Probe News Punishes Omnicare Shares

It slides 3% after disclosure of a generic-drug inquiry.
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Omnicare

(OCR)

is feeling some regulatory pain.

The institutional pharmacy has found itself caught up in two government probes even as it struggles to overcome major glitches associated with the new Medicare Part D drug coverage program. The company recently learned that federal and state officials have begun investigating allegations surrounding three generic drugs that it supplies to its nursing home patients. In addition, it has fielded questions from a federal prosecutor about its relationship with certain drug manufacturers.

The first probe seems to involve Omnicare directly. Based on a regulatory filing Omnicare made late Friday, the government is seeking information about the pills the company supplies to treat three common ailments. Specifically, the filing indicates, the government is questioning whether Omnicare improperly substituted two 7.5-milligram Buspirone anti-anxiety tablets for one 15-milligram tablet, Fluoxetine anti-depression tablets for capsules and Ranitidine heartburn capsules for tablets.

Omnicare has come under fire for executing similar switches in the past.

Notably, in 2004, Omnicare paid a $1 million fine for changes involving a single drug -- Ranitidine -- in the state of Maine. The company allegedly switched patients from Ranitidine tablets costing $15.10 a month to Ranitidine capsules costing $82.77 a month instead.

"The drug switches were initiated specifically to increase revenue to Omnicare of Maine," Maine Attorney General Steven Rowe said when announcing the settlement in mid-2004. "The so-called 'Ranitidine Initiative' at Omnicare was developed to lessen the impact of a June 2000 federal capping of the Medicaid reimbursement rate for Ranitidine tablets. The reimbursement rate for capsules was not capped."

Prior to the reimbursement change, Rowe's office stated, less than 5% of Omnicare of Maine patients who took Ranitidine received the capsule form. But after the change, the office said, that number rocketed to 95%.

"I have been outraged by this case all along," Rowe said at the time.

As part of the 2004 settlement, Omnicare of Maine agreed to "remain under constant monitoring by its parent company's compliance officer." But now, it seems, the parent company has come under scrutiny for similar behavior of its own.

For its part, Omnicare has pledged to cooperate fully with government authorities. In the meantime, the company's stock took a slight hit on Tuesday. The shares fell $1.48 to $58.43 but still remain within $5 of their all-time high.

Analysts recommended buying Omnicare on any weakness in the shares.

Jerry Doctrow, an analyst with Stifel Nicolaus, noted that Omnicare relies on generic drugs for just 12% of its revenue. Moreover, he pointed out, the company has come under scrutiny for just "a few dosages of three drugs" out of the 1,000-plus generic drugs it currently prescribes. Thus, he indicated, the revenue from the drugs in question should not prove material even if those drugs are especially popular ones.

Meanwhile, Doctrow practically dismissed the second government investigation altogether. Omnicare learned of that particular probe after fielding an administrative subpoena from the U.S. attorney in Massachusetts about its relationship with certain drugmakers and distributors.

"We have spoken with the company, and -- although it would not discuss any matters related to the subpoenas -- we believe the subpoenas relate to a previously announced investigation of

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," Doctrow wrote, "and the government is seeking documents to support its case and is not investigating Omnicare in these matters."

Omnicare says that it "believes that its purchases of pharmaceuticals comply with all applicable laws and regulations."

If anything, analysts seem less worried about the government probes than about recent problems associated with the new Medicare Part D program. They estimate that Omnicare saw up to 40% of its claims rejected during the rollout of that program.

Still, they believe the company has already started to overcome some of those early challenges.

"The company has beefed up its temporary labor force to help pursue claims, and its rejection rate has already been cut in half and is well on its way to the company's historical rate of 9%," noted Jefferies analyst Frank Morgan, who is among the large crowd recommending Omnicare's stock. "On balance, we remain encouraged about Omnicare's long-term prospects."

Yet even Omnicare bulls confess that the company has suffered some recent pain.

"The transition to Medicare Part D has been rocky," Doctrow said Tuesday. So "we believe Omnicare and other institutional pharmacies are likely to incur higher costs during the transition than originally projected, a build-up in receivables and perhaps some loss of business among assisting living residents who could switch to other suppliers. ... (But) while the news of the investigation and Part D transition issues are likely to pressure shares, we are maintaining our buy rating" on the company's stock.