CVS Health Corporation Q2 2023 Earnings Conference Call Insights

Key highlights from CVS Health Corporation (CVS) Q2 2023 Earnings Concall

Management Update:

• [00:14:22] CVS said its restructuring efforts are expected to result in over $600 million of annual cost savings starting in 2024.

• [00:27:37] CVS said it’s facing some headwinds in 2023, including uncertainty in Medicare Advantage, the potential for a weakening consumer environment, and reduced retail contributions from COVID.

Q&A Highlights:

• [00:30:11] AJ Rice at Credit Suisse asked if CVS is seeing any specific changes in consumer behavior that are impacting its retail business, or just anticipating changes. Karen Lynch CEO said CVS saw a pullback in consumer behavior in June due to economic volatility and potential recession, and CVS is reflecting this in their forward-looking approach.

• [00:37:58] Lisa Gill from JP Morgan enquired if the strength of the pharmacy side of the business has any impact on the medical side due to GLP-1s. Shawn Guertin CFO replied CVS expects its health plan business to be down in 2024 due to the partial termination of the Centene contract. The company is focusing on winning new business in the employer market and leveraging its full suite of assets, including Signify Health and Oak Street Health.

• [00:38:08] Lisa Gill from JP Morgan also asked about the different components of the business, such as GLP-1s, biosimilars, and RX services, and if there is any rebating activity around GLP-1s or programs around obesity and diabetes in the pharmacy services business. Karen Lynch CEO replied that CVS has experienced increased utilization of GLP-1 drugs in its various businesses. They have adjusted pricing accordingly in HCB. The pharmacy services sector is expected to be a competitive area for CVS, and their PBM will focus on achieving the lowest net cost. While GLP-1 has different impacts on each business, the PBM plays a vital role in risk management.

• [00:44:05] Michael Cherny from Bank of America asked for an update on the Medicare Advantage and exchange businesses, and how CVS is positioning for Stars for fiscal ’25. Karen Lynch CEO answered that CVS has made significant progress in its Stars performance, but the company is still waiting on the CMS cut point to determine its final rating. CVS’ exchange business is performing well, and the company plans to make it a profit contributor in 2024 and beyond.

• [00:46:42] Justin Lake with Wolfe Research asked about the discrepancy between the MLR miss in 2Q and the guidance increase for FY23? Shawn Guertin CFO said that the biggest driver of CVS’ guidance increase for 2023 is the change in outlook on its Medicare MBR.

• [00:47:01] Justin Lake with Wolfe Research also asked for more detail on the $500 million to $800 million increase in operating income guidance, and how much of that is due to changes in Medicare Advantage assumptions. Shawn Guertin CFO replied that the company is increasing its guidance for the health services segment, driven by pharmacy services. However, the company is decreasing its outlook for PCW, due to softening consumer demand.

• [00:50:08] Kevin Caliendo from UBS asked will CVS use less off-balance sheet financing to open more Oak Street clinics, as previously planned. Shawn Guertin CFO replied that CVS is accelerating its expansion of Oak Street clinics in 2024, targeting 50 to 60 new clinics. The company is still evaluating the possibility of a structured transaction to finance the expansion, but the updated outlook for 2024 does not include the benefit of such a transaction.

• [00:52:48] Nathan Rich at Goldman Sachs queried how much of the restructuring savings are included in the 2023 guidance, and what are the magnitudes of the other factors that drove the 2024 guidance revision. Shawn Guertin CFO answered that CVS expects some of the outperformance in pharmacy services in 2023 to pull through into 2024, but not all of it. The company has made provisions for potential headwinds in Medicare Advantage and PCW, as well as the full effect of the Oak Street acceleration.