Healthways' weak outlook sends its shares tumbling

By Varsha Tickoo

BANGALORE (Reuters) - Healthcare management provider Healthways Inc (HWAY.O) forecast weak earnings for the quarter ending November 30 due to problems plaguing some contracts, sending its shares tumbling as much as 26 percent to their lowest level in nearly five years.

The quarter reflects a sequential decline in revenue due to some contract renegotiations, reduced revenue from an ending contract, and small contract losses due to health plan consolidation, Healthways' Chief Executive Ben Leedle Jr said in a statement.

Healthways works with health plans, employers, hospitals and governments to provide programs that enables people to improve their quality of life by avoiding disease and manage illness, if any, including several high-risk conditions.

But rapidly rising healthcare costs and uncertainty about contract renewals are pressuring the company.

"In an environment in which medical costs continue to rise and managed care and corporate executives scrutinize expenses and minimize discretionary investments, Healthways' high-priced services stand to lose ground," Jefferies & Co analyst Arthur Henderson said in a note to clients.

"Should management opt to reduce prices to compete more effectively, it will likely be at the expense of margins and earnings," he said, and slashed his rating on the company to "underperform" from "buy." The price target on the stock was cut to $18.50 from $40.

Healthways also changed the end of its financial year to December 31 from August 31 to better align itself with customers' business cycle.

"The changed fiscal year is a good move. August has been confusing for most investors," Dougherty & Co analyst Brooks O'Neil said in an e-mail. He too pointed out the pricing pressures looming over the company.

Healthways expects to earn 34 cents to 37 cents a share in the three months ending November 30. Analysts on average expect earnings of 46 cents a share, before special items, for the quarter, according to Reuters Estimates.

The company backed its 2008 outlook of $1.50 to $1.55 a share in profit and $720 million to $740 million in revenue. Analysts expect earnings of $1.52 a share on revenue of $735.8 million, before items.

Healthways said it will report results of operations for the financial year ending August 31 in October and for the three months ending November 30 in December.

The company plans to provide outlook for 2009 during the first quarter of next year.

Shares of Nashville, Tennessee-based Healthways were trading down 21 percent at $19.90 Monday morning on Nasdaq. They hit a low of $18.57 earlier in the session.

(Editing by Pratish Narayanan)