- The Washington Times - Monday, May 17, 2004

NeighborCare Inc., a Baltimore pharmacy company, recently reported stronger quarterly earnings, but analysts say more measures are needed to offset some operating costs.

The company, with 5,000 employees, buys and delivers prescription drugs primarily for elderly customers.

NeighborCare last week posted a 74 percent profit surge for its fiscal second quarter ended March 31 to $8.2 million (19 cents per diluted share) from $4.7 million (11 cents) a year earlier. Diluted earnings per share include the value of convertible warrants and stock options.

But cuts in reimbursement from Medicaid, a federal medical assistance program, in several states have cut into the company’s profits.

Analysts say Medicaid reimbursement cuts in Maryland and Florida will affect the company this year, while rate changes are likely in Pennsylvania and California.

The company has focused on cutting the costs of its services to make up for uncontrollable factors such as government programs, said Tania Almond, investor relations director.

NeighborCare’s initiatives are expected to save the company about $3 million to $5 million in the next year, Miss Almond said.

While sales for the quarter also rose 17 percent to $356.6 million from $304.9 million last year, analyst Joel Ray lowered his forecasts for 2004 and 2005 because of the Medicaid issue.

“We are encouraged with the aggressive improvements management is making, but acknowledge that the benefits could take a quarter or two to offset some of the gross margin pressure,” said Mr. Ray, with Wachovia Securities, the brokerage services unit of Wachovia Corp.

Mr. Ray, who does not own any NeighborCare stock, rated the company as in line with the market. Wachovia Securities does have business with NeighborCare.

The resignation of the company’s chief financial officer, Rick Sunderland, also has added to investor anxiety, said Jerry Doctrow, managing director for Legg Mason Wood Walker Inc., a Baltimore investment bank and subsidiary of Legg Mason Inc.

Shares of NeighborCare fell 8 percent to $17.88 on the Nasdaq Stock Market yesterday, down from $19.39 on Friday. The $1.51 drop was the largest one-day decline for the stock in six months.

Miss Almond would not say why Mr. Sunderland was leaving the company, but said he would wait until a replacement was found. Mr. Sunderland has been with NeighborCare for 12 years.

NeighborCare started out as NeighborCare Pharmacies before it was bought in 1996 by Genesis Health Ventures Inc., a Kennett Square, Pa., health care services company to the elderly population.

Genesis Health bought several other general pharmacy companies before changing its name in December to NeighborCare and moving its headquarters to Baltimore. The company spun off its nursing-home operations as a separate company, Genesis HealthCare Corp.

Mr. Doctrow, who rated the stock a “buy,” said the real story for NeighborCare is in 2005 and 2006, “when we believe the company has the potential to put up 30 percent earnings growth.”

Mr. Doctrow does not own any stock but Legg Mason is seeking a banking relationship with the company.

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