Wheels Off at Omnicare

The CEO says a transition year 'lived up to that billing.'
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Omnicare (OCR) found plenty of words to describe a lousy quarter that rendered some investors speechless.

CEO Joel Gemunder kicked off Tuesday's conference call by reminding investors that he had promised, early on, that 2006 would prove to be a transitional year -- and quickly adding that the year had so far "certainly lived up to that billing and more."

The company has struggled through major reimbursement changes, due to the implementation of Medicare Part D, as it tries to capitalize on its biggest acquisition ever. Problems at a drug repackaging facility, shut down because of quality control issues, have made matters even worse. Shares plunged 12% Tuesday to a 52-week low.

Still, Gemunder said on Tuesday that he feels "proud that we kept the wheels on the metaphoric wagon."

The ride has been awfully rough, however. The company saw its third-quarter sales pressured by falling bed counts, competitive pricing and prior-year Medicaid reductions. High payroll, needed to cover Part D and repackaging overruns, hit the bottom-line hard as well.

Indeed, the plant shutdown caused labor costs to rise - rather than fall with expected merger-related synergies - as employees took on more duties in the latest quarter.

"It became extremely difficult to try to remove what we call excess labor because the cascade effect happens when you have something like this," Gemunder tried to explain. "In other words, it takes longer to get bingo cards processed internally."

Now, Omnicare has no clear idea when its repacking system will return to normal.

The company has decided to abandon its idled plant after finding what Gemunder described as "very low levels of residues" that include "penicillin and others." He said that "two highly qualified experts have determined that there is no realistic probability of any risk to public health" resulting from drugs distributed by the facility. However, he said that closing the facility down -- and relocating to a new building -- makes business sense because of the resources needed to carry out remediation efforts required by the Food and Drug Administration.

Gemunder considers the new repackaging center a "No. 1 priority" for the company. He just can't say when it might open.

"It requires the FDA, from time to time, to inspect the process and give us the required approvals as we go along," he explained on Tuesday. "So we practice our steps. We've gone to the dance. But we need the FDA to dance along with us."

He likened Omnicare's current situation to a "brownout," which can interrupt activities without materially damaging them in the end. He said the company has found itself "in the fog of battle ... so to speak," and has adopted a "counterattack mode" as a result. And he urged investors to understand.

"In closing, to say that 2006 has been an interesting year is something of an understatement," Gemunder said. "But we're managing through it with diligence and a focus on commitment to restoring shareholder value. And we very much appreciate your patience "in the meantime."

Interestingly, Omnicare had little to say about one issue weighing on the minds of some -- with the potential to weigh on the company's results as well.

Omnicare could see future profits hit under proposed changes to the "average wholesale pricing" system for brand-name drugs. Another company that acts as a drug middleman,

Express Scripts

(ESRX)

, warned just last week that the changes could in fact prove material in nature. The company's stock plummeted as a result.

But on this matter, at least, Omnicare felt more comfortable keeping quiet.

"Today it is merely a proposed settlement, and we are not going to speculate on its outcome, what the industry participants may do, or any theoretical impact," Gemunder said. "Like others, we are reviewing it in the context of the various contracts we have and actions we may take if warranted.

"So we really don't have anything more to say about this on today's call."