Omnicare's (NYSE:OCR) latest earnings release showed that its business remains under pressure from changes in drug reimbursement trends. At the same time, the provider of pharmacy services for nursing homes is taking important steps to contain costs that should minimize the pain.
The company reported that for the full year, the top line rose 18% to $4.1 billion and earnings surged 21% to $194.4 million. For the fourth quarter, though, results were less impressive. Although sales grew 13% to $1.07 billion compared with the fourth quarter of 2003, earnings slipped 8.8% to $56.2 million from $61.6 million.
Omnicare's fourth-quarter slip stems in part from state and federal efforts to rein in Medicaid costs. The company said drug reimbursement formula changes in Michigan's and New York's programs hurt margins, as did changes in the federal upper limit, which dictates how much Medicaid can reimburse for drugs with generic options. Although the company also expressed confidence that the slide is decelerating, tight budgets in state capitals and in Washington could bring pressure for even more reimbursement cuts.
Not taking the pressure on its margins lightly, Omnicare has a number of initiatives in the works to lower expenses. The most interesting initiative is a hub-and-spokes system that could make Omnicare the Wal-Mart (NYSE:WMT) of long-term-care pharmacy services. Under such a system, automated "hub" facilities would feed smaller pharmacy "spokes" that serve as the face to customers.
In the meantime, Omincare keeps building scale with its aggressive acquisition strategy. In its first foray outside the United States, the firm most recently picked up Canadian long-term pharmacy services provider Medico. Meanwhile, and more significantly, the tender offer for NeighborCare (NASDAQ:NCRX) continues to progress. Yes, these deals have been a drain on cash flow, and they've led to some increase in debt, but so far, Omnicare has managed its finances adroitly. In fact, interest expense was down 13.4% in 2004 from 2003.
In the near term, Omnicare will have to deal with some tough challenges in its business. So far, it's responding well. When the drug reimbursement environment stabilizes, Omnicare should emerge in a strong position.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
