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Executives

Renie Shapiro - Senior Vice President of Corporate Finance

René Lerer - President and Chief Executive Officer

Jonathan N. Rubin - Chief Financial Officer

Mark Demilio - Chief Financial Officer

Analysts

Greg Nersessian - Credit Suisse

Daryn Miller - Goldman Sachs

Carl McDonald - Oppenheimer

Josh Raskin - Lehman Brothers

Scott Fidel - Deutsche Bank Securities

Michael Baker - Raymond James

Kevin Campbell

Magellan Health Services Inc. (MGLN) Q3 2008 Conference Call October 31, 2008 9:00 AM ET

Operator

Hello and welcome to the Magellan Health Services Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Today’s conference is being recorded. If there are any objections, you may disconnect at this time.

I now like to introduce your host Renie Shapiro, Senior Vice President of Corporate Finance.

Renie Shapiro - Senior Vice President of Corporate Finance

Good morning and welcome to Magellan’s third quarter 2008 earnings conference call. This is Rene Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services. Here with me today are Magellan’s President and CEO, René Lerer and our Chief Financial Officer, Jon Rubin. They will discuss the financial and operational results of our third quarter ended September 30, 2008. Also joining us is our CFO, a mayor dust Mark Demilio.

Certain of the statements that will made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed.

These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2007 which was filed with the SEC on February 29, 2008, and in the Form 10-Q which will be filed with the SEC later today.

In addition, please note that in this call we refer to segment profits. Segment profits is disclosed and defined in our quarterly report on Form 10-Q and on our annual report on Form 10-K and is equal to net revenues plus cost of care and cost of goods sold, direct service cost and other operating expenses excluding stock compensation expense.

Included in the tables for our press release issued this morning and in our Form 10-Q to be filed later today is the reconciliation from segment profit to the line item income from continuing operations before incomes income taxes and minority interest. We encourage you to review such reconciliations for an understanding of how segment profit compares to that GAAP measure. Our Form 10-Q for the quarter ended September 30 can be found later today on our web site, MagellanHealth.com under the heading Investor Info.

I will now turn the call over to our President and CEO, René Lerer.

René Lerer - President and Chief Executive Officer

Good morning, everyone and thank you for joining us today. Before we go into this quarter’s results, I would like to introduce and welcome our new CFO, Jon Rubin.

Jon has been with us for just under two months now and during that time has been through a world wind orientation and is now fully engaged in his new role. I am truly delighted to have met with Jon.

Let me begin with some brief comments on the third quarter results and then Jon will provide more details on the quarter and our full year outlook, as well as provide directional commentary on 2009. In my closing remarks I will provide a strategic outlook for our business including any update on key priorities and opportunities for growth, as well as comments on the economy and regulatory environment.

I am very pleased to report that this was another excellent quarter for Magellan. As you saw in the press release issued this morning, we have produced $57.6 million of segment profit in the third quarter ending September 30, 2008, and $164.6 million of segment profit for the year-to-date period September 30, 2008. These results were driven by strong performance from our growth segments. Radiology benefits management, specialty pharma and public sector and by slightly lower earnings in the two prior quarters in our commercial behavioral business.

As we continue to achieve strong earnings growth from the acquisitions we made two years ago, we have benefited from the strength of our diversified profit streams, as earnings from radiology and specialty pharma now approach 21% of our total segment profit before corporate expenses.

NIA results reflected continued strong cost of care and administrative cost managing. Well, we are disappointed that we have not yet closed any new business. We continue to be quite bullish on our prospects. I will describe the NIA pipeline later on.

ICORE continue also to produce strong results and maintain consistent growth in the rebate consulting and distribution lines of business. As we discussed last quarter, the focus in our core distribution business is to supplement and support growth in the rebate business. Our continued success with ICORE rebate results is driven by not only our ability to add additional therapeutic classes to existing customers, but also our ability to move market share, as well as successful ongoing negotiation with pharma manufacturers on rebate contracts.

The public sector experience sustained favorable cost trends. We are please with the results in this very important sector and I will address Maricopa commentary later in my remarks.

In the commercial behavioral sector, results were down slightly from the last quarter primarily due to the higher cost of care in one regional account related to the addition of a new group of new members with a different utilization profile. These new members and adjustment and plan design created unanticipated higher cost in this contract. In contrast to announcements by other managed care organization regarding increase in utilization, we continue to not see any increase in utilization as result of the economy. However, the impact of the one regional account combined with the continued uncertainty related to economy will continue to put pressure on commercial margins in 2008.

As you will recall, at the end of the last quarter, we stated that we expected 2008 results to be in the upper half of our previous guidance’s ranges of 205 to $225 million, and $1.73 to $2.17 of earnings per share. Today are we are confirming that we continue to expect 2008 results to fall within those ranges of 215 to 225 million of segment profit and $1.95 to $2.17 of EPS based on the shares outstanding at September 30, and excluding any further share purchases in 2008.

Also, as you know, on July 31, we announced that the Board of Directors had authorized the $200 million share repurchase program to be executed over an 18 month period. During the balance of the third quarter, we repurchased approximately 395,000 shares at a total cost of $16.7 million, which essentially had no impact on third quarter EPS. We will discuss our fourth quarter purchases during our 2009 February call when we review our full year 2008 results. The program remains in place and further purchases will take into account share price opportunities, projected capital needs, M&A prospects, the status of credit markets in our 2009 cash flow outlook. To reiterate, we are very pleased with the third quarter and year-to-date results, and we continue to expect full year 2008 earnings to be strong.

I am now going to turn the call over to our CFO, Jon Rubin who will walk through additional details and our strong third quarter results, our 2008 guidance and our 2009 preliminary outlook. Jon?

Jonathan N. Rubin - Chief Financial Officer

Thanks René and good morning everyone. As indicated in the press release issued this morning and as René has mentioned, our segment profit for the third quarter of 2008 was $57.6 million. This compares to segment profit of $57.4 million for the third quarter of 2007. Revenues in the third quarter of 2008 were $656.5 million compared to $558.1 million for the same period last year.

The revenue increase resulted primarily from new business added of 108 million, including the Maricopa County behavioral health contract, the impact from same store membership increases of $9.9 million, and net rate increases of $16.2 million in our behavioral and radiology segment. An increased revenue from expansion of our business in the specialty pharma segment of $11.7 million. These increases were partially offset by the loss of membership due to contract terminations of $45 million and other net decreases of 2.4 million.

Net income for the third quarter of 2008 was $23.5 million or $0.58 per share on a diluted basis. For third quarter of 2007, the company’s net income was $25.1 million or $0.63 per share on a diluted basis.

Segment profit for the commercial segment was $39.8 million for the quarter, which was a decrease of 21.1 million from the prior year period. This decrease was mainly due to the impact of contract terminations of $17.4 million, care trend in excess of rate increases of $5.9, and the favorable out of period care development recorded in the prior year quarter of 2.5 million. These decreases were partially offset by increased membership from existing customers of $3.1 million and other net favorable changes of 1.6 million. Aside from the one regional account that René mentioned, the care trend for commercial is consistent with our previous expectation and is still estimated to be approximate 5% to 7%.

Current year third quarter segment profit for the public sector segment is $25.9 million, which is $14.4 million better than the prior year third quarter. This increase is mainly due to new business added since the prior year quarter of $6.3 million, the net impact of favorable rate changes of $5.8 million, and favorable prior period care development recorded in the current year quarter of $3.4 million. These increases were partially offset by net unfavorable variances of $1.1 million. Care trends in public sector are expected to be 3% to 5% consistent with previous expectations.

Third quarter 2008 segment profit for the radiology benefit management segment increased by $3.5 million in third quarter of 2007, mainly due to favorable rate changes of $3.1 million and favorable prior period care development recorded in the current year quarter of $2.3 million, which were partially offset by lower performance revenue of $1.2 million relating to timing and other net unfavorable changes of $0.7 million. We continue to see favorable care development in our risk radiology contracts relative to our estimated range of 12% to 15% trend.

Third quarter 2008 segment profit for the specialty pharma segment was $8.1 million compared to $4.6 million in the prior year quarter. With the increase being mainly due to growth in the rebate and consulting businesses.

Corporate cost excluding stock compensation expense were $200,000 higher than the third quarter of 2007, primarily due to the impact of cost inflation partially offset by improved productivity.

Excluding stock compensation expense, total direct service and operating expenses were 14.9% of revenue in the current year quarter compared to 16.9% in the prior year quarter. This decrease is primarily due to our ability to leverage our operating and corporate infrastructure, as we added additional revenues from the radiology risk contracts and Maricopa County contract.

In the third quarter of 2008, we recognized $7.8 million of stock compensation expense compared to $8.2 million in the third quarter of 2007. This decrease was mainly due to the termination of the employment of our former CEO in the first quarter of this year.

Depreciation and amortization expense was $16.1 million for the third quarter of 2008, compared to $14.4 million in the third quarter of 2007. The increase was primarily due to asset addition during or after the prior year quarter, including of assets related to Maricopa County contract partially offset by a decrease in amortization expense due to an intangible asset, which became fully amortized in the prior year.

Interest expense was $600,000 for the third quarter of 2008, compared to $1.6 million in the third quarter of 2007, mainly due to reduction in outstanding debt balances and lower interest rates in the current year quarter.

Interest income was $4.1 million for the current year quarter compared to $6.4 million for the prior year quarter. This decrease is mainly was due to the impact of lower investment yield. Now, this is consistent with our expectations and we are not changing our most recent full year guidance with respect to investment income not including the impact of share repurchases.

The effective income tax rate for the nine months ended September 30, 2008 was 39.6% compared to 40% for the year prior year period. Our effective income tax rate varies from the federal statutory income tax rate primarily due to state income taxes and the permanent difference between book and tax income.

Turning to cash flow and balance sheet highlights, our cash flow from operations for the nine months ended September 30, 2008 was $236.8 million. This amount includes the positive impact of a shift of restricted cash into restricted investments in the amount of $126 million, which is reflected as a source of cash from operations and a use of cash from investing activities.

Absent this transfer for the nine months ending September 30, 2008, the cash from operations was $110.8 million. For the nine months ended September 30, 2008, the company’s total unrestricted cash and investments increased by $75.9 million from $353.5 million at December 31, 2007 to $429.4 million at September 30, 2008.

The increase in unrestricted cash and investments is mainly due to segment profit for the nine months ended September 30, 2008, of $164.6 million, and proceeds from exercises of stock options of $12.6 million. Partially offsetting such items were the funding the funding of restricted cash of $15.2 million for one of the radiology risk contracts. Funding of restricted cash and other working capital of $12.1 million for other regulated subsidiaries, the run out of net contract liabilities for terminated contract of $14.5 million, capital expenditures of $24 million, debt and capital lease payments of $12.7 million, cash settlements for stock repurchases of $13.5 million that were made under the program announced last quarter. And other net changes of $9.3 million, which mainly related to increased to increased working capital support growth in the radiology and pharmacy segments.

Total repurchases of stock through September 30, 2008 were approximate $16.7 million. However, the cash settlements for $3.2 million of such purchases were completed after quarter end.

Our unrestricted cash and investments of $429.4 million at September 30, 2008, consisted of $262.5 million of unrestricted cash and $166.9 million of unrestricted short-term investments. Approximately $56.2 million of the total unrestricted cash and investments at September 30, 2008, relates to excess capital and undistributed earnings held at regulated subsidiaries.

The company’s restricted cash and investments of $290.6 million reflects an increase of $22.4 million since December 31, 2007, $15.2 million of which is attributable to funding in relation to one of the risk radiology contract as previously discussed. And the remainder of which is attributable to the timing of cash flows with our regulated subsidiaries and other regulatory requirements.

Now, mindful of our significant combined restricted and unrestricted cash and investment balances of $720 million. We have closely monitored the markets and the safety of these assets is of utmost importance to us. We have consistently maintained our conservative investment strategy emphasizing a diversified high quality liquid short-term portfolio. Naturally, the tradeoff to such a strategy that it leads to lower investment yields.

In light of our focus on M&A opportunities combined with the tight credit markets and the difficulties in the financial sector, we have maintained our emphases on the liquidity and quality of our investment portfolio. Our current cash and investment portfolio is heavily weighted towards cash and cash equivalents and high quality investment grade corporate debt security.

To-date we have not realized any permanent losses on our investment portfolio. As of September 30, we have $1.8 million of unrealized losses, which represents about 0.3% of our investment portfolio. We do not expect to realize any of these losses or intent to hold the securities for maturity. As of September 30, 2008, our only debt consisted of $1.3 million of capital lease obligations.

Now I will turn to our financial expectations for full year 2008, which are unchanged from what was communicated last quarter. We continue to expect to generate fiscal 2008 segment profit in the range of $215 million to $225 million and EPS in the range of $1.95 to $2.17. This EPS range includes the impact of share repurchases that were completed in the third quarter, but excludes any repurchases that occur during the fourth quarter.

Also, we believe our increase in unrestricted cash and investment for the year will be in the range we previously provided of $116 to $173 million excluding the share repurchases of $16.7 million that were completed in the third quarter as well as any repurchases that occur in the fourth quarter.

For fiscal 2009, we are in the process of finalizing detailed budget and are planning to provide 2009 guidance in December. In advance of that however, I want to provide some color and directional guidance for next year. In total, our directional guidance for 2009 is that segment profit will be moderately lower in our guidance range for 2008 of $215 million to $225 million. This directional guidance for 2009 reflects the following: the loss of 10-K. As a reminder, the 10-K west region goes away today and the east region terminates as of December 31. The loss of the WellPoint Medicaid contracts that were terminated as a result of WellPoint withdrawing from its contract in Ohio and Nevada; Expected margin compression in the commercial segment; earnings improvement in our continuing public sector business, and continued strong growth in radiology and specialty pharmacy. Again, we plan to provide more detailed guidance regarding 2009 at our December call.

And with that I will now turn the call back over to René

René Lerer – President and Chief Executive Officer

Thanks John. Let me spend a few minutes now discussing the Magellan’s business going forward and our strategic priorities. As we said last quarter, we believe that an environment in which managed care plans and governmental entities are struggling with costs helps us in marketing our products particularly in our growth areas of radiology, specialty pharma and public sector. New business opportunities for ICORE very encouraging, we continue to see new rebate done, signed new rebate done with current customers and we have also been quite successful on renegotiation rebate terms with former manufacturers that have improved their fee structure. In additional we continue to drive market share improvements in our preferred products generating greater value as a result of the tiered rebate structure we have in place. We expect to see continued growth as we see increase penetration with existing customers, add new customers and improve rebate contracts as a result of increases in the number of drugs in the therapeutic classes we manage.

We all are also working in new initiative and managing oncology benefits through focusing on drug utilization management, claim processing and reprising for on oncology reimbursement. We have a robust pipeline in our rebate and related distribution business, as well as the strong interest in the market place for oncology management programs. I’m optimistic about the outlook for radiology business, interest for health plans continues to be strong and as increased of late as a result of the market conditions and cost pressures experienced by these plans. As we’ve stated in the past as they health plans fill greater MLR pressure their interest and outsourcing risk grows.

We also continue to see interest from the states on the management of radiology services for Medicaid population. NIA will launch the first state program for the Commonwealth of Pennsylvania earlier this year and we are currently bidding on additional state RFPs. Our efforts in Washington DC continue and we are working hard to identify opportunities that may present themselves through CMS at some part in the future. Although, we are clearly disappointed that we haven’t yet closed any new radiology risk fields at this time, the pipeline is robust and we remain confident in the market and our future growth.

Let me take your couple of minutes to update you on the status of Maricopa County contract. This quarter we have been deferring revenue as we have throughout the year due to uncertainty and meeting certain contractual performance threshold required by the state. In order to determine whether we will be able to recognize any portion of this deferred revenue, you must wait until we’ve obtained adequate data documenting care services rendered, submitted such final and counter information to the state, demonstrating achievement of the thresholds and received agreement from the state that the thresholds were met, following their review and audit.

For deferred revenue related to initial contract period that ended June 30, 2008, we estimate that the earliest that this process will be complete is mid 2009. We continue to work diligently to meet the state’s expectations and will monitor results. As announced in recent press releases we reached agreement with two adult provider network organizations P&Os for the transfer of 13 of the original 23 behavioral direct care clinics that we’ve been operating since we took over this contract. This transition has already begun and through today we have transitioned five clinics successfully and we expect the balance of these first 13 to be fully transitioned by February.

This is significant step towards our goal of transitioning care to community based providers and transforming the systems care Maricopa. We fully expect to complete the transition of all the direct care clinics in the urgent psych center by October of ‘09. We will continue to work to insure that we maintain, we manage this transition in a way that assures continuity of care and keeps the best searches of our service recipients so far.

We’ve made significant strides towards transforming the system of care and Maricopa County into one that’s rooted in principles of recovery and resiliency and a commitment to recipient choice. The quality of care and service to recipients is paramount. Our approach to this concept from the start has sent through and giving stakeholders a voice in shaping the vision, strategy and oversight of this program and we have been able to establish collaborative relationships in the community to do so. We are very proud of our progress in Maricopa and we hope to continue to build upon these achievements in the future.

With respect to the pipeline in Public Sector, the state of New Mexico RP was issued and we have submitted our technical proposal. We will be submitting our cost proposal in the next several weeks. The contract has a planned effective day of July 1, 2009, and we are confident in the quality of the proposal we submitted. However, as you know, it’s always a challenge to seed an incumbent.

The balance of Public Sector opportunities that we expect to complete on in the near term are otherwise small to mid sized. On the commercial side, although the pipeline for commercial business has slowed over time, there continues to be interest and opportunities in that sector that we continue to pursue. Growth and investment in all of our existing businesses and our acquisition focus continue to be important priorities. Relative to our existing businesses we continue to make investments in innovation for existing a new product lines and capabilities to support on growing growth and opportunity.

With respect to acquisitions, we tend to continue to look at acquisitions that have strategic and economic value. As we’ve stated previously, we look for acquisition opportunities in both our current businesses as well as potential new verticals.

Moving now to the regulatory environment, let me spend a couple of minutes updating you on a significant recent legislative development. As many of you are aware the economic reviewing package signed earlier this month included legislation relating to mental health parity, officially known as the Paul Wellstone and Pete V. Domenici mental health parity, an Addiction Equity of 2008, this represents years of efforts by stakeholders towards improved access to behavioral health care by reducing or eliminating financial burdens. Magellan has long been strong proponent of such legislation and we applied its passage.

This act differs from the 1996 parity laws by expanding coverage requirements to include substance of use as well as mental health illness and as did the prior law it only applies to group health plans that offer both behavioral and medical benefits.

Plans may not establish separate financial requirements but treatment limits for mental health benefits such as co-payments, deductibles, limits on doctor visits, limit on days of hospitalization, as well as annual and lifetime limits on coverage. If a plan however, offers medical only coverage it is not required to add behavioral coverage. Small employer plans with fewer, with 50 or fewer employees are exempt from the law.

The new parity requirements will try to help plan beginning with planned years commencing one year after the date of enactment, meaning planned years commencing on or after October 3, 2009. Effectively we believe that means January 1, 2010.

We have previously said that parity will not have material impact on our near term business results. A large portion of our behavioral health businesses is either exempt from the law because it is with Medicaid, Medicare or some employer plans or is in states with already existing parity laws. If the state has no parity law or one that is less to it, the Federal law will prevail. But, in states with broader and more comprehensive parity laws such as those where small employers require to offer parity, the state law sets the border. Only a small portion of risk business exists in the states that do not have parity.

We do believe however, that parity creates opportunities for us to expand our business to existing and new customer where outpatient care is currently unmanaged. In addition to our EAP and coaching products we become increasingly important tools to provide early intervention and a means of managing behavioral deferred cost.

We also announced in our press release today that Barry Smith has resigned from our Board of Directors effective October 29. Barry has accepted an assignment as a non paid official of the Church of Jesus Christ Latter Day Saints in Dallas, Texas for the next three years. He is serving his mission presence for the Church in North Texas and due to his new responsibilities and requirements of the position he is no longer permitted to serve on any public or private boards during this three year tenure, which will continue until July of 2011.

Barry has served in our board since 2004 and has provided the company with outstanding guidance and it’s personally provided me with beneficial insight and counsel. We thank Barry for his excellent service as a Board Member and wish him good luck in the significant role that he has undertaken. We are planning to fill the vacancy and have begun the search for new Director.

In closing, it’s with mix feeling that I announce that our mayor dust CFO, Mark Demilio will now be leaving us and abandoning his mayor dust title for good. Mark has been a vital part of the Magellan family for the past ten years and has been a trusted partner and great friend to me since 2002.

Well, Mark has seen some turbulent times during his ten year, some his making it is fitting that he is leaving at a time when the company is doing well and has enjoyed turnaround in the result and prosperity growth and diversification, all of which he directly contributed to and then played an important role in our success.

Mark, I thank you for your years of advice, hard work and for the sacrifices you and your family have made for Magellan. Your assistance in transitioning Jon into his new role as CFO has been invaluable and I also thank you for you delaying you’re retirement in order to help us with that one last thing. All of us here at Magellan and me personally wish you a fond farewell and a very best in the years ahead.

Let me turn it over to Mark for a few of his own comments.

Mark Demilio – Chief Financial Officer

Thank you, Renedo. Its very kind, well some of it was, and you know I share your sentiment. I too have thoroughly enjoyed our professional and personal relationship and I hope and I believe that will continue from here in some form or fashion. I also appreciate all the support I have received from you as well as others on the management team and the finance team here, Jon and I wish all of you very well as I do all of them to join the family.

I do leave with the satisfaction that the company is in strong financial and strategic condition and poised for growth and continued success. And, I am also very pleased that I’ve been able to turn the reins over to someone, as talented and capable as Jon who I know will serve you and the company well and will be a key contributor to success that lies ahead for all of you. Well, thank you and I wish you all very well. And while I’ve added thanks everyone on the call as well for all of your support and cooperation over the years, I wish you well as well and specially in the near term turbulent times, thanks everyone.

René Lerer – President and Chief Executive Officer

Thanks, Mark. Let me now operator turn the call over to you for any Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question today comes from Greg Nersessian.

Greg Nersessian

Hi, good morning. And just thank you to Mark for all your help over the years. Just a quick question on this commercial customer that you identify for -- as generating some of the margin pressure in the quarter, could you provide a little bit more color on where the sources of that higher cost came from? And then, I guess, is this a contract that renews January 1, is this part of the reason you’re citing ongoing commercial pressure next year? It doesn’t sound like you’re cost trends are changing, just trying to understand where the sustained cost pressures coming from next year?

René Lerer

Sure. Obviously Greg, we don’t typically name the customers or the detail. The reality is this is a customer that had a large population in a single contract that contract grew materially at one point during the year with an addition of significantly incremental members. Our expectation with those incremental members would have similar characteristics as the existing cohort and as we’ve learned over time that population, for whatever reason had much higher utilization profile than that cohort. So, it’s a customer that over time just generally over utilization, we saw increased utilization, increased cost to care for that one increment, for what we believe to have been the one incremental piece for the incremental member that came on.

Greg Nersessian

Okay.

René Lerer

Other than that in our core business we didn’t see any material change in the utilization.

Greg Nersessian

Okay. So, the ongoing margin pressure next year, is that just a function of the pricing environment?

René Lerer

It’s a combination of pricing environment as we have seen every year over the past several years that has margin, as we look at different margins and our margins become, we make our margins available to transparent price, as well as the significant pressure on healthcare customers in the current environment we expect that pressure to translated down to a certain degree as well.

Greg Nersessian

Okay. And then, just a couple of more quick ones. The depreciation and amortization, or depreciation is a little bit higher this quarter, I think you mentioned the Maricopa assets. I mean now that you’re transitioning those assets, is there going to be an impact on D&A going forward or should we use the 3Q numbers sort of a run rate?

Jonathan N. Rubin

Yeah. Greg, its Jon. We should expect that to go down going forward.

Greg Nersessian

Okay. What was the incremental impact off those Maricopa assets? It looks like a good run rate, I guess?

Jonathan N. Rubin

I think it was approximately $7 million, Greg, over 18 months.

Greg Nersessian

Okay. And then, last question just how much, did you disclose what the deferred revenue related to Maricopa was and is that in your guidance for next year?

René Lerer

We have not disclosed that we talked about it in the past, and again our guidance is really very preliminary, everything we know at this time will be baked in the numbers and we’ll give you more detail in December.

Greg Nersessian

Okay, thank you.

Operator

Our next question comes from Daryn Miller, your line is open.

Daryn Miller

Good morning, thank you. Couple of questions around the share repurchase, is there a plan in place that is implementing those repurchases or is that something that you guys just make a decision to go out to the market and buy. And it looks the price you’re paying was around $42, what are you thinking now with the stock in the mid 30’s. And then one last question, just in terms of timing, if I think about the $200 million and you bought back about $17 million, a relatively modest amount I think how that spreads over 18 months. Did you guys have some kind of thought process and how would be looking at that repurchase on a quarterly basis?

René Lerer

First off, on the amount that we purchased were almost $17 million, it was not a full quarter. If you remember, we didn’t announce the share buyback till July 31. So, it was trunk rated quarter. As far as whether we have a plan in place and what our strategies, we obviously -- we have not disclosed our purchasing, sort of, strategy or how we are moving forward. We are obviously aware where the stock price is, we are obviously aware of other pressures in the community. And as Jon mentioned in his commentary, we will take into account any impact in the economy, the debt markets, M&A markets, our cash generation and so on. So, we put the plan in place to have it complete with 18 months. That gives us latitude to do whatever we need to do up through 18 months period. But any specific details about purchasing strategy or timing, we will be reporting that you on a quarterly basis as we complete it towards purchases.

Daryn Miller

Great. And then a question just on the EAP product. It sounds like the commercial business is coming through in line with your expectations. What are you seeing actually specifically relating to that product?

René Lerer

To the EAP product, in terms of cost of care. Cost of care is really in line with our expectations.

Daryn Miller

In the MOR that you have seen in that business is running is 30 to 40% range?

René Lerer

Roughly.

Daryn Miller

And then one last question Jon, you commented on the radiology business, 1.2 million in lower performance. What is that exactly?

René Lerer

We have certain contracts on the ASO side where their performance thresholds that have been met whether they are expectations for cost of care, utilization management and so on. That information is then collected overtime and we need to produce data to the health plan that demonstrate we have met those performance guarantees or those thresholds and then they need to validate and agree with us that we met them. So, it’s basically over or every six months or a year depending on the contract. We need to demonstrate performance guarantees have been met, they need to validate that. And as Jon said 1.2 million is like there will be more timing than anything else. Remember results are relative to a year ago.

Jonathan N. Rubin

Yeah. It was really the third quarter last year being higher that was driver of it.

Daryn Miller

Got you. So this and other business were you referring revenue?

René Lerer

Well, yeah, but it’s a bit of a different environment. It’s just demonstration across guarantees, cost commitments that we have made. And last year because we have slowed it down, we were able to move a little bit more quickly, we are probably now moving at a more steady state.

Daryn Miller

Got you. Thank you very much.

Operator

Next question comes from Carl McDonald

Carl McDonald

Thank you. I wonder if there was any update on the status of the Blue Cross contract that runs through the end of June next year and how you factor that into the initial outlook that you’ve provided for next year?

René Lerer

Carl, as you know, our experience is that if we lose a contract and it’s particularly a large contract, we have given significant notice. We have not been given any notice by any customer in any termination.

Carl McDonald

And then second question just on the M&A environment that you are seeing. What impact should be seen on potential acquisition candidates from all the instability over the last month or so, how did buyers expectation compared to these days?

René Lerer

Well, it’s an interesting market out there obviously both on the public and the private side. I think the notion of the dropping prices across the board, I am not convinced has some gain and people haven’t been convinced that that’s the new evaluation. So, it’s actually, as a potential acquirer it’s a pretty turbulent time. And there is a concern amongst potential entities that we would potentially acquire that they are not sure what their true evaluation is when can present themselves to the public markets. Obviously, the private markets no one believes their valuation has changed that it’s just a public phenomenon. So, it’s quite turbulent and it’s a time that we continue to monitor and look at and are very active. But we believe the changes in the marketplace are there and any discussion and acquisition that we make need to be consistent with those changes in market expectation. So, we have made our change in what we think to happen and we are waiting for the rest of the world potentially catch up if they are not there yet.

Carl McDonald

Okay, thank you.

Operator

Our next question comes from Josh Raskin.

Josh Raskin

High, thank. Good morning. Let me first echo great comment thanking remarks with help and also congrats to Jon on the new role, questions for you. First, you mentioned the press release specifically this time which you optimistic about the prospect of RBM contracts you know it was in the press release for last quarter. Can we read into that if there is an improvement in the proximity of a new potential contract?

René Lerer

We, if we calculate by the mile, I don’t know. But look, again, I think the issue is, and again as the markets turn down again in managed care, we continue to have more and more requests for folks. The process is painfully long, but, I think the comment I made was that we were disappointed we haven’t closed on a deal, but that we will remain quite optimistic that the market and the pipeline are robust, and that we will be able to make some of those deals get happen. So, in terms of proximity, I’m not sure how you define that. We don’t have the deal until it signed.

Josh Raskin

Okay.

René Lerer

So, we don’t have a signed deal yet.

Josh Raskin

Okay. But you would characterize it, it sound like you’re characterizing the activity at least as having increased?

René Lerer

Yes.

Josh Raskin

Okay, great. And then, second question maybe for Jon, you know, as you come in, I know it’s a tough question to early on, I’m just curious, you’ve now been I assume one quarter close, and I assume you’ve reviewed to some example of financial and the actuarial processes, and I was just curious in that preliminary review anything, sort of jump out at you in terms of areas where, where you may think about doing something different and sort of how comfortable are you, with the current processes?

Jonathan N. Rubin

Josh, first thanks very much for your welcome and to the question which was quite a warm welcome. I get a couple of things I note, first relative to the financial processes the core accounting and actuarial processes, I view them as very, very strong so first and foremost, that’s the over arching comments I’d make. Relative to priorities, on the finance side, as we’ve talked about, there’s a lot of activity right now around radiology risk and other opportunities in the marketplace, we obviously need to be very, very sharp in terms much our pricing and underwriting of those opportunities in that scenario that we’re continuing to try to strengthen and ensure that we’ve got, not just the right processes and methodology but also sufficient resources to be able to keep up with the market. So that’s probably the one area that I’d point out.

Josh Raskin

Okay. That will work. Okay, thank you.

Operator

Our next question comes from Scott Fidel.

Scott Fidel

Thanks, good morning. First question, looks like there was a 3 million member drop in the radiology membership in the third quarter, did you lose the customer or anything you could highlight around that?

René Lerer

As you know, year and a half ago, one of our competitors was acquired. Aimed was acquired by WellPoint and overtime they will begin sourcing that business to their own internal capability. So, the largest impact of that was the beginning of the loss of the WellPoint members who are ASO members who are being brought back and has to be managed by Aim.

Scott Fidel

Understood. So, would that have been the well choice piece for the business?

René Lerer

Well choice, is the risk business and that we still have, and that contract as we stated goes through the end of 2010.

Scott Fidel

Got it. And then, can you just highlight maybe exactly what are the exact specific performance issues that you guys have been dealing with in the Maricopa contracts that has resulted in not being able to book the performance revenues so far?

René Lerer

Again, you know we’ve talked about this on prior calls. There’s a requirement under the contract that we demonstrate and we provide data and encounters documenting the services that have been provided and the associated costs with those services. There’s a threshold that has to be met and we are continuing to accumulate data from the various providers in the community that provide services to demonstrate that we’re meeting those cost thresholds.

Scott Fidel

Okay. That’s all I have. Thanks.

Operator

Our next question comes from Michael Baker.

Michael Baker

Hi, Nat [indiscernible] for Mike Baker, good morning. Just wanted to get a sense in terms of the utilization and early read into October if you can provide that?

René Lerer

We typically don’t provide anything other than the past quarter. So, we’ll give you guidance when we do our year-end in February.

Michael Baker

Okay. And fair enough. Is there any way, in light of that, can you provide any kind of comment teary regarding sort of your underlying trend assumptions in that commercial side, as far as ‘09 goes?

René Lerer

Well Mike, for ‘09 we’re not ready to do that yet, but we’ll do so in December. I’m relative to 2008, although we don’t want to speak specifically about October. As, I said in my prepared remarks for the full year we’re expected to be on track versus what our previous expectations were coming into the quarter.

Michael Baker

Thank you, very much.

Operator

Our next question comes from Kevin Campbell.

Kevin Campbell

Good morning. Thanks for taking my call. I was just hoping you could help me understand your decision making process and your primary considerations when selecting one of the P&Os for the Maricopa account contract. So, far it looks like the trend has been for non-profits. I was wondering if you expect that to consider or to continue and maybe you can elaborate a little more on the timeframe and how many additional awards you’re planning to make there?

René Lerer

I think there are a number of factors. There is a process that goes on in collaboration with the state and identification of potential partners, a number of these partners that ended up doing the acquisitions on the existing clinics that we’ve announced, were identified in our RFP to the state of potential acquirers. So, they’re obviously on the list. There’s an RFP process and a commentary that goes on with potential acquirers as well as with this, involvement of the state bias. There are certain criteria that need to be met; there is a process that has to be approved by the state, there is a negotiation that goes on and then we move forward with the bid.

Kevin Campbell

Okay, great. All right. I think that takes care of it. Thank you.

René Lerer

Thanks.

Operator

At this time we have no additional question.

René Lerer

Great. Well, in the absence of any questions again, I would like to thank all of you for joining us today. We’re very pleased again with the results we have seen for the quarter so we remain bullish on the rest of this year. Mark, again good luck and congratulations even though I am not sure why I am congratulating you. We look forward to speaking to all of you again in December when we provide our 2009 guidance. Take care, thanks everyone.

Operator

Thank you for joining today’s conference. That does conclude the call at this time. You may disconnect.

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Source: Magellan Health Services Inc. Q3 2008 Earnings Call Transcript
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