Health Care and Insurance

Questions follow Standard into new arena: Company boosts health services with several purchases

August 22, 2005

Standard Management Corp. followed the sale of one of its staple insurance businesses with a flurry of purchases this summer aimed at shifting its focus to health care services.

Despite all the change, some constants remain for the struggling Indianapolis holding company: seven-figure quarterly losses and questions about its new direction.

Standard completed the sale of Standard Life Insurance Company of Indiana to Louisville-based Capital Assurance Corp. in June for $79 million, then wasted little time spending some of the cash from that deal to beef up U.S. Health Services Corp., the subsidiary it launched in 2002.

In July, Standard announced three deals in short succession. The company trumpeted the purchase of Seattle-based Rainier Home Health Care Pharmacy Inc. for $12 million, Nashville-based Precision Healthcare Inc. for $2.5 million, and New Castle's Long Term Rx Inc. for another $2.2 million.

Those companies bring in combined annual revenue of nearly $40 million, said Ronald Hunter, Standard Management's chairman, CEO and president.

"The continued execution of our business plan, combined with current operations, should generate annualized revenue of approximately $60 million by year end 2005," Hunter said in a news release.

Standard representatives declined further comment.

On the other side of the ledger, the company earlier this month reported a $5.4 million loss for the second quarter, the eighth straight quarter in which the company recorded a loss of more than $1 million.

Hunter said last year the company needs to spend money to make money with its new venture. U.S. Health Services and its holdings primarily distribute pharmaceutical products to a range of clients, including home health care agencies, assisted living facilities and the veterinary care industry.

He said last fall the company's losses can be chalked up to building the infrastructure needed for the health venture to prosper.

However, the latest quarterly numbers and Standard's recent moves still raise plenty of questions about the new direction. On one hand, the company appears to be buying the expertise it needs to succeed in health care, according to George Farra, principal with Indianapolis-based Woodley Farra Mannion Portfolio Management Inc. On the other, Standard's second-quarter statement shows nearly $39 million in long-term debt on the balance sheet.

The company is so highly leveraged it's hard to see when profitability will kick in, Farra said.

While Hunter predicts his company should be capable of generating $60 million in annual revenue by year's end, Farra noted that health care service profit margins can be tight. Expenses could eat up most of that $60 million.

"You're a wholesaler, and if you make 1 percent, 2 percent you're doing real well," he said.

And some question the $60 million estimate. Mark Foster, chief investment officer for Columbus, Ind.-based money manager Kirr Marbach and Co., noted that in announcing the closing of the Standard Life deal in June, Hunter predicted annual revenue in the $80 million to $100 million range by the end of 2005.

"There's just too many unanswered questions," Foster said. "I mean there's just too much of the business in flux to be able to really tell what they're capable of earning."

Perhaps the best indicator of the company's potential lies in a relatively simple measure. Farra noted that Standard's stock price has dropped more than 50 percent from a 52-week high of $4.45 in February. The stock closed at $2.15 Aug. 17.

"At $2, there is not a resounding vote of confidence that this is going to work out," he said. "When you get down to a $2 stock, you're talking highly speculative."
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