Insider Offering Forces Decline In Shares of Molina Healthcare

Staff Reporter

When insiders unload shares in a company through a secondary offering, it can be read by outside investors as a vote of no confidence, and it can play havoc with the stock price.

That's a lesson being learned by Molina Healthcare Inc. of Long Beach, whose stock has fallen 15 percent in the past month after underwriters were forced to water down a secondary offering that originally included sales of 2 million shares by insiders.

The insider sales, which were scaled back by half before the offering, were primarily from trusts that benefit members of the Molina family, whose patriarch, a local doctor named C. David Molina, founded the Long Beach-based health care company in 1980. Molina died in 1996, and his two sons and one daughter continue to run the company today. (As part of the scaled-back secondary offering, the family cashed out about 6 percent of its holdings.)

The secondary offering comes on the heels of a New Mexico acquisition for which analysts believe Molina overpaid, and the backdrop of a dicey Medicaid market, particularly in California, where budget cuts are expected to take an ax to Medicaid reimbursements.

Molina, a niche provider of managed care to low-income Medicaid patients in five states, gets substantially all its revenue from state Medicaid premiums. It also may encounter more competition in key markets, such as Michigan, where officials opened a bidding process to attract more Medicaid competitors.

Stock gets stomped

Molina's stock has been a high flier since it went public in July 2003 at $20.60 a share. Just a month ago, the shares were at an all-time high of $33.29 each, having run up by 46 percent since the beginning of December.

On March 16, Molina filed a registration statement with the Securities and Exchange Commission, with plans to issue 2 million new shares, raising $65.4 million at $32.70 each. In addition, existing shareholders also planned to sell 2 million of their own stock in the secondary.

Then the market reacted.

Shares of Molina began to free fall, forcing underwriters not only to re-price the secondary offering, but also to reduce the number of new shares being issued and the number of shares being sold by insiders.

On March 24, the company amended its registration statement to reflect the lower share price and reduce the number of new shares to 1.8 million. The expected take, which is to be used to fund internal growth, acquisitions and working capital, fell to $47.4 million.

Insiders sold about 700,000 shares in the offering, plus another 375,000 shares in the over-allotment to underwriters.

Analysts who cover Molina could not comment on the offering because of their involvement in the underwriting. Banc of America Securities LLC and CIBC World Markets Corp. served as joint managers, with SG Cowan Securities Corp. and Legg Mason Wood Walker acting as co-managers.

J. Mario Molina, the company's chairman, president and chief executive, also could not comment because of the "quiet period."

New Mexico expansion

In February, Molina expanded into its fifth state, New Mexico, with the purchase of Health Care Horizons Inc., the parent of Cimarron Health Plan, for $69 million. The company picked up 66,000 Medicaid members and an additional 38,000 non-Medicaid commercial members, whom it plans to divest this year.

Excluding the New Mexico acquisition, the company provides managed care and HMO services to 564,000 Medicaid patients in California, Washington, Michigan and Utah. It operates 21 company-owned primary care clinics in California and employs more than 900 people, including doctors and nurses.

In the third quarter of 2003, Molina ran into cash-flow trouble primarily because the state of Utah delays Medicaid payments to providers like Molina. As a result, its Utah operations were forced into a "tight budget situation" that put a drag on earnings, according to an earlier report by Edmund Kroll, an analyst at SG Cowan.

In the same report, he said that the company overpaid for the New Mexico purchase a view others expressed prior to the quiet period associated with the offering.

Molina reported net income of $11.9 million for the fourth quarter ended Dec. 31, up from $4.9 million for the like period a year earlier.

Premium revenue for the fourth quarter was $208 million, up 20 percent from $173.6 million in revenue from the fourth quarter of 2002.

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