Business Overview
The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, TPAs, consultants and brokers. The Company's business is divided into three segments, based on the services it provides and/or the customers that it serves. See Item 1-"Business" for more information on the Company's business segments.
Results of Operations
The following table summarizes, for the periods indicated, consolidated operating results (in thousands):
Three Months Ended March 31, Change Consolidated Results 2019 2020 '19 vs '20 Statement of Operations Data: Net revenue$ 1,739,489 $ 1,794,307 3.2% Cost of Care 941,961 951,642 1.0% Cost of goods sold 489,793 486,142 (0.7%) Direct service costs and other operating expenses (1)(2) 271,924 287,731 5.8% Depreciation and amortization 30,708 28,684 (6.6%) Interest expense 9,107 9,029 (0.9%) Interest and other income (4,974) (3,759) (24.4%) Income before income taxes 970 34,838 3491.5% Provision for income taxes 539 16,588 2977.6% Net income$ 431 $ 18,250 4134.3%
(1) Includes stock compensation expense of
ended
(2) Includes changes in fair value of contingent consideration of
three months ended
Quarter ended
Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses
Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.
Depreciation and amortization
Depreciation and amortization expense decreased by 6.6 percent or
Interest expense
Interest expense was consistent with the Prior
Interest and other income
Interest income decreased by
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The Company's effective income tax rates were 55.6 percent and 47.6 percent for
the Prior
Segment Results
The Company manages and measures operational performance through three segments: Healthcare, Pharmacy Management and Corporate. The Company evaluates performance of its segments based on Segment Profit. Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Stock compensation expense and changes in fair value of contingent consideration recorded in relation to acquisitions are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.
Healthcare
The Healthcare segment includes the Company's: (i) management of behavioral
healthcare services and EAP services, (ii) management of other specialty areas
including diagnostic imaging and musculoskeletal management, and (iii) the
integrated management of physical, behavioral and pharmaceutical healthcare for
special populations, delivered through Magellan Complete Care. The Healthcare
segment's
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The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in thousands):
Three Months Ended March 31, Change Healthcare Segment Results 2019 2020 '19 vs '20Behavioral & Specialty Health revenue Risk-based, non-EAP$ 361,808 $ 349,580 (3.4%) EAP risk-based 89,617 79,939 (10.8%) ASO 55,203 59,122 7.1% Magellan Complete Care revenue Risk-based, non-EAP 642,571 703,369 9.5% ASO 15,054 16,664 10.7% Managed care and other revenue 1,164,253 1,208,674 3.8% Cost of care 941,961 951,642 1.0% 222,292 257,032 15.6% Direct service costs and other 179,190 196,909 9.9% 43,102 60,123 39.5% Stock compensation expense 1,750 2,021 15.5% Changes in fair value of contingent consideration 144 - Segment Profit$ 44,996 $ 62,144 38.1% Direct service cost as % of revenue 15.4% 16.3% MLR Behavioral & Specialty Health risk 86.0% 83.6% MLR Behavioral & Specialty Health EAP risk 64.8% 71.1% MLR Magellan Complete Care risk 89.2% 85.7% MembershipBehavioral & Specialty Health Risk (1) 11,754 10,329 (12.1%) EAP risk 15,227 14,129 (7.2%) ASO 26,719 24,529 (8.2%) Magellan Complete Care Risk 139 160 15.1% ASO 23 25 8.7% 53,862 49,172 (8.7%)
(1) May include some duplicate count of membership for customers that contract
with Magellan for both behavioral and other specialty management services.
Managed care and other revenue
Net revenue increased by 3.8 percent or
Cost of care
Cost of care increased by 1.0 percent or
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Quarter of
Direct service costs and other
Direct service costs increased 9.9 percent or
Recent Developments - MCC Stock and Asset Purchase Agreement
On
The consummation of the MCC Sale is subject to customary closing conditions, including: (i) the expiration of the waiting period applicable to the Purchase Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the absence of any law or governmental order prohibiting the MCC Sale, (iii) obtaining all required consents, authorizations, permits and approvals under Health Regulatory Laws (as defined in the Purchase Agreement), (iv) no material adverse effect on the Company having occurred since the signing of the Purchase Agreement, and (v) the accuracy of the representations and warranties of each party (subject to materiality qualifiers) in the Purchase Agreement and the compliance by each party with its covenants in all material respects. The consummation of the MCC Sale is not subject to any financing contingency.
In connection with the MCC Sale, the Company and Molina are entering into commercial agreements for certain behavioral health, utilization management and related services to be provided by the Company to Molina and the MCC business. In addition, the parties will enter into a transition services agreement pursuant to which the Company and certain of its affiliates will provide, or cause third parties to provide, certain services to accommodate the transition of the MCC business to Molina.
The foregoing description of the Purchase Agreement and the MCC Sale does not purport to be complete and is qualified in its entirety by the terms and conditions of the Purchase Agreement attached hereto as Exhibit 2.1 and any related agreements.
Pharmacy Management
The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management's services include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs; and (vi) programs for the integrated management of specialty drugs. Pharmacy Management's services are provided under contracts with health plans, employers, state Medicaid programs, Medicare Part D and other government agencies.
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The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):
Three Months Ended March 31, Change Pharmacy Segment Results 2019 2020 '19 vs '20 Formulary management$ 17,183 $ 22,161 29.0% PBA and other 42,712 42,274 (1.0%) Managed care and other revenue 59,895 64,435 7.6% PBM, including dispensing 493,224 518,112 5.0% Medicare Part D 63,341 55,666 (12.1%) PBM revenue 556,565 573,778 3.1% Total net revenue 616,460 638,213 3.5% Cost of goods sold 530,207 537,574 1.4% 86,253 100,639 16.7% Direct service costs and other 79,635 81,866 2.8% 6,618 18,773 183.7% Stock compensation expense 1,672 2,107 26.0% Segment Profit$ 8,290 $ 20,880 151.9% Direct service cost as % of revenue 12.9% 12.8% COGS as % of PBM revenue 95.3% 93.7% Pharmacy Operational Statistics Adjusted commercial network claims 6,845 6,740 Adjusted PBA claims 19,867 17,831 Total adjusted claims 26,712 24,571 Generic dispensing rate 87.6% 87.2% Commercial PBM covered lives 1,910 1,760 Medical pharmacy covered lives 13,936 16,046
Total states and DC that participate in PBA 27 26
Managed care and other revenue
Managed care and other revenue increased by 7.6 percent or
PBM revenue
PBM revenue increased by 3.1 percent or
Cost of goods sold
Cost of goods sold increased by 1.4 percent or
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Direct service costs and other
Direct service costs increased by 2.8 percent or
Corporate Segment
The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.
The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):
Three Months EndedMarch 31 , Change
Corporate Segment & Eliminations 2019 2020 '19 vs '20
Managed care and other revenue
(41,055) (52,407) 27.7% Cost of goods sold 40,414 51,432 27.3% (810) (1,148) 41.7%
Direct service costs and other 13,099 8,956 (31.6%)
(13,909) (10,104) (27.4%) Stock compensation expense 6,185 1,929 (68.8%) Segment Loss$ (7,724) $ (8,175) 5.8%
The Corporate segment loss increased by 5.8 percent or
Inter segment revenues and expenses
Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare's customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company's employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated within the Corporate segment.
Non-GAAP Measures
The Company reports its financial results in accordance with GAAP; however, the Company's management also assesses business performance and makes business decisions regarding the Company's operations using certain non-GAAP measures.
In addition to Segment Profit, as defined above, the Company also uses adjusted
net income attributable to Magellan ("Adjusted Net Income") and adjusted net
income per common share attributable to Magellan on a diluted basis ("Adjusted
EPS"). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for
acquisitions completed after
34 Table of Contents The following table reconciles income before income taxes to Segment Profit (in thousands): Three Months Ended March 31, 2019 2020 Income before income taxes$ 970 $ 34,838 Stock compensation expense 9,607 6,057 Changes in fair value of contingent consideration 144 - Depreciation and amortization 30,708 28,684 Interest expense 9,107 9,029 Interest and other income (4,974) (3,759) Segment Profit$ 45,562 $ 74,849
The following table reconciles Adjusted Net Income to net income (in thousands):
Three Months Ended March 31, 2019 2020 Net income$ 431 $ 18,250 Adjusted for acquisitions starting in 2013 Changes in fair value of contingent consideration 144 - Amortization of acquired intangibles 12,272 14,191 Tax impact (3,282) (3,816) Adjusted Net Income$ 9,565 $ 28,625 The following table reconciles Adjusted EPS to net income per common share-diluted: Three Months Ended March 31, 2019 2020 Net income per common share-diluted$ 0.02 $ 0.73 Adjusted for acquisitions starting in 2013 Changes in fair value of contingent consideration 0.01 - Amortization of acquired intangibles 0.50 0.57 Tax impact (0.13) (0.15) Adjusted EPS$ 0.40 $ 1.15 Outlook-Results of Operations
The Company's Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 2-"Forward-Looking Statements" as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company's risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); (vi) the timing of acquisitions; (vii) changes in estimates regarding medical costs and IBNR; (viii) the timing of recognition of pharmacy revenues, including rebates and Medicare Part D; and (ix) changes in the estimates of contingent consideration.
A portion of the Company's business is subject to rising care costs due to an increase in the number and frequency of covered members seeking healthcare services and higher costs of such services. Many of these factors are beyond the Company's control. Future results of operations will be heavily dependent on management's ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.
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Interest Rate Risk. Changes in interest rates affect interest income earned on
the Company's cash equivalents and investments, as well as interest expense on
the variable interest rate borrowings under the 2017 Credit Agreement. In
addition, interest rates on the Notes are subject to adjustment upon the
occurrence of certain credit rating events. Based on the amount of cash
equivalents and investments, the borrowing levels under the 2017 Credit
Agreement and the principal amount of the Notes as of
Historical-Liquidity and Capital Resources
Operating Activities. The Company reported net cash provided by operating
activities of
The net unfavorable impact of working capital changes between periods totaled
Segment Profit for the
Investing Activities. The Company utilized
During the Prior
Financing Activities. During the Prior
During the
Outlook-Liquidity and Capital Resources
Liquidity. The Company may draw on the 2017 Credit Agreement (discussed further
below) as required to meet working capital needs associated with the timing of
receivables and payables, fund share repurchases or support acquisition
activities. The Company currently expects to have adequate liquidity to satisfy
its existing financial commitments over the periods in which they will become
due. At
Stock Repurchases. On
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the current
Off-Balance Sheet Arrangements. As of
Credit Agreement. On
Restrictive Covenants in Debt Agreements. The 2017 Credit Agreement contains covenants that potentially limit management's discretion in operating the Company's business by, in certain circumstances, restricting or limiting the Company's ability, among other things, to:
? incur or guarantee additional indebtedness or issue preferred or redeemable
stock;
? pay dividends and make other distributions;
? repurchase equity interests;
? make certain advances, investments and loans;
? enter into sale and leaseback transactions;
? create liens;
? sell and otherwise dispose of assets;
? acquire or merge or consolidate with another company; and
? enter into some types of transactions with affiliates.
These restrictions could adversely affect the Company's ability to finance future operations or capital needs or engage in other business activities that may be in the Company's interest.
The 2017 Credit Agreement also requires the Company to comply with specified
financial ratios and tests. Failure to do so, unless waived by the lenders under
the 2017 Credit Agreement pursuant to its terms, or amended, would result in an
event of default under the 2017 Credit Agreement. As of
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
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relation to revenue recognition under ASC 606 which are explained in more detail
in Note A-"General - Revenue Recognition." Actual results could differ from
those estimates. Except as noted above, the Company's critical accounting
policies are summarized in the Company's Annual Report on Form 10-K, filed with
the
Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that its plans, intentions and expectations as reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include:
? the Company's inability to renegotiate or extend expiring customer contracts,
or the termination of customer contracts;
? the Company's inability to integrate acquisitions in a timely and effective
manner;
risks relating to the Company's proposed sale of the MCC business to Molina,
including the ability of the Company to realize the expected benefits of the
? transaction, the ability of the Company to obtain regulatory approvals for the
transaction and to satisfy other closing conditions, and the ability of the
parties to close the transaction in the anticipated timeframe;
changes in business practices of the industry, including the possibility that
certain of the Company's managed care customers could seek to provide managed
healthcare services directly to their subscribers, instead of contracting with
? the Company for such services, particularly as a result of further
consolidation in the managed care industry and especially regarding managed
healthcare customers that have already done so with a portion of their
membership;
the impact of changes in the contracting model for Medicaid contracts,
? including certain changes in the contracting model used by states for managed
healthcare services contracts relating to Medicaid lives;
? the Company's ability to accurately predict and control healthcare costs, and
to properly price the Company's services;
the Company's ability to accurately underwrite and control healthcare costs
? associated with its expansion into clinically integrated management of special
populations eligible for Medicaid and Medicare, including individuals with
serious mental illness and other unique high-cost populations;
? the Company's ability to maintain or secure cost-effective healthcare provider
contracts;
? the Company's ability to maintain relationships with key pharmacy providers,
vendors and manufacturers;
? fluctuation in quarterly operating results due to seasonal and other factors;
? the Company's dependence on government spending for managed healthcare,
including changes in federal, state and local healthcare policies;
? restrictive covenants in the Company's debt instruments;
? present or future state regulations and contractual requirements that the
Company provide financial assurance of its ability to meet its obligations;
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the impact of the competitive environment in the managed healthcare services
? industry which may limit the Company's ability to maintain or obtain contracts,
as well as its ability to maintain or increase its rates;
? the impact of healthcare reform legislation;
? the Mental Health and Substance Abuse Benefit Parity Law and Regulations;
? government regulation;
? proposed changes to current Federal law and regulations;
? noncompliance with regulations;
? the Company's participation in Medicare Part D is subject to government
regulation;
? failure to maintain satisfactory Medicare and Medicaid quality performance
measures;
? the unauthorized disclosure of sensitive or confidential member or other
information;
? a breach or failure in the Company's operational security systems or
infrastructure, or those of third parties with which it does business;
? risk associated with outsourcing services and functions to third parties;
? the possible impact of additional regulatory scrutiny and liability associated
with the Company's Pharmacy Management segment;
? the inability to realize the value of goodwill and intangible assets;
? pending or future actions or claims for professional liability;
? claims brought against the Company that either exceed the scope of the
Company's liability coverage or result in denial of coverage;
? class action suits and other legal proceedings;
? negative publicity;
? the impact of governmental investigations;
? the impact of varying economic and market conditions on the Company's
investment portfolio;
? the state of the national economy and adverse changes in economic conditions;
? the Company's ability to successfully implement its margin improvement
initiatives and plans;
? tax matters, including changes in corporate tax rates, disagreements with
taxing authorities and imposition of new taxes;
? the impact to contingent consideration as a result of changes in operational
forecasts and probabilities of payment; and
the impact of an epidemic or health crisis such as the COVID-19 pandemic,
? natural disasters, political disruptions, acts of war or terrorism,
cybersecurity attacks or other data breaches or intrusions and other
extraordinary events. 39 Table of Contents
Further discussion of factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements is
set forth under the heading "Risk Factors" in Item 1A of Magellan's Annual
Report on Form 10-K for the year ended
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