Magellan Health, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Welcome and thank you for standing by for the First Quarter 2015 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. And now I will turn the meeting over to Renie Shapiro Silver. Maám you may begin.

[Renie Shapiro Silver:]

Good morning and thank you for joining us today. This is Renie Shapiro Silver, Senior Vice President of Corporate Finance for Magellan Health. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin. They will discuss the financial and operational highlights of our first quarter ended March 31, 2015. This conference call includes forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. And such statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed. Please refer to the complete discussion of risks in our annual report on Form 10-K and in the current quarters Form 10-Q which will be filed with the SEC later today and will be subsequently available on our website. In addition, please note that in this call we refer to segment profits, adjusted net income and adjusted EPS, which are disclosed and defined in our annual report on Form 10-K. Segment profit is equal to net revenues plus the sum of cost of care, cost of goods sold, direct service cost, and other operating expenses and includes income from unconsolidated subsidiaries but excludes segment profit from non-controlling interest held by other parties, as well as stock compensation expense and 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 purchases by sellers, amortization of identified acquisition intangibles, and changes in the fair value OF contingent consideration recorded in relation to acquisition. Segment profit, adjusted net income, and adjusted EPS referenced during this call maybe considered non-GAAP financial measures. Included in the tables issued with this morning's press release is the reconciliations from these non-GAAP measures to the corresponding GAAP measures. We encourage you to review such reconciliations for an understanding of how these non-GAAP measures compared to the closest GAAP measures. I will now turn the call over to our Chairman and CEO, Barry Smith.

[Barry M. Smith:]

Thank you, Renie. Good morning and thanks for joining us today. We’re off to a good start in 2015 with solid financial results and continued progress on our two key growth initiatives. As you read in our press release this morning for the first quarter of 2015 we produced adjusted net income of 24.4 million, adjusted EPS of $0.94, and segment profit of 64.9 million. First quarter net income was 7.3 million and EPS was $0.28 per share. Year-to-date through Monday, April the 27th we repurchased approximately 611 shares for a total cost of 38.9 million at an average price at $63.59. To date we have completed approximately 26% of our current 200 million share repurchase authorization. We ended the quarter with 344.4 million of unrestricted cash and investments. Jon Rubin will provide additional details on our results and an update on our full year guidance, but first let me discuss the progress we’ve made on the Magellan Complete Care and Magellan Rx Management. As you know Magellan Complete Care went live in Florida and New York last year and we’ve completed the initial stages of implementation in both states. We are further refining our operations in care management protocols to improve the run rate for this business while ensuring the highest caliber of care for our members. In Florida our SMI specialty plan continues to grow and as of March 31, we had approximately 41,000 members. Open enrolment which occurs annually on the anniversary of the original go live dates for each region is currently underway. Members have a 60 day period prior to the anniversary of their enrolment date to opt into another plan or stay within their existing plan. In order to retain and add additional members and positively impact the lives of this vulnerable population, we are actively involved in developing relationships with and educating care givers and beneficiaries as well as provider, community, and advocacy groups. Our ongoing member outreach efforts are focused on assessment and engagement as they work with various community organizations to ensure access to housing, nutrition, transportation, and other social services and supports. The use of data analytics allows us to identify those members with the highest costs whose care we can directly impact or to improve their wellbeing. We have developed and implemented a comprehensive medical action plan to address all aspects of care and to further improve cost through the balance of the year. The blended risk adjusted rates for the quarter have decreased modestly based on the severity and mix of the actual population served by our SMI specialty plan. This will result in a small decrease in revenues for Florida [ph] in total with a corresponding reduction in care costs associated with this population. This should not materially impact our outlook for MLR or margins for the year. In New York, AlphaCare's Medicaid Managed Long-Term Care, or MLTC plan continues to see steady growth. Consistent with the experience of other players of the region, our fully integrated dual advantage or FIDA plan has seen slow membership growth resulting from high opt-out rates. The state has now decided to extend passive enrolment from April 1st through September the 1st. As of March 31st we had approximately 3000 members across all product lines, with almost 1600 in the Medicaid MLTC plan and the balance in Medicare Advantage, D-SNP and FIDA plans. Growing our membership base is a priority and we continue to build relationships with local license home care agencies that are the primary referral sources for MLTC members. For the Medicare population, we are developing risk sharing models with providers in order to promote wider acceptance and recommendation of the FIDA program and focusing our marketing efforts in more targeted geographies and communities. As I mentioned on our last call, the State of Iowa released the Iowa High Quality Health Care Initiative, RFP which has the stated objective of selecting multiple managed care companies to oversee most of its 4 billion Medicaid program. The new initiative includes physical and behavioral healthcare as well as pharmacy and long-term care services and includes all of the services we are currently providing under our existing contracts including the Integrated Health Homes. Responses to the RFP are due in mid-May with the targeted date of January 1, 2016 to start the program. While we believe we are well positioned for success on the RFP, we anticipate this will be an extremely competitive process. Regarding Louisiana we have finalized a new contract to continue managing their behavioral health services through November 30, 2015. This contract is similar in scope to the contract we’ve held for over past two years. As of December 1, 2015 behavioral health services will be carved into the Bayou health plans which serve Medicaid’s members physical health needs. We anticipate that RFP to manage individuals eligible for Louisiana’s long-term support services will be released early this summer with an effective date of December the 1st of this year. We look forward to hearing the details of this RFP and expect that it will be of interest for our MCC business. Market expansion is a high priority for us and we will continue to pursue growth in existing and new geographies, as well with additional complex populations. We plan to achieve this through a combination organic growth initiatives and acquisitions. In our pharmacy business, we completed an important acquisition this quarter while continuing to successfully grow the business organically. This provides us with additional scale, plans, and expertise in important targeted areas. On April the 1st we closed on the acquisition of 4D Pharmacy Systems, a full service PBM serving managed care organizations, employers, and government sponsored benefit programs such as Medicare Part D plans. The 4D enhances our commercial book to business which has been a focus for us. The base purchase price of $55 million was funded in cash with a potential for contingent payment of up to $30 million. The contingent payments provide for cash payments of up to $10 million based upon achievement of certain growth targets in the dual eligible membership and up to $20 million for the retention of certain business through 2018. 4D has brought health plan clients with commercial, Medicaid, and Medicare lives as well as the relationships and additional expertise to further expand in the areas such as Medicare, dual eligible, and healthcare exchanges. We have begun the integration and expect to complete this process in the third quarter. 4D’s management team with a track record of execution will supplement our existing strong leadership team. Our sales momentum continues across all market segments. In the employer market, we had a net increase of 75,000 lives during the quarter and added approximately 20,000 lives as of April the 1st. In the Medicaid market, we successfully bid on two state RFP’s and were notified of their intent to award deeper service contracts. One contract is expected to go live in the fourth quarter this year and the other in the fourth quarter of 2016. We are finalizing a health plan PBM contract with approximately 20,000 lives which is targeted to go live in January of 2016. And in our Medicaid pharmacy business we added a new health plan customer with approximately 500,000 lives bringing the total lives management of this product to about 10.5 million. We continue to make progress on building our internal Medicare Part D infrastructure to further support health plans and employers of Medicare lives and the 4D the acquisition brought us an expanded expertise and capabilities in this area. In addition we’ve applied to CMS to offer a standalone Part D plan direct to Medicare beneficiaries and then file for insurance licenses in numerous states. We expect to have this Part D plan available to offer beginning in January of 2016. In addition we remain on track to expand our existing specialty distribution facility in the second half of this year to accommodate mail order of traditional drugs. In our specialty markets we are also seeing interest from health plans and managing their total oncology needs by combining our pharmacy and specialty solutions offerings as a bundled service. The pipeline of opportunities across our employer, health plan, state, and specialty markets is robust and positions us very well for the future. This year is off to a promising start and we are well positioned for future growth. We are focused on executing on our growth initiatives and leveraging the knowledge we gained through our core businesses while finding new and innovative ways to look at special population management. I’ll now turn the call over to our CFO, Jon Rubin who will discuss our results in detail. Jon?

[Jonathan N. Rubin:]

Thank you Barry, and good morning everyone. First, I’d like to provide a high level discussion of our first quarter results after which I’ll delve further into the details for each segment. Revenue in the first quarter of 2015 was $981 million which was $14.5 million higher than the first quarter of 2014. The revenue increase resulted primarily from the impact of new business, same store growth and rate increases, and the inclusion of revenues from CDMI in the current year. All of which were partially offset at a loss of revenues associated with previously announced contract terminations. Our segment profit for the first quarter of 2015 was $64.9 million compared to $76.5 million for the first quarter of 2014. The decrease in segment profit is primarily due to previously announced contract terminations which were partially offset by new business, same store growth, and the inclusion of CDMI results in the current year quarter. Included in segment profit for this quarter, approximately $9 million of net favorable, non-recurring, and timing items mainly related to medical claims development in public sector. Now to remind you adjusted net income and adjusted EPS are non-GAAP measures which excludes certain non-cash items relating to acquisitions completed after January 1, 2013. For the first quarter of 2015, adjusted net income was 24.4 million and adjusted EPS with $0.94 per share on a diluted basis. For the first quarter of 2014, adjusted net income was $27.3 million and adjusted EPS was $0.97 per share. The decrease in adjusted net income between periods was mainly due to the decrease in segment profit. Net income for the first quarter of 2015 was $7.3 million or $0.28 per share on a diluted basis. For the first quarter of 2014 net income was 25.7 million or $0.92 per share on a diluted basis. The decrease in net income of $18.4 million is due to lower adjusted net income of 2.9 million and additional non-cash expenses relating to acquisitions. These non-cash acquisition related expenses consisted primarily of $15 million for changes in the fair value of consideration, $7.4 million of higher stock compensation expense, and $2.8 million of incremental amortization of acquired intangibles. Offset by the tax impact of such items. The majority of the change in the fair value of contingent consideration is due to an improved outlook for CDMI which resulted in increased estimates of the performance related earn outs. I’ll now review each of the segment’s results and growth opportunities beginning with commercial. Segment profit for our commercial behavioral health business was $31.5 million, a decrease of $6.1 million from the first quarter of 2014. The decrease is mainly due to the impact of previously announced contracts, terminated contracts partially offset by favorable rate changes in excess of care trends and favorable medical claims development. On January 1st we implemented our unique risk autism product with two heath plan customers and are actively building out autism solutions for other existing and prospective clients. A key initiative for us is a development of innovative solutions for existing and prospective customers. We are currently filing in several products dealing with co-morbidity of medical and behavioral issues, virtual care models, substance abuse solutions, and suicide prevention for the military. As a result of these innovations and our proactive efforts to market our solutions, we are seeing a strong pipeline of opportunities across all markets in both our traditional and new product offerings. Turning to public sector, our segment profit was $25.1 million in the quarter, a decrease of $9 million from the first quarter of 2014. This decrease was mainly due to the termination of the Maricopa County contract at March 31, 2014 and unfavorable care trends in excess of rate changes. These unfavorable variances were partially offset by favorable prior period medical claims development reported in the current year quarter, increased membership from existing customers, and net favorable health insurer fee activity. Segment profit in the quarter includes the benefit of approximately $10 million of favorable out of period items primarily pertaining to favorable medical claims development. Regarding MCC, we’ve seen modest improvements in our cost of care and expect to experience further improvement in our medical loss ratios over the balance of the year as we accelerate execution of our field based medical action plans. Relating to new business, we recently won a new Medicaid ASO behavioral health carve out for children. Also Pennsylvania is currently moving forward with their state Medicaid expansion and were working with our counties to implement it in three phases throughout the year. We expect to add approximately 70,000 lives with annualized revenue of approximately $30 million. To update you on an opportunity we previously discussed for public sector, the release of the New Jersey RFP for adult behavioral health services has been delayed for an undetermined period of time. In our specialty solutions segment, first quarter 2015 segment profit was $11.4 million, a decrease of $5.7 million from the first quarter of 2014. This decrease was mainly due to previously negotiated margin reductions on contract renewals and unfavorable care trends partially offset by the impact of new business. We are continuing to drive strong sales activity and results in our specialty solutions business in 2015. On April 1st we implemented four new markets for radiology and cardiology management with one of our national health plan clients. We also signed and implemented a contract for our radiation oncology program with a major regional health plan effective April 1st. Our muscular scalable management program continues to produce a very high level of interest including interest in our new physical medicine capabilities that we added earlier this year. We’ve begun implementing this product with a regional health plan that will go live this summer and we have a number of other promising musculoskeletal product opportunities for the current year. First quarter segment profit for the pharmacy management segment was $24.5 million, an increase of $9.2 million over the first quarter of 2014. This increase is primarily due to the inclusion of CDMI in the current year quarter results as well as new employer and PBM sales. These positive variances were partially offset by a net decline in dispensing activity and terminated contracts, as well as ongoing direct service costs incurred to support new business. As Barry mentioned, the pipeline of opportunities across our employer, health plan, state, and specialty market is robust and positions us well for the future. Regarding other financial results, corporate costs excluding stock compensation expense totaled $27.5 million which is consistent with the first quarter of 2014. Excluding stock compensation expense and the change in fair value of contingent considerations, total direct service and operating expenses as percentage of revenue were 17.9% in the current year quarter as compared to 16.6% for the prior year quarter. The increase is primarily due to ongoing costs to support new business, development cost associated with the MCC product, and changes in business mix. As I mentioned earlier the current quarter includes $15 million of increases in the fair value of contingent consideration mainly related to the CDMI acquisition. Stock compensation expense for the first quarter of 2015 totaled $13.9 million, an increase of 9.4 million from the prior year quarter. The increase is primarily due to restricted stock purchased by sellers in the CDMI acquisition. The effective income tax rate for the quarter ended March 31, 2015 was 36.5% compared to 51.2% for the prior year quarter. The decrease in the effective rate was mainly due to the inclusion of valuation allowances in the prior year uncertain deferred assets and the reversal affect contingencies in the current year on the favorable settlement of state income tax examinations. Turning to cash flow and balance sheet highlights, our cash flow from operations for the three months ended March 31, 2015 was $44.2 million compared to cash flow from operations of 82.8 million for the prior year quarter. Cash flows for the current year quarter and the prior year quarter includes a positive impact of a shift of restricted cash into restricted investments in the amounts of $13.4 million and $28.2 million respectively, which are reflected as a source of cash from operations and a use of cash from investing activities. Absent these transfers, cash flow from operations for the current year quarter totaled $30.8 million compared to 54.6 million for the prior year quarter. This decrease of $23.8 million in operating cash flows is attributable to the reduction in segment profit of 11.6 million, higher tax payments of 2.9 million, and net unfavorable working capital and other changes between periods of 9.3 million. As of March 31, 2015 the company’s unrestricted cash in investment totaled $344.4 million which represents a decrease of 2.5 million from the balance of December 31, 2014. Approximately $72.6 million of the total unrestricted cash and investments at March 31, 2015 related to excess capital and undistributed earnings held at regulated NDs. The company’s restricted cash and investments at March 31, 2015 of $395.1 million reflect an increase of 3.7 million from the balance at year-end. This increase is primarily attributable to the company’s regulated NDs. Regarding the impact of recent acquisitions on our 2015 guidance, 4D Pharmacy is expected to generate revenues during the last nine months of 2015 of 300 million and segment profit of approximately 6 million. Non-cash items including depreciation and amortization and changes in fair value of contingent consideration are expected to be approximately $4 million in total for the remainder of 2015. In the current year the 4D acquisition is expected to be accretive to EPS by approximately $0.05 per share. The impact of such items, the 4D acquisition is expected to be accretive to adjusted EPS by approximately $0.13 per share in 2015. Relative to full year 2015 we are updating our guidance to reflect the impact of the 4D and HSM acquisitions as well as the increase in the fair value of CDMI contingent consideration and share repurchase activity. We now expect revenue of $4.45 billion to $4.69 billion net, income of $45 million to $61 million, and segment profit of $272 million to $292 million. Adjusted net income from the year is now projected to range from $92 million to $104 million. We are revising our guidance for cash flow from operations to a range of $178 million to $202 million excluding the net shift of restricted funds between cash and investments. We continue to expect the full year effective tax rate of approximately 49%. Taking into account the impact of share repurchase activity through April 27, 2015, but not considering any potential future share repurchases. Our guidance range for fully diluted EPS is estimated to be $1.67 to $2.26 and for fully diluted adjusted EPS of $3.41 to $3.85, based on an updated 27 million average fully diluted shares. Included in our original guidance was a target for new business revenue of $450 million to be recognized in 2015 of which we’ve sold approximately 50% to date. In addition our original guidance assumed total MCC revenue of approximately $800 million for 2015. As a result of slower and anticipated acceptance of the FIDA program in New York and a lower risk adjusted revenues in Florida, we are now expecting full year MCC revenues of between $550 million and $575 million. I am pleased with our solid financial results in the quarter as well as with our continued progress in executing our growth strategy including the successful acquisition of 4D which serves to further strengthen our growing pharmacy business. Barry and I are now available to answer questions and I’ll turn the call back over to the operator. Operator?

[Operator:]

Thank you. We will now begin the question and answer session. [Operator Instructions]. Our first question is coming from Mr. Josh Raskin from Barclays. Sir, your line is open.

[Joshua Raskin:]

Hi, thanks. First question just on the guidance, I just want to make sure I understand, I guess excluding the impact of the acquisitions etc. were there any material changes to the underlying business, I just heard the MCC revenues, but just more on the segment process?

[Jonathan N. Rubin:]

Joshua, its Jon. No, I mean the punch line isn’t always going to be puts and takes as you look at the individual aspects of the business. But in total from a segment profit perspective the only change was literally the approximately $7 million in incremental segment profits associated with the acquisitions, primarily 4D.

[Joshua Raskin:]

And did you have the $10 million of good guides in the quarter, the favorable item period items was that in original guidance, do you have some assumption for that, I mean I am just trying to see what the offsets were, the total guidance is going up less than the favorable amount plus the acquisitions?

[Jonathan N. Rubin:]

Yeah, importantly second part of your statement is correct. Again, the increase we only made for the acquisitions and I and would, to answer your first part of your question partially I mean, there is always going to be timing between years and between quarters, some of that timing we can anticipate, some we don’t. Now, obviously having some favorable items in first quarter and that helps us from a full year perspective. But as we look at our guidance range for the full year we are still very comfortable with the guidance range adjusted for the impact of the acquisitions.

[Joshua Raskin:]

Okay and then on the MCC, the revenues are coming down but I am just curious you guys have the infrastructure built up you had some estimates for what you thought losses could be, I am just curious if you have any updated, is there some potential mitigation there where maybe the losses in that segment or lower I don’t know if that was on the gross margin line or if that was just an EBIT estimate?

[Jonathan N. Rubin:]

Yes, the front line Josh is that look there is a certain level of fixed expenses for MCC. So the fact that revenues are coming in lower just put a little bit of pressure on us from a margin standpoint as we continue to grow and scale that business. So we had talked at our guidance call about moving from losses we had last year to a slight profit this year. I would probably temper that a little bit and say we may end up with a modest loss this year and for MCC in total when you roll things up. But again as we talked earlier there is certainly puts and takes across our businesses and all this is factored into our guidance and we still have confidence in delivering that guidance range.

[Joshua Raskin:]

Okay. And then last question just on the PBM side, when you do these acquisitions looking back at CDMI, looks like that’s running a little better, could you help us with what are typical retention rates and then maybe just oppose that with there is a big United Optum buy in Catamaran. There is potentially a big opportunity in terms some dislocation, are you guys looking at that, are you targeting some health plan business, do you have any comments on that?

[Barry M. Smith:]

Yeah, both are great observations and questions Josh. On the retention elements of these businesses, we expect to retain virtually all and actually grow. There always can be some churn in the book of business but generally we always try to retain the key leaders within the acquisitions that have those relationships and had those relationships long-term. And then to get back in most cases of these acquisitions because of the presence and the financial technical capabilities of Magellan we actually accelerate the existing relationships that haven’t yet come to fruition in term of a sale. So we expect to retain virtually all of the book of business and we would expect to grow the business based upon the pipeline that 4D had. And also enhance that pipeline given our capabilities. And as far as the Catamaran acquisition by Optum, there are always without taking any specific shots at Optum or Catamaran both flying companies, but typically in situations like this there is enhanced channel conflict perception. So there may well be clients that will prefer not to buy from United or a competitor that will obviously be an opportunity for people like us to go after and we do look at those opportunities out in the marketplace. We do think if they are an effective competitor and from our standpoint we will continue to focus on our key market. I think we are in a situation where we don’t have to, they don’t have to lose [indiscernible] and so we feel there is real opportunity in the marketplace with what’s going on.

[Jonathan N. Rubin:]

And Josh, just one thing to add to the first part of the question regarding business retention with the acquisitions, one of the things we think about and actually structuring the deals themselves is to give incentive to retain business and in fact with CDMI, the fact we will increase the contingent consideration partially reflects the fact that the earn out that restructured for a business retention has in effect fully come to fruition. So again that’s net, net good news for us as we think about the value of the business going forward.

[Barry M. Smith:]

In fact in not to deliver the point but at the end all the acquisitions we’ve done in the PBM or world we’ve actually grown these businesses rather dramatically. And so it’s all been not just retention but great, great growth.

[Joshua Raskin:]

Alright I guess we’ll hope Catamaran doesn’t have that same level of debt?

[Barry M. Smith:]

Exactly.

[Joshua Raskin:]

Thanks guys.

[Operator:]

Thank you. Our next question is coming from Mr. David Styblo from Jefferies. Sir, your line is open.

[David Styblo:]

Great, thanks and good morning and thanks for taking the questions. Wanted to come back to the Ford SMI. I think after about six months some of the handcuffs that are normally on that for medical management come off. Just wanted to confirm that we’re about at that time frame or a little bit beyond it and so I am curious what are some of things that you can do to improve the analog going forward and then also provide an updated estimate of what that MLR is right now, I think it was in the mid 90s heading into the quarter?

[Jonathan N. Rubin:]

Yes, that’s correct and firstly congratulations on your new son. I hope all is going well and wish you all the best.

[David Styblo:]

Thanks.

[Jonathan N. Rubin:]

Relative to Florida, a couple of things, one of your observation is correct. Well that’s not necessarily a brake line in terms of the timing. Absolutely there are some restrictions on what we are able to do especially as it relates to people that are in treatment at the time that they are rolling in and we are starting the program. And that does give us more latitude as we move forward. So I would say that in terms of maturity level of our clinical initiatives that as we started this year clearly we have the ability to ramp up many of those initiatives. And honestly we are learning and we’ll continue to ramp things up further as we go forward and that is reflected in the MLR. As we talked about we made progress last year, we ended the year in the mid 90s in terms of the loss ratio. We are seeing slight improvement as we come into this year on a loss ratio as a result of some of the initial initiative and again we expect to be around the 90% range of loss ratio for the full year which again requires us to continue to ramp up the initiatives and make incremental progress. So I characterize this at this point as being on track with that and we’ll continue to give updates as we go through the year.

[David Styblo:]

Okay, let me shift gears to the specialty solutions margins. I know those obviously dip back to low 10%. I heard some of the commentary about contract rates being renegotiated lower, I guess as I was looking at what you originally said in guidance I didn’t -- I wasn’t modeling that much pressure. So I am curious if this is little bit more pressure than you had anticipated or it’s a combination of the new business mix coming on line that has lower margins. Again just to sort of trying to get a sense of is this 9% more run rate or something unusual going on here?

[Jonathan N. Rubin:]

Yes, I would say Dave a combination. So, fairly as we not only gave guidance we did expect some continued decline in margins as business is being reprised. Given the low cost trends we have seen over the last couple of cycles and just the normal underwriting and renewal processes, having said that we did have what I characterized as unfavorable timing in the quarter. So, to some extent the magnitude of the results reflects the fact, for example, there are some rate adjustments and some annual contract settlements that -- what we thought we might get done in the first quarter likely will slip into the second and third quarter. So, I wouldn’t necessarily annualize the first quarter results as being the normal run rate. We did see a little bit of pressure again from the fact that the revenue recognition timing was a little bit different than maybe we anticipated.

[David Styblo:]

Okay, and then lastly on your pharmacy solutions revenue declined in the quarter sequentially and I guess I was thinking it would be growing from here. Especially I think I have heard there is an 80,000 customer add coming out in January. So, can you walk me through the mechanics, I think the sensing was one of the reasons that it might have been a little bit less than I was thinking. But I guess on a quarterly sequential rate I would have expected pharmacy solutions to continue to drift higher?

[Jonathan N. Rubin:]

Yeah, I think that is a great observation and I would say if you look at the fundamental run rate, yes, we do expect pharmacy will continue to grow organically in addition to the benefit of the acquisition. Again there are some timing issues in terms of revenue recognition if you look at the quarterly pattern. And in particular there are some contracts where we have performance revenue and performance incentives. We did get some benefit in fourth quarter of some true-ups in that area. And again first quarter tends to be because it is the first quarter and many of these incentives and performance revenue are calculated annually. We often don’t have enough information to book any of it. So, I wouldn’t again look at the first quarter as being the run rate. We still feel like we are much on track in terms of the full year revenue growth in pharmacy that was developed in our guidance. And we would expect to see further growth as we go forward.

[David Styblo:]

Great, thanks.

[Jonathan N. Rubin:]

Yes.

[Operator:]

Thank you. We have one more question in queue coming from Mr. Scott Fidel from Deutsche Bank. Sir, your line is open.

[Scott Fidel:]

Thanks, first question and Jon not that we are trying to race you out here but just interested if Barry you have an update on the CFO search and just latest thoughts on potential timing around that?

[Barry M. Smith:]

Yes, we have been actively engaged for quite some time making certain that we get the right characteristics in our CFO. We have narrowed the field down and we do have some very qualified candidates and I don’t have anything to report right now. But I expect to have something reported in not distant future. I do express my gratitude to Jon Rubin here. He has been a great partner and continues to be great partner and indicates that he is willing to stay with us through the period it takes to bring a quality, high qualified candidate on board here as a CFO. So, again I thank Jon for that but again we hope to be able to report something in the near future.

[Scott Fidel:]

Okay, and then Jon just on -- just trying to understand the CDMI earn outs and to the extent possible that we could -- we can model those. So, just wanted to extract the numbers, did you say that there is a potential for up to 4 million additional of those over the course of the year and if so do you have -- can you give us some sense sort of when the timing of that would play out if did want to make an estimate around that?

[Jonathan N. Rubin:]

No, no, the 4 million I mentioned earlier were the non-cash items over the balance of the year for 4Ds. That is our newest acquisition.

[Scott Fidel:]

Okay.

[Jonathan N. Rubin:]

For CDMI the increase in consideration of 15 million that really relates to again our improved outlooks in segment profit and gross profit for the business. It is fully recognized first quarter. We could have adjustments in future quarters. There will only be a percent of the outlook changes materially. Otherwise that is the only reason there would be any material adjustments to that.

[Scott Fidel:]

Okay, and then just on the PBM business pipeline. I know you talked a bit about the potential opportunities relating to the United and Catamaran integration. Just interested sort of separate from that, I know it is early here but any initial indications on how the PBM RFP pipeline is looking for the 2016 selling season?

[Barry M. Smith:]

Scott its interesting, the PBM pipeline both for employer and MCOs has really been quite robust and continues to get more robust overtime. What we’re seeing is that last year we saw an uptick in RFP activity and from the consultant community, broker community in particular as we took over partners and consolidated the business. We’re seeing that continue to accelerate so the pipeline is more robust than ever and we’re pretty excited about the future because of what we’re seeing. We have our national conference coming up here in just a few weeks of May. We are having attendance at these conferences by both brokers and consultants far more than we have in the past. And by consultants and brokers that represent a larger employers and larger managed care entities. And so we are quite optimistic about the future or the growth potential for the business.

[Scott Fidel:]

Okay and then just one last question Jon just on specialty solutions and some of the margin compression in the first quarter and you mentioned that there is going to be some rate adjustments and contract settlements that play out over the next couple of quarters. Can you always think about sort of where how much benefit that could provide to the specialty solution margins that you think those get back into sort of the very low double digits over the next few quarters or just any thoughts about sort of the near-term trajectory on specialty solutions margins?

[Jonathan N. Rubin:]

I don’t want to comment specifically on the quarterly pattern of margins but I’d say order of magnitude there is roughly, again depending on exactly how you count the items probably about $3 million of pressure in the current quarter results as it relates to timing primarily revenue.

[Scott Fidel:]

Okay, got it. Okay, thank you.

[Jonathan N. Rubin:]

You bet.

[Operator:]

Thank you. Next question is coming from Ms. Ana Gupte from Leerink Partners. Ma’am your line is open.

[Ana Gupte:]

Yes, thanks. Good morning, appreciate the time for the question. Wanted to get your broader thoughts on your long-term kind of revenue goals, this notion of doubling your revenues across these two legs of the business and how that looks like it might be shaping up now across organic and in organic growth in light of some of the deals you are doing and then also the contract losses that you have been observing, has anything changed?

[Barry M. Smith:]

Yes Ana, you know we still remain very excited about our future growth of the company. I think we started out 18 months to 2 years ago talking about a 2.5 billion revenue number and bottom line also being robust to growing 20% annual over long-term growth rate. In our Rx business with the 4D acquisition plus the organic growth that we’ve had, we feel that we are not only going to achieve that but likely exceed that within the timeframe. So we’re pretty confident. We still have a lot of work to do so I think we’re overly confident here but we’re pretty excited about the opportunity of the PBM side. And on the MCC side as you know we have a big contract coming up in Iowa. There will be between two and four winners for that contract, it’s a competitive field. We’ve had the state as a client for many, many years now, had a great relationship with them. And so we’re cautiously optimistic that we’ll be successful being one of the 4 winners. There will be again that could be a billion dollars in revenue that would flow to MCC. That’s of course we have 400 plus million with the State of Iowa today. So that would represent a substantial upside also. So, we remain optimistic about our potential of achieving what we said where our goals are a couple of years ago. We made a lot of progress and hopefully we’re proving to the market that we will execute and get there.

[Ana Gupte:]

Thanks that is helpful. So, on Iowa again I think you are saying its 400 that’s huge if you can get to the billion. What is the status of the incumbents now and any color on who the new potential attackers are in that space. One of the players I think I am hearing from one of my other coverage company is they are pretty optimistic about being able to get that now. They are expanding those number of players here?

[Barry M. Smith:]

Currently they have card out programs in the state. We have -- we currently manage the behavioral health in State of Iowa and have for 18 years. And there is only one other existing Medicaid player in the state, Meridian and they are I am assuming I don’t know any of the details there but we are the largest of the existing incumbents in the state and have the longest relationship by quite some margin in the state. So you’ll likely have and it will be a very competitive field, my guess is and so you’ll likely have all the big players focus on the State of Iowa. Having said that, the bid is to end Mid May. It was shifted from the 5th of May to the 15th of May but the start date hasn’t shifted that’s January 1, 2016. Again they said they would award between two and four players a portion of the $4 billion spent. There are questions that just came out recently with rates and we are still analyzing those rates. They are expecting responses, comments, questions about those rates and they are due tomorrow which we intend to submit. So we’re again it’s a competitive field that we’re somewhat optimistic about the potential there to gain in the State of Iowa. So it’s a big deal.

[Jonathan N. Rubin:]

And one of the things I will just note as well is the majority of the Medicaid program in Iowa today is cheaper service. So while there is one health plan in today on a relative basis it's very limited to the managed care presence in the State. So this is really a new program and as Barry said because of the length of our relationship with Iowa and the size of our program today we feel good about the relationship and the position we have.

[Ana Gupte:]

And so this contracts starts on January 2016, when is the announcement again or is it that there is…

[Barry M. Smith:]

It’s likely, right now Ana, they have it slated for the middle part of July.

[Ana Gupte:]

Oh wow.

[Barry M. Smith:]

So again, we don’t know that although they shifted the RFP due date by a couple of weeks they have not shifted the announcement date, they might and again its go live on January 1, 2016.

[Ana Gupte:]

That’s very helpful, then switching to pharmacy what are your expectations on margin targets on that. We were higher on numbers than your reports but I am just trying to get some color there?

[Jonathan N. Rubin:]

We didn’t talk about specific margin targets Ana. But again as I mentioned earlier, I caution a little bit on extrapolating one quarter’s results in pharmacy or any of the businesses because of the timing of revenue recognition. So I would really look at it over a 12 month period to gauge what sort of the real run rate of the margins are. Other than what we’ve talked about which is as we’re adding full service PBM business we’d expect some compression of the margins just because of the mix of that business. We are not seeing any other sort of the same store shifts in margins. We’re continuing to manage that business on a consistent basis and continue to be successful.

[Ana Gupte:]

Got it, okay. So wait for the remainder of the year to look at it on full year. Just back to contracts in terms of the pipeline both from the upside and the downside, anything that stands out in terms of contract risk, in addition to opportunity?

[Jonathan N. Rubin:]

No, Ana there really are no large contract terms or situations that are coming up that would materially change our outlook for the year.

[Barry M. Smith:]

Mainly what we’ve talked about.

[Ana Gupte:]

Okay, terrific. Thank you, appreciate your time.

[Barry M. Smith:]

Thanks Ana.

[Operator:]

Thank you. At this time there are no further questions.

[Barry M. Smith:]

Great we’d like to thank everybody for joining us today. We look forward to speaking with you in July when we discuss our second quarter results. Have a great day. Bye, bye.

[Operator:]

Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.