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Edited Transcript of MGLN earnings conference call or presentation 24-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Magellan Health Inc Earnings Call

AVON Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Magellan Health Inc earnings conference call or presentation Friday, February 24, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Bogdan

Magellan Health Inc. - SVP, IR

* Barry Smith

Magellan Health Services, Inc. - Chairman, CEO

* Jon Rubin

Magellan Health Services, Inc. - CFO

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Conference Call Participants

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* Dave Styblo

Jefferies LLC - Analyst

* Michael Baker

Raymond James & Associates, Inc. - Analyst

* Josh Raskin

Barclays Capital - Analyst

* Jason Twizell

KeyBanc Capital Markets - Analyst

* Anagha Gupte

Leerink Partners - Analyst

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Presentation

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Operator [1]

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Welcome. And thank you for standing by for the fourth quarter 2016 earnings call. At this time all participants in a listen-only mode. (Operator Instructions) This call is being recorded if you have any objections you may disconnect at this time. Now I will turn the meeting over to Joe Bogdan Senior Vice President of Investor Relations at Magellan.

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Joe Bogdan, Magellan Health Inc. - SVP, IR [2]

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Good morning, and thank you for joining Magellan Health fourth quarter 2016 earnings call. With me today are Magellan's Chairman and CEO, Barry Smith and our CFO, Jon Rubin. The press release announced our fourth quarter earnings was distributed this morning. Our replay of this call will be available shortly after the conclusion of the call through March 3rd. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of the presentation, we remind you that the remarks made here in are as of today, Friday, February 24th, 2017 and have not been updated subsequent to the initial earnings call.

During our call we will make forward-looking statements, including statements related to our growth prospects and our 2017 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 would like listeners to review the risk factors discussed in our press release this morning 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 profits adjusted net income and adjusted EPS which are defined in our SEC filings and in today's press release. 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.

Adjusted net income and adjusted EPS reflects certain adjustments made for the acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restrictive stock purchases by sellers. Changes in the fair value of contingent consideration amortization of identified acquisition intangibles as well as impairment of identified acquisition intangibles. Please refer to the tables included with this morning's press release which is available on our website for the reconciliation of the non-GAAP measures to the corresponding GAAP measures.

I will now turn the call over to our Chairman and CEO, Barry Smith.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [3]

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Thank you, Joe. And good morning and thank you all for joining us today. During the past several years we have repositioned our company and laid the foundation for accelerated growth ahead. Our value proposition, integrated approach, and decades of expertise working with special populations have all converged to position Magellan as a leader in providing solutions for managing complex populations and conditions across the health care continuum. We are now focused and poised for growth in 2017 and beyond. We diversified our businesses and have significantly reduced our customer and business segment concentration. Our health care and pharmacy businesses now each comprise approximately half of our revenue. And we've aligned our products and services to address the current and future needs of both our commercial and government customers.

We've reinforced and strengthened our leadership team with individuals who bring decades of experience in their respective areas. This is particularly important as we navigate this new area -- era of health care reform. As I reflect on this past year I'm particularly pleased with the execution and progress against our strategic initiatives during 2016. With our two growth platforms, Magellan RX management and Magellan Health Care, we are continuing to deliver innovative solutions for the fast-growing, most complex areas of health care.

Turning to the financial results, we reported revenue of $4.8 billion net income of $77.9 million and EPS of $3.22 per share. Our adjusted net income was $105.9 million, or $4.53 per share and we achieved segment profit of $301.8 million. We executed against our strategy and are very pleased with the results for the year. We increased our revenue by over 5% and segment profit by over 9% versus 2015. In addition we completed three new acquisitions. The management group, or TMG, the Armed Forces Services Corporation, or AFSE, and Veridicus, all of which helped to expand our capabilities. I will now discuss highlights for health care business beginning with the commercial market. The pipeline for new business opportunities remains strong. The combination of our long sales cycle and our commitment to pricing discipline will impact the timing and success of sales.

I'm delighted to announce that 2017 is off to a great start with two behavioral health wins implementing this year. Importantly these new health plan relationships that expand our customer base enable future opportunities for additional product sales. In our government market we were pleased to have been awarded a contract to participate in all six regions of Virginia's managed long-term services and support services initiative, also known as the Commonwealth Coordinated Care Plus Program. We will be one of six plans that will serve approximately 214,000 individuals with complex care needs through an integrated care model.

MLTSS members will be phased in by region from August through December 2017. The current medallion program's aged, blind, and disabled cohort will transition to the CCC plus program on January 1, 2018. To win business like the CCC plus program, managed care organizations must have the experience, people, information technology, and the tools and processes to create a seamless system of care that spans both medical care and long-term services and supports. Companies are not as interchangeable as they may appear when it comes to this business.

At Magellan we offer an array of individually tailored and culturally competent medical and social support services that maximize independence and promote access, customer choice, and importantly, dignity. In Florida our SMI plan demonstrated strong operational execution during 2016, achieving profitability during its second full year of operation. In addition to our integrated care programs, our core behavioral health carve out business remains strong with two county contract renewals in Pennsylvania as well as the addition of one new Pennsylvania county.

We continue to see a growing focus at the state level about redesigning publicly-funded health care programs to better serve individuals with special needs. In LTSS several states are considering new procurements. And states with established programs, like Texas, are considering changes that will enhance their programs. As you may know, Florida is expected to begin the process later this year to rebid its Medicaid program with an effective date of January, 2019. We feel very good about our current success in Florida, and we will carefully evaluate all aspects of this future opportunity as part of our re-bid strategy. There is growing awareness among Medicaid directors about the impact that SMI has on both the effectiveness and efficiency of state programs.

We are using the results of our pioneering work to help states design programs that better address the needs of this population. Turning now to our pharmacy business, we are seeing good sales results which demonstrate that our differentiation between value and volume is resonating in the market. With the addition of a two million life medical pharmacy customer, discussed in our third quarter call, we solidified our market leader position in managing this critical area of spend. Today the total number of lives we manage under our medical pharmacy programs is over 14 million.

Beyond new customers we are also seeing growth through selling additional medical pharmacy product features to existing customers such as our site of service program. In the employer market our recent sales increased our total covered lives by 86,000 on January 1, 2017. In the managed care market we recently signed two regional MCO customers with go live dates in the first and second quarters of 2017. In the government segment we recently signed a new state contract that will go live during the first quarter. And we are actively managing a robust pipeline of opportunities. We also expanded our pharmacy businesses capabilities during 2016. The acquisition of Veridicus has enhanced our suite of clinical offerings and we are making good progress on integration. In addition we launched our Medicare Part D PDP program.

While we accomplished great things in 2016, looking forward we continue to pursue strategies to differentiate ourselves as the leader in value. This is driven by our high-touch clinical programs and consumer-centric models specifically focused on managing some of the most costly specialty drugs and complex conditions. Next I'll provide some thoughts on the current regulatory environment. Like many other industries, we are operating in a tumultuous environment as both the new administration and Congress determine their priorities and next steps.

This specifically includes plans for the Affordable Care Act with democrats talking about fixing pieces of the ACA while republicans favor a repeal and replace strategy. There's been much discussion about the timing of these actions and how the changes to public programs will be phased in. This month we hosted our second annual Magellan open vision exchange, or what we call our Move Summit, in Scottsdale, Arizona. During the Summit we bring together a large cast of voices from the health care industry, primarily CEOs and COOs to discuss the future of our industry. This year we heard from several experts, including Michael Leavitt the former three-term governor of Utah and former US Secretary of Health and Human services. Gove nor Leavitt said that while he expects repeal and replace legislation will pass, significant parts will be deferred for three or four years. Beyond potential changes to the ACA, there are other areas of which we are engaged with policy makers in Washington and at the state level.

For instance, there have been ongoing efforts to improve the cost of pharmaceuticals and to speed up the approval process for new drugs. There is also renewed discussion about Medicaid block grants and expediting approval of waivers requested by the states from CMS. We believe there are numerous opportunities to collaborate with federal and state officials to improve the delivery of services provided through Medicaid and exchange programs. To do that effectively, we greatly enhanced our government affairs and policy department over the past year.

In advance of a new administration and a new Congress. The addition of these new leaders has positioned us well as we continue to navigate changes in both the state and federal government. We expect states will continue to act on their own to reduce trends and expand coverage. And we believe their budget situations will create growth prospects for Magellan. The economy, demographics and politics will force significant changes over time to our health care system. It is important to note that Magellan's value proposition is payer agnostic and can thus can accept well and adapt well in this changing environment.

Our strategy is predicated on expanding our integrated management services for special populations. As well as our full service PBM with the unique focus on specialty drugs. This week we announced that Magellan Health was selected as one of Fortune magazine's world's most admired companies. I am honored that peers across our industry have recognized Magellan Health as a respected and reputable company. Something we strive towards daily. This honor is a testament to our nearly 10,000 dedicated associates who serve our members and customers with passion. I would like to thank our entire Magellan team who helped to achieve our great result this is year. At every level in our company our employees are committed to leading humanity to healthy, vibrant lives.

This is why we do what we do. This is what motivates our team. At the end of the day we do well by doing good. I am proud of our financial success, and most importantly of the great impact we've had on the millions of lives we serve across the country and abroad. We are pleased with the progress we made in 2016, and look forward to executing on our growth strategy in 2017. As a reminder, our 2017 investor day will be held on Thursday, June 22nd, in New York City. Further details and invitations will be sent shortly.

At this point I'd like to turn the call over to our Chief Financial Officer, Jon Rubin. Jon.

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Jon Rubin, Magellan Health Services, Inc. - CFO [4]

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Thanks, Barry. And good morning, everyone. For the year ended December 31, 2016, revenue increased 5.2% over 2015 to $4.8 billion. This increase was mainly driven by the impact of new business and acquisitions. Partially offset by contract terminations. Segment profit increased 9.5% to $301.8 million, which reflects year-over-year earnings growth in both health care and pharmacy. Adjusted net income for the year ended December 31, 2016, was $109.5 million and adjusted EPS was $4.53 per share. The adjusted net income increase of 19.4% from 2015 was mainly due to higher segment profit and a lower effective income tax rate. Net income for the ending December 31, 2016 was $77.9 million and EPS was $3.22 per share.

The increase in net income of 147.9% over 2015 was due to higher segment profit, lower stock compensation expense, lower contingent consideration expense and lower effective income tax rate. I'll now review each of our segment's results. For our health care business, segment profit for the year ended December 31, 2016, was $212.9 million. This represents an increase of 16.2% over 2015. Mainly due to improved results in our MCC business and the impact of acquisitions, partially offset by contract terminations.

Segment profit for the current year included approximately $14 million of favorable prior period items mainly related to medical claims development returning to our pharmacy management segment, we reported segment profit of $122.7 million for the year ended December 31, 2016, which was an increase of 4% from 2015. The year-over-year increase was primarily due to growth in our PBM business, partially offset by results in our Medicare Part D business. Regarding other financial results corporate costs inclusive of eliminations but excluding stock compensation expense totaled $33.9 million, which represents a 32.5% increase over 2015.

This increase is mainly due to higher discretionary benefits and M&A costs in the current year. Excluding stock compensation expense and changes in fair value of contingent consideration, total direct service and operating expenses as a percentage of revenue were 17.4% in the current year as compared to 15.8% for the prior year. This increase is primarily due to the inclusion of AFSC,and TMG. The impact of business mix-changes, and higher discretionary benefits and M&A costs in the current year. Stock compensation expense for the year ended December 31st, 2016, was $37.4 million. A decrease of $13 million from the prior year. This change is primarily due to higher stock compensation expenses in 2015 which resulted from the vesting of stock related to acquisitions. The effective income tax rate for the year ended December 31, 2016 was 47.9% compared to 59.6% for the prior year.

The decrease is mainly due to a more significant impact in 2015 from the non-deductible health insurer feeds. In addition lower valuation allowances were required in 2016, primarily due to improved AlphaCare results. In the fourth quarter we early adopted a new accounting pronouncement that affects the statement of cash flows.

Under this new pronouncement the cash flow schedule reconciles changes to cash and cash equivalents inclusive of both unrestricted and restricted balances. Implementation of the pronouncement required us to restate previous periods to remove any restricted cash activity from cash flow from operations. On this new basis our cash flow from operations for the year ended December 31, 2016, was $66.7 million compared to $157.5 million for the prior year. This decrease of $90.8 million is mainly due to unfavorable work and capital changes and an increase in acquisition related contingent consideration payment. Partially offset by an increase in segment profit and lower tax payments. The largest driver of 2016 unfavorable working capital is the use of cash for the part D business of $113.8 million mainly related to a buildup of receivables.

As of December 31, 2016, the company's unrestricted cash and investments totaled $293.9 million, which represents an increase of $133.7 million from the balance on December 31, 2015. Approximately $117.7 million of unrestricted cash and investments at December 31, 2016, is related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments on December 31, 2016, of $315.9 million reflect a decrease of $99.1 million from the balance on December 31, 2015. This decrease is primarily attributable to the use of restricted cash for the payment of claim and other liabilities associated with terminated contracts, as well as the release of restricted funds from the company's regulated entities.

We are reiterating our 2017 guidance for revenue in the range of $5.8 billion to $6.1 billion. Segment profit in the range of $329 million to $349 million. Net income in the range of $90 million to $114 million and adjusted net income in the range of $123 million to $145 million. We have continued to make progress towards our full-year sales objectives and have now sold approximately half of our new business target of $735 million for 2017. Based on an updated estimate of average fully diluted shares of $24.2 million we are revising our 2017 EPS range between $3.72 and $4.71 per share and adjusted EPS to between $5.08 and $5.99 per share. This share count reflects share repurchases and option exercises through February 22nd, but excludes any potential future activity.

Our implementation of the accounting pronouncement discussed earlier impacts the presentation of restricted cash in the statement of cash flows. As a result we're updating our 2017 expected cash flow from operations to be in a range of $150 million to $182 million. I'm very pleased with our strong 2016 results and continued success in executing our growth strategy. I believe we're well-positioned to achieve our 2017 outlook.

And with that I'll now turn the call back over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you. We will now begin the question and answer session. (Operator instructions) Our first question comes from Dave Styblo from Jefferies. Sir, your line is open.

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Dave Styblo, Jefferies LLC - Analyst [2]

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Thanks. Hi there and good morning. I wanted to start with the year--ending here and talk a little bit about the revenue component. Obviously you guys have a revenue guidance range, it came in at the lower end of that. Seems like some of that might have been from the pharmacy segment, specifically in the dispensing area. I think that you guys did have a customer loss that you previously announced but it would be helpful if you could sort of bridge us on moving parts there. And also talk about why segment profit was down sequentially in the fourth quarter when typically it rises from rebates or closing costs that happen or performance fees that get logged in that quarter. Again, just to understand why that dip down versus typically going up in historical years.

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Jon Rubin, Magellan Health Services, Inc. - CFO [3]

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Sure. Well, first, in terms of the revenue on the pharmacy side in particular, we did previously disclose a managed care contract that we had lost, Dave. And that really was the big driver. Again, as we have talked about previously, while that had reasonably significant revenue, it was largely passed through and therefore the margin was quite small. But in terms of the revenue rolled forward, that was really the big reason. As we look at the fourth quarter results for pharmacy, I think your question was specific to pharmacy, I note a couple of things.

One, fundamental results for the PBM business, particularly on the employer side were actually quite strong. We continued to see both, continued strong result there is and good growth. And, Barry talked about, even our growth into 2017. On the flip side we did see some pressure in part D in the quarter. Mainly just higher utilization towards the end of the year than we had expected. Which, again, was probably -- again, we don't have guidance--for quarters, by segment, but probably if you were looking at either sequentially or relative to high-level expectations was probably the-- the biggest factor in what you're seeing.

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Dave Styblo, Jefferies LLC - Analyst [4]

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Okay. And how much did part D lose in 2016? I think you guys were looking towards getting towards break even. But is sounds like maybe it is based on the high utilization might have had a loss there. As you move forward into 2017, what is assumed in guidance for part D?

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Jon Rubin, Magellan Health Services, Inc. - CFO [5]

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So two -- your first statement is correct. Our target initially for part D was break even. As we went through the year, we did see some pressure through the year on that original expectation. And, round numbers, if you look at the year-over-year impact including startup expenses and implementing program, round numbers around $10 million. We're talking about in terms of 2016. As we go into 2017 -- we both did get stronger pricing in our bid and tighten our formulary some going into 2017. As well as we've talked about we're seeing continued membership growth there. So you put that together there's a range of expected results that is obviously built into our guidance range, but roughly break even for 2017 is what we're expecting.

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Dave Styblo, Jefferies LLC - Analyst [6]

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Okay. That's helpful. And maybe just on a couple specific contracts that are larger in scope, maybe first on Florida. Can you guys talk about what you see unfolding in that RFP (inaudible)? Is there an opportunity to perhaps expand coverage to more folks that might be categorized in there since you're in there? Or is the state talking about changing that program where it may perhaps result in some membership loss. Just to give us some understanding of the conversations you're having. And on Virginia obviously that award starts up later this year. There's now only six players, so maybe get a little bit more revenue. But do you have a sense of how much revenue you're getting and what the economics look like for you guys? And what is baked into guidance for revenue and startup costs for 2017 for Virginia.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [7]

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Yeah, let me start with Florida, Dave, again, good to have you on the phone this morning, on the call. We have done very, very well with the state of Florida. We have a very strong relationship with the state. We have demonstrated just a major impact in terms of the quality and the efficiency. And for the first time nationally we have a plan that focuses on the SMI. It's a difficult population, and the state of Florida has been very appreciative of the great work and progress we have been making to take care of their folks. Because of that we are evaluating and working with the state directly, as we do a lot of states, but a very close relationship with the state of Florida to potentially expand statewide LTC, LTSS and long-term support services are also likely and an opportunity in the state. We think with the fundamental base of expertise we have demonstrated there in the state and the very positive relationship we have with the state, we think there is opportunity there not just to go -- hopefully through the rebid process -- but to expand our current base there in the state of Florida. We're quite optimistic about it.

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Jon Rubin, Magellan Health Services, Inc. - CFO [8]

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Let me take the second part of your question, Dave, on Virginia. The short answer is we don't know yet exactly how the enrollment is going to be assigned and determined. So there's still a lot of uncertainty both in terms of the membership levels and, resulting revenue and financial results. As we've talked about it's about 214,000 individuals, round numbers we're estimating 3.5 billion. We don't know exactly. Split into six regions, they're going to have a minimum of two vendors per region. And obviously we're one of six plans as Barry described earlier. So that kind of at least gives you some sense for the potential side. But we don't know it. And I will remind you, I think we spoke about it as well, this will be phased in over a period beginning this summer. But won't be fully ramped up until 2018. So I would expect membership and revenue to be more modest this year than next year.

Relative to our assumptions, again, we're expecting losses in the first year. It was built into our guidance. Round numbers we're talking $15 million to $20 million in terms of current estimates. But that is just an estimate at this point. There are certain start up expenses. But, again, the size of the program and the implementation pace of the program will certainly depend -- determine the ultimate outcome there. And then long-term we do expect that the contact will be profitable, consistent with other Medicaid plans in that low to mid-single digit margin range. And we'll certainly give updates as we learn more from the state.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [9]

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And just to add to Jon's comment, which is dead on target, we view this whole LTSS opportunity nationally as just a great opportunity for the country. Each one of these that we step into we learn more. We're able to demonstrate more capability. So the next state that we go into, we'll be more operationally efficient. So we have taken a lot of the lessons we've learned in Florida and we are applying them with a few twists, clearly, given the state-- the commonwealth's needs there in Virginia, and we'll continue to grow. As we hope to establish a track record, now that we're in both of course, Florida and Virginia ,New York. We have an ASO program in Wisconsin. Our goal is to get to five to seven states in the next few years here and we think we're well-positioned. This is a very, very large market that's underpenetrated. We think about 15% penetrated. it is an opportunity for us to continue to differentiate treating these special populations that we have unique expertise with.

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Dave Styblo, Jefferies LLC - Analyst [10]

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Sure. That's helpful. Thanks for the insight and the color, especially on the losses, for this year.

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Operator [11]

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Next question is from Michael Baker from Raymond James. Sir, your line is open.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [12]

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Thanks a lot. Just wanted to confirm for the quarter on health care side, favorable prior period development of about $7 million?

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Jon Rubin, Magellan Health Services, Inc. - CFO [13]

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For the -- now for the quarter, you're talking about prior year or prior period?

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Michael Baker, Raymond James & Associates, Inc. - Analyst [14]

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Prior year favorable development.

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Jon Rubin, Magellan Health Services, Inc. - CFO [15]

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No, it was actually --

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Michael Baker, Raymond James & Associates, Inc. - Analyst [16]

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You had $14 million, right?

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Jon Rubin, Magellan Health Services, Inc. - CFO [17]

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That's correct.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [18]

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And the last update I think you gave 7 million for the third quarter?

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Jon Rubin, Magellan Health Services, Inc. - CFO [19]

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Yeah, no, again, it's a little bit of apples and oranges. So the $14 million we've described this period was in the health care segment and was the total for prior period development. The previous number we had given was sort of all the one-time, -- out of period-- components company wide. So there was roughly about, you know, $3.5 million of other stuff that was really more one-time expense, operating expense related. So really the equivalent would be $7 million in prior periods to $10 million this quarter. So it was about $3 million increase in the out of --year -- prior period development in the quarter.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [20]

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I appreciate that. And then can you give us what the PDP membership was in the fourth quarter and where it's kind of tracking now?

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Jon Rubin, Magellan Health Services, Inc. - CFO [21]

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Yeah. We were about $60,000, round numbers -- these are round numbers -- at the end of the year. And we're probably in the $90,000 now. I mean, it still hasn't settled 100% for January. But we're up in that $30,000 plus range in the early returns.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [22]

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Okay. And I know last year it started off a little bit more difficult than what you thought, given what you're seeing in membership composition and stuff like that, what are your thoughts on how you might start off and, how it might develop just generally speaking. Because I know you don't give quarterly guidance.

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Jon Rubin, Magellan Health Services, Inc. - CFO [23]

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No, again, I caveat all this we have very limited actual claims data at this point. It really is just more sort of giving it a qualitative perspective. Qualitatively, where last year we had a lot of voluntary low income members which tended to be the highest utilization members. This year our growth is mainly in the non-low income. So from that perspective the mix is different. And our hope is that plays out favorably. But the key point is we don't have -- we don't have real data yet. So by first quarter we'll have that first couple of months of mature data and we should be able to give you a much better perspective, but, again, kind of coming into the year, because we were able to make some changes -- positive changes -- both in terms of the pricing and formulary we think we'll see some improvement as we go into 2017. And, again, right now our range is centered around break even in terms of the outlook.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [24]

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Okay. And then just in terms of how we think about Virginia and when you will likely kind of initiate some of those startup costs. Any color on that?

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Jon Rubin, Magellan Health Services, Inc. - CFO [25]

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Well, we have -- I mean, there's certain startup costs -- we had some even in 2016 as we started to build out networks and respond to the RFP and start the implementation planning. So it really is sort of an ongoing process. So there is continued work there say we haven't given specific numbers. But we're continuing on a modest spend rate as we go into this year.

In terms of the real ramp up in terms of the service operations and other, more variable expenses, which tend to be the lion's share of the longer-term expenses for the contract, that'll begin really in second quarter. And at that point we hope we'll have a good beat on what the volumes look like and therefore able to really sort of shape the organizations and expense level to the membership that we're likely to be bringing on.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [26]

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Okay. And then a question for Barry. Maybe you can give us a sense of the size of the PBM selling season this year compared to last and any new or different factors you're hearing from customers relative to last year.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [27]

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The pipeline continues to become more and more robust in virtually all segments. I would say the greatest change is that we're being offered opportunities in larger and larger deals. We see that both in the employer market and we also see that in the MCO market. In the employer market, as you recall from our past discussions, it's a more profitable segment. The lower end actually is the most profitable, but it offers us great growth opportunity. So we're pleased with the 86,000 lives that we've had since the 1st of January here in terms of growth. On the MCO side we are also seeing a dramatically larger MCOs. I would have said -- and I'm just guessing here a bit -- but maybe we would have been exposed to 30% or 20% of the large deals that are happening. Now it's vastly more than half to three-quarters, let's say, of the MCO bid processes that were included in and some very large deals.

Now the reality is for the large, large many, MCOs it really is not of great interest to us to grow in that segment rapidly because the margins are really rounding (inaudible) margins.We want to protect and have pricing discipline and be very thoughtful about how we grow. We're trying to find that sweet spot where we do have that growth but we don't compromise our margins longer term. So we are getting far greater access to these, far more calls than we have ever had before. So I would say the pipeline continues to become more and more robust. It's really no surprise because we have grown our sales force, it's been about two years now and we have enhanced it this last year as well. So our product offering is even more sophisticated. Our medical pharmacy offering we're continuing to put the competition further in the distance in terms of our capabilities.

So we have been able to have some really robust success there in that space. That specialty orientation and the medical pharmacy capability truly is unique in the industry and that is what people are looking for. We will try to keep, again, maintain our pricing discipline and make sure we don't erode our margins. But we are seeing greater success and being included in more and more deals than we have before.

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Michael Baker, Raymond James & Associates, Inc. - Analyst [28]

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Thanks for the update.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [29]

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Thanks, Michael. Thanks for calling in

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Operator [30]

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Our next question from Josh Raskin from Barclays. Your line is open.

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Josh Raskin, Barclays Capital - Analyst [31]

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Thanks. Just a quick clarification. You restated all the cash flow numbers for the full year. But what was the fourth quarter cash flow from operations number and maybe a year-over-year number.

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Jon Rubin, Magellan Health Services, Inc. - CFO [32]

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I'm sorry-- fourth quarter specifically or you're asking for both fourth quarter and for full year?

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Josh Raskin, Barclays Capital - Analyst [33]

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Nope. We've got full year in the press release. Just fourth quarter of 2016 versus fourth quarter of 2015 on the restated basis.

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Jon Rubin, Magellan Health Services, Inc. - CFO [34]

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Yeah. Just give us minute, Josh. We'll come up with that. I don't have it at my fingertips.

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Josh Raskin, Barclays Capital - Analyst [35]

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That's helpful. And second, maybe on the share account for next year. Typically we have seen some option exercises, but more than offset by repurchases. Maybe were there any repurchases done through February 23rd or whatever the cutoff date was. Should we read into that? Was that just a cash flow timing, it looks like there were some cash flow issues in the fourth quarter. Or should we read into that just sort of your thoughts on where the stock has gone and perhaps buy backs won't be a major component of shareholder return this year.

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Jon Rubin, Magellan Health Services, Inc. - CFO [36]

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Well, I mean, I look at it this way, Josh, first of all, no. I wouldn't look at it as if we're stopping and starting share repurchases based on any change in our outlook for the company relative to our share price or anything like that. It is solely based on our cash flow and in-cash position. And as we have talked bout before, sort of alternative uses of capital. We always look to fund growth, fund acquisitions first as being critical for the -- to help drive future growth of the business. And, we'll continue to evaluate share repurchase as, we have excess cash available. But you're right. Through year end we did not purchase shares through February and that's -- and there were higher than normal option exercises in that period as well.

And your first question on cash flow by quarter, it was $74.2 million in the fourth quarter of this year, $59.3 million in fourth quarter of 2015 -- I'm sorry. Fourth quarter of 2016 versus fourth quarter of 2015.

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Josh Raskin, Barclays Capital - Analyst [37]

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So it's actually up.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [38]

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And I would add Josh, don't forget we also closed on Veridicus in the fourth quarter which required cash. As John said we want to make sure we have plenty of dry powder we do have a pipeline of M&A and a you have seen this year or the year before we have been very M&A focused to buy capabilities to enhance our competitive organic growth in the future. So we want to make sure we have dry powder for that. And, of course, there's a funding for reserves for part D as well. So we have some valid uses for cash. We never want to get ourselves in a position where we can't execute and maximize shareholder value.

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Josh Raskin, Barclays Capital - Analyst [39]

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Okay. And just last one on Virginia. Let's assume that's 3.5 billion run rate and you're one of six plans, but you're in all six regions. Is there a reason to believe it's not, fair share rateably? Should we think about a run rate or service parameters and algorithms that the state's using in terms of member assignment or something that could potentially change that meaningfully? Obviously it could be close to (inaudible) or so. But any meaningful change use foresee?

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Jon Rubin, Magellan Health Services, Inc. - CFO [40]

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The way I look at it, it is uncertain. We don't know exactly what the state's basis for assigning the members is at this point. Remember, some of the members today are in managed care plans because there's ABB members in this population that are in managed care plans today. Some of whom are continuing in the new program, some who aren't. It isn't clear. There is the potential that over time do I think that we can get our fair share? Absolutely. But, initially how they're going to phase that in and will they reassign members that are in other managed care plans today, we don't know. So there's a potential that the ramp up could be a little slower to get to the fair share over a period of time a few years. But beyond that, again we just don't yet know. And I think, though, we will know over the -- a matter of weeks. So we'll keep you updated.

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Josh Raskin, Barclays Capital - Analyst [41]

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Okay. All right. Thanks, guys.

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Operator [42]

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Our next question is from Jason Twizell from Key Bank. Sir, your line is open.

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Jason Twizell, KeyBanc Capital Markets - Analyst [43]

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Okay. Thanks for taking a question. Just if you can provide an update on the performance of some recent acquisitions, namely Veridicus and the armed forces. You talked a little bit about how you-- the expectation, how they're performing versus your expectation and how you expect them to contribute to growth in 2017.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [44]

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Sure. And I'll take -- they're both very different circumstances. Armed Forces Services Corporation or AFSC is really focused on the federal government business. And it was an important acquisition for us because while we have had the (inaudible) and other programs there with the federal government, we did not have a prime contractor status, meaning that we had to go through another party that was contracted directly with the government. The acquisition of AFSC allows us prime contractor status meaning and we can go straight to with our products and services rather than go through someone else that enhances margins but allows us to be far more competitive and far more selective on the opportunities that we try to take advantage of with the government.

That said, AFSE has been a very strong performer and we're so pleased -- both the management teams -- but exceeded our expectations both in terms of market impact and profitability. So, we are thrilled with AFSC. Verdicus was just recently closed it was important to us-- they do some great clinical work that adds to our quiver of --tools to be able to use to be competitive. And importantly, they have a very large MCO client which is important. They have a great relationship with them and now we have been fortunate to have a really wonderful relationship with them as well. We haven't yet seen--had enough time to see how Veridicus will play out, but we have full expectations, as we have with virtually the vast majority of our acquisitions, they have typically all exceeded our expectations in terms of performance. So we're very pleased with AFSC, great team, great strategy, great results. We expect to see the same out of Veridicus.

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Jason Twizell, KeyBanc Capital Markets - Analyst [45]

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Great. Thanks for that color. In addition I think Jon mentioned about half of your new sales expectations have already been booked. If you can just provide -- how does that compare to past years? Are you ahead or behind scheduled based at this time at the end of February?

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Jon Rubin, Magellan Health Services, Inc. - CFO [46]

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That's a great question, Jason. Literally the half is almost exactly consistent where we're -- where we've been historically. So we feel good in term was where we are. As important to know how much we closed in percentage. I think Barry mentioned this in his prepared remarks, the pipeline is also quite strong. So we view the set of opportunities being certainly more than sufficient to be able to give us the opportunity to meet the full year objective. We've got to close and have to execute, but it's all in front of us.

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Jason Twizell, KeyBanc Capital Markets - Analyst [47]

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Okay. Thanks for that. Last one, you might have already answered this question. But on Part D, I know it's early, but are you guys looking at possibly entering new states or new regions for 2018, or do you think it could be more the status quo?

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Jon Rubin, Magellan Health Services, Inc. - CFO [48]

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Yeah, at this point we don't have any expansion plans. As always we're looking at strategy working both with our internal and external actuaries to, best position our bids for next year. Both in terms of formulary and price. But in terms of geographic expansion we certainly don't have anything material in the plans for the near term.

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Jason Twizell, KeyBanc Capital Markets - Analyst [49]

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Okay. Thanks for the update.

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Jon Rubin, Magellan Health Services, Inc. - CFO [50]

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You bet.

Okay. Operator, do we have any other questions?

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Anagha Gupte, Leerink Partners - Analyst [51]

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Yes, we have one question from Ana Gupte from Lee rink partners. Ma'am, your line is open.

(inaudible) Answering -- I know we're talking later. So the first one -- is seems like you have moved from a state of contract risk to now. It doesn't look like you have that downside. And in fact you're winning quite a bit. Is there -- can you give us some thoughts on forward outlook in your contract? Is there anymore risk left or anything coming up for procurement either in the government space or commercial, or should we now think of you as more of a market share winner an RFP winner, if you will?

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [52]

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Ana, that's a good -- we haven't had the same level of client concentration that we have had historically. We have Blue Shield coming up in 2019, and the state of Florida which we spoke about in the script there. But really beyond those contracts there really is no single contract that is that material to us. They're all important to us, clearly. So we don't have the same level of risk we have had in the last several years.

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Anagha Gupte, Leerink Partners - Analyst [53]

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Okay. Great. The second one would be on the PBM side of the house, the rebate issues that are being discussed versus guarantees, the DIR fees and now you're in part D and, potentially what type of changes might occur there either directly to the benefit design or indirectly as pharma looks like they're pitching for reduced out of pocket and so on. You know, what does that do to your margin profile going forward? And you comment more broadly on the PBM business?

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [54]

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Yeah. I'll -- a whole lot of questions. Great questions here, Ana and I'll tick off some of them and maybe Jon can pick off on some of them as well. Address the DIR fee. We -- don't have fees coming in largely is typically within the part D world. And we, as a PBM, in our part D plan, have very limited, no exposure -- it's very limited exposure. We typically don't pay a lot of DIR fees. In our own specialty pharmacy we don't pay ourselves those fees. So, I know that Diplomat had a real issue with those fees and the reconciliation of those fees We simply don't have that level of exposure. Relative to the rebates. There is so much discussion going on and-- no doubt pharma is feeling a lot of pressure for pricing. To a great degree pharma --I'm not here to defend any party specifically but I don't think that the public fully understands that the rebates are really price offsets and indeed even as they raise list prices many times the rebate will offset.

And most times they offset those price increases. The net cost to the customer that we manage the drug spend for is actually equal to or could even be less in some circumstances. Pharma uses rebates, you're an expert on this, Ana, I know. Pharma uses rebates to channel volume. And there are certain therapeutic classes where their bio equivalent, various agents. So we try to channel, we negotiate with the pharma manufacturers to channel volume. That need to channel volume won't go away. It may take up certain kinds of formats or different ways they pay entities to do that. But essentially they will have that need to channel volume where you have a therapeutic class with several alternatives. While there's pressure and a lot of talk about rebates, it does serve a useful function to channel volume and to also maintain pricing for large customers. The federal government with their 23.1% federal formulary, or the state level where they have supplemental formularies.

That we-- many states-- in fact at this point at least half the states in the country do work for in this space. So we don't think the game changes a lot, but as it does we think we have the tools to be able to address it. So we don't see any major impact on how we're doing business today. I don't know if I hit all your questions. Go ahead.

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Anagha Gupte, Leerink Partners - Analyst [55]

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Sorry, I'm not an expert at all. So it's truly -- but that's helpful.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [56]

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Well, I've -- we've had a great deal of discussion with you, Ana, and you know a lot.

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Anagha Gupte, Leerink Partners - Analyst [57]

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Okay. Thank you. Look forward to catching up later.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [58]

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You bet, Ana. Thanks for the call. Operator, any further questions?

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Operator [59]

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There are no further questions at this time, sir.

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Barry Smith, Magellan Health Services, Inc. - Chairman, CEO [60]

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Great, well, we thank you all for joining us today. We look forward to our next quarterly results and call and look forward to having you join us. Thanks so much. Bye, bye.

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Operator [61]

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Thank you, that concludes today's conference. Thank you for all your participation. You may now disconnect.