Credit Suisse 28th Annual Healthcare Conference

Nov 12, 2019

Summary

Integration synergies are expected to reach $800M in 2020 and a $900M run rate in 2021, alongside a HealthHUB rollout to 1,500 locations by end-2021. 2020 expectations remain at least $7 adjusted EPS, with a low-3x adjusted debt/EBITDA target by 2022.

First off, here is CVS Health Corporation, Larry Merlo, President and CEO, Eva Boratto, EVP and CFO. As all of you know, CVS Health is a leading player in retail pharmacy, leading player in pharmacy benefit management, and with the acquisition in the last year of Aetna, a leading player in health benefits. We are excited to hear from them. I think Larry is going to make a few opening comments, and then we will get into a fireside chat Q&A. What I would suggest is if anybody in the audience would like to ask a question, probably the simplest way is just to go ahead and email me at aj.rice@csg.com, and I can take a look at that. I have got plenty of questions in the interim, so let me pass it on to Larry. All right. Thanks, AJ. It is great to be here. Actually, before we begin, our attorneys have asked me to remind everyone that statements we make today may be forward-looking, and you should refer to the disclaimer in our legal filing that is posted on our website. So, AJ, again, great to be here. Having just reported our third quarter earnings last week, really pleased that we have got three consecutive quarters of financial and operational execution against our long-term vision and our strategy. As we look to the evolution of healthcare, we see more and more that the consumer is in the driver's seat, and consumers are making healthcare decisions for themselves, for their families, and at the same time, many are looking for help that will enable them to make better informed decisions. Our model is best positioned to address this increasing shift to consumerism in healthcare, acknowledging that we can meet people where they are, whether it is in the community, in the home, or for many now, the palm of their hand. With a strong track record of innovation, we are confident in our position as the only consumer-focused, fully integrated, when you think about medical and pharmacy and trusted healthcare brand that can deliver on those expectations. At the end of this month, we will be coming up on our first anniversary as one company. There has been a tremendous amount of work. AJ, I know we will get into some of that in the Q&A here in just a minute, but we are really pleased with what we have been able to accomplish over the past 12 months. We are putting products and services that are validating the beliefs that we have in our strategy. With that, AJ, I will turn it back to you. We can get into some more of the details. Yeah, that's great. Maybe jumping off of that sort of level setting, when you think about where you were coming into the year versus where we are today, what have been some of the things that have been positive surprises for you? Have there been any unexpected challenges that have developed over the year? Well, AJ, as I just mentioned, really pleased with our financial results versus our expectations. We've consistently increased our guidance as we've gone throughout the year. Our integration activities have gone very well. You may recall at the beginning of the year, we had said the integration value would deliver between $300 million and $350 million in synergies in this current year. On the last call, we said we expect at least $400 million for this year, with a pathway to $800 million in 2020, and we'll achieve a run rate of $900 million in 2021. Our transformation and innovation activities, as I mentioned, we've got a variety of pilot programs, products that are beginning to enter the market. Probably the one most visible is our HealthHUBs, and really pleased with the success that we've seen in Houston, and it's given us the confidence to move quickly. We'll be in four markets by the end of this year on our path to 1,500 HealthHUBs by the end of 2021. AJ, your question, look, there's a tremendous amount of challenge that comes with the things that we're talking about, and I know that folks here in this room appreciate those challenges. That's not to say that we haven't had some speed bumps as we've gone through the integration activities, but our organization, I couldn't be prouder of their level of engagement, their commitment to our purpose, and they are not letting those speed bumps slow us down. We're figuring out, as those things come up, how do we resolve them and just keep on moving forward, and that's how it's played out. Okay. AJ, if I could just add one thing to Larry. The HealthHUBs have gotten a tremendous amount of attention and excitement with our customers and with shareholders as well, and one thing that our shareholders have continually asked us is, "When are you going to have more quantitative metrics for these hubs?" As you look at our rollout plan that we're planning between now and next year, by the middle of next year, we expect to have critical mass of hubs rolled out, for which will provide us a really strong foundation to give more quantitative metrics. We've certainly provided a lot qualitatively, but I would say mid-year is when we'll have some more quantitative. Just to piggyback off that, if I could, there is a number of players in the health services space that are putting in place clinics and other types of activities, and the sort of investment cost associated with that is all over the map, depending on which one of these guys you are talking to. To go from where you are at today to 1,500, have you talked to Is there any way to talk about what kind of Is that a lot of upfront investment for you in the next two years? Listen, as we think about the CapEx into the stores. Think about it, that that is spend that we will repurpose from the $2.3 billion to $2.6 billion that those legacy companies spent. We have always had remodels and refreshes. Okay in our stores, so we will shift that focus to the HealthHUB rollout as we look over the nearer term. So it is not that there is a big step-up in the next 18 months of CapEx or anything? Correct. Overall, from a CapEx perspective, we continue to expect $2.3 billion-$2.6 billion. About the same. Okay, that's good. When you think more broadly about, and I'm going to ask you about each of the major segments, but the retail and long-term care space, there's a lot of debate about capacity in the industry and things like that. You're pursuing some initiatives. Obviously, the independents are not in the same position necessarily to pursue some of the things you're pursuing. Can you paint the picture of where the industry is going to be three to five years from now? Well, AJ, I would say that we're leading the, I'll call it the evolution of the corner drugstore. As you look at what we're defining in the HealthHUBs, it's just not about the products that we sell, it's the services that we provide that, yes, it starts with pharmacy, but it goes beyond that. We're repurposing about 20% of the store for more health-related services, expanded MinuteClinic. The nurse practitioners in the clinic can treat about 80% of what a patient would go to their primary care physician's office for, just as one example. When you look at that front store, the product side of that, we're focused on health, beauty, personal care, and some elements of convenience, but it creates a different focus for the drugstore. Again, what we've seen in Houston, it's extremely well received. AJ, in some respects, everyone has used this term omnichannel as it relates to commerce. I think what we're beginning to do is define what omnichannel means for health. Okay. When you think about your traditional customer, are you just addressing the needs of that customer in a new way, or will all these initiatives, in your mind, drive new people into the store that haven't traditionally come there? AJ, I do believe that we'll see new customers coming into our store because of the services offered. Again, some of this goes back to, we sit here today, as we look at the healthcare landscape, the need to be local and the need to make things simpler in terms of the access and the navigation across healthcare. That's what we're able to do in this evolving business model. Okay. AJ- Go ahead If I could just add one thing, is your question started out around our retail footprint, and our footprint is quite productive, across the chain, and we've had a very disciplined approach to our real estate. That said, this quarter we announced early next year, we expect to close about 75 stores. The majority of those are near the end of or at the end of their lease life. So we're also looking at how we're going to play in these communities, where there's opportunities in this competitive landscape to be more efficient and drive profitability. Okay. When we think about the script growth, it's always dangerous when I start quoting numbers, but I think you were up 5.5% in the first quarter, 5.9 in the second, and then 6.4 in the third. I believe those are ahead of market trends. What do you attribute that to? Are these initiatives at this point? You've got a number of things you've implemented. You think they're actually at this point driving that? Is it the positioning of store count? What would you say has been the main catalyst to be? Is it maybe working cross-selling with Aetna and some things? Yeah. I'll say, as you look at the retail script performance, the last couple of years have been very productive, and we've grown and outpaced the market. There are three key aspects to that performance. One, clinical programs that we've implemented. Two, where we've chosen to make investments in preferred networks in the Medicare Part D space, as well as just other aspects and other PBM partnerships that we have driving relevance to our consumers. Under Kevin Hourican's leadership, there's been a tremendous amount of innovation, whether it's our saving patients monies programs, connections we're making with the doctor's office to help patients afford their medications and make CVS relevant. So I'd say all of those factors are driving. If you look at the more recent performance, it's been skewed toward our clinical programs that have been outpacing the growth. Okay. One of the other things, got a little more discussion earlier in the year, was stabilization, and sounds like there's been a little bit of a turnaround in the long-term care business. Can you sort of maybe comment on where you're at with that? Yeah. Things are looking forward, looking upward in the Omnicare business. AJ, to your point, the business is performing much better. A lot of that is being driven by efficiencies and productivities that we have enabled the business to do that they hadn't previously. We're also seeing significant improvements in service delivery that is having an impact on improved customer retention. On the skilled nursing side, the post-acute side, it's still a challenged business. There are fewer bed days, if you will, in that space. Those operators are being financially challenged, and we've seen significant consolidation and a number of bankruptcies in that space. We see the opportunity in the assisted and independent living space, and we're pleased with the progress that we're making there. Okay. Maybe to switch gears to the pharmacy benefit business, you're operating a number of businesses that are going through a significant change. Obviously, in the PBM world, we've had the biggest independent get bought by an insurer. We've had one of the biggest health plans decide they want to stand up their own, with your help, PBM, and then, of course, you've bought a major insurer. How do you assess the, maybe just a very broad question, the change in competitive landscape and your positioning within that? Any broad thoughts before we drill down into a couple specific areas? Do you want to start, or you want me to start? Yeah, go ahead. Eva, you start. I think if you look at the PBM space, PBMs have been a critical part of the healthcare system in reducing underlying pharmacy costs. As you look at these new combinations, partnerships, formation of new businesses, the fundamental purpose of the PBM doesn't change. I think you'll continue to see innovation coming out of the PBMs. As we talk to our clients today, they're very excited with the transformation that we're talking about, the new programs that can help utilize our assets to manage their business, whether it's pharmacy, whether it's helping them with other aspects of chronic care. So, I think you'll continue to see innovation on that front, and we believe we have the right assets and the foundation to deliver. You already were, and it was already a major client of yours before you purchased them. Is whatever incremental opportunity to synchronize pretty much in place at this point, or is there still things to do with Aetna in terms of integrating them with the PBM and all, I guess? I think there's many things that have been done, but there are also many things that are still to do. You heard Karen Lynch talk about on the earnings call how she's rolling out the reduced MinuteClinic copay program. So, that was a program that we had in place long before we came together as a company, but as we align on our priorities, as our incentives are aligned, I think you'll see more, A, of our existing programs, and B, of the innovation come to bear of what the needs truly are of those Aetna members. Larry, I don't know if you have to add anything there. No, AJ, the only other thing I would add is, we really had a really good foundation to do what Eva's describing to do, acknowledging that the business relationship had allowed for a big portion of the IT connectivity to be done. To Eva's point, there were a variety of programs, Aetna had adopted some they hadn't, and that allowed for a more rapid adoption of those other programs. Some of that is reflected in what we've been able to do from an integration synergy point of view. But again, the opportunities, there's still plenty in front of us in terms of doing even more. When you just think about the selling season, 2019 selling season for 2020 launches, it seemed like you guys had an unusually large number of contracts that were up for renewal, maybe relative to the previous two years. I guess I should ask, is that right? That is the perception as an outsider. Then second, can you say anything about the 2020 selling season for 2021? Is it a similar amount of business, less, more? How would you characterize it? Yeah. So, I think, AJ, it is a good problem to have, right? The business has grown tremendously over the last several years, right? As the business grows, the contracts are typically a three-year cycle, so that business up for renewal is going to grow each year. So, your foundation is correct. In selling in for 2020, which is near complete, we had about $45 billion of business up for renewal. As we look toward 2021, it is a bit higher, call it about $50 billion, and I would say it is the normal cycle of our contracts. That said, we are pleased with how we are performing. As you have seen since our investor day, our net new business has improved tremendously for the 2020 selling season, over $2 billion from what we had announced at investor day, and our service levels remain strong. We recently signed FEP, extended for another year through 2021. So, we feel like we are coming into the cycle with a positive direction and look forward to continuing to innovate to meet our clients' needs. There is always a discussion in the PBM landscape about pricing, whatever that looks like. Pricing, I mean, you got all kinds of aspects to that. How would you characterize the, I mean, with this incremental competition, or I do not even know if I would call it incremental, IngenioRx, reshuffling with Cigna Express Scripts. However you are going to define pricing, guarantees, trend, objectives, whatever. How do you characterize that? How would you say that? I would say overall, there's been no fundamental change in the underlying dynamics. We've said for a long time, you have to be right on price and right on service through the sales cycle, and then at that juncture, clients are willing to look at other things that you offer. As we look forward, we expect that to continue, and we'll continue to engage with our clients to deliver value. Early in the year, there was a lot of focus and a lot of discussion in the investment community in Washington on potential policy changes around the drug benefit, and obviously, we spent a lot of energy worrying about rebates and where they might go. Some of the companies are still talking about point-of-sale rebates as a priority. Others have said, "Well, our clients aren't really that interested." Anything you'd share about that specific issue or about where drug policy stands in general and what you're focused on? Yeah, AJ, it's a great question, and you're right. There was a lot of discussion not that long ago on rebates. Look, I think the data has helped everyone separate fact from fiction and really put the spotlight on, "Hey, this is what PBMs do to drive down the net cost of pharmaceutical for plan sponsors and their members, whether it's through point-of-sale rebates or lower monthly premiums." You're beginning to see the focus back on, "Well, wait a minute, what about the list price?" And the focus shifting back to the pharma manufacturers. To your question, AJ, in terms of what are we hearing from clients, we have seen, I would say, an increase in the number of private sector clients who are adopting point-of-sale rebates. With some of the changes in the definitions of how to use an HSA, we're working to educate our clients that, "Look, if you have a high deductible plan with an HSA, it's not all or none if you decide, 'Well, gee, if I take my rebate dollars and apply them at the point of sale, then I don't have any dollars to buy down the monthly premiums.'" We've got enough experimentation and success where we can show how clients can do both and apply some of those dollars in the deductible phase for their members and still have dollars with which to reduce the monthly premium. So, I would expect we will see additional clients adopting point-of-sale rebates as we go forward. Larry, we continue to educate our clients and give them choice. We do believe it's our client's choice how they want to utilize those rebates. Okay. Maybe just lastly on the pharmacy benefit area, specialty is obviously an area of a lot of focus. I think about 25% of your PSS revenue are designated as specialty. You did one acquisition there, the Premier business. Is that an area that you're looking to add to? How would you characterize where you're positioned in specialty today and where you hope to be? So, a couple of things there, AJ. Specialty has been a core part of our growth strategy for the PBM for a number of years, and we've continued to gain share in the market in that business and be really relevant to our customers, our Specialty Connect program, and other aspects. As you look at, I think you highlighted the growth last quarter. As you look at the growth last quarter, we had strong underlying growth by our book of business, but it was also aided by the onboarding of the Anthem business, which really ramped up during Q3. In terms of M&A, I'd say big picture, we're focused now on delevering and paying our debt down. But within that construct, we've spoken about we'll continue to look for opportunities for what we call file buys, and you can think about those in the specialty area on the legacy retail side of our business and think about Premier in that frame. Okay. Maybe to switch gears to the health benefits business. The big bright spot, I guess, this year, at least certainly on the top line, has been the growth in MA, 30% enrollment growth, which I can't remember ever seeing that before with any of the companies. Was that a surprise to you? Did you know you were going to have that kind of year, even if not 30%, an outsized growth year coming in? Any thoughts about, we've got the health insurer fee coming back next year. Other guys are saying, "Hey, I want to get back on more of a growth mode than I was this year," on the landscape, thinking about 2020 as well? Yeah. I'll start, Larry. Yeah If you want to jump in. Overall, we were quite pleased with the growth that we realized. Aetna has been on a journey for a number of years, right, to expand in the Medicare space, continuing through geographic expansion as well as product design and being relevant to the consumers there. Overall, I think the growth in line with our financial expectations that we have said, we continue to expect to outpace the market in growth. Obviously, in 2021, we'll be about penetrated in 81% of where the lives reside. That's up from 75%. In 2020, sorry, in 2020, we'll be at 81%. What we'll also look for is what you think about it as same market sales, right? As you get greater name brand recognition, as you start to know those members better and the relevance. It's truly a market by market, geography by geography design that we work through as we prepare bids. AJ, maybe I'll just add, Lisa, terrific job by the team. A really good example where, while much of the growth was coming from geographic expansion, it wasn't at the expense of the quality of the delivery of the product. As you saw in the Star Ratings for 2021 that came out last month, 76% of the Aetna beneficiaries are now in a 4.5 plus Star plan. So, really pleased with that performance as well. Look, back to the integration work, one of the first things that we did out of the gate was to take the SilverScript business, which was resident within the Caremark book, and move it over to the Aetna, the healthcare benefits segment for their ongoing management with the opportunity as we go forward that we believe that there is a conversion opportunity of the SilverScript PDP member to a Medicare Advantage product. So, that work has begun, and we think that that is also, excuse me, an important trajectory for growth as we go forward. Larry, that's a great point going back, AJ, to your first question, what's gone well and how the integration is going. Had we not moved rapidly on that org design change, we would have essentially lost a full year, right? Because the bid cycle incurs in annual increments. By virtue of moving rapidly, we could complete our bid strategy due in June with a longer term vision in place around how to generate value for the greater enterprise. Okay. Medicaid, which a number of companies have pointed to, have had various challenges this year. You've had a couple wins, nice wins, Florida Healthy Kids, the Texas STAR+PLUS program recently announced. Alternatively, there was the Louisiana one where you were an incumbent and didn't get re-awarded. I know that's under protest at this point. How do you assess where you're positioned on Medicaid at this point and the relative attractiveness of that business and the priority of that business? Yeah, AJ, listen, we think we are well positioned, and it is another important growth driver. As we think about the focus of that, we think about tailoring our response and program designs to the state-specific needs. We have additional opportunities in terms of bringing to life our unique and differentiated approaches and capabilities. Back to the point that we were making earlier in terms of the opportunity for localized, highly integrated, recognizing that this is a membership that oftentimes there are challenges in terms of the outreach and the need to communicate on a regular basis. The asset capabilities that we bring, I think, can be an important gap closer in those communities. A lot of this speaks to the strength of our enterprise as a combined new company. I know in the second quarter, you guys commented specifically on a little bit of volatility in the middle market area. It sounded like by the third quarter, you felt like you corrected that. Broadly in the commercial market, we are always trying to figure out, are we seeing pricing pressure from Blues plans, otherwise? How would you assess that, and maybe a little more comment about what happened in the second quarter that was able to correct so quickly in the third quarter? Sure. As we headed into our second quarter earnings call, as you said, we were seeing some pressure in our commercial business in the lower end of that middle market. There are execution levers around medical management that we deployed. It was elevated utilization. We saw it as utilization, not as pricing. We executed on some of those measures we had. As we headed into third quarter, we feel confident with where we are. I would say overall from an MBR perspective, we are tracking our initial guidance was 84% plus or minus 50 basis points. We are obviously above the midpoint as we have commented, but right in line with the initial guide that we provided. We are all, obviously, you guys have not formally given guidance for next year other than what you said at the investor day. I think since the investor day, as Larry mentioned, you have raised guidance three times on this year's numbers. At the investor day, I think you were talking about at least $7 and low single digit earnings growth. How should we think about those comments in light of how this year's played out? Yeah. I think, AJ, on our Q3 call, we really, we continue to expect to deliver at least $7 and low single digit growth. We provided clarity of in our 2019 results, items that we will call non-recurring, prior year's development. Right as well as realized capital gains. So off of our adjusted baseline, we feel good as we head into 2020. That is about how much was the one-time stuff? That was about $0.20. It was about $0.20. $0.20, right. Okay. I wanted to clarify the $0.20, but you were going to say? No, no. As we said last week, we're even more confident about those expectations for 2020- Okay than we were sitting in investor day in June. Right. You mentioned on the M&A that there's a focus on debt. Just real quick on the capital deployment and priorities for that. Where are you trying to get to on the debt to cap or whatever debt metric you're using? Yeah. We're using adjusted debt to EBITDA. Okay Our goal is low three times. During that period, we'll continue to maintain the dividend, invest in the business, our CapEx spending in that range of $2.3 billion-$2.6 billion, as well as what I'll call modest file buys. Right Things like that. Right. And what time period, how quick would you get down to your target roughly with that? Our target is 2022. 22. Right. All right. Well, I really appreciate CVS participating in this year's conference. Thanks, everyone. Next up in this room will be Medpace.