Jul 28, 2006
Magellan Health Services Reports Second Quarter 2006 Financial Results; Company Raises 2006 Guidance

Magellan Health Services Reports Second Quarter 2006 Financial Results; Company Raises 2006 Guidance

AVON, Conn.--(BUSINESS WIRE)--July 28, 2006--Magellan Health Services, Inc. (Nasdaq:MGLN) today reported operating results for the second quarter of fiscal year 2006. The Company also raised its 2006 segment profit guidance to $190 million to $210 million, and its earnings per share guidance to $1.81 to $2.18 per diluted common share, including the anticipated impact of its acquisition of ICORE Healthcare, LLC.

Financial Results

For the quarter ended June 30, 2006, the Company reported net revenue of $398.9 million and net income of $20.2 million, or $.52 per diluted common share. For the prior year quarter, net revenue was $464.5 million. Net income for the prior year quarter, as restated, was $21.7 million, or $.59 per diluted common share. Segment profit (net revenue less cost of care and direct service costs and other operating expenses plus equity in earnings of unconsolidated subsidiaries) for the current year quarter was $50.1 million, compared with $58.9 million in the prior year.

For the six months ended June 30, 2006, the Company reported net revenue of $799.5 million and net income of $42.5 million, or $1.11 per diluted common share. For the prior year period, the Company reported net revenue of $917.3 million and net income, as restated, of $44.8 million, or $1.21 per diluted common share. Segment profit for the first six months of 2006 was $99.3 million versus $120.2 million for the prior year period.

See the attached tables detailing the Company's operating results, including results by segment.

The Company ended the quarter with unrestricted cash and investments of $241.1 million. Cash flow from operations for the six months ended June 30, 2006 was $69.8 million compared with $90.3 million for the comparable period in the prior year.

"Continued strong performance in our behavioral health segment and further progress in growing our business through new sales and acquisitions were hallmarks of the second quarter for Magellan," said Steven J. Shulman, chairman and chief executive officer. "Our efficient operations and effective management of care in the behavioral area continue to yield excellent financial results. We announced our entry into the specialty pharmaceutical arena with the purchase of ICORE and completion of the acquisition is ahead of schedule, with our anticipated close slated for the end of this month. With ICORE and, earlier this year, National Imaging Associates, we have made significant progress in our long-term strategy of becoming the leading diversified specialty health care management organization," Shulman said.

2006 Guidance

The Company increased its segment profit guidance for 2006 to a range of $190 million to $210 million, and its earnings per share guidance to $1.81 to $2.18 per diluted common share, including the anticipated impact of its acquisition of ICORE.

See the attached tables detailing the Company's revised financial guidance.

"Based on six months of robust financial performance in our behavioral health business, and in anticipation of closing the ICORE acquisition one month earlier than planned, we are increasing our segment profit and EPS guidance for the year," said Mark S. Demilio, chief financial officer. "With regard to our cash position, we have consistently stated that our preferred use of cash is the funding of acquisitions designed to further our long-term objectives. With NIA and, now, ICORE we have executed on this plan, as we will fund the ICORE transaction with cash on hand."

Earnings Results Conference Call

A conference call will be held to discuss the earnings at 10:00 a.m. Eastern time on Friday, July 28. To participate in the call, interested parties should call 1-888-390-4698 and reference the passcode Second Quarter Earnings and conference leader Steve Shulman approximately 15 minutes before the start of the call.

The conference call also will be available via a live Webcast at the investor relations page of Magellan's Web site, www.MagellanHealth.com.

A taped replay of the conference call will be available from approximately 12 noon Eastern time on Friday, July 28 until midnight on Friday, August 4. The call-in numbers for the replay are 1-866-505-9251 and 1-203-369-1876 (from outside the U.S.).

Those who plan to listen to the call and/or Webcast are encouraged to read Magellan's Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8, 2006, including the section entitled "Risk Factors."

About Magellan: Headquartered in Avon, Conn., Magellan Health Services, Inc. (Nasdaq:MGLN) is the country's leading diversified specialty health care management organization. Its customers include health plans, corporations and government agencies.

Cautionary Statement: Certain of the statements made in this press release including, without limitation, statements regarding estimates of segment profit, net income, earnings per share, future growth, new business opportunities, closing of the ICORE transaction, and other matters constitute 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 contemplated or implied by such forward-looking statements, including (among others) risk concerning the possible election of certain of the Company's health plan customers to manage the behavioral health care services of their members directly; renegotiation of rates paid to and/or by the Company by customers and/or to providers; higher utilization of behavioral health treatment services by risk members; delays, higher costs or inability to implement the Company's initiatives; the impact of changes in the contracting model for Medicaid contracts relating to managed health care services; termination or non-renewal of contracts by customers; the impact of new or amended laws or regulations; governmental inquiries and/or litigation; the impact of increased competition on the Company's ability to maintain or obtain contracts; the impact of increased competition on rates paid to or by the Company; and other factors. Any forward-looking statements made in this document are qualified in their entirety by the more complete discussion of risks set forth in the section entitled "Risk Factors" in Magellan's Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8, 2006, and posted on the Company's Web site. Segment profit information referred to in this press release may be considered a non-GAAP financial measure. Further information regarding this measure, including the reasons management considers this information useful to investors, is included in Magellan's Annual Report on Form 10-K for the year ended December 31, 2005.

          MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                            (Unaudited)
              (In thousands, except per share amounts)



                           Three Months Ended      Six Months Ended
                                 June 30,              June 30,
                          ---------------------  ---------------------
                             2005      2006 (1)     2005      2006 (1)
                           ---------  ---------   ---------  ---------
                          (restated)             (restated)

Net revenue               $ 464,544  $ 398,933   $ 917,298  $ 799,529

Cost and expenses:
 Cost of care               316,921    262,706     621,129    532,541
 Direct service costs        66,340     61,991     129,214    119,332
 Other operating expenses    23,861     24,113      49,708     48,740
 Equity in earnings of
  unconsolidated
  subsidiaries               (1,503)         -      (2,952)      (390)
                           ---------  ---------   ---------  ---------
                            405,619    348,810     797,099    700,223
                           ---------  ---------   ---------  ---------
 Segment profit              58,925     50,123     120,199     99,306
                           ---------  ---------   ---------  ---------

 Depreciation and
  amortization               13,573     11,333      24,791     21,990
 Interest expense             8,611      1,721      17,250      3,690
 Interest income             (3,899)    (4,921)     (6,932)    (9,138)
 Stock compensation
  expense                     4,419      6,594       8,169     12,094
 Gain on sale of assets           -       (403)          -     (5,148)
                           ---------  ---------   ---------  ---------

Income from continuing
 operations before income
 taxes and minority
 interest                    36,221     35,799      76,921     75,818
Provision for  income
 taxes                       15,316     15,575      32,868     33,279
                           ---------  ---------   ---------  ---------
Income from continuing
 operations before
 minority interest           20,905     20,224      44,053     42,539
Minority interest, net            4          -          72          -
                           ---------  ---------   ---------  ---------
Income from continuing
 operations                  20,901     20,224      43,981     42,539
Income from discontinued
 operations (2)                 816          -         830          -
                           ---------  ---------   ---------  ---------
Net income                   21,717     20,224      44,811     42,539
Other comprehensive (loss)
 income                        (458)       166        (472)       376
                           ---------  ---------   ---------  ---------
Comprehensive income      $  21,259  $  20,390   $  44,339  $  42,915
                           =========  =========   =========  =========

Weighted average number of
 common shares outstanding
 -- basic (3)                35,567     36,999      35,475     36,852
                           =========  =========   =========  =========
Weighted average number of
 common shares outstanding
 -- diluted (3)              36,980     38,599      36,899     38,384
                           =========  =========   =========  =========

Income per common share --
 basic:
 Income from continuing
  operations              $    0.59  $    0.55   $    1.24  $    1.15
                           =========  =========   =========  =========
 Income from discontinued
  operations              $    0.02  $       -   $    0.02  $       -
                           =========  =========   =========  =========
Net income                $    0.61  $    0.55   $    1.26  $    1.15
                           =========  =========   =========  =========

Income per common share --
 diluted:
 Income from continuing
  operations              $    0.57  $    0.52   $    1.19  $    1.11
                           =========  =========   =========  =========
 Income from discontinued
  operations              $    0.02  $       -   $    0.02  $       -
                           =========  =========   =========  =========
Net income                $    0.59  $    0.52   $    1.21  $    1.11
                           =========  =========   =========  =========


(1) For a more detailed discussion of Magellan's results for the three
    months and six months ended June 30, 2006, refer to the Company's
    Quarterly Report on Form 10-Q, which will be filed with the SEC on
    July 28, 2006, and the live broadcast or taped replay of the
    Company's earnings conference call on July 28, 2006, which will be
    available at www.MagellanHealth.com.

(2) Net of income tax provision of $940 and $1,045 for the three
    months and six months ended June 30, 2005, respectively.

(3) Weighted average number of common shares outstanding for the three
    months and six months ended June 30, 2005 were calculated using
    outstanding shares of the Company's Ordinary Common Stock and
    Multi-Vote Common Stock.



          MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Unaudited)
                          (In thousands)


                                            Six Months Ended June 30,
                                            --------------------------
                                                2005         2006
                                             -----------   ----------
                                             (restated)
Cash flows from operating activities:
 Net income                                 $    44,811   $   42,539

 Adjustments to reconcile net income to net
  cash from operating activities:
   Gain on sale of assets                             -       (5,148)
   Depreciation and amortization                 24,791       21,990
   Equity in earnings of unconsolidated
    subsidiaries                                 (2,952)        (390)
   Non-cash interest expense                        694          694
   Non-cash stock compensation expense            8,169       12,094
   Non-cash income tax expense                   30,754       30,116
   Cash flows from changes in assets and
    liabilities, net of effects from
    acquisitions of businesses:
    Restricted cash                             (46,030)     (11,627)
    Accounts receivable, net                     12,578        6,878
    Other assets                                    169       (3,336)
    Accounts payable and accrued liabilities     (3,281)     (20,481)
    Medical claims payable and other medical
     liabilities                                 19,929       (1,970)
    Other liabilities                               153          (53)
    Minority interest, net of dividends paid        123       (1,520)
    Other                                           344           39
                                             -----------   ----------
      Net cash provided by operating
       activities                                90,252       69,825
                                             -----------   ----------

Cash flows from investing activities:
 Capital expenditures                            (8,628)      (8,923)
 Proceeds from sale of assets                         -       22,200
 Purchase of investments                       (224,683)     (23,481)
 Maturity of investments                        173,777      206,534
 Acquisitions and investments in businesses,
  net of cash acquired                                -     (120,735)
 Proceeds from note receivable                    7,000        3,000
                                             -----------   ----------
      Net cash (used in) provided by
       investing activities                     (52,534)      78,595
                                             -----------   ----------

Cash flows from financing activities:
 Payments on long-term debt and capital
  lease obligations                             (13,560)     (12,657)
 Proceeds from exercise of stock options and
  warrants                                       12,041        7,771
                                             -----------   ----------
      Net cash used in financing activities      (1,519)      (4,886)
                                             -----------   ----------
Net increase in cash and cash equivalents        36,199      143,534
Cash and cash equivalents at beginning of
 period                                          45,390       81,039
                                             -----------   ----------
Cash and cash equivalents at end of period  $    81,589   $  224,573 A
                                             ===========   ==========


A   Cash and cash equivalents as of June 30, 2006 does not include
    unrestricted investments of $16,484.




          MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                           (Unaudited)
      (In thousands, except membership amounts in millions)



                              Three Months Ended   Six Months Ended
                                    June 30,            June 30,
                              -------------------  ------------------
                                2005      2006       2005      2006
                               --------  --------   --------  --------

Net revenue
  -  Health Plan              $233,494  $159,381   $458,396  $317,168
  -  Employer                   31,741    32,057     63,401    65,237
  -  Public Sector             199,309   195,066    395,501   396,965
  -  Radiology Benefits
   Management                        -    12,429          -    20,159
                               --------  --------   --------  --------
  Total revenue                464,544   398,933    917,298   799,529
                               --------  --------   --------  --------

Cost of care
  -  Health Plan               132,142    89,899    253,870   176,175
  -  Employer                    7,786     6,911     15,646    15,066
  -  Public Sector             176,993   165,896    351,613   341,300
                               --------  --------   --------  --------
  Total cost of care           316,921   262,706    621,129   532,541
                               --------  --------   --------  --------

Direct service costs
  -  Health Plan                42,296    25,516     81,878    51,849
  -  Employer                   16,430    17,427     32,135    34,122
  -  Public Sector               7,614     8,918     15,201    16,980
  -  Radiology Benefits
   Management                        -    10,130          -    16,381
                               --------  --------   --------  --------
  Total direct services costs   66,340    61,991    129,214   119,332
                               --------  --------   --------  --------

Other operating expenses -
 Corporate & Other              23,861    24,113     49,708    48,740
                               --------  --------   --------  --------

Equity in earnings of
 unconsolidated subsidiaries
  -  Health Plan                (1,503)        -     (2,952)     (390)
                               --------  --------   --------  --------

Segment profit (loss)
  -  Health Plan                60,559    43,966    125,600    89,534
  -  Employer                    7,525     7,719     15,620    16,049
  -  Public Sector              14,702    20,252     28,687    38,685
  -  Radiology Benefits
   Management                        -     2,299          -     3,778
  -  Corporate & Other         (23,861)  (24,113)   (49,708)  (48,740)
                               --------  --------   --------  --------
  Total segment profit        $ 58,925  $ 50,123   $120,199  $ 99,306
                               ========  ========   ========  ========


Reconciliation of segment
 profit to income from
 continuing operations before
 income taxes and minority
 interest:
  Segment profit              $ 58,925  $ 50,123   $120,199  $ 99,306
  Depreciation and
   amortization                (13,573)  (11,333)   (24,791)  (21,990)
  Interest expense              (8,611)   (1,721)   (17,250)   (3,690)
  Interest income                3,899     4,921      6,932     9,138
  Stock compensation expense    (4,419)   (6,594)    (8,169)  (12,094)
  Gain on sale of assets             -       403          -     5,148
                               --------  --------   --------  --------
  Income from continuing
   operations before income
   taxes and minority interest$ 36,221  $ 35,799   $ 76,921  $ 75,818
                               ========  ========   ========  ========


Membership
  -  Health Plan                                                 26.8
  -  Employer                                                    13.8
  -  Public Sector                                                1.9
  -  Radiology Benefits
   Management                                                    17.9
                                                              --------
  Total membership                                               60.4
                                                              ========



Magellan Health Services, Inc. and Subsidiaries
Revised Fiscal 2006 Forecast Guidance - Earnings
(In millions, except per share amounts)


                                                   Low         High
                                                ----------  ----------

Net revenue                                     $   1,710   $   1,730

Cost of care                                        1,161       1,166
Direct service costs and other operating
 expenses                                             359         354
                                                 ---------   ---------
Segment profit                                        190         210

Depreciation and amortization                          48          46
Interest expense (income), net                        (10)        (12)
Stock compensation expense                             32          30
Gain on sale of assets                                 (5)         (5)
                                                 ---------   ---------
Income from continuing operations                     125         151
Income taxes                                           55          67
                                                 ---------   ---------
Net income                                      $      70   $      84
                                                 =========   =========

Weighted average shares outstanding - diluted        38.6        38.6
                                                 =========   =========

EPS - diluted as revised                        $    1.81   $    2.18
EPS - diluted per previous guidance                  1.53        1.94
                                                 ---------   ---------
Change in EPS guidance                          $    0.28   $    0.24
                                                 =========   =========


Note - Includes forecasted NIA activity for the eleven months ended
       December 31, 2006, and ICORE activity for the five months ended
       December 31, 2006.



Magellan Health Services, Inc. and Subsidiaries
Revised Fiscal 2006 Forecast Guidance - Cash Flow
(In millions)


                                                   Low         High
                                                ----------  ----------

Cash Flows From Operating Activities
Net income                                      $      70   $      84
Adjusting items:
  Gain on sale of assets                               (5)         (5)
  Depreciation and amortization                        48          46
  Non-cash stock compensation expense                  32          30
  Non-cash income tax expense                          51          61
  Other net cash flows from changes in assets
   and liabilities                                    (47)        (41)
                                                 ---------   ---------
  Net cash provided by operating activities           149         175
                                                 ---------   ---------

Cash Flows From Investing Activities
Capital expenditures                                  (32)        (22)
Proceeds from sale of assets                           22          22
Cash used for NIA acquisition                        (121)       (121)
Cash used for ICORE acquisition                      (165)       (165)
Proceeds from note receivable                           3           3
                                                 ---------   ---------
  Net cash used in investing activities              (293)       (283)
                                                 ---------   ---------

Cash Flows From Financing Activities
Payments on long-term debt and capital lease
 obligations                                          (25)        (25)
Proceeds from exercise of stock options and
 warrants                                               8          10
                                                 ---------   ---------
  Net cash used in financing activities               (17)        (15)
                                                 ---------   ---------

  Net change in cash, cash equivalents and
   unrestricted investments                     $    (161)  $    (123)
                                                 =========   =========


Note - Includes forecasted NIA activity for the eleven months ended
       December 31, 2006, and ICORE activity for the five months ended
       December 31, 2006.

CONTACT: Magellan Health Services, Inc.
Investors:
Melissa Rose,
877-645-6464
or
Media:
Erin Somers,
410-953-2405

SOURCE: Magellan Health Services, Inc.