News Column

Ahead of the Bell: Analyst drops Centene to 'Sell'

June 3, 2014

The Associated Press

Centene shares hit another all-time high price Monday and have climbed 29 percent so far this year, but Citi analyst Carl McDonald says it is time to sell the Medicaid coverage provider's stock.

An expensive new hepatitis C treatment and the company's expansion into new markets are among the elements McDonald expects to strain future earnings. He lowered his rating on the shares to "Sell" from "Neutral."

McDonald also said in a Monday evening research note that some of the stock's recent growth was fueled by speculation about a possible takeover by the Catholic health care system Ascension Health, and Ascension has squelched that talk.

St. Louis-based Centene Corp. runs Medicaid programs in several states. Medicaid is the state and federally funded program that provides health coverage to poor and disabled people.

Health insurers started warning earlier this year about the high, $1,000-per-pill cost of the new, breakthrough hepatitis treatment Sovaldi from Gilead Sciences Inc.Centene told analysts it booked more than $7 million in costs related to new hepatitis C treatments in the first quarter.

McDonald expects use of those drugs to double in the current quarter.

"Centene has built the expected cost of Sovaldi into earnings guidance, but given the acceleration in (prescriptions) in the second quarter, it raises the obvious question of whether the company incorporated a big enough increase in spending," McDonald wrote.

The insurer also expanded its presence in Florida and added more than 118,000 customers in California over the past year. Enrollment gains bring in more revenue, but McDonald also noted that new markets "are almost always unprofitable."

Insurers are typically limited on the care management they can do after entering a market. States often require them to let patients initially continue to see doctors that may not be in their provider network, or an insurer may have to cover a drug that isn't in its pricing formulary.

McDonald said he's concerned the insurer hasn't been conservative enough in estimating the losses it will incur.

A Centene spokeswoman did not immediately return a call seeking comment Tuesday morning from The Associated Press.

Centene shares closed at $75.69 on Monday after reaching their latest all-time high of $75.90 earlier in the session. The stock has set several record highs this year.

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Source: Associated Press

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