Hi, everybody. I'm A.J. Rice, the Healthcare Services Analyst from Credit Suisse. We're excited to have as our next presenter in here, Cigna Health Corporation , Brian Evanko, Chief Financial Officer representing the company. I have my usual question about just sort of setting the stage for the year today, but I'm going to start off because you had a big announcement earlier in the week. Maybe I ask you about that. Give us some perspective on that because that's clearly where I'm getting all the questions. I'm sure you guys are too. How did that come about? What are you thinking in terms of the reasons that that makes a lot of sense for Cigna and anything else you want to share on that? Welcome, Brian.
Yeah. Thanks, A.J. And thanks to you and Credit Suisse for hosting us here this week. We had an announcement yesterday, if anyone didn't see it, that Cigna was going to be a minority investor in VillageMD, specifically relative to their combination with Summit Medical Group that's underway and planned to close in the first quarter. There are really three value drivers within that investment that I think are important for investors to understand. I'll just spend a minute on each of the three. The first one is our overall investment in the combined company is approximately $2.7 billion. For that, we'll have a low teens percentage ownership stake. This is the combined Village plus Summit post-deal company. That's value driver one, the minority equity position that we'll have. We would not have done the deal just for that, just to clarify.
Importantly, that then leads to value driver number two. On approximately $2 billion of that $2.7 billion, we'll receive an annual dividend or coupon stream from that investment. Think of that as a mid-single-digit type return off of that investment that we're making there. Those two things together make the financial investment attractive for us as a company. We still would not have made that investment for those two reasons alone because we're not a financial investor. We're not a speculator. Importantly, the third value driver is the one that's most strategically important for us as a company. Specifically, this investment and the partnership with VillageMD that will essentially result from this allows us to accelerate our journey of value-based care, but in a different way than many others talk about value-based care.
Specifically, what I mean by that is the majority of the Village and Summit patients are commercial employer covered. The majority of our Cigna Healthcare customers are commercial employers. The value-based care we're talking about here is a bit of a different context than in Medicare because so many of the lives are in commercial employer-oriented arrangements. You should think of it simplistically as a shared savings arrangement between Cigna and Village that will transpire through site-of-care optimization as well as preferred clinical and quality outcomes when a Village physician or a Cigna-owned capability is enabled. Maybe I'll stop there, A.J., and see where you want to go.
Yeah. Some of the questions that I've heard people ask is you guys have laid out a steady progression on your earnings and expectations 2023- 2024. How does this impact that? Does that still hold or does this change the trajectory of earnings in the company in any way?
Yeah. We had our third quarter results just this past Thursday. We reported a strong quarter. The third quarter this year, we exceeded our expectations and also the third time we raised our full-year outlook. We're on track for the full year to generate earnings per share of at least $23.10, which is 13% off of our reported 2021 adjusted EPS. Really proud of the company performance here in 2022. Three strong quarters, three full-year guidance raises. As it relates to what we then talked about for 2023 and 2024, we provided some preliminary indication of where we see the earnings per share outlook shaping up for next year. I'm sure we'll talk about Centene in a few minutes here that impacts the trajectory in 2023 and 2024. The Village investment that we made yesterday is essentially neutral to our earnings per share outlook for 2023 and 2024.
It's accretive in a cash sense, but relative to our assumptions around share repurchase, it's approximately neutral to EPS. You should think of what we talked about on the third quarter call last Thursday as unchanged by the investment that we announced yesterday.
Good. You're talking about that third element of the value-based care opportunities and so forth. Maybe expand a little bit on that. Is that something that you're factoring into the assumptions about accretion or assumptions about contribution? You said that's the most important aspect strategically. Give us a little more flavor on that.
Yeah. The third element, the shared savings through the value-based contracts that we'll have with Village is far and away the most strategically interesting part of this opportunity for us. Importantly, the capabilities that we'll generate there in partnership with Village are extensible to other provider partners, meaning the shared savings and the risk-based contracts that will exist. They're also extensible beyond the Cigna Healthcare health plan business to other health plans that Evernorth serves over time. This isn't all day one. These will over time evolve and emerge. The financial modeling associated with the earnings per share impact does not assume any meaningful contribution from that third lever associated with the acceleration of the value-based care strategy for us. To the extent that there's more value there, that does provide some upside to our business case in the coming years.
Evernorth has a number of things going on there in July, obviously the PBM. Do you envision those getting incorporated in any way in what you're trying to do?
In this arrangement with Village?
Yeah.
In the near term, this is very focused on health care services specifically. As we think about primary care, specialty care, virtual care, home-based care, that's the angle specifically with which the contracts are being derived. There's a possibility over time that some pharmacy assets could make their way into that, similar to the way that, for example, specialty injectables transcend into the medical benefit in a number of instances. We've created some nice value for our clients and customers there. Initially, this is very focused on the health and medical-oriented capabilities as opposed to the pharmacy.
MDLIVE would presumably be something that would be virtual. Do you think you'll take that into these arrangements?
MDLIVE is absolutely part of this.
Okay.
It absolutely is. You should think of shared incentive for Village and Cigna to drive volume to MDLIVE when it makes sense. There will be a shared savings opportunity for both parties in that instance.
Because this is all Evernorth is the one that's the direct contracting relationship with Village, does that mean that some of the shared savings you might be able to hold on to a little more of that? I mean, a lot of it with your ASO contracts, the employer gets the benefit of savings. I'm sure they'll get some benefit here, but does there create some value creation opportunities for Evernorth as Evernorth then contracts with Cigna or contracts with other third parties as a result of all this?
You're thinking about it in the right way. This isn't Evernorth and VillageMD. I used the term Cigna to talk about the parent earlier. Evernorth and VillageMD are the contracting entities. There's an opportunity for some value creation to remain in Evernorth in that instance, in addition to the margin that we make in the health plan. If we're serving other health plans, that health plan would earn their own underwriting margin. This does provide some incremental opportunity.
Okay. Obviously, the context of the whole transaction announcement, Walgreens is involved there. Were you working with Walgreens or you basically, this is between you and VillageMD? How would you describe that dynamic? People are left with the right impression of what's going on here.
The arrangement I made reference to is between Cigna and VillageMD specifically. Obviously, Walgreens is the majority shareholder in VillageMD. They were comfortable with this. We were comfortable with our involvement, but the relationship I described in the value-based care is specifically with VillageMD. We have a cordial relationship with Walgreens. They're in our pharmacy network across many of our client contracts. In that respect, kind of mutually aligned on making the investment.
Okay. Just the history with VillageMD, are you doing a lot with VillageMD? Do you overlap a lot with them?
We do have a number of existing relationships with them where they're in our medical networks, for example, in Cigna Healthcare. If you were to take all of our Cigna Healthcare customers and look at them on a map of the United States and then lined up where the Village clinics are and the multi-specialty groups along with Summit's, we currently have about 1/3 to 40% of our customers overlapping in the geographies where Village and Summit are based. Over time, as they expand geographically, that overlap percentage should increase further.
Okay. Great. Maybe pivoting to the rest of the business and talk a little bit about that. What have been some of the wins? Obviously, this is a big potential win looking a couple of years out. What have been some of the wins this year for Cigna ? Where have been areas of challenge, maybe looking beyond this particular transaction?
Yeah. We're really proud of the company's performance here in 2022. As I made a reference to, three straight quarters of outperformance, three straight increases to our full-year guidance. 2022 would be characterized as a year of strong execution for our company. Importantly, all my coworkers, as we stepped into the year, realized that 2021 was a little bit choppier than the way we had originally drawn it up. Everyone focused intently on strong execution. You see that in the results that we posted. Cigna Healthcare will grow our customer base by about 900,000 lives net this year and will expand the profit margins by about 90 basis points from where they were in 2021. Strong growth and margin expansion. Evernorth continues to grow really nicely. You see it in both the revenue and income that's on track for another good year here.
I think the recently announced win of the Centene PBM contract is a good example of the value proposition kind of resonating in the marketplace, which positions us for future growth.
With that Centene win, that's obviously $40 billion in drug spend. I think there's been estimates that that might translate into about $30 billion in revenue for you ultimately when it's up and running. Was that, maybe describe the process. Was that sort of a normal, I mean, there's nothing normal about that big a contract, but was it sort of a normal PBM process? Do we think about it as having played out with the normal levers, rebates, pricing, whatever? Was there any aspect of it that's sort of unique or different regarding specialty or other guarantees that you put in? How should we think about that contract?
Yeah. The process from a procurement standpoint certainly was a lengthy one. It also involved, I'd say, probably more hours of our team's time than any other recent bid that we've been part of. That said, it will be our largest client come January 2024 for the whole company. We already serve large clients like the Department of Defense. This will be even larger than that. Making sure we really understood the client's needs and were able to deliver a solution that met those needs was extremely important and involved lots of hours of classic blood, sweat, and tears to get there. Overall, I wouldn't say it was a normal procurement by any means due to the size, scale, and amount of time and energy that went into it.
In terms of where the value drivers were, specialty was certainly a very important one, and especially these 51%, 52% of all the drug spend now. Understanding exactly what we can deliver, what we have to offer there was extraordinarily important. Making sure our customer service was well- understood in terms of what we do today, the investments we're making and continuing to improve that was extremely important. Obviously, the economics around things like biosimilars in the coming years became really important to the client as well.
One of the interesting features on that contract is it's at least, I know there's some market checks, etc., but it's a five-year deal. Give us a little perspective on that from Cigna's perspective. You know, most PBM contracts are three years, something this big. You don't want to transfer every three years. What was your thinking there? Does that create opportunities? What other takeaways should we have from that?
Yeah. Five years, as you said, a little longer than a typical health plan client contract. We have many three-year deals. Having a five-year one was a nice win. As you said, there are market checks along the way, of course. The Department of Defense contract is a seven-year deal. That gives you a little bit of a sense for the football field in terms of the types of contracts that we tend to write. Importantly, to your point, with such a scale here moving from one PBM to another, they wanted to make sure, and we wanted to make sure that it was going to be a sustainable relationship and not have to flip back in a few years. A lot of the energy that went into it was to make sure it is sustainable both financially, but also from an experience perspective for their members.
Importantly, job one for us was ensuring a smooth implementation in January 2024. Down the line, we're opportunistic, potentially about expanding that relationship. As you think about all the services within Evernorth that are not attached to the initial contracts, the initial contracts, the pharmacy contracts, PBM services, specialty, mail order, over time, we've got opportunities to potentially expand that relationship like we've done with a number of our other health plan clients.
It's been discussed by both you and Centene that there's sort of these $200 million of transition fees in 2023 that will be paid. Is there any better visibility on how that might layer out over the course of the year? Is there variability around that, or is that a pretty firm number? Give us any thoughts on that.
Yes. You should think of the $200 million as implementation-related spend that we will incur, essentially to prepare and then migrate all of their customers over onto our chassis for January 2024. Think of that as the variable costs associated with hiring people that will be needed to process claims. Think of that as ensuring our mail order capabilities have the fulfillment capacity that we need to mail all the prescriptions as needed come January 2024. All those things essentially form the basis for the $200 million. The $200 million is an estimate. We will continue to refine that in the coming months. It is a pretty good estimate based on where we are right now. Over time, as I mentioned on the earnings call last week, we see that being a 2023-specific headwind for us.
We expect a 2024 income contribution to be neutral to the company and potentially even a small positive. You should just think of this as spend that we need to incur prior to the revenue being received.
Thinking about it, it's sort of a net DBS, about a $0.50 headwind on next year. That sort of goes away and it's neutral to slightly positive. We look at the CAGR as somewhere around your 10%+ growth. I know you typically start to guide a year conservatively. I assume that would be the way you'd approach 2023 and ultimately 2024. When we put all that together, I know you haven't given formal guidance. I think the last two years you started out with an 8%- 9% initial target, and then you've ended up upping that. Is all of that in the mix as you think about 2023 and 2024? Does that sound right?
Yes, just save for the implementation-related cost on Centene that we just discussed.
Right. You take $0.50 off this year, and that would just add that back for 2024. Is that the right way?
Right. Yeah. As I said in our earnings release, we would expect from 2022- 2024 to be within our compounded growth rate range for earnings per share. You do the math on that and you get $28+ in 2024.
Right.
If you do that math in round numbers.
Okay. Obviously, there's a lot of things going on worth asking about. What about all this discussion on biosimilars and the opportunity that represents for Evernorth? You've mentioned on the call that you will come out with the initial national formulary for next year at the end of the month or early December, implying that that would give us something of a sense of where you're going with a drug like HUMIRA and the biosimilar opportunity. Now, none of those biosimilars are going to be approved at that point. What will we be able to tell from the national formulary initial decision? I know you can change it as the year progresses, but I just want to make sure I walked away and everyone walks away with what was trying to be communicated around that.
The national preferred formulary, for those who aren't familiar, represents what's used by about 70% of the Evernorth clients today. The majority of our clients choose that, and it's because we're able to get the benefits of high-volume purchasing through that sort of a mechanism. The other 30% or so have client-specific formularies, but they tend to often prefer similar drugs as within the national preferred formulary. It's an important milestone and data point because it does represent where we tend to prefer one drug versus another one. For January 1, we published that one already, actually. That was recently published, and that's before there are any biosimilars available for HUMIRA. That doesn't really tell you anything to your point.
We will likely publish an update once we finish all the negotiations in the coming weeks with the manufacturers if there's any change in posture for February when the Amgen biosimilar is available in the market. We do update the national preferred formulary throughout the year if there's a significant enough change. To the extent that there's another change in July or the third quarter when additional biosimilars are available, we'll essentially refresh that again and publish an update to that.
Okay. You said, in thinking about the puts and takes for 2023, you would have some modest benefit from biosimilars incorporated. I know you haven't quantified that. Is the range of outcomes around that pretty wide, or do you have a pretty good line of sight as to what you think that will be? I don't, the way this thing could play out, I could see that there might be some variability, but give us your perspective on that at this early date.
Based on where we are with the negotiations with the manufacturers, we certainly expect it'll be a tailwind. That's why we called it out as in the tailwind column relative to headwinds, tailwinds for 2023. The range of outcomes, though, still has a range around it, and it's a tightening range as each date passes. The one caveat I give you is, to the extent there are multiple drugs co-preferred, if that's where we end up, it's not decided yet. If we were to end up in that scenario, then the volume matters in terms of the mix between those. To the extent we end up exclusive with either HUMIRA or one of the biosimilars, then it's a little more straightforward in terms of doing the math on that. We'll likely be looking at a range even as we step into giving you formal guidance in the fourth quarter.
Okay. Your ability to potentially move utilization to, certainly once it's an interchangeable biosimilar, but even with the first one, Amgen, in February, you feel pretty confident you could move that if you need to, even in a drug, pretty significantly, even in a drug that's not completely identified as interchangeable?
We've got a history with other biosimilars, you know, granted different classes and different situations, smaller scale, where we've been able to move volume even when the drugs are not interchangeable. Interchangeability obviously makes it that much easier by taking away one of the steps. It's a bit more like the easy pass version.
Right.
We do have a history of moving volume to non-interchangeable biosimilars in other instances.
Okay. When we think about the benefits business, I know there's a couple of dynamics going on. There's been some repricing on the commercial side, and some of that's been realized this year, and that's part of the strong performance. There's also some opportunity for next year. Where are you at on repricing that? Do you feel like you got a good line of sight on the retention of those accounts, etc., into next year that that'll be similar to what you experienced this year? Give us an update on that if you don't mind.
Sure. In Cigna Healthcare, or the benefits business as you referenced, we're on track this year for profit margins to be just south of 9% for the segment. If you take our income guide of $4.05 billion divided by the revenue, our target margin for that segment is 9%-1 0%. We'll still be operating just below the bottom end of that. There are two areas of potential margin expansion for us in 2023. The first one is in our commercial employer book of business. The stop-loss products are still performing below their target margin due to some of the pressure we incurred last year carrying forward into 2022. The second area is in our government business. Those products, think Medicare, individual exchange, are below their margin targets.
We'll take a step forward on those in 2023, but we won't get all the way there because we continue to invest outsized dollars into Medicare in particular. You can think of for 2023, we will be in our target margin range of 9%- 10%, but likely at the lower end of that as the government margins will continue to be below targets.
One of the things that you said was a goal even before all the recent announcements was to get enrollment growth back to growth in Medicare Advantage. We're into the AEP now. Any early read? I know you wanted to capture some of the agents more attractive, more regularly than you had historically. You broadened your networks. You had some geographic expansion. Are those gaining the traction you thought? Any early comments on MA enrollment?
Yeah. So far, so good as it relates to what our projections were versus the actual as we sit here on November 8th and prepare for the balance of the AEP. Importantly, though, Thanksgiving tends to be an important event in the shopping cycle, as I'm sure you can appreciate. The last few weeks tend to be important, and therefore, it's premature to declare success. Directionally, the numbers are shaping up in line or slightly better than we had anticipated in terms of net growth so far at this point in the cycle. We do expect a year of net customer growth in MA as we balance freemiums, benefits, networks. A lot of that's due to the hard work that we did following last year's year where we didn't grow members due to the prioritization of margin expansion.
A lot of work's been going on behind the scenes on network, on capturing commercial agents, on making sure targeted strategies are in place for PDP and med sub customers, etc.
Yeah. Maybe pivoting over to Evernorth, just putting the Centene piece aside because we talked about that. You have some other contract updates, Prime, the DoD contract, which you always reference, which is pretty substantial. How would you characterize that? I mean, are you going to show accelerated revenue growth because of that, but maybe the margins will be either steady or even step back a little bit because of investments? How would you describe that?
Yeah. Both the DoD and Prime, who are very large clients of ours, had renewals effective 1/1/2023. As a result of that, each of them had some contractual changes. The most sizable one that I think is important for everyone to appreciate is the DoD moved from having our Accredo Specialty Pharmacy in its network to having it exclusively in its network. We will be the exclusive specialty pharmacy provider to the DoD effective 1/1/2023. We will see a step up in our revenue from 2022- 2023 associated with that contract. Think of that as low single-digit billions in terms of the annual effect. That does result in additional costs being incurred, though, as we prepare to onboard all the additional volume and customers, etc., associated with that.
We will see a bit of an income headwind in 2023 associated with the renewal of those contracts and their reconfiguration. The revenue will step up, and as we step into 2024 and 2025, you will get more of a maturation of the profit profile on each of those.
Thinking about that, make sure we're all on the same page. Those investments, does that mean you sort of stay steady? Does that mean you take a little bit of a step back because of those investments on the margin in Evernorth?
We would expect from 2022- 2023 that those contract renewals are a headwind in terms of the 2023 over 2022 income contribution.
Okay.
Squaring up the tailwinds and headwinds, we talked about biosimilars as a tailwind. This is a headwind. The Centene implementation costs are a headwind.
Right.
We will also grow the business, which is the tailwind.
When you think about that, I mean, that one contract's seven years, does that give you, I assume every year it gets a little more profitable for you in the nature of pharmacy benefit contracts? Is that the right way to think about it? That is something that should incrementally contribute for quite a while and provide a tailwind for you?
There tends to be directional correlation between where you are in the contract cycle to the profitability, but I wouldn't necessarily draw a straight line from 2023 through 2029.
Okay.
We would expect 2024 to be a stronger contribution than 2023. Beyond that, I don't necessarily know that I'd grow it meaningfully off of that level.
Okay. Capital deployment's been a big part of your story this year. This was a unique year with the asset sales and all and how much you spent on buying back. Give us some perspective on where you're at. You're putting up $2.7 billion in this transaction we discussed at the beginning. Give us some thoughts on updated priorities there.
Yeah. Our broad capital deployment priorities continue to guide the company's actions. No change in that context when you think about organic reinvestment first, shareholder dividends second, and then opportunistic M&A versus repurchase depending on the circumstances in the year. As you said, this year was a very unique year because we not only generated all the cash flow from operations, but we also had the Chubb divestiture proceeds that was available for deployment. We had over $12 billion available for deployment when you add all of those different sources. A unique year in that sense. We're on track this year to repurchase at least $7 billion of our shares for the full year. We did $5.8 billion through the third, very attractive for purposes of using the share repurchase lever. For that reason, you should expect we'll continue to employ that.
Opportunistically, we'll pursue strategic M&A where it makes sense. You can think of the Village investment as somewhat M&A oriented, even though it's a minority position. It's essentially an M&A move in that regard. We would expect to continue to use the repurchase lever in the future as well.
$1 billion too, I don't know what your average daily volume is. You can get that done just over market purchases or?
Yeah.
Okay. I should have asked you on the Village, or how are you going to account for that? Are you going to, is there an equity, would your equity account for that, or how would you account for that in terms of your, you said it would offset otherwise share. Is it just enough in that 5% or mid-single-digit dividend to offset it? Is that how it will impact the income statement?
Yeah. Certainly, the dividend is, and it's 5.5%. I wasn't trying to be too cute there, but off of the $2 billion.
Right.
We will see from the value-based contracts I made a reference to.
We're finishing up here, but I always get asked, so I have to ask you. Government business priority MA for sure, but any updated thoughts on Medicaid since people seem to want to know, where do you stand on Medicaid? Thinking about that, you exited last year, so I guess you'd have to do something inorganic to get back in there.
Yeah. Certainly, we serve quite a bit of Medicaid lives through Evernorth today, and we'll serve many more after the Centene contract is live. I think your question's more on the health plan side where we don't have a presence. Right now, I'm glad we don't have a health exchange or Medicare offering. Over time, obviously, it's a big part of the healthcare system, and it's an area we continue to evaluate. Does it make sense strategically for us to be bigger in that space? We don't intend to do any organic expansion into the Medicaid health plan space. If we ever did anything, it would need to be inorganic, but we don't feel the need to be there. We're very confident, comfortable in our skin, and I think the results speak for themselves in that regard.
That's great. Thanks, Brian, and thanks to Cigna Healthcare for presenting today. Our next up is Labcorp in this room. Thanks.