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Catamaran (NASDAQ:CTRX)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Mark A. Thierer - Chairman and Chief Executive Officer

Jeffrey Park - Chief Financial Officer, Executive Vice President of Finance and Principal Accounting Officer

Analysts

Jeffrey Bailin

David Larsen - Leerink Swann LLC, Research Division

Amanda Murphy - William Blair & Company L.L.C., Research Division

George Hill - Citigroup Inc, Research Division

Michael R. Minchak - JP Morgan Chase & Co, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Zachary William Sopcak - Morgan Stanley, Research Division

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Anthony V. Vendetti - Maxim Group LLC, Research Division

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Catamaran Corporation's 2013 First Quarter Results Conference Call. Catamaran issued an earnings press release this morning, which has been filed with the SEC and is available on the Investor Information section of Catamaran's website at www.catamaranrx.com.

Listeners are reminded that portions of today's discussion contains forward-looking statements that reflect current views with respect to future events, such as Catamaran's outlook for future performance and revenue and earnings growth and various other aspects of its business. Any such statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to the cautionary language in the earnings release and in Catamaran's filing with the SEC, as well as Catamaran's most recent annual report on Form 10-K.

During the call, there will also be a discussion of some items that do not conform to Generally Accepted Accounting Principles, including adjusted EPS and EBITDA. Catamaran has reconciled these items to the most comparable GAAP measures in today's earning release.

[Operator Instructions] This call is being recorded on Thursday, May 2, 2013, at 8:30am Eastern Time. A replay of today's call will be available on Catamaran's website approximately 1 hour after the conclusion of the call.

I would now like to turn the conference over to Mr. Mark Thierer, Chairman and CEO. Please go ahead.

Mark A. Thierer

Thank you, and good morning, everyone. We appreciate you joining our call today. We are pleased to report a very strong start for 2013 in both revenue and EBITDA. Once again, Catamaran posted strong performance, delivering $3.2 billion in revenue and $144 million in EBITDA during the first quarter.

We are in the middle of our robust selling season in which we're seeing more RFPs than we have ever seen in the history of the company. The level of engagement we're seeing from all segments is high, and we're extremely pleased at how well our capabilities complement the emerging needs of the marketplace. Our strategy, to move-up market as a scaled alternative to the traditional industry model, is clearly taking hold. The combination of our scale, technology, service and innovation has opened up a multitude of opportunities in every segment. We've been asked a bit on a large number of new business opportunities, not only in core markets, but also in those where we compete and hold the leadership position, such as Fee-For-Service Medicaid, Workers' Compensation and other segments that are active for us.

We're finding that our expanded skill and scale has opened doors in the large employer market, and while we do not announce every win and will not announce anything before it's signed, we can report that we are feeling very good about this selling season in the employer segment. Our pipeline in the health plan segment is equally strong. We are seeing health plans make moves to position themselves for 2014 and beyond. Catamaran has emerged as a preferred PBM partner for health plans who want to play a role in the management of pharmacy but also want to partner for certain strategic value drivers and services. Each of these health plans has unique needs and complex requirements. And it is here that our capabilities truly come together: Our Medicare Part D footprint, our strategy to support exchanges, our full product line and our track record of flexibility and innovation.

Our experience, ranging from not-for-profit Blues plans, large public company plans, managed Medicaid plans, Medicare Part D, commercial and ASO, makes Catamaran a strong strategic partner for any health plan. For large complex plans, our model is a hand and glove fit, and our flexible and customized model works very well in this space.

We all know that health-care reform is reshaping the health marketplace. The dynamics created by the Affordable Care Act are creating substantial opportunities for Catamaran. Health plans are seeking new ways to compete effectively, and are making decisions now about which states they want to be in and how to compete for individuals in those states. For these clients, Catamaran is helping to define the PBM services, interfaces and technologies that will empower these client programs to market to and service individuals in the exchanges.

We're very excited about our opportunities to address the post-ACA marketplace. Already, Catamaran is emerging as the partner-of-choice for organizations seeking to win in this new environment. As we previously outlined, our strategy involves participating across the range of models, which include public and private health exchanges, CO-OPs or consumer oriented and operated plans, the dual eligible demonstration projects and Medicaid expansions.

We've gotten off to a fast start in this space and are experiencing success already having won nearly half of the CO-OPs in this emerging market. Our strategy of supporting more market segments, based on our flexible service model and scalable technology platform, will position us to take advantage of these complex changes. In addition, our strong presence in managed Medicaid and Fee-For-Service Medicaid creates significant growth opportunities from the expected Medicaid expansion.

The value we deliver in this space is the ability to quickly assimilate and translate rules and regulations, coupled with the flexibility to structure an offering for any payer competing in health care marketplaces. So in addition to our core markets, the post-ACA market is emerging as a very active space for our company.

Shifting gears, specialty continues to be an important strategy. You may have noted, we announced that our specialty brand, BriovaRx, was awarded Specialty Pharmacy Accreditation from URAC, a Washington, D.C.-based accrediting organization that establishes quality standards for the health care industry. This designation reflects the strength of our specialty offering, highlighted by our personalized approach to managing chronic conditions and the high level of one-on-one support that we provide.

BriovaRx takes an information-based, patient-centric approach to specialty pharmacy. It is not just about transactions or drug distribution, it is a high touch, comprehensive and coordinated system, where patients with chronic and complex illnesses, receive expert therapy management and support tailored to meet their individual needs.

The clinical management specialty should not be overlooked, and we believe it is a key differentiator for us here at BriovaRx in the marketplace. The robust pipeline and extraordinarily high cost of these drugs demand more than just a focus on cost. Equally important is the clinical management and the ability to influence outcomes. We excel on both dimensions. We buy it right, and we manage it right. BriovaRx can fulfill all specialty scripts, including limited distribution medications, which is a testament to the strength of BriovaRx in the marketplace.

On the subject to trend, we're excited to tell you about our new trend book throughout this month, which does an excellent job of laying out the challenges we see and how we are well-positioned to address them. In it, you'll read about our holistic approach to pharmacy management at the national, regional and individual levels. I'd encourage all of you to take to look at this document. It articulates our point of view that the health care industry, as we all well know, is in for significant change. At Catamaran, we see a major opportunity in a personalized model, one that looks at understanding and managing risk at an individual patient level. We are pleased to report that our overall commercial trend was 2.6% and our highly managed trend was 1%.

We're also very enthusiastic about the progress of our innovation center, which opened formally in Chicago -- will be opening formally in Chicago earlier -- or this summer. Technology and innovation have always been the heartbeat of our company, and we are especially excited to showcase a variety of technologies that bring to life our view of the future of the PBM industry. We captured our vision in an interactive, world-class technology showcase of the PBM of the future. We've already brought a number of clients through this location and as expected, the space is a powerful tool to engage clients in forward thinking and collaborative discussions.

Let me summarize by saying it as clear. In all the markets we serve, that Catamaran's flexibility, the speed with which we address market trends and the innovations we are bringing to the market have squarely positioned us as the scaled alternative to the traditional model. Our multiple market strategy continues to serve us very well. We continue to experience traction as we move upmarket and we are winning in the new post-ACA marketplace. 2013 is shaping up to be a bellwether year for Catamaran.

At this point, I'd like to turn the call over to our CFO, Jeff Park, who can provide you with a more detailed look into the quarter.

Jeffrey Park

Thank you, Mark, and good morning, everyone. The first quarter was another successful quarter, both financially and operationally. We generated strong growth, driven by new clients, the addition of Catalyst book of business and related synergies. Let me take you through the results.

First quarter revenues for Catamaran were $3.2 billion compared to $1.7 billion in Q1 last year, an increase of 88% on a year-over-year basis. Q1 revenues were impacted by expected seasonality, as well as softness in some of our health plans who exited certain markets or experienced some client churn. In addition, our revenue was impacted by the reset of high deductibles or consumer-directed plans, in which members pay pharmacies directly at the beginning of the year.

The company's gross profit increased to $248.4 million in the quarter. Gross profit percentage for the PBM segment was 7.1% compared to 5.4% in Q1 2012. We are very pleased with our margin performance, especially considering the seasonal impact typically seen in the first quarter of the year. Our impression -- our impressive margin performance in the quarter was due to synergies related to our acquisitions and strong specialty pull through, which helped offset the typically lower margin profile of new and renewed business. We expect continued gross profit expansion through 2013 as our reiterated guidance suggests.

We continue to deliver strong EBITDA results, achieving $144 million in the quarter. This represents 164% growth on a year-over-year basis. Adjusted EPS was $0.42 in the quarter and represents a 62% increase year-over-year. We also generated strong cash from operations in Q1, which enabled us to pay down $100 million in debt in the first quarter. Our leverage levels have come down very aggressively. We are now below 2x on a debt-to-EBITDA basis. We have repaid $300 million of debt since we closed the Catalyst transaction 3 quarters ago. So you can see cash flow from operations continues to be an important value driver of our business model.

SG&A expenses were $100 million in the quarter, roughly $14 million less sequentially. This is a testament to our team and our leverageable operating model.

We are reiterating our 2013 guidance, and as you can see, our guidance indicates very strong growth for Catamaran throughout the year. We continue to be a strong player in health plan and middle-market segments and we like our prospects for moving into the large employers. Catamaran posted strong business sales for 2013, and as Mark said, we are in the heat of the RFP season right now. The health care industry is transforming rapidly, and the expected changes will be starting in 2014. Catamaran is well-positioned to take advantage of these transformative changes. Payers are looking for alternatives and a strategic partner that's willing to deliver customized solutions to meet their needs. We expect to capitalize on this demand in the new marketplace.

In closing, I'd like to reiterate that we are very encouraged by the activity we're seeing and our model continues to be an excellent fit in the environment. We are excited about the growth opportunities for Catamaran.

Operator, I'd like to now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Glen Santangelo from Credit Suisse.

Jeffrey Bailin

This is actually Jeff Bailin in for Glen this morning. It's obviously pretty early in the selling season, so as you suggest, there's not a ton to report yet, but we've been hearing a lot of noise around carve-in PBMs coming out with a more aggressive pricing and a differentiated message. Can you guys comment a little bit if you're seeing anything different from the carve-in PBMs at the broader competitive landscape?

Mark A. Thierer

Yes, Jeff, it's Mark. This is a cycle that has been in this industry for as long as I've been in it. And the bottom line is, I take a look at our RFP pipeline, and we have lots and lots of carve-in opportunities that our client is looking to better manage a pharmacy. And so the best gauge is always the pipeline in terms of sheer number of opportunities and the dollar volume. And as we mentioned in our prepared comments, we are seeing across every segment, including employer, health plan and all 5 of our operating segments, more in terms of the sheer number and dollar volume of opportunities than we've ever seen before. So the activity level is very, very high.

Jeffrey Bailin

Great. If I could just ask one more, maybe. We're sitting here about 7 or 8 months before the expiration of your first term of your contact with HealthSpring. Is there any update that you guys can offer on the status of that relationships or the discussions with Cigna?

Mark A. Thierer

Well, Jeff, obviously we don't like to talk about any specific client, but I will, since this is, for the last 2 years, the #1 question we've received. I will offer a little color. Number one, our business relationship with Cigna continues to be very strong. We're focused on helping them execute on their business strategy. And obviously, we know the business and have great respect for their leadership team. We do believe the fact that our company does not compete, and this applies really to any health plan, we do not compete in the Medicare Part D space against our health plan sponsors, as well as the exchange strategy. We think these are 2 important differentiators for our company, broadly, in the health plan space. We also think that our skill and scale can help release operating leverage for the largest health plans in the country. So without answering specifically on the Cigna relationship, we really do feel good about our positioning to support large health plans.

Operator

And we'll go next to David Larsen from Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

Jeff, can you just maybe comment on the script volume in 1Q? Was there a bit of a sequential decline? And I know you made some comments on your preliminary speech there, but can you maybe just give a couple more highlights as to why it was a little bit light?

Jeffrey Park

Sure, Dave, this is Jeff. So to step back and look at scrip utilization, we continue to see utilization for 2013 to be in the 1% to 2%. And as I mentioned earlier in my comments, that at the beginning of every year, you do get to see an impact on the number of scripts that you can touch through some of the high-deductible health plans or consumer-directed plans. We did see some churn at some of our health plan clients as they exited some of these markets and that had an impact. But overall, we feel very good about the utilization and the utilization growth. Some other math components for you to consider, as we see an increase in the rise of our 90-day scripts that get filled at the retail setting, those 90 day scripts don't get adjusted upwards for the 3 multiples. So this can have an effect similarly.

David Larsen - Leerink Swann LLC, Research Division

Okay. So the total number of clients that you had as of 01/01/13 increased relative to 4Q '12, is that correct? It's not like there were any client losses, it was really just sort of trends within your base?

Jeffrey Park

Correct.

David Larsen - Leerink Swann LLC, Research Division

Okay, great. And then SG&A declined pretty nicely sequentially. Was that all mainly synergies tied to Catalyst?

Mark A. Thierer

Yes, we've been very aggressively focused on driving operating leverage into our business. So this is something that we take very seriously. We want to make sure that we can drive incremental gross margin and a disproportion of that gross margin that will drive to EBITDA. So it's a focus on cost.

David Larsen - Leerink Swann LLC, Research Division

Okay, great. And then just one last one. Can you just talk about your presence in Medicaid? So in 2014, obviously, there'll be a large increase in the number of people eligible for Medicaid. How many states do you have access to this new Medicaid population? And let's say you do expand your relationship with Cigna, how would that change?

Mark A. Thierer

Okay, Dave, this is Mark. First of all, we have -- we currently service 9 states throughout the United States in Medicaid, Fee-For-Service Medicaid. And this is a market that we've been in for the last 3 or 4 years and had some very, very good success. I'll also say that in our pipeline, we are active with a number of Fee-For-Service Medicaid bids that are out right now as we speak. The way we win, compete and win, is this is a technology-oriented market space, and we're bringing our tools and snapping them up and under the MMIS systems in each of these states. Every single state Medicaid plan looks and behaves differently. We're selling our ECOB, our Enhanced Coordination of Benefit product, to these states and it is a real-time cost-containment tool that we've had great success with. And we're also selling carved-out specialty to a number of the Fee-For-Service Medicaid state. And so this is a segment that will grow and we are very well-positioned. We've been a net share gainer in this space every year since we entered the market and we expect that to continue.

Operator

We will go next to Amanda Murphy from William Blair & Company.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Just a question on specialty. So you talked to BriovaRx. I'm curious, just as you have conversations with the consultants and the large employers, I mean, do you feel you have some more work to do there in terms of education on what your value proposition is in specialty or do you think people kind of get what you have to offer there?

Mark A. Thierer

Yes, Amanda, this is Mark. So I think specialty is a market that we've placed some very large bets. And just like as we moved upmarket and went to the consultant community, we have always got more work to do in terms of getting our brand out. But the fact of the matter is we are the fourth -- fifth largest specialty pharmacy, and I think by the middle of this year we'll be the fourth largest specialty pharmacy in the industry. The growth we're seeing in this segment is very aggressive. We've got kind of a 5-point plan. First, we're pulling through on our current book, and as you know, we've got a very large block of business that was in the network from Catalyst, and we've now pulled a decent portion of that into the book and, by the way, we continue to execute on that. We also have an aggressive open market strategy and direct calling on the physicians. And so we're doing that in the employer and health plan segments, but what we're doing that sets us apart, I think, is we're selling specialty into these fragmented messy markets that really don't have much in terms of competition. And these are segments, as I mentioned, like Fee-For-Service Medicaid, Workers' Compensation, and the related segments that some of the big guys don't compete in. The third point on our plan in specialty is focus on innovation around the medical pharmacy intersection. And as you know, 50% of the drugs in the marketplace are still covered in the medical benefit. So the deployment of extraction tools, to actually, in a real-time basis, extract these specialty meds that could be managed into the pharmacy benefit, is something that we're piloting and active with a number of clients on. And then I will also add, we are expanding our footprint. What I mean by that is we are growing our capacity in specialty, placing big bets on our ability to service this tidal wave of drugs that are coming into the pipeline. And finally, I'll say that our ability to win in the limited distribution marketplace is notable. There are 3 drugs here that we recently won which include Tecfidera, Aubagio and Pomalyst, and these 3 drugs are all limited distribution drugs, and BriovaRx won the ability to distribute those drugs. So all in all, we're feeling very good about our specialty strategy and our results.

Amanda Murphy - William Blair & Company L.L.C., Research Division

And just a follow-up to the point about expanding the Suprenamin. Is that -- I think you said, at this point, you're still pretty comfortable with the assets you have in specialty. Is that still the case or do you think you might pursue some additions there?

Jeffrey Park

Amanda, this is Jeff. With respect to the capabilities we have, we have 12 different facilities across the country to distribute specialty medications. So we feel good about the footprint and the coverage that we have. We're continuing to grow the business and so, we're continuing to add capacity. And as it relates to acquisitions in the marketplace, our focus principally is on pulling through our existing book of business. We have so much opportunities in our current book that we're focused on doing that, specialty acquisitions have been something that we've been pursuing and reviewing, but not at the top of our list from an acquisition strategy at this point.

Operator

We'll go next to George Hill of Citigroup.

George Hill - Citigroup Inc, Research Division

I guess, Jeff, I would sort of put first, you've got [indiscernible] in the HCIT to PBM conversion in the quarter. Is there anything you can give us with respect to size or what that client looks like?

Jeffrey Park

Thanks, George. As you know, these conversions from technology to PBM have been one of the drivers for us. We think we've got a pretty compelling model to take clients, really, all through the lifecycle, from a technology to clinical services to specialty to networks. And so we've been very active, as you know, in the past about pulling these through. We've got an active list of opportunities that we're continuing to pursue. With the size of the book of our HCIT business, we still have a lot of clients that we are working on. From a more tactical near-term opportunity for us, we've identified a dozen or so targets for conversion. This is one of them. The sizes range, there's -- they have very different sizes. Some relatively modest in size. We announced Blue Cross Blue Shield of Arizona in Q3 of last year, that was $350 million. This one is certainly smaller than that, but a nice-sized plan. One of the things that it does for us is first of all, it's not business that we compete in the open market for, there's no -- it's not a normal cycle of January 1 or 07/01s, and so we feel great about our spot with these conversions.

George Hill - Citigroup Inc, Research Division

Okay, that's great color. And then, Mark, maybe a follow-up on what you're seeing strategically in specialty. It sounds like you're less interested in M&A, and pertaining to the last couple of specialty conferences, it seems like this is a market that's getting more fragmented as opposed to less fragmented. You're seeing all these tiny specialty PBMs coming to market that are focused on a drug or a therapeutic area. I guess, can you talk about, is that what you're seeing? Is that having an impact in the market? And I guess, do you think, how far do think we are from kind of a shake-out period?

Jeffrey Park

George, this is Jeff. Let me just address some of the pieces that we're seeing from a company perspective in the marketplace. You're on point, exactly. There's a number of, really, modest-sized specialty operations, and those specialty operations are generally focused on 1 or 2 key therapies, can have 1 or 2 key clients, and it's really a relatively niched strategy. What we're finding is the clients that are looking to partner with us are looking for more of a national scope and scale, they want to be able to have a broad distribution across the number of different areas. Having access to multiple limited distribution medications is important. There's always a niche for all different types of players in the marketplace. But specialty is consolidating, not fragmenting, in my opinion.

Operator

We'll go next to Lisa Gill from JPMorgan.

Michael R. Minchak - JP Morgan Chase & Co, Research Division

It's actually Mike Minchak in for Lisa. Just first off on the new business pipeline, are there still any opportunities out there from your starts and can you talk about the pricing dynamics that you're seeing in the market and has anything changed there? And then is there anything new and unique that employers are looking for out of their PBM relationship this year, especially ahead of health reform in 2014?

Mark A. Thierer

Yes, Mike, it's Mark. I'll take the first half of that question. The short answer is, yes, there a decent number of mid-year start opportunities that we are engaged with as we speak. Those are primarily kind of off-cycle year opportunities, employers and businesses in our TPA and small group segment, as well as a couple of state opportunities. So there are a number of mid-year opportunities. The bulk of the pipeline is a 01/01/2014, and there's a decent amount of the pipeline in the health plan space that's actually beyond that, mid-year next year. And in fact, 01/01/15-type opportunities are being worked as we speak. So that's a little bit of color on kind of the timing of the pipelines.

Jeffrey Park

Mike, as far as what we're seeing from a pricing perspective, it continues to be pretty rational as to the pieces. Every year, there is usually some uniquenesses. Last year was around preferred networks. This year, I think, what we're seeing is clients are really looking for more forward-looking clinical models that really integrate a total patient view. So first, that means coordinated care. Patients are really not a collection of conditions or chronic diseases and we really need to have a full view of the memberships, and Mark touched on that when he talked about the BriovaRx strategy. Second it's really integrated risk models and how we use information at the point of care to either populate information for physicians which would be patient medication history, information around specialists or hospital data in the hands of the doctor. And we really are aligned with health plans, not just on how do we find and ensure that they've got -- our patients have high medication possession ratios or adherence, but outreach; integrated medical and pharmacy data, as Mark had addressed; intervention tools and really, unbiased pharmaceutical advice. We think we have a unique approach. Across the country, we will partner with pharmacists to work with patients at the pharmacies to reconcile medications that they might be taking that's not always known to the doctor or in the hospitals, like I said, in the primary care setting. And then finally, we have a dedicated team who does this with patients over the phone which is a very convenient service, in particular, for our more aging populations, where we have all their information at our disposal. So these are some of the new things that we're seeing in the selling pipeline this year.

Michael R. Minchak - JP Morgan Chase & Co, Research Division

And then just as a follow-up, with respect to your full year guidance, are you baking in any assumptions in that guidance around incremental new business wins that haven't been announced or any incremental health care IT to PBM conversion opportunities beyond the one that you completed this quarter?

Jeffrey Park

Yes, we've got -- so our view for guidance we gave 2 months ago, really, nothing has significantly changed our view yet for 2013. Our guidance suggests we've got 45% top line growth and 85% EBITDA growth on a year-over-year basis. So we feel good about what we have in our guidance.

Operator

We'll go next to Robert Jones from Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just trying to tie some of the comments from the other PBMs out there this quarter. Specifically, that this could be a lighter selling season relative to other selling seasons we've seen recently. Mark, I know, in your prepared remarks, you mentioned gaining traction in the employer group and I understand you're not going to announce the specific wins, but just trying to get a better sense of how active this selling season might be relative to last year for you guys. Not sure if you'd be willing to give us an idea of what your net new expectations are for the '14 selling season relative to the '13 selling season.

Mark A. Thierer

Yes, Robert, I appreciate the question. And obviously, I've been listening to the other commentary as I always find it interesting. The only thing we can comment on with certainty is what we see, and what we see relative to last year is a substantially larger number and dollar volume of RFP opportunities in every market segment that we compete in. And so it's still early in the selling season here. And the fact is we posted some pretty substantial wins that we feel good about. I mentioned our CO-OP wins, but beyond that, the employer space, there is movement. And so, I will say that if you're a large health plan and you're going to make a Part D move effective 01/01, the clock is ticking and there's not a lot of runway for those kind of opportunities to make decisions, if you've not already begun the implementation work. And so we feel pretty good about the pipeline, really, right across the board.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

That's great. And I know we don't spend a lot of time talking about potential losses or business losses because obviously it sounds like the RFP pipeline is pretty full. But I'm just curious if you would comment on the retention you've seen from the Catalyst legacy customer base at this point?

Mark A. Thierer

Yes, I will, and I think it's worthwhile to step back and look at the book of business that we have. It's really, I think, very different than a kind of a traditional PBM. There are certain segments in our book that have substantially longer contracts. Fee-For-Service Medicaid is one, Workers' Comp. In fact, it's not uncommon to have 5- to 7-year deals in those segments. And in our HCIT segment, we almost never see an RFP. And so something like 20% of our book, 15% to 20% in any given time could be available to go up for bid. So when we talk about the employer segment, we're much more like the rest of the industry. These are typically 3-year deals and we have focused on an early renewal strategy and been very successful. So the short answer is, we have felt very good about the retention, both at the Catalyst and our legacy book at SXC prior to that. And we're expecting our client retention rates to be at or better than our historical 98%.

Operator

We'll go next to Ricky Goldwasser of Morgan Stanley.

Zachary William Sopcak - Morgan Stanley, Research Division

This is Zach in for Ricky. I just wanted to follow up on the last question. When you talk about early renewals, can you quantify at all what kind of pricing discount somebody may get for an early renewal as opposed to going out for a bid?

Jeffrey Park

Sure, Zach, this is Jeff. If you think about what we do from a pricing perspective, generally speaking, contract is a 3-year forward price, you've got barometers to allow for improvement in generics, but when you do come to renewals, you're going to see prices get adjusted to address for the new costs, the new generics that come to market. But our strategy has been to find opportunities to drive additional services into our client base. Our goals of having same-rate renewals or improvements in pricing are derived from our ability to deliver more services, whether it be clinical outcomes, clinical services, clinical models or specialty pull through. As you know, one of the big differentiators for our business model is that we can break apart the services that we provide. Why is that important, it means that as we go through and bring more businesses together, we can actually sell them more services. Much like what we did when we announced this conversion this quarter, where we take technology clients and upsell them additional services. That's really the strategy for us on renewals.

Zachary William Sopcak - Morgan Stanley, Research Division

Great. And one other follow-up, earlier you had talked about the 90-day retail potentially impacting your claims volume for the quarter. Can you give any color on what kind of trend you're seeing in 90-day at retail within your book?

Jeffrey Park

Sure, this is Jeff again. We're definitely seeing an increase in 90-day trend. When you step back and look what's happening, you can see mail-order and mail utilization has not only been softening, it's now declining. And that's really driven by these 90-day programs, where pharmacists -- our pharmacies are taking mail-order prices and they're driving those scripts back into the pharmacies. When you look at the population bases that are growing in the United States, it's people that are over 65, and it's people that are uninsured. Both of these populations have low to sometimes no mail utilization, but they can take 90-day scripts at the store. So we're seeing a definite increase, it's been a marked improvement over the last 2 years. So I'm interested to see how it's going to trend out this year as well. But it's a very large and growing percentage of the book of business.

Operator

We'll go next to Tom Liston from Cantor Fitzgerald.

[Technical Difficulty]

Operator

We're getting no response, we will move along to our next question, Brian Tanquilut from Jefferies.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Mark, thanks for the commentary on the RFPs. Just wanted to hear your thoughts or how you can characterize the -- I know the numbers are up, but how can you -- if you can characterize the conversion rate and kind of like the best and final yields that you're getting from the increased RFP flow?

Jeffrey Park

Yes, it's early, Brian, in the selling season. And so right now, we're feeling good about the points we put on the board. Best and finals happen over the next 3, 4 months, and so we're in the heat of it right now and at any given time, have our sales leadership on an airplane headed somewhere. I can tell you that our ability to break through and actually attend the best and finals and make the final 2 or final 3 in a best and final drill is way up. And that is very encouraging to me because now you've got a solid swing at the plate to win the business. And so I think the coming together of our organizations last year, the whole thesis was we'd be able to move upmarket and compete at a whole another level. And the fact of the matter is, we've been invited to the dance, I think, pretty broadly for everything of size that's moving up in the marketplace.

Mark A. Thierer

This is Mark, percentage-wise, it's up versus what we saw let's just say, 3 years ago.

Jeffrey Park

From 3 years ago, it is way up.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay, got it. And then your Catalyst acquisition, we're coming up on anniversary-ing that in July. Just wanted to hear your thoughts on M&A. Are you guys at that point where you feel ready to go back and start converting some of these acquisition opportunities within your existing book?

Jeffrey Park

Brian, this is Jeff. To your point, we're coming close to the 12-month anniversary here. We're 10 months at this point in the integration and the team is still working very hard on driving the synergies and the savings for clients and doing the integrations and the operating efficiencies. We are well-positioned to look forward and look ahead at next acquisitions. And we continue to be very active and we look to continue, to your point, to roll up in the middle market. We think we've got a proven track record of sourcing, financing and integrating these accretive acquisitions, and we are well-positioned in the market to do that. And we've made some comments earlier about our cash position, we like where we're positioned from a cash perspective, we're under 2x from a debt-to-EBITDA. We think we've got the balance sheet and the operational leverage to keep moving ahead on this.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Got it. And then last question, Mark, the trend that you reported, 2%-ish, that's obviously very good. But as you get in front of clients today, how are those discussions, as you make them think about what the future trend should look like and how to prepare for that, I mean, in post generics world. Whether it's your existing clients or as you pitch potential clients?

Mark A. Thierer

Yes, and actually, it's the client discussions where the rubber meets the road and where we bring our clinical leadership to talk about the actual programs that we can put in place to manage the drug benefit. And here's where, I think, you can begin to differentiate yourself in each of these market segments. Obviously, the big cost drivers are specialty, and so the programs that I outlined earlier are very central to the selling process. But then unique approach is on plan designs. And so what we're seeing is employers and payers of all sorts looking at 4- and 5-tier plan designs with very aggressive cost savings initiatives. There is some serious cost shifting that's going on. So the real way to get after trend is through the active management of the plan design. We are marketing and seeing adoption, restricted and preferred networks. And then finally, we'll unbundle our offering, in a way, in some of these very large, sophisticated payers want to own part of the decision-making process and some of the interface on the clinical side. And so it's a complex mix of levers and in the end, it's the client's choice on how aggressively they like to manage trend. If you've got a very rich benefit with very low co-pays and you're a very paternalistic employer, you're not going to see a 1-point trend. However, if you're willing to step-up and implement aggressive generic programs and all the rest that I've just described, you can see negative trend and in fact, we're seeing it with a number of large clients.

Operator

We'll go next to Anthony Vendetti of Maxim Group.

Anthony V. Vendetti - Maxim Group LLC, Research Division

I just had a question, Mark. I was wondering if you could tell us exactly what your contractual relationship is now with Cigna, and then just delve into that relationship and why you think that's strong.

Mark A. Thierer

Well, Anthony, no, I'm not going to delve into the exact contractual relationship. I mean, it's been talked about a lot that HealthSpring, which Cigna acquired, has been a long-time client of ours. And Bravo, which they had acquired, is also the Medicare Part D plan, is running on our platform. And so as I've mentioned, we've had a long-standing relationship with Cigna. It's a good business relationship. And obviously, they are performing in the marketplace, which is very good to see, and we're focused on helping them make their plan. So that's really it. We've got great respect for their leadership team and feel good about where we stand with Cigna.

Operator

We'll go next to David MacDonald of SunTrust.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of quick questions. Jeff, you called out strong specialty pull through in terms of a margin benefit in the quarter. Can you give us any sense, is that running a little bit better than you expected? And was that ahead of plan in terms of coming from the Catalyst book? Or was it just in the kind of overall legacy book, in terms of where you saw the success?

Jeffrey Park

Thanks, Dave. Yes, we've been very pleased with our specialty pull through. We've been spending time right from the beginning of the Catalyst acquisition to talk to the clients around what opportunities we can deliver inside of their specialty book. It's got a very concerted strategy on pull through, as well as talking to clients who have open networks and how do we limit or restrict to provide preferred or exclusive relationships. Those 2 have been very successful and are ahead of schedule. As far as the rest of the book of business, I think the other thing that's interesting about how we set up for specialty is to not lose sight of the fact that a majority of our specialty distribution is in the open markets where we're directly working with doctors and patients. And when you think about the comments Mark was making are twofold. First of all, how much of the business is going to continue to be in these open markets, and then secondly, the medical benefits, where you're seeing 50% of the specialty spend is running through the doctor's office or through the hospital at hospital charges. These specialists, you need to be able to have direct relationships with them. And so we feel that we've been able to drive improvements and pull-through strategies you just identified, but also been very successful in our open market and our direct-to-physician and membership strategies.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And that actually kind of dovetails into my second question. I don't know if you guys can give any details on this. But can you give us a couple of examples of how you extract specialty that is running through major medical and pull it out and get it into the pharmacy benefit? Can you give us any examples of that or is that still too early in the pilot to kind of get into?

Jeffrey Park

No, Dave, it's not too early in the pilot. We've got clients that use these services today. So when you think about it, the first thing we need to be able to do is have contracting strategies with manufacturers to get the lowest cost for fulfillment. The second is really, that we've talked about, is how we use our specialty footprint that we have, which is direct-to-physician and members to give us the connection to the doctors. And then third, to get to the heart of your question, is how we partner with these health plans to ensure that the payments and the treatment patterns are linked to best outcomes and lowest costs. So that means being able to, first, from a technology perspective, work with the health plans to append the claims that are coming to the medical benefit and pull out the specialty component of it. Being able to reduce the reimbursement for that specialty component, whether it's manually or through automated tools that we utilize, is one step in the process. But the second step, and equally important, is you need to be able to work with the health plan on the reimbursement to the doctors. If you think about an oncologist, it's not just looking at one component of the cost specialty. You have to be able to have a really a coordinated reimbursement plan with the doctors. This starts to tie into some of these things we are highlighting around ACOs, how you integrate and look at a more holistic view of the patient, how you provide incentives and compensation to the docs for really being -- to drive the right adherence and patterns. So use our tools technology, we use our clinical and specialty capabilities and we really see this as a great growth area for us.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And then just, guys, one final question. You mentioned on M&A that you think you're at the point with the integration of Catalyst that you may be in a position to look at some additional properties. Would that include both properties on your platform and not on your platform? Do you feel like you're at a point where you could go out for something that's not currently on your platform and be ready to go there also?

Jeffrey Park

Yes, Dave, this is Jeff again. So we've got a lot of clients that use our technology that are on our platform. And obviously, that's been principally where we placed our acquisitions in the past. We bought 6 clients. But we are looking at opportunities that are PBMs and health plans that have captive PBMs that aren't on our technology. We certainly think we'd be ready to do some of those.

Operator

We'll go next to Michael Baker of Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Mark, it seems like you're putting a lot of focus on the CO-OPs. I was wondering if you could just more broadly give us a sense of your expectations on how they perform, say, in '14, '15. And in terms of what they're looking for from you, maybe give us a sense of the difference relative to kind of the normal health plan and whether or not you're able to lock them into a longer-term arrangement.

Mark A. Thierer

Yes, Michael, appreciate the question. So these CO-OPs, just to frame it for everyone, are a kind of public-private quasi organizations that were an offshoot of the ACA. They're actually 501C corporations, not-for-profit. There are 24 of them throughout the United States, and they are very well-funded. They were set up really to be an alternative to private insurance companies in the states to provide competition and a landing pad for these new Medicaid eligibles, these 25 or 30 million people coming into the system. And so, they'll be bands of products, metal collars, that associate with the overall expense of -- and the richness of the benefit. And so, what are we expecting in 2014? Candidly, I'm not sure. I know that there's going to be uptake, there's been a lot of work done. And so we're expecting some uptick, but I think it's a little hard to predict exactly what the number of eligibles will come in and enroll through the exchanges. I do think in 2015, '16 and beyond, what you'll see is, like with Medicare Part D, you will see an adoption of the CO-OPs for sure. And we feel especially good about having gotten out of the blocks really quickly. And so it looks and feels like a health plan kind of pricing orientation, I'd say, kind of on the higher of where we price health plans. One of the reasons we got out fast is we've built the business unit headed up by former cabinet post holder in Mitt Romney's administration when he was the governor of Massachusetts. And this woman has led a team of the sales leaders to win this business. And so we've gotten after this pretty hard and fast and feel pretty good about where we stand.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

And how about in terms of the -- like their term of the contracts, are they longer in light of the kind of ramping effect or just normal standard terms in terms of length of contract?

Mark A. Thierer

Yes, they’re really normal PBM contracts.

Operator

That is all the time we have for questions today. At this time, I would like to turn the call back over to our hosts for any closing comments.

Mark A. Thierer

Okay, operator. Thank you, all, for your continued support and we look forward to seeing at least some of you at our upcoming Annual Shareholder Meeting on May 14, or at upcoming investor conferences. Thank you, and have a great day.

Operator

That does conclude today's conference. We thank you for your participation.

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