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Omnicare gets 18% increase in Iridian

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Feb. 23 2015, Updated 10:33 a.m. ET

Iridian’s position in Omnicare

In its 13G filing in January, Iridian Asset Management increased its shares in Omnicare, Inc. (OCR) by approximately 18%. The number of shares went from 5,047,158 to 5,948,816. The filing also showed that the fund holds a passive stake of 6.1% in the company.

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Omnicare: A leading healthcare services company

Omnicare, Inc. (OCR) is a leading healthcare services company. It offers complex pharmacy services across a wide range of pharmaceutical product types, care settings, and patient populations.

The company operates in the following two major businesses: Specialty Care Group and Long-Term Care.

Omnicare is an industry leader within its Long-Term Care business. The assisted living, skilled nursing, and chronic-care settings are its major customers.

Manufacturers, physicians, nurses, caregivers, providers, and patients are the major customers for Omnicare’s Specialty Care Group business line. This business has grown rapidly in recent years and accounts for more than 25% of the company’s 3Q14 revenue mix.

Favorable market dynamics for the Long-Term Care segment

The population in the United States aged 85 and older is expected to experience a CAGR (compound annual growth rate) of 2.3% based on estimates from the U.S Census Bureau. The utilization of pharmaceuticals by senior citizens is reportedly three times higher than that of the general population. This signals positive news for the Long-Term Care segment.

Additionally, the increase in the company’s dispensing rates of generic drugs is a major driver for Omnicare. The introduction of low-cost drugs tends to benefit the company as well as its customers.

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Favorable market dynamics for the Specialty Care Group segment

According to statistics that Omnicare referred to in its company presentation, US spending for specialty drugs is projected to increase 63% before the end of 2016. Specialty products are also expected to comprise 41% of US sales by the year 2020.

Biotech products are increasingly witnessing a larger share of the top 100 prescription products. The Specialty Care Group segment is suitably positioned to capitalize on the growing specialty market.

Omnicare’s business segments show strong financial performance

Net sales for Omnicare’s Long-Term Care segment were 2.2% higher during 3Q14 than during the same quarter in the previous year. The segment also witnessed an adjusted operating income amounting to $159 million. This was congruent with its value during the same period in the previous year.

Net sales for Omnicare’s Specialty Care Group segment were up 18.9% in 3Q14 compared to its value during the same period in the previous year. Operating income experienced a massive 27.4% increase compared to its value in the same period in the previous year.

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New introductions of generic drugs and improved collections have improved the days sales outstanding. This is providing a massive benefit for working capital and cash balances. Convertible and floating rate debt have also decreased as a percentage of total debt during 4Q14, thus creating a debt structure that’s more predictable.

The company has also been demonstrating a consistent commitment to lower its SG&A (selling, general, and administrative) expenses during every quarter of the last year. It is doing this by making improvements in its operating efficiencies.

Iridian’s 13G positions

According to its 13G filing, Iridian Asset Mnagement didn’t initiate any new positions.

The fund increased its holdings in the following companies:

  • Myriad Genetics, Inc. (MYGN)
  • Service Corporation International/US (SCI)
  • Avis Budget Group, Inc. (CAR)
  • Omnicare, Inc. (OCR)
  • Halozyme Therapeutics Inc. (HALO)
  • Theravance Inc. (THRX)
  • AOL Inc. (AOL)
  • Lexmark International, Inc. (LXK)
  • The Valspar Corporation (VAL)
  • W.R. Grace and Company (GRA)
  • Sealed Air Corp. (SEE)
  • Pitney Bowes Inc. (PBI)
  • Graphic Packaging Holding Company (GPK)
  • SemGroup Corporation (SEMG)

A significant aspect of the fund’s 13G filings is that Iridian Asset Management dropped the following two key positions:

  • Dresser-Rand Group, Inc. (DRC)
  • Wyndham Worldwide Corporation (WYN)

In the next part of this series, we’ll analyze Iridian Asset Management’s holdings in Halozyme Therapeutics Inc. (HALO).

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