Omnicare Sickness Spreads

Shares plunge 12% on Medicare Part D problems.
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keeps getting sicker.

Hit hard by reimbursement changes and quality control issues, the giant institutional pharmacy has once again fallen short of Wall Street expectations.

Moreover, the company has warned that ongoing challenges -- including the shutdown of a major drug repackaging facility -- will pressure its results for the remainder of the year.

During the third quarter, Omnicare saw profits tumble 11% to $52.2 million as the company continued to struggle under the new Medicare Part D program.

Excluding special items, the company's earnings per share of 63 cents missed the consensus estimate by a full 9 cents. Its revenue of $1.59 billion, while up 10% from a year ago, missed the mark as well.

"The third-quarter results reflect the dynamic and challenging environment in which we currently operate and the number of complex and unanticipated issues which we were required to address," stated Omnicare CEO Joel Gemunder.

"Notably, the voluntary closing of one of our repackaging facilities, as well as the ongoing complexities associated with the transition to Medicare Part D, inhibited our short-term ability to achieve planned revenue growth and cost savings from certain productivity initiatives and the early implementation of best practices.

"Taken together, these issues resulted in earnings that were lower than expectations," he continued.

Omnicare expects that pain to continue.

The company now predicts that fourth-quarter earnings will be "roughly equivalent to those in the third," or 63 cents a share, compared to the 82-cent target Wall Street analysts have set.

Meanwhile, Omnicare has given up on reopening its current Heartland Repack Services facility altogether.

The company shut down the big drug repacking facility this summer due to quality control issues -- including mislabeled drugs that triggered a recall -- and later, fire damage at the plant.

A government list of drugs involved in the recall runs on for nearly 120 pages.

Now, Omnicare says that it has conducted environmental tests at the facility "which showed very low levels of beta-lactam residue" on the premises.

Because of the time and expense required for remediation activities, coupled with the short-term nature of the facility's current lease, the company says it will move its repackaging operation to a nearby building instead.

Omnicare continues to rack up excess costs in the meantime.

The company took a $25 million third-quarter charge to cover ruined inventory and other problems at the damaged plant.

It faced other special payments as well: It set aside nearly $10 million for legal fees associated with government investigations and a big dispute with managed care giant


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Omnicare is losing its battle with UnitedHealth for now.

Omnicare saw its quarterly results hammered -- once again -- because UnitedHealth continues to pay far less for Omnicare's services than the company believes it should.

Omnicare has accused UnitedHealth of breaking multiple laws and is seeking to reinstate higher payments from the company through a legal battle that is currently working its way through the courts.

Omnicare hopes to get back on its feet in the meantime.

"Taking the longer view, our proven strategy remains unchanged -- generating substantial economies of scale and enhancing our competitive advantages to leverage our growth," Gemunder concluded when announcing the company's latest results on Tuesday.

"The 'Omnicare Full Potential' plan we announced in July is designed specifically to further these goals.

"We remain convinced that this plan takes advantage of the strengths of our business model and our scale and will allow us to grow our business and increase the efficiency of operations," Germunder said.

By now, however, investors clearly have their doubts.

They pushed shares of Omnicare down 11% to a new 52-week low of $37.69 on Tuesday.