Magellan Health Services, Inc. (NASDAQ:MGLN)
Barclays Capital 2013 Global Healthcare Conference
March 13, 2013 10:45 AM ET
Barry M. Smith - CEO
Joshua Raskin - Barclays Capital
Joshua Raskin - Barclays Capital
Our next speaker and newest addition for the presenters at the Barclays Healthcare Conference, we’re going through the automated response, so hopefully you guys got your trackers. John, I will let you answer as well, once you tell me what the answers are. We’re going to skip one or two because they’re particularly may not really [related] all to Magellan. So, we’re asking the same question to all the companies.
First one, do you think health performance going to be a positive or negative for Magellan in 2014? One very negative and five very positive. So excuse us all right this is well that’s – I don’t know if I’ve seen that yet. But that’s good to see.
Next question, we’re going to skip the contracted rates on exchanges, utilization trends, let’s pick a business, lets go with and I will write this down, we will go with behavioral segment. Do you think that the trends which has been very consistent for a long time, I hope we’re leaving the witnesses, significant increase or significant decrease or somewhere in between? All right. That’s interesting, interesting certainly a [bias there].
Next question. How would you like to see, let’s put the newest CEO on the spot right here, what should he do, M&A, share repurchases, increase the dividend, repay of debt or invest in the core business? All right. That seems consistent with what the feedback has been on the conference call.
Next question. Do you think the Company can grow earnings; we’re defining this as EPS in 2014? All right, I agree. I guess there is some confidence in that one specific contract we’re talking about. Next one, do you currently own shares in Magellan? All right, so some ownership buyers here. They’re still 38% to convince. Next one and the current buyer from the stock, positive regardless whether you’re in a positive, neutral or negative? All right, [that clears buyers that] way as well. Great.
So I’m going to turn it over – so now Magellan is going to present the first time I get introduce Barry Smith as the CEO of Magellan. He is – I guess the third CEO I’ve introduced at this conference over the 10 years that I’ve been here. You may recognize him or know him from his previous life as publicly traded CEO as well. But we’re really excited to have him very early in his 10-year to give us some broad prospectus on the company, we’re going to do a formal presentation. And then we’re going to hold all the questions for the break out session after. So we’d appreciate the patience on that.
And with that, it’s my pleasure to introduce Mr. Smith.
Barry M. Smith
Thank you. Well, I was hoping I will get the music, the same music during the presentation that – maybe its not part of the deal. I just want to thank Josh and Barclays for having the good sense to have this conference in Florida. And I understand we’re going to do it again this next year.
Well, it’s great to be here to be able to talk about Magellan and give you an overview. First, the cautionary statement, which I won't go through the detail, but talking about where we’re today Magellan, how we’re going, I'm very excited about the Company; I have been here for just over two, two and half months now. However, I did serve on the Board for several years. So I am very familiar with where we’re strategically, where we are going and I'm very excited about the Company.
Just to give you a quick overview of our services today, we have of course at our core a great behavioral health business where we manage special populations in our core capabilities in behavioral health. We are also developing products in autism, which we are developing and rolling out. We have a significant demand from our clients for those services. We also have a very robust radiology business. We acquired the company Sun, seven years ago and it’s been growing ever since and we’re thrilled to see the – see progress we’ve made in that segment.
We will talk more about the pharmacy during the course of the day-to-day as well. We have what we call Magellan Total Drug Solutions, which is a full service PBM. In that we have core PBM capabilities, we have a well-developed specialty pharmacy business, which we will talk about, but we also had a very significant presence in the Medicaid market. We service some 26 out of 50 states in Medicaid pharmacy. And again, I'll spend a bit more time on that today. And we also see a great opportunity in the Medicaid expansion that’s going on in the next 24 to 36 months in particular where there will be a – that’s a great opportunity for growth in – with this expanded population, but also we’re very focused on dual eligibles and again I'll spend a few minutes today talking about that.
The Company has grown interestingly over the last several years and while 10 years ago we used to be solidly a behavioral health company, we diversified the revenue in the Company with these new growth areas, particularly in pharmacy and in radiology. We have about a 12% compound annual growth rate over this period of time and for the first time in 2012 we have over $3 billion in revenues and growing that. And you will see from the slides upcoming we are – our guidance we're giving is between 3 – 3.5 and 3.7, $2.8 billion in revenues. So, we're excited about the future.
Now we have many different pathways to growing the business. We clearly have some very solid good large client relationships that we will expand within existing clients. I have been asked the question this morning how does the Medicaid expansion and healthcare reform affect Magellan? We are very excited about what that means to us, because we grow both through our plan partners and we had significant large plan partners. We believe we will be very successful in this world. We're working with them directly to expand their business and to define products. So that will be a successful both in the Medicaid markets, but also in the exchange with ACO's that are developing.
We also have a footprint; we are expanding in terms of the states that we have not only contracted for currently, but for expanding in to, we’d see a great opportunity both in the commercial, but particularly in the public sector to expand our footprint. We also are innovating products in each of our sectors, so that we can have the opportunity to have – add-on product sales. In particular, we are doing a lot of work in our radiology business, where we have the radiation oncology, cardiac products, pain management products that we are developing, and of course as I mentioned the autism product expansions there.
We also are increasing the revenue and the depth of our relationships with many of our public partners, clients that we serve and integrated home health. We are seeing this integration of behavioral health with physical medicine. I'll spend more about that during the presentation and these are clients and accounts we were able to step into those relationships and expand revenue and again the depth of the relationship. And of course with long-term care that's an opportunity within that patient population to customize the products that we currently have to be particularly applicable to those in those settings.
Now in terms of new populations and managing new populations, we believe that there are great opportunities within our pharmacy work as well and radiology to expand our current strong base with the public market and also our plan customers in to more broad-based PBM services, we today and again I’ll spend more time about it during the course of the day. Already have these capabilities when it relates to standard what I will call PBM 1.0 capabilities, we are very experienced as specialty pharmacy and we also have an extensive experience and track record in medical pharmacy management, which again I will review.
In terms of where we are going in the future, today I like to focus on two key initiatives that we think has – the bulk had great potential. The first is Magellan Complete Care and you will hear about this in a several different flavors which I will talk about today, but this is that trend that we see in managing populations based upon a state. In this particular case we talked about the seriously mental ill where we have a unique and deep capability. We are also talking about the Dual Eligibles and SMI specialty populations.
So, for example we think about the SMI specialty plan, here in the state of Florida, we are licensed today as a fully licensed HMO. We have plan partners across the country, but here in Florida we are entering the market as a specialty plan working with the state to define that specialty plan, which we see as a very significant opportunity for us to combine again a full healthcare plan integrating both physical medicine and behavioral health with this population.
We today also have recently announced the joint-venture and a win in 10 counties in which we responded with the RFP, in Massachusetts with Fallon, Fallon Healthcare, a great Medicaid partner in the State of Massachusetts. We are a 49% owner of a joint-venture with them, they’re 51%. They are handling the physical medicine portion of that contract, but this is the first dual demonstration project in the country. In that population, 35% of that population are seriously mental ill individuals. The RFP has written for behavioral health orientation. So it allowed us to respond and be very successful there within the State of Massachusetts.
We also believe that there is a real opportunity for the dual eligible population over 65, roughly 20% of these individuals have seriously – serious mental illnesses, but also have other implications that we have particular strengths in dealing with more complex both behavioral health and medical management cases. There are several states clearly in both the duals under 65 and over 65 that are looking at launching programs and so we want to be very actively involved in those populations and in those states.
Now the reason we focus on serious mental ills, because we have great experience with them, and great and well-developed capacity to manage these very complex cases. Now the seriously mental ill interestingly have the same disease states that you and I have, but on average live 30 years less than you and I will live. And the reason is again because they have different diseases, is because their access to medical care is hindered by their behavioral health issues, and so they are not able to access health care the way again you and I would. When you think of the – a patient in the waiting room of a primary care physician, the physician have a hard time having a patient that’s disrupted in the waiting room for if you have a very depressed patient the patient doesn't have the best ability to communicate those issues that they might have clinically, so the physician is not able to diagnose nor treat the patient effectively. And so, it’s for this reason that you typically see a lot less in terms of life expectancy than you would for you and I, the non-SMI population.
Now importantly, if you take a look at the overall spend in Medicaid -- and I’ll use pharmacy as a good case in point, roughly $0.09 of every dollar is spent in Medicaid and Medicaid program for a non-SMI individual. If you take a look at the individuals with the Medicaid patient, enrolling with serious mental illness that pharmacy spent ramps up to $0.32 of every dollar is pharmacy spent. As you can see roughly 14% of that is for behavioral health spent, but importantly 18% of that is non-behavioral health spent. So the ability to manage pharmacy and to use our strengths in both understanding the SMI population, but also understanding pharmacy is critically important.
Certain another way if you took a look at the total spent for the SMI Medicaid patient, what we do today with the Magellan can take care of roughly $0.70 – $0.69-$0.70 of every dollar. So we have great capability to manage the total care both the physical medicine and the behavioral health of this particular population. So it's a great opportunity that we see ahead of us here.
Now in terms of the total, the target revenue for Magellan Complete Care; we are looking at several states, at this point we’re in Arizona today as the Behavioral Health Plan and I’ll talk – I’m sure on the Q&A we’ll have a few questions about the Maricopa. We today cover 750,000 lives in Maricopa. We’ve managed that business for over five years. We have a great relationship with the state. And out of that 750,000, 14,000 of these individuals who are SMI, serious mental ill individuals, the state has asked a new – the new – we were very hopeful that it’ll be us. But the RFP asks for those particular 14,000 to be covered having integrated both Behavioral Health and Physical Medicine. And we also – as I mentioned focused on the dual eligibles under 65 as well as all dual eligibles because of the significant spend in those populations and the opportunity. In the states that we’re targeting, there’s roughly a $50 billion spend for these states in this population. And so by capturing just a small part of that population we believe we’ll be very, very successful.
Now I mentioned these particular sites already. Again in Massachusetts the Go-Live is 7/1. We submitted bids, submitted the RFP response to 10 counties, you bid county-by-county. We rewarded access to all 10 counties, and we’re excited about that. Again, this is the first duals demonstration project in the country, so a lot of eyes are on what we will occur there in Massachusetts, and that program will Go-Live 7/1 of this year, so just a few months from now.
I mentioned Arizona, that we have a great relationship. We expect the bid which we submitted in early January, we expect the response to come back in April. We’re cautiously optimistic. We certainly don’t want to be arrogant about it. But we do have a great relationship with the state and believe that we’ve submitted a bid that’s unparalleled in terms of demonstrating our technical expertise there. So we’re excited about that.
Of course, in Florida we’re fully licensed as I mentioned as an HMO. We will not be a broad spectrum HMO in terms of our offering, but we’re working with the state now to define a special needs plan for the SMI population. In the state of Florida, there are roughly 160,000 to 170,000 SMI individual’s that’s estimated, in the areas that we’re focused on there are 110,000. In terms of the cost of PMPM for these individuals for Standard Medicaid Patient it’s roughly $900 PMPM, and we’re looking at two, three maybe even more PMPM for the SMI population.
So penetrating even 20% or 25% or 30% which we hope to do over time in this population will be a very significant growth opportunity for Magellan approaching more of what Maricopa looks like. So, we’re very excited about Magellan Complete Care and having this opportunity here. And then of course there are a variety of partnerships and joint ventures that we’re exploring at this point that will allow us to continue to build on the momentum of what we’ve already done with Magellan Complete Care. We’d like to do deals with our commercial plan partners wherever possible, and where it makes more sense to go direct state as we have in Florida, we’ll do that as well. But again, we like to work with our plan partners whenever possible.
Now with Fallon again, given the time, I won't spend a lot of time here. But the total value of all contracts here just to give you some idea of size is $3 billion. It's a three-year demonstration project beginning on the 1st of July. And again we were one of six vendors that were allowed access to these 10 counties. Enrollment will begin in July, and they will go in through a process of auto enrollment to later, but we’re very excited about what we’ll be able to do. Again, it was the first state to sign a memo of understanding with CMS for the duals, and we’re hopeful that will become a real lighthouse and a model for how other states execute on their dual strategy.
Now, I’d like to spend a few minutes talking about our pharmacy solutions. And I have a countdown clock that’s not counting down. Josh, will have to give me the – [well it’s up there, good] 7:51. I’d like to spend a few minutes talking about pharmacy which we’re very excited about. As I mentioned earlier we have already a very well developed pharmacy capability both in general PBM capabilities, but also in specialty pharma which I’ll talk about. Our solution is what we call Magellan Total Drug Solution, meaning instead of being kind of plan centric where we have a general plan and individuals either fit in or out of certain categories. We look at it more as being catered to specific individuals within the plan. So whatever pill, tablet or liquid, self-injectables, or infused biologics, anything, anywhere that touches a patient we have the capability and the technology to be able to manage that cost.
We also focus on site of service and we do so in a highly customized way. So, whether again it's self administered by a patient in a home setting, whether it's administered in a physician’s office or an alternative site, we have the ability to manage the cost of those drugs or an outpatient setting. Again, any benefit, now particularly in the specialty world where drug cost is rising dramatically, we estimate that roughly 50% of that drug spend in specialty which is the single greatest growing component of the drug spend and there are estimates between 30% and 50% of those spend – that spend will be in specialty pharma. I was just with a CEO a month and half ago who said that 2% of this population spent 40% of the drug spend – the total drug spend, so you can see the opportunity and this is a segment that is increasing dramatically.
We just recently published in our Magellan Drug Solutions and Oncology trend report, medical – a pharmacy report that between 2010 and 2011 for example in this population that we surveyed we do a survey of 50 commercial plans representing a $160 million enrolled lives, the increase was 22%. So, we’re talking about very significant increases in pharmacy spend within this specialty world. So, what our proposed solutions and solutions that we sell are looking at not only the pharmacy benefit, but we’re also working directly with plants and with employers on the medical benefit, combining our PBM experience that we have extensive – that is extensive again if we process, adjudicate over 190 million claims annually, so we’re a very significant player, but we combine that with both the specialty pharma capability as well as medical pharmacy management which is a different science in a way of getting out the cost.
Just in terms of the different solutions that are out there. You have the full service PBM capabilities that I’ve just mentioned, meaning that we have all the normal components you think of within a PBM offering from claims processing, the network management, mail service capabilities, Part D capabilities all those kinds of things. But we also have very well developed, we believe that we’re a national leader in the specialty pharma world where we have specialty dispensing capability or [sell through] our own pharmacies, both formulary management and rebate management. And to give you some perspective on that, in our human growth hormone for example, where and with our partners, with our drug that we work with manufacturers and have a certain discount because of our effectiveness, we see market share is at 80% versus the market norm for that product in the market is 30%. So because of that kind of capability we received rebates which are transparent to the client and help them achieve greater savings in their drug spend both of the PBM side, extended PBM side but also in the specialty pharma piece as well.
Now in the medical pharmacy solution’s, there’s a lot of confusion in the market place as to what this really is. We don’t view it as simply a redirecting of the pharmacy spend through a mail-order facility. While there could be some savings from doing that it's minimal and in fact in some cases can actually cost a client more. What we’re talking about are proprietary reimbursement and capabilities where we work not only with the patient directly, but also with the physicians office to help manage the spend for pharma. And I’ll use oncology as an example of this. We take about oral chemotherapy agents, roughly 70% of those today are used and are – the claims are submitted to the medical system, not the pharma system. So, the pharma side doesn’t see a lot of that spend. There is a solution that one might provide in a traditional PBM way to take that spend within the physician’s office and have it routed through the mail service facility and receive the same discounts. But the challenge with that solution for a pay order is that the physicians typically buy 17% -- at a 17% greater discount than due the PBMs. And so they have a lower drug cost basis.
What's the fact when you send that drug to the doctor’s office? Roughly 20% of that drug is wasted. And so the savings or the perceived savings completely evaporate. So, it's a real challenge to administer it in that fashion. We take a very different perspective. We work directly with the physician offices, we integrate all the means of controlling cost and quality of care by taking a look at first what is appropriate. What is the appropriate drug? And within a class of drugs what is the drug that we have to have a same therapeutic equivalent? What is the best, both medical benefit as well as cost implication given the discounts that we have from the manufacturers. We then say well, in many cases an individual may not tolerate that chemotherapy drug more than a few days before realizing it doesn’t work. So dispensing 90 days to that individual doesn’t make a lot of sense, and so we’ll dispense 14 days to control the wastage that would likely occur with a larger dosage being administered or being sent out. So, there are real opportunities to using a far more sophisticated approach using all the tools we have to control the drug spend. And I’ve got to really run through this presentation at this point.
So what does the market want? They most – want the most cost effective medications, and they want to make sure that it's delivered in the most clinically appropriate way. The traditional PBM approach is to have more volume go through, typically the mail service facility or in the case of chain store based PBMs that go through the store for the opportunity to sell more of other products to the individual. Our solution again is very individually based. We take a look at all the drugs spend, no matter what drug, no matter what site of service and we focus on both the clinical side as well as the patient -- the quality of care for the patient.
So, I’m not going to recap what I just said. Let me just give you a quick note, I’ve got 33 cycles to kick through the financial highlights. I think you have these already. But in terms of the revenue for this – the guidance for this next year, we’re looking about $3.5 billion to $3.8 billion as I mentioned before. The segment profit we expect to be between $250 million and $270 million and just as a side note, we were spending roughly $25 million this year in new work that we’re doing in Magellan Complete Care not counting potential acquisitions. So we’re heavily investing in a business as we go forward. Net income $91 million to $109 million, and of course EPS of $3.27 to $3.92 per share. Well, I think I’ve got exactly – well actually timer is going up, so I’d probably went over.
So thank you Josh, for the time and I didn’t get the music. We thank you for being here today.
Joshua Raskin - Barclays Capital
[No Q&A for this event]
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