I JUST FOUND THIS LINK. INTERESTING?
INVESTMENT RECOMMENDATION:
google.com
The latest issue (Sunday, November 19, 2000) of the financial weekly Barron's reported PolyMedica and its Liberty Medical Supply unit, the nation's
largest diabetes testing kit provider, are the subject of a FBI Medicare fraud investigation. As a result, PolyMedica's stock fell 50 percent, closed at $25.75
today (Monday, November 20, 2000).
After participating in PolyMedica's conference call at 2:30 p.m. EST today and carefully reviewing and analyzing the information revealed by the
Company and Barron's for the past several months and researched by the Badgerfund, the analyst would like to make a sell recommendation at this point.
It is believed that PolyMedica's fundamentals are still strong . Mostly important, the Company's sales are not likely to slide since its customers are very
much satisfied with the Company's delivery and related administrative services and the Company's unique compliance management program. However,
due to the unknown nature of the FBI investigation and possible future unfavorable follow-up events, it is believed that selling the stock now is a more
appropriate approach to manage our portfolio.
The Badgerfund analyst will continuously pay close attention to the future development of the FBI Medicare investigation. The Badgerfund should
include PolyMedica again into the portfolio if the cloud of the Medicare fraud investigation is ever lifted and the Company still provides the superior
growth prospects, the strong catalysts for share price appreciation, and the attractive valuation that Badgerfund searches for.
Applied Security Analysis Program
975 University Ave. Phone: 608-263-3465
Madison, WI 53706 uwasap.org Fax: 608-265-3495
POLYMEDICA'S REPLY TO BARRON'S ARTICLE
PolyMedica's Responses1 Quotes from Barron's Article2
1. "PolyMedica is not aware of any FBI 1. "Barron's has learned ... that the
investigation directed at PolyMedica Federal Bureau of Investigation is
Corporation or Liberty Medical Supply." probing PolyMedica and its Liberty
The senior management of PolyMedica Medical Supply operation. A senior
or Liberty Medical Supply is not official at the FBI confirmed that
contacted by anyone from the FBI inquiries into possible health-care fraud
regarding any investigation. are being conducted by the agency's
As a matter of policy, the FBI does not offices in Chicago, Omaha, Tampa and
disclose information about its San Juan, Puerto Rico. This official says
investigation. Therefore, the Company the oldest case dates back to 1995, while
cannot validate the accuracy of the the latest was opened in the past 12
investigation referred by Barron's. months. "
However, PolyMedica believes that the
Company is the White Knight in the
diabetic industry -- PolyMedica
conducts its business in the highest
standard to achieve the strictest compliance with all regulatory
guidelines. Therefore, if any agency
contacts PolyMedica or Liberty Medical
Supply, the Company will fully corporate.
(With respect to the diabetic industry)3
2. PolyMedica is not included in the 2. "In total, Medicare paid out $79 million
Medicare payments involved with flawed for blood-glucose test strips in 1997 on
documentation. "Liberty Medical only claims with flawed documentation. The
bills Medicare when it has received government paid out $33 million in test-
complete order information including strip claims with insufficient
signed Authorization of Benefits and documentation, and $46 million in
Doctor's Orders." That is, the Company claims that lacked incomplete order
will not process Medicare reimbursement information or supplier delivery
unless required information is complete. records."
1 PolyMedica's conference call at 2:30 p.m. EST on Monday, November 20, 2000
PolyMedica's Press Release via Business Wire on Monday, November 20, 2000
2 The article can be obtained at interactive.wsj.com.
3 The source is an Office of the Inspector General (OIG) investigation. This will be discussed late in this
report. 2
PolyMedica's Responses (cont.) Quotes from Barron's Article (cont.)
(With respect to the diabetic industry)3
3. It has been the Company's practice that 3. "Not only were beneficiaries filling out
"Liberty Medical contacts its customers their Medicare paperwork improperly,
and receives authorization prior to but people were getting more supplies
shipment and documents this than they needed."
communication according to Medicare
guidelines." In October 1998, a new
Medicare policy was enacted. Medicare
patients are required to convey their
needs to their medical suppliers for
additional supply. After receiving the
customer's authorization, Liberty
Medical accurately fills out the Medicare
paperwork for the beneficiaries with all
information required by Medicare. The
Company is confident that neither
improper reimbursement paperwork nor
excess shipment will occur under the
Company's operation since the
Company has the expertise in the Medicare rules.
4. PolyMedica does not charge Medicare 4. "PolyMedica, through the Liberty
for what is free for the Company's Medical brand, primarily sells -- or more
customers. In addition, Liberty Medical's often gives away -- a diabetes test kit
direct response advertising does not called a glucometer." "...questionable
declare free products as sales inducement marketing tactics relating to the sale of
but rather focuses on providing these strips to Medicare beneficiaries."
healthcare information. "Liberty Medical "...some companies have offered
receives free glucometers from its inappropriate sales inducements, such as
suppliers which are provided and free glucose-monitoring kits, in an
shipped free to our customers and for attempt to sell more paper strips."
which Medicare is not billed. This
practice is an accepted industry standard
that helps the patient and saves Medicare
millions of dollars annually."
3
PolyMedica's Responses (cont.) Quotes from Barron's Article (cont.)
5. Diabetes is a disease that has no cure. 6. " PolyMedica's method of accounting
PolyMedica believes that there is no for advertising spending raises
reason for its customers not to stay with interesting questions. Instead of
the Company's compliance management, expensing ad outlays as they are
unless they are dead, hospitalized, or incurred, as most companies do,
resided in the nursing home, which are PolyMedica capitalizes its advertising
out of the Company's business scope. costs as an intangible asset on its
As a result, PolyMedica believes the balance sheet called 'direct response
Company's accounting treatment advertising, net.' This enables the
regarding its advertising costs is justified. company to delay the recognition of
PricewaterhouseCoopers has certified expenses, and makes reported earnings
PolyMedica's consolidated financial higher than they would otherwise be if
statements. management used a more conservative-
In addition, as stated in the conference and more customary-accounting
call of Oct. 23, 2000 and emphasized treatment."
again in the conference call of Nov. 20,
2000, PolyMedica capitalized the
advertising costs of $7.8 million in 01Q2
and expensed $4.6 million. That is, the
net ads costs capitalization is $3.2 million
in 01Q2. This amount is less than $4.6
million of 01Q1 and less than $5.9
million of 00Q4. As this shows a
declining trend, the Company expects
this trend will continue beyond FY2002.
4
OTHER INFORMATION/UPDATES
Earnings Estimates. As stated in the conference call of Oct. 23, 2000 and emphasized
again in the conference call of Nov. 20, 2000, PolyMedica projects its 01Q3 diluted EPS of
$0.53-$0.54, 01Q4 diluted EPS of $0.55-$0.56, FY2001 diluted EPS of $2.07-$2.09, and
FY2002 diluted EPS of $2.32-$2.45. PolyMedica's EPS projections are in line with sell-side
analysts' estimates.
Earnings Per Share Estimates
Diluted EPS
# of Mean High Low Std. Proj-
Ests. Est. Est. Est. Dev. P/E
Quarter Ending 12/00 4 0.53 0.54 0.49 0.02 --
Quarter Ending 03/01 4 0.54 0.56 0.50 0.03 --
Year Ending 03/01 6 2.00 2.08 1.90 0.08 25.56
Year Ending 03/02 5 2.42 2.45 2.35 0.04 21.16
LT Growth Rate 3 29.33 35.00 25.00 5.13 --
Source: Market Guide from multex.com on Nov. 20, 20004
Analyst Recommendations and Revisions
As of As of 4 As of 8 As of 12
11/20/2000 Weeks Ago Weeks Ago Weeks Ago
(1) Strong Buy 5 5 5 5
(2) Buy 1 1 1 1
(3) Hold 0 0 0 0
(4) Underperform 0 0 0 0
(5) Sell 0 0 0 0
No Opinion 0 0 0 0
Mean Rating 1.17 1.17 1.17 1.17
Source: Market Guide from multex.com on Nov. 20, 20004
Service and Pricing Comparison. Regardless of the senior transportation issue, for
Medicare-eligible diabetic patients who go to drugstores for testing supplies need to lay
down $55 for 50 test strips, which is on average $1,200 up-front co-payment a year. They
will also need to learn how to fill out reimbursement forms. In addition, it usually takes
several months to have their up-front co-payment reimbursed. Therefore, for seniors on
fixed incomes, they try to skip a few blood-sugar tests to make the test strips last longer and
thus save their pecuniary costs5.
4 Market Guide from multex.com
marketguide.com
5 Gloria Lau, "Saving Diabetic Seniors Trips To The Pharmacy," Investor's Business Daily, A10, Aug. 10, 1999
5
On the contrary, PolyMedica mails diabetic test supplies to its customers' home and charges
$85.30 for 100 test strips for those who live in California, for example6. Not only do
PolyMedica's customers save their energy from traveling and pay less, they do not need to
worry about the up-front co-payments and complicated reimbursement paperwork required
by Medicare. Because 80% of the testing strips charges are directly billed to Medicare and
the rest 20% to the patients or the patients' private insurers, and PolyMedica fills out all the
paperwork with its customers' authorization and the doctors' confirmation. Moreover, the
Company assists its customers to lead a normal life with its unique compliance management.
Market Share. As of Aug. 10, 1999, approximately 10% of diabetic seniors used the direct-
mail service provided by PolyMedica or its rivals. At the time, through its Liberty Medical
Supply subsidiary, PolyMedica serviced around 220,000 seniors. The rest went to the drug
store or did not have any help with their diabetes5. Currently, PolyMedica's active customer
base is roughly of 285,000 seniors, which accounts for 4.5% of the nation's 6.3 million
seniors with diabetes1. In addition, the Company has a customer dropout rate of less than
3% a year6.
Ads Costs Capitalization. Compared to the statistics provided in Badgerfund's initiating
report7, PolyMedica's active diabetic customer base increases roughly 20,000 seniors, 0.3% of
the nation's diabetic seniors, in 01Q2. The Company attributes the expansion of its active
customer base to its successful nationwide direct-to-customer TV and radio ad campaigns
and word-of-mouth advertisement. It is estimated that the Company's customers on average
stay with the Company at least seven years. For 01Q2, for every $390 advertisement cost
spending, PolyMedica captures one customer for average of seven years. In addition, due to
the declining trend of net advertising costs capitalization, the Badgerfund analyst believes
penalty on America Online Inc. in mid-May 2000 regarding its ads spending (the largest ever
non-fraud charge)6 is unlikely to happen to PolyMedica.
Prior Medicare Fraud Investigation8. Prior to July 2000, an article in the Wall Street
Journal underlined an Office of the Inspector General (OIG) investigation. The OIG
investigated into 1997 Medicare overpayment for the test strips in the diabetic industry due
to flawed documentation or improper paperwork. However, Medicare has never audited or
cited PolyMedica for any suspect behavior. "Liberty Medical only bills Medicare when it has
received complete order information including signed Authorization of Benefits and
Doctor's Orders. 9 " PolyMedica is confident that neither flawed documentation nor
improper paperwork has been filed by the Company for Medicare reimbursement. In
addition, the essence of the OIG diabetic industry investigation is to discover companies
6 Gloria Lau, "Supplier Gets Word Out On Diabetes Products," Investor's Business Daily, May 26, 2000
7 The initiating report used data revealed in PolyMedica's 01Q1 Quarterly Report.
8 Ryan Rauch, "What More Can You Ask For? PLMD Beats Consensus by $0.03 Per Share--Reiterate Strong
Buy Rating and $68 Price Target," Adams, Harkness & Hill Research Note--Change in Estimate, Adams, Harkness
& Hill, July 25, 2000.
9 PolyMedica's conference call at 2:30 p.m. EST on Monday, November 20, 2000
6
that increase their business by covering their patients' Medigap insurance, which PolyMedica
has never done. SELL RECOMMENDATION
Although the fundamentals of PolyMedica are still strong, the Badgerfund analyst would like
to recommend that we sell our holdings of PolyMedica (NasdaqNM: PLMD) now. The
analyst will continuously pay close attention to the future development of the FBI
investigation event. We can always include the stock again into the Badgerfund's portfolio if
PolyMedica's fundamentals keep strong when the cloud of the Medicare fraud investigation
is ever lifted. |
