CVS Health Corporation (NYSE:CVS) 20th Annual Morgan Stanley Global Healthcare Conference September 13, 2022 8:35 AM ET
Company Participants
Karen Lynch – President and Chief Executive Officer
Shawn Guertin – Executive Vice President and Chief Financial Officer
Conference Call Participants
Ricky Goldwasser – Morgan Stanley
Ricky Goldwasser
So, good morning everyone. And for those of you who are new to the room, welcome to Morgan Stanley’s Global Healthcare Conference. We’re very happy to be here in person after a couple of years. I’m Ricky Goldwasser, Morgan Stanley’s Healthcare Services analyst; I’m part of the services team.
And joining me this morning are Karen Lynch, President and CEO of CVS; and Shawn Guertin, Executive VP, and CFO. So good morning, Karen, Shawn, so great to have you here with us.
Karen Lynch
Good morning, Ricky. Great to be here.
Ricky Goldwasser
And before we start one disclosure, for any holding regulatory disclosures please go to the Morgan Stanley website into the research website.
And with that Karen I’ll pass it to you for some introductory remarks.
Karen Lynch
Thank you so much. I think what I would first say is our business is performing quite well. We had a very strong second quarter, we saw revenue grow 11% year-over-year. We have very robust cash flows. And as you know we increased our EPS guidance in the last two quarters.
If you think about each of the segment we are very strong in our healthcare segment. We have grown membership across all product lines. And as we look to 2023, we expect to see 98% retention and strong National Account growth. And we expect to grow our group Medicare as well.
If you think about Pharmacy Services, we had a strong second quarter, very good – we have the best pharmacy trend really due to our specialty business. And again, we’re seeing strong retention on that book of business at 98% with about 75% of the contracts.
And then I would say in the retail business, we are quite proud of the results. They are very strong and we’ve seen script volume growth. And we have been taking share for every quarter since the first quarter of 2020.
And the biggest news we have in the company is we announced a potential acquisition last week with Signify Health. And we are very excited, as you think about our strategy and what our strategy is evolving Signify is, it fits quite nicely. Our strategy was really to build our foundational businesses, drive into primary care, in-home services and provider-enabled services, Signify checks to those boxes. So we’re very excited about that opportunity.
Ricky Goldwasser
So this is in the first public conference that you are speaking it after announcing Signify. So I do want to dig a little bit deeper into those capabilities that Signify brings. And one of the things is that just interested in sort of the decision and the thought process behind acquiring an asset that pivots from sort of how people traditionally think about home healthcare.
Karen Lynch
Yes, I think I’ll answer that Sean will fill in. But I think if you think about the opportunity we have and one of the important parts about our businesses, we are really shifting into extending into health services and consumer engagement. And this asset really gives us that opportunity to enhance our consumer engagement. We’re in the home. We can direct people to the right sources of care, think about directing them to our MinuteClinics, for example, think about pharmacy reconciliation. It also gives us a big platform for future opportunities as we extend into primary care. They have a very strong provider enablement asset through Caravan, which is another entryway into value-based care. And that gives us an opportunity to extend those relationships with providers and really drive that provider a value-based contracting. That asset is strong. They’ll have over 700,000 attributed lives in 2023 and they are demonstrating real growth.
So let me ask Sean to add anything that I might have missed.
Shawn Guertin
Yes. No, I think I would say a lot of times strategy is about sort of identifying those trends that you really think are going to be so powerful that you can ride them. Karen mentioned one, right with the consumer care in the home as a preferred setting. The other big one that we’ve talked about that, I think, is very relevant here is why I’m excited is the move from fee-for-service to value-based care.
And when you think about what you need in value-based care, you need the technology, you need the network, you need the sort of IP around how to manage cost for chronic care populations. And while actual delivery of care in the home is a little bit different than what they have all, they have 80% to 90% of what you need to enable that. And so, as I’ve said to many people as we’ve thought about home, home is so vast, and in some ways the challenges where to start. The one thing I know we need, and the one thing I know our business will benefit from is the value-based care capability, especially around chronic care populations, like Medicare, Medicaid, and public exchanges.
Ricky Goldwasser
So, can we dig deeper on that, so how does Signify accelerate your value-based care journey?
Shawn Guertin
Well, as Karen mentioned, right, they have an asset in Caravan, which I think is a relatively new acquisition. So people aren’t as familiar with, but they – that is a scaled platform that today is participating in MSSP and has a documented track record of actually generating savings. And one of the reasons I like that as a quality metric is there is no coding in there, right? So that is about really saving healthcare costs.
And so I think they have the right technology and there is a logistical element of this too, right which is getting people to the right places, knowing who those people need to go see. I think for the future, what’s really most exciting is the ability to bring care delivery together with a technology-enabled MSO option. I think that will actually be the long-term model that succeeds in this space. It’s not just getting to the independent health systems or docs and getting them the information, but the actual interventional capability that you might have with sort of a clinical home capacity. And frankly we can use our MinuteClinics and other CVS assets to bolster this. I think that’s a really winning formula, I think, in the long run around value-based care. And they have all of the important componentry to sort of do that.
Ricky Goldwasser
It’s sort of that idea that in order to take risk, you have to have scale, right. You have to shift scale and you have to have kind of like the enabling technology and that’s ultimately where we’re heading.
Shawn Guertin
Yes. I mean, we’ve talked a lot about our acquisition strategy, management, technology scale.
Ricky Goldwasser
Yes.
Shawn Guertin
And I think in addition to checking the capability boxes, this checks those boxes as well.
Karen Lynch
And I think the other thing Ricky, I would say that you have to really think about the power of the size of signifies, home-based activities coupled with us having a large retail footprint and the power of that coming together to really coordinate care for members is a unique opportunity for us as well.
Ricky Goldwasser
So, let’s talk a little bit about that, about the consumer, as we think about it, about the member and you have these 360 vantage point in a way. What tools are required to speed up their transformation into a truly consumer-centric system? Everybody talks about the consumer.
Karen Lynch
Yes.
Ricky Goldwasser
But how do we really kind of like become these empowered consumers?
Karen Lynch
Yes, let me put it in perspective. I think at the heart of what we do is very focused on consumer. And I always think about what gets me up every morning; get excited, it is the power of our company and our reach and the breadth of capabilities with consumers. I would start with Morning Consult just named us the most trusted brand in our industry. And we are the fifth most trusted brand in all industry. So I think that speaks to the connection we have with consumers.
And just to give you a sense for the reach with consumers, we have a 100 million people that we interact with through our Aetna and our pharmacy business. Five million people walk into our stores every single day. 85% of Americans are within 10 miles of our retail locations. We have 45 million unique digital customers. And I think if you think about just the breadth and the scale of our interactions with the consumer, those numbers speak volumes.
So as you think about our opportunities going forward, we have the reach, we have the engagement, we have the digital connections, we have the retail connections, we have the home connections. So we can meet consumers wherever they are on their entire health journey. And that’s the power of our company when it comes to the consumer.
Do you want to add anything?
Shawn Guertin
Perfect.
Ricky Goldwasser
So let’s switch from Signify. We’re still going to be on the consumer, right, because ultimately they are the ones that driving demand and they want to talk a little bit about the macro, because that is a question clearly that’s on everybody’s minds. There was some discussion about that yesterday from the med tech companies that did presented here.
So let’s first start with kind of like the here and now, what are you seeing in terms of utilization trends?
Shawn Guertin
Yes, I would say that, it’s largely been similar to what we’ve seen all year, right, both by product and by type of service, right. We’re continuing to obviously see a lot of COVID activity, but not the severity that we’ve seen sort of in past waves. And across the board the trends in the second quarter were a lot, like we saw in the first quarter in terms of where we see the biggest weaknesses in inpatient hospital compared to sort of normalized baselines, right which are going back a few years now when we trend them. And I would say commercials a lot closer to being at a normal level than the government programs have been. So it’s been a fairly, I think, stable environment this year.
I think as we think about that the other dynamic, obviously that’s important to appreciate now is that we’ve been able to put all this into product pricing for the first time, right in a full and complete way and think about all the different dynamics. And in that way we’re sort of back to where we used to be, right. This is now about matching revenue to cost and looking at that sort of performance.
But overall, it’s still been a fairly stable environment in consistent with our expectations.
Ricky Goldwasser
And as you think about, we’re hearing a lot of – there is a lot of economic data, right and some of it is conflicting. We still have very low levels of unemployment, but then there is all these concerns that we’re hearing. We’re hearing about layoffs from some pretty prominent companies. How is this shaping your view as you think about kind of like 2023?
Shawn Guertin
Yes, so, I mean, there is really sort of two impacts to our business right. There is one, which is just sort of the macroeconomic effect around employment, and utilization. And for the most part we’ve been able to navigate that fairly well, right. The inflationary elements in our business, you can see, but there is certainly not as pronounced as we’ve seen in many of the headlines kind of numbers in the high single digits. We’re not really seeing it in pharmacy yet. We do see it to some extent in front-of-store and we do see it to some extent in provider contracting on the HCB side. But I think that’s proven manageable.
From a volume standpoint, we’re not really seeing – we’re still seeing good membership sort of growth in our businesses. And so that all feels good. A lot of this, when you think back in history has to do with the depth sometimes over the recession and what – there is a lot of resiliency in our business against that, but obviously there are times when the depth of the recession and frankly, governmental intervention into that sort of that’s when we started to create some of the discontinuities in our business. So we were watching that but doesn’t feel like we’re near that.
Really the more adverse [ph] effect on our results has been interest rates. And it’s just because we have such a large fixed income investment portfolio that supports the insurance business. The effect of that on our business has been more pronounced. Again, that’s a short term strain, but also a long term good guy. And what I mean by that is as we reinvest new money, we’re reinvesting it at much higher rates than we’ve had, frankly, the last 10 years.
And I think people forget how big a component in at least in the managed care world, that investment income was for a long time to sort of the revenue stream. And again, it will take time as we reinvest the portfolio, but this short term pain that we’re feeling now in the realized capital gain area will eventually also lead to sort of higher net investment income.
So it’s certainly something we talk about every day, and we navigate and there is – you can see different strains and pushes and pulls, but here to four, I think, we’ve done okay. I would be remiss if I didn’t say, I think, the fact that we acted on minimum wage early has really helped us a lot on sort of the labor side of this equation as we’ve gone into this. And it’s not to say that that’s not still challenging to some degree. But I do think it’s given us an element of stability as well.
Ricky Goldwasser
So, it sounds like that if I step back and it sounds like just to think about what you just said back to sort of that enterprise diversified approach. It’s kind of like that idea that you have the different moving parts, even with inflation. Yes, it’s continuing, but it’s not at the same pace that we’ve seen this year, as we think about next year, then you have interest rates. So part they are kind of like headwinds and tailwinds, but overall you are saying net-net seems to be in line with sort of how you’ve thought about things when you kind of like gave us the targets back in December.
Shawn Guertin
Yes, I think it’s navigable. I mean, we’ve certainly had to think about unit cost inflation.
Ricky Goldwasser
Yes.
Shawn Guertin
Say in our HCB business and make sure we have appropriate provision for that in our forward pricing, right. You can see it it’s there. But again, like a lot of things, this is all about being able to plan and price for these things and work them into our planning process. So far we’ve been able to navigate that.
Karen Lynch
And we’re pulling levers. So you think about the retail business, we can push to CVS branded products, we can use our discounts through our care passes, there is lots of things. And to your point is it a broad diversified portfolio, and we have kind of the pushes and the pulls, and we have different levers that we can pull across the continuum of businesses.
Ricky Goldwasser
So if we are in the topic of earnings power, there’s a question that I’ve been getting from, from people here in the room. And by the way, if you have any questions for Karen or Shawn after this question, just kind of like raise your hand, we’re going to get you a microphone because we want to make sure that we get all your questions answered. But one that, that I got earlier in the day is really about the, the COVID comparison. So clearly there was an EPS contribution from everything related to COVID in 2022.
We’re seeing companies, right, that have underestimated to pull forward of demand from COVID and now are have to revise their numbers. And I think that that’s something that’s very kind of like, it’s on investor’s mind. So as you think about 2023 and sort of, is it $0.80 or $1 sort of in earnings impact benefit from COVID in 2022? How are you thinking about that sort of kind of like year-over-year comparison?
Shawn Guertin
So I think, I think I sort of take the HCB business and sort of push that a little bit to the side and say, this is now about matching price to cost, right, which we’ve largely done. There will be a COVID element, but this is about how do you feel that we’ve done sort of putting that into price and this year we’ve done, I think a very good job of that. And I think you throw the unit cost inflation in there, and you sort of have that pricing equation, but that’s what that will be all about.
And I think we’re in a good position on that business as we go into 2023 from a pricing standpoint. So this really comes down to retail and just to be clear when we’re in 2021, we probably had nearly $4.5 billion of revenue from what I’d call the explicit COVID sources, the over-the-counter test kits, the vaccine administration, and the diagnostic testing that we did through many clinics and things like that.
When we came into this year, we thought that would be about $1.5 billion and the marginal contribution to that business is around 50%. So that’s sort of what we had this coming in. We now think that’ll be closer to $3 billion for this year, just really given the demand sort of to your point. The way to think about this and – is the same way that I and Karen have challenged these business leaders.
When we were at Investor Day, we had this business at about $6.1 billion, and that’s what we charge our leaders with producing. It’s not obviously going to be our most dynamic growth business, but we’ve asked them to at least hold that business flat, while we go through this strategic transition. There’s a lot of things as Karen mentioned. There’s assets in that portfolio that enable the strategy, obviously it generates a lot of cash.
So the question then becomes; how do we solve for $6.1 billion with all of the things going on in that business? And so I think if you kind of reset the year back to where we thought about, you start first with what will the COVID contribution be? And we’ll – I think it will not be zero. But I think will it be all the way back to where we thought coming into this year, maybe not.
But there’s other levers that we have coming online here, like the store closure, the effect of the store closures, right, which begins to be accretive in 2023 and 2024 is something that contributes. And there’s to Karen’s point there’s levers that we pull all the time in this business to try to make that sort of navigation. I also think there is some in – I’ll call it sort of almost like an endemic tail benefit that’s where COVID related and non-COVID related.
We’ve seen incredible strength in front of the store for the last five quarters. And there, I think we’ll get some continuity for at least a while from that. How this ripples through to sort of other respiratory illness treatment, other vaccines, I think is also going to be something that we can continue to capture as a positive. We’ve done some new things in retail, like buy online, pickup in store, which is not a new – it’s not a new kind of idea, but it wasn’t something we were doing.
And I think that can have incremental benefit. So I think there’s a number of incremental benefits but what I’ve directed everybody to is the sort of the same thing we’ve directed our internal team to is, I need you to produce $6.1 billion out of that business. And I know you might have to pull a lot of levers and I know COVID is going to move, but I also don’t think COVID is going away either.
Karen Lynch
And I would say that the benefits for COVID, 45 million people that kind of interacted with us or even more for vaccines. We’ve seen 15% of those individuals come back for and have a relationship with us. And we’ve seen the script share coming up. We’ve been able to manage our labor and keep our stores stable and open at the same time, while we’re closing. We’ve retained over 70% of the scripts as we’re closing stores. We’ve retained those people. So the, I don’t want people to forget the value of COVID and the continuation of that customer engagement is a powerful asset for us as well.
Ricky Goldwasser
So any questions?
Karen Lynch
Okay. I guess we’re doing a good job addressing all the questions.
Ricky Goldwasser
So next, let’s talk a little bit about Medicare Advantage. Clearly it’s very important business, for you a very important business, just very important marketplace. Increasingly competitive always has been, but it seems that it’s getting more and more in the last few years, you’ve gained share quite nicely. As we think about that business beyond just kind of like one-year what do you need, right? What assets do you need to have in order to stay competitive in that business because I do think that as time goes by the business will become more and more competitive. It’s just the growth cycle of that population?
Karen Lynch
Yes. I think it’s important to recognize when you think about Medicare for us, we’re in the group Medicare business, we’re in the individual Medicare business, we’re in the PDP business, they have the largest PDP. We are in med-sup business. So there are lots of product offerings in Medicare for us. And if you think about this year we reached a major milestone in our individual book of two – over 2 million members and that was a big milestone. You’re right, Ricky, it is a competitive market, but as you think about what our assets are, we have the opportunity to have innovative products because of the unique capabilities that we have as a company.
The ability for us to offer so many clinics, for example, we continue to invest in innovation. Digital will continue to be an area of opportunity for us. We have the Medicare resource centers that we use in those locations – in our retail locations where we can engage with our members. Our signify asset is another opportunity for us as we think about the potential of Medicare. So there’s a lot of unique capabilities that we have. Signify, obviously as we think about it, investing in digital and obviously keeping our star ratings performance is paramount for us.
What I miss?
Shawn Guertin
The only thing I would add is in defining our strategy, right, that question actually was at the heart of it. There’s as Karen articulated, there’s a real business opportunity. We have to do something differentiated from a care delivery perspective, but I’d also say that when you as well as our Medicare advantage product has done which has been exceptionally good. The idea going forward though is, if you look at our two bigger competitors in Medicare advantage they have fairly well articulated care delivery strategies.
And so strategically that’s a flank we need to address. And I think when I think about the business to the, kind of the context of your question beyond one year, that’s one of the reasons why I think this strategy also makes so much sense for us and that it’s not only offensive. It actually also sort of bolsters this very, very important product. And so I think continuing to execute in our strategy around provider enablements and home and care delivery is actually very, very important strategically to this business in the long run as well.
Ricky Goldwasser
Makes sense. I mean, at the end of the day, when you think about sort of the landscape, the competitors at the end of the day it’s really kind of like the assets that fit your existing assets.
Shawn Guertin
Right.
Karen Lynch
That’s right.
Ricky Goldwasser
Biosimilars, so to me biosimilars when we think about 2023 and 2024 probably one of the most interesting opportunities, and I think to me what’s so interesting about it is the fact that there’s newness to it. We haven’t seen yet a pipeline that is so focused on pharmacy type drugs. But I also think that there is some confusion in the marketplace because investors haven’t seen it yet. And just curious to get kind of like, from what – from your perspective, what do you think the market is missing about the PBMs, right, and specialty pharmacy’s role in this new product cycle that we’re seeing?
Shawn Guertin
Yes. So I think – I think part of it, right, is if you started with this, if you asked customers, right, about after price; why are they making a PBM decision? It would really be about the capabilities that you have in specialty pharmacy to not only manage cost but to provide the right experience for the consumer and the provider. Because at times there’s a fair amount of complexity, right, in the delivery of this, and it’s something I think that we’ve excelled at.
A little bit of a misconceptions we haven’t seen it yet, right. We’ve seen the tip right. There have been examples and the economic model that we’ve sort of talked about has manifested itself. It’s just not been in the way, right, that the next five to seven years might be. But there are individual examples if some of these coming on market, us getting a lower cost just like happened on pills and tablets with generics. Getting a better cost to the consumer and actually having that be beneficial to the PBM as well.
So the unit economics of the idea sort of are underway, right? And I think some of this has at times when we’ve talked about this got conflated to being like something about 2023 and partly because that [indiscernible] so big, I get it. But I think as we’ve thought about this I would sort of boil it down simply to say if you thought about this business, maybe it’s a mid-single-digit growth business systemically, but this particular opportunity can probably add a little bit to that over the next five to seven years as we roll this out. It is likely the timing will be a little choppy because sometimes it’s unpredictable, sometimes this has to do with interchangeability, multiple agents, and things like that, and that can be a little trickier to predict.
So I think it, we can debate the timing of it. So do I think everything’s going to kick in on 2/1/23? No, not necessarily when you look at the specifics, but when I think about this over a three, five, seven-year period, I think there is a longer term opportunity that’ll benefit both the consumer and the PBM.
Ricky Goldwasser
Makes a lot of sense, and one thing that I’ll go back to as you said, we’ve actually seen this in the past, maybe it wasn’t in the context of biosimilars and specialty, but we saw – we saw those in generics…
Karen Lynch
That’s right.
Ricky Goldwasser
…which will be interesting to watch what’s going to happen with the pricing dynamic?
Shawn Guertin
Right.
Ricky Goldwasser
Okay. So I think we have time for one more question. We started with M&A, we started with Signify and I’m going to circle back to that. As we think about the M&A environment, I mean, you’ve clearly articulated your strategy back in the Analyst Day in 2021, but over the last few months we started to see a step up in activity and we’re seeing non-traditional players coming in. And I’d say that up to a few months ago, we could have debated what will Amazon do or not do in healthcare, but now they are, they’re doing and we’re seeing – we’re seeing them more involved. I think for us what’s most striking is the speed at which they operate. So as you think about that is you kind of like at this new information that we have in the market. How is this sort of shaping your thoughts and sort of the urgency right around doing things?
Karen Lynch
Well I think we are urging, obviously – we’re very urging, I just ask our teams and I think if you think about our strategy, really we’ve been very clear that we want to extend into care delivery and we’re starting with Signify. We can’t always determine the order. Obviously primary care is something we believe we need to advance because we really want to enable consumers to have a differentiate experience and improve health outcomes. So we’re playing our game. We have a continuum of healthcare capabilities starting with the financing through insurance, with the PBM through retail health, through in-home when we do make the acquisition. We’re missing that one piece; I’ll let Shawn talk about the M&A environment, so to speak. But I think that, we have a very clear strategy. We’re executing on that strategy and we’re moving at the pace that I want to move faster, but the market doesn’t let you move as fast as you always want to move, but I…
Shawn Guertin
Let the bruises on my shins show the sense of urgency on this issue. No, but what I would say is no part of our strategy was ever premised on our biggest competitor sitting idly by, right. We always knew that there would be response that we’d have competition. The other thing that I would just say that’s important is so much of this always revolves around the valuation discussion, and that is obviously important getting a deal done. But this is about capabilities for us, and when I reflect on my time and deals that didn’t work out so well, it wasn’t because of valuation. It was because we misread something about the capabilities, the management team, the techno – whatever it is, right.
So there’s as much work we’re putting in thinking about are these the right capabilities for our portfolio of assets to enable our strategy in addition to valuation, and so that is an important part of our thinking. And I think that is something that while it can take a little time, but it’s important to sort of be delivered about while we go through this. But I still have a lot of confidence that we can execute our strategy as we articulated it, not withstanding sort of the activities of others.
Ricky Goldwasser
Great. Well Karen and Shawn, thank you. It’s always a pleasure.
Shawn Guertin
Thank you.
Karen Lynch
Thank you, Ricky.
Question-and-Answer Session
Q –
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