TriZetto Stock Sinks After Being Downgraded
Shares of TriZetto Group Inc. were pummeled Wednesday, after the Newport Beach Internet health services firm scrapped a much-criticized merger and analysts downgraded their ratings.
TriZetto shares fell $4.94, or 20.6%, to $19.06 in Nasdaq trading, one of the largest percentage losses in U.S. markets.
In calling off its merger with drug data giant IMS Health Inc., TriZetto said it instead will buy an IMS unit, Erisco Managed Care Technologies, for about $225 million in stock. Erisco sells software to managed-care companies.
IMS stock fell 81 cents, or nearly 5%, to $16.56.
Analysts applauded the new strategy because investors had been concerned that TriZetto, a fast-growing Internet company, wouldn’t be a good fit with IMS, which provides market research and information systems to drug makers. Indeed, the proposed merger had met with so much displeasure on Wall Street that the value of the stock deal plunged to $2.45 billion from $8.4 billion in less than four weeks.
The companies on Tuesday said they were opting for a more limited “strategic alliance.”
Still, a number of analysts downgraded their ratings of IMS and TriZetto after the companies gave a disappointing outlook for the year.
“People consider TriZetto to be a growth stock and a growth story,” said Richard Lee, an analyst at Wit SoundView. “Our expectation is that revenue will be pretty flat in the next two quarters” in the company’s main businesses of supplying information technology to managed-care companies.
Lee said large managed-care companies, like health maintenance organizations, had probably put off buying TriZetto’s services as they grapple with rising medical costs that eat into their earnings.
“TriZetto is somewhat dependent on their clients to get their acts together,” Lee said. “Implementing [changes] at these big companies also takes some time, and it seems to be taking more time than expected.”
Lee downgraded his rating of TriZetto to “buy” from “strong buy.” Analyst Charles Trafton at Adams, Harkness & Hill cut his rating of the stock to “accumulate” from “strong buy.” TriZetto was also downgraded to “buy” from “strong buy” by analyst Christopher F. Brinzey at Advest Inc.
IMS said it still expects earnings to rise 20% this year, but analysts said the company faces a higher tax rate, lower cash flow and a one-time charge related to the sale of Erisco.
IMS was downgraded to “market perform” from “accumulate” by analysts at Friedman, Billings, Ramsey & Co., and cut to “attractive” from “buy” at Bear, Stearns & Co.
