Magellan Health, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Welcome and thank you for standing by for the Fourth Quarter 2016 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, Senior Vice President of Investor Relations at Magellan.

[Joe Bogdan:]

Good morning, and thank you for joining us today for Magellan Health’s fourth quarter 2016 earnings call. With me today are Magellan’s Chairman and CEO, Barry Smith; and our CFO, Jon Rubin. The press release announced our fourth quarter earnings was distributed this morning. a replay of this call will be available shortly after the conclusion of the call through March 3rd. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of the presentation, we remind you that the remarks made herein are as of today Friday, February 24th, 2017 and have not been updated subsequent to the initial earnings call. During our call 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 1st, 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 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 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 accelerated 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. We're now focused and poised for growth in 2017 and beyond. We diversified our businesses and have significantly reduced our customer and business segment concentration. Our healthcare and pharmacy businesses now each comprise approximately half of our revenue and we've aligned our products and services to address their current and future needs of both our commercial and government customers. We've reinforced and strengthened our leadership team with individuals who bring decades of experience in their respective areas. This is particularly important as we navigate this new area -- era of healthcare reform. As I reflect on this past year, I'm particularly pleased with the execution and progress against our strategic initiatives during 2016 with our two growth platforms, Magellan Rx Management and Magellan Healthcare; we're continuing to deliver innovative solutions for the fast-growing most complex areas of healthcare. Turning to the financial results, we reported revenue of $4.8 billion, net income of $77.9 million, and EPS of $3.22 per share. Our adjusted net income was $109.5 million or $4.53 per share and we achieved segment profit of $301.8 million. We executed against our strategy and are very pleased with the results for the year. We increased our revenue by over 5% and segment profit by over 9% versus 2015. In addition, we completed three new acquisitions, The Management Group or TMG, the Armed Forces Services Corporation, or AFSC, and Veridicus. All of which helped to expand our capabilities. I'll now discuss highlights for our healthcare business beginning with the commercial market. The pipeline for new business opportunities remained strong. The combination of our long sale cycle and our commitment to pricing discipline will impact the timing and success of sales. I'm delighted to announce that 2017 is off to a great start with two behavioral health wins implementing this year. Importantly, these new health plan relationships that expand our customer base enabled future opportunities for additional product sales. In our government market, we were pleased to have been awarded a contract to participate in all six regions of Virginia's managed, long-term services and supports initiative also known as the Commonwealth Coordinated Care Plus Program will be one of six plans that will serve approximately 214,000 individuals with complex care needs through an integrated care model. MLTSS members will be phased in by region from August through December 2017. The current Magellan programs aged, blind, and disabled cohort will transition to the CCC Plus Program on January the 1st, 2018. To win business like the CCC Plus Program, managed care organizations must have the experience, people, information technology, and the tools and processes to create a seamless system of care that's managed both medical care and long-term services and supports. Companies are not as interchangeable as they may appear when it comes to this business. At Magellan, we offer an array of individually tailored and culturally confident medical and social support services that maximize independence and promote access, customer choice, and importantly, dignity. In Florida, our SMI plant demonstrated strong operational execution during 2016, achieving profitability during its second full year of operation. In addition to our integrated care programs, our core behavioral health carve out business remains strong with two county contract renewals at Pennsylvania as well as the addition of one new Pennsylvania County. We continue to see a growing focus at the state level about redesigning publically funded healthcare programs to better serve individuals with special needs. In LTSS, several states are considering new procurements and states with established programs, like Texas, are considering changes that will enhance their programs. As you may know, Florida is expected to begin the process later this year to rebid its Medicaid program with an effective date of January 2019. We feel very good about our current success in Florida and we will carefully evaluate all our aspects of this future opportunity as part of our rebid strategy. There is growing awareness among Medicaid Directors about the impact that SMI has on both the effectiveness and efficiency of state programs. We are using the results of our pioneering working to help states design programs that better address the needs of this population. Turning now to our pharmacy business, we're seeing good sales results which demonstrate that our differentiation between value and volume is resonating in the market. With the addition of a 2 million live medical pharmacy customer discussed in our third quarter, we solidified our market leader position and managing this critical area of spend. Today, the total number of lives we manage under our medical pharmacy programs is over 14 million. The odd new customers, we're also seeing growth through selling additional medical pharmacy product features to existing customers such as our site of service program. In the employer market, our recent sales increased our total covered lives by 86,000 on January 1st, 2017. In the managed care market, we recently signed two regional MCO customers with go-live dates in the first and second quarters of 2017. In the government segment, we recently signed a new state contract that will go live during the first quarter and we are actively managing a robust pipeline of opportunities. We also expanded our pharmacy businesses capabilities during 2016. The acquisition of Veridicus has enhanced our suite of clinical offerings and we were making good progress on integration. In addition, we launched our Medicare Part D PDP program. While we accomplished great things in 2016, looking forward, we continue to pursue strategies to differentiate ourselves as the leader in value. This is driven by our high touch clinical programs and consumer-centric models specifically focused on managing some of the most costly specialty drugs and complex conditions. Next I'll provide some thoughts on the current regulatory environment. Like many other industries, we're operating in a tumultuous environment as both the new administration and Congress determine their priorities and next steps. This specifically includes plans for the Affordable Care Act with democrats talking about fixing pieces of the ACA, while Republicans favor a repeal and replace strategy. There's been much discussion about the timing of these actions and how the changes to public programs will be phased in. This month we hosted our second annual Magellan Open Vision Exchange or what we call our MOVE Summit in Scottsdale, Arizona. During the Summit, we bring together a large cast of voices from the healthcare industry, primarily CEOs and COOs, to discuss the future of our industry. This year we heard from several experts, including Michael Leavitt, the former three-time Governor of Utah and former U.S. Secretary of Health and Human Services. Governor Leavitt said that while he expect repeal or replace legislation will pass, significant parts will be differed for three or four years. Beyond potential changes to the ACA, there are other areas in which we're engaged with policymakers in Washington and at the state level. For instance, there have been ongoing efforts to improve the cost of pharmaceuticals and to speed up the approval process for new drugs. There is also a renewed discussion about Medicaid Block Grants, an expediting approval of waivers requested by the states from CMS. We believe there are numerous opportunities to collaborate with federal and state officials to improve the delivery of services provided through Medicaid and exchange programs. To do that effectively, we great enhanced our government affairs and policy department over the past year in advance of a new administration and a new Congress. The addition of these new leaders has positioned us well as we continue to navigate changes in both the state and federal government. We expect states will continue to act on their own to reduce trends and expand coverage and we believe their budget situations will create growth prospects for Magellan. The economy demographic and politics will force significant changes overtime to our healthcare system. It is important to note that Magellan's value proposition is payer agnostic and can thus accept well and that well in this changing environment. Our strategy is predicated on expanding our integrated management services for special populations. As well as our full service PBM with a unique focus on specialty drugs. This week we announced that Magellan Health was selected as one of Fortune Magazine's World's Most Admired Companies. I am honored at peers across our industry have recognized Magellan Health as a respected and reputable company something we strive towards daily. This honor is a testament to our nearly 10,000 dedicated associates who serve our members and customers with passion. I like to thank our entire Magellan team who helped to achieve our great results this year. At every level in our company, our employees are committed to leading humanity to healthy fibered lives. This is why we do what we do. This is what motivates our team. At the end of the day, we do well by doing good. I'm proud of our financial success and most importantly of the great impact we have had on millions of lives we serve across the country and abroad. We are pleased with the progress we’ve made in 2016 and look forward to executing on our growth strategy in 2017. As a reminder, our 2017 Investor Day will be held on Thursday June 22nd in New York City, further details and invitation will be sent shortly. At this point, I would like to turn over the call to our Chief Financial Officer, Jon Rubin. Jon.

[Jon Rubin:]

Thanks, Barry and good morning, everyone. For the year ended December 31, 2016, revenue increased 5.2% over 2015 to $4.8 billion. This increase was mainly driven by the impact of new business and acquisitions, partially offset by contract terminations. Segment profit increased 9.5% to $311.8 million which reflects year-over-year earnings growth in both healthcare and pharmacy. Adjusted net income for the year ended December 31, 2016, was $109.5 million and the adjusted EPS was $4.53 per share. Adjusted net income increased of 19.4% from 2015 was mainly due to higher segment profit and lower effective income tax rates. Net income for the year ended December 31, 2016 was $77.9 million and EPS was $3.22 per share. The increase in that income of 147.9% over 2015 was due to higher segment profit, lower stock compensation expense, lower contingent consideration expense and lower effective income tax rate. I’ll now review each of our segment results. For our healthcare business, segment profit for the year ended December 31, 2016 was $212.9 million. This represents an increase of 16.2% over 2015, mainly due to improved results in our MCC business and impact of acquisition, partially offset by contract terminations. Segment profit for the current year included approximately $14 million favorable prior period items, mainly related to medical claims development. Now turning to our Pharmacy Management segment, we reported segment profit of $122.7 million for the year ended December 31, 2016 which was an increase of 4% from 2015. The year-over-year increase was primarily due to the growth in our PBM business partially offset by results in Medicare Part D business. Regarding other financial results, corporate cost inclusive of elimination, but excluding stock compensation expense totaled $33.9 million which represents 32.5% increase over 2015. This increase is mainly due to higher discretionary benefits and M&A cost in the current year. Excluding stock compensation expense and changes in fair value of contingent consideration, total direct services and operating expenses as a percentage of revenue were 17.4% in the current year as compared 15.8% for the prior year. This increase is primarily due to the inclusion of AFSC and TMG, the impact of business mix changes and higher discretionary benefit and M&A costs in the current quarter. Stock compensation expense for year ended December 31, 2016 was $37.4 million, a decrease of $13 million from the prior year. The change is primarily due to higher stock compensation expenses in 2015 which resulted from divesting of stock related to acquisitions. The effective income tax rate for the year ended December 31, 2016, was 47.9% compared to 59.6% for the prior year. The decrease is mainly due to a more significant impact in 2015 from the non-deductible health insurer fees. In addition lower valuation allowances were acquired in 2016, primarily due to improved AlphaCare results. In the fourth quarter, we early adopted a new accounting pronouncement that effects the statement of cash flows. Under this new pronouncement, the cash flow schedule reconciles changes to cash and cash equivalents inclusive of both unrestricted and restricted balances. Implementation of the pronouncement required us to restate previous periods to remove any restricted cash activity from cash flow from operations. On this new basis, our cash flow from operations for the year ended December 31, 2016 was $66.7 compared to $157.5 million for the prior year. This decrease of $90.8 million is mainly due to unfavorable working capital changes and an increase in acquisition related contingent consideration payments, partially offset by an increase in segment profit and lower tax payments The largest driver of 2016 unfavorable working capital is use of cash for the Part D business of $113.8 million, mainly related to the build-up of receivables. As of December 31, 2016, the company’s unrestricted cash and investments totaled $293.9 million, which represents an increase of $133.7 million from the balance of December 31, 2015. Approximately $117.7 million of unrestricted cash and investments at December 31, 2016 is related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at December 31, 2016 of $315.9 million reflect a decrease of $99.1 million from the balance at December 31, 2015. This decrease is primarily attributable to the use of restricted cash for the payment of claim and other liabilities associated with terminated contracts as well as the release of restricted funds from the company’s regulated entities. We are reiterating our 2017 guidance for revenue in the range of 5.8 to $6.1 billion. Segment profit in the range of 329 to $349 million. Net income in the range of 90 to $114 million and adjusted net income in range of 123 to $145 million. We’ve continued to make progress for the full year sales objective and have now sold approximately half of our new business target of $735 million for 2017. Based on an updated estimate of average fully diluted shares of $24.2 million, we’re revising our 2017 EPS range to between $3.72 and $4.71 per share and adjusted EPS to between $5.08 and $5.99 per share. This share count reflects share repurchases and option exercises through February 22nd, but excludes any potential future activity. Our implementation of the accounting pronouncement discussed earlier, impacts the presentation of restricted cash in the statement of cash flows. As a result, we are updating our 2017 expected cash flow from operations to be in a range of 150 to $182 million. I am very pleased with our strong 2016 results and continued success in executing our growth strategy. I believe we are well-positioned to achieve our 2017 outlook. And with that I will now turn the call back over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the Dave Styblo from Jefferies. Dave, your line is open.

[Dave Styblo:]

Thanks. Hi there and good morning. I wanted to just start with the year ending here and talk a little bit about the revenue component, obviously you guys had a revenue guidance range it came in lower ended that it seems like some of that might have been from the pharmacy segment specifically in the dispensing area? I think you guys did have a customer lost that you previously announced it will be helpful if you could sort of bridge us to moving parts there? And then also talk about why segment profit was down sequentially in the fourth quarter when typically it rises from rebates or closing cost that happen performance fees that get large in that quarter? Again to just understand why that gets down versus typically going up in historical years?

[Jon Rubin:]

Sure. We will first in terms of the revenue on the pharmacy side in particular, we did previously disclose a managed care contract that we have lost, Dave and that really was the big driver. Again, as we have talked about previously well that has reasonably significant revenue. It was largely passed through and therefore the margin was quite small, but in terms of the revenue more forward that was really the big reason. As you look at the fourth quarter results for pharmacy, I think your question was specific to pharmacy. I noticed couple of things, one, fundamental results for the PBM business particularly on the employer side, we are actually quite strong. We have continued to see both continued strong results there and good growth and Barry talked about even our growth in 2017. On the flip side, we did see some pressure on the Part D in the quarter, mainly just higher utilization towards the end of the year than we had expected which again was probably we don’t have guidance in the fourth quarter by segment, but probably if you are looking at either sequentially or relative to high level expectations was probably be a biggest factor in what you are seeing.

[Dave Styblo:]

Okay. And how much did Part D lose in 2016, I think you guys were looking for trying get towards breakeven, but it sounds like maybe there is some high utilization you might have had a loss there and then as you roll forward in 2017, what’s assumed in guidance for the Part D?

[Jon Rubin:]

Yes. I would say two separate. One, your first statement is correct. Our target initially for Part D was breakeven. As we went through the year we did see some pressure through the year on that regional expectation and wrong numbers if you look at the year-over-year impact including start-up expenses in implementing the program, wrong numbers about 10 million we are talking about in terms of 2016. As we go into 2017, we both did get stronger pricing in our bid and tightened our formulary some going into 2017 and as well as we’ve talked about we are seeing continued membership growth there. So, if you put that together, I mean, there is range of expected results, it's obviously built into our guidance range but roughly breakeven for 2017 is what we're expecting.

[Dave Styblo:]

Okay. That’s helpful. And then may be just on a couple of specific contracts that are larger in scope maybe first on Florida, can you guys talk a little bit about what you see unfolding in that RFP from the SMI, is there an opportunity to perhaps expanding coverage to more folks that might be categorize since you are in there? Or is the state talking about changing that program where it may perhaps result in some membership loss just to give us some understanding of the conversation you're having? And then on Virginia, obviously that awards start to later this year, there's now only six players, so maybe you will get a little bit more revenue, but do you have sense of how much revenue you're getting and what the economics look like it for you guys? And what is baked into guidance for revenue and start-up cost in 2017 for Virginia?

[Barry Smith:]

Yes. Let me start with Florida, Dave good to have you on the phone this morning on the call. We’ve done very, very well at the State of Florida; we have a very strong relationship with the state. We’ve demonstrated just a major impact, both in terms of the quality and the efficiency and for the first time nationally; we have a plan that focuses on the SMI. It’s a difficult population and the State of Florida has been very appreciative, I think, the great work in progress we’ve been making to take care of their folks. Because of that we're evaluating and working with the state directly as we do a lot of states, but a very close relation with the State of Florida to potentially expand state-wide LTC, LTSS and long-term support services are also likely an opportunity there on the state. So, we think with the fundament base of expertise that we've demonstrate that on the state and very positive relationship that we have with the state. We think that there is opportunity there, not just to go hopefully and went to rebid process, but to expand our current base there in the State of Florida. So, feel -- we're quite optimistic about it.

[Jon Rubin:]

Yes. And let me take the second part of your question, Dave. In Virginia, when we -- the short answer is we don’t know yet exactly how the enrolment is going to be assigned and determined. So, there's still a lot of uncertainty, both in terms of the membership levels and the resulting revenue and financial results. As we’ve talked about 214,000 individuals round numbers we’re estimating 3.5 million, we don’t know exactly. That’s spilt into six regions, they are going to have minimum of two vendors per region and again we're obviously one of the six plans as Barry described earlier. So that kind of -- at least gives you some sense for the potential size, but we don’t know it. I also will remind you I think we spoke about that as well that this will be phased in over a period beginning this summer, but it won't be fully ramped up until 2018. So, I would expect membership and revenue to be more modest this year than the next year. Relative to our assumptions, again, we're expecting losses in the first year. It was built into to guidance. Round numbers we're talking $15 million to $20 million in terms of current estimates, but that is just an estimate at this point. I mean there are certain start-up expenses, but again the size of the program and the implementation, pace of the program will certainly depend -- determine the ultimate outcome there. And then long-term we do expect that the contract will be profitable consistent with other Medicaid plans in that low to mid-single-digit margin range. And we'll certainly give updates as we learn more from the state.

[Barry Smith:]

And just to add to Jon's comment which is dead on target, we view this whole LTSS opportunity nationally. It’s just a great opportunity for the country. Each one of these that we step into, we learn more. We're able to demonstrate more capability. So, the next state that we go into will be more operationally efficient and so we've taken a lot of the lessons we've learned in Florida and we're applying them with a few twists clearly given the state -- the Commonwealth's needs there in Virginia and we'll continue to grow. And as we hope to establish a track record now that we're in both of course Florida and Virginia, New York, we have an ASO program in Wisconsin. Again, our goal is to get to five to seven states in the next few years here and we think that we're well-positioned. Remember this is a very, very large market that's underpenetrated. We think it's about 50% penetrated. So, it's an opportunity to for us to continue to differentiate between these special populations that we have unique expertise with.

[Dave Styblo:]

Sure. That's helpful. Thanks for the insight and color especially on the losses on this year.

[Operator:]

Next question is from Michael Baker from Raymond James. Sir your line is open.

[Michael Baker:]

Thanks a lot. Just wanted to confirm for the quarter on healthcare side, favorable prior period development of about $7 million?

[Jon Rubin:]

For the quarter, you're talking about prior year or prior period?

[Michael Baker:]

Prior year favorable development?

[Jon Rubin:]

No, it was actually--

[Michael Baker:]

I hear you had $14 million, right?

[Jon Rubin:]

That's correct.

[Michael Baker:]

And then in the last update I think you gave $7 million for the third quarter?

[Jon Rubin:]

Yes, no, again, it’s a little bit of apples and oranges.

[Michael Baker:]

Okay.

[Jon Rubin:]

So, the $14 million we described this period was in the healthcare segment and was the total for prior period development. The previous number we had given was sort of all the one-time out of period component company-wide. So, there was roughly about $3.5 million of other stuff that was really more one-time expense -- operating expense related. So, really the equivalent would be $7 million in prior periods to $10 million this quarter. So, it was $3 million increase in the out of -- other year -- prior period development in the quarter.

[Michael Baker:]

I appreciate that. And then can you give us what the PDP membership was in the fourth quarter and where it's kind of tracking now?

[Jon Rubin:]

Yes, we were about 60,000 round numbers. These are round numbers at the end of the year. And we're probably in the 90s now. I mean it still hasn’t settled 100% for January, but we're up in that 30,000 plus range in the early returns.

[Michael Baker:]

Okay. And I know last year it started off a little bit more difficult than what you thought, given what you're seeing in membership composition and stuff like that, what are your thoughts on? How you might start off and how it might develop? Just generally speaking because I know you don't give quarterly guidance.

[Jon Rubin:]

Yes. No, again, I'd caveat all this in it. It would be a very limited actual claims at this point. So, it really is more -- just giving you some sort of qualitative perspective. Qualitatively last year we had a lot of voluntary low income members, which tended to be the highest utilization members. This year our growth is mainly in the non-low income. So, from that perspective the mix is different. And our hope is that that plays out favorably, but the key point is we don't have real data yet, so by first quarter, we'll have that first couple of months of mature data and we should be able to give you a much better perspective. But again, kind of coming into the year, because we were able to make some changes -- positive change both in terms of the pricing and formulary we think we'll see some improvement as we go into 2017. And again right now our range is centered around breakeven in terms of the outlook.

[Michael Baker:]

Okay. And then just in terms of how we think about Virginia and when you will likely kind of initiate some of those startup costs, any color on that?

[Jon Rubin:]

Well, we have -- I mean there are certain start-up cost that we had some even in 2016 as we start to build out networks and respond to the RFP and start the implementation planning. So, it really is sort of an ongoing process. So, there is continued work there. I'd say we haven’t given specific numbers, but we're continuing sort of on a modest spend rate as we go into this year. In terms of the real ramp-up though in terms of the service operations and other more variable expenses which tend to be the lion share of the longer term expenses for the contract. That will begin really in second quarter and at that point, we hope we'll have a good beef on what the volumes look like and therefore able to really sort of shape the organizations and expense level to the member shift that we're likely to be bringing on.

[Michael Baker:]

Okay. And then a question for Barry, maybe, you can give us a sense of the size of the PBM selling season this year compared to last and any new or different factors you're hearing from customers relative to last year?

[Barry Smith:]

The pipeline continues to become more and more robust in virtually all segments. I would say the greatest change is that we're being offering opportunities in larger and larger deals. And we see that both in the employer market and we also see that in the MCO market. In the employer market, as you recall from our past discussions, it’s a more profitable segment, the lower actually is the most profitable, but it offers us great growth opportunities and so we're pleased with the 86,000 lives that we've had since the 1st of January here in terms of growth. On the MCO side, we also are seeing dramatically larger MCOs. I would have said we would have been -- and I'm just guessing here a bit, but maybe we have been exposed to 30% or 20% the large deals that are happening. Now, it's vastly more than half to three quarters let's of the MCO bid processes that were included in and some very large deals. Now, the reality is for the large, large MCOs, it really is not of great interest to us to grow in that segment rapidly because the margins are -- really rounding area margins. We want to really protect and have both pricing discipline and be very thoughtful about how we grow. So, we’re trying to find that sweet spot where we do have that growth, but we don't comprise our margins longer term. And so we're getting far greater access to these far more calls than we've ever had before. So, I would say the pipeline continues to become more and more robust. And that's really no surprise because we have grown our sales force, it's been about two years now and we've been asked this last year as well. So, our product offering has become even more sophisticated. Our medical pharmacy offering, we're continuing to put the competition further in distance in terms of our capabilities and so we’ve been able to enhance a really robust success there in that space. That specialty orientation and the medical pharmacy capability truly is unique in the industry and that's what people are looking for. So, we will try to keep -- again, maintain our pricing discipline and make sure we don't erode our margins, but we're seeing greater and greater success and we're being included in more and more deals than we ever have been before.

[Michael Baker:]

Thanks for the update.

[Barry Smith:]

You bet, Michael. Thanks for calling us.

[Operator:]

Our next question is from Josh Raskin from Barclays. Sir your line is open.

[Josh Raskin:]

Hi. Thanks. Just a first quick clarification. I know you restated all the cash flow numbers; do we have a full year book? What was the fourth quarter cash flow from operations number? And maybe a year-over-year number?

[Jon Rubin:]

I'm sorry, fourth quarter specifically, or you're asking for both fourth quarter and in full year?

[Josh Raskin:]

Nope. I've got -- we've got full year in the press release. Just fourth quarter of 2016 versus fourth quarter of 2015 on the restated basis?

[Jon Rubin:]

Yes. If you give us a minutes, Josh, we'll come up with that. I don't have it on my fingertips.

[Josh Raskin:]

Okay. That's helpful. And then second maybe on the share count for next year, typically we've seen, I guess, some option exercises, but more than offset by repurchase. Maybe were there any repurchases done through February 23rd, or whatever the cutoff date was? And should we read into that? Was that just sort of cash flow timing, it looks like there were some cash flow issues in the fourth quarter? Or should we read into that sort of -- just sort of your thoughts on where the stock has gone and perhaps buybacks won't be a major component of shareholder return this year?

[Jon Rubin:]

Well, I mean I look at it just -- first of all, no, I wouldn't look at it as if we're stopping and starting share repurchases based on any change in our outlook for the company relative to our share price or anything like that. It is solely based on our cash flow and cash position and as we've talked about before, sort of alternative uses of capital. I mean we always look to fund growth, fund acquisitions first as being critical for the -- to help drive future growth of the business and we'll continue to evaluate share repurchases as we have excess cash available. But you're right, through year end we did not purchase shares thorough February and that's -- and they were higher than normal option exercises in that period as well. On your first question on capital by quarter, it was $74.2 million in fourth quarter of this year, $59.3 million in fourth quarter of 2015 -- fourth quarter of 2016 versus fourth quarter of 2015.

[Josh Raskin:]

Okay. Got you. So it was actually--

[Barry Smith:]

And I would just add Josh. Don't forget we also closed on Veridicus in the fourth quarter, which required cash. As Jon said we want to make sure we have plenty of dry powder. We do have a pipeline of M&A and well as you've seen this year and the year before, we've been very M&A focused to buy capabilities to enhance our competitive organic growth in the future. So, we want to make sure we have dry powder for that. And of course there's a timing for reserves for Part D as well. So, we have some valid uses for cash. We never want to get ourselves to the position where we can't execute and maximize shareholder value.

[Josh Raskin:]

Okay. And then just last one on Virginia, let's assume that's $3.5 billion run rate and you guys have one of six plans, but you're in all six regions. Should we -- is there a reason to believe it's not fair share ratably? Should we think about run rate or are there service parameters now in the states using in terms of member assignment or something that could potentially change that meaningfully? I mean obviously it could be close to six or so, but just any meaningful changes you're going to foresee?

[Barry Smith:]

Josh, the way I'd look at it is uncertain. But we don't know exactly what the state's basis for assigning the members is at this point. Remember some of the members today are in managed care plans because there's [ABB] members in this population that are in managed care plans today. Some of them are continuing in the new program, some who aren’t. So, it just doesn’t clear, but there is the potential that over time -- do I think that we can get our fair share? Absolutely. But initially how they are going to phase that in and will they reassign members that are in other managed care plans today, we don't know. So, there's the potential that the ramp-up could be a little slower to get to the fair share over a period of time, a few years. But beyond that, again, we just don't yet know. And I think that we will know over the matter of weeks. So, we'll keep up updated.

[Josh Raskin:]

Okay. All right. Thanks, guys.

[Operator:]

Your next question is from Jason Twizell from KeyBanc. Sir your line is open.

[Jason Twizell:]

All right. Thanks for taking the question. Just if you can provide an update on the performance of some recent acquisitions namely Veridicus and the Armed Forces. So, you talk a little bit how you -- their expectation -- how they are performing versus your expectation and how you expect them to contribute to growth in 2017?

[Barry Smith:]

Sure. And I'll take the -- both very different circumstances. Armed Forces Services Corporation, or AFSC, is really focused on the federal government business. And it was an important acquisition for us because while we've had -- we've had the intellect program or other programs there with the federal government, we did not have a prime contract or status, meaning that we had to go through another party that was contracted directly with the government. The acquisition of AFSC allows us a prime contractor status, meaning, we can go straight to with our products and services, rather than we go through somebody else. That enhances margins, but also allows us to be far more competitive and far more selective on the opportunities that we try to take advantage of with the government. That said AFSC has been a very strong performer and we're so pleased both with the management team, but it exceeded our expectations both in terms of market impact and profitability. So, we're thrilled with AFSC. Now, Veridicus, we just recently closed. It was important to us. They do some great clinical work. It really adds to our quiver of opportunities -- of two rules to be able to use to be competitive. And importantly, they have a really large MCO client which is important and they have a great relationship with them and now again, we’ve fortunate to have a really wonderful relation with them as well. So, we haven’t yet seen -- had enough time to really see how Veridicus will play out. But we have put a lot expectation as we have virtually with vast majority of our acquisitions. They typically all exceeded our expectations in terms of performance. So, we're very pleased with AFSC, great team, great strategy, great results. We expect to see same out of Veridicus.

[Jason Twizell:]

Okay. All right. Thanks for that color. In addition, I think Jon mentioned about half of your new sales expectations have already been booked. If you can just provide update how does that compare to past years or you ahead or behind schedule based at this time at the end of February?

[Jon Rubin:]

Yes, it’s a great question Jason. Literally the half is almost exactly consistent where we’ve been historically. So, we feel good in terms of where we are. As important to know how much we closed in percentage, I would supplement that. I think Barry mentioned in his prepared remarks, the pipeline is also quite strong. So, we view these set of opportunities as being certainly more than sufficient to be able -- to give us the opportunity to meet the full year objective. We’ve got to close and have to execute, but it’s all in front of us.

[Jason Twizell:]

Okay. Thanks for that. Last one, you might have already answered this question, but on Part D, I know it's early, but are you guys looking at possibly entering new states or new regions for 2018 or do you think it could more of the status quo?

[Barry Smith:]

Yes, at this point, we don’t have any expansion plans. I mean, as always we're looking at strategy working both on our internal and external actuaries to best position our bid for next year, both in terms of formulary and price. But in terms of geographic expansion, we certainly don’t have anything material in the plans for the near-term.

[Jason Twizell:]

Okay. All right. Thanks for the update.

[Barry Smith:]

You bet. Okay, operator, do we have any other question?

[Operator:]

Yes. We have one question from Ana Gupte from Leerink Partners. Ma'am, your line is open.

[Ana Gupte:]

[indiscernible] decline. Answering I know we're talking later and so first one was it seems like you have moved from the state of contract with to now, it doesn’t look like you have that downside and, in fact, you're winning quite a bit. Is there -- can you give us some thoughts on forward outlook on your contract? Is there any more risk left or anything coming up through procurement either in the government space or commercial or should we now think of you more as winner -- market share winner RFP--?

[Barry Smith:]

Ana, that’s a good observation. We really don’t have the same level of client concentration that we've had historically. We have Blue Shield that’s coming up in 2019; essentially and I'm going to say Florida, we just spoke about in the script there. But really beyond those contracts, there really is no single contract that is that material to us. They are all important to us clearly and so we don’t have the same level of risk that we've had in the last several years.

[Ana Gupte:]

Okay. Great. On -- the second one would be on the PBM side of hose, with the rebate issues that are being discussed versus guarantees, the DIR fees and then now you are in Part D and potentially what type of changes might occur either directly to the benefit design or indirectly as pharma looks like they are pitching for reduced out of pocket and so on. What does that do to your margin profile I guess going forward? And can you comment more broadly on the PBM business what the downside is?

[Barry Smith:]

There's whole lot of questions. Great questions here Ana. So, let me just kind of tick-up some of them and maybe Jon can pick-up on some of those well. I'll address, for example, the DIR fee. We don’t have fees that are coming in largely, its typically within the Part D world and we, as a PBM in our Part D plan, have a very limited no exposure -- very limited exposure. We typically don’t pay a lot of DIR fees. In our own especially pharmacy, we don’t pay ourselves those fees. So, I know that diplomat had real issues with those fees and trying to reconciliation of those fees. And so we just simply don't have that level of exposure. Relative to the rebates, there' so much discussion going on and pharm is feeling a lot of pressure for pricing. And I think to a great degree pharma -- and we're not here to represent any party specifically, but I don't think that the public fully understands that the rebates are really priced offsets and even as they raise list prices, many times the rebate will offset. In most times, they offset those price increases. So, the net cost to a customer that we manage should the drugs stand for is actually equal to or could even be less in some circumstances. Pharma uses rebates -- and you're an expert on this Ana, I know, pharma uses rebates to channel volume. And of course there are certain therapeutic classes where they are bioequivalent to the various agents. And so we try to channel, we negotiate with the pharma manufacturers they channel volume. That need to channel volume won't go away. It might take up certain times formats or different ways that they pay entities to do that. But essentially they will have that need to channel volume where you have a therapeutic class as several alternatives. So, we think that while there's pressure when I talk about rebates, it does serve our useful function to channel volume and to also maintain pricing for large customers. These are federal government with the 23.1% federal formulary or the state level where they have supplemental formularies that we manage. In fact, at this point, at least half the states in the country do work for in this space. So, we don't think the game changes a lot. But as it does, we think we have the tools to be able to address it. So, we don't see any major impact on how we're doing business today. I don't know if I hear all your questions. Yes, go ahead.

[Ana Gupte:]

No, sorry, actually I'm not an expert at all. So, it's truly asked because I don't know. But that's helpful.

[Barry Smith:]

Well, we've had a great deal of discussion with you, Ana, and a lot.

[Ana Gupte:]

Okay. Thank you. Look forward to catching up later.

[Barry Smith:]

You bet, Ana. Thanks for the call. Operator, any further questions?

[Operator:]

There are no further questions at this time, sir.

[Barry Smith:]

Great, well, we thank you all for joining us today. We look forward to our next quarterly results and call and look forward to having you join us. Thanks so much. Bye, bye.

[Operator:]

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