Investors Pound PacifiCare After Blunt Analyst Warnings
Analysts and investors slammed PacifiCare Health Systems Inc. on Thursday, driving its stock price down 7% amid accusations that the company had been less than frank about its legal problems in Texas and its earnings outlook.
Santa Ana-based PacifiCare, which is trying to right itself with an ambitious restructuring plan, has seen its stock tumble 20% in the last four days; its shares fell $1.29 to close at $16.80 on Nasdaq.
The nation’s biggest Medicare operator already faced significant challenges, slashing jobs and trying to reinvent itself as it moved from a fixed-payment HMO business model to a “shared risk” model in a search for better profit. Then came the announcement Monday that Texas was suing its affiliate in that state “for violations of state laws that have resulted in millions of dollars in unpaid claims, disrupted patient care and unresolved complaints.”
That set off a crescendo Thursday in which analysts sounded like betrayed suitors, using unusually blunt language for Wall Street.
Merrill Lynch punctuated its “sell” rating with a statement that PacifiCare’s Wednesday earnings report had failed to instill confidence about the company’s future or the soundness of its business plan. “Bottom line, PacifiCare not only failed to meet estimates but reported a quarter that did little to dispel concerns about its business model or future prospects,” Merrill Lynch analyst Roberta Goodman wrote in a research report.
“Given the many shifting parts, the turbulent Medicare environment, the shift away from [fixed fees], and the Alamo-like siege in Texas, it’s difficult to have much confidence in our forecasts” of PacifiCare’s prospects, Banc of America analyst Todd Richter said in a research note.
Another analyst, Sheryl Skolnick of Fulcrum Global Partners, accused PacifiCare of the “sin of omission” by not sharing with investors its increasingly contentious negotiations with state officials in Texas. “The company commits the sin of omission on numerous occasions and investors still buy the stock,” wrote Skolnick, who has a “sell” rating on PacifiCare. “Pardon our outrage, but we fail to understand how anyone managing anyone else’s money can purchase these shares.”
PacifiCare officials said the company had been involved in negotiations in good faith with Texas officials and had been hoping to reach a settlement when it found out the lawsuit had been filed.
Howard Phanstiel, PacifiCare president and chief executive, told investors Thursday that he was confident about his company’s position in the Texas case, that PacifiCare had no legal liability and that “we are in full compliance with the Texas Department of Insurance regarding the timeliness of claims resolution.”
Suzanne Shirley, vice president of investor relations for PacifiCare, said the company was open in all of its negotiations with Texas officials.
“We exchange information with regulators all of the time. It’s a request for information. It’s not something we are required to disclose,” Shirley said. “We were trying to reach a global settlement with the Texas Department of Insurance. We were shocked and disappointed to hear that the lawsuit had been filed. Our business is very solid. We are just going to have to keep proving it quarter after quarter.”
That won’t be easy, said Peter Boland, a management consultant and industry analyst, because the criticism of PacifiCare is acquiring a momentum of its own.
“Any time you have a major restructuring plan, it’s never quick or pretty or easy. It’s usually a multiyear problem. Now, there is a lack of confidence. The investors are saying that they see fundamental problems with PacifiCare’s business model and they are simply not sure when and if it will be turned around,” Boland said.
*
Times wire services were used in compiling this report.
