Once a Wall Street high-flier, eye-care physician practice management company Physicians Resource Group is scrambling to turn itself around as its share price sinks to all-time lows.
The company's problems highlight the risk of selling the assets of a physician practice for stock.
With the descent in PRG's value, "basically you've given away your practice" if doctors received stock as payment for joining the company, says John Shepherd, M.D., whose Las Vegas ophthalmology practice affiliated with PRG in 1995.
Following months of turmoil, Richard Gilleland, a PRG board member since June 1995, on Dec. 16 took the reins as chairman, chief executive officer and president. He faces a difficult job in fixing the nation's largest eye-care PPM, which has about 650 ophthalmologists and optometrists.
Gilleland replaced Emmett Moore, the chairman and CEO fired Nov. 19, and Richard Owen, who resigned as president Oct. 31. Moore and Owen were casualties of PRG's rapid decline, precipitated largely by the company's problems in integrating acquisitions.
Moore and the company are defendents in a shareholder class-action lawsuit, filed Dec. 18 in U.S. District Court in Dallas, alleging false and misleading statements about the company's performance and the value of the practices it was acquiring. On the same day, two PRG board members and the company's chief financial officer resigned.
Gilleland and other PRG executives weren't available for comment because of the "chaos" surrounding the changes at the Dallas-based company, a spokeswoman said.
Analysts had projected full-year 1997 earnings of 61 cents per share, but PRG won't even come close to that figure. In the first nine months of 1997, the PPM lost 36 cents per share, or $10.6 million, on $307.2 million in revenues. The third-quarter results were especially harsh: a loss of 62 cents per share, or $18.4 million, on $101 million in revenues, compared with a 13-cent-per-share gain, or $3.5 million, on $60.5 million in revenues in the year-ago period.
Other PPMs have missed analysts' earning estimates, but "no one (else) has been hit this hard" by Wall Street as a result, says John Rex, a healthcare analyst for BancAmerica Robertson Stephens in San Francisco.
PRG has two strikes against it, as far as Wall Street is concerned. It was a "rollup," meaning the company didn't begin operating until its June 23, 1995, initial public offering, which gave it the money to buy its first 10 practices.
Investors now are suspicious of rollups' ability to work out any problems in their operations before going public. For example, another Dallas-based rollup, radiology PPM American Physician Partners, has traded far below its $12 IPO price since going public Nov. 21.
The second, and most important, strike against the PPM is that investors are looking askance on any company that can't integrate its practices, meaning turning them into profitmaking entities consistent with the PPM's corporate culture. Such concerns led to a 20% drop in PhyCor's market value on Oct. 29, the day it announced its proposed $8 billion acquisition of it largest multispecialty rival, MedPartners.
In PRG's case, analysts said the company most notably had failed to absorb the acquisitions of EquiMed's eye-care division and American Ophthalmic, which were PRG's two largest competitors when the company bought them for about $140 million in November 1996.
EquiMed last May initiated arbitration proceedings against PRG for charges such as breach of contract and fraud in relation to an alleged failure to cooperate in "completing the follow-up" on the acquisition, according to PRG documents filed with the Securities and Exchange Commission. The case is pending.
Member doctors said PRG has been successful in integrating clinics' business operations but it has had more trouble trying to merge individual doctors' clinical operations. For example, in Nevada, PRG wanted to reserve surgery for certain doctors, but no one wanted to give up that most lucrative arm of ophthalmology.
The third-quarter losses put PRG in default of its $90 million credit facility, and the company had to replace it in November with a $20 million facility through NationsBank-Tennessee. PRG has drawn down $12.5 million from the latter deal.
Between the charges taken for the default and for paying Moore's $750,000 severance pay, PRG started the fourth quarter of 1997 $1.8 million in the hole.
"I think PRG is probably one of the primary practice management examples of what happens when you're not successful executing an integration," Rex says.
As a result of the financial turmoil, PRG's stock has sunk like a stone. After starting the year at $17.13, PRG dropped to $4.34 as of Dec. 19, and that includes a 52% surge on the day Gilleland was hired. On Dec. 5, the company hit an all-time low of $2.56.
Many of PRG's doctors are in a panic. They received shares valued at $20 to $30 at the time they sold the assets of their practices. But with two-year restrictions on the sale of the stock, they haven't been able to unload their shares.
Shepherd of Las Vegas is one of the lucky ones; through a quirk of timing, he was able to sell his shares for $28.50 as part of PRG's June 1996 secondary stock offering. In that month, PRG sold for as much as $33.38 per share.
Those days are long gone. No doctor has filed a shareholder lawsuit against PRG, although sources say physicians are trying to rework their management agreements with the company as a result of the stock-price dive. In its third-quarter earnings filing with the SEC, PRG said it had reworked some 1997 acquisitions so that doctors received promissory notes-a form of debt-instead of stock.
In September, PRG hired Goldman, Sachs & Co. to investigate ways to maximize shareholder value, including a possible sale of the company. Someone else may make that decision for PRG: Houston investor Robert Alpert, who bought and made profitable the aircraft parts distribution business of bankrupt Eastern Airlines, on Dec. 8 disclosed in an SEC filing that he purchased 7.3% of the company with the possible intent of taking it over.
At the least, PRG plans to sell or close some practices. The company took a $27.3 million charge against third-quarter earnings for "future practice closings" of 14 clinics in "nonsaturated" rural or suburban areas, according to the company's SEC filing. The company hasn't identified which practices it will close or sell or how many doctors will be involved.
Meanwhile, the company also is trying to control costs by limiting physicians' access to cash balances "at the individual practice location," according to another SEC filing by PRG. The company said it took a $4 million charge against third-quarter earnings for the changes to its treasury management system, although it says without further explanation that the change could cost as much as $17 million.
Mark Rosenberg, chief administrator of the Barnet-Dulaney Eye Center in Phoenix, says his 20-member practice is satisfied with its PRG affiliation, despite its doctors being stuck with shares originally valued at $20 each. As a result of PRG's managed-care sales, Barnet-Dulaney will receive an extra $500,000 to $700,000 in revenues on top of the $18 million to $20 million it originally expected in 1998, Rosenberg says. Also, PRG is picking up the costs for a patent-infringement lawsuit against Barnet-Dulaney regarding refractive eye surgery techniques even though the suit was filed before their affiliation.
"We've benefited from PRG, even if the doctors haven't benefited in the value of the stock they own," Rosenberg says.
Shepherd, 61, who affiliated with PRG with an eye on retirement, says the company may end up being a victim of circumstance even if it solves its integration problems.
Ophthalmology is heavily dependent on Medicare, since most eye surgery is done on older Americans; Shepherd says Medicare makes up 85% of his revenues. But Medicare has cut reimbursements significantly: Pay for cataract surgery ran $2,500 10 years ago but has fallen to $800 in 1998 and is slated to drop to $500 in 2002.
"PRG should have gotten into anything but ophthalmology," Shepherd says. "Radiology, anything else."