Q2 2020 Magellan Health Inc Earnings Call
Greetings and welcome to the Magellan health.
Third quarter 2020 earnings conference call.
Hi, all 10, Arnie listen only mode a.
Brief question and answer session will follow the formal presentation.
Sure acquire operator systems during the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded.
Now my pleasure to Institute.
Sure Dan Farrell, Chief Investor Relations Officer. Thank you you may begin.
Good morning, and thank you for joining Magellan health second quarter 2020 earnings call with me today are Magellan's CEO, Ken first of all in our CFO Jon Rubin. The press release announcing our second quarter earnings was distributed this morning replay of this call will be available shortly after the conclusion through August 22.
20.
I must to access the replay can be found in the earnings release.
For those who listen to the rebroadcast of this presentation remind you that the remarks me here and as a or as of today July 29, 2020 and have not been updated subsequent to the initial earnings call.
The real call, we will make forward looking statements.
Leading statements related to our 2020 outlook.
Listeners are cautioned that these statements are subject to certain risks and uncertainties, but.
Many of which are difficult to predict generally beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
Advise listeners to review the risk factors discussed in our press release. This morning Inter form 10-K filed on February 28, 2020 wells in our form 10-Q, two we filed today.
In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results.
Please refer to the tables included with this mornings press release.
Which is available on our website for a reconciliation of GAAP financial measures to the corresponding non-GAAP financial measures.
Finally on this call we won't be reviewing Magellan health results, which now reflect Magellan complete care as discontinued operations in our financial statements.
As a result of the plan divestiture to move into health care.
All references to Magellan health results in this call unless noted otherwise will be presented to exclude Magellan complete care from continuing operations.
I will now turn the call Liberty, our CEO, Ken subtle Ken.
Thank you dare and good morning, everyone.
Take this opportunity to welcome Dare, who joined US as Chief Investor Relations Officer earlier this month.
Before joining Magellan Darrens served as senior Vice President strategy and Investor Relations for American renal Associates Holdings incorporated for the past five years.
Prior to this role his career spans 17 years as an equity research analyst for several leading wall Street investment banks covering health care services company. We're excited to have different on board to lead our full time efforts to build a more active dialogue with investors and analysts I.
I'd also like to thank Joe bargain for guiding the Investor relations team for over three years led the IR function along with other responsibilities as a key member of our senior Finance team Joe will continue to lead the actuarial an underwriting teams and it's also assumed additional leadership responsibility for medical economics and analytics and such.
<unk>, Magellan strategic priorities and growth initiatives.
The first half of 2020 is represented a tumultuous time for our country and there remains considerable uncertainty in this environment.
Continued to be pleased with how quickly and effectively our team has responded to the needs of our members and clients to help them deal with the cobot 19 pandemic. The repercussions from just health crisis. Despite challenges many of our associates my faith in their own homes.
Well, they're operating a hot line for first responders and medical professionals, serving on the front line, we're offering what Castro digital tools for dealing with anxiety depression, and that's certainly we're making sure that needed services are delivered on time to professionalism and can do attitude in the Magellan team or inspiring it gives me confidence that are ambitious vision from.
Magellan is cheap.
Like many other organizations, we closely evaluate our diversity equity and inclusion efforts within the jialong throughout the communities we serve.
Well, then Magellan health, we're committed to advancing a diverse and inclusive workplace and are proud that our company's demographics demonstrate this coming.
Our workforce of approximately 10000 associates is comprised of 75% female associates and 40% minority associates among our leadership position hires of manager are up all over the past 12 month, 64% have been female and 35% had been minority.
We recognize that there's still more work to do as we advance diversity inclusion within Magellan and we will strengthen our resolve around this business impaired and moving forward.
Further as a company with a long history of managing complex specialty and behavioral health services across commercial and public sector markets. We play a leading role bringing solutions that improve called equity what they find already community.
Our organization possesses distinctive capabilities to lead in this area given how much we already do to help pepper families and communities manage the burden of mental health stress and anxiety.
We're committed to seeing that Magellan remains a leader in helping Americans in this difficult times, well modeling the behaviors necessary to move US all forward Magellan remains focused on the valuable work, we accomplished each day and the resulting positive impact we have on the people and the communities we serve.
As we report our results midway through the 2020 fiscal year I'd like to update you on our near term priorities.
Earlier this year I stated our four key priorities were delivering on our existing commitments lowering our operating cost structure strengthening our capabilities through innovation and improving our ability to capitalize on growth opportunities.
Let me share some of the highlights of our second quarter results showcase our focus on delivering on these commitments.
The second quarter of 2020, Magellan reported revenue of 1.1 billion segment profit up 57 million, while revenue was down slightly year over year segment profit increased primarily due to lower utilization trends in our health care segment, partially offset by some largely nonrecurring items.
Within our pharmacy said.
For full year 2020, we now anticipate continuing operations, which exclude Magellan complete care will generate revenue in the range of 4.4 billion to 4.6 billion and segment profit in the range of 145 million to 165 million.
This updated guidance continues to assume that will return to more normal utilization trends during the second half a year.
Please note that this updated segment profit guidance includes approximately 25 million a 30 million of stranded overhead costs that were previously allocated to MCC what are required to be reclassified to continuing operations in accordance with gap.
Post closing, we expect the stranded overhead cost to be mostly offset by plane cost reductions and for a period of time revenue from the only in a transition services agreement.
John will provide more details around the quarterly results and updated guidance later in the call.
Now, let me share progress update on our transformation initiatives, which we expect to drive lower operating costs, while also enhancing our competitive position.
We continue to expect these transformation initiatives to yield 30 million of net savings in 2021, and we expect the net savings to reach 75 million during 2022.
Our transformation teams prioritized over one doesn't administrative work streams that are focused on four categories process improvement human capital Worksite strategy and vendor management.
Category, one is process improvements.
That's the largest category in terms of savings. This represents the opportunity to automate manual processes streamline clinical work streams digitize communications consolidate systems improved claims adjudication and optimize non critical functions.
We expect approximately 60% of our total that savings by 2022, well result from process improvements with the balance what somewhat evenly among the remaining three categories.
The second category human capital.
Aligning our human capital our associates to our business strategy was critical to our future success.
That is why we're investing in innovation clinical leadership data analytics business development and transformation to drive future growth and say.
We're also streamlining our administrative model reduce layers and increase the pace of decision making.
Third category is Worksite strategy <unk>.
Cobot 19 pandemic is taught us that our business can thrive in a virtual environment, where many associates can work remotely.
Before the pandemic approximately 40% the 50% of our workforce was working on a remote basis.
Even as the number of Magellan associates working remotely has grown considerably in recent months, we prove it we can maintain a vibrant and engaged workforce.
We're currently assessing magellan's perspective real estate footprint as we anticipate transitioning many more of our associates to work from home or a more agile flexible office setting.
On a more permanent basis.
We've already taken some initial steps to rationalize our real estate footprint and recognize that special charge in our second quarter financial results relating to planned lease terminations.
We intend to take additional real estate actions throughout the remainder of this year.
Finally through vendor management or category for we'd be gone a review of our vendor in supplier contracts to drive more favorable terms and identify re procurement opportunities where available.
Now, let me move on day innovation.
We're making real progress advancing our innovation agenda to develop new product offerings and build enhanced capabilities that will strengthen our competitive position.
Previously discussed that there's an addressable market in excess of $400 billion for patients with co morbid behavioral and physical health conditions and there are gaps and how these complex patients are managed.
The impact of covert 19 has made abundantly clear the existing and growing societal need to address the behavioral health of individuals.
A recently published Kaiser study showed that 36.5% of adults in the United States reported symptoms of anxiety or depressive disorder up from 11% in 2019.
As we drive innovation with our product offerings, we see opportunities to create a more integrated physical and behavioral health experience for the people, we serve and to address this growing need.
We're already making progress with our innovation lab, which Weve officially launched as Magellan health studio.
We've assembled a remarkable team that brings significant health plan experienced an expert clinical leadership team led by our Chief Medical Officer Dr. Caroline Carney.
This expertise will be complemented by customer feedback and external clinical advisors, who provide critical insights to fuel our vision to create whole person health solutions and experiences.
This well rounded pain will collaborate and re imagined the physical and behavioral health experience for the people we serve to the design and development of integrated solutions powered by transformational capabilities.
Our re imagined product portfolio, which includes features to drive a differentiated value proposition, including.
Leading edge digital capabilities that support optimal experience at outcomes.
That means more accessible digital tools for screening wellness and awareness, allowing customers to self direct and become more engaged in their health and advanced analytics and AI capabilities that will predict identify and connected so that our solutions can better support rising population health demands.
Well drive these innovations across our behavioral physical health and pharmacy businesses to strengthen coordination and our go to market strategies and accelerate our whole person approach to address the needs of complex populations.
We expect to begin launch in parts of this new product suite in 2021.
To that end I'm pleased with the progress, we're making the aggregate important claims and medical data the segment and target markets for political intervention.
We're enhancing our analytical capabilities to strengthen the clinical value of our integrated offerings.
We've also worked extensively in recent months to develop a virtual care platform strategy.
Planning exercise identified capability requirements across the care continuum and resulted in a plan of action for us to build by or partner to achieve our objectives.
Our business and corporate development teams are actively pursuing these objectives as well as evaluating relationships with various organizations best suited to enable the strategy.
It's important to recognize that our innovation efforts will include both organic investments partnership and necessary acquisitions to accelerate our existing capabilities.
We're committed to a disciplined approach as we deploy capital towards identified opportunities.
And we're excited about the physical space, we're developing to showcase the newly launched Magellan helped studio.
The studio will be adjacent to our executive offices in Frisco, Texas, where we intend to research design and share. The next generation of care management solutions with and for our customers.
In the end actions speak louder than words, and you will see how our innovation initiatives will manifest in our Reimagine product suite in 2021 and beyond as we extend the breadth and reach of services across new and existing disciplines to increase the value to our customer base and elevate the member experience.
Finally, the rebuild of our growth engine is well underway for the leadership, Tim Lacey, who joined Magellan earlier this year.
In connection with our work to drive an enterprise level business in product development infrastructure, we've begun the implementation of enhance sale standards across each of our businesses.
Early focus of the standardization includes consolidating CRM for capturing client relationships that span across our businesses and centralizing product innovation via our new Magellan health studio.
We've also completed market availability reviews across our targeted customer segments and identify the need to add sales resources to reach more of the opportunities within these addressable markets.
The results of these initiatives profit a significant expansion of our team with a planned investment in over 30, new business development associates, including senior sales executive sales managers and player coaches.
These additional feet on the street will allow us to build a deeper sales pipeline and manage the various sales cycles within our customer segments.
We're confident that our transformation efforts will improve our effectiveness and expand our margins.
Also recognize investments in innovation business development are critical to long term strategy and Magellan and we believe these investments will yield a differentiated portfolio and position us well within a large addressable market serving complex patient populations.
Let me now providing an update on Magellan complete care, we remain on track with the previously announced sale of MCC Molina healthcare for 850 million in cash we believe the regulatory approvals are falling into place putting the deal on pace for its targeted close by the end of the first quarter of 2021.
We continue to estimate taxes and fees associated with the transaction to be between 80 million and 85 million. Magellan will also receive an amount equal to any excess capital above regulatory requirements and Magellan complete care subsidiaries they close.
At June 32020, this excess capital was approximately 160 million up from 94 million at March 31 2020.
Our transition team and Molina had been working very collaboratively to execute on the commercial agreements that were entering into in connection with the sale of MCC.
We expect these agreements to contribute 125 million to 150 million of incremental revenue annualized once these services have been implemented in Molina markets by midyear 2021.
These new services reinforced magellan's value proposition in pharmacy, behavioral and specialty health care and we remain very excited about the opportunity to roll out a unique integrated behavioral health model in Virginia, and innovation proof point that we expect will open doors and other molina markets and with additional managed care customers over.
Todd.
Aside from this MCC divestiture update I also wanted to confirm that we're on track with our Medicare part D exit plant, which we expect to be completed by January one 2021.
Obviously, there's much to come to share that will impact our nation work tracking cakes trends for cobot in our markets and are adjusting our service delivery as needed we feel confident in the process as we develop that meet our clients' needs and keep our associates healthy.
We believe that many of our service improvements such as Tele health will bring value and the post pandemic world.
We also recognize that a national election brings new and sometimes old ideas to the forefront of our national conversation.
Because of the unique personal nature of health care, we expect that this issue will again be front and center in presidential politics.
The administration's recently issued executive orders on drug pricing. For example included in order to eliminate rebates from the Medicare part D program.
While we plan to exit the party program in 2021, we believe that there are many open questions about how this and other executive orders may move forward without raising cost and Medicare beneficiaries or disrupting innovation in the pharmaceutical industry.
We're closely tracking policy legislative proposals like this one at both the national and state levels, and where appropriate advocating for positive changes to the health care system.
And we'll continue to serve as a thought leader, while healthcare remains infocus through the election and into 2021 and beyond.
Let me now I'll turn it over the call the Jon Rubin for financial review job.
Thanks, Ken and good morning, everyone.
In my comments. This morning, I'll review, the second quarter results and discuss our updated outlook for the full year.
Please note that the current year results. The prior year comparative results into 2020 guidance well now reflect the Magellan complete care business unit as discontinued operations, given the pending sale to Molina healthcare announced on April Thirtyth.
It's also important to note that the GAAP rules for reporting discontinued operations.
Not allow us to allocate certain shared costs to the Magellan complete care reporting unit in a manner consistent with our past practice.
As a result, approximately $25 million to $30 million of annualized stranded overhead cost has been shifted into the corporate segment within continuing operations.
Approximately half of this stranded overhead will be mitigated free planned cost reductions in conjunction with a transaction closing while the remaining $10 million to $15 million is expected to be offset in 2021, but fees from the Molina transition services agreement as we discussed last quarter.
For the quarter revenue was $1.1 billion, representing a 4.7% decline versus the same period in 2019.
This decline was largely attributable to net contract losses within our health care segment.
Net income was $47.1 million and as the dollar an 86 cents.
This compares to net income in excess of 7.2 million and 30 cents, respectively for the second quarter of 2019.
Adjusted net income was $21.3 million, an adjusted EPS was 84 cents.
For the second quarter of 2019, adjusted net income was 12.9 million were 53 cents per share.
Segment profit for the quarter was $57 million compared to 53.6 million for the second quarter of 2019.
Excluding the overhead previously allocated to the MCC business, most of which we expect to be offset post closing.
Segment profit for the quarter would have been $64 million.
Our results reflect year over year improvement in our health care segment due primarily to reduction utilization that was consistent with what we discussed on our last earnings call, partially offset by a year over year decrease in our pharmacy segment.
For our health care business segment profit for the second quarter of 2020 with $60.8 million, representing an increase of 19.7 million from the second quarter of 2019.
Specialty health care results reflected favorable utilization trends in the second quarter, given the deferral of care associated with Cobot 19.
Within our behavioral health business, we've continued to see relatively steady demand for behavioral services into experienced a significant shift to more outpatient telehealth visits.
Now turning to pharmacy management, we reported segment profit at $13.2 million for the second quarter 2020, representing a decrease of 17.6 million from the second quarter of 2019.
This year over year decrease was largely result of nonrecurring items.
Polluting losses in our Medicare part D business customer settlements related to prior periods.
Startup costs associated with the medical contract, which remains on track to go live on January Onest 2021.
We also experienced the impact of lower script volume due to covert 19 during the second quarter 2020.
Regarding other financial results corporate costs inclusive of eliminations, but excluding stock compensation expense totaled $17.1 million versus 18.3 million into second quarter of 2019.
These totals reflect the reclassification of overhead previously allocated to the MCC business of 7 million, an $8.5 million respectively for the quarters ended June Thirtyth 2020 in June Thirtyth 2019.
Total direct service, an operating expenses, excluding stock compensation expense and changes in fair value of contingent consideration were 17.6% of revenue in the current quarter compared to 16.5% in the prior years corridor.
The increase was largely driven by higher discretionary benefits.
Health insurer fee expense in the current year and the timing of transformation innovation and growth investments relative to the savings offsets.
Stock compensation expense for the quarter was $6.6 million a decrease of 1.4 million from the prior years corridor.
The changes primarily due to accelerated vesting of certain equity awards in the first quarter in the prior year.
During the second quarter, we recorded a special charge of $8.3 million for certain lease abandonment charges associated with reducing our real estate footprint as we transition more associates to work from home or shared office environment on a more permanent basis.
With respect to taxes, we recorded a $38.9 million income tax benefit associated with deferred tax assets in connection with a pending divestiture of NCC to moving up.
This income tax benefit was a primary factor that skewed our effective income tax rate for the second quarter into six months ended June Thirtyth 2020.
Our cash flow used in continuing operations for the six months ended June Thirtyth 2020 was $7.5 million.
This compares to cash flow from continuing operations, a 45.9 million for the prior year period.
This decrease is mainly attributable to the timing of accounts receivable and other working capital changes.
As of June Thirtyth 2020, the company's unrestricted cash and investments totaled $161.5 million versus 81.1 million at December 31st 2019.
Approximately 29 million of the unrestricted cash and investment at June Thirtyth 2020 is related to excess capital and undistributed earnings held at regulated entities.
This unrestricted cash and investments totaled excludes approximately $160 million of excess capital undistributed earnings related to Magellan complete care.
It's important to note that excess capital undistributed earnings related to NCC, including any additional amounts generated by entities NCC Threeq at closing date will remain with Magellan at closing.
Restricted cash and investments at June Thirtyth, 2020 was $74.6 million versus 136.3 million at December 31st 2019.
We continue to it to expected approximately $100 million of working capital in our balance sheet will be freed up following our Medicare PDP exit effective January Onest 2021, the majority of which will be received within 12 to 18 months.
At June Thirtyth 2020, we had $320 million of Undrawn capacity under 400 million dollar revolving credit facility.
Finally, well Magellan complete care is now in discontinued operations, it's appropriate to acknowledge the strong performance of that business and highlight some unusual items impacting reported results.
MCC segment profit for the second quarter of 2020 was $70.3 million.
On a year to date basis for the six months ended June Thirtyth 2020, NCC segment profit was 103.5 million.
NCC results, primarily reflect the benefit of lower utilization due to cope with 90.
The year to date MCC segment profit also reflects favorable prior period care development in approximately $14 million of lower corporate costs that we would have previously allocated to the business unit.
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We are updating our 2020 guidance, which now excludes the Magellan complete care business unit retroactive to January Onest 2020.
As such our updated guidance only reflects magellan's continuing operations.
We're projecting net revenue of between 4.4 billion in $4.6 billion.
Net income is expected to be in the range of 15 million to $27 million, which equates to a diluted EPS range of 59 cents due a dollar and six cents.
We expect adjusted net income to be in the range of 16 million to $28 million are between 63 cents and dollar 10 cents per share.
Our updated 2020 guidance for segment profit was for a range of $145 million to $165 million under continuing operations basis.
Adjusted for the 25 million to $30 million of stranded overhead allocated to continuing operations due to GAAP accounting rules. The midpoint of our segment profit guidance would be $180 million to $185 million, which is consistent with our previous commentary.
Well, it's too early to provide an outlook in 2021, we continue to believe segment profit should benefit next year from a number of Tailwinds we've discussed previously.
Including the benefits of our transformation initiatives, our new medical PVA contract the elimination of Medicare part D losses losses, and the new services, we're rolling out into Molina markets.
We're also updating guidance for other income statement items below segment profit.
And as follows stock compensation of approximately $25 million depreciation and amortization of approximately 98 million interest expense of approximately 31 million interest income of approximately 2 million.
Special charges related to plan real estate actions of approximately $15 million, including the 8 million recorded in the second quarter.
And a full year net tax benefit between 29 and $37 million largely as a result of the deferred tax asset created by the planned divestiture of Magellan complete care.
We expect our fully diluted share count to be approximately 25.4 million.
In closing, we're pleased with our solid second quarter results and believe our key initiatives for the balance of 2020 should establish a stronger foundation for future growth.
We'll also have significant financial flexibility to add shareholder value. Following the completion of the MCC sale.
And we will remain disciplined as we evaluate opportunities to deploy capital.
With that I'll now turn the call back over to Ken Ken.
Thank you John I continue to be excited about magellan's future since I joined Magellan, we shared with you our vision to become the leading independent payer service company operating behavioral health specialty help and pharmacy management solutions for high cost chronic populations on a carve out or integrated basis.
Yes.
Vibrant cultures attract talent I believe we've assembled an accomplished and forward thinking executive team to Reimagine, our business drive product innovation build a stronger sales pipeline and engage differently with our customers to solve complex challenges and health care.
Our team is working hard to transform the cost structure of our organization, which will expand margins improve efficiency enhance our competitiveness in the marketplace.
We're also advancing well what the MCC divestiture process and net proceeds of that sale plus MCC excess capital combined with the capital we ultimately free up from our Medicare part D exit should yield nearly $40 per share value.
This is an important asset Magellan shareholders and will provide us with significant financial flexibility to invest in our remaining businesses.
As the balance of 2020 unfold, we're keenly aware that we need to share more concrete actions that support our vision for Magellan.
Our intent is to provide you with continued visibility into our go to market strategy and the resulting proof points that will demonstrate how we accelerate our strategy capitalize on opportunities this addressable market and solve complex challenges on behalf of our customers and their members I.
I look forward to providing you with updates as the year progresses with that I'll turn the call back over to the operator for your questions.
Thank you will now be conducting a question and answer session.
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Our first question comes from the line of Dave Styblo with Jefferies. Please proceed with your question.
Hi, there good morning, Thanks for the question with Magellan, sorry, with M.C.T. now out of the continuing operation a lot of investors are asking more about historically, what trends and behavioral, especially if they look like and obviously your disclosures help provide some context around what the consolidated results are but I'm wondering.
Maybe just to help level that the table can you talk about Oh things like enrollment growth are there shifts from risk <unk>. So going on what are the key drivers of revenue growth, whether that's pricing were enrollment things of that nature for each one of those businesses. So we have a little bit better handle a of how those that have trended in the last year or two.
Hi, Good morning day, this is Ken and I hope, you're well I'll, let John start and add color as required.
Great, Hi, Hi, Dave and good morning, everyone.
In terms of just the overall mix of business, Dave I wouldn't say that there's been any significant you know land chefs, meaning that it's been pretty stable in terms of you know the mix of I guess, so and and risk business as well as the product composition.
And you know we've seen more significant growth over the last several years on the specialty side you know as as Ken has articulated in past discussions. We've had you know we were really are spending a lot of time now to reinvigorate the behavioral business and.
And you know drive additional growth there is as we go forward and Ken can can speak more to some of the things. We're doing there in terms of you know other recent trends again.
You are aware over the last several years, we have seen some attrition in the B S age book, particularly on the behavioral side and you know again, there's lots of reasons for that some of which you know really no longer exists in terms of some of the the industry trends I'm now we think there isn't a good opportunity for.
Growth and behavioral.
I'd say pricing to remain competitive, but but we've continued to be able to make you know good margins in the business and going forward I think the key will be stabilizing the existing book and driving growth you know topline you know as as we're maintaining margins and through the transformation.
In efforts trying to enhance margins in areas, where we see the the opportunities now this years, obviously, a little bit different given the.
Phobic 19, where you know we have seen utilization patterns in the first half of the year, especially on the specialties I'd be more favorable, but we're expecting that to returned to normal over the second half year would that can maybe I'll turn it back to you and maybe you can talk a little bit about you know some of the efforts on the behavioral side to drive.
Growth as we go forward yeah. Thanks, John you know they were sizing a lot of market opportunities across each of our businesses focusing on our Medicaid payer partners and and those we identified as targets regional midsize health plans and I'm, particularly excited about the opportunity.
Build on our really enviable list of Fortune 50, and Fortune 500 employer customers increasingly you know this past the I guess was weak before we made a decision internally and announced that we consolidated our employer EAP business with our behavioral health business.
At the bring added focus and leverage not only the installed base of existing customers, but the growing interest among large employers to respond to not only the challenges of cobot, but oh, the challenges of responding importantly to the diversity.
And inclusion.
Our focus that you know moving forward importantly across our country and definitely a key focus for a lot of our key customers and so.
We think that represents an important opportunity to accelerate the predictive nature of the way, we can engage employer through a pain leverage that into behavioral health.
You know, we're adding meaningfully to our business development muscle I mean, we have three salespeople across you know behavioral and specialty Weve with the addition of a number of I'm not only what tends broad and recently, we added a gentleman by the name of jet bring Gardner, who Jim Murray and I'd worked with for years actually ran national major accounts for me when I was it.
Manner to.
To help lead the sales efforts in our behavior and specialty business. So you know the I talk about vibrant culture is attracting talent, we're adding some some real business development muffled what the pipeline. There is it's not as elastic if she thinks we got to move quickly and but that tied with the work we're doing it the innovation lab, which I'm really excited is going to be right next door and taking this my first call from our.
Our executive offices here in Frisco, I think there's going to.
Great to kind of accelerant, we need to leverage what happened is a real opportunity as I described in my script.
Okay. Thanks, and then maybe the talk little bit more about how that pipeline and starting to form out I know you've added a lot of sales personnel and you're working on product development I'd imagine some of the <unk> the conversations, especially about an integrated behavioral plan, which what do you think is where the market Uh huh.
Opportunity to go to I imagine that takes some time to develop as you're right you're talking to both to the regional health plans I get the Molina contract and relationship there serves that maybe a proof point.
But you know again I'm sure. There's there's got to be at some time for results to shake out and and what you could 0.2, there but can you just talk about how that pipeline is forming and where you are.
In terms of conversations with with potential customers and how we should from a mark for second thing about timing of wins that this still.
You know next went to be now that you know at least six months out at least a year out sort of situation or already.
You know could could that be pulled forward sooner yeah, Dave I'll on that question a timing one of the things. It was interesting I I tried to reach.
As many of our largest customers and some past customers I mentioned this on some prior calls that level of executive engagement here has increased dramatically not only you know the calls that I'm, having but Jim Murray Mustapha come all and other and not Caroline Carney, who is an amazing.
Clinical leader and we've added I won't go through all the name. So we've added at least for new clinicians with UBS business development experience and when you're having these kind of conversations and we moved from procurement to the C suite and talk about strategy around behavioral health I haven't had a conversation yet where the Ceos indoor senior executives I I talked to haven't acknowledged.
This is a really big problem, and they're bringing existing focus actually accelerating their own focus inside of their businesses on this real challenge around managing the whole person and so we're actually stepping into existing took the conversations that are ongoing and you know this challenge is.
Not only known but noteworthy and as a result of that you know I think while it's difficult to put an exact timeline around how the pipeline will develop I would tell you the level of interest is real what's there and we can move quickly or the other thing is that we were reintroducing ourselves to consultants and brokers. We historically works directly through a lot of plans and we're reaching them.
For years now in a in a variety of different ways and a one of the we had two consulting meetings in the last two weeks both of which produced inside a five days RF piece for businesses with over 30000 employees and so I am really excited about reintroducing magellan than a different way.
And I think so I'm optimistic that you know the degree of elasticities here can allow us to rebound quickly I talked about adding resources we've added.
Five to six right now we're moving to 30.
Obviously with coated the whole idea of how we reach and sell and engage in conversations with people was changed but as businesses become more comfortable we adjusted early to cobot and the ability to work from home and maintain business continuity in all our partners, we're able to move as quickly and so as they've gotten more comfortable those conversations are picking up as well.
Okay. Thanks, My color there the last one I'll step back from others, but I think you generate nearly $100 million of segment profit through the first half of this year and I'm wondering if you can help us bridge to the segment profit guidance midpoint of 155 million.
With that face value that seems quite conservative fits your if you just annualize the first half results, but I suspect like like some other.
Managed care peers, you might be a Sydney utilization goes above the baseline at the back half a year and maybe that's a headwind.
And I don't know if there's any sort of unusual timing with stranded costs. I know there were some oh of course already absorbed but I don't know thats more backend loaded for some reason, but anything else that would be a headwind against just annualizing those results and the high utilization that might come.
And Dave I'll take that.
First within our health care segment.
You're correct the impact of cold bid it definitely.
Got it more profound impact or favorability on the first half of the year. So.
Really I bifurcate it a little bit in that specialty healthcare is where you know we have seen the most favorability and you know we're expecting that in our forecast really too I'm back to more normal levels over the second half of the or no behavioral health is interesting and that we had a little bit.
Early favorability.
But that really has normalized largely because we've seen significant shifts to more telehealth visits.
And in terms of the second half of year, you know, we're actually expecting behavioral health to to have increased demand you know even relative to normal levels, given some of the potential impact of coded and unemployment and and the overall the overall economy. So that's the position we've taken into Fourq.
Yes, I mean in terms of other factors, we do have additional spend for growth investments and transformation over the second half of the year as well as some pretty implementation expenses for the Molina commercial business and some other you know new business I'm over the second half the year no no again.
I'm sure you pointed out there's still a lot of uncertainty in the environment around covert 19.
So we've taken you know what we think so prudent approach in terms of our forecast there.
Understood. Thanks, so much you.
You bet. Thanks Jay.
Thank you. Our next question comes from the line that's it out with Stephens Inc. Please proceed with your question.
Hi, Thanks, and good morning, everyone.
Actually just wanted to follow up on Dave's question. There in terms of thinking about segment profit in the back half of the year relative to the first half and dot summertime interested just if he then you know you can help us in terms of thinking about what the implied back half segment profit split would be between health care and.
And pharmacy segments, you know, it's around 82% weighted towards health care and QQ, but obviously, we just talked about some of those timing factors that benefited health care into Q. So such that if you have sort of a similar sort of waiting you could give us for the back half of the or help us sort of accurately project out the two segments. Thank.
Scott and good morning out, but I'll, let John build on his earlier comments and jump in after it as I do that.
Great and good morning, Scott.
In terms of the the first first to second half again the factors I noted earlier are the most significant ones and in particular with coal bed and just to mention a little bit.
You know, we haven't they need to round numbers I'm, Scott about 25 million of favorability in the first half of the year.
Relative to cope with 19 on the health care side, we actually expect that to flip to.
A you know a negative meaning meaning we expect utilization the second half two year to be higher than normal I'm. As a result of kobin. So maybe you know approximately half of that will will will you know flipping the other direction over the second half of the year. So that gives you a sense in terms of how we're thinking about the utilization component and then.
And then as I said earlier, there's there's also some additional spend in the second half of the year for growth transformation in pre implementation.
In order of magnitude, good a you know $10 million or or or thereabouts.
On pharmacy, I, I actually think of it and as more of a normal pattern typically we haven't pharmacy about 60% of the segment profit in the second half of the year.
And this year some of its we had some onetime issues and the in Q2 around around.
Certain settlements and claims but in addition, as as you know part D. Just a normal seasonality of part D is more favorable in the second half of the year based on the benefit structure. So I'd look at that in sort of.
Pharmacy being you know roughly a 40% of the annual earnings in the first half <unk>, 60% in the second half and then you can sort of back into the to the health kids component.
Which should sync up with.
I'm of the directional indicators I gave earlier.
So that helps guide.
Yeah, Yeah, absolutely I appreciate the additional color there and then.
Question for you guys in and and it's a 2020 focus so I know it's still early here why wasnt watches your initial sense here on a topline trajectory.
For the bad the pro forma healthcare segment, and just how you think about sort of that the timing you know sort of growth acceleration back to sort of topline growth.
You know if you look into second quarter, the health care segment had run at 12%, 12% year on year decline.
All in topline, but obviously, you're trying to bigger right. The cells focus there and you've got the Molina contracts coming online. So I know it's early here, but you know just interesting your initial sense, whether you think there's enough Tailwinds you get the segment back to topline growth and 2021, but all I. Obviously at the same time you know we still.
Might have some membership you know impacts if unemployment stays high et cetera, and some of the carbon related dynamic. So obviously I know there's lot of moving pieces. There. So perhaps your thoughts on that yeah, I'll pitch I'll start and John can always that add color as necessary Oh, you you mentioned Molina and obviously.
That's going to be a good start to the year and neither the patient with respect to Medicare is going really really well and I think that's an amazing foundation to continue to build on what has been a growing business for US you know 27 states in the district of Columbia, I think you know Medicare was originally targeted at 13 million and I think with co but that number I've heard it could push as high as a team.
I mean, I'm specialty health in 2021 is going to get the benefit of a lot of the work we're doing with seven.
Centene and the.
Additional wellcare lives, which would pay south through the year and so but and the work we're doing with respect to employer I think has you know is really.
Encouraging and you know I've asked the team to you know to thinking about 10% growth across the next several years as a minimum hurdle or to build on I know that sounds aggressive, but you know I'm a big believer in the I repeat myself a lot I think Scott youve, probably seen that over the years and Dr. dumping went a long time doing that but I'm I'm fond of saying by.
What method and so one of the things I'm really.
Encouraged by here, it's not only you know the discipline and you know the gym and others have added with respect to execution, but the pace with with <unk> with with which we are accelerating.
The innovation a priority I you know I mentioned, we're staying true to honoring our commitments and lowering our cost structure automating our business removing friction reducing abrasion you know and then innovating in a way that will allow us to position the company for growth we needed the business development resources out and actually tell our story and while I'm, you know I love to sell and.
Having folks like John and Jim here to make sure. The train drawn on give me in Caroline Carney and others the opportunity Mustapha the opportunity to get out and really accelerate the pace with which we're engaging in seats, we conversations to put Magellan back on the map and I think that will be really really helpful and but I think we <unk> at our core you know working.
To stay really focused and disciplined on making sure not only that we honor the commitment to grow our existing business, but that we demonstrate account by account at a you know there's plenty of opportunity to build on Amazing Foundation here. So.
Yeah, obviously I can wax poetic for a long time on that but hopefully I can just sense for you know some of the areas that where I see opportunity set, especially next year I think you've got 17% just simply on few cases, if you and I just mentioned.
Yeah got it and that's helpful. And then just last question for me.
You know on the the opportunity for additional states that you booked a car back out all pharmacy benefits and re contract that all love, what California that I know that you guys have been optimistic and hopeful that there could be other opportunities on the arrives in there just interested <unk> give us an update on what you.
You're seeing and hearing from the states.
Yes point around that potential opportunity just given obviously, there's a lot that the states have on their place right now are dealing with the cobot crisis in the impacts to Medicaid and everything else acts and that's it for me.
First of all we're still I'm convinced that that's going to be up a growing opportunity for us and building out what is already a market leading position I think to stop let's say if he was on the call and maybe pick up separately after that.
We've seen that.
There is about a three to four month lag we've seen on the Rx business as people have tried to deal with the states or are dealing with a real challenges of the pandemic, but that interview hasn't diminished enthusiasm. It's just slowed the you know the business development cycle. Just a few months I think the others have reported sort of a similar phenomenon with respect to Rx.
But where we stand by our conviction that that represents a great opportunity for us to build on an industry leading foundation.
Okay. Thank you.
Thank you. Our next question comes to know line, it's Kevin that with Bank of America. Please proceed with your question.
Great. Thanks.
Can you talk a little bit about I guess, you know you mentioned in the health care segment, you were losing contracts this quarter as a headwind to explain a and what we're going on there.
Hi, good morning, Kevin.
You want to pick up on that a little bit.
Yes.
Kevin I think I I think the I'm not sure exactly what you're referring to if you're referring to the script. It was really a description of year over year revenue, which really reflected you know kinda news that that was older meaning meaning if their their accounts that have terminated subsequent.
To second quarter of last year and are now.
In year over year, showing up as an unfavorable variance in revenue. If you think about the book going forward and you know kind of what the current trajectory is as Ken mentioned into behavioral specialty business. We have you know the molina commercial contracts, which.
Well be coming on in the stage fashion in 2021, and as well we've got.
Other sales on the specialty side, you know expansion of existing customers that we believe will actually result in a meaningful year over year topline growth as we go into it into 2021. So I look at the the statement in the script around you know you know quarter over quarter results.
Really to be more you know sort of rearview mirror averse versus looking forward.
Okay. That's helpful, but so I guess, maybe five for that we say expansion to.
Customers and twice, probably water contracts and frankly, I wonder what what exactly.
Referred to.
I'm it refers to existing customers where.
One of our key sales initiatives has been on the specialty side, both expansion of existing customers, meaning new geographies that we're able to sell within existing accounts or new products that were able to penetrate with those customers and you know we've had success I'm.
Going into 21 in some of those initiatives and that's in addition to the Molina commercial contract. The source of what can noted earlier in terms of Ah you know positioning us for meaningful topline growth next year.
Okay back and you guys have outlined the number.
New initiative and it sounds like there's maybe $10 million that extra costs in the back after this year related to that but I just wanted to understand and make sure that.
What I'm thinking about the 2022 earnings power I mean is it is it right to take this guidance and and play GAAP in 25 to 30 million kind of cost in the.
75 million or cost reduction.
Again, I like them part D.
Call It 20 $30 million shipped from from California.
Are those the building blocks or is there you know in your view.
Counterbalance as you know the innovation lab will cost X million or X y Z or the rapidly. So of course will cost of amount that we should be thinking about when we think about kind of the.
The earnings power of the company a couple of years.
Yeah, I think I think.
Kevin you're thinking about the long term earnings power with the right frame of reference, meaning you know the net net cost savings or 75 from from transformation.
The that no roughly 30 million turnaround in the under Medicare PB PVA sale. You know also the elimination of the majority of the 10 million of part D losses.
And the incremental segment profit from the Molina commercial agreements on those are those are all you know favorable is as you look forward and you know long term.
It's hard to speak to specific periods and you know what new sales there might be or other or other factors that you can consider but I think you've got the main ones that was we think about 2021. There are a few headwinds that you know we were dealing with meaning you know.
We still don't know exactly what the date of the MCC close will be so you know how the timing of that closing the and how exactly the timing of the elimination of the stranded overhead as it relates to transition services agreement needs to play out for B S. Eight you know we talked about a number of business wins on you know we also.
Well have some some you know terminations in 2021.
In 2021, you also had the elimination of the health insurer fee, which is neutral and net income, but but yeah. It does create a little bit of a headwind on on I'm segment profit. So while it's too early to talk about specific guidance for 21 or 22.
So you've got the right frame of reference in terms of long term growth, which is pretty substantial.
Okay, Great and then I guess, yeah. Some of these initiatives that you're talking about yeah.
Due to me kind of imply a longer term you know or impacts.
Is there any goalpost you guys are looking at as you talk about reinvigorating the behavioral business and wrapping up the sales force and and and having new products to watch the market I mean, when when should we reasonably expect to see some of that show up at the show up in 2021 or is this a announced in 2021 for planes are too.
So just trying to level set the expectations, yes, Kevin I'll I'll start John can add I [noise].
I've set up you know that.
Actions speak louder than words Theres, a number of things that are you know being stage right now the roll out between now and the next time, we talk.
But you know we absolutely intend you know and my goal is we get in next quarter call to begin to give you those very specific markers. So that you can keep score I think really really important I said, we're going on or commitments that starts with all of your investor. So we think that's an important way for you to.
Oh and for us to demonstrates our teams that you know.
You know that we're going on or what we say and back that up with relax and I think that between now and then you'll not you'll see you know I've said in prior calls you've asked us.
I'm going to do with the sorts of proceeds and and as we organize around you know what the Magellan it looks like going forward you know, we're not waiting to begin to obviously do the work necessary to think about the solution set we're driving to the market to achieve the strategy. We described in the capabilities are gonna be required to deliver that so.
Jeff investments in some technologies partnerships.
Incubating new opportunities here in the lab and a lot of that works already well under way and so the goal is to you know begin to roll that out between now and the next time, we talk so you can speak directly we're putting a real energy and muscle behind the our conviction and then give you those markers as we begin to I talked earlier about the markets that we've sized and the size.
That's a very detailed.
Exercise that we've gone through to looked at the available you know the opportunity or what I call. The universal potential revenue by customer segment, and then looking at our installed base and the size of the opportunity who's going to bid when they bid where it is and what the opportunity for us is to grow that share and so as we begin to get more texture around that.
Well sure it and and hopefully demonstrate that we can get the kind of revenue growth I described earlier.
Alright, great and maybe last question you mentioned at the beginning.
About the executive orders and again.
I kind of a Greek if it's it does feel like certainly the cornerstone rebate rule would be almost on workable based upon the conditions are trying to.
Me as far as not increasing premiums or costs to the government or co pays.
How should we get there was some sort of reform the point of sale rebates.
I guess, we're talking about the government business I guess it can certainly be that's it somehow with regard to commercial business over time.
Yes is there any way think about what Rick if any and you see from if that works you mean somehow applied into the commercial business of actually Yeah. I think you rightly pointed out first of all can be hard you know we support the administration's go to lower health care costs and we're proud of the work we've done on our end up particularly targeting complex patient.
You know the executive order starts with Medicare Medicaid rebates.
But I think your suggestion that is there risk for the commercial market look in today's environment, we're already offering commercial customers choice between pass through pricing and you know more perdition traditional pricing. So you know well we don't believe the government should be legislating choice in this regard if the for the rebate Roby legislated to include commercial agreements that you know we spent.
The restructure the economics of the service our service model reflect the similar margins for savings we can generate per customer. So we're gonna be agile there and I'm like like you and others can be watching really closely what happens over the last several months and then as I said leading into the election lock. It happens we now November.
All right, let's have a good so just to just to make sure I think that you're saying that right. Now you offer customers both options and you are market neutral and profit neutral between those two options.
Yeah, John would you say that's fair.
Yeah, I mean, it varies quite a bit by customer. So so I wouldn't say that it's always neutral, but you know you know we're pretty transparent even when we do or you know retained portions you know customers are aware what were attaining.
We're comfortable that you know we could get too.
You know reasonably consistent solution you know it if we had to move that way.
Okay, great. Thank you.
Hi, Kevin stay well. Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr. facility for any closing remarks.
Thank you and thanks for your time and for your continued support Oh, We hope you all stay well what's happening in and around.
Both the pandemic and the important.
Activities in our community. So we're going to stay focused keep our head down execute on our commitments and look forward to talking to you all either offline or.
Between now in the next quarter call. Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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