Molina's problems blamed on rapid growth, major missteps.

It's one of the oldest stories in business.

A successful, private family-run company decides it's ready for the big time, goes public, rapidly expands--and then stumbles.

Molina Healthcare Inc., is the latest case study.

Since its initial public offering two years ago, the Long Beach-based Medicaid health maintenance organization saw its stock more than double to over $50 a share this year--but that was before a series of missteps that have shaken analyst and investor confidence.

The stock is now trading close to $25 following a profit warning in July caused by an assortment of unexpected cost increases--itself only the latest in the string of bad news.

"This company's problems do not stem from a handful of lousy provider contracts or a long cold winter in Michigan. They stem from inadequate management depth and controls at a company that grew rapidly, too rapidly by acquisition," wrote Credit Suisse First Boston analyst Patrick Hojio after Molina reported its second-quarter loss last week.

The loss of $4.7 million compared with net income of $12 million in the like-period a year ago--even as revenues grew to $404.3 million from $249.1 million.

The company, with about 900,000 members, was founded in 1980 by Long Beach doctor C. David Molina and is now run by his son, Chief Executive J. Mario Molina, also a doctor. Another son, John, is chief financial officer, while a daughter is executive vice president for research and development.

The family, which still controls the majority of outstanding shares, decided to go public after financial success as a regional Medicaid care provider that had expanded into Utah, Washington and Michigan. It was ranked 67th in Hispanic Business magazine's 2005 list of fastest-growing Hispanic-owned U.S. companies, with a sales growth rate of 234 percent between 2000 and 2004.

However, Molina has stumbled both in California and elsewhere after an expansion fueled by the $115 million initial public offering, including entrances into the New Mexico and Ohio markets. The company has responded by hiring five outside executives this summer, including a new chief medical officer and a director of government contracts.

"As the company grows and matures, we need to bring in more experienced people," acknowledged J. Mario Molina, even as he defended the family's decision to go public to acquire more capital. "If I had to make the decision today, I'd still decide to go public."

Profit warning

The latest problems started with the July profit warning of a second-quarter loss of 15 cents to 20 cents, instead of analysts' estimates of a 56-cent-a-share profit.

The company blamed the loss on higher hospital charges in Washington state and New Mexico, an unusually high number of births in Michigan, more catastrophic hospital cases nationwide, and a longer flu season in Washington.

At the time, J. Mario Molina said the costs were unexpected, but the market didn't buy it, causing the stock to dive 43 percent in one day, chopping $600 million off its market cap.

Some investors saw the troubles as evidence that the company, so successful when it was smaller, had forgotten the bedrock principles of running an expanding health maintenance organization. That is, managing, and even more importantly, forecasting health costs.

The company did recently complete installation in its top four markets of a high-end package of health care management and analytical software developed by its actuary, Milliman USA.

The profit warning was not the first serious issue for Molina. Earlier in the year, the company reported that it had lost a lucrative MediCal contract in Riverside and San Bernardino counties after a clerical error in filling out the proposals. The company is appealing the decision, but some analysts were surprised that Molina could lose a contract it had held for years.

Then there was the rookie mistake the company made in 2004, when it went to market with a secondary offering of 2 million new shares to raise $65 million at the same time insiders wanted to sell 2 million shares of its own stock.

The market saw that as a sign of the family's lack of confidence, and the stock fell 15 percent, forcing the Molinas to re-price the offering and reduce the number of shares being sold by insiders. That had followed a problem in the third quarter of 2003, when Molina's Utah operation ran into cash flow problems because of delays in receiving Medicaid payments from that state.

"They were very well run in California for many years--they seemed to have all the buttons in the right places," said Janice Young, healthcare and insurance analyst for the research and advisory firm Gartner. "They may have made some assumptions about what would happen in these other states that didn't bear out."

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