CVS Health Corporation (NYSE:CVS) 2022 Barclays Healthcare Conference March 15, 2022 8:00 AM ET
Company Participants
Shawn Guertin – CFO
Conference Call Participants
Steven Valiquette – Barclays
Steven Valiquette
Welcome everyone to day one of the Barclays Global Healthcare Conference. I’m Steven Valiquette the Healthcare Services Analyst here at Barclays. Pleased to kick things off with CVS Health. With us from the Company is Shawn Guertin, Company’s CFO. This will be a fireside chat. So, I think with that, I guess we’ll just dive right in.
Shawn Guertin
Sure.
Question-and-Answer Session
Q – Steven Valiquette
Okay, great. So, maybe we’ll kick off with some topics, this first question kind of ties to a lot of the parts of the overall company. Maybe just some of your latest thoughts around the COVID impact from here on out. It’s been pretty topical for investors. Obviously, January was a pretty clear trend with COVID being pretty high. It’s obviously tapered off since then. And that has impact, both on the COVID and non-COVID utilizations. Now, over a few months out from that most recent case resurgence, maybe just offer any additional color on that trajectory of COVID-driven trends in both, the retail and the HCB segments.
Shawn Guertin
Great. Thank you, Steve, and good morning, everyone. Just one housekeeping, as I have no slides, I do just want to point out that I will be making forward statements that I’d ask that you consult our description of our Risk Factors that are contained in our most recent 10-K. But, back to COVID.
So, this obviously, remains sort of the biggest item in terms of forecasting that is creating uncertainty to your point. And I think before we go into details, it’s always important to remember that we really had two businesses that have just been going in opposite directions, as COVID has ebbed and flowed. When case counts go up, our retail performance has been better and obviously, the HCB performance has been pressured and vice versa. So, all of these trajectories have moved very much in sync with case counts overall that you see in the country.
So, as Steve mentioned, we were continuing to see a lot of the Omicron activity in January. That showed up obviously in treatment and testing costs, in the insurance business, but it also showed up in high levels of testing and vaccines in the retail business.
From the middle of January towards the end of January, that really has started to fall precipitously, much like you’ve seen on the national statistics. And so, in that vein, while we’re still — we’re not at the mature point in the quarter, you can start to see the HCB case counts also coming down. So testing and treatment would likely come down.
We’ve seen a pretty big falloff in February on vaccine activity from where we were in January. Testing is also down but probably not as much as vaccines event. And the over-the-counter testing has remained pretty steady. So, I think what you’ll see is that this pattern of sort of offsetting movement I think is likely to play out through the first quarter of this year. And we’ll see what the year holds. I know there’s obviously — there’s been a lot of media lately about potentially another turn up in case counts. But, it’s too early for us to determine that.
Steven Valiquette
Okay, great. Maybe just a few more questions on the retail segment for a moment here. So, on your brick and mortar strategy, you announced last November, the closing of 300 stores year-over-year for next three years or so. Just any updates on the progress of that? And any thoughts around either change in the size or scope of that to make it larger or smaller based on what you’re seeing so far?
Shawn Guertin
Right. Yes. I think it’s unlikely. Again, it’s pretty early. We’re only a couple months into it this year. I think it’s unlikely in the near-term that we would change the size and scope of it. We did go through a pretty thorough analysis. And I think it’s important to remember what this really was. This really is about the dedensifying as opposed to sort of expand — or decreasing our coverage, if you will. And this was really about where clusters of stores had been built up in certain geographic areas.
And so, I would say, so far, so good. We’re certainly in the first wave of what we’re going to take on this year. And the real economic lever here is how many of these scripts will transfer from the closed store to the open store. And fortunately closing stores is something that we actually do every year. So, we have a very good [Technical Difficulty]. There’s a combination of factors that are around price and products, and then there’s a combination — then there’s distribution of that product. And I think, on price and product, it has always started with Stars. And we’ve always been in a very strong position in Stars and continue to be. That allows us to find those products and price combinations that are attractive in the market.
And we have long been adherent to the zero premium philosophy. Even when others were introducing premiums, we really fought hard to maintain sort of consistency around the zero premium product. But there’s also other element of plan design that we think about a lot. So, getting that product positioned sort of correctly is a big part of that.
But then, it’s about distribution of the product, right? And we’ve always, again, had the philosophy of having as wide a net as we can on distribution. So, we’ve worked. We have internal resources, we have external partnerships, and we’ve really worked across all of those. And it’s not just having them, right? It’s making sure it’s effective, making sure it’s market sensitive. But there’s been some other growth aspects for us that are not insignificant in this equation.
Duals were probably underpenetrated compared to some of our competitors on Duals. And so, this AEP, we grew much faster in Duals than our overall block, as you’d expect. So, that’s been a positive. And conversions, conversions from PDP of which we have the largest PDP plans. Conversions of PDP to MA have become a meaningful item and in even agents from commercial to MA have started to become an item.
So, it’s really very multi — a lot of the discussions become about kind of one variable in this equation. But, I think to drive market or better than market growth that, you really need to be operating across that whole spectrum pretty effectively, to do that, just given the level of competition in this space.
Steven Valiquette
The only quick follow-up on this topic, we could probably spend the entire 25 minutes just talking about the sales channels, et cetera. But my only quick follow-up would be, if you have any sort of just approximation of either the Aetna, MA, membership or growth each year that just comes from the internal versus the external marketing capabilities? And also, are you content with that mix right now, the amount of good follow-up around that?
Shawn Guertin
Yes. I mean, I think, it’s something we think about all the time. I think the internal driven sales are, I believe less than 20% of the total sales. So, we haven’t — we’ve always had national distribution partners. And we’ve had some of these other kind of e-broker types that we’ve sort of worked with. So, those are important as well. So, I think we always think about — it really is about acquisition costs, right? And so, we always aspire to get a low cost of acquisition. But again, I also think this is about having a very wide — because we’re also selling that stuff and the PDP. We have a wide array beyond sort of just MA right now, so. But, it is something that — the mix of that is always about distribution effectiveness and total cost of acquisition.
Steven Valiquette
Okay. Maybe shifting gears over to Medicaid. So obviously, a lot of investors are focused on the redetermination process that is still expected to begin at some point this year. It seems like every time we ask companies for updates on this, gets delayed a little bit further. So, maybe just give us your latest thoughts on how you see that progressing as far as just the chronology and how that might impact the Company for this year relative to what you guys were previously?
Shawn Guertin
Yes. So, we have built in some degradation to our Medicaid membership in the back part of the year related to the expiration of the PHE. The PHE has been formally and officially extended I believe to about mid-April. I think there’s a 60-day buffer period, even when it comes off. So effectively, it’s been extended through Q2. It seems likely to me that it may roll another quarter. But I think then, at that point, we’ve begun to assume that as it comes off, we’ll begin to get some of the, like I said, the degradation in membership.
I do think this will vary by state and will probably also vary by pace. So, I don’t think it’ll be all at once. It’ll be sort of maybe phase over a period of two to four quarters or something like that. And right now, we haven’t built in anything in our guidance that we would be catching these members in an ACA plan or commercial group plan or anything like that. I think that’s — I don’t think we have the visibility right now to do that.
Steven Valiquette
Okay. All right. Let’s shift gears and talk about the PBM segment for a couple minutes here. So yes, obviously, it’s been a high degree of focus on the anticipated launch of biosimilar Humira next year. Maybe just your latest thoughts on the launch pipeline, not only Humira maybe, but also beyond that, because you guys touch a lot of areas of the overall pharma supply channel and opportunities you see over the next several years side of this Humira and beyond Humira will be helpful.
Shawn Guertin
Yes, no. And I think the broad category here of biosimilars and specialty generics, it does look like there will be a period over the next two to three years where a great number of these come on. And as you guys know, as well as I do, some of these drugs are huge, right? And when they do hit, they will have a very large impact.
So, the prospects here of having the generics come in, what we’ve seen that do in the past, both the customer costs, but also sort of our business has always been a positive. And we think that this is one of those factors that I think potentially can keep the PBM maybe a little higher than mid single digits with its sort of full impact. I think, one of the tricky parts of this maybe is the timing. These are big drugs, they’re going to be chunky, the timing has been difficult to predict. So, it may be harder for us to do that. But I do think that they will have an impact. And for us, it all starts with the lowest net cost for the customer. Whether we get there through the branded agents, or whether we get there through generics, that’s something we always go through about finding that lowest cost point.
And one of the real, this has really been a key to the PBM success, we just publish our latest trend report through the third quarter of ‘21. And I think our non-special — our overall trend was I think 2.5%, our specialty trend was a little less than 6%. That’s the first time we’ve ever printed I think a mid-single-digit specialty trend in the history of the people doing that study. So we will aspire them to sort of get that lowest cost and then sort of adjust off of that.
And to your point, there’s a number of things sort of queued up. But the timing of this, I think, I saw something that there’s been maybe 32 biosimilars approved or something like that, and 10 or 11, or 12, or something still aren’t even in the market yet.
So, there’s a lag throughout this and a timing element. That’s a little bit tricky. But, this — certainly specialty pharmacy, largely, but this item in particular, I think, is one of the things feels like an opportunity for the PBM business going forward, over the next few years for sure.
Steven Valiquette
Actually somewhat tied into that but just one of the next questions, but the — as far as the PBM success you’ve had the last selling season, maybe the next few is specialty pharmacy spending still the primary focal point for customers, and you have some muscles you can flex as an organization to control that. Is that part of the…
Shawn Guertin
Yes, absolutely. I think, the PBM team would say that it’s probably — when you get by the usual discussions on cost and services, probably one of the bigger differentiators, and then one of the things that’s been a bigger part of the sale, I mean, they’re more than 50% of pharmacy expense now. So it has that level of importance. But our digital tools are really excellent in this. And our Specialty Connect program is also something that people find value, again, being able to pick that drug up at the pharmacy versus having it may be shipped to cold storage as an example, is something that optionality people like. So, I think it’s probably been the most important part in the PBM selling cycle, if you will, that has gotten us success, just like you said, given our size and sophistication.
Steven Valiquette
Okay. Last thing, just on PBM and just drug pricing. Obviously, the drug price reform has kind of been front burner or backburner in Washington over the last 6, 12, 18 months? And what are your latest thoughts on, what you’re focused on there, just updates on drug price reform, just from your own perspective on what’s happening right now?
Shawn Guertin
Yes. It’s hard to really react to — to know which way this goes. I think it will be one of those items, given its size and visibility that is always sort of in discussions. And if I go back to, for example, there was a discussion earlier about the DIR part of this and that being at the point of sale. And a lot of these things really go back to — in that case, we’re not sure that that really lowers costs. So, we’re always advocating for things that truly lower costs for the consumer. And that I’m not sure that one would. But even in that one, that’s a good example, we saw that through to potentially creating higher PDP premiums. And if we had to navigate this, again, it’s about lead time. So, if we’re going to make these changes, give us the lead time to really appropriately sort of position ourselves both administratively to do it, which sometimes there is no small task, but also to do it sort of financially in our products. But it certainly does feel like an item that’s always going to be in discussion in one form or another.
Steven Valiquette
Okay. All right. Shifting gears here, again, maybe just provide us an update on your latest thinking around the Company’s primary care strategy and what you’re doing to attract physicians to the business. And also how critical is M&A as part of your overall primary care expansion that you guys are talking about?
Shawn Guertin
Right. So, as we take a deeper step in the care delivery, our real focus right is to not only sort of be in that space, but connect all of our assets to truly provide a differentiated experience, whether that’d be pharmacy, MinuteClinics, whether that’d be the insurance. The ability for us to kind of connect fulfillment and care delivery, really is somewhat unique to us and I think is a real opportunity.
We certainly could set off on this voyage de novo. But I think timing wise, and I also think just the quality of asset wise, it’s going to make sense to at least get this started with some capability focused M&A. We — a lot of these guys have good managements and talents, who’ve been doing this now for a number of years, who’ve learned a lot of lessons, can really see the conductivity points with us in terms of where we could drive value faster. A lot of them have excellent technology. And this is especially true in the provider facing side of the world. We have a lot of good consumer technology, digital technology, but we really don’t have the provider workflow side of this.
So, those kinds of qualities, I think, save us in — real lot of time if we pursue these through M&A. And we talked about an array of potential capabilities. There’s the clinical care delivery part that we talk about a lot. We’ve also talked about an MSO capability, because it may make sense to partner as opposed to own in certain markets. And we can still sort of provide that fulfillment experience, even with partner physicians, we thought about the MSO capabilities. We’ve talked about home health, being a vital link and that our ultimate vision is to sort of have home and virtual and community all sort of fully integrated.
Steven Valiquette
Okay, great. All right. Well, with that we got a pretty full audience here. I want to tee up the audience response, various questions. I guess a couple things. I guess, we’ll get the audience’s view on some of the things we talked about here, just for fun. This is one of my favorite parts of doing this. So, everyone’s got their clicker in front of them if they want to vote on their thoughts around this.
So, first question, how would you like to see the Company deploy its excess capital in 2022/2023? One would be managed care M&A, and we’ll add primary care into that. Number two would be pharma services M&A. Number three, greater share repurchases. Number four, repay debt. Or number five, just invest in core growth? Five seconds left for answers here. Watch the clicker.
Number one, managed care M&A and primary care was number one answer.
Okay. Question number two. Do you believe that biosimilar Humira will drive meaningful accelerated profit growth for the overall company in 2023? One, yes; or two, no. Pretty simple. And to be clear, this is the investor view of this, not the Company view, so just to be clear.
Oh, wow, actually, yes, looks like 60%-plus say no. So, that’s kind of interesting, and only high-30%, yes. Interesting.
Okay. Question number three, final question here. Just the Company has announced plans to close 300 retail pharmacy stores over next couple years. Do investors believe this is the right number or… Well, number one, should it be higher than 300? Number two, is 300 the correct number? Or number three, should it be lower than 300 as far as retail store closures for CVS?
Well, 50%-plus think it should be higher than 300.
Shawn Guertin
And it is over the next few years, I think. That number would really largely be this year.
Steven Valiquette
But 35%, 40% think that’s the correct number. And only about 10% think it should be lower than 300. This is also a nice reminder, I need to get my vision checked. That seems kind of blur to me right now. So, if I could just fix that.
So, with that we’re out of time. I thank everybody for joining us in this CVS session. Thanks Shawn.
Shawn Guertin
Yes. Thank you.
Steven Valiquette
Thank you.
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