Federal cutbacks in pathology put Primary revenue on the sick list

FEDERAL government funding cuts have blasted a $45 million hole in Primary Health Care's revenue, contributing to a 41 per cent slide in full-year profit.

By InvestSMART · 23 Aug 2011

By InvestSMART ·
23 Aug 2011

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FEDERAL government funding cuts have blasted a $45 million hole in Primary Health Care's revenue, contributing to a 41 per cent slide in full-year profit.

The company, which owns a chain of medical clinics and pathology laboratories, posted a $78.3 million net profit yesterday, down from $132 million the year before.

Hardest hit was the pathology business, the earnings of which declined 12.3 per cent to $118.7 million.

LINWAR Securities analyst John Hester said the results showed for the first time the full effect of government cuts to pathology, announced in December 2009.

"Effectively what they have done is take $45 million away from what the business was two years ago and that translates down to profitability of the division," Mr Hester said. "It's no great surprise to anyone. It's exactly what we thought it [would] be."

Nevertheless the shares shed 8?, or 2.9 per cent, to $2.66, while the broader market slipped 0.5 per cent.

Falls in patient demand for general practice and diagnostic service compounded the profit slide, the company said in a statement. After the government funding reshuffle, Primary Health Care began a radical cost-cutting program, which included axing 290 full-time equivalent jobs and closing 23 sites, mostly diagnostic practices.

Redundancies and lease obligations cost the company $28 million, but it said the cuts would generate savings of about $27 million a year.

Mr Hester said the headwinds the company faced appeared to be easing and UBS analyst Andrew Goodsall said the financial results appeared to show a stabilisation of the company.

Revenue rose 2 per cent to $1.322 billion, with most of the increase recorded in the second half of the year after the company's cost cuts. Primary Health Care said GP attendances had shown improvement last quarter while pathology referrals had returned to near historical levels.

Imaging referrals were up 5 per cent and health technology subscription renewal rates had remained strong. The company said it expected to move towards a "fee-for-service" model with radiologists next year. It will pay a final dividend of 5?, down from last year's 10?, on October 10.

Primary Health Care's chief executive, Edmund Bateman, said shareholders had shared the pain of the cost cuts with those who had lost their jobs in the cost-cutting program. "I think a material increase in dividends is well and truly justified," Dr Bateman said.

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Frequently Asked Questions about this Article…

Why did Primary Health Care’s full-year profit fall by 41%?

Primary Health Care's full-year net profit fell 41% largely because federal government funding cuts to pathology removed about $45 million of revenue. That, combined with falls in patient demand for general practice and diagnostic services, pushed net profit down to $78.3 million from $132 million the prior year.

How badly was the pathology business affected and what were the numbers?

The pathology division was the hardest hit: earnings declined about 12.3% to $118.7 million, reflecting the full effect of government cuts announced in December 2009 that reduced pathology revenue by roughly $45 million compared with two years earlier.

What cost-cutting measures did Primary Health Care take and what are the financial impacts?

Primary Health Care launched a radical cost-cutting program that included axing 290 full-time equivalent jobs and closing 23 sites (mostly diagnostic practices). Redundancy and lease obligations cost the company $28 million as one-off charges, while management expects the cuts to generate roughly $27 million of annual savings.

How did the market react to Primary Health Care’s results and what happened to the share price?

The shares fell about 2.9% to $2.66 on the day the results were released, while the broader market slipped 0.5%. The decline reflected investor concern about the profit hit from government funding changes and lower patient demand.

Is there any sign that Primary Health Care’s business is stabilising?

Yes. Revenue rose 2% to $1.322 billion, with most of that increase recorded in the second half after the cost cuts. Management said GP attendances improved in the last quarter and pathology referrals returned to near historical levels. Analysts from LINWAR and UBS also suggested headwinds appeared to be easing and results showed signs of stabilisation.

What operational trends did the company report for imaging and health technology services?

The company reported a 5% increase in imaging referrals and said health technology subscription renewal rates remained strong, indicating pockets of growth despite the broader challenges in pathology and GP demand.

What dividend did Primary Health Care declare and how does it compare with last year?

Primary Health Care declared a final dividend of 5 cents per share, down from last year’s 10 cents. The record date for that dividend payment was noted as October 10 in the results statement.

What strategic change did Primary Health Care say it would implement for radiologists?

The company said it expected to move towards a 'fee-for-service' model with radiologists in the following year, a shift intended to change how radiology services are paid and potentially align costs with service delivery.