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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

Sera Kim - GMP Securities L.P.

K. Newton Juhng - FBR Capital Markets & Co.

David MacDonald - SunTrust Robinson Humphrey, Inc.

Gabriel Leung - Paradigm Capital, Inc.

Elliot Feldman - Barclays Capital

John Kreger - William Blair & Company L.L.C.

Eugene Goldenberg - BB&T Capital Markets

Anthony Vendetti - Maxim Group LLC

Michael Minchak - JP Morgan Chase & Co

Constantine Davides - JMP Securities LLC

Tom Liston - Versant Partners Inc.

Brian Tanquilut - Jefferies & Company, Inc.

Brooks O'Neil - Dougherty & Company LLC

SXC Health Solutions (SXCI) Q2 2011 Earnings Call August 4, 2011 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SXC Health Solutions Corporation 2011 Second 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 the SXC's annual information form. I would like to remind everyone that this call is being recorded on Thursday, August 4, 2011, at 8:30 a.m. Eastern Time. I would now like to turn the conference over to Mr. Mark Thierer, Chairman and Chief Executive Officer. Please go ahead, sir.

Mark Thierer

Well, thank you, and good morning, everyone. Thanks for joining us. Based on feedback we've solicited from a number of you, we've decided to modify our approach here to the earnings call this morning, and we are shortening our prepared remarks in order to maximize the time for questions, so thanks for the feedback. And with that in mind, let's get started.

We're right in the middle of the sales season, and I'm very pleased to report that we've already exceeded our plan for new wins this year. While 2010 was a record year for the company, we followed it up by setting a new company record so far in 2011. With the strong momentum continuing through Q2, we're revising components of our guidance upward today, which Jeff will describe in a moment.

So as you know, we posted a number of material contract wins, including those with Health Alliance, a health plan in Michigan, the state of Nevada's fee-for-service Medicaid plan, HealthPlus of Michigan, and Bravo, a recent $1 billion addition to the HealthSpring family and another significant win for SXC.

In addition to these previously announced wins, we have closed new business in the quarter, totaling approximately $300 million annually across several of our target markets for which we did not issue press releases. These wins represent 1.8 million new members for SXC. While the majority of the '11-'12 decisions have been made in the health plan segment, the employer and TPA selling segments are in full swing and we expect to add to what we've already accomplished. Our track record in selling and successfully implementing larger, more complex plans has opened up our pipeline to many more opportunities than we have ever seen before. What is clear to us now is as we meet with our prospects and bring in new accounts, is that the companies are in strong credibility in every market segment in which we compete.

In recent quarters, we've won many new market opportunities with market leaders in each of these customer segments. 3 or 4 years ago, some prospects and consultants did not know SXC well, and they have perceived that those are risks in choosing SXC. Today, that is simply not the case. Subsequent to the quarter, we were informed by the state of Hawaii of an impending notice of intent to award the EUTF business to another company. We're evaluating this notification to determine our course of action. If the EUTF business does move away from SXC effective January 2012, we expect the impact to be minimal.

On the acquisition front, we announced yesterday the acquisition of PTRX, a full-service PBM and a client of SXC's, along with SaveDirect, PTRX's exclusive mail order pharmacy. This acquisition is in keeping with our stated strategy to acquire assets that currently use SXC's technology platform and can be easily integrated. They've built a very effective strategy to drive high generic and high mail use in the small employer segment, utilizing plan design and high levels of customer service. Now we've known the PTRX team, as well as management, for over 5 years and we really like this business model.

The integration of Medfusion, our specialty pharmacy business, is nearly complete. We are already accruing the benefits of better access to limited distribution drugs and better buying within the biotech supply chain. We are ahead of expectations on timeframe, and we are ahead of plan in terms of volume.

The MedMetrics integration is progressing exceptionally well. As expected, we have retained 100% of the MedMetrics book, setting the stage for successful pull-through discussions. These discussions are actually well underway, and by all indications, the opportunities in this book of business are another affirmation of our acquisition model. Because of the relative ease of integration of these recent acquisitions, we are unencumbered with resource or implementation constraints going forward. And as a result, we continue to be very active on the acquisition front, evaluating a number of opportunities as we speak.

Earlier this week, we made an exciting new product launch announcement in the fee-for-service Medicaid market. This new service called eCOB or enhanced Coordination of Benefits, is the industry's first realtime electronic COB tool, improving upon the current paper-based pay-and-chase model that's available today. This tool is fully operational, and importantly, can be deployed standalone, operating independent of the claims processing platform. eCOB is deployed today and is saving state Medicaid programs significant dollars as we speak. With the current financial challenges facing every state in the country, we see significant demand for this product nationwide.

On a broader scale, we view the news of Express Scripts' acquisition of Medco as good news for our industry. On the one hand, we expect customers and patients will benefit from more affordable medications. And on the other hand, this merger creates significant opportunity for SXC to continue to offer our differentiated model to clients who prefer a more flexible and customized solution. We expect to see more and more customers interested in exploring the SXC model.

In summary, we're leveraging our company's skill and scale to win both organically and through acquisition. Our momentum in this quarter has positioned the company for a record-breaking year in 2011. And with that, I'll turn the call over to Jeff.

Jeffrey Park

Thanks, Mark. Q2 was another strong quarter. We continue to perform well across both the PBM and HCIT segments. We converted another HCIT customer to our full-service PBM offering during the quarter. And as Mark mentioned, the integration of the Medfusion and MedMetrics acquisitions have gone smoothly. Based on our level of activity, we are raising our 2011 guidance, which I'll address in a moment.

We continue to show strong revenue growth. Revenue was up 10% on a sequential basis and 153% on a year-over-year basis. The increase in PBM revenue is primarily due to the HealthSprings account, as well as OPTIMA, which went live April 1, as well as the HCIT to PBM conversion in the quarter. Adjusted prescription claim volume for the informedRx division was $22.8 million in Q2, compared with the $21.3 million in Q1 2011. Our eligible mail order penetration was flat sequentially compared to our Q1 2011. As we had discussed previously, the HealthSprings and OPTIMA plan have a lower mail utilization rate than our traditional business. Driving mail and our mail eligible plans is a focus of ours. The acquisition of MedMetrics provides the opportunity to capture mail scripts within its book of business, and the pending acquisition of PTRX and it's focus on small- to medium-sized employers augment our mail strategy.

We continue to lead the industry with the generic dispense rate which was 78% in Q2. On the HCIT front, the increased Q2 revenue includes approximately $1.5 million of one-time license revenue, resulting from the sale of some clinical intervention tools we sold to an existing customer in the quarter. Gross profit dollars increased by 17% on a sequential basis and 38% on a year-over-year basis. SG&A expenses in Q2 2011 increased by 17% on a sequential basis. The change in SG&A is primarily due to new headcount to support the organic growth of the business with the additions of HealthSpring, OPTIMA and the ramp up for Bravo, as well as additional headcount, transaction and transition costs related to the acquisition.

Additionally, we continue to drive solid growth in the adjusted EBITDA, which grew 18% on a sequential basis and 32% on a year-over-year basis. In terms of cash generated from operations, the Q2 period was impacted by the timing of pharmacy payments and client receivables. This is due to the growth in new business, as well as the quarter closing on a Thursday and some clients funding weekly on Fridays. The day following Q2's quarter-end, we received approximately $40 million in payment of our receivables.

We expect the timing of payables and receivables to normalize over the course of the year, just as it did in 2010, and we have consistently proven the ability of our business model to generate strong cash from operations. Based on our Q2 financial results, we are raising our 2011 full year guidance. This guidance does not take into account our recently announced PTRX acquisition. We will adjust guidance when the deal closes, which is expected to be in Q4, but our press release on PTRX should be helpful on how to think about PTRX's impact.

Our revenue guidance is $4.6 billion to $4.7 billion for the fiscal year 2011 versus the prior estimate of $4.3 billion to $4.5 billion. The midpoint of the range implies growth of 138% over fiscal 2010. Our 2011 target range for adjusted EBITDA is $168 million to $172 million, versus the prior estimate of $165 million to $171 million. The midpoint of the range implies growth of 41% over 2010. The full year target range for our fully diluted 2011 GAAP EPS is $1.43 to $1.47, compared to our prior estimate of $1.40 to $1.47. The midpoint of our EPS would imply a 41% growth year-over-year. Our non-GAAP adjusted EPS guidance on a diluted basis for 2011 is $1.58 to $1.62, compared to our prior estimate of $1.55 to $1.62. Adjusted EPS, excludes all deal amortization, which for 2011, we expect to be $15 million or approximately $0.15 per share, net of tax.

Q2 was a strong quarter as we continue to grow our top line revenue and adjusted EBITDA on the strength of the organic growth we've delivered, the benefits from our Medfusion and MedMetrics acquisitions are already having an impact and help to expand our scope and offer strong differentiation in the marketplace. We look forward to the integration of the PTRX, SaveDirect acquisitions and the benefits that should come with these assets. 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. Thanks, Jeff. As I've said before, the key to this business is skill and scale. The economies of scale from our recent acquisitions build upon those that we already have earned from HealthSpring, Bravo and other -- OPTIMA, as well as other organic wins. And from a skill standpoint, the caliber of the PBM leaders that we've brought into SXC are among the best in the business. With that, I'd like to open the call up to the questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Dave MacDonald with SunTrust.

David MacDonald - SunTrust Robinson Humphrey, Inc.

Just a couple of quick questions. First, can you -- just on the Medco Express, I mean you've obviously got a colossal company once this deal closes. Mark, when you look at some of the potential opportunities there, is it a case where you think some of the middle and small guys, middle market and small guys will just look for a smaller provider, higher service levels potentially? What do you expect in some of the disruptions as that deal gets closed and integrated to create some opportunities? Just a little color there.

Mark Thierer

Yes, Dave. Well, obviously, it was a pretty big splash in the industry. And you've been following our story for a long time, I've maintained that this market is bifurcated and has been for the last several years, so this acquisition that ESI has announced with Medco does not change the SXC strategy, really, at all. In my view, it strengthens our strong foothold in the middle market. And I do think that clients are going to continue to look for alternatives, I mean, obviously, they have been. What I see for us is, I do see new opportunity, and I think, as to your point, on the lower end of the client base for ESI and Medco, I think this deal will cause customers pause, I mean, there'll be a long FTC set of hoops, as well as an integration plan. This could be an 18-month window in which that I expect SXC will get more looks. And so our sales team is obviously heads down with the game plan to go after those opportunities. And just to be clear, we're going to continue to no bid, the largest mail order accounts like FEP and CalPERS. We've said from the start that this is a bifurcated market and we know where we can win. I would just say from an opportunity standpoint on a final note, I think this makes us, perhaps, the most rational consolidator in the middle market. And my guess is that this will help fuel some of those M&A discussions. Overall, I just -- I see it good for the business.

David MacDonald - SunTrust Robinson Humphrey, Inc.

And then just to follow up on that, with regards to acquisitions, when you look at some of the properties that are out there, especially the ones that are sitting on your platform, are there some interesting companies that bring you the additional tools or some things that you think could implement as best practices? Are there some things within that acquisition pipeline that you think you could plug in and leverage a whole lot better off of the bigger company?

Mark Thierer

Yes, Dave. It's Mark again. I would say that our target environment remains very rich. And we are looking in segments in which there's a lot of room to run, and I would say broadly that includes some of the niche-based PBM segments. Workers comp, long-term care, some of the fee-for-service activities, these are all higher margin, higher gross margin per claim opportunities with less traffic. And so in that respect, there are tools and books of business, a customer base that would be really additive--very additive to the company. And then in terms of right in the middle of fair way, smaller PBMs like what we've just announced with PTRX, continue to be just meat and potatoes for us, very low execution risk, great opportunity to drive synergies and really drop EBITDA down to the bottom line. And so we like the horizon in terms of targets for us.

David MacDonald - SunTrust Robinson Humphrey, Inc.

Okay. And then just last question. Jeff, I was wondering, could you give us some sense in terms of what you expect for cash from operations for the year? I realize it's a little bit squishy, given the timing of working capital. But can you just give us some ball park sense of where you expect cash from ops for the year?

Jeffrey Park

Yes. David, we generally would generate between $25 million and $30 million, $32 million of cash from operations on a quarterly basis. This phenomena when it closes and the day after collections. We'd expect to see this sort of continue to smooth out if that quarter would have closed a day earlier, last quarter it would have been $30 million. The quarter would've closed the day after this quarter, would've been $40 million. So we'd expect to see that $30 million a quarter kind of run through the year.

Operator

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

Elliot Feldman - Barclays Capital

It's Elliot Feldman filling in for Larry Mairsh. Just a couple of quick ones if I could. First, we're seeing a somewhat conflicting commentary out of your larger competitors around script utilization, and it sounds like things are fairly normal with what's going on with your own book. But just maybe can you talk about briefly what you're seeing in terms of same-store script utilization rate, if you will?

Jeffrey Park

Sure. This is Jeff, Elliot. The script counts that we look at, as you mentioned, we see a very broad array of platforms, different health plans, different market segments in our own book and across our HCIT business. And I'd say, we've been seeing very consistent, steady expansion. Utilization is certainly continuing to grow through on a year-over-year basis. I'd say the changes that we've seen have really been in the area of the mail scripts and the 90-day at retail fills where you're seeing continued increases in the 90-day fills and continued softening in the mail utilization across the industry trends. As you also know, Q2 versus Q1 or Q3 and Q4, you certainly have the healthiest top piece of the population now as we've cleared through the winter months. And so we're continuing to see good momentum in the scripts.

Elliot Feldman - Barclays Capital

Okay, got it. And I know, Mark, you talked about specialty and mail pull through strategies. Can you just provide me a little more color there, maybe how specialty cross selling is going into HealthSpring? And then maybe the BRAVO opportunity there that's somewhat similar, more so on the specialty side but maybe touching on some mail as well.

Mark Thierer

Sure. Specialty is a top 5 priority in the company. We've brought some new talent into the business that has extensive biotech and specialty channel expertise, particularly in the area of COGS. And so from a pull through standpoint, we're kind of all hands on deck, continuing to pull through, the full book of business and utilizing the Medfusion hub and scope model for what we're calling very high touch distribution model in the middle market, and that's helping us to win. To the second part of your question on Bravo, we are actually setting up in an identical drill to what we did with HealthSpring, which is in advance of the '11-'12 go live for the full Bravo plan, we are executing on a go-to-market strategy that includes physician focus, as well as working directly with the health plan's chief medical officers to get our footprint, actually, in front of the doctors and begin to direct traffic and receive prescriptions today. And so that continues to go well. Specialty is a huge focus for us and an important margin driver. To your question on mail, a little bit more of the same. We continue to drive mail order offerings across the book of business. And again, on a relative basis, we're under-penetrated, and that is obviously a cost savings drill that we put in front of clients. And in conjunction with 90-day offerings, we have an aggressive network offering. And so in that respect, we're really looking to work with the clients' wants and wishes, make sure we're meeting their needs.

Operator

Your next question comes from Brian Tanquilit with Jefferies & Co.

Brian Tanquilut - Jefferies & Company, Inc.

Mark, you've talked about, just going back to the Express-Medco deal, and you've talked about scale, so I guess the question that I have is, once this deal finally closes, if it does, and it's integrated, how do you guys remain competitive given the significant amount of scale that they gain with this merger?

Mark Thierer

Well, Brian, it kind of depends on how you look at this thing. And the way I look at it is Express Scripts and Medco were dominant competitors before this started. And data extracted what you'd argue would be the industry's best supply chain savings to begin with. And now that they've doubled their size, what will be how they add it to their competitive set. And the way I look at it is, they're going to take 18 months to clear the deck on the coming together of those organizations. And in terms of scale, really what they've done is they've effectively just short of doubled their mail-order footprint. And again, we've talked about this for a long time. That's one weapon in the arsenal of how you win in this marketplace. And it's true, they'll be by far the largest mail-order provider in the market. But what's happening in the market is sophisticated buyers make buying decisions, they're looking at total cost, they're looking at the best channel for the distribution to their members, and candidly, some of the mail-order leverage that existed in the years leading up to now has been arbitrage and competed away. And so net-net, they're a big player. We have huge respect for them. And we expect to continue to get a lot of looks and we'll win on the low-end for clients who want and need a customized and flexible model.

Brian Tanquilut - Jefferies & Company, Inc.

Got it. And then just in terms of the selling season, I don't know if you measure these metrics, but can you just maybe describe to us what kind of best and finals [ph] are you seeing now or are you getting into? Are these larger accounts? Are you seeing more investment finals this sell season compared to last year? Just something along those lines.

Mark Thierer

Yes. This is perhaps the thing I'm most pleased with, what's going on around here at SXC. The sales team is full stride. We've made great improvements in our RFP process, our bid process and our best and final processes. So I'm looking right now at the targets we have in the sales pipeline. It's north of 250 targets, and by far and away, the largest pipeline that we've ever seen at this time of year. And that's keeping in mind that we've already booked 1.8 million in new lives and well over $1 billion in new business. And so as I break the pipeline down, it's interesting that this year, just short of half of those targets are in the payer segment and I'm talking here about various kinds of managed care plans. And again, that's where we're really an emerging competitor with a very strong value proposition for these payers. And so it's public sector, it's employers, it's TPAs. We've got a very broad representation in the pipeline, but it's easily the most robust we've ever seen.

Brian Tanquilut - Jefferies & Company, Inc.

Okay. And then last question, Mark, obviously, with the United contract scheduled to go away from Medco, how are you reacting to that benefit? You guys, what, it's 2012 or 2015, when that contract finally moves?

Jeffrey Park

Yes. Brian, this is Jeff. With respect to our relationship with United, they've been a great client of ours for quite sometime. As you know, they're a licensed client. We provide them service and support around the tools and technology and maintenance with respect to it. We also provide them with a strong support of professional services. As they would look to bring on and harden their infrastructure, we're looking to continue to build and support their needs. They've got a lot of work as they're moving that big block of business in over the next 18 months. With respect to our economics as a licensed client. A majority of our licenses, when they start to move up in transaction counts, clients like buying seats [ph] need to pay for access to more and more transactions, so we'd expect to see increase in our license sales, in the corresponding maintenance and then more importantly, the ongoing service and support that we will be providing United. They're a great client and we look forward to helping them expand.

Operator

Your next question comes from the line of Tim (sic) (Tom) Liston with Versant Partners.

Tom Liston - Versant Partners Inc.

Mark, just more in the eCOB as a standalone, can you talk a little bit about how do you go to market with that? Obviously there's certain budgets around items and how do you price it? And given those standalone, how do you hit those states and make sure you get sales into them?

Mark Thierer

Yes, Tom. And this is actually, we're feeling really good on the development side here with what we've come out with. And you've heard me talk over the last few years about of the attractiveness of the fee-for-service Medicaid space, there's not a lot of competition in this space. And there's a large market opportunity in fraud, waste and abuse, as well as payment reconciliation. And so as far back as our Investor Day, we talked about we were working on new initiatives in this area. And so obviously, we've delivered on that. The enhanced COB offering is aimed squarely at the collection process for states. And Medicaid plans today are spending in excess of $15 billion in pharmacy. The COB opportunity, we think, is in the $1.5 billion range. And it's interesting that states are often typically the payer of last resort, but 13% of these Medicaid beneficiaries actually have unreported primary coverage elsewhere. And so from an innovation standpoint, this is the first online and realtime service offering. We're taking these data feeds from unique data sources and then building kind of secret sauce or algorithms around that claims editing process. And so the economic model is pretty simple. There's real savings power here, and when we drive up the recoupment from the paper-based to pay and chase model, we kick into a share savings economic model where we've aligned our incentives, we're collecting a modest administration fee. But if we drive real savings to the state, this $1.5 billion market opportunity represents material opportunity for us. And the other thing that I want to emphasize is, this is applicable to a broad range of other markets. And so the shared savings model, given and [ph] in addition to the fact we're going to take this to other markets, represent important factors in the eCOB product. We're pretty happy with it.

Tom Liston - Versant Partners Inc.

And real quick. Because it's shared savings for the most part, at least, does it necessarily have to be a budget item? Or what does the procurement process look like because it's a new initiative in a way?

Mark Thierer

Yes, that's what's really important, because the state procurement process is just actually very rigid and can be time-consuming. This is a net savings to the state the minute they implement the program, they begin to save money. And so we are actually selling this as we speak. In fact, in Austin this week, there is a -- we have our whole team down at this MMIS conference where all these Medicaid directors, and it's a small kind of cottage industry. We're getting together and we launched this product with a lot of fanfare. And the long and short of it is, they don't have to wait for a calendar year to get started on this, they can get started tomorrow.

Tom Liston - Versant Partners Inc.

Very good. And just quickly on PTRX, obviously, some healthy margins and you alluded to some very successful mail penetration, at least suggested it-- is there some best practices that you can drive across the rest of the business there or could you just comment more on their success?

Jeffrey Park

Sure, Tom. This is Jeff. With respect to the niche that they sell into, small, medium employers and TPAs, they've basically done an effective way of product sizing a simplified plan design and customer support model that drives high generic utilization and high mail utilization. Generally speaking, if you look into the small to medium employer market, it's mail utilization, it's not very highly penetrated. And PTRX is really targeted clients who are looking for low net costs, not necessarily looking for high branded rebates. And they've successfully implemented that customer care to make it simple for patients to have their prescriptions moved into mail-order. And because of that, they've been able to see a significant improvement over the industry on mail utilization factors. We will be looking at bottling up some of that program and offering to some of the client base that we have. And so we're excited about that. But also, that type of product offering doesn't necessarily fit across all clients and all industries and all areas. So although we are interested in being able to roll this out, it won't be applicable to the entire platform that we've got.

Operator

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

Brooks O'Neil - Dougherty & Company LLC

I have a couple of questions, guys. I guess, first, maybe you could just talk broadly about your outlook for margins. Obviously, we've all expected as you've brought on big chunks of business like HealthSpring, and ultimately next year, Bravo, that there will be some margin pressures. But can you talk about sort of the puts and takes in terms of where you see the margin expansion opportunity or sort of what your outlook is going forward?

Jeffrey Park

Sure, Brooks. This is Jeff. If you look at -- when we bring on new accounts, we're generally going to see the margin on those new accounts at its lowest point. And as we can drive through programs, whether it's mail or specialty or increasing utilization of generics, we're going to see the margins expand over time. With HealthSprings coming in, in the first quarter, you certainly saw my gross margin percentage on my PBM change substantially. But as you look into the second quarter, we been able to move our gross profit percentage on the PBM from 4.8% to 5.1%. It's a nice progression. And you'll continue to see that progression on our base book of business. The only thing that you, again, need to keep in mind is we bring in new pieces of large business, we'll see the same phenomena which will be compression on that piece and expansion over time. So we'd expect to continue to see our margins expand on our current book, and as we're aggressively looking to land new accounts and with our differentiated model, as you know, it's selling components of services and then pulling through others over time. So that's our margin expansion strategy.

Mark Thierer

And Brooks, the other thing I'll add is when we [indiscernible] these PBM -- HCIT to PBM conversions, we are driving gross margin dollars and EBITDA in a substantial way. And obviously, our gross margin percentage suffers when we do it. And so -- and I know you know that.

Brooks O'Neil - Dougherty & Company LLC

Yes. And I guess 2 other quick questions. One, I want to follow-up on Dave's question on the cash flow. Jeff, I think I heard what you're saying. I was just curious if you would expect in the balance of this year any catch-up improvement over that sort of $30 million to $40 million quarterly run rate, given that you haven't really generated much cash in the first half of the year from operations.

Jeffrey Park

Yes, we will. We'll see that catch-up. And although you don't necessarily see it, we carry a positive flow through these quarters. So we'll have anywhere between $40 million to $45 million of additional cash than what's shown on the balance sheet based on checks outstanding. And as you know, this is a positive flow business.

Brooks O'Neil - Dougherty & Company LLC

Yes. Okay. And then just lastly, I'm just curious, obviously, there was some talk in the marketplace about the Hawaii situation. I understand it's not, at this point, a top 10 customer anymore and won't likely -- no big impact on the outlook. But can you just talk about what happened there? How they made their decision, and whether you think what happened in Hawaii was sort of a one-off situation? Or whether there's any lessons to be learned for the rest of the outlook?

Jeffrey Park

Sure, Brooks. This is Jeff. Hawaii has been a long-term client of ours. They were originally brought in with the National Medical book of business. And we worked with the states and we're very proud of the savings opportunities. We've actually been able to plan design, mail utilization and specialty utilization drive significant savings for the state and for the members. Anytime you go through an RFP process and you're going to have an opportunity to see potential dislodging, we've been very successful with our client retention and we're proud of that. I think having a procurement process that goes through a government program, there is always a level of questions and concerns regarding the awards and we've certainly are pursuing our avenues in that regard. But I don't really see it as any sort of barometer or any -- or concern, or read the tea leaves across the broader platform for it.

Operator

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

Constantine Davides - JMP Securities LLC

Yes. First, just a quick follow-up on Brooks' question, Jeff, what was retention -- or where does retention stand outside of the Hawaii departure?

Jeffrey Park

Yes. 98%.

Constantine Davides - JMP Securities LLC

Okay. And then just wondering on the specialty side, you guys talk a lot about pull through and cross sell into the existing book, but are you seeing any more instances where Ascend or Medfusion are being added to the specialty networks of larger PBMs, the big 3, that may have formally been restricted?

Mark Thierer

Yes. Constantine, that's actually a very relevant question. We've just staffed up in our peer contract, an area relative to specialty contracts and we have been able to successfully add Ascend/Medfusion to a number of payer plans that we actually didn't have before. And this is important when you're filling open network and other people's prescriptions for specialty meds. And that's been part of the volume pickup that we've seen in that line of business.

Constantine Davides - JMP Securities LLC

And then 2 quick ones. Jeff, I don't know if I missed this, but did you quantify what the integration or nonrecurring transaction costs were in the quarter? I know when you guys bought Medfusion, it was a couple of million of a hit to SG&A. And that's it, actually.

Jeffrey Park

Yes, I didn't quantify my earlier remarks, but it's been about $1 million to $2 million in the quarter.

Operator

Your next question comes from the line of Gabriel Leung with Paradigm Capital.

Gabriel Leung - Paradigm Capital, Inc.

Mark, I just wanted to go back to your comments around your bid in RFP activity. If you look back over the last, let's call it 12 months, can you talk a little bit about your success rates and what you're seeing on that front? And in areas or in bids where you have been unsuccessful, what were some of the main areas of deficiency and what you can do to address those?

Mark Thierer

Yes, Gabe. Well, our win rate year-over-year has continued to rise. And I've talked about if we get to the kind of 1-in-3 batting average, we're going to feel pretty good about it and we're in that zip code. In terms of -- it's a competitive market, and we, for sure, don't win them all. There are capable companies who have strong value propositions. And what we're focused on is really setting ourselves apart, using our technology, our tools and high-level of customer service. We actually had an initiative inside the business called CLIENTS FOR LIFE, and we spend a lot of time talking to prospects about what that means. And at the end of the day, we have been successful in improving our win rates and moving up the food chain for larger and larger deals. The other aspect of that, that I think sometimes gets lost is consultants drive and brokers drive a big piece of the RFP deal flow. And we are just seeing more -- there isn't a consultant out there today who doesn't have some familiarity with our company. So we've definitely shown up on the radar and our win rate is up. So hopefully, that gives you a feel for what's going on in the bids process.

Gabriel Leung - Paradigm Capital, Inc.

That was great. And just 2 follow-on questions for you, Jeff, maybe. First, in your prepared remarks, I believe you had talked about $300 million in net new wins which were unannounced previously. Can you talk about when those wins are expected to start or if they have already, #1. And #2, you had made a comment around license revenues in the quarter. I heard something about $1.5 million, was that one specific contract or was that total license revenues in the quarter?

Jeffrey Park

Sure, Gabe. With respect to the license revenue in the quarter, that was one specific contract. With respect to the business wins that we've brought on, the majority of those are really starting into 2012 as you would imagine. We do have some of them that will start up in the last half, in the last quarter of the year here, but the majority of those impacts are rolling through for 2012.

Operator

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

Eugene Goldenberg - BB&T Capital Markets

Just 2 quick ones. Would you be interested in any of the potential assets that may be sold as part of the Express or Medco merger, whether it be on the specialty side or mail? Is that something that you'd be interested in taking a look at?

Jeffrey Park

Eugene, this is Jeff. We've been pretty specific around what we're looking to acquire in adding PBM lives and PBM clients and building out and adding to our footprint in either mail or specialty. I'm not sure what, if anything, would make itself available. I know that there has been some speculation and some discussion around what they may have to get rid of, but we're interested.

Eugene Goldenberg - BB&T Capital Markets

Got you. And then as far as the specialty pull through strategy that you guys have in place on -- it seems that you guys are running pretty well in line or maybe even a little bit better than internal expectations. Any change to your expectation of maybe within the year at an annual run rate of $40 million to $50 mil?

Jeffrey Park

No, we're in good shape with respect to the specialty pull-through, as you outlined. I think we're really bullish about our positioning. In the middle market, our specialty footprint is very healthful. We have a very large footprint, and the expertise that comes with specialty is really important, because the patients who are taking the specialty medications are also the highest cost on the medical side. And so being able to drive strategies, to drive not only patient compliance, but overall care, is a huge component. Health plans needed, employers are looking for ways to manage it more effectively and so we're on track and ahead of schedule as far as our expectations in specialty.

Eugene Goldenberg - BB&T Capital Markets

Great. And the last question I have is really on the selling season. Surprised [ph], that you guys are seeing being well above your external expectations already in the year. Is there any particular market segment that you guys were pleasantly surprised then or that you're gaining an inordinate amount of traction? Or is it pretty much across-the-board strength?

Mark Thierer

It's been really successful across all the different market segments we're in. I think the areas where you see the biggest expansion are going to be health plans. Health plans have the highest dollar value, therefore, will have the highest revenue impacts on our business. But it's also the area where they're looking for the most sophisticated and the most customized answers, and we really are uniquely positioned for those health plans that are looking to find a way to have a more flexible model that fits into their desires.

Operator

Your next question comes from the line of Newton Juhng with FBR.

K. Newton Juhng - FBR Capital Markets & Co.

I was just wondering, a kind of follow-up to the comments you made about the consultants and brokers, Considering the current environment with the potential combination of 2 of the big 3, are you seeing in your conversations with them a change in the way that you're looking at things? And is there a way for you to succeed or kind of exploit that?

Jeffrey Park

Yes. Newton. This is Jeff. I think we're already seeing, consultants are looking for more alternatives and so they want to be able to make sure that there's enough different opportunities for them to show their clients. And anytime you see large acquisitions, it's going to create an opportunity for some customer churn or some consultant concern for new business that may be awarded. And so we certainly think we're going to be able to take advantage of that trend as it starts to roll out further as we head in through the concluding pieces of the selling season for next year, and into next year's selling season.

K. Newton Juhng - FBR Capital Markets & Co.

And are they looking at those entities as 2 separate ones still at this point in time? Because obviously, the situation hasn't consolidated. Or if they're even in the same RFP, are they looking at this as more of a -- that, that's really one entity that we're looking at?

Mark Thierer

Yes. I think in actuality, you probably should ask the consultants for how they're looking at it. I do think that, in general, the markets viewing these 2 companies as separate standalone companies for the near term, and they'll probably be competing, would be my guess for the near-term. To Jeff's point, confusion is good for our business, and having speed and agility to react quickly with this flexible model is how we're trying to take advantage of that.

K. Newton Juhng - FBR Capital Markets & Co.

Got you. And then one more follow-up here. Just on your M&A strategy, can you remind us again like how many of your key [ph] customers are kind of legitimate takeout targets for you at this time? And then also, is the limitation for your ability to bring those transactions kind of on the integration team and just how much you can do it at a particular point in time? And are you looking to maybe replicate them so that you could do more acquisitions faster?

Jeffrey Park

Sure. Newton, this is Jeff again. We have roughly 30 different PBMs that are either part of our full-service PBM offering or inside of our HCIT business. And at some level, the majority of them are legitimate targets. Not all of them are usually for sale at any one time, but we're working actively to pursue not only those targets, but others that are not on our platform. From an integration perspective, integrating current clients has the least amount of disruption. First of all, there's no member re-carding, there's no planned sponsored changes that occur. They're already on our platform. They're already under our contracts inside the pharmacies or with manufacturers. And so there's really no execution risk on an acquisition. There is integration of platform or back office functions and things like that, and account management support. And so those are, in the scheme of things, easier pieces to work on. We feel confident we'd be able to do a number of those types of integrations if we were able to do them. But really, the only meter is having a willing seller and agreeing on the right terms and price.

Operator

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

Michael Minchak - JP Morgan Chase & Co

Just a couple of quick questions. The first, just following up on Constantine's question. Jeff, is that $1 million to $2 million per quarter in non-recurring acquisition and transaction related costs, is that roughly what's included in your guidance going forward? Or do you expect that to pick up in the second half with the addition of PTRX?

Jeffrey Park

No. We've taken into account what we'd expect in our guidance for the last part of the year. As we add on PTRX, we will see some transition expenses in the quarter that had closes. But that's sort of been reflected in the press release that we gave out on the PTRX topic. And yes, the $1 million to $2 million was charges inside this quarter.

Michael Minchak - JP Morgan Chase & Co

Okay. And then just a question on the renewal front x Hawaii, where do you guys stand at this point? Are there any of the big ones that are still out there that come up for you at '11 or any point in 2012?

Jeffrey Park

No, we've got a lot of our renewals, as you probably would imagine. If you're up for '11-2012, there's -- most of those decisions are already made or being made. We've worked with our accounts to the early renewals. We will see renewals as we head through into 2012 and to the sort of latter half of 2012. But there's nothing that is significant that we're worried about.

Operator

Your next question comes from the line of John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C.

Could you give us an update on your Medicaid business? I'm curious if you're seeing any sort of changing and in terms of structures as states wrestle with a lot of budget pressures. And also are you seeing any signs of new competitors trying to break into this market ahead of 2014?

Mark Thierer

John, it's Mark. We continue to really like the fee for service Medicaid market and the short answer is, no, we're not seeing any different behaviors from the state Medicaid directors. They are under tremendous pressure to save money, and they're looking for new ways. I mean, we fundamentally have 2 competitors in that space, one inside Magellan in First Help, and the other, ACS. And over the past 3 or 4 years, we now have 8 state relationships, and our most recent one being Nevada. And we're actively competing for live opportunities in the fee-for-service space. New York and Florida, there's a lot of talk about how much will move into managed Medicaid, which happens to be a segment that we like a lot and compete strongly in. At the end of the day, we're continuing to respond to open RFPs that will move members into the fee-for-service space. And it's our expectation that that's going to continue to grow. The other piece of it is you'll see us expanding from a service offering. We just began pulling through specialty pharmacy on an exclusive basis. That's new to the Medicaid space. We've just announced the eCOB product on payment reconciliation. That's new in the Medicaid space. So we view that market segment as a margin driver for our business, not so much a top line contributor. And we like it a lot because if you could save the states money, you're going to win business. And so that's how we view that segment.

John Kreger - William Blair & Company L.L.C.

Great, thanks. And second question kind of relating to your more active procurement efforts. If you look at drug pricing, are you seeing any changes in inflation transfer for your brand, products or deflationary trends with generics?

Mark Thierer

Yes, we're not seeing anything dramatic, one way or another. I'd say when you look at the brand prices, you're still continuing to see brand price increases, that was the major driver for last year's trend. It's a continued to see this year. Generic pricing has been consistent and continuing to move away. I'd say the only category that's really seeing significant price expansion, as well as consumption expansion is the specialty market. That's an area that's continuing to really have a significant impact on overall trend.

John Kreger - William Blair & Company L.L.C.

And what sort of inflationaries are you seeing in specialty, Jeff?

Jeffrey Park

I don't have those with me, John.

John Kreger - William Blair & Company L.L.C.

Probably double-digit?

Jeffrey Park

Yes.

Operator

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

Sera Kim - GMP Securities L.P.

Just as a follow-up to the previous eCOB question, I'm just wondering, you launched the product and you mentioned that there was a lot of fanfare. What sort of feedback have you received so far and how quickly do you think the states are prepared to move just given what's going on and the pressure to just lower the costs?

Mark Thierer

Well good question. Just to be clear, this product is up and running for one very large state customer, and it's saving them a lot of money and with just a couple of months under our belt. So we're feeling pretty good about that aspect. As to how quickly can other states adopt it, they are currently utilizing coordination of benefits services today. Every state is buying some level of these services today on what is really known as a paper-based pay and chase model. And there's decent success, pretty sizable success with the current model. We're looking to drive the recoupment from the paper-based model to our shared savings electronic model substantially up. And there is actually nothing that would preclude the states from moving quickly. And in effect, it's found money. There may be states where we'll live side-by-side with the current provider and there may be states where we actually dislodge the current provider in total. And so I think that will remain to be seen, but right now we've got a lot of interested parties that have read our release and heard about our pitch at this MMIS conference, so stay tuned.

Sera Kim - GMP Securities L.P.

Okay. And did you quantify how much money you're saving this one large state customer?

Mark Thierer

No, we didn't.

Sera Kim - GMP Securities L.P.

Is it something that you can provide?

Jeffrey Park

No. That's probably -- In terms of any specific client kind of contributions, you shouldn't expect anything from us there. I will just tell you, though, we're talking about a lot of money. There is a $1.5 billion COB market opportunity that's out there and we are aligning our incentives with the states. If we do save the money, we expect to participate.

Sera Kim - GMP Securities L.P.

Okay, great. And also, what's the size of your mail-order pharmacy business right now? And what will it be once it redirects [ph] acquisition closes?

Mark Thierer

Well, we actually have a nice little middle market footprint in our mail facility. It's something that we've been continuing to expand on although it's still small in relation to the largest players. In the middle market, having our own mail facility is a differentiator and it's a decent size. With adding the PTRX book of business, they're already supporting their mail platform, and we're looking forward to using their current mail facility as a backup to our existing spot. So we're not looking to consolidate the mail footprints into one location.

Sera Kim - GMP Securities L.P.

Do you have a combined mail-order penetration rate?

Mark Thierer

Yes, we will be reporting combined. Once they're combined, we'll be reporting what those numbers are.

Sera Kim - GMP Securities L.P.

Okay. And can you just talk about some of the strategies that will allow you to further increase the mail order penetration and pull it, like, I guess, increase to similar rates to SaveDirectRx, with your existing business?

Mark Thierer

Sure. So with respect to the strategies to pull through on mail, really, the first thing we need to be able to do is communicate the savings with the members and the convenience with the members. That is the first strategy. We've already deployed to our member base. The second way to be able to drive that is to drive compliance by using their employers and plan design changes that can enforce more utilization of mail, either mandatory utilization of mail, opt out of mail or adherence of certain medications, that involves not only letter campaign and calls to members. So those are really the pieces. The other way that you can drive through mail utilization is specifically driving plan designs that are exclusive to mail and that's really the piece that PTRX has. That's what I was saying earlier that not all employers or small to medium employers are going to want to drive mandatory utilization of mail or high utilization at mail into their member base. But for those that do, there's an effective pull through strategy that they deployed. We're looking to use that in some of the solution sets and some of the smaller markets that we are in today in our TPA and our small employers. So we expect to replicate that, but on a small piece of our book of business, not on the overall book of our business.

Sera Kim - GMP Securities L.P.

And I guess just last question with respect to the pipeline, are there any opportunities within the pipeline that's similar in size to Bravo that you're waiting to hear from between now and the end of the year?

Mark Thierer

I don't think you should expect anything Bravo size between now and the end of the year. Health plans of that size, they need a minimum of 6, 9 months to make decisions and pull the trigger. So for the larger health plans -- I'll tell you what our focus is for the larger health plans. Today, we are sitting down with the leadership inside middle market and larger health plans, talking about their ACO models and talking about their patient-centered medical home. And basically, our whole selling process is focusing on life after reform from a health plan standpoint. The leadership inside the health plan, this is what they're thinking about. And so from our standpoint, we're approaching them with our tool set. Our unbundled approach, call it our picks and shovels approach, to bring their vision to life relative to ACO or patient-centered medical home. And so primarily with these larger health plans, we are focused on 4 things: Cost management, the early identification of chronic members, data sharing and portal management, both with members and with physicians; and then performance assessment. Docs are going to get comps differently after reform, and we're very focused on how you evaluate them and ultimately compensate them. So I do think this movement, and it's still very fluid, but this whole movement to ACOs, and PCMH models sets up very well for our unbundled model and our technology tool set, and when we're selling, this is what we're talking to our customers about because this is what they're working on.

Operator

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

Anthony Vendetti - Maxim Group LLC

Could you give the mail utilization rate for the quarter?

Jeffrey Park

No, I said it was just flat.

Anthony Vendetti - Maxim Group LLC

Just flat? Okay. The acquisitions that you're looking at, I know you've talked about -- are you also looking at any captive PBMs at this point?

Jeffrey Park

Yes. See, you were looking at stand-alones captive. We really see them all as PBMs, either on their own or inside of a larger entity.

Anthony Vendetti - Maxim Group LLC

Okay. And has pricing been stable throughout the year?

Jeffrey Park

Pricing from an acquisition perspective or pricing -- is that what you mean?

Anthony Vendetti - Maxim Group LLC

No. No, from a contract perspective.

Jeffrey Park

Yes, pricing has been consistent. I'd say when you look at a distance, you can see that price improvements over years of a contract have continued to improve. But really, the cost of goods have continued to come down. And so we look at pricing in our market segments and they've been very consistent.

Anthony Vendetti - Maxim Group LLC

Okay. And then lastly, you've worked with the state of Hawaii for, I think, about 5 years. Was there a particular reason that they went somewhere else? Can you provide a little bit more color on that, please?

Mark Thierer

First of all, they haven't gone anywhere else just yet and they're in the process of working through that decision. And so the state of Hawaii is happy with our service. The client satisfaction is very high. Our service levels and service level guarantees are mixed and it's a pretty rock solid relationship. And so that's a procurement process that is in process. And again, there is a notification of intent to award to another provider as it stands today.

Anthony Vendetti - Maxim Group LLC

And would you surmise that, that's mostly a price issue? Are they very, very price sensitive, as most states are at this point?

Jeffrey Park

Price is always one of the components in it, absolutely. But it's not the only component. When you look across what the evaluation pieces are and you can flare this information. I'd encourage you to do it. I think we've got a very good bid, a very aggressive bid and we saved the state a lot of money.

Operator

And your final question comes from George Hill with Citigroup.

George Hill

I apologize if a couple of these were answered, I kind of got on the call late. You guys talked about the $1 million to $2 million of integration costs incurred in the quarter and your SG&A was kind of well ahead of what I had modeled. I guess should we think of those costs as included in the SG&A and how should we think about the moderation of those costs over time?

Jeffrey Park

Yes, they're included, George, in the SG&A.

George Hill

Okay. And with respect to PTRX, evaluation on that asset seems pretty attractive relative to what we discussed in the past. I guess anything you needed for that asset where you guys were able to get sometimes [ph] 10x, 9x EBITDA and just is that reflective of the environment for acquisition targets?

Mark Thierer

George, it's Mark. I think that's reflective of the fact that we had a 5-year relationship with this client and that they saw an opportunity to join a larger and more successful organization. We're going to keep the leadership, we like these guys. They know what they're doing in this segment, strong Texas footprint, strong TPA footprint, nice backup facility. And so we paid what we thought was a fair price. And obviously, they thought it was a fair price. So I think it's an indication of how we're situated relative to targets that are our customers.

George Hill

Two more last quick ones. #1, the jump in receivables in the quarter was just...

Jeffrey Park

The jump in the receivables is a bit of a function of the addition of MedMetrics, as we add their balance sheet to our balance sheet. You're going to see an increase, but our DSOs are relatively consistent. They are under 17 days and they're continuing to be under 17 days.

George Hill

I guess the HealthSpring, I guess can you talk about how closely you guys work with the relationship hand in hand? It looks that they could lose a lot of the California PDP membership, but they're going to bring on more lives in Texas and M&A, of course, remains a big priority for those guys? I guess just talk about how closely you work with those guys and we should think about how their business evolves in line with how your business evolves with them.

Mark Thierer

Yes, George. So our relationship with HealthSpring is outstanding and I'd encourage you to ask them. Bottom line is, we work everyday of the week with this client and you'd expect that they're very, very large. We have a dedicated team. We meet regularly on site. We have people living with them, and the business relationship is very strong. And as they execute on their strategy, and Bravo's a great example, when they grow, we've grow, and we're obviously trying to help them succeed executing on their plan. I'm not going to comment on any specific market segment issues they face as a company. I'd encourage you to talk to the HealthSpring leadership on that front.

Operator

There are no further questions at this time. I turn the call back over to the presenters for any closing remarks.

Mark Thierer

Okay, great. This is Mark. Thanks for your time today and we look forward to talking to you next quarter.

Operator

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

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