(Includes additional details from Coventry)
DOW JONES NEWSWIRES
Magellan Health Services Inc. (MGLN) announced plans to pay $110
million for Coventry Health Care Inc.'s (CVH)
Medicaid-administration business.
First Health Services Corp. administers drug benefits and
provides health-care management and information-technology services
to state Medicaid programs. The business, assuming the deal closes
July 31, would add $60 million in revenue and $7.5 million of
earnings to Magellan the rest of 2009.
Coventry Chief Executive Allen F. Wise said an internal review
indicated that First Health didn't complement the company's
long-term strategies. The proceeds from the sale of First Health,
which it acquired in 2005, are earmarked to help reduce debt and
for share repurchases.
Coventry expects a goodwill write-down of 55 cents to 60 cents a
share related to the sale, but excluding that shouldn't impact
earnings the rest of the year.
The move comes as Medicaid spending is rising faster than many
other categories and is putting increased pressure on state
budgets. It would also complement Magellan's behavioral health,
radiology-benefits management and specialty-pharmacy
operations.
Medicaid's pharmacy spending is growing 5% to 7% a year, the
company said, making that a prime target for states to seek
savings.
The proposed deal also includes a preliminary three-year
agreement for Magellan to manage radiology services and provide
oncology management services for Coventry in five markets.
Coventry said in April its first-quarter profit slumped 65% on
surging claims costs. A series of missteps last year led to
Coventry slashing its 2008 forecasts in October, resulting in
shares losing half their market value. A subsequent management
shakeup returned Chairman Allen Wise, who had helped deliver strong
results a decade earlier as chief executive, to the helm.
For Magellan, it has recorded steady growth in recent years as
it continues to expand. Its shares closed Thursday at $29.43 while
Coventry finished at $17.99. Neither traded premarket.
-By Kevin Kingsbury and Tess Stynes, Dow Jones Newswires;
201-938-2136; kevin.kingsbury@dowjones.com