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Friday, May 22, 1998
PMR Corp.
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Phone: 619-295-2227
Website: http://pmrcorp.com
Price (5/21/98): $10 5/8
HOW DID IT FIND TROUBLE?
Investors don't like uncertainty about a company's business model. Yet that's exactly what shareholders of mental health care program manager PMR Corp. have gotten. So the stock has been acting justifiably wacky.
The three-year chart shows a heady sprint from $3 to $35 in October '96. The company had signed a deal to manage some mental health programs for Columbia Healthcare, and profits were exploding. For the year ended April '97, net income more than tripled, thanks to a 49% rise in outpatient revenues. But talk of changes in Medicare reimbursements created a backdrop of uncertainty that has punished the stock.
The latest troubles began February 20 when the company announced that third quarter EPS was up 29% to $0.18, in line with estimates. The bad news was that the Health Care Financing Administration had informed Scripps Health of San Diego, PMR's largest customer (14% of revenue), that its PMR-run programs would no longer be considered "provider-based" for Medicare reimbursement purposes.
PMR also said the Department of Health and Human Services was conducting a civil investigation of an outpatient program the firm had formerly managed in Dallas. The issue was the eligibility of 63 patients for partial hospitalization services. That double-whammy sent PMR's shares plunging $6 3/16 to $12 3/8.
Though the stock recovered on hopes that both matters would be resolved favorably, it collapsed again on May 13 after PMR announced preliminary fourth quarter results. They included $4.7 million in special charges, mostly to close ten weaker programs in seven states. Expenses connected to those closings, including $2.2 million in reserves for anticipated reductions in collections from those sites, accounted for 70% of the charges. The rest related to the Scripps program.
Including the charge, the company expects a loss of $1.7 to $1.9 million, or $0.25 to $0.28 per share for the April period. Backing out the charge, net profits would amount to $850,000 to $1,050,000, or $0.11 to $0.14 per share, less than the $0.15 per share reported a year ago and below the $0.18 a share that analysts had been looking for. However, excluding one-time costs associated with an acquisition and administrative expenses associated with these closed sites would add $390,000 or $0.03 per share to operating income.
With question marks hanging over PMR's basic business, though, investors voted with their fear and dropped the stock $3 to $10 1/2.
BUSINESS DESCRIPTION
San Diego-based PMR manages specialized mental health programs designed to treat individuals diagnosed with serious mental illnesses, mainly schizophrenia and bipolar disorder (manic depression). Most of its revenues (71% in FY97) come from outpatient care, now conducted at 39 facilities. It also operates case management programs (24% of revenue) and chemical dependency programs, for a total of 44 sites managed for seven different healthcare providers.
PMR manages outpatient programs under contracts (usually 2 to 5 years) with acute care hospitals, psychiatric hospitals, and community mental health centers. The case management service (limited primarily to Tennessee) is designed to manage treatment, rehab, and support services for mentally ill patients in a managed care, capitated financial system. PMR's fees depend on its ability to create savings versus baseline costs.
The company also has an agreement with United Healthcare to explore ways of using PMR's patient base to collect and process clinical data that will improve the use of therapeutic drugs.
Insiders own about 30% of the stock with another major stake held by Proactive Investment Managers.
FINANCIAL FACTS
Income Statement*
12-month sales: $65.4 million
12-month income: $4.35 million
12-month EPS: $0.68
Profit Margin: 6.7%
Market Cap: $79.9 million
(*As of Jan. 31, 1998)
Balance Sheet*
Cash: $40.2 million
Current Assets: $62.7 million
Current Liabilities: $6.6 million
Long-term Debt: $0.4 million
(*As of Jan. 31, 1998)
Ratios
Price-to-earnings: 15.6
Price-to-sales: 1.2
HOW COULD YOU HAVE SEEN IT COMING?
Given the string of record quarters, including the strong third quarter results (revenues up 16% and EPS up 29%), it's hard to say the company's performance, per se, would have caused major concern. The trouble has been a changing and sometimes confusing regulatory environment.
Still, while the troubles with the former Dallas site and the "provider-based" designation were unexpected developments, investors have known for over a year that there would be changes in the outpatient payment system. Since PMR is so dependent on its outpatient business, investors had good reason to be cautious.
WHERE TO FROM HERE?
There's no update on the Texas investigation. Meanwhile, PMR is still negotiating with Medicare and Scripps Health to come up with an alternative solution that would allow the company to continue providing mental health care at these San Diego hospitals.
The company is also finalizing a deal announced February 19 to acquire the provider division of American Psych Systems, which includes partial hospitalization programs, hospital management contracts, and other outpatient services in New York and Ohio. This deal will bring in an additional $6.5 million in revenue and should be accretive to FY99 earnings.
Still, PMR's future is really riding on the new prospective payment reimbursement schedule that the U.S. government is due to propose by late May or early June. Though the final plan won't be approved until November for introduction on January 1, investors will soon know whether or not the reimbursement plan will be good enough to justify PMR's continued expansion in its core outpatient business.
Some of the ten terminated outpatient programs were losing money, but others were simply in markets too small to prove very profitable under a more austere reimbursement system. So PMR is not sitting on its hands. Still, a disappointing rate structure could require PMR to re-evaluate its entire business from top to bottom. A positive fee structure would validate PMR's outpatient operations and could lead to a rush of new contracts.
The stock carries major short-term risks. The downside, though, is cushioned by the firm's $36 million in cash, or $4.77 per share, after subtracting the special charge and $2 million for the acquisition.
First Call still shows a consensus EPS estimate of $0.86 for FY99 ending next April. That's a guess at this point. Still, with trailing earnings of around $0.68 a share on an operating basis, PMR now trades for $6 a share minus cash, or for just 8.8 times annual earnings. Bad news in coming weeks could drop the stock further considering that it would unleash more restructuring charges to close out current programs, but a positive payment schedule could land PMR in our Daily Double.
--Louis Corrigan
([email protected])
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