No Acclaim for Accredo

The stock plunges after the company gives investors another dose of bad news.
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Accredo Health

(ACDO)

has taken another turn for the worse.

The specialty pharmacy company announced on Monday that falling reimbursements will significantly

weaken its 2005 earnings. The warning comes just weeks after investors learned that Accredo could soon lose a big chunk of business from one of its major customers.

But Monday's news proved to be even more painful. Shares of Accredo spiraled 24%, setting a 52-week low, in extremely heavy trading. The plunge came after Accredo slashed its 2005 earnings guidance by nearly 20% to between $1.45 and $1.53 per share. Analysts were looking for 2005 profits of $1.88 instead.

Lisa Gill of J.P. Morgan wasted no time downgrading the stock.

"We had expected the company to reduce guidance by 15 cents at most, due

to various factors facing the company," wrote Gill, who lowered her recommendation from overweight to neutral on Monday. "While revenue guidance for 2005 remains unchanged, the weaker EPS guidance symbolizes weaker margins in the company's overall business, which is concerning."

Accredo blamed five major developments for the shortfall. But one of those -- expected to shave up to 20 cents from 2005 profits -- especially bothered Gill.

"We find the impact from the IVIG

intravenous immunoglobulin particularly surprising," Gill wrote, "and do not expect margins for this business to revert to peak levels for the foreseeable future."

Looking ahead, Accredo faces other complications as well. Medicare plans to cut its reimbursements on several major Accredo drugs. MediCal expects to pay less for Accredo's hemophilia treatment. And

Aetna

(AET)

-- currently responsible for 7% of Accredo's revenue -- is scaling back its reliance on the company. It is in the process of partnering with

Priority Healthcare

(PHCC)

, an Accredo competitor, to develop an in-house specialty pharmacy operation of its own.

Raymond James analyst John Ransom expressed concern about Accredo's condition when downgrading the company's stock from strong buy to market perform early this month. He pointed to the Aetna development and the "still-uncertain picture" of future reimbursements as reasons for his move.

But another analyst, Robert Willoughby of Banc of America, followed up just one day later by upgrading the stock from neutral to buy due to its summer selloff. He acknowledged that reimbursement cuts and the Aetna business were "legitimate concerns." He nevertheless predicted a rebound in the shares.

"The effect on the company's valuation, which is down 27% since April, has been overstated," Willoughby declared. "We expect the valuation to improve on greater clarity over its earnings outlook for 2005."

Instead, the stock -- trading then for $28.29 -- is now in free fall. Even news of "record" fourth-quarter and 2004 results failed to cushion the blow.

Accredo's fourth-quarter profits of 40 cents a share, up 15% from a year ago, matched the consensus estimate exactly. But its revenue of $383 million fell slightly short of expectations.

Still, Accredo CEO David Stevens portrayed the quarter as a solid one.

"We are pleased with our record results for the quarter, especially considering the challenges we faced with significant reductions in reimbursement from government payors," he stated. "We are also excited about a number of positive events, including ... our expanded relationship with

Medco Health Solutions

(MHS)

and our announced acquisition of Hemophilia Resources of America."

Accredo expects the latter, by itself, to add 11 cents to earnings in 2005. And Willoughby predicts even greater returns from the Medco deal. Indeed, he suspects that it may prove more valuable than the current Aetna arrangement. He projected this month that the Medco relationship could wind up being worth $400 million annually -- or four times more than the threatened Aetna contract -- as time goes by.

Still, Willoughby has been too optimistic before. For example, he predicted that Accredo would top revenue expectations in the latest quarter. And his $34 target price for the stock, following Monday's plunge, now looks particularly ambitious.

Accredo fell $6.60 Monday to $21.20.