M&A Announcement

May 1, 2020

Welcome and thank you for standing by for the Magellan Complete Care Call. At this time, all participants are in listen only mode. 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. Good morning, and thank you for joining today's call to discuss the sale of the Magellan Complete Care business unit to Molina Healthcare. With me today are Magellan's CEO, Ken Fosola and our CFO, John Rubin. Although we'll not be taking any questions on today's call, we will provide opportunities for questions during our Q1 earnings call scheduled for May 11. A replay of this call will be available shortly after the conclusion through May 31, 2020. The numbers to access the replay can be found in today's press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 1, 2020, and have not been updated subsequent to the initial earnings call. During our call, we'll make forward looking statements, including statements related to our 2020 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release yesterday and documents we filed with or furnished to the SEC. In addition, please note that Magellan uses certain non GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, which is defined in our SEC filings. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries, but excludes segment profit from non controlling interests held by other parties, stock compensation expense, special charges or benefits as well as changes in the fair value of contingent consideration recorded in relation to acquisitions. I will now turn the call over to our CEO, Ken Fisola. Ken? Thank you, Joe, and good morning, everyone. In our 2019 earnings call in February, I noted that there was a need to focus our strategy, create and sustain market leading positions for our services and deliver on our commitments. To that end, I initiated a comprehensive portfolio analysis of our businesses to evaluate our value proposition, brand and growth potential in each of the markets served. While we were conducting this review, we received inbound interest on our Magellan Complete Care portfolio. Working in conjunction with the leadership team and the Magellan Board of Directors, we accelerated our review and made the decision to capitalize on the opportunity. Yesterday evening, we announced the sale of MCC to Molina Healthcare for $850,000,000 Let me provide you with additional details of the transaction, including the strategic rationale for the sale. We've achieved significant growth in MCC over the last 7 years, and while we've made operational and profitability improvement over the last year, there is still more work to accomplish in the near term. We've created a foundation of strong value, which Molina can further build upon by leveraging their scale and expertise. Molina is one of the nation's most experienced and largest Medicaid managed care organization that services 14 states and recognized total revenue in excess of $16,000,000,000 in 2019. MCC and Molina have complementary cultures, mission, strengths and capabilities. In recognition of these complementary capabilities, we're excited to announce that Molina has entered into various long term contractual agreements with Magellan, including new medical pharmacy and musculoskeletal management contracts for over 3,000,000 Molina members and retaining Magellan for behavioral health, radiology and musculoskeletal management services in certain MCC markets. In addition, Molina and Magellan have also agreed to develop an integrated behavioral health pilot in Virginia. The purpose of the pilot is to develop a best practice model using data, technology and care coordination processes to improve quality and lower total medical costs. In the future, the model may be used by used in other Molina markets and as the basis for our Magellan offerings to the broader market. I'd also note that Magellan Rx Management will continue the existing pharmacy benefit management relationship within MCC. We're very proud of the team that helped build Magellan Complete Care from an initial concept 7 years ago into a business that had revenue of over $2,700,000,000 in 2019. We believe that transitioning this asset to Molina creates a win win opportunity for both companies. This is an attractive deal for Magellan shareholders and provides us with additional financial flexibility to make the necessary investments to further elevate our behavioral health products and position Magellan as the leading independent payer services company offering behavioral, specialty and pharmacy management services. We'll be reporting a more detailed historical view of MCC Financials starting with our 2nd quarter earnings call. But I'd note that MCC segment profit and stock compensation expense for full year 2019 was $33,000,000 $3,000,000 respectively. The $850,000,000 purchase price is a strong EBITDA multiple, which reflects the earnings potential of the business we built, a portion of which we're expecting to capture in 2020 as a result of our profitability improvement initiatives. Additionally, Magellan Health will receive an equal amount I'm sorry, an amount equal to any excess capital above regulatory requirements at Magellan Complete Care subsidiaries at closing, which was approximately $75,000,000 at December 31, 2019. Finally, the sale eliminates the risk of Magellan's ability to execute on its MCC profitability improvement initiatives and allows the leadership team to focus on the remaining businesses, improving the services we provide to our customers and members and further enhancing our ability to succeed in these areas. The bottom line financially is that this represents a very attractive multiple, allows us to focus on remaining businesses and finds a good home for MCC, leveraging Molina's scale and added expertise. We remain excited about the growth prospects for our behavioral, specialty and pharmacy businesses moving forward. Let me start with our views on behavioral health. Through my onboarding process as CEO, I've had the opportunity to meet with many managed care executives at local, regional and national health plans as well as health care leaders within state governments. I consistently heard the same message in these meetings, fully integrating behavioral and physical health is a challenge. Unfortunately, these challenges will only become more pronounced because of the additional anxiety, stress, isolation and depression brought on by the coronavirus pandemic. A 2017 Millman study estimates additional healthcare costs incurred by people with behavioral comorbidities to be over $400,000,000,000 across commercially insured, Medicaid and Medicare beneficiaries in the United States. Most of the increased costs for these or those with comorbid behavioral health and substance abuse disorder conditions is attributed to physical health services, creating a large opportunity for total medical cost savings through the integration of behavioral and physical health services. We are uniquely qualified to help payers capture these potential savings based upon our sovereign skills and extensive experience in managing the care for persons suffering with acute and chronic behavioral health conditions. Tapping into this integration opportunity is not a business as usual solution. We've been working in earnest to enhance our behavioral health services by developing or acquiring capabilities for additional self-service, telemedicine, digital and primary care collaboration solutions that will allow for better, more efficient member and provider experiences and an increased value proposition to payers. We see near term opportunities to displace competitors, both in the commercial and government marketplace due to recent ownership and management challenges. We're also excited to continue our integrated behavioral health program with Molina in Virginia under a new economic model based upon the total health care spend where both parties can share in savings created by holistic care management. Longer term, we see the potential for Magellan to assume the full physical and behavioral health risk for the management of specific populations like members suffering from severe and persistent mental illness or those with substance use disorders. This is where the behavioral health market is moving and where we see our ability to generate health care savings for payers. In our specialty health care business, we see opportunities to strengthen and deliver our existing services more efficiently and to expand our suite of management solutions to cover additional high cost, high trend areas of healthcare spend. Finally, within our pharmacy management segment, we feel uniquely positioned to capitalize organically via acquisitions on the emerging trends in the market. 1st, state Medicaid programs are seeking additional savings and transparency by carving out pharmacy benefits from managed care. Magellan Rx is the market leader, the largest Medicaid pharmacy benefit administrator in the country with proven capabilities and programs as demonstrated by the recent win of the Medi Cal contract with over 3,000,000 lives. 2nd, total pharmacy spend continues to shift away from traditional drugs to specialty drugs administered either under the pharmacy or medical benefit. Magellan Rx evolved from our roots in specialty drug management. We've been delivering market leading and sophisticated specialty drug management solutions for over 15 years as evidenced by our robust and long standing relationships with many large regional health plans and over 15,000,000 lives under management in our industry leading medical pharmacy program. 3rd, national managed care plans have merged with the largest PBMs. Magellan Rx will be the only publicly traded PBM that will not be affiliated with a managed care organization, offering alternatives for both independent health plans who want to avoid channel conflict and self funded employers who are not getting the attention and service they need from the jumbo PBMs. In addition to the standalone services of our unique businesses, we're also exploring new opportunities to manage members through programs that integrate services across our business. For example, our Live Vibrantly Whole Health program is an innovative solution that focuses on behavioral health and opioid management, utilizing specially trained pharmacists with certifications in pain management and psychiatry. The program educates providers and leaves them with the tools and resources necessary to make informed decisions regarding treatment for their patients. Clients have seen positive outcomes like reductions in pharmacy spend, hospitalizations and emergency room visits, resulting in lower overall cost and improved quality of care. Now let me turn the call over to John to highlight some of the financial details associated with the transaction. Thanks very much, Ken, and good morning, everyone. As Ken mentioned in his opening remarks, Magellan will receive $850,000,000 in cash at closing from the sale of MCC to Molina. MCC includes our Medicaid and Medicare Managed Care operations in the states of Massachusetts, New York, Virginia, Florida and Arizona. MCC also includes our Medicaid ASO contract for the management of long term care service supports in Wisconsin. The terms of the transaction also allow us to receive an amount equal to any excess surplus in the NCC subsidiaries at closing. As of December 31, 2019, MCC excess surplus was $75,000,000 of the total company's $135,000,000 of unrestricted cash held at subsidiaries. We estimate taxes and fees associated with the transaction to be between $80,000,000 $85,000,000 We intend to use the proceeds from the NCC transaction and the associated release of the excess capital from NCC to 1st, repay a portion of our debt to maintain a target leverage ratio and second, invest in enhancing and growing our behavioral specialty and pharmacy management businesses, both organically and through acquisition. To the extent we project having excess capital, we'll continue to consider repurchasing shares. Now as Ted noted, we have entered into an ongoing management contract with Molina related to both the MCC and the Greater Molina populations. We expect that the initial annual incremental revenue associated with these contracts to be between $125,000,000 $150,000,000 with opportunities for future growth. Given the estimated timeline to receive the regulatory approvals from the various states involved, we anticipate that the closing will occur by the end of the Q1 of 2021. We will begin reporting MCC separately as discontinued operations with our 2nd quarter earnings. So I'll provide some context for the portion of our 2020 guidance that is attributable to MCC. Revenue of $2,900,000,000 segment profit of approximately $80,000,000 stock compensation of approximately $3,000,000 depreciation and amortization of approximately $29,000,000 and interest income of approximately $6,000,000 In addition, we estimate that the annual stranded overhead following the closing of the transaction will be approximately $10,000,000 to $15,000,000 For the 1st 12 months following the closing of the transaction, we expect the majority of this to be offset by revenue from the transition services that we will provide to Molina. And with that, I'll now turn the call back over to Ken for a few closing comments. Ken? Thanks, John. I'd like to reemphasize the benefits to Magellan this deal brings: an attractive price on business we are very proud to have built over the last 7 years Financial flexibility to invest in businesses that strengthen or add to our existing core capabilities and consistent with what I stated when I arrived, which is a renewed focus on a smaller number of strategic segments. I'm delighted with how quickly we've been able to pivot our focus and create balance sheet strength and flexibility. This positions us attractively to meet the increasing needs, demands of a challenging marketplace and provides excellent growth potential in the near and longer term. I'm very enthusiastic about the future as we quickly refocus our strategy. I'd also like to thank the individuals across the organization who have worked under very short time frames while adopting and adapting to the unprecedented challenges of sheltering in place to support the deal and congratulate them on a job well done. We look forward to speaking with you again at our Q1 earnings call on May 11, where we'll provide an opportunity for questions and answers. Thank you. Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.