Lexicon Pharmaceuticals Inc. (NASDAQ:LXRX)
JP Morgan Healthcare Conference
January 11, 2012 12:00 PM ET
Arthur Sands – President and CEO
John McDermott – CEO, Endologix
James Carlson – CEO, Amerigroup
Julie Trudell – IR, Amerigroup
Karen Jay – JP Morgan
Kim Gailun – JP Morgan
John Rex – JP Morgan
Good morning, I’m Karen Jay from the Biotech team at JP Morgan and thank you for coming this morning. And we’re going to hear from Lexicon Pharmaceuticals, the CEO Arthur Sands will be speaking about half of the company. There is a break-out session in the Yorkshire room just down the hall to the left.
And with that, I’ll turn it over to Arthur.
Thank you very much. And welcome. I’d like to start off by thanking the entire JP Morgan team for another excellent conference this year. We’ve had a number of excellent meetings. And we look forward to future participation.
I will be making certain forward-looking statements and so I’d like to draw your attention to our forward-looking statements filing with the SEC regarding our risk factors.
I’m sure a number of you know Lexicon well but we – for those of you who don't, we’re focused on defining new mechanisms of action and finding, discovering breakthrough treatments for human disease. We take a genomics approach to identifying these new targets, fuelled by G-knockout technology. So, every target we work on is genetically defined and the therapies we develop are small molecules that address those targets, all developed by our internal research team.
Business models to commercialize both independently and through partnerships, these new discoveries as we progress our pipeline.
As you can see by our pipeline slide, we have a fairly diverse portfolio of products and development, the small molecule products. The diversity comes from our genomic approach that allows us to be very selective as to what we think are truly the best opportunities in each therapeutic space. It allows us to operate in very large areas such as diabetes and then also very focused indications, such as carcinoid syndrome, which is an orphan indication.
Each of these of course are new molecular entities and novel mechanisms. And so in Phase 2, where we achieve proof of concept as we have with a number of the programs now indicated here on the slide, that’s a very important milestone for us. We also have products and gastrointestinal disease, Irritable bowel syndrome, autoimmune disease, rheumatoid arthritis and our latest product and our development is in glaucoma LX7101, we’re happy about having filed the IND in December of last year and moving forward rapidly, into a trial and patients coming up here in the next quarter.
So, then was the time on the Phase 2 programs, I’d like to dedicate a fair amount of time to our diabetes program which is a unique agent, first in class dual inhibition of SGLT1 and 2. For those of you who are not familiar with these two targets, they’ve been, they were defined genetically first in humans lacking these targets.
And first it was SGLT2 here on the right, a target, glucose transport in the kidney. And these patients lacking those targets basically had an anti-diabetic phenotype. They excrete large amounts of glucose in their ear (ph) offload the glucose that way.
We developed Knockout (inaudible) and SGLT1 and we identified SGLT1 as also a very attractive diabetes target, humans liking SGLT1 have also been found and they have Glucose Galactose Malabsorption because SGLT1 is – if they take large amounts of glucose and SGLT1 is the transporter in the G1 tract responsible for importing glucose into the system.
So, looking at these two targets from a human genetic side, most of Big Pharma focused on SGLT2 and there is a number of compounds in fact, most, all of them are focused on their target. But we developed agents that inhibited both as well as selective inhibitors. And looking at the profile of the dual inhibitor, both SGLT1 and SGLT2, we saw superior profiles. So, we selected LX4211 as our drug candidate to go forward on clinical development.
Now, there had been theoretical concerns about SGLT1 inhibitors that might cause gastrointestinal side-effects, we have not seen that with our pharmacology studies in either animals or in humans. And so, we’re happy with the safety profile today for those dual inhibitor.
Just a quick look at the competitive landscape you can see that there are again, most of the large companies focused on SGLT2, we’re the only dual inhibitor and most recently though, our GSK is in the space with a SGLT1s, selective compound, there at the bottom of the slide in Phase 1, and we recently saw update on that confirming our findings in terms of the benefits of hitting SGLT1.
So, let me just pay for your overall strategy in the clinical development and diabetes. And this actually goes for our strategy in developing drugs in our other areas as well. But first and foremost, we seek to demonstrate the benefits of our new mechanism, in this case SGLT1 and 2 in Type 2 diabetes. And then, also differentiate these findings from the competing agents. And so, in this case and diabetes it’s all about the parameters of glycemic control to demonstrate these benefits.
Next we include biomarkers for every development program we have. And we have seen that our compound has activity enhancing the secretion of Glip 1 via the SGLT1 action, that looking on like Peptide 1 and PYY and appetite suppressant hormone via that action as well as urinary glucose excretion.
We also think it’s important in the development paradigm to demonstrate the power of not only model therapy with LX421 but the combination therapy which is, become the mainstay of diabetes treatment. Of course documented in the safety profile, and our goal here in the diabetes is to engineer Phase 3 ready – partnership ready program which we should have by the end of 2012.
The strategy has translated into a successful series of clinical trials for LX4211. And I won’t go through all the trials we’ve conducted but it’s been a very robust clinical development program, very thorough and aligning ourselves with eventual large pharmaceutical partnerships.
And culminating in the study at the bottom, which is the ongoing 12-week 2b study where we should have results in June that will be the last clinical trial before we embarked on the Phase 3 preparations in the second half and then we would hope to start Phase 3 in early 2013. So, I’ll hit on a few highlights from these various studies to show you some of the latest findings from LX4211.
Just to give you some context from our 2A study in 4211, this is a graph showing the very rapid reduction of fasting plasma glucose over 28 days, this was our first in-patient study both those groups had really profound effect on fasting plasma glucose, translating to a fairly remarkable effect on decreasing hemoglobin A1C in only four weeks. So, we think that this affect on glucose controls a rapidly, really is driven by the dual inhibition of SGLT1 and 2.
In addition, we saw triglycerides drop about 30%, again we think mediated through the SGLT1 portion of the mechanism and demonstrating additional benefits in this parameter. This is unique from SGLT2 selected compounds.
And then, what you’re looking at here is nice drops in weight in both those groups by week over four weeks, as well as drops in blood pressure. So, a very nice metabolic picture overall which we think will translate to an excellent safety profile and ultimately perhaps cardiovascular benefit which will be part of the Phase 3 program.
Highlights from our studies showing first mechanistic study showing where we learned that Glip 1 is elevated by hitting our target, single doses both in red and blue, those are different dose forms, both elevating total Glip 1 over the course of the day, the peak CC are meals and elevating PYY, this hormone that is part of the response to eating meals.
So, with this Glip effect, and the SGLT1 mechanism, what we really, I think our breaking new ground here at Lexicon, we asked most recently a very important question, could our drug synergize with DPP Foreign Inhibition. DPP Foreign inhibitors are established in the marketplace. They operate by breaking – by blocking the enzyme that breaks down Glip 1 if good glycemic control and safety profile there are weight neutral.
And this, since combination of therapy has again become a mainstay of diabetes therapy we want to be able to position our product profile to be able to be combined with a number of agents.
And the bottom line here, the last bullet point there is the whole goal is to be able to have oral therapies that would prevent the progression of disease and also avoid the need for moving to injectables such as insulin and Glip 1 injectables.
So, the first study that we saw in mice, this is really interesting synergy between our drug in blue Sitagliptin our Genovia (ph) given to mice. And then, looking at the Glip 1, active Glip 1 levels here when given together, quite impressive, this is both sustained and significant in dosing in animals, and gave us confidence to move into Type 2 diabetic patients to test this dual mechanism concept.
So this is the first time we’re presenting this data here, we did have a press release Monday afternoon announcing the results of the study, of a single dose study with 4211 and DPP4 inhibitors of the Sitagliptin, 18 patients were Type 2 diabetes, triple cross-over, blinded design to control for all the variables and get us some good answers.
So, let’s start with total Glip 1, and blue is our agent on top. And in gold here is Sitagliptin. And you can see, we have a very nice, statistically significant affect on total Glip 1, Sitagliptin does not appear to have such an affect. Agents given together, in combination we do have the statistically significant increase in total Glip 1 as compared to Sitagliptin alone. Now this is a bit of a complicated story, total Glip 1 is now seen as a desirable incretin to have with beneficial metabolic affects.
Early on in the story, most people had focused on Active Glip 1 and here, is the two agents in Active Glip 1, you can see Sitagliptin as it’s designed to do its primary mechanism of action raising active Glip 1 nicely, our agent on the bottom. But together we see at least an additive affect on single doses and we hope through time this could actually become a synergistic effect. So, we’re able to work with the PP4 Inhibition to enhance this beneficial effect.
PYY, you can see our agent on top, profound effects on PYY, combined we’re able to somewhat rescue the flat or negative effects of Sitagliptin on PYY. And we think this may ultimately translate to an advantage in terms of appetite suppression which is the function of this hormone.
And then, netting us together Postprandial glucose, you see our on top Sitagliptin after meals for blunting the Postprandial glucose although still abnormal, our agent having a nice effect, about equivalent at launch. And their agent looking a little bit better at dinner but together they bring down postprandial glucose. This is the first signal that we’re getting these agents, really are creating a clinically meaningful affect on blood glucose, not just the biomarker effect.
And in insulin – insulin is stimulated by Sitagliptin, that’s how it works when you have more active Glip 1. We have lower insulin levels and achieving good glycemic control. Together we’re able to bring down the insulin levels, slightly, it is statistically significant. And this is important because it’s a reflection of the pancreas not working as hard, not having to put out as much insulin in order to gain glycemic control. So, the overall profile looks quite good of this combination. We can also see that of course our agent increases glucose excretion, that’s this methodology of action, Sitagliptin does not.
So, we’re encouraged by this combination therapy. We think that this is something to consider for the Phase 3 program. We think it as to a therapeutic product profile in terms of the ultimate number of combination products that could be designed.
But of course the first combination study and I think the most important which we’ll complete in June is with Metformin. Metformin is a standard of care and being able to – first to add the Metformin level is very important and this is the study in 285 patients which we’ll read out then.
So, I think I’ve hit on many of the summary points here in the slide, why we’re excited about this program, this opportunity for this new mechanism, this new small molecule, really a first in class agent.
I should also mention at the bottom, we are now designing, based on these recent findings, our study in modern to severe renal impairment where we think we can address this important probably by about 30% diabetes where other agents have not been able to function there again, driven by the Sitagliptin story.
I’ll move very quickly through LX1032 for carcinoid syndrome, this is our tryptophan hydroxylase inhibitor. We block serotonin synthesis the tumors here are metastatic in these patients. They secrete large amounts of serotonin creating GI symptoms flushing ultimately cardiovascular problems. We have fast track status with the FDA and we are also exploring this in a newly initiated proof of concept trial in ulcerative colitis.
This field has been dominated in terms of competitive landscape as you can see here by sandostatin and somatostatin analogs. We’re the first I think new small molecule to come and addressing this patient population.
I’ll just move through quickly the results of our proof of concepts study in 23 patients. Again, this is an orphan indication this is a good sized study for this size indication. We tested four dose groups and with our primary end points being looking at relief from gastrointestinal systems symptoms among others.
The clinical response here defined as greater than 30% reduction in bile movements for two weeks or more, as well as a biochemical response of our biomarker, that’s 5HIA.
Looking at the results, then in placebo column you can see no responders zero, zero, zero on placebo, significant percentages after only four weeks in the (inaudible) treatment group. And we know now from our European Open Label Study as you progress to 12 weeks, we get even larger percentages of patients responding. So, we’re very encouraged by the durability of this and the fact that going longer, patients seem to do better.
This is just the slide that shows you the overall negative readings or reductions in bile movements and the treated group, placebo group actually going up as in the per day basis, makes a significant difference to the life of the patient. And if you look at all the patients in this study, the percent reduction of bile movements in base here, these are treated, the majority of treated patients showing a nice reduction. In green of the placebo, they’re getting increases as reflected in the individual data.
So, with treatment we see that we’re having in fact a statistically significant and important affect for patients. And the patients report this subjectively by reporting adequate relief as you can see in this placebo group, no patients reporting adequate relief.
The 5HI Biomarker correlated with these clinical symptoms saw there was excellent correlation across the variables we measured. And the adverse events were generally balanced between groups, once serious adverse event, of nausea which has been documented in these patients before and the patient recovered rapidly.
So, overall, we’re encouraged by the top line data. We’re meeting with the FDA shortly to discuss the Phase 3 program and the EMA and we look forward to moving this into Phase 3.
We are conducting this ulcerative colitis trial, that’ll be going through the course of the year and show that results in the first half of 2013.
We have a locally acting version of this compound, LX1033 that blocks only in the gastrointestinal tract, the production serotonin we’re pursuing this for IBSD. This has progress very well through its Phase 1 program. And we’re initiating a large Phase 2 trial. Currently it’s a 360 patient trial the investigator meeting is in a couple of weeks.
This is a busy slide, but just sufficed to say a number of genetic studies have come out recently and each of these as sighted here as abstracts and recently the DW meeting, finding mutations in the serotonin pathway as being correlated with IBS. IBS has been notorious, subjectively defined syndrome. But finding these genetics I think are quite substantiating for our mechanism which is right on the serotonin pathway.
1033 is a very potent agent. We get nice reductions in serotonin biomarkers, you could see here a multiple of the dosing regimens, this allows us to go and explore BID dosing in the next trial and gives us an objective biomarker by which to measure the response of the drug. Again, very important in this GI area and new, and it’s leading us to actually co-develop a companion diagnostic for this space.
So, in summary, LX1033 has completed Phase 1 initiating large Phase 2 trial. We think we’ve got a nice serum plasma biomarker 5HIA which is a new test to bring forward for the phase 3 program. And we think ultimately we’ll be using clinical practice actually quite extensively to gage dosing for those drugs.
The study, I think I already mentioned 360 patients that was a very thorough study. And we’re going to be looking at the biomarker correlating with clinical efficacy, we’ll be looking at genotypes, this is a very scientific study and should put us in good position to launch a phase 3 study in 2013.
Last program to discuss and then I’ll sum up with our overall trajectory for the programs as a group. LX2931, this is our first in class S1P Liaison Inhibitor. This is a key regulatory pathway for inflammation and lymphocyte trafficking which is the first agent really on this pathway to be approved as Galena for Novartis for AMS. We had a target within the cell, which is the enzyme that controls production of this very important signaling molecule S1P, very potent effects on lymphocyte trafficking, multiple applications of course in ordering new disease rheumatoid arthritis, MS and others.
The last study we conducted in this was a 200-patient trial where we studied this at the doses that went up to 150 mgs. And we found in that study that in the high-dose groups and in those patients that achieved a certain blood level of 60 anagrams from now, we got a very nice ACR response 80%, versus a high placebo rate of 49 but statistically significant but not significant enough for us.
And so, what we’re doing is a dose escalation trial. We’re dosing patients up to 500. We think we under dosed in this initial 2A study, so it’s in this transition trial currently. We should have results in Q2. And that would put us in the position to judge whether or not this agent could go forward of higher doses to achieve these ACR responses and these blood levels. So, this is ongoing. As I said, we should have results in Q2. And at that point we’ll make a judgment call about the next step for that program.
So, to sum up then, the overall pipeline, I know this is a busy slide but as you can imagine, we do have a number of programs moving forward. And we’re able to prosecute them diligently.
In bottom, if you just draw your attention to these purple Phase 3s, these are really the targets for us. With these programs, over the next 6 to 24 months, we could have three Phase 3 transitions. Of course we believe carcinoid will be the first, that’s well on track. But, then followed by diabetes and IBS penning those results, this puts us in a very strong position with regard to partnership and the ultimate development of commercialization of our programs.
So, I think in the near term, the most important milestone is right here in mid-2012, our results from diabetes. I think that’s probably got most of the attention currently. But I also would keep an eye on 2931 I think that’s a fascinating program.
So, just to close then we ending here in a very strong financial position. We have cash and investments of over $280 million as of December and that’s after a successful completion of rights offering with proceeds of approximately $161 million. We’d like to thank all the investors who strongly participated and supported that rights offering structure. It was very important to the company for us to be able to progress programs and maintain financial flexibility and partnership flexibility.
Just a word or two on our business strategy, commercialized products both independently and in collaboration with partners. Clearly, these large global primary indications, we’re going to be seeking partners. And we’re going to be leveraging the large company‘s strengths with our strengths in science to bring forward these to broad populations. And this of course would be diabetes in particular.
We have been engaged in a number of discussions, already this meeting of course and prior too, regarding LX4211. And I think there is a lot of interest in the program.
The second point there, we intend to form regional partnerships to commercialize, select indications or commercialize these ourselves independently. And this is a bit of a shift after what I reported on our last conference call, we have been in discussions with companies on LX1032. I had indicated we were moving forward to a partnership in that area that is still an opportunity to us.
However, given the recent successful financing and after a number of very thoughtful conversations with our investors, Lexicon would like to own a larger share of carcinoid syndrome. And so, we would although the door is still open to regional partnerships, we definitely are focusing on commercializing and moving out forward ourselves. But we are leaving the door open to partnership considerations.
So, with that I’ll close. Thank you all for your attention. I know, I had to go through a lot of data fairly quickly. If you have any questions, we’ll be in the break-out room I believe in the Yorkshire room. Thank you.
Good morning. I’m Kim Gailun with the JP Morgan Med Tech team. And presenting next we have Endologix. So, without any further adieu, it’s my pleasure to introduce CEO John McDermott.
Thanks Kim, good morning. Okay, so Endologix, medical device manufacturer located in Irvine, California, here is our Safe Harbor disclosures. Just briefly to kind of kick us off at a high level, we are competing in a large and growing market, and I’ll walk you through all of the dynamics of that and how we plan to accelerate that growth.
The company has grown very nicely over the last several years with significant number of continued growth drivers which I’ll also touch on through the course of the presentation. As well as you can see, we’ve had strong growth and then expect to continue that over the next several years.
This is what we do, we treat Abdominal Aortic Aneurysms. The picture over on the right shows the traditional or historical approach which is open repair. And what’s evolved over the last several years is more of an endovascular approach or what we call EVAR, which is the catheter based therapy whereby a device is inserted through a small incision in the patient’s groin. And the device is guided up to emplace and deployed which basically realigns the aorta from the inside out. Therefore shunting the blood off of the fragile aneurysm and preventing rupture which is fatal.
In the United States now, a little over 60% of the Triple As are repaired with endovascular therapy. And another 40% are still treated surgically. The reason for that I’ll touch on as I go through the presentation is really primarily related to the wide range of different types of anatomies that we still see in the devices that are currently available are not suitable to treat all those different anatomies.
This is the current EVAR market. This is for devices that are used below the renal arteries. And the location with the Aorta would become important as we talk about how we’re going to expand the market moving forward in our product portfolio. But if you just took last year’s total global sales of these devices used below, the renal arteries, it’s about $1 billion.
And you can see the segments, 60% of that is in the US and you can see those relative market percentages. So, 85,000 procedures on a worldwide basis and you can see the average selling price is relatively high. We tend to have one of our clinical specialist or sales people in the OR for every case, so this is very high touch, high clinical type of sales.
This is the competitive landscape. All of the devices over on the right, which we call proximal fixation, really the first generation or traditional types of devices, they look very similar to a surgically implanted graft. And in fact that’s how they, that’s how the development evolved. They were surgically implanted graft to which they sowed stents and they put these devices inside catheters and they were delivered through the legs as I mentioned.
Our device over on the left is fundamentally different. You can see that it sits it actually sits on the patient’s native bifurcation. And that’s how it gets it’s fixation with all of the other devices, they’re deployed up near the renal arteries. And when they come out, there were anchors, hooks and barbs that attach and try to adhere to the vessel wall for their fixation, that’s how they are put into place.
Unlike all of those devices, ours is actually positioned to sit right on the patient’s native bifurcation. So, we get our stability. We don't hang from the artery like the other devices we actually sit on that patient’s natural bifurcation. The advantage to that is we can’t lose our purchase. There is nowhere for the device to go. So, we’ve got very good long term clinical data.
The other advantage to that is we preserve that bifurcation. So, if you put in any of the other competitive devices, once that device is in, you can no longer go back through that graft if you ever wanted to do a future peripheral intervention, which is common. About a third of aneurysm patients also have peripheral arterial disease
And the preferred approach to treat somebody with PAD is coming from one side of the groin and cross-over to treat the lesion on the other side. Once you have one of the competitive devices in place, you can no longer do that. So, it’s the only device that preserves the ability to go back over the bifurcation for future interventions. And that has become more and more important as you get a larger installed base of these Endo-grafts and these patients are living longer and they’re coming back now with PAD. And it becomes a problem for the doctors to treat them with the exception of our device.
So, we kind of grew up being the other guy, you know, the analogy we use and the company has worked, you need more than one type of screw-driver in your tool-box. You’ve got a Philip’s head and a fly-head, and we’re the Philips.
And we grew up treating some more challenging anatomies than the other companies. But over the last few years, as we worked our way into physician’s practices, they’ve realized, they can use us for the common cases as well as the challenging cases, and that has contributed to our growth. As well as we’ve worked hard to broaden the range of sizes that the device can now treat and made it easier to use.
Just briefly, the clinical results, we’ve got a lot of different peer reviewed articles highlighting our data we’ve done, 3 PMA trials. The device has been used in thousands and thousands of patients with long term follow-up, our results are as good as or better than any of the competitors. And again, what’s unique about this platform, it’s the only device that really sits on the bifurcation and preserves that anatomy.
Here is our historical growth, so the company has grown nicely over the last several years. 2011, we do not announce at this conference, our call will actually be in third week I think of February. That $83 million that you see on the slide here for 2011, that’s the mid-point of our guidance. But we haven’t reported our full year results yet.
So, as we go through the product portfolio, what I showed you a minute ago was this concept of what we call anatomical fixation. If you look at our sales today, all of our sales and expenses, that is all with this core product. And we just introduced a new version of that device that we call AFX, and it stands for Anatomical Fixation. We introduced that in August of this last year and are still, I would say, still rolling that product out.
What’s unique about it relative to our previous devices, it’s a lower profile version as well as we developed a new graft material for one of our other devices, which I’ll talk about in a minute called Ventana.
And this new graft material has really, phenomenal seal characteristics, sealing is what we do. If you think about these, these technologies, you want to shunt that blood but you need to also have a very good seal, a blood tight seal above and below the aneurysm to make sure that there are no leaks. And so far in the early clinical results, with their effects, it’s performing extremely well. So, this is our newest most recently launched technology.
The way we sell these devices in the US, we have a direct sales force. As you can see, we finished the third quarter with 72 reps and clinical specialists. We plan to grow that up next year to about 77. But next year or this year now for 2012, we’re putting much more effort into building our direct channel in Europe.
So, we started in the second half of last year to build our own direct sales force and finish the year with 12 people which was our plan, and will more than double that by the end of 2012.
The reason to go direct in Europe is really driven by the portfolio of new devices. We have several launches of new technologies in Europe over the next few years and wanted to do that through our own team as opposed through distribution partners.
As I mentioned, it’s a very clinically involved sales process. It takes really years for these reps to become proficient and be able to treat complex anatomies. And as you can see, we’ve got well over 400 years of EVAR experience in the sales force.
So, where are we focused on the new products? I just showed you our most recent device which replaced our previous infernal system. But the big unmet needs in our marketplace have been more challenging anatomies. Specifically this area, just below the renal artery is what we call the neck of the aneurysm which is the landing zone for all of the competitive devices.
All those devices have to achieve both seal and fixation at that point. And if you don't have enough real-estate or enough good vessel, then those patients can’t be treated. And as you can see here from this 3D reconstruction of this vessel, this is not an uncommon image where there is no neck there is no narrowing below the renal arteries for one of these devices to attach.
So, this patient which represents about 20% of the diagnosed aneurysms, could not be treated with the currently available devices. So, they would have to go to surgery, and if they weren’t a surgical candidate, they would get no treatment at all. So, there is a big portion of that, 40% of patients that still goes to surgery that falls into this category with these very challenging anatomies that need a better solution. So, that has been one of the major issues.
The second issue or limitation with EVAR is what we call secondary interventions. As I mentioned before, sealing is very important and you want to prevent leaks. The problem is if you get any kind of leaking from above or below or in some cases 15% to 20% of the time, we actually have side branches that remain patent to our open, that profuse that aneurysm sack. So, even if the device is put in successfully, if there is a side branch vessel that continues to profuse that aneurysm, it’s still that risk of aneurysm expansion and rupture.
So, that’s why these patients once they get a device, they need to be monitored, really for the rest of their life. And the standard protocol for monitoring EVAR patients is with CT follow-up. So, once a year they’ll go in for a CT-Scan and they have to do that for the rest of their life.
Now, there is a trend toward doing that with Ultrasound but there is still the prevalence is CT. The reason they have to do that is to monitor these aneurysms and make sure they don't expand and rupture. And that’s a limitation with the current technology. So, we need a better way to seal these aneurysms permanently than we have today and I’ll talk about that as we go into the portfolio.
And then the last unmet need is percutaneous. So, there is – as the devices get smaller and smaller, you know, we need right now to insert the devices as you do bilateral surgical groin incisions. And we should be able we should be able to do this therapy over a guide wire like many other endovascular procedures.
To that extent, a few years ago, when we introduced a device called Intuitrak, which is a Sheath based system, a lot of physicians came to us and they said, this device is great for percutaneous. And we said, terrific. We’ll start to – we’ll start to provide physician training and we’ll teach the market how to do this.
But the problem is, is that – it’s an off label indication. So, we went to FDA, and to seek an indication and had to do a clinical trial. And we’re just in the later stages of enrolling that. And I think we’ll finish enrollment at the end of this month or first part of next month.
We partnered with Abbot who has the closure devices. And by combining these technologies, our EVAR device and their closure device, we can actually we can do these procedures fully percutaneous over a guide wire. The benefit to the patient is there is, no groin incisions at all. So, they can literally go home with band-aids in their groins and that should reduce groin related complications, as well as less pain and discomfort to the patient.
So, that trial is just about completing and we would expect those results to be publicly available probably in the middle of this year and hope to receive that expanded indication by the end of 2012.
Another new technology that’s gotten a lot of attention is called NELEX. And we had a development program internally for a couple of years, looking at different ways to seal that aneurysm sack. As I mentioned, you can still get leaks, once you put the device in, you still have an aneurysm sack and you need to prevent leaks. So, we had looked at a variety of different technologies to seal that sack and make that a more permanent repair.
And we had a program that was designed to do that and we’re making very good progress with it. And we got excited and convinced that sealing the sack was the way to go. There was only one other company that was doing anything like that. And it was a company actually located in Paulo Alto called NELEX.
And we looked at them and said, you know, if we are committed to sealing the sack, there are the only other competitor in this space. We think this is the way of the future so, we acquired them last year. It’s been just about one year ago today. We completed that acquisition of fully integrated the technology made significant improvements to it. And just at the end of December filed for our CE.CA in Europe and I’ll show you the new product pipeline in a minute.
So, this is a very exciting product in that. It’s the only device that really has the opportunity to complete seal the sack. It’s much easier to use than the existing EVAR devices and we’ll treat a wider range of anatomies and I’ll show you that in a minute.
So, here is just a list of the competitive set, just kind of what I’ll call the specs if you will. We measure indications in the EVAR world by vessel size. So, you’ve got the profile which is the outside diameter of the catheter basically the size of the catheter that the vessel sees. The neck length, that’s that area of tissue, just below the renal arteries. And right now, the limitation has historically been 10 to 15 mm.
As you can see, the NELEX device, we’ll be able to treat necks as short as 5 mm. So, we’ll treat the shortest neck of all. And the reason is, because it fills the sack, it doesn’t need that neck tissue as a way to anchor. It basically seals the sack and the stability comes by sealing that sack. And by the way, it’s a bio-stable polymer that has the consistency of like a pencil eraser. So, it’s bodyweight, you don't have a cast. It’s not as heavy projecting object, it’s a very biocompatible soft and conformable.
The next dimension you’ll see there is neck diameter. It’s another limitation with the current devices is they can only treat up to 32 mm necks. This device will be able to treat larger necks. So, these patients with larger aortic necks today, they have to go to surgery. And again, if they’re not surgical candidates, they don't get treated.
And then lastly, iliac diameters, about a third of the Triple A patients actually have the disease that extends down into and includes their iliac arteries. If the iliac arteries are too big, they too cannot get an EVAR treatment. So, they’re left for surgery if they are a surgical candidate.
So, we believe based upon the feedback from clinicians that today about 60% of the patients are treatable with a NELEX technology, we should be able to expand that up to about 75%. In addition to being the only device that completely seals the sack and it’s considerably easier to use than the other technologies. So, we’re excited about this and the clinicians that we show it to share that enthusiasm.
Another one of our devices Ventana, because we sit on the bifurcation we don't have the same limitations as it relates to working our way up the aorta. And as I mentioned about 20% of the diagnosed aneurysms have no aortic neck or have a very, very short aortic neck and these patients don't get treated today. We developed a device that you can see as branches that extend into the renal arteries. And we can open up another segment of this market that these patients today are just – they’re destined for surgery if they are surgical candidates.
So, this is an exciting program for us. We are closing in on completing our CE trial enrollment, 30 patients we should have that done, end of this month or first part of February. We’ll file for, and I’ll show you a timeline in a minute for CE Mark. We had conditional IDE approval as we exited last year, this week we received our formal final IDE approval and now we’ll start pulling on the sites, we’ve got 23 sites identified in the United States to run our IDE trial. And again, lot of enthusiasm for this technology because there isn’t a good solution for these patients today.
So, if you combine these two new devices. Today if you look at the blue bar, 60% of the diagnosed aneurysms are treatable with the currently available technologies. If you expand that 60% to 75% with NELEX and then you add the additional 20% that you can now capture with Ventana, we think we can expand the treatable population over 90% from today’s 60. So, it’s a significant market expansion.
And we’re not just going to grow from that market expansion we think we can take significant share within the existing market because NELEX is significantly easier to use than the other devices. So, we’re very bullish about the future.
This is a busy slide but gives you a perspective on the new product pipeline and the timing. As you can see, if you look over to 2012, we have not introduced AFX in Europe. We will do that slowly starting in the first quarter and roll that out gradually over the course of the year.
You can see that NELEX is expected to get CE Mark around the middle of the year. That will be done in a very controlled, limited market introduction through the balance of 2012. We think we’ve got something special. We’re going to take our time and do it right. We’ve already got selected centers identified that will start a limited market introduction and then we’ll do fairly significant post market trial also in Europe to gather more data. We should exit 2012 with some momentum to open that up more commercially in 2013.
Ventana is also slated for CE mark before the end of next year. So, similar to NELEX, we will start that in a limited number of centers, building more and more clinical experience. We’ll have a post market study there as well, rolling into a more full commercial launch in Europe in 2013.
And then you can see, as you move your way across, Ventana would then be slated for US approval in 2014 and NELEX in 2015. Expand, if you see that name, that’s actually the name of the devices that were developed to treat those renal arteries. Those branches, that’s actually a really nice stand alone products, about $100 million market. It’s adjacent to us, same customer, same call point, our technology. So, we would get another indication for that device as well.
So, we’ve got a busy several years ahead of us with all these new product introductions. That’s why we decided to go direct in Europe. We didn’t want to launch all these new technologies in Europe through distributors, we thought we could do a better job, do it direct.
This is what we think the market is going to look like over the next five years. What’s different about this from the earlier chart I showed you was just the – the earlier chart which was $1 billion was just the infernal segment of the market. So, that $1 billion is expected over the next five years to grow to about $1.7 billion.
We’ll create this new segment of the market for juxtarenal aneurysms, that’s these aneurysms that are higher up, that are targeted for Ventana. And then the thorasic, that yellow slice of the pie, that’s the other aspect or the other area of the aorta where we don't currently have a presence but have plans to.
So, for us, you know, we’re really a single blood vessel company. And we’re going to be competing in a market worth well over $2 billion. So, given our size and skill, we can do nothing but a aortic work for a long-long time and grow the business very nicely so, very focused with a lot of opportunity ahead of us.
Here is our 2011 guidance again. We don't – we won't provide our 2012 guidance until our Q4 call which will be later in February. You can see the sales guidance for the year and our anticipated loss per share. We have guided to be profitable in 2013 as well as we forecast our average sales growth rate over the next five years to be 25%.
Here is how we finished Q3 in terms of balance sheet. So, we finished – we finished that quarter with $24 million in the bank in addition to a $10 million unused line of credit. So, we feel we’ve got adequate liquidities to support the growth and needs of the business moving forward. And that’s it.
So, we’ve got a very strong core business. And obviously a very exciting pipeline that will both expand the market as well as enable us to capture more share in the existing market. The pipeline in addition to our continued gradual expansion of the US sales team and then building a whole new sales and marketing capability in Europe, we think provides us with good long-term growth opportunity. So, I’ll look forward to answering questions in the breakout. Thank you.
All right. I think we’re ready to go. I’m John Rex. I cover healthcare services stocks for JP Morgan. Thanks for joining us. So, next up we have Amerigroup, Jim Carlson is on the stand. He’s the CEO, and he’ll be presenting the story, also Julie Trudell, who runs Investor Relations for the group here. So, Amerigroup are purely focused in government program business. I guess of I think about a theme that we could say has been underscored many, many times over the last three days, it’s some of the emerging opportunities in that business and Jim is going to tell us about them now.
I’ll turn it over to Jim.
Well, thank you John and good morning everybody. I’m glad to be back here at JP Morgan 2012. Let me start with a little housekeeping here. We’re going to be, we’re webcasting this just with the audio. So, I’m going to read to you the Safe Harbor statement that companies are presentation this morning.
Our presentation includes forward-looking statements including statements related to our growth prospects. These statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise you to review the risk factors discussed in our Annual Report on Form 10K for the ended December 31, 2010 and subsequent Quarterly Reports on Form 10Q and Current Reports on Form 8K filed with or furnished to the Securities and Exchange Commission.
So, just to lay out the agenda here for a few minutes, we’re going to first talk about the company, spend a little time on the industry and spend most of our time on the market opportunity and wrap up with some financial highlights. First the company.
So, we always, like to start our talks about the company with pointing out to folks, particularly folks who are new to Amerigroup, there really are different kind of insurance company that might be in your frame of reference. We uniquely serve state governments, meaning their Medicaid programs, not employers. We deal with populations that are financially vulnerable and disabled. So, people depend upon state programs or typically low income status or have a disability different than you know, selling to corporate America.
The states, who are our customers, actually set our rates as opposed to us setting the rates. So, it’s more of a price taker economy, to find a margin you have to operate your business more efficiently than the actuarial assumptions built into the rates that you accept. It really explains a wide variation among industry participants in terms of performance. It’s an all-commerce business.
So, with all this debate in terms of healthcare reform of our preexisting conditioning exclusions and so forth, we take everybody the state sends us. Always have, always will. And because we enter into a rates with states, we have much lower distribution cost than you would typically see in the health insurance company.
If we win up a new business opportunity, we would typically start experiencing hundreds of millions of dollars in the first year revenues from a sale like that. So, we don't have a retail sales force like you would typically see in other companies.
Today, Amerigroup finds itself as the eight largest publicly traded managed care company with a 18% compound annual growth rate. And we’ll enter our 12th market and have to be in business for 17 years, this coming February here if everything stays on schedule.
I would also point out that within these Medicaid programs that we operate, there is a distribution of our revenues. So that a little bit more than 30% of our revenues are derived from Non-Temporary for Needy Family and State Child Health Insurance Program members, meaning that the inverse is true. Most of our members are low income people they’re in Medicaid because of their low income status.
But the big part of state budgets financing Medicaid is really people with disabilities and people from nursing homes and people with long-term care needs. And today’s that over 30% of our revenue. So, it’s very distributed within and diversified within Medicaid.
This slide would more point out to you the markets in which we operate. You can see some pretty deep concentration of our members within the markets we serve. These are all people who are insured. And we look at other large companies, they may have a lot of bodies that they take care of but because of many employers choose to self fund their employee benefits, we really have as large footprint in terms of insured business in many of these markets as virtually anybody in the business with the exception of some of the large Blue Cross concentrations that we see on the commercial side.
So, at the bottom, we’ve got a few boxes that breakout these populations. Again, a large portion of our membership are in core Medicaid and Chip, but look at the middle box there, we have over 200,000 people in the categories of age blind disabled duly eligible and long-term care members.
And way over in the right hand side of the box, you’ll see that we’re also in the Medicare Advantage business but our focus in Medicare Advantage has been historically to provide services under the provisions that allow for special needs plan marketed to people who are duly eligible for Medicare and Medicaid, so, again, a very distributed and diversified array of members across our geographic footprint.
In 2011, we experienced a few highlights that we’d like to share with you this morning. We’ve hit roughly the 2 million member milestone. Medical cost trends during the year, the backdrop for medical costs for us, it’s been a fairly benign environment the last year and half or so. During 2011, we did see cost up-tick a little bit back into the range of what we consider normal. And we have called that out.
The big headline for us from a growth standpoint in 2011 was really the re-procurement of the Texas Medicaid opportunity, Texas going into this re-procurement was about $5 billion opportunity for the industry and it doubled to $10 billion. And Amerigroup really fared well and winning a broad expansion of our footprint there. Publicly we’ve commented about the possibility of adding about $1 billion of incremental revenue on top of the business we’ve been operating for 14 years.
As I mentioned earlier, we are going into Louisiana, which will mark our 12th state and recently we announced an acquisition to expand our presence in New York by acquiring Health Plus in New York. This is a business of about 300,000 members and we’ll bring incremental revenue something in the order of a $1 billion into the company that will start whenever the transaction closes, hopefully in the first half of 2012.
In November, we went to the high yield debt market to issuer, inaugural corporate bonds and we’re pleased with that offering. So it represents sort of a new milestone for us relative to the capital structure of the company as well. Before then we’re pretty underleveraged relative to a lot of the other managed care companies where the debt to cap ratio in the mid-teens and we thought this was a, particularly with these markets and interest rates it was a good time to bolster our capital by issuing a new security in the market.
So, let’s look at the industry here for a few minutes. And when you segment the US Healthcare market, it’s really trying to address the needs of over 300 million people and coming to about $2.7 trillion a year.
And at the bottom two boxes there, you really see the scale and scope of what we look at when we think about Medicare and Medicaid. So, Medicaid actually covers more people than Medicare and is fairly competitive, in terms of the spending with over $400 billion a year going at the needs of people who are low income or with disabilities.
Together, you know, they really are not only the largest segment from an insurance standpoint but growing at the expense of government sponsorship relative to the proportion of where premiums are within our industry. So, you know, there is a lot of government sector, you’re seeing that in a way people look doing at Medicare opportunities in the past year. Medicaid is growing every bit as fast if not more so in many markets.
And this slide here, you know, is important to point out from the standpoint of the operating environment in which we conduct our business. So, there is, a few big takeaways here. Our customers are almost always in financial dire-straights. You know, their revenues are down at the state level, they operate at the deficit.
But the things you need to understand when you look at a slide like this, is that the states are required by CMS to get federal matching money to produce rates for the industry that are actuarially sound. So, a few ago, I think we were at the conference and people wondered on the front end of the recession, how these sort of economics would affect our business.
We target a profit range somewhere in the vicinity of 2.5% to 3.5% net overtime. And as recently as 2010, we were outside the high end of our range which is really counter intuitive when you look at what the deficits were like at the state level.
So, we depend heavily upon the states having an honest development of the rates. They have to do that to submit those rates to CMS and get CMS to provide the matching funds and by in large, most of the company’s operating history as a public company since the IPO has been characterized by an environment where customers are hard pressed to finance these programs. And so, that drives a lot of their interest in private sector solutions like us to help them balance their budgets.
So, here we sort of call out some of the specific elements of the value proposition that the states are considering when they turn to the private sector. Well, typically when they go to a managed care offering, they are looking for upfront savings. You know, we’ve seen first year savings anywhere between 5% and you know, 17% of the prior year cost. So, when you think about Medicaid budgets within the states, typically the average about 22% of the state budget, it’s the fastest growing component.
If you can take 5%, 10%, out of 22% of the budget, when you have a deficit and you have a balanced budget requirement by virtue of your state constitution, that’s a pretty big driver of your interest in turning to the private sector. Not only do we give them upfront savings though, we are giving them predictability in terms of their budget. So, the alternative is to run an unaccountable, unmanaged Be for Service program where the state doesn’t know exactly what the cost is going to be as they go into a planning period by transferring the risk to the private sector, they remove some of that to uncertainty.
Increasingly the states are compelling us to be more accountable for quality, they sometimes reward us with extra membership if we have the highest performance relative to indicators of clinical quality. Sometimes they add incremental revenue to the firms that do the best job of improving things like immunizing children or providing data blockers to adults after heart attacks or making sure that you know, women are getting appropriate pre-natal care and so forth. All of these things are measurable in increasing part of the formula with which we deal with the states.
We think the states have learned over the years that we do a better job of providing services to the constituents that they care about. We operate as I said earlier, quite reasonable margins, 2.5% to 3.5% net. The rates that we deal with are explicitly require CMS to – CMS requires them to build in some sort of cost to capital that allows for a margin.
And I think the thing that the states have also experienced over the years is, you know, once they go to a managed care offering, not only they get the savings, they get the security of knowing what the cost is going to be but the trend-line is lowered going forward. So, makes multiple year projections a little bit more attractive as they see. We typically operate, 3%, 4%, 5% in terms of the inflation of our programs whereas the Fee for Service programs they’re coming away from often inflated in double digits.
So, I’ll spend a few minutes on the market opportunity. We tend to look at the way we’re going to grow our business sort of the pre-reform environment and what happens as of 2014. Again, I called out some of the penetration of the industry earlier but I’ll do it again here in the far left hand box.
So, think about the state spending, the state and federal government spending over $400 billion a year on Medicaid, less than $90 billion of that is in annual premiums anywhere in the private sector. So, only about 20%, 21% of their spending has been penetrated by the industry. And when you compare that for instance for the commercial insured market, probably 85% to 90% after many, many years of managed care offering to employers.
So, that said, the states have really, going back to that value proposition, looked at their own agendas and have brought a lot of business opportunity into the market that we’re starting to get some visibility on. I’ll talk a little bit more about that in a second.
But other firms have quantified as roughly $50 billion in annualized first year premiums. And that’s after a very robust 2011 when Texas, Louisiana, Kentucky all came to market. And as I said earlier, Texas was the largest procurement in the history of our industry.
So, and of late, our pre-reformed environment has been affected by some pretty interesting developments that have been going on in Washington relative to trying to deal with the unique needs of people who are duly eligible for both Medicare and Medicaid and I’ll talk about that for a minute.
So, and then 2014, presuming that the Affordable Care Act is not repealed or the Medicaid expansion is not adjusted, we see that one stabilize, size of the Medicaid program auto-grow by another $90 billion. And we also think there may be an opportunity for us to participate in health insurance exchanges because so many of those people are going to have a subsidy to buy insurance, they’re going to have a subsidy because they have low income status.
And for us that means there are people who gain and lose Medicaid eligibility periodically. So, there are many other people who are in the exchanges, people who have previously been in programs like ours, we think we have a brand that resonates with them and this could be a significant business opportunity for us as well.
So, I said I’d mention a little bit more about our pipeline. You can see how this breaks out. And you know, there are different product opportunities in different states. We’re probably most oriented towards expansions of the opportunity within markets we already serve. The biggest ones that we’re pointing to right now is the possibility of expansion is in Florida, Georgia and in Ohio and I’ll take those separately.
So, in Florida, the size of the managed care market is about $3 billion but that’s only about 20% of the $15 billion that they’re spending. And under Governor Scott, the legislature has moved to expand managed care to basically the other $12 billion. And we are neck and neck as market share leader from a Medicaid standpoint in Florida.
Now, the size of the Georgia Medicaid market right now is about $2 billion. And we are very excited about the possibility of a re-procurement there that will expand in the age blind disabled population that could double or even triple the size of the addressable market in Georgia.
In Ohio, we have a small market presence there. But they’re going to go pretty much all-in for managed care addressing needs of the duly eligible, the ABD folks. And those are, you know, exciting segments for us.
So, one of the things if I’d showed you the slide a couple of years ago, you would probably see far more orange dots and fewer pink, lavender and yellow dots, meaning that, as the states had experience with managed care working, they’re moving these more challenging populations into the marketplace where the company, as I said, on one of my earlier sites, we have over 200,000 people already on those populations. Arguably the national market share leader meeting the needs of people with long-term, who have a need for long-term care services and who are classified as duly eligible and age blind and disabled.
So, I’ve thrown out this term the duals a few times here in the presentation. And you may have heard it this week here in San Francisco. But what’s really going on is deficit, policy and politics have really converging and what we consider as an entirely new opportunity for the industry and that is to integrate services for people who are eligible for both Medicaid and Medicare.
So, let’s – let’s try to size this for a second. There is about 9 million – 9.2 million people currently who are in both Medicaid and Medicare simultaneously. And you can see some pretty interesting statistics on this slide. So, together they account for about $300 billion in annual spending. And if you trend forward, assuming they stay in the same proportion of spending they are today, probably by the end of 2016, it’s going to be more like $500 billion a year.
So, it’s a massive amount of spending on a small percentage of the people, 21% of Medicare and 15% of Medicaid, who are in these sort of special categories, their needs are fairly unique and so little of this is in managed care today. We have about 80,000 people who are duly eligible receiving the Medicaid side of their benefits.
So, let me level-set this a little bit, and answer the question, so, who, are the duly eligible? So, these are people who are entitled to Medicare Part A and Part B, they’re entitled either due to their age, because they’re over 65 or due to their disability, those would be people who are under 65, who are disabled, who are in the Medicare program.
And when we think about why they’re duly eligible, they’re also eligible for some level of Medicaid benefits because of their low income status. They don't have the money to be able to pay Part B premiums and co-insurance and co-payments and so forth. And the state wraps around their Medicare coverage, additional services like nursing home, long term care service, supports. There could even be programs like Meals on Wheels and transportation and participation in adult daycare and things like that.
They’re all services that are designed to allow people to live independently and not become wards of the state, institutionalize in a nursing home, where they spend $5,000, $6,000 a month for the rest of their life and live shorter lives quite frankly.
So, there is a lot going on here. It’s really a fast-track for CMS and what does this derive from? Well, the Affordable Care Act explicitly called out the need to integrate people who are in both programs. It’s been accelerated by discussions from entities like the Bowles-Simpson Commission that recommended there would be significant deficit savings if the two programs were integrated.
So, you’ve got a lot of buy partisan support for the policy idea, you’ve got CMS who’s empowered by the Affordable Care Act to do something about this. In the spring, they awarded 15 states, $1 million planning grip, to build, do eligible programs. What’s really important is the communication this past summer where CMS wrote letters to the state Medicaid directors inviting them to bring back the CMS, what CMS called three-way contracts, arrangements between CMS, State Governments and health plans.
And what’s really, note worthy is you’ve got a $300 billion marketplace where the federal government is saying, we want this to happen in partnership with the states and with their health plan infrastructure as decided by the states, but also with the approval and acceptance of CMS.
So, and beyond that is a stated goal to get 1 million to 2 million of those 9 million duals enrolled into some sort of integrated offering by the end of the year. So, that’s why you’re hearing a lot of excitement about this, I would sort of remind everybody that not a single contract has been signed, no revenue has changed hands, nobody has been enrolled. But I would like you to come away from the presentation thinking the company has a pretty unique positioning to participate in this opportunity.
Beside that when we look beyond the 214 line, we think about the affordable carat in our positioning mayor, we think that some 16 to 20 million people are going to get enrolled in Medicaid. And we think all of that expansion is going to be financed by the Federal Government for a few years. They’re after about 91% of it financed by Federal Government, that’s one of the reasons why you hear governor sort of pushing back and saying, you know, we’re not comfortable with the other 9%. But this is a massive expansion of Medicaid. And 40% of that expansion is going to occur in markets in which Amerigroup already operates if we don't even add another state to our map.
So, we’ve sized that as somewhere between 600,000 and 1 million incremental people into our company. We spent 17 years getting to 2 million members and it’s possible we could grow a million in 2014 just from the expansion.
So, let me back up here and summarize the things we’ve talked about here relative to growth. We went to under penetrated segment, less than 20% of the Medicaid spending in the private sector hands, compared that to what’s going on in the commercial arena.
The states are utilizing managed care because they have severe budget pressures. They’re not doing this out of the kindness of their hearts, they’re doing out of enlightened self-interest. It allows them to bounce their budgets, save money, allocate money to the needs of teachers and transportation, all the other things that tax payers expect the state government.
We’ve got some exciting expansion opportunities in existing markets where we enjoy strong relationships and a great operating track record. And our pipeline is heavily populated by emerging long-term care and ABD populations where we’re arguably the market share leader nationally among all companies irrespective of size.
We have an exciting track record in terms of winning RFPs having prevailed in the Texas massive re-procurement this year, having won our way into Louisiana. We’re invited to come into Kentucky but we declined for various reasons. So, I think our competitiveness is sitting a very good place at a time when we’re looking at this huge pipeline.
The dual opportunity emerges at a time where the company has a 13 year operating history in meeting the needs of duly eligible people, spread out over a number of states. What’s really critical about competency for this dual opportunity is helping the state’s administer these long-term care programs.
We’ve been in Star Plus in Texas for 13 years. We’re in the New Mexico CoLTS program, the Choice’s Program in Tennessee, the Diversion Program in Florida. We’re doing long-term care in New York. There is probably no other company with the exception of United that does this much work, meeting the needs of people when they’re not in an acute care setting. And that’s critical for what CMS is considering as they think this through.
We are the nation’s market share leader in serving people with disabilities. We’ve got an exciting opportunity associated with the expansion coming out of the Affordable Care Act. And we continue to grow, make in-roads on our own Medicare Advantage footprint.
So, couple of financial highlights. We’re only going to talk this morning about what we reported through the end of the third quarter. We’re giving no inside the quarter information whatsoever as is our practice.
We closed the third quarter with nearly 2 million members. It stacked up to about $1.6 billion in premium revenue. Our health benefits ratio was at a comfortable 83.9%, anytime we’re below 85% we’re going to feel pretty good about that. We continue to make significant progress in terms of our overhead and our efficiency as our SG&A ratio is down in the low 8% range, down couple of hundred basis points from what it was just a few years ago.
So, with the growth that we foresee coming we think we’re going to be able to, you know, push that down pretty dramatically going forward. We made $48 million in the quarter and as I said earlier, we target a margin of about 2.5% to 3.5% here in the third quarter right on 3%, right in the middle where we’d like to be.
We’ve got a real strong balance sheet, about $1.9 billion in cash. This is all before we went to the high-yield market and issued the debt. But we had within that 1.9 billion of cash, there were about $300 million of unregulated, unrestricted cash so we can use for corporate purposes. We had claims payable as you see here, a little over $0.5 billion. So, a very well reserved. The debt to cap ratio was very comfortable in the mid-teens with $254 million of debt and the shareholder’s equity you see there is a little over $1.2 billion.
From a capital deployment standpoint, with all this growth, it’s important for us to sort of manage our cash so that we can post adequate money into subsidiaries that receive the business so we have the states require that. So, our first priority is to continue to invest in our business. We’ve got a lot of growth and it’s important for us to be well capitalized at the local health plan subsidiary basis.
We do have the where with all to do acquisitions, when we think they made good sense for us, as evidenced by what we’ve done in New York in the past year. We’ve got a very active share buyback program in the last couple of years. We’ve tried to keep the share count as stable as we can through that. And we want to make sure we’re efficiently using the cash that we’re generating in our shareholder’s best interest.
So, that sums up our presentation this morning. And you’re welcome to join us for our breakout session in the Yorkshire room. Thank you everybody.
[No Q&A session for this event]
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