UBS Global Healthcare Conference 2017

May 24, 2017

Summary

Pharmacy’s regulated, insurance-linked model and pharmacist relationships were presented as differentiators from e-commerce; mail order accounted for <15% of prescriptions and was declining. Integrated clinical programs target better outcomes and lower costs, while SilverScript had 5.5M members and a four-star rating for two years.

Okay. Great, everyone. We'll get started. I'm Michael Cherny, the healthcare tech and distribution analyst at UBS. I thank you all for joining us for day three. More importantly, thank you to the CVS team, Larry Merlo, President and CEO, David Denton, Chief Financial Officer, joining us for a fireside chat. After this, we'll be doing a breakout session as well downstairs in the Broadway Room, where I'm sure there'll be plenty of other questions. Might as well start with the most topical items. I think last week, a small e-commerce company was discussed as potentially making an entrance into the market. Maybe as you think about what a hypothetical Amazon competition could look like relative to the pharmacy, clearly this is a company you've been competing against, along with plenty of other e-commerce companies for a number of years. But relative to the pharmacy, how do you think about the competitive differentiation CVS has now that continues to show how you're able to drive share versus any type of competition, like an e-commerce type player? Yeah, Mike, as you mentioned, it's a great question. It's been in the news a lot over the last week. Certainly, listen, Amazon's a respected competitor. You don't take anything lightly that they may be doing. That said, pharmacy is not a commodity business like many of the other consumer categories are. There are certainly high barriers to entry. It's a highly regulated industry. You look at the mechanics of pharmacy, if you will, today more than 95% of all the prescriptions that are dispensed across the country have some type of insurance coverage associated with it. So, the integration between pharmacy, insurers, the physicians is also another unique component of that sector. Maybe the most important element is the fact that from a consumer, a patient point of view, they certainly value the relationship and the trust that they have with their retail pharmacist. If you look today across the mail order channel, less than 15% of prescriptions are dispensed through mail order pharmacies. That number has been on the decline. As you think forward, as we think more about value-based care, value-based reimbursements, again, the role of pharmacy being more than just dispensing a prescription is going to grow in its importance around the clinical measures, the clinical components that the pharmacy can provide. So, I do think, again, it's a very different business operation than some of the other consumer-based commodity categories that are offered online. That said, we continue to work to define what We've heard this term omnichannel many times, and we're working to define what that means for our customers, what that means for our channel, both in the front of store as well as the pharmacy. And how do we use digital properties, digital tools, we've been investing more in that, to enhance the customer, the patient experience, and kind of just make the whole process easier for our customers. And I want to get back to some of the digital applications. You mentioned a few terms I know are particularly important across this market, clinical integration, patient experience, some of these items, particularly as you think about other ways to pursue care management programs, some of your disease state-related pushes, particularly with the integration with the pharmacy and the PBM side. How does that continue to give CVS, at the enterprise, a leg up versus a number of the other players in the market, particularly the players that you necessarily don't see coming? Yeah, Mike. As we think about our capabilities, we think about how we can make care more affordable, more accessible, and more effective. And as you look at what we have been able to do across our broad suite of assets, oftentimes, and you've heard us refer to the phrase of, "We deliver the last mile of care to millions of patients every day across the various distribution channels that we can offer," whether it's retail pharmacy, specialty, infusion, MinuteClinic, yes, mail order pharmacy, and now long-term care. And the ability to connect the dots across all those different businesses has allowed us to bring, to some degree, disruptive innovation to market with products like Specialty Connect, Pharmacy Advisor, Maintenance Choice, and our newest product, Transform Diabetes Care for diabetics, where we think that through that program, we're going to be able to bend the cost curve, and we're doing some unique things that will put a cap on the trend within the therapeutic cost of treating that disease. Along those lines, using the Transform Diabetes Care program maybe as a microcosm for the way you evolve the business, clearly there has been a lot of commentary around integration with your largest customers, continue to focus on driving best total cost of care, especially against the backdrop of the uncertainty on the drug pricing dynamic. Are these the types of programs that continue to get you deeper and deeper in terms of your partnerships with customers like Aetna, with customers like your other health plans that are looking for more of that total integrated cost of solution? Well, Mike, I think it does. I think whether you are talking about our relationship with Aetna or the fact that we have more than 70 health plan clients today. I do believe that there is a growing realization that healthcare is becoming more localized. We started talking about this notion of the retailization of healthcare. If you think about the realities in the marketplace, there are many different plan designs that are pushing more decision-making, more accountability to that patient, let us call them that healthcare consumer, but yet healthcare literacy. The tools with which to make those decisions, they are lacking. They are behind the plan designs. We think we can play an important role, for the reasons that I mentioned earlier. We have the face-to-face interaction with those customers every day, and we can help to bridge some of those gaps. Again, the programs that we were alluding to earlier have made a difference in terms of effectiveness and at the same time reduce cost of care. I think what you have seen us do is we have created a clinical platform that integrates all our assets together. We have pushed that decision-making down to the pharmacist level or the technician level so that they can, one, interact with the patient, but importantly follow up with the patient. What we have seen is as we have done that, the outcomes compared to others are significantly better. You have seen us improve our performance and improve the performance of those that we serve, both from a clinical perspective and also from a cost perspective as we plug into payers and health plans and Medicare. You have seen really a movement from a statistically significant movement in performance. Is this the way we expect or should expect the market to continue to evolve, given if you take the largest payers in the market, Optum has become both a key competitor on the PBM side as well as a key partner in terms of your preferred network strategy, and obviously you have a long-standing relationship with. As you come to the end of the initial contract, you think about ways to work together. Then obviously Anthem has made some very public noise about what they want to do relative to the PBM strategy. Are these the ways that we continue to see this market shift and further evolve in terms of the closer, tighter integration? Yeah, I think you're seeing the market move to an outcomes-based. I mean, at the end of the day, this is all about making patients improve their clinical outcomes, also at the same time be the most cost-effective solution in the marketplace. You're seeing us and maybe others who really invest in pharmacy do that. I do think that you're going to see us plug into different payers in different ways such that we can really drive value and really align our objectives with their objectives over time. Yeah, and I think, Mike, along those lines, I think the industry is learning the realities of being competitors, but at the same time partners. We have that today in our Medicare Part D business. SilverScript is the largest PDP product, and yet at the same time, we manage the Medicare pharmacy product for more than 40 of our health plan clients. We've been able to demonstrate for them there's a value add even though their product may be competing with SilverScript. We're able to show them that their rate of growth is ahead almost by 50% of the overall market growth in the PDP space. So I think it's a great example for us from a learning point of view, the fact that we can be competitors and at the same time partners. I think that's a great transition as, again, we're sitting at the end of May for the 2018 PBM selling season. As you think about the way the season developed, I know you made some commentary on the 1Q call about the pacing of renewals being somewhat similar, maybe a little lighter, at least, or sorry, the pacing of available contracts a little lighter versus last year. But as you think qualitatively, relative to the RFP process, what are some of the differences that people are asking for in terms of both health plans and employers that they want to see the type of service expansion that you can provide for them? Yeah. Again, I think there is a whole dialogue now about outcomes and value-based performance. Clearly, if you look at our product solution set, we continue to be very differentiated in the marketplace. Our Maintenance Choice product still gets a lot of play in the market, but I think what has happened more over the last couple of years is how we go to market in specialty in our unique solutions from a patient engagement, from a specialty perspective, and how we are improving performance, managing cost, managing utilization, manage formularies in that space is really a topic of great interest both to our health plan clients or potential clients, but importantly in the employer and government space. Those dialogues continue. I think there is also a big discussion around how MinuteClinic can play a more active role in helping these payers manage costs, just even outside of the pharmacy space, because it is a very high-quality, low-cost solution to deliver care. Mike, we just had our client forum about a month ago. It was the last week in April, and we had a record attendance, over 1,000 folks there. David's points got an awful lot of attention and discussion. There was a lot of interest in the Transform Diabetes Care Program. I think the other thing that was very interesting is in March, we came out with our trend report. We talked about 2016 year-over-year growth was 3.2%, the lowest that it has been in quite some time. Probably most important in that information was the fact that 38% of our clients actually had negative year-over-year trend. Some of you may recall our analyst day back in December 2015 where we introduced what we are calling the RxInsights tool that is a current view of that particular client's pharmacy spend. By therapeutic class, we can drill down in real time in a variety of ways. What I saw at the client forum is there was a tremendous amount of interest in terms of, as people think about clients that may be peers to them of like sizes, like employer makeup, what is it that that client did that they experienced a negative trend, and I ended up growing at 5%? I think many of the themes were in terms of what is on clients' mind were similar to the last couple years, but I would say to David's point that there was a growing interest in terms of these unique capabilities that we have and what it can mean for them. And I think the good thing with the RxInsights tool is that we can pinpoint exactly what those savings would be with them, and we can implement those programs in a matter of a couple months. And thinking about using the trend report as a backdrop, specialty is one area that clearly has been a major impact on trend going forward, or going in the past. You introduced Specialty Connect, which is off to a good start. As you think about the rise of and the continued growth of specialty and other tools you can provide to your customers to help manage costs as best as possible, how do areas around formulary management, formulary exclusions, pieces like this, traditional PBM tools, continue to evolve into the specialty market? Yeah, I think to your point, specialty is really important, and it's a combination of both managing costs, but as importantly is really managing utilization and making sure that as a patient is on a specialty indication, that they're taking it appropriately. Because the worst thing you could do is have a patient who's on a specialty drug that's very expensive, but not taking it appropriately, therefore not getting the outcome. So, as important of managing costs is wrapping around a clinical solution and engagement solution from a member, a lens to make sure that they're getting the best care possible and engaging them. From a cost management perspective, this is about how do we get the right drug at the right price to the right patient? A lot of that is formulary management driven. We're working to align our incentives kind of up and down the supply chain, from the manufacturer to the payer to the patient, to make sure that the value that's created from a patient taking those medication is shared across that supply chain and that we drive solutions to manage costs. So again, it's back to formulary management. We continue to evolve our exclusion list a bit to make sure that we're maximizing our value. As we create rebate yield, that buys down the cost of those drugs for that payer in a very meaningful way, and we continue to push on that aggressively. How has that ongoing rebate discussion evolved? Clearly, this has been another topic that maybe not as important in the last week, at least for the last year, in terms of the role of rebates in driving savings. I think some of the misnomers of what exactly goes into a rebate, what goes into rebate calculation, and how those factor into the contracts, particularly with the increase of specialty drugs impacting the market. I guess, how does that trend and your ability to negotiate the right rebates for the right clients continue to shift? Yeah, I think this has been a hot topic, I say largely in the investment community. If you go talk to our clients, they understand the value of rebates and actually we have transparency with our clients so they can understand rebate yield and how that flows back to them. As we've said many times, over 90% of all rebates get passed back to our clients in the form of a. Essentially, think about it as a buydown or a discount to those drugs. It's a meaningful way in which they control the cost of branded drugs. If you think about the world today, branded drugs in some cases have a little bit of a monopoly in certain categories, and this is a way for the PBMs to exert some leverage into the supply chain on behalf of our payers to drive down the cost of their prescription drug plan. We get paid to do that, and we're very focused against it. Different payers have different philosophies on how they want to use the rebates. Many of them say, "Hey, I want to take those back to the plan in totality, and I'll use that to buy down the cost of my prescription drug plan and lower the premiums that I give to my members." Some of them apply that rebate at point of sale so that the member sees that day in and day out. We have the flexibility to accommodate both of those solutions and other solutions from that perspective. Again, our objective is to get the lowest net cost for that drug and support the objectives of the plan sponsor. Mike, just two important related points to that. We are very much aligned with our clients, and as it relates to the discussions in Washington, D.C., we talk a lot about that. We talk about the fact that today, 87% of all the prescriptions that we are dispensing are generic products, and we are talking about how can we get more generics into the market. We have got a backlog of 4,000 potential drug approvals, many of which are generics in the FDA. From everything that we have seen from Dr. Gottlieb, I think he shares a view that we have got to introduce more competition within these therapeutic classes to drive down costs. The second point is, we talk about the fact that some have attempted to portray rebates as secrecy. We talk about the fact that there is a difference between secrecy and confidentiality. All of the client relationships that we have are in the form of a contract. There is a buyer and a seller, okay? The buyer has complete transparency in terms of what it is that they are signing up for and the ability to ensure that we are doing what they are buying, okay? Whether it is they can come in and audit or the things that you would typically have as part of a contract. We talk about the fact that the confidential nature is of that contract. We think that there are many studies out there that have said that if that pricing in that contract is made available in the broader market, the only person that is going to get hurt is the client and the consumer because prices are going to go up. By the way, that same philosophy exists across most industries. We talk a lot about that in terms of separating fact from fiction in D.C. I think the second point, and Dave touched on this a little bit, and back to our client forum, we have seen tremendous growth in the consumer-directed health plans. We spent a fair amount of time in the client forum making sure that clients understand the options within that type of plan design, that you can apply those rebates at the point of sale. Within that particular plan design, the use of a Preventive Drug List can further reduce the cost of the prescription at the pharmacy counter. So that too got a fair amount of time and attention by our clients in this recent forum. This point of sale rebate functionality, how widely used is it within your customer base right now? We have the functionality that can cross all of our business segments. I would say it's still pretty small from a utilization standpoint across our book of business. It's offered to all of our clients. They all have the option of taking us up on that. Turning to the SilverScript business, which I know you mentioned earlier, largest PDP in the market. We have an uncertain ACA repeal, replace, whatever you want to call it, world going on right now. How do you think about the potential growth opportunities around SilverScript, particularly in an environment where it seems like the market will be moving more towards supporting further enrollment in PDP plans? Yeah, Mike, I would say we're quite pleased with what we've been able to accomplish, especially over the last couple years with SilverScript. Today we have about 5.5 million members in the SilverScript plan. If you go back and look at what that number was at the beginning of 2016, it was around 5 million. I think the nature of that plan in terms of the fact that it has a low premium, a zero deductible, and low copays on many prescribed products has been well received and attractive for many beneficiaries. The fact that SilverScript has, for the last two years, has been performing at a four-star level, that too is an important point in terms of the quality of that product. We believe that we'll be able to continue to grow in the marketplace. Turning to some of the retail network strategies that have been evolving in the market. You had an agreement announced last November with Optum. Kind of talk us through how that agreement's starting to continue to roll out as you prepare for the go-live date and how that, from a broader perspective, plays into the continued ask from the market for more preferred networks. Yeah. As you know, we've been talking about the fact that, as we think about 2018 and going forward, is how do we take our suite of assets and make sure we're plugged into payers in a more complete fashion such that we can drive value for them and value for us. I think Optum is the first solution set that we've announced around how we're going to market a little bit differently from a CVS Pharmacy perspective and wrapping in many of our clinical programs into a product like that so that we can, again, demonstrate value either through adherence and utilization management and patient engagement, at the same time moving share into one of our dispensing channels. You're going to continue to see us as we move forward have more programs like that. Again, this is getting back to how are we pivoting from in a world of outcomes and value management, this is how we're pivoting to be able to be more impactful to these patients and these payers. I think our solution set, the great news is we have, if you look at all the solutions that we have across the spectrum of healthcare, we have a lot of opportunities to wrap ourselves around these members and really make the engagement more impactful and really drive down cost. When you have these discussions as you think about the evolution of network strategies, where are the points of hesitancy for parties who do not want to participate in some of these more restrictive or preferred networks? Yeah. Keep in mind that the restricted network market today is still pretty small. You see preferred networks largely in the Medicare space, and we've participated in a preferred status when we thought it made economic sense for us, and we've not participated in preferred status where we didn't think it made economic sense for us. I do think in a world, if the world were to move to a more, I'll say, restricted network environment, which we don't see a rapid increase at this point in time, it's pretty stable, but if the world began to move there, we think we're very nicely positioned to be a net winner long term in that market. Think about us having a high-quality, low-cost clinical solution, having a patient engagement model with a clinical overlay at the pharmacy counter. Think about us being in the home with infusion. Think about us being in SNFs and ALFs from an Omnicare perspective. All those solutions come together with better outcomes. If you think about a restricted network or a narrow network, we think we will disproportionately win more over time with that lens. Mike, just using as an example to your point, think about this dialogue with a health plan who sees tremendous value in MinuteClinic from the cost of the site of care as a variable in getting that visit out of the ER and into a retail clinic. Now think about a world where maybe they're thinking about CVS Pharmacy not being in their pharmacy network, but they love the value that MinuteClinic can bring. Now all of a sudden you're having a conversation, can you think about the patient experience going in and getting treated at a MinuteClinic, testing positive for a strep throat, only to walk 20 feet to go back to the pharmacy and have the pharmacist turn around and tell them, "Your prescription's going to be $60 because your insurance isn't covered at CVS." That does change the dialogue in terms of, "Whoa, whoa, we don't want that." I think some of it gets back to our ability to connect the dots across our suite of services in all the ways that we can manage that patient in a holistic fashion does create a different dialogue than what may exist with another pure pharmacy provider. Got it. In the interest of time, I'm going to ask one quick one that probably has an elongated answer, but I'll try it anyways. As you think about the total enterprise and combine that with the strong cash flow you generate, how do you prioritize M&A in this environment, particularly with the uncertain challenges that are being changed legislatively? Yeah. Listen, if you look at our balance sheet, we have a very strong balance sheet. We are probably a little over-levered compared to where we would like to be. We are probably around three times. We would like to get down to about 2.7 times. We are very focused and committed on doing that. The great news is our cash flow performance is extremely strong. I do think there are opportunities in the marketplace from an M&A perspective that can be meaningful, that can help us, again, continue to kind of build out our healthcare delivery solution such that we can be more impactful to the payers that we serve today, whether that be the federal government and Medicare or a health plan as they play in both the commercial Medicare and a PDP space, or whether it be an employer. You have seen us step into, I will say, adjacent areas like infusion or into long-term care. You should expect us to continue to kind of build out that portfolio of product solutions. Perfect. Well, we will continue this downstairs in the Broadway room. Great. Thanks, Mike.