HCIA tries to fight its way back after bad deal LBA purchase left company in tailspin

Health care industry

June 14, 1998|By M. William Salganik | M. William Salganik,SUN STAFF

For HCIA, there is before the LBA deal and after the LBA deal.

HCIA, a Baltimore health data company, bought LBA Health Care Management Inc. of Denver in July 1996 for $130 million.

Before the deal, things were heady.

Fueled by internal growth and acquisitions, revenue for the four quarters before the announcement of the LBA deal was 55 percent higher than in the year-earlier period. Profitability was improving.

And the stock price was on a steep climb; from an initial offering at $14 a share in February 1995, the price tripled in less than a year.

After the deal came headaches.

Wall Street seemed happy at first. It pushed the price of HCIA shares up more than 24 percent in two days after the LBA deal was announced, to $65.

But, in October 1996, HCIA announced that earnings for the quarter would be about half what analysts expected. The stock lost 45 percent of its value in a single day, a paper loss of a third of a billion dollars.

The troubles continued: flat earnings, quarterly losses, results below projections. For the first quarter this year, revenue was off 32 percent from the corresponding period a year earlier. The stock dropped as low as $6.50 this month, less than a 10th its price at its peak two years earlier, before rallying to end the week at $9, off 50 cents on the day.

"LBA has really turned out to be a bust. It's the rock that dropped the bird out of the sky," said Michael D. Samols, a vice president for research at BancAmerica Robertson Stephens.

"It seemed like a natural product line extension," said George Pillari, HCIA's chief executive officer. "But it turned out not so great financially. We had a terrible year with it, and it took the wind out of the sails of the company."

With a large write-down of LBA's value in the first quarter of 1998, Pillari said, "The most difficult part is behind us."

Analysts, who have heard several previous turnaround scenarios during the past 1 1/2 years, were skeptical even before seeing HCIA fall well below projections again in the first quarter this year.

"There's a lack of confidence in management because of two prior misses," said Anthony Vendetti, an analyst at Gruntal & Co. "The fact that they had another poor quarter doesn't help the situation, but I don't think it changes it very much."

Pillari recognizes the problem. "We're a show-me stock right now," he said. "People are going to want to see some results before they pay us in the stock price."

HCIA is, in effect, returning to its roots, he said.

Barry Offutt, chief financial officer, said, "We're going back to what the company had grown on."

The company began with work Pillari did as a Johns Hopkins University undergraduate, building databases for two professors who were studying hospital costs and performance.

Realizing that such data had not been compiled by anyone else, they saw a business opportunity and started the company in 1985. Pillari was named CEO in 1987.

Essentially, its work was digesting data. It collected large databases on hospital costs and other health costs and outcomes. It acquired a proprietary system that allowed it to compare data that had been collected using different coding systems. And it sold the information to hospitals, insurers and drug companies, which are interested in tracking how their patients compared to national benchmarks.

"We were a straight database business," Pillari said, "but we found our customers wanted more value-added services."

LBA offered a chance to expand into consulting. "When we took data to a hospital, that presented an opportunity to follow up," said Don Good, HCIA's chief operating officer. The data might suggest ways to save money, Good said, and HCIA would be able to provide consulting and "implementation" services for six to nine months.

At roughly the same time, HCIA thought it saw another chance to boost revenue quickly.

It began an "integrated solutions" unit. "It was our attempt to enter customers at a high price point," Pillari said. "We had had some success moving customers from $100,000 orders to $1 million orders, and we were hoping to get them to enter at $1 million."

Good said HCIA tried to accomplish this by offering prospective customers an "integrated solutions" bundle of four or five products and services at once. For example, he said, a pharmaceutical company might want historical data on a certain disease, coupled with identification of insurers that might buy the company's drug to treat that disease.

"It's an excellent concept," Good said. "The market needs it."

The market might need it, but it didn't buy it.

Meanwhile, some key LBA executives left. Not only was HCIA generally unsuccessful in selling its own customers the kind of consulting LBA had offered, but LBA's usual business declined.

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