Health Care Plunge: 4 Stocks Falling Hard

These 4 health care stocks are falling hard on earnings and dilution.

Brenton Flynn
Brenton Flynn
Oct 19, 2012 at 11:30AM
Health Care

Health care is broadly considered to be a safer, defensive industry to invest in. However, when describing many smaller cap health care stocks, "safe" is often times last word used. Let's dive into four of these small-cap health care stocks making huge moves lower this morning.

Dilution is way of life in biotech, and today two stocks -- Cempra (NASDAQ:MLNT) and Cleveland BioLabs (NASDAQ:CBLI) -- are falling hard after announcing they were raising capital and reducing existing stockholders' share of the company pie. Cempra shares are falling around 13% as of this writing after its $25 million private placement, while Cleveland BioLabs investors are seeing the stock fall nearly 24% after a $15 million offering was announced.

Though not nearly as risky as your run-of-the-mill biotech stocks with little to no revenue, shares of health-care-services stocks athenahealth (NASDAQ:ATHN) and Healthways (NASDAQ:TVTY) are showing exactly what happens when a company fails to meet expectations.

Shares of athenaheatlh -- a provider of Web-based practice management and electronic health records services -- are down nearly 9% today following a disappointing third-quarter earnings release. Revenue was shy of expectations, and while at first glance it looked like earnings per share may have come in ahead of Wall Street's estimates, after backing out the impact of a recent acquisition, they also came up short.

Expectations for athenahealth are nothing short of sky-high, and with the stock trading at around 150 times trailing earnings and over 50 times forward estimates, the decelerating top-line growth we saw this quarter -- combined with a margin profile that might be peaking -- make this pricey stock look even more expensive.

If you've ever had a health consultant call to check on your lifestyle and fitness habits, chances are you were dealing with a Healthways employee. In fact, one of the country's largest insurers, Cigna (NYSE:CI), has had a longtime contract with the provider of "well-being services." Unfortunately, that contract is winding down, impacting the top line for Healthways to the tune of $19 million during the third quarter.

While the company has been successful at signing up new customers to help offset the big Cigna loss, costs associated with the implementation of those contracts is weighing on near-term earnings. Yesterday, the company offered fourth-quarter earnings guidance well below expectations on these costs, while also suggesting that it could be a while before revenue kicks in. That's a one-two punch that has investors dazed, and shares are trading off about 9% as a result.