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Executives

Mark Thierer - Chairman and Chief Executive Officer

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

Analysts

George Hill - Citigroup Inc

Sera Kim - GMP Securities L.P.

Matthew Galati - UBS Investment Bank

David MacDonald - SunTrust Robinson Humphrey, Inc.

Glen Santangelo - Crédit Suisse AG

Elliot Feldman - Barclays Capital

Eugene Goldenberg - BB&T Capital Markets

Amanda Murphy - William Blair & Company L.L.C.

Anthony Vendetti - Maxim Group LLC

Michael Minchak - JP Morgan Chase & Co

Tom Liston - Versant Partners Inc.

Constantine Davides - JMP Securities LLC

Brooks O'Neil - Dougherty & Company LLC

SXC Health Solutions (SXCI) Q1 2011 Earnings Call May 5, 2011 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SXC Health Solutions Corp. 2011 First Quarter Results Conference Call. [Operator Instructions] Listeners are reminded that portions 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 the 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.

I would like to remind everyone that this call is being recorded on Thursday, May 5, 2011, at 8:30 a.m. Eastern time. I would now like to turn the conference over to Mr. Mark Thierer, Chairman, President and CEO. Please go ahead, sir.

Mark Thierer

Good morning, everyone, and thank you for joining us on today's call. This morning, we issued our 2011 first quarter financial results by press release, and a copy of those results are available on our website, sxc.com.

With me today is Jeff Park, our EVP and CFO. I plan to summarize the key events of the year-to-date, and then, Jeff will review our financial results for Q1 and the outlook for the full year. I'll then close with a few comments, and we'll open it up for Q&A.

Well, we are off to a great start in 2011. We surpassed the $1 billion mark in revenue in the first quarter, which is a significant milestone in the SXC growth story. That represents growth of more than 140% over the same period last year and twice the revenue from 4Q 2010. And we're pleased to report that we are carrying that momentum forward.

Last night, we announced a 4-year PBM contract with Bravo, a wholly owned subsidiary of HealthSpring, which goes live January 1, 2012, and represents approximately $1 billion in annual pharmacy spend. The Bravo win is a very important win for us and is a direct result of our successful working relationship with HealthSpring. This contract significantly expands our already strong presence in the Medicare space, as Bravo offers Medicare Advantage plans in 5 states and the District of Columbia, as well as Part D PDP plans in 43 states and through these plans, Bravo Health serves over 500,000 Medicare members.

Under our contract, Bravo will be utilizing a similar suite of PBM services as HealthSpring does, including specialty pharmacy, retail network management and Medicare compliant services. And just like our HealthSpring implementation, we will first begin to initiate specialty pharmacy services, and we're in process right now through mid-2011, with the implementation of PBM services to full suite beginning January 1, 2012.

Taken together, HealthSpring and Bravo represent over 1 million Medicare Part D lives. And clearly, HealthSpring has emerged as a major player in the Medicare market, and we are delighted to have earned their business.

Stepping back, from a marketplace perspective, we continue to see more and more health plans looking for more flexibility and control regarding their specific go-to market strategies, and SXC is well positioned to take advantage of these unique needs. To that point, the Health Alliance Plan of Michigan agreement, that we announced a couple of weeks ago, is a 3-year HCIT service contract in which we will provide a full suite of flexible PBM tools, including RxAuth, RxBUILDER, RxMAX, RxEXCHANGE and Zynchros, to their 500,000 commercial and Med D members, effective January 1, 2012. Health Alliance represents another HCIT opportunity, with future pull through potential for expanded PBM services.

In the managed care space, we are seeing a resurgence of traditional HCIT opportunities, and SXC is at the table, leading these discussions with some of the largest payers in our industry. These payers are demanding flexible solutions that can offer a combination of tools and customized PBM services. SXC is capitalizing on the market demand, and Health Alliance is a great example of the opportunity that we see emerging in this market. Clients are telling us that it is, in fact, our unique business model that differentiates SXC and allows us to leverage our technology assets to bring on new business where we can layer on PBM services over time, as they need them.

In terms of HCIT to PBM conversions, we were able to successfully convert another one of our installed HCIT clients to our full-service PBM offering in the first quarter. Within the state fee-for-service Medicaid market, we announced a 5-year contract to provide PBM services to the state of Nevada's 180,000 Medicaid members.

SXC will be a subcontractor to HP Enterprise Services for this 5-year deal, which has two 2-year options for a total contract length of 9 years.

We will administer the state Medicaid's pharmacy transactions and help to manage the state's rebate administration program, prior authorizations, e-prescribing, as well as the MMIS integration.

We are driving what we see as an exciting new trend in the state fee-for-service Medicaid space. The Nevada contract represents our first exclusive contract for specialty pharmacy with the state Medicaid plan.

Now, specialty pharmacy is an area that has traditionally been unmanaged within the state fee-for-service market. And as you know, the financial challenges each state faces today are an opportunity for SXC to introduce new solutions, such as specialty pharmacy management, to help these programs more effectively manage their pharmacy spend. The Nevada win demonstrates our ability to effectively build on our growing presence in the fee-for-service Medicaid space, and it validates our recent acquisition of MedfusionRX.

We expect the state fee-for-service Medicaid business to continue to grow as there are a number of opportunities in front of us, and we are well positioned with a strong track record of quickly delivering meaningful results to these states. In fact, in addition to Nevada, we were able to successfully sell another of our current state Medicaid clients, an exclusive specialty pharmacy contract in the past quarter.

In addition to these significant wins, we've put on the board approximately $75 million of incremental new business from other sales in the first quarter of 2011. And while individually, these new contracts are not material to our results, taken together, they build upon the very strong start that we've had in this year's selling season.

Last year's 2010 selling season was, in fact, the best in our company's history, and this year's selling season is, obviously, off to a great start. Our sales success has been a direct result of targeting and pursuing the right opportunities. With the name recognition SXC has now earned in the market, we are getting more looks, and many of them are a great fit with our model. And at the same time, we've been able to drive up our overall win rate.

Looking back. Two years ago, we bid on a lot of business, and we won a handful of new customers. And then last year, we bid on even more business, and we, in fact, won even more. But this year, we are competing at a whole new level. We're competing for larger scale deals in every one of the markets in which we serve. It's really a validation of our ability to engage with our prospects, build the right solutions and close on those opportunities. I think the quality of our sales team, along with our improved bids and proposal responses and our best and final efforts are driving measurable and better sales results today

Now, with regard to current clients, we're continuing to focus on maintaining our 99% record client retention rates. We recently held a 2-day client advisory meeting in San Antonio where 100 of our largest customers joined us to participate in discussions of our new trends and solutions with the SXC leadership team. This annual meeting is an important part of our account management and retention strategy, and the feedback from this year's conference was really good.

Internally, the SXC organization is aligned around the idea of CLIENTS FOR LIFE, and with initiatives that we've built centered around operational excellence, client member focus and ultimately, retaining 100% of our customers. And we have aligned incentives for our employees, as I've mentioned earlier, by rebuilding the organization's compensation plan to reward client satisfaction and client retention.

Shifting gears. On the acquisition front, our most recent acquisition, MedMetrics, a middle-market PBM located in the Northeast, and we announced this deal in April, is really, I think, a great example of the SXC client life cycle. MedMetrics was initially an HCIT client, 7 years ago, when we brought them on initially. And we expand it to a full-service PBM relationship in 2009.

Our solid partnership with MedMetrics and the close working relationship we built over the years allowed us to take the next logical step of acquiring the company outright. We're bringing on a talented management team from MedMetrics, and we're excited about the footprint the company provides us in the Northeast region.

The MedMetrics acquisition is an affirmation of our strategy to acquire niche, middle-market customers and leverage the efficiencies of a single operating platform with the opportunity to drive additional services such as mail, specialty, rebate services and others into their existing accounts. We continue to be active in evaluating other acquisition targets and have the financial and operational capacity to move on them quickly.

So with that, I'll turn the call over to Jeff to review our financial results

Jeffrey Park

Thanks, Mark, and welcome, everyone. Q1 was another strong quarter for SXC. We generated record revenue growth with the full implementation of HealthSpring, converted another HCIT customer to our full-service PBM offering, and announced the acquisition of our largest customer from 2010, MedMetrics. Based on this early activity, we are raising guidance for the 2011 full year period, which I will address in a moment.

Revenue was $1.1 billion for Q1 2010 (sic) [2011], an increase of 143% on a year-over-year basis. PBM revenue for Q1 increased by 151% on a year-over-year basis and 114% on a sequential basis. The increase in revenue is primarily due to the addition of HealthSpring and other new customers and includes another successful HCIT to PBM conversion during the quarter, as well as the expansion of our Specialty Pharmacy business.

Adjusted prescription claim volume for the informedRx division was 21.3 million in Q1, compared to the 12.6 million recorded in Q4 2010. As we discussed on previous calls, we are now reporting our eligible mail order penetration to allow a direct comparison to previous periods.

The eligible penetration figure excludes clients like HealthSpring that did not use mail order. Our eligible mail order penetration was 11.5%, which is essentially flat during the period, compared to Q4 2010. The new plans that went live for Jan 1 have lower mail utilization, but we will continue to focus on driving mail in our mail eligible plans, and we feel this is a great opportunity for us into the future.

Our industry leading generic dispense rate during Q1 was 77.7%, which is an increase from 77% in Q4 2010. Generics continued to be a critical component of cost control for our customers. The pipeline of new generics remains robust as more than 142 billion of branded prescription drugs are expected to come off patent in the next 5 years and will continue to be a major driver of our PBM business.

HCIT revenue was relatively consistent in Q1, increasing 4% compared to Q1 2010. HCIT revenue was down relative to Q4 2010, as we continue to see slight fluctuations in HCIT revenue due to performance awards and professional service projects on a quarterly basis, which impacted the sequential comparison in the quarter.

However, as Mark said, we have seen an increased level of activity within the HCIT unit. New business opportunities, including the Health Alliance Plan win we announced last month. We continue to pursue HCIT leads as part of our ongoing sales initiatives.

Gross profit increased by 27% on a year-over-year basis and 11% on a sequential basis. When considering the sequential comparison, remember last quarter, we outlined we have received $3.5 million during Q4 2010 related to one-time awards or payments that are not a quarterly occurrence. Gross profit margin for Q1 was approximately 6% compared with 11% in Q4 2010.

As has been the case in previous quarters, the HCIT to PBM conversions impact our overall margins. As PBM business carries a lower margin percentage, gross profit margin was also impacted by the addition of HealthSpring business where the gross profit percentage related to it, significantly lower than our average. Although both HCIT to PBM conversions and new sales can be profit percentage dilutive, they are accretive to gross margin dollars and EBITDA.

Gross profit for adjusted claims for the PBM segment was $2.43 in the quarter compared to $3.44 last quarter. Adjusted EBITDA in Q1 was $35.2 million, an increase of 27% on a year-over-year basis.

SG&A expenses in Q1 2010 increased by 29% on a year-over-year basis and 10% on a sequential basis. The change in SG&A is primarily due to the ongoing costs related to the Medfusion acquisition and additional resources to support the growth of the new business. We expect SG&A to remain relatively consistent. However, we expect it to move up slightly as we get ready for our January 1, 2012 go-live.

In terms of cash generated from operations, the Q1 period in each year is impacted by the timing of pharmacy payments and client receivables. Accounts receivables were up in Q1 due to the increased HealthSpring revenue. Following the quarter close, we received approximately $31 million. So you can see one day can make an impact on our cash flow.

The days sales outstanding for the quarter continued to improve, moving down to 16 days sales outstanding compared to 21 days in Q4. During the remainder of 2011, we expect the timing for payables and receivables to normalize just as they did in 2010, and we have consistently proven the ability of the business model to generate strong cash from operations.

At March 31, 2011, we have $326 million in cash compared to $321 million at December 31. Mark mentioned the announced acquisition of MedMetrics. In terms of timing, we expect the transaction to close with the next 30 days. We have replicated the integration process from our earlier acquisition and appointed a team that is implementing 30-, 60- and 90-day action plans, and those plans are tracking on schedule.

MedMetrics is a great acquisition for us as it represented our largest client in 2010, and it's good business whenever you can secure that type of revenue and margin on an ongoing basis. Our ability to sell additional savings such as mail, specialty and rebate services represent the upside for us in the future.

Based on our Q1 financial results, we are raising our 2011 full year guidance. Our revenue forecast is $4.3 billion to $4.5 billion for fiscal 2011 versus the prior estimate of $3.5 billion to $3.7 billion. The midpoint of the range implies a growth of 131% over fiscal 2010. Our 2011 target range for adjusted EBITDA is $165 million to $171 million versus the prior estimate of $161 million to $167 million. The midpoint of the range implies a growth of 39% over 2010.

The full year target range for our fully diluted 2011 GAAP EPS is $1.40 to $1.47 versus the prior estimate of $1.35 to $1.42. The midpoint of our EPS guidance would imply a 39% year-over-year growth. With respect to our non-GAAP adjusted EPS guidance, on a diluted basis for 2011, we are estimating the range to be $1.55 to $1.62 versus our prior estimate of $1.50 to $1.57. Adjusted EPS excludes all the amortization, which, for 2011, we expect to be $15 million or approximately $0.15 a share net of tax.

Q1 was a great start for 2011 for us. With sequential growth of 108% in revenue and 13% in adjusted EBITDA and resulting increase in 2011 guidance. The underlying fundamentals of the PBM industry remains strong, with increased pharmacy spend and utilization, the introduction of new generics and biosimilars, the increased prominence of specialty pharmacy treatments, as well as healthcare reform. Each of these components are causing payers, governments and members to search for the cost control, reporting and flexible solutions that our technology platform and PBM services offer.

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

Mark Thierer

Okay. Thank you, Jeff. Our results in the first quarter, I think, make it clear that SXC is competing at a whole new level across all our major markets. We've delivered record growth, multiple new contract wins and important acquisitions, including the recent acquisition of MedMetrics. Taken together, these factors put SXC in a great position to make 2011 a very good year indeed.

We have all the components in place to compete and win new business, and we're just getting started. Here at SXC, it all starts with our technology. Early on, we established our business by building and implementing technology solutions that enabled our clients to implement complex and dynamic plans. We've taken that same discipline and mapped it to our PBM implementation process to effectively plan and execute very large and complex clients, such as HealthSpring, Bravo and OPTIMA. SXC's unique business model, which is utilizing our technology platform to deliver flexibility and customization to multiple markets truly sets us apart from our competition.

We're pleased with our results, and we like our position as the technology leader in the PBM marketplace. For a growing number of customers, the SXC model is the PBM business model of choice. And with that, I'd like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc

I don't normally say this but, nice quarter. Jeff, let me ask you a financials question. It looks like the HealthSpring business that came on in the first quarter came on at a gross margin that was lower than what you had guided to for the business at a normalized run rate. I guess how should we think about the ramp of the gross margin in that business as we go throughout the year? And then as we think about the Bravo business rolling on in 2012, should we expect something similar?

Jeffrey Park

The new revenue that's coming in from HealthSpring's are a really admin fee only, so we expect the total business from HealthSpring's to come at a slightly lower percentage than our initial view as the business is much larger. But with more lives, we're focused on selling more specialty and working towards these performance awards as we move through the contract. With respect to the new business that comes in from HealthSpring's and the Bravo for 2012, we'd expect it to follow the same pattern that I sort of outlined.

George Hill - Citigroup Inc

Okay. And congratulations on the Nevada business, where you guys tend to be extremely well positioned to pick up more components of the Medicaid market. We know that the Florida RFP is out right now. I guess, can you talk more about the environment that you're seeing there, where there are a bunch of these states that kind of have these captive health plan type situations that are looking to farm out the PBM business?

Mark Thierer

George, it's Mark. We are feeling pretty good about what's happening in the state Medicaid space and our current footprint. And we gauge that by the -- on 2 fronts. One, it's the expanded dialogue we're having with our current clients, and it goes far beyond just selling dedicated specialty pharmacy to these customer sets that basically haven't even looked at managing specialty. That's a trend that we are driving and we like a lot. Obviously, a nice margin driver in what is already a high gross margin contributor here to the business. But we're talking to them more broadly about other tools and other services in the fraud, waste and abuse space and really driving collections and better cash management, as well as pharmaceutical spend management in these markets. And so with our current installed customers, we've taken the level of dialogue to a whole other level. And as a result, we are looking at every single new opportunity for a Medicaid customer that we don't currently have. So we're active on that front and obviously, we don't comment on specific opportunities, but we like our chances.

George Hill - Citigroup Inc

Okay. And then just one last one. Sounds like the Hawaii RFP has kind of finally made it out. I know about all the issues that have gone on with the trustee situation in the state of Hawaii. Maybe can you just talk about how the company feels about its opportunity to retain that business?

Mark Thierer

Yes, George, Hawaii is out and is a 2012 customer that has got an RFP on the street. We've had north of a 5-year business relationship with the state. We've got a strong implementation of a complicated plan design. We like our chances, and we're expecting to retain that customer.

George Hill - Citigroup Inc

Good deal. You guys have done a good work there. Appreciate the questions.

Operator

Our next question comes from the line of Constantine Davides with JMP Securities.

Constantine Davides - JMP Securities LLC

Just a couple of quick follow-ups here, Jeff and Mark. First, on Bravo, any additional costs required to support that agreement above and beyond what you already have for HealthSpring?

Jeffrey Park

Constantine, this is Jeff. We've obviously got the same mix of services that HealthSpring is consuming today, so some of the infrastructure is already in place. But as they bring on 500,000 new lives, we are expecting to see increases in call volumes, additional clinical support, additional account management support, so we will have some expanded costs as we move through. But we expect it to follow the same pattern as we ramped up for HealthSpring.

Constantine Davides - JMP Securities LLC

And Jeff, on the specialty side of that business, when does that start? And what's the size of the specialty at Bravo?

Jeffrey Park

Yes, we are already starting to work with HealthSpring on the same preferred provider relationship that we have with them for this new book of business. We've started work already. We're hopeful that we'll be able to see a ramp-up through 2011 for that, but the majority of the business for the size of specialty, it hasn't been announced. Generally speaking, specialty can represent anywhere between 10% to 15% of the total spend, so that should give you an idea of how big that would be.

Constantine Davides - JMP Securities LLC

Okay, great. And then just on the HCIT conversion in the quarter, when exactly did that occur? And is that sort of towards the low end or the high end of a typical conversion for you?

Jeffrey Park

It was at the beginning of the quarter, and they're all different, so I would say mid- to low end, from a size.

Constantine Davides - JMP Securities LLC

All right, guys. Congratulations on Bravo.

Operator

Our next question comes from the line of Glen Santangelo with Credit Suisse.

Glen Santangelo - Crédit Suisse AG

Just a couple of quick questions. Mark, when I was comparing your results to our model, the revenue number was -- it's several hundred million above kind of where we were forecasting. And based on your original estimates in terms of what you told us about HealthSpring, did anything change significantly from the $1 billion that you gave us early on because it seems like it was much bigger than we thought?

Mark Thierer

Right, Glen. I will tell you that HealthSpring has been executing very well as a health plan in the Medicare Part D space across all fronts. And so from an eligibility and new membership standpoint, including utilization, the overall plan did come in better than we expected. And we feel really fortunate being aligned with this company. They've done a phenomenal job, not only growing their business on a substantial rate, but kind of carving out a unique clinical and market-specific strategy in the Part D space that I think is paying them dividends in the marketplace, and we're obviously benefiting from that.

Glen Santangelo - Crédit Suisse AG

So Jeff, maybe as I think about your $4.3 billion to $4.5 billion revenue guidance, given that you're already at $1.1 billion in the first quarter, if I just run rate that with OPTIMA coming on, some of the new business wins that you've announced today, I mean, shouldn't we be thinking that, that number is going to be above that range? Or are you just being conservative there?

Jeffrey Park

Well, Glen, we just gave the guidance out this morning, so we feel confident with what we've given. We do take a conservative view on what we see. I think if you -- when you look at the first quarter, revenues in the quarter are high. You do have a lot of seasonal utilization and medications. And when you see new enrollments with health plans, when they get new members, it's not unusual to see consumption high in the beginning as these new plans start. As you did outline, we went live with the health plan on April 1, and we are expecting to otherwise see increased utilization of generics, which can soften some of the top line through the second half of the year. But we have taken a conservative view. And with more claims history and our clients, we'll be able to give you a better view of that maybe next quarter.

Glen Santangelo - Crédit Suisse AG

Mark, maybe if I could just ask one last question. Based on our model when we were looking at gross profit per script and EBITDA per script, both those metrics were well below kind of where we were modeling. You kind of touched on that a little bit maybe with the HealthSpring contract being a different type of relationship, to some extent that maybe drove those metrics a little bit lower. But as I look at the $0.33 you generated in the first quarter, compared to your full year guidance, we're going to have to see some sequential earnings improvement as the year progresses. And so should we expect those gross profit and EBITDA per script metrics to take up sequentially as we go through the year? And if that's the case, kind of what drives that?

Jeffrey Park

Glen, this is Jeff again. You can tell from our guidance, we're expecting performance to improve through the year. And so why that is, you can see -- as I mentioned, on Q4 call, in the first quarter, you can see with the new plans, the deductibles that start, those deductibles mean that members are making the pharmacy payments and that, that impacts both revenue and profitability. So as those deductible periods come through, you'll be able to see expanded margin profiles from those. So we expect to see gross profit increasing sequentially through the latter half of this year.

Operator

Our next question comes from the line of Brooks O'Neil with Dougherty & Company.

Brooks O'Neil - Dougherty & Company LLC

Congratulations on the quarter and the Bravo. I have a couple of questions. I'm just curious if you could describe in any level of specificity sort of the nature of the performance awards that you have potential to earn in the HealthSpring contract. Is that likely to be sort of a lumpy type of contribution or how would you expect that to unfold going forward?

Jeffrey Park

Sure, Brooks, this is Jeff. We have performance awards in lots of our contracts. And really, what we should do is align the incentives around not only some metrics for customer support, call members, member engagement, clinical initiatives, generic performance, basically savings and member satisfaction. So that's not unusual for many of our contracts. I don't really want to talk specifically about any one in particular, so that's something that we have across many of our customers. When you look at those performance awards, generally, what you can see is, you can see lumpy pickups on those things. Last year, we had a $3 million pick up. I think it was in the second or third quarter, the year prior was $1.5 million. And so they'll come in once you've achieve the objectives, you've agreed to the performance with your clients. And so you'll see these performance kind of pickup throughout the year and into 2012.

Brooks O'Neil - Dougherty & Company LLC

Great. And then secondly, I'm just curious. Obviously, you talked about Hawaii. Can you just talk about your relationship with Catalyst? I know -- I think that contract is set to expire at the end of this year as well.

Jeffrey Park

Sure, Brooks. As you know, we've had a very long and prosperous contract with Catalyst. That's a company that has grown very rapidly over the years, and we've enjoyed a very strong working relationship with them and fully expect to continue that business relationship. Keep in mind, Catalyst has a very strong relationship in the state markets. And these are places where, by and large, we don't spend as much time. And candidly, as Catalyst business grows, we benefit from that. So the business relationship's really never been stronger. We've got great respect for that company.

Brooks O'Neil - Dougherty & Company LLC

Just as a little follow-on, obviously, they're acquiring WHI [Walgreens Health Initiatives, Inc] That's a customer of yours as well. Is there significant IT work that needs to be done to integrate that business into their overall platform?

Jeffrey Park

Right. Well, I think questions that you've got for Catalyst, you might want to ask David and that might be more appropriate. But obviously, where there's technology requirements and our customers ask for help, that's our job. And that's a business model we like, and we're obviously available to help in any way we can.

Operator

Our next question comes from the line of David MacDonald with SunTrust.

David MacDonald - SunTrust Robinson Humphrey, Inc.

A couple of questions. There's been a lot of focus on the gross profit of the HealthSpring and Bravo business. I was wondering if you could talk a little bit about the fact that you've got a $1.9 billion top line company in '10, that's going to probably $6 billion in '12. And spend a minute just on the supply chain economics and some of the benefits you guys will see just from the significant increase in scale and when that's going to start to flow through the P&L in a more meaningful way.

Mark Thierer

Yes, Dave. I appreciate the question -- this is Mark -- because you're underneath the punchline in the importance of bringing this new client on. We can model EBITDA per script and gross margin per script until the cows come home. I'm trying to focus on driving EBITDA and earnings per share and creating shareholder wealth here and that's the one metric that we get measured on. And so the way you make money in this business is cost leverage, and you get cost leverage by increasing buy-side volume and bringing skills in that can drive cost of goods leverage. And when we bring an account like HealthSpring and then add and Bravo, you can begin to see the scale we bring to some important buying levers, including network contracting, including specialty pharmacy, including generic purchasing. The list is pretty long. And so our expectation is that we will continue to see COGS expansion through these additions of substantial new business, and it's much more than HealthSpring. And at this time next year, our buying leverage is going to be much better. So I appreciate the question because that is actually the secret sauce in this game, and we're going to benefit from that.

David MacDonald - SunTrust Robinson Humphrey, Inc.

Okay. Just a couple of follow-ups. First, on the other state that you had in another exclusive specialty, can you give us a sense, is that one of your larger states or not? And then just can you talk about, with Medfusion, the benefits that you're seeing there in terms of some incremental specialty capture with some of that new products that, that brought?

Mark Thierer

Yes, Dave, it's Mark. The state that we've not called out the name of, and we won't be doing that, was one of our smaller states. But it was a nice tuck-in win. And it's obviously -- the thing that's interesting is these fee-for-service Medicaid directors, like every other market segment, they all know each other. And they all attend the same conferences, and it's a pretty small cottage community. And we're benefiting from the buzz that comes from having gotten a real foothold here in this new trend. And the second part of your question was the benefits relative to Medfusion?

David MacDonald - SunTrust Robinson Humphrey, Inc.

Yes, just additional specialty capture. I know it brought some additional products and capabilities. Can you just talk about what that's done for you?

Jeffrey Park

Sure, Dave. This is Jeff. We are on track with the integration, particular the sales opportunities, including having given access to our clients for those limited distribution medications that, Medfusion had that previously SXC did not have. Specialty spend and the diseases that they're supporting are really a top item for all of these payers. And as Mark outlined, we are engaged with a number of prospects in our existing client base, including states who have very disjointed management of specialty and who may be seeing -- most of the specialty is getting filled either in the physician's office or included in a medical benefit or through a high-cost retail distribution model. Clients are looking at the same information you are, which is specialties taking an increasing share of the total spend in states like Nevada carving out specialty management. We feel we are really well positioned to take advantage of helping them save in these new areas.

David MacDonald - SunTrust Robinson Humphrey, Inc.

Okay. And then just one question. Just want to circle back to Hawaii for a minute. And just -- can you guys remind us when that went mandatory mail, didn't you drop a facility into Hawaii to kind of grease the skids in terms of the some of the local retailers? And doesn't that put you in a very good competitive position in terms of renewing this business?

Mark Thierer

Yes, Dave, we do have a footprint in Hawaii. What I think is most important is, the state of Hawaii is in the same kind of shape many states are, and at some level, they're even in tougher shape. The economics are tough. We've been saving this plan a great deal of money. And so through this RFP process, we are obviously pointing out the savings that we've generated over time. And bottom line is, we think we're, both from a relationship and an economic standpoint, in a very good place with the state of Hawaii. So that's a bid that's out. And the decision will be made reasonably quickly, and we're expecting to retain it.

Operator

Our next question comes from the line of Tom Liston with Versant Partners.

Tom Liston - Versant Partners Inc.

Just sort of -- for clarity on the expanded relationship with HealthSpring because you used the word expanded last night, and you mentioned of 4 years being Bravo. Can you talk about -- is it essentially one combined contract where there is incentives put together? Because the 4 years, I think, HealthSpring was 3 plus 1 and 1. Does that become 4 secure years from here on out? Or can tell us the nuances of how those contracts work, and how are they combined and so forth?

Mark Thierer

Yes, Tom, it's Mark. It's basically coterminous, and what the HealthSpring's done is effectively just folded the deal that we negotiated with them, folded the Bravo piece into that. And what it provides for is a very similar set of services that we'll be providing, in fact, identical to the folks at Bravo. What we like most about it is, really, they're using the full armamentarium that we bring to the table. And we've had a number of positive meetings with the Bravo folks and we're looking forward to that go live in 01/01/2012. And as Jeff mentioned, we're already cranked up and started on the specialty front.

Tom Liston - Versant Partners Inc.

Does this still work as two, one-year extensions or is it. . .

Mark Thierer

It's the same contract terms.

Tom Liston - Versant Partners Inc.

Same contract terms, okay. Great. And just a question that we haven't talked about in a while. You got some early success, numbers of years ago, in long-term cares, has there been anything renewed interest there? Is there anything in the pipeline that could be interesting?

Mark Thierer

With Omnicare and PharMerica as 2 very large clients in that space, those guys have 60-plus percent market share. And so we are active with half a dozen or so of the smaller players. We continue to like that space a lot. And in fact, we've added another customer that's smaller in that space. So I think you should look at that as a kind of higher gross margin, lower overall opportunity market segment where we have effectively no competition.

Tom Liston - Versant Partners Inc.

But is there still further significant opportunity within the 2 large customers you already have?

Mark Thierer

Yes. That's the area where we're really spending our time. And the answer to that is yes, we have more room to run inside both of those client footprints.

Operator

Our next question comes from the line of Matt Galati with UBS.

Matthew Galati - UBS Investment Bank

This is Matt Galati on behalf of Steve Valiquette. I had a couple of questions. A lot of mine had been asked. But what exactly -- or can you give us an update on brand drug inflation versus generic drug inflation? I guess, are you seeing much difference in terms of manufacturing pricing trends compared to prior quarters? And secondly, I didn't necessarily catch the 5-year generic launch pipeline. I was wondering what that was. If you could, comment a little bit on that anecdotally.

Jeffrey Park

Sure, Matt. This is Jeff. With respect to pricing for brands and generics, we're really not seeing much change. As you know, last year, there was pretty substantial increases in brand prices that the manufacturers were passing along, principally due to the fact that they had been pushed hard from a rebate perspective. And so we're continuing to see that. We've not noted any difference in trends in the first quarter and not really expecting much difference for 2011 than what we had seen last year.

Mark Thierer

And Matt, I'll just comment on the pipeline here for generics. It's really pretty substantial and obviously, the industry's going to benefit from this. It's in the range of $30 billion in 2012 and it ranges anywhere from $6 billion to $15 billion per year for the coming years. So for the next 4 or 5 years, the branded drugs going off patent and flipping to generics is going to fuel the profit lever inside our business pretty substantially and candidly, every other player in this market as well.

Matthew Galati - UBS Investment Bank

Great. I'm not sure I caught it. But did do you mention an aggregate number for those 5 years?

Mark Thierer

Yes, in the prepared remarks, we said more than 142 million of branded prescription drugs are expected to come off patent in the next 5 years.

Operator

Our next question comes from the line of Sera Kim with GMP Securities.

Sera Kim - GMP Securities L.P.

So it looks like you've already had a great start to 2011 selling season with Bravo and a couple of these other state deals. I'm just wondering not including these deals that have been already won, what does the size of your pipeline look like today relative to what you're looking at the same time last year? And just secondly, I'm wondering if you can describe your level of confidence at winning these deals i.e. are the opportunities in the pipeline largely in your sweet soft spot of targeted customers or are you seeing -- starting to see the big 3 encroaching to your targeted market segments as you go after these larger scale deals.

Mark Thierer

Appreciate the question. This is Mark. Today, our bids and proposals area is oversold. We have more opportunity in our pipeline today than we've ever seen. And so the spot we find ourselves in is an enviable one. We're being very careful about picking our spots and where we're really moving in to win. And this is something where I'll tip our hat here to our sales team, as well as our entire client-facing side of our business. When you can get a spot where you're discerning about the customers that you want to engage in go-and-get, that's a very good situation. So we track 5 market segments in which we compete. We've got live opportunities in every one of them, and a good majority of them are larger opportunities than we've ever seen in the past. And so we've got a very good feeling about our pipeline, and I won't comment about -- on our projected win rate, but we've been driving our win rate up year-over-year, as I said in my prepared remarks.

Sera Kim - GMP Securities L.P.

That's great. And just last question, with CVS Caremark closing its deal with the Universal American Financial, I'm just wondering. Do you expect the competitive landscape to change at all in the Medicare Part D market? And just wondering if you can kind of remind us what SXC's competitive administrators are in this market, and how you expect to maintain a good share in this segment.

Mark Thierer

Well, yes, the part D market is a very dynamic place to be, and we like it a lot. If you take a step back and you look at the current clients that we service and then the current HCIT customers who have footprints in Medicare Part D, depending how you do the math, we're clearing or touching 1 out of 3 to 1 out of 4 Medicare Part D claims nationally. So you could argue that we have the largest single footprint in the business touching these Medicare Part D claims. And so beyond technologies, though, in order to really have a sustainable model, you have to be strong in compliance, strong in clinical, strong in reporting and obviously, be able to deal with the CMS changes that are very late breaking almost all the time. And so for us, our primary competitive advantages is that we are, in fact, a CMS approved PDP. We have been for years. We do not take that to market with an individual product. So that when we partner with clients like HealthSpring, we bring domain expertise at a whole other level and at the same time, don't compete in the open market for their business. And that is a very unique differentiator that we bring to the marketplace. So we're expecting to see, especially in the Medicare Advantage market, continued growth. That's a very hot segment. It's lining up very nicely with this ACO model that's being talked about. And our business strategy is very clear, and that is, we want to continue to support our clients from a back-office standpoint and making sure compliance is first done front and center as we deliver our service offering to these clients.

Operator

Our next question comes from the line of Michael Minchak with JPMorgan.

Michael Minchak - JP Morgan Chase & Co

Two quick questions. First, I just wanted to get some color. What were the biggest factors underlying the increase in the EPS guidance? Is it new customers, cross-selling services, new convergence? Just trying to get some incremental insight there. And then secondly, a question on the HealthSpring specialty volumes. Now, that you're about a year in on the Specialty side, can you talk about the trend there, how successful you've been with your outreach strategy?

Jeffrey Park

Sure. Michael, this is Jeff. With respect to the principal driver for the EPS increase, it's been growth in the top line. So when you look at the higher sides of the HealthSpring and other business that we brought on, that's the principal reason for the EPS expansion. With respect to our specialty franchise and our ability to penetrate into our existing client base, we've been -- when we started this process, we had talked about being able to achieve $10 million to $20 million of specialty sales from HealthSpring's business in the last year and moving in to sort of closer to $40 million or $50 million this year. And we are pleased with how we've been moving in that regard. As a preferred provider, we are working with them to ensure that we can help them save the most money on the prescriptions that are getting filled and have been very pleased with our ability to get that uptake. So we're on track.

Operator

Our next question comes from the line of Elliot Feldman with Barclays Capital.

Elliot Feldman - Barclays Capital

This is Elliot filling in for Larry Marsh. Just first, quickly broadly on the M&A environment. I know, Mark, you mentioned you guys continue to be active there. Correct me if I'm wrong. I think last year, you mentioned you guys want to focus more, during the selling season, on kind of renewing new business and -- it should be, bringing on new business and renewing existing clients. So is that the kind of thing that over the selling season, you'd be less so focused on M&A and maybe we'll expect some of that towards the back half of the year when the selling season is over, as we sort of enter the heart of the selling season here?

Mark Thierer

Elliot, it's Mark, and I appreciate the question. We've been doing this for a long time and the whole idea of making acquisitions and timing it appropriately with the selling season is very important to us. The best way to grow a sustainable business is to win new business and grow organically. And obviously, you can create kind of a step functions in your customer base and your earnings leverage through acquisitions. So we think a lot about timing and what makes sense when, based on our sales pipeline and our overall kind of status of the business. So having said that, we are full stride on looking at properties. I was just paging through and looking at the half a dozen deals or so that have gotten done in the last 18 to 24 months. And we've gotten a couple of those done, and they're going to pay dividends for the company long term. And so, yes, we're very active looking at mid-market properties that could add a lot of value to the franchise here, and we've been pretty clear about that strategy.

Elliot Feldman - Barclays Capital

Okay. And just a quick one for you Jeff, if I could, on IT to PBM conversions. You guys mentioned the HCIT conversion to PBM in Q1 that helped the growth there. So wondering if any HCIT to PBM conversions are embedded in your guidance for 2011 based on what we saw here in 2010. You mentioned you already secured some accounts here this year. So I'm just double checking that any additional conversions would sort of be incremental to your guidance. Or are there some sort of assumed in that number for 2011?

Jeffrey Park

The only thing that we put in our guidance is business that we've got contracted for, so if we can -- if we are successful at converting through the year other HCIT accounts, those will be positive for the guidance.

Operator

Our next question comes from the line of Anthony Vendetti with Maxim Group.

Anthony Vendetti - Maxim Group LLC

Can you talk about how the specialty cross-selling is going into HealthSpring? And then is the Bravo specialty opportunity similar? And then, obviously, with the gross margin where it is now, should we see sequential improvement in that as we move throughout the year?

Mark Thierer

Sure, Anthony. This is Mark. So our strategy for driving specialty inside the HealthSpring service areas has been pretty focused. Number one, we're focused, on the high writers, the doctors who are providing the bulk of the specialty meds; number two, we're focused on the chief medical officers in each of the MSAs, in which that health services are delivered at HealthSpring. We've also build out a direct call telemarketing, a functionality to touch each of the physician practices where these referrals are destined. And then finally, we've built out our staffing on the sales side for the hand-to-hand combat piece of pull-through. And so we've been after that for a year at HealthSpring. And we are, as Jeff mentioned, feeling good about our progress in pulling through the specialty meds. And that same model will be duplicated for Bravo, and we have begun that ramp as we speak. We really like this aspect of the business because it is higher gross margin for the company. It's actually an area where utilization's growing very rapidly and the need for aggressive management is big. So we like the trend, starting with HealthSpring, and we're taking that same approach in the balance of our book.

Anthony Vendetti - Maxim Group LLC

Okay. And then the overall gross margin as we move forward throughout the year?

Mark Thierer

We expect it to expand. The guidance suggests that gross profit and EBITDA both continue to increase through the rest of the year.

Operator

Our next question comes from the line of Amanda Murphy with William Blair.

Amanda Murphy - William Blair & Company L.L.C.

I just had a quick follow-up. The first one, Mark, you made some comments earlier about working with Medicaid to control fraud, waste and abuse. Could you provide a little more color on what you meant there? And it's sounds generally like Medicaid is more interested in sort of managing pharmacy spend. Is that fair?

Mark Thierer

Yes, Amanda. I mean, the Medicaid market is kind of a bit of green field. There hasn't been much in terms of advanced pharmacy management deployed in this space. The big, very experienced pharmacy benefit managers haven't even entered this market place. So what we're seeing is an opportunity not just to manage unit costs of these medications, but also the clinical management opportunities are pretty rich. And it goes across just managing on a therapy- or a pill-specific basis into the administrative side of managing these benefits. And there is substantial opportunity in fraud, waste and abuse. A coordination of benefit work to basically just making sure payments are aligned and that the states have been properly reimbursed. And the proper payer is paying for the bill because, as you know, the state Medicaid plans are the payers' kind of at the end of the rope, payer last resort. So we see, really, a lot of running room, and we're using our technology footprint to help solve some of those problems for our largest state customers.

Amanda Murphy - William Blair & Company L.L.C.

And in terms of the services that you mentioned that are sort of beyond the pill by division, are they not provided by kind of existing players now?

Mark Thierer

I'm not sure I understand the question.

Amanda Murphy - William Blair & Company L.L.C.

So the larger guys haven't entered the Medicaid market but I'm curious, these services that you're talking about on the fraud side and that type thing, are those incremental to what's been provided in the marketplace now?

Mark Thierer

Yes. To our knowledge, nobody's providing these services. They require -- if you step back and you really think about Medicaid, there's a reason that traditional PBMs are not in the market. It is very unique. It's a technology driven market, first of all. Each state has its own MMIS system into which you must integrate the managed pharmacy piece. Secondly, rebates and the management of network, the normal cost of goods levers, they're basically the property of the state. Federal and supplemental rebates go back to the state. There's not a rebate sharing model that's out there. And the network contracts, by and large, are the states. If you look at the mail order penetration, it's generally low. I'm talking about a change in the exclusive status on the specialty side. But the biggest uniqueness, I think, is the skill set. It required to compete in the Medicaid space, and it does require a dedicated and experienced team. And we have that in our public sector unit. So I hope that helps a little bit on kind of the uniqueness of the Medicaid space.

Amanda Murphy - William Blair & Company L.L.C.

Okay. And I guess just following up to Brooks' earlier question on performance incentives. Just curious. At a higher level, have do you change your thinking about performance incentives at all or especially in kind of in front of this big generic conversion? Or is it pretty much consistent in the new selling season?

Jeffrey Park

No, it's consistent. Amanda, this is Jeff. We're focused on trying to align our incentives with our clients and making sure that as we can help them see performance improvements in cost saving, that we're aligned with them. And so that's really one of the core tenets of the performance incentives that we put into these contracts

Operator

Our next question comes from the line of Eugene Goldenberg with BB&T Capital Markets

Eugene Goldenberg - BB&T Capital Markets

Just 2 quick follow-ups. With the implementation of the HealthSpring book of business at Jan 1 2011, what's your overall book look like at this point as far as the mix between the traditional spread pricing and the past year model?

Jeffrey Park

Sure, Eugene. Prior to the go-live of HealthSpring, the mix was around 50%. So HealthSpring is going to represent a big piece of the overall, so that's going to drive that percentage down. We continue to see growth in our traditional book of business. As we've talked about before, when clients are coming in for RFPs, they're looking at a combination of all pass-through and traditional pricing. And many clients are still taking traditional pricing in the smaller end of the market. Some of the larger health plans that our more sophisticated buyers are looking for sort of a customized answer, which lends itself more to pass-through pricing. So as we bring on larger health plans, we're expecting to see more of those come on a pass-through basis with this mix of unique services that they like, and on the smaller employers, still traditional pricing.

Eugene Goldenberg - BB&T Capital Markets

And the last question is, can you please share with us the revenue contribution from the MedfusionRx acquisition in the quarter?

Jeffrey Park

We didn't break out any of the units for the quarter. When we acquired Medfusion, we announced that it had around $270 million of revenues. And so that went live in January 1. So you can get a pretty good idea of what the quarterly impact to that would be.

Operator

And this concludes today's Q&A portion of the call. I'll turn the call back over to the presenters.

Mark Thierer

Okay. Thank you, operator. Well, thank you, all, for joining us on today's call. And we look forward to speaking with you again at investor conferences in the coming months. Have a great day.

Operator

And this concludes today's conference call. You may disconnect your lines.

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