Catalyst Health Solutions' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.22.12 | About: Catalyst Health (CHSI)

Catalyst Health Solutions, Inc (NASDAQ:CHSI)

Q4 2011 Earnings Call

February 22, 2012 8:00 AM ET

Executives

David Blair – Chairman and CEO

Rick Bates – President and COO

Tim Pearson – Chief Financial Officer

Analysts

Amanda Murphy – William Blair

George Hill – Citi

Larry Marsh – Barclays Capital

Jeff Bailin – Credit Suisse

Brooks O'Neil – Dougherty & Company

Michael Minchak – JPMorgan

Rohit Sah – Oppenheimer

Robert Jones – Goldman Sachs

Andrew Schenker – Morgan Stanley

Robert Willoughby – Bank of America-Merrill Lynch

David Toung – Argus Research

Operator

Please standby. Good day, everyone. And welcome to today’s Catalyst Health Solutions, Incorporated Q4 Year End Earnings 2011 Conference Call. Today’s call is being recorded.

This conference will contain forward-looking information. Forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements maybe significantly impacted by certain risks and uncertainties described in the company’s filings with the Securities and Exchange Commission.

With that said, I will now turn the conference over to the Chairman, Chief Executive Officer of Catalyst Health Solutions, Incorporated, Mr. David Blair. Please go ahead.

David Blair

Good morning. And thank you for joining our 2011 year end investor call. Rick Bates, our President and Chief Operating Officer; and Tim Pearson, our Chief Financial Officer are also joining us.

The company had an outstanding year both from a financial and an operational perspective driven by the acquisition of Walgreens Health Initiatives and strong organic growth.

For the quarter, revenue increased 38% and adjusted earnings per share increased 23% over the prior year. We ended the year with over $400 million of new business wins. The acquisition of WHI and our recently announced business development initiatives positioned Catalyst to continue our growth trajectory.

We certainly expect to continue our growth through new client wins, margin expansion across our installed base and strategic acquisitions. We are confident in our strategy and our mission to improve the quality of health for our members while controlling healthcare costs for our clients.

Next, let me comment on our Invest Now initiative that we launched last quarter to capture additional opportunities in the evolving PBM market. We’ve made significant progress with our equipment efforts, business development and product expansion such as the acquisition of a shell insurance company through our employer group waiver plan business.

We continue to see in-bound RFP activity running over 30% higher than last year and are responding to significantly more RFPs. We’re optimistic about our organic growth for 2012 and 2013.

Now, I’ll turn the call over to Tim for review of our financial results and then following Tim’s comments Rick present on our business performance, progress and integration, and new investments.

Tim Pearson

Thank you, David. In the fourth quarter, we continue to deliver strong earnings growth with significant year-over-year revenue and adjusted EPS gains. Revenue grew 38% to $1.54 billion from $1.12 billion in the prior year.

The increase is primarily due to the addition of WHI prescription volume for the fourth -- for the full quarter, as well as higher prescription volume for new business. This is partially offset by larger member co-pays and increased generic utilization.

Total adjusted managed claims processed in the fourth quarter increased to $32.1 million from $26 -- $24.6 million for the same period in 2010. The increase in prescription volume was again primarily due to the addition of WHI and new clients.

Generic utilization increased to 75% from 73% in the fourth quarter of 2010 and we realized mail penetration of 10% in 90-day prescriptions of 28%, both reflecting the addition of the WHI book of business.

Gross profit for the fourth quarter increased 40% to $92.6 million from $66.1 million in the prior year. This is due to the addition of WHI revenue, higher generic utilization and margin contribution from new clients, offset by thinner margins on renewal business.

Gross margin in the quarter was also favorably impacted by incremental synergies for WHI realized ahead of schedule. Fourth quarter gross profit is also reported net of $5.6 million of intangible asset amortization related to acquisitions.

WHI related transition and integration expense during the quarter was approximately $13.5 million or $0.17 per diluted share, roughly half of this is for professional fees related to IT, integration and analytical support to maximize synergies.

The other half represents payments to WHI for transition services and severance costs. Amortization of acquisition-related intangible assets included in SG&A was $5 million. In total, this gets you to our adjusted EPS for the fourth quarter of $0.69, as compared to $0.56 per diluted share in 2010 or 23% increase.

From a cash flow perspective, CapEx for the quarter was $18 million, depreciation and amortization was $14 million, and cash flow from operations was $17 million. We ended the quarter with $49 million of cash on the balance sheet and paid down our revolving credit facility by $25 million to $130 million.

Moving to the full year 2011 guidance, we’re reiterating our prior revenue and EPS guidance for the revenue range of $5.8 billion to $6.2 billion and adjusted earnings per share of $2.60 to $2.80.

The integration of the WHI is still ongoing and I’m continuing to expect $15 million to $20 million in transition and integration expense in 2012, and $40 million of acquisition-related intangible amortization from all prior deals.

For clarification, these items are added back towards adjusted EPS. As we enter into 2012 we’re on track to achieve the $75 million of run rate EBITDA from WHI by the beginning of 2013.

Lastly, I’d like to inform you that few changes I’ve planned to make in the cadence of our investor communications. For the year of 2013 we will provide annual guidance in the fourth quarter 2012 call rather than preliminary guidance in the Q3 call as we’ve done in the past. As well consistent with best practices we will be implementing a quite period three weeks prior to earnings announcements.

And with that, I’ll turn the call over to Rick Bates to give you an update on our business.

Rick Bates

Thanks Tim. I’ll discuss two areas of our business this morning. First, I’ll cover our business operations and the progress we’re making on our integration efforts then I will discuss our growth initiatives and Invest Now.

Our business is running well and we continue to make progress integrating WHI. As we stated previously, we’re managing three major streams of work, organizational alignment, operational integration and contract maximization.

We’ve completed the organizational alignment work and are operating as a single organization with the single Catalyst brand. The account management teams and their customers have all been integrated into our business segment model and we’ve strengthened our value proposition leveraging the best of WHI’s capabilities.

Regarding operations, we opened our Orlando call center in December and we’ll open another new office in Bannockburn, Illinois during the second quarter. We expect to transition all of the call center, IT and clinical activities from WHI to these Catalyst facilities in the second quarter. We’re also working to complete a new data center by the end of second quarter.

We continue to make progress on the extraction of systems and applications from Walgreens and are targeting a complete exit from Walgreens by the end of the third quarter 2012. In terms of our contracting efforts we’ve optimized our market position and improved the performance of the WHI book of business.

Now, I’m going to make some comments on our growth initiatives. With the acquisition of the FutureScripts and WHI, we’ve diversified our revenues and believe we will achieve a client retention rate for 2013 in the high 90% range.

I’ll also highlight that we have renewed our relationship with WellCare extending our contract through 2015. We also reached a three-year agreement with AARP to provide a direct to consumer pharmacy program to all of their 37 million members. We see tremendous growth potential in this offering.

In addition, the Office of Retirement Services in Michigan has extended our relationships serving the Michigan Public School Retirement System through 2013. These recent agreements position us well going into 2013.

As per ramping up our investments and growth, I thought I would provide an update on our Invest Now Initiative. As a reminder, we created the Invest Now program to take immediate advantage or the changing landscape in the PBM industry.

Our acquisitions of FutureScripts and WHI have strengthened our company and we believe we are better positioned than ever to capitalize on market disruption and uncertainty. Invest Now is designed to enable the company to accelerate our organic growth allowing us to double our new business wins over the next two years.

The initiative has three main components distribution, product development and product infrastructure. Regarding distribution, during the fourth quarter of 2011 and through this month we have ramped up our proposal activity.

As David stated earlier, we are seeing a roughly 30% increase in in-bound volume and are planning to respond to 50% more RFP’s than we did during last year’s selling season. We are seeing opportunities across all lines of business.

Today, we have about 8 million lives represented in our pipeline, compared to 5.5 million at this time last year. We’re very encouraged by the larger volumes in our progress to-date. Additionally, we are optimistic about the progress we’re making in the consultant community and expect to secure more new employer business than we have in the past.

On product development, we recently closed on the acquisition of a shell insurance company which will position us to apply the CMS to become a Part D Plan sponsor and expand our EGWIP offerings.

We’ve also formed a joint venture to develop the direct-to-consumer business, anticipating how the market is changing and the inevitable impact of healthcare reform, we’re investing to develop expertise and consumer acquisition and retention, consumer engagement and understanding a purchased decisions and behavior change. This business will offer discount cards, affinity programs and clinical programs direct-to-consumer.

Third component of Invest Now is product infrastructure. We continue to execute well in this area. Our MedMonitor therapy management product is the best-in-class in our industry. Walgreens did an excellent job developing this tool and we have invested a more functionality and reporting capabilities, and are in the process of bringing this product to more customers in 2012.

It has become one of our most compelling differentiators going out with virtually every bid and renewal. This technology will establish a market leading position in clinical programs and analytics, and carries a strong ROI guarantee for our clients.

We’re also expecting to rollout mobile application enhancements mid-year that will add push messaging, medication and refill reminders, safety notifications in an animated avatar.

In summary, the WHI integration is proceeding as planned and our investments and growth are well underway, and has strengthened our value proposition to clients this selling season.

Now, I’ll pass the comments back over to David.

David Blair

Thanks Rick. In summary, 2011 was a superb year for Catalyst. We signed significant new business, completed a major strategic acquisition and launched Invest Now to capitalize on the evolving PBM market. Looking forward, 2012 is already off to a great start and we are well-positioned to benefit from the market disruption and gain meaningful market share.

And so with that, operator, we’ll go ahead and open up the call for investor questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And we have our first question today and that is Amanda Murphy with William Blair.

Amanda Murphy – William Blair

Hi. Thanks. I just had a couple of follow-ups on the selling season. So thanks for the detail around lives and the pipeline, that’s pretty helpful. I’m curious when you are talking with clients and consultants these days, what are they looking for? What are they most excited about in terms of Catalyst, is it your Walgreens relationship or there is something specific you can point to?

Rick Bates

Well, Amanda, this is Rick, and I think I just offer a couple of things. There is still a lot of energy around limited networks and people continue to ask for that as an alternative. Certainly, we have seen a tremendous amount of interest in our clinical capabilities which are much more robust than they have been in the past as it relates to the MedMonitor technology that we acquired in the WHI acquisition.

And then I think, the final thing I’d say, which has been true about our company for a long time is our center of excellence service model, which is continue to be very compelling whether it’s for health plans, state or government business or large group employers.

Amanda Murphy – William Blair

Okay. Great. And then just ask a question that people often ask this time of the year, just I know it’s early in the selling season. But what are you seeing from the pricing standpoint obviously there is a lot of changes in the market, so any meaningful difference at this point relative to last year?

Rick Bates

So I think that there is more business in play that we’ll see this year. But I don’t feel that that the market is going to be more aggressive on pricing or less disciplined. I mean, I think that everybody is pushing very aggressively in terms of pricing and being aggressive in negotiations with the retail network and trying to secure better costs to goods for mail and specialty. But I think it’s actually fair consistent with what we saw a year ago.

Amanda Murphy – William Blair

Got it. Okay. And then just last one, in terms of the EGWIP program, excuse me, when do you expect that to be something that you can actually not just to sell but launch?

Rick Bates

And so we’re working aggressively towards a launch, let’s say, expecting that we will have this product for 2013, we have some customers today who have that EGWIP offering that we administer, but we don’t hold the contract with CMS. So we are -- we have made our application to CMS and I’m not sure of the specific timing of when we -- we'd hope to hear about formal approval from them. So maybe that’ll give the follow-up for you with Tim.

Amanda Murphy – William Blair

Okay. Thanks.

Operator

And our next question will come from George Hill with Citi.

George Hill – Citi

Hey. Good morning, guys, and thanks for taking the question. Maybe just a little bit more on the EGWIP plan that you purchased, Dave was the cost that material in the quarter or should we just think of that largely an administrative acquisition?

Tim Pearson

George, this is Tim. You could take it as largely administrative and it’s a balance sheet related item. It’s from an order of magnitude it was an acquisition of roughly $5 million plus some restricted cash for the state required deposits.

George Hill – Citi

Okay. And then maybe just a quick follow-up on the AARP announcement earlier in the month, how should we think about the opportunity there with seniors that tend to have a that for instance had a pretty big marketing intact with the DTC component to go after this Part D live. Is there a way you can kind of size up the opportunity of having their brand attached to your product?

Rick Bates

So, George, this is Rick. And I think we’re very optimistic about our ability to grow the number of scripts that we serve through the AARP membership. I think it’s a little too early for us to be specific about sizing it simply because we’re in a process today of really segmenting their membership and getting a deeper understanding of where the opportunity lies, and what segments of that population are going be most likely to use this product. AARP has been enormously supportive of our program and we expect terrific results, so more to come on that.

George Hill – Citi

Okay. Thanks for the question.

Operator

Larry Marsh with Barclays Capital is next.

Larry Marsh – Barclays Capital

Thanks and good morning. Just couple of quick things. First of all congrats on expansion -- extension of the WellCare relationship. Could you remind us that the type of services you do provide to WellCare currently, have you size that business and is there an opportunity to expand relationship there?

Rick Bates

Larry, its Rick Bates. And we are provide -- this is an ASO only relationship. So we manage their retail network and provide, obviously claim adjudication services and then there are some other ancillary services and programs that are part of this.

Larry Marsh – Barclays Capital

Yeah.

Rick Bates

We are working with them to meet all of their needs. Certainly, WellCare has been performing particularly well and growing their business, and we continue to have discussions about other services that we may be able to provide for them.

Larry Marsh – Barclays Capital

Okay. And have you sized the relationship at this point?

Rick Bates

I’m sorry have we signed?

Larry Marsh – Barclays Capital

Sized, sized, how big is it?

Rick Bates

So, WellCare, I believe, has about 2.5 million lives that they cover.

Larry Marsh – Barclays Capital

Yeah. Okay. Second question then, I know you communicated, I think, the last quarter some upside in the volume of ASO business with WHI. I think roughly run rate of $80 million scripts and about $25 million, $26 million managed scripts, looks like the fourth quarter ASO scripts were $21 and change. Is it still we view that $80 million is the right kind of ballpark number for ASO scripts for WHI for 2012?

Tim Pearson

Yeah. Larry, this is Tim. I think that’s still on the ballpark, yeah.

Larry Marsh – Barclays Capital

Okay. Couple of other quick ones, if I could. So you talked about the business renewal for 2012 in the high 90s, confirmed some extensions, MPSERS, et cetera. Are you able at this point time to comment either in State of Ohio or the Union H.E.R.E.I.U, which were mid-years?

Rick Bates

I’m sorry, Larry, in addition to Ohio what was the other comment.

Larry Marsh – Barclays Capital

The Taft-Hartley plan, H.E.R.E.I.U.

Rick Bates

Yeah. Sure. So, Larry, I think, consistent with our historical practice is, what we’d like to do is certainly not comment on specific client renewals. I mean, certainly if they are not out to date, we don’t want to comment on them for competitive reasons.

Larry Marsh – Barclays Capital

Yeah.

Rick Bates

And then what we’ll do beginning with that second quarter call, we will provide investors and analysts with how much business we’ve retained for the upcoming year as in terms of percentages of our current business and then we’ll update again during the Q3 call.

Larry Marsh – Barclays Capital

Okay. Great. Two other quick things then. So I just wanted to make sure – so part of your message with Invest Now is your goal to double net new business over the next two years from your current $400 million run rate. The communication today 30% increase in bidding opportunities, increasing your bid participation by 50%, so I think Tim you mentioned you're going to be holding off giving 2013, I guess, guidance until next February. So, when do we – when do you think we should get an update on the success of your 2013 selling season in terms of tracking you versus the goal, if you're not going to guide until next February?

Rick Bates

Sure, Larry. So, what we'll do is, I mean, obviously if we win any marquee accounts, we would certainly immediately announce those when that occurs. And then beginning either with the first quarter call or second quarter call, we'll start announcing total sales year-to-date. And just typically we'll use an annualized revenue number and describe how that breaks down between managed care, employer and state government business.

Larry Marsh – Barclays Capital

Okay. Great. I got it. And the final thing for me – I think, one of the messages, David, you suggested is with some of your communication around the flexibility of your networks, you're creating opportunity for incremental business compared to some of the limited networks that are offered in the market today. I know that didn't necessarily rule the day in Maryland, and I heard your comments expressing some frustration there. Is it still the view that part of the process around bid this year is your flexibility on your networks is going to create some additional benefits for you this year?

David Blair

We do, Larry. I think in many respects, Catalyst is uniquely positioned, and that we have I believe terrific relationships with all of our retail pharmacy partners and we can certainly customize networks based on our unique client demands. And then the other comment I would make is the increasing demand for Retail 90 programs and we're certainly a big supporter of those and they can provide additional cost savings for both client and members.

Larry Marsh – Barclays Capital

Yeah. Okay. I guess I'll stop here, thanks.

David Blair

Thanks.

Operator

And Glen Santangelo with Credit Suisse has our next question.

Jeff Bailin – Credit Suisse

Thanks, good morning. It's Jeff Bailin, in for Glen. Could you guys talk a little bit about the opportunity you might see in specialty, what your current economics might be and what that opportunity could look like in 2012 and 2013?

Rick Bates

Sure, Jeff. This is Rick. We are certainly making some pretty significant investments in our specialty capabilities, that has been part of our Invest Now initiative. And it's tied in directly to our clinical program management.

In addition, we continue to look at opportunities in the specialty space for M&A and believe that this could potentially be a very compelling strategic asset if we're able to find the right opportunity in the marketplace. So, I think that our expectations in specialty will become a bigger part of our business in 2012 and 2013.

Jeff Bailin – Credit Suisse

All right. Great. And then just one more on the Invest Now initiative. Looking at the sequential step-up in SG&A in the quarter, are we beginning to see any of those expenses that started flowing through in 4Q?

Tim Pearson

This is Tim, Jeff. There obviously are initiatives that are underway around Invest Now, we haven't broken out specific dollar amounts here in SG&A related to Invest Now, but I think it's more so also the increase in activity that we're seeing in the pipeline. Obviously, we're sending out more proposals than we have in past years and there's cost associated with doing these proposals, and so to some extent the potential new business is driving some cost as well as other initiatives that have gotten kicked off.

Jeff Bailin – Credit Suisse

Great. Thanks a lot. I appreciate it.

Operator

Our next question will come from Brooks O'Neil with Dougherty & Company.

Brooks O'Neil – Dougherty & Company

Good morning, couple of questions. You guys have mentioned marketplace disruption and there's clearly been lot of conversation about it. I'd just like to hear from you guys, who're in the marketplace, what you see in terms of market disruption right now, what do you think is causing it and how does that benefit Catalyst?

Rick Bates

Brooks, this is Rick. And I would suggest that today what we're seeing is lot more business coming to market and more opportunities that we're getting the chance to bid on. So certainly our RFP volume is up and our ability to aggressively pursue more of those opportunities has improved. There seems to be a lot of uncertainty related to the Express and Medco potential merger. And that has created enough disruption and activity in the market place to create opportunity for us.

And I think that there has also just been more brand awareness related to Catalyst since we did the WHI acquisition and that has led to stronger relationships in the consultant community for employer business. And we're very optimistic about our prospects in that segment this year and as you know that, that's been a business segment that we have not performed as well in the past.

And now I think you'll see better results from us going forward. I mean we're very confident about the new business opportunities and I think that the market disruption can't be understated at this time.

Brooks O'Neil – Dougherty & Company

That's great. I appreciate all that color. I'm curious obviously you've announced a number of those significant renewals recently would you comment that margin pressures on renewals are greater, less or about the same as they've been in the past?

Rick Bates

I think they're consistent with what they have been in the past.

Brooks O'Neil – Dougherty & Company

Okay. Good. And then I'm just curious you mentioned a couple of times MedMonitor your clinical programs and the strength of those and what you acquired from WHI, maybe you could just give us a little color on what that offering is and how it's resonating in the marketplace now?

Rick Bates

So, MedMonitor is our medication therapy management capability. So it deals with RetroDUR, Star Advantage programs for Medicare. It's directly connected in Walgreens pharmacies, not today. We have made significant investments in its features and functionality. It is a terrific tool to prove the value of clinical interventions.

And we have been able to put return on investment guarantees with the pricing of this capability in the marketplace. It's something that the WHI team deploys fairly effectively and that we believe is really differentiating us with new business in the marketplace and has been an excellent add-on for us with many of our existing customers.

Brooks O'Neil – Dougherty & Company

Do you think you can expand that capability to other pharmacy retail chains besides Walgreens?

Rick Bates

That is something we're exploring. Then another unique feature of this is we actually have the ability to look comprehensively across all medical claim data. So if the health plan shares their medical claim data with us, we're able to actually evaluate the – have a comprehensive view of medical and pharmacy data and be able to segment that based on condition and provide analytics that improve our outcomes.

Brooks O'Neil – Dougherty & Company

Great. And then just one last question, I think you commented in the release that you're on track with FutureScripts integration, which is great. You're realizing the expected benefits. Can you just quickly update us there and would you mind mentioning whether you completed the IT transition, I think you were thinking about for 2011? Thanks very much.

David Blair

Sure, Brooks, appreciate the questions. So the FutureScripts integration is complete. We have reached our EBITDA target and that is now fully integrated within Catalyst.

Brooks O'Neil – Dougherty & Company

Great. And the IT, did that get gone too?

David Blair

Yeah.

Brooks O'Neil – Dougherty & Company

Thank you very much.

Operator

Next we'll turn to Michael Minchak with JPMorgan.

Michael Minchak – JPMorgan

Thanks, good morning. Just a couple of questions. First, I think you had mentioned in the prepared remarks that you've seen some WHI synergies ahead of plan in the fourth quarter. First, can you quantify those? And then second, I know you reiterated that $75 million synergy number for 2013, but are you still expecting $50 million in '12 and the $15 million run rate in the fourth quarter?

Rick Bates

Sure Mike. Just around order of magnitude, the benefits that we’re seeing in the fourth quarter is rough order magnitude of $1 million and then the, the expectations are still the same for 2012 in terms of the EBITDA contribution that we had laid out in the Q3 call.

Michael Minchak – JPMorgan

Great. And then just following up on the ASO business, the piece that associated with the Walgreens prescription savings card, is that profitable business for you and with the increase enrollment that Walgreens is seeing as a result of the express scripts is good there, is that enough to move the needle for you or is it just the profitably around the scripts is too small?

Rick Bates

The profitability around the scripts is not as significant obviously as you find in our managed population. But it is profitable business and its good -- benefits us as they grow, but I’m not certain that it will necessary move the needle from our point of view.

Michael Minchak – JPMorgan

Okay. Great. And then just maybe once final clarification on the Medco’s contract, with the announcement of the one year renewal option was there price resale on that contract for the renewal period or is just consistent with the pricing that you always had on that contract?

Rick Bates

It’s consistent with the pricing that we originally did on the contract.

Michael Minchak – JPMorgan

Okay. Great. Thanks for the comment.

Rick Bates

Sure.

Operator

And our next question will come from Bret Jones with Oppenheimer.

Rohit Sah – Oppenheimer

Good morning. This is Rohit in for Bret Jones. I just had a couple of clarification questions. It looks like on your diluted GAAP earnings had came down by $0.06 and is all attributable to the increase and adjustment amortization of intangible assets. I just want to confirm that and what – I want to find out what’s the rationale behind that?

Tim Pearson

Yeah, Rohit. This is Tim Pearson. There is additional amortization associated with that. The WHI evaluation was a preliminary valuation at the time that we closed the deal and booked Q2. Accounting rules allow you one year to refine and update that valuation. We did that here at year end and associated with that, updated the valuation for the intangible assets, we established a new amortization schedule for some of them that went from a straight line to accelerate. So that brought some of the amortization into the earlier years. That’s what’s driving that up.

Rohit Sah – Oppenheimer

Okay. And could you remind me, I think you said 90% renewal rate for 2013, could you remind me how much of your business is up for renewal excluding Maryland, I think I remember that was less than 10%? Is that right?

Rick Bates

You know what, so I, I don’t know that we provided that number. Typically, the percentage that we would report is the percentage of the business that we’ve retained for the upcoming year and you can look for us to give that initial number during our Q2 call, which should be the percentage of business that we will retain for 2013.

Rohit Sah – Oppenheimer

Okay. And the last question, I thought I heard in your prepared remarks that the margins on renewal business was thinner, but in the prior question you answered it that it’s consistent with what you’ve seen in the past, did I get that wrong or what was that?

Rick Bates

I would clarify that by, yeah, the renewal margins are thinner, but they are consistent with the renewal margins we have seen in the past.

Rohit Sah – Oppenheimer

Okay. Okay. Thank you very much.

Operator

And our next question will come from Robert Jones with Goldman Sachs.

Robert Jones – Goldman Sachs

Great. Thanks for the questions. Just want to go back to the 30% increase in RFP so far, trying to get a better sense. Are you getting the feeling that that’s market driven or are you actually just feeling that you are getting invited to bid on more proposals given some of the market disruption maybe the potential for large merger, may be just a little bit more clarity around what’s driving that?

Rick Bates

So we believe that it is -- that we are getting invited to the table more often.

Robert Jones – Goldman Sachs

Got you. And are those -- you mentioned trying to ramp up employer plan exposure, are those type of plans you’re now getting invited to the table to or is that a sponsor base that’s driving that growth?

Rick Bates

Well, I think that we’ve seen the same amount of proposal activity increases across all lines business and we have expanded our sales organizations, we are much better known company today in all of the business segments and we are seeing similar RFP activity in health plans, state and government opportunities and then certainly in the employer’s base.

I think it is notable for us and the employer’s base because that’s seems to be the area of where we have had more challenges in the past and many more doors have been opened as a result of the WHI deal.

Robert Jones – Goldman Sachs

Understood. And just one another area, obviously disruption in the marketplace between Walgreens and Express, I thing you guys have comment around the benefit of having a network that obviously includes Walgreens in it, is it things that Walgreens can do on their end to actually incentivize PBM that you have them in the network to drive more members towards their stores?

Rick Bates

Well, I think that all of the retail pharmacies especially the largest chains have the opportunity to work with PBM partners to try to change or drive share into their stores based on improved cost positions and 90 day script programs et cetera. So I would definitely suggest that Walgreens has capability to do that as with their competitors.

Robert Jones – Goldman Sachs

And I guess, the question was more have you seen them increase the incentives that they are using in order to try to drive, the PBM still have them in network towards the stores?

Rick Bates

I guess our comment on that would simply be that we work very closely with Walgreens and are continually making an effort to price the lowest cost solution to our customers and they have been a very good business partners of ours.

Robert Jones – Goldman Sachs

Great. Thanks for the questions.

Operator

Andrew Schenker with Morgan Stanley has our next question.

Andrew Schenker – Morgan Stanley

Good morning. So just looking back on the selling seasons well, are you seeing the increase in part perhaps driven by people starting the RFP process earlier this years than maybe they have in the past and on top of that your growth in terms of volumes is that from a few more large clients or is that just an increase in number of RFPs from smaller clients as well?

Rick Bates

I think there’s a really good balance in our pipeline of mid-market customers up to large national accounts or health plans or large state opportunities, and I don’t necessarily think that the timing of the RFPs has changed at all.

Andrew Schenker – Morgan Stanley

Okay. And then, in the past you have always talked about your local approach with your regional centers of excellence as your RFP activity and presumably your wins increase with more national accounts is there any change to that approach with the regional centers as I think?

Rick Bates

I don’t think we’re going to change that approach it work particularly well for us, I think we’re just getting smarter about managing through efficiencies and leveraging some of the current centers that we have and we have the potential to expand capabilities within them.

But I think you’ll continue to see Catalyst to be very aggressive in the marketplace with the COE model. And the last point, I’d make related to this is there are varying models for the COE and some are fairly small with just handful of service people or account management teams and some are fairly significant. So we do have a lot of flexibility in how we deploy that.

Andrew Schenker – Morgan Stanley

Okay. Great. And then just sort of a housekeeping question. You said, if I’m not mistaken, $80 million for CapEx in the quarter that seems particularly high versus some of your recent run rate. May I ask what drove the increase in CapEx and maybe what you’re thinking about for 2012 cash deployment?

Tim Pearson

So we have opened the Orlando call center, which was fairly significant expense and we continue to invest in IT and infrastructure to support our growth.

Andrew Schenker – Morgan Stanley

Okay. And is the $80 million run rate, we think about through 2012 as you guys keep investing in growth or is this just kind of spent a lot of it, more one-time in nature?

Rick Bates

We’re expecting roughly $50 million in CapEx for next year.

Andrew Schenker – Morgan Stanley

Good. Thank you very much.

Operator

Our next question will come from Robert Willoughby, Bank of America-Merrill Lynch.

Robert Willoughby – Bank of America-Merrill Lynch

Hi. Is it standard live which in your PBM contracts that you do have the right to opt out of the pharmacy networks or to walk away from your retail pharmacy agreements with 90-day notice? Do you guys do that?

Rick Bates

We don’t comment on our specific client contract or pharmacy contracts.

Robert Willoughby – Bank of America-Merrill Lynch

But as a general rule, what protection you have against changes and how the retailers came after you?

Rick Bates

So, we have it, obviously we have a national network and we have sufficient access to our members and so we've been in business for over dozen years and we’ve never had any issues associated with access to network.

Robert Willoughby – Bank of America-Merrill Lynch

Okay. Is the AARP designation, it’s I assume that’s a 100 license it’s not a guarantee of any business with the AARP members.

David Blair

Well, there is current business with AARP that was just a very significant business, well performing business and we have worked with AARP to expand this relationship and increase the offering. So, we certainly expect that we'll be able to experience fairly significant growth across that population.

Robert Willoughby – Bank of America-Merrill Lynch

How do you reach them though, I guess the AARP endorsement is certainly important, but do you have these members one by one to sign them up or is there any way to efficiently bring larger books of business on Board there?

Rick Bates

Well, so, the AARP program provides this as an offering to all of its members, so there is not a whole sign-up program necessary. They’ve made it available at no cost, so it is our responsibility to partner with them to drive greater utilization and acceptance of the product across the population, certainly they have significant communication vehicles that they use and marketing vehicles that they use that will support this effort.

Robert Willoughby – Bank of America-Merrill Lynch

I assume there are other players there obviously then if I’m an AARP member, I might be getting a mailing only from AARP or am I getting something from you and your competitors.

Rick Bates

It would in this particular program we are the only offering. We have an exclusive relationship for a discount pharmacy program with them. So you would not be getting any other mailings from any other PBMs that would be affiliated with AARP for this product offering.

Robert Willoughby – Bank of America-Merrill Lynch

Okay. Perfect. And just lastly on the acquisition Tim, I mean, did you guys comment on what the non-controlling interest line item. How that would trend, is run rate here in the first quarter a good number to use for the remainder of the year or does that increase or decline?

Tim Pearson

I think that numbers are good rate to use for the quarter going forward.

Robert Willoughby – Bank of America-Merrill Lynch

Going forward to fourth quarter, carry that forward. Okay. Perfect. Thank you.

Rick Bates

Thank you.

Operator

George Hill with Citi has a follow up question.

George Hill – Citi

Hey guys. Thanks for taking the quick follow-up. Rick, I was wondering if you could just talk about the mix what you’re seeing in the RFP environment, if there has been change and I’m, I guess, I’m just interested to get any color you can provide with respect who is out to bid, who would just be part of the normal selling season or do you feel like you’re seeing increased trend especially on the employer side as a result of the consolidated PBM environment and the increasing discussions are on the circuit retail networks?

Rick Bates

George, I believe that we’re seeing increased volume based on the disruption in the marketplace and new opportunities are coming to us that otherwise may not have. And I think that that is going to give us some fairly significant opportunities across all of the business segments.

I think the most significant change that we would see is the mid-market employer business, seems to have the largest incremental increase for us at this time. But having said that, we are seeing significant increases in all three of our business segments, and within the employer group also with national account opportunities.

George Hill – Citi

Okay. I appreciate the color. Thanks

Operator

And we have a question from David Toung with Argus Research.

David Toung – Argus Research

Yeah. Thank you for taking the question. Rick, I think you’ve talked about multiple application engine platform, can you talk about any possibility of consolidating or any cost saving or -- what’s your strategy there and?

Rick Bates

Sure, David. Let me respond like this. I think it’s important for investors that today we’re really good shape as a related to claims processing. We have all the capabilities to meet the unique needs of our clients and we certainly are providing excellent level of service.

And we also recognize the clear advantages to consolidating claims platforms and I think some of the things, which will seeing as we capture synergies with WHI and other potential future acquisitions is our ability to consolidate and you capture the EBITDA targets that we set for investors.

David Toung – Argus Research

Right. And I think the another question that was alluded today, but currently the timing of your WHI acquisition and given the risk between Walgreens and Express. It seemed like your timing was actually very, very prescient. Is there any other opportunities there from the world as you ship that you see benefit to in terms of your relationship -- ongoing relationship with a Walgreens?

Rick Bates

Well, I certainly think, we have a long relationship with Walgreens over the past 10 years they served us, provider of mail and specialty for certain clients on occasions and has done an outstanding job. And so I think that's our relationship really positions as well as we target certain accounts in part for the country where Walgreens have dominant market share.

And so, we certainly leverage up on that relationship. But I would also comment that I think we have excellent relationships with all of our pharmacy partners and one of the things that we do as a company and Rick alluded to this is to drive the lowest cost solutions for our clients and really response to their unique request and how they want to structure the pharmacy network.

David Toung – Argus Research

Okay. Great. Thank you for the follow-up and the detail. Thank you.

Tim Pearson

Sure.

Operator

And currently there are no questions in queue. I will turn the conference over to our host for any closing or additional remarks.

David Blair

Great. We would just like to thank you for joining our year end Investor call and we look forward to speaking with you next quarter. Goodbye.

Operator

And that does conclude today’s conference call. Thank you for your participation.

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