Question & Answer

Tuesday, April 30, 2002

Analyst: HME prospects have never looked better
NEW YORK CITY — As managing director and group head of Banc of America's healthcare equity research, Todd Richter has his microscope trained on Lincare and Apria. With news about Lincare (its stock being downgraded), Rotech (emerging from bankruptcy) and American HomePatient (attracting institutional investors) popping in recent months, HME News got Richter on the horn for his take on the nationals and the home medical equipment industry at large.

HME: What is your outlook for Lincare and Apria?

Todd Richter: Fundamentally very positive. The stocks have not performed particularly well for a variety of reasons, principally due to uncertainties regarding AWP reimbursement. Stocks tend not to perform well when there are underlying uncertainties, but I don't believe the uncertainties will result in a major earnings issue for either company and certainly not one over the near term. Consequently, I am very positive on both, and both have posted terrifically strong results for the last couple of years.

HME: You don't see a reduction in the AWP as significantly biting into Apria and Lincare's earnings power?

TR: Relative to the reimbursement cuts in 1997, it is going to be a mosquito bite, a pin prick. It is an issue. Clearly delivering albuterol and other respiratory medications is a profitable line of business for Apria, Lincare and other companies. And any reduction in reimbursement will crimp profitability a little bit, but it is not that big a part of either companies' revenue, 10% or so, so I don't see it as a major issue.

HME: Are you at all phased by the call for national competitive bidding for HME in President Bush's 2003 budget proposal?

TR: Point one: There really is not a proposal for competitive bidding. The president said he'd like to see it, but there really is not a mechanism by which it would be implemented. Point two: Both Apria and Lincare were enormous winners in the demonstration projects in Polk County and San Antonio. It resulted in huge market share gains for both Apria and Lincare who were able to get patients without the marketing expense. Their market shares in those two communities more than made up for the modest discounts in pricing.

HME: What do you look for from Apria and Lincare on the acquisition front?

TR: Both companies will continue to do just what they are doing. Apria is relatively new back on the acquisition trail. Lincare has consistently been buying between $55 million and $80 million of business per year, and I don't see any change there.

HME: Two analysts recently downgraded Lincare's stock, following its acquisition of a large respiratory pharmacy. Was that just an over reaction or maybe giving too much weight to AWP worries?

TR: The downgrading of stock is not a mark of fundamentals. It simply says that Lincare doubled down its bet against an AWP reimbursement cut, which they did. Therefore they increased the magnitude of the uncertainty. I think they are simply saying that they would prefer not to own the stock until they get greater clarity on the magnitude and timing of an AWP cut. I take a different view. I believe the time to buy stock like Lincare and Apria is when the uncertainty is greatest. I view the acquisition as a positive for the stock. Not a negative.

HME: What is your outlook for the HME market in general? Do you buy into the whole belief about growth being inevitable because of graying Baby Boomers?

TR: I've been an analyst for 21 years, and I am more positive on the prospects of the healthcare service field driven by rising utilization than at any point in my 21 years.

HME: So you think there will be tremendous growth?

TR: It is going to play out. That is fact, intractable fact.

HME: What about reductions in reimbursement and payment issues related to managed care? Won't they rein in this projected growth?

TR: They will, but I don't think they will overwhelm the growth opportunities.

HME: Putnam Investments just bought 6.9% of American HomePatient's stock. Does that indicate Putnam thinks AHP is primed for a turnaround?

TR: Not necessarily. I don't view what investors do as a vote of confidence or not. They are betting that the stock will go up. When they sell, it is not a vote of non-confidence. They've done what they are supposed to do, which is make money. They think the stock is undervalued. That's all it means." HME