News Column

Molina Healthcare's CEO on the Economy and the Value of a Nickel

June 18, 2008

Michael Bowker--Managing Editor, Hispanic Business Magazine

Dr. J. Mario Molina
Dr. J. Mario Molina

In 1980, Dr. David Molina formed a company to serve low-income patients in California. Today, Molina Healthcare, under the stewardship of Dr. Molina's son. Molina Healthcare has ascended to the top of the health care sector of the HB 500, and into the second position overall. Now operating in nine states, the company's revenues rose 25 percent from 2006 to 2007, to a total of $2.5 billion. Yet, like many companies in the health care sector, Molina Healthcare is facing the dilemma of lagging stock prices.

Recently, we had a chance to talk to Dr. J. Mario Molina, the company's personable CEO, about how the company is meeting that challenge and others. He also talked candidly about opportunities for new growth, the effects of presidential election, the company's search for new investors, and the advice he gives to young, Hispanic entrepreneurs. He provides an inside look into one of the HB500's most successful companies.

HB: How did the company perform in '07?

2007 was very good for us, better than we anticipated. It was an extension of 2006, which was also a good year. In fact we've had 11 consecutive quarters where we've met or exceeded Wall Street expectations.

HB: Will 2008 present new challenges?

Yes, without a doubt. We're facing a slowing economy, even in the health care sector. Specifically, California's budget problems are going to have a negative effect on us. The state plans to cut back its Medicaid Program in the second half of the year. We are characterizing those cuts as costing us about 10 cents per share. Our shares are at about $2.35 per share right now, so we anticipate it will cost us less than five percent. Overall, we estimate it will cost about $10 million in total revenue in '08. That's a small overall impact on our total revenue, which is expected to be about $2.9 billion, but it does have a greater impact on our profitability.

HB: Although the health care sector seems to be faring better than most in today's economy, is it facing its own challenges, such as the devaluation of stock?

Yes. On the whole, health care is doing well as a sector. It is seen as independent of the economy because, while people can put off buying a new car or new home, you can't put off health care. But, while investors see putting money into the health care industry as a safe move, that isn't true for the HMOs. In fact, the HMO sector has the lowest stock valuation in 10 years. Our stock has dropped 40 percent this year, and that's true in the entire HMO sector. The bigger companies say they are having a difficult time this year because costs are going up while stock prices are going down. You asked me what is the most difficult lesson I've learned in dealing with this economy, and I'd have to say it is the fact that while our company has performed very well, our stock price is not reflecting that. The lesson is that unfortunately sometimes company performance does not correlate directly to higher stock prices. We beat our earnings estimate by five cents last quarter only to see our stock price drop. It's frustrating.

HB: Is there a silver lining to the stock devaluation?

If there is, it is in the fact that we just announced we are repurchasing shares because we think they are a great buy right now. We are buying back about $30 million in shares. We have excess cash. With interest rates falling to a point where we are getting only 3.1 percent on interest income and with our stock being undervalued but growing at an historical rate of 15 percent per year, it was easy to determine that this was the most economical use of our cash.

HB: What effect is the U.S. presidential election having on the sector?

It is weighing heavily on sector stock prices. People are nervous about the future, and investors have backed away from stocks like ours that depend on government contracts. They are nervous despite the fact that these government health care programs have been around since 1965. We have always provided health care for low-income people, and I don't see any long-term diminishing of the need for our services. We expect things to rebound after the election. The outcome, ironically, won't have much of an effect on us. Our company does well under Republicans and Democrats. It's one of the situations where if you continue to provide a better product at a lower cost you'll be in good shape regardless of politics.

HB: With your stock prices falling, what are you doing to attract investors?

We've been very active. The large investor banks hold big conferences, and we participate in those. We go out and meet with investors, and every quarter we hold large conference calls with investors and potential investors where we talk about earnings. There are significant investor meetings in New York at the end of May, and we actively take part in those. Those are the primary ways we get the word out, but it is difficult. As a Fortune 1000 company, we are in competition with 999 other companies for investors. Because we are relatively small, we don't attract a lot of media attention, so we have to proactively tell our story.

HB: Who are your biggest investors?

Our biggest investor is the family, and thank goodness it isn't hard to convince them of the value of our stock. The family owns about 53% of the shares right now, but that will go up when we repurchase the shares.

HB: Where do you see the primary opportunities for growth in 2008 and beyond?

First, we are looking at geographic expansion. We are now in nine states, we just entered Missouri, and we have a couple of new states in mind for '08. At the same time, we are also looking at a new demographic. We will be serving low-income seniors, which is a market overlooked by HMOs right now. We feel this is a great opportunity for us. Ultimately we plan to have Medicare products for seniors in every state. The way we look at it is that we're taking care of young people and children, and now we're including the grandparents.

HB: Has the poor economy forced you to change your business model?

No, we really haven't changed it, but we have continued to focus hard on controlling cost. We aren't like other businesses, which tell the hospitals, etc. what they are going to charge. The government tells us how much it will pay us, not the other way around. So, for us, it is all about managing our business costs. My father once told me this is a business of nickels. That's something I've never forgotten.

HB: From nickels to cyberspace, how important is the Internet to your business?

We are starting to use it more and more. We use it with hospitals and doctors to transfer information, in terms of claims. Its use still isn't high yet inside the company, but we see a lot of use for it in the future. For example, if you lose your health benefits card, you can call health plan to get a new card, or now you can go on line and get it yourself. We also see it playing a big part in disseminating health education, but the truth is we are behind the curve in utilizing its potential.

HB: If you had a piece of advice for young Hispanic entrepreneurs, what would it be?

I've thought a lot about this since you asked about it earlier, and I've come up with four things. First, you have to believe in yourself. If you don't believe in yourself, nobody else will. Second, be persistent. My father failed at several businesses before he founded this one. Persistence is really important in every aspect of your business. Third, it is critical to understand that people don't make it on their own out here. Everybody needs help. We all need other people to talk and consult with, so it is important to cultivate friendships and seek out people who can help. Finally, once you become successful, you have an obligation to help others. It is okay to focus on your own success, but once you achieve it, you need to give back.

HB: What lessons did you learn early in your life that helped your career?

What you traditionally learn in business school is that it takes money to make money, that you have to have a fancy business plan to gain get investors, and that you should expect to lose money for a time before you begin to make it back. Frankly, most successful entrepreneurs don't do any of these things. They bootstrap themselves up, usually don't have much money, and they are profitable right from the beginning. In fact an important lesson our father taught us was that we should avoid debt as much as possible. We have a small debt now, but we had none most years. Once you get yourself in debt, you are not working for yourself anymore, you are working for the bank. It's ironic that we are not looking for capital, other than through stock sales, but today we have banks willing to loan to us. When we first started, and for a long time, nobody would give us money. That changed when we went public. Most public companies, of course, have better access to capital. That makes it even more important that you steer clear of borrowing money, just because it is available.

HB: What do you do to relax when you aren't working?

I am on the board of a couple of nonprofit boards, and I like working with them. I also like to collect books, old medical books, because I have a deep interest in the history of medicine. Sometimes I buy them off the Internet, but I know certain people who specialize in historic medical books. I also really enjoy going to book fairs, where you can sometimes find a rare edition.

Source: (c) 2008. All rights reserved.

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