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Apria Hammered on Slowdown

Apria (AHG), a major provider of home health care services, has landed in a sickbed of its own.

The company saw its stock tumble 15% to a two-year low after warning of a dramatic slowdown in revenue growth and a looming shortfall in full-year earnings. It blamed three separate businesses -- durable medical equipment, infusion therapy and respiratory medications -- for the big disappointment.

Apria said that revenue growth had slowed to just 1% in the third quarter and will likely remain under pressure for the remainder of the year. As a result, the company now expects to report full-year revenue growth of no more than 3% -- roughly half its previous estimate -- and a profit of between $1.68 and $1.72 a share, instead of the $1.90 that Wall Street had been anticipating.

Even before Apria's warning, however, some experts had expressed concern about at least one of the company's troubled business lines. Specifically, they noted that the federal government could soon cut the fees it pays to companies such as Apria for dispensing respiratory drugs to Medicare patients. Moreover, they noted, the proposed cuts would come on top of sharp reductions in the amount the government pays for the respiratory medications themselves.

"In fiscal year 2005, [the Centers for Medicare and Medicaid Services] reduced the drug reimbursement for respiratory drugs by roughly 85% but increased the monthly dispensing fee from $5 to $57 at the urging of the industry," said Citigroup analyst Matthew Ripperger. But a new government report, published in late September, "provides additional support to the government's claim that the $57 dispensing fee is too generous."

To be sure, Apria competitor Lincare (LNCR) stands to lose the most. Ripperger estimates that every $10 reduction in dispensing fees would shave a full dime from the company's bottom line. Still, he has warned, Apria faces some exposure as well. Now, however, the company itself has slashed its outlook weeks before the government is even expected to reach a final decision on that particular issue.

Early Warning

One expert actually downgraded Apria two months ago in anticipation of bad news.

Wachovia analyst William Bonello cut the stock from market perform to underperform because he felt an earnings shortfall coming. Indeed, Bonello suggested that Apria's acquisition-related growth has been masking the company's "deteriorating base business" for more than a year. Even without Medicare cuts, he said, the company's nonacquired businesses weathered a second-quarter drop in earnings before interest, taxes, depreciation and amortization. Going forward, he predicted, the company will fall short of its profit goals and see its shares come under pressure as a result.
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