Omnicare Inc. (OCR) reported better-than-expected third-quarter 2014 results. Earnings per share (EPS) of 95 cents beat the Zacks Consensus Estimate by a couple of cents, while net sales of $1.61 billion were also ahead of the same.
Earnings per share (excluding special items and cash EPS adjustments) increased 9.2% from the year-ago quarter driven by 6.1% growth in net sales.
Segment Details
Net sales from the core Long-Term Care (LTC) Group increased approximately 2.2% year over year to $1.18 billion in the quarter. Net sales per script increased 3.2% from the year-ago quarter to $42.72.
Total LTC Group scripts fell approximately 1% from the year-ago quarter. Product mix shift toward fast growing assisted living platform, which has lower utilization levels than skilled nursing and non-service related customer losses, negatively impacted sales growth in the quarter. On the other hand, Generic scripts dispensing rate increased 105 basis points (bps) to 84% in the quarter.
Specialty Care Group (SCG) net sales jumped almost 19% to $424.6 million, primarily due to double-digit growth in fee-for-service and specialty pharmacy business.
Specialty pharmacy net sales increased 19% year over year, primarily driven by 15% growth in script volumes. Physician referral increase of approximately 49% in the quarter also benefited results.
During the quarter, Omnicare gained access to distribution network of another five products. The company’s relationship with manufacturers continues to improve as reflected by 70% win ratio among commercialized products in the limited distribution products category.
Operational Details
Gross margin contracted 130 bps from the year-ago quarter to 21.9% in the reported quarter. The decline was primarily due to price inflation and unfavorable product mix.
Selling, general and administrative (SG&A) expenses as percentage of net sales declined 100 bps on a year-over-year basis to 11.1%. The year-over-year decline was primarily due to operational efficiency.
Adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) increased 4.4% to $179.8 million in the quarter. The year-over-year growth was primarily driven by strong results in SCG and higher operating efficiencies.
Financial Position
Omnicare ended the quarter with cash and cash equivalents of $287 million. Long-term debt (including notes and convertible debentures) was $1.41 million as of Sep 30, 2014.
Cash outflow from operations totaled $36 million, while free cash outflow was $75.2 million at the end of third quarter.
As of Sep 30, 2014, Omnicare had approximately $340 million worth of shares available under its current share repurchase authorization.
Outlook
Omnicare reiterated its 2014 net sales outlook of $6.3 to $6.4 billion. Moreover, the company raised the lower end of its previously announced earnings per share guidance. Currently, Omnicare expects earnings to be in the range of $3.70 to $3.72 per share (prior outlook $3.64 to $3.72) for the full year.
Omnicare expects gross margin to remain stable in the fourth quarter. The company reaffirmed its previously announced operating cash flow guidance range of $500 to $550 million for the full year.
Management believes prescription volume growth will improve through 2015, buoyed by strong sales execution.
Our Take
Omnicare delivered an improved operating performance during the quarter, driven by its ability to convert increased sales to robust operating earnings and strong working capital management. Moreover, the company continues to make investments in its sales pipeline, which will boost results going forward.
With a rapidly changing healthcare environment, we believe Omnicare is well-positioned to identify new opportunities and generate consistent growth. However, stiff competition from the likes of PharMerica Corp. (PMC) in the LTC segment remains a potent headwind.
Additionally, Omnicare continues to face robust inflation in high-cost branded drugs and general pricing adjustments, which will hurt profitability going forward.
Currently, OCR carries a Zacks Rank #3 (Hold). Other stocks that warrant a look in the industry include Charles River Laboratories (CRL) and ICON Public Limited (ICLR). Both Charles River Laboratories and ICON Public Limited sport a Zacks Rank #1 (Strong Buy).
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