Filed by PacifiCare Health Systems, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Company: PacifiCare Health Systems, Inc.
Commission File No. 001-31700
TRANSCRIPT
UNITEDHEALTH GROUP & PACIFICARE CONFERENCE CALL
JULY 6, 2005
Operator: Good afternoon, ladies and gentlemen. My name is Miles [ph] and I
will be your conference facilitator this afternoon. At this time, I would
like to welcome everyone to this afternoon's conference call. [Operator
Instructions].
I would now like to turn the call over to Dr. William McGuire, CEO of
UnitedHealth Group. Dr. McGuire, you may begin your conference sir.
DR. WILLIAM W. MCGUIRE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
EXECUTIVE COMMITTEE
- --------------------------------------------------------------------------------
Thank you, good afternoon everyone. I appreciate you joining with us today.
As you know, we've announced that UnitedHealth Group and PacifiCare Health
Systems have signed a definitive agreement to merge our businesses. We are
going to briefly review the transactions' logic and our expectations with
you at this time. In addition at the close, I will provide a brief
preliminary look at our expected second quarter results, which are quite
positive and be reported in full on the 14th of July.
The combination of UnitedHealth Group and PacifiCare is compelling, it is
straightforward and it is powerful. It's really about continuing efforts to
improve healthcare services to better address the needs of a broad group of
constituents. These efforts serve to expand business opportunities and to
compel growth beyond our already favorable outlook.
Based on the clear advances for customers that will emerge from this
combination, we expect improved growth opportunities across multiple
business units and markets. That in turn will drive additional shareholder
value because the merger really embodies financially prudent terms that
allow both immediate and intermediate term earnings accretion. We believe
that both PacifiCare and UnitedHealth Group customers as well as
shareholders are going to benefit from the effects of this merger for years
to come.
In reviewing our thoughts around this combination, including some of the
business logic, expected outcomes and financial implication, I am joined by
Howie Phanstiel, Chairman and Chief Executive Officer of PacifiCare. He is
going to be sharing his own perspectives on this merger and its expected
results in a moment.
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First, let me offer a high level view of PacifiCare. It is a high quality
financially sound and well positioned enterprise that under the leadership
of Howie and his management team is undergoing impressive operational
improvement, and successful business diversification over the past few
years. Neither elements of which is yet complete. It operates in important
geographic markets, has excellent products and accordingly strong brand
recognition and throughout the broad healthcare market and particularly
among seniors.
To us it offers compelling strategic value. It has significant presence in
the west and is one of the market leaders in California. It has diversified
product offerings in the commercial, senior and specialty market segments.
It is well positioned, both operationally and financially. It has
significant opportunities for further cost efficiencies and operating
improvements. And it has a deep management team and positive financial
performance.
Regarding specific numbers, I note the following. The publicly available
2005 projected revenue for PacifiCare is around $14.5 billion, EBITDA is in
the range of $750 to $775 million, and estimated earnings per share for
2005 range from $3.70 to $3.85 a share excluding around $50 million or
roughly 30 cents per share spending that is planned for marketing and
launch costs related to Part D, the value of which will begin accruing next
year.
Looking at the commercial market segment, I note that the company serves
around 2.6 million (technical difficultly) with over 200,000 of those in
Colarado, 160,000 in Arizona and 135,000 in Texas and Oklahoma, all states
where we currently operate. They also have a business presence in several
states where we do not currently operate, California with a 1.5 million
people, Nevada with 445,000, Washington with 60,000 and Oregon with 55,000
people.
They also are currently serving another 430,000 consumers nationally
through American Medical Systems, and specifically in the small group and
individual product lines. The PacifiCare market positions will help balance
our more central and eastern market orientation. Where we do have market
overlap, there is going to be meaningful opportunity to translate the
business combination into enhanced customer value, particularly by
leveraging business processes, technology and systems infrastructure to
lower operating cost and to improve consumer access and experience.
Relative to services for seniors, PacifiCare is the second largest provider
of Medicare HMO products in the country after Pfizer. They have over
700,000 Medicare advantage members and around 40,000 with Medicare
supplements. The Medicare eligibles using their products include around
100,000 people in Arizona, some 50,000 in Colorado, 90,000 in Texas, 40,000
in Washington, 26,000 in Nevada, another 360,000 or so in California.
Secure Horizons is a nationally prominent brand in the seniors market and
the company is considered by all parties to be one of the highest quality
and best run enterprises in this segment. Like us, PacifiCare sees
significant opportunity in Medicare Part D and has been investing in this
area this year in anticipation of the program launch in 2006.
The specialty services represent a third key area of interest. They have a
growing behavioral health business that's covering some 4.6 million lives,
representing around $300 million of estimated gross revenue. This fits well
into our own company, United Behavioral Health, which covers around 22
million people and is just over $1 billion in revenue. Similarly, their
dental and vision businesses are high quality, serve around 1.2 million
people, report $175 million of revenue and are strongly complementary to
our own businesses in these areas.
Lastly, their emerging PBM business is growing and performing well with
some 5.5 million customers and $1.6 billion of gross revenue. While we do
not need an internal PBM fulfillment capability given our relationships
with Medco and Walgreen's health initiatives, we look forward to assessing
how this capability can enhance overall results for us and further improve
services and lower cost for our customers.
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The key transaction points were outlined in the release today, but to
remind you of the major elements there I will offer the following points.
The equity value of the merger is $8.1 billion and debt adds another $1.1
billion to create an enterprise value of $9.2 billion. The transaction will
be 73% stock and 27% cash. Accordingly, PacifiCare shareholders are going
to get 1.1 UNA shares and $21.50 in cash for each share of PacifiCare
stock. We intend to retire their total $1.1 billion of debt. We would
expect to pay this down immediately from our internal cash flow at closing.
This transaction has a fixed exchange ratio with no collars. The stock
portion is tax free. There is appropriate yield projection and a breakup
fee of around $245 million. We are hoping for completion in the merger in
late 2005, perhaps running into early 2006. Transaction is immediately
accretive to earnings and should provide around 5 to 6 cents per share for
the full year. First year run rate synergies of $75 million to $100 million
could add another 3 to 4 cents per share for us.
And, finally employment agreements are in place for key business players at
the company. Let me stop with that for a moment and turn the discussion
over to Howie, again CEO of PacifiCare. Howie?
HOWARD PHANSTIEL, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF PACIFICARE
- --------------------------------------------------------------------------------
Thank you Bill. Good afternoon everybody. We are excited about this
business combination. It significantly advances our efforts to provide
better and more affordable healthcare. The opportunities reported [ph] to
us particularly come from technology applications, elements used in new
consumer driven health plans and national network access that expands the
services currently available to our customers and because PacifiCare and
United operate largely in different geographic markets yet focus on the
same efforts just as serving seniors, this is a combination that we believe
will build on growth and business expansion as services are improved and
costs are reduced.
One of the particularly exciting areas for us is the potential for
improvement in our administrative infrastructure and various support
programs. We will move operations to the United System infrastructure to be
part of a fully integrated single system that spans all geographies and
products. The result will be meaningful cost savings, product enhancements,
and data availability all of which translate into better services for
clients and partners, lower operating costs, and in turn additional upside
to both our customers and shareholders. I can't really overstate the value
of these technology systems for us in terms of operating performance and
business growth. We'll essentially be leveraging the $2.5 billion of prior
technology investments directly into our company and that's great. We are
similarly enthusiastic about the product enhancements and additions we can
realize with this merger. This starts with much broader access to providers
of care, particularly impacting what would be out of network cost for us
and our customers. Our clients will benefit from the virtual elimination of
service restrictions created by geographic boundaries and that will extend
from the number of physicians to accessing the outstanding centers of
excellence programs at United that are now available to over 15 million
people.
These elements will help advance our PPO product experiences. We will also
expect to see some major contributions from the consumer-directed health
plan resources as United. Examples include the consumer directed services
and expertise of Definity Health, the modernized fully transportable
magnetic strip benefit cards, now being used by millions of UnitedHealth
Group customers, and the consumer and financial services capabilities of
Exante Bank. These can all be applied to our entire book of business.
Finally, I would highlight our history and commitment to Medicare and
those who depend on it. It's been a constant focus of PacifiCare and is
manifest by the over 700,000 seniors we serve under the Secure Horizons
banner. With UnitedHealth and its Ovations business, we will offer
services to a much wider audience through more uniform simplified
products. We will jointly gain by applying other resources like the
best elements of our respective care management services
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used in nursing homes across a much wider geography. And without
question, we will be able to more effectively address the prescription
drug named the Seniors under the Part D initiative because of our
potentially expanded experience base and different approaches and
resources. It's too early to speculate on the outcomes of our, or
frankly anyone's, Part D program. But, we are comfortable that we will
be well positioned given our historical success in help seniors with
the issues of access and affordability of prescription drug.
DR. WILLIAM W. MCGUIRE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
EXECUTIVE COMMITTEE
- --------------------------------------------------------------------------------
Thanks Howie, we will be back with some questions and how we can respond to
in a few moments. Let me continue on and talk about this a little further.
The value that's emanating from this business combination is quite
meaningful. It really starts with the enhanced ability to make healthcare
more affordable, more accessible, usable and reliable in terms of quality.
Those achievements are going to come from our ability to better organize
and use healthcare resources to apply technology that will gain efficiency
and simplicity and use data and information to help guide decision making.
It is important to note that these are the areas of corporate competency
that we have championed and applied to our business development for some 15
years. They are the very things that I think have driven our growth and
success to this date. I don't want to overstate the potential arising from
our combined efforts, but I will offer you a few examples of how I think
some of this can play out in the merged company.
First, our national networks of care providers, as well as access to
expanding and increasingly successful centers of excellent resources for
important medical problems and provide meaningful savings for PacifiCare
and its client, Howie just hit on that a moment ago. Similarly, our own
company and particularly the larger multi-site clients at Uniprise can
benefit by accessing the additional network resources of PacifiCare and the
various pacific regions. I would also note that we have separately entered
into certain customary market cooperation agreements that will help further
enhance access to care providers and promote positive customer service and
continuity. Also, new consumer-directed products and capabilities including
things like banking services and HSA or HRA accounts will be made available
to a much wider audience through PacifiCare client base and distribution
channels.
As a result of this, for instance, we can project that some 25 million
people potentially will be carrying our more modernized benefit cards and
the embedded consumer and financial services capabilities that they provide
in the near future. Also, leverage around our business operations is going
to be meaningful, particularly in the use of technology, and the cost
savings and process simplification results. Around $75 million to $100
million of run rate savings are in our near-term sites for the first 12
months and that can be used to support better and more affordable products
as well as enhancing shareholder value. In turn, this fuels growth and with
it earnings and enhanced value again and well more distance I think that
$200 million to $250 million of additional synergy are reasonable
expectations in the subsequent two years or so. That adds up to a
meaningful value proposition.
Well the expanding numbers and needs of older Americans are well known to
us, I think that we are going to be in an even better position to provide a
broader array of intelligent usable healthcare services directed at their
changing needs. Just as in past years we view this not as a product
specific approach such as playing on Medicare HMO, Medicare supplement or
Part D drug benefits, but really as continuum of valuable service and
intervention capabilities that are specific to this large growing and very
important constituency. This is perhaps particularly important because the
government is the largest and most committed participants in healthcare. It
provides coverage for 29% of the US population today or 86 million people
and accounts for about 46% of the 1.8 or so trillion dollars in annual
healthcare spending in this country. Its participation is going to be
increasing as our population over aged 65 grows by around 10 million people
in the next decade alone.
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Our combined company is going to be well equipped to response to the needs
of this group with a wide spectrum of products that include Medicare
advantage HMOs, local and regional PPO offerings, Medicare supplement
products, higher fee for service, special need plan and Part D for
prescription drugs. As well as being position to address unforeseen health
and well-being needs that are undoubtedly going to emerge in the future.
And cash flow generation is going to be even stronger than today further
enhanced by better operating performance across the combined businesses.
With annual revenues exceeding $65 billion, once the combination is
complete yearly cash flow from operation of $6 billion plus it really quite
realistic. This offers us tremendous flexibility and leverage to ensure a
sound capital base, make ongoing investments in each of our business
segments. To reinvest in our own stock and other steps that will continue
to generate superior return to shareholders.
I will close at this point by noting that, again this is not a transaction
that either company really needed to do. That's going to be apparent when
UnitedHealth Group reports its second quarter earnings next week, on the
14th of July. The indicators for us at this point are positive; including
growth, cost and operating cash flows.
All of this really underscores our continuing bullish outlook and the fact
that we are engaging in this business combination and advancement, because
it enhances the opportunity and our ability to better serve the healthcare
needs of the people, both our existing and future customers is going to be
significantly enhanced.
I hope you can sense from this rather brief presentation, this is really
pretty exciting stuff. Both of our companies are doing very well, together
we are going to do even better, that's better for the people on this call
and perhaps most importantly, better for the customers that we are jointly
serving now and will serve in the future.
So, with that, I will close off. We will take questions for perhaps 30
minutes and then stop for the evening. Thank you.
Q&A
Operator: [Operator Instructions]. Your first question comes from the line
of Christine Arnold with Morgan Stanley.
[Q - CHRISTINE ARNOLD]: Good evening. I have a question about the California
arrangement that you have with BlueShield, are you envisioning continuing
that relationship in light of this merger? And also, could you help us
understand the components of the 75 million to 100 million in synergies?
Thanks.
[A]: Thanks Christine. I will pars that question out in two pieces. The first
one, I think, you are referring to our CareTrust relationship, which is in
fact, we expected to continue, it's served our customers well, and we see
no need to really change that. Steve, you want to comment on that?
[A - STEPHEN HEMSLEY]: That's right. It is a long-term relationship. It is
important to us. We anticipate and maintained it in full, it remains in
place on the long-term basis and, we ultimately believe that transaction
will be viewed as complimentary, in terms of managing healthcare costs be
positive for California consumers. So, we anticipate maintaining that
relationship and making the complimentary in the years to come.
[A]: And, do you want to read off the comment on the synergies and then may
be turn to-date?
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[A - STEPHEN HEMSLEY]: I think we have been very thoughtful and meticulous
in terms of synergies and perhaps somewhat conservative, particularly in
the early going. So, Dave within - where most of the synergies will be
principally true UnitedHealth Care comment.
[A]: Christine, I will believe your question really, specifically related
to the first year synergies, which I will touch in just a moment. What I do
want to touch on first is, as we - as an enterprise look at this, first and
foremost, there is a great opportunity for growth for United HealthCare
results and how we both touched on the fact that this represents a
significant opportunity for us to enter into new markets in particularly
California, Washington, Oregon and Nevada and we look forward on building
on the strong base business that we have there. We also touch on the fact
that it improves our presence in several other states, particularly Texas,
Oklahoma, Colorado and Arizona and these are all very strong markets for
UHC. I think the broader networks will enhance our ability to sell
multi-type products, we will have a broader and more diverse product
offering and there is certainly plenty of opportunity for the specialty
businesses and for the emerging Part B opportunity.
Our synergies are really classified into four broad categories; network
efficiencies, public company cost, and what I characterize other
intermediate synergies, improved efficiencies, systems rationalization and
scale and then obviously, savings attributed to the senior and specialty
business opportunities. In the first year, we would expect majority of
those to come from network savings and the obviation of certain public
company and, you know, immediate administrative cost. And, the break out of
that would be about 40 million to 65 million and network savings somewhere
in the range of 30 million to 35 million and public company cost and other
administrative savings.
[Q - CHRISTINE ARNOLD]: Thanks Dave.
[A]: Great, thank you very much.
[A]: Next question?
Operator: The next question comes from the line of Scott Fidel with J.P
Morgan.
[Q - SCOTT FIDEL]: Hi thanks, good evening. First question just had to do,
if you can walk us through the timeline for the integration in specialty,
just in terms of client systems integration?
[A]: Well integration starts once the transaction is complete. So, Steve?
[Q - SCOTT FIDEL]: More for the systems..
[A - STEPHEN HEMSLEY]: I think it depends on the product offerings and so
forth. The first step in terms of the integration is to rationalize the
products and the networks to make sure that the administrative practices
are consistent and so forth. We will likely migrate PPO product, for
example, onto our national platform first and migrate that in a thoughtful
and measured way, usually in renewal cycles, that kind of an approach; that
will take some time. We will then just basically move them into our
operating environment. We will get into areas such as, billing and group
services administration in the areas of contracting and credentialing, in a
first phase kind of a context as well as in care management. So, this will
go in phases, in the first year we will do some very obvious basic things
to align our operations in a consistent way. Once those business processes
are aligned and there are meaningful efficiencies that are drawn from that,
we will then begin the process of moving into technology and bringing them
into our operating environment that will probably be within a year. And
once they are in there, then we can take advantage of things like our
portals, which will simplify and streamline the business processes even
further, so it will go phases in that fashion. We think that these things
take three to four years to really migrate in a thoughtful way to not be
disruptive in the markets then we harvest the benefit year-by-year.
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[Q - SCOTT FIDEL]: Okay. And then just a follow up question, both companies
have had a number of different initiatives underway on the disease
management front. Do you had a chance you have to review where those
different initiatives might, you know, coincide and also just in terms of
overall opportunities on that front?
[A]: That's probably a little too specific for this conversation right now
Scott, it's got - I will tell you that in the aggregate all of us - both
companies believe that programs that help physicians and other care
providers facilitate care, ensure that resources are optimally utilized,
are important to ongoing care improvement. And therefore we'll undoubtedly
be bringing elements of these together and sharing our experiences once the
thing is complete, based on what works for the particular constituents that
are out there. So, there will be things such as extension of some of the
ever care approaches on the frail elderly across a much broader audience.
There will be some specific programs working in specific areas and for
instance that have been quite successful and helpful for people with
cardiac illness that can be applied and spread over. It's multifaceted, but
will be positive all the way around for our customers.
[Q - SCOTT FIDEL]: Okay. Then just one last question, just in terms of with
the recent American medical acquisition, PacifiCare did expand their small
group broker network pretty significantly, can you talk about some of the
opportunities you see to leverage that into UnitedHealthcare?
[A]: You know, it goes both ways, I mean we have our business that's
centered around golden rule and some of our small group stuff and they have
the AMFs and other features, we will attempt to bring these things together
in a logical way that enhances the services for the customers across all
the state where they do business. Steve?
[A - STEPHEN HEMSLEY]: You know, Scott, that is a very natural blend. I see
those going together very - very, sitting effectively flowing that business
into our existing markets and so forth and the product alignment is
probably one of the earliest terms and easiest aspects in $75 million to
$100 million, AMS is a meaningful piece of it.
[Q - SCOTT FIDEL]: Okay. Thank you.
Operator: And your next question comes from the line of Sarah James with
Lehman Brothers.
[Q - SARAH JAMES]: Yes, I have three questions. My first is on the timing
of the closing of the deal. I noticed that is about six months, a little
bit further out than your last two deals with MAMSI and Oxford and I was
wondering if that's because it includes application process that Germandi
[ph] is calling for?
[A]: I think the - our prospects for six months or so is really built
around the fact that, it's a multi-state, a little more complex business
than we had at either of the other more recent programs that involve
various - the same various regulatory bodies, it's nothing more sinister
than that, just a reasonable expectation. Now, we are going to stay attuned
to the fact that what's happening here advancements for customers and we
will be sensitive to the needs of all the parties out there to get this
done in an orderly and appropriate fashion.
[Q - SARAH JAMES]: So, there is a possibility that there could be further
delays in California just out right until though?
[A]: I didn't say that.
[Q - SARAH JAMES]: Okay.
[A]: I mean you may know something I don't, you know, we think this is
a transaction that make sense for the people, the customers in
California just as in every other states. And we are quiet
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comfortable that the regulators and other people that are involved here
are interested in that first and foremost. And we expect that we will
bring these things together effectively. The timeline is what it is,
because we have a number of states to do businesses, to get through,
and we want it to be sensitive and respectful of the people there and
the regulatory people that have a lot of things in their place. So, we
think end of the year is a good timeframe.
[Q - SARAH JAMES]: Okay, thank you. And then my next question is on the
PBM. You stated that you are happy with your relationship with Medco and
you expect to continue it, as far as the PacifiCare PBM goes, is there any
thought on whether or not you would PacifiCare members to remain on that
and not bring them up on to the Medco contract or possibly bring them on to
the Medco contract and spin out the PBM?
[A]: Yeah, we have several relationship as I alluded to and we see all of
those staying intact and we expect to continue to support the PacifiCare
program as well. Steve, do you want to...
[A - STEPHEN HEMSLEY]: You know, right now Medco serves, largely our
commercial population, Walgreens Pharmacy Services is really focused on our
ovations senior business. Those relationships are working very effectively
and we expect them to continue. How we can, you know, probably add much
more to this than I can, but their PBM is a very innovative high quality,
very effective organization and it is approaching capacity and it's very
focused on the Part B opportunity. They are looking at expanding it and we
anticipate keeping that in place in full for all of its membership and to
focus on the Part B that they are serving and focusing on right now. Howie,
you want to add that?
[A - HOWARD PHANSTIEL]: Yes, just to fill in some meat on the bones, our
board has recently approved a $50 million capital investment to build a
second mail order facility in Kansas City, Kansas and the statistics was
something as follows, but today we are on double shift in our facility and
crossed that, that 740,000 script capacity per month. The new facility will
add 1.1 million script capacity on a single shift and the top priority now
is to continue to serve our current commercial members, continue to grow
our external third party business, which has been growing at a rate of
about 40% a year. And then of course, ensure that we have adequate capacity
for Part D. So, there is plenty to keep us busy for the next couple of
years.
[Q - SARAH JAMES]: Great, then I assume you have intentions of keeping on
all your external contracts that you have, where you are the standalone
PBM?
[A]: Yes.
[Q - SARAH JAMES]: Okay, great. And my last question....
[A]: No, no I am sorry - four is enough, we are going have to - we are
going to get through, we have got a 1000 people on this call and we have a
number of questions in the queue. I think I appreciate, the input, but we
should allow a few other people avoid. Let me say one thing going and
relative to this last one, and you are going to I think keep hearing it, so
if it sounds we are donned it on purpose. This business combination is
really not about any cynical competitive issues or anything else, this is
about serving people better. Our healthcare system needs to work better, we
are convinced in the aggregate that it can work better and there are going
to be lots of tools and services and lots of needs that will be applied to
that and the people that we are working with and I think the Medco folks,
the Walgreens folks, how these people at PacifiCare for instance in the
drug, everyone is on the same course here. There are huge opportunities and
this is going to be an effort to apply every way we can through optimum
resources to improve healthcare and there will be a number of people
working with us to that end and that is going to be a stedfast agenda for
us. So, thanks, next question.
Operator: Your next question comes from the line of Ed Kroll with SG Cowen.
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[Q - EDMUND KROLL]: Good evening. On the cost savings, the 75 to a 100
million and then you mentioned longer term 200 to 250, is that 200 to 250
inclusive of the 75 to 100 or is that incremental?
[A]: That's incremental additive.
[Q - EDMUND KROLL]: Okay, great. And then...
[A]: And this is a side we intend no charges.
[Q - EDMUND KROLL]: No charges, great. And then back on the Medco
relationship, if you would just remind us, when does the current contract
with, UNH's current contract with Medco expire?
[A]: Several years out, I am looking around the room to see who is
up-to-date with the numbers.
[A]: I think it expires around 2009, it has extension options beyond that,
but we think the basic term is 2009.
[Q - EDMUND KROLL]: Okay, great. And then finally, another quick one, on
the Blue Shield relationship in California, you've described this
acquisition as being complementary to that. Does that mean that your
national account members in that residing California would thus have a
choice an expanded network, Blue Shield plus PacifiCare?
[A]: Ed, the network our clients used in California comes for Care Trust,
it is not the same as the Blue Shield network to my knowledge. What we
intend is that our customers will have stability and in fact hopefully
enhanced opportunities to access an even broader network. After this
transaction is complete we will look for ways to further the issues for
customers in the interim and even beyond that we think the relationship
with the Care Trust will continue on and frankly continue to grow. And I
think, the Care Trust people are equally interested and focused on how they
can best serve the people in California who are a domicile there or who
travel outside of that area and that's what the relationships helps to do.
[Q - EDMUND KROLL]: Okay, very good. Thank you.
Operator: Your next question comes from the line of Sheryl Skolnick with
Fulcrum Global Partners.
[Q - SHERYL SKOLNICK]: Thank you very much. I just want to say Harry
congratulations on doing the right deal again. I hear every - can you hear
me?
[A]: Yes, thanks.
[Q - SHERYL SKOLNICK]: Yeah. Okay, you are welcome. I hear everything you
are saying about focus on improving healthcare and it does resonate, it is
the consistent theme. I am curious about one specific item and it maybe too
early to know the answer to this. Given the timing of the close at the end
of this year, given that PacifiCare has invested considerable amount in
introducing Part D marketing, rolling it out, constructing, benefit plans
as has United, do we expect those activities to continue and then you will
be offering separately branded plans on as you bid them and quote so far.
And might there be some consolidation of that brand further down the road,
further cementing the goodwill or some connection between the brands, the
United AARP, the Secure Horizons brand being the three that I would be
concerned about obviously?
[A]: Well, I think you laid it out fairly accurately, obviously for the
rest of this year before completion of the two companies, clearly we
will pursue their respective courses and they are separate and
distinct, different names, different sets of services such as the PBM
that PacifiCare versus our Walgreen self initiative et cetera. And we
would expect them to work independently
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accordingly. Once the transaction is complete, we would obviously assess
and look at how we can best serve things - serve people and to the
extent there are other approaches or ways to do this, we would certainly
consider that. But, right now, it's, you know, it has to be independent
activity until the companies would get it.
[Q - SHERYL SKOLNICK]: And, if you'll permit me one more question on a
different topic, a number of years ago United exited California, sets the
proper terminology. Can you tell me why you are comfortable operating a
business in California in the insurance markets in California again? Is it
because you are retaining the expertise and the progress that PacifiCare
has made the difference, or is the market significantly changed, or is it
because it's less - there's something else going on?
[A]: Sure. I think the word exit is probably the operative thing we should
focus on. United was really not ever significantly in California, at least
during the time I've been here. We made an acquisition MetraHealth, and
with MetraHealth came some relationships in California that included small
and mid-sized business insurance product. And, at the time, we simply felt
that we could not do justice to those customers relative to meeting their
needs versus what other people can apply frankly. And so, we did "exit that
particular market segment", at the same time, we built up our investments
and our commitment to larger employers and today we work with nearly a
million people, who are in California through Uniprise. So, we have
expanded that and in addition we have several other million - several
million more customers who are in other kinds of our businesses. So, this
is, you know - I think our comfort level here is that this is clearly a
stronger presence and a better presence. And, additionally a number of the
products and things that are of interest to people in California now which
will range from the various consumers-directed programs, frankly the PPO
products which are the things that have been most interesting to clients
are things that we know a lot about, we have a lot of capability and we
think we can actually enhance that market when we pair them up with the
PacifiCare program.
So, those are sort of some of the reasons that we would look at this
favorably. I would also point out that the aggregate business combination
here is not just about California - California is one piece of it, there
are a lot of other states that I alluded to. So, it's sort of a host of
responses, but we are quite comfortable that we can together with
PacifiCare and other business partners make some things interesting out
there. Steve, you probably add some comments.
[A - STEPHEN HEMSLEY]: Just one interesting data point, when we - as you
would say exited California, we had less than 250,000 members at that time,
in an enormous state it wouldn't be even in the top 15 probably in that
market. Not a position to be in and those members were largely thought
about as on a collateral membership as a result of other acquisitions. This
would put us in a position of serving perhaps 3.3 million members on a
combined basis in a much different position in that marketplace. It remains
as it was been a complex competitive marketplace. It is moving more towards
PPO products, which is a particular strength of ours. So, I think the
circumstances of our presence there are very different than several years
ago. The market remains about the same.
[Q - SHERYL SKOLNICK]: Great, thanks. And congratulations to all folks at
United as well.
[A]: Thank you Sheryl. Next question?
Operator: Your next question comes from the line of Matthew Borsch with
Goldman Sachs.
[Q - MATTHEW BORSCH]: Thank you. I just had a question, a follow up on that
last point in California. Can you talk about some of the other markets
where you have market overlap and, you know, maybe Texas, Oklahoma,
Colorado, maybe put some numbers around United's presence there relative
to, you know, the numbers that we already have for PacifiCare. And, I
guess, related to that, is there any state where, you know, you think you
are on the border of riding into any competitive challenge on the
approvals?
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[A]: You know, it's without hearing a voice of "no, do it". I am going to
refrain from going through each and every state, where they are
overlapping, but some body speaks ahead up here and say, they have all the
numbers. But, let me comment to the last part of the question, which I
think is better. In the states where there is business overlap, the
combination of our two companies never really produces a significant sort
of technical problem around what people refer to an anti-competitive
environment. And in fact, none of these states that we really emerge as the
#1 player versus available competition nor are we or the markets had
limited to just a couple of people. So, we don't view it as a negative or a
problem issue in that area. People, you know, the appropriate authorities
will certainly want to look at all the data, which is appropriate, but I
don't think it's anything more sinister than that. Hopefully, we can bring
some great assets and support services to improve the market position of
what we do have in that. Steve, do you want to - I think, we maybe have a
number or two but...
[A - STEPHEN HEMSLEY]: Yeah, you know, it's just on a broad strokes.
Arizona might be about a 1.3 million members on a combined basis. Maine
indicated that California might be in the zone of about 3.2. Texas might be
in the 2.6 million member zone, maybe approaching 900,000 in Colorado, that
kind of sense of it.
[Q - MATTHEW BORSCH]: Great, thank you. And, just a couple of quick
followups, just as we model this out, can you comment on your 3.5 billion
plan per share repurchase and how that might that be impacted if at all?
And also, the intangible amortization expense; if you can, you know, give
us any sense of the size that you expect related to the steel?
[A]: Pat Erlandson?
[A - PATRICK ERLANDSON]: On the share repurchase, because we will be
accumulating cash to pay down debt at closing, it will impact share
repurchase, it will still exceed $3 billion for the year.
[A]: So, share repurchase will still exceed 3 billion, but it may not be
quite as much obviously as it would, if we weren't paying down debt of $1.1
billion.
[A]: Sure.
[A]: Yes, we will do. But we will have a good capacity to retain the
balance sheet parameters, bad debt equity ratios that we have consistently
stayed on, as well as, continue our share repurchase for the reasons we
have always done it.
[Q - MATTHEW BORSCH]: And that intangible amortization expense?
[A]: You know, you should assume that that's consistent with the
methodology we have used in the past.
[Q - MATTHEW BORSCH]: Okay. Thank you.
[A]: Thank you. Next question?
Operator: Your next question comes from the line of Carl McDonald with
CIBC.
[Q - CARL MCDONALD]: Thanks. In the past you have expressed concern over
visibility into long-term Medicare funding, is that still true today or do
you have greater comfort that the industry's Medicare presence is going to
grow large enough over the next couple of years that makes significant
Medicare cost less likely?
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[A - WILLIAM MCGUIRE]: Carl, I am going to turn this to Lois and then,
maybe we will ask Howie, his view as well from the way they have viewed
Medicare. But, I think broadly what we have a high degree of comfort, which
is what I've stated earlier, the government is part of the healthcare
system in this country and it will always be and it will be an increasingly
large participant given the nature of population demographics. And, we are
comfortable that the governments will support to deliver or availability of
healthcare resources to its people. We think that we have the wherewithal
to make various programs, work effectively in response to meet the people
out there with government funding. We recognize that there may be ebbs and
flows as to how that is and what it is, but that's something for us to work
through. And, you know, we are also thinking that there is going to be a
whole host of product solutions and things going on. So, you know, it would
be wrong to look at it, and just say, okay, what's, you know, Medicare
advantage is going to be next week versus three years out whatever? But,
let me, let Lois Quam mention that and then we will ask Howie, his response
too.
[A - LOIS QUAM]: Carl, the funding for the Medicare program itself is very
strong. As Bill said, it's a growing program; the government has supported
it very well. The important thing in participating in Medicare is to do two
things. It's to have a diversified product base, so that we are providing
services for the Medicare program and the Medicare population as a whole.
Therefore, as Bill mentioned, as an unique phase, there are going to be
ebbs and flows around a product because, we participate in a diversified
space. We are able to grow steadily, innovations has demonstrated that
through the past several years. Secondly, we take our assets and our
capabilities and very regularly take what our reasonable government program
designs and turn them into superior results. And, I will just give you two
recent examples; one is the prescription drug card. Certainly, you saw some
companies struggled in this space. Because of the assets we had from a
technology point of view, the relationship we had with the pharmaceutical
industry with AARP and other assets we were able to translate that into
very strong results serving 2.5 million people, bringing them over 30%
reductions in the price of prescription drugs and from the word go,
operated profitable business. Secondly, in the Evercare space, we saw a
need to provide services to the frail elderly. We built that into a $1
billion business which has been profitable every quarter for what will
nearly now be a decade. So, it's a growth phase, you have to do it well
with sufficient seasoning and with a diversified product platform and
that's of course how we are approaching that.
[A - HOWARD PHANSTIEL]: This is Howie - I would agree with everything that
Bill and Lo [ph] have said. And I think the way to view this space is this
is a seniors business, not a Medicare part ex-business. And, I do think
over the next several years some of the products will ebb and flow. But,
the aging of America is incontrovertible, healthcare costs for seniors will
continue to rise. And, I really think the Government has no place to go but
to turn to private sector and to the extent that it does that, both these
companies I think are two of the best in the country. For those investors
that [indiscernible] PacfiCare, almost as a call option on Medicare if you
will, there is still a very good opportunity to roll that investment into
United, because we combined are still going to be very active participants
across a broad panoply of products. At the same time, one of the advantages
of this transaction for PacifiCare investors is the diversification. So, we
are not as dependent on it. But as Bill said, the opportunity leverage our
technology particularly in the areas of disease management, population
management,, populations at risk, particularly diversity populations where
for example one out of four black American women, over 50 have diabetes.
These are the things we need to tackle, to improve clinical outcomes in
America and improve the quality of care for all.
[Q - CARL MCDONALD]: Thanks Howie.
[A]: Why don't we roll on to last couple of questions here?
Operator: Your next question comes from the line of John Rex with Bear
Stearns.
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[Q - JOHN REX]: Thank you. The color commentary you provided on your 2Q , I
wondered if we could get just some similar color commentary from PacifiCare
on their 2Q and I guess is that - will that still be reported as is planned
on July 28th?
[A]: Yes, we'll still be reporting earnings on the 28th. Our focus today
was on a very exciting transaction for our shareholders and the focus
wasn't to talk about 2Q. But, if we had any changes to our direction and
forecasting guidance, we would have provided it, either today or earlier.
So, we are on track and we will see on the 28th.
[Q - JOHN REX]: And does this - you know, thinking on - both you in terms
of, as you are approaching party distribution, I think PacifiCare was a
little more biased potentially towards the broker distribution network. You
know, United, you think, that AARP relationship is going to assist with
maybe a more bias towards the mail order distribution network. Does this
alter your distribution - as you are building this distribution plans for
January '06 or followed for fall. Does this alter either of your plans and
how you approach this, or do you just kind of continue down the path that
you are going?
[A]: John, I think, we both are obligated to continue down our path. We
have submitted program designs and stuff independent of each other and we
will fulfill both of those. And, I think, as I said earlier, there are some
differences obviously in how we are looking at it and ultimately, the
objective is going to be to serve this constituency. So, after we are
together, we will step back and have an opportunity to see what seems to
work the best on behalf of the customers, and we will make sure that we are
optimizing that. I suspect you will see both. Now, there is really no good
reason to say that, you know, one is right and one is wrong when they are
both well constructed from two companies that have a good insight in
different kinds of assets.
[Q - JOHN REX]: All right, thank you. And just, if I could followup on that
is that, we were to still assume for a standalone PacifiCare, you would
still be thinking of the 50 million spend this year that you'd have been
thinking of then, is that?
[A]: No, there is no change in our plans, I might have to recall or we
shared with you before our consumer research. And, that we think that the
choice of the brands will be important to seniors. And that, they will be
loyal provided they get a good service and response to their needs, just as
Bill said. So, I think, it's very important for the long-term United
shareholder that ultimately both PacificCare and United pursue their
marketing plans, as they are in place. And, we both want to garner as many
Part D members as we possibly can.
[Q - JOHN REX]: Thank you.
[A]: Thanks.
Operator: Your next question...
[A]: We will do two more questions.
Operator: Okay sir. Your next question comes from the line of Greg Sullivan
with SAC Capital.
[Q - GREG SULLIVAN]: Hi, two quick questions. One on the synergies, are you
implying that by '08 the run rate of synergies would be, or should be north
of 300 million?
[A]: In that zone yes.
[Q - GREG SULLIVAN]: Okay. And then, I am not sure how to address this.
But, if you could comment on the take up price for PacifiCare, it's about
10% above where the stock had been trading, which is not that much of a
premium. Can you just discuss kind of, you know, some color
13
around that, you know, maybe like when the discussions took place or
just something that would give us some color on that, please?
[A - WILLIAM MCGUIRE]: Greg, you know, the two companies have been looking
at this opportunity and accepting it for a considerable period of time and
the construct [ph], the financial construct was not created last night or
this morning in response to anything. And, it does not look at the
volatility of the stock market or the sort of speculative interventions
that come and go in it. So, it is based on a longer view looking backwards
and the co-premium will have to be derived from some prior point. But, more
importantly, I would remind, I think, you know, that's why I will remind
everyone that, we really don't look at the computer screen of the current
stock price to decide what the appropriate value proposition is. We look at
cash flow, we look at business growth, we look at all of the parameters.
PacifiCare has moved its stock up significantly in response to its
performance as well as opportunities, we reflect that in this. And so, we
think this is a very appropriate transaction in the aggregate, when we
consider all of the elements, cash flows, all of these things that are out
there in front of us and one that provides positive opportunity for both
PacifiCare shareholders, as well as United shareholders and most
importantly for the future shareholders, who are going to benefit from the
strength of this transaction and the ability to put us together in a way
that is financially sound and allows the preservation of all of the
important capital characteristics today, truly outstanding company needs to
continue to conduct it's business on behalf of its customers.
[Q - GREG SULLIVAN]: Okay, thank you Bill.
[A - WILLIAM MCGUIRE]: Thanks.
Operator: And your..
[A - WILLIAM MCGUIRE]: Last question.
Operator: Yes sir. Your final question of the evening comes from the line
of Wayne Cooperman with Cobalt Capital.
[Q - WAYNE COOPERMAN]: It's amazing. I guess, the first call on the Oxford
call and the last one on this one. Congratulations guys. Howie, question
for you, just A); were there other interested parties that you spoke to
during the process, because clearly you guys might be very interesting to
somebody else? And B); I just really wanted to thank you and congratulate
you; you've done a great job here.
[A - HOWARD PHANSTIEL]: Well, thank you very much. I think for today, I
would just summarize it by saying our board has been actively engaged with
management over two year period, and assessing, evaluating and exploring
all the strategic options in an industry that's obviously consolidating. I
will leave the detail for what's transpired over the last six months for
you to read in the proxy. I would say at this point, well we did not do an
auction process for PacifiCare. When you read the details, I think you will
see that it all transpired within a very competitive context and I am very
pleased with the results and I might - I added response to Greg Solomon's
question. We are talking here of price that reflects 21 times '05 earnings,
almost 13 times last 12 months EBITDA. And, I think if people do the
research on precedent transactions, it will be hard to find too many that
do better than that. So, I am very pleased for the shareholders and pleased
with the process we have gone through.
[Q - WAYNE COOPERMAN]: Do you think this is the last chapter or that we may
hear from somebody else at this point?
[A - HOWARD PHANSTIEL]: I will go comment on that. I am just very pleased
with how we've come out here and looking forward to working towards getting
this transaction approved.
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[Q - WAYNE COOPERMAN]: And, well the fit seems great. So, congratulations
to both of you.
[A - HOWARD PHANSTIEL]: Thank you.
[A - WILLIAM MCGUIRE]: I think the last statement Wayne, the fit is great
and most importantly, the opportunity is great for customers of both
companies now and in the future, and from that, always extends the value
for the shareholders. So, we appreciate it. Howie, do you have any other
comments you want to hit before we close.
HOWARD PHANSTIEL, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF PACIFICARE
- -------------------------------------------------------------------------------
No, thank you Bill. I just want to tell everybody how excited the
PacifiCare management team is about the combinations and some opportunities
for us to dramatically make an impact, in terms of the quality of care
members received and we are looking forward to working with the new
company.
WILLIAM W. MCGUIRE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF EXECUTIVE
COMMITTEE
- -------------------------------------------------------------------------------
Well, thank you. And, we will close. Again, I think, Howie summarized that
well. Great opportunities here, we think a combination that's done
intelligently on behalf of all of the constituents around, that will reap
substantial rewards for everybody as we move ahead and certainly I think
we'll advance our agenda, trying to make healthcare work better. So, thank
you and we look forward to talking to you if not sooner on the 14th of July
when we do our earnings. Good evening.
Operator: Ladies and gentlemen, this does conclude this afternoon's
conference call. You may now disconnect.
**********************
IMPORTANT MERGER INFORMATION
----------------------------
In connection with the proposed transactions, UnitedHealth Group and
PacifiCare intend to file relevant materials with the Securities and
Exchange Commission (SEC), including one or more registration statement(s)
on Form S-4 that will contain a prospectus and proxy statement. BECAUSE
THOSE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION, INVESTORS AND HOLDERS
OF PACIFICARE COMMON STOCK ARE URGED TO READ THEM, IF AND WHEN THEY BECOME
AVAILABLE. When filed with the SEC, they will be available for free (along
with any other documents and reports filed by UnitedHealth Group and
PacifiCare with the SEC) at the SEC's Web site, www.sec.gov. In addition,
investors and PacifiCare stockholders may obtain free copies of the
documents filed with the SEC by PacifiCare by directing a written request
to Pacificare Health Systems, Inc., 5995 Plaza Drive, Cypress, CA 90630,
Attention: Investor Relations.
PacifiCare and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from the holders of PacifiCare
common stock in connection with the proposed transactions. Information
about the directors and executive officers of Pacificare is set forth in
the proxy statement for PacifiCare's Annual Meeting of Stockholders, which
was filed with the SEC on April 13, 2005. Investors may obtain additional
information regarding the interest of such participants in the proposed
transactions by reading the prospectus and proxy solicitation statement if
and when it becomes available.
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FORWARD-LOOKING STATEMENTS
--------------------------
This document may contain statements, estimates or projections that
constitute "forward-looking" statements as defined under U.S. federal
securities laws. Generally the words "believe," "expect," "intend,"
"estimate," "anticipate," "could," "may," "project," "will" and variations
thereof or similar expressions identify forward-looking statements, which
generally are not historical in nature. These forward-looking statements
are based on current expectations and projections about future events. By
their nature, forward-looking statements are not guarantees of future
performance or results and are subject to risks and uncertainties that
cannot be predicted or quantified and, consequently, actual results may
differ materially from our historical experience and our present
expectations or projections. A list and description of some of the risks
and uncertainties can be found in our reports filed with the Securities and
Exchange Commission from time to time, including our annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. You
should not place undue reliance on forward-looking statements, which speak
only as of the date they are made. Except to the extent otherwise required
by federal securities laws, we do not undertake to publicly update or
revise any forward-looking statements.
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