35th Annual JP Morgan Healthcare Conference

Jan 10, 2017

Summary

Integrated pharmacy, payer and care assets were positioned to lower costs and improve outcomes, with PBM membership nearing 90M in 2017. A multi-year efficiency plan targets nearly $3B in cumulative savings by 2021, alongside a long-term adjusted EPS growth target of roughly 10% on average.

Good morning, and welcome. My name is Lisa Gill, and I am the healthcare technology and distribution analyst with J.P. Morgan. It is with great pleasure this morning that I introduce CVS Health. With us this morning is Larry Merlo, CEO, who will do the presentation. After the presentation, we will take it to the breakout room, which is Borgia across the hall, where CFO Dave Denton will join us for questions. Larry? Well, thanks, Lisa. Good morning, everyone. Happy New Year, and we certainly appreciate you joining us today to learn more about CVS Health. Before I get started, I want to draw your attention to our forward-looking statement, which is also posted on our website. I would also like to remind everyone that we hosted our analyst day back on December 15, and at that meeting, we provided a more in-depth review of our business and our growth strategies than time permits this morning. So, I would encourage you to visit our investor relations website for additional details on the topics that we will talk about. So let me just begin by reminding everyone that we continue to have the most extensive suite of integrated enterprise assets in the industry. On a standalone basis, each one would be market-leading, yet what really sets them apart lies in our ability, largely through technology, to integrate pharmacy care from the payer to the provider to the patient. These integrated capabilities allow us to bring unique products and services to the marketplace, helping us to deliver on our goal of driving more affordable, accessible, and effective care, delivering value for all healthcare stakeholders. Here is what we mean. It starts with our proprietary programs. If you look at products like Maintenance Choice and Specialty Connect, they remain the gold standards in giving patients choice while driving substantial savings for payers. Members can seamlessly move between channels as needed, enhancing their experience while driving appropriate utilization and better outcomes. Since we are channel-agnostic from an economic perspective, our incentives are fully aligned with those of our clients, and we can work closely with them to help them realize all of the financial, the convenience, and the clinical benefits that come from our exclusive programs. Additionally, we have a full view of the patient and a single patient record for prescriptions and care that is provided in our channels, and this minimizes any potential delays in patient identification, and it provides important information in real time to our pharmacists regardless of which channel the patient chooses. Our digital assets are integrated as well, giving patients the simplicity of downloading a single app to manage all of their prescription needs, including retail, mail, and specialty. Finally, our Health Engagement Engine is a powerful clinical rules engine that integrates our enterprise assets, providing real-time, actionable healthcare information. It allows us to aggregate data from both internal and payer sources, then we marry it with our clinical research to identify opportunities to improve clinical care. This enables our more than 30,000 pharmacists and clinicians to have important conversations with patients that will help lead to better health outcomes and lower costs for payers. Not only does our model allow us to bring unique and innovative solutions to market, it also allows us to connect broadly with all healthcare stakeholders. These stakeholders, they each have different needs as they try to navigate this evolving healthcare landscape, and through our assets and capabilities, we can bring them powerful solutions that cannot be matched by our standalone peers. If you look at a traditional retail pharmacy, while a frequent touchpoint for healthcare consumers, pharmacy inherently lacks the connections to payers, which drive a great amount of healthcare decision-making. Traditional PBMs have deep connections with their client base, whether it is an employer, health plan, government entity, but they lack the face-to-face consumer connections to truly impact clinical outcomes. Through our enterprise assets, we can partner broadly and deeply with all healthcare stakeholders. We have affiliations with more than 70 health systems across the country, providing affordable healthcare services and connectivity through our Epic EHR. We also partner with providers through many of our enterprise assets to enhance clinical care for their patients. Additionally, we have connections with patients through our numerous customer-facing assets, whether it is a CVS Pharmacy, a MinuteClinic, or our specialty pharmacy. We are also the leading provider of pharmacy services in the long-term care space, giving us access to patients and caregivers within senior living. We have a diverse PBM book of business, including employers, government entities, and health plans. All of these assets work together to drive our competitive advantage. First, we are the premier company with the ability to impact patients, payers, and providers with innovative channel-agnostic solutions. We also have deep clinical expertise across our enterprise assets and our multiple patient touchpoints, enabling us to deliver superior outcomes at lower costs for both patients and clients. With CVS Pharmacy as the anchor of our suite of enterprise assets, we can provide an unmatched value proposition for all payers, regardless of whether or not we are their PBM. In specialty pharmacy, we have the broadest capabilities to holistically manage patients, provide clinical support, improve access to medications, and drive superior outcomes. We also remain the leading provider of pharmacy services in the growing long-term care market, and through our broad clinical capabilities, we can enhance the continuity of care to help improve patient outcomes. Through our industry-leading infusion services, we offer site of care management, significant differentiator with clients, as we help move patients to more convenient, lower-cost sites of care. Additionally, we are the largest retail clinic operator. We have now more than 1,100 MinuteClinics across the country, more than 32 million patient visits since its inception, and MinuteClinic continues to offer unmatched access to convenient, high-quality, cost-effective care. Through co-pay incentives, this can help payers achieve significant cost savings. We certainly have unparalleled scale in the U.S., both in terms of dispensed prescription volume and managed claims volume to help drive down costs. Our value proposition for clients has never been stronger. Through Caremark, we're focused on attaining the lowest net cost for our clients, and that has resonated with clients and prospective clients alike. If you look over the past five selling seasons, we've been very successful at winning new business with more than $40 billion in gross wins, including $7.8 billion in gross wins for the 2017 selling season. We've also been successful in retaining business with a five-year retention rate of between 96% and 97%. These strong selling season results, along with our continued success in Medicare Part D, have allowed our PBM membership to grow from 62 million in 2013 to nearly 90 million members expected for this year. This is a powerful proof point that clients and patients alike value the unique capabilities that CVS Caremark brings to the market. As we've been able to grow the number of lives in our PBM book of business, we've also been able to expand our enterprise dispensing share. If you look from 2013 to 2017, we will have increased the number of prescriptions filled across our enterprise by more than 300 million prescriptions. Let me briefly highlight each of our business segments. CVS Caremark is now the largest PBM in the U.S., with managed claims volume of nearly 1.4 billion, with about a 30% share of the market. We're also well-positioned in the fastest growth areas. We're the largest specialty pharmacy with more than $50 billion in total specialty revenues. We're also a leader in Medicare Part D, as our SilverScript prescription drug plan is the largest PDP with more than 5.6 million members. Additionally, through Caremark, we support the Med D and MAPD offerings of more than 40 of our health plan clients, working with them to bring compelling offerings to market and improve their Star Ratings. So in total, our PBM supports more than 12 million Medicare lives. With healthcare costs rising at an unsustainable pace, plan sponsors continue to count on PBMs as an indispensable partner to help manage their drug spend, and no PBM is better positioned to offer innovative cost management solutions that meet the needs of both plan sponsors and patients than CVS Caremark. We have all of the tools of a traditional PBM, including utilization and formulary management, network strategies, generic programs, but we're even better at managing costs and outcomes when using the full suite of CVS Health assets that include site of care management and infusion capabilities, the ability to manage specialty spend under both the pharmacy and medical benefit, utilizing our NovoLogix technology platform, real-time trend surveillance to help our clients proactively identify trend drivers and respond quickly to changing market dynamics, and best-in-class clinical programs to ensure that patients stay on their prescribed therapies. So taken together, these solutions have had a dramatic impact on client trend. If you look at the first three quarters of 2016, client costs were reduced from an unmanaged gross trend of 11.8% to a managed trend of 3.3%, with actually more than a third of our clients experiencing a negative trend given the range of programs that they have adopted. At the same time, there has been much written and said about the rising list prices of pharmaceuticals. It is an issue that affects both our clients' healthcare costs and the ability of their members to afford their needed prescriptions. It is important to remember that as manufacturers continue to attempt to push price increases through the supply chain, PBMs have been very successful at mitigating these increases through a variety of tools and programs. This IMS industry chart, I think, illustrates that point well. It shows the growing gap between gross and net drug price increases, and this growing delta reflects the success of innovative PBM management strategies while providing another example of the value that PBMs bring to the healthcare economy. Nowhere are these strategies more important than in the fast-growing specialty market. The specialty market can be broadly broken into two distinct segments, patients and payers, with each having their own goals as they try to navigate this complex environment. When you look at patients, adherence, clinical support, convenient access are their key objectives. For payers, they value utilization management to ensure that the right patients are on the appropriate medications. Let me highlight just two important areas where our capabilities truly stand out. The first is our last-mile connectivity to patients through Specialty Connect. a program that remains unmatched in providing convenient local pickup options to patients on these specialty medications. The second is in our ability to manage specialty medications across the medical benefit through that NovoLogix technology platform that I mentioned a minute ago, something that our competitors struggle with, either due to a lack of appropriate technology or potential channel conflicts. Our capabilities have made us a partner of choice for specialty patients and payers alike, as no other provider can deliver more fully on their unique goals. When people have had to vote with their wallets, the decision has been to choose CVS Specialty, as we have captured about 40% of all specialty growth since 2013. Let me turn to our retail long-term care segment, a segment that includes not just our retail stores, but also our MinuteClinics, along with Omnicare. Within retail, we currently operate more than 9,600 retail pharmacies in 49 states, Washington D.C., Puerto Rico, and Brazil. We have nearly a 24% share of the overall U.S. retail prescription market. In addition to our significant presence in retail pharmacy, we continue to invest in clinical programs to ensure that CVS Pharmacy remains the leader in adherence solutions for patients. Through our high-touch interactions with healthcare consumers, we can provide the right outreach through the right medium to the right patient at the right time. We have developed dozens of patient-centric programs, and through them, we conduct adherence outreach millions of times, each and every week. By helping people take their medications as prescribed, we are improving health, we are saving lives, and we are significantly reducing medical costs for patients, payers, and the entire healthcare system. Turning to MinuteClinic, our retail clinic footprint, as I mentioned earlier, consists of more than 1,100 clinics spanning 33 states. More than 50% of the U.S. population now lives within 10 miles of a MinuteClinic, and today, MinuteClinic has more than half of the retail clinic market share, with approximately three times as many clinics as its next closest competitor. MinuteClinic remains a key differentiator for us in the marketplace that is continuing to innovate to provide more patients with high-quality, low-cost care. We continue to invest to drive patient engagement and access with elements like new scheduling tools, expansion of primary care services, and telehealth. A third of our patients are now using these online tools, which allow them to view wait times, hold their place in line, and this year, we'll add the ability for patients to actually book future appointments online, while also expanding the number of chronic diseases that we treat. It's been about 16 months since we completed our acquisition of Omnicare, a leading long-term care pharmacy, and that actually serves more than 1 million patients and dispenses about 100 million prescriptions each year, and it still has significant opportunities to grow. If you look at the fact that we've got about 10,000 baby boomers turning 65 every day, older adults are projected to account for about 21% of the population by 2030. Today, about three-quarters of Omnicare's business is in serving skilled nursing facilities, as this historically has been the focus of long-term care pharmacy. While we see opportunities to grow in the skilled nursing market, we're also encouraged by the significant growth potential in both the assisted living and independent living markets. The combination of this marketplace growth and the consumer-facing assets of CVS, it gives Omnicare tremendous opportunities for continued expansion. We'll look to do this in three distinct ways. First, by achieving operational excellence across Omnicare's entire footprint. Second, by rolling out industry-leading transitions of care experiences. Third, by serving assisted and independent living communities with new integrated capabilities. Although it's taken us a little longer than anticipated to achieve our accretion targets, we believe that through our combination of assets, we have the winning formula to achieve success in this growing market. Through all of these various patient touchpoints that I've been talking about, we like to say that we own the last mile in the delivery of care. These unmatched touchpoints, whether it's our retail pharmacy, mail, specialty, infusion, MinuteClinic, now long-term care, they put us in direct contact with healthcare consumers each and every day, no matter what healthcare road the patient's on. This is an underappreciated advantage of our model, as these face-to-face interactions have been proven to be two to three times more effective at increasing adherence and improving health outcomes. You combine that with our unique integrated programs and full view of the patient, and what you have are healthcare solutions that are more affordable, more accessible, and more effective. Turning to our enterprise growth strategy, it's been centered around five key strategic imperatives, and these have not changed. First is aggregating lives. As we touched on earlier, we've been very successful at growing the membership in our PBM book of business by demonstrating value to both existing and prospective clients through our cost management solutions and clinical capabilities. Second is to continue to grow share across our enterprise dispensing channels, and keep in mind that this is more than just a retail story, as we intend to grow share across our enterprise assets, including specialty and long-term care. Third, we must continue to execute with excellence, driving efficiencies across our enterprise so that we can continue to be a low-cost provider for payers while delivering exceptional service for our patients. Fourth, we remain committed to driving innovation across all lines of our business, and I'll talk shortly about some of the ways that we are innovating to drive increased value for our partners. Finally, we'll continue to operate with an enterprise mindset, recognizing that we have many avenues of growth across our broad suite of assets, and the solutions that we bring to market may adversely impact one area of the business to the benefit of another and to the benefit of the CVS Health enterprise. We have been steadfast in executing on these business imperatives to drive growth across our enterprise, and we'll continue to do so. As I'm sure you're aware, we'll be experiencing some near-term headwinds in 2017, and we have a plan in place to return to more robust levels of earnings growth. Importantly, this plan is not a departure from our enterprise growth strategy, but a set of actions to respond to near-term market dynamics. Let me review the four points of this plan. First, we will leverage our enterprise capabilities and CVS Pharmacy's compelling value proposition to partner more broadly with other PBMs and health plans. Our recent announcement of a 90-day solution with Optum is an example of this strategy in action. Going forward, we'll continue to work with Optum to define a roadmap of other ways that we can help one another by leveraging our suite of assets. We have capabilities that generate results that other retail competitors simply cannot match, and we've begun to offer a menu of bundled services, including our exclusive clinical capabilities, along with our MinuteClinic, infusion, and long-term care capabilities as a component of the CVS Pharmacy value proposition. As we've discussed many times in the past, the delivery of pharmacy care will not simply be about the lowest cost, but will be about who can keep patients the healthiest and deliver the greatest overall healthcare value. Second, we'll continue to innovate to bring new integrated PBM products to market that capitalize on the benefits inherent in our unique integrated model while meeting the evolving needs of our clients and members. Our ongoing innovations will encompass clinical solutions to support patients at all stages of the care continuum. We're also bringing new value-based approaches in specialty and traditional pharmacy, including partnering with pharma in different ways to drive savings. We're also introducing new network strategies that ensure competitive reimbursement based on a series of performance metrics, and we're introducing a new generation of Maintenance Choice. This new version of our industry-leading program will bring a new level of convenience for patients, delivering pharmacy right to their door, right when they need it. We also continue to be focused on driving costs out of our business by improving productivity and optimizing our cost structure so that we can drive costs lower for our clients and the members that we serve. To that end, we've launched a multi-year enterprise streamlining initiative. As part of this initiative, we'll focus on three broad areas: rationalizing our store footprint, enhancing the efficiency of our shared services functions, and optimizing our pharmacy delivery platform. Through these efforts, we expect to achieve nearly $3 billion in cumulative savings by 2021. Finally, we have significant cash generation capabilities that provide us with a variety of ways that we can grow and return value to shareholders. We remain confident that we can achieve solid operating profit growth across the enterprise in the years ahead, and our substantial cash generation affords us opportunities to bolster that growth. We'll continue to evaluate strategic acquisitions to supplement our existing asset base. Absent that, we'll deploy our capital to return value to shareholders through annual dividend increases and value-enhancing share repurchases. This year, we've increased our dividend by 18% over last year to $2 per share, and we expect to complete $5 billion in share repurchases. Between dividends and share repos, we'll allocate nearly $7 billion toward enhancing total returns for shareholders this year. Last month, we also laid out our long-term adjusted EPS growth target of roughly 10% on average, recognizing that some years may be higher and some lower. That growth is expected to generate $7 billion-$8 billion in free cash flow per year, which we'll continue to utilize to execute on our share repurchase authorization. You also see here our expectations for growth for revenue, operating profit, and share repurchases. In wrapping things up, I'd like to leave you with five key messages that I hope you'll take away from this morning's presentation. First, in an era of rising healthcare costs, we are the optimal partner to deliver savings and help improve outcomes for all healthcare stakeholders. Second, we own that last mile of healthcare delivery. If you think about all of our enterprise assets, each one delivers care directly to the healthcare consumer. Keep in mind that retail pharmacy is quite often the front door to healthcare with the highest frequency of patient interaction. As a result, we have an unmatched ability to help change consumer behavior and drive outcomes. Third, we can be a strong partner for all PBMs and health plans, and we have the ability to leverage our enterprise assets and capabilities to meet the individual needs of these payers. Fourth, we've built the capabilities to integrate pharmacy care from the payer to the provider to the patient, and our proprietary integrated programs continue to remain unmatched in the marketplace. These programs are seamlessly integrated through our Health Engagement Engine, providing a better member experience, greater adoption, and superior results. Finally, we're focused on maximizing shareholder value with an enterprise mindset. We have strong cash generation capabilities, and we'll continue to employ a disciplined approach to capital allocation, returning value to shareholders. Let me just conclude by stating that we remain very confident in our model and our position in the evolving healthcare landscape. We can bring value to all healthcare stakeholders, helping them achieve their goals of making care more affordable, accessible, and effective. With that, again, thanks for your time, and we'll move across the hall to the breakout session.