Healthcare Updates
by Tim Meyer (MF Attila)

McLean, VA (April 21, 1997) -- It was a big week for earnings announcements, especially in pharmaceuticals.

OUR POLITICAL HEALTH

The continuing shakedown of the tobacco industry was a major story this week. It was reported that the nation's two largest tobacco companies were discussing a settlement that would, among other things, have the companies pay $300 billion over the next 25 years to create a fund to pay for smokers' health care costs.

The announcement produced the most lawyer interviews I've seen in a day since the O.J. Simpson trial. Among the more interesting statements was that of Arthur Miller, a Harvard Law School professor who was introduced as a plaintiff 's attorney. Mr. Miller stated on CNBC that "now is a good time to declare peace."

Of course $300 billion is a pretty good piece, even though former Surgeon General C. Everett Koop called it a "paltry" amount. I also found the comments of Sen. Richard Durbin (D-Ill.) enlightening. Sen. Durbin said, "I'm willing to let them buy themselves out of this situation..." I wonder what industry will be the next target?

In other news, it has been 34 days since government agents raided COLUMBIA/HCA HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> facilities in EL Paso, Texas, under sealed warrants and as far as I can tell, the government still hasn't disclosed the nature and scope of the inquiry.

In Medicare news, the Prospective Payment Assessment Commission (ProPAC) reported that hospital Medicare profit margins would reach 12.7% in 1997 and 14.8% in 1998. A staffer for the commission said the data supports the commission's call for a freeze on Medicare payment rates to hospitals because the margins would still be 11.4% and if President Clinton's recommendation to reduce payments to hospitals were approved, margins would still reach 12.8% in 1998. The commission data also shows that 36.4% of hospitals lose money on Medicare. Not surprisingly, the American Hospital Association (AHA) disputes the commission findings, saying the data used was outdated. In addition, the AHA president sent a letter to Health and Human Services Secretary Donna Shalala pointing out that in January she had said the administration would not propose a freeze in payments. Guess she changed her mind.

In Congress, legislation has been introduced to eliminate a tax loophole used to sell subsidiaries on a tax-free basis. The loophole, known as the Morris Trust, was previously targeted by the administration and is viewed by congressional leaders as a misuse of the tax provision in order to avoid paying taxes (you mean we aren't supposed to use the tax code to minimize our tax liability?). If the measure were enacted, it would be retroactive to April 16, 1997. It is uncertain how much tax revenue would actually be generated by the proposal since many corporations will choose other options. (A Morris Trust transaction is described below in the second Health Care Stocks in the News article regarding the agreement between Beverly and Capstone).

HEALTHCARE STOCKS IN THE NEWS

Two health care companies were discussed this week in The Motley Fool's Daily Double feature. CLOSURE MEDICAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLSR)") else Response.Write("(Nasdaq: CLSR)") end if %> on 04/18/97 and DYNAMIC HEALTHCARE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DHTI)") else Response.Write("(Nasdaq: DHTI)") end if %> on 04/16/97. They are worth a read. For the past week Closure closed Monday at $14 1/4 and Dynamic was up $11/16 closing at $7 1/8.

I pulled the following from a press release this week on the Business Wire. BEVERLY ENTERPRISES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEV)") else Response.Write("(NYSE: BEV)") end if %> and CAPSTONE PHARMACY SERVICES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DOSE)") else Response.Write("(Nasdaq: DOSE)") end if %> announced they signed a definitive agreement to combine Beverly's Pharmacy Corporation of America (PCA) unit with Capstone to create the nation's largest independent institutional pharmacy company.

Capstone will issue approximately 50 million shares of its stock to Beverly shareholders (valued at approximately $587.5 million, based on the April 15, 1997, Capstone closing price) and assume $275 million of PCA debt. The transaction, which utilizes a "Morris Trust" structure, is intended to create incremental value for Beverly shareholders. It will be accretive to Capstone, increasing annual earnings per share by at least 10%.

Beverly shareholders will receive approximately 0.44 of a share of Capstone stock for each share of Beverly stock (on a fully diluted basis), and cumulatively will own 57% of the combined pharmacy company. Beverly Enterprises will not retain any ownership position in it. The exact ratio of Capstone-to-Beverly shares will be based on the total number of shares of Beverly stock outstanding on the record date of the transaction, which has not yet been set. The transaction, which is intended to be tax free, will occur in two stages:

-- First, Beverly will transfer all of its businesses except PCA to a new company, which will retain the Beverly name. Shares of the "new Beverly" (comprised of skilled nursing centers, transitional care hospitals and rehabilitation therapy operations) will be listed on the New York Stock Exchange.

-- Second, Beverly's remaining operations-- PCA -- then will be merged with Capstone, which will continue to be listed on the Nasdaq Stock Market. The appropriate number of shares of the combined pharmacy company will be distributed to Beverly stockholders.

The transaction is subject to approval by the shareholders of both Beverly and Capstone, favorable tax ruling from Internal Revenue Service, and customary regulatory reviews. It is expected to close by year-end. It is not clear to me whether this transaction will be grandfathered under the legislation discussed above eliminating Morris Trusts. For the week, Beverly was down $1, closing on Monday at $13 3/8, while Capstone was up $1 3/8, closing at $8.

The California Public Employees' Retirement System (CalPERS) announced starting in 1998 it would raise its payments to 11 HMOs an average of 2.7%; the first increase proposed by CalPERS in five years. The rising cost of drugs was cited as a major reason for the premium increases. PACIFICARE HEALTH SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHSYA)") else Response.Write("(Nasdaq: PHSYA)") end if %> was the only HMO to agree to a multi-year contract with CalPERS. PacifiCare, which will receive a 2.5% rate increase beginning January 1, 1998, for its 105,000 CalPERS members, signed a three-year agreement. The agreement also ties a share of PacifiCare's senior executives' compensation to the health plan's performance in terms of member satisfaction. For the week, PacifiCare was up $3/8 closing on Monday at $75 3/8.

HUMANA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> issued a statement affirming its commitment to providing quality affordable health care for its members -- including those in need of heart transplants. The statement noted that in 1996, Humana approved 46 heart transplants and denied none. The statement was issued in response to a report by Kentucky physician Dr. Linda Peeno about a heart transplant request 10 years ago.

Dr. Peeno had been quoted in news reports recalling that, while working for Humana, she recommended non-payment for a heart transplant for an unnamed patient who she believes subsequently died. Dr. Peeno has not provided the news media with specific details of the case in question or the name of the patient (of course that didn't stop them from running the story). Humana states Dr. Peeno was not a Humana employee, she was a part-time consultant who averaged 15 hours a week of work for a period of less than 9 months before resigning in 1987. She was paid a flat hourly rate, earning less than $30,000, and received no incentive compensation for any activity. News reports indicated Dr. Peeno might have been rewarded for her claims denials for Humana. For the week, Humana finished down $5/8 closing on Monday at $20 3/8.

HCIA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HCIA)") else Response.Write("(Nasdaq: HCIA)") end if %> said Friday that its net income per share for the first quarter ended March 31 will be in line with analysts' consensus estimate of $0.21 a share and that revenue for the quarter was about $25.7 million. The company's first quarter results are set to be released on April 23. The company made this announcement in response to unusual trading activity in its stock. For the week, HCIA was down $1 1/16, closing on Monday at $17 11/16.

VALUE HEALTH, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VH)") else Response.Write("(NYSE: VH)") end if %> announced it has entered into an amended and restated merger agreement with Columbia/HCA Healthcare Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %>, providing for a merger in which each outstanding share of Value Health common stock would be exchanged for $20.50 in cash, which would value the transaction at about $1.12 billion. The restructuring was a result of the recent decline in the value of Columbia/HCA stock.

Under the previous merger agreement announced in mid-January, each Value Health share would have been exchanged for 0.58 shares of Columbia, which at the time resulted in a market value of $23.35 per share, or about $1.3 billion. At the close of business on Monday, April 14, 1997, the original deal would have had a market value of $18.20 per share.

Value Health also announced it had rejected a proposal from MEDPARTNERS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> to acquire Value Health in a merger transaction in which each outstanding share of Value Health common stock would be exchanged for 1.112 shares of MedPartners common stock, an offer of about $1.24 billion. The Value Health Board determined that proceeding with the amended Columbia cash transaction was in the best interests of Value Health shareholders. A MedPartners spokesman said, "We're not interested in getting in a bidding war with Columbia."

The merger with Columbia remains subject to the approval of Value Health stockholders and regulators and is expected to be completed in the second quarter. In addition to this deal, Columbia announced it will spend $1 billion buying back its own stock (about 5% of Columbia/HCA shares outstanding). For the week, Value Health finished up $2 3/8, closing Monday at $20 1/8; MedPartners was down $1/4, closing at $20 1/8; and Columbia/HCA was up $3 3/8, closing at $34 7/8.

EARNINGS REPORTS

JOHNSON & JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> reported first quarter net income of $909 million, or $0.68 a share (meeting estimates), on revenues of $5.7 billion, compared to 1996 first quarter net income of $790 million, or $0.59 a share, on revenues of $5.3 billion. For the week, Johnson & Johnson was up $4 1/4, closing Monday at $57 1/4.

DURA PHARMACEUTICALS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DURA)") else Response.Write("(Nasdaq: DURA)") end if %> reported first quarter net income of $8.8 million, or $0.19 a share (beating estimates of $0.17), on revenues of $40.9 million, compared to 1996 first quarter net income of $4.1 million, or $0.11 a share, on revenues of $18.6 million. For the week, Dura was up $5 5/16, closing Monday at $34 1/8.

MERCK & CO., INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> reported first quarter net income of $1.02 billion, or $0.84 a share (beating estimates of $0.83), on revenues of $5.6 billion, compared to 1996 first quarter net income of $863.8 million, or $0.70 a share, on revenues of $4.5 billion. For the week, Merck was up $3 7/8, closing Monday at $86 1/2.

PFIZER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> reported first quarter net income of $602 million, or $0.93 a share (meeting estimates), on revenues of $3 billion, compared to 1996 first quarter net income of $517 million, or $0.81 a share, on revenues of $2.7 billion. For the week, Pfizer was up $2 7/8, closing Monday at $88 7/8.

CYTYC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYTC)") else Response.Write("(Nasdaq: CYTC)") end if %> reported a first quarter loss of $6.6 million, or $0.42 a share (compared to estimates of losses of $0.46), on revenues of $3.4 million, compared to 1996 first quarter loss of $2.7 million, or $0.25 a share, on revenues of $1.1 million. For the week, Cytyc was up $3 3/4, closing Monday at $21 1/4.

U.S. SURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %> reported first quarter net income of $29.7 million, or $0.39 a share (2 cents better than estimates), on revenues of $284.6 million, compared to 1996 first quarter net income of $20.9 million, or $0.28 a share, on revenues of $266.0 million. For the week, US Surgical was up $2 3/8, closing Monday at $33 1/4.

SCHERING-PLOUGH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> reported first quarter net income of $375 million, or $1.03 a share (a penny better than estimates), on revenues of $1.6 billion, compared to 1996 first quarter net income of $327 million, or $0.89 a share, on revenues of $1.4 billion. For the week, Schering-Plough was up $4 1/4, closing Monday at $74 3/4.

MEDIC COMPUTER SYSTEMS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCSY)") else Response.Write("(Nasdaq: MCSY)") end if %> reported first quarter net income of $3.1 million (after an acquisition charge of $1.0 million), or $0.12 a share (meeting estimates), on revenues of $47.5 million, compared to 1996 first quarter net income of $5.1 million, or $0.21 a share, on revenues of $43.4 million. For the week, Medic was down $1/2, closing Monday at $14 5/8.

HEALTH CARE AND RETIREMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCR)") else Response.Write("(NYSE: HCR)") end if %> reported first quarter net income of $16.3 million, or $0.35 a share, on revenues of $213.9 million, compared to 1996 first quarter net income of $13.9 million, or $0.29 a share, on revenues of $187.6 million. For the week, Health Care and Retirement was up $1/8, closing Monday at $28 5/8.

ELI LILLY & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> reported first quarter net income of $432.6 million (including a $24 million charge), or $0.79 a share ($0.82 a share without the charge, which was a cent higher than estimates), on revenues of $1.95 billion, compared to 1996 first quarter net income of $389.2 million, or $0.71 a share, on revenues of $1.78 billion. For the week, Lilly was up $4 3/8, closing Monday at $85 1/8.

That wraps it up for another week. Please share any comments/suggestions on how to improve this feature via e-mail (MF Attila). In the meantime, here is hoping your investments are healthy!

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