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The Daily News of Los Angeles

WellPoint Health Networks Inc. and Anthem Inc. posted profitable second quarters Tuesday, a sign analysts said that both companies are still highly capable of functioning on their own should their proposed merger flop.

The quarterly results arrive a day after WellPoint said it plans to sue California Insurance Commissioner John Garamendi, who blocked a portion of the company’s $16.4 billion merger with Anthem Inc. The companies would not clarify on what grounds they would be suing the commissioner, although Anthem and WellPoint said they believe the California regulator abused his power.

“He clearly went beyond his legal authority arriving at the decision he announced,” said Ed West, a spokesman for Anthem. The Indianapolis- based company expects to file a lawsuit in California later this week.

Despite merger woes, the companies continue to post profits. WellPoint reported a second-quarter net income of $299.9 million, or $1.86 per share, compared with $224.5 million, or $1.49 per share, in the same period a year ago. The health care company beat estimates by 4 cents, according to Thompson First Call.

Anthem reported second-quarter net income of $237.9 million, or $1.66 per share, versus a net income of $177.3 million, or $1.25 per share, in the like quarter a year ago. Anthem’s earnings beat analysts’ consensus estimate by 2 cents.

“I’ve been continuing to value these companies as independent companies. And if the deal does not go through, these companies are well- positioned as independent entities,” said Dr. Curt Morrison, an analyst with Morningstar in Chicago.

Shares of WellPoint and Anthem have fallen in recent days, suggesting that their values are now more aligned with the companies’ financial performance. WellPoint shares declined $6.18, or 5.9 percent, to close at $99.03 Tuesday on the New York Stock Exchange, while Anthem shares fell $6.38, or 7.2 percent, to close at $81.78 on the same market.

Both companies continue to boost their membership levels. Anthem’s medical plans saw an 8 percent increase, or 891,000, to more than 12.6 million during the quarter. WellPoint‘s medical membership was 15.5 million, compared with 14.1 million at the end of the second quarter last year.

Morrison said though the companies’ performance is strong, he is concerned about Anthem’s cash flow. “It appears earnings and operating margins were a bit ahead but cash flow was way behind,” he said. “The quality of the earnings is not quite as strong now.”

Regardless, Anthem increased its earnings expectations for the year to $6.95 to $7.05 per share, from an earlier expected range of $.90 to $7 per share. WellPoint also raised its earnings forecast for the year to $7.55 a share from $7.50 a share previously. WellPoint is expected to hold a conference call regarding its results today.

Analysts said suing the insurance commissioner could further thwart WellPoint and Anthem’s stock performance. The lawsuit is likely to face an uphill battle because of the vague statutes that dictate Garamendi’s power.

“Filing a lawsuit is a way for Anthem and WellPoint to buy time while they weigh their options. The only shot they have at getting final approval is significantly reducing the golden parachutes that executives will receive if the merger goes through,” said Jerry Flanagan, lead health care advocate with the Foundation For Taxpayer and Consumer Rights in Santa Monica.

At issue is Garamendi’s decision to block Anthem from acquiring WellPoint‘s Blue Cross Life and Health subsidiary. Representing about 10 percent of Blue Cross of California’s business, Anthem said it would rather fight to keep BC Life instead of simply carving it out of the deal.

“The original deal called for acquiring all of WellPoint, and that is the deal we are focusing on,” West said.
Contact the author Evan Pondel at: (818) 713-3662 or [email protected]

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