Some of Omnicare's ( OCR) biggest customers don't seem to like paying full freight. Recently, two major operators of long-term care facilities have sought cheaper prices from the giant institutional pharmacy. Closely held Life Care Centers of America has actually sued Omnicare, claiming that the company has been overcharging it for years. Meanwhile, Genesis Healthcare ( GHCI) has already negotiated a new contract with Omnicare that's expected to save it money. For its part, Omnicare has downplayed both developments as the ordinary course of business. Omnicare portrays the Life Care lawsuit as a mere contract dispute, lacking merit, and points out that the company remains a long-term customer. Similarly, Omnicare says that it saw the Genesis changes coming, adding that it "knew that a re-pricing of the contract was likely to occur to bring it more in line with market pricing," and that its guidance fully reflects that expectation. Still, Omnicare continues to battle with even bigger players, such as the government and UnitedHealth ( UNH), over the rates it charges for its services. The government claims that Omnicare has been bilking Medicaid and has launched multiple investigations, including a criminal probe, in response. And UnitedHealth has decided to take matters into its own hands by paying Omnicare less money than the company has demanded. Even some long-time Omnicare bulls have started feeling uneasy as a result. Several analysts have downgraded Omnicare's stock in recent months, expressing concern about the company's relationships with its customers and its compliance program as well. Meanwhile, bears have grown increasingly comfortable with their big bets against the company.
Omnicare's stock has already fallen hard. The shares, which peaked at $62.50 each just before a successful secondary offering last December, inched up 51 cents to $43.85 on Tuesday.
"In addition to the items noted above (which included the government's criminal probe), we are more concerned about Omnicare's ability to garner new business because Life Care is well regarded in the industry and is one of the largest private operators," Doctrow explained. "We believe their litigation with Omnicare could hurt Omnicare's reputation with other private operators." Doctrow's firm hopes to secure investment banking business from the company over the next three months.
filed 148 criminal charges against a state-level executive of the company for allegedly defrauding the Medicaid program.
"The attorney general disclosed that this review of the Michigan operations has been ongoing for the last three years, and the claim is that there was historical Medicaid billing abuse in multiple areas," Ripperger noted in his downgrade of Omnicare last month. "Though this claim is unresolved, given the extent of the historical inquiry and the breadth of the claim, we do believe that it raises concerns over compliance and oversight by the company." For its part, Omnicare portrays government reviews and investigations as routine in the highly regulated healthcare industry. Omnicare further insists that compliance and ethics rank as top priorities for the company, adding that it deals with any problems that it uncovers "immediately and completely."
Meanwhile, Erhart continues to serve on the boards of both Omnicare and Chemed. Those companies share other directors -- and even a chairman -- as well. That arrangement has raised some eyebrows. Last year, The Cincinnati Post reported that the two companies "share a possibly unprecedented number of board members and executives," posing questions about how well those boards can perform. "I've never heard of such a thing," Dan Dalton, director of the Institute for Corporate Governance at Indiana University, told the newspaper last summer. "I absolutely defy you to find a case like it." Shareholders of Omnicare and Chemed have gone on to suffer dearly. Both stocks have weathered steep losses in recent months and now trade at the low end of their 52-week ranges.