Centene Corporation

Greetings and welcome to the Magellan Health, Inc. second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Darren Laring, Chief Investor Relations Officer, Thank you. You may begin.

Good morning, and thank you for joining Magellan Health's second quarter 2020 earnings call. With me today are Magellan's CEO, Ken Fasola, and our CFO, John Rubin. The press release announcing our second quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion through August 28, 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, July 29, 2020, and have not been updated subsequent to the initial earnings call. During our call, we 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 in our Form 10-K, filed on February 28, 2020, as well as 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. please refer to the tables included 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. Finally, on this call, we will be reviewing Magellan Health's results, which now reflect Magellan Complete Care as discontinued operations in our financial statements as a result of the planned divestiture to Molina Healthcare. All references to Magellan Health's results in this call unless noted otherwise, will be presented to exclude Magellan Complete Care from continuing operations. I will now turn the call over to our CEO, Ken Fasola. Ken?

Thank you, Darren, and good morning, everyone. I'd like to take this opportunity to welcome Darren, who joined us as Chief Investor Relations Officer earlier this month before joining Magellan. Darren served as Senior Vice President, Strategy and Investor Relations for American Reno Associates Holdings Incorporated for the past five years. Prior to this role, his career spanned 17 years as an equity research analyst for several leading Wall Street investment banks covering healthcare services companies. We're excited to have Darren on board to lead our full-time efforts to build a more active dialogue with investors and analysts. I'd also like to thank Joe Bogdan for guiding the investor relations team for over three years. He led the IR function along with other responsibilities as a key member of our senior finance team. Joe will continue to lead the actuarial and underwriting teams and has also assumed additional leadership responsibility for medical economics and analytics in support of Magellan's strategic priorities and growth initiatives. The first half of 2020 has represented a tumultuous time for our country. and there remains considerable uncertainty in this environment. I continue 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 COVID-19 pandemic and the repercussions from this health crisis, despite challenges many of our associates may face in their own homes. Whether operating a hotline for first responders and medical professionals serving on the front lines, or offering webcasts or digital tools for dealing with anxiety, depression, and uncertainty, or making sure the needed services are delivered on time, the professionalism and can-do attitudes of the Magellan team are inspiring and give me confidence that our ambitious vision for Magellan is achievable. Like many other organizations, we closely evaluate our diversity, equity, and inclusion efforts within Magellan and throughout the communities we serve. Within Magellan Health, we're committed to advancing a diverse and inclusive workplace, and are proud that our company's demographics demonstrate this commitment. Our workforce of approximately 10,000 associates is comprised of 75% female associates and 40% minority associates. Among our leadership position hires of manager or above over the past 12 months, 64% have been female and 35% have 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 imperative 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 in bringing solutions that improve health equity within minority communities. Our organization possesses distinctive capabilities to lead in this area, given how much we already do to help members Families and communities manage the burdens of mental health, stress, and anxiety. We're committed to seeing that Magellan remains a leader in helping Americans at this difficult time while modeling the behaviors necessary to move us all forward. Magellan remains focused on the valuable work we accomplish 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 to showcase our focus on delivering on these commitments. For the second quarter of 2020, Magellan reported revenue of $1.1 billion and segment profit of $57 million. While revenue was down slightly year over year, segment profit increased, primarily due to lower utilization trends in our healthcare segment, partially offset by some largely non-recurring items within our pharmacy segment. For full year 2020, we now anticipate continuing operations, which exclude Magellan CompleteCare, 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 we'll return to more normal utilization trends during the second half of the year. Please note that this updated segment profit guidance includes approximately 25 million to 30 million of stranded overhead costs that were previously allocated to MCC but are required to be reclassified to continuing operations in accordance with GAAP. Post-closing, we expect the stranded overhead cost to be mostly offset by planned cost reductions, and for a period of time, revenue from the Molina Transition Services Agreement. John will provide more details around the quarterly results and updated guidance later in the call. Now, let me share a 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 team has prioritized over one dozen 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, improve claims adjudication, and optimize non-critical functions. We expect approximately 60% of our total net savings by 2022 will result from process improvements with the balance split somewhat evenly among the remaining three categories. The second category is human capital. Aligning our human capital, our associates, to our business strategy is 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 savings. We're also streamlining our administrative model to reduce layers and increase the pace of decision-making. Third category is worksite strategy. The COVID-19 pandemic has taught us that our business can thrive in a virtual environment where many associates can work remotely. Before the pandemic, approximately 40% to 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've proven 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 recognized a 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 four, we've begun a review of our vendor and supplier contracts to drive more favorable terms and identify re-procurement opportunities where available. Next, let me move on to 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. We've previously discussed that there's an addressable market in excess of $400 billion for patients with comorbid behavioral and physical health conditions, and there are gaps in how these complex patients are managed. The impact of COVID-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 we've officially launched as Magellan Health Studio. We've assembled a remarkable team that brings significant health plan experience and 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 will provide critical insights to fuel our vision to create whole person health solutions and experiences. This well-rounded team will collaborate and reimagine the physical and behavioral health experience for the people we serve through the design and development of integrated solutions powered by transformational capabilities. Our reimagined product portfolio will include features to drive a differentiated value proposition, including leading-edge digital capabilities that support optimal experience and 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 connect data so that our solutions can better support rising population health demands. We'll drive these innovations across our behavioral, physical health, and pharmacy businesses to strengthen coordination in our go-to-market strategies and accelerate our whole person approach to address the needs of complex populations. We expect to begin launching parts of this new product suite in 2021. To that end, I'm pleased with the progress we're making to aggregate important claims and medical data to segment and target markets for clinical 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. This 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 this 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 Health 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 reimagined 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 through the leadership of Tim Lacey, who joined Magellan earlier this year. In connection with our work to drive an enterprise-level business and product development infrastructure, we've begun the implementation of enhanced sales standards across each of our businesses. The early focus of this 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 seconds and identified the need to add sales resources to reach more of the opportunities within these addressable markets. The results of these initiatives prompted a significant expansion of our team with a planned investment in over 30 new business development associates, including senior sales executives, 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. We also recognize that investments in innovation and business development are critical to the long-term strategy of 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 provide you an update on Magellan CompleteCare. We remain on track with the previously announced sale of MCC to 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 at closing. At June 30, 2020, This excess capital was approximately $160 million, up from $94 million at March 31, 2020. Our transition team and Melina have been working very collaboratively to execute on the commercial agreements that we're 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 mid-year 2021. These new services reinforce 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, an innovation proof point that we expect will open doors in other Molina markets and with additional managed care customers over time. Aside from this MCC divestiture update, I also wanted to confirm that we're on track with our Medicare Part B exit plans, which we expect to be completed by January 1, 2021. Obviously, there's much to come this year that will impact our nation. We're tracking case trends for COVID in our markets and are adjusting our service delivery as needed. We feel confident in the processes we develop to meet our clients' needs and keep our associates healthy. We believe that many of our service improvements, such as telehealth, will bring value in 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 healthcare, 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 Part D program in 2021, we believe that there are many open questions about how this and other executive orders may move forward without raising costs to Medicare beneficiaries or disrupting innovation in the pharmaceutical industry. We're closely tracking policy and legislative proposals like this one at both the national and state levels, and where appropriate, advocating for positive changes to the healthcare system, and will continue to serve as a thought leader while healthcare remains in focus through the elections and into 2021 and beyond. Let me now turn over the call to John Rubin for a financial review. John?

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, and the 2020 guidance will now reflect the Magellan Complete Care Business Unit as discontinued operations given the pending sale to Molina Healthcare announced on April 30th. It's also important to note that the GAAP rules for reporting discontinued operations do 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 to $30 million of annualized stranded overhead costs has been shifted into the corporate segment within continuing operations. Approximately half of this stranded overhead will be mitigated through planned cost reductions in conjunction with the transaction closing, while the remaining $10 to $15 million is expected to be offset in 2021 by 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 healthcare segment. Net income was $47.1 million, and EPS was $1.86. This compared to net income and EPS of $7.2 million and 30 cents respectively for the second quarter of 2019. Adjusted net income was $21.3 million and adjusted EPS was 84 cents. For the second quarter of 2019, adjusted net income was $12.9 million or 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, our segment profit for the quarter would have been $64 million. Our results reflect year-over-year improvement in our healthcare segment due primarily to a reduction in 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 healthcare business, segment profit for the second quarter of 2020 was $60.8 million, representing an increase of $19.7 million from the second quarter of 2019. Our specialty healthcare results reflected favorable utilization trends in the second given the deferral of care associated with COVID-19. Within our behavioral health business, we've continued to see relatively steady demand for behavioral services and to experience a significant shift to more outpatient telehealth visits. Now turning to pharmacy management, we reported segment profit of $13.2 million for the second quarter of 2020, representing a decrease of $17.6 million from the second quarter of 2019. This year-over-year decrease was largely a result of non-recurring items, including losses in our Medicare Part D business, customer settlements related to prior periods, and startup costs associated with the Medi-Cal contract, which remains on track to go live on January 1, 2021. We also experienced the impact of lower script volume due to COVID-19 during the second quarter of 2020. Regarding other financial results, corporate costs, inclusive of eliminations but excluding stock compensation expense, totaled $17.1 million versus $18.3 million in the second quarter of 2019. These totals reflect the reclassification of overhead previously allocated to the MCC business of $7 million and $8.5 million, respectively, for the quarters ended June 30, 2020 and June 30, 2019. Total direct service and 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 year's quarter. The increase is 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 year's quarter. The change is 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 a 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 MCC to Molina. This income tax benefit was a primary factor that skewed our effective income tax rate for the second quarter and the six months ended June 30, 2020. Our cash flow used in continuing operations for the six months ended June 30, 2020 was $7.5 million. This compares the cash flow from continuing operations of $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 30, 2020, the company's unrestricted cash and investments totaled $161.5 million versus $81.1 million at December 31, 2019. Approximately $29 million of the unrestricted cash and investments at June 30, 2020 is related to excess capital and undistributed earnings held at regulated entities. This unrestricted cash and investments total excludes approximately $160 million of excess capital and undistributed earnings related to Magellan Complete Care. It's important to note that excess capital and undistributed earnings related to MCC, including any additional amounts generated by MCC through the closing date, will remain with Magellan at closing. Restricted cash and investments at June 30, 2020 was $74.6 million, versus $136.3 million at December 31, 2019. We continue to expect that approximately $100 million of working capital on our balance sheet will be freed up following our Medicare PDP exit effective January 1, 2021, the majority of which will be received within 12 to 18 months. At June 30, 2020, we had $320 million of undrawn capacity on our $400 million revolving credit facility. Finally, while Magellan CompleteCare is now in discontinued operations, it's appropriate to acknowledge the strong performance of that business and highlight some unusual items impacting the reported results. MCC's segment profit for the second quarter of 2020 was $70.3 million. On a year-to-date basis for the six months ended June 30, 2020, NCC segment profit was $103.5 million. NCC results primarily reflect the benefit of lower utilization due to COVID-19. The year-to-date NCC segment profit also reflects favorable prior period care development and approximately $14 million of lower corporate costs that we would have previously allocated to the business units. We are updating our 2020 guidance, which now excludes the Magellan Complete Care Business Unit retroactive to January 1, 2020. As such, our updated guidance only reflects Magellan's continuing operations. We're projecting net revenue of between $4.4 billion and $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 $0.59 to $1.06. We expect adjusted net income to be in the range of $16 million to $28 million, or between $0.63 and $1.10 per share. Our updated 2020 guidance for segment profit is for a range of $145 to $165 million on a 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 to $185 million, which is consistent with our previous commentary. While it's too early to provide an outlook on 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 Medi-Cal PBA contract, the elimination of Medicare Part D 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 line 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 planned 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've shared with you 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 or integrated basis. 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 in healthcare. Our team is working hard to transform the cost structure of our organization, which will expand margins, improve efficiency, and enhance our competitiveness in the marketplace. We're also advancing well with the MCC divestiture process. the net proceeds of that sale, plus MCC's excess capital, combined with the capital we ultimately free up from our Medicare Part D exit, should yield nearly $40 per share of value. This is an important asset to Magellan shareholders and will provide us with significant financial flexibility to invest in our remaining businesses. As the balance of 2020 unfolds, we're keenly aware that we need to share more concrete action 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 in this addressable market and solve complex challenges on behalf of our customers and their members. 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Dave Stiblo with Jefferies. Please proceed with your question.

Hi there. Good morning. Thanks for the questions. With MCC now out of the continuing operations, a lot of investors are asking more about historically what trends and behavioral and specialty look like, and obviously your disclosures help provide some context around what those consolidated results are. But I'm wondering, maybe just to help level set the table, can you talk about things like enrollment growth, are there shifts from risk to ASO going on, what are the key drivers of revenue growth, whether that's pricing or enrollment, things of that nature for each one of those businesses so we have a little bit better handle of how those have trended in the last year or two?

Good morning, Dave. This is Ken, and I hope you're well. I'll let John start and add color as required.

Great. Hi, Dave, and good morning to everyone. In terms of just the overall mix of business, Dave, I wouldn't say that there's been any significant land shifts, meaning that it's been pretty stable in terms of the mix of ASO and risk business, as well as the product composition. We've seen more significant growth over the last several years on the specialty side, As Ken has articulated in past discussions we've had, we really are spending a lot of time now to reinvigorate the behavioral business and drive additional growth there as we go forward. And Ken can speak more to some of the things we're doing there. In terms of, you know, other recent trends, again, as you're aware, over the last several years we have seen some attrition in the BSH 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 exist in terms of some of the industry trends. Now we think there is a good opportunity for growth in behavioral trends. I'd say pricing's remained competitive, 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, top line, you know, as we're maintaining margins and through the transformation efforts trying to enhance margins in areas where we see the opportunities. Now, this here is obviously a little bit different given the – of COVID-19, where we have seen utilization patterns in the first half of the year, especially on the specialty side, be more favorable. But we're expecting that to return to normal over the second half of the year. With that, Ken, maybe I'll turn it back to you, and maybe you can talk a little bit about some of the efforts on the behavioral side to drive growth as we go forward.

Yeah, thanks, John. You know, Dave, we're sizing a lot of market opportunities across each of our businesses, you know, focusing on our Medicaid payer partners and those we identified as targets, regional midsize health plans. And I'm particularly excited about the opportunity to build on our really enviable list of Fortune 50 and Fortune 500 employer customers. Increasingly, This past, I guess it was a week before, we made a decision internally and announced that we've consolidated our employer EAP business with our behavioral health business to 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 COVID, but the challenges of responding importantly to the diversity and inclusion challenges. focus that's 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 employers through EAP and leverage that into behavioral health. We're adding meaningfully to business development muscle. I mean, we have three salespeople across behavioral and specialty. We've, with the addition of a number of, not only what Tim's brought, and recently we added a gentleman by the name of Jeff Ringardner, who Jim Murray and I had worked with for years, actually ran national major accounts for me when I was at Humana to help lead the sales efforts in our behavioral and specialty business. So, you know, when I talk about vibrant cultures attracting talent, we're adding some real business development muscle, but the pipeline there is It's not as elastic as you think, so we've got to move quickly. And that's tied with the work we're doing with the Innovation Lab, which I'm really excited is going to be right next door. I'm taking this, my first call from our executive offices here in Frisco. I think it's going to create the kind of accelerant we need to leverage what I think is a real opportunity, as I described in my script.

Okay, thanks. And then maybe to talk a little bit more about how that pipeline is starting to form out. I know you've had a lot of sales opportunities. personnel and you're working on product development, I'd imagine some of the conversations, especially about an integrated behavioral plan, which you think is where the market has an opportunity to go to, I'd imagine that takes some time to develop as you're talking to the regional health plans. I guess the Molina contract and relationship there serves as maybe a proof point for But, you know, again, I'm sure there's got to be some time for results to shake out and what you could point to there. But can you just talk about how that pipeline is forming and where you are in terms of conversations with potential customers and how we should, from a market perspective, think about timing of wins? Is it still, you know, next wins to be announced, you know, at least six months out, at least a year out sort of situation? Or, you know, could that be pulled forward sooner? Sure.

Yeah, Dave, on the question of timing, one of the things that was interesting is I've tried to reach as many of our largest customers and some past customers. I mentioned this on some prior calls that the level of executive engagement here has increased dramatically, not only the calls that I'm having, but Jim Murray, Mustafa Kamal. and Caroline Carney, who's an amazing clinical leader. And we've added, I won't go through all the names, but we've added at least four new clinicians with business development experience. And when you're having these kind of conversations and we move from procurement to the C-suite and talk about strategy around behavioral health, I haven't had a conversation yet where the CEOs and or senior executives I've talked to haven't acknowledged that 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 to 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. It's there and we can move quickly. The other thing is that we're reintroducing ourselves to consultants and brokers. We have historically worked directly through a lot of plans, and we're reaching employers now in a variety of different ways. And we had two consultant meetings in the last two weeks, both of which produced inside of five days RFPs for businesses with over 30,000 employees. And so I am really excited about reintroducing Magellan in a different way. And I think, so I'm optimistic that, you know, the degree of elasticity here can allow us to rebound quickly. When I talk about adding resources, you know, we've added five to six right now. We're moving to 30. You know, obviously with COVID, the whole idea of how we reach and sell and engage in conversations with people has changed. But as businesses become more comfortable, we adjusted early to COVID and the ability to work from home. and maintain business continuity. Not all our partners were able to move as quickly. And so as they've gotten more comfortable, those conversations are picking up as well.

Okay. Thanks for the color there. And the last one, I'll step back for others. But I think you generated 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. I guess at face value, that seems reasonable. quite conservative if you just annualize the first half results. But I suspect, like some other managed care peers, you might be assuming utilization goes above the baseline at the back half of the 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 are some, of course, already absorbed, but I don't know if that's more back-end loaded for some reason. But anything else that would be a headwind against just annualizing those results and the higher utilization that might come

Dave, I'll take that. First, within our healthcare segment, you're correct. The impact of COVID definitely had a more profound impact or favorability on the first half of the year. Really, I bifurcated a little bit in that specialty healthcare is where we have seen the most favorability and we're expecting that in our forecast really to come back to more normal levels over the second half of the year. Now behavioral health is interesting in that we had a little bit of early favorability, but that really has normalized largely because we've seen a significant shift to more telehealth visits. In terms of the second half of the year, you know, we're actually expecting behavioral health to have increased demand, you know, even relative to normal levels given some of the potential impact of COVID and unemployment and the overall economy. So, you know, that's the position we've taken in the forecast. In terms of other factors, we do have additional spend for, you know, growth investments and transformation over the second half of the year. as well as some pre-implementation expenses for the Molina commercial business and some other new business over the second half of the year. Now, again, as I'm sure you'd point out, there is still a lot of uncertainty in the environment around COVID-19. So we've taken what we think is a prudent approach in terms of our forecast there.

Understood. Thanks so much. You bet. Thanks, Dave.

Thank you. Our next question comes from the line of Scott Fidel with Steven Zink. Please proceed with your question.

Hi, thanks, and good morning, everyone. I 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 John, I'm interested just if even, you know, you can help us in terms of thinking about what the implied back half segment profit split would be between healthcare and pharmacy segments. You know, it was around 82% weighted towards healthcare and 2Q, but obviously you just talked about some of those timing factors that benefited healthcare and 2Q. So I'm interested if you have sort of a similar sort of weighting you can give us for the back half of the year to help us sort of, you know, accurately project out the two segments.

Yeah, thanks, Scott, and good morning. I'll let John build on his earlier comments and jump in after, as I did at Dave's.

Great, and good morning, Scott. In terms of the first versus second half, again, the factors I noted earlier are the most significant ones, and in particular with COVID, and just to mention a little bit, you know, we have, and these are round numbers, Scott, about 25 million of favorability in the first half of the year, you know, relative to COVID-19 on the healthcare side. We actually expect that to flip to, you know, a negative, meaning we expect utilization in the second half of the year to be higher than normal as a result of COVID. So maybe approximately half of that will flip in 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, as I said earlier, there's also some additional spend in the second half of the year for growth transformation and pre-implementation in order of magnitude, you know, $10 million or thereabouts. On pharmacy, I'd actually think of it as more of a normal pattern. Typically, we have in pharmacy about 60% of the segment profit in the second half of the year. And this year, some of it, we had some one-time issues in Q2 around certain settlements and claims. But in addition, 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 as sort of, you know, pharmacy being, you know, roughly 40% of the annual earnings in the first half, 60% in the second half. And then, you know, you can sort of back into the healthcare component, which should sync up with some of the directional indicators I gave earlier. Okay. Does that help, Scott?

Yeah, yeah, absolutely. Appreciate the additional color there. And then a second question for you guys, and it is a 2020 focus, so I know it's still early here, but what is your initial sense here on, you know, top-line trajectory for the pro forma healthcare segment and just how you think about sort of the timing you know, sort of growth acceleration back to sort of top-line growth. You know, if you look at the second quarter, the healthcare segment had around a 12% year-on-year decline, you know, in top-line, but obviously you're trying to invigorate the sales focus there, and you've got the Molina contract coming online. So I know it's early here, but, you know, just interested in your initial sense of whether you think there's enough tailwinds to get the segment back to top-line growth in 2021. But 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 COVID-related dynamics. So, you know, obviously I know there's a lot of moving pieces there. So I'd love to hear your thoughts on that.

Yeah, I'll start, and John can always add color as necessary. First of all, you mentioned Molina, and obviously, you know, that's going to be a good start to the year. And, you know, the implementation with respect to Medi-Cal 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 and the District of Columbia. I think, you know, Medi-Cal was originally targeted at 13 million. And I think with COVID, that number, I've heard it could push as high as 18. Specialty Health in 2010. 21 is going to get the benefit of a lot of the work we're doing with Centene and, you know, the addition of WellCare Lives, which will pace out 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 think about 10% growth across the next several years as a minimum hurdle 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, you've probably seen that over the years, and Dr. Deming lived a long time doing that. But I'm fond of the saying, by what method? And so one of the things I'm really encouraged by here is not only the discipline that Jim and others have added with respect to execution, but the pace with which we are accelerating the innovation here. priority. I mentioned we're staying true to honoring our commitments, lowering our cost structure, automating our business, removing friction, reducing abrasion, and then innovating in a way that will allow us to position the company for growth. We needed the business development resource to get out and actually tell our story. And while I love to sell and having folks like John and Jim here to make sure the trains run on time, give me and Caroline Carney and others the opportunity, Mustafa the opportunity to get out and really accelerate the pace with which we're engaging in C-suite conversations to put Magellan back on the map. And I think that'll be really, really helpful. But I think at our core, we're going 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 that there's plenty of opportunity to build on an amazing foundation here. Obviously, I could wax poetic for a long time on that, but hopefully I give you a sense for, you know, some of the areas where I see opportunities, especially next year. I think it should be up 17% just simply on the few cases that you and I just mentioned.

Yeah, got it. And that's helpful. And then just last question for me, you know, on the opportunity for additional states to look to carve back out, pharmacy benefits and recontract that a la what California did. I know that you guys have been optimistic and hopeful that there could be other opportunities on the horizon there. Just interested to give us an update on what you're seeing and hearing from the states at this point around that potential opportunity, just given obviously there's a lot that the states have on their plates right now dealing with the COVID crisis and the impacts to Medicaid and everything else. Thanks, and that's it for me.

First of all, we're still convinced that that's going to be a growing opportunity for us and building on what is already a market-leading position. I think Gestapo would 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. The states are dealing with the real challenges of the pandemic, but that, in our view, hasn't diminished enthusiasm. It's just slowed the you know, the business development cycle just a few months. I think others have reported sort of a similar phenomenon with respect to RX. But 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 from the line of Kevin Fishback with Bank of America. Please proceed with your question.

Great, thanks. Can you talk a little bit about, I guess you mentioned in the healthcare segment, you were losing contracts this quarter as a headwind. Can you explain what was going on there?

Good morning, Kevin. John, you want to pick up on that a little bit?

Yeah. Kevin, I think the, I'm not sure exactly what we're referring to. If you're referring to the script, it was really a description of year-over-year revenue, which really reflected kind of news that was older, meaning accounts that had 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 kind of what the current trajectory is, As Ken mentioned, in the behavioral specialty business, we have the Molina commercial contracts, which will be coming on in a staged fashion in 2021. And as well, we've got other sales on the specialty side, expansion of existing customers that we believe will actually result in meaningful year-over-year top-line growth as we go into 2021. So I'd look at the... the statement in the script around, you know, quarter over quarter results really to be more, you know, sort of rear view mirror versus looking forward.

Okay, that's helpful. But so I guess maybe follow up on that. We say expansion of customers in 2021 or contracts in 2021. What exactly does that refer to?

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 we're able to penetrate with those customers. We've had success going into 21 in some of those initiatives, and that's in addition to the Molina commercial contract, the source of what Ken noted earlier in terms of you know, positioning us for meaningful top-line growth next year.

Okay, great. And you guys have outlined a number of new initiatives, and it sounds like there's maybe $10 million of extra cost in the back half of this year related to that. But I just want to understand and make sure that when I'm thinking about the 2022 earnings hour, I mean, is it right to take this guidance and take out the $25 million to $30 million share in the cost and the $75 million in cost reduction? You know, $10 million from Part D, you know, call it $20, $30 million shift from California. Are those the building blocks or is there, you know, in your view, a counterbalance as, you know, the innovation lab will cost X million or XYZ or the ramp up the sales force will cost some amount that we should be thinking about when we think about kind of the earnings power of the company in a couple of years?

Yeah, I think, Kevin, you're thinking about the long-term earnings power with the right frame of reference, meaning, you know, the net cost savings of 75 from transformation, you know, the roughly 30 million turnaround on the Medi-Cal PBA 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. Those are all, you know, favorable as you look forward. And, you know, long term, you know, it's hard to speak to specific periods and, you know, what new sales there might be or other factors that, you know, you can't consider. But I think you've got the main ones. Now, as we think about 2021, there are a few headwinds that, you know, we're dealing with, meaning, you know, We still don't know exactly what the date of the MCC close will be, so how the timing of that close and how exactly the timing of the elimination of the stranded overhead as it relates to the transition services agreement needs to play out. For BSH, we talked about a number of business wins. We also have some terminations in 2021. In 2021, you also have the elimination of the health insurer fee. which is neutral in net income, but, you know, does create a little bit of a headwind on segment profit. So while it's too early to talk about specific guidance for 21 or 22, I'd say you've got the right frame of reference in terms of long-term growth, which is pretty substantial.

Okay, great. And then I guess, you know, some of these initiatives that you're talking about, you know, do to me kind of imply longer-term benefits you know, impacts, is there any goalposts that you guys are looking at? You talk about reinvigorating the behavioral business and wrapping up the sales force and having new products to launch to the market. I mean, when should we reasonably expect to see some of this show up? Did this show up in 2021 or is this announced in 2021 for 2022 implementation, just trying to level set the expectations?

Yeah, Kevin, I'll start and John can add. I've said that actions speak louder than words. There's a number of things that are being staged right now that will roll out between now and the next time we talk. But we absolutely intend, and my goal is as we get in the next quarter call, to begin to give you those very specific markers so that you can keep score. I think that's really, really important. I said, we're going to honor our commitments. That starts with all of you and our investors. So we think that's an important way for, for you to hold us accountable and for us to demonstrate to our teams that, you know, you know, that we're going to honor what we say and back that up with real action. 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, you know, what are we going to do with the source of proceeds and, And as we organize around, you know, what Magellan looks like going forward, you know, we're not waiting to begin to, you know, obviously do the works necessary to think about the solution set we're driving to the market to achieve the strategy we described and the capabilities are going to be required to deliver that, suggest investments in some technologies, partnerships, incubating new opportunities here in the lab, and a lot of that work's already well underway. The goal is to begin to roll that out between now and the next time we talk. So you can see directionally we're putting real energy and muscle behind our conviction and then give you those markers as we begin. I talked earlier about the markets that we've sized and the sizing. That's a very detailed exercise that we've gone through to look at the available, the opportunity or what I call the universe of 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, we'll share it and hopefully demonstrate that we can get the kind of revenue growth I described earlier.

All right, great. And maybe the last question. You mentioned at the beginning, you know, about the executive orders. I guess I kind of agree that it does feel like... certainly the point of sale rebate rule would be almost unworkable based upon the conditions they're trying to meet as far as not increasing premiums or costs to the government or copays. But, um, you know, how should we think if there was some sort of reform of point of sale rebates, um, you know, I, I guess we're talking about the government business, but I guess the concern would be that it somehow would move over to the commercial business over time. Um, you know, Is there any way to think about what risk, if any, you see from if that were to be somehow applied into the commercial business eventually?

Yeah, I think you rightly pointed out, first of all, it's going to be hard. We support the administration's goal to lower health care costs, and we're proud of the work that we've done on our end, particularly targeting complex patients. The executive order starts with Medicare and Medicaid rebates. But I think your, you know, suggestion that, you know, 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 traditional pricing. So, you know, while we don't believe the government should be legislating choice in this regard, if should the rebate rule be legislated to include commercial agreements, then, you know, we'd simply restructure the economics of these service. Our service model reflect the similar margins for the savings we can generate for our customers. So, We're going to be agile there, and like you and others, we're going to be watching really closely what happens over the next several months. And then, as I said, leading into the election, a lot's going to happen between now and November.

All right, that's helpful. So just to make sure, you're saying that right now you offer customers both options and you are margin 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 I wouldn't say that it's always neutral. But, you know, we're pretty transparent even when we do, you know, retain portions. You know, customers are aware of what we're retaining. So we're comfortable that, you know, we could get to, you know, a reasonably consistent solution, you know, if we had to move that way.

All right, great. Thank you.

Thanks, 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. Fasola for any closing remarks.

Thank you. And thank you for your time and for your continued support. We hope that you all stay well. Lots happening in and around both the pandemic and the important activities in and around our community. So we're going to stay focused, keep our head down, execute, honor our commitments, and Look forward to talking to you all either offline or between now and 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.