Q1 2020 Earnings Call
[music].
Welcome and thank you for standing by for the first quarter.
2020 earnings call.
This time all participants are in a listen only mode. During the question answer session. Please press star one on your Touchtone phone today's conference is being recorded if you have any objections you may disconnect. At this time now I would turn the meeting over to Joe Bob.
You may begin.
Good morning, and thank you for joining Magellan House first quarter 2020 earnings call.
With me today, or Magellan, CEO and solo and our CFO Jon Rubin.
The press release announcing our first quarter earnings with distributed this morning.
A replay of this call will be available shortly after the conclusion through June 10th 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 as of today May 11, 2020 and have not been updated subsequent to the initial earnings call.
During our call will make forward looking statements, including statements related to our 2020 outlook.
Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and 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 our form 10-K filed on February 28, 2020, as well as updated or supplemental risk factors and information security and cyber security matters.
And extraordinary events, including the coded 19 pandemic, including in our form 10-Q to be filed today.
In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results.
Specifically, we refer to segment profit adjusted net income and adjusted EPS, which are defined in our SEC filings and in today's press release.
Segment profit is equal to net revenues less the sum of cost of care cost of goods sold direct service costs and other operating expenses.
And includes income from unconsolidated subsidiaries, but excludes segment profit from non controlling interests held by other parties stock compensation expense special charges or benefits as well as changes in the 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 compensation expense, resulting from restricted stock purchases by sellers changes in the fair value of contingent consideration amortization of ice.
In a fight acquisition intangibles as well as impairment of identified acquisition intangibles.
Please refer to the tables included with this mornings press release, which is available on our web site for a reconciliation of GAAP financial measures to the corresponding non-GAAP financial measures.
I will now turn the call over to our CEO Ken facilities.
Yes.
Thank you Joe and good morning, everyone. We belong to cover today. So I'll begin with Magellan's response to covert 19, followed by an update on our work to refine our strategy, including revisiting the four priorities I outlined in our February call.
We'll provide highlights of our results for the first quarter, including our perspectives on the impact of Cobot 19, as we look forward.
Magellan has a vital ongoing and shared responsibility in protecting the mental and physical health of millions of people in fact, the Corona virus pandemic has made abundantly clear what we already knew the behavioral health of individuals remains a critical societal need presenting challenges for health plans employers.
And government payers or challenge and opportunity Magellan is well positioned to address.
Serving our members and our communities through the Cobot 19 pandemic is a top priority.
We've taken proactive steps first to protect our associates and then to address the needs of our members are provider partners and our communities in response to the pandemic.
More than 90% of our 10000 associates for working from home within the first week of the emergency.
We focused on maintaining and strengthening our provider in service delivery systems as well as ensuring that our members, especially the most vulnerable among them have the necessary support and access to care.
We facilitated and when necessary push to expand telehealth services, we've seen a shift towards telehealth visits in late March and April, particularly in behavioral health, where telehealth utilization has increased over 20 fold.
Represented almost half of all behavioral outpatient services in April.
We believe that the general acceptance of Tele health by both providers and patients is a significant and lasting game changer, because its use improved access efficiency and productivity.
We increased the amount we pay providers for the same to be the same for these visits as in person visits in cases, where we have not already done so and we made advance payments available to help ensure that these clinicians are partners had improved liquidity.
Beyond our care coordinators and pharmacists on the front lines in the fight against Cobot 19, a number of our clinicians volunteered their time with our support.
Magellan Health has also opened a free hotline staffed by our certified license mental health conditions to serve our nation's first responders and healthcare workers to help address their mental and emotional well being at this difficult time.
The further support our communities Weve also made donations of cash personal hygiene products and protective equipment to food banks in community partners as they serve those in need.
I'm extraordinarily proud of the resilience in spirit of Magellan's associates, who have risen to meet the unprecedented healthcare challenge, we're facing with cobot 19.
Magellan is a company with a noble mission and our associates live that mission every single day as they bring their passion and commitment to those we served through their work and their volunteer efforts I. Thank each of our associates for their tremendous commitment.
As our strategy is taking shape, let me provide you with a vision of where we're headed.
Today, we're the largest independent company, providing behavioral health specialty health and pharmacy benefits to health plans employers and individuals.
What I've seen over my now six months strengthens my conviction and increases might resolve together with Jim Murray Jon Rubin in our leadership team I'm excited about the growth prospects for Magellan moving forward.
We believe we can significantly improve outcomes with lower total medical costs for our customers and their members through a proprietary differentiated model addressing the specific needs of complex high cost populations.
Key aspects of our go forward strategy will include sustaining and strengthening our leading carve out services, while also evolving those into a new capability and integrated whole person approach leveraging our behavioral pharmacy in clinical strength.
Then, creating an integrated value proposition targeted at complex populations supported by proprietary Magellan offerings.
Architecting new solutions to address major payer challenges, such as oncology care and opioid management and delivering a compelling pharmacy strategy highlighting Magellan Rx his position as the Premier independent full service PBM with superior clinical distinction in India.
Three leading specialty and medical pharmacy solutions.
Magellan has a legacy of performance in meeting customer needs and behavioral health specialty health and pharmacy.
We intend to deploy capital to develop strengthen or acquire capabilities that will enhance our unique value to customers in addressing the specific needs of complex high cost populations.
In February I noted that we were launching a comprehensive portfolio analysis of all of magellan's businesses to evaluate our value proposition and growth potential.
While we were conducting this review we received inbound interest on our Magellan complete care portfolio.
We accelerated our review and made the decision to concentrate our focus on serving payers.
We thus decided to sell the Magellan complete care business at an attractive purchase price that reflects the value we've built and MCC.
This sale tightens, our focus strengthens our balance sheet and creates a new multi faceted strategic relationship with Molina healthcare, a fortune 500 company with a strong reputation for serving states in their beneficiaries healthcare needs.
Let me summarize the key aspects of the transaction.
On April Thirtyth, we announced the sale of Magellan complete care to Molina healthcare for $850 million in cash.
We estimate taxes and fees associated with the transaction to be between 80, and 85 million, which translates to net proceeds in excess of $30 a share.
Over and above this magellan will receive an amount equal to any excess capital above regulatory requirements at Magellan complete care subsidiaries at closing.
At March 31, 2020, this excess capital was $94 million.
Importantly, Molina has entered into multiple long term contractual agreements with Magellan, including purchasing new medical pharmacy, and muscular skeletal management services for over 3 million Molina members as well as retaining Magellan for behavioral health radiology and muscular skeletal management services.
Certain MCC markets.
I'd also note that Magellan Rx management will continue the existing pharmacy benefit relationships within MCC.
Furthermore, Molina and Magellan have also agreed to develop an innovative integrated behavioral health pilot, leveraging magellan's learnings and experienced in Virginia.
The purpose of the pilot is improving quality and lower total medical costs through best practice model using data technology and care coordination processes.
After demonstrating success in Virginia, the intent is to expand and adapt this model to other Molina markets. It will then become the foundation for Magellan offerings for the broader market.
This is a good example of the innovation that will enable our strategic shift to an integrated model.
Our portfolio analysis also included a review of our pharmacy part D business.
We entered the PDP market in 2016 to demonstrate competency in Medicare part D.
This was a critical component to building a full service PBM that can effectively compete for multi line health plan and employer PBM business.
After five years in the PDP business, we successfully built that expertise.
The time is now appropriate to exit the individual market at the end of 2020 and fully dedicated Magellan Rx is Medicare team to focus on continued growth across our health plan and employer PBM business.
Let me turn now to an update on our near term priorities, which I shared with you in February.
First deliver on our existing commitments second lower operating costs third strengthen our capabilities through innovation and for improve our ability to capitalize on growth opportunities.
With respect to delivering on our commitments, let me share some highlights of our strong first quarter results.
For the first quarter of 2020, Magellan reported revenue of $1.8 billion and segment profit of $74.8 million, while revenue was largely level with the prior years first quarter segment profit increased by over 60% given our improved operational execution.
Favorable prior year development and lower utilization in some areas, including the early impact of Cobot 19 in the last few weeks of March.
Our strong first quarter results.
Reflects solid fundamentals across the company.
Looking ahead for the balance of 2020.
Our industry is facing significant uncertainty about cobot nineteens impact on our businesses.
While we cannot predict with accuracy the impact cobot 19 will have on our business. We are maintaining our full year 2020 guidance.
John will provide additional details on both the actual first quarter results.
And the 2020 forecast considerations later in the call.
Next let me share progress update on our transformation initiative, which we expect will enhance our customer experience, while lowering our operating costs.
It's early but I'm pleased to report that the pace of anticipated savings is meeting our expectations.
We're making progress in offsetting our investments in 2020 and on creating a path to meet a net segment profit improvement of over $75 million by 2022.
The current focus areas with the greatest traction today include operational process improvements, including automation and self service direction outsourcing of noncore activities vendor contract renegotiations and claims payment integrity.
We do not expect the divestiture of MCC to have a material impact on the $75 million of earnings benefit targeted in 2022.
Our third near term priority as innovation.
We've established in innovation lab focused on consumer health, where we will facilitate real world testing of solutions with key health companies that are part of our healthy ecosystem and invest in early stage innovators with practical cutting edge ideas.
We've recruited an excellent team and our seeding the lab with experts and data analytics medical economics, corporate development and a variety of clinical disciplines.
Hi, formed a clinical leadership committee that spans the enterprise Magellan is a pioneer with a rich history of clinical distinction and academic focus and innovative solutions in the care of complex populations.
The focus on clinical innovation has energized our company and will further accelerate the pivot anchoring our strategy.
Finally, Magellan is committed to a culture of growth and performance.
Honoring and executing our commitments optimizing our cost structure and delivering solutions anchored in innovation data analytics and clinical insights will set the table for success across the business development continuum.
We are rebuilding our growth engine by establishing disciplined enterprise.
Go to market standards across strategy development product innovation market positioning and sales execution.
We're adding senior sales leaders with proven C suite, selling skills and clinicians experienced in business development.
Growth at Magellan centers around our ability not only to share and enterprise story, but also to execute longitudinal member experience across all Magellan platforms.
Our initial focus has been on a media cross selling opportunities within our existing customers and expanding our distribution by investing in significantly strengthening our sales capabilities enterprise wide.
As we continue to evolve.
Two and in an end to integrate our product marketing and sales strategies. We're confident the investment in our enterprise go to market platform will yield a differentiated portfolio and our unique integrated story.
With that I'll turn the call over to John to provide more details on our results for the quarter.
Thanks, very much Ken and good morning, everyone.
For the quarter revenue was $1.8 billion increase of 3% over the same period in 2019 due to growth within Magellan complete care.
Net income was $18.3 million and EPS was 73 cents.
This compares to net income as a zero point $4 million.02, a share respectively for the first quarter of 2019.
Segment profit was $74.8 million for the first quarter, including approximately $12 million a favorable out of period items, primarily related to MCC reserve development.
As Ken suggested this represents strong growth compared to $45.6 million in the prior year quarter.
As a result first quarter adjusted net income was $28.6 million, an increase of $19 million from the first quarter of 2019.
An adjusted EPS was $1.15 cents.
Now, let me share the detailed operating results for the quarter.
Healthcare business results were strong for both our MCC and behavioral and specialty healthcare businesses with segment profit for the first quarter of 2000 plenty of $62.1 million.
Segment profit increased $17.1 million versus the first quarter of 2019, driven by favorable prior period development and utilization results, particularly in Mtc of Virginia in New York.
As well as the reinstatement.
Of the health insurer fee.
As it relates to cobot 19, we've seen some reduced levels of medical utilization since the last two weeks of March due to reduction in elective services across our healthcare businesses.
This reduction has more than offset the direct medical costs associated with the Corona virus and early pharmacy refills with our health plans.
As I'll discuss in a few minutes, we expect to see the full impact of the favorability in our second quarter results with the magnitude as well as the timing of any potential utilization increase later in the year remaining uncertain.
Now turning to pharmacy management, we reported segment profit of $20.9 million for the quarter ended March 30, Onest 2020, which was an increase of $12.6 million from the first quarter of 2019.
This year over year increase was primarily driven by improved gross margins in the PBM business as well as strong performance within our specialty drug management portfolio.
We saw a slight uptick in PBM script volume towards the latter part of March as we made early refills available to patients.
That's good volumes has since returned to normal levels.
Regarding other financial results corporate costs inclusive of eliminations, but excluding stock compensation expense totaled $8.2 million compared to 7.7 million in the prior years quarter.
Total direct service and operating expenses prior to stock compensation expense and changes in fair value of contingent consideration were 15.7% of revenue in the current quarter compared to 15.1% in the prior years quarter.
This increase was largely due to the reinstatement of the health insurer fee.
Stock compensation expense for the quarter ended March 30, Onest 2020 was $6.1 million a decrease of 3.6 million from the prior years quarter.
This change is primarily related to the timing of vesting of certain equity awards.
The effective income tax rate for the quarter ended March 31, 2020 was 47.6% compared to 55.6% for the prior year quarter.
The tax rate for the first quarter of 2020 was higher than the federal and state statutory rates, primarily due to the nondeductibility of the health insurer fee, while the rate in 2019 was higher than the statutory rate primarily due to book tax differences and stock compensation expense.
We anticipate the Twentytwenty full year tax rate will be approximately 43%.
Magellan's liquidity position is strong our cash flow from operations for the quarter ended March 31, 2020 was $31.7 million.
As of March 30, Onest 2020, the company's unrestricted cash and investments totaled $281.2 million, an increase of 85.8 million from the balance at December 30, Onest 2019.
Approximately $123 million of the unrestricted cash and investments at March 31, 2020 is related to excess capital and undistributed earnings held at regulated entities, including 94 million at MCC entities.
Thus, we had over 150 million an unrestricted cash at the parent as of March 31 2020.
Finally, we have $320 million, an untapped revolver capacity and a debt to total capital ratio of approximately 34% at quarter end.
Okay.
Now, let me address our 2020 guidance.
In addressing our full year guidance, we're benefiting from a strong first quarter and expected second quarter favorability associated with lower utilization of discretionary healthcare services.
However, the full impact of coded 19 remains uncertain over the balance of the year, which increases the level of potential variability in results.
As such and as Ken noted previously we're maintaining our full year 2020 guidance.
Prior to reporting MCC on a discontinued operations basis. This guidance includes net revenue between seven and $7.4 billion.
Net income between 42 and $62 million.
Segment profit between 250 in $280 million.
Adjusted net income between 83 and $103 million EPS between $1.69 in $2.49 and adjusted EPS between $3 and 34 and $4 in 14 cents.
To address Cobot 19, we brought in multiple scenarios against a number of variables across our businesses, including but not limited to the duration in variation of the current shelter in place orders across the country and abroad.
Any recurring peaks of the virus contagion.
The cost of care impact related to these pandemic scenarios.
The change in unemployment levels in the possible impact to membership.
The potential rate changes tied to utilization levels, including contractual MLL R or gate or gain sharing provisions.
Lower investment yields and the impact to administrative costs.
Now this planning exercise produces a relatively wide range of forecasts across magellan's diverse commercial and government sponsored membership in businesses, even as we're maintaining our previous 2020 guidance.
We'll continue to track, leading indicators and emerging results versus current assumptions on a frequent and ongoing basis to help ensure that our guidance ranges continue to be appropriate.
We do expect the Corona virus pandemic will influence, earning seasonality in our business.
We now anticipate that the second quarter will produce strong operating results given the ongoing deferral of discretionary healthcare spending.
We're currently expecting the back half of 2020 will experience heavier than usual utilization as pent up demand returns.
I'd also like to point out that the guidance include full year 2020, Magellan complete care results given the estimated date of closing being before the end of first quarter 2021.
As a reminder, nccs results included in our 2020 guidance are as follows.
Net revenue of approximately $2.9 billion.
Segment profit of approximately $80 million of which approximately 7 million results from the provision for the health insurer fee non deductibility.
Stock compensation expense of approximately $3 million.
Depreciation and amortization of approximately $29 million of which approximately 18 million relates to acquisition related intangible amortization.
And interest income of approximately $6 million.
We estimate the incremental revenue associated with new customer agreements that accompany the relationship with moving up will contribute between 125 and a $150 million annually.
In addition, we estimate that the stranded overhead following the closing the transaction will be between 10 and $15 million.
For the first 12 month following closing the transaction, we expect the majority of this to be offset by revenue from the transition services provided to Molina.
Now I'd also like to provide some color regarding our individual PDP business, which as Ken noted, we're playing to exit in 2021.
Specifically by 2020 revenue from the individually PDP is approximately 230 million.
And the business currently operates at a loss.
Elimination of this loss will ultimately add incremental segment profit of approximately $10 million. The majority of which we believe we will achieve in 2021.
Yes.
In summary, Magellan posted strong first quarter results, while cobot 19 presents uncertainties our business fundamentals are on track.
Finally, we've taken bold steps to read to refine our strategy lock in value and provide financial flexibility to the company moving forward.
And with that I'll now turn the call back over to Ken for some closing comments Ken.
Thank you John.
The balance of 2020 will be focused on delivering on our promises in these unprecedented times.
And MCC. This means continued delivery of our high quality Medicaid services, while executing against our cost of care initiatives as we work in conjunction with Molina to obtain the regulatory approvals necessary to transition this business.
This divestiture will provide magellan with additional financial flexibility to invest in our remaining businesses.
For our behavioral health operations, we're working in earnest to enhance our services by developing or acquiring capabilities for self service telemedicine and digital and primary care collaboration solutions that will allow for more effective more efficient member and provider experiences.
According to a 2000 17 million study the medical cost for people with co morbid behavioral and physical health conditions is over $400 billion in the United States. Magellan is uniquely qualified to help improve the quality of care. These people receive while recapturing some of the spend for payers.
In specialty health, we see opportunities to strengthen and deliver our services more efficiently and to expand our suite of management solutions to cover additional high cost hi trend areas of healthcare spend.
Finally within pharmacy, we're uniquely positioned to capitalize on emerging trends in the marketplace that create compelling opportunities for growth both organically and through acquisitions as new scientific advances emerge in the pharmaceutical management drug total drug cost continue to accelerate and the clinical management of drew.
Doug therapy is becoming increasingly complex.
With rapid growth across specialty drug categories, including novel cell and gene therapies are proven clinical programs and differentiated specialty and medical pharmacy capabilities enable Magellan Rx to deliver meaningful and disruptive solutions that address these emerging market needs.
The marketplace is in need of an independent alternative partner for comprehensive pharmacy services. Our intent is to fill this need.
Our team is excited about our vision to become the leading independent payer services company offering behavioral health specialty health and pharmacy management solutions for high cost chronic populations on a carve out our integrated basis I look forward to providing you with updates on these initiatives as the year progresses I will now.
Ill turn the call back over to the operator for questions.
And thank you. Our first question is from Scott Fidel with Stephens. Your line is open.
Hi, Thanks, good morning, everybody.
First question just just interested in some of the impacts from Cnineteen are little more detail it and maybe starting first with utilization just to end the behavioral and specialty segment.
If you can maybe give us any in color that's possible just in terms of what you've seen specifically on utilization.
Trends in terms and April any insight there.
And then also just remember in the back half of last year, you guys did spike and behavioral utilization I'm, assuming that kogut, probably headed up working as that corrective action plan around.
Muting out that uptick in utilization, but just interested in.
And clarify exactly whether you saw that occurs.
Hey, Scott, It's John Let me, let me start and Ken can can add color. Afterwards first in terms of what we're seeing on cobot 19.
It really it is still very early and as I mentioned in my comments the.
The change or the impact and utilization, we really saw its a very tail end of the of the month of March and obviously now we've we've had the benefit of the majority of April. So let me talk about some of the utilization trends, we're seeing but but again most of it we will have impact in second quarter.
First we are we seeing lower utilization of discretionary services. So if you think about our book of business.
That really come through both in.
Our our behavioral and specialty business protective, particularly in the in the specialty healthcare business, where you have more discretionary services.
Across a variety of different specialties.
And the behavioral side to a lesser extent because what we're seeing in behavioral is.
Some reduction on inpatient care, but on the outpatient care really a shifting from in office utilization to Tele health as we ramped up our tele health capabilities and then on the pharmacy side, we saw actually in early spike in volume and towards the end of March as people were getting early fills.
And as I mentioned in my comments that settled down more to to normal levels. So at this point again Theres Theres a lot of uncertainty in terms of what will play out.
What we're assuming no is continued lower discretionary services in second quarter.
Again, primarily on the on the specialty side in areas like diagnostic radiology.
On the behavioral MCC side, it will be much more more modest in terms of utilization.
And but but we are assuming at this point that we will see.
In the uptick in utilization in some of these same areas, where there might be pent up demand in the second half of 2020 that obviously still remains to be seen but that's that's really what's in our assumptions.
Relative to your tier question on behavioral acute if you remember last year, we saw an increase of behavioral health utilization really starting in second quarter of of the year.
In really across the booking in a number of different areas.
We did reprice our business in 2020 on behavioral utilization has settled down in first quarter.
And we did get the business priced appropriately. So this year I would say things have played out prior to the it to the end to the impact of coded played out as expected as weve headed into the year.
Understood Thanks for that John.
And then.
Final question, just on called the 19 and impacts and can maybe just one for you just on.
How what you're seeing in terms of the impact from the crisis just on the sales cycles for specialty began behavioral and in pharmacy and and then also I know that a big focus of yours is is just on.
Lacking a lot with some of the payer organizations around.
Working on coming up with new innovative solutions to work with them on a route behavior on specialty it just interested.
How the dialogue I guess is progressing at this point just given.
Probably a lot of five other distractions and urgent dynamics out there around.
Based on where that stockholder right now.
Yes, thanks, Don good morning.
With respect to up we'll start with the first part of that and then move the second.
In the pharmacy business.
We have seen a little bit of slow down the pipeline, but also.
The persistency of our business is likely to hang in there if not improve a little bit for the same reasons right. So the market have slowed down a little bit as a result of that's not keeping our staff from.
Creating conversations and and working to protect and maintain existing relationships, but I think both.
It represents both headwinds and tailwinds on the specialty and behavioral health business, the conversations or are increasingly.
Moving towards the lingering impacts of cobot 19 on populations.
Particularly with respect to the in its this has been relatively.
Well documented the likely increase and the demand for mental health services as a result.
Both the the actual mental health impacts of the virus itself on first responders caregivers, but also the impact of the financial stress that people are under is contributing to mental health as well and we know that the combination and impact.
Behavioral health on physical health is going to becoming an increasingly important challenge for payers and I think this is an area where our pivot is going to serve us an incredibly well as we move to take product ideation through innovation to.
Enhanced capabilities around integrated care I think are going to create a really good story for us as we strengthen our C suite selling skills and reintroduce Magellan of the different level.
Got it and then just last one from me John what the NCCN.
Contribution was segment profit.
In the first quarter.
See that enrollees, so just want to see if you have that.
Okay.
Yes, Scott I'll give you sort of ballpark numbers and remember again, we had material prior.
Prior period development in the numbers almost all that was was MCC. So we talked about 12 million favorable out of period.
Including the benefit of that out of period.
Segment profit call. It in the mid twenties for first quarter, just to give you a sense and again that includes the.
The benefit of the prior period development.
Got it okay. Thank you.
You bet.
And thank you. Our next question comes from Kevin Fischbeck.
Bank of America.
Great. Thanks, I was wondering if you could.
Help us kind of think about what the growth profile of.
Core magellan's going to look like as we enter 2020 ones like too.
Beyond that.
Obviously, the prior management team kind of got into.
Cc and pharmacy, because they didnt really view the specialty vehicle businesses as growing is quickly. So I mean, you obviously.
The opportunity now just trying to get US have you can give us some kind of guide post her.
Core modality and look like.
Going forward.
Well I'll I'll start John can certainly jump in and want to speak generally.
Obviously, we are making.
Relatively strategic pivot.
In favor of our sovereign skills around behavioral and complex care management, particularly with respect to integrating those capabilities more broadly across Magellan.
Bringing in our specialty pharmacy experience as we look at new areas of opportunity we mentioned in the call.
Oncology and opioids is a great example, just two areas.
But.
We think thats the opportunity to become a I used the term partner or carbon as opposed to carve out where we have a seat at the table kind of special teams Cogent integrated.
In an integrated approach to managing the whole person, which we believe has the potential to be really really powerful for us and.
The.
Combination of behavior on physical solutions together I think represented a giant opportunity I think we quoted somewhere in the neighborhood of over $400 billion. That's probably light I know that was a millman study from 2017, but the opportunity to go at the behavioral mental health impacts and co morbid.
With members of multiple challenges, we think really represents a.
Our unique sweet spot for Magellan power forward, so without putting any math around that right now I would tell you that the innovation lab and the work we're doing in the transformation office to create a cost structure that allow us to price more competitively I think is going to those the combination of those things are going to be really powerful. So we we've lost a little ground relative to our competitive position.
And I think the great work with Jim Murray and his team are on in the transformation office, which is on track.
Despite coated.
Really is is going to build some nice momentum as we positioned the company forward. We also we had pivoted our sales expertise away from that core business as well and we weren't having the kind of strategic conversations that we're having now and I can tell you even in the conversations we had with those that were who who.
We're also suitors in the in the.
MCC conversation that the opportunities in and around behavioral health or not insignificant and so I'm not sure anybody's doing that really well yet and I think when you look at the continuum of care from mild to moderate through to more complex carrying that the whole way through puts Magellan and a really strong position. So I think the things you'll see us invest in moving.
Forward.
Strengthen our capabilities across the continuum, but recognize that for over 25 years magellan's done the hard stuff.
Really really well and we're going to continue to lever that.
Okay Thats helpful I guess.
Going I guess clarifying that you said in there.
The $75 million kind of cost cutting initiatives are you thinking about that is kind of additive to segment profit are you thinking about that is just kind of in your back pocket and you think about pricing and delivering the more affordable product into the market.
Additive to segment profit John you're welcome that any additional color there you want.
Yes, no thats correct, Kevin the only other note I'd make to Ken's earlier comments are in addition to as Ken mentioned in terms of our enhancements, we're making to our behavioral and specialty business, our pharmacy business as well.
Has been strong performers performed well in the quarter, we're continuing to see good growth, we talked about the win in California on our last call in the pharmacy benefit administration contract, we're starting to get increased interest from other states in in doing the same carving out of pharmacy ought to be.
[music].
The myriad of of health plans and we're continuing to also continue to have strong results both growth and financially on the specialty pharmacy side. So I just wanted to supplement Ken's comments on the behavioral specialty side to note the opportunities in pharmacy are real and substantial as we go for.
Forward.
Okay, Great and then how do you think about the ability to grow this business during a recession. Obviously, if you have MCC you have kind of a hedge in there, but when you think about the opportunity.
Sounds like.
A lot of is kind of more focus to either commercial employers or other hair health plans that might be commercially focused or is it more.
Reverse as far as the.
Again target.
Yes, I'll start and again, John John can jump in I actually think that Theres, a great opportunity for us that were weak while were divesting MCC, we're not getting out of the Medicaid business, So Medicaid and Medicare, We're Jim and I actually have a great deal of not only experienced but interest I think our two areas that represent.
Great upside for us as we think about again this management of complex care and in a more integrated model and I think thats going to be a big part of our business going forward.
John anything you'd add to that.
No no change I would just.
Just reinforce that Kevin in saying that even with our existing behavioral specialty business on behavioral and specialty we've got significant.
Kind of focus and books of business on the Medicaid and on the exchanges and in pharmacy as well as I talked about we're the largest pharmacy benefit that administrator for state Medicaid programs, so with the.
Outlook for growing Medicaid both both through the.
The current economic.
Environment and beyond.
It should serve us well in terms of both our existing books and our focus as we as we look ahead.
Great and then I guess last on for now be yet.
Part do business exit is there any extra capital that we should think about.
As freeing up when you exit that business.
Yes, yes, yes. There is so we can we can reconcile with you offline, but there is that there's actually a number of capital items.
Relative to part D. So theres theres there is some statutory capital and in that that will be that that will be freed up.
Also.
There is there are significant receivables both receivables from CMS relative to reinsurance that gets trued up 12 months post or almost 12 months post the end of the year. It's usually October the following year and then we also have a lag in terms of.
Rebate receivables.
From our from our rebate Aggregators. So you sum that up its actually well over $100 million in terms of capital that's tied up in those pieces and again, we can we can offline kind of reconcile.
What some of those pieces are but.
It gives you some sense for it.
Okay, great. Thank you.
Thanks, Kevin.
And thank you our next question from Dave Styblo Your line.
With Jefferies.
Hi, there good morning, Thanks for question.
I was hoping you got to provide maybe some refreshed.
Used on your 350 to 40 million of out years segment profit I think.
Yes, certainly reiterated the fact that you think you can still achieve at least $75 million from transformation savings.
Curious why it why maybe some of that doesn't go away with with Magellan complete care being divested.
And then separate from that.
Other moving parts that you can help us understand the impact of specifically how much was NCC contributing to that $350 million to $400 million and it sounds like with the party exit maybe there's there's another $10 million the savings in there.
But just curious if theres any other parts to those as well as.
Quantifying the MCC contribution.
Yes, So let me let me start with that first in terms of the transformation benefits.
The real focus of our transformation efforts was really on behavioral specialty and pharmacy as well as some of the corporate areas and.
Essentially very little because we've recently built MCC and have largely.
Bing Bing separately, focusing on that profitability improvement plan, which was prior to launching transformation. We really didn't have much at all built into our transformation plan related to MCC. So that's really why that that 75 million gets gets maintained.
What I would think about relative to 2021 and beyond and we talked about it I think many of these pieces before our.
And they see.
This year and again it does include some of the favorable development, we reported first quarter, but we expect.
Around 80 million of of segment profit.
And we would have gotten that to kind of.
But not fully competitive, but but to decent margins. This year. So why you'd see some continued growth of that the growth going forward would be not more normal versus the big step functions. We've seen over the last couple of years.
We talked also about.
The fact that.
Well, we have startup costs. This year on on the medical program will have margins next year, we talked about the 75 to 80 million of revenue with.
With the.
Mid to high teens are far higher margins on a contribution basis. The transformation benefits 30 million in 21 75 million in 22 and beyond.
And then the some of the newer items, we talked about here are the exit of part D, which we believe has an ultimate gain of around $10 million and obviously the management contracts with with Molina, which which we're very pleased to have a great company like Molina as a partner going forward.
Initially about $125 million to $150 million of revenue with some opportunity for growth.
As we go forward. So those those are some of the pieces of how we think about things over the next year or so but as Ken mentioned as we as we really enhance our current capabilities and behavioral specialty.
To continue the investments and growth in the pharmacy side. We think we can have good growth in the core businesses as well.
Yes, Dave I would I would just add to what.
John said was I think was.
Great and comprehensive answer just back to the.
Transformation office again, the early Tractions around process improvement IP and outsourcing and on the process improvement side I'd like say would give a lot of we want to help clinicians work the top of their licenses. We have a lot of 50 dollar people doing five dollar work because we had an automated and brought efficiencies to those processes and I think you going to see a lot of pickup on their early which is also.
We are going to strengthen the quality of the caliber of the relationship we enjoy with these partners enable him enabling them to work more efficient. Both those are employed here and those that are an important part of our growing network.
Understood. Okay, and then can maybe from your seat.
You're going to how close $1 billion proceeds from the divestiture.
Curious about.
The use of that that cash I know some of it sounds like it's going to go to.
Take down some debt leverage maybe doesn't change and then it sounds like there'll be some investments and to the extent.
Maybe that you'd find any acquisition opportunities out there is that something that's on your radar.
And what is sort of the timeline that you'd be putting on.
The cash in terms of it not being is such that it would go towards buybacks.
Yes the.
Obviously first and foremost we want to make sure we stay focused and move through the required regulatory processes because disclosed.
Sufficient time and so.
Beyond that at the same time the work that's underway.
In the innovation lab and around looking at the solutions required to further advance our business in the capabilities that are necessary to deliver those.
We're going to be disciplined.
As we think about how and when we move forward.
And so that the goal is to enhance our value proposition to create and drive value for our shareholders there'll be a lot of focus around as I said before we talk about an integrated model. It hinges on our ability to get access to data to interpret that data at analyze it bring clinical insights.
And then tied to the operational rigor that is working in parallel there'll be a byproduct of the work we're doing in the transformation office allow us to bring these.
New and reinvigorated solutions to the market in a very competitive at a very competitive price.
And I think that will enhance and build momentum as we think about business development going forward. So we're going to focus on our core disciplines, we're going to be thoughtful and deliberate were.
And so.
The money is not going to burn a hole in anybody's pocket, it's going to be used efficiently and effectively you mentioned the possibility obviously debt.
Is an area you highlighted first and then.
If share repurchase makes sense for our board and our investors, we'll certainly consider that but.
I like the were early work that's underway in the innovation lab to identify.
Enabling capabilities to drive deeper solutions around complex care management, and I think as the quarters progressing we have an opportunity to update you I think you'll be pleased the direction, we're taking the company and.
The everybody's talked about Tele health as one example, but the fact of the matter as I said game changer in this in my earlier prepared remarks, but.
The nature of the way healthcare is delivered particularly in around behavioral health is going to it has and will continue to evolve by virtue of cobot 19, and we're going to leverage that these are things that we had already been doing.
And that are now building momentum and I think will not only create more opportunities for improved productivity and efficiency, but also helped drive down costs and broaden access.
Okay. Thanks, and then I was just lastly from me just to get a little more color on what the pilot with Molina looks like in Virginia, How what can you tell us about that that pilot how's that financially structured our you sharing risk there that PMPM model.
And what are the milestones to look out from that before perhaps something larger could happen.
Sort of a six month evaluation a year evaluation before you too with looking chartering say hey. This is this is working well, let's expand this contract and and if thats. The only pilot they got going on I know you've been in conversations with other payers to advance those but curious where where you're at maybe with with other.
I was out there.
Yes, I will.
Whether it's the word pilot or whether we're working in collaboration partnership we are talking to other payers about.
Taking this concept of a more integrated model leveraging the.
The impact of our experience around helping to manage the impact of behavioral mental health on physical health I've been really really impressed and pleased with the job our Virginia team has done.
In.
Advancing our collective efforts here and I think it was a big part of we talked about pilot it's really.
Working too.
Bring answers to the very specific question you asked about okay. So what does this look like as we think about our relationship with Molina going forward and then as the basis for which will take this out more broadly into the market. So.
A lot of the questions you've asked or are still among those that will.
To be resolving as we move forward Thats why the word pilots that we're we're benefiting from.
The great efforts of our team in this area already in Virginia. Some now is talking about how do you take that and evolve that in a way that we can expand it more rapidly.
I don't know key elements, obviously are.
Looking at all the data and not just segmented data around behavioral health so data aggregation.
Having the primary care Dr. at the center that relationship and and a focus on population health with the technology platform that will enable us to make and ensure that we and our provider partners are able to work efficiently and all that will benefit from earlier identification. So that we can get ahead of.
These.
The potential.
Those situations that has the potential to become higher cost by virtue of.
Have not catching them quicken up so those are just some of the headlines as I think about what that relationship is ultimately going to look like again, it's a pilot.
In terms of that nature of the way, we're going to moving forward with Molina become core in terms of how we're thinking about existing conversations underway with current and future customers.
And Dave Dave One other quick thing on this is what is another thing thats different about that that supports what Ken described in terms of the best practice model with data technology and care coordination designed to lower total medical costs is that we're actually structuring. This is a gain share.
Based not just on the behavioral health savings, but on the total medical cost savings produced from members of behavioral health needs. So that's part of what uniques about the public what is unique about probably what excites us and we think offered presents a potential opportunity not just for expansion within Molina, if we do a.
Great job as we expect to you, but more broadly in the market.
Understood great. Thanks, guys.
Thank you Dave.
Okay.
At this time is seeing no further questions.
Alright listen I want to thank you for your participation on today's call. We look forward to speaking with you in July when we'll update you on our progress both on our strategic plan and our second quarter results.
Stay safe.
And thank you. This does concludes today's conference call you may disconnect. Your lines. Thank you for you.