Magellan Health Services posts loss of $29.7 million

Earnings

May 12, 2000|By M. William Salganik | M. William Salganik,SUN STAFF

Magellan Health Services announced $29.7 million in losses and a $58.2 million write-down of assets yesterday in its specialty health division, demonstrating that problems in the division were deeper than had been previously acknowledged.

While earnings were steady in other divisions, the specialty health difficulties meant that Columbia-based Magellan posted a loss of $45.5 million, or $1.45 per common share, for the three months ending March 31, the second quarter of Magellan's fiscal year. That compares with earnings of $4 million, or 13 cents a share, reported for the year-earlier quarter.

Magellan also reported that $6 million of the pretax losses had occurred in its first quarter ended Dec. 31, and restated the revenue for that quarter. That means Magellan earned $4.2 million, or 13 cents per common share, in that quarter. It earlier had posted fiscal first-quarter earnings of $6.3 million, or 19 cents a share.

The company said it had changed top management in the specialty health division, terminated 200 of its 400 employees and canceled several money-losing contracts. The terminated employees were based in Florida and New Jersey. The goal for specialty health, the company said, is to be running at a break-even rate by the end of the fiscal year.

Although Magellan had indicated in March that it was running into problems in specialty health, its projected charge then was only $12 million to $15 million. It also said in March that the division would break even for the year. In addition to announcing the much-larger-than-expected charge, Magellan said the division is expected to lose $2 million to $3 million in the third quarter and $1 million to $2 million in the fourth quarter.

The specialty health division contracts with HMOs or employers to manage patients with particular health conditions, such as asthma, or care in a particular medical specialty, such as cardiology.

Magellan shares traded higher much of the day before closing down 25 cents at $2.625, a new low. After trading at more than $30 in 1997, the shares have dropped steadily for several years, J. Kevin Helmintoller, vice president of investor relations, said he thought the shares' performance yesterday was a reflection of "when you get down to what's really driving this company moving forward, it's behavioral health, and in behavioral health we had strong revenue growth and strong membership growth."

The behavioral health division, which generated 82 percent of Magellan's revenue in the quarter, functions as an HMO for mental health, collecting premiums from health plans or employers and contracting with therapists and hospitals to provide care. It covers mental health care for 69 million Americans, up 7.3 percent from a year earlier.

Helmintoller attributed a slight drop in margins in behavioral health to several large government contracts, which provide thinner margins, coming on line. However, he said, behavioral health had achieved rate increases in some contracts and has already reached agreements to add about a million more members this year in existing accounts.

"We believe the third and fourth quarters will be significantly stronger," he said.

Eleanor Kerns, a health analyst with Credit Suisse First Boston, said the shares were not hit harder because "investors that are in this stock are looking for a long-term turnaround." After Magellan's March warning, "they weren't looking for something stellar this quarter," she said.

Kerns said yesterday's announcement "gives cause for concern, but in the long term, I think, they'll pull it off and turn it around."

Revenue for the quarter was $502.2 million, up 4.7 percent from $479.7 in the year-earlier quarter.

Magellan said it is renewing efforts to sell its profitable Mentor division, which provides community services such as therapeutic foster care and group home placements.

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