Molina Healthcare Inc. made the largest acquisition in its history last week, but the company’s challenges are not over: It has to convince Wall Street of the wisdom of its strategic bet.
The Long Beach managed care provider entered into an agreement to acquire the health information management business of Unisys Corp. for $135 million in cash. The Reston, Va., unit’s roughly 900 employees will become Molina Healthcare employees and stay in Virginia.
The unit provides assistance to state governments that need to better track their treatment of low-income Medicaid patients. It has contracts with the states of Idaho, Louisiana, Maine, New Jersey and West Virginia, and provides drug rebate administration services for Florida. It has been contributing roughly $110 million in annual revenue to Unisys.
For Molina, which operates Medicaid HMOs in California, Florida and eight other states, taking over Unisys’ business gives the company the opportunity to develop relationships with state governments that provide most Medicaid services through the traditional fee-for-service model.
Specifically, Molina Chief Executive J. Mario Molina believes his company can interest these state health departments – the customers of Unisys – to contract for other information technology-intensive services. Those services include disease management programs that are intended to reduce the cost of treating chronic conditions such as diabetes.
“The (Unisys) business will complement our Medicaid health plan business and advance our strategic plan by expanding our services and product offerings beyond managed care,” he said.
But analysts are wary, since the revenue model for information management is so different from that of a Medicaid HMO. In managed care, companies like Molina Healthcare are paid in advance to take care of a certain number of patients. Health information management providers receive milestone payments while they install or upgrade systems, but companies can’t recognize the revenue on their balance sheets until the systems are certified by regulators. That can take 12 to 18 months after the systems go live.
During a conference call, skeptical analysts closely questioned Molina Healthcare officials about the longer-than-usual drag that the acquisition – financed through the company’s credit facility – would have on earnings. The Unisys business will add to cash flow as soon as the deal closes, but will dilute earnings per share likely until 2012.
“We prefer that smaller companies stick to their core Medicaid managed care business,” said Well Fargo Securities analyst Matt Perry in a Jan. 19 note to investors. “We believe that this decision to expand into related or ancillary markets adds execution risk to Molina’s operations.”
Molina acknowledges that executives have their work cut out for them at the company’s annual Investor’s Day this week.
“In the long run we think this is a good business to be in, but I understand their concern,” he said. “We’re now asking analysts to start covering a type of company that none of them have covered before.”
