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2001 BW 50

SPRING 2002

STREET WISE

WellPoint: A Health Insurer Flexes Its Muscles
It's pushing unorthodox ways to cut costs -- including taking on drugmakers via the FDA -- and it's getting healthy results


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Last year, WellPoint Health Networks (WLP ) stunned the pharmaceutical industry by petitioning the Food & Drug Administration to move the prescription allergy medications Allegra, Zyrtec, and Claritin to over-the-counter status. Although an FDA advisory panel agreed with WellPoint's argument -- that if the drugs are truly as safe as their ads proclaim, patients shouldn't need prescriptions and insurers shouldn't have to pay sky-high prices for them -- the agency didn't act on the petition.

Still, Thousand Oaks (Calif.)-based WellPoint, No. 28 on this year's BusinessWeek 50 list of top-performing companies, had made its point. On Mar. 8, Schering-Plough (SGP ), the maker of Claritin, announced that it would begin selling the popular drug over-the-counter this December, when its patent expires (see BW Online, 3/21/02, "Schering Puts on a Marketing Clinic"). If the makers of competing drugs follow suit, WellPoint CEO Leonard D. Schaeffer estimates that his company will save $90 million a year in prescription-drug costs and unnecessary doctor visits.

Prior to WellPoint's petition, it was unheard of for an insurance company to request that the FDA change a drug's marketing status, but that didn't deter Schaeffer from charging ahead. In fact, WellPoint, the nation's largest operator of Blue Cross health-insurance plans, has thrived by swimming against the tide. Schaeffer stayed away from providing Medicare coverage -- a decision that proved smart when the government capped reimbursement rates in 1997. He avoided pursuing growth through rapid acquisitions, a strategy that analysts say has backfired on large competitors such as Aetna (AET ). Instead, he focused on devising innovative ways to cut costs and attract more members to WellPoint's health plans.

REMARKABLE RUN.  The reward: More than 20% annual profit growth over the last three years. In 2001, WellPoint's revenues rose 35%, to $11.6 billion, and net income jumped 21%, to $414.7 million. The stock has blown past analysts estimates, hitting an all-time high of $131.25 in February. To attract more investors, the company will split its shares 2-for-1 on Mar. 15. And despite its remarkable run already, analysts say WellPoint is a stock that long-term investors should consider.

WellPoint is benefiting from a few key factors that will fuel its long-term growth. The labor market is on the upswing, erasing fears that WellPoint could see membership in its plans drop during a protracted recession. Its financial strength has allowed it to dip its toe -- slowly and carefully -- into the acquisition game. In 2001, it acquired Blue Cross Blue Shield of Georgia for $700 million in cash. Earlier this year, it picked up Missouri-based RightCHOICE Managed Care for $1.3 billion in cash and stock.

The additions helped WellPoint increase its membership base from 10 million a year ago to 12 million. Next year, pending regulatory approval, it could add an additional 3 million members with its planned $1.3 billion acquisition of CareFirst BlueCross BlueShield, a plan that serves patients in Maryland, Delaware, and Washington, D.C.

HEALTH-CARE FEAR.  So why do WellPoint shares continue to trade at a discount? Its price-earnings ratio of 19.2, as calculated using its past 12 months' earnings, is far below that of the Standard & Poor's 500: 31.45. Analysts say investors may be staying away from the health-care sector altogether because of troubles experienced by companies like Aetna and WellPoint's neighbor, PacifiCare (PHSY ). Santa Ana (Calif.)-based PacifiCare has seen its stock lose half its value in the last year, as profits have been pummeled by rising costs and falling Medicare reimbursements.

"People are frightened that this is a volatile business," says John Szabo, an analyst for CIBC World Markets. "But WellPoint has a good track record of consistent growth and stability in earnings. I don't think it deserves a low valuation."

That's not to say WellPoint isn't facing any risks. Although it has stayed away from the Medicare trap, it could still fall victim to rising health-care costs. Prescription drug prices, which are increasing more than 14% each year, are a particular problem. That's why Schaeffer is going off the beaten path -- to places like the FDA -- to fight rising prices.

BRAND-NAME AVOIDANCE.  Last year, WellPoint also sent doctors in its network samples of generic Prozac to give to patients requiring antidepressants. Peddling generics was an unusual move for an insurer, but Schaeffer figures it's in his company's best interest to try anything that might keep patients away from pricey brand-name prescription drugs. "We want to encourage physicians to use generics," Schaeffer said upon launching the program. "It could help us substantially reduce our costs."

The company has adopted other innovative ways of shielding itself from rising costs. While most plans guarantee employers a fixed one-year premium, WellPoint reserves the right to raise rates at any time for individuals and small businesses, with 60 days' notice. The company also offers "hybrid" plans that are as affordable for employers as HMOs but allow members more flexibility in their use of health-care providers, provided they pay more out of their own pockets. More than two-thirds of WellPoint's customers have opted for these nontraditional health plans.

All told, analysts expect that WellPoint's revenues will grow from $11.6 billion last year to $14.8 billion this year, with earnings per share of $7.78, up 24%. Investors looking for a vaccine to shield their portfolios from the volatile swings of an uncertain health-care sector could find WellPoint a healthy choice.


MARCH 25, 2002



By Arlene Weintraub in Los Angeles

Edited by Beth Belton

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