Goldman Sachs 43rd Annual Global Healthcare Conference

Jun 15, 2022

Summary

Growth plans balance acquisitions with existing-business improvement, while primary care, MSO capabilities and home health remain strategic priorities. Retail faces reimbursement pressure, and Caremark growth may benefit from specialty generics and biosimilars over the next two to three years.

Good morning. My name is Lindsay Golub. I work on the healthcare services team at Goldman Sachs, and we are pleased to have you all here with us today in California. I have Shawn Guertin with us from CVS. We are very pleased to have them here. Thank you. Good morning, everyone. Great. Just before we start, just have to make some quick disclosures. We are required to make certain disclosures in public appearances about Goldman Sachs relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received, or 1% or more ownership. We are prepared to read aloud disclosures for any issuer upon request. However, these disclosures are available in our most recent reports available to you as clients on our firm's portals. Disclosures and updates to these disclosures are also available by ticker on the firm's public website, gs.com/research/hedge. Also, the views stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. Great. With that out of the way, I want to start with a long-term question. Okay. At the December analyst day, you highlighted the potential to increase earnings growth by up to 2% starting in 2024 through new care delivery models and accelerating foundational growth. While I want to talk about getting into primary care and areas like home in a minute, the potential drivers of earnings improvement that you discussed then were broader. and included things like omnichannel pharmacy, virtual care, and subscription models. Of that 2% incremental growth, how should investors think about what might be addressable within the assets that CVS has today versus what the company may have to buy or build? Right. At the time we did that, we had a view that about half of that growth would come truly from new, kind of likely kind of acquisition sources, external sources, but that we'd also be able to get about the other half from our existing businesses, either in the form of better margins or better growth. That's sort of how we saw that outlook for 2024. Today, I think we are still committed to delivering the EPS targets that are implicit in that guidance. Inevitably, when you do something like that over a multi-year basis, the eventual path will be a little bit different potentially in its composition. One of the variables obviously there is the timing of any acquisition activity that we're able to execute on. I think the thing that we did do, and is a bit of a safety net, if you will, has been we were careful with our assumptions about capital deployment and share repurchase throughout all that. As we think about sort of the variable of timing, we think the strength of our cash flows and our capital deployment can be something we can use to sort of offset that timing issue and potentially stay on the trajectory. A lot more to play out here, but it really was sort of both an effect on the existing business and sort of our new assets, if you will. Okay, great. Thank you for the color. Maybe talking a little bit about M&A specifically, you've indicated that primary care, MSO capabilities, and home health are all spaces where you're looking externally. How are you prioritizing those as we think about working towards the goal on taking on more risk-based care, and what do you see as the most attractive avenue to accelerate that effort? Yeah. All three of those remain our priority, and in many ways, they become sort of the legs of a stool that we need to achieve our vision. If you think about the first two in there, the primary care delivery and the MSO capability, really in some ways, they've become a front door to our kind of ecosystem going forward. One might be one that you own on a proprietary basis, one might be one where you're partnering, and obviously those have different capital dynamics, different growth dynamics. They're equally important, I think, for a company of this size, and I also think some markets may be more amenable to one approach than the other as you go through them. Our vision obviously is to have community assets, have virtual assets, and have home assets, and that's where the home leg kind of comes in. Ideally, the first two make more sense and then attach sort of home when you have that, but obviously the world doesn't always present itself in a nice orderly fashion for you to decide. That's why we sort of talk about them as three. But I think with those three, we'd really have a sound foundation to think about how we could frankly build other assets on into the future and then go back to enhance sort of our existing business. Wonderful. Maybe talking about sort of continuing on M&A, given the difference in views on valuation between buyer and seller, how has your thinking changed between full ownership and partnership? I would say that we've always been open to both approaches, probably more so in the past. I think there are actually pros and cons in almost every situation of taking a partial ownership stake or a full ownership stake. Obviously, one of the bigger things when you're at the beginning of executing a strategy is wanting to make sure that you can shape it and deliver on what you think you need to get those benefits that you started the questioning with. So you always want to make sure you have that. But like I said, I think there are some real risk management capital benefits and whatnot of both approaches. So we approach that asset by asset, situation by situation, and try to think not only about what works best for the business, but frankly, what works best for both parties in that discussion. Yeah, that makes a lot of sense. With such a large footprint geographically, it makes sense that you're taking different approaches by place and- Right thinking through- Right full strategy. Exactly. In many ways, this is unlike a lot of deals that have been done in this space in that this is more of a capability play, right, as opposed to just like an overlap kind of play. Really, those capabilities become really the key thing that you're trying to evaluate. To your point, I think there's different mechanisms to avail yourselves of those. Okay. Yeah, thank you for the color there. For many of the primary care models out there, I think investors are still looking to get comfort with sort of the long-term sustainability and profit ramp. When you think about getting into primary care, how is CVS positioned to help or accelerate the maturation of these businesses? Yeah, and I think they still are fair questions to ask, whether it be about Medicare or commercial, about sort of the models and how they perform. But the one key thing I think will be that these models are always going to have to work, I think, in a value-based or a risk-bearing mode, I think, going forward, and that could take various shapes and sizes. But one of the things that we obviously want to evaluate in each asset is their ability to take and manage risk. Now, obviously, that's a capability that we also have, and there's a lot of elements of that from our insurance enterprises that we understand sort of how to measure. So I think that is something that we can help round out. Obviously, one of the things that we bring is the potential to put membership through generally what are under-capacity kind of operations, right, that have been built out. So our ability, I think, to get membership in there sooner rather than later can also help some of that economic kind of impact of where they are right now in their development. But I also think the technology of this. For us, we're not trying to build an integrated experience that looks just like today's traditional primary care. It really is going to be one that has a fundamentally better and different consumer experience. And frankly, that's going to be the basis of competition for us. Their ability to do that, which often is heavily driven by the technology that they have and how they interface with their providers and how they interface with their consumers, and even how they interface with specialists and other providers, it is absolutely a critical part of the experience. I think that is one of the more important things that we try to evaluate when we look at these. Great. Thank you. Yeah, obviously, technology is a huge part of building this, and we hear all the companies across services increasingly talk about the importance of having that base of technology. For us, it is obvious, right, but for a company of our size and scale, the scalability aspect of any of these models has to be enabled by their technology, right? Great. Sort of going off of that, when you think about the move to value-based care, what is your thinking on how to get the most leverage out of the stores that you have? I think in some ways, obviously, there's some big benefits that we have as an organization on what I'll call fulfillment side of this. Our ability to procure pharmacy, right? Our cost of goods sold is as good as anybody given our size, right? There's just some simple kind of cost management things we can do. I think a really good example of this, though, is actually the MinuteClinics and HealthHUBs. I think in the past, these have largely existed as kind of a wide catch basin for episodic care, kind of low acuity episodic care. I think going forward, they actually play two more critical roles in addition to that. One, if you think about any provider who is on risk, either full or partially, the ability to direct somebody to that kind of low-cost setting for a diagnostic test or whatever they need, as opposed to sort of a more expensive setting, I think can be very, very valuable to risk-bearing positions. Obviously, we have about 1,000 of those across the country with a great deal of coverage. I think the other important thing is, I think most people understand this now, but we talk sometimes about virtual and telemedicine as sort of an independent channel, when in reality, that's going to just become an integrated part of everyone's provider experience. You're going to expect it. Importantly, that really can't exist fully in an isolated environment because there is going to be a time where you need to have somebody see somebody or get a test done. Again, I think the MinuteClinics and HealthHUBs are ideally situated to be that physical touchpoint for sort of telemedicine or virtual. I think in many ways, sometimes when you think about our assets, we have a lot of things that surround primary care, but don't have the center. I think the things that we can bring because of our size and our scale can really enhance sort of the overall experience. Yeah. Very helpful. Maybe just before we move on to retail, which I know is a big focus area for investors, maybe just one last one on capital deployment. In the absence of M&A this year, would you think about resuming share repurchase activity early? This is just a question that we've been getting from some investors. Yeah. It's always an option, and to some extent, at investor day, one of the things that we said we were going to do was to do at least enough share repurchase to offset the dilution in the share count each year because of equity comp. So at some point this year, it's likely we would do that to offset next year's dilution anyway, probably towards the end of the year or the beginning of next year. The question is, do we do more? That always is the flex, right, about that. Obviously, I think doing the right M&A deal is paramount to our long-term growth, so I do have some bias to make sure that we're well-prepared to be able to execute on that when we can. But that certainly is a possibility. I do think sometimes it's an underappreciated part of the story when you look at the strength of our cash flow, and sometimes we get down into the weeds talking about this deal or this accretion, and you just think about how that cash flow can sort of fill in sort of timing gaps. It's very powerful when you look at it. So it's something that is always on the radar. My first choice is always to grow the business sort of strategically with that, so I always want to do that, but there's always that optionality out there. Yeah. No, great to hear, because obviously there are multiple avenues for deploying the free cash flow that CVS has. Correct. Great. Let's move on to the retail segment, key focus area right now. Maybe starting with COVID, case counts have remained high, but there have been fewer hospitalizations, and stays have been shorter. It seems like there could be some change in the relative size of testing versus treatment costs. Can you help us think about how these current dynamics impact your HCB and retail segments? Yeah. Obviously, from the macro picture, we've had these two kind of countervailing forces throughout COVID, where as case counts go up, we see the hit in HCB, we see higher testing, we see higher treatment, but we also then see higher testing revenue and higher vaccine revenue and associated treatment with retail. I would say that I would expect we're going to continue to see that dynamic. Certainly, what you described is what we evidenced in the first quarter, where even though case counts were high, they certainly weren't as. The costs in HCB weren't nearly as high as they've been in the past. I think this ongoing testing/treatment cycle does continue to have a longer tail. I mean, people, whether it be conferences like this or travel or work, there's still this testing tail that is going on, even as people, I think, frankly, become more acclimated. When you think about even whether there's going to be seasonal boosters and things like that, one of the nice things we have with the MinuteClinics is we can go right from test to treat. Right in the pharmacy and do that all as part of one cycle. I do think that's one of the things that has come out of this, as we think about that more broadly for other conditions, to be able to sort of do that efficiently for the consumer, I think is something that I think will carry on with us kind of going forward on this. I do expect we'll continue. It is feeling every day more and more like this is going to be endemic, and that there will be this sort of tail that we continue to have to sort of navigate through as a company. Yeah. Yeah, I'm not going to try and predict COVID, but it does seem like this is sort of a longer term and- It does, but to your point, I mean how it's going to impact the company, it's going to impact society. It's been impossible to predict, to your point, even when the Now we're seeing severity as a variable, even with certain kind of case counts going up and going down. So, it is a very difficult thing to predict, but it does feel like we're continuing to see those forces at work against each other. All right. Thank you. The important thing on HCB to remember for this year is, this is the first year where we've really been able to put that into pricing. We didn't really have that in the past year, so you really had full back and forth. This year, some of what we're seeing, the favorability isn't only the lower severity, but the fact we've put something into pricing for it in a meaningful way. Great. Yeah, we definitely want to get into pricing and cost trend in HCB. I'm going to stick with retail for now. On 2022 specifically, retail segment COVID revenue was lower than expected in the first quarter, but you left the guidance unchanged, offset by demand for a second booster for people over the age of 50. Having been through this a few times now, do you feel like you have good visibility on what demand for that fourth shot will look like, and how has demand in the initial weeks since the CDC recommendation been versus what you were expecting? Yeah. Again, it goes back to the point you made. It's very difficult to ever even use the word comfort. But I do think, to your point, we have seen patterns that I think have continued to play out. The overall level of activity, I think we understood that level in Q1. Obviously, we affirmed our guidance for the year, so I think we feel that the pieces together are kind of working in an expected way right now. Okay. Yep. Thank you for the color. Maybe just turning to the long-term retail outlook. I think prior to the pandemic, it had kind of been a fight to keep the retail segment EBIT flat, given just reimbursement pressure and very challenging dynamics on the front end. When we think about your guidance for flat to slight growth in retail, how are you thinking about the longstanding headwinds that have impacted the business, like reimbursement pressure, but also tailwinds on the other side from omnichannel and growing basket size? Yeah. I think it is a bit of a tale of two cities, right? On one, in terms of the headwind blowing in your face, the biggest challenge for that business has been the pharmacy reimbursement pressure the last few years, and that's continued this year. As I mentioned, if you wanted to say it's good news, it's stabilized. It's certainly not accelerating. So, it has stabilized. But what that has done is there are some really strong dynamics under that. I mean, we have been growing share in script counts. I think the first quarter, we were double the market average, and we've taken share at least eight quarters in a row. A lot of the things we're doing around omnichannel, around buy online, pickup, or things like that, there's a lot of things that are showing up with us taking share. It's one of the ways that we're combating, if you will, the reimbursement pressure. So, that has been very good. The front store trends have been excellent in the first quarter, and they were very strong last year. But to your point, this is a problem that we need to sort of both confront on the supply and the demand end of the curve. So, we're looking at different ways that we can continue to work on the cost of goods sold side of this equation and help us navigate this. Obviously, closing the 900 stores was another tool that we had to try to combat some of these pressures. So, I would say it is still a challenge for that business to fight its way to flat, and pharmacy reimbursement pressure is the biggest item. But there are also some things under the surface that are working the other way, which have been pretty positive to eat into that a great deal. All right. One of the things that you've been mentioning as we talk through retail, and mentioned that you had a very strong performance, somewhat aided by COVID. Just beyond this year, how are you thinking about further erosion of COVID-related earnings that are still embedded in the retail segment? I understand that we just talked about the offsets on the HCB side and these other tailwinds, but just trying to get comfortable with this type of earnings outlook. Yeah. I think coming off anything from the peak, it is hard. It is always sort of directionally, it seems like it is going in one direction. But like I said, I think it is still the hardest thing, obviously, to predict. I think it going to zero seems more and more unlikely. A lot of this will come down to, I think, whether there are endemic or seasonal sort of treatment patterns, which you are hearing talked about in the market, and what that will mean. One of the things for us that is true now that we are seeing is if you think about back when a lot of this started, you had these large mass testing centers. A lot of that infrastructure does not exist, so a lot of that volume is now being pushed into a sort of a smaller system. It seems like it is still going to be there, that whole test and treat cycle, for a while. I think a lot of this will have to come down to sort of the necessity or the recommendations or not for whether there would be a seasonal booster of some sort going forward, which is still to be determined. Great. Well, maybe one last one on retail. On wage pressure, you guided to $600 million run rate of wage investments over the next three years. Wage pressure has remained persistent in the broader economy. Do you feel like the company has remained competitive on this level of wage investment when it comes to attracting and retaining employees? Yeah. I mean, we have done okay, and I think it was fortunate that we launched that move before a lot of this took off in full force. We are certainly not immune from the hiring challenges in the market, but we have actually done okay. I think getting in front of that has gone a long way for us to helping kind of push through this. That is true at the retail end. It is also true probably in the Caremark and the Aetna businesses too, where we have had to do a lot of hiring for growth. We have generally done pretty well and have maintained service levels and hours in the stores and things like that. So, it is certainly something that is at the top of the list as we kind of monitor and think about. But net-net, we have been okay so far. Great. Yeah. Glad you are feeling okay there. I know that you have talked about this a little bit before, really getting ahead. Maybe turning now to pharmacy services and starting with the long-term PBM outlook. How are you thinking about the build to high single-digit growth for Caremark over the next couple of years? Pharma spend typically grows 6%, plus or minus. Where do you see opportunities to outperform the market, and are there any underlying assumptions around market share gains built into that outlook? I think we have had a lot of discussions with this, and I would say structurally, sort of absent maybe where we are in any given business cycle, I would concur that I think it is probably a mid-single-digit growth business. I think the strength of specialty, and in particular the potential over the next two or three years for the specialty generics and biosimilars to come into the market, I think can be a major contributor to take that from mid to mid to high and to high. Not necessarily the only factor. That timing could be very lumpy, because there is a lot to Frankly, there is just difficulty sometimes predicting the timing, but there is a lot of detail as to what is coming on when and how that is going to get treated. So, I think that is one of the bigger opportunities that can help push that up. Again, just the overall strength, we had one of our best-selling seasons in a long time in 2022. The trends in the specialty pharmacy business broadly have been very favorable for us, and we have continued to do an excellent job on the cost of goods sold for our clients. So, I think that business is in a decent place and well-positioned for the next couple of years. Yeah. Thank you for the detail there. Another one on PBMs, a little bit different. Centene released its PBM RFP earlier this quarter. Was there anything in the RFP that was different than expected, and what is the timeline for our response? Anything to say on that? Yeah. We typically don't get into detail about individual customer relationships and their RFPs. Obviously, they are a very important customer, a customer I think we have served well. I think we have a particular expertise when you look at our health plan client list about government programs. We want to do everything we can to keep them and meet their business needs as well. I think, again, the things we bring to the table because of our ability to get cost of goods sold, frankly, our clinical programs, we continue to produce fantastic sort of trend results for our clients. We will continue to do that for all of our clients, but for Centene for sure. Okay. Thank you, and appreciate that. One last one for now on the PBM. There have been a lot more headlines on the regulatory front in this area, including the introduction of new legislation and also an FTC investigation announced this month. It is difficult to know the outcome, but it seems like spread pricing is one of the things that the FTC is focused on. How do you characterize the relative importance of spread pricing in the PBM model today, and how has that changed from the past? Yeah. A lot of this gets into what even people mean by spread pricing, right? In the most classic sense of the old network definition, that is obviously been something that over time has gone down as a source of earnings, and those earnings have gone other places. I think the thing to keep in mind is, this has been looked at multiple times in the past, whether it be at the state or the FTC level. In all those surveys, they do ultimately conclude that there is a significant effect that the PBMs have on keeping costs down. I think it is interesting to think about that study and that conclusion in an inflationary environment, because I do think every time this is looked at fairly and objectively, they do see that the PBMs have played a very important role. We just released, I think our drug trend, I think it was either through the third quarter or the fourth quarter of last year, in the 3.5% range. There is a very important role the PBMs play here to keep costs down for employers and individual consumers. Okay. Maybe we will come back if we have time to the PBM. Maybe moving on to the Health Care Benefits segment. The providers that we have had at our GS Healthcare Conference this week are saying that utilization has been slower to come back than anticipated in the second quarter, and MedTech has also had a similar message. Is that consistent with what CVS has been seeing on the utilization front? I would not want to give intra-quarter sort of updates here. Again, I would go back and say we did affirm, obviously, our outlook. The things we have been seeing have obviously been within that framework of that outlook. If I went back to first quarter, those trends were certainly in evidence in the first quarter. We continue to see what we would think as baseline utilization being below the baseline, and it has followed a very familiar pattern where commercial tends to be closest to the baseline, and then Medicare, and then Medicaid. We have seen that very consistently throughout the pandemic. We saw that in the first quarter of this year, and it is getting, I tell people, it is getting difficult to look at that and start to think about whether that is deferred or not, because you obviously are now going all the way back to 2019 and trending that forward and trying to form conclusions, which I think are becoming as much artistic as scientific in that analysis. Whether this is the baseline utilization we are going to see, because we do see some things, for example, maybe going to outpatient more. That was a trend that was happening before the pandemic. Is that a continuation of that? It is hard to tell, but it is certainly, one could certainly kind of come up with a hypothesis that perhaps that is going to be a preference going forward. Our first quarter, I think, was very consistent with those commentary, and the pattern was very consistent to one we saw a lot of last year. Okay. Thank you for the comments, and I think we can appreciate that the comps, yeah, it's definitely challenging. Right Looking back to the past with all of the sort of volatility with COVID here. Maybe on cost trend, we've seen higher-than-normal requests for rate increases from providers this year, just given the cost pressures they're facing, including on labor, and some of your peers have talked about that this week. How does the contracting process work, and how would higher costs get reflected in the rates that you agree to? Do you see this as having the potential to drive a significant change in cost trend versus recent years? Yeah. I think this, for the most part right now, is largely a commercial issue. Okay. The Medicare, and generally the Medicaid rates are schedule-based and fixed, and a lot of those have been released already, and you can see what those are going to be. So, this would show up in our forward pricing assumptions for commercial, in the unit cost assumption in particular. This is more of a hospital issue than I would say it is an individual physician issue, because again, a lot of those are fee schedule-based and tied to Medicare in some form or things like that. So, it's really a hospital issue. Obviously, this is not an issue for 2022. That's all contracted. A great deal of 2023 has been contracted as well. Most of our hospital contracts are multi-year in nature. A typical duration is three years, so you could think about a third of your hospital unit costs coming up for renegotiation every year. Within that, we are definitely seeing push in those negotiations, to no surprise. Going back to how this shows up, what this becomes about is how you factor that into your forward pricing. So, we are definitely going to factor in higher unit cost assumptions into our forward pricing. The interesting dynamic in the market now about this is you have a COVID load in a lot of the pricing, right? That which, in theory, to our prior discussion with the recognizing the difficulty predicting it, at some point would probably come down. You do have a rate level that has been pushed up a little bit for that. At the end of the day, I think it is only prudent that we have to assume that there is higher unit costs on the hospital side and build those into our forward pricing. All right. Very helpful. Maybe in the last couple minutes that we have, we will go a little bit into the HCB segment. On Medicare Advantage, you have seen double-digit enrollment growth the last several years. The 2023 bids were due just last week. At a high level, how did you approach your bids for next year, and what do you see as the biggest opportunities to continue to grow your MA book? No, I mean, obviously our STARS ratings have improved. Obviously, the reimbursement was, I think, a fair reimbursement level for us to go into next year. I feel good about the bids for next year. We do not have a margin problem that we are trying to correct. We do not have any distribution issues that we are trying to correct. So, that operation is running very well, and so I think we could do some really attractive things around positioning. I would say on the margin, we still have some opportunities around geographic expansion. Not as big as they used to be, but we are still going to expand geographically. In terms of the dual eligibles, that is a population that we are under-indexed in, where we have had very strong growth the last few years. So, I would expect that we would continue to do that growth. I think a lot of this, sometimes we focus on one element or another, but like any, frankly, any business, there is just a lot that goes into making this successful. It is your marketing, it is your distribution, it is your plan design, which is premium and benefits. All of those things really sort of have to work in concert for you to have a successful year. But the business is performing well, and at this relatively early stage, I feel pretty optimistic that we can continue the trajectory we have been on. Great. And yeah, obviously it's a very complicated market-by-market process with Medicare, as I think a lot of investors have learned over time with this market. Maybe just then going off of that to dive into how that process works, where do you think CVS moves the needle most on value prop to the member, given so much of the market today is already at zero premium or zero copay for primary care? Yeah. No, I mean, I do think over time, and to your point, the market has come there, but there was a time when there was a divergence in the market between premium bearing and zero premium, and we were very much zero premium zealots at the time and stuck to that, and I think that has served us very well. I still think we're, if we're not the most, we're close to the top in terms of percentage of zero premium membership representation. So I think that's important. I think some of our other assets, it's probably small in the grand scheme of things, but are beginning to have marginal benefit with us as well. But again, a lot of this is also about distribution. There's an awful lot of this that's still sold, not bought, right, by people. Working those relationships and knowing how and where to spend your money in the distribution season is important, and STARS is important as well. Okay. Maybe in the last two minutes, let's move to commercial. How are you thinking about the growth outlook for commercial next year? I think there's some concern around the economy and level of employment, but the redetermination process in Medicaid could potentially push people into commercial. With the macro uncertainty and cost pressures impacting employers, are you seeing any change also, just going off of that, in their priorities and what they're looking for from a health benefits standpoint? So maybe just touching on some of the macro fears and then also if there's any shift in priorities. Yeah. Obviously, over the period of time, commercial is doing well. In fact, from a membership standpoint, it probably looks as positive as it's looked in a long time. A lot of that, I think, is some of the same group growth, right, that we've been seeing over time. When you look at the 2023 season, I wouldn't say we're seeing anything abnormal or different in the pipeline yet. Historically, as cost trends have gone up, to the point of your prior question, this has led employers sometimes to go to bid more often or to buy their benefits down and change benefit plan design, something we used to talk about all the time that we haven't really had to talk about in these lower-cost sort of environments. I wouldn't be surprised to begin to see that. Obviously, if there's some kind of economic turn, right, and how that sort of ripples through employment levels will be something that we'll have to watch, but we're not really seeing that yet. It's been a positive story for us over the last year, and I feel pretty good about the momentum we have going into next year. Wonderful. With that, we just have a couple seconds left, so maybe I'll close it out. Thank you, everyone, for coming, and thank you again, CVS, and for your whole team for being out here in California with us. Thank you, Lindsay.