Primary Health Care suffers $45m setback

FEDERAL government funding cuts have blown a $45 million hole in Primary Health Care's revenue, contributing to a 40 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 blown a $45 million hole in Primary Health Care's revenue, contributing to a 40 per cent slide in full-year profit.

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

Hardest hit was the pathology business where earnings 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," he said. "It's no great surprise to anyone. It's exactly what we thought it would be."

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

The company said that falls in patient demand for general practice and diagnostic services had compounded its profit slide.

After the government funding reshuffle, Primary 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 that Primary 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 $1.32 billion, with most of the increase recorded in the second half of the year after the cost-cutting.

Primary said visits to GPs improved in the last quarter and pathology referrals had returned to near historical levels. Imaging referrals were up 5 per cent and health technology subscription renewal rates remained strong. Primary said the company 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.

The company hopes to lift dividend payments in the year ahead.

Chief executive Edmund Bateman said shareholders had shared the pain of the cost cuts with those who had lost their jobs. "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…

What caused Primary Health Care’s $45 million revenue shortfall and profit slide?

Primary Health Care said federal government funding cuts to pathology (announced in December 2009) removed about $45 million from the business, a key factor in a roughly 40% fall in full‑year profit. The company also reported falls in patient demand for GP and diagnostic services that compounded the profit decline.

How much did Primary Health Care’s profit and revenue change this year?

Primary reported a net profit of $78.3 million, down from $132 million the year before. Despite the profit fall, revenue rose about 2% to $1.32 billion, with most of the revenue gain recorded in the second half after cost‑cutting.

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

The pathology business was the hardest hit: earnings declined about 12.3% to $118.7 million. Analysts said the results reflected the full effect of the government pathology funding cuts.

What cost‑cutting actions did Primary Health Care take and what savings will they deliver?

Primary implemented a radical cost‑cutting program that included axing 290 full‑time equivalent roles and closing 23 sites (mostly diagnostic practices). Redundancies and lease obligations cost about $28 million, but the company expects the cuts to generate roughly $27 million a year in savings.

How did investors react to Primary Health Care’s results?

The shares fell 2.9% to $2.66 on the day the results were released, while the broader market fell about 0.5%.

Are there signs that Primary Health Care’s business is stabilising or recovering?

Yes. Company commentary and analysts suggested headwinds appear to be easing: visits to GPs improved in the last quarter, pathology referrals returned to near historical levels, imaging referrals were up about 5%, and health‑technology subscription renewals remained strong. UBS and LINWAR analysts described the results as showing signs of stabilisation.

What changes to dividends and business strategy did Primary Health Care announce?

Primary will pay a reduced final dividend (noted as 5, down from last year’s 10) on October 10, and said it hopes to lift dividend payments in the year ahead. The company also expects to move toward a fee‑for‑service model with radiologists next year.

What should everyday investors watch for next in Primary Health Care’s performance?

Investors should monitor indicators mentioned by the company and analysts: pathology referrals and GP visit trends, imaging referral growth, the delivery of the planned $27 million annual cost savings, progress in implementing the fee‑for‑service model with radiologists, and any further government funding changes that could affect revenue.