Magellan shares fall with loss of major contract

Shares of Magellan Health Services Inc. tumbled Monday after the company announced the impending loss of a major contract to provide behavioral health management services for an insurer.

THE SPARK: The Avon, Conn., company said in a statement that the unidentified customer decided to work with another vendor and won't renew a contract that ends Dec. 31, 2013. Magellan said the contract brought in $144.5 million in revenue over the first nine months of 2012.

Magellan said the end of the contract will not affect its forecast for 2013. The company said Dec. 11 that it expects to earn between $3.22 and $3.85 per share on revenue of $3.56 billion to $3.74 billion in 2013.

Analysts expected earnings of $3.88 per share on $3.63 billion in revenue, according to FactSet.

THE BIG PICTURE: Magellan manages behavioral health, radiology, specialty pharmaceutical and public sector pharmacy benefits programs. It works for health plans, employers and government agencies.

The company also said Dec. 11 that Dr. Rene Lerer will step down as CEO on Tuesday but will remain executive chairman. Board member Barry Smith will become CEO.

THE ANALYSIS: Citi analyst Carl McDonald said in a Monday research note that the contract is with Horizon Blue Cross Blue Shield in New Jersey.

Magellan representatives did not return a phone call or respond to an email request seeking comment.

McDonald estimates about $193 million in 2012 revenue for Magellan from Horizon Blue Cross, and he noted that the contract loss at the end of next year won't pressure Magellan's earnings until 2014. He said Magellan can still grow its earnings before interest, taxes, depreciation and amortization by then if it scores a big contract win.

"There's enough business out to bid, particularly in the Medicaid behavioral health realm, that Magellan seems likely to win something," the analyst wrote. "But timing will be an issue, as new contracts tend to be a lot less profitable in the first 12 months of operation."

SHARE ACTION: Down 4.4 percent, or $2.30, to $49.45 in afternoon trading. The stock has ranged from $40.24 to $56.58 in the past year.