Healthways’ condition takes a downturn

Monday, June 30, 2008 at 2:38am

Over the past couple of years, Healthways has grown by leaps and bounds, winning contract after contract for disease management services and expanding with an acquisition.

Bursting at the seams in Green Hills, the disease management company had a sparkling new headquarters built in Cool Springs. They moved in late last year. Space reserved for growth was spoken for prior to moving in and the company already was seeking additional office space elsewhere.

Then in the first part of the year, the company’s stock tanked, shedding hundreds of millions in market value on news that a Medicare program would end and drain company revenues as well as profitability.

Has the luster worn off a local health care darling?

Healthways’ stock is down roughly $40 from it’s 52-week high and has been bouncing just a few dollars a share off its low. The company has laid off 100 to 200 people in May.

The company has been broadening its business to include wellness and prevention programs along with disease management, meeting demand for keeping employees healthier on the front end so they may not need the disease management in the future.

A sluggish economy has raised questions about whether companies will continue to add wellness and prevention programs to health care coverage as they manage their own expenses in uncertain economic times. Healthways has lost some contracts with smaller customers who have struggled financially.

Healthways management declined to be interviewed for this story.

But in the company’s earnings call with analysts, Ben Leedle, the company’s chief executive officer, told an analyst there is some sensitivity with the economy and corporate decision making relative to healthcare.

“You know, I would be crazy to tell you there’s no impact because I think that there is, and where that shows up first is in the translation,” Leedle said. “The same people that are driving the demand are having to rationalize what’s happening in their core business and what available funds do they have for their perceived short- and long-term investments in and around employee and dependent family initiatives around their health.”

He added that the sales process still is ongoing. If a company scales back purchases, he said it’s a matter of determining what that means.

“Wait until later or scope down and buy less than what they originally intended?” he said. “And right now, the data is still not clear on that just because of the nature of the timing and where we are in the year in the sales cycle.”

Analysts who track the company are mixed on the future but not strongly negative. Eight have ‘buys’ or market outperform ratings and eight say ‘hold’. Only two have a ‘sell’ rating.

“Systemic health care cost concerns should help Healthways,” James Kumpel, analyst with Friedman, Ramsey & Co., wrote in a recent research report on the company.

The company’s third quarter results met Wall Street expectations on better-than-expected revenues and net income, $191 million and $14 million, respectively. Kumpel noted, however, that debt shot up to buy back stock.

In other areas to watch, he said the mergers and acquisition environment continues to be active for patient-centric care companies.

“No other international deal (is) assumed in 2008 guidance,” Kumpel wrote.

Healthways is a thinly traded stock, averaging about 500,000 shares each day while companies with much higher market caps trade millions of shares every day.

Gaylord Entertainment, another local company with a $1 billion market cap, trades about the same on volume.

Like Gaylord, institutional investors own most of the available stock.

Earlier this year, Healthways’ volume leaped into the millions when news came that Centers for Medicare and Medicaid Services would end the Medicare Health Support program at the close of this year and not proceed with a second phase.

It is a pilot program started in 2005 and Healthways is one of the initial participants. Questions arose a year ago about the company hitting performance targets for the Medicare program and possibly having to pay back money.

Since the news on the program ending, murkiness emerged, however, about the future of the second phase.

Once the first phase ends in July, a series of performance reports will be done, Leedle told analysts. Healthways has reported revenues as a result of the program.

“We couldn’t recognize revenues if we weren’t performing,” Mary Chaput, the company’s chief financial officer, told one analyst.

Filed under: City Business