Magellan Health: Psychiatric Profits

06/04/2014 7:00 am EST

Focus: STOCKS

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

Our latest Special Situation feature is a managed healthcare company that provides services to health plans, insurance companies, employers, labor unions, and various governmental agencies, notes Charles Mizrahi, editor of Hidden Values Alert.

Magellan Health Services (MGLN) deals with third party psychological and psychiatric facilities in both the commercial and public sectors. It provides services for individuals in need of care through a network of outpatient programs, inpatient treatment, and crisis intervention.

MGLN's specialized services cater to the needs of millions of people in want of diagnostic imaging (radiology). This includes patients in a variety of medical situations such as oncology (cancer), ultrasound, cardiology, and pain management.

Magellan recognizes how hard it is to compete with large pharmaceutical companies who have an incredible amount of money to allocate for exclusive drug patents. Instead, the company chose a different route: to specialize in industries that it can thrive in.

Unfortunately, rare diseases continue to plague families around the globe. By providing their services to more focused fields of medicine, MGLN can offer highly demanded services to customers willing to pay a premium.

In cases of rare illnesses, costly treatments are last resorts that offer a glimmer of hope. For this reason, MGLN has found an important niche in the medical field.

The company has a large exposure to Medicaid and Medicare patients with more than half of its 2013 revenue coming from the public sector (derived from contracts with the government).

This creates a dependence on government entities that can be affected by budgetary changes. However, MGLN was able to grow this segment's revenue in each of the past two years.

Total revenue increased by nearly 20% in the past couple of years with the Public Sector growing by a similar figure.

Additionally, its commercial segment grew by more than 35%. Finally, management acquired Partner's RX to increase the scale of its pharmacy segment, nearly doubling revenues since 2011.

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