Magellan Health, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Welcome and thank you for standing by for the First Quarter 2017 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 now disconnect at this time. Now, I will turn the meeting over to Joe Bogdan. Thank you, and sir, you may begin.

[Joe Bogdan:]

Good morning, and thank you for joining Magellan Health's first quarter 2017 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 26th. 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 Wednesday, April 26, 2017 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 2017 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 risks factors discussed in our press release this morning and documents we file with or furnish 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 interest 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 reflects certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchase 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 in 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 Smith:]

Thank you, Joe. Good morning and thank you all for joining us today. During the past several years, we have repositioned our company and laid the foundation for growth ahead. Our value proposition, integrated approach, and decades of expertise working with special populations have all converged to position Magellan as a leader in providing solutions for managing complex populations and conditions across the healthcare continuum. I'm pleased to report that we continue to see solid results in the first quarter. We reported net revenue of $1.3 billion, net income of $17.7 million and EPS of $0.74 per share. Our adjusted EBIT income was $26.1 million or $1.09 per share and we achieved segment profit of $69.8 million. We are reiterating the 2017 guidance provided during our year-end earnings call in February. Jon will provide more details later in the call. I'll now discuss highlights for our healthcare business beginning with an update on the commercial market. We recently extended the behavioral health contract with our largest commercial customer through 2021. It was originally expected to run through 2019 but we were able to extend it as a result of our strong performance. In addition, effective January 1, 2017, this customer implemented our muscular skeletal product which helps to manage spine surgeries and interventional pain procedures. It's an example of our efforts to add new product sales to existing customers. We continue to see interest in expanding services that control healthcare costs and increase the quality of care for our members. In the government market, we're working closely with Virginia to implement their managed long-term services and supports program also known as the Commonwealth Coordinated Care Plus Program and we are on-track for our Go Live in the first region on August 1, 2017. As you will recall, the program is scheduled to be faced in through January 1, 2018. Our Florida health plan for individuals with serious mental illness continue to perform well and we are preparing for the states expected rebid this summer with an effective date of January 2019. We feel very good about our current success in Florida but of course there are no guarantees within a reprocurement. I'm pleased to share that Magellan Behavioral Health of Pennsylvania are business serving health choices members in the Commonwealth has received both managed care, managed behavioral health organization accreditation from NCQA. We're honored to receive this recognition which sets rigorous and important accreditation standards. Achieving full accreditation demonstrates our continued commitment to delivering high quality care to healthy individuals we serve. Turning to our pharmacy business, sale execution has been strong and we've seen solid growth in our membership base. We ended the first quarter with $1.9 million commercial PBM members and $13.7 million medical pharmacy members. In our Medicare Part D Plan, we are working to ensure strong service levels to handle our rapid growth and membership which currently stands at approximately 96,000 lives. Earlier this month we released our 7th Annual Medical Pharmacy trend report, a leading source for payers and other industry stakeholders to analyze high cost injectable drugs paid under the medical benefit. Among the report findings we noted that commercial medical pharmacy spend increased by 55% from 2011 through 2015 or an average of 12% annually. Importantly of the commercial health plan surveyed, 90% have not implemented any advance to medical pharmacy program beyond standard utilization management and 20% of plan surveyed are not managing the spend at all. These findings underscore the tremendous opportunity we have to sell our industry leading specialty capabilities which strengthen our value proposition as a full service PBM. If you would like to read the full report, you can access it by going to www.magellanx.com [ph]. Lastly, I'm pleased to share that we were recently reaccredited by URAC for pharmacy benefits management for commercial and managed care lines of business. As you know, URAC is the independent leader in promoting healthcare quality through accreditation, certification and measurement. This demonstrates our comprehensive commitment to qualitative care, improved processes and better patient outcomes. Across the healthcare industry there is a great deal focused on enhanced innovation and consumerism bringing healthcare to individuals where they are and when they need it. When you look at what you can do with apps on your cellphone and consider how little bit of that is healthcare focused. You begin to see how far the industry needs to move to catch up. At Magellan our innovation labs accelerate innovation on behalf of our customers and members. We are collaborating with therapeutics to create a suite of FDA approved mobile apps for people challenged by conditions such as insomnia, substance abuse, depression and anxiety. This collaboration is a great example of how we're working with other innovative companies to bring healthcare solutions to people in a convenient and very personalized way. Several cities published in peer review journals have demonstrated through randomized control trials that digital therapy may have outcomes that are as effective or -- as or better than other options. Magellan has been the leader in the use of digitally based therapy tools for several years. This includes having some of our software included in the Substance Abuse And Mental Health Administrations or SAMHSA's National Registry of Evidence Based Programs and Practices. Our program is the only one of its kind to achieve the highest rating under SAMHSA's new stringent guidelines. In pharmacy, we worked for a breakthrough digital healthcare tools to improve the member and patient experience and overall clinical outcomes. With nearly 50% of patients not taking their medications as prescribed addressing not [indiscernible] is a critical focus for us. Along the lines of personalized medicine, we're launching a new genetic testing pilot to learn more about one's ability to metabolize medications and the impact it has on drug effectiveness, health outcomes and cause. Now I'd like to provide context around some of the legislative and regulatory changes being discussed in Washington. While the initial repeal and replace legislation was withdrawn by republic leadership last month, healthcare reform discussions continue in Washington as senior administration and congressional leaders have revived difference, this is hardly due to the connection between changes in spending contemplated with healthcare reform as a way to fund a tax reform. We believe there is a potential for movement in the near future. Across the country, many states are wrapping up their annual legislative sessions and they can take a look for ways to improve the quality of care and reduce cost for their Medicaid populations. CMS has expressed a willingness to consider labors and is encouraging states to include personal responsibility and member co-payments in expansion plans. States like Florida, Texas and Virginia are planning to expand or enhance their managed care programs. Magellan has demonstrated meaningful ways to bend the cost care and improve the member experience for specialty populations and we are using this experience to help states shape their programs. Leading humanity to healthy vibrant lives is a pursuit that guides our growth and inspires us. We will continue to provide innovative solutions for the fastest growing most complex areas of healthcare. At this point, I'd like to turn the call over to our Chief Financial Officer, Jon Rubin. John?

[Jon Rubin:]

Thanks, Barry, and good morning, everyone. For the quarter, revenue was $1.3 billion, which represents an increase of 16.9% over the same period in 2016. This increase was mainly driven by business growth and the annualization of revenue from prior year acquisitions, partially offset by the impact of contract termination. Net income was $17.7 million and EPS was $0.74 in the current quarter. This compares the net income and EPS of $13.2 million and $0.54 per share respectively for the first quarter of 2016. Adjusted net income was $26.1 million and adjusted EPS was $1.09 for the first quarter. The adjusted net income increase of 34.5% from the first quarter of 2016 was mainly due to higher segment profit at a lower effective income tax rate. Segment profit was $69.8 million for the first quarter, an increase of 16.5% from the prior year quarter. For our healthcare business, segment profit for the first quarter of 2017 was $47.2 million. Results included $13 million of favorable prior year period items comprising approximately $8 million of revenue retroactivity and $5 million of care development. Segment profit increased 27% over the first quarter of 2016, mainly due to improved results in our government markets and in net favorable out of period items partially offset by the impact of the health insurer fee moratorium in 2017. Now turning to our pharmacy management segment, we reported segment profit of $29 million for the quarter ended March 31, 2017, which was an increase of 1.6% from the first quarter of 2016. This year-over-year increase was primarily due to new business sales and earnings from the Veridicus acquisition, offset by contract terminations and higher administrative costs to support growth initiatives. Regarding other financial results, corporate cost inclusive of eliminations but excluding stock compensation expense totaled $6.4 million which represents a $600,000 increase as a result of one-time expenses to support acquisitions. Excluding stock compensation expense and changes in fair value of contingent consideration, total direct service and operating expenses as a percentage of revenue was 16.2% in the current quarter, which is comparable to the 16.5% ratio in the prior year quarter. Stock compensation expense for the quarter ended March 31, 2017 was $10.1 million, an increase of $1.3 million from the prior year quarter. This change is primarily due to the timing of equity or investing in higher annual grants in 2017. The effective income tax rate for the quarter ended March 31, 2017 was 40.3% compared to 47.3% for the prior year quarter. This decrease is primarily due to the health insurer fee moratorium in 2017. Our cash flow from operations for the quarter ended March 31, 2017 was a net use of $31.1 million. As a reminder, cash flow from operations in the first quarter includes the impact of the timing of variable compensation payments. As of March 31, 2017, the company's unrestricted cash and investments total $288 million, which represents a decrease of $5.9 million from the balance of December 31, 2016. Approximately $121.5 million of the unrestricted cash and investments at March 31, 2017 is related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at March 31, 2017 of $299.3 million reflects the decrease of $16.6 million from the balance of December 31, 2016. This decrease is primarily attributable to the use of restricted cash and investments for the payment of claim and other liabilities associated with terminated contracts. We are reiterating the 2017 guidance provided during our year-end earnings call in February. Specifically, we would expect revenue in the range of $5.8 to $6.1 billion and segment profit in the range of $329million to $349 million. In addition, we expect net income in the range of $90 million to $140 million, adjusted net income in the range of $123 million to $145 million; EPS in the range of $3.72 to $4.71; adjusted EPS in the range of $5.8 to $5.99 and cash flow from operations in the range of $150 million to $182 million. Compared to the first quarter of 2017, we expect the segment profit run rate to increase for the remainder of the year due to the following factors. Timing of new business implementations, signing of rate changes, normal earning seasonality in our part D plan and timing of customer settlements across our businesses. In summary, I'm pleased with the solid results we recorded this quarter and our continued success in executing our growth strategy. With that, I'll now turn the call back over to the Operator for questions. Operator?

[Operator:]

Thank you. Now we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Josh Raskin. Your line is now open.

[Josh Raskin:]

Thanks. Good morning, guys. First one to South Virginia, have you guys got any color from the state on sort of membership allocation and algorithms that they're going to use? Any sense on how each of the plans will do?

[Barry Smith:]

Josh, good morning to you. On Virginia, we're going through the month of May, basically to readiness reviews as everybody is and then the state will then allocate or go to the algorithms and assign plans as we understand it based on the readiness. We don't have yet that understanding of how they will be allocated and the flow goes across the months between the implementation on August 1 through January 1, 2018. So that's not known and it probably won't be known until we get much closer to the implementation day.

[Josh Raskin:]

Okay. Maybe on 2Q call. Got you. Just second, the $13 million of out of period favorable items within the healthcare segment, just remind me, how does that work relative to guidance? Are those good guides related to what you were expecting or is there some normal level of favorable development that's included in your guidance?

[Jon Rubin:]

Yes, Josh, it's a great question. I would say it's a little bit of both. As a general rule, we would not forecast any idea on our development since any point in time where we're recording our best estimates, probably BNR [ph], but there are other things that lead to prior period adjustments such as some customer settlements and revenue adjustments that we might project in our guidance or in our outlook as we go through the year. And I would say this quarter, it's probably about 50-50. We had both customer settlements, revenue-related items and IBNR in the $13 million.

[Josh Raskin:]

Okay, similar to that $8 million of the $13 million was now unexpected, but the $5 million was kind of an extra good guy?

[Jon Rubin:]

I think it probably would be closer to 50-50, but you have the general idea.

[Josh Raskin:]

Okay. And then just lastly on the Florida SMI contract, I know the reboot is coming out, do you expect to hear this year? I know the contract doesn't start the new one until '19, but do you expect to hear in terms of reprocurement this year?

[Barry Smith:]

It's coming out near the end of the year. You never know about these things. Sometimes it takes a little longer, but we wouldn't be surprised to hear later this year, or the first quarter of next year depending upon their decision process.

[Josh Raskin:]

Okay. All right. Thanks, guys.

[Jon Rubin:]

You bet, Josh. Thanks for calling.

[Operator:]

Our next question comes from Ana Gupte from Leerink Partners. Your line is now open.

[Ana Gupte:]

Yes. Thanks. Good morning.

[Barry Smith:]

Good morning.

[Ana Gupte:]

My question is on the pharmacy business and you talked about contract termination. If you could just get some color around that? And then just with the broader discussion around CBMs [ph] and the business coming on the margin pressure. Perhaps more with commoditized view of the value proposition, how you stack against the broader business and with the landscape?

[Barry Smith:]

You bet, Ana. Let me address the issue of the kind of the contract terminations. We have on any given basis, we win contracts and there are a few contracts that we do a number of issues. Typically you don't have the contracts that leave these service issues. We really differentiate ourselves. We have a top net promoter scores, how our clients perceive us in terms of quality and the service and we take great pride in that. Typically there are circumstances where they have other contractual relationships, or it might simply be a price issue as well on occasion. Whichever way speaking, you'll have some love level of contract terminations. You'll have an occasional larger one. We talked about one - I think it was last summer - t didn't have much of an impact on our bottom line, but certainly it was a larger top line revenue impact. The issue is kind of normal, but really the [indiscernible] in the contract base. Relative to the differentiation, what I mentioned before about the net promoter scores, we're thought of as very high-performance in the industry. We take great price in our service levels, our execution, the bulk implementation, we're also very focused on being - we're very happy to be able to customize and be very flexible with the customers we work with in terms of their plan design and implementation. We can typically react far more quickly than the larger PDF [ph]. So people see us as very flexible, again just excellent execution of implementation and the plan designs. I don't think it's very different about us and how we differentiate ourselves particularly relative to the larger layers, is that we'd really focus on the specialty component of it. About 50% of the spend were about there now and some of our customers are already there, but it will get there for virtually everybody within the next year or so is specialty and that's really where we cut our key and where we're well-known. We mentioned in the earnings call, we have nearly 14 million covered lives of the medical pharmacy benefit. Most of that spend is specialty and that's where the action is. As larger health plans, employers look at trying to control that segment of the specialty spend, they are more and more focused on guys like us and specifically us, I think because of our expertise on that space. We're very different. The way we go about vanishing those cost is dramatically different and that's the reason why you see us having nearly 14 million lives versus just a very small percentage of that held by others, even the big guys. I would say those are the headlines.

[Ana Gupte:]

That's very helpful, Barry. I agree with you on specialty. So would you say on a go-forward basis, your business will be much more on subcontracting as well from health plans in addition to employers that looked like you were trying to go more up market to larger employers? And then on margins again, would you say that your margins grow fine on a normal life basis, [indiscernible] affects the growth and all that is more likely to have done with pressure?

[Barry Smith:]

Ana, you make a very interesting point in that. We try to be very selective as to the types of contracts we take so that they truly are profitable and sustainable for us over the long term. At a certain point in time, particularly the very large MCOs, the contracts are literally at no margin and sometimes subterranean margin, less than zero with the hope that that volume will buy you something in the future. We think that that actually just traps the PBM because it's very difficult to make that up. The larger player certainly won't be able to make that up because the market is too competitive. And in the mid-sized employers, there are not enough of them and certainly the smaller ones, there are not enough of them to make that differential. We try to be very selective about the generic PBM kind of a business. That said, as we take a look at our client base, we have quite a few substantial MCOs in our client base, but instead of taking the bread and butter pharmacy claims administration business and plan design business, we focus on that especially because that's where the money is. So we will continue to do that and not really take contracts that compromise rapidly our overall margin, but really focused on the high margin specialty subset of the pharmacy business. In terms of our approach to the marketplace, we're likely to continue that. We think that we'll see great growth. We've said over less several years - well, certainly I think in mid-2013, that our margin is ultimately - so we moved upscale to the mid-sized employers with a few larger employers, a few larger health plans, nothing big at health plans, but a few of the larger ones that margin would likely compress and get into the range of what the larger PBMs are. Historically, there have been three to five, there are three to six. Probably, you no doubt have noted with the recent large [indiscernible] loss of significant contract, I think you may guess what I'm talking about here. We always feel sorry when that happens, but it underscores the importance of not having so much of your business tied up with one account, one customer and secondly the impact on margins that has on a business. So we don't have that kind of exposure here at Magellan and we're likely not to have that kind of exposure, but you will see those margins, I think, over time being that three, to five, to six normalized rate - very similar with what you'd see with the other larger PBMs.

[Ana Gupte:]

Most helpful. Thanks, Barry. One final question on the health plan side of it. Outside of the trial period, you just come in better on your loss ratio just on the core business and how much of that - can you point to some of the drivers of that? Is that the SMI business? And then also just following up on Josh's question on reprocurement, As Florida, any color on the Florida is looking at consolidating suppliers, whether they're still committed to a seriously mentally ill Facebook [ph] of business, which is inherently adverse and naturally priced definitely?

[Barry Smith:]

Ana, we think the first part of the question which is relating to the loss ratios for the quarter, I would say that in a way I depicted is the majority of the improvement we're seeing year-over-year, if you look at it versus last quarter, it's coming from the public business. It's just primarily the Magellan complete care business and to a lesser extent, some of the remaining public sector behavioral business, where again, we're seeing the continued benefit of many of the care management initiatives we've put in place over the last year, as well as continued operational execution. Ana, good question about how the state perceived the plan. ACA is just an outstanding job and the governor, Governor Scott in leading the country in terms of these very innovative plan designs that allow them both to control the cost, but increase quality and provide services to those who ordinarily wouldn't receive service. Nationally, they're seen as a thought leader and indeed within the state. We had a great partnership and they have been highly complementary, the work that we've done and advancing and we're refinding the approach there on the state. We think that we're in good stand. Again, there are no guarantees, but the work that we've done with them, we've advanced the cost, it created the first of its kind in the country and I think ACA takes great pride as they should and have the sponsor that envision that and created that and we feel very fortunate to be their partner. Even states like Virginia, as they were going through the decision process, they look to Florida and there were significant conversations with the leadership that are in Florida and as you know, we're awarded the business also in Virginia along with others. But again, it's a clear indicator of how the state thinks about us. We do think that states will follow their lead. And just a quick commentary on healthcare policy, I have this conversation with Governor Scott and other governors as well - one of the governors specifically regarding how they think about the Medicaid population and the private control of the cost having the federal government basically give states greater flexibility and be fun, more open about creative plan designs. I think what you're going to see are more states will do what Florida is doing, what Virginia is doing and you'll see the states have more control over their future. The reality is in these states where we have these populations, where 5% of the population spend 45% of the premium dollars, you simply have to focus on that most illed [ph] part of the population, which have more seriously mental ill, intellectually development disabled ABD population, you have to have specialist to focus on those. That's what we do and that's our great strength. So we think what Florida has done is not only the place in Florida, a place about fairly in Virginia and we'll play that out as we implement there, but we think we will see that trend where states are being far more creative and being allowed to do so by CMS.

[Ana Gupte:]

Very helpful. Thank you much.

[Barry Smith:]

You bet, Ana. Thanks for the call and the question.

[Operator:]

Our next question comes from Dave Styblo from Jefferies. Your line is now open.

[Dave Styblo:]

Good morning. Thanks for the question. I just want to start on the PBM and I understand the quarter trends here. The revenue growth was pretty strong year-over-year and sequentially, I think even when I try to account for the Veridicus deal closing revenue, was still quite a bit higher. Can you give me a little bit more color about what drove that and then on the bottom line per segment profit for that business, it seems like on an absolute dollars basis, you've been pretty flat year-over-year. It sounded like perhaps you might have been putting in some additional administrative spending, but when you have -- call it $140 million more of revenue year-over-year and segment profit is flat, trying to help understand why we didn't see some more leverage on that business and then perhaps you can all just talk about what the Part D drag was if that was the factor in the quarter?

[Jon Rubin:]

Okay, Dave, this is Jon. I'll try to capture all your questions here. First, in terms of revenue on the pharmacy side, I would really depict it in three pieces. One, this is new business and we have seen strong sales results both as we went through 2016, which we're now getting the full annualized benefit of and in 2017. That's really across employer health plan and specialty specifically at medical pharmacy, we've had some good results. Also, Medicare Part B, we've continued to see growth as we've come into this year. I think, Barry, on the script talk about the membership growth there and the Veridicus acquisition. Those are really the three primary driver. Now if you look at revenue versus segment profit, there's only the little bit of noise in comparing one quarter to another because they put some dates and all these volatility and non-fundamental items. But largely, the general trend you're noting is really a shift in business mix where we're seeing more growth in both Part B and the traditional PBM. As Barry mentioned in his comments in response to an earlier question, that's a trend that we've expected. Meaning that as we get more into the PBM business and continue to further our strong growth there, we will see some reduction in margins as the percentage of revenue. Of course the revenue there is higher because we're counting the cost to drugs versus some of the fee-based revenue in our traditional specialty pharmacy business. Those are the main drivers. Part B in general, you'd ask about that. We had in our guidance and continue to have something close to breakeven for full year for Part B. As expected we had a slight negative margin in the first quarter. As I'm sure you're aware, the seasonality of Part B because of the benefit structures is such that the earnings improve as you go through the year as a percentage of revenue - not material, but small negative contribution in the quarter.

[Dave Styblo:]

Okay. And you guys have talked about the additional administrative spending. Is that a big nugget or anything particular call out that you guys are investing that for whether being capabilities or ahead of contracts coming online?

[Jon Rubin:]

It's really a combination of things. So it is both staffing up to support new capabilities and new customers for those growth initiatives including Part B where we've obviously seen growth over the course of the last year. But as well on the managed care and the employer side to support that growth. And then we are continuing to build out our clinical capabilities and other capabilities in the specialty arena as well.

[Dave Styblo:]

Okay, it's helpful. A couple of higher level guidance update question -- revenue, I don't think I heard you guys talk about that. The last update we've had was you're about half-way sold up your $735 million. Where are you with that? And along with the guidance there, I think in response to Josh's question, you talked about half of the favorable $13 million of development wasn't expected. Is there an offset to call the $6 million or $7 million that you had an upside there? Or are you just being conservative in guidance at this point?

[Jon Rubin:]

Let me again take those questions sequentially. First in terms of new business, we continued to make good progress in new business, so we're above 50% now. Call it in the 60% range. Importantly though, our pipeline continues to be very strong and our sales results continue to be strong. I think in terms of exactly how this year plays out, it will depend on the timing of implementation both of business we've sold already in business that we're well along with in the pipeline. But we feel very good about both the results to date in the prospects as we go forward. In terms of parsing the other period adjustments, we have a guidance range, there is always going to puts and takes within that range. I think we're probably being a little bit overly precise to think about is $5 million or so of prior period items going to push us up towards the beat upper end of the range or where exactly we'll be in that range. But obviously, it's good news to have that momentum coming into the year. I wouldn't read that it's conservative or aggressive at this point. We have the range and we're comfortable with that at this point.

[Dave Styblo:]

Okay. And then just lastly, Barry, I know you've talked a lot about the commercial pipeline, it just being robust and a lot stronger than you guys have seen a long time and the inflection being upwards. Can you elaborate more on that in terms of has that been a little bit internally driven as well as externally driven just because the local plans have needed some additional help where maybe their reserves have been knocked down from the exchange losses that they've had and they're speaking your help. Or have you guys done something internally with reorganizing your sales to go to market that has changed that and then maybe just a broader update about how that pipeline is looking? Thanks.

[Barry Smith:]

Yes, Dave, it's really both. Indeed internally, we've rebuilt the product line and kind of modernize the entire product line. We've expanded the product lines. They're doing services, for example musculoskeletal that didn't exist, let's say two years ago, and now suddenly have million covered lives. It also creates additional stickiness and introduction into new clients as well. So that's good example of enhanced product and a new product, but even our core products of the company have been substantially modernized over the last two or three years. And then in addition to that, we have built a sales force. Three years ago, we had virtually no sales force. We had great people out there serving our clients and the clients' service capacity. It think nationally, we had two people. That just is not enough of a sales force to be able to tell the Magellan story. It's been basically a rebuilding of the company's capabilities both by yet modernizing existing product, increasing product and the quality reporting. Kind of moving to the new world in terms of the types of risk feels. We could either take and expand risk deals with our clients, they like that and we can tell the story far more effectively. The second part of it is the part that you point out. Unlike virtually any of the time we've seen in the last several years, given the pressures, exchanges have caused on the part of regional health plans particularly, even national and for regional ones, they're looking for solutions and they realize that in order to come up with a kind of expertise and sophistication of product that we've been able to develop over years, that's very difficult to do on your own internally. Post effect, if they like others, they'd like to delegate risk, they like us to take the risk for accomplishing the goal, to have them meet their financial goals for the year, for this year and for the next few years. That drive, that initiative has been very, very different. As you recall two years ago particularly, it went the opposite direction because people thought there would be changes, they were so focused on coming up with the exchange product, they really didn't pay attention to focusing on these services which really are part of the cost and that has really changed that today they see that they have this real need of greater expertise. And the last point that I would make, over the last year and-a-half, two years, we've seen a real emergence of a recognition of a latish between behavioral health and physical medicine. We're seeing it in the public markets, it heads the Florida, Virginia; we'll see others that will implement as well we believe over the next while, but you're also now seeing it in the commercial marketplace. Again, payer has realized that unless there's expertise and linkage between the behavioral health product and the physical medicine, they can achieve the results they want to achieve - certainly not on BA [ph] side and certainly not at physical medicine side. So the products are far more integrate and digitally-driven and consumer-oriented than they were two or three years ago. It's a very different marketplace. It's an interesting topic which we'll talk more about during our investor day coming up in June.

[Dave Styblo:]

Great. Thanks.

[Barry Smith:]

You bet.

[Operator:]

Our last question comes from Michael Baker from Raymond James. Your line is now open.

[Michael Baker:]

Thanks. Barry, I was wondering if you could give us the sense of the size of the health plan market that you target, as well as give us indication as to the mix between Blue/non-Blue and then also comment on whether or not you're relative competitive dynamics with Prime having teamed up with Walgreens to strengthen their specialty offering?

[Barry Smith:]

All right. Michael, good to have you on with us this morning. Is this question more focused on the PBM side?

[Michael Baker:]

Yes. The PBM side, but also in your earlier response on PBM competitive dynamics, I didn't hear you also indicate that part of your benefit is you have a wide range of service as PBM and non-PBM that you can offer as well. If there are tie ins there, feel free.

[Barry Smith:]

Yes. Absolutely, Michael. Looking up to take them one at a time. We do have a focus on regional health plans. Many of the national players, either the contractors are so large that it would dwarf us and/or the pricing is so challenging, it just isn't that appealing to us. It's not that we wouldn't do specialty things with those players and we do, but we would focus more on specialty rather than general PBM. Because of that, UCS have a very significant presence within the Blues world. Interestingly for the last many, many years, we've had a strong presence in the Blues world and continue to have that presence. What has happened is that over the last, again, three or four years, we'd bill in the sales force, we've seen a lot of leakage - increasing leakage between at least relationship-wise and also product-wise between the healthcare services offerings as well as the PBM offerings. So while they have different CEOs, we talk to the same players, the same leadership and the plan and if a healthcare services client is thrilled with our service, they'll be more amenable to listening to our story on the PBM side and vice versa as well. So we see a lot of cross marketing going on increasingly over the last several years. Again, Blues versus non-Blues, we have a major footprint in the Blues world, but we also have broken out over the last I would say six months, a year, a year and-a-half to increasing our sales focus on non-Blue account as well. It's kind of a mix. Probably more dense Blues, but also other regional MCOs that we've focus on as well. Now relative to Prime, Prime is a great provider. I know [indiscernible] well and he's the CEO out there in Minnesota. Good quality out there. As you know, they're owned by several Blues partners and so those partners typically use Prime for their services and that's fine. I think Prime does a fine job. What we do that's a little bit different than Prime including with the relationship with Walgreens is again as I said earlier, we sell this both on the specialty piece and on medical pharmacy. That's fundamentally not what Prime does or they're not known for that. Again, good quality leadership and great services. We fundamentally have different way of going about things in terms of our offerings and indeed with several Prime customers, we offered a specialty medical pharmacy benefit. That's not an atypical way for us to work side-by-side with Prime. Relative to their agreement with Walgreens, as you know, both Walgreens and CBS are duking it out for market share and it's a very competitive world. With the acquisition of -- who knows what's going to happen? Obviously the right ideal with the Walgreens, but again, those two players, you almost have to have one or the other in your network. As Walgreens won their relationship with price, it helps Prime in terms of some economics, but fundamentally, we could be very effectively the same because we have relationship with Walgreens and CBS as well. It hasn't really changed the dynamics on the marketplace probably to have relationship with Walgreens. At least we haven't seen it yet. I don't know, did I cover the last key point on your questions, Michael?

[Michael Baker:]

Yes, that was helpful. Thanks for the update.

[Barry Smith:]

You bet. Thanks for calling in. Operator, are there other questions?

[Operator:]

We are showing no questions at this time, sir.

[Barry Smith:]

Excellent. Well, we again are thrilled to have you with us here today. Just one moment. I'd like to remind everybody that our 2017 Investor Day will be held on June 22 in New York City. We all hope to see you there. Thanks for calling in today and joining us. Bye, bye.

[Operator:]

And that concludes today's conference. Thank you for your participation. You may now all disconnect.