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Executives

Mark A. Thierer - Chairman and Chief Executive Officer

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

Analysts

George Hill - Citigroup Inc, Research Division

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

Tom Liston - Versant Partners Inc., Research Division

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

Elizabeth Blake

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

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

Michael R. Minchak - JP Morgan Chase & Co, Research Division

Andrew Schenker - Morgan Stanley, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

SXC Health Solutions (SXCI) Q4 2011 Earnings Call February 23, 2012 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SXC Health Solutions Corp. 2011 Fourth Quarter and 2011 Year-End Results Conference Call. SXC issued an earnings press release this morning, which has been filed with the SEC on Form 8-K and is also available on the Investor Information section of SXC's website at www.sxc.com.

Listeners are reminded that portions of today's discussions contain forward-looking statements that reflect current views with respect to future events such as SXC's outlook for future performance and revenue and earnings growth and various other aspects of its business. Any such statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to the cautionary language in the earnings release and in SXC's filings with the SEC including the Risk Factor section as the SCX's most recent annual report on Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, there will also be a discussion of some items that do not conform to generally accepted accounting principles including adjusted EPS and adjusted EBITDA. SXC has reconciled these items to the most comparable GAAP measures in the earnings release and on its website, www.sxc.com, under the Investor Information section.

I would like to remind everyone that this call is being recorded on Thursday, February 23, 2012, at 8:30 a.m. Eastern time. A replay of today's call will be available on the SXC's website approximately one hour after the conclusion of this call. This broadcast is the property of SXC, and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of the SXC is strictly prohibited.

I would now like to turn the conference over to Mr. Mark Thierer, Chairman and CEO. Please go ahead, sir.

Mark A. Thierer

Well, thank you, and good morning, everyone. Appreciate you joining us today. 2011 was truly a breakout year for SXC. We posted record results across the board, including strong fourth quarter results. For the full year, SXC delivered $5 billion in revenue and $176 million in adjusted EBITDA.

We were very pleased to have these results earn us FORTUNE Magazine's recognition as the #1 fastest-growing company in the United States. We were able to achieve these record results because we feel that a very strong team here that is executing on a very clear strategy. So for purposes of the call today, I'd like to highlight the 3 main drivers of our record performance.

First, we have demonstrated strong ability to grow organically. We closed more than $1.4 billion in new business during 2011, making it our most successful selling season in the company's history. And as you know, a record selling season in 2011 means we are very well positioned for 2012.

Our sales team is certainly on a roll. On Tuesday, we announced a major win to kick off the 2012 selling season, Blue Cross Blue Shield of Rhode Island. We signed a 3-year, full-service PBM contract that starts January 1, 2013, and the contract covers 450,000 lives with approximately $400 million in annual drug spend. This contract includes mail order, claims adjudication and a full suite of clinical programs as well. We're very excited about this new strategic win, and we've already begun the implementation process. This opportunity attracted every major PBM player in the industry, and we were honored to be selected. This client win is reflective of the larger opportunities that we are competing for today and winning.

As you all know, the level of disruption and uncertainty that exists today at the high end of the PBM industry is driving unprecedented levels of opportunities and many of them directly towards SXC. Our pipeline is very strong and opportunities exist in all our vertical markets, as payers and their consultants are evaluating alternatives and looking for new and flexible solutions tailored to meet their business requirements. SXC has emerged as a particularly strong competitor in the health plan space, where an unbundled, competitive and flexible offering truly sets us apart from the pack.

From a sales perspective, we have clearly moved up market in terms of targets, and we are now competing for a much larger opportunities. I've talked for some time about the importance of cost of goods leverage in this business. You simply have to have it to win. And SXC's skill and scale in the COGS arena is making us very competitive as we compete for larger plans.

The second driver of our performance is our acquisition strategy. We announced 3 acquisitions during the course of 2011. In the summer of 2011, we successfully completed the integration of MedMetrics, a middle-market PBM in the Northeast. Then in the fourth quarter, we completed our acquisition of PTRx in San Antonio and its exclusive mail-order pharmacy provider, SaveDirectRx. The integration process is on schedule and proceeding well as we are taking full advantage of their mail-order capabilities.

Also in the fourth quarter, we announced the acquisition of HealthTrans, a well-established middle-market PBM located in Denver. This transaction was completed in early January. Each of these acquisitions that I've mentioned including HealthTrans is an example of us acquiring our own technology clients. And as a reminder, the HealthTrans business model looks like lot many SXC. They're on a full-service PBM, and it is complimented by a host and host a dozen technology clients as well. As a result, the HealthTrans acquisition expands our pool of potential acquisition targets, as well as conversions to our full-service PBM offering. The HealthTrans deal is a great strategic fit for SXC.

These 3 acquisitions are a continuation of our strategy to roll-up the middle market, with a focus on targets already using our platform to drive shareholder value. As you know, we generate immediate synergy value by laying on our COGS contracts on top of these subscale targets. And remember, acquiring clients who run on the SXC platform significantly reduces our integration risk.

Our M&A track record demonstrates that we built a company core competency around sourcing, negotiating, financing and closing on acquisition targets and then integrating those businesses quickly. We continue to be active on the acquisition front in terms of evaluating potential targets. The strength of our balance sheet, coupled with ample cash from operations, ensures that we are encumbered from a financial perspective. And in keeping with our model, we will be disciplined as we evaluate opportunities to deploy capital and drive solid accretion, just as we have with our previous acquisitions.

The third and in my opinion, the most important driver of our record performance is the strong team that we put in place. We have developed and added to our bench strength throughout the course of 2011. And I've said this before, but I would stack our leadership team up against anyone in this business. Our leadership team continues to push the envelope to make SXC a standout performer amid the dramatic changes that are underway in the PBM space.

In 2012, we intend to extend our lead in the area of innovation. We have formed a dedicated office of innovation, headed up by our Executive Vice President, John Romza, who many of you have met. John is well known in PBM circles as one of the industry's most innovative and visionary technologists. We've surrounded John with some of the best and brightest solution minds here at SXC. Their goal is to develop and deliver game-changing innovation to help drive our clients' agendas forward. Stay tuned for much more from John and his team.

And on a final note, we were very pleased to add Mr. Pete Bensen to our Board of Directors. Pete is the Chief Financial Officer of McDonald's Corporation, a $100 billion market cap global company, and we're truly fortunate to have someone of Pete's stature and financial skill set join our board.

Now with that, I'll turn the call over to Jeff.

Jeffrey Park

Thanks, Mark, and good morning, everyone. Clearly, 2011 was a record-setting year for SXC. We reached new heights in revenue, gross profit, EBITDA and net income, which were all driven by a combination of organic growth and accretive acquisitions. With today's press release, we have provided our 2012 full year guidance, which I will review in a moment.

As Mark mentioned, it was a busy quarter. We began the integration work for PTRx and prepared for the integration of HealthTrans. We had one of our busiest seasons for implementation of customers that went live on January 1, and we're in full swing supporting our specialty and mail operations as they manage continued growth. In addition to our increased selling activities, we also successfully converted 2 more HCIT customers to our full-service PBM offering during the quarter. Our pull-through strategy is firing on all cylinders.

Revenue increased 155% on a year-over-year basis. Q4 revenue increased by 162% compared to 2010 and was up 7% over last quarter. The PBM segment's prescription claims volume increased by 91% for 2011 to $91.7 million. Gross profit per prescription in the fourth quarter rose to $3.18, an increase of more than 30% from where we started in Q1 this year. This shows our focus on driving margin by aligning with our clients' goals of delivering more effective health care to members in the most cost-effective way.

Our industry-leading generic dispense rate improved to 79% in Q4, up from 78% last quarter. Generics continue to be a focus area for SXC to help clients contain costs. With the launch of LIPITOR late in the fourth quarter, we have seen an increase in our GDR as we moved through December and January 2012, and so we expect to continue to lead with a higher-than-industry average generic dispense rate in 2012.

Health care IT revenue was up 9% in 2011 compared to 2010 driven by new clients as well as existing clients using more products and services. We continue to be pleased with the HCIT growth particularly when you consider how successful we have been converting clients to full-service PBM. Our success has come both from retaining 100% of our HCIT clients and increasing pricing for the value that we offer them. We continue to grow the HCIT segment using these solutions to drive deeper penetration into our customer base and differentiate ourselves in the marketplace.

Consolidated gross profit increased by 45% in 2011 compared to 2010 and 56% in Q4 versus Q4 of 2010. Primarily, this growth has been driven through the PBM segment. Our SG&A cost increased 47% in 2011. The change in SG&A relates both to the increase in operating costs from acquisitions, as well as additional resources needed to support the growth of our PBM segment. Additionally, transaction costs in the fourth quarter were approximately $1.5 million.

Adjusted EBITDA was $176 million in 2011, an increase of 46% compared to last year and compares to our November guidance of $172 million to $173 million. Q4 adjusted EBITDA was $51.3 million, an increase of 65% over the same period last year.

I will now review our 2012 financial guidance that we released this morning. Our forecast for revenue is $6.8 billion to $6.9 billion for the fiscal year, the midpoint of the range implying growth of 38%. As outlined in our press release, we will now be providing guidance for EBITDA going forward rather than adjusted EBITDA. Our reported EBITDA will now include stock compensation charges, which were excluded from the adjusted EBITDA figure. We've made the switch to ensure consistency with industry norms and should provide clear consensus reporting for shareholders.

For comparison, our 2011 EBITDA was $166.4 million, which is the adjusted figure I reported of $176 million less $9.4 million in stock comp charges. Our 2012 range for EBITDA is $248 million to $255 million. The midpoint in the range implies growth of 51%. For 2012, we anticipate stock comp charges will be in the range of $13 million to $14 million.

Our full year target range for fully diluted EPS is $1.96 to $2.04. The midpoint of our net income using the EPS guidance implies 38% year-over-year growth. Our fully diluted non-GAAP adjusted EBITDA, which excludes approximately $41 million in deal amortization, is $2.37 to $2.45 for 2012, midpoint representing 48% year-over-year growth.

A few other key assumptions for 2012, we expect our corporate tax rate to be 34% and net interest expense for the year to be $4 million to $5 million, increasing from the $2 million in 2011 due to our drawdown of $100 million in debt and unused revolver fees.

To put our 2012 guidance in perspective, EBITDA grew 26% in 2010. EBITDA grew 45% in 2011, and we are guiding EBITDA growth of 49% to 53% for 2012. Our guidance indicates that EBITDA, as a percentage of revenue, will increase in 2012 versus 2011. And considering the $1.8 billion to $1.9 billion in new revenue growth, this is a strong indicator of operating leverage in our model.

Q4 finished the year on a strong note for SXC. We continue to grow within both the HCIT and the PBM segments. We began the 2012 selling season with a large health plan win, and we are focused on taking SXC to the next level. Our ability to drive accretion and synergies from acquisitions is a competitive strength. We are on plan with our PTRx and HealthTrans acquisitions, and as Mark said, we remain active on the acquisition front.

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

Mark A. Thierer

Thanks, Jeff. We feel great about the record results we posted in 2011, and with that said, our focus now is clearly on 2012 and executing on our operating plan that we put in place. We're genuinely excited about the multitude of opportunities on our radar. SXC is very well positioned to capitalize on the confusion and dislocation in the PBM market today. We intend to move quickly to capture opportunities in each of the markets we serve.

Operator, I'd like to now open the line for questions.

Question-and-Answer Session

Operator

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

George Hill - Citigroup Inc, Research Division

Jeff or Mark, wonder if we can dig in, in the BCBS Rhode Island a little bit. It's a nice win for you guys. Can you talk about the pricing environment and maybe the margin environment? And going forward Jeff, we had talked before about how the competitive environment is leading to new large deals that likely come on below the composite. Maybe just give us some indication of where we should expect the new deals to come on and how the profit profile of those deals should ramp and where they can max up.

Mark A. Thierer

George, it's Mark. I think I'll start with the overall win at Blue Cross Blue Shield of Rhode Island and let Jeff talk to you about how we view health plan margin profiles over time. But this deal was very strategic to us, and we were extremely pleased to partner with this premier health plan. As you may know, Blue Cross Blue Shield of Rhode Island is the dominant player in Rhode Island. They have an excess of 50% market share in that state, and they've got a very strategic agenda over the next couple of years in growing that health plan through PCMA initiatives and health care reform positioning. We view this as an opportunity really to showcase the full line of SXC products and build a world-class reference by helping this health plan succeed. And so let me just take you through kind of why SXC, how we were able to win. First of all, as I mentioned in my comments, everybody in the business was asked to the table. This was a procurement that was led by a premier consulting shop in the United States, a PBM boutique shop who sources a lot of business. And the Blue Cross Blue Shield of Rhode Island business requirements were very clear. First, they were looking to improve the economics of the prescription drug program. Second and equally important, they were looking for a strategic partner with a strategic fit to their business plan over the next couple of years. They also wanted a full network to basically make available to their membership. That was an important component. And they've got, as I mentioned, a very aggressive PCMA strategy, engaging their positions in the state of Rhode Island and at -- to a new level. So candidly, they took their top 10 executives starting with the CEO and led a strategic selection process that was very exhaustive and very complete. So soup to nuts, this was a very competitive circumstance for us. We felt great emerging as the victor. And I'll let Jeff just take a moment and talk about our margin profile.

Jeffrey Park

George, thanks for your question. As we've outlined in the past, when you look at some of these large health plans, health plans are looking for partners to really align the cost model with their PBMs, not take what the PBM's cost model should be. And so having a 1% to 2% margin for these large plans as they begin is not uncommon. And really, what we look to do is grow our margin profiles with them over time for some of these large plans, and we do that through clinical programs. We do it through dispensing tools, and we do it through purchase improvements. As you've seen through 2011, in my prepared remarks, I talked about gross profits in the PBM segment increasing from where we start the year to where we end the year, and that's really based on our ability to drive these clinical programs, purchase improvements and aligning our models with the health plans.

George Hill - Citigroup Inc, Research Division

Yes. That's great color I'll say. It's a particularly an impressive win given where this plan is located. Maybe just one more quick follow-up. Does the deal include specialty?

Jeffrey Park

No. It doesn't at the outset, George. It does not include specialty at the beginning of the contract.

George Hill - Citigroup Inc, Research Division

Okay. And then just given that the incumbent is doing some interesting things on the pharmacy network side with pricing, are you seeing an increased demand for more restrictive pharmacy networks or alternative benefit networks? And I'll jump off with that.

Mark A. Thierer

Yes, George, this is Mark. We are seeing dialogue around restrictive networks kind of taking a couple steps up the ladder. But as I've said before, there's nothing particularly new about the concept or the discussions around restricting the network, restricting access for a better price. And so I would just say that we have had a heightened level of discussion with many clients around restricted network and actually have put a number in place at this point. It's interesting to note that this health plan wasn't looking for that.

Operator

Your next question comes from the line of David Macdonald with SunTrust.

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

I was wondering can you guys frame what you're seeing in terms of the size of the 2013 new business pipeline, either by RFP activity or revenues or lives, whatever you feel is kind of most appropriate.

Jeffrey Park

Sure, Dave. This is Jeff. If you think about the pipeline from a build perspective, as you know, the employer markets really start to come in, in the second quarter where you see the consultants start to build up the employer business with their view of having selections in the third quarter and implementations in the fourth quarter. So really a peak point for the pipeline is generally at the midpoint and near the end of the second quarter. Health plans, although move their numbers much sooner, they make decisions sooner. We've seen a significant increase in the number of health plans. We've seen a significant increase in the number of employers. It -- there's 2 implications for it. First of all, we're seeing more of them come in earlier, whether it's some of the disruption or pending disruption in the marketplace. We're seeing a lot more accounts come to market to look and a lot more accounts coming earlier to market. So we've seen a relatively significant increase, almost 2 to 3 times the spot where we've been in, in the past at this point.

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

Okay. And then is there still reasonable amount of business that now is in terms of stuff that you could add maybe late in 2012, some of the smaller stuff that's not as tied to January 1?

Jeffrey Park

Yes, there's a number of opportunities that are for mid-year starts, and there's always employers that are making decisions really through different points in time in the year. But we do have a number of good size opportunities we're looking at in the second half of the year.

Mark A. Thierer

The other thing, Dave, that I'll add just to finish on that, when you look at our market segments, again, Fee-For-Service Medicaid, workers' comp plans, we have a number of segments that are not as tied to 1/1 start dates. And so we like that variability, and it does kind of smooth our workload throughout the year.

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

Okay. And then guys, could you just give a quick update on 2 areas, the Coordination of Benefits area and then also if you're seeing any increased traction in terms of management specialty in some of the Medicaid markets?

Jeffrey Park

On the -- Dave, on -- this is Jeff. On the Coordination of Benefits, we continue to see growth in the footprint that we have with our existing clients. We're really pretty excited about what we've had and what we're seeing build in that part of the market. And the enhanced Coordination of Benefits is really one of the first of our innovation deliveries that Mark was discussing earlier in the call. In addition to the expansion from our existing clients, we've had commitments from 2 more, and we have several other managed care commercial and state plans that we're working on in the near-term pipeline on that. So we're really product of the offering, and it's very aligned with our clients' goals of saving and avoiding costs, and it enables us to really further showcase the value of the SXC's integrated product suite. It's definitely a great spot for us.

Mark A. Thierer

And then your second question, Dave, regarding specialty, could you just repeat that aspect of your question?

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

I was just curious -- I know a lot of these states aren't doing a very good job managing their specialty spend. I was wondering if you guys are gaining any traction in terms of working with some of the states on the specialty side in addition to the PBM business.

Mark A. Thierer

Yes. Let me address that. This is Mark. As you know, last year, we announced the first Fee-For-Service Medicaid exclusive specialty carve-out in Nevada, and since that time, we've actually added 2 more states to a very similar model. And so we are expanding our reach in terms of our current customers, and some customers in the state sector who were not even SXC claims processing clients are targets for us. And so that's an area where we see a lot of runway, and we put 2 new states on the board since we last talked.

Operator

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

Tom Liston - Versant Partners Inc., Research Division

Just a little more on the ECOB. So the first target is existing clients. And could you just walk through -- I won't call them hurdles, but in terms of adoption, obviously, it seems in many cases almost no brainer for them to avoid these costs. Is it more about what kind care [ph] and others presenting their -- the live data for them to start to take a closer look? And along with that, what type of internal personnel do you need in terms of implementing? And is there any kind of skills shortage there to sort of ramp of those contracts? And the third part, I guess, in the -- when you said commitments, when would the start dates for those 2 commitments begin?

Jeffrey Park

Okay, Tom. This is Jeff. Let me see if can get through the pieces that you have there. So first and foremost, it’s a really a great opportunity to help these clients save money. From an implementation -- from a decision perspective, we're not constrained. It varies from a time frame, but 30, 60, in some cases at the high end, 90 days would be the outside of what it would take to get these turned on. When there are existing claims processing clients, it's really not much to add to the support. And so when you ask about what are some of the -- what would some of the selling challenges be, any time you're selling something that hasn't been purchased before is usually the first hurdle of the selling challenge, helping people understand what the strategy is. The second piece is when you're selling it into state governments. Contracting cycles, contacting decisions don't follow the same sort of commercial decision-making processes. So those are -- would really be it. But we've seen a really a high level of interest in the solutions we've sold and a high level of interest in new clients. It's very scalable, so the ability to deploy across larger and larger and more footprints is, again, part of the technology and the automation of the technology that we have. It's really the differentiator.

Tom Liston - Versant Partners Inc., Research Division

And just finally, the 2 commitments, do you have start dates for them yet?

Jeffrey Park

We do. They have Q1 start dates.

Tom Liston - Versant Partners Inc., Research Division

Okay. And just I don't think you talked about it. Just overall on specialty, certainly, one of your peers had some very good results. Could you just comment on the overall pie of specialty and the growth year-over-year?

Mark A. Thierer

Yes, Tom, this is Mark. We love the specialty business. We are investing time, energy, talent, and we're looking at properties in the specialty business. You know the score on the pipeline for new drugs coming to market, how many of them are oncologic agents, our specialty-targeted medications. So our performance in 2011 in specialty was very strong, and our outlook for 2012 is aggressive for specialty. And keep in mind, the markets that we primarily focused on, the middle market, Fee-For-Service Medicaid, these growing health plan relationships, many of these markets are under penetrated for us. And so when you look at the penetration levels of our book of business, using specialty compared to, saying, mature, traditional model PBM, we're way less than half of those guys from a penetration standpoint. So we've got a lot of running room, which is why we brought talent into this business, and we're very focused on growing our specialty footprint in 2012 and beyond.

Operator

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

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

I had some follow-up questions on the margin side. So you have a lot going on, on the gross margin side, just given the economics of the health plan accounts that you've added and the conversions, I'm just trying to get a sense of how do we think about sort of expansion in the core business and just think about the typical drivers, generic, mail and then renewal pricing, specialty. And how do we think about just core margin expansion in the business?

Jeffrey Park

Sure, Amanda. I think probably the biggest piece is a number of -- this is Jeff -- a number of pieces in the answer, but if you sort of start from the beginning, you'd think in 2012, we went live on January 1 with Bravo. We've been clear about what to -- how to think about the margin profile on a large account like that, 1% to 2%, so that sort of sets the start. When you look at the guidance that we've given, we've guided that EBITDA as a percentage of revenue will go up in 2012. Now if you put that much business on top with a 1% to 2% margin and yet you're still seeing EBITDA growth overall, that tells you a few things. First of all, you're seeing margin expansion through the existing book of business, and that comes from generics. It comes from clinical programs. And also you're seeing expansion in our pieces of distribution, whether it's specialty or mail order. So all of the same profit drivers that you see in a traditional PBM you do see here at SXC. I think the only piece that you need to contemplate is the same that happened in the beginning of 2011. When you bring on these large books of business, you'll see an implication in the beginning and expansion throughout. We're really excited about what we have.

Mark A. Thierer

Amanda, I'll just add one other response there to your question because you embedded it in your question, and that was kind of what's going on with renewals. For 2012, we have no material renewals on the horizon. And the way we actually manage and compensate our account management folks is they run and manage our business relationships with our clients is we do target what we call same rate renewals and evaluate our people on this front, and where we can, we look to expand margins through the renewal process. Basically, by adding new products and services, this is this pull-through model that we've been successful with, and so that strategy -- and it doesn't always work. Sometimes we have to take a haircut on the renewal. But in the markets that we serve, it's not like the high end where every renewal is a twoonie. It's just not the same. And when you sort of overlay that with the way we approach our HCIT renewals, which again we've lost exactly 0 clients over a 6-year run, that renewal process is a positive one, and we are adding more value and where it makes sense moving the economics north in those relationships. So that's really what's happening on the renewal front.

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

Got it. Okay. And then if you look at HealthSpring, you've talked about sort of purchasing efficiencies you've been able to drive there. Ventures, do those come in line or have they come in line with where you thought? And if you look at the BCBS of Rhode Island, is that sort of size, I mean, account enough to move the needle from an efficiency standpoint?

Jeffrey Park

Thanks, Amanda. With respect to our ability to drive purchasing efficiencies with the larger and larger books of business that we've been able to bring on, we've certainly been at or above our expectations in those areas, and that's helping us continue to drive more competitive pricing in the marketplace, which helps us make more successful new accounts, bring on more accounts. And it's really based on the team that we have. As Mark talks about the skill and scale, this is the skill part of what we've been able to bring. When you start to add new accounts like the Blue Cross Blue Shield of Rhode Island, they're all the mix of client base that they have, the geographic mix is different, and so you really need to start to tailor the networks and the purchasing, and that's really where our team is -- really stands out.

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

Okay. And then just last one, switching topics. Just curious, you sort of talked about this a little bit. But in terms of the Walgreens Express Scripts situation, I mean and I know it's early in the season here, but how big of a opportunity is that for you? And have you changed your, I guess, your retail network-tracking philosophy at this point?

Mark A. Thierer

Amanda, this is Mark. I would say that I'm somewhat surprised this has gone on this long, and we just won our first account that was a direct derivative of the dispute between ESI and Walgreens. And so there had been a lot of talk on how much business has moved. I don't think a lot of business moved late last year, but we just won our first. And candidly, there are a good number of employers and health plans evaluating what is the impact on the network, and there is a level of discomfort around the notion of not having Walgreens in the network, and for many, many buyers, that's a big problem. So it is, for sure, creating opportunity and not just for us, for others in the middle market. And so that coupled with the Medco-ESI merger discussions and the lengthening of that process through the Federal Trade Commission, these things taken together are for sure driving new activity and a lot of new discussions. And so we're just running fast to capitalize on a lot of this confusion. I will tell you, we just won our first account that was also a direct result of the Medco-ESI merger. And so we're starting to see tangible fallout from these kind of large scale dislocations in the form of new wins.

Operator

Your next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

Elizabeth Blake

This is Elizabeth Blake, in for Bob Willoughby today. Just a question on HealthTrans, how are you ultimately funding that transaction? And you also mentioned you've taken on some debt in the first quarter. Do you seek to pay this off near term?

Jeffrey Park

Sure, Elizabeth. This is Jeff. With the $250 million purchase price, we used $150 million of our cash, and we drew $100 million on a unsecured 5-year line of credit. So we have the ability and the cash proceeds to not pay or not require the debt to be paid down. But we generate a good amount of cash, so it's really just to get the right operating leverage model for us.

Operator

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

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

I have a couple of questions. I guess, first, I'm surprised no one's asked you about HealthSpring and Cigna, but I'm just curious, obviously, now that deal is closed. Have you seen anything different in the relationship or the outlook you've presented in the past?

Mark A. Thierer

Brooks, it's Mark. Well, we went live with Bravo and the Bravo go-live went very, very well on 1/1/2012, very large plan, very complicated plan. We felt very good about it, so we now obviously run the full HealthSpring platform. And they're 30 days, give or take, into the integration work into Cigna. And so obviously, as we've talked about earlier, we have a good relationship with Cigna. It's our hope to grow that relationship, and I would say beyond that, nothing new to report.

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

Good. Secondly, I'm just curious, obviously, a lot of movement in another large client of yours, UnitedHealthcare, with them preparing to assimilate or bring back the business they had previously outsourced to Medco. I'm just curious if you're seeing opportunities with them at this time.

Mark A. Thierer

Yes, Brooks. This is Mark. So as you well know, UnitedHealthcare and their Optima Rx business has been a long-term technology client for us, and they run our RxCLAIM platform exclusively inside that business. So we are busy supporting them in their work efforts to make the conversion happen. It's going well. They're obviously the market leader in the Medicare Part D space. And as you well know, we have a dominant position from a technology standpoint in Medicare Part D, so we are side by side with them, helping them to build up that business and prepare it for the transition work that they are looking at in 2013.

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

That's great. And then just one last one and it's been touched on quite a bit already. There's been a lot of conversation about narrow networks, which I assume means networks that exclude Walgreens, and you've been pretty clear that you see opportunities in the marketplace where people actually value having Walgreens. So could you just talk briefly about broader networks as opposed to narrower networks and the real opportunity you guys offer to include all of the significant pharmacy chains in your network and whether that's really resonating in the marketplace in 2012?

Jeffrey Park

Brooks, this is Jeff. Yes, I think it's -- there certainly has been a lot of conversations around narrow networks, and it's principally arriving from some of the dispute that's obviously underway today, and that's driving a lot of the conversations in the value propositions or concerns regarding it. As Mark said, with respect to the pipeline, we've had clients that are concerned about a narrow network. Really what's the key theme is that clients are really focused on savings and choices, their choices, not the PBM's choice for the appropriate channels for their members. Every health plan is in a different environment. They want to be able to differentiate themselves in the marketplaces they compete in. In some cases, they want to differentiate their offerings, which may mean they'll have a restricted network offering and an open network offering to be competitive. And if you think about what health plans are considering as they move closer and closer into the environment where health care reform will drive members to make choices, really they have to be able to have multitudes of offerings.

Mark A. Thierer

That's right. The other thing about it is and remember, I mean, it doesn't matter if it's health plan or an employer. We're really hired to be the intermediary with the supply chain and bring leverage from a buying standpoint and a clinical standpoint. So for us, we've got a long and strong relationship with Walgreens, and so I just disagree with one aspect of your question. I don't think the discussion around narrow networks necessarily means excluding Walgreens. There are a lot of ways to build networks, and regional networks, Part D networks, long-term care networks, and this is where a product line and a strategy around network management is pretty central to your success. And I would here, again, say that we have an advanced set of skills as well as an offering, and you can see that in the wins that we're posting. And so our job is not to pick a favorite chain. Our job is to meet our client's need and help manage drug cost through that strategy in building strong supply chain relationships candidly with every player is in our interest, that's our strategy.

Operator

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

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

Mark, just a question on capacity. It seems like you guys have a lot of momentum winning new business, and you've got a big contract coming in, in 2013, and I think you're going to have a pretty good selling season seems like. So just wondering -- and tied to CapEx guidance and I know Jeff can give this, but how much do you need to spend to build up capacity to make room for all these new or large businesses coming in?

Mark A. Thierer

Yes, Brian. It's a great question because there's a lot of discussion in the industry about capacity and CapEx, and I'll let Jeff address that aspect of our model. But the PBM model, if it's built properly, is highly leverageable. And capacity here, for us to add Blue Cross Blue Shield of Rhode Island, we're going to add some client facing and some on-site talent. We're going to add some call center support. But basically, we're ready to take that plan on with no new capacity, and that's an important point, because if you've been investing over time -- and we have to the tune of $10 million to $15 million a year -- capacity should not be an issue. Now having said that, if you were going to bring on $400 million of new mail order, you may have a capacity issue in your factory dispensing medications, and so capacity can come into play relative to your dispensing capability. But bringing on large health plans and managing large sums of drug spend is a leverageable model here. And here, we're really just talking about having the right skills, the right client-facing people, the right implementation resources available, and we have all that available. So I'll let Jeff address what 2012 outlook for CapEx and investments are.

Jeffrey Park

And Brian, this is Jeff. Just to sort of give a bit of context on the scale, I think it's important to look. If you look back and see 2008, 2009, 2010 and again in 2011, SXC has spent $9 million to $11 million of CapEx a year annually. Now you think about the growth that has been occurring in our business. Back in 2008, we are around $900 million in revenue, and we've been spending $10 million a year, and we're $5 billion in revenue. So it's certainly a very leverageable operating model that we have. Also, it's important to keep in mind that our IT shop is a profit center. We get paid to develop and deploy what other people have to capitalize and build themselves. We don't capitalize any development costs that we have. We take a very conservative approach to what we put on the balance sheet, and we have a very leverageable operating model. We take investments across multiple clients and across our platforms, and we really lean on our one operating platform to deliver effectively across these. When you look at 2012, the CapEx guidance for me would be around $12 million to $14 million.

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

And then as I think about Bravo, should I think about the Q1 implementation expenses in Bravo to be similar to the HealthSpring expenses last year?

Mark A. Thierer

Yes. That's a good way to think about it. From an implementation and preparation perspective, we ramped up some of the call center and support infrastructure that we have heading into a January 1 launch. So you do see some of that coming through in fourth quarter and a little bit more will lean into the first quarter, but we -- you shouldn't see much of a difference in trend.

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

Okay. And then, Jeff, last question, as I think in answering Brook's question on United, you're talking about more consulting work. So should I think about your health care IT margins to be sort of where they were in Q4 as we look at the rest of 2012 because of the higher consulting percentage?

Jeffrey Park

That's one thing, Brian. You'll see also that the margin percentages for the health care IT business will continue to -- it will actually expand. The mix of business moving from some of the transaction processing and more into professional services is one of the effects. Also in the third quarter, we talked about having some helps in our HCIT business around $1 million. That hasn't affected the fourth quarter here. We've also been successful at converting accounts out of the HCIT business with a few of them in the fourth quarter alone. So what you should expect to see on the health care IT margin profile is to actually see it expand over 2012.

Operator

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

Michael R. Minchak - JP Morgan Chase & Co, Research Division

Just a couple questions. First, can you give us an update on the specialty penetration within the HealthSpring and Bravo books of business? Is that -- is it tracking according to plan? And how much more room do you think you have to run there?

Jeffrey Park

Yes, Michael, this is Jeff. The specialty penetration in HealthSprings is actually at plan, a little above plan from where we've seen. Their book of business is growing quickly. Our specialty consumption has continued to expand. Really across our book of business, it's becoming a bigger and bigger piece. We're really pleased with our ability to drive that across a number of accounts including HealthSprings. Every mix of business and the Bravo business coming on is always a little unique, but we expect to just continue to see good penetration for that client.

Michael R. Minchak - JP Morgan Chase & Co, Research Division

Great. Have you actually sized the size of your specialty business at this point?

Jeffrey Park

No, we haven't.

Michael R. Minchak - JP Morgan Chase & Co, Research Division

Okay. And then secondly, you've mentioned that you're going to be doing mail for Blue Cross Blue Shield of Rhode Island. How does that business look in terms of mail penetration? Are they implementing any plan designs that maybe incentivize their members to use mail? Or is it still like most managed care plans, they're still relatively well?

Jeffrey Park

It's relatively low. Most, they look very similar. Obviously, they're coming off of a provider that's got a lot of retail 90 in fill rates that you have on mail utilization. That's a nice size, but it's still a pretty open mix.

Mark A. Thierer

The business mix, Michael, for Blue Cross Blue Shield is roughly 90% commercial, 10% Part D. And they do have an aggressive growth strategy in place. I would expect over time, the opportunity for mail-order penetration to rise and -- but today, it is pretty low.

Operator

Your next question comes from the line of Andy Schenker with Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

Your revenue guidance was very strong, above my expectations, especially concerning the impact of new generic. We know the $1.4 billion new wins, your acquisitions. Just wondering what else was driving that growth. I mean was there a lot of organic growth in some of your managed care clients?

Jeffrey Park

Well, we've got good growth across -- from a utilization perspective, you know how the business works. You're going to see consumption increase. Like you said, we've got some new account wins that we've posted. We were clear about the -- them, $1.4 billion. We've also been able to bring on -- with HealthTrans, you're seeing an impact of that revenue in 2012. And then we really continue to see good expansion. What we've put forward in our guidance is business that we have clear contracted or visibility into. So it's really a great view for 2012. We're just so excited about the growth rates we've been able to put up.

Andrew Schenker - Morgan Stanley, Research Division

What kind of organic growth maybe are you guys seeing in your underlying business?

Jeffrey Park

Well, when you look at script or a trend forecast for 2012, the sort of industry data would point to 1% to 2% script utilizations, and trend data can really vary by book of business and line of business. Last year, the trend data is across -- IMS was relatively high, and so we'd expect to see sort of this 4% to 6% overall trend.

Andrew Schenker - Morgan Stanley, Research Division

Okay. And then following up, what was your eligible mail trend in the quarter?

Jeffrey Park

That's was relatively flat over where we've been. With the larger and larger books of business that we're bringing on and many of them large health plans with either Part D benefits or -- they don't really have the same utilization rates. Clients, what we've seen is a lot of clients expanding their 90-day utilization. The 90-day utilization is grown substantially over the last 2 years, as that is really eating away at mail order on a broad scale. Mail trends over the last 2 quarters have continued to decline, and we're seeing mail utilization across the board decreasing. For us, we still have an opportunity to drive penetration of mail order in some of these small to medium, midsized employers. And -- but like I said, most clients are looking for choice on how they get their medication and where they want to choose, whether the members can get the 90-day at retail or mail script. They don't necessarily want their PBM to dictate which of those 2 options they get.

Andrew Schenker - Morgan Stanley, Research Division

Sure. But following up on that, I mean, one of the advantages of the PTRx acquisition was their unique mail offering. I mean, now that you've closed the acquisition, I mean, how successful or how receptive have clients been to that offering? And is it possible to introduce that mid contract? Or is that something you really discuss when a contract's up for renewal?

Jeffrey Park

Yes, the PTRx business is really focused in the small end of the market on the TPAs, et cetera. And to your point, they've enjoyed almost 2 times industry penetration rates at mail in that segment. So we definitely have been able to see some of those plan design changes get implemented in some of our prior SXC books, and that's definitely got a lot of opportunities for growth in the TPA and the small end of the market. But my earlier comments were sort of a broader industry wide.

Andrew Schenker - Morgan Stanley, Research Division

Okay, great. And then just one housekeeping question. How many health care IT transaction processing volumes were there in the quarter?

Jeffrey Park

The health care IT transaction processing was 102.8 million in the quarter. So for the year, it's around 402 million transactions for HCIT only.

Operator

Your next question comes from the line of Larry Marsh with Barclays Capital.

Lawrence C. Marsh - Barclays Capital, Research Division

Just sorry for -- I’m joining a little bit late, so if I've already -- if you already addressed my question, just tell me so. But I really wanted to drill down a little bit on Rhode Island. Because in some ways, I look at this mini version of HealthSpring, which is a strategic investment in a customer that could grow and they’re -- I mean you hit a home run, obviously, given HealthSpring's growth and Med D and also the acquisition of Bravo. And I think, Mark, you said you looked at Rhode Island in a similar lens given their investment in the patient-centered medical home. And so from where -- I guess, things have said -- you'd say the Blue's world is a little bit more segmented. So it seems like you're saying, "Hey, this could be a client that could really grow for us." So maybe you can elaborate a little bit on how you -- how that could be the case so that we can see some pathway to expansion.

Mark A. Thierer

Yes. Larry, I appreciate the question. We looked at Blue Cross Blue Shield of Rhode Island differently than HealthSpring. HealthSpring was a dominant player in the Medicare Part D and stand-alone PDP space. And for us, it was a huge bet and a bet on their part on throwing their weight behind our CMS-approved PDP capabilities here at SXC and really sort of defined what we already have, which was a very dominant role in the Medicare Part D space. And it was punctuated with that win in a big way, and then it was added to with the Bravo win. So when we got engaged on the Blue Cross Blue Shield of Rhode Island opportunity, it was different. It is primarily a commercial health plan. They have a dominant position inside the state of Rhode Island. And we like this for different reasons. I mean, it's a roughly call it half the size of HealthSpring kind of at the going in proposition, still very, very large. And they've got 4 or 5 strategic initiatives, not just PCMH but the integration of pharmacy and medical data. They're very aggressive in the area of mobile applications and health care settings, aggressive in the area of MTM. We really liked the strategy opportunity with this important Blue's plan. And the other thing was the executive team was fully plugged in. It wasn't like it was a vacuum decision just on cost. It was a strategy decision, enterprise-wide decision, and so for us, we chose this client to throw our weight behind because we see a lot of running room to build an incubator for all our tools. All the picks and shovels we can deliver, we want to put them to work to help Blue Cross Blue Shield of Rhode Island be successful in their market. So that's a little more color on why we really liked this opportunity for the long term.

Lawrence C. Marsh - Barclays Capital, Research Division

Can I just follow up, if I could, around your continued expansion of your platform, both through new strategic initiatives, new service opportunities and an A-grade management team? It seems with, obviously, some of the disruptions already in market, there are plenty of possible opportunities to pull in some additional players, but yet, there is still some period of uncertainty, non-competes and such. So from where you sit, how much do you feel is in front of you to be able to pull in additional talent, say, over the next 6 months from some of those large competitors?

Mark A. Thierer

Yes, Larry. This is -- from my chair, I actually take this idea of building the team out very seriously, and we've been after that for the last 2 or 3 years. We're really at a place where we're kind of where we need to be in terms of bringing talent into this business. We don't have any big gaps on the leadership team. So it's true that there will be talent coming into the market, and we'll be taking a look. But candidly, today, we don't really have any big holes, and that's how we're looking at it.

Lawrence C. Marsh - Barclays Capital, Research Division

Okay, very good. And then just finally, if I could, just a quick elaboration on the specialty market, which you talked about you’re investing in, seeing it as strategic and view as value added to existing customers. If we think about the assets that are on the marketplace, I hear some good, some bad. From a standpoint of what fits best, what are the kinds of things we should be attuned to in terms of the types of specialty assets and business you would look to be interested in expanding through?

Jeffrey Park

Larry, this is Jeff. There is a number of different specialty properties. There's a lot of properties that hit the market or evaluate opportunities in the market, and really what we're working looking for is a broad mix of specialty to deploy, a broad mix from a therapy perspective, a broad mix from a client perspective. We're unique in that we have -- we're not afraid of looking at open networks as well as how to fulfill for other PBMs with our relationships that we have in the marketplace. So we definitely are looking at a number of different pieces in the specialty market. The other thing, I think, that's important or impactful is there's a lot of, in the press, around the pending merger with Medco and Express and the timing and the potential, if any divestitures and what or whatnot they might or might not be. And so we certainly are paying attention to that as well to determine how that may influence some of the properties that are in the market today.

Operator

Due to time constraints, this ends the Q&A portion of the call. I'll turn the call back over to Mr. Thierer.

Mark A. Thierer

Okay. Well, thank you very much. I'll just close by saying we look forward to seeing many of you in New York City on February 27 to 28 at the Citi Conference and then again on March 6 in Boston at the Cowen Conference. So thank you for your time today, and have a good day.

Operator

Thank you for joining the SXC Health Solution Corp. 2011 Fourth Quarter and 2011 Year-End Results Conference Call. You may now disconnect.

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