Magellan Health, Inc.
Q4 2012 Earnings Call Transcript

Published: 1 Mar 2013

[Operator:]

Welcome and thank you for standing by for the fourth quarter 2012 earnings call. At this time, all participants are in a listen-only mode. (Operator Instruction) Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the meeting over to Renie Shapiro. Ma’am, you may begin.

[Renie Shapiro:]

Thank you, operator. Good morning and thank you for joining us today. This is Renie Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services. With me today are Magellan’s Chief Executive Officer, Barry Smith and our Chief Financial Officer, Jon Rubin. They will discuss the financial and operational results of our fourth quarter and full-year ended December 31, 2012. Certain of the statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown certainties and risks which could cause actual results to differ materially from those discussed. These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption risk factors in Magellan’s annual report on Form 10-K for the year ended December 31, 2012 which will be filed with the SEC later today and will subsequently be found on our website, magellanhealth.com under for investors. In addition, please note that in this call, we refer to segment profits. Segment profit is disclosed and defined in our annual report on Form 10-K and is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses excluding stock compensation expense. Segment profit information referred to in this call maybe considered a non-GAAP financial measure. Included in the tables issued with this morning’s press release is the reconciliation from segment profit to the line item income before income taxes. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure. I will now turn the call over to our CEO, Barry Smith.

[Barry M. Smith:]

Thank you, Renie. Good morning and thank you for joining us today. I’m delighted to be hosting my first earnings call as Magellan CEO. Under the leadership of our former CEO and now Executive Chairman Rene Lerer and through the hard work of our team of employees over the past decade, Magellan has transformed into a financially strong, highly regarded and innovative competitor in the healthcare marketplace. I can assure you that we will build on that success as we enter the next phase of profitable growth that will leverage our considerable expertise. I’m pleased to report that Magellan had a strong fourth quarter and completed a successful 2012. All of our business segments contributed to the company’s success with significant accomplishments including solid financial results, product innovation and new business sales. We also made important strides with our Medicaid and Pharmacy growth initiatives which I will detail later in the call. With respect to the financial milestones for the full-year 2012, we produced net income of $151.0 million, diluted EPS of $5.42 and a segment profit of $267.4 million. We entered the year with a strong balance sheet that included $302.3 million of unrestricted cash and investments which is net of share repurchases. Next I will discuss some highlights of this year’s accomplishments and our growth opportunities for each of our business segments. And then Jon will provide additional details on 2012 results. Following that, I’ll talk about our Medicaid and our pharmacy initiatives, as well as opportunities provided by the healthcare exchanges. In our Commercial Behavioral Health segment in 2012, we successfully implemented Blue Shield of California and the Military & Family Life Counseling program for the U.S. Department of Defense. Our 2012 results reflect these new business implementations, as well as continued improvement in cost of care, resulting from our targeted initiatives. Late in the year, we were notified debt of commercial health plan contract with a contract term expiring on December the 31, 2013 will not be renewed. 2012 revenues from this customer were approximately $192.4 million, and we expect that this contract expiration will have no effect on our guidance for 2013. We are working with the customer on a detailed transition plans. We continue to see strong opportunities has health plans expand their presence in the Medicaid market. For example, the state of New Mexico announced the selection of the new Centennial Care managed care organizations that will provide care to approximately 700,000 Medicaid individuals effective January 1, 2014. Magellan will manage behavioral health services for Presbyterian Health Plan the Mexico’s largest health plan serving their Centennial Care program. As our contract with Presbyterian is on an ASO basis, we do not expect revenue to be material to the commercial segment. This year in our Public Sector Behavioral Health segment we implemented a significant new customer the State of Louisiana and expanded our contract with the State of Iowa. A few weeks ago, the state of Nebraska notified us of their intent to award Magellan a risk-based behavioral health contract starting on September 1, 2013. The program extends and expands our partnership with Nebraska which began on an ASO basis in 2002. We anticipate the annual revenue from this expanded contract to be approximately $100 million. Regarding our joint venture with Phoenix Health Plan, Magellan Complete Care of Arizona, we remain optimistic about winning the rebid of our contract in Maricopa County effective on October 1, 2013. Our team put forward a strong proposal based on the innovative programs we’ve designed and implemented over the last six years which has transformed the system of care for the people we serve in Arizona. We’re determined to make truly integrated care a reality in Maricopa County and we expect the award to be announced in the second quarter of this year. Regarding the public sector pipeline, the state of New Jersey is expected to issue an ASO Adult Behavioral Health RP in the second half of the year with an effective date of mid-2014. We expect to hear within a few months on the outcome of the ASO contract in the state of Virginia which was delayed due to a competitive challenge of their disqualification. We received notification that the state of Pennsylvania intends to award a contract for 23 roll counties to the incumbent. In addition, the state of Idaho’s risk-based behavior health carve out was awarded to a competitor and we continue to monitor potential RP activity in multiple other states. Our radiology segment had a good year with several new sales in market expansions, continued product innovation and effective cost of care management. During the fourth quarter, we continued our growth momentum. Specifically, we continued to expand our business with two Medicaid customers by implementing new markets and a cardiac program upsell and we grew our relationship with Coventry through expansions in a number of markets as well as an ASO to risk conversion in an existing market. We are in close dialogue regarding additional market expansion opportunities in 2013. With respect to account retention, we successfully renewed all of our key clients during the year 2012. Our new business pipeline continues to be strong across all of our products. We see interest from new customers as well as opportunities to grow our existing client base through market expansions and product upsells. We continue to aggressively pursue product innovation opportunities including OB ultrasound, radiation oncology, pain management, and cardiac management. The specialty pharmaceutical segment ended the year on a very strong note and produced solid results across all of its product lines. In particular, the dispensing and formulary optimization lines continued to outperform expectations. We had released our third annual Medical Pharmacy and Oncology Trend Report, which is the only source of medical pharmacy trends in the industry and which also demonstrates our deep content knowledge and leadership in managing medical pharmacy for our clients. Our clinical leadership and innovation in this space is a differentiator for our pharmacy product offerings. In our Medicaid Administration unit, we won or extended all of our existing contracts that were up for competitive bid or renewal this year. We continue to provide strong value and excellent customer service which drives account retention and new sales. Just a few weeks ago, we were notified that TennCare has selected Magellan as the new pharmacy benefit manager for its Medicaid Point-of-sale program effective June 1, 2013, previously served by a well established competitor. We expect this contract to generate revenues of approximately $35 million or initial three year contract term with two optional one-year extensions. A pipeline for new public sector pharmacy point-of-sales opportunities has begun to pick up. We are simultaneously working on several RFPs for both state fee-per-service and in particular, Medicaid MCO bids. Given our capabilities to combine state-of-the-art traditional fee band services, clinically based specialty pharmacy services as well as ground breaking medical pharmacy benefit management we are well positioned to take advantage of these opportunities. We had a very successful implementation for the employer base PBM contract; we have previously announced which went live on January 1, 2013. We also managed medical pharmacy and specialty rebates and dispensing for this population and are in discussions to add sited service management solutions. This validates our belief that customers recognize the need to integrate the management of all drugs across all sites and service with a single partner. The implementation of this customer is a watershed event for us as we anticipate that our strategy for integrated management of all drugs will become a growing part of our business and the enrichment of our pharmacy strategy going forward. We have recently received several RFPs and increase for PBM services combined with specialty drug management from both employers and health plans. We are pleased by this heightened level of proposal activity and foresee future benefits from our continued investments in this area. I am pleased with Magellan’s results last year and want to know that 2012 was the first year in our history with total revenues exceeding $3 billion. That’s impressive and we broadcast continued growth for 2013. Jon Rubin will now discuss each segments detail and after I’ll provide some comments on our growth strategies. Jon?

[Jonathan N. Rubin:]

Thanks, Barry and good morning everyone. For the year ended December 31, 2012 the company reported net income of $151 million, diluted earnings per share of $5.42, and segment profit of $267.4 million. For 2011, the company reported net income of $129.6 million, diluted earnings per share of $4.17, and segment profit of $270.4 million. The full-year segment profit results for 2012 are above the guidance range that we confirm during our December call. Net income for the fourth quarter of 2012 was $37 million or $1.32 per share on a diluted basis. For the fourth quarter of 2011 net income was $29.7 million or $1.05 per share on a diluted basis. The increase in net income between periods was mainly attributable to an increase in segment profit. Revenue in the fourth quarter of 2012 was $830.3 million, which was a $108.8 million higher than in the same period last year. The revenue increase resulted primarily from new business, inclusive of the Blue Shield of California and the State of Louisiana contracts. Our segment profit for the fourth quarter of 2012 was $77.7 million compared to $63 2 million for the fourth quarter of 2011. In 2012, we deployed capital to repurchase 459,000 shares at a cost of $23.1 million. And through the close of business on Friday, February 22, under the current $200 million authorization, we have repurchased approximately 1.5 million shares for a total cost of $74.4 million at an average price of $49.65. As of February 22, we had approximately 27 million shares outstanding. I’ll now review each of the segments results beginning with commercial. Fourth quarter 2012 segment profit for the Commercial Behavioral Health segment increased $15.7 million from the fourth quarter of 2011. The increase was mainly due to the net impact of new business primarily Blue Shield of California, as well as favorable prior period Medical Claim Development recorded in the current year quarter, and favorable rate changes in excess of care trends. Segment profit for public sector increased $7.6 million from the prior year fourth quarter, mainly due to the impact of new business primarily in the State of Louisiana, which was partially offset by same-store membership decreases in care trends. Fourth quarter 2012 segment profit for the Radiology Benefits Management segment was down $4.9 million from the fourth quarter of 2011. This decrease was mainly due to margin compression on reprice contracts and to terminated business which were partially offset by earnings from new business. The specialty pharmaceutical segment results were comparable to the prior year quarter. Our Medicaid Administration segment generated fourth-quarter 2012 segment profit that was $2.1 million lower than the prior year quarter. This decrease was mainly due to the net impact of a terminated MMIS contract in late 2011. Corporate cost excluding stock compensation expense were $1.5 million greater than in the fourth quarter of 2011, primarily due to expenses incurred to support our Medicaid and pharmacy growth initiatives. For the full year, we incurred investments in these strategic initiatives totaling approximately $15 million in operating expense and $10 million in capital expense. Excluding stock compensation expense, total direct service and operating expenses as a percentage of revenue were 17% in the current year quarter as compared to 18.3% in the prior year quarter. This year-over-year improvement is due to efforts to reduce administrative costs over the past year, as well as the business mix changes partially offset by higher investments in our Medicaid and pharmacy initiatives. The effective income tax rate for the year ended December 31, 2012 was 20% compared to 33.4% for the prior year. The decrease in the effective rate was mainly due to more significant reversals of tax contingency reserves in the current year. Now turning to cash flow and balance sheet highlights. Our cash flow from operations for the year ended December 31, 2012 was $181.3 million compared to cash flow from operations of $112 million for the prior year period. The cash flows for 2012 include the negative impact of a shift of restricted investments into restricted cash in the amount of $16.7 million, which is reflected as a use of cash from operations and a source of cash from investing activities. Cash flows for 2011 included the negative impact of a shift of restricted investments to restricted cash in the amount of $62.3 million. (Inaudible) these transfers, cash flow from operations for 2012 totaled $198 million compared to $174.3 million for 2011 representing an increase in cash flow from operations of $23.7 million. This increase in cash flow from operations is mainly due to higher working capital needs in 2011 than in 2012. As of December 31, 2012, the company’s total unrestricted cash in investments was $302.3 million which represents an increase of $119 million from the balance at December 31, 2011. Approximately $47.3 million of the total unrestricted cash in investments at December 31, 2012 is related to excess capital in undistributed earnings held at regulated subsidiaries. The year-end cash balance is net of cash used for 2012 share repurchases of $21.9 million. The company’s restricted cash in investment balance at December 31, 2012 of $347.4 million reflects an increase of $24.1 million from the balance of December 31, 2011. This increase was primarily associated with new contracts. Related to 2013, we are maintaining the ranges discussed in our December guidance call for revenue of $3.56 billion to $3.74 billion, net income of $91 million to $109 million and segment profit of $250 million to $270 million. Based upon the impact of share repurchase activity through February 22, 2013, but not considering any potential future share repurchases, we are adjusting our diluted weighted average shares outstanding for the year to $27.8 million, which translates to a fully diluted EPS guidance range of $3.27 to $3.92. I’m very pleased with our strong finish to 2012. We achieved these results while continuing to make significant investments in our medicaid and pharmacy growth strategies, which I believe, positions us very well for success in 2013 and beyond. And with that, I’ll now turn the call back to Barry.

[Barry M. Smith:]

Thank you, Jon. I’d like to take a few minutes to talk about our strategic direction and our goals for success in 2013 and to the future. This is a very exciting time for us at Magellan as we’re entering our next phase of growth. We know that in the coming 24 months to 36 months, this will be an especially dynamic time, as the industry consolidates and the Affordable Care Act takes root with medicaid expansion and the creation of State, Federal and Commercial exchanges. As a result of these regulatory changes, we foresee market disruption for the traditional players, allowing for significant growth opportunities for innovative, agile companies in healthcare services such as Magellan. Let me spend a few moments on our Medicaid strategy. By virtue of our deep experience with specialty healthcare management, Magellan is uniquely positions to capitalize our new opportunities as state governments and CMS addresses the needs of special populations of previously unmanaged individuals. We have created entirely new models of care or special populations that integrate the pharmaceuticals, physical and behavioral health management of individuals with SMI, as well as individuals eligible for both Medicaid and Medicare. We’ve a significant platform upon which to build, a decades long track record of successful transformation in growth and we focus on innovation and execution. Our goal is to manage no less than $2.5 billion of medical spend by 2017 for targeted populations in the five to seven states in which we plan to have a presence either directly or in partnerships similar to those we’ve already consummated and we’re making good progress towards that goal. 2012 was a critical year as we put a structure in place, hired a talented team of professionals, built capabilities and products, and obtained the licenses needed to achieve our business objectives. 2013 will be a year of continued execution of our Magellan Complete Care programs and expansion of our Medicaid strategy. This is the right time for us to leverage our expertise as states are either reevaluating their existing programs that manages population or; are considering expanding and redefining them. For example, very recently the governors of Arizona, Ohio, now New Jersey, Florida have announced expansions of their Medicaid programs. The Medicaid market is growing under healthcare reform. Magellan Complete Care of Florida has received both an insurance license and an HMO license and we anticipate being able to enroll members in the later half of this year. To offer some perspective on this market, the estimated annual spend on individuals with SMI in Florida is approximately $20,000 a year. So that managing even a small portion of the estimated 115,000 individuals with SMI in the regions of the state that we are targeting would represent a significant revenue opportunity for us. In Massachusetts, our Fallon Total Care joint venture has been awarded the opportunity to manage the under 65 dual eligibility population in the 10 counties for which we bid. Our decision to move forward in each of the counties will be predicated on adequate final rate supported by our contracts with network providers. We are particularly enthusiastic about the opportunities that leverage our significant and growing pharmacy expertise. We offer a wide variety of unique and innovative pharmacy solutions to transform the way drugs are managed in today’s system. The current marketplace is fragmented and inefficient with drug reimbursement spread across both pharmacy and medical benefits and delivered through multiple uncoordinated distribution channels including retail, mail, physician offices, home infusion and facility inpatient and outpatient settings. This fragmentation is particularly troubling as it compromises quality of care and increases cost to customers and to consumers. Our vision is to create an entirely new approach, one met traditional PBMs cannot easily replicate so that we can lower the total drug spend, while improving the health of the patients that we serve. Under total drug solutions strategy, we offer a suite of clinical and cost management solutions that integrate our specialty, medical pharmacy and PBM capabilities. Our solutions offer customers a comprehensive approach to managing the quality of cost of pharmaceutical care for any drug at any provider set of service under any benefit. We had several competitive advantages in the space. First, our unique medical pharmacy product focuses on the comprehensive management of specialty drugs paid under the medical benefit and administered by physicians. This product has produced proven results for the past five years utilizing rational reimbursement schedules, enhanced clinical management and dosage and claims errors. Others in the industry are just beginning to pilot limited programs but lacked the full range of capabilities and experience that we already possess. Second, our specialty rebate and formulary product focus is on the patient, not on distribution volumes and has best-in-class rebates with the market shares in excess of national levels. Third and critically important, we bring Magellan’s unmatched depth of clinical expertise and capabilities across traditional pharmacy, specialty and medical pharmacy to provide integrated management of complex conditions across traditional boundaries to drive the best outcomes and costs for patients. These are all things that today’s traditional PBM approach misses. Magellan already has an impressive presence in the drug management marketplace. We currently serve 41 health plans and employers across our specialty product lines, many of which are large national and regional plans and we provide our medical pharmacy products to approximately 8 million members. We also provide Medicaid pharmacy benefit management to 24 states and the districts of Columbia and we processed nearly 190 million pharmacy claims last year alone. This mix is one of the largest adjudicators of pharmacy claims in the country. The initial target markets for our suit pharmacy solutions are commercial and Medicaid health plans or self [insurance] with more than 10,000 lives, state exchanges and state Medicaid programs. With the estimated total annual U.S. drug spend off over $300 billion; we believe we can produce significant growth from Magellan by addressing only a small portion of the market. Our goal over the next five years is to generate pharmacy revenues in excess of $2.5 billion. This will be another transformational event for us, considering today that our pharmacy solutions produced approximately $575 million of revenue. I’m very enthusiastic about our prospects in the pharmacy space, as someone with a deep background in this area, I can tell you that Magellan is defining the future as the entire model forecasting pharmacy spend is evolving. With regard to healthcare reform, insurance exchanges will be in the new marketplace for individuals and small businesses. And we are seeing enhanced activity in this area, as States and Health plans as well as employers decide on their approach to exchanges; we are engaged with them regarding the role we can play in the design and the implementation of their qualified health plans. We believe that future changes will provide us an opportunity to continue to add value to our health plan partners by managing high cost benefits, as well as populations. We see the potential to leverage our unique experience with the types of members who will move back and forth between Medicaid and exchanges as a differentiator for commercial customers who have less experience with this cohort’s utilization and benefit design. We’re also pursuing opportunities to provide PBM services for health plans and co-ops that will operate in the new exchanges. In the dramatically changing healthcare environment, Magellan is determined to be a positive force for change. We have unique and clinically based expertise, a talented team and a clear focus on what must be done to succeed. As I’ve been traveling around the country and meeting with employees, customers and investors we’ve been discussing our next phase of growth which we are calling Magellan 2.0. We are well on our way and believe that 2013 will be yet another year of growth and innovation. I will now turn the call over to the operator for questions. Operator?

[Operator:]

Thank you, sir. (Operator Instruction) Our first question comes from Carl McDonald with Citigroup. Sir, you may ask your question.

[Carl McDonald:]

Hey, thank you. So, on the – going from $570 million in pharmacy spend to $2.5 billion, is that something you think you can do organically and with your existing set of capabilities? Or, to get to that kind of a number do you think you would either need to buy something, whether to add revenue, or to add a capability that you don’t have today?

[Barry M. Smith:]

Well, Carl, we believe that we have very strong clinical capabilities that are very unique in the industry, so we can grow organically. But we also think there is a strong opportunity for acquisition as well in this space. My sense is that, we’ll do both, and we’ll pursue both quite aggressively. So there is this great growth potential in both ways.

[Carl McDonald:]

And I think given the relative lack of understanding in the pharmacy market for a lot of people that follow Magellan, any potential size in terms of what the kind of capabilities you need would cost in the market today?

[Barry M. Smith:]

Well, we really don’t speculate on potential acquisitions. We’re clearly involved in the market and talking to many in the industry. And we cant really say with any specificity of the timing or the size, but we are very aggressively pursuing the market.

[Carl McDonald:]

And then a separate question, any update on the pricing for the dual contract in Massachusetts or expectations around market share there?

[Barry M. Smith:]

Carl, it’s Jonathan, I’ll give you kind of quick update on the pricing situation in Massachusetts. At this point we’ve not yet received final rates, so we’ve got preliminary rates as to the other plans and we are in the process of evaluating those, discussing them with the state and CMS as well as finalizing our internal plans for care management and making sure that the rates in each of the counties support the value proposition that we need going forward. So that will play-out over the next 30 days. In terms of market share, it really does vary by county and as we are finalizing plans, we’ll certainly kind of update our estimates and probably in a position over the next quarter or so to share additional information.

[Carl McDonald:]

Okay. Thank you.

[Operator:]

Our next question comes from Joshua Raskin with Barclays. Your line is open.

[Joshua Raskin:]

Thank you. Good morning. Just the first question on the RBM contracts with Coventry and I’m just curious, I know there has been more expansion rates I believe with anything, but you guys have had discussions with Aetna around your PBM capabilities. I’m assuming there is someone over there that you guys know well enough to do that and just curious and your thoughts on the prospects assuming that merger goes through?

[Barry M. Smith:]

We are clearly focused on the business that we have and clearly much aware of the acquisition there and we would love to have an ongoing and positive relationship with Aetna through Coventry going forward. We do have friends we believe at Aetna and have great respect for Aetna as an operator, but we really don’t have anything definitive going forward in terms of any changes. We have our contract in place with Coventry. We’ve expanded with Coventry. We will continue to do so. We do have change of control provisions in there where we can endure, the contract can endure. So we really have no comment beyond that and we have a positive relationship with Coventry and we are looking forward to building that relationship with Aetna in the future as well.

[Joshua Raskin:]

And Barry when you say the contract would indoor to change of control does that mean that your contract is still in force even if there is a change of control. And can you remind us when the Coventry RBM contracts would expire?

[Barry M. Smith:]

Yes, that is correct. Our contract doesn’t toward door to the change of control that and the contract go through December of 2015. So we would anticipate no changes through that timeframe at least.

[Joshua Raskin:]

Okay. And then just looking at the cash balance again sort of rolling forward we don’t know our balance sheet yet, but rolling forward to 3Q balance sheet. I think you could add $225 million to $230 million of debt, still be under at 30% debt to cap and just based on the share price today it’s probably 16% of your shares outstanding its I calculate something on the ballpark at 19% accretive to buyback stock, and obviously you guys have the cash on hand to do that. So I’m just curious what sort of holding you back. I know 2012, it seems like maybe there was a loss going on and behind the seems and we didn’t really have the buyback, but would we expect 2013 at what point and sort of the cash balance too big for you guys not to just our buying back stock with the understanding that you have this massive debt capacity, because you have no debt yet?

[Barry M. Smith:]

Yes Josh, we had a great balance sheet. There is just no doubt about it. And we certainly look at share repurchase as a way to build value for our shareholders, but we also do it in a very balanced way. There are great opportunities in the marketplace for investing in our core businesses. We’ve talked a lot to today about Magellan Complete Care it’s just a tremendous opportunity that’s going to require investment and we want to very aggressively pursue those opportunities. This next 24 to 36 months is such a period of transition. It’s just an unusual time of opportunity. So we want to make sure we have an upgrade power to do that. We’ve got a great balance sheet as you point out. And also in terms of potential acquisitions, we’re just kind of keeping all options open. We are continuing our current share repurchase and what we’ve got $200 million authorization as Jon pointed out earlier; we’ve gone through about $75 million of that. So we’ll continue along that path. But we want to be very flexible and very thoughtful to really maximize shareholder return. Share repurchases is just one way of doing that. But we also like other options that we’re exploring now that we think can even accelerate our growth.

[Joshua Raskin:]

In accelerating the growth or just to push back a little, I think Jon mentioned it was $25 million of OpEx with CapEx in terms of the investments last year. So should we expect a huge acceleration? I mean just in terms of magnitude, they are reflecting 10% of your cash balance. So does that mean there is a big ramp up in that investment or is it still – or is it more the…

[Jonathan N. Rubin:]

Josh, let me take, kind of the investment piece and Barry may – can comment more strategically. First on the investment, we are expecting a ramp up in investment as we’ve talked about in 2013; also remember, as we enter markets, in some stage we also have to put up regulatory capital and depending on the size and success and the pace of our success that can be material as well. But I think as Barry pointed out, we’re also looking at acquisition opportunities, particularly in the Complete Care arena and Pharmacy that can help accelerate our growth. So I think all of those are potential capital needs that we want to pursue opportunistically.

[Barry M. Smith:]

Josh, we want to be real market leaders in these areas and again it’s – we look at as a real balanced approach. We’ll do share repurchase if we have (inaudible). But obviously want to also grow very aggressively through acquisition. So you’ll see kind of several notes played here. But we appreciate your comment and thoughts. And Josh, (inaudible) we extend at Miami.

[Jonathan N. Rubin:]

Okay. Looking forward to that I think we’ve got some interruption on the conference, just a moment; we’ll that get that cleaned up. I think we’re clear. All right, okay operator next question.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Michael Baker with Raymond James. Your line is open.

[Michael Baker:]

Thanks a lot. I was wondering in terms of the pipeline you gave us some color that you’re seeing opportunities arise in both the employer side and the health plans side. I was wondering if you could give us a sense of what level of switching you would anticipate in both given the dynamics of health pro forma I know there is quite amount of debate there? And I was figuring if you could way in on that dynamic.

[Jonathan N. Rubin:]

Michael, it’s very interesting and we have been working with our health plan partners and ourselves in some of the product development that we’re doing. We believe there is going to be significant churn in the market for individuals both between health plans and for us as a small group market, the Medicaid market. This is clearly not yet fully baked, but we do think that there will be a lot of movement between, on the exchange going forward. So we’re very closely following that. We’ve got both the regulatory fairness group that’s following that very closely and we’re working very closely with our health plans. But I don’t think that it’s fully understood yet what really will happen until its better defined.

[Michael Baker:]

And then I had a question for Jon. Jon I know you don’t typically comment on quarterly dynamics as it relates to 2013 but I just was wondering first half is there any factor that you don’t think is being properly weighted by the street. and then secondly, maybe common and general in terms of how first how might develop relative to second half?

[Barry M. Smith:]

Yeah, we don’t specifically give the quarterly guidance as you know Mike, nor to a necessarily comment on other peoples’ expectations. I will say though consistent with history. We do tend to have stronger earnings in the second half of the year, and that’s something if you look back, has occurred consistently and a piece honestly is because of one growth throughout the year. but also there are certain contracts specifically in a public sector where we have incentives that we’re able to earn and from an accounting standpoint, need the way to record them until we’ve demonstrated that we can earn them. So that tends to be weighted in the second half of the year. So I’d look at past patterns, but obviously there’s always with the caveat of normal volatility between the quarters.

[Michael Baker:]

Thanks for the update.

[Operator:]

Our next question comes from Scott Green with Bank of America Merrill Lynch. Your line is open. Scott J. Green – Bank of America Merrill Lynch Hi, thanks for the questions. First in specialty pharmacy, what margin profile should we think about that segment going forward as you make progress on your goal to $2.5 billion in revenues?

[Barry M. Smith:]

Well, first got the $2.5 billion is not specialty pharmacy that’s really inclusive of all pharmacy and specialty, but also the broader based pharmacy solutions that we’re building, which includes traditional PBM services where the revenue profile is very different, because you have the cost of drugs built in. But in terms of margins, again, if you look at the bulk of the revenue growth, because again, the way the revenue growth works is on a PBM as well as in specialty distribution across the drugs are falling through. You would expect those margins to be lower, similar to what you see in typical PBM earnings for example, versus more of the sort of fee based business that may be if you look back at our legacy would have been more predominant. Scott J. Green – Bank of America Merrill Lynch Okay, that’s helpful. And my next question is about the Radiology segment. It seems like a couple of your larger medicaid health plan customers had much higher than expected medical cost throughout the year, but that didn’t really seem to show up in your Radiology segment results. So could you talk about why there is not always a correlation there? And then I was also curious how you price new markets when your medicaid health plan customers enter a new state? Or you do get some percentage of their total revenue or do you work with them specifically on the radiology piece?

[Jonathan N. Rubin:]

On the first part, maybe we could share the answer there, so on the first part, the radiology benefit is the discrete – discretely managed benefit with unique considerations that don’t necessarily follow the same utilization patterns as you would see for a general healthcare. And that’s true not only in terms of any given health plan, that’s also true, dealing with the kinds of enrolling that we have, for example an SMI radiology spend per member is 5% of a spend if that was a non-SMI, it would still be 5% of the spend. Of course they’re hard greater core mobilities and an SMI individual (inaudible) that is it’s a discreet benefit managed in a discrete way. I think we do an exceptional job in the RBM industry. And so it doesn’t necessarily follow the medical trend that you would expect to see. It can to some degree but not necessarily.

[Barry M. Smith:]

Yeah. And the second part of your question, Scott, I mean it really varies significantly depending on the opportunity. So, if a health plan entering Medicaid for the first time, we’re leveraging whatever data is available. So, is there data that we have in the market from either other Medicaid players, or if there is a new Medicaid program, looking at fee-for-service data that the state or others may make available. And as you would normally underwrite determining how much savings opportunities there is and what opportunities to drive greater clinical yield. So, again, we have a very disciplined underwriting approach, a very strong actuarial team, a very data-driven in terms of our approach. Scott J. Green – Bank of America Merrill Lynch Okay. And lastly, could you talk about – could you quantify how much favorable reserve development that was in the quarter and specifically what drove the margin improvement in public sector? I think margins were over 9% in the quarter.

[Barry M. Smith:]

Yeah. In terms of prior development in the quarter, I mean it wasn’t material overall. There are some puts and takes by segment. Regarding your question on public sector in particular, we did see improvement in care trends in the quarter. Some of it driven by specific care initiatives we put in place, and some of it driven by better-than-expected care on some of our newer contracts where we are starting to get a much more complete view of overall trend. So we saw a little bit of both and you don’t expect that trends – the trends coming into the year were favorable. Now, if you look at earnings for public sectors are going on just going beyond just cost of care. We also saw favorable revenue to the run rate for the beginning of the year as a result to the dynamic I mentioned earlier, which is many of the contracts have incentives that you can earn on an annual basis, and those will get lumpy and tend to be in the latter quarter of the year. Scott J. Green – Bank of America Merrill Lynch Okay, thank you.

[Operator:]

And this time I like to turn the call back to Mr Barry Smith, sir you may begin.

[Barry M. Smith:]

Thank you all for joining us today for the conference call. We’re looking forward to speaking with you again in April, when we will discuss our first quarter 2013 results. Good day.