CVS Health Corporation (CVS) Earnings Call Transcript & Summary

Good morning. Welcome to Morgan Stanley's Global Healthcare Conference day 2, and thank you for joining us today. I'm Ricky Goldwasser, Morgan Stanley's healthcare services analyst. And before we get started today, please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press, and if you are a member of the press, please disconnect and reach out separately. And for important disclosures, please see the Morgan Stanley research is closer website at www.morganstanley.com. If you have any questions, please reach out to the Morgan Stanley's sales representative. And with that out of the way, I'm very pleased to have CVS CEO, Larry Merlo; and CFO, Eva Boratto, here with us today. I mean Larry, Eva, good morning, and welcome to our conference. 2020 has been obviously a roller coaster year as you've worked in the COVID impact and have played such a critical role in testing nationwide and then just building and strengthening and the stark relationship that you have with the community. So Larry, maybe I turn it over to you to provide some opening remarks and discuss how you've been working through COVID as the enterprise, and then we can dive into questions.

Great. Thanks, Ricky, and good morning, everyone, and even I are certainly pleased to have the opportunity to speak with all of you today to provide an update on our business. And we've also posted slides to the Investor Relations portion of our website this morning. And as always, I'd like to remind you that we're going to make some forward-looking statements today, which are subject to risks and uncertainties, and actual results may differ from our projections. So please refer to our SEC filings, including the Risk Factors section of our most recent 10-K and 10-Q for some of those risks and uncertainties. So in our core, CVS Health's mission is helping people on their path to better health, and we're committed to making care more affordable, simple and local while driving better health outcomes. And we are, Ricky, as you mentioned, in a very unique position to do that with a trusted health care brand, clinical expertise and certainly our unmatched local community touch points that together can fundamentally improve the way health care is delivered in our country. And we brought together these diverse assets that enable a more holistic health care experience across what we call this triad of care. And we define it as in their community, in their home or in the palm of their hand. And we see enormous opportunity for our offerings as we look at the underlying trends in health care, whether it's an aging population, the ongoing growth of the incidence of chronic disease as well as a focus on wellness and healthy living. And with our broad and differentiated assets across our integrated platform, we are already having a meaningful impact in the lives of those we serve. And Ricky, as you mentioned, with the COVID-19 pandemic, we have been called upon to deliver essential health services, create new solutions and make them accessible in nontraditional settings. And as a result, we've accelerated elements of our strategy to meet those demands, whether through home delivery, diagnostic testing, virtual care and in-home health care services. In the community, we've expanded our diagnostic testing capabilities, and we've created the largest COVID-19 testing program in the country. We've now administered more than 3 million tests to date. And we're also developing capabilities to assist with clinical trials and, when available, administer COVID-19 vaccines, whether in our community locations or on-site with our client-facing return-ready and long-term care solutions in nursing homes and skilled facilities. To serve our customers in their homes and in their hands, we've expanded Coram home infusion services. We've conducted more than 160,000 visits through the second quarter, freeing up important hospital capacity. And we also accelerated our virtual care offerings through our new E-Clinic offering. We now have more than 7,500 visits conducted through the end of August, and that's up over 40% since just since the end of June. And while we quickly pivoted our business to meet these emerging consumer needs, we also continue to advance our long-term strategy. At the end of August, we have completed the conversion of 275 of our retail locations, the HealthHUBs across 26 states. And we remain on track to reach approximately 1,500 locations by the end of 2021. So all of this points to the fact that CVS Health is much more than just a drugstore. COVID-19 has driven us to bend our innovation curve markedly and accelerate solutions that will have long-term sustainability. And this really underscores the fact that our strategy is right and more important that it is working. Now just a few comments on our recent performance, and we have been providing more frequent updates in light of the pandemic, and our solid second quarter performance demonstrates the underlying strength of our diversified and integrated business model. We delivered total revenue growth of 3% and strong adjusted EPS growth of 40% year-over-year. Importantly, through 6 months, our enterprise performance is in line with our initial expectations, excluding COVID-19. Following significant impacts of COVID in the quarter, we continue to see metrics normalizing across the enterprise through August. And again, we provided more details on preliminary August performance in the presentation posted on our website this morning. And finally, on the balance sheet front, we recently completed a debt tender and issuance reducing our outstanding debt by $2 billion and improving our maturity towers, while simultaneously lowering interest payments in 2020 and beyond. And we provided an update on the impact of this transaction to our full year GAAP EPS outlook in the materials we published this morning. Our adjusted EPS for the full year remains unchanged in the range of $7.14 to $7.27, and we remain committed to our long-term goals, including delivering on our EPS growth targets, executing on the integration synergies, our cost savings initiatives and our deleveraging plans. So with that, Ricky, let me turn it back to you, and let's jump into the questions.

Great. Thank you, Larry. There's a lot there to unpack in the next 25 minutes. So starting with the strategy. To your point, the COVID pandemic really underscored the strength of the strategy. But when we think about the last 6 months, how did these last 6 months shape your view on the timing of the different components of the strategy? And then especially, I think we had a lot of questions on the digital footprint. And how do you balance physical format with digital ones in a world where consumers now feel more comfortable in doing things remotely?

Yes. Ricky, it's a great question. And as I mentioned in the prepared remarks, the last 6 months has really validated our strategy to deliver care across this -- I keep -- we keep calling it triad of care. Some may describe it as, "Larry, aren't you really defining omnichannel for health?" And that's another way of describing it in the community, in the home and in the palm of our hand. And we are seeing an accelerated shift towards this multichannel integrated health care delivery approach. And look, I talked about what we've done with testing in the community, but it doesn't stop there. There are going to be broader opportunities as we move forward as it relates to a broader diagnostics, certainly vaccines, immunizations. And we are very well positioned to be a leading provider across all of these. We talked about in the hand, and Ricky, I'll share just one example that creates an intersection of in the hand and in the community because what we were able to do with testing, we actually leveraged our digital capabilities, became very easy for the consumer to go online, fill out a questionnaire, put any of their medical information and for billing purposes, actually schedule an appointment and head off to their near CVS. And as a result, it was a very seamless experience for our consumers. We didn't have lines of cars at our drive-throughs like you saw in the news and other places. So it's a great example of how those 2 need to come together. And the fact that there are many elements of health care that, eventually, you have to -- face-to-face, you actually have to touch someone with which to finish what may have been started digitally. So it's this -- Ricky, it's this balance between the physical asset and the digital properties. And again, we're very well positioned in that regard. And Ricky, to your point, it did change some of our priorities and allowed us to accelerate some things that may have been further down the road. But what I mentioned this morning around our E-Clinic offering is another great example that regulations were waxed. We've got pharmacists and nurse practitioners now being able to practice to a higher level of their license, when you think about telemedicine for nurse practitioners, immunizations for pharmacists. And we stood up our E-Clinic offering, which is staffed by our nurse practitioners, and as I mentioned, without a lot of fanfare is over -- now over 7,000 visits. So again, a lot of this leverages the CVS brand that exists in the marketplace as well as the accessibility of being in the community.

So Larry, we're actually getting a number of questions on the webcast around your telehealth and digital strategy. So if we can dig a little deeper on that one. I think one of the questions is that also in the slide that you published today, you talked about HealthHUBs and enhancing telehealth and digital capabilities. So when you think about that, you currently have relationship with the telehealth provider. The question here is, does CVS utilize -- can you utilize your own nurse practitioner, your own pharmacist, your own platform and assets? You do telemedicine yourself. Isn't that complementary to your HealthHUB strategy?

Yes. Ricky, your comment is really spot on. It is very complementary to our strategy for the reasons with which we started the conversation, that as we think about this triad of care or omnichannel for health, there's an intersection between the digital experience, the virtual experience as well as the physical asset. And there are going to be many, many use cases where it's important that they come together to create an end-to-end experience. And yes, Ricky, it's -- I mentioned a few minutes ago that we have seen regulations relaxed in terms of responding to the consumer needs in the pandemic. And much like everyone has been talking about, will we ever go back to everything that we were doing in January, I think we -- everyone answers that question, no. And there are many, many positives that are coming out of what pharmacists and nurse practitioners have been able to do with relaxed regulations in terms of making health care more accessible and as you think about site of care more affordable. So yes, what we have been able to stand up in a relatively short period of time with a nurse practitioner telehealth model, the team has done a terrific job there. It's very relevant. And we believe that we can add on to that in those used cases where it is important that, that patient, that customer, nurse practitioner starts, but there's a referral on to a physician. And we'll be looking to utilize our network as a way with which to execute that strategy.

And just one follow-up question on that. Do you envision with -- because if we think about health care, we're thinking about access, we're thinking about relationships. So do you envision a world where I can go into a HealthHUB and have a conversation with a nurse practitioner, but then when I'm at home, I can connect through telehealth to that same nurse practitioner for continuity of care?

Absolutely, Ricky. It's all part of that triad of care and that seamless experience. And the connectivity that can exist electronically with the health record and the investments that we have made leading up to this is serving us well in terms of being able to create that seamless experience across dimensions of care to include -- including the member, the customer, the patients primary care physician when appropriate.

Ricky, that word, connectivity, is one embedded in everything we're doing, how we bring that consumer experience in a more connected way through digital, through the example you just gave and other services we'll provide.

And then one more to ask because we're getting a lot of questions on the HealthHUBs. Obviously, Larry, you're talking about, I think, 275 retail HealthHUB retail locations already open as of the end of August, on track with your goals by the end of 2021. When will you have the data points? And I think a lot of investors in the market have been looking for in terms of the efficacy, the proof points related to the HealthHUBs.

Yes. Ricky, I'll start. Larry, you can jump in, right? As you know, Ricky, the performance, right, has been affected as you look at COVID and volatility in the data. So what we want to make sure we'll provide those proof points as soon as we have the critical mass and stability coming out of COVID. We recognize the importance of that from investors and the desire for that, and it's certainly top of mind. As we look at how they've performed qualitatively, I'll say, they continue to outperform the control group, right? One of the proof points that we highlighted last quarter was around chronic care visits, an outsized increase relative in chronic care visits in the HealthHUBs, which is part of our strategy, right? How are those hubs supporting chronic care, not just acute care. And more pointed is Aetna's performance was outsized relative to its market share in that area. So we feel good about -- very good about the direction we're headed in, and we'll continue to report out as things stabilize.

Ricky, the only thing I would add to what Eva mentioned is, yes, we did shut off all of our marketing that we had scheduled. And as shelter-in-place orders took effect, we thought that, that would certainly be kind of productive. And it'll be later this month where we will reinitiate the plans that we had back in the April time frame. So we have that to look forward to as well.

And then, Larry, in your prepared remarks, you talked about your role in the future in administrating the vaccine. Can you just talk a little bit about what do you -- how do you think about the vaccine revenue opportunity? And what do you think the timing of a vaccine would be for the general population, which I kind of like think about the pharmacy setting is ideal to administer to the general population? Scott Gottlieb talked at conference yesterday, he kicked off the conference, and he was thinking sometime later in 2021 before we reach a general population. So your thoughts there. And then -- and I'm going to sneak in a question that we've got from the audience is also, what are your expectations for the relative strength or weaknesses of the flu season this year? Is there -- there are a number of different opinions out there, whether it's going to be a stronger or weak flu season.