You call this analysis?

Disease management company Healthways reported weak earnings yesterday and the stock dropped more than 20 percent, to about $20 per share.’s article on the the news relies exclusively on Jeffries Analyst Arthur Henderson as its “expert.”

He certainly speaks with confidence. Here are some quotes from him:

Unfortunately, in an environment in which medical costs continue to rise and managed care and corporate executives scrutinize expenses and minimize discretionary investments, we think Healthways’ high-priced services stand to lose ground…

The management team is unwilling to adjust to a rapid moving environment. The good products it had that were good six months ago are not necessarily good for right now…

He’s also not shy on offering advice:

Henderson recommends that the company invest in more home nurses and more face-to-face interaction to build greater trust with patients.

So I just had to laugh when I read this sentence toward the end:

[Henderson] lowered his price target on the company to $18.50 from $40.0, and downgraded the stock to “underperform” from “buy.”

So in other words last Friday this “expert” thought the company was worth more than twice as much as he thought it was worth on Monday, after the company changed its guidance? This is the kind of thing that makes analysts look like idiots.

Healthways is a good company, which peaked at almost $70 earlier this year. (I don’t have access to Henderson’s reports but I wonder what valuation he was putting on the company then.) Three years ago –when the stock was at $30 and the analysts were foaming at the mouth over it– I wrote Is the disease management business peaking? Maybe Henderson should have read it:

Leading disease management company American Healthways reported an 83% earnings increase compared to the same quarter a year ago. The company reports expanding demand from health plans and payers to help coordinate and integrate the care of chronically ill patients. Most of the company’s services are provided by nurses who interact with patients by phone.

Disease management (DM) has gained acceptance in recent years. Almost all health plans and most employers have some sort of effort in place. However, the road ahead could be bumpy:

  • Most programs still address a single condition, such as CHF. Even when DM companies expand beyond one disease, they still can’t address certain co-morbidities such as mental health and cancer
  • Calculating return on investment is tricky. It’s not clear that DM provides a financial payback. Meanwhile, vendors have done a disservice to themselves by over-promising returns
  • There is some perceived conflict of interest as pharmaceutical companies have provided funding for a number of state initiatives. Some observers view these efforts as an attempt to sell more drugs
  • Customers are rarely satisfied with their vendors, and contracts are typically re-bid at the end of the term rather than being renewed automatically

Perhaps the biggest threat to disease management vendors is that hospitals, integrated delivery networks and physician groups will begin to provide disease management services themselves. The DM companies’ current customers would rather have providers coordinate care rather than having to pay a separate vendor. To the extent the providers pick up the ball, it will hurt the DM companies.

August 26, 2008

One thought on “You call this analysis?”

  1. David,

    A couple of thoughts:

    1) Yes, “analysis” from investment analysts in general is suspect, and even more so in this case due to the overnight change in perspectives about the “valuation” of Healthways.

    That said, I’ll offer a glass is half full perspsective. The structure of doing investment analyses changed dramatically earlier this decade when the investment and regulatory community “noticed” the inherent conflict of interest of offering “objective” analysis where the company was profiting from recommendations made by the analysts.

    At least now the regulatory structure ostensibly recognizes this inherent conflict of interest and focuses on creating an environment in which investment analyses are more objective and free from conflicts. Of course this model is imperfect too.

    But it’s better than nothing (i.e., glass half full), as the average investor has almost no access to the type of information gathered in these analyses…so caveat emptor must prevail. You gotta take any investment analysis today with a large grain of salt — understanding that it was mostly put together by 28 year old analysts who have little real world experience which which to accurately interpret the evidence, that they have limited access to potentially relevant information, and that any interpretatation is inherently subjective.

    With these caveats understood, there can be much valuable information in any investment analysis of a company.

    2) Healthways stock has ALWAYS been volatile, and the company has suffered additional unique challenges over the last 6 months.

    HWAY stock collapsed in February due to 3 related but separate events: 1) Medicare’s announcement that it would not proceed with Phase II of Medicare Health Support, the major federal disease management demo project on which the entire industry had been counting; 2) BCBS of MN announcing that it was cutting it’s long term relationshiip with HWAY and hiring 90 nurses to do disease management in-house; 3) HWAY restatement of earnings.

    These three events combined to bring the stock from from 67 to the mid 20s in the course of a month.

    On top of all this, sprinkle in shareholder lawsuits and an overhanging SEC investigation — and you have a company that’s gone through a lot of chaos.

    My point is not to comment on the underlying health of the company personally, but simply to point out that this is a case where reasonable people will disagree given the unique, volatile circumstances that HWAY has gone through this year.

    So don’t go too hard on the analyst here.


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