Change shares peek at 2023 as UnitedHealth merger trial looms
- In its latest earnings report, Change Healthcare highlighted its momentum heading into the next fiscal year, outlining what 2023 could look like for the data analytics company as a standalone business in the event its controversial $13 billion merger with UnitedHealth falls through.
- In previous quarters, Change has not provided formal forward-looking guidance given the pending transaction. But in fourth-quarter results released last week, Change said it expects between 2% to 4% growth in its core Solutions business in 2023, moderately below analysts' consensus, and roughly flat earnings before interest, taxes, depreciation and amortization margins.
- Change noted the flat margins are due to some wage pressure, lower volume-driven revenues as COVID-19 cases drop and client attrition due to its proposed merger with UnitedHealth's health services arm, Optum.
Optum expected to close its $13 billion acquisition of Change earlier this year, but the Department of Justice halted the deal in February, citing anticompetitive concerns. In April, UnitedHealth and Change decided to continue pursuing the merger in court and extended their merger agreement until Dec. 31.
Under the extension, Optum agreed to pay Change $650 million if the court decides their deal should not go through.
In a bid to assuage regulators' concerns over the tie-up, which would consolidate massive amounts of health data under the UnitedHealth umbrella, Change agreed to divest its claims editing unit to TPG Capital for a base price of $2.2 billion. That sale is contingent on the closure of the UnitedHealth deal.
The DOJ trial to block the deal is scheduled to begin Aug. 1 and will last two weeks.
Change management reiterated their belief in the value of the UnitedHealth merger, along with their intention to fight the Department of Justice's attempt to block the deal, on a call with investors Thursday.
"The extension of the merger agreement reflects our firm belief in the benefits for U.S. healthcare of Change Healthcare becoming part of Optum and in our commitment to contesting the meritless legal challenge to this merger," Change CEO Neil de Crescenzo said.
However, the proposed transaction has resulted in no small amount of uncertainty for Change, which the IT vendor noted in its annual filing with the SEC on Wednesday could significantly disrupt business and operations. Along with potentially diverting management's attention and resources from ongoing operations, the merger could affect employee recruitment and retention.
Additionally, Change noted it can't predict how its physician, payer and other partners will react to the transaction, which has proved highly controversial and faced opposition from hospital and pharmacy groups.
The Nashville-based company is already seeing client attrition due to the merger.
"The company noted the attrition is across payors and providers and is affecting all segments, but more so in [its software and analytics segment] owing partly to the absolute size of the business. With that, it did not quantify how much this affected growth," Credit Suisse analysts wrote on a note on the earnings.
Change executives highlighted the company's momentum heading into 2023, including growing transaction volume across core networks, which analysts said set Change up well in case the merger doesn't survive its legal challenge.
"While investor focus remains on UNH acquisition news flow, we see a compelling risk/reward profile independent of a transaction," SVB Leerink analyst Stephanie Davis said in a note.
Change brought in revenue of $920 million in the fourth quarter, up 8% year over year and above Wall Street expectations. Solutions revenue was a record $859 million.
Change's net income was $7 million, compared to a loss of about $13 million at the same time last year