It's an executive's worst nightmare getting hit with bad news on the eve of a road show, when institutional investors have pummeled your stock and are in no mood to buy more.

That's what happened last week to Molina Healthcare Inc., a former high-flyer on Wall Street.

Molina's shares fell 15 percent over a two-day period after the company lost a lucrative Medicaid contract in Riverside and San Bernardino counties to Blue Cross of California. The contract, worth $111 million, caused investors to bail out of shares, sending the stock down to $38 a share, from $44. Since January, Molina's shares have lost 40 percent of their value.

Analysts were surprised that Molina lost the contract since it has been the incumbent managed care provider in Riverside and San Bernardino for the past eight years.

With shares down significantly, the company chose to cancel a secondary offering in which two-thirds of the shares being sold were by Molina family trusts.

"What does it mean that Molina is losing two big contracts on their home turf?" asked Thomas Carroll, a principal at Legg Mason Wood Walker in Baltimore. "It's certainly not good, but I don't think it really reflects on any operational problems at the company."

Carroll estimated that the lost contract will shave 15 cents to 20 cents off Molina's earnings in 2006. The company reaffirmed its guidance of $2.40 a share to $2.45 a share this year, but did not give any guidance for next year, when the two contracts covering 96,000 members expire.

Molina filed an appeal last week to overturn the state Department of Health Service's decision, claiming it was "improperly disqualified" from the bidding process. Molina spokeswoman Patricia Gonzalez-Portillo said the company would not comment further. A decision on the appeal is expected by July.

Ken August, a spokesman for the state's Department of Health Services, said the agency tried to provide flexibility for Molina in the competitive bidding process, where it went up against Blue Cross, Community Health Group, a large HMO in San Diego, and Care First, a unit of WellPoint Inc. The agency delayed awarding the contract for nine months and gave extra time to bidders that needed to fix errors.

"Both Molina and CareFirst were disqualified because they failed to follow the requirements of the bid process despite being given two opportunities to fix errors in their proposals," he said.

The key issue, August said, was that Molina did not adhere to the strict guidelines required by the agency, which asked for a separate list of network health providers for both Riverside and San Bernardino counties not a combined list of providers, which is what Molina allegedly submitted.

Allen Baumgarten, a Minnesota health care analyst and author of the "California Health Care Market Report," said he could not remember another time that an incumbent Medicaid provider had lost such a large contract.

"It's very unusual," he said. "This is a well-established company that has made acquisitions and has expanded into other states which requires making a positive, stable impression on state agencies. "

In fact, Molina has been a strong performer on Wall Street, throwing off three consecutive quarters of 30 percent earnings growth.

Eric Veiel, an analyst at Wachovia Securities, wrote in a recent research report that California Medicaid, the health care program for low-income and disabled residents known as Medi-Cal, is less profitable than Medicaid in many other states. Because Medi-Cal offers profit margins of just 3 percent, he sees just a small impact on Molina.

Medicaid HMOs have become lucrative profit-centers, with operating margins as high as 9 percent. HMOs typically receive a flat fee roughly $100 per member per month from the state, and then they try to increase the number of enrollees while simultaneously keeping a lid on costs.

Molina's "medical margin," which the company defines as the premiums plus other operating revenue, minus medical costs, rose to $24.69 per member per month in the first quarter, a 23 percent jump from a year earlier.

*Staff reporter Kate Berry can be reached at (323) 549-5225, ext.229, or at .

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