CVS Health Corporation

Ladies and gentlemen, good morning and welcome to the CBS Health fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the prepared remarks at which point we will review instructions on how to ask for questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Tom Calley, Senior Vice President of Capital Markets for CBS Health. Please go ahead.

Good morning, and welcome to the CBS Health fourth quarter and full year 2022 earnings call on webcast. I'm Tom Cowie, Senior Vice President of Capital Markets for CBS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer of CBS, Sean Gerton, Executive Vice President and Chief Financial Officer of CBS, and Mike Peikos, Chairman, CEO, and co-founder of Oak Street Health. Following our prepared remarks, we will host a question and answer session that will include additional members of the CVS management team. Daniel Finke, President, Healthcare Benefits. Michelle Peluso, Chief Customer Officer and Retail Co-President. Prem Shah, Chief Pharmacy Officer and Retail Co-President. David Joyner, New President, Pharmacy Services. And Dr. Alan Lotvin, Outgoing President, Pharmacy Services. Our earnings and Oak Street acquisition press releases and slide presentations have been posted to our website along with our Form 10-K and our Form 8-K that we filed this morning with the SEC. Today's call is also 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 pending acquisitions of Signify Health and Oak Street Health 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 pending acquisition and integration of Signify Health. We strongly encourage you to review 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 the risk factors section in this morning's earnings press release, Oak Street Health acquisition press release, and included in our Form 10-K and the Form 8-K we filed this morning. During this call, we will use non-GAAP measures when talking about the company's performance and financial condition, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the investor relations portion of our website. With that, I'd like to turn the call over to Karen. Karen?

Thank you, Tom, and good morning, everyone, and thanks for joining our call today. This morning, we are going to discuss our 2022 results our 2023 guidance, and our announcement that we entered into a definitive agreement to acquire Oak Street Health. Mike Peikos, chairman, CEO, and co-founder of Oak Street Health will join Sean and me during the call to discuss this important transaction. But first, 2022 was a year of progress for CVS Health. We delivered strong financial results. We made meaningful progress on our strategy and we brought a greater value to the people that we serve. This morning, we announced that we exceeded our adjusted EPS expectations for the fourth quarter in a row, delivering fourth quarter 2022 adjusted EPS of $1.99 and full year 2022 adjusted EPS of $8.69. This result represents nearly 10% growth over our 2021 baseline. For 2023, we continue to expect adjusted EPS in the range of $8.70 to $8.90, which at the midpoint represents high single-digit growth off of our 2022 baseline of approximately $8.25. In 2022, CVS Health surpassed the $300 billion mark in total revenues, growing full-year revenues by more than 10%, to $322 billion. We delivered adjusted operating income of $17.5 billion and generated adjusted EPS of $8.69. Our ability to generate cash flow from operations was robust at nearly $16.2 billion for the full year. Each of our foundational businesses generated excellent results. Starting with the healthcare benefits segment, we grew revenues by more than 11% for the year and delivered adjusted operating income of $6 billion. Our medical benefit ratio, 84%, improved by 100 basis points versus the prior year and was consistent with our full-year expectations after adjusting for the impact of elevated blue in the fourth quarter. I want to highlight a few areas within the HCB segment. Although our individual Medicare Advantage growth was below our expectations, Medicare Advantage remains a key strategic growth area for CVS Health. We remain focused on delivering superior service to our Medicare Advantage members while advancing our efforts to improve our star ratings. We are executing on the actions we identified to address our cap survey scores and are making the necessary investments to drive our stars improvement initiatives. We also made progress in the last 90 days in advancing our efforts to diversify our national PPO contract and have obtained the necessary regulatory approval to move forward. This will enable us to more effectively manage our Medicare business in the future. As we will discuss shortly, adding both Signify Health and Oak Street Health to our value-based care delivery platform will deepen our focus on this important business. In our individual exchange business, we now expect to end 2023 with between 900,000 and 1 million individual members. This significant growth in membership is driven by our provider networks, market growth, marketplace disruptions, and our co-branded integrated benefit offerings. We anticipate a positive, sustainable contribution from this membership in future years. Our pharmacy services segment grew full-year revenues by 11%, with adjusted operating income of $7.4 billion. Performance in our specialty pharmacy was, again, outstanding. Revenue grew more than 19% year over year, driven by our industry-leading digital and specialty pharmacy capabilities. As we enter 2023, the first wave of new biosimilars will be coming to market, starting with competitors for Humira. We recently announced that Amgivita will be added to coverage within our commercial formularies alongside Humira and other branded products. Our approach to biosimilars reflects our commitment to drive the lowest net cost for our clients while providing members coverage of clinically safe, effective medications and ensuring continuity of care. Retail delivered another strong year, outperforming our initial guidance and long-term targets. Revenues for the year grew by more than 6% versus the prior year, and we generated $6.7 billion of adjusted operating income. We finished 2022 with another quarter of strong performance in both the pharmacy and the front store. Pharmacy revenue increased by nearly 8% versus the prior year and delivered another quarter of year-over-year market share gains. Front store revenues grew by nearly 7%, driven by demand for consumer health and cough, cold, and flu products. We are making significant progress advancing our strategy, which includes expanding our care delivery and health services capabilities in primary care, home health, and provider enablement. Last year, we announced the pending acquisition of Signify Health, which represented an important step forward in our value-based care strategy. Signify will strengthen our presence in the home and enhance our provider enablement capabilities. We now project that this transaction will close in the second quarter of 2023. At our investor day in 2021, we shared our vision to deliver a superior health experience for consumers. Central to our strategy is advancing our value-based care platform of capabilities that drive consumer engagement. This morning, we announced that we have entered into a definitive agreement to acquire Oak Street Health outstanding shares for $39 per share in cash, representing a total transaction value of approximately $10.6 billion. The acquisition of Oak Street Health will broaden our value-based care platform into primary care and accelerate our long-term growth. Primary care drives patient engagement and positive clinical outcomes. Although it is a very small proportion of total health spend, just about 10% nationally, it wields significant influence over healthcare utilization. Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality rates, and a 33% lower annual health care expense. Oak Street Health has a proven senior-focused primary care model that is scalable at a national level. Their innovative care model goes beyond typical primary care to provide patients with comprehensive preventative care to support overall health and well-being. With 169 medical centers across 21 states today, we see a significant opportunity to expand in the next few years and provide superior care to many more patients. Oak Street has a committed and experienced leadership team with extensive care delivery expertise and a best-in-class, fully integrated technology solution. Oak Street's model focuses on providing more coordinated, holistic, and connected care. Oak Street physicians spend three times longer on average with their 159,000 at-risk patients and drive markedly better outcomes. There are approximately 600 providers and 6,000 team members have a proven ability to improve patient outcomes and experiences. At a time when consumers are increasingly frustrated with their experience in the healthcare system, Oak Street's approach delivers a truly specialized care experience that drives a net promoter score of 90. The quality of this experience is evidenced by the fact that Oak Street was selected to be the trusted primary care partner of AARP and is the only primary care provider to carry the AARP name across all their sites. As part of CVS Health, we believe Oak Street's value-based care model will have a far greater impact on patients. Our unparalleled consumer touchpoints will expand Oak Street's reach and will allow them to engage with more consumers more frequently and more conveniently. The combination of CVS Health foundational businesses with Oak Street and Signify Health creates one of the premier multi-payer Medicare value-based care platforms in the marketplace today. But our ambition does not stop there. These Medicare-focused assets complement our established care delivery assets, including our over 1,100 retail health minute clinics in a number of ways, creating convenient access and additional clinical capacity for Oak Street with preventive care and chronic care services for seniors. enhancing access to our broad nurse practitioner workforce, and providing wraparound services tailored to seniors and those with complex conditions such as medication reconciliation and post-discharge follow-ups. The potential across CVS Health's base of assets is powerful. Together, we will transform the experience for consumers across the country. The Oak Street transaction is financially attractive and enhances our ability to accelerate our sustainable long-term growth. Sean will provide more details on the financials of the transaction, and we'll discuss the growth and profitability prospects of the Oak Street assets. At the close of the transaction, Mike Peikos will continue to lead Oak Street within CVS Health. Mike, we're so excited to welcome you and your team to CVS Health at the close of this transaction. Mike, would you like to say a few words?