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Omnicare, Inc. (OCR)

Q4 2008 Earnings Call

February 26, 2009, 11:00 a.m. ET

Executives

Cheryl Hodges – SVP, IR

Joel Gemunder – President and CEO

Dave Froesel – SVP and CFO

Analysts

Lisa Gill – J.P. Morgan

Adam Feinstein – Barclays Capital

Glen Santangelo – Credit Suisse

A. J. Rice – Soleil Securities

Frank Morgan – RBC Capital Markets

Alan Fishman – Thomas Weisel Partners

Alex Douglas – Goldman Sachs

Presentation

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare's Fourth Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Ms. Cheryl Hodges. Please go ahead, ma'am.

Cheryl Hodges

Thanks, Regina. Good morning, everyone, and welcome to Omnicare's fourth quarter and full year 2008 earnings conference call. Here today from Omnicare are Joel Gemunder, President and CEO, Dave Froesel, Senior Vice President and Chief Financial Officer, and myself Cheryl Hodges, Senior Vice President, Investor Relations.

Before we begin, let me remind you that as we conduct this call various remarks that we make concerning our expectations, predictions, plans and prospects, constitute forward-looking statements. As a result of a variety of factors including those identified in this morning's news release and in our various filings with the SEC. You are also cautioned that any forward-looking statements reflect management's current views only, and that the company undertakes no obligation to revise or update such statements, or to make additional forward looking statements in the future.

For simplicity sake and to focus on what we believe are the best indicators of our operating performance, we will discuss our results today excluding special items and for the CRO business reimbursable out-of-pocket expenses in all periods.

A reconciliation of this non-GAAP information has been attached to our press release and is also available on our website under supplemental financial information on the Investors page.

With that, let me turn the call over to Joel.

Joel Gemunder

Thank you, Cheryl, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full-year results, and our outlook for 2009.

We were pleased to report adjusted diluted earnings per share for the fourth quarter of $0.66, ahead of both the prior-year quarter, and ahead of the street consensus. Moreover, we are gratified to note that these results cap off a year in which we well exceeded initial expectations, and we believe position the company for continued profitable growth.

Now as we look in to the fourth quarter, we continued to benefit from the generally positive trends in the pharmaceutical marketplace, as well as strong operational performance across our organization.

Importantly, we produced sequential bed growth during the quarter, continued to make progress in our productivity and cost reduction initiatives, including the Full Potential Plan and saw robust growth in our specialty pharmacy services business.

Sales of $1.6 billion in the fourth quarter of 2008 were higher than in the fourth quarter of 2007. We saw a substantial improvement in adjusted EBITDA and operating income, both in dollars and in margins over the comparable prior year quarter, even aside from the impact of the incremental provision for bad debts we recognized in the fourth quarter of 2007.

With respect to our year-over-year sales growth, we benefited from drug price inflation, which was in the neighborhood of 7% or so on branded drugs, as well as the increase use of certain higher acuity drugs and biologic agents in our institutional pharmacy business, and growth in our specialty pharmacy services. These factors more than offset the impact on sales of generics, a lower net number of beds serves, and reductions in utilization and/or reimbursement for certain drugs.

As I mentioned a moment ago, we generated a sequential increase in the number of beds served in the fourth quarter of 2008, when we ended December serving 1,435,000 beds, including 58,000 beds inpatient assistance programs. And this compares favorably to the 1,432,000 beds served at the end of September, which included 67,000 patients in patient assistance programs.

The sequential growth in beds served was achieved despite about 5,300 beds voluntarily foregone for pricing or payment issues, as well as facility closures or sales.

And furthermore, the number of beds that were foregone was lower than by more than 40% sequentially, which reflects the progress we have made in trimming marginal business. While we remain cognizant and of our clients' financial condition, especially in the current economic environment, it is reassuring to see that there were fewer of these terminations during the quarter.

The sequential bed growth, we achieved in the fourth quarter is attributable to our focus on and the investments made in improving our sales and retention efforts.

Looking first at retention, I'm pleased to say that excluding beds foregone, our annualized retention rate of 94.3% in the fourth quarter of 2008 was up 150 basis points sequentially, and 270 basis points over the comparable prior year quarter. We lost fewer beds in the fourth quarter of 2008 than in any quarter during the last three years. So clearly, our investments in enhancing service levels and retention efforts are paying off.

In fact for 2008, the number of beds retained, including renewals of at risk accounts by our specialized customer retention team, was approximately 48,000, representing roughly $250 million in annualized revenue.

With respect to new beds added the contribution from acquisitions was lighter sequentially owing to the lumpy nature of that activity. We continued to have a solid pipeline and that we are actively working.

Beds added are brought in to service through the efforts of our sales force and operating personnel were up 17% sequentially, and 22% versus the fourth quarter of 2007. Reaching a productivity level last attained two years ago. Moreover, new contract signings continued at a rate well above 2007 levels.

On a year-over-year basis, fourth quarter contract signings, excluding national accounts, were up 39%. For the full year, signings on this basis were over 30% higher in 2008, which reflects the progress we have made in increasing the size and quality of our sales force, as well as improving the selling effectiveness of our operating staff.

Gross margins expanded for the third consecutive quarter, cresting over 26% of sales, and as we discussed last quarter, there were several generic launches important to the geriatric marketplace in the second half of 2008.

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