MGLN
#Thank you, <UNK>.
Good morning, and thank you all for joining us today.
In my comments this morning, I will review the second quarter results, discuss the Senior Whole Health acquisition, touch on the current regulatory environment and provide some additional color on the second half of the year and our longer-term outlook.
We reported second quarter net revenue of $1.4 billion, net income of $5.5 million and EPS of $0.23 per share.
Our adjusted net income was $14.1 million or $0.59 per share, and we achieved as a profit $54.3 million.
The results for the current quarter were negatively impacted by cost pressures in 2 of our commercial healthcare accounts as well as adverse experience in our Part D plan.
While we are confirming our 2017 guidance for the year, we now expect to be approximately at the lower end of our ranges.
Jon will provide more details on the quarterly results and guidance later in the call.
Next, let me share some highlights on the acquisition of Senior Whole Health and how it aligns with our Magellan Complete Care business.
We are very excited about this acquisition and the strategic capabilities and expertise it brings us.
Senior Whole Health is a specialty managed care organization with a focus on complex high-risk populations.
They provide both Medicare and Medicaid dual-eligible benefits and serve more than 22,000 members across Massachusetts and New York as of July 2017.
Senior Whole Health helps to accelerate our Magellan Complete Care strategy.
In Massachusetts, they serve more than 13,000 members as part of the Senior Care Options program, which offers members at age 65 or older quality health care that combines Medicare health services with Medicaid social support services.
Senior Whole Health has participated in Senior Care Options since the program's inception in 2004.
In New York, Senior Whole Health offers Medicaid-managed long-term care services to nearly 9,000 members combining Magellan's New York program with Senior Whole Health will enhance our scale and capabilities.
It's important to note that Managed Long-Term Services and Supports programs represent a significant growth opportunity for Magellan Healthcare.
Positioning Magellan as a leader in this space makes sense both from a strategic and a financial perspective.
Senior Whole Health has an outstanding management team and reputation, a strong track record of growth and extensive experience facilitating high-quality, cost-effective health care for its members.
Combining the experience, capabilities and services of our 2 companies, it enhances our strategy of being a full service managed-care company focused on complex populations, such as Managed Long Term Services and Supports.
We expect this transaction to close by the end of the first quarter of 2018 and to be accretive to earnings in the 12 months following.
Jon will speak more to the financials later in the call.
Upon closing this acquisition, Magellan will operate specialized managed care plans focused on complex populations in 4 states: Florida, New York, Virginia and Massachusetts, with approximately $2.5 billion in annual revenue.
This represents significant growth since 2013 when we launched the Magellan Complete Care strategy and set a goal of $2.5 billion revenue by 2018.
Specific to our plan in Florida, the reprocurement, also known as the ITN, has been released, and it was written largely as we expected.
The responses are due in November and the state expects to make a decision in April of 2018.
We feel very good about our current success in Florida, but of course, there are no guarantees with any reprocurement.
In Virginia, implementation is on track with a go-live scheduled for the Tidewater region on August 1 as well as the Central region on September 1.
As we noted during our Investor Day, we anticipate a $20 billion pipeline of Medicaid new business opportunities in 7 to 10 states over the next 5 years.
I'm very proud of our success in Magellan Complete Care and look forward to capitalizing on the additional opportunities ahead.
Now turning to the regulatory environment, there has been significant activity at the federal level.
From last week's intense discussion on health care reform issues to the past few days incredible level of activity in the Senate.
Meanwhile, Senate and House committees remain focused on other health care matters, including reauthorization of the CHIP program and the Medicare Advantage Special Needs Plan.
The same is true in the state capitals.
States continue to look for ways to improve the quality of care and reduce cost for their Medicaid populations.
States are considering new waivers that include additional populations for managed care, mandatory enrollment in certain programs and personal responsibility and member co-payments; developments, we are closely tracking.
The fluidity of the past few weeks is proof of what we shared last month during our Investor Day.
Healthcare will continue to be a central part of federal and state policy, the debate for the foreseeable future and a focus of congressional and executive branch activity for the next few months.
We will continue to remain engaged in these discussions and stand ready to provide our expertise and innovative solutions for the fastest-growing most complex areas of health care.
Magellan is well positioned to succeed, regardless of what changes may occur at the federal level.
Currently, we have limited exposure since less than 5% of our revenue is derived from the AC<UNK>
Managing complex populations will drive most of the ---+ the most significant growth opportunities over the next several years.
And addressing the needs of these populations requires our unique expertise.
The changing health care environment requires companies who can respond quickly.
Lastly, as the role of states grows, we have the long-standing relationships and expertise to provide input as they create new and innovative programs.
For the balance of the year, we are focused on the successful implementation of our Virginia program and actions to improve results for our commercial healthcare business.
Looking ahead, Magellan is well positioned for growth beyond 2017.
As we discussed at Investor Day, our long-term objectives include organic revenue growth of 10% to 15%; organic segment profit growth of approximately 10%; and adjusted earnings per share growth of 10% to 15%, which includes the impact of capital deployment.
Leading humanity to healthy vibrant lives is a pursuit that guides and inspires us.
With our 2 growth engines, healthcare and pharmacy, Magellan is a repositioned company at an inflection point for sustained growth, never losing sight of the customers we work with and the members that we serve.
At this time, I'd like to turn the call over to our Chief Financial Officer, Jon <UNK>.
Jon.
Great.
Thanks, <UNK>, and good morning, everyone.
In my comments this morning, I'll review second quarter results, discuss our outlook for the full year and share additional details on the recently announced acquisition of Senior Whole Health.
For the quarter, revenue was $1.4 billion, which represents an increase of 22% over the same period in 2016.
This increase was mainly driven by net new business growth and the annualization of revenue from prior year acquisitions.
Net income was $5.5 million, and EPS was $0.23.
This compares to net income and EPS of $4 million and $0.16 for the second quarter of 2016.
Adjusted net income was $14.1 million, and adjusted EPS was $0.59.
This compares to adjusted net income of $14.4 million and adjusted EPS of $0.58 to the second quarter of 2016.
Segment profit was $54.3 million for the second quarter compared to segment profit of $56.9 million in the second quarter of 2016.
The current quarter results included approximately $3 million of unfavorable out-of-period items, primarily related to unfavorable care development in the healthcare segment.
For our healthcare business, segment profit for the second quarter of 2017 was $30 million, which represents a decrease of 13% compared to the second quarter of 2016.
This decrease is mainly due to the moratorium on the Health Insurer Fee, cost pressures in 2 of our commercial healthcare accounts, contract implementation costs and net unfavorable out-of-period items, partially offset by improved results in our government healthcare business and contributions from AFSC, which was acquired in July 2016.
Now relative to the cost pressures emerging in 2 of our commercial healthcare accounts, we are aggressively working on improvement actions, including both care management initiatives and potential rate adjustments, and expect to see more favorable results in the second half of the year.
Our pipeline continues to be robust with interest from both current and new health plan customers in our behavioral and specialty products.
As we continue to work through these opportunities, we are seeing some delays in new sales and the timing of customer implementations.
Turning to pharmacy management, we reported segment profit of $33.9 million for the quarter ended June 30, 2017, which was an increase of 5% from the second quarter of 2016.
The increase was primarily due to net business growth and earnings from the Veridicus acquisition, partially offset by higher investments to support growth initiatives.
In our Part D business, we've experienced approximately $9 million in losses through the first half of 2017.
Based on our enrollment profile and claims experience through June 30 as well as normal benefit seasonality, we now expect the Part D results to be a loss of approximately $10 million for the full year, which is below our previous expectations of breakeven.
Last month, we submitted our Part D bid to CMS for the 2018 plan year.
In the bid, we made material changes to our formulary to better align it with the PDP marketplace offerings and also increased our member premiums to correspond with emerging claims experience.
While we expect that this will result in lower membership and revenue in 2018, we believe that these actions will lead to improved member selection and financial results in 2018 and beyond.
Regarding other financial results, corporate cost, inclusive of eliminations but excluding stock compensation expense, totaled $9.6 million, which is roughly comparable to the $9.8 million in the second quarter of 2016.
Total direct service and operating expenses, excluding stock compensation expense, changes in fair value of contingent consideration and impairment of acquisition intangibles, was 15.5% of revenue in the current quarter compared to 17.1% in the prior year quarter.
This decrease is primarily due to the suspension of the Health Insurer Fee, business growth and mix, partially offset by startup costs in Virginia.
Stock compensation expense for the current quarter was $11.4 million, an increase of $1.9 million from the prior year quarter.
The change is related primarily to higher vesting of employee stock awards and divesting of restricted stock associated with the AFSC acquisition.
The effective income tax rate for the 6 months ended June 30, 2017, was 43.8%.
We continue to expect a full year effective income tax rate of approximately 40%.
Our cash flow from operations for the 6 months ended June 30, 2017, was $3.8 million.
This compares to net cash used by operating activities of $119.2 million for the prior year period, which was impacted by several factors, including the contingent consideration payment related to the CDMI acquisition, the initial buildup of Part D receivables and the run-out of claims related to our former contract with the State of Iowa.
As of June 30, 2017, the company's unrestricted cash and investments totaled $273.3 million versus $293.9 million at December 31, 2016.
Approximately $116.6 million of the unrestricted cash and investments at June 30, 2017, related to excess capital and undistributed earnings held at regulated entities.
Restricted cash and investments at June 30, 2017, was $316.9 million, similar to the balance of December 31, 2016.
Year-to-date through July 21, 2017, we've repurchased approximately 90,000 shares for $6.4 million.
We have $68.4 million remaining in our share repurchase authorization program, which our Board of Directors has extended for 1 year through October 26, 2018.
We're planning to refinance our credit facility by the end of the third quarter, in order to retire our existing bank debt and provide some additional capital flexibility.
We expect a new facility will be a mix of bank revolver, bank term debt and a public bond offering.
We also plan a subsequent public bond offering to fund the Senior Whole Health acquisition.
Both completion of all of the anticipated financing activity, we'd expect our leverage ratio of net debt-to-EBITDA to remain below our target of 2.5x.
Now turning to our 2017 guidance.
While we're confirming our guidance for 2017, we expect our results to be approximately at the low end of our ranges for the following reasons: timing of sales and implementation of new business; isolated care pressures in 2 of our commercial healthcare accounts; and adverse experience in our Part D plan.
As a reminder, our guidance ranges are as follows: revenue of $5.8 billion to $6.1 billion, net income of $90 million to $114 million, EPS in the range of $3.72 to $4.71, segment profit of $329 million to $349 million, adjusted net income of $123 million to $145 million, adjusted EPS in the range of $5.08 to $5.99 and cash flow from operations in the range of $150 million to $182 million.
Compared to the first half of 2017, we expect an increase segment profit run rate for the remainder of the year due to the following factors: the implementation of actions to improve results in commercial health care, business growth, rate increases, normal earning seasonality in our Part D plan and the timing of customer settlements across our businesses.
As <UNK> mentioned earlier in the call, we anticipate the acquisition of Senior Whole Health will close by the end of first quarter of 2018 after we obtain the required regulatory approval.
Senior Whole Health has achieved impressive growth over the last few years, and in 2017 is expected to have revenue of approximately $1 billion as well as segment profit of approximately $60 million.
We expect the impact of this acquisition will be accretive in the 12 months following closing of approximately $0.60 for EPS and $1 for adjusted EPS.
Beyond 2018, we're also anticipating synergies of approximately $10 million annually as a result of savings from insourcing pharmacy and behavioral health services as well as administrative expense efficiencies.
In 2017, we expect acquisition and integration cost associated with the Senior Whole Health acquisition to be approximately $3 million to $5 million.
In summary, as <UNK> noted, we'll be focused on execution during the second half of the year to achieve solid segment profit growth and to position us well to meet our long-term growth objectives.
With that, I'll now turn the call back over to the operator for questions.
Operator.
Dave, let me try to take all your questions.
First, relative to the commercial accounts, I would emphasize these are isolated incidents.
And really, there's 2 accounts.
The first account is a long-term customer, where in a portion of their program, they experienced higher-than-usual turnover in membership, and the members ---+ and net-net, the members came on, had higher cost and utilization.
The second customer was actually a new customer this year.
And the use of certain services, again, an isolated portion of the account, were higher than the underwriting data that had indicated, the data that we had used in underwriting.
So given, again, the uniqueness of these situations and the fact that there were significant changes versus what would have been expected coming into the year, we are working with both customers to obtain appropriate rate adjustments and are also in the process of developing and implementing care management actions.
Now every situation is different, so it's a little bit hard to generalize.
But I would say, in general, where there are changes in a calendar year, whether significant population changes or new programs being introduced, second quarter does tend to be a time when you get a good run rate for the year.
First quarter, you get some indication.
We did have some indication that there were some volatility in these customers.
But first quarter is tough because you don't have complete claims at that point.
So second quarter, you'd have a much more complete run rate.
And we feel comfortable that we've got a good bead on it.
And net-net, we still have some execution to do.
But I'm confident based on where we are that we will make the improvements we need over the second half of the year.
And most importantly, I don't believe either of these issues will persist beyond 2017.
So in 2018, we should have things fully corrected.
Hopefully, that answers your questions, Dave.
Yes.
I mean the short answer is ---+ on the second part of your question is, yes, that's part of it.
Although there is always an unfavorable development as well as in utilization within the quarter, a lot of puts and takes.
There's always going to be accounts that are positive and negative.
So it's a little bit hard to isolate what part of the $3 million.
But yes, that was definitely a part of it.
In terms of impacting the quarter, again, that's also a little hard to quantify, because it depends on what your starting point is.
But I would say that, relative to where we were coming into the quarter.
So if you look at things at the end of first quarter and even as we project for the full year, I would say things got worse in the sort of $5 million to $10 million range on those customers.
But again, it depends on what your starting point is when you are measuring it.
No ---+ I mean, roughly speaking, yes.
Yes.
Again, we do expect that we will see material improvement in these customers over the balance of the year.
So we think without splitting hairs in terms ---+ are we getting back to what the ultimate run rate will be.
We think we will largely solve the problem over the second half of the year, based on where we are today, and we've made good progress.
<UNK>, here as well.
We don't anticipate these issues falling into 2018 either.
So these are shorter-term client issues we think we can resolve.
Yes.
I would say a couple of things, Dave.
And again, this is a similar instance to what we talked earlier in the commercial side.
Again, second quarter is when you get ---+ we get really a good bead on Part D as well for the year.
As you probably know from having watched us, we did see a pretty substantial increase in membership this year.
And really looking at this, as we've looked at it over the past couple of months, one, we do have a larger formulary than average in the market.
We're probably more consistent with some of the richer, enhanced plans out there.
And as a result, we believe that, that has led to some adverse selection with higher utilizers as part of that significant membership growth we're seeing.
Now again, you do get higher rebates in some cases for those drugs, but we are not able to, kind of, completely offset that higher utilization.
Now year-over-year, though, although the loss is similar, the $10 million loss, we do have ---+ we're projecting roughly double the revenue this year.
So we have made some improvements in the margins year-over-year, but obviously not getting all the way to where it's fully corrected.
Now the good news is, we ---+ for 2018, we were able to reflect the emerging experience into our bid.
We've made much more significant changes in the formulary to the point now where we believe we're going to be fully competitive with the market and also have relatively material member premium increases built in, especially in some of the geographies where they've been less profitable.
So net-net, again, 2018 is the first year we've really taken aggressive action to get that formulary in line with the competition, and again, fully reflect the current run rate.
And while, as noted in the ---+ as noted earlier, we do think we'll see some membership in revenue losses in '18 as a result of that.
We are confident and I'm confident that we'll see much stronger financial results.
Okay.
Couple of different questions in there.
So Virginia in this quarter was sort of in the $5 million to $6 million of readiness expenses, and there was a little bit in first quarter, just to give you a sense for what's flowed through year-to-date.
In terms of third quarter ---+ so we've talked about it in the script, the full year versus the first half of the year and the items that are driving that.
Obviously, the improvement in Part D since we lost $9 million to-date as well as we talked about the commercial healthcare accounts and the actions we've got, other rate increases, businesses growth and the timing of customer settlement.
Now that ---+ I'd say if you think about those items, the timing of customer settlement tends to be heavier in the fourth quarter, but the other items should be ---+ the improvement we should start to see ---+ we should see significant results in third quarter.
So I would expect fourth quarter will be a little bit higher than third, if you think about getting to that lower end of the guidance.
But third quarter should be a material step up from where we are for the first 6 months on a pro-rata basis.
Yes.
Well, I think, so there's 2 different issues that play out.
One is from a pattern standpoint, we still expect second half of the year to be better than first half because of the benefit seasonality.
Quarter-to-quarter, things can bounce around a little bit.
And last year, you are right, fourth quarter was a little bit higher.
But we looked at that really more as an aberration than anything else.
So I would just look at it as, again, second half of the year, we expect to be roughly breakeven, given we're $9 million loss already in the year, based on our actuarial projections in both our internal projections and from our outside actuaries.
So that's that.
In terms of what's different as we go forward.
Though, again, it really is going to be in 2018 the impact of restricting the formulary that we think will have the bigger impact as we go forward.
Now we did a little bit of that last year as you might recall.
And that's improved the margin to sort of cut the losses on a percentage of revenue basis in half this year.
But in order for us to fully get to a profitable run rate, we believe, again, we got to get that formulary to be competitive with the market as well as on a targeted basis getting rates aligned at a place where we can be profitable.
Yes.
I wouldn't view it ---+ nothing that would jump out.
I think as people are ---+ as there's a lot of change in the market in the last month of the year, sometimes people might utilize services because they are not sure what's going to be covered, or in some cases where we made formulary changes, they might be getting drugs.
But ---+ and there was growth through the year as well, last year membership growth.
So you had some people that were coming on that hadn't used their benefits yet.
So the pattern was a little bit different in the fourth quarter.
But I wouldn't look at it as material, I mean, you're going to see some volatility from quarter-to-quarter in the program.
I think we are roughly a little bit over 100,000 in the second quarter, and we were in the low 60s at year-end, just giving you some sense for the growth this year.
Yes, <UNK>, we've had a very robust pipeline.
And we still have a very robust pipeline.
I think sometimes customers might be a little bit slower to decide.
And there might have been some customers, and were, in this particular case, this year, who actually agreed to go with us, which we were thrilled about, but that decision came a little later or their implementations were a little later.
So we're not displeased that they decided to go with us, but the implementations in a couple of cases will be in 2018 versus 2017.
It bodes well for 2018, but that's typically the case, it's not that the pipeline is any smaller or success rate is any less; in fact, it's quite the opposite.
We've been very successful out in the marketplace and would anticipate future success as well.
You bet.
The clients today ---+ our customers today are looking for new solutions, because they felt the financial pressure largely from the exchange challenges they've had last year and this year.
They've also been much more open to new products and new services, just trying to find ways to be more efficient about delivering those services and optimize the quality.
So we see an increase in just straight behavioral health, but importantly, the clients of today, very dissimilar to 2 or 3 years ago, are looking for more of an integrated approach.
So while they'll buy BH or have historically been a BH client, they are looking for add-on services.
These are clients where we have great relationships.
They've been appreciative of the level of service and the outcomes they've had with us.
And so now they're willing to consider other options, such as MSK, RBM, enhanced RBM, converting from fee-for-service to a risk product with RB<UNK>
So we have a host of these new add-on services that have been very successful for us.
For example, MSK over the last 2 years it has gone from basically a product introduction to 7 million covered lives for us.
So these are real opportunities we see to develop add-on products and services.
Again, the difference is, historically, it used to be a kind of one-dimensional buying a BH, but today, we are seeing more of that.
But we're also seeing clients add-on services.
We have many of our clients that are utilizing not just 1 service, but 2, 3, 4 and 5 of our services and more.
The other thing that's a little bit different is that we've had add-on clients that have crossed over from medical services to pharmaceutical services.
And this is particularly true with the medical specialty area, where they see a real challenge with controlling their specialty drug cost being the largest single component of their increase.
And so they've had a good experience with us on the RBM side, MSK or BH side.
They are more likely to look at us also and engage on the Rx side and ---+ medical specialty particularly.
The other thing, just quickly, I'd add to <UNK>'s comments, which were right on, is that 2 things that we're seeing that have clearly picked up over the last year or so, <UNK>, are: one, behavioral health where that had been slow for a number of years, I think because of some of the complex populations that health insurers are taking on vis-\u0102\xa0-vis the exchanges, Medicaid expansion, there is more demand for our services in behavioral health, than we've seen in some time, and some of that, I think, is the capabilities and the talent that we've built up internally.
Second thing is ---+ I mean, probably for similar reasons is we are seeing more interest in risk coverage, which has been in our sweet spot historically, where ---+ both from new customers, but also ASO customers that were able to convert to risk.
So those areas have picked up, which obviously is a good thing for us.
The other thing I'd say to (inaudible) a little bit more, <UNK>, I was just reflecting upon 2, 3, 4 years ago versus today.
We've spent a lot of resource, both financially as well as our personnel, in modernizing our product.
And that I think is true of the BH, it's also true of RBM and musculoskeletal is a good example of that.
And so we're able to bring new services and very innovative services to the marketplace that really didn't exist before.
COBALT, for example, Computerized Cognitive Behavioral Therapy, again, a new product introduction and nothing else like it in the industry.
We see out in the commercial space, particularly we're having great success, a great pipeline.
I think we've got more than a $20 billion pipeline on the public sector side with the integrated approach there.
But on the commercial side, we are being very successful at the close rate much more so than 3 or 4 years ago.
I think it has to do with the need of the client.
It has to do with the level of new product introduction innovation and also the competitive landscape.
We've been very successful out there being more, again, innovative and be perceived as being the player that can really be more efficient at delivering care and ---+ at a time, where our clients really have a dramatic need.
Well, let me just address a few of your questions, Ana.
Good question.
Let me just addressed Florida.
Florida has come out with the ITN to ---+ they've put up basically this ITN, intent to negotiate with 11 players across all regions of Florida.
We feel that we're very well positioned in Florida.
We have a good relationship with them.
And we've shown and demonstrated significant quality improvements within the population.
So all good things.
With the ITN, they have asked us to come back with innovative solutions, not really limiting but it's actually quite expansive in terms of the kinds of things that they like to see us propose and others propose that would really increase the efficiency, the quality and the cost elements for the plan in Florida.
So it really isn't less limiting.
It's actually more expansive than it was before, but not dissimilar to what they did in 2014.
So we're feeling it's a great opportunity for us to not only maintain a client relationship, but potentially expand based on that relationship.
I'll also add, the language, Ana, that's in the ITN is, in fact, virtually identical to the last go-round.
So it does enable specialty plans.
It doesn't specifically speak to all the different types of specialty plans but it is identical.
So again, it was as we expected, and we believe we're positioned well as we go forward.
Yes ---+ no, no, I think that's fair.
And I think we've talked about before that we're this year as a result of the run rate coming into the year as well as the success we've had in care management initiatives running strongly in Florida this year.
We think something in the mid-single-digit range is more reasonable as you think about things going forward, where we're running higher right now.
So I think it's reasonable if you think of something in the kind of mid- to higher-80s on loss ratio, as we go forward, as kind of a normal run rate.
And that's consistent with how we've talked about, not just Florida but the government segment in the past.
In terms of some of your other questions, again, we don't think that the commercial cost of care issues will be issues in 2018.
We're confident that we'll be correcting them in the second half of the year.
Part D as we talked about ---+ we believe, we'll see improvement as we go through next year.
So same thing in Virginia where we're making investments to get it off the ground this year, but believe, we can get that to breakeven or better next year.
And of course, we've talked about Senior Whole Health in the accretion roughly the dollar in adjusted EPS going forward.
So I think you're thinking about many of the right things.
And with ---+ certainly with new business growth, as we go forward, as <UNK> alluded to, 2018 is off to a great start, and we see a lot of upside there.
Great.
Well, we appreciate you joining us here for our second quarter earnings call and look forward to being with you again at our next quarter call.
Thanks very much.
Good day.
