By Pete Gallo
Many hedge fund investors have long been bullish on health care. And it’s easy to see why, given the graying of baby boomers. At the same time, analysts are working overtime, puzzling where the best opportunities will arise next, given the realpolitik of Washington’s efforts to quash runaway Medicare costs.
While weighing risk versus reward remains tough for given portfolio picks, investment teams like Andreas Halvorsen’s at Viking Global Investors seem confident in their own track record in the arena. Viking recently extended its reach into the sector with a sizable bet on Health Management Associates, an owner and operator of hospitals and clinics in 15 states with about 29,000 employees.
How big a bet? An August 2 filing with the Securities and Exchange Commission showed Viking owns 13.2 million shares, representing a 5.2% stake in the Naples, Fla. firm. The hedge fund began building its position in NYSE-listed HMA in the first quarter and has added an additional 5.9 million shares since the end of March.
The stock had been a solid, though not stellar, performer for much of 2011. At the start of the first quarter, shares were trading at about $9.50, hitting $11.17 in the first week of June. Following that, the stock gradually slumped, eventually hitting about $8.70 on August 2, which made it seem like a buying opportunity for Viking.
The stock slipped even further during the general market declines of early August, trading at $7.50 as of August 12. Still, even at that depressed level, HMA represented roughly a $100 million position in the Viking portfolio.
Viking’s big bet may say a lot about the risks and opportunities of investing in health care right now. Sure, HMA was beaten up to a large degree simply because the sector index fell on general market weakness. Many investors on the Street are wondering what Washington’s budget trimming (and possible future trimming) of Medicare spending might mean. In HMA’s case, an analyst at the Argus Research Group on August 5 cited Medicare concerns as the stock was downgraded from a “buy” to “hold.”
But other factors make Viking’s bet on HMA a bit precarious. Only two days after SEC records showed the hedge fund had upped its stake in the firm, HMA officials announced that the company had been hit with not one but two federal subpoenas. HMA said it was cooperating fully with the inquiries.
One involved doctor referrals in a joint venture program. A separate probe focused on “emergency room management” and operations, which included scrutiny of even the medical record software being used by HMA. According to the company’s filings, the first subpoena was received on May 16. The other followed a few weeks later. Still, when news of the federal probe broke on August 4, shares tumbled more than 6% to $8.20.
Surely, Halvorsen’s team isn’t happy that its charge into HMA has been inaugurated by this stroke of bad luck. But the fund must have assessed such a risk, as it’s well known that HMA has been operating joint ventures since 2009.
In fact, much of the company’s growth has been driven by joint ventures. During the second quarter, net revenues grew 13% to $1.4 billion with same-hospital revenues jumping by more than 4%. This was likely not missed by Viking or other investors who could see that HMA has a model to fund its expansion organically. The company has been focusing on rural and semirural regions that lack the modern and large-scale hospital facilities found in metropolitan settings. And here, HMA has also been active of late in acquiring new hospitals to operate.
For instance, SEC filings show that on June 30, HMA entered an agreement to purchase assets of Mercy Health Partners, which is owned by Catholic Health Partners, a nonprofit regional health care system with facilities in Ohio, Kentucky and Tennessee.
It’s a respectable-size deal. Mercy Health Partners has annual revenues of $660 million and operates seven hospitals in Tennessee with a combined 1,300 beds, according to filings. The deal, which is expected to come in at $500 million, still must be approved by U.S. regulators as well as get a final nod from the Vatican.
Regulatory and macroeconomic risks abound. But deals like the one with Catholic Health Partners suggest that HMA’s efforts to create regional hospital networks have strong potential. And although it will likely continue to draw regulatory scrutiny, HMA doesn’t seem to be lacking in its ability to find new opportunities for joint ventures that involve operating leased facilities either.
Whether HMA’s model can continue to match or exceed its current level of revenue and business growth is not clear. But for the moment, considering its $100 million bet, Viking thinks it can.
