CVS Health Corporation

Ladies and gentlemen, good morning and welcome to the CVS Health Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow CVS Health's 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 Larry McGrath Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Good morning and welcome to the CVS Health Third Quarter 2022 Earnings Call and Webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Sean Gurdon, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question and answer session that will include Dr. Alan Laughlin, President, Pharmacy Services, Daniel Finke, President, Healthcare Benefits, Michelle Peluso, Chief Customer Officer and Retail Co-President, and Prem Shah, Chief Pharmacy Officer and Retail Co-President. Our press release and slide presentation have been posted to our website along with our form thank you that we filed this morning with the SEC. Today's call is being broadcast on our website, where it will be archived for one year. During this call, we will make certain forward-looking statements, reflecting current views related to our future financial performance, future events, industry and market conditions, including impacts related to the ongoing COVID-19 pandemic, as well as the expected consumer benefits of our products and services, and our financial projections, and the benefits of the proposed acquisition of Signify Health, Inc. and the associated integration plans, expected synergies and revenue opportunities. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results, including with respect to the ongoing COVID-19 pandemic and the proposed acquisition and the integration of Signify Health. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. including our most recent annual report on Form 10-K, our recent current reports on Form 8-K, this morning's earnings press release, and our Form 10-Q. During this call, we will use non-GAAP measures when talking about the company's performance and financial conditions, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation documents posted to the investor relations portion of our website. With that, I'd like to turn the call over to Karen. Karen?

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. CVS Health delivered another outstanding quarter. Based on our strategic progress and confidence in our execution, we are raising our adjusted earnings per share guidance for the third consecutive time this year to a range of $8.55 to $8.65. During the third quarter, we grew revenue by 10% versus the prior year to over $81 billion and grew adjusted operating income by nearly 4% over the prior year to $4.2 billion. Adjusted earnings per share in the quarter was $2.09, an increase of over 6% from the prior year. Our cash flow from operations was $9.1 billion in the third quarter and $18.1 billion year-to-date. Throughout 2022, we've consistently executed on our strategy centered around expanding our capabilities in healthcare delivery. We are increasingly delivering broader access to quality care, simpler journeys, and better outcomes at lower costs across our channels. With the announced acquisition of Signify Health, we will strengthen our engagement with consumers. We will add best-in-class capabilities that enable in-home services and care coordination. as well as a platform to accelerate value-based decision enablement. Together, we will have a strong foundation for developing new product offerings consistent with our payer agnostic approach. We project that this transaction will close in the first half of 2023. We continually evaluate our portfolio of assets for non-strategic areas that do not fit our long-term priorities. In October, we reached an agreement to sell vSwift, and are actively exploring strategic alternatives for Omnicare. As we divest assets, we will continue to invest in areas aligned with our strategy with a disciplined approach to capital allocation. This morning, we made an important announcement on our ongoing opioid legal matter. In late October, we began a mediation to resolve substantially all opioid lawsuits and claims against CVS Health by states, political subdivisions, and tribes. We reached an agreement in principle to pay approximately $5 billion over 10 years beginning in 2023, an outcome that is in the best interest of all parties and one that will help put a decades-old issue behind us as we continue to focus on delivering a superior health experience for the millions of consumers who rely on us. Let's turn to each of our foundational businesses and discuss their strong results. The healthcare benefits segment had another strong quarter. Revenues for this segment grew nearly 10% year over year with adjusted operating income of $1.5 billion. Our medical benefit ratio of 83.5% improved by 230 basis points versus the prior year, driven by a lower impact from COVID and medical cost trends that remained favorable. Enrollment in our Medicare and commercial businesses was strong this quarter, with our individual Medicare Advantage and PDP portfolio exceeding market growth once again. The 2023 Medicare annual enrollment period is underway, and we are well positioned for another year of growth in our individual Medicare and dual eligible products. we remain a leader in offering $0 premium plans, with more than 73% of our plans in that category. We also continued our geographic expansion in the DSNP market and now offer plans to 61% of DSNP-eligible population, up more than 8% year over year. We were disappointed that the star rating on our national PPO contract fell to 3.5 stars. after nearly a decade-long track record of performing at four stars or better. We have a strong history of delivering affordable, high-quality plan benefits and a commitment to continuous improvement. Improving our star performance continues to be a top priority for the company. We have the right actions in place to improve our star ratings with our ongoing quality and experience efforts as we address the specific measures scored on the member surveys that contribute to star ratings. We will continue to focus on our members and invest in programs and processes specifically designed to simplify and improve their healthcare experience. This is an important priority for the company. In our commercial business, our growth is driven by the combination of our competitive cost structure, our integrated benefit designs, and services that utilize CVS health platforms and capabilities. We achieved a key milestone this quarter with more than 2 million members enrolled in our integrated Aetna and Caremark products. This important goal demonstrates the value we provide our customers through our combined CVS Health offerings, a strong proof point of our strategy. Turning to our ACA individual exchange platform, we expanded our footprint and will be available in a total of 12 states beginning in January of 2023. covering five and a half million lives or nearly 40% of the individual exchange population. Our co-branded product offerings include instant access to providers with 24 seven virtual care and face-to-face access in our minute clinic locations. We are committed to helping provide access to affordable care for all Americans. Finally, our Medicaid platform continues to be an important area for growth. We grew our Ohio Rise program after a successful implementation and have been chosen by the state of Louisiana to serve a portion of their Medicaid-eligible children due to the deep expertise we've built to engage and support children, their caregivers, and their families. We've expanded our capabilities with a focus on quality and member engagement through our CVS Health community channels, as we enter a robust bid period. In pharmacy services, our revenue grew nearly 11% with adjusted operating income of $1.9 billion. Specialty pharmacy revenue grew 22% year over year, driven by our industry-leading cost management and service excellence that continue to differentiate us in the marketplace. We closed out another successful selling season, driving $3.5 billion of growth new business for 2023 and a client retention rate of nearly 98% evidence of the strength of our portfolio of capabilities. Efforts are underway to support a successful welcome season for our members. Last week, we learned that Centene decided to move their business to a competitor in 2024. While we hope to continue our relationship with Centene and bid to do so, we also maintained our pricing discipline. For the remainder of the contract, we will work with Centene to facilitate a seamless transition for members. Even after moving this contract, our purchasing power and our ability to drive value for our customers will not be diminished. Our demonstrated success in growing lives under management and revenue is a testament to our high-quality service compliance capabilities, and specialty pharmacy excellence. Our pharmacy services segment will remain an important driver of growth within CVS Health in the years to come. Our retail long-term care segment also continues to outperform expectations. Revenues in the quarter grew nearly 7% versus the prior year, with $1.4 billion in adjusted operating income. Performance in both the front store and pharmacy was strong. Front store sales were up approximately 4%, driven by growth across the majority of our categories. Demand for COVID vaccines and over-the-counter tests, as well as cost cold and flu products, remain high. In pharmacy, Scripps grew 1.8% year-over-year in the third quarter, or 3.6%, excluding COVID vaccines. This growth helped propel our retail pharmacy business to another quarter of year over year market share gains, extending a trend that started in the first quarter of 2020. Our community retail health destinations play a strengthening role in the overall well-being of the consumers we serve. As demand for health products and services continues to be elevated, we are implementing new digital capabilities that provide a seamless and convenient consumer experience. Now, most of our pharmacists are empowered to prescribe Paxlovid COVID antiviral treatment. Our investments in omnichannel health are enhancing transparency and helping consumers better manage their overall health. While there is growing economic uncertainty and recession expectations in 2023, we are well positioned across our foundational businesses to manage through these potential headwinds. We are increasingly delivering connected experiences and health solutions that improve overall well-being. More and more, we are there for every meaningful moment of our consumers' health. Throughout 2022, we've made significant progress advancing our strategy, building a strong foundation for healthcare delivery, and expanding our health service offerings and developing new products. In October, we announced that Dr. Amar Desai has joined CVS Health to lead our healthcare delivery strategy. Dr. Desai's experience in transforming the healthcare system and driving value-based care will accelerate our vision of becoming the leading health solutions company and our efforts to improve healthcare for consumers. 2022 has also been an important year for growing our digital presence and capabilities. This quarter, we added another approximately 1 million digital customers. CVS Health now serves more than 46 million unique digital customers, an impressive 11 million more since this time last year. Our digitally led omnichannel health approach prioritizes experience that matter most for consumers. This includes advancing our digital tools for a seamless and convenient experience, leading to higher engagement and satisfaction. For example, we recently launched a new functionality that drives more choice and convenience for patients filling prescriptions. Patients can expedite urgent prescriptions, have visibility into out-of-pocket costs, and track their order status, all before even coming in to our pharmacy. We continue to make strong progress on ESG. For example, we are working to decrease disparities with our focus on women's health as it relates to accessing quality and convenient healthcare. As part of our Here for Her initiative, we are launching a variety of new MinuteClinic virtual care services to support women's health that will be available 24-7. And finally, I want to take this opportunity to again thank our CVS Health colleagues, especially those in Florida and Puerto Rico who face natural disasters. our teams pulled together to ensure care continuity for our customers and the communities that we serve. I will now turn it over to Sean for a deeper look into our operational and financial results and outlook.