken in the last couple of years are to basically delever the company slightly, and at the same time, move out our maturities in such a fashion that they will come due over a longer period of time. Our goal has been to have about $500 million come due in each of the next 5 years. And our thought process in doing that is that if we have that financing coming -- refinancing coming due every 5 years, it's very easy with our cash flow generation capabilities to kind of change the allocation of the capital to pay down debt, thus we're not held hostage to any dislocation in the capital markets. And we're all aware, we all lived through 2008. We know what the impact was of that. The current dislocations that occur sometimes in the market, Omnicare doesn't want to be held hostage to some event. And I think we've made some very strong progress. We were facing a significant spike in 2015 at basically $1.6 billion and as of this date, we've gotten that down to a pretty manageable piece, consistent with the theme that I just mentioned.

Next, turning to long-term targets and these are the targets that we put out with our 2010 earnings call as we announced the fourth quarter results and the full year 2010. Some of you and some commented that we thought -- that we were a little bold in putting forth some commentary about longer-term rates. We did indicate that we expected EPS to grow at a compounded annual growth rate of double digits for the period 2010 to 2013 and we're saying that at the time with '11 guidance being consistent or flat basically to '10. We expected to generate substantial cash flow generation. We expected to return value to shareholders and we unveiled the 25% target. We also said we were going to be very disciplined about our allocation and usage of cash flow in terms of the way that we operated the company going forward, not wanting again to necessary leverage up the company but to create a long-term capital structure. So far for the first 9 months of 2011, we see that we're consistent in moving towards these targets and we were very pleased about the progress that we've made so far.

Now many of you, I know, were thinking about guidance and while we've not chosen to give you 2012 guidance, we're going to do that as we close out the year, consistent with our past practice. But we did want to give you some indications of why we're going to be the drivers, because we're focused on the longer-term aspects of Omnicare. And we wanted to give you directionally what those key drivers are going to be to help us achieve that double-digit growth of EPS, not only in that period '10 to '13 but beyond. Some specific highlights as we think about this, branded generics is clearly a very significant driver of 2012 expected performance. While we expect long-term organic growth in 2012, a portion of those gains are going to be negated a little bit by the offsetting net organic losses that we've incurred in 2011 although we've been improving. Thus, you see that characterizes neutral but turning to positive as we go beyond 2012.

We expect reimbursement. Reimbursement, there's always pressure in reimbursement. We continue to expect that to be negative and that's part of our considerations. You will hear more about specialty care later today from Nitin Sahney. We expect that to be a large driver of earnings growth as we look forward into the future. You'll also going to hear about some initiatives. I'm going to talk about the first one, which is ONE system. Jeff's going to hit upon the standardization, automation of Omnicare-at-Home. Because we think these are things that are going to drive performance after 2012 and start to generate some positive momentum and continued earnings growth as we become more efficient, lower cost, improved revenue reporting. We've been talking a lot about, in 2011, that what the management team has been focused on are not necessarily events of 2012. What we've been focusing on and spending a lot of our time on in 2011 are those things that are going to drive growth in 2013 and beyond. And these are some of the examples of those and you're going to hear a little bit more about the details of those, and I think gain an appreciation for those as we move through the today's presentations.

Clearly, underpinning the whole thing is our disciplined use of cash, again with our large cash flow generation. Again, we'll be disciplined about the allocation and that's again supportive of our direction in terms of growing EPS on a double-digit basis. The first one of these major initiatives is called ONE System. We haven't been very creative. I will say that we're not real creative in terms of naming things, but we've labeled it ONE System and basically, the underpinnings are as Omnicare has 2 billing and dispensing systems which are very old technology. And by old technology, I mean 25 years or more in terms of age. What we're looking to do is move to ONE System on a current technology platform and I'm going to talk some about that at this point in time. In first -- the first bullet point describes some of the challenges that we have in our existing operations, that we do have multiple dispensing systems. They're not fully integrated. I mean, Omnicare does not have a common data set or common data warehouse to access information and specialty care has kind of operated independently. So what we're doing with moving to ONE System is not only moving our billing and dispensing systems to one platform, we're also creating a new ERP platform. And are not creating, we're acquiring a new ERP platform which will be Oracle. The company's ERP is at Lawson today and we'll be moving to Oracle as it gives us a lot more flexibility. As we think about the future, it also gives us a lot more control. And when we look at the suite of products that we're acquiring, it also gives us a lot more information flow in terms of moving the company forward.

So in addition to modernizing our dispensing system, moving to this Oracle ERP, we'll create a platform for use both across long-term care and specialty care. And though the ultimate timeline is going to take some time, our plan allows us to pursue items to derive benefit by the end of 2012. If you look at some of the anticipated operational benefits, they are going to be significant. We think they will enhance customer service, as well as automate multiple activities in an integrated fashion, improve compliance as I mentioned, improve our overall platform and provide better information to run the long-term care and specialty care platforms. We basically want to mainstream the information flow so that, that information is accessible to the executive team versus today with a lot of old legacy systems where you have to feed data and try to extract it to get information. This will be an automatic flow and allow us to have much better information to continue to run the company in an efficient manner.

Here you can see the timeline. As I mentioned, this is a long-term project. It's going to run through 2015, but it's important to note that there are deliverables starting in 2012 that will improve our performance both from 2 primary criteria: one is reduced cost. I'm talk about that in a second. And secondly, improve our reject resolution so that we capture those items and are able to bill for those early on versus waiting and perhaps never being able to recoup that money. With the rollout in 2013 and 2015, you're going to see some additional benefits of lower cost as we roll out the system through 2015. We are approaching this whole project in a very, again, standardized process. It's an interaction between, not only the IT group, it's got a strong interaction with the operations group, as well as the finance group. A couple of executives we have today, Randy Carpenter, who's our new Senior Vice President of IT earlier this year and Bob Reese, who's our Senior Vice President of Operations and Finance. They're both here with us today and they're both heavily involved in this process as are a lot of the other management team members you're going to meet a little bit later. So it is a company-wide process and one that, again, we think we'll generate a lot of significance going forward.

Kind of talking about some of those cost benefits. We've talked to you in the past. You've given you some indication of the cost of this new system. And that's in the direction that, that we're going to be spending $15 million, $20 million more a year starting this year for the next few years. So that gives you some idea of the cost of the system.

Relative to the benefits, we expect the benefits to be a multiple of the expenditure. Some of the examples are profiled on this slide, we'll no longer be operating 2 disparate systems. There'll be fewer resources, meaning headcount required in collections and dispute resolutions. And again, our goal is to mainstream the information to the executive team. It also provides a platform that we can integrate with CPOE efforts, which are underway today in a lot of the nursing homes to create some more efficiencies and to capture some lost revenues. This also facilitates that and that's something that drives efficiency, not only to Omnicare, but to our customers. It gives us a state-of-the-art platform as our healthcare customers continue to look for new technology themselves and overall, improves our overall processes. So best to give you some idea, it's one of the key platforms of something that's going to continue to drive growth on 2013 and beyond. As we start to see those benefits again, you're going to hear more about automation, standardization and Omnicare-at-Home as Jeff presents next.

And with that, thank you for your time. And I like to introduce Jeff Stamps, who's our President of Long-Term Care Operations and he's going to talk about that business.

Jeffrey M. Stamps

Thank you, John, and I'd also like to welcome everyone. We appreciate you being here expressing interest in our company. We're very excited about the things going on in the long-term care division of Omnicare. I am a pharmacist, have been with Omnicare for 21 years and this year has been one of the more exciting, I have to say. We're very pleased with how things are going. I am responsible for the long-term care pharmacy group and we'll be going through several different things related to the long-term care pharmacy and this is probably the area of the pharmacy that most of you are most familiar with. Nitin gets to go through a lot of surprise information today or new information today. I'm going to go through some of the things related to our long-term care business, some of which are historical things that we've been doing but very excited to show you some of the new technology things that we're introducing into the market.

So first, let's take a look at long-term care by the numbers. John went through this slide, but we'll just briefly focus on it. First, about $3.5 billion -- $3.8 billion in revenues and we just dispensed a little over 85 million prescriptions through the third quarter. It's important to note that the business in long-term care is a fragmented one as it's related to -- or diversified one as it's related to our customers. I thought you might find interest here in taking a look at kind of our customer base, as the largest customer goes. So the largest customer at Omnicare has represents about a little over 2.5% of our revenue. I've listed for you here our top 10 so you can see that the second one falls quite dramatically from the first. But as you move down to the 10th, it really represents a relatively small part of the total revenue of the company. And then as you would imagine, the balance of that is represented by individual facilities, smaller facility group chains and other businesses that we'll -- or rather facilities that we'll talk about a little bit later.

Okay, so let's take a look at the operating model for the pharmacies themselves. As you can see here, it's a relatively complex series of events that has to take place in order for the prescriptions to be delivered. The focus of this process is really to get the right medication to the right patient in the shortest amount of time possible. Highlighting just a couple of areas of this process. First of all, the orders as they come in. If you look historically in long-term care, most of those prescriptions were faxed to the pharmacy and the pharmacy read those faxes visually on pieces of paper. We digitized that entire process across the organization with our document imaging programming.

In addition to that, as John mentioned, there's significantly more prescriptions that are coming to the pharmacy in the past year electronically through the computer physician order entry, the CPOE that John mentioned. Also, when we look at the label being printed and filled, we're using a lot of our proprietary technology in this area where I'll go through some of those technologies with you later to show you how those are increasing our efficiencies and lowering our cost. In addition to that, providing a higher level of accuracy for our customers. I believe that in this area specifically, Omnicare does a much better job than anyone in the industry.

So the Omnicare advantage, what do we see as the advantage? We're really looking to what are the aspects of our business that create value for our customers and let's take a look at some of those. We really break these down into 4 different categories: the clinical, our operational, specialty, and our technology offerings. In clinical, as you'll see first, the Geriatric Pharmaceutical Care Guidelines. As you see here, it's the industry standard. There's really no reference like it and it's really what we base our clinical programs on. So let's start with our clinical components of our business. As you can see here, we have very robust clinical infrastructure. That is the facing technology for clinical for all of our customers. You'll see here that part of this clinical organization is our consultant pharmacists. I get questions all the time about our consultant pharmacists, what the consultant pharmacists do. The consultant pharmacists really do spend the customer facing time and do the clinical -- day-to-day clinical activities of taking care of our residents. However, they spend very little time related to our therapeutic interchange programs. Those are driven by our clinical intervention centers as you see at the bottom left, and that's a very unique process that Omnicare provides as opposed to any of our competition. We focus those clinical activities as they relate to the therapeutic interchange program and that's getting the most efficacious drug at the most appropriate cost to the resident. We do that prospectively through our clinical intervention centers. This group also represents the kind of frontline compliance for the pharmacies and for our customers, compliance with their regulations that they deal with, with the Department of Health, as well as those things that pharmacies are required to provide for our facilities and must be monitored by our clinicians.

So let's take a look at -- this is the number of additional services that we provide as part of our clinical process and program. Just to highlight a couple of these that are -- we feel unique to Omnicare and definitely that we do a significantly higher level of work than many of our competition. First, the generic conversion rate. John mentioned that earlier and it is something that Omnicare does a phenomenal job. When John Figueroa came to work for the company, we talked a lot about our generic conversion and he challenged us to do an even better job at generic substitution. And we've seen that improvement over this year. And that represents significant savings for our customer, as well as reducing our cost in creating revenue and increased operating profit for Omnicare.

Our prospective therapeutic interchange. Again, an important point that is somewhat unique to Omnicare. We, through our clinical intervention centers, prospectively review all of our prescriptions before they're dispensed. If you look at what happened historically, that was the consultant pharmacist that many times was driving that. Our consultant pharmacist now really only review those that are kind of in the recalcitrant situation where a physician has said they want to take a look at something clinically before they make a change. So most of these are being done prospectively at the clinical intervention center. Additionally, as our facility-specific formulary interchanges which is something that's been an improved technology in our consultant group this year as we've expanded that. All of these are designed to improve quality, create value for the customer and at the same time, lower cost for Omnicare.

As I mentioned earlier, the Geriatric Pharmaceutical Care Guidelines really represents the compendium of clinical information for seniors in the United States. It's unparalleled. We have a resource document that we developed initially in 1994. We continue to work with our Chief Clinical Officer, Barbara Zarowitz, and our physician advisory group to update this every year with the most significant clinical information for seniors. And this is a reference that's related primarily to seniors and the only document of its kind that's been endorsed by the American Geriatric Society. These programs, after they're developed by clinical programs as we roll them out operationally, these represent also additional areas of cost reduction for our facilities as we dispense the lowest cost, again, most efficacious medications for our residents.

Right, John mentioned so I'll just briefly touch on it as well. If you look at introduction of generic and the number of days that it takes Omnicare to aggressively interchange those products, we do have the advantage of buying our products directly from the manufacturers' offers, Omnicare a cost-benefit that our competition doesn't have, and you can see here that we have about a 30% improvement over the market in general.

Right, moving onto the operational elements. And we really have operations. We have pharmacy operations, but we also have operational activities that impact our customers. I've highlighted some of them here for you, facility operations and these are our operations that impact the services provided by our customers. And you can see here there's a quality component, a nursing component and then an area that we've worked on heavily this year which is the billing component and especially the electronic billing component for our customers. Some of the operational programs that we have that assist our facilities, those skilled nursing facilities and assisted-living facilities to expand their business, we've listed for you here. And just to highlight a few of these, first, the infusion program. I'll briefly touch on that shortly. But our discharge with medication program is a program that many of our customers take advantage of. It's a customer program that allows them to send the resident home with enough medications so that there's a continuity of care, allowing them to monitor what's happening with the residents once they go home and preventing them from going back to the hospital with a medication-related event.

Something we're very excited about is our Omnicare-at-Home program. The discharge home with medication program is kind of a temporary program to get them home, get them on medications, get them stabilized before they need to see the physician and get prescriptions filled. The Omnicare-at-Home process is really an ongoing prescription program that we provide for residents who are at home that allows them to organize their medication in a way that it's easier for them to monitor and to prevent medication misadventures.

All right, let's look at the specialty group. No, this is not the specialty care group that Nitin's going to be talking about. So these are just special programs that are within our -- embedded in our operations that impact not only Omnicare, but also impact our customers. If you look at our specialty programs here, infusion. I briefly mentioned it earlier. We've -- we were challenged early in the year to not only look at our infusion programs but to identify, for our facilities, how we could assist them in this area. And we've invested some educational programs for our facilities, making them feel more comfortable with taking these residents in. And we've seen about a 15% increase in 2011 through third quarter versus where we were in 2010. It's also an evidence that the acuity within the long-term care marketplace continues to increase.

Many of the programs that we're looking to implement today, as well things that we're doing in the future, are customer focused. There are things that our customers are asking us about. We spent a lot of time this year talking to our customers and trying to develop and move forward with things that are going to benefit them as well as areas that will lower the cost for us.

Leveraging our specialty care group, Nitin and I, after our appointments have been working together. Obviously, there's a lot of specialty products that go into nursing facilities, and Nitin and I have worked with our staffs to develop programs to allow us to capture those specialty products that are in our nursing facilities. At the end of the day, all of these programs, I just mentioned a few of them here, are really designed to improve the quality of care that we provide and the care that's provided by our facilities and also create a market advantage for Omnicare.

All right, so now let's talk about some of the really exciting stuff, the technology. Obviously, this is an area that Omnicare has spent a lot of time over the past year, looking at ways that we can increase our efficiencies, provide higher-quality services for our facilities, and this is what really separates Omnicare from the competition.

All right, so we're going to show you a video of some of Omnicare's technology. We think you'll find this exciting. So let's give you a little preview of the Omnicare technology.


Now that's world-class automation and it's very, very exciting, having started in pharmacy when we filled everything by hand. You can only imagine how exciting it is to see this type of automation in our pharmacies today. And the accuracy of this automation is truly phenomenal. When you think about machines that can dispense millions of prescriptions and not make a mistake because of its technological advances. It's really quite phenomenal. It does allow us to streamline our operations process. It lowers our cost of providing prescriptions, and that's important to Omnicare. The accuracy, very important to our customers and they notice that. So we feel these technological advances, not only these, but some of the others that I'm going to show you that are the new ones that are coming out, not only being world class and innovative to Omnicare, but are going to represent the future of pharmacy and the improvements are going to continue to improve the quality of care that we provide or able to provide for our customers.

So let's take a look at some of these tools and initiatives. First of all, these are both internal and external technologies. Their proprietary and innovative to Omnicare, and we’re very excited about it. In the video you've seen the machine with the robot. That was the auto label and verify. And that is for oral solid medications. So pills, tablets.

We have developed a similar machine, similar automation that is called a ULV that takes non-oral solid medications, so the ointments, creams, Balmex those types of things, things in boxes. And can do the same auto label, verify. Very exciting technology, and that we'll be implementing in 2012.

Pouch technology, again a new technology that we're going to be moving into 2012, and a significant customer request. We set the year -- set out at the beginning of the year with a commitment to our customers to listen to what they needed for us to do, and one of the biggest things they were asking for was a med availability solution upon admission. We worked very hard with our automation group to come up with proprietary system from the care that we're beta testing today, and again planning on rolling out more system-wide as we move into 2012. And then a myriad of customer facing technologies, just a few of which we'll be able to go through with you today.

But 3 of these are in pilots. So there's tremendous upside for Omnicare from an efficiency perspective. The ULV, the pouch technology and the medication availability. And then as I mentioned, we continue to expand our customer facing technology, which is really what many of our customers are looking for.

So let's take a look at this upside potential. So this is a slide that we're very excited about, obviously. If you look at where we are today, 2011, for the most part, this represents our ALV and our on demand to automation products. And you can see that we’re at about 18.5% of our prescriptions today are dispensed through the automation.

If you project that out to 2015, considering that the ALV can handle the oral medication, the ULV picks up the areas that we couldn't address with the ALV, we're moving in excess of 71%.

So let's take a look at some of our customer facing technology now. Omniview is something many of you who've come through our pharmacy, you hear us talk about Omniview. I thought I would give you a little bit more information about Omniview today.

Omniview, we really have 3 different categories of Omniview. First, our Classic Omniview, which is our facility portal interface that allows our facilities to communicate with us electronically, bidirectionally.

Our new product which is OmniviewDr, we're very excited about this, and again addresses a significant need that's been expressed to us over the past years, the DEA has changed some of its interpretations on controlled substances.

And MyOmniview. MyOmniview is the facility patient portal that allows our customers to review things that are important to them on Omniview. So let's take a look at those different categories.

First, our Classic Omniview, and this is again our portal for our facilities that allows them to interface with us electronically for operational activities, for clinical activities and for financial activities. It's extremely robust product. It's unparalleled in the marketplace. And when you talk about this type of product, we've had Omniview in production, real-time with facilities for over 9 years.

All right, so let's take a look at what we've worked on this year with Omniview. We have a heightened focus this year. We really had a focus on implementing Omniview in many of our facilities who weren't using it before. And as you can see here, we've been very successful this year. We've had results, the utilization is increasing. And as our customers begin to use Omniview, they get more comfortable with the electronic communication updated to the pharmacy. So not only are they able to gather more information, but it allows -- there's opportunities for them to lower their cost and manage their business better. So we're in over 7,000 facilities today with the Omniview product. And as you can see here, about 68,000 users who log in to the product routinely.

And then let's take a look at our newest technology, which is a very exciting technology and that's our OmniviewDr product. This is probably the most significant customer need, this and the medication availability that was expressed to us throughout the year as we saw more and more activity especially around controlled substances. But effectively, what OmniviewDr is, is an application that allows physicians to use their mobile devices to communicate between the pharmacies and the facility.

And if you look at that process today, it is a cumbersome, manual process, and we're very excited about being able to give our physicians something that's unique to Omnicare. No one else can provide this for them, that allow them to order controlled substances, as well as other medications in real time. This has been eagerly anticipated. We've been talking about it with our physicians for a couple of years now, and they're very excited about it and we have had several of them sign up in the area that we're going to be rolling it out, so really looking forward to it.

All right. So I thought it might be interesting for you to see how OmniviewDr works, the interactions that take place as these prescriptions go to the pharmacy and to the facility. So let's take a look.


All right. So hopefully you can see why we're so excited about this. This is something that our customers have really asked us to address. We're very pleased to be able to start providing this for them, and I think you can get an appreciation of how much more quickly we'll be able to act on this much-needed medications whenever we're able to get the physician to have that information and communicate with us electronically. And it really eliminates a lot of steps that today are manual processes.

So let's move on and take a look at MyOmniview. MyOmniview is really designed to address resident families and their needs. It allows them to access their health record. They can pay online, they can ask a pharmacist, there's lots of aspects to it. But essentially it is a portal for them to communicate with their pharmacy and get information about themselves or their family member. All right, so let's take a look at how this is being received by the customer.

We worked very hard this past year to reestablish organic growth in the company, and excited about the result. As John mentioned, we worked very hard this year culturally to increase the focus on the customer experience. We've reorganized the company into 5 identically structured divisions that have allowed us to move our programming out much more consistently to standardize processes across those divisions, which allows us to reduce cost. But most importantly, looking at what can we do to focus on the customer and retain the business.

We set about at the beginning of the year to retain 95% of our business. As John mentioned, we fell a little short of that, but nonetheless, significant progress compared to where we were in 2010. So let's take a look at those early results.

These are service-related bed losses in our programming that we worked with to retain our business. We categorized the losses. And as you can see here, from the first quarter to the second quarter to the third quarter we've seen a continued decline in beds that we've lost related to the direct day-to-day services for our customers.

We've also worked to improve our sales. This improved customer focus is translated into more opportunities for our sales department. We started out the year with a little bit smaller department. We increased that size significantly as we went throughout the year.

We also spent time educating the sales force on really understanding and being able to communicate to our customers the value proposition of Omnicare. And the sales department, Beth Kinerk has done a phenomenal job with moving the sales department forward, and we're very pleased with the success we're having, conveying the Omnicare story to potential new customers.

All right. So let's take a look at the results with organic growth. John went through this, but it's a bragging slide for long-term care so we're going to go and put it up again. As you can see, we've had significantly lower bed losses in every quarter this year, with approximately the 45% reduction in net bed losses or 45% change in our net organic bed growth in the last quarter of this year -- or the third quarter of this year, excuse me.

All right. So what about opportunities outside of long-term care? As you can see here, there's other areas that we're looking to develop business, and we kind of give you a schematic of where Omnicare is in that marketplace. We are excited about things that we're doing especially in the VA and correctional facilities area. We've designated some of our sales folks to work exclusively on those. The response to those parts of our business are a little bit different than the responses that we have with our traditional skilled and assisted-living business.

Psychiatric hospitals, we continue to work with assisted-living and the developmentally disabled facilities. And in assisted-living, we've also implemented some new programs to increase our penetration in the facilities that we currently service.

All right. So with that, through the areas of clinical operational specialty and technology, we really are looking at creating that Omnicare advantage and establishing consistent organic growth for next year. So I'm going to let the group take a break. We'll cut out for about 15 minutes and we'll get started again at about 1:45. Thank you very much.


John L. Workman

We welcome you back from the break. We just like to -- a friendly reminder that you make sure your cell phones are placed on silent mode, please.

At this time, it gives us great pleasure to bring to you Nitin Sahney, the Executive Vice President and President, Specialty Care Group.

Nitin Sahney

I will wait another 30 seconds for everyone to get their coffee. Good morning. My name is Nitin Sahney, and my goal today is to give you an overview of our specialty care group. And I'm going to do that by giving you a little bit of an overview of the specialty marketplace, our operations, our different platforms, our history, what we did in 2011 and what we plan to do operationally and financially in 2012.

So again, I do realize we have complex services, so if there are any questions, please address them in the Q&A, and maybe in the future by going through Patrick.

This slide has been discussed by John and Jeff before, but just to put into perspective where we are today in terms of revenue and prescriptions.

What is specialty? Sometimes there's confusion about specialty in terms of generic specialty product. The way specialty manufacturers view specialty, really, is high-end drugs that are very expensive, complex reimbursement and supply chain challenges, limited patient populations, and they're not available through your normal retail channel. So that's the market that we in specialty care services service the patient in.

And as you can see, the new indications, the new drug profile for 2010 has been very robust. This is a growing population, and it's one of those populations that is basically from age 30 till 65. So significant portion of this patient population actually falls into the commercial paying population. That's another interesting factor of this particular disease state.

I also want to talk about the top categories. So when we talk about specialty, there are about 10 top disease states in this category. Obviously, oncology we all know about. But I think it's very interesting to see that RA is the top biotechnology disease state in this industry. Enbrel being the #1 top brand.

And it's very interesting because if you go and look through, you'll also see growth hormones. People view growth hormones as antiaging, but 80% of growth hormones in the U.S. is dispensed to children, under the age of 14. And they take their drug for about 10 years.

If you look at RA, a typical patient is on that drug for about 20 years, until the time it's not effective. So that's the market when the manufacturers bring the patented for 22 years. They're looking at that market and that patient population.

From 2000 to 2014 there's been a dramatic increase in terms of new indications and new drugs in the marketplace in this category. You can see from this chart, it's growing about 4x compared to a traditional drug. That's another, I would say, market indicator why people are interested in the specialty marketplace.

We've talked briefly, it's not easy to manage these drugs, guys. They have reimbursement challenges, they have supply chain challenges, a lot of regulatory monitoring and you have to really coordinate the patient care between the physician, the manufacturer, hospitals and other caregivers and the supply chain.

These are the products that look very easy to dispense, but a lot happens before these products are actually dispensed to the patient, and that's some of the things we're going to be talking about in the next couple of slides.

So some of you are familiar with individual assets that Omnicare acquired over the last 6, 7 years. I just thought it would be nice to talk about some of them in terms of history.

So if you look at Advanced Care Scripts that was acquired by Omnicare in 2008. It's our specialty pharmacy platform that's headquartered in Orlando. It is one of the largest specialty pharmacies independent of a BDM, and growing at a growth rate that is very nice.

The #2 company that Omnicare acquired was RxCrossroads, which is based in Louisville. It has 3 platforms that focus on the manufacturers, and that was acquired in 2005. And then we have excelleRx, which was acquired a week after RxCrossroads was acquired.

And PBM Plus, which was acquired in 1997. It's an in-house PBM. That strategically really helps the manufacturers and some of the things that we plan to do in the future.

Now what are these platforms and these services? This chart just generically puts some of these services. But let me tell you, each of these services are customized to the brand, the patient population, the brand competition for the manufacturer.

So for example,, the reimbursement services. We have listed them as premium. What do they do? A typical patient will call you through their physician or a physician office will call you at 4:00, and say, "I need this patient to be on therapy. They are suffering, and I want the drug to be delivered to them tomorrow in San Diego." That's the call that typically comes in.

And the drug cost is about $5,000. So what do you do? You have to get a prior authorization, you have to coordinate with the physicians and you have to make sure that if you're sending the drug someone pays for it and the high co-pays. That's just an example of the reimbursement support. We do it every day for patients who really need the help right away. We also customize these services because for some drugs, the manufacturers are willing to send an interim shipment by the time we solve the reimbursement case.

And we work with the manufacturers to develop those programs based again on the drug profile and the patient population. So very customized, a lot of work goes in. Typically, we work with the manufacturer about a year before these products are launched, and if their products have been launched and they want additional help, it takes 6, 9 months of consulting, sitting down with them and making sure we put the right reimbursement programs.

What's the HUB service? Without coordinating all this care between reimbursement, supply chain, the physician office, the clinical services, patients will not get this drug. And if they do get their drug, they won't have a good experience with that particular brand.

So our job as Omnicare specialty care services is to make sure we come up with a customized standard program for the manufacturer that integrates the supply chain and the marketing aspect of it. That's the reason why the patient can get the drug in San Diego the next day.

With all that we've talked about, and we'll actually talk about these services a little bit more in the next couple of slides.

So what do we do for the patients? We've talked briefly. But the patients when they get this drug, you have to be careful that there are no side effects. They're also very worried about the reimbursement support and they also want to know when will I get the drug, and from where?

Our job is to customize programs and products, so that the patient gets their drug, the manufacturer feels that because of those services, that's the brand appreciation.

The disease states that I mentioned clinically, the drugs are almost the same in terms of their effectiveness. Sometimes the difference is how quickly the patient gets the care and what level of care do you get, and that's frankly what we do for the physician office, the patient and the manufacturers.

And again, every product, every indication is different. You could have one product with 2 different indications. How do you manage that? How do you help people? So we have dedicated teams throughout specialty care group for that particular brand.

So view us as an extension of a branded, injectable pharmaceutical company. That's what we do for them. Without these services, these products cannot be accessed and paid for.

So if you look at our 5 platforms, and we view our services as platforms versus company. Our 5 platforms are very unique. And what we're trying to depict in this slide is that the brand support 3PL, which is third-party logistics and patient assistance program, they're very customized, very unique, free for service. We don't have $1 in inventory costs when we manage this.

And in our warehouse at any given time, there's about $1 billion worth of drug that is the manufacturers' drug inventory that we manage.

Now, why is that important? What I can tell you for the manufacturer again is when they launched this product, they outsourced a lot of clinical services, supply chain and reimbursement services. And it's very important for them to know that these services are integrated. I'll give you an example. If you send an MS drug of a certain manufacturer, how does it reach the patient? Sometimes there's a wholesaler required, there's specialty pharmacies, it's manufactured in Europe, how do you get it to the U.S.? Where do you store it? How do you make sure that those products are safe? Because they're so expensive, you drop a vial, that costs you $5,000.

Then you have to make sure that the payers have it on the formulary, then you have to make sure they get a prior authorization and the physicians and other caregivers are coordinated. That's what we do between the brand support services, the 3PL and patient assistance program. And I'll show you a case study following this slide that gives you a brief example of what we do on a day-to-day basis.

But for our specialty pharmacy, which is, I think a lot of you are familiar, you've asked questions. That is what for example a treater does. Our customer is the payer, we get the contracts, we have our own sales force. So we get patients through the physician office, and we service those patients by providing clinical support first, and then making sure they have access to the medication. Sounds simple but what we are trying to do is we want to make sure the manufacturers realize that we can do end to end.

We cannot only help them with the marketing aspect of it and third-party logistics, but we can actually get their drug to their patients the next day. And that's what we're doing right now.

So from a model point of view, that's the buy and sell. The payer is the main client for us, but so are the patients, because about 20% of the referrals come from the physicians. Physicians still have some say in terms of saying, "Hey, this particular product is surrounded by good patient care, and I'm going to recommend this brand over that brand in a particular disease state for a particular brand."

And we make sure that we capture those patients because once they come to us, they stay with us for about 5 to 10 years. So it's very important to make sure that we service them. And that is the difference between us and some other specialty pharmacies that are very huge and are focused on dispensing. We are focused, frankly, on the patient care and what it does for the patient. And then the dispensing becomes an afterthought.

We also have end-of-life care. I'm not sure how many of you are familiar, but Omnicare has a leading position in this care. And that is through our excelleRx company that we acquired in 2005. We were very excited about it. It's very, very complex.

Imagine, when you are in hospice, you usually have 6 weeks on an average. We make sure that we get the medications to the patient's home or to a hospice or to a nursing home on time, very complicated medication, and we have 134 pharmacists that are helping the patients in a call center, making sure the nurses know what's happening, making sure the caregivers know what is happening, because the patients don't, usually, they're in a very critical state.

That is a growth business also for us, and we hope to make sure that we put it back to even further growth in the future. In both those categories of specialty pharmacy and hospice, we do own the product and we do get paid by the payer or by the hospice.

So I just want to give you a case study of what I've been talking for the last 5, 7 minutes. Obviously, we can't disclose to you our client, but it is a top 5 biotechnology client in the world. What we did was we went to them and said, “Your market position is next to last in the marketplace." That was a challenge for them. They had this product, they weren't sure why the uptake wasn't there, and we said, "Well, I think it's because of the patient care that has to be provided." So the challenge was that there were next to last in a crowded growth hormone marketplace.

So the solution we provided them was a very customized, where a patient calls in either the physician or through the physician or directly. And after that, we take care of everything. I think that's what I've been talking about. So we get a typical call, we make sure the patient insurance is fine, that everything is in place, their mother or father or any other caregiver knows when the drug is coming in and the payers are paying for it.

And we do all that work and make sure the patient gets the drug, and then we follow up. What they did was basically -- we showed them the results, which is the next slide, that the results were absolutely outstanding. And this is just one example. It went to almost the #1 marketplace in growth hormone. The company reinvested into a new sales force and the patient programs that we manage have been ranked very high consistently. Again, that's one example of what we do. We have multiple programs like this.

What does it do for the manufacturer? It helps them compete with that brand in the marketplace. So all the services that I've mentioned basically are customized to that particular brand.

We thought it would be helpful to kind of give you a competitive landscape, and really what this chart tells you is that our main competition resides within the PBM, the wholesalers and CROs.

But you'll also see that how uniquely we are positioned very well, where most of these services -- we are 1 of the 2 companies that has all the services that I talked about to help the manufacturer. Right from Phase III onwards, we can help the manufacturer make sure that the program -- the right kind of marketing program is in place, that the logistics are in place, the specialty pharmacy is in place, the reimbursement support programs are there. We are one of the few companies next to only one other wholesaler that provides all these integrated services, very valuable for the manufacturer.

The second advantage for the manufacturer is they view us an independent company outside the PBM and wholesalers. When we approach the manufacturer, we approach them as a client. Because not only are we dispensing for them, we're really helping them and partnering with them on marketing and supply chains.

So as we have reintroduced a specialty care group to the manufacturers, we've seen a lot of positive remarks from the manufacturers who say, “That's great, we want to make sure that you guys are on our side." Imagine if you are a typical specialty pharmacy, you get a payer contract. Frankly, you don't care what brand you're dispensing as long as the economics work. Those are important, absolutely important.

But for us, what we are trying to do with the manufacturer is to say if it's your brand, we want to make sure that we represent only your brand. As a result, you end up doing all the services that are required for these products before they're dispensed. And that's our fee-for-service business.

So what have we done in 2010? In November of 2010, we came together and created a new business plan that basically launched specialty care group. These were independent companies operating independently, sometimes even competing against each other. So what we did was we put all these services together, have the right message for the manufacturer. 3 out of our 4 companies we replaced the operators and put new ones. We started investing in our infrastructure side-by-side and methodically with a plan, we have a 3-year plan, which depicts our EBITDA and our operational infrastructure quarter-by-quarter going forward.

And by timeline, we started executing. We also put a new sales function that did not exist prior to 2010, and we brought in a new team that was very focused on the old-fashioned way of getting new sales. And while doing that, we also protected the business that we already had to make sure that our market reputation enhances.

So this chart basically tells you the timeline of putting good operators in place, putting a sales function in place, making sure we invest directly in our infrastructure, so that when we grow in 2012 and '13 even more aggressively with our sales, the manufacturers view us as having capacity and good operational infrastructure.

The first year. Basically what happened in the first year is if you look at the amount of work we did, which frankly translated into EBITDA, you can do a lot of work but if you don't make money, I view that as a foolish thing. So what we did was we put EBITDA, we put our operations in sales and connected them, which you know is very well connected.

And how did we do that? If you look at the manufacturers, look at the volumes we are doing right now, $1 billion of commercial inventory. We shipped about 19 million shipments a year. We solved about 3,000 patient problems under the reimbursement side on a weekly basis.

And this is a trend, by the way, right now. And very efficiently, without losing a client. So that gives you some metrics on what we did. We also positioned ourselves for a very aggressive growth in 2012 and '13 because the sales cycle for some of these services is a little bit longer because you have to show the manufacturer what your solution is. But once the manufacturer is with you, they stick with you for a long period of time because you're absolutely tied to them with their marketing and supply chains.

Basically, the results were that we had a 13% increase in specialty patients that we manage. We had a 29% growth in the FTE for key platforms. Why is that important? For our entire brand support platform, that's FTE. 80% of it is FTE-based, which is basically dedicated teams by brand that the manufacturer invests in. So that is an important metric for us because we get paid by FTE, in some cases, for the brand support program.

We also had an 18% increase in consigned Rx volumes, which is our third-party logistics. So what we started finding out is as we started going back to the marketplace and showing them our value that more and more manufacturers want to partner with us.

While doing that, while retaining our business, which was very important for us, we also won against major competitors, some additional programs and additional business. And that's the trend we are taking in to 2012.

Basically for growth in 2012, I can summarize by 2010 versus, say, 2011 what we did was we put good operators in place, with good operational infrastructure in place, got our marketing right, we consolidated 5 different entities into 5 new platforms because I think that those are the right messaging for the manufacturers. And while doing it, we retained the business we had while we grew on the EBITDA and the revenue lines that we will share with you.

So compared to 2010 and year-to-date Q3, we grew 24% on the revenue, and about 10% on the EBITDA line. So we are doing about $773 million as of 2011 Q3 for revenues and about $86 million in EBITDA.

The next slide is important. On the right-hand side, the revenue by service. What you will notice is that a significant portion of our revenue comes from our specialty pharmacy business, which is absolutely very good. But what we are focusing on also for 2012 and '13 is our branded platforms, which frankly are much more higher margin business, and that's what our RxCrossroads was started with.

Those are the businesses that were ignored. So our sales force, our operations, et cetera, we put them in line to make sure that we get back, and to aggressively getting clients for the whole solution that I talked about, the HUB programs. So right now, that's 8% of our business and revenue, but it provides us significant EBITDA to the bottom line.

On the payer side, which is our specialty pharmacy and hospice business, about 47% of our payer profile is still Part D for our specialty pharmacy. And those are the patients we get through the physicians and through contracts with the payers.

But that to me is the opportunity on the right-hand side, as we put our infrastructure together. If this pie chart converts into more like a higher double-digit on the revenue side from the manufacturer, it will contribute positively to our EBITDA margin.

So looking ahead, like I said, a lot of work went in to repair the businesses, to put them and position them very well for the future. We feel confident having done that, making sure the manufacturers now know what the specialty care group is, what the services are, what kind of a team we have. And I have to tell you before I close in the next couple of minutes, one of the most fascinating things that have never failed, fortunately me, is when you put good operators and you go the old-fashioned way on the sales side, what the results are?

We feel we are uniquely positioned today versus a year ago, operationally, financially and strategically from a manufacturer's point of view that we can really help them. And like anyone else, the manufacturer wants to know how big are you? What kind of programs have you wanted? The #1 question is have you lost business in the last 12 months? So we feel we've really done a good job operationally, financially and strategically.

Now to go in for more complex therapies, to add more disease states, to add more talent, our phones have been ringing proactively, which wasn't the case before, of good talent calling us and saying, "Wow, we want to join you." And we have actually acquired talent from pharma, from a competition, and frankly, from the supply chain that has come in, in the last 6 months. The team is working very nicely together. And we feel right now as a team, we can aggressively chase the sales looking ahead and new disease states.

Thank you very much. I'm sure we will have some questions in the Q&A, and I'll be happy to answer them.

John G. Figueroa

Let's talk about looking ahead, and maybe a recap on some of the highlights about the company and what we hope to do moving forward. I think at the end of 2010 and certainly confirmed at the beginning of 2011, there was a discussion and a commitment for more transparency on the business. We want you to understand as much of the business as possible, so that you can get excited about what we're doing and get excited about the future.

So in our opinion, the more transparency that we can have, I think the better understanding of the company certainly moving forward, a better understanding of all of the elements of the business.

So in 2010 we made the commitment and fulfilled that commitment throughout 2011 regarding customer retention, breaking that down losses, gains, pulling out all the acquisitions of those numbers and letting you see exactly what's happening in the market. We made a commitment, and we show you a scorecard on that every quarter as we get towards that goal of net organic bed growth.

If you recall at the beginning of the year, we indicated that we felt the end of this year we had a pretty good shot if we executed on all of our plans to be net organic bed growth. You've heard me say that fourth quarter, first quarter, we thought that was the timeframe of getting that done. We had tremendous results the first 3 quarters. I continue to be optimistic that we will continue that trend, and at some point get to that magic statement that we are net organic bed growth positive. So excited about that trend, and we continue to focus on that.

We also said that one of the measures of our business, especially as we grow our specialty business is to start to look at our prescriptions. And that's a measure that we do internally, and we also want to continue to be transparent with you on the actual prescription amount moving forward.

And that's a good barometer of market share. We, in our long-term care world, when we take that patient and the responsibility for that patient, we're responsible for all of their medications. What we want is more patients. So we want more market share, more beds, more patients. And that's the element of growth that we're looking at.

So 2011, what's new? And I think the big unveiling today is that in the fourth quarter and beyond, that there will be more detailed information around the specialty care group as we pull that group out of the numbers, we'll be able to look at that business and evaluate that business entirely on its own moving forward. So we think that's extremely positive as well, and again, in our quest to be more transparent.

And then of course 2012, John gave a lot of credit for a number of folks in this room who said that this business is so cash-oriented, it's such a positive piece of the business that a cash-based adjusted EPS was the right thing for our business. So we do listen to you. And we do go back and determine if, in fact, that would be good for our business and good from a transparency perspective. And I think as we have evaluated through the year, we agree, and I think that's a positive thing moving forward.

Two businesses. When I want you to think of Omnicare, I want you to think of our 2 businesses. For 30 years we were the long-term care pharmacy business. I think the reality is we are a pharmacy-focused business, however, we touch many aspects of healthcare. And I think that's the next 30 years as the company involves. We will have 2 core businesses, perhaps some adjacent businesses as we grow. But we are touching more than just the long-term care patient for pharmacy. And I think that's important to note as we move on.

I like this slide because I think it's a simple slide to talk about the avenues for growth in each of the separate businesses. We are excited about the organic growth that we can create within long-term care. But if you remember that one slide that showed the adjacent markets, we have relatively low market share in a number of those adjacent markets. And I think historically this company didn't pay a lot of attention to those adjacent markets. This company did not adjust its service offering to specifically match the needs of those particular customers.

We are developing plans to do that and do that more effectively moving forward. It goes back to wanting more prescriptions. If you want more prescriptions, you need to expand your target base of additional patients coming into the Omnicare family. So we're excited about that. We're also excited to be in a business that if you look at the demographics, more customers come to you simply because they fall into a category where they need our services. A good business, a strong business, core foundation of Omnicare. And we will continue to be the premier player in that space.

That second area of specialty, a lot of questions I had when I joined the company was why? Why are you joining Omnicare? And when you look at the long-term care piece and the cash flow generation from it, if that doesn't get you excited enough, certainly looking and understanding the specialty assets that we had and the ability to put those assets together, to grow that market space. When organic growth in the space is growing at 15% to 20% and you're not concentrating on that space and you have the assets, putting together a team led by Nitin, you can see why we get excited about that space and why everybody in the industry's excited about specialty. It is a growth engine. And if you do it right and if you do it effectively, it is a business of the future.

Okay, let me kind of highlight a little bit of what John said. The capital allocation when you're a cash generating company is extremely important. We are constantly asking ourselves 2 questions. Deploying our cash in a certain area, how does it affect us in the short term and how does it affect us in the long term? We continue to be focused on meeting our short-term goals and needs, but we're also very, very much focused on ensuring that this company continues to expand and grow in the latter years.

You'll hear us talk all the time about 2012. I mean what are we going to be in 2012? We're also focused about the 3-year plan, and we're focused about 5 to 10 years out, what does this company look like? So our capital expenditures are extremely important as we reinvest into the company. This is a very -- this is a company that has spent very, very low amounts on capital expenditures. We're increasing that a bit. As John indicated, our IT consolidation, our automation that you've seen in some of the videos will increase our capital expenditures. But even with the increase, it's still a relatively low number. So that's certainly a positive.

The capital return to shareholders, we told you that was a minimum of 25% in 2011. We exceeded that substantially, and we want you to know that, that's an important piece of how we deploy.

Debt repayment, we've done a very nice job this year of getting that timeline to a place where we feel comfortable. A key element that John said that I want to reemphasize is that we've got the debt repayment down to the point where our cash flow on an annual basis can take care of those payments. So when you're at that point where you always have the cast to generate anything from a debt perspective, you feel pretty good. So I'm very happy with how we have restructured that throughout 2011.

And then the additive acquisitions. I think you heard me say in the beginning of the year, we are going to be disciplined. You weren't going to see a lot of acquisitions early on until we put in place a structure, a process, accountability, detailed base or business cases on every acquisition that we make. It isn't simply buying an asset, putting it or integrating it into the business and forgetting about it. We have detailed information on whatever that business leader promise on that business case to ensure that we hit those metrics moving forward.

We're not going to waste our money on acquisitions that look good on paper but at the end of the day, don't make any sense for Omnicare. So that discipline is in place. The integration teams are in place.

To tell you, the other thing that I want to make sure that you feel comfortable with, we are doing so many great things with this company. I am so excited about where we're at, I'm so excited about where the future's at. I would not entertain any type of acquisition that I thought would take our eye off the ball from an operations perspective. We are prepared for any kind of integration that comes our way. And the things that we are focused on doing day in and day out to create value, we'll create that value. I'm not worried about that.

It all comes down to our robust cash flow generation. What a business when it comes down to those numbers. So what does this all mean? We talked about our businesses, we talked about standardizing initiatives. I like to say we at corporate headquarters, every time we achieve something that I get excited about, I say, “We're a big boy company." I mean when you can start to standardize as effectively as we're beginning to standardize, you're a big boy company. I mean you are doing some great things, the things that you expect day in and day out, the things that this management team pushes this company to get done. And those standardization initiatives are awesome. And when you have a network like ours, you move on the standardization initiative, it affects your cost significantly. And we continue to do that.

We talked about the capital allocation, what does it all mean? It means exactly what we told you we would do in January of this year. We want to be a consistent double-digit EPS growth company. As John indicated, when we came in 2011 and said we were going to be relatively flat but over 3 years we would be a double-digit EPS growth company, you guys all did the math and said, "Wait a minute that means '12 is going to be pretty good, and '13 is going to be pretty good." We stand by the commitment that we made January of 2011. And we feel pretty darn comfortable that we will meet those needs. There's a lot of things going on in the industry. But I will tell you that, that's something we're focused on day in and day out to achieve.

Okay, let me at least take a second to again reiterate where we're at with the PharMerica offer. When we started this process and, really, in my mind, nothing has changed as to why we think that this makes sense. We are at a point within healthcare that I think is extremely important. You can't watch the evening news or pick up a newspaper without reading an article or listening to somebody talk about the healthcare system in our country. We are a company that plays a big part in the care of America's elderly.

And because of that, there's a tremendous amount of pressure inside and outside to continue to reduce costs, and to continue to reduce costs for our country's efforts around healthcare. There are a lot of changes that are going to continue to take place in our country around healthcare, and we have to be proactive in ensuring that we do 2 things: That we increase the quality of care, especially to our senior population; and that we decrease costs. No matter what you read or talk about, healthcare comes down to those 2 things. And if you can do those 2 things effectively, I think you're going to be a pretty good company in whatever environment we have to deal with.

The PharMerica acquisition is an excellent fit for that because we believe that there are synergies here that make sense from an overall healthcare cost perspective, that make sense for our customers as they continue to look for ways to be healthy.

And with the cuts that they experience in RUGs IV, we, as their partner, feel compelled to do everything we can to keep them healthy. And we've been doing that by coming up with new automation, by increasing their efficiencies, by moving from 3 deliveries a day to 2 deliveries a day, some of the basics to continue to be efficient, but the synergies that we believe that will be created with PharMerica, again, will be good for the entire supply chain.

Those reasons were there in the summer. Those reasons are there today. And I will reiterate from a status update on this, what you all know from a public perspective is that we have moved the tender date to January 20. We continue to work with all entities from a government perspective to answer any of the questions that they have of us. And we are hopeful that at some point we can turn this into a collaborative effort moving forward. That is our desire. We hope we do that at some point soon. And yes, that's the update. There's really nothing more than what has been said publicly.

So hopefully that answers most of your questions or at least you can understand that we can't say much more than that. And when we get into the Q&A, if you can ask about the operations of the business and not ask questions about the PharMerica offer, I certainly would appreciate that.

Okay, what does it all come down to? Those 2 things I said, everything that we do within our businesses are focused on 2 things: increasing quality to the patient, reducing cost. And that's what this slide is all about. And I want you to know that we're focused on that every aspect of our business. Value creation, value to you, value to our patients, value to our employees, to every customer that we touch is the mantra of the big boy business. And we are very excited, certainly, about what we have accomplished early on in this year and what we intend to do moving forward.

Before we get into our Q&A, I did want to acknowledge that we have some senior executives here with us today. In case you ask us a question that's too hard for us, we brought folks here that can help us answer the questions. So I think we have a slide with all of their names. We do. If you guys can kind of stand up and say, wave to the crowd. But we brought all of our key executive managers. So if, in fact, you run into them later, you want to find them for a specific question on their expertise, here they are.

Okay, we're ahead of schedule. I've also been told that, that's a good thing in New York. So hopefully you don't mind. But that gives us some -- a good amount of time for Q&A, and the floor is yours. Okay, I don't know how we're going to handle this. Do we have...

Question-and-Answer Session

Lisa C Gill - JP Morgan Chase & Co, Research Division

I just had a couple of quick questions. Number 1, when I look at your slides where you talked about the pluses and minuses as we look over the next 3 years, the one thing that really sets me is that reimbursement continues to be a negative. Can you maybe talk about the reimbursement environment and where you think the biggest negatives are? That would be my first question. And then secondly, as we hear about specialty, and we're very happy to see you now breaking out specialty, how do we think about the margin profile of specialty? And how that will impact the business going forward as you continue to grow this?

John L. Workman

On the slide, Lisa, that has the positives and negatives, and you asked a specific question about reimbursement. We're always going to be faced with reimbursement. I mean if you look at the last several years, our reimbursement has gone down basically each year. That's why it's important that we're investing in things to continue to lower our cost. Now part of that reimbursement is negative because it's also -- that's the revenue line, it's coming down with more generics. But having said that, our pricing is customarily come down each and every year, both for the Part D plans and with the facilities. And you know what's going on right now with CMS in terms of the new FULs. So our assumption is that's going to continue to be negative. But that's all built in to our business case in terms of still being able to deliver strong growth. And that's why we're investing in things, and that's why we've been spending a lot of '11 in investing in the drivers that are going to provide benefits to us in '12, '13 and beyond, and we view that as a continuum. So our challenge is to stay ahead of that.

Lisa C Gill - JP Morgan Chase & Co, Research Division

There's not -- the things you're talking about right now are things that I think everybody in this room understands. Is there anything new on the reimbursement front that you want to point out?

John L. Workman


John G. Figueroa

There isn't. Every so often we get surprised, and we got surprised a little bit when CMS asked about consultant pharmacies being pulled out of the dispensing pharmacy piece. That was a little bit of a surprise to us. But most of the time, we know what's coming, we know the timeframe, we prepare for that. And when we give you our projections, we have all of that calculated or in our model. So the way I like to explain this business, and I try to simplify everything. We have some plus sides of the business that every single year have to get better, and we have some negative sides of the business that just part of being in this business you have to deal with. The negative side to this business to our model is that reimbursement continues to come down from our payers and the government pretty regularly. And so you have to deal with that. The second one is that you have constant pressure from competition in our customers to reduce price to our customers. So going into any year, you kind of deal with some adjustments on the negative side of the column there. It is this management team's mission to really deal with that and look on the right side of the ledger. And the right side of the ledger is that generics component, where we have to be as good as anybody in the marketplace to increase our margin when it comes to generics to increase the overall margin of the company and to decrease costs. What you saw today is a pretty good advancement in both of those categories to continue to keep our margin healthy. You've heard us say before and we feel comfortable saying it that this company has a mission, and we'll execute on the mission of maintaining and increasing our margin. And so we plan for all of that stuff. The second question around margin on specialty. I think that's a great question, and it's another reason why we want to begin to focus these financials on the business. You heard us say a couple of things, and I think this is where you're going. Specialty pharmacy, a lot of revenue, low margins. I mean, I think that's consistent with any specialty pharmacy in the country, it is what it is. The manufacturer businesses, low revenues, higher margin. When you look at that specialty component altogether, the margins are pretty similar to long-term care. Both businesses are relatively the same, and you'll see that when we break it out. But when you have a platform like that, we're concentrating on that manufacturing side. And we really want to impact that business much more strongly in the next couple of years. But the specialty pharmacy piece, we love. I mean, that volume is great.

Lisa C Gill - JP Morgan Chase & Co, Research Division

And so just so I understand that, so when you think about specialty pharmacy because of the growth on the manufacturing side, do you think that you can maintain a margin overall that looks like long-term care? I guess my concern would just be that even though this is a nice growing business that you can have margin compression through the growth in specialty over the next couple of years.

John L. Workman

And you mean we refer to it as specialty care group and you isolated on specialty pharmacy. As John said, specialty pharmacy, part of the specialty care group, has a little bit lower margins whereas the brands supporting the manufacturer piece has higher. And I think if you -- and maybe Nitin wants to comment on this. Because I know where our sales team is oriented and his sales team is oriented. We want to grow from the specialty pharmacy. They're also heavily focused on that fee-for-service, that high-margin business. So I don't know if you want to add a comment, Nitin.

Nitin Sahney

I mean, our business plan frankly when we came in was focused on the fee-for-service platform that we talked about with specialty for us has being incremental. So obviously, that helps us on the revenue side. But our entire sales force, I would say 90% of it is right now focused on fee-for-service manufacture-branded programs.

Unknown Analyst

Can you help us get to a free cash flow forecast? I guess under our prior management team that we don't speak about anymore, there was a low CapEx number in a very high deal spend. What -- we see the low CapEx number for you guys going forward, but what's a realistic annual deal spend going forward relative to where you've been historically? And then just a quick one on PharMerica, I mean, are you in hold down until you can? In terms of other deals, will anything substantive happen before we know about PharMerica?

John L. Workman

I'll answer the first question, and then John can answer the second. That's the harder one, so he can answer it. The -- I think the way -- our deal spend, it depends what our deal spend is going to be. I mean, you asked a question. I would say a lot of the deal spend under the prior regime was to replace beds that were lost. And so the right way to think about the company in those years, there's a lot of that, was kind of equivalent to maintenance CapEx because all it was doing was filling the hole for the beds that were lost. Going forward, that's not our plan. Our plan is net organic growth. So whatever we do on deal spend would be additive. Now as to the dollar amount, you saw it come down in 2010. You're seeing a run rate in '11 x a PharMerica transaction right now. That's probably not uncharacteristic, but I do want to emphasize different profile because we're looking at the ones that we've added in '11. We had a fairly large one at end of the third quarter as being additive. We would look at those also in 2012 and not the least of which is don't be surprised if we see some in the specialty care business. So, yes, I would characterize it again. Similar dollar amounts right now for lack of anything else because, as you know, it's not totally predictable. Those come and go depending upon the circumstances. Do you want to answer it?

John G. Figueroa

Yes, I mean, the second one. We have Tracy Finn in the audience who handles our strategy and acquisitions. I think he would tell you, and based on the meetings that I've had with him, our funnel for potential acquisitions continues to be robust and probably even bigger than it has been in the past. So I would tell you that we are not on hold. I mean, we continue to run this business as operators thinking about this business as what we have today, what's available out there, and that we will not pass up any kind of opportunity that's good for our business because we're waiting for an alternative acquisition.

John L. Workman


Adam T. Feinstein - Barclays Capital, Research Division

Well, first, I just want to say kudos on becoming a big boy company. And it's really evident just in the changes within the last few years. Just wanted to say great job there. But I guess maybe, John, just to kick it off, as you get comfortable with the customer bed loss growth for not only you guys but for the other large players, it just seems like it's been hard for people to really get their arms around why that is happening. And we've heard a lot of different theories and a lot of different stories, but you guys have had more time to work on it. So just curious as you think about that. And obviously, you've done a lot of stuff about -- within the sales force and opportunities to retain customers and grow customers. But so just with your scale and clout in the marketplace, it certainly seems like you guys should be taking significant market share. And so just as maybe to start with that and a couple of follow-up questions.

John G. Figueroa

Yes, I'll start with that. I'll tell you, I'm a year into this now. So I mean, some of my thoughts in January, some of them have changed in some points significantly and others. I had my aha moment and maybe I anticipated it. But when you feel it, it's a little different. I would tell you that back in January, I thought exactly what you think. I mean, if we do all the things that we can do, we would have some pretty good standing in our market. I still believe that. But I will tell you, I was probably pretty naive on how tough the competition is in this market. I came from an environment where there were 2 other -- there are really 2 other competitors. I mean, there were 3 of you in the market and that was intense in that market. But I'd be happy if I had 3 competitors in this market. I mean, there are 5 to 7 competitors on every nursing home. Those regional, those independents are very, very strong competitors. There are some regional competitors out there who have some of their own unique automation that as a competitor that we have to deal with and we have to compete with on a different level. So you're absolutely right that if we execute in all the things that we potentially can execute on, our goal is to get to 95%. And I think we're starting to see that as we get smarter in deploying our assets and competing in the marketplace. But I don't think anything's going to change when it comes to a competitive standpoint. I mean, those guys are strong, and we have to continue to get better in order to compete with those folks. But I will also tell you, at the end of the day, I am also a firm believer that, because of our assets, we will become a growth company. I don't think we're going to shift market share significantly 1 year over the next, but we will grow. I really don't -- I really hope that this is the first and only year that I talk to you folks about losses. All I want to talk about next year is how much we're going to grow. That will be a thing of the past. And if the industry is growing at a percent, I want to grow it a little bit faster than the industry. That to me is a growth company. But there's a lot of competition out there to prevent us from growing any faster than that.

Adam T. Feinstein - Barclays Capital, Research Division

Okay. And maybe just a follow-up question on specialty. It's clearly a big opportunity there. The growth rate is very strong. And certainly, it seems like doing a great job in terms of building it. So as you think about that business in the future, I mean, is there any chance that if there was ability to create more value for Omnicare that you would look to ever separate it, do a partial offering or anything like that? And if not, what's the thought process?

John G. Figueroa

I'll give you a big boy company response. We're going to look at all options as this company grows. Now that being said, we are focused on driving this business. We like it. It's got great organic growth potential. There are some companies out in the marketplace that we think would be good if they were assets that we own. So we are focused on growing that asset and making it work for us, especially when you look at the long-term care business with '12 being a great generics year. '13 is also a good generics year but not as great as '12. And when you have assets like specialty, I feel comfortable coming up here and saying we're going to grow in '12 and we're going to grow in '13. Without diversified assets, that statement becomes a little bit more difficult, so I like this business. It's a strong business, but a big boy company. I mean, we're going to look at all of these assets quarter after quarter, year after year and determine what's right for the short and long term.

Adam T. Feinstein - Barclays Capital, Research Division

And one short one for John Workman. Just with the nursing homes dealing with the reimbursement pressure, what are you guys doing in terms of just looking at a potential for bad debt expense and just in terms of managing that? Just curious as -- yes.

John L. Workman

Sure, it's a good question. I mean, we're monitoring the results a lot more closely, Adam. I mean, we have a periodic meeting, which is at least monthly, maybe more frequently with the operators' legal. And so we kind of target by division any risk that we see, trying to narrow that gap and that risk. And so we're staying attunely [ph] focused on that in terms of our customers and wherewithal to pay us and making sure that they do pay us. But the good news is on the reimbursement side, Jeff and his team have done a very good job of not giving price concessions. They've done a very good job in getting the value equation out to our long-term care customers, too, and a lot of the bigger players. They -- you know this, they were expecting a reimbursement reduction. Maybe it's a little bigger than they expected, but most of them, even those who did the Propco/Opco structure with the REITs, kept themself enough cushion, that really shouldn't be at risk. Charles.

Charles Rhyee - Cowen and Company, LLC, Research Division

Maybe a couple of questions for Jeff and yourself, John, focusing more on the core pharmacy business. You have that chart up there showing your expectations for automation improvement, and I think you said in '11 it was about 18.5%. Clearly, you're modeling very significant uptick in the automated dispensing part. Maybe if you can give us a sense and magnitude of how much cost comes out for maybe every 100 basis point improvement in that and sort of what the pace we should expect. So what -- and maybe also maybe -- if you can give us an exact magnitude, maybe how much in savings you've already been able to drive out of the cost of goods line so far because of that.

Jeffrey M. Stamps

All right. Well, just on the 18%, if you kind of look at what automation we have deployed, we -- the video that we showed, we only have 18 of those ALVs deployed. So I mean, part of that represents an expansion of that. We've already got an additional 6 of those ordered. And then the ULV has the capacity to not only be implemented in the health pharmacies but they can also be used in the local pharmacies as well. And those pieces of automation take the prescription and in many cases move them through with almost no human intervention whatsoever. So you're going from -- the orders have been entered to process. It's checked by the bar code and goes into the delivery vehicle as long as that's approved in a particular state by the Board of Pharmacy. So as you expand that, obviously, it's going to lower your cost on a per script basis. That is something that we, as an operations group, division presidents, myself and our Senior VP of Operations, we work closely with all of our pharmacies to continue to monitor. Are we getting more efficient? And also, are we improving the accuracy for our customers?

John L. Workman

Yes, I would just -- I would add to that, Charlie. In time, these are -- when you start talking about the automation, that's a capital expenditure for us. And so we have again disciplined process about when we're making those investments, and Mike, who runs kind of our automation group, is here with us. And when they sit down, they have to present the business case, which has to be supported by the operators, which generates very significant returns to us. And we make those decisions based upon the cost that they're going to take out. So what I would say is we look at this -- I think you're asking for, "What's your cost savings?" Well, it's going to depend upon where it's deployed. And all I would tell you is we have very high hurdle rates in terms of expectations to get a very fast payback or a multiple of savings on investment that we're making in the automation.

Charles Rhyee - Cowen and Company, LLC, Research Division

But it's best to think as we get out into '14 or so as it kind of takes more of an exponential jump up, we should see a more significant savings in that in those time periods?

John L. Workman

You should, yes, it'll snowball. I mean, as you deploy more pieces of equipment and you get more utilization, it's going to bring those costs down, correct. That's part of why -- again, the things we've been working on for '13 and beyond, whereas the one system or automation are all geared towards continue to lower our cost model.

Charles Rhyee - Cowen and Company, LLC, Research Division

All right. And then the last question really on Omniview here. You had the chart up how the facility, number of facilities using it has improved and the number of providers. In those 7,200 facilities or so, can you discuss sort of as a percentage of your total facilities served and then maybe also in terms of users? And what's the penetration per facility? So what kind of improvement do we have in the facilities served today?

Jeffrey M. Stamps

Well, if you look at the number of facilities, that's going to be around half of our facilities are using that we were lower than that at the beginning of the year. Clearly, Omniview is a product that's very unique to Omnicare, extremely robust and provides tools for our customers that no one else can provide. That being said, we continue to look at ways that we can get more of our customers interested in using that technology. Because as they use that technology, it brings them closer to the things that we can provide for them and lowers their costs. And there's -- once you're using that type of product, you want to continue to use it. It's difficult to go back to something that is more manual than what the Omniview process is.

John G. Figueroa

That's been one of the key elements of our retention is training and retraining folks to utilize Omniview. One of the things, and correct me if I'm wrong, Jeff, I believe every one of our facilities has Omniview. I mean, when they begin any type of relationship with us, Omniview is there. What we track in the slide that you saw is folks that are actually utilizing the system for services that impact their operations. They may have it on their desk and never use it and still do a fax order. Believe it or not, that happens, or they may use it simply to place an order. It's the folks who are you using it to drive efficiencies in their operation with all of the other services that we track and track on that slide.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

It's A.J. Rice from Susquehanna. Just 2 quick questions, I guess, or as a question. One, John, you already mentioned about the sort of surprise from the CMS rule related to consulting pharmacy, which sort of come now to the end of the comment period. Has there been any feedback at all from CMS as to what they're thinking? And do you have any sense of when the timing on their making a decision as to the final rule might be?

John G. Figueroa

No, but I will tell you that we have been communicating with CMS, both live and with some information on what we think about this process. And they have been very receptive in wanting to understand our point of view and the industry's point of view. I think what they're trying to solve for is the right issue. I mean, how do we ensure that we are getting the right medication for specific disease states in all elements within healthcare? And I applaud that, and we've been very upfront with them that we want to help with our statistics, we want to help with our technology and anything that we can do to stem the tide of anything that's being done incorrectly. We want to be there in the forefront of that change. That being said, we also want to make sure that they understand the quality enhancements of the structure today, and they've been very receptive to listening to us and I know others in the industry. So I feel confident that at the end of the day like short cycle, there will be a resolution here that's actually good for the industry moving forward. But I think there's a clear understanding certainly today that the industry has a tremendous amount of value placed on those consultant pharmacies, not just the dispensing pharmacy, but that nursing home, that patient, the payer, there is a quality that they bring that I think everybody needs to understand.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Have they given any indication about when we might hear something from them again?

John L. Workman

No, remember, there was a consideration of a proposal. So it's even a question as, if it becomes a proposal, you probably have another comment period. So I mean, the other thing I would just emphasize is we have a very cost-efficient model, too, because of the leverage we have and that we've invested in technology for a consultant pharmacist again, which we think is a tool that's value added and makes a lot more sense. And smaller homes or smaller home chains are going to have a very difficult time trying to replicate that at a similar type cost to get anywhere near the quality.

John G. Figueroa

No, we really don't know the timeframe, A.J.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Yes, okay. Obviously, a lot of talk about the specialty business and growing that, and you've mentioned several times you're looking at -- you will be looking at acquisitions in that area. Now there's competitive questions, but can you give us a flavor for what types of things might be interesting to fill in where you're at today? And then also, obviously, everyone -- so there's a lot of guys talking about getting bigger in specialty. What's the competitive landscape? Are you looking at things that there's a lot of other people looking at? Or are you looking at things where the competitions -- sort of valuation sensitivity around opportunities you might see?

John G. Figueroa

Be careful, Nitin.

Nitin Sahney

We have 5 distinct platforms. One of them is specialty pharmacy that people really do understand, which is buy and sell model. We are looking at acquisitions across the board if it makes sense for us. But frankly, this year and going into next year, we have a strong organic growth. So the types of opportunities we're going to look at, we want to make sure that they're really incremental to the phase and we can actually have them in the stride. So we get opportunities on a weekly basis on the specialty pharmacy side and on the services side to a smaller extent, but we have a higher standard, I would add, because we've actually invested in an infrastructure, we put a good sales force, we have put 5 different platforms. So when we look at some of these opportunities, it's a little bit higher threshold. That's number one point. Number two, what are the areas that could be interesting? Frankly, that could be more on the brand support side, for example, clinical services, disease management, things that are a little bit more upstream, maybe reimbursement consulting. And those assets, some of them are there. But again, we have to make sure they fit in with our strategies because we are seeing good organic growth and we don't want to disrupt that either.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

And is it competitive? I mean, I'm sure they're all competitive, but are all the usual suspects at the table whenever one of those come up for a bid?

Nitin Sahney

In some cases, yes. In some cases, we have relationships from the past that we have discussions with. And again, these relationships are starting with how do we partner to help a client. And if that turns out to be, well, that's a good partnership, and you know you can have those conversations. But that's -- it's on a daily basis. We frankly don't want to wait for opportunities to come to us. Our team is well connected enough to know what's available, what can be available, what makes sense and what doesn't make sense. So we kind of look at the private equity mine part to see how this is really fit in. So it's a little bit different. We are looking rather than applying for every book that comes our way.

John G. Figueroa

Yes, I think the other thing to note in that area, the multiples on specialty business is significantly higher than long-term care. So as we look at the economics and the return on our investment of both businesses, yes, that's something that we have to look at.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

I wondered if you could just about what you think the impact is on profitability and your business plan of the potential for CMS to go to unit dosing and from what it is now and how you would respond.

John L. Workman

Yes, I think you're referring to short cycle dispensing.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Yes, the...

John L. Workman

So that's a great example, by the way, of the Omnicare, I think, working with CMS. And some of the management team here were involved in that discussion. So CMS started by saying let's move drugs to a weekly dispensing on the Part D business because Part D business does not have returns. Our group with the long-term care association went to talk to CMS, so that's going to cost you a lot of money. So they came back and they first narrowed it to brands and was going to be on a weekly basis starting January 1, 2012. The team continued to provide data and information to CMS. And ultimately, the rule is going to be -- it's going to be biweekly starting January 1, 2013. Our analysis says this affects less than 2% of our scripts. And as you can see in Jeff's presentation, as we continue to introduce more and more automation, it's going to have a slightly negative impact but nothing of significance to us. Brendan?

Brendan Strong - Barclays Capital, Research Division

Yes, John, maybe the first question for you. I wanted to ask, as you think about the organic growth opportunity over the next year and you think about some of the unique technology you guys are deploying like being able to dispense an emergency medicine much faster than any of your competitors, how do you see that playing out on the organic growth side? Do you see that with affecting like a major customer win where you can really move revenue by 1% or more? Do you see that being lots of small wins? And what do you think the timing is on that?

John G. Figueroa

That's a great question, and I'll answer that question based on the funnels that I've been looking at that Beth Kinerk brings to my office every couple of weeks as we talk about what the opportunities are in the marketplace and what customers are looking for. I would divide customers in half. There are some customers who say, "By gosh, you got to knock a nickel off of this price or you're never going to get my business." The other half actually says, "Look, we understand the value and how it affects my bottom line, and we can walk them through all of the initiatives we have and how it helps them operationally." Those are the customers that I get excited about. Those are the customers that I energize the sales force to go out and tell the story. Those are the folks who are saying, "Gosh, I a new doctor, are you kidding me? I mean, if you can do that kind of stuff and it works, that will affect my operations. It will be better for my customers, and that's the kind of company that I want to work with." So when I look at organic growth and I look at that funnel and I say I want to start talking to you about being a growth company, that is exactly what we're talking about. But it -- of the 50% who say we like all that stuff, I would cut that in half on 25% of the total base. Or half that customer base says, "I'm not going to be the first one to try the technology. I don't want to see it for another 2 years. When you come to me and I can make 10 phone calls that it works and it's great, then I'll buy it." So really, you have about 25% of that customer base and it will be a lot of onesie twosie. But I will tell you that chain customers and the majority of chain customers are in one state or a couple of states. Those are folks that when you have some scale in operations, these types of technologies help and we're targeting to talk to them like we have in the past. But we have a new story to tell. So I think it's going to be a mixture of in the independent nursing stores or nursing homes wanting to adopt the technology as well as some regional chains wanting to do the same thing.

John L. Workman

But I think it will help with retention and believing in to themself. I mean, it's going to be more prevalent if you have a lot of Med A patients are coming in all times of the day. It's going to be more helpful and though to John's point. So it's going to depend upon the facility. I mean, we're piloting it right now. And the reason we're piloting it is to understand what are the benefits to us and the benefits of the nursing home so that value equation will kind of evolve as we kind of come out of the pilot to demonstrate that.

Brendan Strong - Barclays Capital, Research Division

And then on the generic opportunity, as you think about the gross profit dollar per script differential between a brand and a drug -- between a branded and a generic drug, is there any rough dollar amount you can put around that on a per script basis?

John L. Workman

I mean, coming out initially, the gross profit dollars -- or I mean, it demonstrated in that slide, that slides that doesn't have numbers on it is intended to show the graphical representation. So initially, it's going to be a multiple of the branded gross profit dollars at a fraction 30%, 40% of the revenue stream and over time migrate back towards the gross profit dollars of the branded equivalent. But in the Omnicare case in 99% or more of the times, even after 10 years, it's still higher gross profit dollars than the branded equivalent. So that's the dynamic. But every year, remember that you're going to get caught up in the margin rates because as that slope declines, reimbursements coming down. And Dan Maloney is over here working at cutting -- continuing to cut cost on us buying generics, but it does start to squeeze back down.

John G. Figueroa

And I will tell you, the other thing that is -- every single generic launch has different economics depending on what number you are. In Zypreza, we are a large buyer. Lipitor, I think it was in the top 20. It was in the top 20, but it was in the lower part not in the higher part. And there's many, many factors that come out at the time of the year, that it comes a -- I mean, there are so many different factors on that. It's sometimes difficult for us to predict, but we always come in with some kind of range, but it's a difficult equation.

Brendan Strong - Barclays Capital, Research Division

And then just my last question, as I think about the 3 big generics, Zypreza, Lexapro, Seroquel, we're trying to do some math around it and it looks like they could be about $1 billion in sales going generic between what happened with Zypreza, what's about to happen come March. Do you think that's in the right ballpark?

John G. Figueroa

I'm looking over at my guru, and he's slightly saying yes. You want to say something on that?

Unknown Executive


John G. Figueroa

But that's the branded revenue.

Unknown Executive

The branded revenue.

Unknown Analyst

Just coming back to specialty for a moment here. I'm just trying to think about the specialty profit growth versus the core business profit growth because, obviously, the 3-year guidance implies pretty strong acceleration and growth for the core business. I'm just thinking about specialty where you showed the slide where you had 10% EBITDA growth year-to-date this year as it accelerates. Should we just generally assume that specialty profit growth will be faster than what it is for the core business for the next couple of years? Just trying to get a sense for how those 2 sorts of compare without giving specific numbers [indiscernible].

John L. Workman

Well, I think 2012 again is heavily influenced by brand generics, so I would be a little bit careful about that. But I would say going forward, it should be equal or greater than what we're seeing in long-term care. On a dollar basis, I think it probably will be.

Unknown Analyst

Okay. Maybe -- well, maybe again to ask anyone to give some color on this. The 10% EBITDA growth then for specialty, as that accelerates, could it be somewhere kind of mid-teens? Could it be higher than that? Just trying to get a general sense for how much specialty could grow over the next couple of years, again without giving any specific numbers?

John L. Workman

I'll make a broad comment and let Nitin follow on. I think part of it's going to be -- you got 2 components organic but I do think you'll see some acquisitions in specialty, which will help fuel that little higher growth. But, Nit, do you want to?

Nitin Sahney

Remember, we've had some organic growth from -- in 2011, and we are going to have double-digit EBITDA growth on top of that going forward. Now exactly what it is, obviously, we -- in 2012, we don't want to disclose that, but our sales cycle for 3 out of 5 platforms has just been put into place, which is 6 to 9 months in October. So I would say end of 2012 going into 2013, it should be higher than what we have experienced in 2011.

John L. Workman

And I think you -- I mean, you clearly understand the math. If it's growing at 10% EBITDA, that's big in terms of dropping down to EPS because we're -- if you look at the company, we're not growing a 10% EBITDA. And it's a single-digit kind of multiple or growth in EBITDA that translates into double-digit growth in EPS as we continue to look at the company so he is outpacing.....

Nitin Sahney

And that's including any acquisitions we might or might not do in the future.

John G. Figueroa

Well, again, thank you so much for being here today, giving up your morning to Omnicare. We really appreciate it and look forward to continuing to engage in another Investor Day or Analyst Day next year and certainly all the events that will be happening soon. So thank you.

John L. Workman

And I think there are some boxed lunches. If you -- as you leave, if you want to grab a boxed lunch and take it with you. We'll be around for a few more minutes, and thank you for coming.

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