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Executives

Mark A. Thierer - Chairman and Chief Executive Officer

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

Analysts

Michael Cherny - ISI Group Inc., Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

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

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

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

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

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

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Lennox Gibbs - TD Securities Equity Research

Brian Tanquilut - Jefferies LLC, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

David Larsen - Leerink Swann LLC, Research Division

Catamaran (CTRX) Q2 2013 Earnings Call August 1, 2013 8:30 AM ET

Operator

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

Listeners are reminded that portions of this today's discussion contains forward-looking statements that reflect current views with respect to future events such as Catamaran's outlook for future performance, 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 filings 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 with the most comparable GAAP measures in today's earnings release. [Operator Instructions] I'd like to remind everyone that this call is being recorded on Thursday, August 1, 2013 at 8:30 a.m. 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'd now like to turn the conference over to Mr. Mark Thierer, Chairman and CEO. Please go ahead, sir.

Mark A. Thierer

Good morning, everyone. Thank you for joining us on our call today. This morning, we released our second quarter earnings, and I'm very pleased that we continue to deliver strong financial results. During the second quarter, Catamaran posted record revenues of $3.4 billion and EBITDA of $158 million. This performance represents a 101% increase in revenues and a 170% increase in EBITDA compared to the same period last year. Now you may recall that at this time last year, we were in the process of combining SXC and Catalyst to create Catamaran Corporation, bringing to the market a compelling alternative to the traditional industry model. Now, 1 year later, our expanded scale and resources, as well as our flexible technology platform, has put us at the table for the biggest and most complex client opportunities in the industry.

In June of this year, we announced a 10-year strategic partnering agreement with Cigna, an agreement that we believe truly validates our model and the value we bring to the marketplace. It confirms that we can compete and win at the highest levels in the market, delivering a flexible, customizable solution that empowers large health plans to compete in dynamic markets. It also shows that our market-leading technology platform, our innovation and our reputation for flawless execution differentiates us as much as the financial results that we deliver to our clients.

The key to our growth is our proven track record of successfully executing on conversions for very large and complex customers. Integrating clients onto our technology platform and then delivering superior service continues to be a core strength here at Catamaran. This integration and implementation core competency extends to both acquisitions and new client wins alike. We are now 2 months into full scale integration for Cigna, which includes building out a dedicated Center of Excellence in Hartford, Connecticut, and I'm very pleased with the progress we've seen to date.

Beyond Cigna, the pace of business continues to be brisk. We are midstream in the selling season right now and are getting to best and finals at a higher hit rate than ever before in our history. We are posting new wins across all the categories in which we compete, including small to medium-sized health plans where we've always been strong, and now, numerous large Fortune 500 employers. Even though it is still early in the selling season, we are seeing good movement, and we've already signed over $600 million in annualized net new business. Clearly, we've been executing on our strategy to build scale and the proof is in the wins that we're posting in the open market. In terms of healthcare reform, Catamaran continues on a steady course, preparing our current clients, winning new clients and strategically positioning ourselves to take advantage of the emerging ACA-driven opportunities. The timelines for implementation are tight and demanding, and we are fully mobilized as a team.

In the face of these complexities and the time pressures, we are seeing unprecedented opportunities driven by healthcare reform. We are partnering with our current clients who need guidance and require support for new services. We are working with our health plan clients to support their new health insurance exchange-based lines of business in all 50 states in the country. Every health insurance exchange enrollee who chooses one of Catamaran's healthcare plans will have a PBM service managed by Catamaran, creating a promising new market niche for our company.

Catamaran's diversified client segments, coupled with our flexible and scalable solutions, allow us to tailor solutions for the largest payers or for individuals. These strengths, we think, are unique in the PBM industry and position Catamaran for success in a post-ACA world. We also recently announced the opening of our state-of-the-art innovation center located in downtown Chicago. Innovation has always been at the core of our business, and this new facility allows us to put our vision on display and bring to light our view of the future of pharmacy. We hosted an official grand opening of the innovation center a week ago for the Chicago business and civic community. And we've already been bringing prospects and clients through the facility, all with really great feedback. The innovation center is truly a phenomenal setting for us to show clients, prospects and investors alike Catamaran's view of the future of the PBM industry.

And finally, as we've mentioned in previous calls, we continue to evaluate acquisition opportunities that complement our capabilities and deepen our presence in important market segments. So alongside our earnings release today, we are happy to announce that we've entered into a definitive agreement to acquire Restat, a large privately held pharmacy benefit manager for $410 million subject to certain customary post-closing adjustments. Restat provides PBM services for employers, TPAs, health plans, workers' compensation plans, government plans and unions. The business will contribute approximately $650 million in annual drug spend to Catamaran, and Jeff will take you through the financials for this acquisition in a moment.

The acquisition of Restat gives a great opportunity for us as its core business aligns perfectly with ours. Being the first PBM we've acquired that is not a current client, this acquisition not only adds to our scale but it also provides us the opportunity to bring our full suite of technology and clinical services to Restat clients. Restat's client footprint fits hand in glove with the Catamaran install base, and we look forward to welcoming them into the Catamaran family.

Now before I turn the call over to Jeff, I did want to take a moment to acknowledge our Catamaran team, including our management team, our Board of Directors and, most importantly, our employees, the dedicated men and women who are the real heartbeat of Catamaran. This team has worked tirelessly to drive our success beginning with the launch of Catamaran last summer, followed by our integration work with Catalyst, winning the recent Cigna partnership and now, the acquisition of Restat. So I know I speak for the entire team when I say we have never been more excited about our future.

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. Second quarter was another successful quarter, both financially and operationally. We generated strong growth in all key metrics. We are also excited about the announcement of the acquisition of Restat. Let me take you through the quarter results and then I'll spend some time on our underlying assumptions for the updated 2013 guidance.

Second quarter revenues for Catamaran were $3.4 billion compared to $1.7 billion in Q2 last year, an increase of 101% on a year-over-year basis and 6% sequentially. The sequential revenue growth was partially due to the impact of the high deductible plans that muted the first quarter revenue, as well as new client starts in the second quarter. We expect to grow revenue sequentially for the remaining quarters of 2013 due to new clients, start schedules for the back half of the year and typical drug price inflation and utilization increases.

The company's gross profit increased to $265 million in the quarter. Gross margin for the PBM segment was 7.3% compared to 5.8% in Q2 2012. We are very pleased with our margin performance and the sequential expansion. We expect to continue to expand gross margin throughout the remainder of 2013 as our aligned incentives allow us to make more money when we control our client's drug spend. We delivered strong EBIT results in the quarter, achieving $158 million versus $59 million in Q2 of 2012. This represents 170% growth on a year-over-year basis and 10% growth sequentially. Adjusted EPS was $0.49 in the quarter, which is a 96% increase year-over-year.

We generated strong cash from operations in Q2, enabling us to pay down $50 million in debt in the second quarter. Also in the quarter, we amended our credit facility, extending the maturity and securing more favorable terms. Our debt levels have come down very aggressively. At this point, we are well under 2x on a debt to EBITDA basis. We have repaid $350 million of debt since we closed the Catalyst transaction only 1 year ago. So you can see cash flow from operations continues to be an important value driver of our business model. We expect to utilize cash on hand and our revolver capacity to finance the Restat transaction. Our strategy remains intact: use our cash flow to finance acquisitions and continue our roll up of the middle market. We remain steadfast in our strategy to consolidate the PBM space with our financial and operational flexibility, coupled with robust acquisition pipeline.

SG&A expenses were $100 million in the quarter, sequentially flat even though revenues increase, which is a testament to our team and the operating leverage. Taxes in the quarter were at $0.02 to $0.03 positive EPS impact. This is a one-time event, and we can expect to close the year at 29% to 30% effective tax rate for 2013.

We have revised our 2013 guidance, taking into account investments for both the Cigna partnership and the Restat transaction as follows. We continue to expect incremental Cigna revenue come online through the first half of 2014. At this time, there's no expected impact to revenue and associated profit in 2013 from the incremental Cigna business. We currently expect approximately $10 million in additional operating expenses, specifically related to Cigna in the second half. As we ramp operations for Cigna, these investments could increase further as we move through 2013, and we'll provide more clarity on our next call.

The additional operating costs reflect a ramp-up of the investment to support the business and will not be one-time in nature. Restat should contribute approximately $650 million in annual drug spend and approximately $45 million in annual EBITDA. We expect to generate $20 million in annualized synergies, and this integration will take 18 months post-close the transaction, which is expected sometime in the fourth quarter. We expect roughly $10 million in deal-related and integration costs related to Restat to hit in the fourth quarter of this year. This will be one-time in nature but will not back the amount of our EBITDA or adjusted EPS. Restat is another example of a midsized PBM for which we are an ideal strategic acquirer. They have a solid middle-market footprint, in addition to a strong niche in providing solutions to other PBMs and unique payers in the market.

Restat represents our first noncustomer PBM acquisition, but we are very familiar with them and their strong team. Restat operates on a McKesson adjudication platform that we're familiar with, and this platform was used by our first PBM acquisition in 2008, National Medical Health Card, as well as other clients that we've won. You can expect us to execute on the same strategic integration playbook we have used for all of our previous acquisitions. We have developed the core competency to source, structure and integrate acquisitions, and we're very pleased with this transaction. Since we intend to use some of our revolver capacity to fund the acquisition, we expect an increase in interest expense. Therefore, based on our estimated close in Q4, revenue should be at the higher end of our guidance range and EBITDA contribution will be more than offset by onetime integration costs. Therefore, we expect this transaction to be roughly $0.03 to $0.04 dilutive to GAAP EPS and no impact to adjusted EPS in 2013. Restat is expected to be accretive in 2014.

As a result, our updated 2013 guidance is as follows: Revenues of $14.2 billion to $14.6 billion; EBITDA of $650 million to $660 million; GAAP EPS of $1.18 to $1.23; and adjusted EPS of $1.87 to $1.92. Keep in mind, investments related to Cigna and deal-related costs tied to the Restat transaction are not adjusted out of guidance. Adjusted EPS only excludes the after-tax effect of deal-related amortization from our acquisitions. As you can see, our guidance reflects continued strong core growth for Catamaran throughout the year, which is somewhat offset by investments associated with ramping for Cigna and the deal-related costs associated with the Restat transaction. On a year-over-year basis, the high end of our guidance reflects revenue growth of 47% and EPS growth of 76%.

As Mark outlined, we're off to a strong start in the 2014 selling season. The healthcare industry is transforming rapidly, with many changes expected to start in 2014. Catamaran is well-positioned to take advantage of these transformative changes. Payers are looking for alternatives and a strategic partner that is willing to deliver customized solutions to meet their needs while aggressively managing the drug costs for payers and members. We expect to capitalize on this demand in the marketplace with our differentiated approach to pharmacy benefits.

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

Question-and-Answer Session

Operator

[Operator Instructions] First, we go to Michael Cherny with ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So I want to talk a little bit more about Restat. Obviously, as you mentioned, this is the first access you made outside of your core HCIT base. You've talked at length in the past about that being a great pipeline for deals. So maybe talk a little bit about how this communication with them came to be and then going forward, when you look at your HCIT clients, what do you see relative to the ongoing M&A pipeline and your interest and activity in doing more deals on a near-term basis?

Mark A. Thierer

This is Mark. Yes, Restat is a property that we've known for a long time, actually. We've known Cynthia and her leadership team actually for years, and this is a dialogue that began 5 or 6 years ago, candidly. And I want to just stop here and as a reminder, remind everyone the core piece of our strategy, really, since 2007, 2008 has been to first target and then make acquisitions of subscale PBMs, lay our contracting process across their business and do some integration work and then extract synergies. It's really been a recipe for value creation that we've created a template for. And so I think at this point, we've become the leading consolidator in terms of rolling up the middle market. I do think with Restat, we particularly like this property. It's a Wisconsin-based company, very good middle-market competitor with a good reputation. You look at their book of business, it's very diversified, which is like our book of business: small employers, TPAs, labor, workers' comp. It's a very good fit for us. But in particular, they outsource their mail order, specialty and formulary services. All of these things represent a synergy opportunity for us. And I will say that from a leadership standpoint, we like this team. They've got a great set of client-facing relationships and some good tools. And so, obviously, Jeff took you through financials, I won't reiterate them. But I will tell you that we like this property a lot and are looking forward to closing it.

Michael Cherny - ISI Group Inc., Research Division

Great. And then just the rest of the M&A pipeline, any change in terms of how you see the approach for further deals going forward?

Jeffrey Park

Michael, this is Jeff. We've got a very strong M&A pipeline. As I think we've outlined, we are a strategic exit for the middle market. We have a well-positioned balance sheet, and we really assess all of our targets on the criteria: first, the fit; second, the synergy; and then the third, on value returns. Restat is a nice-sized middle-market PBM, as Mark had outlined. And when we see the opportunities in front of us, we have 30 PBMs that are on our platform and numerous other opportunities that are off of our platform that we've continued to have opportunities to dialogue with. We think we've got a very active opportunity to continue to move through our strategy of rolling up the middle-market. We're excited about the announcement of Restat today and looking forward to getting started on the work.

Operator

And next, we'll go to Robert Willoughby with Bank of America.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

On Restat, can you just comment some details on its book of business, kind of mix by payer type, mail penetration? Any specialty component there that you're acquiring, or what's the opportunity to insource that business? And is there any major contract exposure, any 1 or 2 payers that they do business for?

Jeffrey Park

Bob, this is Jeff. Thanks for your question. With respect to the mix of business, it's very diversified. It's a middle-market PBM, and it therefore has a nice mix of business in the middle market: unions, TPAs, midsized employers, some larger employers as well. I think it's very nice balance to the fit of business that we have. It matches and marries very evenly over the work that we have. They're unique in some of the footprints they have in workers' compensation they've built a nice book of business on. And that's really their book, relatively diversified. There's really no concentration risk of any particular client from a fit perspective. As it relates to, not unlike many of the middle-market PBMs, they don't own and operate some of their own distribution capabilities like mail or specialty and have other parties that can provide them some of these types of services. It is one of the opportunities that we outline when we think about how we can bring these businesses in and what are the synergies and how can we create them by pulling through all of our clinical and other capabilities, mail order, specialty, formulary management, into this book of business to help their clients save more money and for us to help them grow and expand their current footprint.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And does your synergy number, that doesn't assume any specialty pull-through insourcing of that nature?

Jeffrey Park

Our synergy view is really a preliminary view of how we see the business today. It's taken into account a number of different factors, operating leverage, how we see some of the current pull-through. It's definitely things that we think we have clear line of sight on versus opportunities and how we can expand them. And Bob, the way we do synergy targets, just for the record, is these are obviously cost opportunities. We do not embed revenue synergies in any of our expected synergy targets.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Well, what is the size of their specialty spend right now that others are doing?

Jeffrey Park

When you -- we don't have the numbers to break out for you on the call today, Bob. If you think about it on -- in aggregate, specialty spend has represent around 15% of aggregate spend in the United States, with their book [indiscernible] $650 million would give you a good way to think about it.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And just the mail penetration by percent of volume, do you know?

Jeffrey Park

We're not -- we don't have that to disclose, Bob.

Operator

Next, we'll go to Michael Baker with Raymond James.

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

Mark, I was wondering if you could give us a sense on a dollar basis how far you think we're through the 2014 selling season?

Mark A. Thierer

Yes, Michael. I think we're, I don't know. On a dollar basis, it's a little bit hard. I'll tell you that I think we're somewhere on the 25 to maybe 30-yard line. Lots of decisions. The numbers we quoted, we have signed contracts for. That's -- yes, I would categorize it still as early innings. I mean, we're sitting here, it's the beginning of August, and really, through the balance of September, we've got some large and intermediate size employers that we're right in the middle of the best and final process. So I would categorize it somewhat short of the 50 yard line for sure with a lot in front of us. And we're -- I have to tell you, the percentages that we're seeing in terms of being invited to best and finals are up by a factor of 2 over last year. And we are really happy about our selling team, our message and our ability to compete, really, on anything in the marketplace right now.

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

And then I was wondering if you could provide us with an update on your thoughts around the exchanges in light of us having more definition in certain markets? Any color you can provide there?

Mark A. Thierer

You bet. I think the -- what's going on in the exchanges is, really, it's amazing from my chair. Still, I think that it's a lot that's going to stand. I still think there'll be 20 million to 30 million new Americans in some form or fashion coming into the system, and I do think that the definitions around where these people will go and where they'll land will change somewhat. But we've got bets out in Medicaid expansion. We've got bets out for private and public exchanges. We're plugged in to dual demonstration projects, and we commented on previous calls that we have roughly half of the CO-OPs that are built, that are state-based 501(c) corporations set up to be alternatives to private insurance. So what we've done here is formed a dedicated unit to address this market. We've got a leader who's helping take us to the next level in this area. And for us, we think we're out to a pretty fast start. Now do I think that enrollment will be huge right out-of-the-box effective in October? I actually don't have high have high expectations that the numbers will be huge. I do think there'll be enrollment. And it's a little hard to predict. It's very, very fluid right now. So for us, our margin expectations are, I would say, cautious. We do see great opportunity for generics and specialty. I mean, cost savings is huge in this segment. And so, for us, it's all net new margin and op side opportunity. And so we really feel well-positioned for the exchanges, recognizing it's very fluid and a little bit hard to predict right now.

Operator

Okay, moving on, we'll go to David MacDonald with SunTrust.

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

Mark, was wondering -- I think a lot about of us are pretty clear on some of the benefits of acquisitions you guys have done that sit in your platform. Can you spend a minute on just what are some of the areas of the most inefficiency for some of the acquisitions that you guys would look at that are not currently on your platform, that when you bring them on drive the most synergies and could be an area of additional kind of upside as you look at other acquisitions that are not currently sitting on your platform?

Mark A. Thierer

Yes, Dave, I appreciate the question because one of the things that we think we bring to the party for these 60-some-odd targets is the industry's leading operating platform for PBMs. And so as we said, at Restat, they're using a competitive adjudication platform. We will -- obviously, we're familiar with it, and we've had multiple conversions with it, as well as acquisition targets. So we've got a template on making these conversions, as well as conversions from other market players that you're familiar with. The advantage of these middle-market companies is in general, they are smaller and lower complexity in terms of plan design. They are not a high-end health plan with highly complex or highly developed plan designs that require complex conversion algorithms. So the actual work, the leg work to make these conversions happen is pretty measured, and we know how to do it. What do these companies get? They get a highly reliable, very flexible and easy to change operating platform once they've made -- we've completed these conversions. And it makes them more competitive to their downstream clients. This is the thing that the PBM industry has been shackled with. It's not an industry that's known as fast, it's not an industry that's known as flexible, and in large part, it's because most of the technology platforms out there are hard to change, and it takes weeks and months sometimes to introduce changes at the plan design level and the infrastructure. And that's something that we use as a competitive weapon. We've got a table-driven system that's easy to change, and it makes these companies more competitive to their downstream clients.

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

And then, Mark, just one other question just on the selling season, I guess a 2-part question. Is there anything noticeably different that you guys are being asked to do this selling season or that people are asking for on plan design or whatever? And secondly, x Cigna, if I think about what sounds like the makeup of your book of new wins, it's fair to assume that you guys are fairly happy with the relative profitability of that just given that there's no big, blocky managed care piece of business in there?

Mark A. Thierer

Yes, Dave. Let me handle first the products and services, what we're being asked for, and then I'll ask Jeff, who's been very active on the Cigna opportunity, to make some comments. I would say that it's been a more aggressive selling season in terms of clients leaning into more stringent plan designs. We're seeing pretty rapid adoption and uptake on restricted or preferred networks. There's a lot of unbundling going on. We're being asked for a higher level of on-site services, which is interesting. But cost savings initiatives, you can really show up with persuasive and data-driven cost saving initiatives. I've never in my career, actually, seen clients more interested in moving forward. Specialty is a huge focus. We're seeing 4- and 5-tier plan designs. And so I'd categorize overall this selling season as more aggressive on the cost-containment side, and it plays into our strengths. We've got a full menu of cost-saving tools that we employ, and we use them aggressively. So let me ask Jeff to make a few comments about Cigna.

Jeffrey Park

Just add to Mark's piece around some of the other areas that our clients are really driving that's interesting is the clinical tools that -- and our ability to integrate into their clinical tools and bring our clinical tools to bear, how it ties into their ACO strategies for health plan. Or from an employer perspective, the member tools, how you focus on engagement and interaction and really the build out of a broader wellness strategy. As it relates to the rest of that $600 million in our book of business, it's really been across each of the different market segments, large employers, midsize employers. We have a very nice mix. It should be a nice approximation of sort of what the businesses that we see today, Dave. So hopefully, that helps give you some color.

Operator

Next, we'll go to Lisa Gill with JPMorgan.

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

It's actually Mike Minchak in for Lisa. Can you talk a little bit about the specialty business and how the performance has been trending there? How big is that business now, and are you seeing more clients there looking to implement PBM tools like formularies or step therapy on the specialty side going into next year?

Jeffrey Park

Michael, this is Jeff. From a scale, scope and size perspective, we're pleased with our growth in specialty. First and foremost, it's a fast-growing category, as you know. It's also, as Mark outlined, one of the areas that all clients are looking for to how to manage those costs more effectively. We're the fourth largest specialty provider in the country today. We're very pleased with our scope, skills and scale there. As it relates to some of the strategies inside of specialty, first, certainly around driving tighter networks to be able to deliver either exclusive or preferred relations in specialty is important to employers and health plans. Being able to also look at different contracting strategies for certain medications and the comparative effectiveness to ensure that they're driving formulary decisions that are not only aligned with their right outcome, but also with their lowest cost. The other piece that's important around specialty for the health plan clients in particular is how you can tie and connect to the medical benefits that they have and how you can see a more holistic view of specialty spend, how you can drive the right behaviors with physicians and how you can contract appropriately across that broader book, not just on what's moving through the pharmacy benefit.

Mark A. Thierer

Michael, I'll just add 2 other points, and that is we do have a specific focus in our specialty strategy on continuing to win limited distribution drugs. We've had notable wins on that front. And finally, we are opening a new specialty facility in the state of Indiana. It'll be open before year end. State-of-the-art facility in Southern Indiana right next to the UPS distribution facility, we think it's going to really add to our competitiveness in that space.

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

And then just maybe a housekeeping question with respect to the Cigna contract. Do you have any incremental colors at this point on the timing of the ramp in '14 on the commercial side? And then of the $5 billion to $5.5 billion of incremental drug spend, do you have a breakdown for the Part D portion that won't come on until 2015?

Jeffrey Park

Thanks, Michael. We expect, as we had outlined, around $5 billion to $5.5 billion of new incremental business from Cigna to migrate through 2014. Some of the Part D business will be migrated with respect to the service and support. Some of it will come over with the contract year for 2015 for them. The integration activities, overall, will be a 2- to 3-year process. We do expect to be driving revenues earlier in the process that will help take on managing pharmacy costs and drive down incremental savings for the business. But we are expecting to, as I'd outlined, make some of these investments to help us ramp up. And as that business potentially moves forward from a transition perspective, we might be able to see some of that revenues come in a little bit sooner in the process than having extended periods of time to get there. So I don't have more clarity than that for you, Michael, but up on the next call, we hope to be able to give you a little bit more of view for 2014.

Mark A. Thierer

Michael, I'll just add. This is obviously our largest integration effort along the way, and we have taken our same template, formed our integration management office that is looked at on a daily -- and I look at it every week. We've got a cadence put on this project that is pretty – we're high stepping around here. We have got the Center of Excellence underway in Hartford, and we have hit all our early milestones at Cigna. And I just want to reiterate the reasons why any health plan would choose Catamaran. Obviously, first and foremost, you have to be competitive financially, and we were. But the platform flexibility is huge for a large, complex health plan like that. Medicare Part D is huge for a health plan like that. And just as a reminder, we don't compete with our clients in the Medicare Part D space, and we do have a 5-star rating from CMS on our EGWIP, which I think is important. But I do think if you were to come to our innovation center, you'd see one of the reasons why a large health plan might want to bet their future on doing business with us because we think that we've got some of the best thinking around where this industry's headed relative to the integration of data, engaging the member at a whole new level, engaging the physicians at a whole new level. So I think the market's telling us that we're a very good partner.

Operator

Next, we'll go to Robert Jones of Goldman Sachs.

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

Mark, I just wanted to go back to some comments you made earlier. Your largest competitor provided a longer-term view of the industry and talked a lot about tighter formulary management, more narrow networks, a greater appetite for mail. I know you touched on some of these things this selling season, but I guess maybe longer term, how are you thinking the plan sponsors or viewing these areas, these 3 specific tools that you have at your disposal to drive savings? And then I guess, if you would be willing to, what kind of savings can you offer by using these specific tools for your plan sponsors?

Mark A. Thierer

Well, I'll tell you that there's a full menu of products and services that drive cost savings. And our job, any job for -- any PBM's job is actually to bring the best cost-containment strategies to the clients in a way that services the member at the highest level. And so specialty, mail order, formulary management, all of these are tools that competitors in the market have and utilize. Our strategy is to be agnostic to those channels, utilize them when they're correct, contract for them in a way that's market leading -- and we've proven that we can do that -- and then in the end, deliver the lowest unit cost at the highest level of quality to our clients. And so we don't rely on any one channel for our value proposition. We don't direct traffic to a specific pharmacy. But instead, we look at where a client's member population lives and build preferred networks around it. And similarly, there are certain populations that have a need and high desire from mail order, and there are others that don't set up well for it. So we show up with a blank agenda, ask our clients what they want and need, build our service offering around their specific needs. And I would say that, that approach, although it's kind of subtle, that's actually very different than what some of the other competitors in our space use. So it's a bit of a long answer, but we're not betting the farm on any distribution channel here. I think, over time, the appropriate use of drug distribution channels is going to be central to success in the PBM industry. And we like how we configured what I like to call a network model.

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

That makes sense. And so you're not seeing any one specific kind of gravitation towards any one specific channel?

Mark A. Thierer

No. I mean, they all have their place. And obviously, mail order can save clients a lot of money. Specialty, if properly managed, can save clients a lot of money, and it goes down the line. And so that's our job, to figure out how and where to apply those tools in every unique client setting. They're not all the same.

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

That's helpful. And Tony, just to follow up on the $600 million in annualized net new that you discussed. And I know you said it's across the spectrum of clients. I guess maybe just sort of helping us think about 2014, I guess relative to your previous mix of business, how should we be thinking about the profitability on that $600 million?

Jeffrey Park

This is Jeff. We're not giving 2014 guidance at this time, but as it relates to the book of business, it's really relatively broadly dispersed. We've got large employers, midsized employers, union groups, really each of the key markets that we've been supporting. And we're continuing to see business come in as we close through the selling season here in each of those categories. So it's a little early to be giving you a view what the margin profile would be. But you've seen our ability to drive new business and our ability to drive margin expansion throughout our books, and you shouldn't expect to see anything different as we continue on.

Operator

Next, we'll go to Amanda Murphy with William Blair.

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

So I had some follow-up questions on Restat, and I appreciate all your commentary about integration and just how you've been doing that for quite some time now very well. I just was curious how you're thinking about managing that, I guess, concern, if you will, especially with the consultant community, just because I think over the past few years, there's been acquisitions, we've heard consultants express concern about various different integrations. Is that something that you're actively doing or will be into the selling season?

Mark A. Thierer

Well, Amanda, the work we're doing with consultants is, I really feel good about our track record here over the last 6 months or so of taking our relationships to a whole new level and educating them on how we do what we do. Obviously, the whole industry is going through a number of different conversions and integrations, so there's no news there. And our track record of being able to quickly integrate, successfully integrate with minimal client disruption or loss, is known in the consultant community. And so I'm not expecting a big wrinkle in our selling season. And by the way, we've got, as I'd said, a lot of in front of us and have already posted a number of good wins. And so if you think about the Cigna implementation, we're cordoning that off. It's a dedicated team. Candidly, the Restat work is a smaller piece of integration work. And so, for us, it's not a big distraction, and I'm not finding the consultants making a big deal of it in the selling process. And so there are still 3 or 4 months here on the selling season to go, so we'll see how we land. But we're feeling pretty good about our results so far.

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

And the $600 million net new number, how are you guys incorporating Cigna into that number?

Mark A. Thierer

Cigna is not part of that number.

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

Okay, got it. And I just had one more on underlying claims utilizations. So I think there's been some commentary from other PBMs about utilization being kind of flat, and given that you guys see a vast number of the scripts in the U.S., I'm curious if you can provide just general commentary about prescription utilization trends.

Jeffrey Park

Sure, Amanda. This is Jeff. Our view from the utilization perspective is 1% to 2% for this year. We're seeing the trends across the book that we have to support that. Our outlook as we look forward in 2014 with the new entrants coming in from the Affordable Care Act and the uninsured, that's going to increase the number of scripts that come in. But on a base basis, 1% to 2% is what we're seeing. Once you add brand price inflation and offset by generic utilization taken sort of in total, it should come up to close to 3% to 5%.

Operator

Our next question will come from Brooks O'Neil with Dougherty & Company.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

I'm just curious if I'm doing the math right. The Restat business looks to be potentially meaningfully more profitable than kind of your base business today, and you commented that without the benefits of scale, without specialty in mail. Can you just describe a little bit about their book of business? And that's going to be a nice contributor to margins going forward, it looks like to me. Is that right?

Jeffrey Park

Brooks, thanks for the question. As you see with many of the middle-market PBMs, their contributions are different based on the types of business that they have. When you're supporting in the small-to-medium marketplaces, you've got lots of ways you can help their clients save money. And really, messy markets are an area that are more predominant when you get into the small and middle-sized PBMs. As you know, messy markets and the small to midsized markets are generally more profitable. That's one of the reasons why we like rolling up pieces in the middle market. Our footprint today is to be into -- in more market segments. We're in more market segments than our competitors. Some of those markets, as you can see, are more profitable. And as we start to enter into these new markets with the large employers, we're expanding our footprint across a broader base. Restat is just a nice fit to our current book of business.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

That's great. And then I'm just curious. Obviously, we understand the integration and implementation costs, the deal costs in the back part of the year, but it looked to me like SG&A was tightly managed, as always. Do you think there's still good opportunities for you to continue to keep the SG&A line under control?

Jeffrey Park

Thanks, Brooks. Yes, absolutely. We've got an organization that as we grow, we're continuing to see the ability to drive leverage through our operation. It's an important tenet for us as we continue to expand and really grow into the size of business that we've become. On a dollar basis, as you look forward, you start see the investments we're making in supporting new accounts as they come live. Obviously, we've made some comments around what we expect to do with Cigna, and then these events as we bring in new businesses, will drive the SG&A on a dollar basis up. But we're pleased with our ability to continue to manage it on a percentage basis, and you should expect to continue to see that from us.

Operator

Next, we'll go to Lennox Gibbs with TD Securities.

Lennox Gibbs - TD Securities Equity Research

So we continue to hear that there may have been a slower than normal switch rate for health plans this selling season. I'm going to assume that you concur, but what comfort do you have that health plans is going to be ready to return to a more normalized level of activity in next year's selling season?

Jeffrey Park

Lennox, this is Jeff. We've seen a lot of businesses, really across the entire spectrum going to the market from a review perspective. I take your point with respect to health plans. Certainly, Cigna is a relatively large health plan to be making a move heading into reform, and they're all looking at these things with the same decisions. What's going to be coming in the beginning of healthcare reform? Principally, the uninsured lives, not the large employers. People aren't looking to rush through these exchanges as they start out. I think you're going to be able to see a relatively metered approached to employers as they approach what's going to be happening more in 2015 and 2016. But health plans need to be well-positioned. If you think about the exchanges are unique in each state, public exchanges and private exchanges. How are they interfacing with those exchanges? What are their strategies from a pricing perspective? But what are their strategies to get to members? And that means, do they have the right tools, do they have the right engagement strategy, do they have the right brand recognition? These aren't things where they're – the health plans are waiting to see. They're all making decisions on how to do this effectively. I think we've really become a great position for health plan because of the flexibility of the technology that Mark had outlined a little earlier but also our ability to see and be in so many different market segments. I think as 2015 and 2016 come, the healthcare reform agenda will start to take a little bit more shape as to where those lives will fit and health plans are going to continue, in our -- in my mind, to continue to see -- turn and change in 2015 and 2016, consistent with sort of how we've seen it in the past.

Operator

Next, we'll go to Brian Tanquilut with Jefferies.

Brian Tanquilut - Jefferies LLC, Research Division

Mark, I'll piggyback on Amanda's question earlier on Cigna. Getting any positive feedback yet in terms of the perceived scale that you have gained from winning that Cigna contract and maybe even now with Restat, both from the target clients and also from the consultant community?

Mark A. Thierer

Yes, I appreciate that question because the fact of the matter is we are now being asked to best and finals to some very, very large blocks of business. And I do believe that the validation in Cigna's choice -- you step back, Cigna is a market leader. They had a lot of choices. They spent 9 months and did a very diligent job trying to figure out the best thing long term for their company, and they selected us. And so what is happening is it is creating opportunity for us at the highest level, and we're responding to it on a selective basis. We're not just shooting at everything that moves. But it was, for sure, a validation of our model and that we could compete, really, on the largest opportunities in the market. So I think that we'll continue to see, over time, large health plans as well as large employers and every other segment sit up, take notice. And, at a minimum, we'll be asked to the dance. It'll be up to us to execute and finish and win. And so we've been investing to get ready for this and feel very good about the spot we find ourselves in.

Brian Tanquilut - Jefferies LLC, Research Division

Now flipping into the other side of things, are the discussions with the supply-chain already ongoing or what kind of feedback are we getting from the supply-chain now that you're going to add Cigna and Restat today?

Jeffrey Park

Brian, this is Jeff. First of all, with respect to our relationships with supply chain, I think we try to make sure we're channel agnostic to how we can support them with respect to the retailers. We've got market-competitive and market-leading rates across the book. That's how we win business to begin with. I think we're going to continue to support our accounts in the ways that they need to see. As we continue to build our multi-business and our operating scale, certainly our direct purchasing, our wholesaler relationships, et cetera, we're going to continue to enjoy some benefits of growth, but across the board of business, I think we're competitive the way it sits today in the market.

Operator

Next, we'll go to Charles Rhyee with Cowen & Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

First, on the selling season, Mark, you talked about $600 million sort of net new wins so far. Can you talk -- and I think you made mention that you still see a lot of opportunities for the rest of this season. Can you give us a sense on where you are relative to plan, sort of where you thought you'd be at this point in time? Maybe give us a sense on how much of what's in front of you, you think is so realistic and maybe sort of the mix. You kind of made suggestions that you've had success in the large employer, Mark. I just wanted to be kind of clear. Is it fair to say that within that $600 million, you do have some sort of larger employers in there?

Mark A. Thierer

Yes, Charles, appreciate the question. We're not going to talk about our internal plan, as you might expect. But you can look through our track record the last few years and the kind of sales numbers we posted to start to get a feel for what we think would be success. We think that we are on track to have a very solid showing full-year in the selling season. The $600 million net new are signed deals, and they do represent some very large and very recognizable Fortune 500 companies. And so -- and the rest of it is a nice mix, as Jeff mentioned earlier, across each of our market segments participating, some of which have very high-margin contributions, some of which are health plan businesses with lower contributions. And so it's a very nice diversified mix. And I fully expect that number to head north over the next 30, 60, 90 days. So we're feeling pretty good about it.

Charles Rhyee - Cowen and Company, LLC, Research Division

Great, that's helpful. And then maybe a follow-up question. Just, Jeff, on the tax rate. I think you're basically saying 29%, 30% for the full year. So basically, we should expect to tick up back closer to 32% for the back half, is that right? And is that the right number for the go-forward when we think about '14 as well?

Jeffrey Park

Charles, thanks for your question. Yes, you're thinking about it properly. As you look through our guidance for the year at 29% to 30%, we're going to be seeing the uptick in the back half to balance out that 29% to 30%. First quarter was 29%. So with this tax rate in Q2 at 26%, we're going to see an uptick to land the year at 29%, 30%. We're not giving 2014 guidance at this time, but we've historically had our taxes in between 32%, 34%. So gives you something to think about how we see going forward.

Operator

We'll take our last question today from David Larsen with Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

Jeff, can you just talk about the long-term margins of the Cigna contract? And are there incentives in place for you to help Cigna grow their earnings through the entire tenure of the contract or not? And then just maybe touch on the sources of what that incremental profitability might be?

Jeffrey Park

Thanks, Dave. Appreciate the question. As you maybe can expect, we're not going to get into the details of any particular client. But as we outlined, the Cigna business will add $5 billion to $5.5 billion of new business incremental to our book. We'd expect that to contribute around 1%. We talk about health plans being 1% to 2%. Obviously, contracts are not having firm fixed price bids around what the rate performance is. It's a way to think about what you should be contemplating in your business models. What we look at from a growth perspective across the book on a longer-term basis for our book of business is, first and foremost, we expect to grow better than the market. We're smaller than our other market competitors. We are definitely positioned with a diversified model. We're in more market segments, we're taking advantage of these fragmented, messier and more profitable businesses. We certainly, in some of these markets, have dominant market share: 20%, 30%, 40% share in some of these positions. Certainly, a big piece of how we can help expand our margin profitability over time across our entire book of business. When you look at how we're positioned with respect to reform, we spent some time today talking about what that will mean for us and how we're positioned appropriately. I think that's a great add on to how we're going to be able to expand our business from a top line and be able to see gross margins dollars continue to increase. From a specialty perspective, it has been one of our fastest-growing areas. Across the industry, it's a fast-growing area. Our client base is looking for ways to save money. Our fit on solution set is really helping us extend our margin profile in our existing accounts, as well as helping clients save more money in this very complicated market perspective. When you add to that the opportunities that we've outlined with respect to our acquisitions and our ability to add on top of this growth in organic, it has certainly been a success story for us in the past, and we're really just getting started on our projected future. So hopefully, that gives you some clarity. I know it wasn't specifically tied to the questions around Cigna, but hopefully, it will give you some perspective on what we think.

Mark A. Thierer

Okay. I want to thank everyone for their time this morning. So as you can tell, we're very excited about the future, not just of our industry but here at Catamaran, our unique positioning in the space. And I actually truly believe we've only just begun. So take care, and everyone, please have a great day.

Operator

That does conclude today's call. We thank everyone again for their participation.

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