UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended | |
Or | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File No.
(Exact name of registrant as specified in its charter)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of Magellan Health, Inc.’s common stock outstanding as of September 30, 2020 was
FORM 10-Q
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
INDEX
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
December 31, | September 30, | ||||||
2019 |
| 2020 |
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ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents ($ | $ | | $ | | |||
Accounts receivable, net |
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Short-term investments ($ |
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Pharmaceutical inventory |
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Other current assets ($ |
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Current portion of assets held for sale | | | |||||
Total Current Assets |
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Property and equipment, net |
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Long-term investments ($ |
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Deferred income taxes | | | |||||
Other long-term assets |
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Goodwill |
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Other intangible assets, net |
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Assets held for sale, less current portion | | — | |||||
Total Assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued liabilities |
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Medical claims payable |
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Other medical liabilities |
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Current debt, finance lease and deferred financing obligations |
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Current portion of liabilities held for sale | | | |||||
Total Current Liabilities |
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Long-term debt, finance lease and deferred financing obligations |
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Deferred income taxes | | — | |||||
Tax contingencies |
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Deferred credits and other long-term liabilities |
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Liabilities held for sale, less current portion | | — | |||||
Total Liabilities |
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Preferred stock, par value $ | |||||||
Authorized— |
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Common stock, par value $ | |||||||
Authorized— |
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Other Stockholders’ Equity: | |||||||
Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Treasury stock, at cost, |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity | $ | | $ | |
See accompanying notes to consolidated financial statements.
2
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended |
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September 30, | September 30, | |||||||||||||
2019 |
| 2020 |
| 2019 |
| 2020 |
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Net revenue: | ||||||||||||||
Managed care and other | $ | | $ | | $ | | $ | | ||||||
PBM |
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Total net revenue |
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Costs and expenses: | ||||||||||||||
Cost of care |
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Cost of goods sold |
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Direct service costs and other operating expenses (1) |
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Depreciation and amortization |
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Interest expense |
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Interest and other income |
| ( |
| ( |
| ( |
| ( | ||||||
Special charges | — | | — | | ||||||||||
Total costs and expenses |
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Income (loss) from continuing operations before income taxes |
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| ( |
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| ( | ||||||
Provision (benefit) for income taxes |
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| ( |
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| ( | ||||||
Net income (loss) from continuing operations | | ( | | | ||||||||||
Income from discontinued operations, net of tax | | | | | ||||||||||
Net income | $ | | $ | | $ | | $ | | ||||||
Net income (loss) per common share: | ||||||||||||||
Basic (See Note A) | ||||||||||||||
Continuing operations | $ | | $ | ( | $ | | $ | | ||||||
Discontinued operations | | | | | ||||||||||
Consolidated operations | $ | | $ | | $ | | $ | | ||||||
Diluted (See Note A) | ||||||||||||||
Continuing operations | $ | | $ | ( | $ | | $ | | ||||||
Discontinued operations | | | | | ||||||||||
Consolidated operations | $ | | $ | | $ | | $ | | ||||||
Other comprehensive income | ||||||||||||||
Unrealized gains (losses) on available-for-sale securities (2) |
| ( |
| ( |
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| ( | ||||||
Comprehensive income | $ | | $ | | $ | | $ | |
(1) | Includes stock compensation expense of $ |
(2) | Net of income tax (benefit) provision of $( |
See accompanying notes to consolidated financial statements.
3
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
| Accumulated |
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| Common Stock | Additional | Other | Total |
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Common Stock | In Treasury | Paid in | Retained | Comprehensive | Stockholders’ |
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| (Loss) Income |
| Equity |
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Balance at June 30, 2019 | | $ | |
| ( | $ | ( | $ | | $ | | $ | | $ | | |||||||||
Stock compensation expense | — |
| — |
| — |
| — |
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| — |
| — |
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Exercise of stock options | — |
| — |
| — |
| — |
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Issuance of equity | |
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| — |
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Net income | — |
| — |
| — |
| — |
| — |
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Other comprehensive (loss)—other | — | — | — | — | — | | ( |
| ( | |||||||||||||||
Balance at September 30, 2019 | | $ | | ( | $ | ( | $ | | $ | | $ | | $ | | ||||||||||
Balance at June 30, 2020 | | $ | |
| ( | $ | ( | $ | | $ | | $ | | $ | | |||||||||
Stock compensation expense | — |
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| — |
| — |
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| — |
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Exercise of stock options | |
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Issuance of equity | |
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Net income | — |
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Other comprehensive (loss)—other | — | — | — | — | — | — | ( | ( | ||||||||||||||||
Balance at September 30, 2020 | | $ | |
| ( | $ | ( | $ | | $ | | $ | | $ | | |||||||||
Balance at December 31, 2018 |
| | $ | |
| ( | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
Stock compensation expense |
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Exercise of stock options |
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Issuance of equity |
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Repurchase of stock |
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| ( |
| ( |
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Net income |
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Other comprehensive income—other | — | — | — | — | — | — | |
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Adoption of ASC 842 |
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| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Balance at September 30, 2019 | | $ | | ( | $ | ( | $ | | $ | | $ | | $ | | ||||||||||
Balance at December 31, 2019 |
| | $ | |
| ( | $ | ( | $ | | $ | | $ | | $ | | ||||||||
Stock compensation expense |
| — |
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Exercise of stock options |
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Issuance of equity |
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Net income |
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Other comprehensive (loss)—other | — | — | — | — | — | — | ( | ( | ||||||||||||||||
Adoption of ASC 326 | — | — | — | — | — | ( | — | ( | ||||||||||||||||
Balance at September 30, 2020 |
| | $ | |
| ( | $ | ( | $ | | $ | | $ | | $ | |
See accompanying notes to consolidated financial statements.
4
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(In thousands)
| 2019 |
| 2020 | ||||
Cash flows from operating activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash from operating activities: | |||||||
Depreciation and amortization |
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Special charges | — | | |||||
Non-cash interest expense |
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Non-cash stock compensation expense |
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Non-cash income tax provision (benefit) |
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Non-cash (amortization) accretion on investments |
| ( |
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Changes in assets and liabilities, net of effects from acquisitions of businesses: | |||||||
Accounts receivable, net |
| ( |
| ( | |||
Pharmaceutical inventory |
| ( |
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Other assets |
| ( |
| ( | |||
Accounts payable and accrued liabilities |
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Medical claims payable and other medical liabilities |
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Contingent consideration | ( | — | |||||
Tax contingencies |
| ( |
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Deferred credits and other long-term liabilities |
| ( |
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Other |
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Net cash provided by operating activities | | | |||||
Net cash provided by operating activities from discontinued operations | | | |||||
Net cash provided by operating activities from continuing operations |
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Cash flows from investing activities: | |||||||
Capital expenditures |
| ( |
| ( | |||
Acquisitions and investments in businesses, net of cash acquired |
| ( |
| ( | |||
Purchases of investments |
| ( |
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Proceeds from maturities and sales of investments |
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Net cash used in investing activities | ( | ( | |||||
Net cash provided by (used in) investing activities from discontinued operations | | ( | |||||
Net cash used in investing activities from continuing operations |
| ( |
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Cash flows from financing activities: | |||||||
Proceeds from borrowings on revolving line of credit |
| — |
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Payments to acquire treasury stock |
| ( |
| — | |||
Proceeds from exercise of stock options |
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Payments on debt, finance lease and deferred financing obligations | ( | ( | |||||
Payments on contingent consideration | ( | — | |||||
Other |
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Net cash (used in) provided by financing activities | ( | | |||||
Net cash used in financing activities from discontinued operations | — | ( | |||||
Net cash (used in) provided by financing activities from continuing operations |
| ( |
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Net increase in cash and cash equivalents from continuing operations |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental cash flow data: | |||||||
Non-cash investing activities: | |||||||
Assets acquired under finance leases and deferred financing obligations | $ | | $ | |
See accompanying notes to consolidated financial statements.
5
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE A—General
Basis of Presentation
The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation. On April 30, 2020, the Company and Molina Healthcare, Inc. (“Molina”) entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company has agreed to sell its Magellan Complete Care (“MCC”) business to Molina (the “MCC Sale”) for $
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2020.
Business Overview
The Company provides managed care and pharmacy solutions for some of the most complex areas of healthcare. The Company offers innovative solutions that combine analytics, technology and clinical rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers Magellan serves. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and third-party administrators (“TPAs”). Magellan operates
Healthcare Segment
The Healthcare segment (“Healthcare”) previously consisted of
The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care organizations (“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for (i) behavioral health, (ii) employee assistance plans (“EAP”) and (iii) other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies.
MCC, which is now reflected as discontinued operations, contracts with state Medicaid agencies and the Centers for Medicare and Medicaid Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a wide range of services from total medical cost to carve out long-term support services. MCC largely focuses on managing care for more acute special populations including individuals with serious mental illness (“SMI”), dual eligibles, aged, blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.
6
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2020
(Unaudited)
Magellan’s coordination and management of these healthcare and long-term support services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.
The Company provides its Healthcare management services primarily through: (i) risk-based contractual arrangements, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month (“PMPM”) fee, or (ii) administrative services only (“ASO”) contractual arrangements, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in some instances, a gain share.
Pharmacy Management Segment
The Pharmacy Management segment (“Pharmacy Management”) is comprised of services that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s customer solutions include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations and Medicare Part D; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.
These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to managed care organizations, employers, third party administrators, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy services to its existing customers and market its pharmacy solutions to the Healthcare customer base, including through integrated Pharmacy Management and Healthcare service offerings.
Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management provides services for most of the MCC business.
On May 11, 2020, the Company announced its decision to exit the Medicare Part D business at the end of 2020. The Company will retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM needs of its existing and prospective Medicare customers.
Corporate
This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in
7
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2020
(Unaudited)
relation to revenue recognition under Accounting Standard Codification 606 (“ASC 606”) which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.
Revenue Recognition
Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three and nine months ended September 30, 2019 and 2020 by major service line, type of customer and timing of revenue recognition (in thousands):
Three Months Ended September 30, 2019 | |||||||||||
Healthcare |
| Pharmacy Management |
| Elimination |
| Total | |||||
Major Service Lines |