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Article by DailyStocks_admin    (03-09-12 02:18 AM)

Description

Pharmerica Corp. CEO GREGORY S WEISHAR bought 20000 shares on 2-29-2012 at $ 12.3

BUSINESS OVERVIEW

Overview

PharMerica Corporation (“the Corporation”) was formed on October 23, 2006, by Kindred Healthcare, Inc. (“Kindred” or “Former Parent”) and AmerisourceBergen Corporation (“AmerisourceBergen”) for the purpose of consummating the transactions contemplated by the Master Transaction Agreement dated October 25, 2006, as amended (the “Master Agreement”). Pursuant to the Master Agreement, Kindred and AmerisourceBergen, through a series of transactions (collectively, the “Pharmacy Transaction”), spun-off and combined their respective institutional pharmacy businesses, Kindred Pharmacy Services (“KPS”) and PharMerica Long-Term Care (“PharMerica LTC”), into a new, stand-alone, publicly traded company. The Pharmacy Transaction was consummated on July 31, 2007 (the “Closing Date”).

Unsolicited Tender Offer by Omnicare

On August 23, 2011, Omnicare, Inc. (“Omnicare”) made public an unsolicited proposal to acquire all of the outstanding shares of the Corporation’s common stock for $15.00 per share in cash. After careful consideration with our financial and legal advisors, our Board of Directors determined unanimously that Omnicare’s proposal undervalues the Corporation and was not in the best interests of our stockholders. On September 7, 2011, Omnicare, through its wholly-owned subsidiary, Philadelphia Acquisition Sub, Inc., commenced an unsolicited tender offer to purchase all of the outstanding shares of our common stock at $15.00 per share. On September 18, 2011, the Board again met with its financial and legal advisors, and after careful consideration our Board of Directors again unanimously recommended that our stockholders reject the offer and not tender their shares of our common stock because it believes that Omnicare’s tender offer (i) undervalues the Corporation and its prospects, (ii) is illusory because it is subject to significant regulatory and other uncertainty, and (iii) is opportunistic based on the Corporation’s then traded market value. On September 20, 2011, we filed with the Securities and Exchange Commission (“SEC”) a Recommendation/Solicitati on Statement on Schedule 14D-9 detailing the recommendation of our Board of Directors in response to Omnicare’s tender offer and the reasons it rejected the offer. Please refer to Part I, Item 3 “Legal Proceedings” and Note 6 to our consolidated financial statements included elsewhere in this report for a discussion of certain litigation commenced in respect of Omnicare’s tender offer and related actions. On October 5, 2011, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York City time, on Friday, December 2, 2011, unless further extended. On December 5, 2011, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York City time, on Friday, January 20, 2012, unless further extended. On January 19, 2012, Omnicare extended the expiration date of its tender offer until 5:00p.m., New York City time, on Friday, January 27, 2012, unless further extended. On January 27, 2012, Omnicare extended the expiration of its tender offer until 5:00 p.m., New York City time, on Friday, February 17, 2012, unless further extended.

On August 25, 2011, after careful consideration and consultation with our financial and legal advisors, our Board of Directors adopted a rights plan and authorized the execution of the Rights Agreement, dated August 25, 2011 (the “Rights Agreement”), between the Corporation and Mellon Investor Services LLC, as Rights Agent. On August 25, 2011, the Board of Directors of the Corporation declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share. The dividend was payable on September 6, 2011 to the stockholders of record on September 6, 2011. The Rights will expire on the earlier of August 25, 2021, or redemption by the Corporation. However, the rights will expire immediately at the final adjournment of the Corporation’s 2012 annual meeting of stockholders if stockholder approval of the Rights Agreement has not been received prior to that time. The Rights Agreement is designed to prevent third parties from opportunistically acquiring the Corporation in a transaction that the Corporation’s Board of Directors believes is not in the best interests of the Corporation’s stockholders. In general terms, it works by imposing a significant penalty upon any person or group that acquires beneficial ownership of 15 percent or more of our outstanding common stock without the prior approval of our Board of Directors. The Corporation’s Board of Directors believes the Rights Agreement has helped the Corporation’s stockholders at this time by effectively preventing Omnicare from opportunistically acquiring the Corporation at a price that the Corporation’s Board of Directors believes is inadequate for the reasons discussed above. The Rights Agreement has been narrowly tailored in a manner that our Board of Directors believes appropriately balances the interests of our stockholders in connection with what our Board of Directors considers an opportunistic, illusory and disadvantageous proposal, against the need to avoid excessive anti-takeover protections that ultimately may adversely impact stockholder value. The Rights Agreement should not interfere with any merger or other business combination approved by the Board of Directors.

Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the “HSR Act”), Omnicare filed a Notification and Report Form with the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (the “FTC”) relating to its proposed acquisition of the Corporation on September 7, 2011. On or about September 19, 2011, the Corporation submitted a responsive Notification and Report Form with the Antitrust Division and the FTC. On September 22, 2011, the Corporation received a request for additional information from the FTC relating to the tender offer. On September 22, 2011, Omnicare also received a request for additional information from the FTC relating to the tender offer (the “Second Request”). The Second Request extended the waiting period under the HSR Act for 10 calendar days after the date Omnicare certified substantial compliance with the Second Request issued to Omnicare. On September 30, 2011, the FTC also issued a subpoena and civil investigative demand to the Corporation covering the same subject matter as the Second Request. The Corporation has produced a considerable amount of material in response to the FTC requests.

On November 18, 2011 Omnicare certified to the FTC that it had substantially complied with the Second Request. On November 18, 2011, Omnicare also executed a timing agreement with the FTC pursuant to which Omnicare agreed (i) to provide 14 days notice to the FTC prior to consummating its proposed acquisition and (ii) not to consummate its proposed acquisition prior to December 19, 2011 without the consent of the FTC. On December 2, 2011, Omnicare agreed with the FTC to extend the date prior to which Omnicare will not consummate its proposed acquisition to January 19, 2012, unless the FTC notifies Omnicare that it has closed its investigation relating to its proposed acquisition. On January 10, 2012, Omnicare agreed with the FTC that it will not consummate its proposed acquisition prior to January 26, 2012, unless the FTC notifies Omnicare that it has closed its investigation relating to its proposed acquisition. On January 27, 2012, the FTC issued an administrative complaint to block Omnicare’s proposed acquisition of the Corporation. The complaint alleges that the proposed acquisition would be illegal and in violation of Section 15 of the FTC Act and Section 7 of the Clayton Act because it would harm competition and enable Omnicare to raise the price of drugs for Medicare Part D consumers and others. The case is scheduled to be heard before an administrative law judge at the FTC in June 2012.

The financial and outside legal advisors to the Corporation and Omnicare have met from time-to-time in an effort to agree upon an acceptable information sharing process relating to antitrust issues. On October 26, 2011, the Corporation and Omnicare and their respective outside legal advisors entered into a Confidentiality and Joint Defense Agreement (the “Confidentiality and Joint Defense Agreement”), which provides, among other things, for the parties to exchange on a confidential and privileged basis information in order to facilitate their respective assessment of the antitrust risk associated with a potential combination of the two companies. Although the Corporation’s Board of Directors continues to believe that Omnicare’s $15.00 per share offer undervalues the Corporation, the Corporation is engaging in this analytical process in order to further its understanding of Omnicare’s assessment of the antitrust risk related to a business combination. The Confidentiality and Joint Defense Agreement does not obligate the Corporation to enter a transaction with Omnicare and there can be no assurance that this review will lead to a definitive merger agreement or any transaction between the two companies.

In connection with these matters, for the year ended December 31, 2011, we expensed $2.8 million of legal and advisory fees, which are included in integration, merger and acquisition related costs and other charges in the consolidated financial statements. We expect to incur significant additional costs in the future in connection with Omnicare’s unsolicited tender offer.

Institutional Pharmacy Business

The Corporation is the second largest institutional pharmacy services company in the United States based on revenues. We service healthcare facilities and also provide management pharmacy services to hospitals. The Corporation operates 95 institutional pharmacies in 44 states. The Corporation’s customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, and other long-term alternative care settings. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 91 hospitals in the United States.

Our core business provides pharmacy products and services to residents and patients in skilled nursing facilities, nursing centers, assisted living facilities, hospitals, and other long-term alternative care settings. We purchase, repackage, and dispense prescription and non-prescription pharmaceuticals in accordance with physician orders and deliver such medication to healthcare facilities for administration to individual patients and residents. Depending on the specific location, we service healthcare facilities typically within a radius of 120 miles or less of our pharmacy locations at least once each day. Each pharmacy provides 24-hour, seven-day per week on-call pharmacist services for emergency dispensing, delivery, and/or consultation with the facility’s staff or the resident’s attending physician. We also provide various supplemental healthcare services that complement our institutional pharmacy services.

We offer prescription and non-prescription pharmaceuticals to our customers through unit dose or modified unit dose packaging, dispensing, and delivery systems, typically in a 15 to 30 day supply. Unit dose medications are packaged for dispensing in individual doses as compared to bulk packaging used by most retail pharmacies. The customers we serve prefer the unit dose delivery system over the bulk delivery system employed by retail pharmacies because it improves control over the storage and ordering of drugs and reduces errors in drug administration in healthcare facilities. Nursing staff in our customers’ facilities administer the pharmaceuticals to individual patients and residents.

Our computerized dispensing and delivery systems are designed to improve efficiency and control over distribution of medications to patients and residents. We provide computerized physician orders and medication administration records for patients or residents on a monthly basis as requested. Data from these records are formulated into monthly management reports on patient and resident care and quality assurance. This system improves efficiencies in nursing time, reduces drug waste, and helps to improve patient outcomes.

Consultant Pharmacist Services

Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. On September 30, 2008, the United States Department of Health and Human Services Office of Inspector General (“OIG”) published OIG Supplemental Compliance Program Guidance for Nursing Homes. With quality of care being the first risk area identified, the supplemental guidance is part of a series of recent government efforts focused on improving quality of care at skilled nursing and long-term care facilities. The guidance contains compliance recommendations and an expanded discussion of risk areas. The guidance stressed that facilities must provide pharmaceutical services to meet the needs of each resident and should be mindful of potential quality of care problems when implementing policies and procedures on proper medication management. It further stated that facilities can reduce risk by educating staff on medication management and improper pharmacy kickbacks for consultant pharmacists and that facilities should review the total compensation paid to consultant pharmacists to ensure it is not structured in a way that reflects the volume or value of particular drugs prescribed or administered to residents.

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.” 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. Specifically, CMS explained its perception that the provision of consulting services by pharmacy providers that supply medication to the facility leads to lack of independence of consultant pharmacists. CMS proposed requiring the independence of consultant pharmacists from LTC pharmacies. The Corporation believes that the proposed rule, which could require the independence of consultant pharmacists, may increase overall costs for payers and customers and reduce the quality of care and service to long-term care patients and residents. However, until CMS provides additional guidance, the Corporation is unable to fully evaluate the impact of the proposed changes in consultant pharmacist services.

We provide consultant pharmacist services that help our customers comply with the federal and state regulations applicable to nursing homes. Currently, we provide consultant services to approximately 73.4% of our patients serviced. The services offered by our consultant pharmacists include:


•

Monthly reviews of each resident’s drug regimen to assess the appropriateness and efficacy of drug therapies, including the review of medical records, monitoring drug interactions with other drugs or food, monitoring laboratory test results, and recommending alternative therapies;


•

Participation on quality assurance and other committees of our customers, as required or requested by such customers;


•

Monitoring and reporting on facility-wide drug utilization;


•

Development and maintenance of pharmaceutical policy and procedure manuals; and


•

Assistance with federal and state regulatory compliance pertaining to resident care.

Medical Records

The Corporation provides medical records services, which includes the completion and maintenance of medical record information for patients in the Corporation’s customer’s facilities. The medical records services include:


•

Real-time access to medication and treatment administration records, physician order sheets and psychotropic drug monitoring sheets;


•

Online ordering to save time and resources;


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A customized database with the medication profiles of each resident’s medication safety, efficiency and regulatory compliance;


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Web-based individual patient records detailing each prescribed medicine; and


•

Electronic medical records to improve information to make it more legible and instantaneous.

Ancillary Services

The Corporation provides intravenous drug therapy products and services to its customers. We provide intravenous (“IV” or infusion therapy) products and services to client facilities as well as hospice and home care patients. Infusion therapy consists of the product (a nutrient, antibiotic, chemotherapy, or other drugs in solution) and the intravenous administration of the product.

We prepare the product to be administered using proper equipment in an aseptic environment and then deliver the product to the facilities for administration by the nursing staff. Proper administration of IV drug therapy requires a highly trained nursing staff. Upon request, our nurse consultants provide an education and certification program on IV therapy to assure proper staff training and compliance with regulatory requirements in client facilities offering an IV therapy program.

CEO BACKGROUND

Frank E. Collins, Esq . Mr. Collins has served as a director since July 31, 2007. Mr. Collins serves as Chair of the Nominating and Governance Committee of the Board and served as a member of the Compensation Committee from June 2008 to June 2009. Mr. Collins was the Senior Vice President, Legal and Administration and Secretary of Sierra Health Services, Inc. (“Sierra”) from 2001 to February 2008. Sierra was acquired by United Health Group Incorporated (“United”) in February 2008. Mr. Collins now serves as the Deputy General Counsel of United. Mr. Collins joined Sierra in 1986 as General Counsel and Secretary. From 1981 to 1986, Mr. Collins was employed by Blue Cross and Blue Shield of Kansas City, originally as Staff Legal Counsel and in early 1986 as Associate General Counsel. Mr. Collins also served as counsel for the Missouri Division of Insurance from 1979 to 1981, where he was responsible for providing legal advice on insurance and HMO-related regulatory issues. Mr. Collins received his Juris Doctor from the University of Missouri at Kansas City School of Law and is a member of the Missouri Bar Association.

As a result of Mr. Collins’ experiences as General Counsel at a public managed healthcare organization, he possesses expertise in the areas of corporate governance, human resources and regulatory compliance and brings experience in the healthcare industry.

W. Robert Dahl, Jr. Mr. Dahl has served as a director since July 24, 2008. Mr. Dahl serves as a member of the Audit Committee. Mr. Dahl is currently the Chief Operating Officer of Arrowhawk Capital Partners, an investment company, a post he has held since September 2009. From May 2007 to November 2009 he was the Vice President of Strategic Business Development and Vice Chairman of the Board of Directors of Golden Pond Healthcare, Inc. From April 1999 until June 2006, Mr. Dahl served as the head of Global Healthcare for the Carlyle Group, a leading private equity firm with over $50 billion of equity under management, where he was responsible for the firm’s investments in the healthcare field. Prior to Carlyle, Mr. Dahl served as co-head of healthcare investment banking in North America at Credit Suisse First Boston. Mr. Dahl is also a director of Slate Pharmaceuticals, Inc., Applied Science, Inc., and Amkai LLC. Mr. Dahl received a BA from Middlebury College and an MBA from the Harvard Graduate School of Business Administration.

Mr. Dahl’s experience as a certified public accountant, investment banker, financial advisor and healthcare private equity investor provides him with financial literacy and expertise and knowledge of the healthcare industry, along with expertise in mergers and acquisitions.

Marjorie W. Dorr. Ms. Dorr has served as a director since January 22, 2009. Ms. Dorr serves as a member of the Compensation Committee. Ms. Dorr served as Executive Vice President and Chief Strategy Officer for WellPoint, Inc. Ms. Dorr held various executive positions while at WellPoint including President and Chief Executive Officer of WellPoint’s Northeast Region SBU, where she was responsible for operations in several states. Ms. Dorr joined WellPoint through the merger in 2004 of WellPoint and Anthem, Inc. At the time of the merger, Ms. Dorr served as President of Anthem Blue Cross and Blue Shield’s East region. Ms. Dorr received her bachelor of business administration degree from the University of Iowa and her master of business administration degree from the University of Chicago Graduate School of Business.

Ms. Dorr’s experience as a senior executive of a large health benefits company equips her with expertise in pharmacy reimbursement practices and strategic planning.

Thomas P. Gerrity, Ph.D. Mr. Gerrity has served as a director since July 31, 2007. Mr. Gerrity serves as a member of the Audit Committee and Nominating and Corporate Governance Committee of the Board. Mr. Gerrity served as interim Chair of the Audit Committee from November 2007 to March 2008. Mr. Gerrity was the Dean of the Wharton School of the University of Pennsylvania from July 1990 to June 1999. Since then he has been Professor of Management and Dean Emeritus at the Wharton School of the University of Pennsylvania. Mr. Gerrity also serves as a director of Internet Capital Group, Inc. and as a member of the Corporation of the Massachusetts Institute of Technology. Mr. Gerrity is the Chairman of the Advisory Board of Arden Fund I, a private real estate investment fund managed by the Arden Group in Philadelphia, Pennsylvania. Mr. Gerrity served as a director of Sunoco, Inc. from 1990 to May 2010. Mr. Gerrity served as a director of Federal National Mortgage Association (“Fannie Mae”) from September 1991 until December 2006 and served as the Chair of Fannie Mae’s Audit Committee from January 1999 until May 2006. He was also a director of Knight-Ridder, Inc. from 1998 to 2006; CVS Corporation from 1995 to 2007; and Hercules, Inc. from 2003 to 2008.

Mr. Gerrity, by virtue of his senior management experience and his positions at the University of Pennsylvania, and by virtue of his education, possesses financial literacy and expertise, as well as strategic planning and management, information systems and technology, organizational change management and corporate governance experience.

Thomas P. Mac Mahon . Mr. Mac Mahon has served as a director of the Board since July 31, 2007. Between July 31, 2007 and December 31, 2010, Mr. Mac Mahon served as Chairman of the Board. He is also a member of the Compensation Committee and served as the Chair of the Compensation Committee from July 2007 to February 2008. Mr. Mac Mahon has served as a director of the Laboratory Corporation of America Holdings (“LabCorp”) since 1995. In addition, Mr. Mac Mahon served as a non-executive Chairman of the Board of LabCorp from January 2007 to May 2009; Executive Chairman of the Board from April 1996 to December 2006; and Vice-Chairman of the Board from April, 1995. From January 1997 until his retirement in December, 2006, Mr. Mac Mahon served as President and Chief Executive Officer and a member of the Executive and Management Committees of LabCorp. Mr. Mac Mahon was Senior Vice President of Hoffmann-La Roche, Inc. from 1993 to December 1996 and President of Roche Diagnostics Group and a director and member of the Executive Committee of Hoffmann-La Roche from 1988 to December 1996. Mr. Mac Mahon is a director and Corporate Governance Committee Chairperson of Express Scripts, Inc. and was a director of Golden Pond Healthcare from November 2007 to November 2009.

Mr. Mac Mahon’s experience as a former Chief Executive Officer and Chairman of the Board, and as a board member at premier clinical laboratory and pharmacy benefits management services companies provides him with in-depth knowledge of the healthcare and pharmacy services and distribution industries. Mr. Mac Mahon, by virtue of his previous senior-level executive positions and current board experiences, possesses executive compensation experience.

Geoffrey G. Meyers . Mr. Meyers has served as a director since November 17, 2009 and as Chairman of the Board since January 1, 2011. On February 1, 2010, Mr. Meyers became a member of the Nominating and Governance Committee. Mr. Meyers is the retired Chief Financial Officer and Executive Vice President and Treasurer for Manor Care, Inc. where he had responsibility for administration and financial management from 1988 until 2006 and was a director of Health Care and Retirement Corp., a predecessor of Manor Care, Inc., from 1991 to 1998. Mr. Meyers has been a Director of HCA Holdings, Inc.’s and Chairman of is audit committee since March 2011. Mr. Meyers is also the Chairman of the Board of the Trust Company of Toledo, a northwestern Ohio trust bank. He received his BA from Northwestern University and his MBA from The Ohio State University.

Mr. Meyers has over two decades of experience in the long term care industry, which provides us with valuable insight into the needs and operations of our customer base. Having served as the Chief Financial Officer of a large public company he also has expertise in finance and accounting matters, investor relations, human resources, information technologies, purchasing, corporate communications, risk management, reimbursement, strategic planning and development and acquisitions.

Robert A. Oakley, Ph.D. Mr. Oakley has served as a director since March 24, 2008. Mr. Oakley serves as the Chairman of the Audit Committee. In 2003, Mr. Oakley retired after more than 25 years service with the Columbus, Ohio-based Nationwide Companies, one of the largest diversified insurance and financial services organizations in the world. Mr. Oakley served on the Boards of Ohio Casualty Corporation from March 2003 to September 2008, First Mercury Financial Corporation from January 2008 to August 2009 and the Physicians Assurance Corporation from January 2008 to August 2009. He received his BS from Purdue University and both an MBA and Ph.D. in Finance from The Ohio State University.

Mr. Oakley possesses financial literacy and expertise from his experiences as a former Chief Financial Officer and chair of audit committees at leading insurance and financial services companies, along with expertise in investor relations, risk management and strategic planning.

Gregory S. Weishar . Mr. Weishar has served as our Chief Executive Officer since January 14, 2007. He has over 20 years experience in the pharmacy services industry. Prior to joining the Company, he was Chief Executive Officer and President of PharmaCare Management Services, a prescription benefit management firm and a wholly-owned subsidiary of CVS Corporation, from 1994.

MANAGEMENT DISCUSSION FROM LATEST 10K

The Corporation’s Business and Industry Trends

The Corporation is an institutional pharmacy services company, which services healthcare facilities and provides management pharmacy services to hospitals. The Corporation is the second largest institutional pharmacy services company in the United States. The Corporation operates 95 institutional pharmacies in 44 states. The Corporation’s customers are typically institutional healthcare providers, such as nursing centers, assisted living facilities, hospitals and other long-term alternative care settings. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 91 hospitals in the United States.

The institutional pharmacy services business is highly competitive. Competition is a significant factor that can impact the Corporation’s overall financial results, pricing to customers, and bed retention. In each geographic market, there are national, regional and local institutional pharmacies that provide services comparable to those offered by the Corporation’s pharmacies. These pharmacies may have greater financial and other resources than we do and may be more established in the markets they serve than we are. The Corporation also competes against regional and local pharmacies that specialize in the highly-fragmented long-term care markets. In the future some of the Corporation’s customers may seek to in-source the provision of pharmaceuticals to patients in their facilities by establishing an internal pharmacy.

A variety of factors are affecting the institutional pharmacy industry. With an aging population and the extension of drug coverage to a greater number of individuals through Medicare Part D, the consumption of pharmaceuticals by residents of long-term care facilities is likely to increase in the future. In addition, individuals are expected to enter assisted living facilities, independent living facilities and continuing care retirement communities at increasing rates. Under Medicare Part D, eligible individuals may choose to enroll in various Medicare Part D Plans to receive prescription drug coverage. Each Medicare Part D Plan determines a distinct formulary for the long-term care residents enrolled in its plan. Accordingly, institutional pharmacies have incurred increased administrative costs to manage each Part D Plan’s formulary, reimbursement and administrative processes for their long-term care enrollees. Institutional pharmacies may continue to experience increased administrative burdens and costs due to the greater complexity of the requirements for drug reimbursement, including costs associated with the short cycle dispensing requirements which take effect January 1, 2013. Medicare Part D also requires increased choices for patients with respect to complex drug categories and therapeutic interchange opportunities. Institutional pharmacies may realize increased revenue by providing long-term care residents with specialized services in these areas. Continued industry consolidation may also impact the dynamics of the institutional pharmacy market.

In addition, our continued success depends on our ability to attract and retain pharmacists and other pharmacy professionals. Competition for qualified pharmacists and other pharmacy professionals is strong. The loss of pharmacy personnel or the inability to attract, retain or motivate sufficient numbers of qualified pharmacy professionals could adversely affect our business. Although we generally have been able to meet our staffing requirements for pharmacists and other pharmacy professionals in the past, our inability to do so in the future could have a material adverse impact on us.

Unsolicited Tender Offer by Omnicare

On August 23, 2011, Omnicare, Inc. (“Omnicare”) made public an unsolicited proposal to acquire all of the outstanding shares of the Corporation’s common stock for $15.00 per share in cash. After careful consideration with our financial and legal advisors, our Board of Directors determined unanimously that Omnicare’s proposal undervalues the Corporation and was not in the best interests of our stockholders. On September 7, 2011, Omnicare, through its wholly-owned subsidiary, Philadelphia Acquisition Sub, Inc., commenced an unsolicited tender offer to purchase all of the outstanding shares of our common stock at $15.00 per share. On September 18, 2011, the Board again met with its financial and legal advisors, and after careful consideration our Board of Directors again unanimously recommended that our stockholders reject the offer and not tender their shares of our common stock because it believes that Omnicare’s tender offer (i) undervalues the Corporation and its prospects, (ii) is illusory because it is subject to significant regulatory and other uncertainty, and (iii) is opportunistic based on the Corporation’s then traded market value. On September 20, 2011, we filed with the Securities and Exchange Commission (“SEC”) a Recommendation/Solicitati on Statement on Schedule 14D-9 detailing the recommendation of our Board of Directors in response to Omnicare’s tender offer and the reasons it rejected the offer. See Note 6 Commitments and Contingencies for a discussion of certain litigation commenced in respect of Omnicare’s tender offer and related actions. On October 5, 2011, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York City time, on Friday, December 2, 2011, unless further extended. On December 5, 2011, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York City time, on Friday, January 20, 2012, unless further extended. On January 19, 2012, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York time, on Friday, January 27, 2012, unless further extended. On January 27, 2012, Omnicare extended the expiration of its tender offer until 5:00 p.m., New York City time, on Friday, February 17, 2012, unless further extended.

On August 25, 2011, after careful consideration and consultation with our financial and legal advisors, our Board of Directors adopted a rights plan and authorized the execution of the Rights Agreement, dated August 25, 2011 (the “Rights Agreement”), between the Corporation and Mellon Investor Services LLC, as Rights Agent. On August 25, 2011, the Board of Directors of the Corporation declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share. The dividend was payable on September 6, 2011 to the stockholders of record on September 6, 2011. The Rights will expire on the earlier of August 25, 2021, or redemption by the Corporation. However, the rights will expire immediately at the final adjournment of the Corporation’s 2012 annual meeting of stockholders if stockholder approval of the Rights Agreement has not been received prior to that time. The Rights Agreement is designed to prevent third parties from opportunistically acquiring the Corporation in a transaction that the Corporation’s Board of Directors believes is not in the best interests of the Corporation’s stockholders. In general terms, it works by imposing a significant penalty upon any person or group that acquires beneficial ownership of 15 percent or more of our outstanding common stock without the prior approval of our Board of Directors. The Corporation’s Board of Directors believes the Rights Agreement has helped the Corporation’s stockholders at this time by effectively preventing Omnicare from opportunistically acquiring the Corporation at a price that the Corporation’s Board of Directors believes is inadequate for the reasons discussed above. The Rights Agreement has been narrowly tailored in a manner that our Board of Directors believes appropriately balances the interests of our stockholders in connection with what our Board of Directors considers an opportunistic, illusory and disadvantageous proposal, against the need to avoid excessive anti-takeover protections that ultimately may adversely impact stockholder value. The Rights Agreement should not interfere with any merger or other business combination approved by the Board of Directors.

Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the “HSR Act”), Omnicare filed a Notification and Report Form with the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (the “FTC”) relating to its proposed acquisition of the Corporation on September 7, 2011. On or about September 19, 2011, the Corporation submitted a responsive Notification and Report Form with the Antitrust Division and the FTC. On September 22, 2011, the Corporation received a request for additional information from the FTC relating to the tender offer. On September 22, 2011, Omnicare also received a request for additional information from the FTC relating to the tender offer (the “Second Request”). The Second Request extended the waiting period under the HSR Act for 10 calendar days after the date Omnicare certified substantial compliance with the Second Request issued to Omnicare. On September 30, 2011, the FTC also issued a subpoena and civil investigative demand to the Corporation covering the same subject matter as the Second Request. The Corporation has produced a considerable amount of material in response to the FTC requests.

On November 18, 2011 Omnicare certified to the FTC that it had substantially complied with the Second Request. On November 18, 2011, Omnicare also executed a timing agreement with the FTC pursuant to which Omnicare agreed (i) to provide 14 days notice to the FTC prior to consummating its proposed acquisition and (ii) not to consummate its proposed acquisition prior to December 19, 2011 without the consent of the FTC. On December 2, 2011, Omnicare agreed with the FTC to extend the date prior to which Omnicare will not consummate its proposed acquisition to January 19, 2012, unless the FTC notifies Omnicare that it has closed its investigation relating to its proposed acquisition. On January 10, 2012, Omnicare agreed with the FTC that it will not consummate its proposed acquisition prior to January 26, 2012, unless the FTC notifies Omnicare that it has closed its investigation relating to its proposed acquisition. On January 27, 2012, the FTC issued an administrative complaint to block Omnicare’s proposed acquisition of the Corporation. The complaint alleges that the proposed acquisition would be illegal and in violation of Section 15 of the FTC Act and Section 7 of the Clayton Act because it would harm competition and enable Omnicare to raise the price of drugs for Medicare Part D consumers and others. The case is scheduled to be heard before an administrative law judge at the FTC in June 2012.

The financial and outside legal advisors to the Corporation and Omnicare have continued to meet from time to time in an effort to agree upon an acceptable information sharing process relating to antitrust issues. On October 26, 2011, the Corporation and Omnicare and their respective outside legal advisors entered into a Confidentiality and Joint Defense Agreement (the “Confidentiality and Joint Defense Agreement”), which provides, among other things, for the parties to exchange on a confidential and privileged basis information in order to facilitate their respective assessment of the antitrust risk associated with a potential combination of the two companies. Although the Corporation’s Board of Directors continues to believe that Omnicare’s $15.00 per share offer undervalues the Corporation, the Corporation is engaging in this analytical process in order to further its understanding of Omnicare’s assessment of the antitrust risk related to a business combination. The Confidentiality and Joint Defense Agreement does not obligate the Corporation to enter a transaction with Omnicare and there can be no assurance that this review will lead to a definitive merger agreement or any transaction between the two companies.

In connection with these matters, for the year ended December 31, 2011, we expensed $2.8 million of legal and advisory fees, which are included in integration, merger and acquisition related costs and other charges in the consolidated financial statements. We expect to incur significant additional costs in the future in connection with Omnicare’s unsolicited tender offer.

Consolidated Income Statements

Our revenues are comprised primarily of product revenues and are derived from the sale of prescription drugs through our institutional pharmacies. The majority of our product revenues are derived on a fee-for-service basis. Our revenues are recorded net of certain discounts and estimates for returns. Hospital pharmacy revenues represent management fees and pass through costs associated with managing the clients’ hospital pharmacy.

Cost of goods sold is comprised primarily of the cost of product and is principally attributable to the dispensing of prescription drugs. Our cost of product relating to drugs dispensed by our institutional pharmacies consists primarily of the cost of inventory dispensed and our costs incurred to process and dispense the prescriptions. Cost of goods also includes direct labor, delivery costs, rent, utilities, depreciation, travel costs, professional fees and other costs attributable to the dispensing of medications. In addition, cost of product includes a credit for rebates earned from pharmaceutical manufacturers whose drugs are included in our formularies. These rebates generally take the form of formulary rebates, which are earned based on the volume of a specific drug dispensed, or market share rebates, which are earned based on the achievement of contractually specified market share levels. The Corporation receives rebates on brand and generic drugs dispensed and other administrative rebates.

Selling, general and administrative expenses reflect the costs of operations dedicated to executive management, the generation of new sales, maintenance of existing client relationships, management of clinical programs, enhancement of technology capabilities, direction of pharmacy operations, human resources and performance of reimbursement and collection activities, in addition to finance, legal and other staff activities.

Integration, merger and acquisition related costs and other charges represent the costs associated with integrating our operations, as well as costs related to acquisitions. Also included in this category are costs related to the unsolicited Tender Offer by Omnicare.

Interest expense, net, primarily includes interest expense relating to our senior secured credit facility, partially offset by interest income generated by cash and cash equivalents.

Consolidated Balance Sheets

Our assets include cash and cash equivalent investments, accounts receivable, inventory, fixed assets, deferred tax assets, goodwill and intangibles.

Cash reflects the accumulation of positive cash flows from our operations and financing activities, and primarily includes deposits with banks or other financial institutions. Our cash balances are at the highest on Thursday nights and at the lowest on Friday nights. Friday is usually our largest cash disbursement day as a result of payments for our drug costs and our payrolls.

Accounts receivable primarily consist of amounts due from PDPs under Medicare Part D, the respective state Medicaid programs, long-term care institutions, third party insurance companies, and private payers, net of allowances for doubtful accounts, as well as contractual allowances.

Inventory reflects the cost of prescription products held for dispensing by our institutional pharmacies, net of allocated rebates, and is recorded on a first-in, first-out basis. We perform quarterly inventory counts and record our inventory and cost of goods sold based on such quarterly inventories. We also include an estimate for returns on inventory.

Deferred tax assets primarily represent temporary differences between the financial statement basis and the tax basis of certain accrued expenses, net operating loss carryforwards, and stock-based compensation.

Fixed assets include investments in our institutional pharmacies and information technology, including capitalized software development. Goodwill and intangible assets are comprised primarily of goodwill and intangibles related to our previous acquisitions.

Our primary liabilities include accounts payable, accrued salaries and wages, other current liabilities, debt, and deferred tax liabilities. Accounts payable primarily consist of amounts payable for prescription inventory purchases under our Amended Prime Vendor Agreement and other purchases made in the normal course of business. The balances in accounts payable and accrued salaries and wages are at the highest on Thursday nights and at the lowest on Friday nights, as a result of payments for drug costs and payroll being funded on Friday. Accrued expenses and other current liabilities primarily consist of employee and facility-related cost accruals incurred in the normal course of business, as well as income taxes payable. Our debt is primarily comprised of loans under our senior secured credit facility as well as our revolver. Deferred tax liabilities primarily represent temporary differences between the financial statement basis and tax basis of fixed assets and tax deductible goodwill. We do not have any off-balance sheet arrangements, other than purchase commitments and lease obligations.

Consolidated Statements of Cash Flows

An important element of our operating cash flows is the timing of billing cycles, subsequent cash collections and payments for drug costs and labor. Due to the nature of the Corporation’s cash cycle, cash flows from operations can fluctuate significantly depending on the day of the week of the respective close process. We pay for our prescription drug inventory in accordance with payment terms offered under our Amended Prime Vendor Agreement. The Corporation receives rebates from its prime vendor and suppliers each period. Rebates are allocated as reduction in inventory and also recorded as a reduction to cost of goods sold in the period earned. Outgoing cash flows include inventory purchases, employee payroll and benefits, facility operating expenses, capital expenditures including technology investments, interest and principal payments on our outstanding debt, and income taxes. The cost of acquisitions will also result in cash outflows.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

The condensed consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q as of and for the three months and nine months ended September 30, 2011, reflect the financial position, results of operations, and cash flows of the Corporation.

Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Corporation” refer to PharMerica Corporation and its subsidiaries.

The Corporation’s Business and Industry Trends

Unsolicited Tender Offer by Omnicare

On August 23, 2011, Omnicare, Inc. (“Omnicare”) made public an unsolicited proposal to acquire all of the outstanding shares of the Corporation’s common stock for $15.00 per share in cash. After careful consideration with our financial and legal advisors, our Board of Directors determined unanimously that Omnicare’s proposal undervalues the Corporation and was not in the best interests of our stockholders. On September 7, 2011, Omnicare, through its wholly-owned subsidiary, Philadelphia Acquisition Sub, Inc., commenced an unsolicited tender offer to purchase all of the outstanding shares of our common stock at $15.00 per share. On September 18, 2011, the Board again met with its financial and legal advisors, and after careful consideration our Board of Directors again unanimously recommended that our stockholders reject the offer and not tender their shares of our common stock because it believes that Omnicare’s tender offer (i) undervalues the Corporation and its prospects, (ii) is illusory because it is subject to significant regulatory and other uncertainty, and (iii) is opportunistic based on the Corporation’s then traded market value. On September 20, 2011, we filed with the Securities and Exchange Commission (“SEC”) a Recommendation/Solicitati on Statement on Schedule 14D-9 detailing the recommendation of our Board of Directors in response to Omnicare’s tender offer and the reasons it rejected the offer. See Note 6 Commitments and Contingencies for a discussion of certain litigation commenced in respect of Omnicare’s tender offer and related actions. On October 5, 2011, Omnicare extended the expiration date of its tender offer until 5:00 p.m., New York City time, on Friday, December 2, 2011, unless further extended.

On August 25, 2011, after careful consideration and consultation with our financial and legal advisors, our Board of Directors adopted a rights plan and authorized the execution of the Rights Agreement, dated August 25, 2011 (the “Rights Agreement”), between the Corporation and Mellon Investor Services LLC, as Rights Agent. On August 25, 2011, the Board of Directors of the Corporation declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share. The dividend was payable on September 6, 2011 to the stockholders of record on September 6, 2011. The Rights will expire on the earlier of August 25, 2021, or redemption by the Corporation. However, the rights will expire immediately at the final adjournment of the Corporation’s 2012 annual meeting of stockholders if stockholder approval of the Rights Agreement has not been received prior to that time. The Rights Agreement is designed to prevent third parties from opportunistically acquiring the Corporation in a transaction that the Corporation’s Board of Directors believes is not in the best interests of the Corporation’s stockholders. In general terms, it works by imposing a significant penalty upon any person or group that acquires beneficial ownership of 15 percent or more of our outstanding common stock without the prior approval of our Board of Directors. The Corporation Board of Directors believes the Rights Agreement has helped the Corporation’s stockholders at this time by effectively preventing Omnicare from opportunistically acquiring the Corporation at a price that the Corporation’s Board of Directors believes is inadequate for the reasons discussed above. The Rights Agreement has been narrowly tailored in a manner that our Board of Directors believes appropriately balances the interests of our stockholders in connection with what our Board of Directors considers an opportunistic, illusory and disadvantageous proposal, against the need to avoid excessive anti-takeover protections that ultimately may adversely impact stockholder value. The Rights Agreement should not interfere with any merger or other business combination approved by the Board of Directors.

Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the “HSR Act”), Omnicare filed a Notification and Report Form with the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (the “FTC”) relating to its proposed acquisition of the Corporation on September 7, 2011. On or about September 19, 2011, the Corporation submitted a responsive Notification and Report Form with the Antitrust Division and the FTC. On September 22, 2011, the Corporation received a request for additional information from the FTC relating to the tender offer (the “Second Request”). The Corporation intends to promptly respond to the Second Request. The Second Request extends the waiting period under the HSR Act for 10 calendar days after the date Omnicare certifies substantial compliance with the Second Request.

The financial and outside legal advisors to the Corporation and Omnicare have continued to meet from time to time in an effort to agree upon an acceptable information sharing process relating to antitrust issues. On October 26, 2011, the Corporation and Omnicare and their respective outside legal advisors entered into a Confidentiality and Joint Defense Agreement (the “Confidentiality and Joint Defense Agreement”), which provides, among other things, for the parties to exchange on a confidential and privileged basis information in order to facilitate their respective assessment of the antitrust risk associated with a potential combination of the two companies. Although the Corporation’s Board of Directors continues to believe that Omnicare’s $15.00 per share offer undervalues the Corporation, the Corporation is engaging in this analytical process in order to further its understanding of Omnicare’s assessment of the antitrust risk related to a business combination. The Confidentiality and Joint Defense Agreement does not obligate the Corporation to enter a transaction with Omnicare and there can be no assurance that this review will lead to a definitive merger agreement or any transaction between the two companies.

In connection with these matters, in third quarter of 2011, we expensed $1.1 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. We expect to incur additional costs in the future in connection with Omnicare’s unsolicited tender offer.

Institutional Pharmacy Business

The Corporation is the second largest institutional pharmacy services company in the United States based on revenues. We service healthcare facilities and also provide management pharmacy services to hospitals. The Corporation operates 92 institutional pharmacies in 44 states. The Corporation’s customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, and other long-term alternative care settings. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 90 hospitals in the United States.

Our core business provides pharmacy products and services to residents and patients in skilled nursing facilities, assisted living facilities, hospitals, and other long-term alternative care settings. We purchase, repackage, and dispense prescription and non- prescription pharmaceuticals in accordance with physician orders and deliver such medication to healthcare facilities for administration to individual patients and residents. Depending on the specific location, we service healthcare facilities typically within a radius of 120 miles or less of our pharmacy locations at least once each day. Each pharmacy provides 24-hour, seven-day per week on-call pharmacist services for emergency dispensing, delivery, and/or consultation with the facility’s staff or the resident’s attending physician. We also provide various supplemental healthcare services that complement our institutional pharmacy services.

We offer prescription and non-prescription pharmaceuticals to our customers through unit dose or modified unit dose packaging, dispensing, and delivery systems, typically in a 15 to 30 day supply. Unit dose medications are packaged for dispensing in individual doses as compared to bulk packaging used by most retail pharmacies. The customers we serve prefer the unit dose delivery system over the bulk delivery system employed by retail pharmacies because it improves control over the storage and ordering of drugs and reduces errors in drug administration in healthcare facilities. Nursing staff in our customers’ facilities administer the pharmaceuticals to individual patients and residents.

Our computerized dispensing and delivery systems are designed to improve efficiency and control over distribution of medications to patients and residents. We provide computerized physician orders and medication administration records for patients or residents on a monthly basis as requested. Data from these records are formulated into monthly management reports on patient and resident care and quality assurance. This system improves efficiencies in nursing time, reduces drug waste, and helps to improve patient outcomes.

Consultant Pharmacist Services

Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. On September 30, 2008, the United States Department of Health and Human Services Office of Inspector General (“OIG”) published OIG Supplemental Compliance Program Guidance for Nursing Homes. With quality of care being the first risk area identified, the supplemental guidance is part of a series of recent government efforts focused on improving quality of care at skilled nursing and long-term care facilities. The guidance contains compliance recommendations and an expanded discussion of risk areas. The guidance stressed that facilities must provide pharmaceutical services to meet the needs of each resident and should be mindful of potential quality of care problems when implementing policies and procedures on proper medication management. It further stated that facilities can reduce risk by educating staff on medication management and improper pharmacy kickbacks for consultant pharmacists and that facilities should review the total compensation paid to consultant pharmacists to ensure it is not structured in a way that reflects the volume or value of particular drugs prescribed or administered to residents.

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.” In the proposed rule, CMS outlined its concerns, and requests comments, regarding certain contractual arrangements between Long Term Care (“LTC”) facilities, LTC pharmacies, consultant pharmacies, and pharmaceutical manufacturers. Specifically, CMS explained its perception that the provision of consulting services by pharmacy providers which supplies the medication to the facility leads to lack of independence of consultant pharmacists and CMS proposed requiring the independence of consultant pharmacists from LTC pharmacies. The Corporation believes that the proposed rules, which could require the independence of consultant pharmacists, may increase overall costs for payers and customers and reduce the quality of care and service to long-term care patients and residents. However, until CMS provides additional guidance, the Corporation is unable to fully evaluate the impact of the changes in consultant pharmacist services.

Hospital Pharmacy Management Services

We also provide hospital pharmacy management services. These services generally entail the overall management of the hospital pharmacy operations, including the ordering, receipt, storage, and dispensing of pharmaceuticals to the hospital’s patients pursuant to the clinical guidelines established by the hospital. We offer the hospitals a wide range of regulatory and financial management services, including inventory control, budgetary analysis, staffing optimization, and assistance with obtaining and maintaining applicable regulatory licenses, certifications, and accreditations. We work with the hospitals to develop and implement pharmacy policies and procedures, including drug formulary development and utilization management. We also offer clinical pharmacy programs that encompass a wide range of drug therapy and disease management protocols, including protocols for anemia treatment, infectious diseases, wound care, nutritional support, renal dosing, and therapeutic substitution. The hospital pharmacy management services segment is comprised of a few customers, of which, our largest service is to substantially all of the Kindred Healthcare, Inc. (“Kindred”) hospitals.

Additional business segment information is set forth in Part I, Item 1 “Financial Statements” and Note 12—“Business Segment Data” to the Condensed Consolidated Financial Statements of this quarterly report on Form 10-Q.

Customers

Institutional Care Settings. Our customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals and other long-term alternative care settings. We are generally the primary source of supply of pharmaceuticals for our customers.

Our customers depend on institutional pharmacies like us to provide the necessary pharmacy products and services and to play an integral role in monitoring patient medication regimens and safety. We dispense pharmaceuticals in patient specific packaging in accordance with physician instructions.

At September 30, 2011, we had contracts to provide pharmacy services to 342,099 licensed beds for patients in healthcare facilities throughout the country. We also have significant customer concentrations with facilities operated by Kindred. For the nine months ended September 30, 2011, Kindred institutional pharmacy contracts represented approximately 10.6% of the Corporation’s total revenues.

Hospital Pharmacy Management Services . At September 30, 2011, the Corporation provided hospital pharmacy management services to Kindred and other customers at 90 locations. For nine months ended September 30, 2011, revenues under the Kindred hospital pharmacy management service contracts represented approximately 3.0% of the Corporation’s total revenues.

Suppliers/Inventory

On January 4, 2011, the Corporation entered into an Amended and Restated Prime Vendor Agreement for Long-Term Care Pharmacies by and between AmerisourceBergen Drug Corporation (“ABDC”), a wholly owned subsidiary of AmerisourceBergen Corporation, the Corporation, Pharmacy Corporation of America and Chem Rx Pharmacy Services, LLC (the “Amended Agreement”). The Amended Agreement became effective on January 1, 2011 and, upon its effectiveness, superseded in its entirety the Prime Vendor Agreement for Long-Term Care Pharmacies entered into as of August 1, 2007 between the Corporation and ABDC.

The Amended Agreement incorporates Chem Rx and is otherwise substantially the same in scope except for modifications to select sourcing and rebate terms. The term of the Amended Agreement was extended until September 30, 2013, with one-year automatic renewal periods unless either party provides prior notice of its intent not to renew.

We also obtain pharmaceutical and other products from contracts negotiated directly with pharmaceutical manufacturers for discounted prices. While the loss of a supplier could adversely affect our business if alternate sources of supply are unavailable, numerous sources of supply are generally available to us and we have not experienced any difficulty in obtaining pharmaceuticals or other products and supplies to conduct our business.

We seek to maintain an on-site inventory of pharmaceuticals and supplies to ensure prompt delivery to our customers. ABDC maintains local distribution facilities in most major geographic markets in which we operate.

Supplier and Manufacturer Rebates

We currently receive rebates from certain manufacturers and distributors of pharmaceutical products for achieving targets of market share or purchase volumes. Rebates are designed to prefer, protect, or maintain a manufacturer’s products that are dispensed by the pharmacy under its formulary. Rebates for brand name products are generally based upon achieving a defined market share tier within a therapeutic class. Rebates for generic products are more likely to be based on achieving volume requirements. For the three months ended September 30, 2010 and 2011, rebates recorded as a reduction in cost of goods sold were $8.7 million and $18.2 million, respectively, and for the nine months ended September 30, 2010 and 2011, rebates recorded as a reduction in cost of goods sold were $27.3 million and $53.2 million, respectively. The Corporation had $3.3 million and $5.6 million of rebates capitalized in inventory as of December 31, 2010 and September 30, 2011, respectively.

Information Technology

Computerized medical records and documentation are an integral part of our distribution system. We primarily utilize a proprietary information technology infrastructure that automates order entry of medications, dispensing of medications, invoicing, and payment processing. These systems provide consulting drug review, electronic medication management, medical records, and regulatory compliance information to help ensure patient safety. These systems also support verification of eligibility and electronic billing capabilities for the Corporation’s pharmacies. They also provide order entry, shipment, billing, reimbursement and collection of service fees for medications, specialty services and other services rendered.

Based upon our electronic records, we are able to provide reports to our customers and management on patient care and quality assurance. These reports help to improve efficiency in patient care, reduce drug waste, and improve patient outcomes. We expect to continue to invest in technologies that help improve data integrity, critical information access, and system availability.

CONF CALL

Teri Hartlage

Good morning and thank you for joining us for the 2008 fourth quarter and year-end conference call for PharMerica Corporation. On the call with me today are Greg Weishar, Chief Executive Officer, Mike Culotta, Executive Vice President and Chief Financial Officer, and Berard Tomassetti, Senior Vice President and Chief Accounting Officer.

Before beginning our remarks regarding the fourth quarter and year-end results, I would like to make a cautionary statement. During the call today, we will make forward-looking statements about our business prospects and financial expectations. We want to remind you that there are many risks and uncertainties that could cause our actual results to differ materially from our current expectations.

In addition to the risks and uncertainties discussed in yesterday's press release and in the comments made during this conference call, more detailed information about additional risks and uncertainties may be found in our SEC filings, including our annual report on Form 10-K. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. PharMerica assumes no obligation to update these matters discussed on the call.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on our fourth quarter and year end 2008 financial results press release. We have made available to you our press release and our 10-K filed with the SEC. In addition, this webcast will be on our website along with the transcript from this call.

I would now like to turn the presentation over to Greg.

Greg Weishar

Welcome everyone. As always, we are pleased to have the opportunity to discuss our company's results today, and we thank you for your attendance. Before I get started with the financial highlights, let me remind you that from a comparative financial standpoint the combined businesses of KPS and PharMerica LTC were merged on July 31, 2007. Therefore, the results for the year ending December 31, 2007, represent the results of operations and cash flows of KPS for those full 12-month periods and PharMerica LTC effective August 1, 2007.

Yesterday evening, we released our fourth quarter and year-end results and we filed our 10-K. The diluted earnings per share for the year were $0.17 and our diluted loss per share was $0.18 for the quarter. Integration, merger-related costs, and other charges represented $8.9 million or $0.20 diluted loss per share for the quarter and represented $26.7 million or $0.53 diluted loss per share for the fiscal year. We took an impairment charge for intangible assets of $14.8 million or $0.30 diluted loss per share for the fiscal year and the quarter. Excluding the integration, merger-related costs and other charges, the impairment charge, and the effect of a favorable tax ruling, our diluted earnings per share totaled $0.26 for the quarter and $1.00 for the year. Our total revenues were $480 million during the quarter, and we dispensed approximately 10 million prescriptions in that period.

Looking at EBITDA, our adjusted EBITDA was $23.9 million for the quarter, giving us a 5% adjusted EBITDA margin. Fourth quarter 2007 adjusted EBITDA was $22.1 million, and the fourth quarter EBITDA margin was 4.5%, so we saw a nice improvement in both the EBITDA growth and margin growth quarter over quarter. Cash flow remained strong. We generated a solid $24 million in the fourth quarter of 2008 and $66 million for the year ended December 31, 2008.

Looking back over the year, a big takeaway from our first full year of operations is that we are seeing greater consistency in our financial results as we consolidate our pharmacies and streamline our operations. Fiscal 2008 adjusted EBITDA was $92.5 million compared to $67.9 million for fiscal 2007 on a combined basis.

We are also very proud that we’ve decreased our EBITDA leverage. The EBITDA leverage ratio has fallen from 3.1 times adjusted EBITDA at our inception to just under 2 times adjusted EBITDA at December 31, 2008. We are seeing major improvements not only in the income statement but also our balance sheet. As of today, we have completed all of our planned pharmacy consolidations. We still have about 15 legacy KPS locations to convert to our standard pharmacy operating platform, but we will move slowly on this. If it takes 2 or 3 years, that’s okay. Our focus in 2009 will be improving customer service, growing revenues, and building our acquisition program.

Now, let me turn to sales. Our sales pipeline is growing in both volume and quality. As we have stated before, we had virtually no pipeline or for that matter a sales organization at the time we merged. We are encouraged by the progress we’re making as our pipeline grows, and we think we are going to be seeing increased productivity there. The sales cycle remains longer than normal, but now that we have finished the pharmacy consolidations and the merger is behind us, we expect improved sales productivity. In fact, we are looking for our best sales effort in the last several years.

As I mentioned in the earnings release, I’m very proud that we were able to hold client retention and customer satisfaction ratings steady during the merger. To be sure, we had some challenges along the way, but our customers were patient with us, and they see how our new company is striving to meet their needs. We emerged from our first full year a stronger, more viable competitor.

Let me say a few words about our 2009 business focus. We see opportunities for improving our company in the following areas: Customer service, capturing scale opportunities, improving the quality and consistency in pharmacy service, accelerating our acquisition program, and driving organic growth. We are optimistic about what we see for the future. To be sure, there are always challenges. For example, bad debt remains an ongoing challenge, particularly in times of economic downturns, but we are optimistic. Cash flow is king during these times, and I want to assure our stockholders that we are spending capital wisely and diligently.

Our client service organization has improved significantly, and its adjunct client service center while still in its formative stage is getting great reviews from our clients and customers. We are very encouraged with this early progress and believe that this service unit will significantly improve the customer experience and be a long-term source of differentiation for our company.

We’re reviewing all operating processes to capitalize on our scale opportunities and investing in our pharmacies to improve the quality and consistency in our core pharmacy services. As we have discussed previously, we believe acquisitions are a key part of our long-term growth strategy, and I’m happy to say that Mike and his team have made solid progress in developing an acquisition pipeline. We are increasingly confident of our opportunities here and have been very pleased with the results of our initial acquisition in the fourth quarter of 2008. We will continue to be disciplined buyers and look only to pay fair value.

Our industry has not been as impacted by the business downturn as much as other segments of the healthcare industry, nor for that matter the overall pharmacy industry. We don’t see that changing. The vast majority of our patients are in skilled nursing facilities and are fully covered by either Medicare part D, Medicaid, or other third party plans. They do not pay co-pays or deductibles. We do see the potential for increased receivables, however, as some nursing home operators may be impacted by Medicaid payment delays, which we are servicing, for instance in California, and the liquidity challenges in capital markets. However, on balance we believe our exposure to the recession is manageable and significantly less than the pharmacy industry as a whole. So, in summary, we have completed another successful quarter and made solid progress for the year. I think our employees can look back with great satisfaction on their many accomplishments. The success of the past 18 months will serve as a springboard for 2009. We are well equipped to tackle the challenges in the coming years.

Our operating strategy continues to be one of execution and consistency. I trust our continued progress has not gone unnoticed to our shareholders. I believe we are showing that we can execute our business strategies and drive shareholder value. The groundwork we have laid this past year coupled with a solid plan for 2009 will bring us continued success. We are in an industry with strong fundamentals and will remain in a position of marked strength.

I will now turn this over to Mike to discuss the financial results in more detail.

Michael J. Culotta

Let’s spend a few minutes on the results of our operations. We have several sections in the MD&A of our 10K. The first section is based on the fiscal year results of 2008 compared to the historical fiscal years of 2007 and 2006. Remember, as Greg mentioned, all results prior to August 1, 2007, only include KPS. PharMerica LTC’s results are included after that date. The other sections of MD&A are comparisons of the fourth quarter of 2008 to the fourth quarter of 2007 and comparison of fourth quarter 2008 to the third quarter of 2008, a sequential quarter comparison. We believe this is useful to you, the investors and analysts.

As you recall, we also furnished an 8-K on November 8, 2007, that combined the operations of KPS and PharMerica LTC, which included certain statistical data. Throughout these discussions, we have obtained information from this source in our previous earnings calls. Let’s now discuss our revenue trends and matrix.

As Greg has previously stated, our fourth quarter revenues were $479.7 million. This is a decline of $12.5 million over fourth quarter of 2007 and a decline of $6.5 million from the sequential third quarter. Our prescriptions dispensed were $10 million this quarter compared to $10.04 million in the third quarter and $10.06 million in the quarter fourth of 2007.

Customer licensed beds under contract at the end of the quarter were 322,376 or a decline of approximately 3200 from the third quarter of 2008. Our institutional revenues per script were $46.59 this quarter compared to $46.95 for the third quarter of 2008 and $47.51 for the fourth quarter of 2007.

Let’s now turn to the cost of goods sold and gross margins. Our total gross profit was $71 million for this quarter or $6.84 per prescription dispensed compared to $70.3 million from the third quarter or $6.72. The increase in gross profit and gross profit prescription dispensed was attributable primarily to the synergies from the consolidations resulting in reduced labor and related cost. Our fuel surcharges were only $200,000 in the fourth quarter of 2008 and approximately $1.1 million in the third quarter of 2008. These items were reduced by decreases in the cost of drugs as we continued to see brand to generic changes and synergies from earlier consolidations and further reduction in our costs and scaling of certain pharmacies for which the consolidation had been completed.

For the fourth quarter of 2007, gross profit was approximately $75.1 million or $7.16 per prescription dispensed. The decrease over comparative quarters was due to less rebates, higher costs associated with closing pharmacies, and contract re-pricing as well as lower margins in the hospital segment due to the lower number of contracts. Rebates were $11.9 million in the fourth quarter of 2008 compared to $12.1 million in the third quarter of 2008 and $12.4 million in the fourth quarter of 2007.

Selling, general, and administrative expenses include functions such as pharmacy, regional and operations management, IT billing, and collection function, legal, HR, finance, and others. It also includes certain costs such as provision for doubtful accounts. SG&A costs were $52.3 million or 10.9% of revenues for the fourth quarter of 2008 compared to $50.5 million or 10.4% of revenues for the third quarter of 2008. The largest increase within labor related and other costs which was primarily related to the third quarter benefit related to the health insurance reimbursement, increases in Workers’ Compensation, and incentive compensation.

We continue to be very focused on driving costs down. Selling, general, and administrative expenses were $60.2 million in the fourth quarter of 2007. Overall, SG&A increased due to costs of being a public company, but decreased as a result of staff downsizing and other cost reduction measures as we continue to challenge all of our costs and processes.

Our provision for doubtful accounts was as follows: $6.8 million or 1.4% of revenue in the fourth quarter of 2008 and $7.2 million or 1.5% of revenues in the third quarter of 2008. The provision for doubtful accounts was $5.5 million in the fourth quarter of 2007.

The company’s adjusted EBITDA for the fourth quarter, as Greg had mentioned, for 2008 was $23.9 million, compared to $25.1 million in the third quarter of 2008. Again, we were impacted favorably in the third quarter by the $2.1 million employee benefits reduction, as it related to the reimbursement of overcharges for health insurance claims. The adjusted EBITDA was $22.1 million in the fourth quarter of 2007. Again, as Greg has previously stated, the adjusted EBITDA for the year was $92.5 million compared to $67.9 million on a combined basis for the year 2007.

We continued to focus on operational efficiencies, cash collections, cost controls and completing our integration processes as well as improving existing processes. Our adjusted EBITDA margins 5% in the fourth quarter of 2008 compared to 5.2% in the third quarter of 2008 and 4.5% for the fourth quarter of 2007. Of course, this is all exclusive of integration, merger related costs, and other charges and the impairment on intangible assets. During the fourth quarter of 2008, we recorded a pre-tax impairment charge related to customer relationship intangibles of $14.8 million, which negatively impacted diluted earnings per share for the quarter and year by $0.30.

Turning to the balance sheets and cash flows, our DSOs were 42 days. We continually evaluate the net realizable value of our receivables and client payment patterns. Our allowance as a percentage of accounts receivable is consistent. Our 10-K in the section on critical accounting estimates describes in detail our processes here. As it relates to inventory, our turns have increased and we have reduced the levels as we have consolidated pharmacies. Our leverage ratio is now below 2.0, which our borrowing interest rate as of today is only LIBOR plus 0.75 or 1.2%. You will note that we have continued improving on our covenant ratios.

As Greg previously stated, our cash flows from operations for the quarter were $24 million and for the year ended December 31, 2008, were $65.7 million. It is very interesting to note here that our cash flow per diluted share in 2007 was $1.70 and our cash flow per diluted share in 2008 was $2.18. We are very proud of our efforts here. In addition, our return on invested capital has gone from 5.1% to 7.3% in just over one year.

In our press release, we have provided our guidance for 2009. Our free cash flow in 2008 was $43.6 million, and we are expecting free cash flow to be between $58 million and $61 million dollars in 2009. The company is expected to pay minimal state taxes. All free cash flow will be used for future acquisitions. Our guidance does not include any future acquisitions. Remember that in the first quarter, our employee benefits will increase from the fourth quarter by approximately $2.4 million to $2.8 million because of the resetting of FICA, FUDA, SUDA, and the 401K. We have a sizeable workforce making over the limits of these taxes and benefits. As we have previously stated, we will probably net organic volume loss over first part of the year and see growth later in the year as sales should increase and retention holds.

Greg Weishar

As we stated before we continue to see opportunities ahead of us and are pleased with the progress we’ve made to date. We remain optimistic about the prospects of our industry, it is essential to provide the medication needs of the frail and elderly and that will only grow as population ages. We believe we are on track to achieve our targets and continue to see solid growth in 2009 and beyond, and we are focused on both internal and external growth and will continue to drive our business to more profitability.

Once again, I thank you for your interest in our company and now I will turn it over to Latrice to begin our Q&A.

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