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Tuesday, 04/29/2008 11:57:06 AM

Tuesday, April 29, 2008 11:57:06 AM

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Posted date: 4/28/2008
Analysts Expect Good Revenue Reports from Beckman

Apria, Oxygen Providers Should Weather Slowdown in Hospitals’ Spending, Medicare Cuts

By Vita Reed
Orange County Business Journal Staff

Analysts are highlighting medical diagnostic companies as standouts and predicting strong first-quarter financial results.

Fullerton-based Beckman Coulter Inc. hopes not to disappoint when it releases its earnings this week.

Beckman Coulter, which is considered the last large stand-alone company in its sector, is set to release its earnings Wednesday. Wall Street expects the company to post a first-quarter profit of $42 million on revenue of $669 million.

Diagnostic companies such as Beckman Coulter “(look) attractive to us,” Jeffrey Frelick, a Lazard Capital Markets analyst, wrote in a recent preview note.

In particular, Frelick likes what he calls “pure plays” or potential straight buyout deals in the sector, such as Beckman and Becton Dickinson Inc. of Franklin Lakes, N.J.

With diagnostic imaging companies under pressure, companies such as Beckman, which has nearly 80% of its revenue coming from leases of supplies, chemistry kits and services, are less likely to be affected by hospitals’ budgets, Frelick said in the note.

Frelick said that Beckman’s existing contracts should carry it through a slowdown in spending by hospitals, which most likely will reallocate money to expand or renovate their buildings and buy expensive equipment.

Three years ago, Beckman changed how it accounted for leases of its medical testing instruments to recognize revenue spread out for the life of an equipment contract, rather than booking revenue as a lump sum at the start of the lease.

“The diagnostic industry has weathered many storms,” Frelick wrote.
Even with pricing pressures and lagging reimbursements, hospitals are spending money on new tests and automated instruments because they “have permitted hospital laboratories to address challenges such as labor shortages while increasing productivity,” Frelick said.

In an earlier report, Frelick said that Beckman watchers are looking to see if the company will develop a simple diagnostic machine that runs various tests that would be meaningful to the routine hospital laboratory market.

Concern for Oxygen Providers

A few weeks ago, Apria Healthcare Group Inc., the Lake Forest home healthcare company, said it was confident that it could hold its own this year in the wake of deep Medicare cuts for its mainstay oxygen business.

But some on Wall Street are a bit concerned about what lies ahead.

In a recent report, Wachovia Securities’ William Bonello wrote that he expected chatter surrounding a final Medicare bill to escalate, potentially causing volatility for some healthcare providers’ stocks. Bonello predicted that Congress could draft a bill in late May or June.

Oxygen providers such as Apria and Clearwater, Fla.-based Lincare Holdings Inc. are at risk because the Senate might consider cutting reimbursement for traditional oxygen concentrator machines by as much as 39%, while more than doubling reimbursement for portable oxygen, according to Bonello.

The analyst estimated that such a cut could dramatically hit Apria and Lincare’s earnings in 2009.

Bonello believes that the odds of a nursing home cut, while less than 50%, were still higher than the odds of home healthcare cuts.

“Of the market adjustments proposed by MedPAC, we believe that skilled nursing facility payments would be one of the first to be tapped if a bill cannot be funded through Medicare Advantage (health plan) and oxygen cuts alone,” he said.

Irvine-based Sun Healthcare Group Inc., Skilled Healthcare Group Inc. of Foothill Ranch and Mission Viejo’s Ensign Group all are part of the nursing home sector, although Bonello only mentioned Louisville, Ky.-based Kindred Healthcare Inc., which has 225 nursing homes, as an example of a company that could be affected by cuts.

Bits and Pieces:

Edwards Lifesciences Corp., the Irvine-based heart valve maker, said longtime board member Vernon Loucks Jr. is retiring, effective May 31. Loucks is chairman of Aethena Group LLC, a Chicago firm that invests in healthcare companies. He’s served on Edwards’ board since its spinoff from Baxter International Inc. eight years ago … BioLase Technology Inc., an Irvine maker of dental lasers, launched its Endolase Root Canal Therapy System. Endolase allows general dentists and endodontists to perform root canal surgeries in a faster fashion … Boyd Hendrickson, chief executive of Skilled Healthcare, will speak at Bank of America’s healthcare conference next month in Las Vegas … Children’s Hospital of Orange County said the clinical documentation team at its CHOC at Mission facility received an honor from Advance for Nurses magazine. The nursing team created and implemented electronic medical records at the hospital.