Molina's leadership shuffle may hint at future sale

Though Molina Healthcare ousted its CEO and CFO on Tuesday, citing the company’s lagging financial performance, later in the day it reported encouraging results for the first quarter of 2017.

The insurer announced that its net income per diluted share was $1.37 for the quarter. Excluding $0.84 of that attributable to a one-time benefit from the Aetna termination fee—as Molina was set to buy its divested Medicare Advantage assets before its merger with Humana broke up—Molina’s cash earnings per share beat Wall Street expectations by $0.05, Leerink Partners analyst Ana Gupte wrote in a research note.

The company’s pretax income rose from $64 million in Q1 2016 to $131 million so far this year.

“Today’s results, which are consistent with our expectations, represent a notable step forward for the company,” David W. White, Molina’s new CFO and interim CEO, said during an earnings call.

In addition, the company’s Affordable Care Act exchange business, which took a hit last year after the insurer had to pay a large sum into the risk adjustment program, appears to be on the upswing this year, White said.

While it is still early in the year, “so far, so good as far as marketplace in 2017,” he added, noting that the Medicaid managed care company is implementing initiatives to improve data capture on risk adjustment as well as how it uses that data to target and engage members.

Given Molina’s positive first-quarter results, some analysts wondered if the move to oust the Molina brothers, whose father founded the company, was motivated by something other than a desire to “drive profitability through operational improvements,” as Dale D. Wolf, the chairman of its board of directors, put it.

“As a smaller MCO, Molina gets discussed in the list of takeout candidates by investors, but the family ownership was a high hurdle,” Jefferies analysts David Windley and David Styblo wrote in a research note. “The management changes open up the possibility of a sale.”

During the company’s earnings call, Wolf downplayed that possibility, but didn’t rule it out, they noted.

“I haven’t seen anything to suggest—and I think I speak for the board—that we aren’t big enough and aren’t diverse enough to perform better than we have,” Wolf said. “Until proven otherwise, I’m in the camp of, it’s just all about execution.”

To Gupte, meanwhile, there are numerous upsides to the company’s leadership change. She expects it “will catalyze better execution, margin expansion and even possible takeout,” according to her research note.