Magellan Health, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Welcome and thank you for standing by for the First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Joe Bogdan. You may begin.

[Joe Bogdan:]

Good morning and thank you for joining Magellan Health's first quarter 2018 earnings call. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin. The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through May 26. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Thursday, April 26, 2018 and have not been updated subsequent to the initial earnings call. During our call, we will make forward-looking statements, including statements related to our growth prospects and our 2018 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release this morning and documents we filed with, or furnished to, the SEC. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, adjusted net income and adjusted EPS, which are defined in our SEC filings and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries, but excludes segment profit from non-controlling interests held by other parties, stock compensation expense, special charges or benefits as well as changes in the fair value of contingent consideration recorded in relation to acquisitions. Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles as well as impairment of identified acquisition intangibles. Please refer to the tables included with this morning's press release, which is available on our website for a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures. I will now turn the call over to our Chairman and CEO, Barry Smith. Barry?

[Barry Smith:]

Thank you, Joe. Good morning and thank you all for joining us today. For the first quarter of 2018, we reported net revenue of 1.8 billion, net income of 11.5 million and EPS of $0.45 per share. Our adjusted net income was 20.8 million or $0.81and we achieved segment profit of 55.6 million. We're lowering our full year earnings guidance as a result of our updated view for MCC Virginia as well as estimates for investments and startup losses for our new Medicaid contract win in Arizona and other emerging MCC market opportunities. Jon will provide more detail later in this call. I'll now discuss our Healthcare business more specifically Magellan Complete Care. On Tuesday, we learned that Magellan Complete Care of Florida has not been selected as a vendor for Florida's Medicaid managed care program for plans beginning January 1, 2019 as noted in our 8-K filing. We're disappointed with this news. We collaborated with the state to the nation' first Medicaid specialty plan focused on individuals with serious mental illness. Since July 2014, our team worked diligently to successfully launch the program and over the past few years, we've proven that this model works. We continue to have a strong relationship with the state and an improved access to quality and affordable care for tens of thousands of people with serious mental illness. We believe the scoring methodology did not take into consider the unique nature of the specialty population we serve. We'll be filing a protest with Florida's Medicaid agency AHCA within the next two weeks. In Virginia, we initially contracted to manage our targeted populations, people in need of long term services and supports and the aged, blind and disabled. Given our existing statewide infrastructure and footprint, we also successfully bid the Medallion 4.0 program, which will start phasing in during August of this year. As one of six health plans, we will collectively serve as roughly 740,000 of Medicaid enrollees once fully implemented. We're also watching Virginia closely as the legislature looks to pass a budget that includes Medicaid expansion which could add another 300,000 plus members and over 2 billion of medical spend to the totality of the Medallion 4.0 program. Moving to Arizona, we are one of seven integrated managed care organizations that will coordinate physical and behavioral health services to approximately 1 million Medicaid eligible members in the central geographic service area, which includes Maricopa, Gila and Pinal counties effective October 1, 2018. Magellan is the only non-incumbent to be awarded a contract, so the actual pace of our enrollment growth is likely to be moderate. We're currently working with the state on a number of implementation items. Turning now to our New York and Massachusetts markets, with our acquisition of Senior Whole Health in October 2017, we've expanded into Massachusetts, increased scale in New York and added dual eligible capabilities to our portfolio. Our integration has been seamless and is striking as planned. Let me offer some perspective on the Medicaid managed care space. The government business is unique and requires a high level of customer understanding and deep domain expertise. While the environment can be challenging in the short term, we're comfortable with this dynamic and remain confident in the strength of our capabilities to manage high cost complex populations. We believe these capabilities will continue to resonate in the market to provide continued growth for the company. Turning to the pharmacy business, we're pleased with our commercial PBM growth in the quarter, proved that our approach to pharmacy management is resonating in the market place. Our PBM revenue excluding Part D grew at 9% versus the first quarter of 2017. Overall, our PBM membership now stands at more than 2 million lives as of January 1, 2018. We continue to experience success in the employer middle market because of our value proposition that appeals to these customers. Our customized benefit structures, speed to a limitation and response of service levels have all contributed to this momentum. Our customers are also coming to realize that there is value beyond the traditional drug discounts on a spread sheet. While obtaining traditional drugs at low cost is still an important consideration, there's also real value created by using clinical programs and formulary strategies to help drive total specialty drug spend, whether under the medical or pharmacy benefit to the lowest net cost. We're also gaining traction with brokers and consultants in the larger employer market. As a result, we're pleased to see an increase in invitations to finest presentations and some initial success. This bodes well for our future in this space. At this time I would like to provide some context around the legislative and regulatory environment in Washington. As you know the President declared opioid crisis a national public emergency, which helps direct and focused federal and state resources. Addressing our nation's opioid crisis requires multifaceted approach, from disrupting traditional healthcare models to develop a new public policy that encourages more process to integration and helps to ensure access comprehensive healthcare services. On April 12, Sam Srivastava, CEO of our healthcare segment participated in a panel discussion of industry experts at the House, Energy and Commerce Subcommittee on health hearing regarding the opioid crisis. Sam discussed how Magellan's healthcare and pharmacy segments innovate and collaborate in response to this hot crisis. In pharmacy, we're utilizing tools such as clinical edits, dosing limits and drug disposal systems to help individuals prevent misuse or diversion. In our healthcare segment, we have specialty management programs designed to help people living with chronic pain. This includes digital, cognitive behavioral therapy and behavioral health programs to identify and address conditions that may lead to dependence or abuse. We also provide solutions when opioid's become a problem with evidenced based best practices medicated, medication assisted treatment, off the space opioid treatment and addiction care management programs with peer support and other recovery services. The house has announced it intends to have legislation on the opioi crisis on the floor by Memorial Day. Before I turn the call over to Jon, let me offer some thoughts on our long term strategy. I'm optimistic about our growth trajectory and acknowledge the investments required to support this growth. We are very focused on execution and our future growth strategy remains unchanged. We will continue to be the nation's leader in addressing complex high cost special populations through the development of innovative products that improve outcomes and reduce cost while empowering members within our communities to live healthy vibrant lives. Now, I'll turn the call over to Jon to review our financial results and outlook in more detail. Jon?

[Jon Rubin:]

Thanks very much Barry and good morning everyone. For the quarter, revenue was $1.8 billion, which represents an increase of 38% over the same period in 2017. This increase was mainly driven by net business growth and the revenue from the Senior Whole Health acquisition that closed in October 2018. Net income was 11.5 million and EPS was $0.45 per share. This compares to net income and EPS of 17.7 million and $0.74 per share respectively for the first quarter of 2017. Segment profit was $55.6 million for the first quarter compared to 69.8 million in the prior year quarter. Adjusted net income was $20.8 million and adjusted EPS was $0.81 per share. The adjusted net income decrease of 20% from the first quarter of 2017 was mainly due to lower segment profit. For our healthcare business, segment profit for the first quarter of 2018 was $45.9 million. Segment profit decreased 3% over the first quarter of 2017 mainly due to the higher favorable out of period items in the prior year's quarter, the October 2017 capitation rate decrease in Florida and operating losses in Virginia, partially offset by the earnings contribution from Senior Whole Health. The current quarter's results included $5 million of favorable out of period items, compared to approximately 13 million of favorable items in the prior year. Now, turning to pharmacy management, we reported segment profit of $15.5 million for the quarter ended March 31, 2018, which was a decrease of 47% from the first quarter of 2017. The year-over-year decrease was primarily driven by the impact of the new ASC 606 revenue recognition standards related to Part D as well as the timing of network management initiatives. We consider both of these items to be timing differences that would reverse over the balance of the year. Regarding other financial results, corporate cost inclusive of eliminations but excluding stock compensation expense totaled $5.8 million, which was comparable to prior year. Excluding stock compensation expense and changes in fair value of contingent consideration, total direct service and operating expenses as a percentage of revenue were 14.5% in the current quarter compared to 16.2% in the prior year's quarter. This decline was mainly driven by the shift in business mix resulting from the Senior Whole Health acquisition. Stock compensation expense for the quarter ended March 31, 2018, was $7.6 million, a decrease of 2.5 million from the prior year's quarter. This change is primarily due to the vesting of equity in 2017 related to the CDMI acquisition. The effect of income tax rates for the quarter ended March 31, 2017 was negligible compared to 40.3% for the prior year's quarter. Income tax for the current period reflects the lower corporate tax rate for 2018 and was also materially impacted by the stock options exercised during the quarter. We anticipate the 2018 full year tax rate will be approximately 32%. Our cash flow from operations for the quarter ended March 31, 2018 was $81 million versus the use of cash of 31.1 million in the first quarter of 2017. The improved cash flow in the current year quarter is primarily the result of favorable timing of working capital. As of March 31, 2018, the Company's unrestricted cash and investments totaled $288.3 million, which represents an increase of $27.2 million from the balance at December 31, 2017. Approximately 91.5 million of the unrestricted cash and investments at March 31, 2018, is related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at March 31, 2018, of $456.5 million reflect a decrease of 8.9 million from the balance at December 31, 2017. Now as Barry noted, we are lowering our earnings guidance ranges primarily as a result of both the slower pace of progress on initiatives to achieve profitability in Virginia as well as estimates for investments and startup losses for our new Medicaid contract win in Arizona and other emerging MCC market opportunities. In Virginia we fully implemented the CCC+ program and are currently working under Medallion implementation. Overall the CCC+ implementation has gone very well. We have re-focused our team and are confident in executing against the profitability improvement initiatives for the balance of the year. In Arizona our recent win demonstrates our ability to compete effectively in Medicaid ted RFP's and we're continuing to actively pursue other MCC opportunities. As a result of these new developments we've incorporated $10 million to $15 million of investments in startup losses into our updated 2018 guidance. Please note that we don't expect revenue for Arizona in 2018 to be material, as a result of the pace of membership environment that Barry noted. Accounting for the above items we now anticipate segment profit in the range of $365 million to $385 million for the year. In addition we expect net income in the range of a 113 million to 137 million, adjusted net income in the range of 151 million to 171 million, EPS in the range of $4.41 to $5.35 and adjusted EPS in the range of $5.90 to $6.68. We are maintaining our revenue guidance at the current level of $7.5 billion to $7.8 billion. Compared to the first quarter of 2018, we expect the segment profit run rate to increase for the remainder of the year, due to the following three factors, margin expansion due to initiatives in our healthcare segment, new business and same store growth and finally normal earning seasonality in our pharmacy business. In closing, we are very focused on execution over the balance of the year. I believe the fundamentals of our business remain strong and I am confident in our long term growth strategy. With that I'll now turn the call back over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question, Ana Gupte from Leerink Partners. Your line is now open.

[Ana Gupte:]

Yeah, thanks, good morning. Yes appreciate the questions. The first one's on the 2018 pressures that you are facing in the startup cost as I understand in Virginia and Arizona. And then Part D, it sounds like you did not anticipate some headwinds in pricing. So can you talk about when the Virginia contract will become break even and what the normalized profit margin is likely to be and when that will be achieved? Same thing any color on Arizona and then on Part D what margins are you running at right now and how much do you expect that to improve relative to where you are in '18?

[Jon Rubin:]

Okay, great I'll try to hit all those questions. First, relative to Virginia, the way that I look at it again and just as a reminder in Virginia, as Virginia is a contract that was implemented in phases. So we began the implementation last August with the initial MLTSS population, that's phasing over the balance of the year. And then we implemented the ABD population in January and now have a new implementation coming up in the latter part of this year. So it really is a phase approach and I think when you look at profitability, you have to remember it takes at least 12 months to achieve profitability in most new Medicaid opportunities. And because of the phases the different tranches of membership become profitable at different points in time. But our expectation is with the benefit of our experience and the actions that we are putting in place that the business should achieve profitability in 2019 and we should be on a reasonable run rate by the end of this year.

[Barry Smith:]

It can be just one of the confidences I have. Absolutely Jon nailed it there. The other thing and again good morning to you, is that we are facing in of course the CCC+ implemented the Medallion 4.0, and then there is of course the Medicaid expansion. Now since the legislature right now, they can call back and is part of a budget deal, but it looks like it's going to pass and that's an additional 300,000 lives that will be distributed amongst the health plans, that will be yet another implementation. So it's really a good new story, the story of growth, we're just going to make sure that we are set for that level of investment to get all those phases phased in and of course as Jon points out they typically take about a year to hit profitability. Sorry to interrupt.

[Jon Rubin:]

No, that's great color Barry. Second part of your question on Part D, again the most significant issue in the quarter was really more timing of revenue recognition. With the new revenue recognition rules, essentially it drives higher seasonality in earnings over the course of the year and that impact in the first quarter was approximately $7 million negative. That is all timing, so that particular issue, it doesn't affect the full year outlook. In terms of your overall question on Part D, we have said coming into the year we expect it to be roughly break even in the year given the pricing changes and the formulary changes that we put into place. It's early in the year, I'd say we are probably seeing a modest pressure if we look at the full year on Part D, but it is still early in the year and there is a lot still to develop. But we do expect the continue to improve as a result of the pricing and formulary changes that we implemented. And, I'm sorry you had one last part of the question?

[Ana Gupte:]

I think one was on the national one Arizona, it sounds like you are already incurring startup costs on that one this year?

[Jon Rubin:]

Yeah, so Arizona - that contract implements over the latter part of this year. So if you think about that we've got a lot of startup cost to be ready to go live later this year. And again that you both have startup costs - we are also in discussions with the state around the enrollment ant how that's going to work. Again given our new plan and the other plans in the program are existing we do expect the ramp up of our membership certainly in the first year and most certainly in this calendar year to be relatively modest. So we will incur startup costs, you've got to have network ready, you've got to be staffed to be able to deliver flawless service through the implementation, which we are committed to doing. And we will see net costs in the latter part of the year and again that is reflected in the guidance now since it is obviously new news, since the last time we get updated guidance.

[Ana Gupte:]

Okay great. Just following up and then time that the loss in Florida, let's assume, keep the protest aside for a moment. Is it fair to say, that even with the rate reduction that Florida implemented at the end of last year, that you were doing somewhere in the 3 and change pre-tax margin. So it's roughly representing I think its 600 plus in revenue, but you know roughly about 10% of your EPS, I mean $0.60 in that range, is that fair?

[Jon Rubin:]

It sounds a little high, but what I would say, I think your logic makes sense meaning that what we expect is that roughly 600 million in revenue for part of it. We'd be in that lot of mid single digit range as we would typically be on Medicaid margins post the realignment of the rates. So I think on a pre-tax basis what you are describing makes sense. I haven't done the calculation on EPS; again that sounds a little bit high, but the 10%, but slightly plays out.

[Ana Gupte:]

Okay and then how is the state with the re-procurement what they have, had you won it for Wellcare and the others, reduced rate further or what might have been if you had won the contract or if your project is successful? So are we talking mainly like you are saying 10% is too high, is it more like 5% after the re-procurement because I understand rates were reduced across the board?

[Jon Rubin:]

Well, it's a little bit hard to say and a little bit hard to predict what had happened or could happen with the protest. But something's also depends on would we have retained 100% or 50% or whatever the number is. But I do think, like we said earlier, the value of the contract today is roughly in lines with the estimates we just discussed and we'll have to see what plays out with the protest and go from there.

[Ana Gupte:]

So, let's say somewhere in the mid singles is what I'm hearing, with what would have been back to Virginia and Arizona, by 2019 how much of that loss of Florida will be back filled with Virginia at the very least and perhaps even Arizona?

[Jon Rubin:]

Yeah, I think the way we look at Virginia - I mean Arizona honestly it's just too early to say. We have to first see what the membership in the scale is for that contract before we'll be able to give estimates for 2019. And we'll clearly have more information as we go through the summer and certainly by the time, we need to give guidance for 2019. But again as a reminder it normally would take at least 12 months to achieve a level of profitability in any of these Medicaid contracts. In Virginia, again we are actually running operating losses in 2018. If you recall when we talked at guidance last year, we said we had lost - sorry net investments and startup losses of about 20 million in 2017, our objective was to cut that in half again as we noted on the call. We are seeing some blaze in turning the corner on profitability in Virginia. But I would look at it as - as we get to profitability in Virginia which - certainly our objective would be for 2019, but not only would you get to a level of profitability, but obviously that's eliminating losses that ruin our current run rate. Again we'll frame that more specifically as we get later in the year and start to consider guidance role for next year, but that's at least directionally how I'd frame it.

[Ana Gupte:]

Okay, great. And one more on Florida, so you said that in the prepared remarks, the scores did not consider the uniqueness of SMI. So is it that your scores didn't come out the way the comprehensive contract was and are you still saying that the scoring was not contemplating that and that's the basis of the protest. And would you kind of handicap what the likelihood of a successful protest might be in part or whole?

[Barry Smith:]

Well, let me answer the last part of the question. We haven't handicapped it certainly, but just let me get a walk to the process really quickly here. We are ready to file our attempt to protest and we'll have that file by Friday, that's the first step. And then within two weeks, we'll file our petition to protest and then after we file that protest then the State has three days to respond to the protest. We haven't had feedback from the State really at all and got notified basically on Monday night, excuse me Tuesday, and we filed immediately the 8-K and so we really don't have the full data. However, given the way the ITN was constructed and managed and given the fact that the special needs plans in Florida where apparently judged differently than the cadet plans. We believe that there is a legal basis and a ground of protest and a number of factors. Again we haven't had those conversations with the State since we learned of the decision by the State, but again we feel that we have legal ground. We've done a lot of great work for the State that can demonstrate some very significant accomplishments in the State. I mean think about things like reducing the number of hospital days from the - and we get the Medicaid - this population is a special population, uses some 8 times number of in patient days as does the general population. And yet we still - we reduced that by 18%, we've managed significantly the drugs spend in terms of number of strips per member from 25. It's typically twice the amount of and otherwise Medicaid really and we reduced that 10%. So, there are a number of factors of quality, and of reduction in cost and higher quality care that we can demonstrate. So again we feel like we have a legal basis to discuss this with the State and we have a good relationship with the State, so again we don't handicap it whatsoever, but we are looking forward to having that discussion with them.

[Ana Gupte:]

Okay, guess one more if I could, we could switch to the PBM, as you look through PBM growth, both organically and any other tuck ins and the like when you don't obviously have any guidance for '19 , but - whereas consensus is modeling in something, growth possibly in the high single digit. Are there about - would you say that the PBM will potentially will has upside either organically or through tuck ins you are planning, again that's an offset and just broadly for SMI?

[Barry Smith:]

You're right Ana, we don't give guidance by setting the order generally for next year. But I will say we've got excellent traction and we are seeing very good results both in the middle market and the upper end of the market. We are having more shots on goal than we've ever had before. We're seeing some good success there. So I believe that you are going to see some very positive outcomes form our pharmacy business, we are pretty confident about that.

[Ana Gupte:]

And then one final one here, the whole industry is consolidating across managed care and PBM's, very, very large companies obviously are doing it. You've held out valiantly at the - with this setback do you see potentially more as a target for takeout and I could think of a number of large players that you would have a good step up?

[Barry Smith:]

Ana, we are smiling here because of course we can't answer that question, we never know it. We feel there are some elements of a David verses Goliath, it's true. But we do think that with agility you can overcome scale and size, there's no doubt of benefit to scale and size. So I'm not saying that and this is an advantage there certainly. But we've been competing very aggressively and appropriately and successfully against the big guys. The flip side of that argument is that the channel conflict these mega deals introduced in the market is fairly significant. So there are players for example, who will not buy from certain providers in the future because they are again aligned with one of their competitors. So we think that on balance it helps as much or may be more than hurts us to have this kind of consolidation in the industry. Now whether or not someone comes after us, I really don't know. But we do - we are mindful of shareholder value, we'll always be focused on shareholder value. And our thought is simple, if we execute today and continued to increase the profitability of the company and the operations in the growth profile of the company, the outcome will be great for shareholders no matter what occurs in the industry. So that's kind of how we approach it.

[Ana Gupte:]

Got it, thanks so much for the color, I appreciate it.

[Barry Smith:]

Thanks, Ana.

[Operator:]

Thank you. Our next question, Dave Styblo from Jefferies. Your line is now open.

[David Styblo:]

Hi, good morning guys.

[Barry Smith:]

Good morning.

[David Styblo:]

I just wanted to go through Florida and kind of recap the sequence of events there, so can you walk us back to time and what happened? Ultimately were you invited to negotiate and if so, what happened after that because again we from outside can't see the raw scores, it sounds like you can, but it looks like you're ranked number three in most of the regions in terms of the tactical scores, but just curious what's different about this RFP where I'm assuming it was probably scored the same way as the prior one and you guys obviously won that one. So what may have changed between the scoring characteristics of this one verses the one four, five years ago?

[Jon Rubin:]

David, its Jon, let me start and I'll invite Barry to add additional color. In terms of the process itself, we really don't at this point want to get into that. I mean, let's just say, with regard to even decisions, it's always a fluid process until it's over. And again as soon as we're notified, we communicated that and issued the 8-K. And again given we are looking at a protest, we also don't want to get specifically into the scoring, but as Barry noted earlier our view is just in this particular ITN in RFP process that these scoring didn't reflect the sort of unique nature of the specialty populations in how things were judged. And that's really what we are looking at and why we feel we've got a good basis for the protest. I don't know Barry if there's anything else you would add?

[Barry Smith:]

Yeah, I think Jon just makes an excellent point there Dave on the base, the kind of base line of both quality and utilization of the special complex populations. They are simply not like your general kind of populations, so they have unique challenges. And I think of the work that we've done to reduce both hospitalization, reduce the drug - the number of prescriptions these individuals have taken and then I also think about the quality and the expert management required to reduce utilization, increase - so if you think about the plants nationally, we are in the top 10% of the Medicaid plants nationally. We are initiating treatment for alcohol, substance abuse, just a major issue in today's population. And particularly with this complex population we are in the top 25% of the Medicaid health plants nationally and Medicaid management and adherence of antipsychotic medications. Again unique populations and we bring - give on our behavioral health and substance abuse capabilities we bring unique capabilities to the space. Over the last couple of years we have improved 90% of our quality measures, including helping children with adults with SMI manage their conditions. That's just a material improvement over base line and I can go on and on and on in terms of what we have accomplished there. So we do think as John points out that if you compare and you simply broad general scores of quality and reduction in cost compared to this population, we just don't think it's a - the comparison is not proper. And we haven't had a discussion yet with the state. So we are looking forward to have that discussion, but we know that with what we've accomplished, we feel like we have a good protest.

[David Styblo:]

Okay. And then just to square up the Florida number a little bit I know in your 8-K you guys talked about over $600 million of revenue, but I think that was in '17 numbers and doesn't reflect the full impact of - I think it looks like a 10% plus rate cut. So I think run rate revenue at least for '18 is more like $540 million, $550 million and kind of putting up 3.5-ish type margin on that around $20 million of segment profit. To me that feels like it might be a little bit more in the ballpark and is less than the 10% of EPS. Is that generally accurate and is there any additional negative fixed cost leverage we need to be aware of assuming you don't win the protest?

[Barry Smith:]

Yeah, I think again ballpark that's right. I mean there is some membership growth in '18 off of the new base line that you referenced, David. But you are in - I think ballpark in the rates range and in terms of fixed cost, yeah, there are some - I wouldn't - again we haven't' refined the estimates at this point, but there would be some and although we don't think big picturesque material.

[David Styblo:]

Okay. And then some numbers on the guidance reduction is $25 million to segment profit. And can you split that specifically out between the incremental impact from Virginia, Arizona, and the other emerging market opportunities and can you also better define what those investments for the emerging market opportunities are? Is that something along the lines of preparing possibly for Medicaid expansion in Virginia? Or is that some other RFPs that you have pretty good line of side of that you feel like you need to start to build up some capabilities?

[Barry Smith:]

Yeah, I mean, I would say a little bit of both. So in answering your question again we've said that there were really kind of a couple of categories that led to our restatement of guidance, one, being our estimates for the investments in startup losses for Arizona and other emerging NCC opportunities. That we frame as being in the $10 million to $15 million range. So I guess you can say round numbers and again that emphasizes round of these numbers, because it's always in any kind of review of full year outlook, it's always going to be a number of puts and takes, but round numbers about half of the $25 million. So again roughly the other half would be just the pace of the ramp to profitability in Virginia, so that's the way I would may be big picturesque phrase it.

[David Styblo:]

Okay, in terms of the emerging market question there?

[Barry Smith:]

Yes. So I would say both. I would say that look at it as we are preparing both for potential wins in expansions and obviously also thinking about what the capabilities are, whether the local market capabilities or general capabilities that would be required to be delivered in those opportunities and bids. So again it's very sad when you sort framed our progress on Medicaid. Look, we've recently won Arizona. We've recently won the new Medallion 4.0 program in Virginia. We've got a significant pipeline of opportunities ahead and we want to make sure we are being thoughtful in how we prepare not just from the purposes of updating guidance but from the purposes of having the capabilities we need to successfully respond to the RFPs and hit the ground running when we are successful.

[David Styblo:]

Okay. And then last one I think I had was on Blue Sky revenue along with kind of the pharmacy traction that you guys are getting. Where - can you give us an update on how much the Blue Sky revenue is for this year? How much of that you've sold? And the color that you talked about with the brokers and consultants in larger markets, is that something that can start to emerge as soon as the cycle that goes for 2019 or is that just a broader longer term opportunity that may not produce fruit that we could see until a little bit later down the road?

[Jon Rubin:]

Yeah, so first in terms of the Blue Sky question, when we talked about our guidance, we said we are still in - at a high level on track with our overall revenue. So I would say relative to Blue Sky, we've got over half of our initial plan sold in the process of being implemented in good line of site to again where we need to achieve our revenue range full year, so no real changes there. I say that again we are continuing to see good opportunities on both the health care and pharmacy business. In terms of Barry's comments earlier on the good progress on pharmacy and the strong pipeline, yes, I would expect - we had a very good one, one season in 2018 I think as we've been successful in what Barry described in expanding our aperture especially around some of the higher end broker and consultant pharmacy business. We do expect that we'll start to see some good success in 2019. So stay tuned.

[David Styblo:]

Okay. If there is not another analyst, I would have one more, but -

[Barry Smith:]

No, go ahead please.

[David Styblo:]

Okay. So can you talk a little bit more about Virginia? You guys obviously have $10 million of startup costs baked into this year's numbers. That seems to be just progressing slower. What is the reasons for that and what are you guys - what's the plan here to move that to profitability next year on - I guess that's specifically the MLTSS and the ABD that I've been facing and that's maybe a problem area, but what's causing the progress to be slower than expected?

[Jon Rubin:]

What I would say on that - it's a great question, David. And what I would say on that is Virginia has become a very, very large market and will be significantly larger and as we've talked about before a lot of different stages and a lot of things that we are managing at different points in time and most important for us as we've continued to expand the business in Virginia is that we implement flawlessly and as Barry said to date we have implemented flawlessly. So if you think about it, initially we knew we would have the MLTSS and ABD business coming on and we are dealing with that. At the same time again we now have the Medallion business that we are faced with and the potential for Medicaid expansion and the team there really has to manage all of that flawlessly. So I don't want to make it sound like we are not managing effectively. It's just the pace of when we expect now to see some of the incremental benefits from our management activities is a little bit delayed versus our initial estimates. And there is a lot of different activities from - on the revenue side sort of ensuring members are given the appropriate rates and are being paid on appropriately managing the services and supports piece. Initiatives, the key members in the community versus nursing facilities which obviously improve quality and costs, as well as in-patient management and doing all that again while we are implementing on different phases of the contract. So again there is a lot to do. We need to make sure given the importance of Virginia to us both strategically and long-term from a business standpoint that again we do everything flawlessly and I have full confidence that we'll continue to operate in a very positive way and get to profitability even if it is again slightly longer than our initial expectations.

[Barry Smith:]

And just to add a quick comment again as Jon said, this has been a great win for CCC plus, the base business, then of course the addition of Medallion 4.0 with another phase of implementation and we are hopeful that we see some more lives, 300,000 K+ that will be divided amongst the plants. Essentially it's getting easier in some ways, but the foundation has to be more robust than ever, because as Jon points out, this is a large population that's coming on there in Virginia and will be one of our largest in terms of lives that we have. So we are very excited about it. We really appreciate the partnership we have with the Commonwealth. They've been great to work with and we are quite proud of what we've accomplished. Again that foundation needs to be very robust given the volume that's coming on.

[Jon Rubin:]

And the other thing, Dave, I just wanted to close on that is we have an extremely capable and seasoned leadership team in Virginia and that has led to our success that was noted in the implementations, but also it gives me full confidence that we will get to where we need to in achieving profitability as we close this year and head into 2019.

[David Styblo:]

Okay. That's great color. Maybe I'll squeeze one more if there is still no one behind me.

[Barry Smith:]

There is one person behind you, but if you have a quick one, we will take it.

[David Styblo:]

Yeah, I think it's quick. So on the pharmacy segment profit, even if I add back $7 million, I think call it $7 million of revenue, so I'm assuming that dropped right to the bottom line, so I think your $15 million goes to $22 million, but that's down considerably from $29 million a year ago. Can you help me understand what the delta is there and then from here how should we think about pharmacy snapping back up in 2Q? I know you guys talked about margin - segment profit gradually increasing from here, but what's the magnitude that we should sort of expect of the snap back up?

[Barry Smith:]

Yeah, I would say if you think about it year-over-year, we're probably down a couple of percent in margins in the quarter and again we think a significant part of that is timing when you think about it. And again we noted two items. One, the revenue recognition's role which is probably a percent of the 2% and the other being some network management initiatives, which I think about as there are certain elements of our relationships with retail pharmacies that we've settled on somewhat of an annual basis and not settlements can occur at different points of time during the year. So we are fully confident based on both our results and what's ahead of us that will get back to the expected run rate over the full year and we still do expect as we've said in our guidance that if you - when we get to the end of this year and look at things on a full year basis that margins will still be up sequentially 2018 versus 2017. So nothing has really changed there.

[David Styblo:]

Understood, thanks for the time.

[Jon Rubin:]

You bet.

[Barry Smith:]

Great, thanks Dave.

[Operator:]

Thank you. Our next question is from Michael Baker, Raymond James. Your line is now open.

[Michael Baker:]

Yeah, thanks a lot. Barry, I was wondering if you could comment on potential health plan opportunities on the pharmacy side in light of some of the pending mergers?

[Barry Smith:]

Michael, again good morning to you. We do feel that both on the pharmacy side and on the medical specialty side specifically including BH and muscular skeletal, there are going to be unusual opportunities for us over the next couple of years both due to somewhat of the market confusion and concerns about channel conflict. But also kind of the momentum that we've been able to gain in the marketplace, we've done very well on those product lines both pharmacy and medical specialty including BH and again muscular skeletal. We do think that there will be likely procurements that will not allow certain people players to bid, again because they don't want to give the business to their competitor. So we think that allows us to have a real opportunity here over the next couple of years to do very well and so we are expecting again some very interesting results over the next couple of years.

[Michael Baker:]

And is there anything you would need to add either on the clinical side or on the processing side to address larger health plan customers that may come to market?

[Barry Smith:]

Well, on the clinical side specifically both in pharmacy and medical specialty we have a pretty significant scale capabilities just the way we are designed now we do our business today. If you looked at the medical pharmacy piece for example, our largest 30, 35 clients, many times will have side by side PBM business. We try to grab that business from the competitor to PBM, but they are already very substantial size, substantial sized MCOs and so we already used to playing in the space where we do have that kind of very significant capability in dealing with larger organizations. There are typically - when I say larger organizations, they are most typically kind of regional insurer's blues plants, which is the large portion of our business and so again this trend of consolidation plays well in our favor we believe. But also in the very large MCOs, they also offer us opportunity. And as this consolidation takes place, we think that concentrates the independence basically leaves us out there as an independent to be able to take advantage of that kind of trend in the industry. So we are pretty excited about the opportunity here.

[Michael Baker:]

And then maybe just talk a little bit about with IngenioRx potentially ramping up, do you see that as an opportunity threat? I mean, obviously you indicated there are some blues, but the blues aren't a big happy family either. So I'm just trying to get a sense of that dynamic as well as prime. Are there assets out there that you are seeing the forward difficult to acquire that are now potentially more likely given some of the dynamics of change going on at the broader level so to speak?

[Barry Smith:]

Well, I just kind of speak to blues owned assets like prime. I think they are a quality competitor and they do well within the blues world. We don't see them as much competitively outside the ownership structure of prime. But again I think they do a fine job and I know the CEO well there and I have great respect for him up there in Minnesota. I think that doesn't necessarily change dramatically the landscape for us. We think that in terms of acquisition the greater challenge is kind of a rational value and a rational pricing scheme. So if you looked at a couple of deals for example, Diplomat, they recently pulled trigger on. They were at fairly high multiples, multiples which we would feel like comfortable with. So while we are very M&A oriented and as you know we pulled the trigger on, what, 8, 9, 10 deals in the last seven years and we'll continue to evaluate these deals, we are very focused on making sure that, A, they are strategically down or fairway and, B, that they are accretive to us and so there will be and have been deals that simply we are not willing to pay up for. So we don't think that the opportunity is inherently greater or lesser, less in this environment with the large player consolidation.

[Michael Baker:]

Thanks a lot.

[Barry Smith:]

You bet, Michael.

[Operator:]

Thank you. At this time there are no further questions on queue, back to you speakers.

[Barry Smith:]

Thank you, operator and thank everybody for your participation in today's conference call. Take care.

[Operator:]

Thank you and that concludes today's conference call. Thank you all for joining. You may now disconnect.