News Release Details

Oct 25, 2006
Magellan Health Services Reports Third Quarter 2006 Financial Results

Magellan Health Services Reports Third Quarter 2006 Financial Results

AVON, Conn.--(BUSINESS WIRE)--Oct. 25, 2006--Magellan Health Services, Inc. (Nasdaq:MGLN) today reported operating results for the third quarter of fiscal year 2006. In addition, on the basis of its third quarter performance, the Company now expects that it will end the year at the upper end of its previous guidance range of earnings per diluted common share of $1.81 to $2.18 and segment profit of $190 million to $210 million.

Financial Results

For the quarter ended September 30, 2006, the Company reported net revenue of $429.5 million and net income of $21.2 million, or $.54 per diluted common share. For the prior year quarter, net revenue was $454.3 million. Net income for the prior year quarter, as restated, was $33.6 million, or $.89 per diluted common share. Segment profit (which represents profit from continuing operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, income taxes and minority interest) for the current year quarter was $54.6 million, compared with $68.9 million in the prior year quarter.

For the nine months ended September 30, 2006, the Company reported net revenue of $1.23 billion and net income of $63.8 million, or $1.65 per diluted common share. For the prior year period, the Company reported net revenue of $1.37 billion and net income, as restated, of $78.4 million, or $2.11 per diluted common share. Segment profit for the first nine months of 2006 was $154.0 million versus $189.1 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 $138.3 million. Cash flow from operations for the nine months ended September 30, 2006 was $132.0 million compared with $144.4 million for the comparable period in the prior year.

Steven J. Shulman, chairman and chief executive officer, said, "This past quarter we again delivered a strong financial performance in total, which included the impact of two months of operating results for ICORE Healthcare, our specialty pharmaceutical management business segment and the second new line of business added this year. ICORE's talented team and successful business model are continuing to generate excellent results and future prospects are strong with ICORE's business development team having recently made progress on 2007 sales targets. Our behavioral health results continued to be robust. While our operating results in the radiology segment were not as strong as we would have liked this quarter, our key efforts were focused in developing and selling a risk radiology product. This important goal was achieved by the signing and announcement of our letter of intent with CIGNA to manage advanced imaging benefits for approximately three million of its members, which are split equally between risk- and ASO fee-based funding. This news is validation of our strategy of combining the strengths of Magellan and NIA to meet the needs of health plans in managing the cost and quality of advanced diagnostic imaging on a risk basis."

Mark S. Demilio, chief financial officer, said, "Our consistent performance, financial integrity and the strength of our balance sheet engender confidence in the customers for whom we manage care through risk contracts. As 2006 comes to a close we expect our favorable performance to continue and that we will generate segment profit at the upper end of our guidance range for the year. We anticipate providing 2007 guidance in December as we typically do. In the meantime, we are providing estimates of the revenue and earnings impact of contract activity known to date."

Contract Update

In addition to the recently announced CIGNA letter of intent, the Company has won new business that will affect revenue and earnings in 2007, primarily in its public sector segment and as a subcontractor with health plans on integrated Medicaid bids. The total impact in 2007 of the new business won year-to-date, excluding the CIGNA letter of intent, is expected to be approximately $170 million of revenue and approximately $21 million in segment profit. These estimates include previously announced wins but exclude new sales by ICORE, which are included in the previously announced guidance regarding ICORE.

The total impact in 2007 of the previously announced contract terminations with WellPoint, Inc. for its Midwest region and TennCare for its Middle Region, each of which will be effective March 31, 2007, as well as other known contract terminations is expected to be approximately $200 million of revenue and approximately $44 million in segment profit.

Earnings Results Conference Call

A conference call will be held to discuss the earnings at 10:30 a.m. Eastern time on Thursday, October 26. To participate in the conference call, interested parties should call 1-888-390-4698 and reference the passcode Third 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 12:30 p.m. Eastern time on Thursday, October 26 until midnight on Thursday, November 2. The call-in numbers for the replay are 1-866-435-5414 and 1-203-369-1033 (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, and Form 10-Q for the quarter ended June 30, 2006, filed with the Securities and Exchange Commission on July 28, 2006.

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, revenue and earnings impact of lost and new business, 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) the risk that the Company and CIGNA will be unable to agree on the final terms of a definitive agreement regarding the management of radiology benefits for CIGNA's members; the risk that the Company does not properly underwrite the risk portion of any agreement with CIGNA; the risk that the Company does not effectively implement any agreement with CIGNA; risk concerning the possible election of certain of the Company's health plan customers to manage the 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 new business or other Company 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; the Company's inability to integrate its acquisitions of NIA and ICORE in a timely and effective manner; 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, and will be included in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2006, which the Company expects will be filed on October 26, 2006.

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

                           Three Months Ended     Nine Months Ended
                             September 30,          September 30,
                          -------------------- -----------------------
                            2005     2006 (1)     2005      2006 (1)
                          ---------- --------- ----------- -----------
                          (restated)           (restated)

Net revenue                $454,266  $429,487  $1,371,564  $1,229,016

Cost and expenses:
  Cost of care              299,134   271,905     920,263     804,446
  Cost of goods sold              -    15,212           -      15,212
  Direct service costs
   and other operating
   expenses (2)              91,867    96,661     278,958     276,827
  Equity in earnings of
   unconsolidated
   subsidiaries              (1,759)        -      (4,711)       (390)
  Depreciation and
   amortization              12,161    13,096      36,952      35,086
  Interest expense            8,711     1,807      25,961       5,497
  Interest income            (4,995)   (4,280)    (11,927)    (13,418)
  Gain on sale of assets          -         -           -      (5,148)
  Special charges
   (benefits)                  (556)        -        (556)          -
                          ---------- --------- ----------- -----------
                            404,563   394,401   1,244,940   1,118,112
                          ---------- --------- ----------- -----------
Income from continuing
 operations before income
 taxes and minority
 interest                    49,703    35,086     126,624     110,904
Provision for income
 taxes                       16,828    13,890      49,696      47,169
                          ---------- --------- ----------- -----------
Income from continuing
 operations before
 minority interest           32,875    21,196      76,928      63,735
Minority interest, net          (25)      (40)         47         (40)
                          ---------- --------- ----------- -----------
Income from continuing
 operations                  32,900    21,236      76,881      63,775
Income from discontinued
 operations (3)                 696         -       1,526           -
                          ---------- --------- ----------- -----------
Net income                   33,596    21,236      78,407      63,775
Other comprehensive
 income (loss)                   44       186        (428)        562
                          ---------- --------- ----------- -----------
Comprehensive income       $ 33,640  $ 21,422  $   77,979  $   64,337
                          ========== ========= =========== ===========

Weighted average number
 of common shares
 outstanding -- basic (4)    36,436    37,096      35,795      36,925
                          ========== ========= =========== ===========
Weighted average number
 of common shares
 outstanding -- diluted
 (4)                         37,605    39,023      37,200      38,569
                          ========== ========= =========== ===========

Income per common share
 -- basic:
  Income from continuing
   operations              $   0.90  $   0.57  $     2.15  $     1.73
                          ========== ========= =========== ===========
  Income from
   discontinued
   operations              $   0.02  $      -  $     0.04  $        -
                          ========== ========= =========== ===========
Net income                 $   0.92  $   0.57  $     2.19  $     1.73
                          ========== ========= =========== ===========

Income per common share
 -- diluted:
  Income from continuing
   operations              $   0.87  $   0.54  $     2.07  $     1.65
                          ========== ========= =========== ===========
  Income from
   discontinued
   operations              $   0.02  $      -  $     0.04  $        -
                          ========== ========= =========== ===========
Net income                 $   0.89  $   0.54  $     2.11  $     1.65
                          ========== ========= =========== ===========

(1) For a more detailed discussion of Magellan's results for the three months and nine months ended September 30, 2006, refer to the Company's Quarterly Report on Form 10-Q, which will be filed with the SEC on October 26, 2006, and the live broadcast or taped replay of the Company's earnings conference call on October 26, 2006, which will be available at www.MagellanHealth.com.

(2) Includes stock compensation expense of $3,855 and $8,939 for the three months ended September 30, 2005 and 2006, respectively, and $12,024 and $21,033 for the nine months ended September 30, 2005 and 2006, respectively.



(3) Net of income tax provision of $28 and $1,073 for the three months and nine months ended September 30, 2005, respectively.

(4) Weighted average number of common shares outstanding for the three months and nine months ended September 30, 2005 and 2006 were calculated using outstanding shares of the Company's Ordinary Common Stock and Multi-Vote Common Stock as appropriate.

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


                                                   Nine Months Ended
                                                     September 30,
                                                 ---------------------
                                                   2005       2006
                                                 ---------- ----------
                                                 (restated)
Cash flows from operating activities:
Net income                                       $  78,407  $  63,775

Adjustments to reconcile net income to net cash
 from operating activities:
  Gain on sale of assets                                 -     (5,148)
  Depreciation and amortization                     36,952     35,086
  Equity in earnings of unconsolidated
   subsidiaries                                     (4,711)      (390)
  Non-cash interest expense                          1,042      1,042
  Non-cash stock compensation expense               12,024     21,033
  Non-cash income tax expense                       45,393     42,232
  Cash flows from changes in assets and
   liabilities, net of effects from acquisitions
   of businesses:
    Restricted cash                                (41,121)    22,241
    Accounts receivable, net                        (2,787)    11,125
    Other assets                                     4,604       (384)
    Accounts payable and accrued liabilities            68    (19,013)
    Medical claims payable and other medical
     liabilities                                    12,804    (39,602)
    Other                                            1,767        (39)
                                                 ---------- ----------
      Net cash provided by operating activities    144,442    131,958
                                                 ---------- ----------

Cash flows from investing activities:
  Capital expenditures                             (14,384)   (14,999)
  Proceeds from sale of assets                           -     22,200
  Purchase of investments                         (462,011)   (29,589)
  Maturity of investments                          331,642    227,534
  Acquisitions and investments in businesses,
   net of cash acquired                                  -   (282,806)
  Proceeds from note receivable                      7,000      3,000
                                                 ---------- ----------
    Net cash used in investing activities         (137,753)   (74,660)
                                                 ---------- ----------

Cash flows from financing activities:
  Payments on long-term debt and capital lease
   obligations                                     (19,266)   (18,929)
  Proceeds from exercise of stock options and
   warrants                                         12,787      8,878
                                                 ---------- ----------
    Net cash used in financing activities           (6,479)   (10,051)
                                                 ---------- ----------
Net increase in cash and cash equivalents              210     47,247
Cash and cash equivalents at beginning of period    45,390     81,039
                                                 ---------- ----------
Cash and cash equivalents at end of period       $  45,600  $128,286 A
                                                 ========== ==========

A Cash and cash equivalents as of September 30, 2006 does not include unrestricted investments of $9,996.

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

                             Three Months Ended    Nine Months Ended
                                September 30,        September 30,
                             ------------------- ---------------------
                               2005      2006      2005       2006
                             --------- --------- ---------- ----------
Net revenue
  - Health Plan              $228,849  $164,479   $687,244   $481,648
  - Employer                   31,437    32,079     94,839     97,316
  - Public Sector             193,980   201,586    589,481    598,551
  - Radiology Benefits
   Management                       -    10,648          -     30,806
  - Specialty Pharmaceutical
   Management                       -    20,695          -     20,695
                             --------- --------- ---------- ----------
  Total revenue               454,266   429,487  1,371,564  1,229,016
                             --------- --------- ---------- ----------

Cost of care
  - Health Plan               128,674    95,404    382,545    271,577
  - Employer                    7,477     6,875     23,122     21,942
  - Public Sector             162,983   169,626    514,596    510,927
                             --------- --------- ---------- ----------
  Total cost of care          299,134   271,905    920,263    804,446
                             --------- --------- ---------- ----------

Cost of goods sold
  - Specialty Pharmaceutical
   Management                       -    15,212          -     15,212
                             --------- --------- ---------- ----------

Direct service costs
  - Health Plan                39,747    25,754    121,898     78,169
  - Employer                   15,727    16,605     47,908     50,879
  - Public Sector               7,074     8,928     22,452     26,269
  - Radiology Benefits
   Management                       -     9,845          -     26,760
  - Specialty Pharmaceutical
   Management                       -     2,631          -      2,631
                             --------- --------- ---------- ----------
  Total direct services
   costs                       62,548    63,763    192,258    184,708
                             --------- --------- ---------- ----------

Other operating expenses -
 Corporate & Other             29,319    32,898     86,700     92,119
                             --------- --------- ---------- ----------

Equity in earnings of
 unconsolidated subsidiaries
  - Health Plan                (1,759)        -     (4,711)      (390)
                             --------- --------- ---------- ----------

Stock compensation expense
 (1)
  - Health Plan                  (130)     (391)      (405)      (957)
  - Employer                      (21)      (94)       (66)      (246)
  - Public Sector                 (83)     (242)      (259)      (603)
  - Radiology Benefits
   Management                       -      (353)         -       (887)
  - Specialty Pharmaceutical
   Management                       -    (1,308)         -     (1,308)
  - Corporate & Other          (3,621)   (6,551)   (11,294)   (17,032)
                             --------- --------- ---------- ----------
  Total stock compensation
   expense                     (3,855)   (8,939)   (12,024)   (21,033)
                             --------- --------- ---------- ----------

Segment profit (loss)
  - Health Plan                62,317    43,712    187,917    133,249
  - Employer                    8,254     8,693     23,875     24,741
  - Public Sector              24,006    23,274     52,692     61,958
  - Radiology Benefits
   Management                       -     1,156          -      4,933
  - Specialty Pharmaceutical
   Management                       -     4,160          -      4,160
  - Corporate & Other         (25,698)  (26,347)   (75,406)   (75,087)
                             --------- --------- ---------- ----------
  Total segment profit        $68,879   $54,648   $189,078   $153,954
                             ========= ========= ========== ==========

Reconciliation of segment
 profit to income from
 continuing operations
 before income taxes and
 minority interest:
  Segment profit              $68,879   $54,648   $189,078   $153,954
  Stock compensation expense   (3,855)   (8,939)   (12,024)   (21,033)
  Depreciation and
   amortization               (12,161)  (13,096)   (36,952)   (35,086)
  Interest expense             (8,711)   (1,807)   (25,961)    (5,497)
  Interest income               4,995     4,280     11,927     13,418
  Gain on sale of assets            -         -          -      5,148
  Special benefits (charges)      556         -        556          -
                             --------- --------- ---------- ----------
  Income from continuing
   operations before income
   taxes and minority
   interest                   $49,703   $35,086   $126,624   $110,904

Membership
  - Health Plan                                                  27.1
  - Employer                                                     13.9
  - Public Sector                                                 2.0
  - Radiology Benefits
   Management                                                    17.3
                                                            ----------
  Total membership                                               60.3
                                                            ==========

(1) Stock compensation expense is included in direct service costs and other operating expenses; however, this amount is excluded from the computation of segment profit since it is managed on a consolidated basis.

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