Renie Shapiro - SVP of Corporate Finance
Barry Smith - CEO
Jon Rubin - CFO
Joshua Raskin - Barclays
Dave Styblo - Jefferies
Carl McDonald - Citigroup
Scott Fidel - Deutsche Bank
Magellan Health Services, Inc. (MGLN) 2014 Financial Guidance Conference Call December 17, 2013 10:00 AM ET
Welcome and thank you for standing by for the 2014 Guidance Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I will turn your meeting over to Renie Shapiro. Your line is now open.
Thank you, operator. Good morning and thank you for joining us today for Magellan’s 2014 financial guidance call. This is Renie Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services. With me today are Magellan’s CEO, Barry Smith and our Chief Financial Officer, Jon Rubin. They will review our 2014 financial guidance and 2013 full year outlook.
Certain of the statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks, which could cause actual results to differ materially from those discussed. These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2012 and in the Form 10-Q for the period ended September 30, 2013, which are both posted on our website.
In addition, please note that in this call, we refer to segment profit. Segment profit is disclosed and defined in our quarterly reports on Form 10-Q and on our Annual Report on Form 10-K and is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries but excludes income from non-controlling interest held by other parties as well as stock compensation expense. Segment profit information referred to in this call maybe considered a non-GAAP financial measure. Included in the tables issued with this morning’s press release is the reconciliation from segment profit to the line item income before income taxes. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure.
For additional information regarding this measure including the reasons management considers as information to be useful to investors, please see our Form 10-K for the year ended December 31, 2012, which was filed with the SEC on February 28, 2013 and can be found on our website magellanhealth.com under for investors.
I will now turn the call over to our CEO, Barry Smith.
Thank you, Renie. Good morning and thank you for joining us. As you read in our press release this morning, our projected net income for 2014 is expected to be in the range of 57 million to 73 million, which translates to diluted earnings per share of $2 to $2.56, including the effect of the ACA tax. Our segment profit for 2014 is expected to be in the range of $215 million to $235 million. We anticipate revenue for the year in the range of 3.61 billion to 3.8 billion. John will provide details on this in a moment.
With respect to 2013, we are confirming our current guidance, which we most recently updated in October. Regarding our share repurchase program since our last call and through December the 16th, we have repurchased approximately 145,000 shares for a total cost of 8.7 million. To-date, we’ve completed approximately 112.5 million of the 300 million program which was increased and extended by our Board of Directors this past July. As of December 16, 2013, we have approximately 27.5 million shares outstanding. Both our 2013 and 2014 net income and EPS guidance include the impact of share repurchases and option exercises to-date but exclude the impact of any potential future activity. We anticipate finishing 2013 with solid financial performance and as we’ve said previously we are on track to complete the year in the upper half of our segment profit guidance range.
A year ago, I joined you on this call when it was announced that I would become Magellan’s CEO effective January 1, 2013. It’s been a dynamic year for our company, and we’ve made important progress in our two primary growth strategies. We also initiated a comprehensive effort to review our operations and products to position us for a strong future, expanded our senior management team, added new customers and respond to the challenges or losing customers. Through it all I’ve been impressed by the commitment and dedication of our workforce. Magellan’s employees are working everyday to exceed the expectations of our customers and the millions of people we serve. It’s my great honor to be part of this team.
Before turning the call over to John Rubin to discuss our guidance in detail, let me take a few moments to talk about our Magellan pharmacy solutions and Magellan complete care initiatives, as well as update you on the status of our protest in Maricopa County. I am particularly pleased with the important strides that we are making in our Magellan pharmacy solutions business. Since the close of our acquisitions of Partners Rx on October 1, we have been integrating our commercial, Medicaid and specialty pharmacy operations into one organization. This integration will allow us to leverage our collective scale and expertise in managing total drugs spend while ensuring a clear focus on the specific needs of each market segment. It’s impressive to note that while we do not report all drug spend under management in our revenues, our state and commercial clients have approximately 15 billion in drug spend.
We’ve also started transitioning onto Magellan’s existing platform certain formulary clinical management and customer service functions that Partners Rx previously outsourced. In addition, we’ve added several pharmacy executives with extensive experience and expertise in network and manufacture rebate negotiations and drug purchasing. We’ve had several recent sales across our pharmacy product line. In our commercial PBM business we’ll add 50,000 new member lives on January 1, 2014 and additional large employer group of 8,500 lives on March 1, 2014. This brings our commercial PBM lives to approximately 400,000 as of January 1, 2014.
In the Medicaid pharmacy market, we continue to renew all state fee for service business and recently won a competitive renewal for an existing customer. Additionally, we were notified of an intend to award a large state fee for service contract to us with anticipated ASO revenues of approximately 40 million over a six-year period. This contract is expected to go live in December of 2014 and is pending approval from the state legislature and CMS.
Regarding Medicaid MCOs we recently executed a contract with a large regional managed care organization that will go live on April 1, 2014 with an estimated 150,000 lives. And in our specialty and medical pharmacy business, we are in renewal discussions with our largest health plan contract which includes all of our specialty products. Our pharmacy pipeline contains many opportunities in the commercial employer and Medicaid segments. Our emphasis on working with third party administrators, brokers and consultants have surfaced many opportunities in the health plan and employer markets.
In the Medicaid space, there is interest from Medicaid MCOs in our PBM product as well as interest from states and traditional fee for service product and within our specialty products we are seeing strong interest in our medical pharmacy offering and integrated pharmacy solutions from health plans. We are also seeing interest in our specialty products from the Partners Rx customer base.
We expect strong organic growth in our pharmacy business as we continue to focus on the employer, managed care, specialty and government markets. We recently expanded and reorganized our sales force and account management team to focus on each of these markets segments. We are committed to organic growth and in addition we’ll seek to increase our scale and expand our PBM capabilities through acquisitions.
We are entering 2014 in a very strong position and look forward to continue growth in our pharmacy business. Our other primary growth engine is Magellan Complete Care where we are a full service health plan holistically managing the physical and behavioral healthcare of special populations. This is a state specific effort with solutions tailored to the needs of the local market.
It’s an exciting time for MCC as we draw upon expertise from across our company and implement a new model of care that we believe will improve healthcare outcomes for these special individuals while lowering healthcare cost for the states. One of our key accomplishments is the creation of a technology platform that provides a complete health plan infrastructure to facilitate medical management capabilities, pay claims, support customer service and can be leveraged whenever and wherever we establish health plans.
This system will become our repository for healthcare data which will be used for historical analysis as well as predictive modeling. Let me provide you some additional details on our progress in specific states. In Florida last September, we received notice of a contract award from the Agency for Health Care Administration, AHCA, to launch a Medicaid specialty plan for individuals with serious mental illness or SMI. We anticipate that our plan which will be the first of its kind in the nation and the only SMI specialty plan in Florida for the next five years, will launch in the second quarter of 2014. We estimate that there are at least 100,000 individuals with SMI in the eight regions we were awarded.
Individually, their healthcare spend is approximately $15,000 to $20,000 per year. We are working currently with the state on a criteria that will be used to define an individual with SMI, the process for enrollment and the finalization of rates. We anticipate that the enrollment process will be staggered with regions rolling out in different months. Typically, an individual will have 30 days to choose a plan after which auto assignment of members maybe possible. We are working to complete the build out of our provider networks, finalize a marketing and communications plan to commence in 2014 and prepare for a readiness review during the first quarter of next year.
The assumption in our guidance is that we will achieve penetration of at least 20% in these eight regions in the first year of implementation with significant additional penetration over time. We are excited about this opportunity, the value the collaboration with the State of Florida and provide more specifics after we conclude our discussions with AHCA.
In August we announced that we had entered into a definitive agreement to make a strategic investment in AlphaCare of New York of Medicaid managed care long-term care plane and Medicare plan initially focused on servicing New York’s long-term care and dual eligible populations. The closing of the transaction is a regulatory approval and for our guidance we’re assuming that the closing will take place on or before December 31, 2013.
While we await regulatory approval and the closing AlphaCare maintains their momentum, membership the Medicaid managed long-term care or MLTC plan continues to grow each month. With regard to the New York State Department of Health Fully Integrated Dual Advantage or FIDA program, demonstration program, scheduled to begin next July. AlphaCare has submitted all their desktop readiness review materials to CMS and the State and anticipates an onsite review in the first quarter of next year.
AlphaCare has also begun enrolling members in his Medicare dual eligible special needs plan. Its institutional special needs plan and its Medicare advantaged plan all of which will go live on January 1. Our investment in AlphaCare provides us the opportunity to enter the New York marketplace providing Medicare and long-term capabilities which can be leveraged in other geographic areas.
In other states such as Iowa, Nebraska, Pennsylvania and Louisiana we’re pursuing HMO licenses in order to expand our geographic footprint. In Iowa where our current integrated health home contract runs through June of 2015, our desire will be to create an SMI specialty plan similar to Florida which will be effected when the SMI integrated health home program has been completed.
Nebraska is expected to issue a RFP sometime next year with the management of their Medicaid long-term care population. Earlier this year, Louisiana put out an RFI soliciting feedback on managing their developmentally disabled population. There are many parallels between our IHH program and management of developmentally disabled. We have building out of expertise in this area including hiring several individuals with significant experience.
In other states, we are taking proactive steps to apply for HMO licenses as we discuss the possibility of managing their special populations. Our goals remained to manage no less than 2.5 billion of total health care spend for targeted populations in approximately five to seven states by 2017. We are excited about our accomplishments to-date and look forward to continued growth in this business.
Next, I want to update you on the status of our bid protest in Maricopa County. A month ago, the administrative law judge issued her decision on our appeal hearing and recommended that the Arizona Department of Administration or ADoA affirm the award to the other vendor and dismissed Mr. Jon’s appeal. Two weeks ago, the ADoA accepted the recommendation of the administrative law judge and also lifted the stay of implementation.
Subsequent to the ADoA order, we filed an appeal to the Arizona Superior Court in Maricopa County and requested a judicial stay of the implementation of the contract until after the court’s decision on our appeal. There is no assurance as to the timing or the result of the court’s actions on both of these issues. In the meantime, we’ll continue to execute on our responsibility to provide services for our members in Maricopa County with the highest quality and without disruption.
In summary, I view 2014 as a transitional year for Magellan as we continue to execute on our growth strategies and implement changes to our products and organization to make them more efficient and competitive in the changing healthcare market. I believe we’re well positioned for long-term growth opportunities. Before I turn the call over to John, I want to take a few moments speak to you on a more personal level.
For the past year, René Lerer has provided support and counsel to assist me in my role of CEO and is acted as sounding board whenever I want it. The transition could not have gone better as it was seemliness for our customers, employees, and shareholders. René and the Board have mutually agreed to end his service as Chairman and Director at the end of this year. I want to thank him for a service of CEO and now as Chairman and Director Magellan and most importantly for his friendship and his 11 years of service to this company.
René has been a leader who has demonstrated extraordinary integrity and capability, a responsible steward of shareholder interest and caring and benevolent friend of our employees. The list of his accomplishments is endless and the course he set has transformed the Magellan into who we’re today. I wish René good health and best at everything in the next chapter of his life. Effective on January 1, 2014, the Board has appointed me as Chairman of the Board.
I will now turn the call over to Jon who will provide you further details on our guidance and perspective on long-term growth. Jon?
Thanks, Barry, and good morning everyone. For our 2014 guidance, we project net revenue between $3.61 billion and $3.80 billion. Our net income for 2014 is expected to be in the range of $57 million to $73 million which equates to diluted EPS range of $2 to $2.56. Our segment profit for 2014 is expected to be in the range of 215 million to 235 million and cash flow from operations for 2014 is expected to be in the range of 181 million to 203 million.
Please note that our 2014 net income and EPS guidance include share repurchases and option exercises through the close of business, Monday, December 14th, but excludes the impact of any potential future activity. As we discussed in October, it’s important to note that our forecasted full year 2013 segment profit, which is in the upper half of our range of 245 million to 265 million includes the benefit of approximately $15 million of favorable year-to-date auto period adjustments; including approximately $6 million in retroactive rate and membership adjustments and customer settlements; $28 million in favorable prior period care development; and $19 million in unfavorable administrative cost, mainly for severance and other contract termination charges.
After adjusting for these favorable auto period items, our 2013 guidance range would be approximately $240 million to $250 million. As compared to this adjusted guidance range for 2013, our guidance reflects moderately lower segment profit in 2014. This expectation primarily reflects previously announced contract terminations with year-over-year revenue impact of approximately $900 million including the assumed end of Maricopa contract at March 31, 2014 and continued margin pressure primarily in our radiology segment.
These unfavorable items are expected to partially offset by the impact of full year of Partners RX, which is expected to be accretive by approximately $0.20 per diluted share. The annualization of new business sold and implemented during calendar year 2013 of approximately $250 million and the impact of expected new business effective in 2014 of approximately $250 million in revenue, of which about half has been sold. I’d remind you that for new contracts we typically incur startup cost and the buildup of reserves which have the impact of reducing first year profitability.
Now let me discuss the specific drivers of our 2014 guidance in each of the individual segments beginning with commercial. For the commercial segment, we’re projecting that revenue will decrease by approximately 15% year-over-year due to previously disclosed contract terminations partially offset by new business. After removing the effect of approximately $7 million of favorable out of period items from our 2013 guidance, year-over-year segment profit margins as a percentage of revenue are expected to increase moderately in 2014. This change is primarily due to the expected favorable impact of care management initiatives as well as restructuring reflects which will result in reductions in direct service cost for the segment. We continue to have a steady pipeline of 2014 and 2015 commercial behavior health opportunities including interest from regional plans, new federal and military programs, employers and other health plans we can support in Medicaid expansion, ACO, and exchange initiatives.
As you know our public sector segment includes the integrated physical and behavioral health products delivered through our Magellan complete care business. For this segment we expect the decrease in revenue of approximately 7% in 2014 resulting largely from the assumption that the Maricopa contract has retained only through March 31, 2014. The impact of the potential loss of Maricopa is mostly offset by new business starting in 2014 and a full year of revenue from new businesses started in 2013 including the expansion of our contract with the State of Iowa, the new contract with the State of Virginia and conversion of the Nebraska contract to risk.
After adjusting for net favorable prior period items of $8 million recorded in 2013, we expect that 2014 segment profit margin as a percentage of revenue to be down modestly compared to the current year mainly due to changes in business mix. After the AlphaCare transaction closes, we’ll own 65% of the entity and we’ll consolidate the results. Our guidance includes the assumption that deal will close on or before December 31, 2013. Our expectation for 2014 is to generate at least $200 million of revenue in MCC with more meaningful revenue in 2015 and 2016. Also, our 2014 projected segment profit guidance for public sector includes MCC startup losses and investments of approximately $16 million. As we achieve scale we expect MCC to be profitable in 2015 and beyond. Regarding the pipelines for new carve out behavioral health opportunities in the public sector RFP release dates continue to slip many into 2014 with effective dates in 2015.
For radiology our guidance contemplates an increase in revenue of approximately 25%, which is driven mainly by the annualized impact of business implemented prior to 2014 and expected new business growth. Excluding the impact of favorable auto period adjustments or approximately $4 million included in our 2013 results to date. The segment profit margin as a percentage of revenue is expected to decrease moderately year-over-year. As we discussed previously, over time we expect some margin compression on risk business as we renew contracts and write new business. On December 1, we went live with the conversion of our Medicaid health plan customer from our ASO advanced imaging program to our full risk service offering including an expanded range of products, including cardiac and radiation oncology management. The four year revenue from this contract is approximately $50 million.
Growth from the radiology segment is filled impart by expectations of expanding Medicaid populations in anticipated new exchange lives. In addition both existing and new customers are interested in our growing suite of products including our expanded cardiac solution, spine surgery and interventional pain management product in our new emergency department clinical decision support to offer advanced imaging.
For the pharmacy solution segment we expect revenue growth of approximately 35% in 2014, the projected increase includes a four years of Partners Rx, the annualized impact of contract implemented prior to 2014 and expected new business growth. These increases are partially offset by terminated contracts. We expect that 2014 pharmacy solutions segment profit margins as a percentage of revenue to be slightly lower than in 2013, as a result of the change in product mix including the impact of our four years results from Partners Rx.
Much of the increase business is driven by our expected PBM sales which includes drug costs and as a result have lower reported margins. We expect that corporate expenses in 2014 excluding stock compensation will be consistent with 2013 excluding cost of approximately $4 million in 2013, related the severance and other one-time items. As a percentage of total net revenue corporate expenses on this adjusted basis are estimated to be comparable between years.
We continue to expect same store normalized cost of care trends for the 12 months forward period of 6% to 8% for commercial behavioral health, 0% to 2% republic sector and 3% to 5% for radiology benefits management.
Turning to other items in our forecasted earnings are 2014 stock compensation expense is expected to be in a range of $16 million to $22 million. The decrease in expense from 2013 projections was mainly due to the acceleration of expense into 2013 of certain equity awards.
This will be partially offset by expense rated to restricted stock issued as part of the Partner Rx acquisition. Depreciation and amortization is expected to be in the range of $74 million to $78 million in 2014, are modestly higher than what we expect in 2013. This increase is driven primarily by a full year of expense from indentified and tangible assets from the Partners Rx acquisition as well as increased depreciation expense from capital addition.
We do not expect to generate any material net interest in 2014 and this reflects continued low yields on invested assets. The effective income tax rate for 2014 is expected to be approximately 49%; the tax rate does not contemplates any potential reversals of federal tax contingencies.
The effective rate is higher than the federal statutory rate primarily due to the inclusion of state taxes and the impacts of ACA regulations and the non-deductibility of ACA premium taxes and limitations under ACA un-deductibility of compensation for certain employees.
The estimated 2014 effective rate is higher than the effective rates of 25% anticipated for 2013 due to the reversal of tax contingencies in 2013 and the impact in 2014 of ACA deduction limitations. This specific impact of the ACA deduction limitations is approximately 9% on the tax rate and approximately $0.38 on EPS. Excluding the impact of ACA deduction limitations our EPS would have been a range of $2.38 to $2.94 in our 2014 guidance.
The 2013 EPS calculations are based on our estimate $8.5 million fully diluted shares outstanding for the year. This estimate contemplates the impact of share repurchases and option exercises to date but does not reflects any potential future activity.
Moving to cash flow, our guidance range for 2014 cash flow from operations is approximately $181 million to $203 million. The cash flow from operations is expected to exceed our net income primarily due to non cash charges and expenses such as stock compensation expense, depreciation and amortization expense. Our cash flow from operations also assumes working capital sources ranging from $34 million to approximately $54 million.
The key factors effecting working capital changes including expected release of approximately $59 million of restricted cash from the potential Maricopa contract termination partially offset by working capital required to support new business as well as the estimated timings, correction in payment of various contracts were receivables and liabilities.
Capital expenditures are projected to be $47 million to $57 million in 2014 which is lower than our forecast of 2013. The reduction is due to the elimination of capital expense for terminating contracts as well as onetime capital investments in 2013 which will require to support new business implementations in office relocations. Other investing and financing activities are expected to be fairly nominal during 2014.
We expect a net increase on unrestricted cash and investment of approximately $110 million to $148 million in 2014 excluding the potential impact of any share repurchases. As Barry mentioned earlier, 2014 is a transitional year for us. We believe that by the end of 2014, we will have a more stable customer base from which we can achieve earnings growth in future years with significant contribution from our Magellan Complete Care and Pharmacy Solution initiative.
We are targeting a long-term compound annual growth rate in both revenue and EPS of 20%. We’re planning to hold an investor day in the first half of 2014 where we will discuss our strategy and this long growth outlook in greater detail. We will provide specifics on this meeting in the near future.
With that, I will now turn the call back over to the operator for questions.
Thank you. We will now begin the question-and-answer session. (Operator Instructions) One moment please for our first question, Joshua Raskin with Barclays, your line is now open.
Joshua Raskin - Barclays
Thanks, good morning. Just a question on the impact of the ACA next year, I guess the $0.38 is a big number and I’m just curious, how is that flowing through to you guys? How much of that is sort of Medicaid premium related? How much of that is commercial sort of pass-through and I’m just curious how do you guys think about passing that through to your customer or are you just completely eating the tax here? Do you not think the states are compensating you for it, et cetera? So I’m just curious why it is such a big impact.
First, just to be clear, the ACA health insurer tax applies to our public behavioral health and MCC business. So there is nothing relating to commercial. And in general we do believe that states will include provision and capitation rates to cover both the direct cost of the tax and the non-deductibility impact; however, for our 2014 guidance we’ve incorporated hedges to our earnings, to account for two areas of near-term uncertainty. First, the one year lag in the timing of the tax assessment could result in the recovery short fall for terminating accounts which may not have a full year revenue base in 2014 to recover tax on that relates to the 2013 full year premiums.
And second the potential that the impact of non-deductibility of the health insurer tax maybe not able to be fully recovered in state capitation rates particularly in year one but it is important to note that we’re continuing to work with states and our objective is to receive ultimately full recovery for all these items but again we’ve incorporated on this provision in our guidance until we have final rate adjustments from all the states. And to just size this provision results in a reduction to net income of approximately $12 million in our guidance which the vast majority is flowing through the tax rate, so hopefully that helps.
Joshua Raskin - Barclays
That helps. So Jon that makes sense to me that some of those terminated contracts you’re going to pay your fee base after 2013 revenues but you don’t have those revenues, so the state can’t really pay you in some sort of capitated rate to make you hold this year, so I’m curious how much of the $0.38 is related to the terminated contract that you don’t think you’re going to get paid for and then are you insinuating the mechanism would just be the states will somehow retroactively figure that out and pay you for the fee that you’ve incurred this year for revenues you don’t have, is that the idea?
Well, that’s our objective. Again, we’re not counting on that in our guidance and to the extent that we get that that would be upside, but our objective is certainly to work with all the states to fully achieve recovery where we can. Given, we think that is part of what a sound or actuarial assessment would guide towards. Round numbers if you look at that, at the health insurer tax piece of it about half of that net income impact is for terminated accounts.
Joshua Raskin - Barclays
Half of the 12 million?
Right, round numbers.
Joshua Raskin - Barclays
Okay, that’s helpful and then just a question on the MCC segment; it sounds like you’re going to not break that out as a separate segment next year I don’t know if there is thought through that later. And then can you just remind us what the AlphaCare revenue run rate is currently as you enter into 2014?
On first Josh, yes, the intent for 2014 is to continue to report the Medicaid business direct to state in one segment which would be public, so that’s what we intend. We are not at this point ready to give a specific breakout on AlphaCare revenue and we haven’t closed the transaction yet and there is a lot going on in terms of their filings for 2014 and state approvals. So that’s something we will update on future calls but at this point just don’t have the information to give at this stage.
Okay, and then last question just on the 20% top and bottom line growth long term. Are you guys insinuating that 2015 is when we will start to see that?
Well, first, again it’s a long term growth rate so we’re not giving guidance for any particular year. But I would say as we sit today we do think there is without being specific we do think that there is the opportunity for material growth in 2015. If you think about what we’ve said on the call there is about 16 million of net start up losses in investments in MCC this year as we’re getting up and running in many markets.
We do expect to turn that to a profit in 2015. As we’ve also said we expect to continue to have strong growth in our pharmacy segment. We’ve had solid top line and bottom line growth in radiology management, which we believe we can continue. And as we’ve said with the after tax impact as it impacts EPS because of the impact of the terminated accounts this year we would expect that percentage impact to go down in 2015. So without being more specific in that and again the 20% not applicable to any year we do think there is good growth opportunities beginning in 2015.
And Josh, Barry here I just add that well said by Jon that we have been building both the senior team generally in both the pharmacy area as well as the planned services including MCC and commercial BH business. And we’ve also been focused on the sales and marketing initiatives in the companies and we are substantially more capable today than we were a year ago. So we’re, we don’t want to be arrogant or overly optimistic but we’re fairly bullish on our long term growth rates and our ability to effect that sooner rather than later.
Okay, thanks guys.
Our next question is from Dave Styblo with Jefferies. Your line is open.
Dave Styblo - Jefferies
Good morning. Thanks for taking the questions. First one, can you just help us reconcile little bit more on the revenue going when I think you’d alluded to $900 million of declining revenues from Maricopa and maybe other business partially offset by I think you had quantified $250 million of new business from ’13 annualized and then $450 million in 2014, so unless there is some gaps in there that suggest that revenue would actually decline is the increase from perhaps industry taxes that are going in there? That would be my first question.
Dave, it’s Jon. No really isn’t the industry taxes to any large degree, I mean that’s a relatively small number you’re talking in the 20s from a $1 million standpoint. It really is primarily the items that we talked about plus remember in addition to the Blue Sky, the new business and the annualization of 2013 business, we also have a full year of Partners Rx revenue flowing through which adds over $200 million in 2014 on a year-over-year impact. Those are really the biggest numbers. I mean there is some same store growth in as well and related - some of it related to Medicaid expansion and exchange lives as our health plan partners are growing in those areas as well. But those are the biggest items.
Dave Styblo - Jefferies
Okay, great. And then kind of circling back to Josh’s question on the 20% growth, I would expect that perhaps your, why you obtain the strong and robust top line growth that your bottom line growth would actually be smaller given the business mix shift the pharmacy which is quite a bit lower margin in additional to the other headwinds that you have on radiology where you’ve signaled multiyear pressure. Could you help us reconcile why the bottom line should be growth as quickly as the top line?
Well it think I mean there are some specific items Dave that we’ve talked about including the impact of the after tax in 2014 which we think will be reduced in future years that helps us a bit on EPS. But again think of the 20% as really being the target. I do think that there is the potential for the revenue growth to be higher and maybe the EPS growth on a relative basis to be lower than the revenue growth. But again we think we can at a minimum achieve the 20% on both.
Dave Styblo - Jefferies
Okay, and then lastly I think you’d spiked up something in the specialty line where you’re in discussions with your largest customer there for renewal. I’m just curious if you’re willing to talk little bit about roughly what that size of that is and is there upside potential to gain more business or is there risk of a contract maybe little bit more background on what’s going on there would be helpful?
Yes, the total amounts of 130 million in round numbers as of today and I believe there is some upside opportunities as we have discussions with the customer and finalizing the specifics of the arrangement going forward. But that at least gives you a relative size.
Dave Styblo - Jefferies
Okay, thanks. Any other color on where you’re at with the negotiations or in terms of thinking about performance how satisfied the client is right now is this just more of a situation where you would advice it towards upside potential or there is risk that the RFP goes up for price or technical events that would put out risk of loss?
There is no indication at this point that we think there is any risk of loss, I mean it’s not a competitive bidding process; it’s a process we’re going through at this stage to finalize the terms. So, again we’re not declaring victory until we get through the contracts that you feel good about it and it’s been a good relationship.
(Operator Instructions). Our next question is from Carl McDonald with Citigroup. Your line is open.
Carl McDonald - Citigroup
Just coming back to be industry tax, just want to clarify, you said that the total amount of the tax in 2014 would be somewhere in the 20 million ranges just trying to get a sense of.
Yes. [Inaudible] number is 25.
Carl McDonald - Citigroup
Just trying to get sense of how much you call conservative and how much you factored in for you’re not getting that rates outside America.
The impact of not getting into about 12 billion, that includes both, its primarily the non-deductibility piece but it does include again both our assumption of how much is the non-deductibility impact will be able to get in year one and again we’re not counting on kind of full year recovery at this point for terminating contracts. Those are the two pieces.
Carl McDonald - Citigroup
And then also get on the long term growth, so I just interested in the timing of you’re talking about it now. I mean I got all the pieces about the MCC loss turning to a profit etcetera but it still seems like you’re going to have roughly $30 million of EBITDA in 2014 that goes away in 2015 because of the terminated contract. So, even with those negative is turning positive it still seems difficult to get any kind of material growth rate in 2015.
Well again, if you think about the pieces Carl, you’re absolutely right on the terminating contract that will only have partial year on those contracts in 2014 which that partially would obviously go away. But again, note again what I said earlier on MCC, we have the combination of start up losses on new contracts and investments we’re making in future growth is a hit to segment profit of $16 million in our 2014 guidance which we expect to turn to a material profit in 2015.
Combine that again with continued strong growth in pharmacy, the growth we’re getting in our other segments and again reduced impacts on the after tax and we do believe that that growth in 2015 is achievable. Now, having said that again, I reemphasis that 25% is the long term growth rate not specifically a, it’s a service guidance for on year-by-year basis. Again, that’s how we think about thing strategically.
As I mentioned earlier, we’re going to provide more details on that as we get into 2014 and do our investor day. So, stay tuned on that.
Our next question is from Scott Fidel of Deutsche Bank. Your line is open.
Scott Fidel - Deutsche Bank
First question, just interested if you could talk about how much visibility you feel you have into around 225 million of business that’s still in the pipeline that’s included in the revenue guidance.
Scott, it vary to some degree, I mean we have for each of our businesses a very good angle on the pipeline which cases our highest probability and feel comfortable that we’ve got adequate activity to be able to close on the incremental half of the guidance range on new business that we have that we put out today. The degree of specificity does vary by business. Remember, there is some segment like if you can think about our behavioral health business where the lead time is relatively long and obviously in very detailed conversations on a number of cases there. On pharmacy where the case size is smaller, its more managing the overall volume and the actual achievement new business can be on much shorter time frame. So, it does vary by segment, I’d say, at this stage we have good confidence.
Scott Fidel - Deutsche Bank
And then second question would be interested if you can give us some thoughts on sort of the aggregate revenue contribution that you’re expecting from ACA expansion, even better if you can give us sort of breaking it down between the Medicaid expansion and assumption on exchanges. But just interested in general amount of contribution you’re expecting from the ACA from a top line perspective in 2014.
In general it does vary by business segment, in Medicaid expansion has a biggest impact in public sector where we have direct to state business and smaller impacts in the commercial and radiology segments where there it’s really the health Medicaid MCL partners that we have, but if you look at it in total between all the segments between exchanges in Medicaid expansion you probably talking order of magnitude a 100 million in revenue next year and the majority of that would be Medicaid expansion.
Scott Fidel - Deutsche Bank
Okay and that’s helpful, thank you. And then just third question just on the guidance for net increase of cash of around 130 million, just interested in sort of update on and I know you’ve talked about in the prepared remarks but sort of biased towards M&A as compared to repurchase and I’m assuming there is no residual effective any of the partners when you think like that right in terms of the for that future the 130 million of free cash flow that year you’re expecting in 2014 and all of that covered in 2013 cash flows, right?
Yes, Scott, that’s correct. We look at - as we’re looking at field both in the pharmacy space as well as in the plan services with health plan opportunities and acquisitions and investments, we see significant investment and opportunity build great shareholder value. And so we will continue to share repurchase, I think we’ve mentioned earlier we’ve purchased the 145,000 shares. We will continue to purchase shares going forward. We have a $300 million authorization; however, we also feel very strongly that we want to put our cash to work in a way that really builds the core value for the company.
We think there is significant upside. We are very active in both the pharmacy space as well as the plan space and so we’d like invest very heavy heavily in that to really build the future growth opportunities for the company. So we’ll still repurchase shares but there is a strong bias toward M&A.
Scott Fidel - Deutsche Bank
Okay thank you.
There are no further questions.
Well, thank you today for your participation in the conference call. We look forward to speaking with you again in February when we’ll discuss our fourth quarter and full year 2013 results. Good day.
Thank you for participation in today’s conference. The conference is now concluded. You may disconnect at this time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!