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Epidemic spreads in Healthcare sectors

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Healthcare stocks are under extreme selling pressure this morning as both the HMO Index (HMO.X) 508 -7.4% and Health Providers Index (RXH.X) 272 -10.3% trade lower as investors begin to question a recent chain of events that has seen healthcare- services provider Tenet Healthcare (NYSE:THC) $15.63 -44% plummet from the $40 level after investigations began turning up potential wrongdoings at two of its facilities, one in California and another in Kansas City.

Recently announced retirements of the company's COO Thomas B. Mackey and resignation of CFO David L. Dennis have also added to speculation that recent investigations may have partially been the cause for management changes.

Adding to a sour taste in the healthcare group is recent findings by Cardinal Health (NYSE:CAH) $67.27 -2.03% and its internal auditing team during due diligence, that Syncor Intl. (NASDAQ:SCOR) $18.18 -19.79%, which Cardinal Health announced back in June that it would acquire for about $1.1 billion, may violated foreign and U.S. law violations, by making certain payments to customers in several foreign countries, including Taiwan and China. The investigation indicated that some of the payments made by Syncor (SCOR) to state-owned and private healthcare facilities may have violated the Foreign Corrupt Practices Act.

That uncovering by Cardinal Health now puts the acquisition of Syncor Intl. in doubt and has the stock under extreme selling pressure. Cardinal Health has recently stated that the acquisition of Syncor is subject to the satisfaction or waiver of a number of conditions set forth in the merger agreement, and at this time is not sure those conditions will be satisfied and cannot assure that the merger will close.

These events in the healthcare sector begin to sound like energy trading firm Enron events and have sector bulls taking some defensive action in the healthcare group.

The selling has not been confined to the major names either.

Seeing the jettisoning of obscure stocks such as Las Vegas-based managed health care company Sierra Health (SIE -8%) and seemingly unrelated stocks such as orthodontic services company Orthodontic Centers of America (OCA -7.3%)...

Other healthcare-related names under pressure include CYH -16.5%, MME -12.9%, DGX -7%, CVH -6.5% and ODSY -3.4%.

Jeff Bailey

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