Healthcare services company Omnicare Inc. (OCR) is facing charges of receiving kickbacks from a pharmaceutical company. The U.S. Justice Department has alleged that Omnicare received unauthorized money from Abbott Laboratories (ABT) for recommending the latter’s prescription drug, Depakote.
Depakote is usually used to control the behavior of elderly nursing home residents suffering from dementia. This use, incidentally, has not been approved by the FDA.
However, the news did not have significant on share price movement which was fairly stable over the last 7 days. Nevertheless, this kind of allegation most certainly raises uncertainties regarding the company’s long-term financial and liquidity position. Hence, more often than not, investor confidence takes a downturn.
The Department of Justice apparently stated that Omnicare accepted kickbacks disguised as grants and educational funding. The civil complaint alleges that Omnicare's consultant pharmacists recommended the drug in return for tens of millions of dollars in kickbacks between 1998 and 2008. It has been claimed that the sales of the drug increased from $3 million to $92 million during the same time frame.
This is not the first time that Omnicare has found itself caught in legal troubles. Earlier this year, it was alleged that the company paid kickbacks in order to secure contracts to supply drugs to nursing homes with Medicare and Medicaid patients.
The Department of Justice holds that this conduct violates the federal Anti-Kickback Statute and has resulted in the submission of false claims to the Kentucky Medicaid program. Consequently, Omnicare had agreed to a $124 million settlement to resolve the allegations.
Though the company reported an impressive third quarter of 2014 and also recently rewarded its investors with a dividend hike, we feel the kick-back allegations may tarnish Omnicare’s image. Since this kind of lawsuits generally take a long time to settle, we believe that it will remain an overhang on the stock.
Zacks Rank
Currently, Omnicare carries a Zacks Rank #2 (Buy). Some other stocks that warrant a look in the Medical Services sector are AMN Healthcare Services (AHS) and Catamaran Corp (CTRX). These two stocks hold the same rank as Omnicare.
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