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Magellan's poor Q2 triggered by contract loss


By Bob Herman
Posted: July 25, 2014 - 1:15 pm ET
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Shares of Magellan Health, formerly Magellan Health Services, tumbled considerably in morning trading after the Avon, Conn.-based healthcare management company reported lower-than-expected earnings and revenue, the result in part of a major contract loss in Arizona.

Analysts said Magellan's earnings per share of 18 cents “badly missed” the general consensus of 57 cents, and they “highlight potential execution risk.”

Magellan's public-sector business was the primary driver behind the weaker second-quarter financials, executives said on a call with investors Friday morning. Effective March 31, Magellan lost its contract with Maricopa County in Arizona to provide behavioral health management services to 680,000 people—a contract that represented $201 million in revenue in the first quarter this year.

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The costs of care and other expenses also rose 11%, but executives said they expect to rein those in by the end of 2014.

“We have plans in place to address the cost-of-care issues over the balance of the year,” Magellan CEO Barry Smith said on the call.

Overall, the company's second-quarter net income plunged more than 84% to $5 million.

Magellan, which contracts with health plans and employers to manage specialty care, was able to increase revenue 5% to $888 million thanks to several acquisitions. Two acquisitions, Partners Rx Management and CDMI, helped expand Magellan's clinical consulting and pharmacy-benefit management services, the company said. The Partners deal closed in the fourth quarter of last year and the CDMI deal closed in the most recent quarter.

Magellan expects to make several investments in the future, executives said. They touted a new $500 million credit facility for expansion opportunities, new HMO licenses in Iowa and Louisiana, and pending HMO licenses in Pennsylvania and Nebraska.

The company reaffirmed its 2014 earnings estimates, saying full-year profit will total $53 million to $69 million. Through the first six months of fiscal 2014, Magellan's profit totaled $30.7 million.

By 10 a.m. EDT, Magellan's shares were down almost 15% to $53.56. They rebounded to $58.16 as of 1 p.m. EDT, still down more than 7% from Thursday's close.

Follow Bob Herman on Twitter: @MHbherman


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