CVS Health Corporation

Good morning, everyone. My name is Bruno, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the CVS Health Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you'd like to withdraw your question, please press the star followed by two. I will now hand over to your host, Larry McGrath. You may begin your conference.

Good morning and welcome to the CVS Health second quarter 2023 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 Curtin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question and answer session that will include additional members of our leadership team. Our press release and slide presentation have been posted to our website, along with our forum thank you 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'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we filed 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 in our most recent annual report filed in Form 10-K, our quarterly reports in Form 10-Q, the most recent of which was filed this morning. and our recent filings in form 8K, including this morning's earnings press release. During this call, we'll use non-GAAP measures when talking about the company's financial performance and financial conditions. You can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to our 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 closed another successful quarter, delivering on our financial commitment to the power of our diversified business model and focused execution of our strategy. We have been relentless in the pursuit of our goal to deliver superior health experiences by improving outcomes, lowering costs, driving higher levels of engagement, and broadening access to high quality care. So far in 2023, we have achieved several key accomplishments. First, we acquired Signify Health and Oak Street Health, two best-in-class value-based care assets. We are making progress integrating these multi-payer companies to create meaningful value. We are unlocking opportunities by connecting Signify and Oak Street to CVS Health assets, such as Aetna, Minute Clinic, and CVS Pharmacy, and driving patient engagement and growth. As we scale our healthcare delivery assets, and realize synergy opportunities, we will accelerate our long-term growth trajectory. Second, we expanded our individual exchange offerings to 12 states and successfully onboarded more than 1 million new members. Strategically, this is an important marketplace that grew to approximately 15 million enrollees in 2022. Our success with this population lays the foundation for future earnings growth at Aetna and creates connections for these members across all our integrated assets. And finally, our ability to generate strong cash flows enables us to invest in our long-term strategy and return value to shareholders. Through June 30th, we generated more than $13 billion of operating cash flow and returned more than $3.5 billion to our shareholders. We expect to continue to return cash to our shareholders and deploy capital to enhance shareholder value. Today, we reported second quarter adjusted EPS of $2.21 and adjusted operating income of $4.5 billion. Our diversified business strengthened by our exceptional execution positions us to navigate emerging headwinds in Medicare Advantage and a changing consumer environment. We are reaffirming our full year 2023 adjusted EPS guidance range of $8.50 to $8.70. Sean will provide more details on our updated outlook for the year shortly. Turning to our performance highlights for the quarter. In our healthcare benefits segment, we grew revenues to $26.7 billion, an increase of nearly 18%. and delivered adjusted operating income of $1.5 billion. Medical membership in the second quarter was 25.6 million, an increase of 1.2 million members versus the prior year, reflecting broad-based growth, including individual exchange, Medicare, and commercial membership. For our core commercial membership, this quarter marks the eighth consecutive quarter of membership gains. This growth reflects our differentiated product offering that addressed the total cost of care and the whole health of a member through our integrated solution. Medical cost trends were well controlled in our commercial and Medicaid books of business. Consistent with the broader industry, elevated medical costs emerged in our Medicare Advantage business, which became apparent in the latter part of the quarter. The primary driver of these elevated medical costs with greater than expected utilization in outpatient settings. Shawn will discuss these trends in more detail. In Medicaid, the state of Oklahoma awarded us a new statewide Medicaid contract beginning in April 2024 that will add approximately 200,000 members. This one demonstrates our market leading ability to comprehensively support Medicaid populations through our deep local relationship investment in clinical programs, and integrated well-being solutions. This quarter, we were able to offset the pressure in our healthcare benefits segment with continued strong execution in our health services segment. Revenues grew to $46.2 billion, an increase of nearly 8%. Adjusted operating income grew 3.5% to $1.9 billion. These results were driven by our pharmacy services business. We consistently demonstrate value to consumers and our clients by successfully managing drug cost trends and bringing innovative clinical solutions to the market. In the second quarter, branded drug revenue increased in part driven by the GLP-1 category. This expensive and fast-growing category presents new choices for the over 70 million adults in the U.S. who are living with obesity and the nearly 37 million people who have type 2 diabetes. We are well positioned to deliver value to customers in this category with our weight loss programs and utilization management tools that drive the lowest net cost for our clients. Every day, we create competition, drive the lowest net cost, and deliver transparency, value, and choice to our customers. This is the foundation of our continued success and our market-leading position. Turning to healthcare delivery, both Signify Health and Oak Street Health had strong quarters, delivering business performance consistent with our expectations. These assets bring core capabilities to our multi-payer, value-based care platform that drive optimal patient engagement with health services across multiple channels. In the short time since we closed these transactions, we've launched efforts to drive high patient engagement by leveraging our CVS health assets. Signify Health is core to our home health services strategy. Signify enables better health in the home and has an unmatched ability to build trust, and connect with 3 million patients in their home annually. We capture valuable insights into a patient's broader care needs during in-home evaluations and are able to create engagement points across other health services for our health plan partners. These engagement points ultimately drive better care, lower the total cost of care, such as reducing hospital readmissions and improving health outcomes. Survey results show that members who are highly satisfied with their Signify in-home evaluations are 26 times more likely to recommend their health plan and 74% more likely to consider additional health services. Signify's customers recognize the power of this trusted relationship and the value of these home services. Since the close of the acquisition, Signify has demonstrated exceptional retention of its health plan and health system customers. We've added new relationships, expanding the opportunity to bring Signify services to more Medicare members. CVS Health's trusted brand and our broad customer touch points further increase opportunities for Signify to engage with patients and expand the services they deliver. This quarter, there is a strong demand for both in-home evaluations and additional Signify services in the home. We launched new member engagement initiatives at select CVS pharmacies to drive IAT conversion of Aetna Medicare members and CVS pharmacy customers to Signify. Early results are promising with higher engagement across the CVS health channels utilized. Turning to Oak Street Health, we are accelerating patient growth through our broad community presence and ability to engage consumers across multiple channels. Today, there are approximately 1 million Medicare eligible seniors who visit CVS pharmacies each week that are located near an Oak Street clinic. We launched new member engagement initiatives focused on creating connections between Medicare eligible CVS customers, both in-store and digitally, and Oak Street health providers. We are also connecting Aetna Medicare members who are currently without a primary care physician with their local Oak Street provider to reengage them in their care. These initiatives will drive Oak Street patient growth and accelerate the path to mature clinic profitability while broadly serving the needs of Medicare members. As Oak Street expands to additional geographies, these opportunities to drive higher patient growth will continue to increase. By the end of 2023, we expect to have Oak Street clinics in 25 states. up from 21 at the close of the transaction. We will also open new Oak Street clinics co-located with CVS pharmacies this year and have already identified additional locations for 2024. We now expect to build 50 to 60 clinics next year. Turning to our pharmacy and consumer wellness segment, we grew revenues to $28.8 billion, an increase of nearly 8% versus the prior year. We generated $1.4 billion of adjusted operating income in the quarter, a decrease of 17% from the prior year, largely due to lower COVID related volumes. Our pharmacy business delivered another quarter of strong performance. Same store pharmacy sales increased by more than 14% versus the prior year, primarily driven by pharmacy drug mix and brand inflation. Same store prescription growth when excluding the impact of COVID grew by nearly 5%. This growth is fueled by our efforts to provide a differentiated omnichannel pharmacy experience that meets customers where they are. In our front store, we've grown market share, increased household penetration, and delivered historically high service levels. This positions us well to manage through economic volatility. In the quarter, our same-store sales, excluding OTC test kits, grew by more than 1%, demonstrating the resiliency of our front-store offering in a more challenging consumer environment. We also continue to make progress growing our digital numbers and sales. This quarter, we exceeded 53 million unique digital customers, up over 2 million from last quarter. Our digital sales increased 24% versus the prior year, including a meaningful increase of 65% in our over-the-counter health solution offerings. This offering is highly valued by our health plan members, allowing them to conveniently access their important OTC benefits. Last quarter, we discussed optimizing our cost structure. This morning, we announced the restructuring charge of nearly $500 million associated with the elimination of approximately 5,000 non-customer facing positions, as well as the impairment of non-core assets. These efforts are expected to generate over $600 million of run rate savings beginning in 2024. Our optimization efforts have also focused on identifying additional opportunities to drive efficiency and operational excellence using technology. For example, we've been selectively using artificial intelligence for some time and are increasingly finding opportunities to improve the efficiency of our operations, enhance our customer experience, and increase our competitiveness. When combining all of our productivity initiatives, we are confident we will achieve the $700 to $800 million of cost savings that we are targeting in 2024. These actions enable us to reallocate resources and invest in critical growth areas such as health services and technology, which are the biggest enablers of our strategy. We've taken meaningful steps executing on our long-term strategy with tangible proof of the value of our unique integrated offering. We look forward to providing more details at our Investor Day on December 5th in Boston. I'll now turn the call over to Sean to provide a deeper look into our results and our guidance. Sean?