A falling knife?

ORLANDO, Fla. - Rotech's share prices have plummeted since the start of 2006 and analysts are baffled as to why the company can't find its footing. Since January, Rotech's share price has plunged 93%, from $16.40 to $1.40 as of Aug. 25. The company reported losses of $433.7 million for the first six months of 2006, compared to a loss of $1.9 million the previous year. "I'm at a loss to explain what's going on there," said healthcare consultant Schuyler Hoss. "They have not hit the numbers they promised the investment community and they are taking a pounding as a result." Multiple reimbursement cuts, changes to budesonide billing codes and payment methodology, and a violation of its debt covenant have resulted in downward revisions of both revenue and earnings, said Tyson Gregor, an analyst with Boston-based Provident Health Partners. "These hardships are causing concerns about internal operations and the company's future ability to pay off its interest expense and generate positive cash flow," said Gregor. "Any additional headwinds would put a serious strain on the company's liquidity." With its heavy dependence on respiratory--87.5% of net revenues for the first half of 2006--Rotech is highly sensitive to reimbursement changes, say insiders. A new billing code that went into effect Jan. 1 reduced reimbursement for compounded budesonide from $4.40 per dose to 20 cents per dose, which the company blamed for a 55% drop in first quarter shares. "Everybody else saw that coming six months ahead of time and changed," said Rick Glass, president of Steven Richards & Associates. Rotech's compounding woes were exacerbated by an Aug. 9 letter from the Food and Drug Administration warning the company to stop compounding medications. The company disagreed with the FDA but said it would begin switching over 30,000 patients. "I think it looks bad they rolled over like that," said one industry watcher. "I think they should have taken a stand." There is speculation among industry watchers that Rotech could file bankruptcy or go on the block, but with its liquidity restraints limiting its growth ability, finding a buyer could prove tough, said Gregor. Bob Leonard, an M&A associate with Pittsburgh-based Braff Group agreed Rotech could have trouble finding a buyer. "There's an old saying in the stock market: Never try to catch a falling knife," said Leonard. "This one might be a falling knife."