April 13th we wrote that PharMerica was right to turn down Omincare’s $15 per share offer. Since that time PMC has continued to underperform the market declining twice as much as the market as a whole. Is this just further proof that relative out-performance on the upside or downside is something to pay attention to or is there something wrong with PMC? We attempt to answer this by revisiting the Stock Checklist. They basically dispense medicines at long term care facilities. PMC gets paid by the pill which in turn is impacted on the revenue side by the number of beds and the balance of generic versus brand. On the COGS side it’s a matter of CMS reimbursement rates. This is a low margin business and the only way to appear to improve margins is increase beds or cut management overhead including the CEO’s outsized salary. On second analysis, the Company should not have fought Omnicare’s acquisition but it would never have happened anyway due to antitrust issues. The good news is that they probably won’t get shareholder lawsuits for fighting it now.
I can see nothing to suggest why the recent breakdown in price other than a sympathetic move with Omnicare stock and the breaking of 52 wk low support. On the other hand in a market that is presenting so many other compelling opportunities now, we have to believe there is more compelling investment opportunities out there.
Previous Overall Score: 3 new Score: 1
Chart: -1 no longer showing a bullish divergence, PMC broke its diverging pattern on 5-17. It’s larger rival OCR broke badly on 5-16 with no apparent news.
Analyst Opinion: -1 We view holds as negative. Although Merrill Lynch is quite bullish with a target of $16 and buy rated.
| Strong Buy | 1 | |
| Buy | 1 | |
| Hold | 5 | |
| Underperform | 0 | |
| Strong Sell | 0 | |
Nothing much has changed except one less analyst covering who was a hold.
Insider Trading: 1
Nothing new. Still only one insider buy, the CEO, who bought 20,000 at $12.30 on 2-29
Management Discussion and Analysis: 0
Since the first analysis, the Company has filed the 10Q. Selective observations as follows:
OCR withdrew hostile takeover effort. In connection with these matters, in the first quarter of 2012, we expensed $2.2 million of legal and advisory fees, which are included in integration, merger and acquisition related costs and other charges in the condensed consolidated financial statements. The Corporation does not expect to incur significant additional costs in the future in connection with Omnicare’s unsolicited tender offer.
At March 31, 2012, we had contracts to provide pharmacy services to 333,174 licensed beds for patients in healthcare facilities throughout the country. We also have significant customer concentrations with facilities operated by Kindred. For the three months ended March 31, 2012, Kindred institutional pharmacy contracts represented approximately 11.2% of the Corporation’s total revenues.
Government and Regulation risk is high. 47.7% of revenue is medicare part D paid.
Institutional pharmacy revenues decreased $36.8 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, due primarily to the net decline in customer licensed beds of 24,495 as well as other factors including the continued wave of drugs converting from brand to generic which results in lower revenues. institutional pharmacy cost of goods sold decreased $43.6 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 primarily due to a decrease in overall total drug costs associated with lower prescriptions dispensed. The quarter over quarter comparisons were negative on both the revenue line and bed but improved on a consecutive quarter basis.
Shift from Branded to Generic drugs is resulting in accelerating margin compression.
Cash provided by operating activities aggregated $19.9 million for the three months ended March 31, 2012 compared to $5.4 million for the three months ended March 31, 2011. The increase in cash provided by operating activities compared to prior periods is primarily a result of lower inventory levels during the three months ended March 31, 2012 partially offset by cash used in payments of accounts payable and accrued salaries and wages.
Stock Performance Relative to Market: -1
Sector Outlook: 0
Healthcare sector is up 10%YTD, Overall stable outlook, it would seem that the regulation risk is low-minimal for now although some uncertainty with the Supreme Ct. ruling on Obama Care.
Free Cash Flow: 1
Cash flow is growing, and adjusted for one time payments aggregating $99.7mm, CFO in 2011 would have been $126.5mm
| 2009 | 2010 | 2011 | ||||||||
| Revenues | $1,841.2 | $1,847.3 | $2,081.1 | |||||||
| COGS | 1,565.7 | 1,607.0 | 1,787.8 | |||||||
| Gross Profit | 275.5 | 240.3 | 293.3 | |||||||
| Amortization | 9.0 | 9.3 | 11.0 | |||||||
| G&A | 190.8 | 180.6 | 214.9 | |||||||
| EBIT | 75.7 | 50.4 | 67.4 | |||||||
| D&A | 27.0 | 28.1 | 31.1 | |||||||
| EBITDA | 102.7 | 78.5 | 98.5 | |||||||
| Capex | (21.6) | (12.6) | (13.2) | One time cash flow items | 2011 | |||||
| Interest | (11.2) | (3.2) | (7.6) | AmeriBergen extra Friday payment | 29.6 | |||||
| Working Capital | (9.3) | 32.3 | (55.2) | Inventory increase to improve margins | 57.4 | |||||
| Taxes | (1.6) | (0.4) | (0.5) | ChemRx acquisition adjustment | 12.7 | |||||
| FCF | 59.0 | 94.6 | 22.0 | Total | 99.7 | |||||
| CFO | 85.0 | 98.2 | 26.8 | |||||||
| CFI | (76.1) | (133.2) | (64.0) | |||||||
| CFF | 1.0 | (5.4) | 43.8 | |||||||
| Net Income | 42.2 | 19.2 | 23.4 | |||||||
PEG Ratio: 1 I’m not convinced of this but that’s always the rub isn’t it. Do you believe projections?
| P/E | 15.32 | ||
| 2011 | 2012 | ||
| EPS | 0.79 | 1.19 | |
| PEG Ratio | 0.30x |
Valuation: 1
Adjusted FCF for 7 yrs from 10 yrs
Adjusted growth rate to 1%
10 yr treasury at 3%
Investment rate is adjusted higher to closer match depreciation rate
Equity risk premium assumed at 5%
Beta is taken from finance.yahoo
Catalyst: 0
11.2% of Company’s revenues according to recent 10Q come from Kindred. Omnicare, the Company’s closest competitor stock has performed far better than PMC.
Long term trends are positive as elderly population expected to double between 200 and 2030.
In October 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a proposed rule entitled “Medicare Program; Proposed Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 and Other Proposed Changes; Considering Changes to the Conditions of Participation for Long Term Care Facilities” (the “Proposed Rule”). In the Proposed Rule, CMS outlined its concerns, and requested comments, regarding certain contractual arrangements between Long Term Care (“LTC”) facilities, LTC pharmacies, consultant pharmacies, and pharmaceutical manufacturers. After reviewing the comments, CMS declined to finalize the portion of the Proposed Rule requiring the independence of consultant pharmacists from LTC pharmacies.
Company on their May 3rd conference call said bed loss is improving, Adjusted earnings were .30 versus .20 a 50% improvement. Company is going to lose a significant customer, Golden Care, over time due to their desire to bring pharmacy dispensing services in house.A number of care homes were moving to insource pharmacy services due to CMS reimbursement rates being lowered. Kindred, their largest customer has notified some of their customers that they are not renewing their management contracts and Pharmerica will have to renew contracts with new owners. Pharmerica was spun off from Kindred.
Company has been distracted by the hostile proposed Omnicare acquisition and appears to be working hard to gather momentum. Analysts were generally positive on the earnings call and growth in hospital beds is not expected to occur until 3rd quarter 2013. It’s hard to see any catalysts for improvement here short of an acquisition or going private transaction. Neither seem likely. I’d give it a -1 except for the Company appears to be improving their operating margins and their main competitor’s stock has outperformed until the last few days.