Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Mark Thierer - President & CEO

Jeff Park - EVP & CFO

Analysts

Glenn Garmont - ThinkEquity

David MacDonald - SunTrust

Larry Marsh - Barclays Capital

Amanda Murphy - William Blair

Charles Rhyee - Oppenheimer

Constantine Davides - JMP Securities

Tom Liston - Versant Partners

Gavin Weiss - UBS

Tony Perkins - First Analysis

Michael Minchak - JPMorgan

Brooks O'Neil - Dougherty & Company

Michael Baker - Raymond James

David Larsen - Leerink Swann

SXC Health Solutions Corp (SXCI) Q3 2010 Earnings Call November 4, 2010 8:30 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the SXC Health Solutions Corporation 2010 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). Listeners are reminded that portion of today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements.

For more information on the company's risks and uncertainties related to these forward-looking statements, please refer to SXC's annual information Form 10-K. I would like to remind everyone that this call is being recorded on Thursday, November 4th 2010 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 today. This morning we issued our 2010 third quarter financial results by a press release and a copy of those results is available on our website sxc.com. With me today is Jeff Park, our Executive VP and CFO. I'll summarize the key events of the quarter and then Jeff will review our financial results for third quarter and update our guidance for 2010 fiscal year. I'll then close with a few comments and open it up for Q&A.

Well we have just completed our most successful selling season in the history of SXC which began with the announcement earlier in the year of the HealthSpring contract a five year deal valued over $1 billion annually and culminated just couple of weeks ago with the announcement of a three year $720 million PBM contract for an East Coast health plan.

These contracts together with other business that we have successfully sold and brought during this selling season represent approximately 1.1 million new lives under management ranging from new middle market PBM business, employers unions, health plans and workers compensation customers.

This momentum we have established is a direct result of the ground what we laid over the past year and the focus that we have put on our go to market strategy of delivering customized and flexible pharmacy management solutions.

As I mentioned on our previous earnings calls, we have made significant improvements in our sales and RFP process combining that with the sales team is now at full fighting force and together we have been able to drive very strong organic growth.

By way of review here at SXC we are growing this business by focusing on four key areas first winning new clients, second retaining our existing clients, third cross selling and pulling through additional services and finally prudent cost management across our enterprise.

In terms of our pipeline most of our 2011 targets have now made their decisions at this stage although we do plan and continue to track a number of employer and TPA prospects who will decide between now and year end.

Our health plan targets include a good number slated for mid-2011 and more important 2012 start dates. We're active across all five segments of our business with a continued emphasis on our HCIT business and a good number of state fee for service Medicaid opportunities coming up in 2011.

This continues to be a market that we like a lot.

In terms of client retention, 2010 was also our best year in our history with a 99% retention rate. All of our major contracts were renewed; we had zero large defections and zero material losses.

We accomplished this in large part due to a brand new account management process that is yielding an all time high in terms of client satisfaction. We've also made many improvements in our service to our members, including turn around time on mail order prescriptions and response times to incoming calls. As a result, our member satisfaction rating is also running at an all time high for our company. Operationally this business is in very good shape.

We have a very aggressive plan in place to pursue client satisfaction, starting with our account team and extending through all areas of the organization. In fact this year we took every employee who is bonus eligible and tied their compensation directly to client satisfaction.

Beyond incentives we have built loyal client relationships by gaining a deep understanding of their needs and their goals at multiple levels within our company and building those customized solutions to address their managed pharmacy issues.

As an example to our commitment to client collaboration, we recently a gold URAC best practices award in conjunction with our client employers occupational health. As a workers comp payer, employers manages the care of individuals who are injured or become ill on the job.

Schedule two or controlled substances are a central part of these treatment plans and actually have the tremendous potential for overuse and abuse. The award winning program with employers is actually jointly operated and includes this system to identify and intervene in cases where there is a risk of over utilization of narcotics. This program has produced a significant impact on both quality of life and a reduction in drug costs.

Switching gears, on the conversion front we successfully converted another HCIT client to our full service PBM offering in the third quarter, which Jeff will address in a moment. And in addition we're actively expanding our technology solutions to take advantage of new opportunities within the State fee for service arena including billing, collection, fraud ways and abuse and coordination of benefits. We actually see a growing set of opportunities emerging in the state fee per service market as an outcome of healthcare reform.

Our mail order penetration has ticked up to 12% which is a nice improvement driven by our pull through initiatives. I think it's interesting to note that the industry data showing a softening in overall mail order scripts through 2010 and then a subsequent increase in retail prescriptions could be attributable to retail change, driving members back into the stores by offering 90 day prescriptions in detail.

Our goal here is to continue to grow our mail order penetration, albeit from a new base once we add HealthSpring effective 1/1/2011. Because our mail order penetration is well below market averages, mail order remains a significant opportunity for additional margin growths here at SXC. This growth stands in contrast to other larger PBM's that historically have had higher mail order penetration rates and also have a greater exposure to the erosion in terms of retail chain tactics.

We continue to lead the industry with a 76% GDR, up from 71% in Q3 of 2009 and nearly 5 percentage points above the industry average. We're very proud of this performance because remember, our incentives are aligned when we dispense generics. With generics first, when we save our client's money, we make more money. Our industry leading GDR is directly attributable to the clinical program management that our people placed.

First of all managing our retail network, secondly formulary management and our generics first approach, third aggressive clinical interventions driving generics also sub supported with transformational clinical IT tools for identification and benefit designs that promote generics….

On the cost management side inside SXC, I am proud that our teams have been able to add new business and retain our existing clients while holding the line on expenses. Once again this speaks to the scalability of the business and our ability to leverage existing cost base to increase revenue and profit.

Finally, we continue to make strategic additions to our senior leadership where it makes sense. First, we had we had a Joel Saban who has joined our company as Executive Vice President of Mail and Specialty. Joel was formerly the Senior Vice President of Industry Relations at CVS Caremark, and has a very strong background in operations and margin management.

Secondly, I am very pleased to announce we recently hired Mark Halloran as our SVP of Strategic Initiatives. Mark was also Senior Vice President and Chief Information Officer however at Medco and he's got a long track record in this industry. We look forward to Mark's contributions and he will be focused primarily on the technology side of our business.

As far as this change, Mike Bennof has left the organization to pursue other interests. We want to thank Mike for his contributions to the company and wish him all the best.

Okay, with that, I'll turn the call over to Jeff to review our financials.

Jeff Park

Thank you Mark and good morning everyone. Q3 was a strong quarter for SXC from a big picture perspective. We increased revenue by more than 10 million on a quarter-over-quarter basis. We added another large health plan subsequent to the end of the period. And they represent approximately 720 million over a three-year PBM contract for the provision of network management, clinical services and Medicare Part D services.

In September, we executed two for one stock split to increase the liquidity and the trading of our stocks and ensure our price range is attractive to the widest possible audience of investors. We are also in the fortunate position to be raising our targets on certain portions of our guidance which I will address in a moment. These changes reflect a strong performance this quarter and our visibility for the year.

Our PBM revenues for the Q3 period grew by 30% compared to Q3 2009. The growth in the quarter is partially due to the HCIT to PBM conversion during Q3 that Mark mentioned as well as growth in our specialty scripts, while the year-over-year growth is primarily due to the new customer starts as of January 1st 2010, another successful conversion over the last 12 months.

Adjusted prescription claims volume for the informedRx division was 11.9 million in Q3 which is up from the 11.8 million recorded in Q2 2010.

As Mark mentioned, our mail penetration for Q3 increased quarter-over-quarter to 12% compared to 9.5% in Q3 2009. When we report our Q1 2011 results, we will be adjusting our mail order penetration go downward to reflect the full implementation of the HealthSpring contract on January 1st 2011. HealthSpring has relatively low mail order percentage to all the absolute order volume will be increasing. The penetration will be impacted.

We believe there is an opportunity to move the needle upwards on HealthSpring mail order but we do not expect to match up heir historical percentage since they are Part D plan.

In the HCIT segment, Q3 revenues decreased from Q2 2010 but as you recall from last quarter, we recorded a $3 million HCIT performance award that I referenced on the Q2 call. And during Q3, we were able to recognize approximately 1.5 million of revenue principally related to license sales. As a result of the completion and acceptance award from a percentage of completion contract.

Backing up the 3 million from Q2 and the 1.5 million from Q3, gives a more accurate picture of the HCIT based revenue. Keep in mind that convergence to our full service PBM offering impact HCIT revenue and with other successful conversion in the quarter we continue to be pleased with the over all direction of the HCIT revenue.

Gross profit for Q3 grew by approximately 11% compared to Q3 2009. In the quarter, the 52.9 million was positively impacted by the 1.5 million of incremental revenue in the HCIT unit which is not expected in future quarters.

Gross profit percentage in Q3 was approximately 11% which is inline with the Q2 2010, as previously noted when we convert HCIT clients to our full service PBM offering, our overall margin percentage is impacted due to the fact that PBM business carries a lower margin percentage than the HCIT unit.

Additionally, new sales can be profit percentage dilutive but are accretive to gross margin dollars and EBIDTA. We have demonstrated great progress on the conversion front; we delivered nine conversions since we began this activity in Q2 2009 with another one in the quarter.

We continue to track another half dozen additional potential conversion candidates and we will continue to pursue additional convergence for both HCIT clients as well as new prospects. Our HCIT platform is a great on boarding process to deliver future full service PBM clients.

Gross profit per adjusted claim for the PBM segment was $3.31 in the quarter, which was improved from the $3.26 last quarter. Adjusted EBIDTA in Q3 was 3.4 million an increase to 25% compared to 24.3 million in Q3 2009. In Q1 we recorded 27.7 million in the quarter, 31.5 million Q2, which includes the 3 million in the HCIT performance the once I mentioned earlier.

I'd like to highlight for you that when we report our Q1 2011 results, to align ourselves with the practices in this sector, we will no longer provide adjusted EBIDTA and instead move to a straight GAAP-EBIDTA metric and break up the stock based compensation impact so you can bridge the historical numbers.

We have demonstrated strong cost control with SG&A expense remaining relatively flat during each of the last three quarters with an increase of less than 1% on a sequential basis. We achieved this cost control while adding new business, increasing revenue and continuing preparations for the start of January 1st launches.

Cash from operations was 26.1 million in Q3 compared to 17.9 million in Q3 2009. Cash flows are obviously impacted by the timing of payments and receipts and year-to-date we generated 53 million or approximately 21 million per quarter.

Overall the business model continues to generate strong positive cash flows from operations. At September 30th 2010, we had 379 million compared to 304 million at December 31st 2009.

As I mentioned earlier we are raising certain portions of our 2010 financial guidance. Our revenue forecast remains consistent at 1.9-2 billion for the year. Given our strong quarter and improved run rate we are narrowing the target range we previously provided for consolidated gross profit. It is now 207 to 210 million, which is at the high end of the previous range of 202 to 210 million.

This change represents a 2.5 million increase mid-point to mid-point and the high end of the revised guidance range implies a growth of more than 12% over 2009.

Correspondingly for adjusted EBIDTA we are increasing our guidance which is 107 to 119 million up $2 million from a 115 and a 117 million. Achieving the high end of the revised range would imply growth of 26% in 2010 over 2009 consolidated gross profit.

Taking into account the two for one stock split, the 2010 full year target range for fully diluted GAAP EPS increased to a $1 to a $1.02 an increase of $0.02 from $0.98 to a $1.

Achieving the high end of our net income target using this EPS guidance would imply 37% net income growth year-over-year. We expect 2010 effective tax rate to be approximately 33.5% compared to 32.3% in 2009.

Our guidance targets for EPS are based on fully diluted share count of approximately 62.6 million shares. Once again taking into account the stock split, our fully diluted non-GAAP adjusted EPS increased $1.06 to a $1.08, an increase of $0.02 from the previous range.

With more than $6 in cash per share of stock, cash per share on hand after the stock split, we continue to actively track acquisition opportunities.

Deploying this capital widely is a priority for us and we are investing time in a number of properties that could be attractive. Our strategy is to remain vigilant and disciplined in terms of valuation and alignment and we do not feel frustrated to move quickly on the target that does not meet our high standards.

2010 marks the end of the most successful selling seasons in our history, we are well underway with preparations for our January 1st launches with wins in Part D, commercial health plans as well as solid middle market clients, in short we are firing in all cylinders.

With that I will turn it back to Mark for closing comments and thank you again for taking time and your continued support.

Mark Thierer

Thank you Jeff, 2010, has been a very good year so far in SXC. We are recently recognized by fortune with a six place ranking in their 100 fastest growing companies list.

We also received a 52nd ranking on Deloitte's 2010 Technology Fast 500 Ranking. We are achieving the highest client satisfaction scores in the company's history.

Our performance on client retention has been outstanding. We have built a pipeline that's very encouraging and most importantly we are delivering on that pipeline in a material and tangible manner by signing mark key clients like HealthSpring and our recently announced Health Plan contract.

We won these opportunities because our business model offers what health plans and other peers want and need. As they search for clarity and visibility into their supply chain to control their future costs, our customized and flexible solutions coupled with our management team provides the tools and the expertise to help them aggressively manage their pharmaceutical costs.

All in all 2010 has been a year of rapid growth and transition for us here at SXC. We have evolved from what many believe to be the markets finest PPM software company now into a highly competitive service organization that couples the industry best technology with a world class service experience.

We believe that combination sets us up extremely well to continue to build on the success we have generated for our shareholders.

In closing I would like to remind everyone that our Analyst Day will be held on Tuesday November 16, 2010 in New York City.

We will provide you an opportunity to hear a more detailed overview of the business from our senior team as well as presentations from a number of our good clients, HealthSpring, Safeway and the University of Toledo. If you would like to attend in person please, RSVP to Susan Noonan, listed on our press release. You can also access a live webcast of the proceedings which are scheduled to start at 8 am eastern time by visiting our website, SXC.com.

All right, with that I'd like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Glenn Garmont from ThinkEquity. Your line is open.

Glenn Garmont - ThinkEquity

Yeah, thanks. Good morning. Mark, just a question; as we think about sort of the outlook for generics, certainly some of your larger peers have generated a fair amount of excitement this earning season with commentary around what 2012 and beyond can look like and I'm just wondering. I know you guys use a little bit more of a transparent model. How should we think about generics -- for the generic opportunity for SXC relative to some of your other growth drivers?

Mark Thierer

Yeah, Glenn. Good morning. Generics are central to the PBM profitability model and that's for every single company in this business including ours and so to the extent that the bigger PBM's benefit from the generic launches over the coming years, we'll benefit in much the same way. It is true that drug mix and client mix are two important variables that impact how much money are you going to make on generic launches. But for us we're making money in generics in the network. We're making money in generics in mail orders. We're making money in the smaller way in generics in some specialty therapies and it is very central to our success because it is the first thing that we try and sell to every client candidly. So we are going to be the beneficiary of the generic wave in basically the whole industry.

Glenn Garmont - ThinkEquity

Okay, I appreciate the commentary. Thanks Mark.

Operator

Next question comes from David MacDonald from SunTrust. Your line is open.

David MacDonald - SunTrust

Mark, quick question on selling season. I know a couple of years ago you guys started to put together an effort in terms of increasing your presence with the consultants and just kind of curious -- some feedback in terms of how that's gone, how you feel that went during the season. Obviously you had some big wins but is that something where you still have some work to do or are you kind of where you wanted to be?

Mark Thierer

Yeah Dave, thank you. We have made what I think is very solid progress on building out our relationships and keep in mind what we're targeting. We are making hay in the middle market and we are focused on the Tier 2 consultant community. These are both boutique shops who focus on pharmacy engagements and don't necessarily include the Towers, the Hewitt's (inaudible) of the world, we're focused on these boutique providers who are really very engaged in the middle market and to a company. They know just who we are. They know our value proposition. We had them here. We've spent time and resources really building up those relationships. I think the best marker is just our sales wins because every decent sized deal has got a consultant attached to it and we've made some great progress there with our sales team.

David MacDonald - SunTrust

Okay and then just two other questions. One, you mentioned in your prepared remarks and expanded opportunity type, the healthcare reform with some of the Medicare fee for service. Can you just provide a little bit more detail there?

Mark Thierer

Yeah. Well obviously everybody is keeping track here with the elections and all that's surrounding healthcare reform and for us, as the healthcare exchanges take shape, they are going to driven by the states and there are a number of ways that fee for service Medicaid is delivered on a state-by-state basis. If you look at the SCHIP program as an example, it sets up for a very interesting opportunity, really kind of from a utility standpoint.

We also see some significant opportunity to just bring basic manage pharmacy in to the state fee for service space. This is a place where the big three, basically don't compete and the need for advance manage pharmacy is just really very significant. And it sets us so nicely for our model because you need four, five things to win in this space and the first thing you need is strong technology in a phase with these MMIS systems. You do need a truly transparent model because it is demanded by the states. You also need capability on federal and supplemental rebate management.

And then you need to be willing to walk if there is no mail order because many states won't have it. And so, for all those reasons, we are ramping up our capabilities in the fee-for-service space and obviously are looking forward to 2014 when these incremental lives come on line.

David MacDonald - SunTrust

And Mark, given the disastrous shape that a lot of these states are in from a budgetary standpoint, have you seen the demand ramp directly tied to their ability, frankly their control cost and cut cost?

Mark Thierer

Well, yeah, Dave. In fact, you know, here in our own home state, Governor Quinn he is able, through all this, to retain his seat. We met with him not long ago. He has got to find a way to get his arms wrapped around. Drug spending in the state of Illinois and it is a huge line item, second biggest bleeder in this budget.

He has got to find a way to save money on his fee-for-service Medicaid lives and he is not unique. Every one of these states, by and large, are upside down and now they are going to have, 15 to 20 million new fee-for-service Medicaid people to service. They are going to lay right on top of these existing fee-for-service models. So, they're going to have to come out in a new way and begin to manage utilization.

David MacDonald - SunTrust

And then just last question. I know, a little way back, obviously a sizeable acquisition of the market, the kind of bumper pricing near-term a little bit. Have you guys started to see some of the expectations moderate? And you know, on the strategic side?

Jeff Park

David, this is Jeff. I think valuations to your point have come up over probably the last 18 months or so. But they have definitely stayed kind of in line and rational base, improvements in the general markets and the access to the credit in the markets. But we haven't sort of seen any change -- quantum changes really in the last two quarters on that regard.

David MacDonald - SunTrust

Okay. Thanks guys.

Jeff Park

Thank you.

Operator

The next question comes from Larry Marsh from Barclays Capital. Your line is open.

Larry Marsh - Barclays Capital

Thanks and good morning, Mark and Jeff. Just a couple of also I could. First, just maybe a little bit of elaboration of your management team. Congrats on adding Joel and Mark. Just maybe a little bit of background of what created the opportunity. Obviously, as you grow, you're going to create some change in your organization to maybe help so frame the context of how you are adding these people and putting them into roles that are so much different in the roles they had in another organizations?

Mark Thierer

Yeah, Larry. Thank you. Actually, of all the things that I do in my job, I think, building the right team and making sure we got the right leadership is job number one. I spent a lot of time on it. And so, relative to Joel Saban, he is a gentleman I have, I don't know, 15 to 17 years of working experience with, we ran together, during my days at Caremark and Joel has extensive experience on the buyer side and the supply chain and in terms of margin management.

He was obviously an executive at CVS Caremark and we brought him on to initially help us build out the mail order and specialty operations where he does have extensive experience, so he will be an executive vice president for the company and someone who we have very high expectations for.

Relative to Mark Halloran if you take a look at his 16 year career at Medco, he touched basically every strategic initiative from a systems and operations stand point inside that business and he left to pursue other opportunities about a year ago and we picked Mark up after really what amounted to a nine month courtship. We're very fortunate to bring him in and as we talk about building out our HCIT footprint in our technology reach inside the Market, I can't think of anyone better equipped to help us do it than Mark.

So those are two examples of senior executives we actually added on the sales side, we're added on the account management side so we're feeling pretty good about the team we fielded.

Larry Marsh- Barclays Capital

Okay great thanks, two other quick once, I guess maybe just to elaborate on the HCIT business, Jeff if you talk about your transactions being up nicely, in the quarter you had a 1.5 million pension with a license fee. Even with that if you just calculate the rough revenue per transaction, it came down some from last year. How do we think about that in context of the evolution of the business? Is that just a mix discussion or is it really in consequently value of thinking about that? I guess along with that generates all the new regulations around Healthcare reform, and CMS around Med D, how should we think about CapEx in the organization here in the next couple of years.

Jeff Park

Sure Larry, just with respect to the sort of transactions versus the transactions revenues and how it sort of – how it compares, it absolutely is changes with respect to the mix of clients that we have.

But if you do look at it, you're going to able to see that its actually been steady kind of increasing Q2 last year and Q3 of last year, we're in sort of mid-teams and that's kind of where we are today as well, the clients that we transactions out of the HCIT unit into full service PBM's are obviously a negative to the HCIT unit and so being able to kind of maintain overall revenues in that group, see revenue expand has certainly been a pretty good accomplishment for the HCIT side.

The second part of your question?

Larry Marsh- Barclays Capital

Just capital expenditures as far as -- it's been modest this quarter. Should we think of that as really beefing up?

Jeff Park

Yeah, so usually with respect to CapEx you are going to see us – this year we've given guidance of around $10 to $11 million in CapEx. I'd expect to see something similar going forward.

Larry Marsh- Barclays Capital

Okay and then finally just – I just – obviously you are successful in selling season. Mark you talked about some shots on goal. You're obviously with a large one that you announced here recently, but obviously you still sit on a lot of cash. So maybe to – if I can elaborate little on today's question from earlier.

To think about the emanating environment say even from three to six months ago, we know evaluations just come up and would you say the environment has become more constructive from where you are sitting, from three to six months ago, less constructive in terms of unrealistic expectations or about the same, what's the message for today?

Mark Thierer

I would characterize Larry, the temperature out there in terms of properties and deal activity as heating up somewhat the overall activity level is high in terms of peoples temperament and expectations. I haven't seen to just point a big change in anybodies thought process there and we are just ruthless on making sure the valuation is right and whatever we do is accretive.

I will tell from a property standpoint there is a lot in the market today and things have been rumored we obviously aren't going to comment on that but our rating and ranking of strategic targets continues to be middle market PPMs that we can create accretion right out of the box. We are very interested in specialty pharmacy and continue to look at properties in that space and those kind of number one, number two our sweet spot in terms of properties that we are looking at.

Larry Marsh- Barclays Capital

Okay very good thanks.

Operator

Your next question comes from Amanda Murphy from William Blair. Your line is open.

Amanda Murphy - William Blair

Hi good morning, thanks for your comment on HealthSpring Mail, I am curious though you are bringing on a quite a bit business next year. Can you just help us think about in general what the mail, specialty and generic utilization that isn't that put as a whole and a sort of what the opportunity is in that book longer term?

Jeff Park

Sure Amanda this is Jeff, yes the mail penetration on the book of business that will be bringing on for 2011 is largely low and waited to HealthSpring, they represent and pretty significant piece of that new business. So, we do have an opportunity, we look to expand the mail penetration on this new book as we bring it in through next year but also we are actively continuing to work with our existing customers to drive more mail utilization.

As a fees thesis to the clinical programs and ensuring that you have got not only the right adherence but the most cost effective way to distribute the mediations, it continuous to be a key theme for our client.

Mark Thierer

I will just add to Jeff comments as it relates to specialty, we have seen a pick up in the HealthSpring ramp and obviously the overall opportunity, they are running north of a $1 billion. There is a over a $100 million plus of specialty that are being managed through the health plans that comprise HealthSpring and they are getting bigger as you know and so we are all over it in terms of ramping specialty in the health plans base.

Amanda Murphy - William Blair

And then how did Bravo fit into that sort of preferred specialty program, are you able to access that currently or not?

Jeff Park

Well HealthSpring is not closed yet on the Bravo transaction, I think they are targeting this month to bring it to closure and you can rest assured that we will be engaged with them, talking with them about bringing those lives across in a timely basis and so it's pretty mature to really try and project what's going to happen there but again HealthSpring acquired Bravo and we are going to be talking to them about helping them.

Amanda Murphy - William Blair

Okay then and this last line, you have talked about HealthSpring and East Coast plan, are you quantifying sort of your net new business position outside of that for 2011 at this point?

Jeff Park

Well we have talked about 1.1 million lives and that's our quantification.

Amanda Murphy - William Blair

Okay. Thanks very much.

Operator

Your next question comes from Charles Rhyee from Oppenheimer. Your line is open.

Charles Rhyee - Oppenheimer

Yeah thanks for taking questions guys. Maybe it's become a couple of earlier questions around the annual environment just to (inaudible) maybe Larry's maybe. Obviously the valuations have come up; it's only my expectations that we have been valuations have gone down just given a general sense of scarcity value for PBM assets out there yesterday. So is there -- at some point you just decide, hey look, rather than going to -- just say this is what the market is expecting and this will pay or is that point that you say, you know what, we're better off just trying to growth organically and win big chunks of business like the deal you just won -- announced a little while ago?

Jeff Park

Great, Charles. This is Jeff. Yeah, we are focused first and foremost on growing through our sales activities. Organic growth is the thing that feeds our business. From a inorganic growth perspective, we really look at fit and as Mark outlined a little earlier, from a fit perspective we're targeting mid market PBMs that bring forth really a good customer mix and presuming specialty pharmacies to help us build our specialty footprint.

Fit first and then accretion and valuation third. We're -- we remained disciplined on what we do. We don't believe we've got to rush out to put the capital of the work but there is a good amount of properties and we're actively pursuing to get the transaction closed. That will make sense.

Mark Thierer

And Charles, this is Mark. I'll just finish on Jeff's comments. The bottom line is if there is a solid accretion opportunity, we can pay up to get a property and still make a lot of money for the shareholders. So we're just being careful in making sure we get it right.

Charles Rhyee - Oppenheimer

No, that is great. Thanks for that. And maybe Jeff just wanted to talk about the conversion that you are announcing here on the quarter. Obviously it's been about a year since Presbyterian. Can you maybe give us a sense on the size of these -- if this conversion, maybe last conversion relative to Presbyterian in terms of size and the one that you announced last quarter, is it fair to think that that's sort of in the prescription numbers here in this quarter?

Jeff Park

Yeah. The conversions on the last quarter are and the conversion targets, they really range inside as you can imagine Charles. Presbyterian was a large one at around 150 million of drugs spent annually. These other targets really range inside but a better average for a mid sized plan could be $50 million to $75 million on average and that's probably a better way to think about them.

Charles Rhyee - Oppenheimer

Great, thanks a lot guys.

Operator

Next question comes from Constantine Davides from JMP Securities. Your line is open.

Constantine Davides - JMP Securities

Thanks. Mark, you guys obviously had a really strong selling season, especially when you look at how little business appeared to change hands with the big three and I was just wondering if you can maybe talk about the pipeline or quantify the pipeline that you are seeing for '11 versus what you saw in 10 and maybe another way of asking that also is are you seeing HealthSpring sized accounts that you believe you could be in contention for. Would it be more of a mid market year?

Mark Thierer

Yeah Constantine, thank you. You're call, when we signed HealthSpring that I was pretty prescriptive around the fact that this was going to create a sentinel effect for our company. And that's what happened. We are doing a bang up a job getting ready to go live with HealthSpring. It's going to go off well.

We have our A team making sure that every aspect of it will be flawless and as a result of that win candidly we're seeing a lot more traffic in the HealthSpring space, or in the health plan space and so right now our pipeline for mid year 2011 looks pretty good.

I'll tell you it's larger for 1/1/2012 starts and we are already in the middle of getting after and selling a bunch of larger plans and so that has been the bi product of nailing HealthSpring and that is we have moved up the food chain in terms of target size. And we remain pretty discipline and still really like the middle market health plan as well. 250,000 life health plans remain really good place for us to compete. So, a little bit of a long answer but we will be chasing some larger opportunities into the middle of next year and the beginning of the following year for sure.

Constantine Davides - JMP Securities

And if you think about that in conjunction with your M&A strategy, I mean, how sensitive do you think your customers are to you around, -- you're doing an acquisition. It just seems like you're perpetually in a selling cycle. You had a number of competitors closed some deals here. So, is there a window you're looking at on the M&A front or does the selling season really interfere with that at this point at all?

Jeff Park

Hi, Constantine, it's Jeff. The selling season is usually impactful from mid-market PBMs. They are looking to sell their business. They don't want to necessary sell inside of the selling season. But from a client perspective, as you know, the industry PBMs are active in acquisitions at different times in the year. And so, that certainly hasn't been a factor and don't anticipate acquisitions or possible acquisitions or acquisition ideas to sort of impact any of the selling aspects of our business.

Constantine Davides - JMP Securities

Alright, thanks guys.

Jeff Park

Thanks Constantine.

Operator

The next question comes from Tom Liston from Versant Partners. Your line is open.

Tom Liston - Versant Partners

Hi, thank you. Good morning. Just to follow-on, I think, on Amanda's question, just to pick out HealthSpring from the 1.1 million many lives and certainly the deal you announced a couple of weeks ago; what does the remainder of new business look like. Does it include mail? Can you comment just on, those heavy deals, why you want etcetera?

Mark Thierer

Yeah, Tom and good morning. So, it's a nice mix and it includes winds in every segment in which we compete. We got a very nice size, workers compensation client that we will be starting in January. It's got a little bit of mail and a lot. We got a good number of small and median-size employers. Most all of them have mail order and specialty attached to their service offering and we've expanded some of our key PA footprint as well and so, it's a nice mix of accounts, none of which are on their own wanted public announcement and we're basically just going to be announcing material deals. So, that kind of what filled in the rest of it.

Tom Liston - Versant Partners

Yeah. And just on the renewals, certainly you said you had zero material losses. What about competition coming out of some of those deals and level of pricing concession, if any, with those deals?

Jeff Park

Tom, this is Jeff. As you know, in the business, anytime you go through a renewal process, you're talking about price. It's effective. People try to take business away from you all time and you need to make sure you got good relationships to Mark's other comments around customer satisfaction. Those are the things that are really important as you go through renewal process. And you do have re-pricing and compression that can occur. But that's part of the business as well. And so you see those things kind of made up with improved utilization on generics as well as the increased consumption in mail order and specialty.

Mark Thierer

Tom, I'll just finish Jeff's comments with one other and that is, you know, I've talked about kind of a bifurcated market here for a while. There is a market in which the big three compete. And then there is the middle market where we're emerging, I think, as a pretty dominant player. And the pricing compression that goes on in the middle market doesn't look like what I am hearing. It's like on the high end of this market and so we have to battle it and you have to compete to win and price is important, but we don't see the kind of compression that you're lately hearing some of these guys talking about.

Tom Liston - Versant Partners

Sure absolutely, thanks a lot for it.

Operator

Your next question comes from Steven Valiquette from UBS. Your line is open.

Gavin Weiss - UBS

It's actually Gavin Weiss in for Steve. Just wanted to talk a little bit about the gross profit growth in the quarter. It was around 8%. Are we seeing some of the HealthSpring cost in that line or is this just and an anniversary of client wins?

Jeff Park

Yeah the cost to goods in the PBM doesn't have any of the HealthSpring's implementations cost or anything like that in there.

Gavin Weiss - UBS

Okay so can you just give a little bit more color on what’s the trend in that lying for us?

Jeff Park

Sure, Q2 was 8.6% and Q3 was 8.5% and so it’s pretty consistent for me.

Gavin Weiss - UBS

Okay, see you thanks.

Operator

The next question comes from Tony Perkins from First Analysis, your line is open.

Tony Perkins - First Analysis

I was just curious as your SG&A was actually down over 500,000 from year ago, even with the 28% revenue growth which is pretty impressive. I'm just curious if you can comment on when we should – the timing we should see that track with revenue or does there continue to be some operating leverage in the model?

Jeff Park

Tony this is Jeff, as you know; as we bring on accounts we look to drive a lot of operating leverage into the model. When you look at the dollar of EBIDTA contribution that comes from every incremental gross margin dollar, it’s a very nice improvement, so that’s a key thesis for the model.

Yes we will expect to continue to see SG&A grow as our book of business grows, but its not expected to grow at the same rate as the revenue, so as we get into the forth quarter, as we get ready for the January 1st launches, we will see and increase in head count and we will see and increase an increase in the SG&A line and that’s all factored into the guidance that we’ve given for 2010.

But we’ve been very disciplined on cost containment and cost management. In this market you need to make sure that you are achieving the leverage across the entire books of business and you are staring to see that as we’ve hit our scale here.

Tony Perkins - First Analysis

Thanks Jeff. Mark you brought up the fraud, waste and abuse and the coordination of benefit services with Medicaid. I don’t know if I caught that. Can you elaborate further? Do you see yourself on the program integrity side with prescription entering at market or was this just an offering you think the Medicaid program are going to be looking for in the future?

Mark Thierer

Medicaid programs are looking for and buying services like that today and that is an area that’s got significant growth. It is a area where have a number of options including partnering with some market leaders and building based on our technology handshake with these states building some of these solutions ourselves.

So we’re in discussion with a number of very large states because fraud waste and abuse is a great big problem in the Medicaid space, much larger than almost anywhere else in Healthcare and there is a lot of money to be re-cooped and participating in some of that savings is an attractive segment.

Tony Perkins - First Analysis

So you would be looking to partner or would you be looking to have an offering in that space or is it open at this point?

Mark Thierer

Its open, we can – we got a couple of ways we can skin the cat in that segment and we’re evaluating our alternatives and talking to our customers right now, that’s always been one of the best ways for us to bring new product in market and that is get a great understanding of what the client is looking for and then evaluate building it or partner with some of the delivery. We’re pretty good at that.

Tony Perkins - First Analysis

Thanks Mark.

Operator

Next question comes from Michael Minchak from JPMorgan. Your line is open.

Michael Minchak - JPMorgan

Thanks and good morning. Just a couple of questions. First obviously we have a couple of very nice wins on the health plans side. Can you talk about what are the key factors that has been driving your profession in that Customer segment and what’s really differentiating you from that competition?

Mark Thierer

Yeah, Michael, the first thing is each of these health plans has a unique way that they want to implement managed pharmacy. And some of them want exit the business and turn the keys over to our company to basically run suit in that the entire managed pharmacy footprint. Others are looking to retain perhaps formulary management or their clinical programs and services. Some of them might want to retain the contracts with the pharmaceutical manufacturers. In fact, I would suggest that everyone of these health plans, a couple of which we’ve not announced, they all look different.

We’re not selling a black-box, one side split into the health plans base. So if the customer wants to build an architect their own discreet PBM offering then they’re talking to us because that is our model. We are all about flexibility in customization. We’re selling in the open market, we’re talking about flexibility in customization which are two words that the traditional PBM model but those are not worth but then used along the way. So that’s how we’re winning.

It’s basically being either to the business with being flexibility and customizing the solution around that you need to go – that health plans you need this.

Michael Minchak - JPMorgan

Great and then just a second question around the healthcare key business, is there recall Walgreens PBM runs your Rx claim platform at those CVS Caremark PharmaCare business. Given their potential fail at the Walgreens asset and CVS's goal to move to one platform overtime; just wanted to get some color on those relationships. Are they on a license or ASP basis and how impactful that would it be to the health criteria as opposed to if those contracts were to potentially go away overtime?

Mark Thierer

Yeah, this is Mark. So we don’t – I prefer not to comment in detail about our clients, specific client relationships. I’ll just tell you with that a long relationship with Walgreens, it is a license relationship and we enjoyed a great working relationship and as we had expected continue to talk to them about how to drive improvements in their business. The CVS Caremark relationship similarly is a license relationship and there are up doing what they’re doing relative to their platform consolidation. So from a materiality standpoint, these are both very small contributors to our P&L.

Michael Minchak - JPMorgan

Okay. Great and then finally just a quick follow-up on the healthcare IT to PBM conversion opportunity. I’m not sure if I missed it but did you get an update on how many potential targets are still left there within your customer base?

Mark Thierer

Michael like I said, we’ve got a half dozen targets that we are continuing to pursue.

Michael Minchak - JPMorgan

Great. Thanks for the comments.

Operator

The next question comes from Brooks O’Neil from Dougherty & Company. Your line is open.

Brooks O’Neil - Dougherty & Company

This is on a great quarter. Can you just refresh our memory about any significant handing renewals that will come up in 2011?

Mark Thierer

Brooks, this is Mark. Actually, no top ten clients are due to come up to my knowledge herein 2011. So we’re in pretty good shape.

Brooks O’Neil - Dougherty & Company

That’s great. And then I guess I will just leave you with fairly big one and insane, clearly over the last two years earnings have frequently surprised all of us. I suspect at least primarily driven by your success with the NMHC integration but also obviously that sitting from strong internal growth and good management of the business. So, I guess my question is how would you characterize SXC today and in particular as you look forward as it relates to are you becoming a more mature, more predicable, more consisting company or do you still think there are meaningful opportunities for outsized growth given the profile of business wins and M&A opportunities you see today.

Jeff Park

Yeah Brooks thanks for the question. I guess it's kind of a strategy question and our positioning; we have been working very hard to build a platform that’s scalable here with the expressed purpose of competing for bigger and better opportunities and a broader range of markets. So, today I would have to say I think we have more opportunity in front of us than ever in our history.

And our opportunity to be a disruptive player in both the traditional space and in some segments where there is not a lot of competition including workers compensation, workers' compensation, hospice, cash card, managed Medicaid and obviously fee for service Medicaid. These are segments with a lot of running room. So, we are not talking about 2011 guidance but we this business has a lot of running room.

Brooks O’Neil - Dougherty & Company

That’s great, that’s what I expected, that’s what I am counting on. So, congratulations again. Thanks a lot.

Operator

Next question comes from Michael Baker from Raymond James. Your line is open.

Michael Baker - Raymond James

It seems like for some of your more high profile wins in the managed care space that they may have come from a specific vendor and I was wondering if you could give us a sense of whether or not that has more up for renewal next year than they have had this year?

Mark Thierer

Michael we have won a few health plans from specific vendor but candidly we have been taking health plans from a number of different players and the short answer is yes to your question. There are other opportunities that are coming up next year. We don’t focus as much on who has got them today. We are really more focused on what do they need and do we line up well from a service delivery model and so that’s kind of how we qualify our prospects.

Michael Baker - Raymond James

And then I had another question on managed care space, earlier in the year you talked about a number of opportunities emerging obviously. You have had some success, have you seen situations where a health plan stuck with their existing vendor for say just extended a year dealing with the fact that health reforms still hasn’t laid out in a lot of detail. So, I was just wondering if there maybe even more opportunities next year with them instead of signing renewals for three years maybe just one year to get more clarity on the reform dynamics.

Jeff Park

Yeah Michael this is Jeff, with some of the grandfather in causes that were in place. Many people weren’t necessarily changing their medical and that type their pharmacy benefits as well this year. I’m not sure some of those decisions that get extended with incumbents if they were extended for one year renewals to sort of match the sole purpose of this grandfather and causes or whether they are extended into three years but I think you’re going to see some more activity next year and then the following year. People start to get prepared more for this new live that are coming in.

Michael Baker - Raymond James

Okay. And then I just had one final one with respect to that, a rumor the transaction that’s out there, is it safe to assume that it would be for a male and retail and not specialty?

Jeff Park

Michael, this is Jeff. We’re not going to comment on any particular properties with rumors but –

Michael Baker - Raymond James

All right, thanks.

Jeff Park

Okay.

Operator

Your final question comes from David Larsen. Your line is open.

David Larsen - Leerink Swann

With the new recently announced win that starts April 2011, 720 million over three years; it's about 400,000 lives, is that correct?

Jeff Park

That’s right.

David Larsen - Leerink Swann

Okay. So I think HealthSpring has about 500,000 lives and HealthSpring will generate a billion in revenue. It just seems that the new win, the revenue number of roughly 240 million a year is a lot lower than HealthSpring's billion even though the number of lives is about 80% of the number of HealthSpring lives. Can you may be just sort of give some detail on why there's a discrepancy or you're doing things for HealthSpring but you're not doing for these new clients?

Jeff Park

No. The HealthSpring as you know has got PDP and MAPD lives so they're – if you're a PDP, you got a high utilizing amount of prescriptions and that's why you can see a disproportionate number of prescription base on the lives that are covered. Even normal kind of commercial plans and the traditional business usually have the relationship every life can have 10 to 12 prescriptions per person and that gets to be significantly higher for people over 65, they can be close to 20 to 40 prescriptions per person and that's why you can see a higher utilization on those Part D lives.

David Larsen - Leerink Swann

Okay. That's very helpful. Thank you. Are there any additional services down the line that you think you might be able to go for which is new clients starting in April that they're not sign off for right now?

Jeff Park

Yes. There are and they include mail order, specialty and clinical services, including our integral product and a bunch of intervention program. So that's the one thing that we really like about this new client and it's really kind of our pieces which is use security's clients and you can start what the claims platform if you'd like but the notion of getting them in sort of in the house and then pulling through other products and services from the menu, that is our model. So yes, that new win has us some runway as well.

David Larsen - Leerink Swann

Okay. That's great. And then in the past you've talked about the size of EBITDA sort of potential target acquisitions, I think you mentioned may be 30 million in the past. Would a 100 million in EBITDA be sort of out of the question or is that something that you might consider?

Jeff Park

We look at anything, that's the short answer. We're not looking at when I talk about what the average size of the mid-market PBM, what I've talked about is the mid-market PBMs range in size. The NMHC acquisition which was a mid-sized PBM had revenues of around 850 million and roughly 12 million in EBITDA but a normal mid-sized PBM with 850 million in EBITDA can have closer to 20 to 25 million, and 850 million in revenue can have 20 to 25 million in EBITDA. The properties are all different, some large, some small and we're going to look at anything that would make sense from a fit and an accretion perspective.

David Larsen - Leerink Swann

That's super helpful. And then just my last question. On the billion in HealthSpring revenue, some of that is already started in '10, I think, right? So, just roughly speaking, how much of that billion is still sort of set to go for 2011. Just roughly speaking. I mean, is it like 80% of that billion will be recognized in ‘11 or more?

Jeff Park

The account starts January 1st, and you will see almost all of the $1 billion move through. The business that we started in 2010 is related to their specialty growth and specialty scripts. We initially had targets that we talked about to trying to drive $10 million to $20 million of specialty revenues from HealthSpring in 2010.

David Larsen - Leerink Swann

Okay. That's super. Thanks so much.

Jeff Park

Okay.

Operator

This concludes the question-and-answer period on today's conference call. I'll turn the call back over to the presenters.

Mark Thierer

Well, great. I want to thank everyone for joining us today and for those of you who would join us at our Analyst Day. We will see you on November 16. Thanks and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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: transcripts@seekingalpha.com. Thank you!

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: transcripts@seekingalpha.com. Thank you!

Source: SXC Health Solutions CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts