Magellan Health Cantor Fitzgerald Healthcare Conference September 26, 2017
Cautionary Statement and Non-GAAP measures 2 This slide presentation and our accompanying oral comments include forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management s current expectations and are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those reflected, contemplated or implied by such forward-looking statements including, but not limited to, the following: Termination or non-renewal of contracts by customers Renegotiation of rates paid to and/or by the Company by customers and/or providers Higher utilization of health treatment services by members Delays, higher costs or inability to implement the Company s initiatives The impact of new or amended laws or regulations Acts of war, terrorism or other catastrophic events The impact of increased competition on ability to maintain or obtain contracts The impact of increased competition on rates paid to or by the Company Loss of relationships with providers, vendors and/or manufacturers The impact of share repurchase programs Governmental inquiries and/or litigation Interest rate changes Economic uncertainties Many of these factors are beyond the control of the Company. Any and all forward-looking statements made in this presentation are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on February 24, 2017, and the company s subsequent Quarterly Reports on Form 10-Q filed during 2017. Magellan undertakes no obligation to update any forward-looking or cautionary statements. 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. A reconciliation of GAAP to non-gaap measures is included at the end of this presentation as well as our SEC filings.
Magellan Health Today: At a Glance Revenue Breakdown (2016) Key Metrics 2016 Revenue ~$5B Pharmacy 46% Healthcare 54% Market cap Material contracts up for renewal prior to 2019 ~$1.9B None Contracts representing > 15% of revenue None 3
Agenda At an Inflection Point Two Growth Platforms The Road Ahead 4
A Repositioned Company, At an Inflection Point Successfully Repositioned Two Growth Platforms Long-Term Sustained Growth Strong performance record, since 2013 grew Pharmacy >3X Both with a specialty focus and multiple drivers Our unique capabilities play key role in reducing healthcare costs 5
Repositioned for Growth 2006-2012 2013-2016 2017+ Diversification Building on behavioral health Repositioning Through Magellan Complete Care & Pharmacy expansion Growing Through two platforms Healthcare and Pharmacy 6
Capital Deployed Strategically to Support Repositioning ~$1.5B of Cash Deployed 2013-2016 ~$260M Capital Expenditures ~$85M Operational Investments ~$610M* M&A ~$570M Returned to Shareholders High-return investments Investments in MCC and Pharmacy 9 acquisitions ~9.9M shares repurchased 7 * Excludes approximately $80M in stock compensation related to acquisitions
R E S U L T S : Solid Track Record of Growth while Repositioning Revenues $B ~11% CAGR $4.6 $4.8 $3.5 $3.8 54% Healthcare % of Total 82% 46% 18% 2013 2014 2015 2016 Pharmacy % of Total Growth achieved despite legacy business losses, and remaining large contract exposure minimized 8
R E S U L T S : At an Inflection Point Positioned for Long-Term Sustainable Growth Revenue ($Billions) Segment Profit 1 ($Millions) $3.5 $3.8 $4.6 $5.8-6.1 $4.8 $259 $267 $329-$349 $302 $275 2013 2014 2015 2016 2017E 2013 2014 2015 2016 2017E 9 1 represents an adjusted financial measure not in accordance with GAAP. The reconciliation of this measure as well as Management s explanation for its use can be found in GAAP to Non-GAAP Measures section at the end of this presentation.
Agenda At an Inflection Point Two Growth Platforms The Road Ahead 10
Our Two Growth Platforms 11
Magellan Healthcare Has Built a Leadership Position in Complex Population Health 40+ years experience 50M 1k+ lives contracts Specialty Innovators Advanced imaging Cardiac MSK pain management Physical Medicine Federal / Military Full-service Managed Care Organization AlphaCare New York TMG Wisconsin MCC Florida MCC Virginia 12 Behavioral Health Pioneers Autism Opioid Cobalt digital therapy
T H E B U S I N E S S A T A G L A N C E Delivering Differentiated Services to Complex Populations Healthcare Revenues (~$3B) Behavioral Health Specialty Federal 42% 83% 21% 9% 27% 13% 3% 2013 2016 Behavioral Health Specialty Federal Fast Growing Magellan Complete Care Strategically diversified revenue Magellan Complete Care provides key growth driver Targeted acquisitions provides growth opportunities New growth offsets Government behavioral health contract losses Reduced contract risk and increase in growth businesses 13
Core Capabilities Delivered Across All Buyer Segments VALUE PROPOSITION Complex Population Management Behavioral, Specialty, MCO Evidence based, clinically driven, self-directed care Analytics, technology, performance Lower cost, better outcomes Payer Agnostic Diverse Payment Arrangements Differentiated Model 14
Our Two Growth Platforms 15
T H E B U S I N E S S A T A G L A N C E Full Service PBM Focused on High-Growth Specialty Drug Spend Full service PBM plus differentiated specialty capabilities Revenues ($Billion) #1 in U.S. focused on medical pharmacy management ~14M lives 4 acquisitions last 4 years, fueling 50% of growth $1.1 ~48% CAGR $1.7 ~$2.3 $0.7 2013 2014 2015 2016 16
Magellan Rx A Full-Service PBM Across the U.S. 40+ yrs Medicaid Pharmacy Experience 50 26 32 30+ yrs Self-Funded Employer Experience States and D.C. with Commercial PBM States and D.C. with FFS Medicaid PBA States and D.C. with Medicare PDP 53 1.9M ~14M Health Plan Clients Commercial PBM Members Medical Pharmacy Members 17
Powerful Pharmacy Trends, Driven by Specialty Drugs $299B $412B $572B Specialty Drugs Traditional Drugs Net promoter scores for PBMs are low Consumerism on the rise Overall drug costs continue to grow Specialty drugs as a percent of total drug spend continues to increase 2011 2016 2021 18 Source: The 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, Drug Channels Institute, 2017, Exhibit 66.
But Something is Missing Medical Pharmacy Not managed by most PBMs Specialty Drugs on the medical benefit For every $1 spent on Specialty Drugs under the pharmacy benefit, there is another $1 spent on the medical benefit 25 specialty approvals last year, 50% on medical benefit Specialty Drugs on the pharmacy benefit 28 unique billion-dollar medical pharmacy drugs by 2020 19 Source: The 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, Drug Channels Institute, 2017, Exhibit 66.
Agenda At an Inflection Point Two Growth Platforms The Road Ahead 20
Well Positioned to Succeed in Current Healthcare Environment Key Trends Focus by government and private payers on managing complex populations Growing awareness that behavioral health, especially severe mental illness, drives significant expenditures Need to manage high-cost specialty drugs, especially in Medicaid and Medicare Opportunity for nimble, entrepreneurial players in a continuing period of transformation Play to Magellan strengths 21
Capital Flexibility to Fund Growth Debt Capacity $M Capital Highlights June 30, 2017 $800 2.5 x TTM EBITDA $600 $400 Additional Net Debt Capacity 1.4 x TTM EBITDA Unrestricted Cash and Investments: $273M Unused Credit Facilities: $223M $200 Actual Net Debt Debt & Capital Lease Obligations: $631M $- 30-Jun-17 Unused 2015 Share Repurchase Authorization: $69M Currently working on refinancing credit facility to increase capacity and flexibility 22
Capital in Action: Acquisition of Senior Whole Health STRATEGIC RATIONALE Highly aligned with Magellan s strategy Core managed care capabilities Geographic expansion Attractive financial profile ANTICIPATED FINANCIAL IMPACT Estimated $0.60 EPS and $1.00 Adjusted EPS accretion Beyond 2018, anticipate synergies of approximately $10M annually 23
A Repositioned Company, At an Inflection Point Successfully Repositioned Two Growth Platforms Long-Term Sustained Growth Post-2017 Long-Term Growth Objectives: Revenue 10-15% Segment Profit 1 ~10% Adjusted EPS 1 10-15% 24 1 represents an adjusted financial measure not in accordance with GAAP. The reconciliation of this measure as well as Management s explanation for its use can be found in GAAP to Non-GAAP Measures section at the end of this presentation.
Overview of 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. The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes ( 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. In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan Health, Inc. ( Adjusted Net Income ) and adjusted net income per common share attributable to Magellan Health, Inc. on a diluted basis ( Adjusted EPS ). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted 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. The Company believes these non-gaap measures provide a more useful comparison of the Company s underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures we disclose, such as Segment Profit, Adjusted Net Income and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. 25
Reconciliation of Non-GAAP Measures Reconciliation of Segment Profit to Income before taxes (in millions) 2017 Guidance 2013 2014 2015 2016 Low High Segment Profit $ 259.4 $ 266.9 $ 275.7 $ 301.8 $ 329.0 $ 349.0 Stock compensation expense (21.3) (40.6) (50.4) (37.4) (40.0) (36.0) Changes in fair value of contingent consideration - (6.2) (44.3) 0.1 (2.0) - Impairment of intangible assets - - - (4.8) - - Non-controlling interest segment profit (loss) - (5.1) (2.6) (0.7) - - Depreciation and amortization (72.0) (91.0) (102.9) (106.1) (117.0) (113.0) Interest expense (3.0) (7.4) (6.6) (10.2) (23.0) (13.0) Interest and other income 2.0 1.3 2.2 2.8 2.0 2.0 Income before income taxes $ 165.1 $ 117.9 $ 71.1 $ 145.5 $ 149.0 $ 189.0 26
Reconciliation of Non-GAAP Measures Reconciliation of Net income attributable to Magellan Health, Inc. to Adjusted Net Income and Adjusted EPS (in millions) 2016 2017 Low Guidance 2017 High Net income attributable to Magellan Health, Inc. $ 77.9 $ 90.0 $ 114.0 Adjusted for acquisitions starting in 2013 Stock compensation expense relating to acquisitions 19.2 16.7 16.7 Changes in fair value of contingent consideration (0.1) 2.0 - Amortization of acquired intangibles 25.3 34.0 34.0 Impairment of intangible assets, net of non-controlling interest 3.9 Tax impact (16.7) (19.7) (19.7) Adjusted Net Income $ 109.5 $ 123.0 $ 145.0 Weighted average number of common shares outstanding - diluted 24.2 24.2 24.2 Adjusted EPS $ 4.53 $ 5.08 $ 5.99 27