Centene Corporation

Welcome and thank you for standing by for the first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. During the question and answer session, please press star 1 on your touchtone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Joe Brogdon. Sir, you may begin. Good morning.

Good morning. And thank you for joining Magellan Health's first quarter 2020 earnings call. With me today are Magellan CEO, Ken Fasola, and our CFO, John Rubin. The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion through June 10, 2020. The numbers to access the replay can be found in the earnings release. For those who listened 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, we'll 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 on information security and cybersecurity matters and extraordinary events, including the COVID-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 reflect certain adjustments made for acquisitions completed after January 1st, 2013 to exclude non-cash compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles. Please refer to the table concluded with this morning's press release, which is available on our website, 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 Sassola. Ken?

Thank you, Joe, and good morning, everyone. We have a lot to cover today. So I'll begin with Magellan's response to COVID-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 COVID-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 coronavirus 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, a challenge and opportunity Magellan is well-positioned to address. Serving our members and our communities through the COVID-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, our provider partners, and our communities in response to the pandemic. More than 90% of our 10,000 associates were working from home within the first week of the emergency. We focused on maintaining and strengthening our provider and 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, pushed 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 telehealth by both providers and patients is a significant and lasting game changer because its use improves 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 had not already done so. And we made advance payments available to help ensure that these clinicians, our partners, had improved liquidity. Beyond our care coordinators and pharmacists on the front lines in the fight against COVID-19, a number of our clinicians volunteered their time with our support. Magellan Health has also opened a free hotline staffed by our certified, licensed mental health clinicians to serve our nation's first responders and healthcare workers to help address their mental and emotional well-being at this difficult time. To further support our communities, we've also made donations of cash, personal hygiene products, and protective equipment to food banks and community partners as they serve those in need. I'm extraordinarily proud of the resilience and spirit of Magellan's associates who have risen to meet the unprecedented healthcare challenge we're facing with COVID-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 serve 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 my resolve. Together with Jim Murray, John Rubin, and our leadership team, I'm excited about the growth prospects for Magellan moving forward. We believe we can significantly improve outcomes and 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, and 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 MagellanRx's position as the premier independent full-service PBM with superior clinical distinction and industry-leading specialty and medical pharmacy solutions. Magellan has a legacy of performance in meeting customer needs in 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 CompleteCare 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 build in MCC. This sale tightens our focus, strengthens our balance sheet, and creates a new multifaceted strategic relationship with Molina Healthcare, a Fortune 500 company with a strong reputation for serving states and their beneficiaries' healthcare needs. Let me summarize the key aspects of the transaction. On April 30th, we announced the sale of Magellan CompleteCare 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 musculoskeletal management services for over 3 million Molina members, as well as retaining Magellan for behavioral health, radiology, and musculoskeletal management services in 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 experience 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 to 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 PDM that can effectively compete for multi-line health plan and employer PDM 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 dedicate MagellanRx's 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 our operating costs. Third, strengthen our capabilities through innovation. And fourth, 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 year's first quarter, Segment profit increased by over 60% given our improved operational execution, net favorable prior year development, and lower utilization in some areas, including the early impact of COVID-19 in the last few weeks of March. Our strong first quarter results reflect solid fundamentals across the company. Looking ahead for the balance of 2020, Our industry is facing significant uncertainty about COVID-19's impact on our businesses. While we cannot predict with accuracy the impact COVID-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 a 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. Current focus areas with the greatest traction to date include operational process improvements, including automation and self-service direction, outsourcing of non-core activities, vendor contract renegotiations, and claims payment integrity. We do not expect the divestiture of NCC to have a material impact on the $75 million of earnings benefit targeted in 2022. Our third near-term priority is innovation. We've established an innovation lab focused on consumer health, where we'll facilitate real-world testing of solutions with key health companies that are part of our health ecosystem and invest in early-stage innovators with practical, cutting-edge ideas. We've recruited an excellent team and are seeding the lab with experts in data analytics, medical economics, corporate development, and a variety of clinical disciplines. I 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 insight will set the table for success across the business development continuum. We're rebuilding our growth engine by establishing discipline, 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 an enterprise story, but also to execute a longitudinal member experience across all Magellan platforms. Our initial focus has been on immediate 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, and 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 a unique integrated story. With that, I'll turn the call over to John to provide more details on our results for the quarter.