CVS Health Corporation

Ladies and gentlemen, good morning and welcome to the CVS Health Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow CVS Health prepared remarks, at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Suzie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

Thank you, and good morning, everyone. Welcome to the CVS Health Third Quarter 2021 Earnings Call. I'm Susie Lisa, Senior Vice President of Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Sean Gurtin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will host a question and answer session that will include Executive Vice Presidents Alan Lotvin, President Pharmacy Services, Dan Finke, President Healthcare Benefits, Neela Montgomery, President, Retail and Pharmacy, and John Roberts, Chief Operating Officer. Our press release and slide presentation have been posted to our website along with our Form 10-Q that we filed with the SEC this morning. During this call, we will make certain forward-looking statements reflecting our current views related to our future financial performance, future events, industry and market conditions, as well as the expected consumer benefits of our products and services and our financial projections. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from what may be indicated in them. 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 cautionary statement concerning forward-looking statements and risk factors section in our most recent annual report on Form 10-K, this morning's earnings press release, and included in our Form 10-Q. During this call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning's earnings press release and the reconciliation document posted on the investor relations portion of our website. Today's call is being broadcast on our website, where it will be archived for one year. Now, I'd like to turn the call over to Karen.

Good morning, everyone, and thank you for joining our call today. CVS Health has delivered another strong quarter and exceeded expectations. For the third quarter in a row, we are raising adjusted EPS guidance. Throughout 2021, we have made progress executing our strategy to deliver an integrated healthcare experience centered around the consumer. We sustained strong revenue growth in each of our core businesses, helped improve health outcomes, and reduced costs by broadening access to quality care. We helped fight the pandemic and reached millions of consumers with convenient, accessible care in communities across America. During the third quarter, we delivered revenue growth of 10%. This double-digit growth was led by membership gains in both health care benefits, and pharmacy services, as well as higher volume in retail. We grew adjusted operating income by 12.5%. We generated adjusted earnings per share of $1.97 and strong cash flow from operations of $5.5 billion. Given these results and our outlook, we are raising our adjusted earnings per share guidance to $7.90 to $8.00. This higher guidance reflects the quarter's outperformance and continued positive momentum, which Sean will discuss shortly. Third quarter results again demonstrate that our customers value how we bring together our unique portfolio of assets, our deep healthcare expertise, and vast consumer touch points to meet health needs. There is strong demand for our integrated solutions across the healthcare continuum, including health management programs for chronic conditions, mental health support, pharmacy services, and health and wellness products. We added over 1.3 million new integrated pharmacy and medical members through the 2021 and 2022 selling season. More customers are seeking complementary health services that work together, such as virtual care. Earlier this year, CVS Health launched the first national virtual primary care program. This market-leading solution offers a national network of physicians virtually and access to convenient face-to-face care in our minute clinic locations when needed, often with zero copays. Our program has grown to 30 customer accounts with over 750,000 eligible members as of January 1st, 2022. This is an indication of our ability to scale nationally and bring innovative products to the marketplace. Our customers recognize the importance of CVS Health care solutions and the ease of access we now provide in the community, the home, and virtually. Our high customer retention rates and new business wins are a testament to the strength of our business model. Healthcare benefits revenue increased 9.5% year over year. Strength in government services helped drive an adjusted operating income increase of 2.4% versus prior year, despite higher costs related to COVID-19, net of deferred care, primarily within our commercial book. We generated sequential membership growth across all three product lines in the quarter, commercial, Medicare, and Medicaid. Our medical benefit ratio of 85.8% was above our expectations, driven by COVID-related costs, primarily driven by commercial. Underlying non-COVID costs emerged in line with our expectations. We believe aggregate medical costs will slightly exceed baseline levels for the full year. We produced strong results in our Medicare business and grew membership both sequentially and year-over-year across all Medicare products. This reflects our strong product portfolio, STARS performance, and reputation for service excellence. Year-to-date, Medicare Advantage membership has grown 9.2%. In 2022, we anticipate we will achieve double-digit growth in individual Medicare and generate strong momentum in dual eligibles. Our strong performance in STARS continues. as you saw for 2022, with 87% of our members in STAR plans rated 4 and higher, up from 83% in 2021. In our commercial business, we expect moderate growth in 2022 for national accounts, driven by both increased sales, which are up approximately 50% year-over-year, and a 95% client retention rate. As we mentioned earlier this year, we are reentering the individual exchanges in eight states as of January 2022. Enrollment began on Monday, and we anticipate our co-branded CVS Aetna offering and benefit design focused on consumer choice will result in gains of at least 100,000 new members in 2022. Turning to pharmacy services. We delivered third quarter revenue growth of 9.3% and adjusted operating income growth of 9.5% year over year. For the 2022 selling season, we achieved a 98% retention rate. We drove $10.4 billion of growth new business, resulting in $8.9 billion of net new business wins, providing evidence of our market-leading trend management, transparency, customer service, and integrated offerings. We continue to be a leader in specialty pharmacy with programs that drive value in the marketplace, provide substantive savings to customers, and differentiate us as we pair programs with digital assets. We maintain the strong momentum this quarter with specialty revenue up 8.7% versus prior year. Our service excellence and top-tier execution are key areas of differentiation. Our retail segment continues to play a critical role as a local health destination for millions of Americans. Retail outperformed both expectations and the industry in the third quarter. We delivered 10% revenue growth and 22% adjusted operating income growth year over year. Pharmacy sales and prescriptions filled both increased 8% year over year, largely driven by COVID-19 vaccine administration and core pharmacy services. Our patient satisfaction scores remain high with approximately 90% satisfied with their experience in our CVS Health locations. We continue to support millions of Americans for COVID-19 testing and vaccine administration. We administered 11.6 million COVID-19 vaccines and 8.5 million COVID-19 tests in the quarter. Since our program began, we have administered 43 million vaccines and approximately 38 million tests. We also expanded our digital capabilities to provide universal access to CVS Health vaccination records to the millions of adults we have vaccinated. This new capability has driven over 1 million visits per month to vaccination records on CVS.com. This provides another opportunity for us to build deeper engagement with our customers while simplifying and connecting their health experience. Front-store sales momentum also continued with revenue growth of 13% versus prior year. Front-store sales were led by consumer demand for COVID-19 home testing kits, as well as cough and cold products with year-over-year volume increases across most front-store categories. Our CVS Health retail presence consistently serves as a strong channel for capturing new lives. In fact, this year, 12.5% of new COVID-19 testing customers chose to fill new prescriptions or receive a COVID-19 vaccination with CVS Health. Finally, we anticipate a benefit from administering boosters and pediatric doses to eligible consumers will occur largely in the fourth quarter of this year. We continue to make measurable progress with our strategy to deliver a superior customer experience and address the total cost of care. We have focused on several important areas. First, with our unique portfolio of businesses, we continue to expand our role in care delivery designed around the customer. We are taking a proactive approach to meeting the emerging needs of customers, clients, and communities. We are improving access, lowering costs, and combining local points of care to simplify the consumer health experience. We have one of the country's largest network of physician extenders and are able to deliver care locally with our national footprint. We will continue to drive higher engagement with customers as we evolve the format of select CVS locations, creating community health destinations, and shifting into three distinct models. Sites dedicated to offering primary care services. an enhanced version of Health Hub with products and services designed for everyday health and wellness needs. Our traditional CVS pharmacy store model that provides prescription services and health and wellness and other convenient retail offerings. Our unique combination of businesses and our presence in communities nationwide enable us to meet consumers where they are to enhance their well-being and to be a bigger part of their wellness. We are further strengthening the consumer experience through the expansion of digital services and platforms that connect to health services and in-person channels for our more than 35 million unique digital customers. For example, more than 70% of CVS Pharmacy customers are enrolled in our text messaging programs today. Within that group this quarter, adherence outreach drove 10% growth in prescriptions filled. Greater adherence leads to improved health outcomes and lower costs. In today's hyper-connected, digital consumer-driven world, the demand for omnichannel pharmacy is greater than ever. We continue to modernize our operating systems and enhance the integration of pharmacy models, simplifying consumer interactions and driving further engagement with our customers. Finally, we continue to invest in our employees as part of our workforce strategy. Last quarter, we announced a phased increase in the minimum wage to $15 an hour by July 2022. We invested in modernizing our training programs and technology for our frontline and clinical colleagues. Despite the tight labor market and anticipation of the higher demand for health services, we strengthened our workforce in every business. We hired a record number of people in the third quarter to advance open enrollment and customer service, as well as enhance technology and clinical capabilities. Nearly 20,000 pharmacists, pharmacy technicians, and nurses recently joined the CVS Health Team supporting flu season, as well as COVID-19 vaccinations and testing. Our pharmacists and pharmacy technicians are an integral part of our overall workforce strategy. We are committed to investing in our pharmacists, awarding immunization bonuses in the second half of this year. We look forward to sharing more about our strategy to improve access, quality, and customer engagement and Investor Day on December 9th. Our commitment to shareholders, customers, and communities remains steadfast. Health equity is critical as the pandemic continues to disproportionately impact certain communities. In addition to targeted vaccine and booster education efforts, we provided 31 million meals this year to people suffering from food insecurity and invested in 2,800 affordable housing units in 30 cities. By helping address the social determinants of health, permanent housing can reduce healthcare costs by 59%. We recently hired our first-ever Chief Health Equity Officer, Dr. Joneigh Khaldun, to build upon our efforts to advance health equity and better support underserved communities. And our increased wages and bonuses support our employees, their families, and their communities. For the third quarter in a row, we executed on and exceeded our plan. and raised adjusted EPS guidance. We continue to enhance our diverse portfolio of assets to serve the customer. We are guiding to a strong year end, all possible due to the leadership and commitment of our over 300,000 CVS Health colleagues that bring their heart to every moment of our customers' health. With that, let me turn it over to Sean.