CVS Health Corporation

Ladies and gentlemen, thank you for standing by and welcome to the CVS Health Q3 2019 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. I would now like to hand the conference over to your speaker today, Valerie Hartel, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, and good morning, everyone. Welcome to the CVS Health Third Quarter 2019 Earnings Call. As a reminder, this call is being recorded. I'm Valerie Hartel, Senior Vice President of Investor Relations for CVS Health. I am joined this morning by Larry Merlot, President and CEO, Eva Barado, Executive Vice President and CFO. Following our prepared remarks, we'll host a question and answer session when John Roberts, Chief Operating Officer, Karen Lynch, President of Aetna, Derica Rice, President of Caremark, and Kevin Hurrican, President of CVS Pharmacy, will also join us. In order to provide more people with the chance to ask their questions during the Q&A, please limit yourself to no more than one question with a quick follow-up. In addition to this call and our press release, consistent with our practice, we have posted a slide presentation on our website. Our Form 10-Q was filed this morning and is available. Please note during this call, we will make certain forward-looking statements that reflect our current views related to our future financial performance, future events, and industry and market conditions, and forward-looking statements related to the integration of the Aetna acquisition, including the expected consumer benefits, financial projections, and synergies. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what may be indicated in the forward-looking statements. We strongly encourage you to review the information in the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the risk factors section of our annual report on Form 10-K and the cautionary statement concerning forward-looking statements disclosures in our quarterly reports on Form 10-Q. You should also review the section entitled Cautionary Statement Concerning Forward-Looking Statements in this morning's earnings press release. During this call, we'll use non-GAAP financial measures when talking about the company's performance and financial condition. In accordance with SEC regulations, you can find a discussion of these non-GAAP measures and the comparable GAAP measures in the earnings press release and the reconciliation document posted on the investor relations portion of our website. And as always, today's call is being broadcast on our website where it will be archived for one year following the call. Now I'll turn the call over to Larry.

Thanks, Valerie. Good morning, everyone, and thanks for joining us. In the third quarter, we continued building on our positive business momentum, delivering adjusted earnings per share of $1.84, exceeding the high end of our guidance range. Importantly, this performance was driven by strong operational execution across our enterprise, with all three segments performing in line with or above our expectations. And I'll note that 4 cents of our Q3 performance was the result of net realized capital gains and favorable prior year's development. We generated strong cash flow from operations, which enabled us to continue to make progress on deleveraging, all while investing in our core businesses and returning capital to our shareholders through dividends. Given our year-to-date success in executing against our strategic plan, We are raising and narrowing our adjusted earnings per share guidance range to $6.97 to $7.05. And Eva will provide a more in-depth review of our results and increase guidance in her remarks. Now, as we continue to transform CVS into the country's leading consumer health company, we are successfully executing on our long-term growth strategy across the four key enterprise-wide priorities we shared at our June Investor Day. Importantly, our teams are working together across the enterprise to maximize value to our members, consumers, patients, and shareholders. And our operational and financial performance this year reflects their efforts. We continue to use our unmatched combination of assets by enhancing and creating products and services to further grow and differentiate our businesses, our first strategic priority. In our retail long-term care segment, we continue to drive strong prescription growth using our data and analytics capabilities through targeted, proactive member communication. A key differentiator of our retail stores is our ability to meet members and consumers where they are, to deliver local, personalized care through our minute clinics, and now our health hubs, making healthcare more accessible and affordable. And our approach is clearly resonating in the marketplace and is exemplified both by our continued share gains at retail and the early success of the health hubs. Now in terms of early impact, our health hubs in Houston, which now have about eight months of performance, have continued to outperform their control group with higher script volume and minute clinic visits, along with higher front-store sales, traffic, and store margin. This favorable performance and the incremental value we expect will be derived from the expanded utilization of the hubs gives us further confidence in our planned rapid roll-up. And we are on track with three additional metro areas with approximately 50 hubs operational by year-end, along with our plan to have 1,500 hubs by the end of 2021. The value we expect our health hubs to deliver stems from various sources. First, increased earnings contributions from the greater use of our new and enhanced products and services. Second, improved medical cost savings in Aetna's book of business as we deploy our capabilities to address the unique needs of the member populations we serve, driving value to our healthcare benefits segment. Our plan design innovations aim to incentivize members to utilize more cost-effective settings, and providing our pharmacies with integrated medical and pharmacy data allows for improving the delivery of a member's next best health action to impact behavior changes and improve health outcomes. Third is our unmatched capability through our open-source approach in extending consumer-centric offerings to our health plan relationships across the CVS Health Enterprise. And our new product and service offerings have a direct impact on the overall healthcare costs of the clients and partners serviced by CVS Caremark and CVS Pharmacy, and they are making a difference in our market positioning with these clients and partners. And all of this leads to a fourth driver of value, and that's the resultant benefit of increased customer satisfaction and retention. Now, our opportunity to differentiate our offerings at the community level received another boost with a recent designation earned by our MinuteClinics. CVS Health professionals who staff our clinics, which again are foundational to our Health Hub expansion, have earned a Pathway to Excellence designation from the American Nurses Credentialing Center for the quality services they provide. And MinuteClinic is the first and only retail clinic to receive this elite designation. So as more hubs come online toward our goal of 1,500, we will continue to update you on our performance and the benefits of our integrated healthcare approach for consumers. For our pharmacy services segment, we continue to deliver solid performance driven by growth in specialty, strong volume in our maintenance choice program, and continued improvement in purchasing economics. As for the 2020 selling season, it's nearly complete, with gross new business increasing $1.1 billion and net new business improving by approximately $1 billion since our second quarter update in August. The 2021 selling season is now underway, and we are well positioned with our product offerings, and our sales teams are engaging in productive conversations, identifying innovative ways to serve both new and existing clients. To that end, in the quarter, we successfully renewed our relationship with the Federal Employees Health Benefits Program through December 2021. And this renewal includes both our mail and retail contracts and represents an opportunity to continue to strengthen our client relationship. Our healthcare benefits segment is also well positioned for growth heading into 20. and we are building momentum with our new enterprise offerings, which will differentiate us in the marketplace. Our customer value proposition has been further reinforced by the most recent Medicare Advantage star ratings data released by CMS last month. And Aetna's Medicare Advantage plans earned an overall weighted average of 4.3 out of 5 stars for 2020, with 76% of our Medicare Advantage members enrolled in plans rated at least four and a half stars, and that's based on our September 2019 membership, and that's also the highest percentage among publicly traded companies with over 250,000 Medicare Advantage enrollees. Our 2020 star ratings drive more favorable bonus payments and bid rebates, enabling enhanced product offerings in 2021. And this year's star ratings demonstrate the success of Aetna's approach to growing our Medicare business across the country while maintaining best-in-class quality. Turning to Medicaid, we were recently awarded Medicaid Lives in the Texas Star Plus program and the West Virginia Children and Youth program. And these wins reinforce our commitment to Medicaid and speak to the strength of our Medicaid services and capabilities. allowing us to build upon existing relationships with two very important state partners. Now, we're also encouraged by the strong client interest in our new integrated capabilities, including our health hubs, and these capabilities will be a core component of our value proposition for the 21 selling season. We're also excited about our recently launched Healing Better program, a transitions of care program intended to improve the recovery process from joint replacement procedures. Healing Better is another example of the power of our combination to provide enterprise solutions to improve patient experiences. And we're excited to incorporate this offering into Medicare Advantage plans in select geographies in 2020. Moving to our second strategic priority, delivering transformational products and services, We are continuing to advance innovative pilot programs and introduce new and innovative offerings. In the third quarter, our oncology pilot continued to roll out across selected geographies. We also rolled out the first phase of our chronic kidney care management program to Aetna and Caremark clients for early disease detection and care management development. And with several hundred members under management, we are moving on to the second phase of the program which is the face-to-face counseling around different dialysis modalities. And I should also mention that our home hemodialysis clinical trial is progressing as expected, with our first two sites active. And we are confident that we will complete the trial on our previously discussed timeline. With our third strategic priority, we are developing and enhancing programs that encompass our consumer-centric technology infrastructure. And as previously announced, our Care Pass subscription service went live nationally in the third quarter. We have already enrolled more than 1 million members in less than two months, which has exceeded our expectations for this recently launched membership program. In our healthcare benefits segment, we have expanded the use of our proprietary Novologix technology for prior authorization and claims management in our commercial populations. and given the proven success of our NovoLogic capabilities, we are confident in our ability to drive cost savings and efficiencies for our clients who participate in those programs. Additionally, we now have more than 82 million consumers and members engaging with our enterprise through text messaging, and that's an increase of 7% from last quarter, and we're encouraged by the increased engagement we are experiencing across our digital programs. Moving to our fourth strategic priority, modernizing our enterprise functions and capabilities. Again, we're making progress and are on track to see the initial benefits beginning in 2020. We have aligned teams around simplifying our service operations, embedding intelligent automation to streamline routine processes, and further advance our digital footprint. These initiatives are expected to further enhance our self-service capabilities by eliminating unnecessary member and patient mailings, as well as reduce incoming call volume across our businesses. And we continue to expect to generate $1.5 to $2 billion in run rate net savings in 2022 for enterprise modernization. And I should also note this is in addition to the $900 million run rate of projected integration synergies in 2021 that we have previously discussed. Another exciting accomplishment related to our investments on the CSR front is CVS Health being named to the prestigious Dow Jones Sustainability Index for the seventh consecutive year and for the first time added to their World Index. And we are proud of this recognition, which is a true indication of our industry leadership in the area of corporate sustainability and our commitment to improving the healthcare system. And with that, I'll turn the call over to Eva to walk through our financial results and guidance.