The UBS 2016 Global Healthcare Conference

May 24, 2016

Summary

The integrated model supported PBM wins, specialty growth, and expansion into retail clinics and long-term care. 2016 adjusted EPS guidance was $5.73-$5.88, with more than $5B planned for dividends and buybacks.

Good morning. Thank you for attending The UBS 2016 Global Healthcare Conference. My name's Rob DiGia, and I'm happy to be your host for this session. Our next presenting company is CVS Health. Presenting on behalf of CVS will be Larry Merlo, President and CEO. A breakout session will follow in the Broadway Room immediately after this session, and we'll make sure Anthem gets out on time. Thank you. Okay, thanks, Rob, and good morning, everyone. I'm happy to be here today to speak with you about CVS Health. Before we begin, I do want to draw your attention to our forward-looking statement, which is also posted on our website, and I'd ask that you take a moment to review it. With that, let me start by sharing our thoughts regarding the evolving healthcare marketplace and why we believe we have the right strategy to take advantage of the opportunities it creates to drive sustainable enterprise growth. As we monitor this changing landscape, we believe that our value proposition is very compelling. With healthcare costs rising and the market rapidly evolving, patients, payers, and providers are looking to lower their healthcare costs while enhancing quality and maintaining sufficient access to care. With that in mind, we've assembled the most extensive suite of leading assets, which make us well-positioned to play an important role in solving what we refer to as this cost-quality-access conundrum. Our integrated assets allow us to partner more broadly across the healthcare landscape, creating real value for patients, payers, and providers. This enables us to deliver superior outcomes at a lower cost. So you may ask, well, what's our competitive edge? First, we are still the only company with the ability to impact various stakeholders with innovative channel-agnostic solutions. Products such as Maintenance Choice or Pharmacy Advisor, Specialty Connect, they remain unmatched in the marketplace. In specialty pharmacy, we have unparalleled capabilities to holistically manage patients, provide clinical support, and drive superior outcomes. As a low-cost provider and valued partner for clients looking to drive down overall healthcare costs, our growing retail, now long-term care and mail volumes, along with our generic sourcing venture with Cardinal Health, create unparalleled scale and purchasing expertise. Additionally, we're the largest retail clinic operator. We have more than double the number of clinics than that of our next closest peer. Our deep clinical expertise enables us to help deliver superior outcomes at lower costs for our patients and our clients. Our multiple touchpoints give us a unique view of their specific needs. When you combine that with the flexibility of our integrated model, we can deliver optimal solutions that our standalone peers simply cannot match. Finally, we're a leading provider of pharmacy services in the growing long-term care space. Through our broad clinical capabilities, we can enhance the continuity of care to help improve patient outcomes. Over the past several years, our Caremark PBM has won significant new business, increasing its volume of managed claims by more than 57% since 2008. This has allowed us to drive additional volume through our enterprise dispensing channels, with that volume growing by more than 70% over that same time period. This is one of the key advantages of our integrated model, as our channel-agnostic offerings provide a wider net to capture claims growth while generating client savings. The last slide looked at our Caremark claims. This slide is looking at Caremark revenues, and it shows that we have notably increased our share of those revenues. This enterprise dispensing share of Caremark business has increased by 700 basis points since 2008, allowing us to capture an incremental $7 billion in dispensed revenue, with $2 billion of that growth coming last year alone. This outperformance, it really lies in our ability to capture an increased share of the fast-growing specialty pharmacy market, and our unique programs like Specialty Connect are helping us win in the payer choice market, and our innovative tools to help payers manage their specialty costs are driving to support additional volume through one of our channels. Let's take a deeper look at how we are achieving this growth. We continue to win in the PBM marketplace, and as clients evaluate their options, they are often selecting CVS Caremark. This reflects favorably on our high levels of service and execution, our competitive pricing, and of course, our integrated model, which allows us to deliver differentiated products and services. We wrapped up another outstanding selling season in 2016. We had gross new business wins of $15.2 billion. About 83% of these wins are from health plans such as Wellmark and WellCare. This number also includes the Aetna Coventry Medicare Part D lives that moved onto our platform on January 1. We also had about a half a billion in government wins with clients such as the State of Illinois and Health Choice, and we continue to be very successful in the employer space with 91 new employer clients totaling $1.8 billion in revenue. We also had another successful renewal season with a 97.3% client retention rate, resulting in net new business for 2016 of $13.1 billion. Turning to the 2017 selling season, it's early, but we are off to a very good start, even when taking into account the recent and well-publicized CalPERS and ERS contract losses. Our integrated model continues to resonate strongly as we maintain high levels of service across our diverse client base. Consistent with our past practices, we will provide a quantitative update on our next earnings call once we are further along in the selling season. Why does CVS Health continue to win in the marketplace? It should be no surprise that with the return of double-digit pharmacy trend fueled by branded price increases along with specialty pharmacy, our ability to manage drug costs is our clients' top priority. After reaching a double-digit high of 11.8% in 2014, our clients' prescription drug trend dropped pretty dramatically to 5% this past year, 2015. Despite record levels of drug price increases, we were actually able to cut clients' trend by more than 50%. While the trend drivers, including brand, specialty, and generic price inflation, were similar to what was seen in 2014, a broad adoption of proactive CVS Caremark cost management strategies successfully mitigated their impact. Our significant wins for the 2016 selling season in the health plan segment, they're clear evidence that these clients continue to value the unique capabilities that CVS Health brings to the table to help them with their offerings, and we can partner with health plans in a multitude of ways to drive value. First, our strong procurement capabilities and our compelling scale allow us to be a low-cost provider. With the increased focus on controlling pharmacy spend, both size and scale are absolutely critical. Second, we have a broad service portfolio to support the individual needs of health plans, regardless of whether or not they are a PBM client. If you look at our enterprise assets, whether it's our retail stores and clinics, our leading specialty assets, infusion services, and now long-term care, we have a variety of ways to work with health plans to improve their individual offerings. Additionally, with our national network of retail pharmacies, we can be an important part of their network design strategies. Third, the fact that pharmacy is our focus. We have a long history of investment to introduce innovative tools and products to improve the pharmacy experience and drive clinical outcomes. Additionally, the growth in government programs is requiring continuous investment in systems and human capital to meet the increasingly strenuous regulations and compliance standards that come with that business. Finally, probably one of the most underappreciated features of our model is our multiple touchpoints with healthcare consumers. This face-to-face interaction, it gives us valuable insights that help to not only shape our clinical programs, but also bring them to life and ultimately improve outcomes and lower costs. If you add it all up, you have a very compelling value proposition that has made us and will continue to make us a valuable and sought-after partner with health plans. I mentioned scale earlier, and I wanted to dig just a little deeper to add some additional context around the value that we can bring. First, let's look at dispensed prescription volumes. Last year, we dispensed more than 1.3 billion prescriptions. That's across the CVS Health enterprise, including our retail, our mail, and our specialty pharmacies, as well as a pro forma of pharmacy volume for the Omnicare and Target acquisitions. This is eight to 11 times more than the proposed health plan combinations, and this gives us significant procurement scale to lower our cost of goods. By the way, note that our purchasing scale is further enhanced through our Red Oak sourcing venture with Cardinal Health, which is not included in these numbers. If we look at managed prescription claims volume, in 2015, we managed more than 1.1 billion claims within the Caremark book of business, and this is two to three times more than the proposed health plan combinations. This provides the scale to effectively negotiate with brand manufacturers for rebates and formulary placement, and this in turn creates real value for payers as the vast majority of those rebates are passed directly back to our clients. Through our considerable dispense volume and our managed claims volume, we are a low-cost provider of pharmacy care. In this environment where everyone is looking to drive down costs, I think you can see how size and scale are critical differentiators. Although there's been a lot of rhetoric in the market about the potential of health plans to insource their PBM functions, we feel that this approach would prove to be suboptimal, and we can offer a very compelling value proposition that has made us, and again, will continue to make us a valuable and sought-after partner with health plans. This was evidenced by the significant health plan wins that I alluded to earlier in the 2016 selling season. Let me turn to another significant growth area, the specialty pharmacy business. With the addressable specialty market projected to eclipse $200 billion by 2020, plan sponsors continue to search for innovative solutions to manage this spend. They're frequently looking to CVS Specialty for help, and we're well-positioned as the largest and fastest-growing specialty pharmacy. We generated more than $40 billion in specialty revenue last year. That figure is projected to climb to approximately $49 billion this year. If we just focus on CVS Specialty dispensed revenue, we've grown at a more than 32% CAGR from 2012 to 2016, and this growth has outpaced that of the industry, which has grown at a 19% CAGR over that same time period. Why have we been so successful in specialty? In addition to our scale and expertise, we also have the broadest capabilities to help clients manage trend while improving care for their members. Only CVS Specialty has the footprint to provide convenient access to specialty pharmacy through our Specialty Connect product, offering the convenience of either CVS Retail or Caremark Mail. Clinically, only CVS Specialty has embedded rare disease care management nurses from our Accordant business that are embedded into the specialty pharmacy process, and these nurses produce an objective improvement in clinical quality and can significantly reduce disease-related hospitalizations and unexpected ER visits. This is a standard for quality improvement that is unmatched in the industry. For payers, only CVS Specialty has the tools to manage all specialty medications, including those that are infused or paid under the medical benefit. This significantly improves the client's ability to manage these high-cost agents and reduces the administrative burden associated with multiple vendors. Our core retail pharmacy business also continues its history of strong performance. We're outpacing the market, growing twice as fast as the overall retail market, and our growth has been driven not just by growth at CVS Caremark. If you look over the past two years, nearly 44% of our retail growth has been driven by share gains with other payers. We have best-in-class clinical capabilities and tools that's allowed us to drive medication adherence, making us an invaluable partner. These capabilities include advanced analytics to help us identify gaps in care and inform us on when the appropriate time and what the appropriate medium is to deliver an intervention. We've introduced unique adherence tools like ScriptSync and multi-dose packaging to make it easier for patients to follow their medication regimens. Our investments in these tools and capabilities have paid off as our adherence continues to outpace that of our competitors. In fact, our medication possession ratio for the three chronic conditions that you see listed is roughly 650 basis points better than our top three retail competitors. We also accelerated our retail growth with the acquisition of more than 1,600 pharmacies and 80 retail clinics from Target late last year. This acquisition provides us with a tremendous opportunity to improve the performance of these pharmacies, as traditionally, the Target pharmacies have filled about half the number of prescriptions as a CVS. When you think about our brand and name recognition, our clinical capabilities, our unique integrated programs like Maintenance Choice or Specialty Connect, Pharmacy Advisor, we are confident that we will increase prescription unit volumes. Now, the integration of these pharmacies and clinics is well underway, and we expect that all of the stores will be converted to the CVS Pharmacy and MinuteClinic brands by the end of this summer. Another key piece of our enterprise growth strategy is MinuteClinic, the largest retail clinic operator in the country with more than 1,100 clinics in 33 states and the District of Columbia. Today, more than 50% of the U.S. population actually lives within 10 miles of a MinuteClinic. Last year, we rolled out the Epic EHR across our entire chain of clinics, and with about 60% of Americans having an Epic record, this integration gives us tremendous connectivity with health systems across the country. Epic also helps us expand the scope of services that MinuteClinic can treat, allowing us to play an important and complementary role with traditional primary care. We also broadened our pharmacy reach last year with the acquisition of Omnicare, the leading pharmacy provider in the long-term care market. This acquisition provides a new pharmacy dispensing channel for CVS Health, expanding our customer reach to a broader population of chronic care and seniors at an important time as our population ages. In fact, the humbling statistic of about 70% of people over the age 65 will require some form of long-term care. Over the next several years, the number of older adults is expected to increase from about 10 million to more than 21 million. Now, for the different constituents that Omnicare serves, there were historic gaps in their offerings that now have the opportunity to be more complete with our combined enterprise assets. As we integrate Omnicare into our business, we plan to enhance our enterprise offerings and believe that CVS Omnicare is in the best position to serve the senior care continuum. Our revenue synergies focus on addressing those previously unmet needs for the different senior populations, helping to drive better outcomes and lower overall cost to our customers and their residents, and ultimately, for the healthcare system. Now, we expect to complete the vast majority of the integration activities by the end of this year, and we remain very excited about our enhanced ability to serve seniors along their continuum of care. I think you can see that we are uniquely positioned with multiple channels all across our asset base to drive pharmacy growth. Our traditional retail business, which again includes CVS Pharmacy, the front store, MinuteClinic, has always served as the face of the company and is a key driver of prescriptions. With CVS Caremark, our unique plan designs and integrated offerings provide savings to clients while driving additional share through one of our dispensing channels. The acquisition of Omnicare significantly expands our ability to serve this growing senior patient population. Our presence in the ever-important specialty pharmacy business. Lastly, our new partnership with Target expands our footprint and the reach of CVS Pharmacy as well as MinuteClinic, and we'll continue to leverage our integrated model to drive pharmacy innovation and growth. With that, I'd like to quickly walk you through our strategy for driving long-term enterprise growth. You look at the most basic level, our growth strategy is centered on growing our core pharmacy business while broadening our base by entering into new spaces in the healthcare market. How do we accomplish this? First, we'll continue to add capabilities to enhance our core business. Second, we'll continue to deepen our relationship with payers and providers as they seek to partner to lower costs and improve outcomes in a market that is beginning to put more emphasis on the efficiency in which care is delivered. Third, we'll continue to increase patient engagement by providing unparalleled levels of service and continuing to introduce consumer-friendly solutions. Fourth, we'll remain vigilant in driving costs out of our business by continuing to innovate in our drug procurement and drive supply chain efficiencies. Finally, we're going to continue to pursue opportunistic bolt-on acquisitions that further enhance our enterprise capabilities. We believe that this strategy will allow us to continue to drive shareholder value, and we've been very successful at enhancing value by following our roadmap that focuses on driving productive long-term growth, generating significant levels of free cash flow, and allocating capital using a disciplined approach. This encompasses acquisitions that drive returns, dividend growth, and value-enhancing share repurchases. We've been able to successfully enhance value for all stakeholders through this model, with all three of these pillars contributing significantly to our success. Now, following this roadmap, we expect very solid EPS growth and significant cash generation in 2016. As we stated on our last earnings call a few weeks ago, adjusted EPS is expected to be between $5.73 and $5.88, and that excludes acquisition-related costs in both years, and that represents growth of 11%-14% over 2015. As many of you probably saw, last week we announced a tender offer for a portion of our outstanding debt, and we anticipate the net effect will be leverage neutral and are looking to take advantage of the attractive interest rate market. This is an opportunistic trade which was not contemplated in our guidance and is expected to lower ongoing interest expense for the year. Now, given that the transaction is not yet completed, we will provide an update regarding its impact on our next quarterly earnings call. I do want to remind you of some of the timing factors that will influence the cadence of our earnings throughout the year. As we stated back at Analyst Day in December, and again on our earnings call earlier this month, earnings growth will be significantly weighted towards the back half of this year for several reasons. First is the timing of generic introductions and the break-open periods associated with new-to-market generics. Second, and is what is becoming more and more typical, our profits in the Medicare Part D, they are weighted to the third and fourth quarters. With this year's Med D growth rates, we expect the impact on the cadence to grow as well, with growth benefiting in the latter part of the year. Third, there are various initiatives that are either expanding or that we are undertaking to drive front store profitability, and the benefits from these initiatives are expected to be back half weighted. Fourth, share repurchases will be largely complete by mid-year, and as you know, we completed more than $2 billion in the first quarter, and while this will help the entire year, the greatest benefit will occur in the back half of the year. Finally, we are expecting a favorable resolution on certain tax items at some point during 2016, but the timing of these is uncertain at the moment, and we have assumed that these will not be resolved until the back half of the year, and as such, the tax rate was higher in the front half of 2016. In December, we also announced that our board of directors approved a 21% increase in our annual dividend for this year, putting us comfortably on track to meet our 2018 dividend payout ratio target of 35%. We currently have $5.6 billion left on our 2014 share repurchase authorization, and we expect to complete $4 billion of share repurchases during 2016. So between dividends and share repurchases, we will allocate more than $5 billion towards enhancing total returns for our shareholders this year. To wrap up, I would like to leave you with four key takeaways. First, our leadership positions and expertise in multiple interrelated areas allow us to drive superior value, and no competitor has this combination of assets. Second, we remain focused on expanding our core pharmacy business while broadening our reach into new healthcare channels. No one possesses both the B2C and the B2B capabilities of CVS Health. Third, we are always looking ahead, and we will continue to introduce new and innovative products to create value for our various stakeholders, and today our business remains a category of one. Finally, we are an integrated healthcare company that is committed to driving sustainable enterprise growth and enhancing shareholder value through strong earnings and cash flow, along with a disciplined approach to capital allocation. With that, again, I want to thank you for your time this morning, and we are going to move into the breakout room, which is the Broadway room, and I think it is down the stairs to the right. Thank you.