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Sale Plans at Value Health Preceded Bad News

October 4, 1995

Several Value Health Inc. executives filed papers with the Securities and Exchange Commission indicating they planned to sell shares in their company just weeks before the firm disclosed it would take a large one-time charge in 1995.

The charge, which could total as much as $80 million, was first broached by Value Health management at an investors’ conference Sept. 20, when the company said it needed to cut operational costs and contend with unexpected ``softness″ in its newly acquired Diagnostek unit.

The reaction by Wall Street was instantaneous: Value Health’s shares plummeted $5 that day, closing at $32, and selling was so fierce the following day that trading was suspended altogether. The shares traded recently around $26.125 on the New York Stock Exchange.

Registered corporate insiders are required to file papers indicating they plan to sell shares before they actually do so _ Form 144s in SEC parlance. Between Sept. 8 and Sept. 18, five insiders filed those forms, according to CDA-Investnet, a database that tracks insider buying and selling. The insiders also are required to file another form when they have sold the shares; those Form 4s, as they are known, haven’t shown up on the database yet.

Director David J. McDonnell Sept. 8 indicated he planned to sell 32,200 shares. A trust in the name of Jacqueline Kosecoff filed papers Sept. 14 indicating a planned sale of 9,300. Leslie D. Michelson, an officer at one of Value Health’s units, filed papers regarding a planned sale of 10,000 shares. Ms. Kosecoff and Mr. Michelson are co-chief executive officers of Value Health Sciences Inc., a unit of Value Health Corp. Barry M. Smith, chairman and chief executive officer of Value Rx Pharmacy Program Inc., Sept. 11 indicated plans to sell 9,668 shares.

A fifth insider was William J. McBride, Value Health’s president and chief operating officer until Sept. 11, when he resigned amid a companywide reorganization. On Sept. 18, he filed papers with the SEC indicating plans to sell 25,000 shares in Value Health. Mr. McBride, a founder of the company, still is considered an insider at the company because he is remaining on the board, and he also will be a consultant to the company.

A spokeswoman for Value Health said company rules restrict the time during which its executives can buy and sell shares to specific ``windows.″ The sales would represent less than 10 percent of the holdings of each executive and are all related to the exercise of options, the spokeswoman added. ``These sales reflect the manner in which Value Health executives realize a portion of their compensation and were completely unrelated to any fundamental developments at the company,″ she said.

Indeed, there have been flurries of sales and options exercises in previous window periods. Sales in May 1994 and options exercises and sales in June 1994 far outpace the recent round of potential sales.

Value Health is an Avon, Conn.-based provider of specialty managed-care benefit programs and health-care information services. The eight-year-old firm has grown rapidly, partially through internal growth but mostly through acquisitions amid the nationwide push to contain medical costs. Value Health has averaged about one acquisition a year.

Its most recent purchase is Diagnostek, a mail-order pharmacy business acquired July 28. Unexpected problems already have cropped up with that acquisition, according to a statement last month by Value Health Chief Executive Robert Patricelli. There has been some ``softness″ in Diagnostek’s business, he said, but it isn’t clear how much because the unit’s prior owners closed the books quarterly instead of monthly. Thus, Value Health won’t know the state of its business until after the end of the quarter.

``We intend to do whatever we have to do to clean this business up, and that will likely result in additional charges beyond normal merger-related expenses in the third or fourth quarter,″ he said in that statement.

It was Mr. Patricelli’s statements _ at a Montgomery Securities investor conference in San Francisco Sept. 20 and a day later in a conference call to Wall Street analysts _ that were behind the precipitous drop in the company’s share price. A flurry of analysts also downgraded the stock, although many did as Cowen & Co. did; that firm lowered its rating on the company to a ``buy″ from a ``strong buy.″

Insider selling at Value Health hasn’t gone unnoticed, although what caught the attention of those who follow the stock was a sale that took place nearly six weeks ago. On Aug. 22, Steven H. Shulman, an executive vice president with Value Health, sold 25,000 shares at a price of $36. (Mr. Shulman has since been appointed president of the company’s pharmacy and disease management group as a result of the Sept. 11 restructuring.)

The subject of Mr. Shulman’s sale came up Sept. 21, during the conference call between Mr. Patricelli and analysts. Asked about the stock sale, Mr. Patricelli said Mr. Shulman had come to him about selling the stock ``well before we made any judgments″ about a recent administrative reorganization or the charge related to the Diagnostek acquisition. ``I believe Steve is perfectly square on his timing in that regard,″ Mr. Patricelli said.

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