Q3 2008 Magellan Health Services Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Hello, and welcome to the Magellan Health Services third quarter earnings conference call. At this time all participants are in a listen only mode. After the presentation, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If there are any objections, you may disconnect at this time. I now would like to introduce your host, Renie Shapiro, Senior Vice President of Corporate Finance.

RENIE SHAPIRO, SVP, MAGELLAN HEALTH SERVICES: Good morning, and welcome to Magellan third quarter 2008 earnings conference call. This is Renie Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services. Here with me today are Magellan's President and CEO, Rene Lerer, and our Chief Financial Officer, Jon Rubin. They will discuss the financial and operational results of our third quarter ended September 30, 2008. Also joining us is our CFO Emeritus, Mark Demilio.

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, 2007, which was filed with the SEC on February 29, 2008, and in the Form 10-Q, which will be filed with the SEC later today.

In addition, please note that in this call we refer to segment profit. Segment profit is disclosed and defined in our Quarterly Report on Form 10-Q and on our Annual Report on Form 10-K, and is equal to net revenues less cost of care and cost of goods sold, direct service costs and other operating expenses, excluding stock compensation expense. Included in the tables for our press release issued this morning and in our Form 10-Q to be filed later today is the reconciliation from segment profit to the line items "income from continuing operations before income taxes and minority interest." We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure. Our Form 10-Q for the quarter ended September 30, can be found later today on our website, magellanhealth.com, under Investor Info.

I will now turn the call over to our President and CEO, Rene Lerer.

RENE' LERER, PRESIDENT, CEO, MAGELLAN HEALTH SERVICES: Good morning, everyone, and thank you for joining us today. Before we go into this quarter's results, I'd like to introduce and welcome our new CFO, Jon Rubin. Jon has been with us for just under two months now, and during that time has been through a whirlwind orientation and is now fully engaged in his new role. I'm truly delighted to have him at Magellan. Let me begin with some brief comments on the third quarter results, and then Jon will provide more details on the quarter, on our full-year outlook as well as provide directional commentary on 2009. In my closing remarks, I will provide a strategic outlook for our business including any update on key priorities and opportunities for growth as well as comment on the economy and regulatory environment.

I'm very pleased to report that this was another excellent quarter for Magellan. As you saw in the press release issued this morning, we have produced $57.6 million of segment profit in the third quarter ending September 30, 2008, and $164.6 million of segment profit for the year-to-date period ended September 30, 2008. These results were driven by strong performance from our growth segments, Radiology Benefits Management, Specialty Pharma, and Public Sector, and by slightly lower earnings in the two prior quarters in our commercial behavioral business. As we continue to achieve strong earnings growth in the acquisitions we made two years ago, we benefited from the strength of our diversified profit streams as earnings from Radiology and Specialty Pharma now approach 21% of our total segment profit before corporate expenses.

NIA results reflected continued strong cost of care and administrative cost management. While we are disappointed that we have not yet closed any new business, we continue to be quite bullish in our prospects. I will describe the NIA pipeline later on.

ICORE continue also to produce strong results and maintain consistent growth in the rebate consulting and distribution lines of business. As we discussed last quarter, the focus in our core distribution business is to supplement and support growth in the rebate business. Our continued success with ICORE rebate results is driven by not only our ability to add additional therapeutic classes to existing customers, but also our ability to move market share as well as successful ongoing negotiations with farmer manufacturers on rebate contracts.

The Public Sector experienced sustained favorable cost trends. We are pleased with the results from this very important sector, and I will address Maricopa commentary in later in my remarks.

In the commercial behavioral sector, results were down slightly from the last quarter, primarily due to the higher cost of care in one regional account, related to the addition of a new group of members with a different utilization profile. These new members and adjustments in plan design created unanticipated higher cost in this contract. In contrast to announcements by other managed care organizations regarding increasing utilization, we continued to not see any increase in utilization as a result of the economy. However, the impact of the one regional account combined with continued uncertainty related to the economy will continue to put pressure on commercial margins in 2008.

As you recall, at the end of the last quarter, we stated that we expected 2008 results to be in the upper half of our previous guidance ranges of $205 million to $225 million and $1.73 to $2.17 of earnings per share. Today we are confirming that we expect-- we continue to expect 2008 results to fall within those ranges of $215 million to $225 million of segment profit and $1.95 to $2.17 of EPS, based on the shares outstanding at September 30 and excluding any further share purchases in 2008. Also, as you know, on July 31, we announced that the board of directors had authorized a $200 million share re-purchase program to be executed over an 18 month period. During the balance of the third quarter, we re-purchased approximately 395,000 shares at a total cost, $16.7 million, which essentially had no impact on third quarter EPS. We will discuss our fourth quarter purchases during our 2009 February call when we review our full year 2008 results. The program remains in place, and further purchase will take into account share price opportunities, projected capital needs, M&A prospects, the status of credit markets, and our 2009 cash flow outlook.

To reiterate, we are very pleased with our third quarter and year-to-date results, and we continue to expect full-year 2008 earnings to be strong.

I'm now going to turn the call over to our CFO, Jon Rubin, who will walk through additional details and our strong third quarter results, our 2008 guidance, and our 2009 …