EPS
2003 - $1.97
2004 - $2.29
2005 – $2.19
EPS
ESTIMATES
2006 – $3.01
2007 – $3.47
OMNICARE, INC.
PROS
TICKER: OCR
DEMOGRAPHICS
STOCK PRICE: $46.39
REVENUE
GROWTH
TARGET PRICE: $55.52
RECOMMENDATION: BUY
CONSENSUS
2006 ESTIMATES
HIGH - $2.98
AVG - $2.94
LOW - $2.90
CONSENSUS
2007 ESTIMATES
HIGH – $3.80
AVG - $3.54
LOW - $3.35
OMNICARE INCORPORATED (OCR)
97
PRICE 46.37 DATE 08-11-2006
76
Stock Val ®
59
46
46
36
36
28
28
22
22
17
17
13
13
10
10
8
6
5
1996
8
The Ohio State University
6
Fisher College of Business 5
1997
1998
1999
Price Change
% Diff SP5
1-Day
-0.64
-0.24
1-Week
-0.43
0.56
4-Weeks
-1.13
-3.60
QTD
-2.21
-1.94
YTD
-18.96
-20.44
2005
65.28
62.28
2004
-14.29
-23.28
2003
69.49
43.11
FYE Dec 2005 EPS 2.47
2000
2001
First Call Data
Mean Estimate
Change
High
Low
Total
# Up
# Down
House Estimate
PE Ratio
2002
2003
2006
2.94 ↓
+19%
2.98
2.90
13
0
13
15.8
2004
2005
2 0 0 7 2008
3 . 5 4↓ 4 . 2 2↓
+ 2 0 % +19%
3.80
4.55
3.35
3.98
13
4
0
0
12
2
13.1
11.0
2006
2007
2008
Data Page # 1
Revenues ($Mil)
6,373
Market Value ($Mil)
5,626
Shares Out (Mil)
121.3
Volume 60-Day Avg (Th) 2,111
Volume 60-Day Avg ($M) 97.9
Dividend Estimate
0.09
Payout Ratio
3%
RetentionRate
97%
Dividend Yield
0.19%
DEFENSIVE
SECTOR
INDUSTRY
PERFORMANCE
ASSET GROWTH
STRATEGY
CONS
ANALYST
STEVEN KENNEDY
614-354-6011
KENNEDY_366@OSU.EDU
SG&A GROWTH
FUND MANAGER
ROYCE WEST, CFA
LITIGATION
CONCERNS
COURSE
FINANCE 824
ACQUISTION
DIGESTION
DATE
8/15/2006
EARNINGS
MISSES
GOVERNMENT
EXPOSURE
TABLE OF CONTENTS
COMPANY OVERVIEW
3
ECONOMIC OVERVIEW
4
MARKET OUTLOOK
6
SECTOR ANALYSIS
Sector Overview
Sector Performance
Sector Financial Analysis
Sector Valuation
7
7
7
8
8
INDUSTRY ANALYSIS
Industry Overview
Industry Performance
Industry Valuation
10
10
10
11
COMPANY ANALYSIS
Financial Statement Analysis
Earnings Projections
12
12
15
COMPANY VALUATION
Ratio Analysis
Price Forecast – Target Multiples
Discounted Cash Flow Model
17
17
17
18
SUMMARY & RECOMMENDATION
19
APPENDIX A – Medicare Reimbursement: Recent Changes
APPENDIX B – Medicaid Reimbursement: Recent Changes
APPENDIX C – Statement of Cash Flows
APPENDIX D – Projections
APPENDIX E – OCR Ratios
APPENDIX F – OCR vs. Health Care Services Industry Ratios
APPENDIX G – OCR vs. Health Care Sector Ratios
APPENDIX H – OCR vs. S&P 500 Ratios
APPENDIX I – DCF Model
20
22
23
24
25
26
27
28
29
2
COMPANY OVERVIEW1
Omnicare, Inc. (the “Company”; “Omnicare”) is a geriatric pharmaceutical services
company that provides pharmaceuticals and related ancillary pharmacy services to longterm healthcare institutions primarily in the United States and Canada. The firm was
formed in 1981 and is headquartered in Covington, Kentucky. As of 12/31/2005,
Omnicare employed 17,900 persons. Omnicare’s FY 2005 net sales totaled $5.3 billion,
generating $226 million of net income (4.3% net operating margin).
Omnicare operates in two segments: Pharmacy Services and Contract Research
Organization Services (CRO Services).
Pharmacy Services
Pharmacy Services is Omnicare’s primary line of business, accounting for 97% of net
sales in FY 2004 and 2005. Pharmacy Services purchases, repackages, and dispenses
prescription and nonprescription pharmaceuticals. This segment also provides
consultant pharmacist services, including evaluating patient drug therapy, monitoring the
drug distribution system within the nursing facility, and assisting in compliance with state
and federal regulations, as well as proprietary clinical and health management programs.
In addition, Pharmacy Services segment offers ancillary services, such as administering
medications and nutrition intravenously, and furnishing dialysis and respiratory services,
medical supplies and clinical care planning, and financial software information systems.
Further, this segment provides pharmaceutical case management services for retirees,
employees, and dependents that have drug benefits under corporate-sponsored
healthcare programs. Pharmacy Services segment’s long-term care facilities comprise
approximately 1,452,000 beds in 47 states in the U.S., the District of Columbia, and
Canada.
CRO Services
CRO Services segment provides product development and research services to client
companies in the pharmaceutical, biotechnology, medical device, and diagnostics
industries. This segment provides support services for the design of regulatory strategy
and clinical development of pharmaceuticals by offering integrated clinical, quality
assurance, data management, medical writing, and regulatory support for its client’s
drug development programs.
1
http://finance.yahoo.com
3
ECONOMIC OVERVIEW
Demographics - Elderly Population
Omnicare’s business model is almost exclusively focused on the provision of pharmacy
related services to individuals residing in long-term care facilities. Long-term care
facilities are largely occupied by elderly individuals. For example, the average age of
nursing home residents is 812, while the average age of assisted living residents is 80. 3
Thus, Omnicare’s current and future business prospects are heavily influenced by U.S.
aging trends.
The U.S. elderly population, broadly defined as persons 65 years or older, numbered
36.3 million in 2004, representing 12.4% of the U.S. population. By 2030, there is
projected to be 71.5 million persons 65 years or older, 20% of the forecasted
population. 4
This growth in the U.S.’s senior population is evidenced by the growth in nursing homes.
In 1987, there were 14,050 nursing homes with a total of 1.48 million beds, compared to
16,840 nursing homes and 1.76 million beds in 1996. The number of nursing homes and
the number of nursing home beds both increased nearly 20% during this period.
However, growth in the elderly population has outpaced growth in the supply of nursing
home beds. The supply of nursing home beds for people 75 years and over dropped 8%
from 1987 to 1996, from 127 to 117 beds per 1,000 people this age. 5
Government Reimbursement
Omnicare receives nearly half of its revenue from government payer sources.
Specifically, in FY 2005, Omnicare’s payor mix (by revenue) consisted of 46% Medicaid
and 1% Medicare. Therefore, Omnicare’s earnings and financial condition are highly
correlated with changes in government reimbursement policies and procedures.
Medicaid 6
Title XIX of the Social Security Act is a Federal/State entitlement program that pays for
medical assistance for certain individuals and families with low incomes and resources.
This program, known as Medicaid, became law in 1965 as a cooperative venture jointly
funded by the Federal and State governments to assist States in furnishing medical
assistance to eligible needy persons. Medicaid is the largest source of funding for
medical and health-related services for America's poorest people.
Medicare7
2
National Center for Health Statistics; www.theseniorsource.org
National Center for Assisted Living; www.ncal.org
4
Administration on Aging; www.aoa.gov
5
Agency for Healthcare Research and Quality; www.meps.ahcpr.org
6
US Department of Health & Human Services: Centers for Medicare & Medicaid Services;
www.cms.hhs.gov
7
US Department of Health & Human Services: Centers for Medicare & Medicaid Services;
www.cms.hhs.gov
3
4
Medicare is a health insurance program for people age 65 or older, people under age 65
with certain disabilities, and people of all ages with End-Stage Renal Disease
(permanent kidney failure requiring dialysis or a kidney transplant). Medicare
reimbursement is provided through Medicare Part A (hospital insurance), Medicare Part
B (medical insurance), and Prescription Drug Coverage.
The majority of independent living facilities and assisted living facilities are ineligible to
be licensed for Medicaid or Medicare reimbursement, and therefore, Omnicare mitigates
its exposure to government reimbursement for clients operating in these sectors.
However, government reimbursement through the Medicare and Medicaid programs
provides funding for approximately 70% of residents in nursing facilities.8 Furthermore,
the proportion of nursing homes certified by both Medicare and Medicaid (dually
certified) rose from 28% in 1987 to 73% in 1996. 9 Omnicare has significant exposure to
government reimbursement policies via its nursing clientele.
Omnicare anticipates that some of its Medicaid exposure will be transferred to Medicare
exposure as a result of the passage and implementation of Medicare Part D
(Prescription Drug Program). While this will result in slightly decreased reliance on state
reimbursement in favor of increased reliance on federal reimbursement, there is not
predicted to be a significant net change to government payer exposure.
See Appendix A and B for more information regarding recent changes to the Medicare
and Medicaid reimbursement programs, and how those changes may impact Omnicare.
8
9
The Department of Housing & Urban Development; www.hud.gov
Agency for Healthcare Research and Quality; www.meps.ahcpr.org
5
MARKET OUTLOOK10
The US Federal Reserve’s decision to hold short-term interest rates steady at its August
meeting (following 17 consecutive rate increases since June 2004) provides more
evidence of the difference in opinion among economists as to whether the economy is
on the verge of slowing or picking up speed. The Dow Jones Industrial Average has
remained volatile over the past 12 months, ranging from 10,100 to 11,700, and currently
priced near 11,100. For the year so far, the Dow is up 3.5 percent and the S&P 500 is
up 1.5 percent, while the Nasdaq is down 6.7 percent. Investors will continue to keep a
sharp eye on inflation data, with Wall Street anxious for any indication of whether the
Federal Reserve will remain paused at its September meeting or resume raising rates.
Other factors likely to impact future stock market performance include geopolitical
relations, oil prices, and the housing market. Geopolitical developments still have the
potential to weigh on markets, as mounting fighting between Israel and Lebanon only
adds to the insecurity of an already unstable Middle East region. Crude oil prices should
continue to be a strong influence on stocks, especially with hurricane season in full
swing. One area of the economy that most analysts agree is showing sure signs of
slowing is the housing market. The forecast calls for July housing starts to slow to an
annual pace of 1.805 million units from 1.850 million in June. July building permits are
pegged at a slower pace of 1.840 million units, down from 1.869 million in June.
10
http://finance.yahoo.com
6
SECTOR ANALYSIS
Sector Overview
The health care sector accounts for approximately 12% of the S&P 500. The entire
health care sector is made up of roughly 1,050 publicly traded companies. Health care
companies are broadly broken down into two organization types:
1) Provide health care equipment and supplies, or health care related services
2) Research, development production, and marketing of pharmaceuticals and
biotechnology.
The health care sector can be broken down
into eight industries, including: biotechnology,
health care distributors, health care
equipment, health care facilities, health care
services, health care supplies, managed
health care, and pharmaceuticals.
Pharmaceutical companies make up nearly
half of the sector (48%), followed by health
care equipment (14%), managed health care
(11%), and biotechnology firms (10%).
10%
4%
14%
48%
3%
5%
1%
1%
11%
Biotechnology
Health Care Equipment
Health Care Services
Health Care Techonology
Managed Health Care
3%
Health Care Distributors
Health Care Facilities
Health Care Supplies
Life Sciences Tools & Services
Pharmaceuticals
The healthcare sector is defensive and growth oriented, performing independently of
economic cycles. The sector is impacted by external factors including demographics,
government regulation, and the product development cycle. Specifically, the
demographic variables have favored the health care sector, as baby boomers age and
approach retirement and the average life expectancy continues to lengthen. By 2010,
individuals 50 and up will make up 40% of the US population, compared to accounting
for 34% in 2000. Additionally, worldwide demographics boost the sector’s prospects, as
the world’s population grows older and wealthier, increasing spending in on health care
products. In the US alone, healthcare spending has continued to steadily rise, currently
accounting for roughly 16% of GDP.
Sector risks include earnings vulnerability due to liability lawsuits, patent expirations, and
product development costs, which are rising faster than sales in recent years.
Pharmaceutical development and manufacturing is expensive with little guarantee for
success. The cost of drug development averages roughly $1.8 billion, and the ROI for
large pharmaceutical companies is down from 9% in the late 1990’s to roughly 5% today.
Pharmaceutical companies face long investment periods, which total anywhere from 2 to
12 years from discovery to market, as well as slim odds of introducing a blockbuster
drug (only 1 in 10,000 compounds reach market). Additionally, patent expiration
threatens ROI, as generic substitutions are poised to enter into the market.
A Porter’s Five Forces analysis shows that the sector is relatively favorable for existing
participants. Barriers to entry are high, supplier power is low, and substitutes are low.
However, buyer power is neutral and competition is heavy.
Sector Performance
7
The health care sector performed
relatively well in 2005, with the
sector up 6.03% for the year,
compared with the S&P 500 index
up only 3.00%. However, YTD
2006 has been disappointing, with
the sector down 2.49%, nearly
2.00% off S&P 500 YTD
performance, making it the third
worst performing sector in 2006. However, the sector has rebounded in the third quarter,
up 2.33%, easily outpacing the market’s bearish -2.36% quarterly returns.
Sector Financial Analysis
S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 40.74
Stock Val
The sector’s financial performance
remains strong, although momentum
has waned in recent years. After
tremendous revenue growth during the
1990’s, growth has slowed every year
from 2001 through 2005, reigning in
ROE from 30% to 20%. However, the
sector’s corporations have succeeded in
retaining cash on their balance sheets
while decreasing inventories and leaving
debt levels steady. This has resulted in
a jump in dividend yields from roughly
1.1% in the late 1990’s to 1.7% in 2006.
Corporate balance sheets show
strengthened capital structures, with
LTD/Capitalization declining from near 28% in 1997 to below 22% in 2006, ensuring that
the sector has the capacity to reinvest in product development when appropriate.
®
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
30
28
HI
LO
ME
CU
26
24
22
28.9
20.2
23.4
20.2
09-30-1996
03-31-2006
20
RETURN ON EQUITY %
2.0
1.8
HI
LO
ME
CU
1.6
1.4
1.9
0.9
1.4
1.7
1.2
1.0
07-19-1996
07-21-2006
0.8
DIVIDEND YIELD %
28
HI
LO
ME
CU
26
24
27.3
21.5
25.5
21.5
22
12-31-1996
12-31-2005
20
LONG-TERM DEBT / CAPITAL %
Sector Valuation
The health care sector’s PE ratio has declined from roughly 20x in 2002 to 16x in 2006.
While this trend was similar to other income statement related measures, like
Price/Sales and Price/CF, Price/Book
StockVal
S&P HEALTH CARE SECTOR COMP ADJ (SP-35) Price 40.74
Value witnessed even more of a
decrease as corporate balance sheets
paid down debt and built equity.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
HI
LO
ME
CU
1.2
0.9
®
2007
1.37
0.53
1.09
0.98
0.6
07-19-1996
07-21-2006
0.3
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO SP-5 E-Wtd
The maturation of the health care sector
is evidenced when compared relative to
the market. Relative price measures
illustrate that the health care sector has
reached relative trading values similar to
the overall S&P 500 index. This is in
clear contrast to the higher relative
valuations during the late 1990’s. Given
that industry revenue and earnings per
share continue to evidence steady gains
HI
LO
ME
CU
2.4
1.8
2.43
1.03
1.85
1.11
1.2
07-19-1996
07-21-2006
0.6
PRICE / SALES RELATIVE TO SP-5 E-Wtd
HI
LO
ME
CU
1.8
1.5
2.09
1.17
1.51
1.26
1.2
07-19-1996
07-21-2006
0.9
PRICE / CASH FLOW ADJUSTED RELATIVE TO SP-5 E-Wtd
HI
LO
ME
CU
2.5
2.0
2.69
1.07
1.90
1.15
1.5
07-19-1996
07-21-2006
1.0
PRICE / BOOK VALUE RELATIVE TO SP-5 E-Wtd
8
in 2006, 2006 relative valuations appear to be somewhat low.
While the health care sector has performed relatively in line with the S&P 500 over the
past couple years, 3rd quarter 2006 growth appears promising based on solid earnings
fundamentals. Revenue and earnings per share continue to experience growth, and
balance sheets have built equity. Based on solid fundamentals and a divided market
outlook, the health care sector appears to be a solid defensive play that may be priced
somewhat cheap.
9
INDUSTRY ANALYSIS
Industry Overview11
The U.S. health care services market, the world's largest, is worth about $1.7 trillion,
while the European market is worth about $700 billion.
A problem, and an opportunity, is the rising demand for services. People are living
longer and need more care. The rise and fall of long-term care centers in the U.S. is an
example of the peril. Such firms as Kindred Healthcare, Sun Healthcare, and Beverly
Enterprises, which once built and bought nursing homes and opened home care and
other specialized care units, are now hurting. Taking care of patients requiring expensive
drugs and other care drains budgets. Cutbacks prescribed in the 1997 Balanced Budget
Act did not help: Starting in 1998, providers were reimbursed based on per-day cost
caps, not on the total cost of care.
However, the landscape for senior care services and prescription drug benefits is
expected to improve in the U.S. with the initiation, in January 2006, of the Medicare Part
D prescription drug program, a program which is a direct result of the Medicare
Prescription Drug, Improvement and Modernization Act (MMA) of 2003.
In most nations, though, the government controls health care, but many of those are also
suffering as costs rise and demand exceeds capacity. The UK National Health Service
has announced it will team with such private sector providers as BUPA to help clear
crowded waiting rooms.
Slashed budgets create a domino effect. The competition among health care supply
distributors, including Alliance UniChem, McKesson, and Owens & Minor, has heated up
as facilities look to cut their number of vendors and the costs of their supplies. These
distributors are among the industry's leaders in adopting new technology to help cut
costs.
Technology may not be the industry's panacea. Loading patient and payor information,
supply orders, and other administrative red tape onto computers organizes information
and helps reduce costly errors, but many doctors are reluctant; after all, learning the
system takes time -- time that could be spent providing care to patients. Technology
solutions are also pricey and do not often fit into budgets.
Industry Performance
Health care services has been far and
away the strongest performer among all
health care sector industries over the
past 12 months. Industry returns have
totaled 16.2% over that period,
compared with 12-mo sector returns
down 1.2% and market returns up 2.3%.
11
http://finance.yahoo.com
10
Industry Valuation
The below “Kendex” evaluates the strength of the industry relative to its health care
sector peers. The “Kendex” equally weights five different valuation and fundamental
metrics, gauging the overall strength of each industry. Health care services ranks 4th out
of the sector’s eight primary industries.
Biotechnology
Health Care Distributors
Health Care Equipment
Health Care Facilities
Health Care Services
Health Care Supplies
Managed Health Care
Pharmaceuticals
12 Mo Performance
Actual
Rank
-7.2%
6
9.6%
2
-7.9%
8
-7.5%
7
17.4%
1
-2.9%
5
7.7%
3
-1.8%
4
12 Mo Profit Margin
Actual
Rank
16.3%
1.2%
11.6%
3.8%
3.7%
8.0%
5.9%
16.3%
1
8
3
6
7
4
5
2
ROE
Actual
Rank
9.78%
8
12.46%
5
14.54%
3
12.40%
6
13.43%
4
10.71%
7
16.05%
2
19.32%
1
Debt to Equity
Actual
Rank
0.9
5.1
4.3
30.5
6.9
6.9
3.2
2.9
1
5
4
8
6
6
3
2
EPS Growth 5 Yr
Actual
Rank
19.16%
13.94%
15.72%
13.92%
17.26%
16.44%
15.53%
9.22%
Final
Total
1
6
4
7
2
3
5
8
Final
Rank
17
26
22
34
20
25
18
17
1
7
5
8
4
6
3
1
Health care services is strengthened by valuation measures, including its 12-mo stock
price performance (1st ) and 5 Yr EPS growth (2nd). However, fundamental measures,
especially 12-mo profit margin (7th) and debt to equity (6th), negatively impact the
industry’s ranking. With top tier fundamentals, pharmaceuticals and biotechnology are
tops in the sector, while health care facilities clearly rounds out the bottom.
11
COMPANY ANALYSIS12
For Omnicare, the year 2005 was one of strong growth and development, owing largely
to the success of its acquisition and integration model. During the year, the Company
made three strategically important acquisitions that, together, increased the size of the
Company by more than one-third and broadened its breadth of services and future
growth platform. In addition, the Company successfully completed a major refinancing,
undertook the integration of current year acquisitions, prepared the organization for the
implementation of the Medicare Part D benefit, and continued to generate solid growth
and enhancements in the cost structure of its core pharmacy business.
On July 28, 2005, the Company completed the acquisition of NeighborCare, Inc.
(“NeighborCare”), which represented the largest acquisition made in the Company’s
history. This acquisition significantly expanded the Company’s presence in the long-term
care pharmacy market and at the time of the acquisition, increased the number of beds
served by Omnicare by approximately 27% and increased annualized revenues by
approximately 36%. At the time of the acquisition, NeighborCare was an institutional
pharmacy provider serving long-term care and skilled nursing facilities, specialty
hospitals and assisted and independent living communities comprising approximately
295,000 beds in 34 states and the District of Columbia. NeighborCare also provided
infusion therapy services, home medical equipment, respiratory therapy services,
community-based retail pharmacies and group purchasing.
The NeighborCare acquisition provides opportunities to achieve economies of scale and
cost synergies. The Company has implemented an integration plan under which the
processes have been put in place to achieve such savings in the purchasing of
pharmaceuticals, the elimination of redundant functions and the consolidation of facilities
in overlapping geographic territories.
During August 2005, the Company completed the acquisitions of excelleRx, Inc.
(“excelleRx”) and RxCrossroads, LLC (“RxCrossroads”). At the time of the acquisition,
excelleRx provided pharmaceutical products and care services to approximately 400
hospice programs with approximately 48,000 patients in 46 states. At the time of the
acquisition, RxCrossroads provided specialty distribution, product support and mail order
pharmacy services for pharmaceutical manufacturers and biotechnology companies,
generally for high-cost drugs used in the treatment of chronic disease states.
Financial Statement Analysis
The following financial statement analysis is based on audited statements for fiscal years
ended December 31, 2001 – 2005.
Income Statement
Sales averaged 25% annual growth over the period reviewed, ranging from a high of
33% from 2002-2003 to a low of 18% from 2003-2004. However, increases in cost of
sales slightly outpaced sales growth in all years, capping net operating margins at an
12
Omnicare 2005 Annual Report
12
average of 4.1%. Net income growth actually decreased each subsequent year,
dropping from a 70% rise from 2001-2002, to a 4% drop from 2004-2005.
Omnicare, Inc. - Income Statement
Actual ($ Millions)
Sales
Reimbursable out-of-pockets
Total net sales
2001
2002
2003
2004
2005
2,159
99% 2,606
99% 3,474
99% 4,101 100% 5,264
99%
24
1%
26
1%
25
1%
19
0%
28
1%
2,183 100% 2,632 100% 3,499 100% 4,120 100% 5,292 100%
Cost of sales
Reimbursed out-of-pocket expenses
Total direct costs
1,580
24
1,604
72% 1,915
1%
26
73% 1,941
73% 2,577
1%
25
74% 2,602
74% 3,071
1%
19
74% 3,090
75% 3,965
0%
28
75% 3,993
75%
1%
75%
Gross profit
579
27%
691
26%
897
26% 1,030
25% 1,299
25%
SG&A
Goodwill amortization
Restructuring & other related charges
Other expense
Operating income
350
33
18
5
173
16%
2%
1%
0%
8%
411
23
257
16%
0%
1%
0%
10%
510
387
15%
0%
0%
0%
11%
588
442
14%
0%
0%
0%
11%
759
19
521
14%
0%
0%
0%
10%
Investment income
Interest expense
Income before income taxes
3
(56)
120
0%
-3%
5%
3
(57)
203
0%
-2%
8%
4
(81)
310
0%
-2%
9%
3
(70)
375
0%
-2%
9%
6
(166)
361
0%
-3%
7%
46
74
2%
3%
77
126
3%
5%
116
194
3%
6%
139
236
3%
6%
135
226
3%
4%
Income taxes
Net income
Management attributes the 2005 decline in net income primarily to the Company’s asset
growth strategy, which resulted in 18 acquisitions. Management is optimistic that it will
realize benefits from the acquisitions in terms of economies of scale and cost synergies
in coming years, more than offsetting any short-term opportunity cost.
Balance Sheet
Balance sheet growth has been significantly driven by acquisition activity. Omnicare has
utilized balance sheet leverage to finance the purchase of several companies, boosting
liabilities from 50% of total assets to 59%. Correspondingly, equity, as a percentage of
total assets has decreased from 50% to 41%. However, nominal equity has jumped
156% since 2001, fueling earnings per share growth.
13
Omnicare, Inc. - Balance Sheet
Actual ($ Millions)
2001
Assets
2002
2003
2004
2005
Current assets
Cash & cash equivalents
Restricted cash
Deposits with drug wholesalers
Accounts receivable (less allowances)
Unbilled receivables
Inventories
Deferred income tax benefits
Other current assets
Total current assets
168
3
478
24
149
28
77
927
7%
0%
0%
21%
1%
7%
1%
3%
40%
138
3
523
25
190
19
103
1,001
6%
0%
0%
22%
1%
8%
1%
4%
41%
187
1
678
15
327
53
122
1,383
6%
0%
0%
20%
0%
10%
2%
4%
41%
84
44
839
14
331
95
143
1,550
2%
0%
1%
22%
0%
8%
2%
4%
40%
215
3
83
1,261
17
474
108
200
2,361
3%
0%
1%
18%
0%
7%
2%
3%
33%
Noncurrent assets
Properties & Equipment (less AD)
Goodwill
Identifiable intangible assets (less AD)
Other noncurrent assets
Total noncurrent assets
155
1,124
84
1,363
7%
49%
0%
4%
60%
140
1,189
97
1,426
6%
49%
0%
4%
59%
148
1,691
173
2,012
4%
50%
0%
5%
59%
142
2,003
68
136
2,349
4%
51%
2%
3%
60%
232
4,029
339
196
4,796
3%
56%
5%
3%
67%
Total assets
2,290 100%
2,427
100%
3,899 100%
7,157
100%
3,395 100%
Liabilities/Equity
Current liabilities
Accounts payable
Accrued employee compensation
Deferred revenue
Current debt
Other current liability and income taxes payable
Total current liabilities
140
25
39
64
268
6%
1%
2%
0%
3%
12%
176
23
25
73
297
7%
1%
1%
0%
3%
12%
296
31
22
21
93
463
9%
1%
1%
1%
3%
14%
283
20
24
25
115
467
7%
1%
1%
1%
3%
12%
397
56
25
356
166
1,000
6%
1%
0%
5%
2%
14%
Noncurrent liabilities
Long-term debt
5.0% convertible sub debentures, due 2007
8.125% sr sub notes, due 2011
6.125% sr sub notes, net, due 2013
6.75% sr sub notes, due 2013
6.875% sr sub notes, due 2015
4.00% jr sub convertible debentures, due 2033
3.25% convertible sr debentures, due 2035
Deferred income tax liabilities
Other noncurrent liabilities
Total noncurrent liabilities
31
345
375
81
39
871
1%
15%
16%
0%
0%
0%
0%
0%
4%
2%
38%
345
375
84
52
856
0%
14%
15%
0%
0%
0%
0%
0%
3%
2%
35%
136
375
227
345
51
123
1,257
4%
0%
11%
7%
0%
0%
10%
0%
2%
4%
37%
282
375
233
345
138
133
1,506
7%
0%
10%
6%
0%
0%
9%
0%
4%
3%
39%
753
9
230
225
525
978
249
246
3,215
11%
0%
0%
3%
3%
7%
0%
14%
3%
3%
45%
Total liabilities
1,139
50%
1,153
48%
1,720
51%
1,973
51%
4,215
59%
Stockholders' equity
Preferred stock
Common stock
Paid-in capital
Retained earnings
Treasury stock
Deferred compensation
Accumulated other comprehensive income
Total stockholders' equity
95
723
381
(20)
(24)
(5)
1,150
0%
4%
32%
17%
-1%
-1%
0%
50%
95
737
499
(24)
(29)
(4)
1,274
0%
4%
30%
21%
-1%
-1%
0%
52%
105
986
684
(46)
(50)
(4)
1,675
0%
3%
29%
20%
-1%
-1%
0%
49%
107
1,039
911
(55)
(66)
(9)
1,927
0%
3%
27%
23%
-1%
-2%
0%
49%
123
1,861
1,128
(78)
(77)
(15)
2,942
Total liabilities and stockholders' equity
2,289 100%
2,427
100%
0%
2%
26%
16%
-1%
-1%
0%
41%
0%
100%
3,395 100%
3,899 100%
7,157
Omnicare’s total assets grew from $2.3B to $7.2B in only four years. Management was
able to decrease AR as a percentage of total assets during this period, despite an
average annual asset growth rate of 36%.
Ratio Analysis
Inventory management performance has declined, as inventory turns have slowed by
23% since 2001. Additionally, working capital has suffered as management has tried to
14
absorb and integrate newly acquired businesses as efficiently as possible. Collections
slowed by 19% since 2003, only partially offset by a corresponding slowdown in
payables, slowing by 15% since 2003.
Omnicare, Inc. - Ratios
Items
2001
2002
2003
2004
2005
Current Ratio
Total current assets
Total current liabilities
Current Ratio
927
268
3.5
1,001
297
3.4
1,383
463
3.0
1,550
467
3.3
2,361
1,000
2.4
Inventory Turnover
Sales
Inventories
Inventory Turnover Ratio
2,159
149
14.5
2,606
190
13.7
3,474
327
10.6
4,101
331
12.4
5,264
474
11.1
Payables Turnover
Cost of sales
Accounts payable
Payables Turnover Ratio
1,580
140
11.3
1,915
176
10.9
2,577
296
8.7
3,071
283
10.9
3,965
397
10.0
Receivables Turnover
Sales
Accounts receivable (less allowances)
Receivables Turnover Ratio
2,159
478
4.5
2,606
523
5.0
3,474
678
5.1
4,101
839
4.9
5,264
1,261
4.2
Statement of Cash Flows
Net cash flows from financing and investing activities increased by about 6x in 2005,
reflecting Omnicare’s embrace of its heightened acquisition growth strategy. However,
cash flow concerns are somewhat mitigated given the Company’s relatively stable
operating margins, which have consistently averaged nearly 10% per year over the past
five years.
See Appendix C for Statement of Cash Flows.
Earnings Projections
An earnings model was developed for Omnicare based on historical operations (see
Appendix D). FY 2006 projected earnings totaled $3.01, while FY 2007 projections
yielded $3.47.
Omnicare, Inc. - Project Earnings ($)
2007E
2006E
2005
Projected
3.47
3.01
2.19
Analysts - Avg
3.54
2.94
Analysts - Low
3.35
2.90
Analysts - High
3.80
2.98
15
As evidenced above, FY 2006 projected earnings are $0.07 greater than average
analyst expectations. However, FY 2007 projected earnings are $0.07 below average
analyst expectations.
Sales growth estimates were conservative on a historical basis. Specifically, sales
growth was estimated at 15% per annum during 2006 and 2007, significantly below
Omnicare’s 2001-2005 average of 25% (18% - 33% per annum range). However,
earnings expectations were negatively impacted when Omnicare recently (August 9,
2006) announced it was revising its second-quarter earnings to include a charge of $22
million, or 18 cents per share. The company said the charge is related to an
investigation by the Michigan attorney general into its Medicaid billing practices. The
charge reduces second-quarter net income to $8.4 million, or 7 cents per share, from
$30.4 million, or 25 cents per share.
Omnicare has faced investigations from officials in several states for its practices. In
mid-January, the Ohio Attorney General's office raided Omnicare's Dublin office, and
seized information related to suspected Medicaid fraud. Two days later, a subpoena was
issued regarding a Massachusetts investigation claiming that Omnicare substituted three
generic drugs for prescribed brand-name medications. And on Jan. 26, a raid by the
Michigan Attorney General's office took place at the company's billing center in Livonia,
Michigan. The investigations also provoked a spate of lawsuits from shareholders.
When it originally stated its second-quarter earnings, Omnicare included $64 million in
charges to cover reserves for the inquiries and litigation. It also revised its first-quarter
earnings in May, taking a $34.1 million charge.
Cost of sales, accounting for between 72%-75% of total net sales, was calculated based
on a 25.8% annual gross margin, the Company’s average historical gross margin from
2001-2005 (24.7% - 26.8% per annum range). SG&A growth was projected based on
the historical SG&A to Sales average (15.1%), and the tax rate assumed totaled 37.6%,
equal to the Company’s five-year historical average tax rate.
In sum, given the above noted conservative revenue growth assumptions coupled with
the historically-based expense growth assumptions, analysts appear to be applying a
significant discount to future earnings. This likely reflects Omnicare’s recent earnings
misses, prospects for continued litigation expenses, and a slowdown in the Company’s
aggressive acquisition strategy.
16
COMPANY VALUATION13
Ratio Analysis
A detailed ratio analysis was completed to determine if Omnicare was cheap or
expensive versus its long-term and short-term historical averages. In addition, Omnicare
valuation metrics were compared with the S&P 500, the health care sector, and the
health care services industry over various time frames.
Price / EPS
Price / Sales
Price / CF
Price / Book
Current
14.20
0.85
14.10
1.80
OCR Values
1-Yr
5-Yr
18.60
15.30
1.20
1.02
18.00
13.50
2.30
2.10
10-Yr
17.30
1.08
13.70
2.10
Indication
Undervalued
Undervalued
In Line
Undervalued
Price / EPS
Price / Sales
Price / CF
Price / Book
Current
0.75
0.39
0.74
0.55
OCR to Industry
1-Yr
5-Yr
0.83
0.49
0.49
0.48
0.83
0.60
0.63
0.59
10-Yr
0.16
0.49
0.25
0.59
Indication
In Line
Undervalued
In Line
Undervalued
Price / EPS
Price / Sales
Price / CF
Price / Book
Current
0.89
0.50
1.01
0.50
OCR to Sector
1-Yr
5-Yr
1.09
0.75
0.63
0.47
1.19
0.84
0.59
0.48
10-Yr
1.09
0.63
1.19
0.59
Indication
In Line
In Line
In Line
In Line
Price / EPS
Price / Sales
Price / CF
Price / Book
Current
0.85
0.53
1.23
0.62
OCR to Market
1-Yr
5-Yr
1.17
0.81
0.73
0.70
1.49
1.06
0.74
0.71
10-Yr
0.84
0.70
1.04
0.70
Indication
In Line
Undervalued
In Line
Undervalued
*Median Values used for 1-Yr, 5-Yr, & 10-Yr
Overall, Omnicare appears to be undervalued, or cheap, relative to its historical
averages. The Company is most significantly undervalued on a stand-alone historical
basis, and somewhat undervalued on a relative basis to the industry and the market.
However, Omnicare appears roughly in line with sector valuation.
See respective valuation graphs in Appendix E, F, G, & H.
Price Forecast – Target Multiples
13
The Company Valuation section was based off of Doug Harvey’s Schlumberger Limited Analyst
Report; OSU Fisher College of Business; May 2005
17
Target multiples were estimated in order to produce price forecasts based on the above
noted ratios. The table below presents current ratios and the historical averages, along
with target multiples and price forecasts based on these targets. The average price
based on the four target multiples is $52.22.
Price / EPS
Price / Sales
Price / CF
Price / Book
Current
14.20
0.85
14.10
1.80
OCR Values
1-Yr
5-Yr
18.60
15.30
1.20
1.02
18.00
13.50
2.30
2.10
10-Yr
17.30
1.08
13.70
2.10
Target
Multiple
14.8
0.9
13.8
2.0
Price
Estimate
44.40
54.85
54.02
55.59
A sensitivity analysis was completed to quantify the change in Omnicare’s stock price
based upon various PE ratios and EPS estimates. The price ranged from $35 - $56.
EPS Estimate
$2.90
$3.00
$3.10
Target Price / EPS Estimates Multiple
12
14
16
18
$34.80
$40.60
$46.40
$52.20
$36.00
$42.00
$48.00
$54.00
$37.20
$43.40
$49.60
$55.80
Discounted Cash Flow Model
A discounted cash flow model was completed to quantify the intrinsic value of
Omnicare’s share price given projected cash flows. See Appendix I for the Omnicare
DCF model.
The Company’s revenue growth rate declined from 15% to its 5% terminal FCF growth
rate from 2006 to 2015. Both operating margin and tax rates remained constant over the
time period, at 10.5% and 37.6%, respectively; both consistent with historical averages.
Based on a terminal discount rate of 12%, Omnicare’s terminal value totaled $11.3 B,
yielding a 10.5x PE, 10.4x EV/EBTDA, and 6.7% free cash yield. With an NPV of free
cash flows totaling $2.8B and an NP V of terminal value totaling $2.9B, Omnicare’s
projected equity value totaled over $5.7B. The value yielded an implied equity value per
share of $55.52 on 103.2 MM shares.
In sum, according to the DCF model, Omnicare’s current share price of $46.39 is
undervalued, resulting in approximately 19.7% upside based on intrinsic valuation.
18
SUMMARY & RECOMMENDATION
Omnicare’s business prospects are bolstered by aging demographics and impressive
revenue growth. Additionally, the Company operates in a defensive sector and favorably
valued industry, compelling given the uncertain future growth prospects of the economy
as a whole.
However, Omnicare is inherently threatened by heavy exposure to government
reimbursement and regulation. Additionally, it is critical for management to curb
continued litigation problems, as well as realize economies of scale and cost synergies
born from the Company’s aggressive growth strategy.
Relative valuation via target multiples reveals a target stock price of roughly $52.
Similarly, intrinsic valuation via the discounted cash flow method calculates a stock price
of approximately $56. Given Omnicare’s current price of $46.39, the final
recommendation is to BUY Omnicare.
19
APPENIDX A - Medicare Reimbursement: Recent Changes14
The Balanced Budget Act of 1997 (BBA) sought to achieve a balanced federal budget by,
among other things, changing the reimbursement policies applicable to various
healthcare providers. In an important change for the Skilled Nursing Facility (SNF)
industry, the BBA provided for the introduction in 1998 of the prospective payment
system (“PPS”) for Medicare-eligible residents of SNFs. Prior to PPS, SNFs under
Medicare received cost-based reimbursement. Under PPS, Medicare pays SNFs a fixed
fee per patient per day based upon the acuity level of the resident, covering substantially
all items and services furnished during a Medicare-covered stay, including pharmacy
services. PPS resulted in a significant reduction in reimbursement to SNFs. This caused
a weakness in Medicare census leading to a significant reduction of overall occupancy in
the SNFs Omnicare served. This decline in occupancy and acuity levels adversely
impacted Omnicare’s results beginning in 1999, as the Company experienced lower
utilization of Omnicare services, coupled with PPS-related pricing pressures from
Omnicare’s SNF customers. The BBA also imposed numerous other cost-saving
measures affecting Medicare SNF services.
In 1999 and 2000, Congress sought to restore some of the reductions in reimbursement
resulting from PPS. This legislation improved the financial condition of SNFs and
provided incentives to increase occupancy and Medicare admissions, particularly among
the more acutely ill. While certain of the payment increases mandated by these laws
expired October 1, 2002, one provision gave SNFs a temporary rate increase for certain
high-acuity patients, including medically-complex patients with generally higher
pharmacy costs, beginning April 1, 2000 and ending when the Centers for Medicare &
Medicaid Services (“CMS”) implements a refined Resource Utilization Group (“RUG”)
patient classification system that better accounts for medically-complex patients. For
several years, CMS did not implement such refinements, thus continuing the additional
rate increase for certain high-acuity patients through federal fiscal year 2005.
On July 28, 2005 CMS issued, and on August 4, 2005 published in the Federal Register,
its final SNF PPS rule for fiscal year 2006. Under the rule, CMS added nine patient
classification categories to the PPS patient classification system, thus triggering the
expiration of the high-acuity payments add-ons. However, CMS estimates that the rule
will have a slightly positive financial impact on SNFs in fiscal year 2006 because the
$1.02 billion reduction from the expiration of the add-on payments will be more than
offset by a $510 million increase in the nursing case-mix weight for all of the RUG
categories and a $530 million increase associated with various updates to the payment
rates (including updates to the wage and market basket indexes), resulting in a $20
million overall increase in payments for fiscal year 2006. The new patient classification
refinements became effective January 1, 2006, and the market basket increase became
effective October 1, 2005. While the fiscal year 2006 SNF PPS rates will not decrease
payments to SNFs, the loss of revenues associated with future changes in SNF payment
rates could, in the future, have an adverse effect on the financial condition of Omnicare’s
SNF clients which could, in turn, adversely affect the timing or level of their payments to
the Company. In that regard, on February 8, 2006, the President signed into law the
Deficit Reduction Act (DRA), which will reduce net Medicare and Medicaid spending by
approximately $11 billion over five years. Among other things, the legislation reduces
14
Omnicare 2005 Annual Report
20
Medicare SNF bad debt payments by 30 percent for those individuals who are not dually
eligible for Medicare and Medicaid. This provision is expected to reduce payments to
SNFs by $100 million over 5 years (fiscal years 2006-2010). Congress may consider
legislation in the future that would further restrict Medicare funding for SNFs.
The MMA includes a major expansion of the Medicare prescription drug benefit under a
new Medicare Part D, which became effective on January 1, 2006. Until the Part D
benefit became effective, Medicare beneficiaries could receive assistance with their
outpatient prescription drug costs through a prescription drug discount card program,
which began in June 2004 and has provided enrollees access to negotiated discounted
prices for prescription drugs. The drug discount card program ends May 15, 2006.
Under the new Part D prescription drug benefit, Medicare beneficiaries may enroll in
prescription drug plans offered by private entities (or in a “fallback” plan offered on behalf
of the government through a contractor, to the extent private entities fail to offer a plan in
a given area), which provide coverage for prescription drugs (collectively, “Part D Plans”).
Part D Plans include both plans providing the drug benefit on a stand alone basis
(“PDPs”), and Medicare Advantage plans providing drug coverage as a supplement to
an existing medical benefit under that Medicare Advantage plan (an “MA-PD”), most
commonly a health maintenance organization plan. The deadline for Part D enrollment
for 2006 is generally May 15, 2006, although the new benefits became available January
1, 2006 and nursing home residents can enroll at any time. Medicare beneficiaries
generally have to pay a premium to enroll in a Part D Plan, with the premium amount
varying from plan to plan, although CMS provides various federal subsidies to Part D
Plans to reduce the cost to beneficiaries.
Medicare beneficiaries who are also entitled to benefits under a state Medicaid program
(so-called “dual eligibles”), including the nursing home residents we serve whose drug
costs were previously covered by state Medicaid programs, now have their outpatient
prescription drug costs covered by the new Medicare drug benefit. (In 2005,
approximately 46% of our revenue was derived from beneficiaries covered under state
Medicaid programs.) CMS is providing premium and cost-sharing subsidies to Part D
Plans with respect to dual eligible residents of nursing homes. Therefore, such dual
eligibles are not required to pay a premium for enrollment in a Part D Plan, so long as
the premium for the Part D Plan in which they are enrolled is at or below the premium
subsidy, nor are they required to meet deductibles or pay co-payment amounts. Further,
all dual eligibles who had not affirmatively enrolled in a Part D Plan as of December 31,
2005 were automatically enrolled into a PDP by CMS on a random basis from among
those PDPs meeting CMS criteria for low-income premiums in the PDP region. As is the
case for any nursing home beneficiary, such dual eligible beneficiaries residing in
nursing homes may change Part D Plans at any time through the established Part D
enrollment process. In sum, dual eligible residents of nursing homes are entitled to have
their prescription drug costs covered by a Part D Plan, provided that the prescription
drugs which they are taking are either on the Part D Plan’s formulary, or an exception to
the plan’s formulary is granted. CMS has reviewed the formularies of Part D Plans and
has required their formularies to include the types of drugs most commonly needed by
Medicare beneficiaries and an exceptions process to provide coverage for medically
necessary drugs.
21
APPENIDX B - Medicaid Reimbursement: Recent Changes 15
The Balanced Budget Act of 1997 (BBA) repealed the “Boren Am endment” federal
payment standard for Medicaid payments to Medicaid nursing facilities (“NFs”) effective
October 1, 1997, giving states greater latitude in setting payment rates for such facilities.
Some states continue to face budget shortfalls, and most states are taking steps to
implement cost controls within their Medicaid programs.
The Deficit Reduction Act of 2006 (DRA) includes several changes to the Medicaid
program designed to rein in program spending. Certain DRA provisions are expected to
reduce Medicaid spending by an estimated $2.4 billion over 5 years. The law also gives
states greater flexibility to expand access to home and community based services by
allowing states to provide these services as an optional benefit without undergoing the
waiver approval process, and includes a new demonstration to encourage states to
provide long-term care services in a community setting to individuals who currently
receive Medicaid services in nursing homes. Together, these provisions could increase
state funding for home and community based services, while prompting states to cut
funding for nursing facilities.
15
Omnicare 2005 Annual Report
22
APPENIDX C – Statement of Cash Flows
Omnicare, Inc. - Statement of Cash Flows
Actual ($ Millions)
2001
2002
2003
2004
2005
74
126
194
236
226
32
42
25
17
3
33
12
31
15
9
35
21
45
58
-
45
36
58
110
8
Operating activities
Net income
Adjustments to reconcile net income to cash flows from operating activities
Depreciation
Amortization
Provision for doubtful accounts
Deferred tax provision
Non-cash portion of restructuring charges
Write-off of debt issuance costs
Changes in assets and liabilities, net of effects from acquistion of businesses
Accounts receivable and unbilled receivables
Inventories
Deposits with drug wholesalers
Current and noncurrent assets
Accounts payable
Accrued employee compensation
Deferred revenue
Income taxes payable
Current and noncurrent liabilities
Net cash flows from operating activities
-
-
38
15
45
44
4
(51)
(13)
6
15
(2)
11
(8)
151
(42)
(28)
(37)
35
1
(14)
18
159
(97)
(87)
9
36
1
(3)
(7)
(17)
175
(154)
13
(44)
(29)
(16)
(18)
2
(8)
27
168
(163)
(71)
(4)
(28)
37
(1)
1
(8)
18
264
Investing activities
Acquisition of businesses, net of cash received
Capital expenditures
Transfer of cash to trusts for employee health and severance costs
Other
Net cash flows from investing activities
(20)
(26)
(1)
(47)
(128)
(25)
(153)
(663)
(17)
2
(678)
(399)
(18)
(417)
(2,620)
(24)
(2)
(2,646)
70
(475)
375
(3)
(16)
8
(8)
(49)
90
(120)
1
(8)
(37)
749
(593)
595
(354)
(25)
(5)
179
12
(9)
549
835
(686)
(1)
(5)
10
(9)
144
3,560
(3,165)
1,769
(369)
(52)
5
743
33
(10)
2,514
Financing activities
Borrowings on line of credit facilities and term A loan
Payment on line of credit facilities and term A loan
Proceeds from long-term borrowings and obligations
Payments on long-term borrowings and obligations
Fees paid for financing arrangements
Change in cash overdraft balance
Proceeds from stock offering net of issuance costs
Proceeds from stock awards and exercise of stock options and warrants
Dividends paid
Other
Net cash flows from financing activities
Effect of exchange rates on cash
-
1
4
(1)
(1)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
55
112
(30)
168
50
138
(106)
187
131
84
Cash and cash equivalents at end of year
167
138
188
81
215
23
APPENDIX D – Projections
Income Statement
(Mill$)
Sales
Reimbursable out-of-pockets
Total net sales
Omnicare, Inc. - Forecast
FY
FY
FY
2007E
2006E
2005
6,962
6,054
5,264
24
24
28
6,986
6,078
5,292
FY
2004
4,101
19
4,120
FY
2003
3,474
25
3,499
FY
2002
2,606
26
2,632
FY
2001
2,159
24
2,183
Cost of sales
Reimbursed out-of-pocket expenses
Total direct costs
5,166
24
5,191
4,492
24
4,517
3,965
28
3,993
3,071
19
3,090
2,577
25
2,602
1,915
26
1,941
1,580
24
1,604
Gross Profit
1,795
1,561
1,299
1,030
897
691
579
SG&A
Goodwill amortization
Restructuring & other related charges
Other expense
Operating Income
1,050
12
733
913
12
636
759
19
521
588
442
510
387
411
23
257
350
33
18
5
173
8
(167)
574
7
(145)
498
6
(166)
361
3
(70)
375
4
(81)
310
3
(57)
203
3
(56)
120
216
358
187
311
135
226
139
236
116
194
77
126
46
74
Basic EPS
Basic shares
3.47
103.2
3.01
103.2
2.19
103.2
2.29
103.1
1.97
98.5
1.34
94.0
0.80
92.5
Diluted EPS
Diluted shares
3.33
107.6
2.89
107.6
2.10
107.6
2.17
108.8
1.89
102.6
1.33
94.7
0.79
93.7
Investment income
Interest expense
Income before income taxes
Income taxes
Net income
24
APPENDIX E – OCR Valuation
StockVal®
OMNICARE INCORPORATED (OCR) Price 46.37
1996 19961997 1997 19981998 1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006 200720072008
HI
LO
ME
CU
36
24
44.2
7.8
17.3
14.2
12
08-09-1996
08-11-2006
0
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
4
4.21
0.36
1.08
0.85
2
08-09-1996
08-11-2006
0
PRICE / SALES
HI
LO
ME
CU
27
18
47.9
3.8
13.7
14.1
9
08-09-1996
08-11-2006
0
PRICE / CASH FLOW ADJUSTED
HI
LO
ME
CU
4
4.2
0.6
2.1
1.8
2
08-09-1996
08-11-2006
0
PRICE / BOOK VALUE
25
APPENDIX F – OCR vs. Industry Valuation
StockVal®
OMNICARE INCORPORATED (OCR) Price 46.37
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
HI
LO
ME
CU
0.4
0.92
0.00
0.16
0.75
0.2
08-09-1996
08-11-2006
0.0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO MEDICAL PRODUCTS/SUPPLIES (082A) E-Wtd
HI
LO
ME
CU
1.5
1.0
1.82
0.17
0.49
0.39
0.5
08-09-1996
08-11-2006
0.0
PRICE / SALES RELATIVE TO MEDICAL PRODUCTS/SUPPLIES (082A) E-Wtd
HI
LO
ME
CU
0.6
0.4
0.98
0.00
0.25
0.74
0.2
08-09-1996
08-11-2006
0.0
PRICE / CASH FLOW ADJUSTED RELATIVE TO MEDICAL PRODUCTS/SUPPLIES (082A) E-Wtd
HI
LO
ME
CU
0.9
0.6
1.17
0.17
0.59
0.55
0.3
08-09-1996
08-11-2006
0.0
PRICE / BOOK VALUE RELATIVE TO MEDICAL PRODUCTS/SUPPLIES (082A) E-Wtd
26
APPENDIX G – OCR vs. Sector Valuation
StockVal®
OMNICARE INCORPORATED (OCR) Price 46.37
1996 19961997 1997 19981998 1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006 200720072008
HI
LO
ME
CU
1.5
1.0
1.95
0.27
0.75
0.89
0.5
0.0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P HEALTH CARE SECTOR COMP ADJ (SP-35) M-Wtd
08-09-1996
08-11-2006
HI
LO
ME
CU
1.5
1.0
1.66
0.10
0.47
0.50
0.5
08-09-1996
08-11-2006
0.0
PRICE / SALES RELATIVE TO S&P HEALTH CARE SECTOR COMP ADJ (SP-35) M-Wtd
HI
LO
ME
CU
2
2.60
0.15
0.78
1.01
1
08-09-1996
08-11-2006
0
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P HEALTH CARE SECTOR COMP ADJ (SP-35) M-Wtd
HI
LO
ME
CU
0.6
0.4
0.79
0.08
0.43
0.50
0.2
08-09-1996
08-11-2006
0.0
PRICE / BOOK VALUE RELATIVE TO S&P HEALTH CARE SECTOR COMP ADJ (SP-35) M-Wtd
27
APPENDIX H – OCR vs. Market Valuation
StockVal®
OMNICARE INCORPORATED (OCR) Price 46.37
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
HI
LO
ME
CU
2
2.61
0.21
0.84
0.85
1
08-09-1996
08-11-2006
0
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO SP-5 E-Wtd
HI
LO
ME
CU
3
2
3.54
0.19
0.70
0.53
1
08-09-1996
08-11-2006
0
PRICE / SALES RELATIVE TO SP-5 E-Wtd
HI
LO
ME
CU
2
4.64
0.24
1.04
1.23
1
08-09-1996
08-11-2006
0
PRICE / CASH FLOW ADJUSTED RELATIVE TO SP-5 E-Wtd
HI
LO
ME
CU
1.2
0.8
1.27
0.15
0.70
0.62
0.4
08-09-1996
08-11-2006
0.0
PRICE / BOOK VALUE RELATIVE TO SP-5 E-Wtd
28
APPENDIX I – DCF Model
DCF Valuation
8/14/2006
Ticker: OCR
Steve Kennedy
Terminal Discount Rate =
Terminal FCF Growth =
12.0%
5.0%
Forecast
2008E
2009E
2010E
6,986
14.94%
7,510
7.50%
8,036
7.00%
8,558
6.50%
11,079
5.00%
636.1
10.47%
733.3
10.50%
788.3
10.50%
843.5
10.50%
898.3
10.50%
1,162.9
10.50%
(160.0)
-3.02%
(138.2)
-2.27%
(159.0)
-2.28%
(170.9)
-2.28%
(182.8)
-2.28%
(194.7)
-2.28%
(252.1)
-2.28%
Taxes
Tax Rate
Equity Income, net
% of sales
135.0
37.6%
0.0%
187.3
37.6%
0.0%
216.1
37.6%
0.0%
232.3
37.6%
0.0%
248.6
37.6%
0.0%
264.7
37.6%
0.0%
342.7
37.6%
0.0%
Net Income
% Growth
226.0
310.5
37%
358.2
15%
726.8
103%
777.7
7%
828.3
7%
1,072.2
5%
Add Depreciation/Amort
% of Sales
% of Capex
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
81.0
1.53%
0.00%
(451.0)
-8.5%
24.0
0.45%
93.0
1.53%
0.00%
(1.3)
0.0%
93.0
1.53%
106.9
1.53%
0.00%
(200.9)
-2.9%
106.9
1.53%
114.9
1.53%
0.00%
(216.0)
-2.9%
114.9
1.53%
123.0
1.53%
0.00%
(231.1)
-2.9%
123.0
1.53%
131.0
1.53%
0.00%
(246.1)
-2.9%
131.0
1.53%
169.6
1.53%
0.00%
(318.6)
-2.9%
169.6
1.53%
Free Cash Flow
YOY growth
(168.0)
309.2
-284%
157.3
-49%
510.9
225%
546.6
7%
582.2
7%
753.7
5%
Year
2005
2006E
2007E
Revenue
% Growth
5,292
6,078
14.85%
Operating Income
Operating Margin
521.0
9.85%
Interest and Other- net
Interest % of Sales
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
$2,827.6
$2,901.7
5,729.2
-2.93%
Shares Outstanding
103.2
Current Price
46.39
Implied equity value/share
55.52
Upside/(Downside) to DCF
19.7%
49%
51%
2015E
Terminal
P/E
EV/EBITDA
Free Cash Yield
Terminal
Value
11,304.8
10.5
10.4
6.67%
29