CLEARWATER - Lincare Holdings Inc. has become one of the nation's biggest providers of home oxygen and respiratory therapy by following a simple formula: Use acquisitions and new openings to claim an ever-bigger share of the growing population of Americans with emphysema, chronic bronchitis and asthma.
By following that model, Lincare of Clearwater on Monday reported a 19 percent increase in revenues last year, when it provided services to nearly a half-million patients in 47 states.
But now Lincare's formula for success is in danger.
Medicare, which pays the bills for more than two-thirds of Lincare's patients, is slicing reimbursements for both oxygen and inhalation drugs through provisions in last year's Medicare prescription drug bill.
Oxygen reimbursements, which account for about 60 percent of Lincare's revenues, will be cut by an estimated 10 percent in 2005.
Inhalation drugs, which account for just 30 percent of revenues but an estimated 35 percent of Lincare's profits, will take a considerably bigger hit. Congress is cutting reimbursements for these specialty drugs, which Lincare mixes at its three pharmacies, by 15 percent this year. And though guidelines have not been established for 2005, analysts say the cuts could be as deep as 70 percent.
Such uncertainty has led analysts to take a wait-and-see attitude toward Lincare, whose shares closed Monday at $31.25, down 19 cents. Shares have ranged from a high of $43.98 to a low of $27.80 over the past year.
After the market's close, Lincare released earnings for the quarter ended Dec. 31 of $62-million, or 61 cents a share, on revenues of $302.8-million, compared with earnings of $50.3-million, or 46 cents a share, on revenues of $253.8-million a year ago.
For 2003, Lincare's earnings were $232.1-million, or $2.22 per share, on revenues of $1.15-billion. In 2002, the company had net income of $190.4-million, or $1.73 a share, on sales of $960.9-million.
Though Lincare's quarterly results beat Wall Street's expectations by a penny, analysts said Lincare's shares are unlikely to see much movement until more details on the reimbursement cuts are known.
"It's not what happens in 2004, but what happens in 2005," said William Bonello, a Wachovia Securities analyst who upgraded Lincare's stock from "underperform" to "market perform" in late January, indicating a belief that it will move with the market. "I'm not recommending you go out and buy the stock. I'm just saying the catalyst for downward movement is done."
Bonello and other analysts think if Congress resists Lincare's lobbying and goes through with deep cuts in drug reimbursements, the company will get out of that business and focus strictly on oxygen delivery.
Such a move could have drawbacks. Lincare has not only enjoyed a healthy margin from delivering specially compounded inhalation drugs to a patient's home, it has also gotten a valuable introduction to a patient who is likely to need Lincare's oxygen service as a disease progresses.
Still, Bonello thinks Lincare will exit the business and sell its pharmacies if the cuts go through.
"They think they would lose money at the projected reimbursement, so there's no incentive to stay in the business," he said. "And they're saying, "If it's negative for us, and we drop out of the business, it's going to be a lot worse for people who don't have our purchasing economies.' Lincare is saying that unless the government changes this, there's going to be a problem with access to care."
A spokesman for Lincare declined to comment Monday. But in a news release in late November, after the Medicare bill's passage, the company said the cuts "could eliminate access to these critical respiratory medications by home care providers to more than one-million end-stage emphysema patients across the United States."
Bonello said that such pleas are unlikely to carry much weight with Congress, which is trying to cut generous reimbursements to inhalation drugs at the same time it extends coverage, for the first time, for other prescriptions under Medicare.
One reason legislators may stand firm is that inhalation drugs like the ones compounded by Lincare are available, premixed, at retail pharmacies.
"Will Congress care that patients used to have the drugs delivered and now they have to have somebody go and get them?" Bonello asked rhetorically.
Nor does he think it is likely the cuts will be reversed before 2005.
"Historically, Congress has not acted on a threat of access to care," he said. "They've waited until the problem has manifested itself."
While analysts and shareholders ponder Lincare's future, the company's chief financial officer, Paul Gabos, sold 310,000 shares in mid December, for a profit of $6.8-million. Arthur Henderson, analyst with Jeffries & Co. in Nashville, said Gabos, who still has exercisable options worth more than 1-million shares, retains plenty of stock in the company.
"Paul still has quite a bit of skin in the game," said Henderson, who has a hold recommendation on Lincare stock. "But it doesn't send a great signal to see that sale, especially when the company just had such sizable reimbursement cuts."
