SXC Health Solutions Corp. Q3 2009 Earnings Call Transcript

Nov. 7.09 | About: Catamaran Corp. (CTRX)

SXC Health Solutions Corp. (SXCI) Q3 2009 Earnings Call Transcript November 5, 2009 8:30 AM ET

Executives

Jeff Park – EVP and CFO

Mark Thierer – President and CEO

Analysts

David MacDonald – SunTrust

Amanda Murphy – William Blair

Tom Liston – Versant Partners

Brooks O'Neil – Dougherty & Co.

Blair Abernethy – Thomas Weisel Partners

Glenn Garmont – ThinkEquity

Michael Baker – Raymond James

Gabriel Leung – Paradigm Capital

Michael Minchak – JPMorgan

Tony Perkins – First Analysis

Dushan Batrovic – Canaccord Adams

Scott Rattee – Blackmont Capital

Operator

Good morning, ladies and gentlemen. Welcome to the SXC Health Solutions third quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, November 5, 2009 at 8.30 AM Eastern Time.

I would now like to turn the conference over to Mr. Mark Thierer, President and Chief Executive Officer. Please go ahead, sir.

Mark Thierer

Good morning, everyone and thank you for joining us on today's call. This morning we issued our third quarter financial results by press release. A copy is available on our Web site sxc.com.

With me today is Jeff Park, our CFO. I'll summarize the key events of the quarter and then Jeff will provide an overview of the financial results along with an update on our 2009 guidance. I'll then close with a few comments, followed by Q&A.

3Q built on the strong momentum that we established during 2009. We continue to drive new business activity in key target markets and to benefit from the revenue and cost synergies resulting from our acquisitions in 2008.

With solid results behind us and good momentum heading into the fourth quarter, we’re once again raising the targets for our 2009 financial guidance. Jeff will address the specific details related to our guidance in a moment.

The strong performance in 2009 is a result of our focus in four key areas. First, we're seeing very strong client retention, exceeding 98%. Second, we've announced several meaningful new business wins. Third, we're focused on converting cross sell opportunities and pull through business opportunities. And finally, we're very focused on cost containment inside our company as well as prudent expense management.

In September, we were pleased to announce the renewal of one of our largest clients, the State of Hawaii, also known as Hawaii EUTF. This renewal was very strategic and that expanded our service offerings to include mandatory mail order as well as specialty pharmacy. Importantly, the State of Hawaii will save over $10 million annually and their members are saving an incremental $4 million through the use of mandatory mail.

The Hawaii contract clearly shows our ability to retain existing clients, while at the same time providing them with new ideas, such as expanded mail and ultimately saving them money in delivering more to their members.

In July, we announced a three-year contract with the Ohio Bureau of Workers’ Compensation, a large workers comp contract servicing approximately 1.6 million claim cases every year. This win gives us a large and visible reference account in the workers comp marketplace. We like this market a lot because the workers comp space is still very fragmented and requires strong technology capability to succeed.

I'd like to take a moment to commend our implementation and our IT staff on flawlessly bringing up this client in the past weekend. Great job, guys.

Okay. Subsequent to the quarter end, we announced a four-year deal with Spectral Health Solutions, a pharmacy benefit administrator based in Florida. Spectral delivers drug benefit management for a number of Medicare Part D plans, such as Freedom Health and others. Together, with annual drug spend of about $50 million, total contract value of over $200 million.

For Freedom Health, it's a homecoming of sorts. Freedom was a client of NMHC's and left the fold shortly after our acquisition. We're pleased to see them return and they'll be using the full suite of informedRX services including specialty pharmacy, effective January 1, 2010.

In July, we were successful in upselling our long-time HCIT client, Presbyterian Health Plan, to a full service PBM relationship. Presbyterian, a large health plan located in New Mexico has annual drug spend of approximately $150 million and servicing about 450,000 members.

Beyond Presbyterian, we were also successful in converting a handful of other HCIT clients in the quarter. This HCIT to informed RX pull through strategy is working well for us. And we’re focused on a number of similar opportunities as we speak.

To put it in context, Presbyterian represents only a portion of the total lives that we successfully converted to expanded PBM relationships so far this year. We believe our HCIT pull through strategy is a unique discriminator for SXC and adds an important lever to our investment thesis.

Keep in mind, pull through sales strengthen our client relationships, and at the same time drive both top-line and margin performance. Our recent successes in this area serve to reinforce the benefits of the NMHC acquisition which filled out our full service PBM offering. As I mentioned earlier, these types of sales remain a top priority for SXC.

New customer wins and mail order pull through sales helped increase our mail penetration to 9.5% in the quarter, up notably from prior periods.

In addition to Hawaii's mandatory mail win, we were successful in bringing on a number of large labor union accounts, each with good mail utilization. As a result, we expect our mail order penetration number to continue to climb towards the low double-digit range by year-end.

As many of you know, in October, we completed a successful secondary offering, raising just over $200 million in cash and leaving us now with a total of over $300 million cash on hand.

I'd like to take this opportunity to welcome our new shareholders to the SXC story. And by now you're aware that we've outlined an aggressive growth plan to grow our business organically. Now, with the successful integration of our last acquisition, coupled with our capital raise, we're well positioned to move forward with our acquisition plan as well.

As I mentioned previously, the type of companies that attract our attention are small to medium size PBMs that provide regional or specific customer focus, who are EBITDA positive, and have a high percentage of recurring revenue. These players may have specialty expertise in niche sectors such as specialty pharmacy, specifically, oncology, outcomes and analytics or a demonstrated expertise in public sector pharmacy management, including fee-for-service Medicaid. We’re active, but remain very disciplined in terms of valuation.

Changing gears, SXC has positioned itself as the industry's technology enabled PBM. And as such, we're very focused on innovation and connectivity. In October, we entered into a relationship with Allscripts, the market leading electronic health record provider, to give our clients an opportunity to exchange member information with physicians who use the Allscripts e-prescribing or electronic health record solutions.

The goal here is to give doctors the ability to review plan member information in real time in order to make safer and more cost-effective decisions on the spot in their office.

As you know, the Obama administration has earmarked $20 billion of the stimulus package for technology investments in the physicians’ office and SXC intends to take a leadership role in this area.

Before turning it over to Jeff, I would like to just take a moment to reiterate our primary value proposition in terms of cost containment for our clients. Through the aggressive use of generics, mail order exclusive pharmacy, we’re helping our clients save money and deliver better care to their members.

We remain very disciplined in targeting the five market segments outlined in previous calls and that focus is paying dividends in the way of strong operating results.

With that, I'll turn the call over to Jeff to review the 3Q financial performance.

Jeff Park

Thanks, Mark, and welcome everyone. As Mark mentioned, we’ve carried the momentum from the first half of 2009 into Q3. Revenue for the quarter was up 20% from Q2, and by a similar percentage over Q3 2008.

The increases are due primarily to the addition of new customer contract and the conversion of several HCIT customers to a broader PBM service platform. The revenue recognition for these converted customers have moved from a net recognition basis to a gross one, as the company is now managing the drug spend for several of these HCIT customers, like Presbyterian, who moved to full PBM services.

Overall, these changes put an exclamation point on the value realized from the NMHC acquisition, which rounded out our PBM services offering and has allowed us to realize a number of cross-selling opportunities for the company.

Adjusted prescription claims volume for the informedRX division was $9.9 million in Q3, up from $8.9 million in Q2 2009, again, due in part to the conversion of several HCIT clients to the PBM platform.

Our mail penetration increased to 9.5% in the quarter from 8% in Q2 2009. As Mark stated, we’re pushing to achieve a goal of low double-digit penetration by the end of 2009.

Our generic dispense rates remain industry leading at 71%. We will continue to seek opportunities for increased generic prescription drug usage to help reduce overall prescription drug costs to our clients and their members.

In the healthcare IT business, revenue increased year-over-year by $5.1 million. This increase includes approximately $1.5 million of performance awards, earned for achieving savings commitments and service level guarantees.

As you know, some of our contracts have performance criteria, such as call center metrics, generic utilization targets or savings achieved. And we recognize revenue when the targets are met. We do not expect to have a similar performance award recognized in Q4 2009.

Transaction processing volume was 92 million in Q3 2009, compared to 98.8 million in Q2 2009. The relative change to Q2 '09 was impacted primarily by two items, some batch processing in Q2 '09 and the conversion of several IT clients to the PBM platform.

Consolidated gross profit for Q3 was up slightly from Q2 and up 37% year-over-year. Gross profit per adjusted claim for the PBM business was $3.67 in Q3, compared to $3.88 in Q2 '09, and $2.77 in Q3 '08.

Strong gross profit performance year-over-year was due primarily to purchasing leverage gained through our pharmacy network and manufacture rebate initiatives, improved pricing on generics, the addition of new clients, and the $1.5 million in performance awards I mentioned earlier.

Q3 adjusted EBITDA was $24.3 million, compared to $23.7 million in Q2 and $11.9 million in Q3 '08. On a year-over-year basis, this equates to a growth of 104%. Our adjusted EBITDA performance in the quarter and the year-to-date period reflects our success in driving improved performance, post the NMHC acquisition.

As noted on the last call, the factors that have contributed to this success include revenue and cost synergies, firstly. Secondly, new business and high client retention. Third, growth in higher specialty operations and increased mail penetration. Fourth, high generic utilization rates. And fifth, successful cost containment through network and rebate re-contracting.

Many of these factors were evident in Q3 and are expected to contribute going forward. As a result, we’re again in a position to increase our guidance, which I will address in detail shortly.

Back to the income statement, on Q3 GAAP net income, was $.043 per diluted share, compared to $0.15 per diluted share in Q3 '08 and $0.47 per diluted share in Q2 2009. The change in sequential period reflects the increase in shares outstanding post the $204 million offering.

Our ability to generate strong cash from operations remains a key feature of our business model. In Q3, we generated net cash from operations of $18 million compared to $3.3 million last year. On a year-to-date basis, we’ve generated just under $50 million in cash from operations, more than double from $21 million in the same period last year.

Our cash from operations combined with proceeds from our recent $204 million financing means our balance sheet is solid. At the end of Q3, we had $320 million in cash on the balance sheet compared to $68 million at December 31, 2008.

Now let's move on to a discussion of 2009 guidance. We’re increasing our revenue forecast up $25 million, from $1.35 billion to $1.4 billion to a new $1.375 billion to $1.425 billion. With consolidated gross profit, we’ve increased our guidance from $166 million to $171 million, to now $180 million to $182 million.

With adjusted EBITDA, we’ve increased our guidance range from $78 million to $81 million, to now $87 million to $89 million. To put this in context, in 2008, our adjusted EBITDA for the full year was $42.5 million, representing an increase of over 100% in 2009.

GAAP EPS guidance on a diluted basis is now expected to be $1.57 to $1.62 versus our prior estimate of $1.42 to $1.50. Again, as a reference point, 2008 GAAP EPS was $0.65. 2009's year-to-date effective tax rate was 32.5%. We expect 2009 effective rates to be 33%. With respect to non-GAAP adjusted EPS guidance on a diluted basis, it is now expected to be $1.76 to $1.81.

In closing, Q3 represents the continuation of our strong first half in 2009. And our outlook for the remainder of the year and into 2010 remains positive.

With that, I'll turn it back to Mark for closing comments. Thank you again for your time and your continued support.

Mark Thierer

Thank you, Jeff. 2009 has been an exciting and rewarding time for SXC. Based on our performance over the last nine months of the year, we find ourselves now in a very strong position just as the broader economy appears to be showing signs of turning the corner.

Nevertheless, we’re certainly not sitting still. Our message is resonating with our customers and there is a growing market appetite for our services and our unique service model. We intend to continue to drive our sales engine as we look for innovative and cost saving strategies to deliver to both new and existing customers.

As we move to close out 2009, we're well positioned to carry our momentum forward into 2010. So our focus, for the balance of this year, is to continue to build our new business pipeline, flawlessly implement the new business for 1/1/2010, and continue driving our pull-through strategies including mail order, specialty, and HCIT to PBM convergence.

SXC has emerged as the industry's technology enabled PBM. We now have ample resources to pursue both the organic and acquisition initiatives that will help us maintain an aggressive growth rate.

In closing, I'd like to remind everyone of our upcoming Investor Day on November 17, in New York City. If you're interested in attending, please contact our investor relations team, who's contact information appears on today's press release.

We’ve an exciting morning plan, featuring presentations from a wide range of our senior team here at SXC, as well as several customer testimonials. We hope to see you there.

Thank you for your participation then, on today's call, and your ongoing support of SXC. This concludes our prepared remarks for today. And at this point, I'd like to open the call up to any questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from David MacDonald with SunTrust. Please go ahead.

David MacDonald -- SunTrust

Good morning, guys. Can you, Mark, just touch briefly on if there's anything left for 1/1 sitting out there in terms of the selling season and then kind of what's sitting in front of you in terms of mid-year starts for 2010? Just kind of an update on the pipeline of where we stand there.

Mark Thierer

Yes, Dave, good morning. We do have a handful of 1/1 decisions that are still hanging out. I'll tell you they are medium size employers. And all the way up through mid-December, a bunch of our TBA clients will be adding new business. So, we do have an opportunity to make some incremental additions. Most of the big decisions have been made by now. And so, that's the outlook for 1/1. As it relates to 4/1 and then mid-year starts 7/1, we’re encouraged with the RFP area and our business proposals group. We've got a lot of good opportunity including some nice size, middle-market health plans that are looking for mid-year starts. So, we're busy. We're bit busy in our bids area.

David MacDonald -- SunTrust

Okay. And then, Mark, in your prepared comments you talked about Presbyterian being only a portion of kind of the upselling success, ASP customers moving to full service. Can you put any numbers around that? Either how many other accounts or what percentage of pull-through Presbyterian represented, just to give us a sense of how much more business there was there or are you not comfortable to go to that level of detail?

Mark Thierer

Well, Dave, I'll tell you this. We’ve 70 payer clients in that book of business and many of them represent good targets for us in terms of pull through. We've been active in terms of full service PBM conversions like Presbyterian and we’ve been successful with a couple others. And so, some of these wins that we've posted we will not be announcing and we've made a decision to do it that way. But I'll tell you, whether it's mail order, specialty pharmacy, or all the way through to full service PBM including clinical management, formulary management, network management, this is a unique discriminator in our model.

And every time we do one of these pull-throughs, we drive the top line and the margin line and importantly, we're saving our clients money. They're making these conversions because it's improving how they run their businesses. So, this is an area where we’re all hands on deck and very focused.

David MacDonald -- SunTrust

Okay. And then just a final question, can you guys put some numbers around what type of growth you saw in specialty year-over-year and how critical will an oncology presence in specialty distribution be over the next, say, three years to five years?

Jeff Park

Yes, if you look at, our specialty business is actually growing in line with most of the market for specialty. Specialty usually grows between 10% and 15% per year. It's as you know one of the highest growth areas, particularly, as our clients look to find ways to get at some of the specialty medications that are currently buried inside the medical claims portions of their business.

So we've been very pleased with our investments in specialty as well as our growth rates in that side. On a go-forward basis, as Mark was mentioning from an interest perspective, we think there's a lot of opportunities in the oncology market. We're continuing to build out our footprint on that area, so that we're going to be able to take advantage of the growth as these new products come online over the next two years to three years.

Mark Thierer

Dave, this is Mark. If you look at today's dispensing volumes in our sense, specialty unit, we move a lot of oncology product today. And the idea of getting a larger footprint in oncology is, as Jeff just said, with an eye toward getting well positioned for the pipeline over the next two, three, four years, and so, we do like that market.

David MacDonald -- SunTrust

Okay, thanks, guys.

Operator

Your next question comes from Amanda Murphy with William Blair. Please go ahead.

Amanda Murphy -- William Blair

Hi, good morning. Just a couple questions here. I know you haven't specifically talked to 2010 guidance, but perhaps you can speak to more of your longer-term growth targets in the business. And also, as a follow up to a previous question, provide some color on pull through opportunities for next year, perhaps more from a mid-year standpoint.

Jeff Park

Sure, well, like you said Amanda, we're not giving 2010 guidance today. If you look at the sector, as you know, the industry's been successful at growing their EPS in the 20-plus percent range. We think with the size we're at and our ability to drive much higher top-line growth that we're going to be able to certainly meet and beat those types of expectations in the market.

With respect to the pull through opportunities, one of the unique things with the pull throughs is that it's not as dependent on Jan 1st, April 1st, 7/1, we can convert clients all through the piece, so some of the dates aren't really dependent on the sort of traditional launches. And why that is these clients are already in our platforms. We don't need to re-card their members. We're able to really take advantage of the relationships we've already built with them. And so we expect to be able to have this as one of the key focuses for our business. You can see with the growth from Presbyterian as well as some of the others in the third quarter. As we move through 2010, we expect this to be one of the principle drivers for us as well.

Amanda Murphy -- William Blair

Okay. And then just a question on mail penetration, obviously that was a very strong in the quarter. Can you just remind me, I know, given that you're sort of agnostic to that channel, how your incentives are aligned with your clients on the mail side?

Mark Thierer

Well, Amanda, this is Mark. We're really actually not agnostic. We really are a big believer in mail order. And in terms of aligning our incentives, as an example, in Hawaii, as I mentioned, we literally, through implementing mandatory mail, are saving that client, as a planned sponsor, $10 million on a calendar year, and through reduced co-pays and lower drug costs, $4 million to the members. And so, that's really a very aligned incentive strategy for mail order. And we're pushing aggressive mail order plan designs throughout the book of business.

Amanda Murphy -- William Blair

Are you seeing, in general, just an uptake in mandatory mail across your client base?

Mark Thierer

I would say the answer is in pockets we’ve certain clients that are interested, but on balance, I think there is a desire to have choice and open network. We're bidding some 90-day at retail business. We do see some mandatory mail. It's really very customer-specific, including what their population and their demographics look like. So, it's definitely not a one size fits all.

Amanda Murphy -- William Blair

Okay, thanks very much.

Operator

Your next question comes from Tom Liston with Versant Partners. Please go ahead.

Tom Liston -- Versant Partners, Inc.

Hi, thank you and good morning. Mark, I'm not sure if you commented on it, I apologize if I missed it, but that Dave was talking about some of the new opportunities in 1/1/2010. Did you comment on renewals? Or if you haven't, can you comment on the renewals that your firm was out there trying to close?

Mark Thierer

Yes, Tom. We had a good year, a great year in fact for renewals and have been very successful. We quoted a 98% retention number. So, the very large majority of the clients that we carried over from the NMHC acquisition have been renewed. We’ve one large client that is a mid-year renewal for 2010 that we’re in process of renewing now. And so, we're feeling very good about account retention and importantly, overall customer satisfaction. We've gotten our customer survey feedback and we're feeling really good about the overall satisfaction level in the client base.

Tom Liston -- Versant Partners, Inc.

Sorry, the second part of that I should have asked was, there's always pricing pressure, but the level of pricing pressure, vis-à-vis, prior periods.

Mark Thierer

We're really not seeing it. In the five segments we target, we're not seeing any unique pricing pressure. Anytime you renew a client, in general, what you're trying to do is persuade them to sign on for a longer-term deal. And typically we're selling them more products and services with a goal toward maintaining margin or through more products and services in some cases, expanding margin.

Tom Liston -- Versant Partners, Inc.

Good. And any comments you can give us on where the acquisition pipeline looks like in terms of-- number of opportunities that you're closing it on, the size, where the valuation multiples seem to be assessing out at.

Mark Thierer

Yes, I will comment. I think, we're observing and we're very active. This is something that Jeff takes a lead role here inside our company in pursuing. But in terms of pure play PBMs, we like that space the best. And there are, as you may know a hundred or so middle-market PBMs, many of them privately held, many of them actually are clients that are out there and in the marketplace. Most of these pure play PBMs would not be material to some of the largest players in our market, but they certainly are to us. And then beyond that, there are just a host of properties available, what I'll call adjunct spaces, specialty, oncology, pharmacy, outcomes and analytics. And so, we’re active in each of these segments.

And you asked about valuations. I actually think that the financial markets are opening up at some level and that valuations look pretty attractive. So, hopefully that gives you a little bit more of a feel regarding the acquisition pipeline and our perspective on what it looks like out there.

Tom Liston -- Versant Partners, Inc.

Great. Thanks Mark. (inaudible).

Operator

Your next question comes from Brooks O'Neil with Dougherty & Co. Please go ahead.

Brooks O’Neil -- Dougherty & Co.

Good morning and congratulations on the terrific quarter, guys. I'm just curious I want to follow up on Tom's question. And given the dynamics in the acquisition pipeline, would it be reasonable for us to expect you to make more than one acquisition in the relatively near-term? Or are you thinking it would be best to try to do just one?

Jeff Park

Well, Brooks, as Mark outlined, some of the targets that we’ve are varying in size, there is a number of mid-size, smaller, some that are larger. And so, we're really looking at a few things. One is accretion, our ability to find the right amount of synergies in these businesses and then valuations. So when we can find the right mix of those, it really is going to depend on which of those targets meet those three criteria. Whether it's one, two, three or more, our focus is closing one and one at a time and integrating them effectively. That's really the key focus, whether that's mid-size or smaller.

Brooks O’Neil -- Dougherty & Co.

That makes sense. In Q2, you called out a number of non-recurring items and then if I was listening correctly Q3 you kind of identified the performance fees as something that is not likely to recur. Would you highlight anything else that we should be thinking about from Q3 as we head into Q4 in that regard?

Jeff Park

No, just that, Brooks.

Brooks O’Neil -- Dougherty & Co.

All right. That's good. And then beyond the $1.5 million and the obvious increase in the number of shares, when you think about seasonality, is there reason to think that 4Q is going to be less profitable than 3Q?

Jeff Park

No, the guidance wouldn't really suggest that. If you look at, it would suggest that we expect to see an uptick in the profitability in the fourth quarter.

Brooks O’Neil -- Dougherty & Co.

Great. And then maybe just one more question. I don't think you said anything specifically about success in the state government market, which has obviously been an area where you've done well in the past and one might assume they're looking for additional help. Can you just update us on what you're seeing in that segment?

Mark Thierer

Yes, Brooks, this is Mark. We remain very active with the state business. And again, that's business that doesn't have a 1/1 start date per se. So there are open bids that are states evaluating alternatives as we speak and a couple of large ones. In terms of the pipeline for 2010 and 2011, it's pretty target rich. There are only two competitors in the market space. And as we've talked about in prior calls, we really like this market.

Secondarily, all depending on how the administration shakes out with a pubic option, there's talk about a state sponsored public option. I wouldn't handicap this one way or another. But if it were to come down that it would be a regional state sponsored program, SXC, I think is pretty uniquely positioned to move quickly to service that kind of a model. So, we continue to like the state market a lot and we’re performing well with the six states that we currently service.

Brooks O’Neil -- Dougherty & Co.

That's great. I guess I do have one more question. I'm curious, it looked like revenue per adjusted prescription was quite a bit higher than we're modeling and I think up sequentially. Was there anything big going on there that you'd call out?

Jeff Park

No. The conversions, as we mentioned with Presbyterian, those things are going to have an impact of driving the top-line. We increased the top-line by 20% over the second quarter. So that will have the effect of really making a pretty big difference on your revenue per script.

Brooks O’Neil -- Dougherty & Co.

All right. Great. Thanks a lot and congratulations again.

Jeff Park

Thank you.

Operator

Next question comes from Blair Abernethy with Thomas Weisel Partners. Please go ahead.

Blair Abernethy -- Thomas Weisel Partners

Thank you. Couple things. Just on the conversion of the HCIT customers over to the PBM side, how far into that opportunity would you say you are at this point?

Mark Thierer

Well, Blair, we're really just getting started, to be honest. We announced the Presbyterian deal and that we've had a handful of others. But we're just getting cranking on that at this point.

Blair Abernethy -- Thomas Weisel Partners

So would you say you're a quarter of the way into it or not even that far along?

Mark Thierer

We're in that range.

Blair Abernethy -- Thomas Weisel Partners

And if I look at your PBM services revenue on a year-over-year basis, it's up 20%, of the Q3 last year. So can you put a number on how much of that came from conversions and how much of that came from new external clients?

Jeff Park

Yes, with the 7/1 start, we announced in the first quarter number of lives that were coming on that were going to be impactful in 2009, that had 7/1 starts. The conversions are just one of those things. We think we've been successful with our selling efforts in the state business. We think we've been successful with health plans as well as conversions. So, we haven't called out, I guess all of the pieces from some of the customers that we've brought on. And that's really, as Mark mentioned, some of the accounts really don't want us to be announcing which customers we're doing this with. So, unfortunately, that's the clarity I can give you.

Blair Abernethy -- Thomas Weisel Partners

Okay. And then shifting over to the healthcare IT side of the business, Mark, talk a little bit about the opportunities on that side of the business to onboard new customers and what is sort of the growth profile you're expecting on the HCIT side?

Mark Thierer

Yes, Blair. We're actually chasing a couple, small handful of pretty large technology deals right now. If we were fortunate enough to get one, or two of them, we'd feel very, very good about. Because again, you can feed on these for a long time. Once you land them, you keep them, for us basically forever. And it also gives you this opportunity down the line to pull through and expand that business relationship. So, in terms of overall opportunity, you should think of it as limited market opportunity of net new starts, but for anyone who's looking at technology implementations, we're at the table, as the market leader in that space. So, we continue to invest. We like that space a lot. It's very high margin for us, longer sell cycles, fewer targets, but once you get them, and it’s a good place to be.

Blair Abernethy -- Thomas Weisel Partners

Okay, great. Thanks very much, guys.

Mark Thierer

Thanks, Blair.

Operator

Your next question comes from Glenn Garmont from ThinkEquity. Please go ahead.

Glenn Garmont -- ThinkEquity

Yes, thanks for taking the question. I just had one. Mark, having been in the full service PBM business for several quarters now, maybe can I get to the comment on any change in the dynamic that exists between yourselves and maybe some of your PBM clients on the IT side, now that they are, obviously, clients as well as competitors. Thanks.

Mark Thierer

Yes, Glenn. This is actually 3.5 years, it's not a couple quarters. We've been doing this for about three and half years. And the informedRX unit is not new. We've been marketing our full service PBM for that period of time. And during that time, we've lost no HCIT clients, because we continue to service them with what we think is the best service offering at the best price in the industry. And so, candidly, we're just not seeing a lot of noise on the line relative to competing with our HCIT clients. And if you look at many of those clients, the fact of the matter is, we don't see them in the five segments that we've chosen to compete in. It's a great big market out there and there's a lot of room to run. And we just don't see that contention, in terms of this notion of competing with our clients. We get asked about it by investors. It's a fair question, but it's a non-issue in the market for us.

Glenn Garmont -- ThinkEquity

Okay, that's helpful. Appreciate it, thank you.

Operator

Your next question comes from Michael Baker with Raymond James. Please go ahead.

Michael Baker -- Raymond James

Thanks a lot. I was wondering if you could give us a sense for how the RSV Synagis season is shaping up relative to how it was last year?

Mark Thierer

Yes, we’ve a lot of effort in that business. We've certainly been able to continue to grow that. NMHC was successful at building a good base in that business directly with some of the doctors and physicians that prescribe across the country for Synagis. We certainly feel good about how we've set up for the start of this year and we expect to see growth year-over-year for the Synagis season for us.

Michael Baker -- Raymond James

And then in terms of the quarter, can you give a general sense of what the costs were for bringing on customers and how that might look in the fourth quarter relative to what you've seen in the third quarter?

Mark Thierer

Yes, so for us, when we bring on and convert, either convert accounts or launch new accounts, there isn't a significant amount of new investment for us. We've got a very leverageable model. And so, in some instances, in particular, with some of the state contracts or large state contracts where we've got on site requirements or things like that, we would staff into. But there really isn't a significant amount of ramp of expenses we'd expect to see in the fourth quarter as we head into 2010.

Michael Baker -- Raymond James

And then, in terms of informedRX, can you give us some sense of the percentage of business that is pass-through versus spread.

Jeff Park

No, actually. We've got a good mix of business. It depends on the clients needs. So we would probably have a pretty even mix of both types. And every client that comes in the door has unique requirements that they're looking for, that has a full range of pass-through to traditional price, to shared savings models, to unique treatments in mail as specialty. So we've got a really good mix of business. We think we've got a very diversified customer base and a very diversified pricing model.

Michael Baker -- Raymond James

And then I know you're not providing 2010 guidance, but one of your competitors indicated that despite fewer new generic introductions next year, they actually expect an increased incremental contribution due to, they're waiting so to speak, with respect to those generics that are coming online. I was just wondering directionally what do you anticipate in terms of new generic introduction benefits, so to speak.

Jeff Park

Yes, as you said 2010 as far as it relates to 2011 or 2009, it's a lower period for generic introductions. Some of the comments that others had made were with respect to the fact that many of the generics or some of the generics that are coming in, are maintenance medications that are currently being dispensed through some of their mail facilities or otherwise. And that can have an impact in particular, on the profitability through the mail facilities. We don't have anything that we'd expect to see a relatively dramatic year from a generic improvement perspective for us.

We're already relatively high in the generic penetration rate, so vis-à-vis our competitors, as they kind of move their percentages closer to ours, I think it's going to make potentially a bigger impact for them. But we think that there's some great opportunities in the generics, not only for our clients, but for our margin opportunities in 2010 and into the future.

Michael Baker -- Raymond James

And then one last question, more kind of record keeping, can you give us the breakdown, if you haven't already, in the HCIT business in terms of your two categories of claims process?

Jeff Park

Yes. I don't have those numbers in front of me, just a second. So, with respect to the quarter and the pre and post edit work, we did roughly 30.7 million transactions. And then in the commercial claims, we did roughly 61.3.

Michael Baker -- Raymond James

Thank you.

Operator

Your next question comes from Gabriel Leung with Paradigm Capital. Please go ahead.

Gabriel Leung -- Paradigm Capital

Thanks and good morning. Mark, a quick question for you. So, if you look back over the past year, can you talk about what the company success rate was in terms of RFPs that you guys had bid on? And I guess with the ones where you were unsuccessful, can you talk about where it was exactly, what aspect of the bidding process you kind of missed out on? And maybe what areas where you think you can improve vis-à-vis competitors?

Mark Thierer

Yes, Gabriel, I think, we just had a kind of all hands sales meeting and we looked in the mirror and said how we do this year? I think we felt very good about our performance and I'd tag our win rate in the 15% to 20% range. And I think that part of our challenge candidly post acquisition was getting out there and making sure that the consultant community, the broker community, really knew who we were and that we had good name recognition and people felt confident in putting business with our company.

And so, that's been a big focus for us, will be a continuing focus in 2010 and we'd expect to drive that number closer to 30% candidly. We're disciplined about no bidding business that's outside our sweet spot. So that's really what we're talking about from a selling standpoint. We're going to improve on that in 2010.

Gabriel Leung -- Paradigm Capital

Great. And then just looking to the pipeline, you kind of talked qualitatively about pipeline being in a healthy position right in terms of new opportunities. Any chance you can quantify that, whether it be in terms of dollars, direct spend dollars on a deal that you're bidding on or lives under management?

Mark Thierer

Well, we're a little different than the other people in this market because if you were to put a dollar figure on, say the state business that we're chasing, I mean, it's in the billions and billions of dollars of drug spend that we'd be managing. And similarly, the HCIT deals, some of these large health plan technology take-outs, I mean these are very large scale deals. But for us in our target markets, small employers and small health plans, I mean they add up to an awful lot of dollar opportunity. I'm not going to quote a number, but because we're in five discrete segments, our overall opportunity is very large.

Gabriel Leung -- Paradigm Capital

Okay. And couple of quick things for you, Jeff. Any chance you can give us an update on, within the informedRX group anyway, number of lives under management?

Jeff Park

Yes, we're just over 5 million, just over 5 million lives, Gabe.

Gabriel Leung -- Paradigm Capital

Okay. Secondly, it sounds like, as you mentioned earlier, you've been successful in converting some of your HCIT transaction processing customers over to full suite PBM solution. So, on that basis, should we expect to see some potential pressure on the transaction processing line, offset of course by increased PBM contributions?

Jeff Park

Yes, it should as those clients get converted.

Gabriel Leung -- Paradigm Capital

Okay. And then just lastly, in terms of the $1.5 million performance bonus, was that in the ASP line?

Jeff Park

Yes.

Gabriel Leung -- Paradigm Capital

Perfect. Thanks a lot guys.

Operator

Your next question comes from Michael Minchak with JPMorgan. Please go ahead.

Michael Minchak – JPMorgan

Thanks, good morning. Just couple questions. First, the follow-up on acquisitions. Can you talk about the competitive environment for acquisitions? So generally the companies you’re targeting are probably too small to draw any significant attention from the bigger PBMs. Are you seeing a greater level of interest or competition from smaller PBMs for the types of deals you might be looking at?

And then as a follow on to that, can you quantify how many smaller PBMs you currently have as customers? Because obviously targets that are already on your RS [ph] claim platform would probably be much easier to integrate.

Jeff Park

Just with respect to the PBMs that are clients, there's roughly two dozen mid-size PBMs in various forms or fashions that would be using our claims processing engine. With respect to the environment, as Mark was saying earlier, the pricing environment certainly is kind of come in. We think we've got a lot of the conditions for success to be a good bidder, strong balance sheet, good track record of success on integrating acquisitions which are important to the targets and healthy financial positions.

When you look at the different people who would be competing, like you said, many of these mid-size accounts or otherwise, aren't really competitive or material to some of the larger PBMs and would not be bidding on these things. The financial players in the market have certainly dissipated over what the financial buyers would have been two years ago. And so we think we're in a great position. We do see other bidders on potential targets and some of these things take a long time to put together. But we've been very active in the space prior to the NMHC acquisition and right after the NMHS acquisition, working on getting opportunities close at hand.

Michael Minchak – JPMorgan

Got it. And then switching gears, can you talk about the Allscripts relationship in terms of the benefits for SXC? Is it just the opportunity to lower the cost on the back end through increased utilization of e-prescribing? Or is there other opportunities for you around that relationship?

Mark Thierer

Yes, this is Mark. That relationship has real long-term value creation potential for our company. And as you know, Allscripts is the market leader in electronic health records. They have an excess of 150,000 doctors using their tool. They're also the market leader in e-prescribing. And what we really have is our two companies do share a vision of the future and that vision includes the PBM industry overtime converging with the electronic health record industry, and in particular, around the area of e-prescribing.

So our deal with Allscripts has two phases to it. First is really a direct connect relationship where a certain of our payers and our PBM clients will be utilizing and direct connecting with Allscripts prescribers, as I described in my prepared remarks. And the second phase of our relationship is contemplating adding more clinically rich data to the RxCLAIM.

And so for us, we think this is a very unique relationship, one we feel great about. We're just getting it off the ground as we speak. And I do think it's an important component as we've emerged as the technology enabled PBM. We do see connectivity and linkages as the next chapter in the PBM playbook.

And on a final point, we've just seen over, January through September, this year, the e-prescribing volumes have gone log rhythmic. We've really seen volume ramp hard in the last nine months. And I think part of it is, in fact, due to the stimulus and more physicians just adopting the technology.

Michael Minchak – JPMorgan

Great, thanks. And then just finally, just a clarification for, Jeff. The non-recurring impact from the performance awards in the quarter, would that have fallen straight to the bottom line?

Jeff Park

Yes.

Michael Minchak – JPMorgan

Thanks for the color.

Operator

Next question comes from Tony Perkins with First Analysis. Please go ahead.

Tony Perkins -- First Analysis

Good morning. Mark, we're in such a unique environment here, I was wondering if you could let us know anything you experienced for 2010 selling season that surprised you?

Mark Thierer

Not really, Tony. I mean I think clients are showing a willingness to move, which is always encouraging. I thought pricing, in our five segments, made a lot of sense. Remember we don't really venture into the backyard of the big guys very often and we sort of stay out of the way of the big three, in terms of the largest employers. So I can't comment on the pricing environment in that segment. But in the markets in which we compete, we’ve a rigorous underwriting process and a contribution margin target below which we won't write business. And I thought it was pretty disciplined. So, I don't think there was anything uncharacteristic about the selling season.

Jeff Park

Yes, I think the only thing I'd add to that, Tony, is the economics that are going on where there has been layoffs, etc., people are definitely looking for more aggressive plan designs, they've been certainly interested in more clinical initiatives, step edit, etc., to try to find ways to save money. I think one of the things that we've seen as clients are continually willing to look at opportunities to change plan design to try to drive the right member behavior and ultimately save the plans more money.

Tony Perkins -- First Analysis

Which I guess leads to the potential for more clients come down on mandatory mail type programs. Is that fair to say?

Jeff Park

It's one of them.

Tony Perkins -- First Analysis

Just one other quick question, do you feel your technology foundation and flexibility resonates well with PBM clients in specific sectors? Just wondering I know fee for service Medicaid sounds like it would be a promising sector your offering and also the workers’ comp space. Is there anything else that just head and shoulders above everyone else, really looks to a flexible technology based solution?

Mark Thierer

Tony, this is Mark. That's an important question because the answer is yes. Any of these messy markets that we've waded into, and they include workers’ compensation, I'd include fee for service Medicaid, the long-term care pharmacy market falls in this bucket, where we think we're the first mover as the long-term care PBM, and candidly some of the complexities in that small to intermediate size health plan space, they all have attributes where you need strong technology capability. And, in fact, even in the most recent commercial plans, in the Medicare Part D space, it's really your technology and your speed to market and your ability to drive application development and be able to code these changes in the marketplace and do it quickly. This is the thing that sets the company apart.

And in that respect, you can think of us as the special purpose PBM and we’re using our technology footprint, our speed to market, and our development capability as a weapon in the open market. And it's part of the reason so many PBMs use our platform and why we're able to enter these other segments where the big guys can't go. So, it is a unique discriminator for the company and I'd say it's our single most important competitive advantage.

Tony Perkins -- First Analysis

Sounds great. Thanks, guys.

Operator

Your next question comes from Dushan Batrovic with Canaccord. Please go ahead.

Dushan Batrovic – Canaccord

Hi, thank you. First one around the growth and the mail penetration, wondering if you could just provide a bit of color as to what the impact might have been on the gross margin line, given there were some one-time items last quarter, it's difficult to actually interpret what that mail penetration rate did this quarter. And looking at guidance, there's not much implied as far as gross margin expansion as well. So if you could just draw that link a little bit, that would be appreciated.

Jeff Park

Sure. We definitely see mail and specialty as great opportunities for clients to save money. And for us, as we're the dispensing pharmacy, and we're able to take more leverage through our buying efforts, we can make some more margin when we sell through our mail or specialty business. So, we've certainly been able to see, as you mentioned growth in the gross profit over where we were in Q2 2009 to Q3 2009. And that's, in part, attributable to the mail growth as well as our specialty growth.

With respect to the Q4 and the view for guidance, you'll see that, with the guidance range we've provided, we’re anticipating an uptick in the fourth quarter from a margin perspective and that would be attributable to some continued expansion in our mail facility as well as the specialty business as it comes into a full swing in the fourth quarter.

Dushan Batrovic – Canaccord

Okay. Next one from me is on operating expenses. You've been really disciplined here, revenue and margins and everything else is growing, yet your OpEx was down sequentially. I don't think they're implying much in the way of sequential growth for next quarter either. What's your thought on the OpEx side? Will you need to start ramping up expenses a little bit more as you start targeting some of the larger opportunities out there?

Jeff Park

No, we think we're very disciplined on how we manage our costs. We definitely invest where areas are growing and where we’ve clients, new clients, successes coming in. It's a very leverageable business. So as we've grown the scale of our operations, you're being able to see a lot of that fall right down to the bottom-line and, in fact, show the leverage on our model. So we don't expect that really to change. If your questions or suggestions are around any particular step investments that we're expecting to make, I think we feel good about the investments that we’ve made in the business and it's ability to scale appropriately.

Dushan Batrovic – Canaccord

All right, terrific. I'll leave it there. Thank you.

Operator

Your next question comes from Scott Rattee with Blackmont Capital. Please go ahead.

Scott Rattee -- Blackmont Capital

Hi, good morning. You had sort of touch on it a little bit earlier, just with regard to how sort of healthcare reform is playing out, I guess I'm sort of curious, it does look like it will likely be a net benefit to the PBMs. But I'm wondering if, given your focus on the transparent pricing and given some of the discussion around increased disclosure, whether or not you expect some benefit disproportionately than some of the other competitors?

Mark Thierer

Scott, I think you've framed it the right way. I mean, I do think the industry overall, all the competitors in our space are going to benefit from what I view as a net positive coming out of the current suggested packages that Washington is talking about. But for SXC, I do think that we will be perhaps a larger benefactor. And as I mentioned, if this public option comes down and is administered, if it begins to look and feel like a State Medicaid plan, that's something we've been doing for sometime now and we like that model. That model doesn't set up as well for some of the competitors in our space.

And we also think that the money that's being thrown at technology and healthcare, this $20 billion stimulus, we're going to be the benefactor of some of that direct investment relative to e-prescribing. And so one of the things we did here as a company is we joined PCMA as an actual board member and just to increase our visibility on the issues that are being debated inside the Bellevue in Washington, we just went to our first meeting here this past quarter. And so, overall I think, I do believe SXC will be a net benefactor for what's being talked about coming out of Washington.

Scott Rattee -- Blackmont Capital

Okay. And sort of just continuing on that train of thought just a little bit. If we look out a little bit further, obviously I think in the near-term, even though the final decision in the healthcare reform we don't know exactly the sort of shape it will take, but if it sort of goes along the path we're looking at right now, if you look out five or so years, is there any concern that some of the larger players, (inaudible) players sort of more focused on the spread will be more actively trying to emulate what you do? And is that anything that sort of keeps you up at night as you look out sort of five years or so?

Mark Thierer

Well, I do think that the industry is maturing and that there are fewer segments where you can play. And so I think for some of the largest players, what they will discover if they elect to move into these other segments, is that you don't just parachute in and turn on the lights and start competing. They're going to have to build capability, staff out a team with skills in these segments, take a new contracting approach. They are fundamentally different businesses, which in large part, is why they're not in them today. And so, I don't lose a lot of sleep over the concept that the big guys may elect to enter the market because that's going to take them sometime to get there and really become formidable competitors. I do expect over time that that's what they'll do. There are only so many places that they can generate growth as $30 billion, $40 billion, $50 billion companies. And they're going to have to come into these other segments.

Scott Rattee -- Blackmont Capital

Okay. I appreciate that. Thank you. And just one final question, a little bit more on the housekeeping side on the financials, just for Jeff. Sort of seeing, obviously, the tax rate creeping up a little bit, I don't know if I missed it, but do you have an outlook for either the fourth quarter or the full year '09 for the tax rate?

Jeff Park

Yes, we expect to be 33% for the year '09.

Scott Rattee -- Blackmont Capital

Okay. That's great. Thanks very much guys.

Operator

Mr. Thierer, there are no further questions. Please continue.

Mark Thierer

Okay, well thank you for the questions today. We'll look forward to seeing some of you at our upcoming investor meeting and talking to you at our next quarterly call. Have a good day.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. Please disconnect your line.

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