EXHIBIT (a) (8)
NEIGHBORCARE, INC.
Moderator: Tania Almond
06-14-04/12:00 pm CT
Confirmation #8098890
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NEIGHBORCARE, INC.
MODERATOR: TANIA ALMOND
JUNE 14, 2004
12:00 PM CT
Operator: Good afternoon, my name is (Tanika) and I will be your
conference facilitator. At this time I would like to welcome
everyone to the NeighborCare Investor Presentation Conference
Call and Webcast Slide Presentation. All lines have been placed
on mute to prevent any background noise. After the speakers'
remarks there will be a question and answer period. If you would
like to ask a question during this time simply press star then
the number 1 on your telephone keypad.
If you would like to withdraw your question press star then the
number 2. If you experience any issues during the show please
press star then 0 on your touchtone phone or send a chat message
to the Help Desk, each request will be answered as quickly as
possible. I would now like to turn the show over to Miss Tania
Almond, Director of Investor Relations with NeighborCare, please
go ahead.
TaniaAlmond: Thank you. Good afternoon, I want to thank you for
joining NeighborCare for a special conference call and webcast.
You may view the slide presentation that we will be referencing
through the webcast. You can access the slides through the link
provided in our press release or go to www.mshow.com and
NEIGHBORCARE, INC.
Moderator: Tania Almond
06-14-04/12:00 pm CT
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under Join A Show enter Show Number 172956 and your e-mail
address, complete a brief registration page and you will be
joined to the webcast. A replay of the call and the presentation
will be posted to our Web site within a few hours following the
event.
John Arlotta, the company's Chairman, President and CEO will make
the presentation, then we will open up the call to questions.
Rick Sunderland, the company's Chief Financial Officer; John
Gaither, our Senior Vice President, General Counsel and
Secretary; Bob Smith, our Chief Operating Officer and Jack
Kordash, our Executive Vice President and Assistant to the CEO
are also here with us as well for the Q&A session. I would like
to request that everyone limit themselves on the multi-part
questions so that we are able to fit in all who would like to ask
a question.
Before we begin I must remind you that statements made in this
conference call, in our public filings, releases and Web site
which are not historical facts maybe forward-looking statements
that involve risks and uncertainties and are subject to change at
any time. We caution investors that any forward-looking
statements made by us are not guarantees of future performance,
we disclaim any obligation to update any such factors or to
announce publicly the results of any revisions to any of the
forward-looking statements to reflect future events or
developments.
There is more complete information regarding forward-looking
statements, risks and uncertainties in the company's filings with
the Securities and Exchange Commission available on our Web site.
In addition, we are going to discuss non-GAAP financial
information on the call. Historical information is reconciled to
comparable GAAP financial information in our earnings releases.
Non-GAAP information for future periods will always be reconciled
to GAAP figures as part of our earnings releases.
NEIGHBORCARE, INC.
Moderator: Tania Almond
06-14-04/12:00 pm CT
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Now I'll turn it over to John Arlotta, the Chairman, President
and CEO of NeighborCare.
John J. Arlotta: Thank you Tania and good afternoon everyone. I would
like to thank all of our shareholders for your patience and
understanding while waiting for us to be able to speak to you
today. As you probably know we are prohibited from public comment
until we file our 14D-9. I am pleased to report that this filing
was completed this morning and I'm now able to speak directly to
you about our business plan. I want to emphasize that the
business plan, which I will discuss with you today, is not new.
It is the plan that began taking shape shortly after I arrived at
the company in December of last year when NeighborCare became a
standalone public company.
It is also a plan, which I have discussed with our shareholders
in increasing detail over the last six months. Therefore, for
those of you that have followed us for some time you will see
today's presentation as a continued effort to present more
visibility on a business plan that is working. For those of you
who are new to our story you will see a well-conceived, detailed
plan to maximize the potential of NeighborCare.
With that said, I have four specific objectives for today's
presentation. First, I will provide a brief background and
history of NeighborCare; second, I will show you at a high level
what the company looks like today; third, I will lay out our
business plan, including our success to-date as well as our
assumptions for the future and finally, I will provide some
insight into what the business plan will produce in terms of
revenues and earnings in future years.
NEIGHBORCARE, INC.
Moderator: Tania Almond
06-14-04/12:00 pm CT
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You will see two consistent themes throughout today's
presentation that are particularly noteworthy. The first is that
the business plan is working. Virtually every priority we have
established for the company is being successfully implemented.
The second is that the plan makes sense. The assumptions we have
developed for future performance are very achievable in light of
what we have already accomplished in such a short period of time.
With that said, please take a moment to review our notes on the
14D-9 and forward-looking statements so I may begin today's
discussion.
Okay, I'd like to start today with a brief overview of the
history of this company. It actually started in 1985 as Genesis
Health Ventures, which was a nursing home company. In 1988 they
entered the pharmacy business, actually through an acquisition of
a nursing home business. In 1996 the company made its first
acquisition taking it fully into the pharmacy business and in
1998 the company acquired Vitalink. Now at that point in time the
pharmacy business was worth about $1.1 billion in revenue. Then
in 2000 and 2001 the company went in and out of bankruptcy, due
primarily to changes in the nursing home reimbursement. In
December of 2003, as many of you know, we split the company into
two pieces and renamed the company NeighborCare under a new
management team.
A couple of points I'd like to make about this slide, the first
is that until the spin, this was a nursing home company. Very
much run by individuals who had been involved in the nursing home
business for a long period of time and the second point is that
NeighborCare on its own is a standalone business, it is just
getting started with pure focus on the pharmacy business.
Now let's take a look at the history of events leading up to
where we are today, at least from my perspective. You can read
through this on your own, I'd like to make a couple of points. I
guess the first one would be that the
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Moderator: Tania Almond
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initial meeting with Mr. Gemunder, I agreed to primarily because
I had not met Mr. Gemunder in the past and we are of course two
industry leaders, I thought it would be good to sit down and get
his views on the industry as a whole as well as express some of
my own views.
The second is, I'd like to just mention very importantly, that I
never expressed any interest in the proposal that he provided,
either at our dinner meeting or thereafter and the final point is
that in every discussion I did say that we were just getting
started and the greatest value to this company is really down the
road as we begin to perform on our business plan. However, with
all of that said I did offer to take his ideas to our Board
because I have a fiduciary responsibility to do so.
Now that I have reviewed that from my perspective, let me talk
about the management team here at NeighborCare. I have, since
July of last year, brought in four key new managers to help run
the business. As you look through this slide you see a
significant amount of healthcare experience and very importantly
a diverse experience base within healthcare including people that
have long-term care experience, people that have PBM experience,
homecare experience and of course technology experience.
My own experience base most recently is in the PBM industry and I
bring that up because I think it's important as I look at this
industry overall I see an industry today that looks very much to
me like the PBM industry did some 10 years ago. I think that
there's a real opportunity for this management team to take this
industry, particularly this business, forward and raise the level
of sophistication going forward.
We have a new team. This team as you can see is very capable of
raising that level of sophistication and as I mentioned earlier
we're just getting started in
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Moderator: Tania Almond
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transforming this business. Now this is the management team,
let's take a look at the Board of Directors.
A few points I'd like to make about this slide, first of all
there are eight people on the Board today. The Board essentially
makes up the same Board that was the Genesis Board pre-spin with
two exceptions; Mr. Art Reimers and Miss Phyllis Yale have joined
our Board since the spin. There's only one Board member from
management and that is myself and there are six independent Board
members. Final point I would make is that one member, Jim Dondero
from Highland Capital, is in fact our largest shareholder.
Now let's take a look at the NeighborCare business overall. You
can see on this slide that we're estimating our revenues to be
between $1.4 and $1.5 billion in 2004. The business is broken
into four product lines. The first and obviously the most
important product line is our Institutional Pharmacy business,
which makes up about 85% of our revenues or a little over $1
billion in revenue. We have 255,000 beds that we're servicing
today though 65 pharmacies in 32 different states.
The second business is our Retail Pharmacy business; excuse me,
which is about 8% of revenues or approximately $100 million in
revenues. These pharmacies, 33 of them, are located in four
states, most of them actually being in Maryland and they're
essentially small pharmacies of about 500 square feet located in
medical office buildings.
The third product line is NeighborCare At Home, this represents
5% of our revenues or about $75 million, split pretty evenly
between home IV and home respiratory therapy. We're located in 10
states with most of the business again being along the Eastern
seaboard and today we service about 20,000 patients.
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06-14-04/12:00 pm CT
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The last product line is our Tidewater GPO, which is one of the
largest long-term care GPO's in the industry, and it serves about
500,000 beds, primarily with food products and durable medical
equipment. The Tidewater GPO actually represents an excellent
cross selling opportunity for our company since many of the beds
under contract with Tidewater are not currently NeighborCare
Pharmacy beds.
So that's what the business looks like. Let's take a look at what
the customer base looks like. As you can see on this next slide,
on the right-hand side, we have about 2,500 customers today with
an average tenure of 5.7 years. We have a contract length that is
actually increasing; in fact since July when I arrived we've had
new contracts, about 50% of our new contracts have actually been
3 to 5 years in duration. You can also see on this slide that
ManorCare and Genesis are our largest customers and their
actually very long-term in nature, with ManorCare's contract
going through February of '06 and Genesis, really a 10-year
contract.
On the left-hand side of the slide, again you see ManorCare and
Genesis making up about 20% of our business, but 80% of the
business is actually small accounts with no single account
representing more than 3% of our business. So the point I would
make about this slide is that our large accounts are stable and
overall we have a very diversified customer base without
significant risk.
I'd like to finish with a quick snapshot of where the business is
today. You can see here, 255,000 beds, our organic growth about
6,000 net new beds year-to-date and 10,000 beds acquired through
June of this year. Our revenue per bed is about $406 and we see
that rising at about a 7 to 8% rate on a year-over-year basis and
our adjusted EBITDA is about 8%.
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Moderator: Tania Almond
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So again the important thing about this slide is that we have
size and scale to compete effectively in this marketplace with
255,000 beds and 65 pharmacies. A second point I would make is
that the organic growth numbers and the acquisition numbers again
indicate that we're executing successfully on our plan to grow
the business organically and through strategic acquisition.
We have a plan, we're executing on the plan, let's take a look at
the opportunities that are ahead of us. First, this is a great
industry to be in. We've got built-in top line growth because of,
what I refer to as drug trend, and I'll share some numbers with
you a little bit later on drug trend that I think are
interesting. We also have built-in bottom line growth because we
have a business that's converting to generic products from
branded products and those generic products are not only better
for our customers in terms of the lower price, but they're more
profitable for us.
We're also in a great business situation because we have an
opportunity to expand our EBITDA margin, the market leader is
significantly higher than we are in EBITDA margin and I would say
that this is an issue, not of size, but of execution and as
you'll see as we go through the presentation we are in fact
beginning to execute very nicely on the various areas that will
help to increase our EBITDA margin.
Third point I would make is that there's a very real opportunity
to differentiate ourselves in the industry from a sales value
proposition standpoint. As I say to our employees and our
customers all the time, we want to be more than just a
distributor of drugs, we want to be someone who actually helps
our customers to manage their drug costs.
The next point is that the mom and pop's of the industry are
significant, their large in number and there is a lot of
opportunity to consolidate this industry
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and we've been showing through our recent acquisitions that we're
very well situated to do that.
And then finally we have an experienced management team, as I
mentioned earlier, that's very capable of transforming this
business to where we want to get it to.
Now these are the opportunities, how are we going to do it? The
next slide is one that, for those of you who have followed us for
a while will be very familiar to you, it is our business plan and
it's something as I mentioned earlier I've laid out very early in
the process and we are tracking very nicely on executing toward
this plan. I'm not going to go through each of the points right
now, I'll go through them individually and share some information
in just a moment and in fact what I want to do here is I want to
take each of these priorities and show you our progress to-date,
then I'd like to also show you the assumptions that we're making
over the next four years that lay out our business plan.
Taking a look at the first priority you can see that priority is
to drive our service costs down while improving our customer
service. Today I'm going to focus on the cost side of the
equation, but understand if you will, that we have significant
programs in place today that help us to track our customer
service levels so that we're sure that as we're beginning to
drive our costs down we are in fact getting the results that
we're looking for, which is not just cost reduction, but also
improvement in our customer service.
You can see here this has been a three-phase program for us that
I've laid out. Phase I is Best Demonstrated Practices. We have
saved to-date; through the end of this year we will have saved
about $18 million. In Phase II, which I have laid out to our
shareholders in the past, we've moved to centralization of
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various processes, adding fax servers and imaging equipment, a
new decision rule engine and very importantly, our Drug Repack
initiative. These programs will save us between $20 and $30
million on an annualized basis and in Phase III of the program,
what we refer to as Advanced Pharmacy Automation, where we intend
to save another $20 million in costs, is a program that I'm going
to share a bit more insight on as we go through the presentation
today.
The points that I'd like to make about the graph on this
particular slide, first of all, again the programs are working.
This is a graph showing cost of service as a percent of revenue
and as you can see here we've had about 100 basis point
improvement between '03 and the end of '04. Our future assumption
also makes sense. You can see that going out through 2008 we'll
see an additional 200 - 300 basis points improvement. Again,
primarily through the Phase II and Phase III programs that I've
just mentioned and I'll go into in a little bit more detail in a
moment. So as you can see our assumption relative to cost of
service is very doable and very reasonable.
Next I'd like to talk about our product costs. As you can see
here we've had a lot of success as well. In fact, we just
announced an expanded relationship with Cardinal, which is going
to save us approximately $5 million a year. We also have had a
lot of success in developing our new P&T process and our new
formulary, which I will tell you briefly is a formulary that I
would call in the middle, it's not an open formulary, it's not a
totally closed formulary, it provides our customers the
flexibility that we think that we need and yet it still helps us
to drive greater rebates. We also put in place a new system to
track our rebate performance by individual pharmacy and this is
helping us really to monitor the performance of our Formulary
Management Program in a way that we've never been able to in the
past.
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As you look again at the chart I want to point out that our
programs here on rebates as a percent of revenue are in fact
working. We've seen a 40 basis point improvement between '03 and
'04 and going out our assumption is that we'll continue to see
improvements getting to 60 to 80 basis points by '08. So again,
this is a story that makes a lot of sense and the assumptions
make a lot of sense going forward.
Now I've talked about cost of product and cost of service, let me
move to our sales effort. Our third priority is to grow sales
organically and increase our customer retention. This, as I've
said many times in presentations in the past, is a story of
working on the fundamentals, the blocking and tackling.
In doing that we have started by centralizing our contracting and
our pricing programs, we have also put in place various programs
to better monitor our sales force performance, we've initiated a
brand new account management program aimed at retaining our
customers, we have also put in place a new value proposition for
our sales force to work with our customers on and I'll give you a
little bit more color on that later in the presentation and
finally we have a complete new team in terms of management from a
sales and account management perspective.
Now if you look at the chart here on this particular slide you'll
see again that our programs are working. Our net bed gains over
the last four years have been flat and now we're moving into a
stage where we're getting positive net bed gain. In fact, we're
very much on track to deliver the 5,000 to 10,000 net new beds
that I've been talking to the marketplace about over the past few
months.
Our retention rate on the top of the graph has also improved
between '03 and '04, you can see going from 86% retention to
almost 89% retention. So again,
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looking at this chart I think the retention rates as well as the
net bed gains are very achievable going out into 2008,
particularly when you consider that we're building terrific
momentum right now going into 2005 and we have a brand new team
in place, ready to go with new tools.
Now our next priority was strategic acquisitions and when it
comes to acquisitions we've had a couple of thoughts in mind. The
first is we wanted to look to locations where we did not have a
presence and we needed to fill in our geographic presence,
particularly so that we could compete for large national
contracts. We also look at places that we have an existing
presence and we feel that we can gain a very significant
additional presence through making an acquisition. You can see
that our acquisition programs in the past have been rather
meager. In 2003 we acquired 1,300 new beds, in 2004 year-to-date
we've already acquired 10,000 beds and our budget for this year
is 14,000 new beds.
Now our recent acquisition is a great example of how this
strategy has actually been coming to light. This was an
acquisition in Connecticut where we were not, quite frankly, very
strong as an organization. By taking the acquisition and putting
it with our existing beds we now have a significant presence in
the State of Connecticut.
And also looking at this potential acquisition we are quite
excited that the people running the organization had the same
philosophy that we had relative to the use of technology and in
fact, this was one of the reasons that we made this particular
acquisition, so that we could bring into our shop some technology
and some ideas that were right inline with what we're trying to
do for the entire company.
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Now again the point I'd make from this slide is that we've proven
that we can compete on acquisitions and going forward, as you
see, we've got a very reasonable assumption of 10,000 to 20,000
new beds. That's very achievable.
In addition to the acquisition plan we've also had a new plan for
startup locations. Quite frankly we had some gaps in our
geographic coverage that have limited our ability to compete on a
national basis for national contracts. Particularly these areas
were the southeast and the plain states as well as Ohio and the
West Virginia area.
Our plan was to add 5 to 10 new sites in 2004, you can see from
the large red stars indicating sites that we will have open by
the end of August that actually going back over the last 12
months we will have opened 12 new sites and very nicely filled in
some of the geographic coverage gaps that we've had. We also have
a couple of future locations shown in yellow here where we intend
to go into particular states to really completely round out our
geographic coverage. So the point I'd make about this slide is
that we have, in fact, filled the gaps and we're very capable of
competing for national accounts.
Now I've talked about the four priorities, I said I would
actually come back to a discussion, a further discussion, on
automation. I'd like to do that at this particular point in time.
I always like to start with this particular slide; it's what I
call our Long-Term Care Pharmacy Business Cycle Slide. I like to
use this because, for those of you that are not familiar with the
industry, I think it's a very nice, quick way to understand how
the industry operates. On the upper left-hand side of the slide
it all starts with buying drugs and we buy today about $900
million worth of drugs, a significant number.
About $80 million of that is generic purchases. Once we contract
for and buy the drugs we have a drug wholesaler, in our case it's
Cardinal, who delivers on
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a daily basis to our pharmacies. The pharmacies job is then to
package and dispense to specific patient orders and then we
deliver those orders into the long-term care facilities,
generally within 150 mile radius of our location.
Now this is how it works today within NeighborCare. Let me,
through the next few slides, share with you what the future will
look like utilizing automation. The first step in the process is
to put a drug repackaging facility between the manufacturer and
our NeighborCare pharmacy. This facility will be an FDA approved
location and it will prepackage, in bulk, the blister cards that
our used in our pharmacies. The pharmacy will then label that
prepackaged package, if you will, and send it out for specific
patient orders to our long-term care facility.
We actually had a thought that we'd be in place with this program
by 2006, late 2006, we've made tremendous progress however and
we're now saying that we'll be - this drug repackaging facility
will be online in late 2005, a full one year before our previous
expectations. We do feel that this will save us between $3 to $5
million a year through 2005 and 2006. I want to point out that
not only is this better for our cost structure but it also
reduces med errors significantly and improves patient safety so
it's a very important program, not only for us, but for our
customers.
Now once the drug repackaging is in place we can then move
towards more automation within our individual pharmacies.
Automation of these pharmacies is done really through the various
- looking at the various functions within the pharmacy and how we
can automate them.
Now without divulging too much to our competitors I'd like to
show you a few of our thoughts on how this automation will occur.
You can see in this slide that we intend to have fully automated
Super Pharmacies in some
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locations and semi-automated smaller pharmacies in others. As I
said earlier, not only will this reduce our costs but it will
also improve patient safety. Now one thing that is sometimes lost
in automation programs is that it also improves customer service,
in this case the programs we're intending to put in place
actually improve the cycle time significantly, sometimes from as
much as 3 hours down to 30 minutes, so our response time for our
customers will be much greater.
Now we recently announced that we were going to spend $35 million
over a 3-year period of time on these programs and we would save
$20 million a year through these automation programs. This is
totally new to the industry and again as I said, drives down our
costs and improves our customer service. Now you can't do this
however, without utilizing an intelligent operating system.
The next slide I want to show you speaks to the Intelligent
Decision Rule Engine that we're in pilot on right now and again,
if you followed us for a while you've heard me talk about this
program, it is a program that is in test in, in fact five
locations right now. We hope to have a decision by the end of the
summer or early fall on implementing this new system. The system
helps us because it minimizes the training and the education for
our employees, provides for much greater efficiency within our
pharmacies and again, along the same theme of patient safety, it
does help us to reduce medication errors.
Now what I'd like to do in the next few slides is to give you a
visual of how all of this is going to come together. You can see
the slide here that today's NeighborCare has 65 decentralized,
fully functional and fully staffed long-term care pharmacies in
32 different states. Let's take a look at how we're going to
transform this picture.
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To do that you should understand the various functions that occur
in a pharmacy. Now this slide is not intended to show all the
functions within a pharmacy, just the ones that we're focused on
right now in terms of our automation program. You do have data
processing in the pharmacy; you have the packaging function,
particularly in blister packs that I talked about earlier; you
have the dispensing function, the specific patient order and
fulfillment, which is the delivery and the billing. So those are
all of the pieces, this gives you an idea of the various things
that are done in a pharmacy. Let's take this and break it down
even further.
In this particular slide you'll see that what we're going to do
is take the first piece, the red piece, the data processing and
centralize that. This gives us tremendous reduction in headcount
and helps us to gain better control over all of our operating
systems.
In the next slide you get the impact of the Drug Repackaging
facility that I talked about earlier and in this case we're
centralizing and getting the benefit of volume efficiency by
doing the packaging in a single location.
In the next slide we look at dispensing, again to specific
patient orders and what we'll end up with here are several fully
automated Super Pharmacies in conjunction with partially
automated smaller pharmacies.
And again the last slide, it can't work unless you have an
intelligent system to network all of this together and that's
where the piece comes - or that's where the system that I talked
about earlier brings all of this together.
Now if you take a step back for a moment and think about the last
10 or 15 slides I've taken you through, we've started with Phase
I of our Cost Reductions programs that we called Best
Demonstrated Practices and that will
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be done by the end of 2004 and we'll see savings of about $18
million on an annualized basis.
In Phase II, which is essentially 2005 and 2006, we begin the
Automation Programs, including fax servers, imaging and drug
repackaging and we intend to save about $20 to $30 million
through those programs.
And then in Phase III we get in, in 2006 and 2007, to the real
heart of the automation, the vision of the future of what our
pharmacies will look like and another $20 million in cost
savings.
Now obviously this truly transforms our operations through the
use of technology. I'd like to move to another area that we're
using technology to enhance our relationships with our customers.
I'd like to start with a slide again that I've used in the past,
this slide relates to the drug trend, that I mentioned earlier,
in the industry. If you look at drug trend you really have to
break it into its individual components.
As you can see here, in our book of business, we see drug trend
increasing by about 8 to 13% on an annualized basis. Again, this
is part of what makes this a tremendous business to be in, we
have built-in top line growth because of this drug trend. You can
see the components here; price increases generally 2 to 4%, I
would tell you that this year in the first quarter we actually
saw price increases from the manufacturers more on the order of
about 6%; new products there are many new geriatric products
coming out, they fuel the top line growth and in our case,
currently to the extent of 1 to 2%.
I actually think that this number will increase in the future
because of many of the geriatric drugs that are currently under
evaluation; the final piece is what I refer to as utilization and
this is essentially doctors prescribing more drugs to
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treat their patients. In our book of business we see utilization
increasing by 5 to 7%. Now this is the one component in drug
trends that we can influence by working with our customers and we
have developed a number of programs we refer to as our Cost
Management Programs, to do that and this again, is the new value
proposition that we're bringing to our customers today.
I'm going to move forward and actually share with you a little
bit of the technology that we're using and showing to our
customers today to help them control their drug costs. Let's go
back to our business cycle for just a moment and again we're
talking about the facility side of the business. We have two new
programs to help manage drug costs. The first one is what we call
inTelAdmit and the second one is inSightRx.
Let me start by telling you a bit about inTelAdmit. One way that
you can manage your utilization is to address your drug costs
prior to admission, so we have developed this perspective
admission screening tool, again we call it inTelAdmit. What we're
doing through this tool is essentially looking at whether or not
the proper drug is being used, is it the lowest cost drug and is
it being utilized appropriately.
Now without sharing too much with our competitors, let me show
you a little bit of how this new program works. First of all, it
runs on a laptop, a PC or a tablet, you plug in the various
demographics of your patient and also plug in information on your
facility customers and what their costs are, as well as pricing
and other factors. And this tool actually projects the drug costs
for our clients, it makes suggestions on potential substitutions,
it also provides a clinical review looking at drug
incompatibilities, allergies and other clinical issues. This is a
tool that's unique in the industry today. It's real, it's been
tested and we're currently, by the end of July, will be in
rollout to select customers.
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Now you can't always catch the drug changes on the frontend, so
we've also developed a tool to look at drug costs on the backend
and actually provide analysis and look at trends for our
customers, again to help them manage their drug costs. We do this
through a product we call inSightRx, inSightRx is a Web based
drilldown tool into the data on drugs that we have for all of our
customers, again it helps to manage drug costs and utilization.
Version 1 was actually released this month; our initial customers
are currently being in-serviced as we speak.
Now again I'll take you into some of the details without
providing too much competitive information. You can see on this
next slide that there are various things that our customers want
to look at, these are just examples. One example is looking at
the Top 50 medications being used within their facilities,
drilling down into those medications in terms of who uses them
and where they're used and very specifically targeting specific
drug intervention programs to, again, impact drug costs.
Another report that people like to look at is their Medicare A
drug spending. This is because facilities are responsible for
these drug costs and they want to manage these costs as
effectively as they can, so we provide reports that show what the
drug spend is for their Medicare Part A patients and take them
through, again, a series of drilldowns so that they can see how
their costs are really working within their facility.
And the final example would be physician profiling where we're
looking very specifically at how the physicians are prescribing
and helping our customers to work with them so that they can use
more cost effective medication and also benchmark the physicians,
see how their doing against formularies and other things that
they're asking them to do.
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So I've now shown you the various technologies and automation
programs that we're using. I'd like to go back now to our overall
business plan and remind you first that we've demonstrated the
execution is working on these plans, we've provided some forecast
assumptions in earlier slides and I'd like to now get to what the
results are that we expect to get moving out into the future.
You can see on this next slide, this is a revenue buildup 2004 to
2007; you can see a series of graphs that show the various
components of our growth programs. Again, this goes back to the
assumptions made earlier, which were very logical assumptions and
very doable assumptions. You can see here revenue in 2004 should
be in the $1.4 to $1.5 billion range and by 2007 we expect
revenues to be $2.3 to $2.5 billion. The key drivers again are
drug trend, that's that built in top line growth that I talked
about earlier and bed growth and in this case bed growth is both
organic and acquisition growth.
On the drug trend side we're assuming going forward, a drug trend
actually less than the 8% that we are currently experiencing.
Primarily because the cost management programs I just described
to you are in fact designed to slow down drug trend a bit.
Our bed growth, again going back to earlier slides and what we've
already accomplished, the momentum we have, the new team we have
in place and the new value proposition is very doable over this
period of time.
Let's see how the EBITDA buildup looks. You can see in 2004
EBITDA of about $110 to $120 million, by 2005 we're beginning to
see our bed growth kick in as well as the other acquisition
programs and drug trends. In 2006 begin to see cost programs in
full swing and by 2007 most of our automation
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has been put in place and we're seeing EBITDA in the $300 to $330
million range.
Now let's take a look at how all of this drives EPS. You can see
here on the next slide EPS growth in the 54 to 63% range,
starting in 2004 with EPS in the range of 85 to 90 cents and
growing to $3.30 to $3.65 by 2007. Again, 2005 is really the
first year that we begin to get a significant traction on all the
programs I described to you earlier and the out years are driven
by very logical assumptions that I made earlier so you can see
the buildup and see how we actually get to these numbers. In
short, this plan makes sense. We've got a demonstrated ability to
execute on the key assumptions, which we have already shown and
our future assumptions are reasonable.
Let's take a look at Capex required over this period of time.
Again, as I've mentioned to many of you in past discussions, our
steady state Capex runs in the $20 to $27 million range, our
acquisition Capex for this program is $25 to $50 million per
year, unless we see something that's bigger that's available and
if it makes sense, we certainly would look at that. And about $20
million in our Phase II Cost Program, shown here in red and then
$35 million in automation, actually through 2008 for our Phase
III Program.
As you can see on the next slide, all of this drives to the
expected results in 2007, top line growth between 16 and 20%,
EBITDA margins reaching in excess of 13% and again, our long-term
EPS CAGER of 54 to 63%.
I thought I would conclude my comments today with a brief summary
of our current situation. As all of you know, the NeighborCare
Board of Directors has emphatically and unanimously rejected the
proposal of the other company on three separate occasions. We
believe strongly that their proposal is
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opportunistic and not in the best interest of our shareholders
and our other constituencies.
We also believe that the best course forward for our company is
the business plan, which I have laid out for you today. With that
said, to me the situation is very straightforward, this company
is just getting started and the proposal we have is totally
inadequate based on the future potential of the company.
The plan we have is working, our service costs are dropping as we
complete Phase I of our Cost Reduction Program, which have been
focused on Best Demonstrated Practices. We're poised to roll into
Phase II of these programs in 2005 and 2006, as well as an even
more exciting Phase III, which will utilize automation and
technology to totally transform the business. Our new formulary
and P&T process is also working and our suppliers are seeing a
more educated and demanding customer.
We have a solid plan for organic growth and we are seeing
significant success here as well. Our Sales and Account
Management organizations have new leadership, as well as new
sales programs that enhance the value proposition of NeighborCare
for our customers. As a result retention rates are increasing and
we are experiencing net bed gains for the first time in the past
four years. Our acquisition plan is also working, but we have
demonstrated that we are able to compete effectively for
strategic acquisitions that make sense to the company.
Finally, we had a plan to expand our geographic coverage so that
we could compete for large national accounts and as of August of
this year we will have successfully completed the majority of
this plan as well.
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In addition to executing on our strategic priorities, we've also
recruited and hired key new management and educated and mentored
our existing management so that we could effectuate change. We
now have a core group of employees who have distinguished
themselves as change agents for the company and they are
beginning to drive the cultural change necessary to take this
company to the next level.
In short, again we have a plan and we have successfully executed
on our plan over the last seven months. However, we're just
getting started. The greatest success for this company is down
the road when we have successfully transformed the business as I
have described today.
This type of revolutionary change does not happen overnight,
however, by anyone's standards the change we have inspired has
been substantial. All of us at NeighborCare look forward to the
exciting times ahead and the opportunity to continue to build a
great company that has sustainable value. Thank you and Operator
we will now take questions.
Operator: At this time I would like to remind everyone if you would
like to ask a question press star and the number 1 on your
telephone keypad. We'll pause for just a moment to compile the
Q&A roster.
Your first question comes from Glen Santangelo from Charles
Schwab.
Glen Santangelo: Just a quick question gentlemen, you know, I just
want to understand yours and the Board's dissatisfaction with
OmniCare's proposal a little bit more. It sounds like, based upon
what you're saying, there isn't anything structural or cultural
that wouldn't make these two companies a good fit. It sounds like
that the bid is financially insufficient to, you know, to
compensate NeighborCare's shareholders for all the potential
upside, given all the programs that you have
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in place. If the later is the case, which is I think what you're
saying, why doesn't it not make sense to sit down at least with
OmniCare and maybe see if there's something that could be worked
out where they could adequately compensate NeighborCare
shareholders for all this potential upside that seems to exist?
John J. Arlotta: Thanks for your question. Yes, I think that you got
it exactly right in terms of a summary of why we're not
interested in this proposal. We think the greatest value is ahead
of us. We're obviously, as you can see from the presentation
today, just getting started and, you know, to me we'll react to
whatever happens to be in front of us. What has been in front of
us since earlier this year has been the price that you're all
aware of and the Board felt from the beginning, and still feels,
that that price is just way below the potential value of this
company down the road.
So to me it doesn't make sense to respond to something that's
hypothetical or something that could be or something that might
be. To me that's not the way to move forward. We have a plan,
we're executing the plan and we're going to stick to it. One of
the things I didn't mention today is that our employees are
extremely focused and what we're saying to them is, "You keep
your head down, you keep moving and make sure that you stay
focused on this business and continue to make the execution
happen the way you've seen here over the last seven months."
Glen Santangelo: Okay thanks for the comments, appreciate it.
John J. Arlotta: Thank you.
Operator: Your next question comes from Jerry Docktrow from Legg Mason.
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Jerry Doctrow: Hi, I just have of the things, you know, just in terms
of thinking about pricing and stuff, you obviously have some
specific numbers and a case and I think we all appreciate that.
What kind of, I don't know, risks or uncertainties are there as
we think about it in terms of getting to some of the numbers,
particularly as we think out, sort of, you know, '07, are there
things that can go wrong or, you know, what I'm trying to sort of
think through myself kind of on the fly here is kind of, you
know, what the discount rate, you know, if I - to try and sort
out what's something worth in '07 coming back?
John J. Arlotta: Yeah, thanks Jerry. Well I think normally when you
look at a plan like this you look at execution risks, anybody
would, I think that's quite logical. The picture that I've tried
to paint today is that we actually, again are executing very
nicely and the plan we've laid out is really just a continuation
of what is already been happening, so I think that the execution
risk is not a significant one. We've got an organization that's
making it happen, the assumptions we've laid out are not crazy
assumptions, they're very doable assumptions and I think they
make sense.
If you take a step back and just look at perhaps the industry as
a whole, I think one risk factor you have to look at is the
Medicare program and at this point in time, I know some people
think that it might be an upside, I think you could make some
arguments that there might be a slight downside, so I would argue
that the biggest risk factor is probably what's going to happen
with the Medicare program. But if I were to kind of weigh in, I
would weigh in it will be somewhat neutral, but I still would
have to say that's a risk factor Jerry.
Jerry Doctrow: Okay and just to follow-up on the prior question
too. Any other issues that, you know, would make you reluctant to
negotiate them? I guess if I understood your answer you're saying
until you get a price that's, either you consider it enough or
you consider it close enough to warrant a discussion, it
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doesn't make sense to sit down, but are there any other factors
that, you know, lead you to say, you know, not open it up to
negotiations and sort of push the other guy to the tender offer?
John J. Arlotta: No, I don't think so. I mean I have, as I stated
earlier, we have a big job here to execute on the programs that
we've laid out, and I'm going to make absolutely sure that from
the top of this organization to the bottom of this organization
we stay focused on the task at hand, which is to execute on these
programs and, you know, if something else were to be on the table
we'd look at it at that point in time, but right now we're very
focused on just executing the plan.
Jerry Doctrow: Okay, thank you.
Operator: Your next question comes from Bruce Wilcox, Cumberland and
Associates.
Bruce Wilcox: Yeah, hi guys. Thank you for this very thorough
presentation. As I looked over the Capex budget there's a fairly
large number for implied acquisitions and I guess the one thing
that I would have liked to have heard and did not hear is the
extent to which the NeighborCare common stock on the public
market might be one of the highest and best acquisitions that you
could make, because it looks to me like you could easily fund
everything else out of, you know, operating cash flow and then
some.
So, I think to the extent that you are asking your shareholders
to forgo an offer currently of $30 in hand, which may be raised,
but I think that the implication is that it is the Board's belief
that the value of this enterprise and it is our believe, the
value of the enterprise is substantially higher, so why not get
explicit about, you know, share repurchase given your balance
sheet and the prospective cash flow?
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John J. Arlotta: Yeah, thanks Bruce, appreciate the question and
really this has been more of a matter of timing and priorities.
As you can well imagine, running the business and also reacting
to this situation has taken quite a bit of time. That is
something that we'll have on the Board for discussion at future
Board meetings and I can assure you that this is something that
we'll take up at the appropriate time. So that's about all I can
say about that at this point. It's just something that we just
haven't gotten to given everything else that's going on.
Bruce Wilcox: Well John, just if I may follow on, I think in this
battle for the hearts and minds of the public shareholders, I
can't think of a higher priority than now so I would encourage
you and your Board to take this up sooner rather than later so we
can throw it into the mix as we evaluate our alternatives.
John J. Arlotta: Great, I appreciate your input on that Bruce.
Bruce Wilcox: Thanks very much.
John J. Arlotta: Thank you.
Operator: Your next question comes from Kevin Fischbeck from Lehman
Brothers.
John J. Arlotta: Hi Kevin.
Kevin Fishbeck: Hello, thank you. Let's see, I have a couple of
questions on the top line, I guess, assumptions, unfortunately I
don't have the presentation in front of me I'm having technical
difficulties, but can you go over your assumptions and I know you
talk a little bit about Medicare pricing being a concern going
forward, but what are your assumptions about Medicaid pricing,
that seems to be the concern coming off the quarter, maybe it
might take a little bit longer to
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see all the cost cutting to show up in the bottom line. What are
your assumptions on Medicaid rates over the next couple of years?
And then also could you talk briefly about the ManorCare contract
being stable, have you gotten any indications on that and what
are your assumptions on that going forward?
John J. Arlotta: Sure. Yes, on the Medicaid side, as you well know,
two years from now that will not be a big issue for us because of
the new Medicare program, but a little bit of an update on the
Medicaid situation as we see it today. I think last time we
talked about this we were talking about Florida and Maryland,
Pennsylvania and California as being potential locations where we
could see some reimbursement reductions still this year. I think
right now we're down to Maryland and Florida, Maryland in July
and Florida sometime this summer and those are fairly certain but
remember Maryland is a second reduction and a little bit less
than the impact that we saw the first time around and Florida is
not significant. So those two combined, I would say we ought to
be able to offset those changes.
In the case of Pennsylvania it looks like they've taken those
changes off the table, at least for now, so we feel like there's
somewhat clear sailing between now and the end of the year and in
the case of California, they actually had come back and talked
about a reduction, but also at the same time, I think it was
after the earnings call, mentioned that they would be increasing
the fee that they pay us. So we don't expect them to get to the
levels that they're talking about in California. They had tried
to get to the 5% discount level and that's been hung up in the
courts and they were talking about going beyond that and adding
an additional dispensing fee, I think all in, the California
situation is what I would call stable at this point in time.
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So just to summarize, Florida and Maryland for Medicaid, probably
still impacts us this year, those will be the ones that we see
that are big and are on the horizon.
The ManorCare situation, all I can tell you is that I have met
several times with the ManorCare people. They are very pleased
with the service that we provide. We are, in fact, showing them,
like we're showing all of our customers, a number of the programs
that I've shared with you today. They are excited about those
programs and the opportunity that it brings to save money on
their drug costs, so all indications that I have are just very
favorable relative to ManorCare, I feel very good about that one.
Kevin Fishbeck: Okay, thanks.
John J. Arlotta:Thank you.
Operator: Your next question comes from Chuck Myers from Fidelity
Investment.
Chuck Myers: You there?
John J. Arlotta:Yes.
Chuck Myers: Oh got it. Okay, so I guess the bottom line question that
I have for you guys is that the one thing that was not addressed,
which I think is relevant and you guys presented a lot of
important issues and information today, but I think the most
relevant issue is, how much - or how many (unintelligible)
quantified the economies of scale in this business. Would you say
their substantial and do you think that you could, you know,
expand margins substantially overtime by getting bigger or that
they're hard to come by and getting bigger is not a huge benefit
in this industry?
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If you believe that economies of scale are substantial in this
industry, the rational conclusion I think would be is that it's
only a matter of price, which I think you hit on already and if
that's the case you clearly must have a price in mind and where
is the logic in not at least sitting down with OmniCare
Management and discussing the price in the sense that, you know,
if they don't know what you're asking for, you know, they just
keep throwing out numbers and getting rejected in public, which
probably isn't good for anyone.
John J. Arlotta: Well they don't know what I'm asking for because I've
never asked for anything.
Chuck Myers: Well, I guess that's the question. If your fiduciary
responsibility to shareholders, they might be willing to pay what
you'd ask, if you don't ask.
John J. Arlotta: Well, it's not my responsibility to ask. I have
reacted to what's been proposed and I will continue to do that.
Let me answer your question on economies of scale very briefly
and I'll come back. There's no question that the bigger you are,
the better your margins can be, but that is not 100% of the issue
relative to margins.
In fact, if you really begin to break this down the rebates are a
significant part of being more profitable and rebates have
nothing to do with your size and scale. They have everything to
do with how well you drive market share on behalf of the
manufacturers, so you could be the smallest player in the
industry and get the same rebates if you're able to move market
share the way the manufacturers want you to and that's one of the
reasons I showed that Rebate Slide earlier in the presentation.
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There are other areas, the Sales and Marketing programs, in my
mind don't have anything to do with economies of scale. We're
bringing a new value proposition to the marketplace, managing our
customers drug costs has nothing to do with scale. You can see
based on where we are and the size we are today, we've been quite
successful in getting new programs out there ahead of our
competitors, so I don't think that has anything to do with scale
either.
Now just to come back, again I would say that in terms of, you
know, what we're doing, what we're doing is executing on the
plan. If someone else wants to make a proposal to us they're free
to do it as they have done in the past, but right now I'm not
going to react to some hypothetical situation.
Chuck Myers: I guess there's no virtue in your mind to being proactive
in terms of, you know, a bird in the hand versus two in the bush
type of scenario. You know, risk of the execution of the
strategy, if you have a particular valuation in mind, what's the
harm in sharing that with someone in case someone is willing to
pay it?
John J. Arlotta: Well again, the price that we have on the table right
now is so far off of what we think the right price is that I
don't see any reason to do that.
Chuck Myers: Got it. Okay, thanks.
John J. Arlotta: Thank you.
Operator: Your next question comes from Drew Figdor from Tiedemann.
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Drew Figdor: Along that vein, have you done anything to explore
whether there are other alternatives or whether there are other
people interested and have you been contacted by anybody?
John J. Arlotta: No, we have not done anything to explore other
possibilities at this point in time. Again, we've been - we've
had a pretty full plate here doing the things that we're doing to
run the business to execute on these plans and respond to this
situation, so no, we have not. Now whether or not there have been
various calls that have come in and so on, I don't know, I don't
think so at this point but I would say that we certainly have not
been seeking any other options.
Drew Figdor: Thank you.
Operator: We have time for one more question.
Your final question comes from Greg Davis of Davis Capital.
Greg Davis: Thank you, good afternoon. Just a quick question, can you
discuss how long, if in fact you defend yourself against the OCR
and (unintelligible) and obviously the stockholders will pull
back somewhat, how long will it take your plan to get the stock
to the price where you think it's reasonable?
John J. Arlotta: How long will it take the plan to get the stock to
the, I'm not sure I follow the question can you give it to me
another way?
Greg Davis: (Unintelligible) isn't reasonable in your mind, isn't high
enough. So what I'm saying is, how long will it take under your
current plan to get the stock to where you think it is at the
proper price? I mean, is it going to be '07's number or '06
number? Where should we, you know, at what point are you going to
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get to the point where they might be willing to pay if you were
to have an ongoing discussion with them?
John J. Arlotta: Well, the plan is basically the plan. I can't control
the price of the stock, so you've seen the plan, you've seen it
laid out in great detail, you've seen the timing on it and
essentially, as I said earlier, we get good traction in '05, we
get significant traction in '06 and '07, so you can probably make
your own estimates based on the information we gave you today.
Greg Davis: But even if you used a high end estimate for '05 at 160,
put a 25 multiple which is currently, you know $40 stock, I mean
how do you know currently that OCR wouldn't be willing to pay you
that price had, you know, had you made them make the proposal?
John J. Arlotta: Well again, I'm not going to speculate. You've asked
me to speculate on a number of things that I can't control, I
can't control the other side and I would never speculate on what
they might be thinking.
Greg Davis: (Unintelligible) more directly is, it sounds like
listening to this call it sounds like many of the people on this
call would like you to have open dialogue with them and discuss,
you know, after listening to your plan maybe they won't feel that
it would take a lot longer to realize the proper price of your
stock then it would if you were to have an open negotiation with
OCR. I guess that's sort of the question is why you wouldn't...
John J. Arlotta: Well, let me just make a comment. We are not
entrenched here. I don't want anyone to get that impression from
my comments, however on the other side, if you go back to my
explanation of the chain of events leading up to the point we're
at right now, I think if you put yourself in my chair, you would
probably react the same way that I'm reacting today. This price
is not anywhere close
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to what's appropriate, my past experience is that it's, you know,
it's better to react to something that's real then to even sit
down and have conversations similar to the ones that we had
before and that's what I'll do and that's what the Board will do.
If we got a different price we'd react to that but there's really
no need to take time and effort away from running this business
and executing on these plans to do that until something else is
there. For me, I'm not going to deal with the hypothetical.
Greg Davis: So if in fact OCR comes back with another bid you will
then sit down and discuss with them, (unintelligible) with them?
John J. Arlotta: We will react to anything that's put in front of us,
just like I reacted when I talked to Mr. Gemunder early on and I
promised him that I would go to our Board of Directors and I did
that.
Greg Davis: Okay, thank you very much.
John J. Arlotta: Thank you.
Operator: At this time there are further questions.
Are there any closing remarks?
John J. Arlotta: No, I just want to thank everybody again for your
patience as we were getting to you here. I know you understand
some of the issues we had and we really couldn't talk until today
so I'm pleased to have this opportunity to talk to you and look
forward to answering any other questions that I can over the next
few days. Thank you very much.
NEIGHBORCARE, INC.
Moderator: Tania Almond
06-14-04/12:00 pm CT
Confirmation #8098890
Page 35
Operator: At this time - Thank you for participating in today's
conference call, you may now disconnect.
END