Q4 2019 Earnings Call
[noise] welcome and thank you for standing by for the fourth quarter 2019 earnings and the 2020 guidance call. At this time all participants are in listen only mode. During the question answer session. Please press star one on your touched on the phone today's conference is being recorded.
If you have any objections you may disconnect at this time I would now like to turn change meaning to Joe Bob did Sir you may begin.
Good morning, Thank you for joining Magellan now full year 2019 earnings and 2020 guidance call.
With me today are Magellan, CEO, and just tell us and our CFO Jon Rubin.
The press release announcing our fourth quarter earnings in 2020 guidance. We've distributed this morning.
A replay of this call will be available shortly after the conclusion of the call through March 31st 2020.
The numbers to access the replay can be found in the earnings release.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are at the Friday February 28, 2020 and have not been updated subsequent to the initial earnings call on that.
During our call we will make forward looking statements, including statements related to our 2020 guidance.
Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict in generally beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release. This morning, and documents, we filed with or furnished to the FCC.
In addition, please note that Magellan uses certain non-GAAP financial measure is when describing our financial results.
Specifically, we referred to segment profit.
Adjusted net income and adjusted yes.
Which are defined in our FCC filings and in today's press release.
Segment profit is equal to net revenues left at some of cost of care cost of goods sold direct service costs and other operating expenses.
That concludes income from unconsolidated subsidiaries, but exclude segment profit from non controlling interests held by other parties.
Compensation expense.
Special charges or benefits as well as changes in fair value of contingent consideration recorded in relation to acquisitions.
Adjusted net income and adjusted EPS reflects certain adjustments made for acquisitions completed after January Onest 2013 to exclude noncash stock compensation expense, resulting from restricted stock purchases by sellers changes in fair value of contingent consideration amortization.
Have identified acquisition intangibles as well as impairment of identified acquisition intangibles.
Please refer to the tables included in this mornings press release, which is available on our website for a reconciliation of GAAP financial measures did a corresponding non-GAAP financial measures.
I will now turn the call over to our CEO and there's no.
Thank you Joe Good morning, and thank you all for joining us I'd like to start by saying how truly excited I am to be here.
When I first looked at Magellan, It's Richard screen Noble mission I knew the company had something very special to offer to our customers are members of like I've not been disappointed in fact I'm more optimistic today than it was the day I started and I'm energized about the opportunities that lie ahead of us.
Before I share financial and operating updates and near term priorities I wanted to provide our investors with my high level assessment of my first 100 days a CEO.
First Magellan word is complicated after talking to customers investors and Magellan employees. It's clear we have an opportunity to bring improved clarity to our operating model and accelerate the pace of investment in digital capabilities and process improvement.
We've demonstrated an ability to drive distinction and differentiation managing complex conditions.
We've seen the value that can be created as a by product specifically I believe there is real opportunity to revitalize our behavioral and specialty businesses. This is in our DNA. We cannot however scale effectively trying to be all things to all people and thus need to create unique differentiated.
Offerings in defensible market positions to that end I have initiated a comprehensive portfolio analysis of all of our lines of business designed to enhance our value proposition and magellan's brand in the marketplace. Magellan was built on a platform of cutting edge market, leading products and services. This increased focused.
On execution will help us maintain and in some areas regain the high ground and lead the market through product ideation, both clinically and economically.
Vibrant cultures attract and retain talent, we have great people at Magellan I've been in front of nearly 4000 employees in face to face Townhall meetings to since my appointment on November Eightth and I have been truly impressed I'm committed to investing in leadership development broadly across all disciplines.
I'm also committed to strengthening senior leadership as evidenced by my hiring of Jim Murray, who many of you know from his time Humana.
Jim is an incredible executive one I've worked closely the side in the past and have the most competence and.
Jim and I share a strong belief the actions speak louder than words. The moves we are making reinforce our commitment to excellence anchored by an investment in the culture and leadership necessary to execute an honor our commitments.
Before I talked about magellan's future and my focus let me take time to acknowledge our accomplishments in 2019.
For the full year 2019, we reported net revenue of 7.2 billion.
Net income of 55.9 million in earnings per share of $2.28.
Our adjusted net income was 91.7 million or $3.73 per share and we achieved segment profit of 252.7 million.
John will provide additional details on to 19 results later in the call.
Within the healthcare segment, we successfully executed against our Magellan complete care cost of care initiatives in Virginia, our medical loss ratio improved to approximately 90%. The result was a modest segment profit contribution in 219 compared to a 45 million dollar loss the prior year.
I'm proud of the team for delivering on their commitment and look forward to continued progress in 2020.
In the third quarter call or behavioral and specialty health unit reported an unexpected increasing utilization that was largely concentrated in behavioral health inpatient services. While this variance created some pressure on 2019 earnings we successfully negotiated rate increases for 2020, which we.
Expect to cover the increase in cost of care I'd also note that we did not experience any additional behavioral cost of care pressure during the fourth quarter.
Turning to Magellan Rx, we re contracted our retail network as well as our wholesale wholesaler and manufacture agreements to lower our cost of goods, creating savings for our customers, while improving our gross margins.
I'm also pleased that we were awarded the medical pharmacy benefit administration contract with the state of California at the end of 2019.
When we began servicing this contract I'm sorry, when we begin servicing this contract in 2021 will be managing the pharmacy benefits for more than 13 million Medicaid members in the state of California.
With more than half of the states in the country as pharmacy benefits administration customers, we continue to strengthen our already dominant position in this important and growing market.
Finally, we started investing in future operational improvements across the organization.
Elaborate on the nature of these activities in a moment, but I'd note that we expect savings to begin to materialize in late 2020 in early 2021.
Let me now turn to the focus of our important important work for 2020.
In my experience a strong alignment between the companies culture execution strategy leads to a productive work environment with engaged employees increased business opportunities and enhanced value for members customers and shareholders.
The culture at Magellan is as strong as any as I've witnessed since my first day as Magellan's CEO in mid November I've been learning about our unique capabilities and distinctive competencies I've been traveling the country and meeting with our customers and employees. This first hand feedback about our challenges and opportunities is high.
Upping the shape of strategy that focuses on meeting market demands for our customers improving health outcomes for our members and creating value for our shareholders.
As we work to finalize our long term strategy, we're focusing on for immediate priorities for Magellan.
First and foremost we will deliver on our existing commitments. The promises we make must be promises that we keep to our customers members and shareholders over the last few years, we've not consistently performed to our own or others expectations. That's already begun to change and the remaining near term price.
Ortiz will accelerate the pace at which we move forward.
Second in order to be competitive we must lower our operating cost and reinvest in our businesses by improving and automating processes, leveraging technology consolidating platforms and reducing any friction that our customers providers and members experience when doing business with us.
To help drive these efforts we've established a transformation office solely focused on executing against these important initiatives.
The range of work streams is broad targeting process improvement and over a dozen different disciplines.
Third as we transform how we do business, we're launching an innovation lab to strengthen our capabilities and technology solutions product innovation and service delivery.
Magellan has deep experience in managing some of the most complex high cost areas of healthcare spend.
We know that our payer partners are realizing limited success in managing high costs populations, notably in fully integrating behavioral and physical health.
We will create new capabilities in programs to bring meaningful value to our clients and members.
I will talk in a moment about how we've begun to revitalize and enhance our behavioral and specialty health portfolio to address the credit clinic I'm sorry critical needs in this market.
But I.
I do think it's worth mentioning that these challenges are negatively affecting our nation. According to the centers for disease control U.S. life expectancy, either fell or stayed flat between 2014 and 2017.
This is largely attributed to fatal drug overdoses and suicide debts. Despite advances in care for other conditions Magellan has the clinical capabilities best practices and expertise to help our customers address these issues.
Finally, as I've traveled around the country and met with state Medicaid directors and governors Ceos and clinical leaders of health plans and providers I've heard many similar points being made by this diverse group.
The impact of behavioral health, the lack of integration and care delivery and the high cost of drugs are among the most prevalent challenges there are confronting on a daily basis and these challenges are growing at a rate that is greater than many of the risk bears can handle.
In the past excuse me.
In the past, we've made significant investments in Magellan complete care and Magellan Rx and as a result, we've experienced recent growth within these businesses, including the pharmacy PVA win in California.
I believe.
We have further growth potential across all our businesses and will sharpen our business ackman to fully capitalize on these opportunities in particular I see a large market for a revitalized and expanded suite of payer solutions within our behavioral and specialty health business.
Previously many viewed this business is somewhat of a buying their choice customers either carbon or carved out. These services in my conversations with current and former customers. It's obvious that there are many ways in which we can provide significant value to our customers. Whether these services are in sourced or outsourced we believe.
Weve a more integrated behavioral health model is possible and one with a more pronounced positive outcome for members.
Leveraging our deep clinical experience and locally based employees combined with predictive analytics and new care management platforms consumer engagement and proactive segmentation of specific populations. We can be positioned to provide services that are unequaled in the marketplace.
To achieve that we're prepared to make the necessary investments in people processes and technologies to capture the current in emerging market opportunities in behavioral and specialty and continue our progress in MCC Nm Rx.
Look forward to sharing more about this progress in future calls.
So looking ahead to 2020, we announced in our press release today that net income is expected to be in the range of 42 to 62 million, which translates to earnings per share of $1.69 to $2.49. We expect adjusted net income of 83 to 103.
He million and adjusted earnings per share of $3.34 to $4 in 14 cents.
We anticipate 2020 segment profit in the range of 250 to 280 million and revenue for the year in the range of seven to 7.4 billion.
Optimistic about the long term opportunities ahead and confident in our ability to achieve these 2020 guidance now let me turn the call over to John to review, the 2019 results and our 2020 guidance in more detail.
Thanks, Ken and good morning, everyone.
I'm pleased with our results for the fourth quarter, which were solid in line with our most recent full year 2019 guidance.
For the year ended December 30, Onest 2019 revenue was $7.2 billion largely consistent with 2018.
Net revenue growth in MCC was largely offset by the loss of a health plan PBM customer due to an acquisition and the planned reduction in the geographic scope of our part D Pharmacy plan.
Net income for the year ended December 30, Onest 2019, with $55.9 million, an EPS was $2 in 28 cents.
The increase in net income was primarily due to higher segment profit.
Adjusted net income for the year ended December 31, 2019 was $91.7 million, an adjusted EPS was $3.73 compared to 61.7 million in $2.46 per share for the year ended December 30, Onest 2018.
Segment profit increased from $228 million to 252.7 million year over year.
2019 segment profit included approximately $23 million, a favorable out of period items versus 10 million in 2018.
The majority of these out of period adjustments related to our health care segment.
For the full year, we reported 2019 healthcare segment profit of $177.4 million compared to 149.1 million in 2018.
The 2019 increase was primarily driven by MCC cost of care improvements in Virginia, partially offset by the contraction in the MCC of Florida footprint, and the behavioral and specialty utilization pressure that we discussed previously.
We reported pharmacy management segment profit of 110.4 million for the year ended December 30, Onest 2019, which was an increase from the hundred 4.4 million in 2018.
This year over year increase was primarily due to strong results in our specialty division and improved margins in our PBM business, partially offset by lower discretionary benefits in 2018.
Regarding other financial results corporate costs inclusive of eliminations, but excluding stock compensation expense totaled $35.2 million for the year compared to 25.6 million in 2018.
Increases mainly due to lower discretionary benefits in 2018.
Excluding stock compensation expense and changes in fair value of contingent consideration total direct service and operating expenses as a percentage of revenue were 14.9% in the current year as compared to 14.2% for the prior year.
This increase is primarily due to business mix changes and lower discretionary benefits in 2018.
Stock compensation expense for the year ended December 31, 2019, with $25.5 million a decrease of 4 million from the prior year.
This change is primarily the result of accelerated vesting of certain equity awards in 2018.
The effective income tax rate for the year ended December 30, Onest 2019 was 30.8% compared to 44% for the prior year. The decrease was largely driven by suspension of the nondeductible health insurer fee in 2019, partially offset by book to tax differences related to stock compensation expense.
Our cash flow from operations for the year ended December 30, Onest 2019 was $115.8 million compared to 164.8 million for the prior year.
The decline was largely due to the timing of receipt of MCC capitation payments.
As of December 30, Onest 2019, the company's unrestricted cash and investments totaled $195.4 million, which represents an increase of 65 million from the balance at December 30, Onest 2018.
Definitely $134.8 million of the unrestricted cash and investments at December 30, Onest 2019 is related to excess capital and undistributed earnings held at regulated entities.
Restricted cash and investments at December 30, Onest 2019, a $475 million reflected a decrease of 52.6 million from the balance at December 30, Onest 2018.
This decrease was primarily attributable to a delay in health plan capitation payments from the state of New York, partially offset by growth in MCC, Virginia.
Now, let me walk you through a summary of our 2020 guidance.
We're projecting net revenue of between seven and $7.4 billion net income for 2020 is expected to be in the range of $42 million to $62 million, which equates to a diluted EPS range of $1.69 to $2.49.
We expect adjusted net income in the range of 83 to 102 hundred $3 million and an adjusted EPS range of between $3 and 34 and $4.14 or 2020 guidance for segment profit is a range of $250 million to $280 million.
Our 2020 guidance ranges largely maintained our current level of margins, while simultaneously funding necessary investments to position us to meaningfully accelerate our prospects for future growth and margin expansion in 2021 and beyond.
I'll now highlight the key investments included in our 2020 guidance.
For pharmacy, we'll invest approximately $10 million to $15 million and operating costs and up to $30 million in capital costs to prepare for implementation of the medical PVA contract starting in January 2021 at which point the contract will produce approximately $75 million to $80 million.
Annual revenue a typical fee for service pharmacy benefit administration margins.
From an enterprise standpoint, we're investing $50 million for for the transformation innovation initiatives that Ken discussed.
These investments will focus on growth new products and operating process improvements.
We expect the earnings benefit from these investments to begin in the back half of this year and essentially offset the full year 2020 investments.
Going forward, we expect the net benefit to increase to $30 million in 2021 and over $75 million in 2022.
Now to put this in perspective, where retail already achieved the projected return on these investments in 2020, our segment profit would be in the range of 350 $400 million.
Now I'll discuss the key year over year drivers of our 2020 guidance.
To begin our full year 2019 segment profit of approximately $253 million needs to be adjusted by three items to normalize the run rate for 2020 comparison.
First $23 million, a favorable out of period adjustments.
Second $7 million of severance and third $12 million of additional segment profit and 2020 related to the provision for none inductive nondeductibility of the health insurer fee.
After adjusting for these three items, our 2019 normalized segment profit run rate would be approximately $249 million.
The 2020 segment profit guidance midpoint of 265 million is $16 million higher than the normalized 2019 actual results and includes the aforementioned $10 million to $15 million of startup costs for the California, Medicaid pharmacy contract.
Now I'll provide commentary on specific drivers over 2020 guidance for each of the individual segments beginning with pharmacy.
For our pharmacy management segment, we're expecting 2020 revenue to be up slightly from 2019 solid PBM net business growth is expected to be mainly offset by the termination of a Medicaid fee for service contract and the reduction in our part D membership.
We expect to 2020 segment profit margin pharmacy as a percentage of revenue could be modestly lower than in 2019, largely due to the startup expenses related to the new California pharmacy benefit administration contract.
For healthcare segment were projecting revenue to be up slightly year over year in 2020 as net growth within the existing Magellan complete care states is expected to be mostly offset by net behavioral and specialty help contract losses, particularly in the business, where we provide staffing solutions to the federal government.
Segment profit margins within healthcare as a percentage of revenue are expected to be modestly higher than for 2019.
This year over year expected increase in margin is driven by continued execution against our cost of care initiatives within Magellan complete care rate increases in excess of cost of care trends as well as segment profit impact of reinstatement of the health insurer fee.
2020, corporate expenses, excluding stock compensation expense are expected to be approximately $3 million lower than for 2019.
Now turning to other items in our forecasted earnings 2020 stock compensation expense is expected to be approximately $29 million.
We project depreciation and amortization expense to be about 122 million in 2020, and we expect to incur interest expense of approximately 34 million and to generate interest income of about 14 million in 2020.
The effective income tax rate for 2020 is projected to be approximately 44%.
The effective rate is higher than the federal statutory rate, primarily due to the inclusion of state taxes and the nondeductibility of both the health insurer fee and a portion of executive compensation under the 2017 tax Act.
Capital investments for 2020 are expected to be approximately $100 million, which is higher than our historical investment levels, primarily due to the investments supporting implementation of the medical contract for pharmacy.
The 2020, EPS and adjusted EPS calculation are based on our estimate of 24.9 million fully diluted shares for the year.
This estimate comp contemplates the impact of share repurchases an option exercises through February 20, Onest 2020, but does not reflect any potential future activity.
In 2019, we repurchased approximately 61000 shares for $3.7 million.
We have 186.3 million remaining in the current share repurchase authorization that expires on October 22nd 2020.
The pace of any future repurchases will vary based on a variety of market and company considerations.
In closing we ended 2019 with solid fourth quarter results and I believe that our 2020 guidance strikes a good bounce between current earnings in the necessary investments to establish a strong foundation for growth and margin expansion in 2021 and beyond.
Look forward to discussing our progress in these initiatives at our first quarter call.
And with that I'll now turn the call back over to Ken Ken.
Thanks, John before we move to questions I want to take the opportunity to share a few flowed closing comments.
I'm excited and honored to have the opportunity to guide Magellan in our mission of leading humanity to healthy environment lives I see tremendous opportunity for our businesses to grow and thrive.
Well into the future in it as I said, the first time I had the opportunity to address you I believe great companies well defined by their leaders are in fact built by their people. We have a strong leadership team in place that's been bolstered with the recent additions of Jim Murray Magellan's, New President and Chief operating Officer, and David Haddock Magellan's, New General Counsel.
The 2020 outlook share today strikes a balance between current margins and the necessary investments for transformation that will build the foundation for future margin expansion earnings growth and value to all our stakeholders delivering sustainable industry competitive margins across our businesses remains a.
Clear strategic priority for Magellan would that we'll now open up the phone lines for questions.
And again as a reminder, if he would like to ask a question from the phone. Please press star one on your line and record trading when prompted our first question comes from Dave Styblo with Jefferies. Your line is open Sir.
Hi, good morning, Thanks for the questions Ken Great to hear your thoughts on the near term priorities and maybe I'd start with that if I could.
I know you talk a little bit about doing a portfolio review Im curious if you've had any or early learnings of pieces of the pie that maybe just don't fit.
In the context of you can't do all things for all people and certainly heard your comments, there about revitalizing growth and behavior on specialty I guess.
The.
Challenge that that investors have thought of as behavioral business might be in a secular decline, but maybe that's more in the state government side and not so much on the payer side. So maybe you kind of flush out.
What you see as opportunities to help integrate that and I assume this would be for clients that are maybe smaller mid size payers as opposed to the larger ones, who likely how some of these services and house or any.
Yeah, Great question. Thank you.
Now, let's start with the last piece because.
We as we spend time thinking about where opportunities to go forward. There's no question that behavior when specialty costs continue not only places like the system more broadly.
But represent a real opportunity for innovation and integration so.
I think that if you think about the idea being the special teams player at the table as part of an integrated delivery solution where.
Spares or looking at the total humans I mean picked thinking about the patient holistically, there's an opportunity for us to regain exceeded that table and leverage years of real experience local and distinctive capabilities to augment emerging digital technologies to provide a more fulsome.
Solution set and so I think we perhaps self inflicted maybe or kind of steered ourself away steered the boat out of some of that turbulence and I think there's an amazing opportunity to steer Magellan back in to the conversation and become a vastly more integrated player with payers of all size candidly because I don't think this issue is necessarily.
It's been slate, yet and by virtue of that creates enormous opportunity for organizations with sovereign and distinctive skills.
Similar to those we have here at Magellan, So I really think and the under investment that's been kind of a byproduct of our pivot towards MCC and Magellan Rx, while those businesses have grown I think created great opportunity for upside as we focus forward.
Our early work in and around transformation executing and honoring our commitments.
Has really taken priority and so to your first question around you know what may or may not be deemed as non strategic that portfolio analysis. I described is well underway and I think in future calls we can bring more clarity.
The specifics that are necessary.
As I said to be mystify, Magellan and reduce the degree of complexity and add clarity to our business model.
Okay and other other businesses that you're not in right now that you think would be a good fit and logic as your as you're pursuing the credit strategy ahead.
No I don't see any businesses that were not in I think that looked at the integration that's necessary in the reality that you know the link between behavioral and physical is well documented I think the real opportunity for us is to demonstrate fear in the Medicaid business often times its behavioral that drives physical.
As we move into our you know the senior market, it's clear that often times, it's the physical that drives behavioral and I think that's where the real opportunity is and while we have as I said.
Ladies and distinctive and longstanding sovereign skills I also think theres an opportunity.
To leverage the many of the new and emerging technologies.
To create a more comprehensive end to end solution and I think you'll see this in terms of how we refreshing grow our product suite now I talked about businesses I do think there are high cost areas and it's hard to say anything unmanaged, but there certainly those that are undermanaged, we see great opportunities as an example in oncology.
So they're up there are I think areas that where we have great experience and managing complex care that we can leverage that and other emerging high cost areas.
Okay, Great and then can when you step to and you sort of inherited.
And that had set an established net income margin target of 2% plus and 2021.
Guys, providing a lot information to they haven't had a chance to refresh the French kind of in my mind real quick, but I'm curious what your assessment of the company's ability to achieve that or is that something me that gets pushed out because the investments that are happening in some of the transformation initiatives are going through and perhaps longer term what do you see as as a target net income target for.
The company over the next two to four years three to five year something along that horizon.
Yes, I'll, let John add to this as well you know he's obviously the.
Little more time here of a gentleman I do but I can tell me early on and I think its evidenced hopefully you picked it up in the script and as and you'll see us as we move forward through the balance of the first half of this year on keenly focused on execution and getting the company organized and focus to build momentum the level in range of things were contemplating both.
And the transformation office and again transformation is not just drop process improvement, it's about rebuilding muscle memory around business development.
And strengthening our ability to move with speed. So this is about execution in momentum.
I think you'll begin to see the real benefits of as we move through the year and I think that'll inform and we'll take that momentum into 21, and 22 and I think you'll see that reflected.
In the value that's created as a byproduct John and Dave Let me just had said a bit in terms the financials.
First we're obviously not ready to give guidance on 2021 at this point, having said that I mentioned, a couple of things one as Ken alluded to earlier, we see substantial growth opportunity in behavioral specialty through.
The work that we're doing to sort of reinvigorate the portfolio the distribution capabilities for the business et cetera that hadn't been previously contemplated.
20, Twentys in investment year for Us and you know relative to.
Our past plans, what I'd say is we're investing more for the long term. It may from a timing standpoint, I mean that we're not making as much incremental progress in 2020 on things like.
Some some of the efficiencies, but we're gearing up really to be able to drive more sustained and larger improvements longer term. So the way I the way I'd characterize it again is not yet to give sort of specifics for 2021, but believe that with the transformation office, which over the next couple of years, we think can drive.
More than $75 million improvement I think we can get too.
2% margin and beyond but will you know in the into subsequent quarters report more specifically on what we believe me up the pace of that improvement will be.
Okay. That's helpful. And then lastly back to Ken I'm, one of the comments that you set for the near term priorities again was just promise promises that you want to making.
And execute on I'm curious has have you had.
A different approach perhaps to to help guidance has built up for this year in terms of feeling like the numbers are particularly conservative and that you guys have room to.
Navigate through any challenges are hiccups that come along the way is there any change in how you guys go about setting that and and perhaps leaving yourself some some opportunities to create some upside over time.
I think the.
Excuse me.
Recovering from a long cold nothing more than that for anybody in the room, but.
The.
As I said earlier my primary focus coming in I said to the management team actually does board early on that I was going to be focused on cultural culture strategy and execution and when I arrived here they want I flip that to execution strategy and culture.
Which is evolving really really nicely I.
I think Magellan has that real opportunity when I say, we're going to honor the promise we want to make promises that we can keep and we want to honor. The commitments. We've already made we have to be able to to execute to our commitments each and everyday.
And if we got a bit behind in a couple areas and I I referred to that when I said we.
Maybe underperformed.
Our own expectations and those of others.
In the script and so my real thinking here after 100 days.
One I'm I'm extraordinarily enthused about the opportunity to build momentum as we move for the you through the year.
The team is engaged in digging in the work that Jim has done in just the first five weeks not only like identify work streams, but to put the size and scope them.
The name leaders and create a path forward, we're already beginning to see.
Acceleration in the pace with which we can execute around these opportunities and so I think I think you'll start to see that momentum in future calls and then you can draw your own conclusions about what thats likely to mean in terms of upside, but I'm I'm again as I said, it's it's a focus on action an orientation around execution.
And revitalizing our growth engine in the business development opportunities that will follow I'm certain will be meaningful.
Okay. Thanks, I'll step back for others.
Thank you enter next question comes from the Kevin Fischbeck as Bank of America. Your line is open sorry.
Great. Thanks.
I guess a few questions first one.
Personally center and the call so far you've talked a lot about kind of growing the behavioral and specialty business you guys, specifically signal that I wasn't sure if that was just more to kinda.
[noise] address maybe a change and how that companies talk about or the perception the market or whether that was in any way a signal. It's kind of your view about the growth and in the Medicaid or the pharmacy businesses I wasn't for you were deemphasizing that opportunity in some way to the negative or whether it was really just about that operator are you still the way that the companies talking about so.
We were just talking about behavioral as being a third kinda growth driver so any color there.
Thanks, Kevin and.
It.
I am thrilled with the great work, that's been done in MCC and than year over year.
Momentum is.
Hi priorities in terms of sustaining that through 2020 and beyond and so my comments were not intended in any way shape or form to suggest that we're pivoting away from our prior strategy with respect to met our our ex businesses.
Indoor MCC quite the contrary, what I think is that the challenges facing risk bears and by virtue of those we serve in around behavioral and specialty health are continuing to grow I think it's just a big rock and I think it is a great opportunity.
To leverage sovereign skills distinctive competencies in.
And.
Emerging technologies to rapidly reinvigorate a business that frankly, we've kind of taken our eye off of a little bit so again in.
In no way, suggesting that that youve dispense of either the other business is quite the contrary in addition to.
Okay, Great and then I wanted to understand because again I appreciate the commitment to delivering on.
Thomas isn't I guess, one step towards that would be this 2020 guidance.
In particular that might help but we certainly the street being able to gauge your execution get that would be it could get little bit more color maybe on a seasonality for this year because it sounds to me I have this right you guys are investing.
You know I don't know I guess $50 million on this transformational dynamic which is going to I guess be a drag in the first half and then be a tailwind in the second half.
And then trying to extend the pacing of the of the $15 million in costs around the Medicaid contract is that is that more in the back half just trying to understand some of these kind of onetime things and making sure that we understand that progression. So that we we can kind of judge how you're executing through the year.
Yeah, Hi, Kevin It's John.
A couple of comments. So so first on just the overall seasonality I I think you have the general sequencing right, meaning that the the transformation benefits will be weighted more towards the back half the year. Therefore, we will see higher than sort of the proportional earnings in the second half the year.
And again you know we've had if you look back at our history.
Pattern that varied but has been generally more back half weighted so if you look at whether its last year, when we had improvements and MCC during the second half of the year or or or you know going back a few years I I think you'll see that similar pattern of you know something in the in the 40 percentage wise.
In the first half than and at a higher percentage of earnings in the second half relative to California me and the 10 to 15 million. We are you know it is a massive implementation I mean, it's you know the largest.
Pharmacy benefit administration contract by a wide margin anywhere. So so it. So we have already started the work in that have already started to bring people on board, having said that it does ramp up as year goes on but I wouldn't relative to our overall seasonality view that is overly material and how it weights you know the total energy.
Rise numbers, but you know will be again as I mentioned with the overall seasonality somewhat higher weighted in the second half of the years as we continue to build stuff to be ready for implementation.
Okay, Great and I guess, when you think about that the investments are saying this year net neutral next year at 30, the next year AD.
70 fives.
Is the way to think about that are those actual good numbers or it sounds like you're also making a lot of investments that we think about any of these savings being we reinvested in the business are those those are kind of net numbers that we should expect from a contribution perspective.
Yes, I mean, those are estimates right now for net numbers. So that so that already does net out you know any incremental investments in those years as well.
Okay. So.
And I may have missed it.
My view into the nuance in there, but I think you said something along the lines of and if your pro forma for savings here, we'd be at a.
350 to 400 million dollar number I think your guidance. This year to 50 to 280, so that would be likely 25 to.
355.
Are you putting that on the 20.
19 numbers or we are putting that on the 2020 guys are there another.
Component in there.
Yes, I know Theres really two components. So the two components are you know for transformation you know again, well we've got a 15 million dollar investment. This year that we think will be net neutral in 2020 with the benefits we get in the second half the year.
So you know the full run rate when when everything is implemented will be positive 75 million. So you look at that it's kind of a plus 75 and then on Medicare will for for Rx. We have a net investment of 10 to 15, this year, which obviously won't repeat and then we said that would produce revenue going forward of 75.
The 80 million that you know typical PCBA margins. So so it's really the combination of those to it it's the elimination of the onetime investment this year in Rx.
The benefits of that revenue and earnings stream going forward and then the the 75 million in net benefits that we ultimately get and transformation.
That's adding counseling, okay that makes sense and then maybe last question. It sounds like you're bullish about the the growth opportunities here and I guess all of your businesses, but you haven't really grown topline in a little while now so.
Turning to understand how we should think about the pace of that Reacceleration, excluding California.
I guess, we already know about like how does the selling season for next year look you guys expect to see PBM topline growth next year or is this something that these investments are really more about.
2022 at that at that perspective, and then the same thing I guess on that.
MCC side.
Weeks be expecting growth or is this more about kind of a multiyear before we should expect.
Topline growth.
Yes, let me start and then you know Ken Ken can add color Kevin. So first in terms of the in terms of the growth prospects for for PBM. They ask you continue to be quite good I mean, we're seeing very solid growth in the PBM. This year in sort of the core PBM business that you know again as we mentioned there were some onetime losses that.
That partially offset that going forward, though we obviously have they have the California PVA contract coming in you know that that will start to both revenue and earnings next year and expect to have strong continued PBM growth as well as on the specialty side. So we think that'll that'll be good if you recall on MCC you know we consciously.
We just given.
What are the operational initiatives, we had in place to drive improved profitability into fully digest, the very rapid growth. We've had over the last few years did not.
Actively pursue any large new implementations over the last year or so we are now actively.
Working a pipeline and again why can't predict what 21 in 22 will look like we certainly view that they're being significant growth opportunities. There and then I'm behavioral specialty you know as we bring reinvigorate the portfolio about 2020, you know we're not seeing you know yet the large opportunity that we believes there.
There from a potential standpoint, we do think beginning in 2021 and beyond we'll have a ample opportunity to to capitalize on the investments, we're making and can Oh, you know you give a key to talk maybe a little bit more about some of those revitalization efforts yeah. Thanks, Sean.
When we talk about transformation I think it's the natural inclination is to think about process improvement and clearly a lot of the work streams are oriented around accelerating the pace with which we.
Get at platform consolidation.
And automating processes that were going to drive efficiencies in margin improvement.
That I think.
I don't want.
With a pace with which we got a lot of that stuff in the last year sort of slowed with respect to but but there's a second side of the transformation agenda, which is tied to growth. So we have Jim Murray, leading the transformation work streams tied to process improvement I'm, leading the transformation work streams tied to growth.
We are.
Close to being.
We're going to name a chief growth officer, which I think is going to help me with accelerating the pace with which we assess and evaluate our capabilities across the business development continuum from source.
Through sell retain upsell cross sell we a lot of existing revenue from traditional relationships and that's why honoring current commitments are so important as we think about building revenue in the short term also what their environmental issues out there that are affecting our competitors many are struggling.
And there's a tremendous amount of consolidation, which creates short term opportunities.
That will help fill the pipe and I think that a bias time as we worked aggressively to create the.
Kind of value proposition that we can leverage and build growth towards 21 and 22. So I think you know as you'll see I wish I referred to this somewhat in the script, but.
You watch our actions with respect to leadership leadership development and lighting and talent.
We have concentrated we've added we've augmented existing talent with a number of new folks inside Jim's organization.
And and now we're moving to strengthen and augment talent inside of business development.
I think you'll see the byproduct of that as we move forward.
Great. Thanks.
Thank you. Our next question comes from Scott Fidel with Stephens. Your line is open.
[laughter].
Got you may be on mute.
Hi, guys can you hear me.
Oh, Yeah now okay.
Good morning, and I can't nice to catch up with you. Today first question for you guys is just wanted to clarify on the on the update on the behavioral cost trends and.
Relative from the three Q2, the Fourq you.
Sort of sequential dynamics. So just just wanted to.
Get a sense. So you had the cost bump in the third quarter. I know you guys mentioned in the prepared comments that you didn't see any additional cost pressure. So it's basically that rolling forward to 2021 that the threeq you sort of up lifting cost out that's the new baseline from which you were pricing for for 2021.
But you did see any additional incremental increase in cost trend in Fourq you.
Yes, Hi, Scott John I would I think you characterized it accurately we haven't seen any additional pressure in fourth quarter. The run rate has been similar to third quarter, So and again as we talked about in previous in the previous quarter.
We saw this uptick that really started to occur. This year. There were some changes in certain populations that we were covering which did establish that new baseline. So that is what we're carrying into 2020 into this year. As we mentioned we did achieve customer rate increases that we were targeting.
So that affect essentially did cover the increased demand were seeing because of the market and and specific population drivers were seeing within our book, having said that we're continuing to implement action plans to mitigate cost of care. So it's not like we are accepting the harder baseline we've got a number of initiatives.
Concurrent review for inpatient stays.
Looking at re contracting so so that we're able to best control those costs going forward as well from a structural standpoint, and other targeted initiatives I'm within the network too.
Two.
Fine tune the network to be able to drive both.
Adequate access and and reduce costs. So that's that's kind of the quick snapshot I'd give them.
Got it and John can you put to put any numbers around that two to help it frame as a frame it in terms of where what's your view on trend sort of going into three Q.
For behavioral and specialty trend I know that theres different sort of businesses within that but it sounds right behavioral was was sort of the key cost drivers so sort of where was behavioral trend going into Threeq, you and then where did you use your estimate of it currently.
During 2021 in terms of what on what type of tried your pricing too.
Yeah, it's a great great questions. So I would say historically got you know we've seen mid single digit trends really both on the behavioral in specialty side I mean, there's always going to be some on the specialty side, some puts and takes depending on the specific.
Categories of care, we did see you know that spike in 2000, and ER and 19. So that you know the behavioral trend crept up higher you know called the high single digit type trends versus what we've historically seen.
In our pricing, we're really pricing for the higher levels of trend to largely continue again with some offsets that work that we're driving on the the improvement plans around the cost of care mitigation to the extent that you know trends return to historical levels that that does provide some upside, but we're not kind.
Turning on that in terms of how we price the business.
Got it and maybe to bring our tenant to this as well just just along those lines of having seen this uplift in the behavioral and specialty trend in terms of where you guys are underpriced business for how does that factor in at all to refocus the focus on driving growth.
You know in in that particular end market right now as you have seen cost trends rise you needed to sort of increase pricing for the customers as a result.
Yeah, Scott good reconnect look forward to senior along the way.
You know I build on were John was maybe taking a slightly different perspective, you know as part of the opportunity to revitalize our behavior on specialty businesses, there's a huge opportunity to leverage data analytics.
We can mine for clinical insights to try to get ahead of.
A lot of this side of services, just such an important component and timing related to when we intervene.
You know, particularly in our Medicaid business. So if we if we if we can identiv continue to work to identify.
Hi risk.
Relations and get in front of them sooner we can Medicaid.
The impact of utilization down the road when things sort of spiral out of control.
Two late in the process. So I think we have a great.
Analytics team here.
And we've demonstrated through our cost of care improvements in in Virginia, and our other MCC states that we've got competency here and so I think.
There is an opportunity.
To to leverage data analytics and it'll be in its also I think a byproduct we talk about innovation labs, where we're starting so.
I hope that helps.
Yep band I, just had one one other question on the the sort of refocus on BH in specialty and just interested in your thoughts on the competitive environment and that end market right now I know Ken in the prepared comments you talked about it looks like you see a bunch of targeted opportunities to that to get into that space more in a differentiated.
Hi, I'm at the same time, you know from our and we certainly at here all of the larger National MCR is talking about investing more in the specialty markets and and driving more incremental margin or more incremental growth in specialty so interested in how you juxtapose that in terms of.
What we are hearing from a number of others is an increased focus on specialty markets as well.
Yeah, I actually I I'm I think that work that focus this positive trend for us because again it's.
Hi directly to the legacy.
And I said sovereign, but a longstanding distinctive competencies in areas that I think we can add real value I think we had to change the nature of the way we build contracts the nature of the way we think about now that we've demonstrated an ability enactment of mer risk.
We think about you know changing the nature of the conversation, we have with existing past and future customers.
And.
Again, it's not carve out a truly carve in its bring Magellan to the table as a special teams coach and one of the Tom in an important.
View around value based care in managing the whole individual I just I think when the return that we can provide exceeds what those companies can can achieve on their own independently and I think a lot of while there's definitely directionally.
A desire to invest we want to be good partner and we can share in that and so I.
Getting a good response, Scott to those conversations in and among my peers and I think its changes the nature of the way, we think about how we pitch ourself and how we position ourselves and product development standpoint, and a you know and we let our value proposition slipping a little in some ways over the last year. So when I think invigorating that and again couple of.
On the conversations I've had with my peers, who suggested it or not necessarily satisfied with the progress there seeing creates a real opportunity for a different kind of relationship. So you can think about it you know in terms of the way this business used to be it's really about changing the narrative in the paradigm as we move forward and.
Again, as I said I I'm getting a good response to that and eager to see where that can go.
Got it and then just one last question for me Ken why did they give you just in initial opportunity to talk about your priorities for capital deployment sounds like obviously, it sounds like reinvesting in the business seems to be that but I don't want to put words in your mouth, maybe you want to talk about sort of priorities between reinvesting in the business M&A.
Okay and then.
Returns to shareholders and in terms of buybacks.
Yeah, we've first wanted to.
Early.
Work screams was to step back and and and take a long hard look at what we've done in the past keeping in mind that for insight to ensure that the decisions, we make going forward and around how we deploy capital aligned directly with our strategy again I spoke to the opportunity to demystify, but the fact is is that when we're looking we're starting.
How we add value to our customers and it goes back to kind of partnerships I talked about.
You know I.
Jim Murray last me, because I say on the king of worthless analogies, but I can getting Dale Earnhardt race car, but I'm not going to win the Daytona 500, right. There's a lot of amazing new and emerging technologies out there.
That that frankly don't have the benefit of our experience.
The size and scale that Magellan can bring and only get to a certain point in the care continuum, and then have to hand, it off and I think the ability to think about how to work in an integrated fashion and weve ourself into that.
In ways that can be impactful will inform the kind of decisions. We make early on about what we invest in particularly with respect to strengthen our digital capabilities targeted investments.
Long that care continuum.
And that align very closely with our strategy going forward.
As we think about the strengthening of business.
Around managing complex care at a time, particularly with respect to behavioral and many of these specialties where costs are increasing and extremely rapid rate. So as I said earlier is a big rock I think we have an opportunity to crack and in a way that can be meaningful and I think you'll see the capital.
Strategy and deployment of.
The investments, we make going forward aligning very closely with that strategy.
Across each of our three businesses.
Okay, great. Thanks.
Thank you.
Thank you and I'm showing no further questions on the phone line item from.
Great well listen thank you all very much for joining US today, we'll look forward to our next call when discussing progress, we're making come through the next quarter.
Thank you.
Thank you for your participation in today's conference you May now disconnect at this time have a wonderful day.