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Executives

Mark A. Thierer - Chairman and Chief Executive Officer

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

Analysts

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Tom Liston - Versant Partners Inc., Research Division

Constantine Davides - JMP Securities LLC, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Andrew Schenker - Morgan Stanley, Research Division

Kipp R.F. Davis - Barclays Capital, Research Division

Brian Tanquilut - Jefferies & Company, Inc., Research Division

George Hill - Citigroup Inc, Research Division

Amanda Murphy - William Blair & Company L.L.C., Research Division

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Eugene Goldenberg - BB&T Capital Markets, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

SXC Health Solutions (SXCI) Q3 2011 Earnings Call November 3, 2011 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SXC's Health Solutions Corp. 2011 Third Quarter Results Conference Call. [Operator Instructions] Listeners are reminded that portion of today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in 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, November 3, 2011, at 8:30 a.m. Eastern time. I would now like to turn the conference over Mr. Mark Theirer, Chairman and CEO. Please go ahead, sir.

Mark A. Thierer

Thank you, and good morning, everyone. Thanks for joining us. I'm pleased to report that 2011 has been our most successful selling season in the history of the company. We closed more than $1.4 billion in new business, representing the addition of over 1 million new lives that has either gone live in the second half of 2011, or is scheduled to go live January 1, 2012.

And so with today's record third quarter results, we are raising our guidance, and we remain very confident in our outlook. The 2013 selling season is already well underway, and we are actively responding the bids for midyear 2012 starts, as well as January 1, 2013, starts. We are very encouraged with our sales pipeline across each of the segments in which we compete. Today, we are now competing for larger scale deals in every one of the markets that we serve. And for the largest health plan opportunities in the industry, SXC is being asked to compete for every one of the commercial and Medicare Part D opportunities that come to market.

There are 2 primary reasons we're seeing an increased activity level in terms of new opportunities. First, and most importantly, we've scaled the company to the point where we can compete from a service-level and cost of goods standpoint with the largest players in the market. Secondly, the pending acquisition of Medco by Express Scripts combined with the public dispute between Walgreens and Express Scripts is in fact creating a level of confusion and discomfort in the marketplace, and clients are actively evaluating the downstream impact of these disruptions. We're talking with each and every one of them about their options and their alternatives.

Transitioning to the acquisition front, we've completed the integration of MedMetrics, and that process went very smoothly. We're off to a fast start with the integration of our recent PTRX transaction. Our first 2 goals there were to put in place our COGS contracts to drive purchasing improvements and to ensure we had no client disruption. We were successful on both fronts.

Acquiring clients who run on our platform is very advantageous from an integration standpoint. PTRX has had a successfully deployed PPA model for years. And in fact, we're going to replicate that model in our own book of business as we look to drive better mail-order penetration in that segment. We expect to complete the full-integration process of the PTRX acquisition within the next 12 months.

The integration success we're seeing with MedMetrics and PTRX demonstrate that the execution risk of acquiring clients operating on our own technology platform is very low. We believe these transactions are great examples of our strategy to roll up niche middle-market competitors and then leverage the efficiencies of a single operating platform, with the opportunity to drive better purchasing, as well as other services such as mail, specialty pharmacy, rebate services and others into their existing accounts.

We continue to be active on the acquisition front in terms of evaluating potential targets. We are unencumbered with financial or integration resource constraints. And as a result, we are evaluating a number of opportunities as we speak. You can expect we'll be very disciplined as we have been in searching these opportunities to deploy capital to drive solid accretion, just as we have with Medfusion, MedMetrics and PTRX.

We recently announced the 5-year contract extension with provisions for 2 additional one-year renewals to provide HCIT services to Catalyst Health Solutions. We've enjoyed a long relationship with Catalyst, and they remain a valued client. This contract renewal ensures that Catalyst will continue to be a very important part of our HCIT business, and demonstrates our commitment to client retention as a key component of our growth strategy.

Finally, subsequent to the end of the quarter, as you all know, Cigna announced the intention to acquire HealthSpring. I want to provide some perspective on what this could mean to SXC both short term and longer term. As you will recall, we are in the first year of a 5-year contract that has a 3-year base and 2 one-year renewal options. We are on track to implement the Bravo plan on 1/1/2012, and we've been working closely with the HealthSpring leadership team to ensure a smooth implementation. Our service levels have been strong, and our client satisfaction remains high. It is our expectation that as SXC will service the HealthSpring and Bravo lives for the duration of the contract.

Separately, we know and respect the Cigna leadership team. And over time, we hope to expand our working relationship with Cigna beyond supporting the HealthSpring platform. Now with that, I'll turn the call over to Jeff.

Jeffrey Park

Thank you, Mark. Q3 was another strong quarter, both the HCIT and the PBM segment demonstrated growth, and our cash flow is strong. We successfully converted 2 more HCIT customers to our full-service PBM offering during the quarter, and we are delivering on solid growth in all areas of our business.

Based on the activity and our performance to date, we are raising our 2011 guidance, which I will address in a moment. We continue to show strong revenue growth. Revenue was up 6% on a sequential basis and 163% on a year-over-year basis. The sequential increase in PBM revenue is due to new business wins, in addition to 2 HCIT to PBM conversions in the quarter, bringing us to 4 conversions for 2011. Adjusted prescription claims volume for the informedRx division was $23.3 million in Q3, up 10% from Q1 of this year due to growth in utilization, HCIT conversions and new customers.

During this period, we've also experienced an increase in pull-through sales of clinical, specialty and higher utilization of generics. These factors have helped improve the gross profit per script by 20% compared to Q1 of this year. This further validates our model of selling our clients what they want, and demonstrating additional value in services as our relationships grow.

The adjusted prescription claims volume, together with the transaction processing volume from the HCIT business showed increased spend and consumption of medications within the markets that we serve. We continue to lead the industry with a generic dispense rate of 78%.

As I mentioned earlier, we are firing on all cylinders including announcing a record quarter in both of our segments. Year-over-year, we have experienced the 15% growth rate in the HCIT segment. In the quarter, we continued with strong system sales as we did last quarter, in addition to the $1 million in onetime help in the quarter. We are selling more to our existing clients, and we are winning new clients like the 2 we announced earlier this year.

We continue to see our strategy of allowing clients to purchase PBM tools or PBM services as a huge differentiator for us. It creates more opportunities for sales by expanding our addressable market, and it creates a great feeder for HCIT to PBM conversions. This strong revenue growth has translated into 40% year-to-date consolidated gross profit over last year.

SG&A expenses increased by 5% on a sequential basis compared to the 11% increase in gross profit over that period, fully demonstrating the leverage in our model. The SG&A growth relates to the acquisition of MedMetrics, and we expect SG&A to increase in Q4 as we bring on the new employees from PTRX, as well as ramp up our support for our January 1, 2012, launches.

We continue to drive solid growth in adjusted EBITDA, which grew by 16% on a sequential basis and 58% on a year-over-year basis. As you know, the previous EBITDA guidance suggested a 22% increase in EBITDA in the second half of 2011 over the first half of 2011. You can see that materialized in the Q3 results that were posted today.

We generated $85 million in cash from operations in the quarter. This is a significant increase over the Q1 and Q2 period. And as I have mentioned on previous calls, due to the timing of pharmacy payments and receivables, this can impact cash flows. As I have described, Q3 would serve to normalize the 2 earlier quarters. And looking at the 9-month period, this represents a 35% increase compared to the 9-month period last year. This increase continues to demonstrate the ability of the business model to generate strong cash from operations.

Based on our Q3 financial results, we are raising our 2011 full year guidance. Our revenue forecast is $4.7 billion to $4.8 billion for the fiscal year 2011, representing $100 million increase in the midpoint of the prior range, and implies a growth of 144% over fiscal 2010. Our 2011 target range for adjusted EBITDA is $172 million to $173 million, representing a $2.5 million increase in the midpoint of the prior range, and implies growth of 43% over 2010.

The full year target range for our diluted 2011 GAAP EPS is $1.46 to $1.47. The midpoint of our EPS represents $0.015 increase over the prior range and applies a 42% increase over the previous year. Our non-GAAP adjusted EPS guidance on a fully diluted basis for 2011 is $1.62 to $1.63. The midpoint of this adjusted EPS represents a $0.025 increase and a 46% year-over-year growth. Adjusted EPS excludes all deal amortization for 2011. We expected to be $17 million or approximately $0.16 a share net of tax.

Q3 was another in a series of strong quarters for SXC. We grow the top line across all segments. We demonstrated margin expansion across our base as is reflected in our gross profit expansion, and we enjoyed even higher adjusted EBITDA, all while driving strong cash from operations. The benefit of our recent acquisitions of Medfusion and MedMetrics and the successful integration of these businesses is having a positive impact. Q3 has set us up to finish 2011 in a strong position as we enter the implementation season for 2012.

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

Mark A. Thierer

Thanks, Jeff. Q3 was obviously another clean and very good quarter from an operating standpoint. We're especially pleased with the sales success we've seen, and how those new wins position us for 2012 and beyond. And I'd like to remind everyone that our Investor Day that will take place coming up November 17 will be in New York City. A webcast of the proceedings will start at 8 a.m. Eastern time, which you can access from our website.

We're really pleased we'll have presentations from 3 very important client executives, who will share their respective experiences with our company, along with presentations from my senior leadership team as well. I believe one of the most important and best insights into a business is what their clients actually say about them. So this is a great opportunity for you to hear directly from some of our most important customers. And with that in mind, I'd encourage to either attend or listen to our webcast on the 17th. Okay. With that, I'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Constantine Davides with JMP Securities.

Constantine Davides - JMP Securities LLC, Research Division

Two questions, Mark. I guess first, I think it sounds like you're kind of reiterating what your competitors said around an uptick in RFP activity. Just wondering if you can kind of put a box around it and tell us if you think you have the resources and infrastructure in place to handle that kind of increased volume? And then secondarily, just on the new business, you guys are bringing in for next year, the $1.4 billion, outside of Bravo, can you tell us a little bit about what the business looks like, where you're winning it from?

Mark A. Thierer

Sure, Constantine. From a resource standpoint, in terms of the new business pipeline, obviously, we're just cranking up the engine from a bids and proposals standpoint. I will tell you that we're very pleased with what's coming through in terms of bid responses for the midyear starts. But I'm especially pleased with are the number of larger health plan opportunities that are actually queued up for 1/1/2013. That's a longer sales cycle, as you know, and we are getting a good look in a number of sizable opportunities for 1/1/2013. From a resource standpoint, we have been investing here on a religious basis over the last couple of years, both through acquisitions and just growing our base. But from a bids and proposals RFP response, sales, sales support, and all the rest, we are ready to go and can service these opportunities with our base platform. And now, the second half of your question was on the $1.4 billion?

Jeffrey Park

It was on the new sales. So Constantine, with respect to where those sales are coming from, we continue to see signings and wins really with new customers in all of these different segments, from the employers and the TPAs and the health plans, we really been able to see wins really across-the-board.

Constantine Davides - JMP Securities LLC, Research Division

And is it fair to say, Mark, maybe as you look out a couple years, you've always kind of done a good job of taking share from some of the mid-market guys. But is it right to infer from your comments that maybe you're getting a little bit of leakage out of the big 3?

Mark A. Thierer

Constantine, it's very fair. I mean, obviously, when we moved the Bravo business from a big 3, that I think, was a pretty impactful move. And obviously, we're taking a look at much larger opportunities. So we've scaled this business, and we're looking at bigger deals, and we're competing really very broadly across each segment in the market, including the larger deals.

Operator

Our next question comes from the line of Kipp Davis with Barclays Capital.

Kipp R.F. Davis - Barclays Capital, Research Division

This is Kip Davis, just calling in for Larry. So just a couple of quick ones. I know the transaction volumes in the healthcare IT segment came in a bit stronger than we had assumed. Were there any particular drivers there? And then along with that, gross margin usually looks like it came down a bit there as well. So I'm just kind of curious on what was driving that?

Jeffrey Park

Sure. Kipp, this is Jeff. Yes, we're continuing to see good growth volumes in the PBM and on the HCIT segment. The PBM is obviously enjoying some good growth. We're able to see new lives, as well as some conversions from the HCIT platform. To your point, the HCIT business is still continuing to see increases in transaction volumes. As you probably know, IMS has reported a year-to-date script growth of around 1.5%, which is ahead of last year. So script growth is still going, and we're certainly seeing good script growth across our platforms. With respect to the margin expansion, in the PBM segment, I covered off, but your question around the HCIT segment, it's in line with where we expect it to be. We do have items that can kind of go up and down in the quarter. Last quarter, we talked about some system sales, but it's in the range we'd expected. We're just pleased with the revenue growth in the HCIT segment.

Kipp R.F. Davis - Barclays Capital, Research Division

Got you. Great. Another quick one. Given the environment right now, just kind of curious of your view on limited networks and just thinking about some of the issues that are obviously in the PBM landscape right now, and how you folks are approaching that and whether that's creating opportunities or anything like that for you guys?

Mark A. Thierer

Yes. Kipp, this is Mark. The limited network discussions, I would say in the new selling season here are getting a little bit more airtime. There's nothing new here. We've been talking about limited networks for as long as I've been in this business. A handful of clients have deployed them. I'm not seeing rapid or wide-scale adoption. And it's because, in general, people like open access to pharmacies. Now I think with the cost constraints, there is actually a reframing of that thinking. But candidly, I haven't seen a rapid student body right to limited networks. Now we've built discrete pharmacy networks for 90 day at retail, discrete networks for limited pocket networks, wrapped networks. We have a full product line from a network management standpoint. I'm just telling you, clients today have not made a mass exodus into limited networks.

Kipp R.F. Davis - Barclays Capital, Research Division

Got you. Okay. And then just one final one. The wording on fulfilling the obligation under the HealthSpring contract, I'm just kind of wondering how we think about that. I know initially a 3-year contract but obviously, the 2 one-year renewals there. Is there anything specific or any details in terms of what gives you confidence about going through the full 5-year term of the contract and just wondering how we kind of should think about that?

Mark A. Thierer

Well, I think you should think about it that we expect to serve out the full 5-year contract.

Operator

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

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Just had 2 questions. Mark, when you look at the acquisition landscape, now that kind of the top end, the buyers at the top end of the market are tied up in Express and Medco. Have you seen any increased activity in terms of some larger deals and incoming phone calls on that front? And then I just have one follow-up.

Mark A. Thierer

Yes. Dave, actually, as I gauge our M&A activity over the last 3 or 4 years, I would say, it has spiked recently in the sense that we are very active on a number of, what I would call, meaningful targets. Anytime the industry starts to have large kind of places of the earth move, it creates opportunity and activity. So we are feeling pretty good about the traffic in terms of the properties that are out there, and including some larger scale properties. Hope that answers your question.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And Mark, when you say recently, has that activity picked up noticeably since, basically, the 2 biggest buyers in terms of the independent PBMs have essentially moved off the market?

Mark A. Thierer

Yes. I'd have to say I do think it's created a handful of phone calls. It's been interesting to me. But candidly, you know our model, and we've been doing diligence for years on a lot of these targets. And so I do think that some of the dislocation that's happening in the market today is having, in particular individuals who own their own companies, it's causing them to stop and think about what's the long-term future. So I do think it's broken loose a few opportunities.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, Jeff, one other question. the 35% growth in cash from operations through the first 9 months, is that a pretty decent growth rate to think about for the full year?

Jeffrey Park

Yes. Growth in cash from operations really should follow the EBITDA growth, Dave. You're thinking about it the right way.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And there's no kind of working capital things or anything that should be funky in the fourth quarter?

Jeffrey Park

No.

Operator

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

Tom Liston - Versant Partners Inc., Research Division

Can you just give more detail on the enhanced Coordination of Benefits? I think you had 2 states going. Are the metrics following what you initially published in some of the industry, participants are talking about and what does the pipeline look for that program?

Mark A. Thierer

It's Mark. We are feeling really very good about the eCOB opportunity. And including the near-term pipeline and 2012 plan, we just completed our outlook in terms of targets for next year. And as you know, we're targeting state Fee-For-Service Medicaid plans, as well as managed Medicaid plans and ultimately moving this thing into the commercial space. And so we are on track for our hopes and expectations for eCOB. And obviously, the early results from the current clients have been -- they've been very encouraging for us. So hopefully, that gives you a little bit of guidance.

Tom Liston - Versant Partners Inc., Research Division

And is it mainly, I know you consult to any one, but is it mainly the existing Medicaid that you're trying first because of your relationship or is it pretty widespread targets?

Mark A. Thierer

No. It is actually -- our primary focus out of the shoot here is the Fee-For-Service Medicaid states that we service, and we're in active dialogue with each of them actually. And we'll kind of skin that cap first and then move on from there.

Tom Liston - Versant Partners Inc., Research Division

Okay. You've given a fair bit of color, but in the past, you talked about being very targeted in your approach in going after bids where you think you have a very good shot. Are you loosing that up a little bit with the Express and Medco, and trying to take a few more shots at that base? And sort of where you're targeting and how you're approaching that market?

Mark A. Thierer

I would say not really. We've had a game plan here that we are very focused on. I think the only change that I see over the last 2 or 3 years is just the size of the deals, and we've moved up a couple rungs on the ladder in terms of our willingness and our interest in taking a hard run at winning some of the larger deals, which I'm feeling pretty good about. But in terms of our target markets, I mean we have 8 segments. We're very disciplined in terms of where we can win. And that's one thing I've been pleased with. Our win rate is up substantially over the last couple of 3 years. And our sales team ripped it this last year and I'm really proud of them. I like our opportunities here for the upcoming selling season.

Operator

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

Amanda Murphy - William Blair & Company L.L.C., Research Division

I had a few questions here. I guess the first one is on HealthSprings. So it seems like at this point, the market is at least discounting to some degree that, that business is gone, and you just mentioned that you expect to serve that for 5 years. I'm curious, how do we think about leverage at this point in the business? So let's just assume for a minute that, that is gone 5 years from now. How do you think about the impact just broadly to purchasing efficiencies and what have you? And then vice versa, to the extent that you can service Cigna in some way, how does that benefit you on the other side?

Mark A. Thierer

Okay. Amanda, this is Mark. Let me just take a step back and kind of reframe the whole HealthSpring situation, it's probably worthwhile. We're actually 9 months into a 5-year contract, and our business relationship with HealthSpring is outstanding. We're helping them perform on their own operating plan. You can see it in terms of their own performance and their own results. And so we're on track for a Bravo go live 1/1/2012 as I have said. And actually, I believe we've helped them become a very major Medicare Part D plan sponsor that has been growing rapidly. Now in terms of our relationship with Cigna, as I mentioned ,we do know these guys. We know them well. They use a couple of our tools. And obviously, they are a leader in the managed care market. And as you well know, they've got an internal PBM that today runs on a different platform. We think, and our hope and expectations over time, we're looking to not just service the HealthSpring lives, but look for ways to use our flexible and customized platform to do more for Cigna. And in the end, that will be a business decision that they will make obviously. And as I said in my comments, we're fully expecting to service the full term of that contract.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Okay. That's helpful. And then just a question on the comments you've made about just what's going on in the general marketplace with Express and Medco, and what have you. I'm curious as you kind of see the opportunity to bid for those accounts and maybe compete more with the larger players than perhaps you have historically. I'm curious how you think about pricing in that environment especially with the combined Express Scripts, Medco and also your ability to compete now that you've added Joel onto your team? So how do you think about competing with that, with the larger players given the opportunity?

Mark A. Thierer

Yes. So I've said, and you followed our story for a long time, this business is about skill and scale. And beyond any one individual, we built an operating platform with functional leadership that I would stack up against anybody in the industry. So in terms of our COGS leadership and our ability to know what the market will deliver and command, I feel very good about that. I'm not concerned about losing any COGS leverage. First of all, I don't think we're going to lose HealthSpring. But second of all, I think we're in a very good place on the contracting standpoint that spans brands, generics, the network contracting, specialty biotech, as well as our wholesale contracts. So feeling pretty secure about that. Let me address your question about kind of the breakage in the market, and maybe a little bit on the Walgreens and ESI dispute that's out there. Obviously, I think employers and health plans are having to react and evaluate their potential downstream impact. And in today's environment, when you're talking to customers, they want to talk about 2 things as a general rule. They want to talk about price and they want to talk about access. And obviously, they care about quality, but these are the first 2 items that get checked off on any client meeting. So our job has been from the start to negotiate with the supply chain and deliver really good COGS contracts for one job and one job only, and that's to contain costs. And then from there, it's our job to help direct those prescriptions to the most effective delivery channels. So this business has always been about COGS and your ability to contract. And I view this as an efficient market that's out there, and we can compete well in it. So just to -- you and I have talked about this along the way, in terms of relationships in the network, we enjoy a strong and long-standing relationship with Walgreens. I'll remind you that we were their technology provider for 8 years. And obviously, we know and respect their senior team. So you have to have Walgreens as part of a network strategy. Anybody in this business needs Walgreens long term as a part of the network strategy because they fill one out of 5 prescriptions in the country. So at the very same time, I think it's important to note we've got strong relationships with CVS, Rite Aid, Target and all of them. And at the end of the day, we're not in the business of showing favoritism to the network. We're in the business of delivering service and cost containment to our clients. So I mean that's kind of philosophically how we see it. I do expect a resolution to this dispute, primarily because it's in both company's best interest.

Operator

Our next question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc, Research Division

If we can dive into the $1.4 billion new sales number a little bit. Mark, is that a gross number or is that a net number?

Mark A. Thierer

That's a gross number, George.

George Hill - Citigroup Inc, Research Division

Okay. And I guess if we break that down, should we think of that as, that's $1 billion-ish from Bravo plus the new, the 2 HCIT, 2 PBM conversions minus Hawaii? Is there anything else significant that I'm missing in that mix?

Jeffrey Park

George, this is Jeff. The $1.4 billion is made up of new sales. So it's new wins.

George Hill - Citigroup Inc, Research Division

I'm sorry. Right, not net of Hawaii. I'm sorry.

Jeffrey Park

Yes. So it's gross numbers. So if you think about -- we announced when Bravo was signed on that we had expectations of around $1 billion. And so you can assume that the rest of the business, the $400 million is net new sales, really, across a number of different categories. Some large health plans, some midsized employers, specialty PBMs, other accounts. So we really been able to get it across the key different segments that we hit.

George Hill - Citigroup Inc, Research Division

Okay. Are you willing to quantify the value of the conversions for us?

Jeffrey Park

The conversions in this quarter were relatively small in size. As you know, we have a range of different sized customers. So they were in the smaller scale, but we're really pleased with them, and it's again good validation of the business model.

George Hill - Citigroup Inc, Research Division

Okay. And last question for Mark. I recognize that it's still kind of fresh off the presses at this point, but have you reached out to or had any conversations with the Cigna management team yet?

Mark A. Thierer

Well, George, as I mentioned to you, we've known Cigna for a long time. They've got a couple of our products they use in their operation. And we've got a good relationship. I think it's worthwhile to just step back and categorize for everyone how any major health plan would make this decision process. And going forward, and you've seen a lot of big health plans make decisions in these areas. It first starts with strategy. And any large health plan begins with what is their member strategy, how do they want to clinically manage their engagement with the member. A lot of health plans, and I'm certain Cigna is no different, have a view to 2014, what will be the patient center medical home strategy, how will the ACO model be delivered. And in the end, every health plan looks at the skill and scale required to support the delivery of service to the member. I just want to point out that SXC has created a huge footprint in Medicare Part D, and our platform is clearing 1 out of 3 claims in this industry. And we're obviously a CMS-approved PDP, and there's a reason why major Medicare Part D plans have been utilizing our platform to deliver their service. So when you step back from a health plan leadership standpoint, there are limited choices, really to move the business, and there are a lot of strategic considerations that would encompass that decision. So when I think about it, obviously, our industry landscape is changing rapidly. We think that from an SXC standpoint that we're in position a, with our unbundled model, our ability to be flexible and customize and wrap it around either an existing operation or run alongside an existing operation or potentially replace an existing operation, we have a model that can conform to any one of those permutations. So I would like to say that in terms of our business strategy, we've built a business that can move and adapt rapidly to these changes in the market. And so, without talking specifically about any given health plan, I mean that's how the guys around these health plans look at it.

Operator

Our next question comes from the line of Andrew Schenker with Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

So we've heard recently that there's a big move towards EGWIP products, concerning SXC's leadership in Part D. I mean, how are you trying to capitalize on this trend, if you are?

Mark A. Thierer

So we have, just to be clear, we have in the range of 50 EGWIP relationships out there, it's very solid footprint. And I do see over the next couple of years a growth in the EGWIP footprints. So it's a service delivery, a product offering. We're offering our employers today, and expect that to grow pretty rapidly, actually, over the next couple of years.

Andrew Schenker - Morgan Stanley, Research Division

Okay. Great. And then concerning Medfusion and your specialty business, you guys called it out as seeing a greater pull-through. I mean, what is the runway with that? What is the penetration maybe within your current book and I mean how much -- how large can that get?

Jeffrey Park

Sure. Andrew, this is Jeff. Just as a broad trend, you know that specialty in the industry grows very rapidly. It's been expanding in and around 15% per year on the industry basis. So we've continued to see good growth in our specialty book, in line and better than the market. One of the reasons why we've been able to enjoy growth is really the Medfusion asset not only brought with it a good core capability, but also a very capable sales team. Health plans, employers, they're all struggling with ways to manage their specialties spend. This is something that's growing rapidly. It's where the drug manufacturers are investing a lot of their resources into new specialty medication. It's definitely a differentiator for us when we can get in and to talk to clients about how clinically we can manage their patients for a better case, for wellness and more specifically, how we can take their cost down in specialty. So this is certainly an area of continued focus for us, and we're really pleased with our ability to grow so far in this marketplace.

Andrew Schenker - Morgan Stanley, Research Division

Okay. Great. Just as a follow-up, I mean would you be able to size maybe what the current penetration is within your book and maybe how much you think that might be able to grow?

Mark A. Thierer

Yes. If you look at our book, I don't have the percentage penetrations in front of me, Andrew, but I can give you some perspective. If you think about our specialty book today, we have not only sales into our PBM clients, but we also have sales into the open network, where we sell and manage into pharmacy -- I'm sorry, physicians directly. Having a big piece of the open network is important. State Medicaids are all open networks, and so being able to support those states effectively. So our penetration inside of our book of business is probably in and around 20-or-so percent, and as we look at that area expanding in addition to the open network expansion.

Jeffrey Park

The thing I'll add to this, and I think it'd be worth your time to sign on and have a listen to our Investor Day, we will be outlining the specialty strategy as it surrounds your question. And how do you drive increased open network participation, how do you actually make the conversions into the PBM lockouts. We're going to talk about limited distribution networks, Fee-For-Service Medicaid, specialty adoption in that space. We're going to talk about medical to pharmacy, carb outs for drugs that are hard to mine as a medical benefit. And we'll be outlining our specific strategy to grow the specialty footprint at SXC over the next 2 to 3 years. So that's a key strategy driver for us in the near and intermediate term, and we're all over it.

Andrew Schenker - Morgan Stanley, Research Division

Okay. Great. Looking forward to that. Just last question, on HealthSpring, can you maybe mention any contract terms that help give you increased confidence, I mean, I think, there's been discussion that maybe Cigna will be required to buy you out, and maybe what that might mean?

Mark A. Thierer

No. I mean we don't talk about any specific contracts. But one of the things that we've made a primary focus is for all our larger scale deals. We have built in the proper protections in the event of both change of control and unplanned termination. And so you can just assume that the company has the proper protections.

Operator

Our next question comes from the line of Brian Tanquilut with Jefferies.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Jeff, just a clarification quickly. On the HCIT side, the $1 million nonrecurring revenue, is that a performance fee that you recognized during the quarter?

Jeffrey Park

Not a performance fee per se. This quarter, we had this pickup, as I mentioned, of $1 million. It was for a state client who released a milestone payment. In some quarters, we've recognized either performance fees or otherwise. I'm trying to call out some of the uniqueness in the quarter that was the intent of that.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay. And then I think I missed your mail pen rate for the quarter. I don't know if you gave that out.

Jeffrey Park

It's flat.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Flat. Okay. And then Mark, you talked about some mid-2012 potential contracts or potential wins there. If you don't mind just giving us a framework, are these relatively large or are these more of the small side that could potentially come up midyear?

Mark A. Thierer

I would categorize our -- and now I'm talking about employers who are midyear transitions by and large. These are not health plans as a general rule. We do have some Fee-For-Service Medicaid business that has midyear potential. These are larger employers than we've seen in the past. When we first ramped up our PBM operation, we were kind of in the 500 to 3,000 life range. We're seeing a lot of 3,000, 5,000, 10,000 and even 20,000 life plans that we're competing for. And I fully expect for our midyear that we'll have a decent number of those onboard. So they are somewhat larger than they've been in the past.

Operator

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

Eugene Goldenberg - BB&T Capital Markets, Research Division

Just 2 questions. And Mark and Jeff, I think this is for both of you guys. I know you guys have been very disciplined as far as the RFP type that you go after, and you typically go after something that you have a very good chance of winning. But can you just kind of frame for us maybe as a percentage, how many RFPs do you actively respond to that typically come across your desk?

Jeffrey Park

Well, that's a good question, Eugene. I don't -- when you think about the RFP processes, they basically come through at various, at different times in the cycle. So generally speaking, you're going to look at an RFP in the first quarter, generally, there's not as many RFPs that are coming out. There's a huge season in Q2 for RFPs. And so to try to give you a simple answer, it'd be depends on the time of year. We have continued to see an increase in the number of RFPs, as Mark has outlined. And that's principally due to some of the anxiety that's going on in the marketplace, as well as our increase in scale, and our capabilities have really started to show well. I think if you would have looked that as a few years ago, the broker network would have been thinking about if we were competent and capable enough. And at this stage, we've gotten a lot of high marks in the brokers. This is a great opportunity for them to put alternatives in front of clients, and we're just really pleased with our positioning here in the market.

Eugene Goldenberg - BB&T Capital Markets, Research Division

Got you. And then just 2 follow-ups to that, one is given how late we are in the year and kind of knowing what's happening with Express and Walgreens and their dispute, I mean we're hearing that there is a substantial pickup in RFP activity this late in the year. I mean are you seeing clients that are basically putting out RFP and even if they can't make the Jan 1 implementation they'll say, look implement me in February, March, I don't care, I just want out. Are you seeing any of that?

Mark A. Thierer

We're seeing a handful of it, but I think it's overblown. It's late for a decent size plan to move and that's the bottom line. So I don't think there's been a mass exodus out of any one vendor due do this very recent disruption. If you think about how long it takes to move a plan, there's not a lot of runway. So we've seen some, but it has not been huge.

Eugene Goldenberg - BB&T Capital Markets, Research Division

Okay. That's helpful. And then just a last question, any thoughts on Pfizer's aggressive rebate strategy on LIPITOR as it approaches the patent expiration cliff? I mean have you guys reached any new agreement with Pfizer on LIPITOR? And if so, are you able to share with us any of the specifics?

Mark A. Thierer

Well, I'll say this, first of all, in terms of something that I harped on from the get-go, this is an element of COGS leadership. And in terms of what the market will bear and the proper contracting strategy with the supply chain, you can assume we've been all over this. Obviously, there are manufacturers who are going to offer deals. And if there are deals in the marketplace, we're going to capitalize them. We do have a strategy, it does include Pfizer. There's a mail-order strategy, it's a discrete strategy. But for someone to say there is a one-size-fits-all approach to this situation, that's a mistake. There are variable pricing arrangements, variable plan designs. There are certain state mandates. So at the end of the day, the way we handled it was that we've evaluated every single clients. Certainly, all of our larger clients' current drug mix, and we've customized a solution to each client. If it's a large mail-order client, you can assume there'll be branded product with a very strong contract attached to it. And if retail, there are multiple ways to handle this. And so it's important to build a customer-specific strategy to any brand to generic conversion, and this is something that SXC is very good at and we've been focused.

Operator

Our next question comes from the line of Michael Baker with Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Mark, I know enhancing service capability was a key focus of yours when you took the leadership reins. I was wondering kind of where you stood in that process, and if you could give us some sense to how that's materializing in the RFP scores particularly on the employer side?

Mark A. Thierer

Michael, I appreciate you asking, because this is -- we talked to the investment community about the things you're interested in. But what we talked to our company about is something we call clients for life. And it's something we talk about everyday. It's something we build our compensation plan around, and it's totally focused on customer retention and client satisfaction. So we've got 3 pillars to this initiative. We're in the kind of the 2-year window for this, with the second full year. These 3 pillars include a base operating excellence platform, a client focus and a comp plan around it and a full-employee engagement across the company. So one of the things I'm extremely proud about is that we've changed the culture inside the company from what had been, really, a product company, delivering the best software and service to the industry to now a full-scale service company delivering some of the industry's best service. I've seen this approach work in the past, and we are executing on it religiously. And so feeling very good. And the results are in the numbers. Our client satisfaction are in the mid-90s and rising, and our client retention rate were at 98% of our clients for 2012 are done and signed. So the proof's in the metrics, and that's how we you keeping score on this front.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

And then I also know that you've kind of been focused in on enhancing the management ranks there. Are there any kind of recent hires that are worth kind of pointing out? And then as we look forward, are there any key areas where you're looking to add additional folks in?

Mark A. Thierer

Yes. I appreciate the question. I would say that we have fielded what I think is an outstanding leadership team, and we are where we need to be. So I'm not looking at bringing in any new high-priced folks. Really for the last 3 years, we've spent a lot of time and energy building this team. And so we feel pretty good about the level of industry experience we have in each of our key functional roles.

Operator

Our next question comes from the line of Charles Rhyee with Cowen.

Charles Rhyee - Cowen and Company, LLC, Research Division

Mark, a question for you. I think if I recall back, when you initially signed HealthSpring last year, you kind of talked about it as sort of the opening salvo for you guys to really get into this bigger health plan space. And I can't remember the exact number, but you talked about a large number of other opportunities out there and then as you demonstrated your ability with HealthSpring, you thought that would really jarring some of the contracts loose. Obviously, we have the Bravo that is getting moved over. Can you talk about how your discussions are progressing with maybe some of these other plans? And does anything really change here, perhaps with the Cigna takeover HealthSpring?

Mark A. Thierer

Yes. Charles, I mean, I think you need to just, for one thing, page back a couple of quarters. We announced 2 decent-sized health plans that we won in Michigan HAP and HealthPlus of Michigan, both of which are a couple of hundred thousand life health plans larger than that in one case. And these are complex health plans servicing a complex membership base. Those are great targets for us. And in the 300,00, 400,00, 500,000 life health plan space, we are a formidable competitor. When you move upscale into the larger health plans, many of those discussions surround the technology footprint and how can we help a major health plan run their own operation more efficiently, and we're very good at snapping our tool set and our skills into a health plan and helping their strategy come to life and execute operationally for them. I think if you take a look at OPTIMA, which was a health plan that went live in the second quarter, that's also a great example of how the company is well positioned to serve as a leadership health plan. So candidly, I think SXC is a formidable competitor in the health plan space, and it's now well beyond the middle-market targets that we originally set out to get after. It's the largest health plan in the country.

Charles Rhyee - Cowen and Company, LLC, Research Division

That's very helpful. Maybe just talking about Cigna, you made a comments earlier, you're discussing potential opportunities to talk to them in the future. Maybe if we just rewind, I don't know the last time that the Cigna RFP came up, when they selected their platform, I would assume you were sort of in the mix. Can you give us a sense of what the discussions were back then perhaps? Perhaps why, if you were involved, you didn't get selected? Maybe what Cigna was looking for back then? And perhaps, in terms of what your capabilities might have been then versus now? Whether you have more capabilities to bring to the table that may help influence the decision differently next time?

Mark A. Thierer

Yes. Charles, we're not going to talk at all about Cigna. I've tried to give you some insight into how health plans in general. I think about their strategy decision as it surrounds managed pharmacy, and it's just not appropriate talk about Cigna at all.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. Then maybe instead, can you talk about -- is it fair to think though that over the last few years that we continue to see SXC develop more and more capabilities in their offerings so that every time you've kind of come to the table with large clients, if you've never been selected before, you're bringing more to the table this time around than last time?

Mark A. Thierer

Yes. I will tell you that for any health plan, they've got a lot of things on their plate they're trying to solve on. Not just the new healthcare reform and delivering on, predicting the future on how to deliver a health plan service in that setting. But Medicare Part D continues to change every day. We have a leadership footprint there from a technology and service delivery standpoint. D.0 is an entirely new standard that we've delivered, and we're first in the industry to deliver. If you take a look at the data reporting requirements in these new models, some of our data analytics and integral reporting services are right in the sweet spot for what major health plans want and need. And so we've spent north of $10 million every year for the last several years on coding a platform that solve these unique problems. And so, obviously, I hope you're getting the sense, we like our current strategic situation in terms of being a player to help solve some of these large scale problems, and that would apply for every health plan in the country including the large ones.

Operator

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

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

I have a couple of questions. So first, I was curious, obviously, you've had tremendous success in the Part D area, and that's one of your key platforms. Could you help us to understand how you would be differentiated from potential competitors in that arena? And obviously, we'd be most interested in how you square up with our guess, but just in general, be helpful to get the specifics in that area.

Mark A. Thierer

Yes. Brooks, I'm not going to talk about a specific competitor. I will tell you what sets our company apart in Medicare Part D. Aside from the fact that we've been at it the longest in terms of creating a Part D platform that can deal with the rapid-fire changes that CMS comes down with, I would have to tell you that's the single most important asset we have, which is our operating platform. If you look at any large health plan, one of the biggest issues they have, aside from delivering a great service and making sure members are eligible and they can clear these claims, this is a compliance-driven product line inside the health plan. And you have to be fast, and you have to be right about, are the claims cleared correctly? Are the prior offs [ph] handled correctly? Is the member satisfaction high? I mean obviously, these health plans are competing for star ratings, and it's very important that the service delivery is high and that the United States government thinks that you're compliant with the terms that are out there. And so one of the reasons that we've done so well is we have an operating platform that is very flexible. We customize it to each of these health plans that we service, and we are very focused on compliance and delivering good service. The reason that, that is still center for us is, we are a CMS-approved PDP, and we don't market a product. And so for people to evaluate who can bring these kinds of skills, we are in the Medicare Part D business. We are a PDP-approved by CMS and we don't compete in the open market with a product on our own. So these are the reasons that large health plans are selecting us and it's not just that it's a good sales process. You have to deliver in this space.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

That's perfect. That's extremely helpful. Second question, obviously, you've had tremendous selling success really in 2010 and 2011. I know you've talked a lot about the pipeline and where you're going. Do you think you could have another record selling year in 2012?

Mark A. Thierer

Well, Brooks, if you talk to our sales team and we just had everybody in about 2 weeks ago, we have built a plan that will -- that's our target. I mean the proof's in the pudding and you've got to win. And it's an interesting and dynamic market right now. But I like our chances better today than I ever have. And we have got a selling team and an operating platform that competes. And so I'm not predicting the future for you here. I'm just telling you I like our chances.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Sure. Third question. Just curious. Obviously, there's been a lot of interest and focus on the COB product and opportunities you have there. I'm curious if you can help us scale that opportunity in terms of, is it big enough to really have an impact on your company at this point, or is it a nice strategic opportunity but not really going to move the needle?

Jeffrey Park

Brooks, this is Jeff. We continue to target the state for these services. You really like it as an adjunct to our state sales strategy, as Mark had outlined, and it's certainly an opportunity for our managed care clients. This is really just getting started for us. We're going to see it as a nice contribution as we start to bring through some of these sales opportunities into 2012. It will fit inside of our HCIT unit. So from a revenue perspective, it's not going to pull a big differentiation in relation to the PBM. But we are actually going to be highlighting the enhanced COB at our upcoming Analyst Day in a few weeks. We're going to do a deep dive into the product and how it differentiates in the marketplace. I think it'd be a great opportunity to kind of learn more about it then.

Mark A. Thierer

And Brooks, I'll add one thing and that is, this is a shared savings model. This is a margin driver for the company. And we are using our footprint inside of Fee-For-Service Medicaid as the door opener. And so, tune into New York City, and I think you'll learn some more.

Operator

Our final question comes from the line of Bret Jones with Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I just wanted to confirm, when you talked about the $1.4 billion of new business wins, I believe, Mark, you said in your prepared comments that some of that was a second half '11 start or did I mishear that it was second half or mid-'12?

Jeffrey Park

This is Jeff, Bret. We did win some business in 2012. You're seeing that now, this $1.4 billion will be impactful for full year 2012.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

All right. And so when we think about the $400 million to the x Bravo, I just want to make sure none of that started in the second half of '11, and I'm right?

Jeffrey Park

No. That's going to be a full year 2012.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay. I know you guys talked about that you believe you'll keep the HealthSpring all the way through the end of the contract. But as you do internal contingency planning, if CI were to bring this in-house, how much new business do you anticipate having to win or replace the HealthSpring business, given that it's relatively low margin?

Mark A. Thierer

Yes. I mean, I think that's the important point, And we're not planning to lose the HealthSpring business. But if, beyond 2015, the world changes, keep in mind HealthSpring is a big revenue contributor. But on the margin line, we've talked about our health plan business broadly being in the 1 to 2 points of gross margin. So I think when you start to model the impact longer term, you've got to do a cash flow model in terms of the impact on the share price. And so I don't see much in 2015, that's a long time to predict the future.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

All right. Fair enough. And then just lastly, in terms of -- you talked about meeting the performance obligations within the HealthSpring contract, I just wanted to understand, does that mean that you hit the incentive targets for the full year, or at least through the third quarter? And kind of where are we in terms of margin on that business?

Mark A. Thierer

We're not going to talk about specifics of any client other than to tell you that our customer here at HealthSpring is very satisfied with our services.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay. But when you talk about performance obligations, I wonder if you can tell us what exactly that means.

Mark A. Thierer

That means we're servicing the account to the standards that were defined in the contract, and they're very satisfied customer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

But it doesn't mean incentives necessarily instead of targets?

Mark A. Thierer

We're not talking about any specifics in terms of any given client.

Operator

This concludes the Q&A portion of the call. I'll turn the call back over to the presenters.

Mark A. Thierer

Okay. Well, thank you very much. We will see you in November at our Analyst Day. Have a good day.

Operator

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

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