Good morning, and welcome to the Magellan Health Third Quarter 2020 Earnings Call. We apologize for the technical difficulties that led to the rescheduling of this call this morning and appreciate your patience in this matter. As a reminder, this call is being recorded. We will be conducting a question-and-answer session after management's prepared remarks. It is my pleasure to now introduce you to your host, Darren Lehrich, Chief Investor Relations Officer for Magellan.

Good morning, and thank you for joining Magellan Health's third quarter 2020 earnings call. With me today are Magellan's CEO, Ken Fasola; and CFO, Dave Bourdon. The press release announcing our third quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion through November 30, 2020. The replay dial-in numbers can be found in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made during this call are as of today, October 29, 2020, and have not been updated subsequent to the initial earnings call. During this call, we will make forward-looking statements, including statements related to our 2020 outlook. Listeners are cautioned that these statements are subject to risk 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 Form 10-K filed on February 28, 2020, as well as in subsequent Form 10-Q filings, including our Form 10-Q to be filed today. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Please refer to the tables included with this morning's press release, which is available on our website, for a reconciliation of non-GAAP financial measures to the corresponding GAAP financial measures. Finally, as a reminder, Magellan Health's results reflect Magellan Complete Care's discontinued operations in our financial statements as a result of the planned divestiture to Molina Healthcare. All references to Magellan Health's results on this call, unless noted otherwise, will be presented to exclude Magellan Complete Care from continuing operations. I will now turn the call over to our CEO, Ken Fasola. Ken?

Thank you, Darren, and good morning, everyone. I'd like to take this opportunity to welcome Dave Bourdon, our new Chief Financial Officer, who joined the Magellan team in September and is off to a fast start. Dave is an accomplished finance executive with significant experience leading health care businesses undergoing transformational growth. During Dave's 20-plus years at Cigna, he led the finance function supporting diverse businesses offering a range of products and services, including individual and employer health care, behavioral, pharmacy management and dental. Dave served in the United States Coast Guard, and we're very proud to have a U.S. veteran join our executive leadership team. Dave is based in our corporate offices in Frisco, Texas. I also want to thank Jon Rubin for his 12 years of financial leadership at Magellan. We appreciate the support Jon has been providing to ensure a smooth transition over to Dave, and we're grateful he'll continue to support this transition through year-end. On behalf of the entire Magellan team, I wish Jon well in his retirement from Magellan and in his future endeavors. At a high level, our performance in the third quarter was consistent with our internal expectations and demonstrates that we continue to execute against our 2020 plan. As such, we're reaffirming our 2020 guidance ranges for revenue, segment profit, adjusted net income and adjusted earnings per share while also adjusting our full year guidance range for GAAP net income and earnings per share to reflect special accounting charges. During the quarter, we remained focused on the implementation work underway to support important new 2021 business within both our Healthcare and Pharmacy segments. Our success is in no small part based on the efforts of our Magellan associates who have responded to the needs of our members and clients during the…

Thanks, Ken, and good morning, everyone. I'm very excited to be at Magellan, and I look forward to interacting with our investors and analysts going forward. I'm grateful to Jon Rubin for his partnership and support during the transition, and I want to echo Ken's remarks of wishing him the best in his retirement from Magellan. I was attracted to the Magellan opportunity and have become a big believer in the connection between mind and body and consider Magellan to have disruptive potential as more health care participants focus on the importance of this connection in an effort to manage better outcomes for patients while achieving lower cost to the system overall. I've now been at Magellan for approximately two months, and I'm impressed with the talent, experience and energy of our organization. In my comments this morning, I'll review the third quarter results, discuss our reaffirmed outlook for the full year and provide some initial thoughts about 2021. For the quarter, revenue was $1.2 billion, representing an increase of 1% versus the same period in 2019, largely attributable to growth in our Pharmacy segment offset by net contract losses within our Healthcare segment. Total segment profit for the quarter was $34.1 million compared to $45.6 million for the third quarter of 2019. The net loss from continuing operations for the quarter was $17.3 million or a loss of $0.68 per share. This compares to net income of $4.1 million and earnings per share of $0.17 for the third quarter of 2019. For the third quarter of 2020, adjusted net income was $2.1 million or $0.08 per share. For our Healthcare business, segment profit for the third quarter of 2020 was $21.2 million, representing a decrease of $5 million from the third quarter of 2019. The year-over-year quarterly decline in…

Thank you, Dave. Next week, I will reach the one-year mark since joining Magellan. When I arrived, job one was to stabilize the business and rationalize the strategy. The four overarching business priorities we quickly put in place have not changed: first, honor and deliver on our commitments; second, execute on operational transformation initiatives to reduce our cost structure and improve efficiency, reliability and effectiveness; third, accelerate innovation to create compelling, contemporary and competitive new solutions for the market; and fourth, build a robust engine for growth across our businesses. As we look ahead over the medium term, we'll continue to focus on these four pillars. With the advent of our decisions to sell our managed Medicaid business to Molina and to exit Medicare Part D as a plan sponsor, we began to pivot back to payer services. As a result of those important decisions, we will generate approximately $40 per share in cash proceeds, creating meaningful value for our shareholders. As we focus Magellan forward, our business consists of payer solutions that are centered around the following high-growth and difficult-to-manage areas of health care: behavioral health, specialty health, pharmacy management. Our solutions and the products and services that flow from them are focused on delivering a lower total whole person cost of care, better clinical outcomes and an overall better experience for our members. With these solutions in mind, we're energized to share with key stakeholders the answer to the question why Magellan. Our points of differentiation across our solutions will be anchored in the following capabilities: first, robust data analytics and insights. This capability enables us to identify and predict impactful intervention opportunities, quantify the impact of those interventions, create value-based partnerships with providers and pharmacists and identify opportunities for new products and solutions. Second, digital tools and capabilities; this capability enables us to improve member, provider and client engagement to drive behavior changes through user-friendly digital tools that create utility for all stakeholders, automate and streamline data collection and sharing that drives effective intervention and deliver care through digital assets. Third, personalized clinical programs and solutions; this capability enables us to move to personalized evidence-based high-quality care, partner with the provider community to drive adoption of clinical protocols, leverage key opinion leader think tank as an asset to realize continuous improvement on clinical standards. And fourth, market-leading availability and access to high-quality care; this capability enables us to become the partner of choice for providers, develop high-performance networks, deliver care through both digital and community-based assets. Implied in this differentiation will be a relentless focus on execution, data and insights and superior strategic relationship management that's embraced by the entire Magellan organization. We're making great progress on this journey, and I look forward to updating you again when we report our fourth quarter results. With that, I'll now turn the call back over to the operator for your questions.

Thank you. [Operator Instructions] Our first question is from Kevin Fischbeck with Bank of America.

Okay, great, thanks. So I just wanted to kind of go to your 2021 commentary here. So if I'm doing it right, I heard $155 million at the base, adding in $70 million from cost saves, California, Part D, the stranded overhead cost is basically going to be zero as it's mitigated and then minus $15 million to $20 million. So that kind of is a starting point of kind of $205 million to $210 million. You made a separate comment that you expected revenue and profit growth in your businesses. I wasn't sure if you meant that to be a separate add-on as kind of there's going to be organic growth on top of that or whether that profit growth was kind of incorporated into those dynamics that you outlined.

Kevin, this is Ken. Thanks for the question, and I hope you're well. I'll let Dave jump in and give you his thoughts for that, and then I'll build as necessary.

Kevin, thanks for the question. So as far as that macro statement on revenue and segment profit growth, just think of that as that's a macro statement. Don't think of that as in addition -- like for the earnings to be necessarily in addition to. We'll update you on more detail as we -- on 2021 once we get to fourth quarter. In regards to your math, maybe one adjustment. So if you think about, yes, the $155 million as the midpoint of our guide for this year, you'd add about $25 million for the stranded overhead that we'll take out. And then you add the net of those tailwinds and headwinds.

Okay. So that's actually $25 million more than what I was saying. That's actually $230 million to $235 million?

Correct.

Okay, perfect. Okay. And then as far as the quarter itself goes, were there new contract losses in the Healthcare segment? You mentioned that -- on the Pharmacy side, it was previously disclosed, but you didn't have that same wording in the Healthcare segment side of things. So just wanted to see if there's any update on how contracts have been trending in that business.

Yes. I can start, and Dave can certainly jump in. I would probably draw you more to some of the MLR provisions embedded in some of those agreements, which put a little downward pressure. So there wasn't any extraordinary losses and offset by, I think, good growth considering where we came from, and we're building real momentum there. So I'd point you more towards provisions inside of some existing contracts, which put downward pressure on revenue as opposed to any substantial losses that weren't previously talked about.

Okay. And then, I guess, maybe last question now anyway. When you -- do you guys have any kind of long-term kind of guardrails for how to think about the business after 2021? Is there any way that we should be thinking about? Or if not today, then when should we kind of expect an update on those kind of long-term growth targets?

Yes. Kevin, you're breaking up a little bit, but I assume -- let me pare it back and make sure I captured the essence of your question. So you're asking about longer-term outlook beyond 2021 with respect to growth trajectory. And I'm assuming that's across all of our businesses.

Correct, yes.

Yes. So I -- one of the things I know we've committed to and we're building, I think, a good business case around proof points with respect to the progress we're making around reimagining our businesses. I'll take them each individually. So as you think about behavioral health, obviously, the pandemic has intensified the impact on behavioral and mental health, and the conversations we're having are really important, with large payers, around ways to energize this recognition that managing the whole person. And the impact behavioral health is having on that, I think, is creating an opportunity for us to get more granular with respect to the kind of things we're doing, not only in Virginia, which we branded Magellan Connect, but that we're beginning to build the capabilities to expand more rapidly nationwide. And so I also think the work Jim Murray did to quickly consolidate our behavioral health and EAP businesses is providing a forum for us to talk to Fortune 500 and Fortune 50 customers particularly, around their growing concern about the impact on their employees of the elongated pandemic, the challenges of societal issues are impacting and the growing concern that has on their own employee well-being. And so the program I mentioned that we're building quickly, leveraging our experience with -- in the military in Magellan Federal. Just another example, I think of some things that we can do where the pipeline and the procurement cycle is a little more accelerated than what we've normally seen in traditional BH RFPs. And so -- and then with the advent of what we're doing with the digital front door, Livongo and Kaden to strengthen our vMAT, telehealth and another extension of our collaborative care capabilities I think help make that narrative even stronger. Specialty health business, we're…

And just to pile on to that. Look, we know the investor community would like us to provide long-term strategic growth targets on revenue, segment profit and EPS. And that's consistent with how we'd like to operate, and we're working towards that. And we'll do that at an appropriate time, which will be after we get through this transitional phase and have demonstrated on some of the key areas that Ken just noted.

Thanks, Dave.

Thanks, Kevin. Appreciate your questions.

[Operator Instructions] Our next question is from Dave Styblo with Jefferies.

Good morning, thanks for the question. I think I understand all the 2021 bridge comment, but I do have a follow-up on the new cost for security and IT. I'm just curious if those are something that you'd expect to persist after 2021? Or would they rise? Would they decline? Is it something of a onetime-in-nature investment on that front?

Okay. First of all, good morning and appreciate your question. I can -- I'll start, and I'll let Dave jump in. One of the things that I'm excited about is -- and I talked about the things that are going to be differentiating for us going forward, is the advance in digital tools and capabilities and robust analytics and insight. And if you step back and think about the whole cybersecurity area is an arms race. So making sure that we're best in class and investing hard in our systems to enable the confident connections that are necessary to advance the strategy anchored around data analytics is really key to us. So the investments we're making are in concert with investments we're making in our underlying platform to enable the seamless implementation of these new digital tools, and so those go hand in hand. A lot of this is contemplated in the work that we were doing with respect to transformation and identified early. So -- but we -- when we think about the security piece of that, there's just no reason not to be extra diligent and vigilant. Dave?

Yes. I mean just to reinforce what Ken said. I mean we take protecting our members' and clients' information very seriously, and that's why we're making the investment to harden our environment. Dave, I'd have you think of this as, while there's certainly some onetime charges in there, I would -- I'd consider this to be run rate going forward.

Okay, that's helpful. And then I know you guys are building up the sales force this year towards your 30-person goal. Can you just give us an update on how conversations and the pipeline is shaping up as you talk to employers and the clients about better integrating behavioral with medical pharmacy and the early reads on where you are in that process? Is it still going to be a few months away before you'd be in a position to share any of that information, given where we are in the cycle? Or are some of those conversations more advanced at this point?

Actually, I'll make a couple of comments there. And I -- this has been really not only important, but really exciting as we think about the pivot we're making. As I said on the earlier calls, one of the things we don't have to do is to prove that our payer partners are challenged by the growing impact of behavioral and mental health on total cost of care. And so it saves a lot of time when you walk in and start those conversations. We've pivoted to having more C-suite and more strategic conversations with existing, prior and what we hope will be future payer customers around this growing challenge and again, the fact that it's been intensified by the pandemic. And so we're on -- we're actually right where we wanted to be with respect to the addition of new sales talent. We've probably -- we filled 1/3 already. We've got 1/3 that offers are in hand. We started the first training program actually last week. And we're hiring experienced professionals, not only domain-specific experience with respect to our solution sets and lines of business, but also really experienced and deep with -- individuals with deep relationships in very specific channels. And those include really direct outreach to a lot of our largest customers who, again, are eager to look for creative ways and -- to deal with the growing total cost of care challenge. And integrating, again, the behavioral health, specialty health and EAP capabilities that exist in the company has really been well received. And so again, some of those conversations are starting off cycle, which we're encouraged by. And I think that's just a function of existing challenges and demand among those large employers. And there's -- I recently saw there was an RFP that came out in one of our larger states targeted directly at child mental health. And I think you're going to see more of that as people begin to step back and reflect on some of these, again the challenges of both suicidal and pandemic-oriented issues with respect to substance use disorder and related mental health issues.

Okay. And then, just a couple of housekeeping questions on both of the segments. So for Pharmacy, results were a lot better than we were looking for. Is there any material puts or takes there? I think there might have been some contract settlements that were positive. And then on the flip side, can you quantify how much the start-up costs for California were in the third quarter and what those might look like for the fourth quarter? And then on the -- similar question on the Healthcare side. Any start-up costs there for things like the Molina contract or the transformation costs that are going on as you build into next year?

Yes. I'll start, and Dave can add the additional mathematical color. But as we think about the revenue beat, it's driven really probably in the following order, new business in the PBM and the specialty performance that I talked about earlier in the call. And Dave, you want to build on that?

Sure, yes. Dave, I'll unpack that a little bit. There were a few questions in there. So let's start with the pharmacy piece. So as you noted, big step-up sequentially in segment profit. We're really pleased with the performance of the pharmacy business. Having said that, that result is consistent with our expectations. Within the Pharmacy segment, our 2020 guidance contemplated a higher weighting of segment earnings, like almost 60% of the year to be in the second half, with the third quarter being the highest because we are going to see a ramp in the Medi-Cal implementation costs as we get closer to the start of that contract. To your question around the specifics in the quarter, we -- on a sequential basis, we had highlighted in the second quarter a few unusual onetime items related to PDP claims and some unfavorable customer settlements. And in the third quarter, we experienced stronger specialty trends, which Ken noted and also received benefit from some new business. So those are the primary drivers as you think about it from a sequential basis in Pharmacy. In regards to start-ups -- start-up costs for Medi-Cal, I think in the $5 million to $10 million range is what we'll see in fourth quarter and one of the reasons why the -- sequentially, the segment profit will be going down from Q3 to Q4. In regards to Healthcare, a big step-down in segment profit sequentially. And that was -- having said that, it was generally consistent with our expectations as well. The sequential decline was largely driven by higher utilization in both specialty and behavioral care as compared to the second quarter as well as the impact of some minimum MLR thresholds in some of our contracts. On specialty utilization, as you're aware, we saw a lot of favorability in the first half of the year, and we've now seen that return to normal level in the third quarter, and we expect that to continue throughout the remainder of the year. From a behavioral perspective, we did not see that same level of favorable utilization in the first half. As a matter of fact, it ran pretty much at normal pre-COVID levels. We were expecting or our -- we were expecting it to move up to levels higher than pre COVID. And we did experience that in the third quarter, and we expect that to continue into the fourth quarter. So those were the primary reasons why we had a step-up -- or a step-down for that matter in segment profits from second quarter to third quarter.

Got it. Thanks much. All have been asked. All right, thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing remarks.

Yes. Listen, thank you very much. We apologize for the need to delay today's call, and we continue to wish everyone the best as we continue to power through these unique times in and around the pandemic. We continue to appreciate your support, and stay well.

This concludes today's conference. Magellan Health thanks you for your participation, You may disconnect your lines at this time.