The Cigna Group (CI) Earnings Call Transcript & Summary

Okay. Great. Okay. We're going to get started with our next session here in the afternoon stride here in the afternoon on day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst. Pleased to have Cigna featured here in our next session. With me is the company's CFO, Brian Evanko. This will be a fireside chat. So I think with that, we're just going to dive right in.

So first question, you guys had a press release out a few weeks ago back on February 28 just talking about some of your capital deployment priorities. I think also within there, there is a pretty clear message about not really contemplating any large-scale M&A. I think that was pretty clear as far as that part of the message maybe we'll just start. With that press release and just any other things you really want to be the takeaway point as far as capital deployment priorities. And we'll let the conversation kind of morph from there.

Sure, Steve, and good afternoon, everybody. It's great to be here face-to-face, by the way, and appreciate Barclays hosting us here in the week. But the press release that you made reference to was issued on February 28, and a few things I'd ask all of you to take away from that. For one, we have a tremendous amount of confidence in our organic path forward and our ability to deliver for Cigna shareholders over time 10% to 13% earnings per share growth. And in addition to that, for 2022, we wanted to provide our investors with some further clarity of how we would intend to deploy our capital. And so in that press release, you'll see we intend to repurchase at least $7 billion of our shares in the year, and we do not intend to pursue a large-scale M&A here in the 2022 calendar year. So that's not forever, but for purposes of 2022, we thought it was very important given the number of questions that came from our investors to provide clarity of our intended uses of capital. So we will continue to look for strategic m&A that's aligned with our goals. That's more in the smaller end. So think tuck-ins or bolt-ons that could have purchase prices in the hundreds of millions of dollars or maybe single-digit billions. But we wouldn't look for larger deals than that at this point in time here in 2022. We thought it was important to provide that level of clarity to the market in terms of how we intend to deploy our capital, and we have a tremendous amount of confidence in our ability to grow organically. And we really like the stock price right now in terms of using the share repurchase lever for purposes of deploying that $7 billion plus.

Okay. Okay. So maybe somewhat tied into that, we'll dive into some commercial questions in a few minutes here, but we'll focus on the managed care side of the business first and do some PBM stuff later. I guess first question is, maybe just off the back of that question around the capital deployment. So as far as growing on the government side, is there any shift where you still would try to grow that sort of organically or de novo? Or do we still see further amount of -- decent amount of activity, I think, on the M&A side as far as tuck-in deals on the government side?

Yes. For our Government business, in particular, you should think of 2022 as a margin improvement year. So we consciously chose to improve the margin profile in our Medicare book as well as our individual exchange book coming off of 2021 year, where the medical care ratios were pressured in that line of business in particular. So we'll have a net reduction in lives in the individual exchange this year compared to 2021. And our Medicare Advantage business will be roughly flat in terms of lives '22 versus '21. '23 and thereafter, we would expect to resume growth in both of those lines of business. So we're making the investments right now to prepare for 2023 accordingly. Amongst our 4 M&A priorities in no particular order, one of them is U.S. Government programs and services. And so Steve, we are looking at opportunities to accelerate that organic growth through targeted M&A, which could be Medicare, could be individual exchange, could be Medicaid, et cetera, if it makes sense. But it has to be strategically attractive to us. It has to make financial sense. Meaning, as we said, larger deals need to be accretive in year 1. And then finally, we need to have a level of certainty of deal closure in order to do anything in that space. But for purposes of 2022, whether it's government or other types of assets, we'll be focused on smaller tuck-in or bolt-on size acquisitions.

Okay. And since you mentioned Medicare Advantage, that's clearly been a topic pretty well-discussed at this conference for sure in a lot of the sessions. You mentioned a somewhat disappointing growth for '22. Maybe talk about what the favorable rates for '23, some of the things you can do to hopefully resume the growth in membership but also still work towards your target margin for that business as well. Maybe just provide some color on that.

Yes. As you indicated, for purposes of '23, the preliminary notice, which came through was quite strong at 4%-ish rate increase. We'll see what the final notice has in store in the next few weeks. But as we look forward to '23, we would expect, as I said earlier, to resume growth in the Medicare Advantage line of business. And part of that will be fueled by the revenue. But importantly, there are a number of other actions that we're taking to grow Medicare in the future. One of them is to expand the number of programs that we have in place to take advantage of our captive lives that are available to us. So we have about 120,000 commercial employer lives that age into Medicare every year, and we have not captured many of those lives historically. So we have programs that are now designed to capture more of those lives. We have about 1 million individual PDP lives and another 0.5 million [ Med Sup ] lives. All of those are captive Cigna customers, who may be better off in a Medicare Advantage offering. So we're looking to maximize that opportunity that exists. Secondly, we have the opportunity to spend even more in the way of marketing at a local market level. In some cases, this is with broker partners. In some cases, this is with our television ads. In some cases, this is our direct mail. So we have a marketing budget that we're looking at right now. We'll evolve that dynamically as we head into '23. And then lastly, we found some geographies last year. Our networks were a bit too narrow. And seniors, in some cases, are looking for broader networks. So we're going through some network refinements as we speak in some geographies that will make us more competitive as we step into '23. So we would expect to see a resumption of growth in the Medicare Advantage line compared to the flattish 2022 that we'll generate.

Okay. Yes, that's helpful. And then just to follow up on that quickly as far as the geographic overlap. You mentioned members morphing from commercial and aging into Medicare, but what's the percent overlap geographically of Medicare roughly with commercial? I think there was a rough percentage of them were around.

Yes. So currently, if you look at our Medicare footprint overall across the United States, we cover about 1/3 of the Medicare beneficiaries. So that provides us with a tremendous amount of headroom in the future in terms of growth as we enter more and more geographies over time. That won't all happen in 1 year, but over time, we're in more geographies. To your specific question with our commercial book of business, we're currently overlapping about 40% of the commercial employer lives. So you can take that 120,000 and adjust it accordingly. But it's still a meaningful amount of potential volume coming into our Medicare book in the future.

Yes. Perfect. Okay. And then as far as your commercial membership outlook for this year, it seemed like a decent number, but also you could argue it's conservative because it does not really include any potential Medicaid members in the U.S. morphing into your commercial book, which would be pure upside for you guys given your lack of Medicaid book right now. Maybe you could talk about potential upside in relation to that.

Sure. Yes. So for Medicaid, just to remind everyone, we do not have a presence in the Medicaid health plan space today. So in the past 2 years, as there have been some 14 million lives added to Medicaid managed care plans. We have not participated in that windfall, if you will, nor do we have the potential for headwinds in the future as some of those lives are redetermined and fall off the Medicaid roles. So that's not a risk to Cigna because we are not active in the Medicaid health plan space. But to your point, that does present some potential for upside for us to the extent that redetermined Medicaid individuals end up in a commercial employer plan or in an individual exchange plan, we have the opportunity to pick up some of that volume. That's not contemplated in our guidance. So that will be all upside relative to what we've communicated for 2022. For Cigna Healthcare, which is our overall health plan business, we expect at least 575,000 net customers to be added this year in '22 compared to '21. Most of that's going to come from commercial fee-based business, ASO self-funded employers. But again, it does not contemplate any redetermined lives coming in.

Okay. Great. So let's shift gears here a little bit, just talk about the medical loss ratio. Your guidance for this year is 82% to 83.5%. That assumes that total medical costs will be above baseline in 2022. It's getting harder also to distinguish between COVID and non-COVID expense. But we're asking every managed care company at the conference, just any insights you have on some of the medical cost trends so far in early calendar '22, where you obviously had COVID spiking in January but then falling off a lot in February and March. And then normally, there's like an inverse correlation of the non-COVID medical cost. But any color you can provide on what you're seeing as far as medical trends so far in calendar '22 would be great.

Yes. So our data so far for the commercial book, for the Medicare book, for the individual book has largely patterned the national data. Meaning January, we saw quite a bit of Omicron-related treatment and testing costs at our book of business. When that transpired, we also saw some non-COVID utilization deferral. So similar to the early parts of pandemic where there was an inverse relationship is embedded in your question, Steve. February, March has tapered off meaningfully. Meaning the amount of treatment costs given those infections coming down, both commercial, Medicare, individual, they all saw that same dynamic transpire in the months of February and March. But correspondingly, non-COVID utilization came up. So all in, we're off to a good start to the year as it relates to Cigna Healthcare. And if I were just to boil it up to the enterprise level, our volumes so far, membership, revenues, tracking very close to our expectations essentially in line. Our income in our medical care ratio for the first quarter so far, tracking in line to slightly favorable compared to what we would expect to see for the first quarter based on the first couple of months of data.

Okay. All right. Great. Okay. Maybe we'll shift gears here a little bit and just talk about the PBM side of the business. So obviously, a lot of attention on upcoming launch of biosimilar Humira in '23. Something -- going high level, I think most people hopefully understand by now that you'll have first one will launch in January that will not be interchangeable. Then you'll get the first interchangeable biosimilar Humira really in July. So the back half of '23 along with a lot of other noninterchangeable ones, but a lot more competition that would historically kind of bode better for PBM specialty pharmacy business model. So our thought is that the back half of '23 could be a lot more profitable than the first half for PBM business model. But I guess I'm curious how you're thinking about all of calendar '23 for biosimilar Humira and whether or not that could be a meaningful profit driver for the company? And just any extra thoughts around the mechanics around that, the way you're thinking about the market.

Yes. So broadly, we're very excited about the biosimilar opportunity that's in front of us. While there's some 20 biosimilars already in the market in the U.S., there are many more to come in the future. And we see this as a great opportunity to drive affordability for the benefit of our clients and customers. And when our Evernorth business drives lowest net cost to our clients and customers, it gives us the opportunity for value capture from the standpoint of our economic engine. So whether that's Humira, whether that's this past year, we've had success with Remicade [indiscernible] as examples. We got some other biosimilars coming to market this year. All of those provide opportunities for us in Evernorth given our expertise in managing the pharmaceutical supply chain and our Accredo specialty pharmacy. Those are great opportunities for us moving forward. And we would expect for biosimilars, on a drug-for-drug basis, if we move somebody off the reference into a biosimilar that the income contribution will be comparable or potentially even greater on a drug-for-drug basis. So for '23, it's a little too early for me to talk specifically about the numbers, given how far away we are from the year. But Humira should be net-helpful to us in aggregate as things settle in. But the adoption curve of the January -- if Amgen's first in January, the adoption curve will impact the timing, how things go the interchangeable in July, that's coming to market. That will also impact the adoption rates of the various drugs in the different cohorts whom we serve. So just a little too early for us to talk about '23. But over a multiyear period, we see a tremendous amount of value to be created and captured in our Evernorth business.

Okay. Yes. I mean, really, the big debate I think investors are having around biosimilar Humira is that there's this perception that a lot of the big PBMs already making so much profitability on the rebate dollars just on the brand side before it even has biosimilar competition that, that's when we'll maybe prevent a lot of the incremental profitability. My own view is that 95%-plus of that gets passed along to your customers anyway. So I think if under an interchangeability scenario, the dispensing profit you can make would more than offset what you might lose on slightly smaller rebates. But you're making rebates on the biosimilars anyway. So by my math, it still comes out net ahead. But I don't know if you could -- it sounds like you're kind of reinforcing what you just said that you also think directionally is probably favorable for the company as well, but the magnitude is still kind of TBD. Is that the right way to think about it?

I think it's the right way to think about it. And as I said, we would expect drug for drug to be neutral to favorable from an income standpoint on a per script basis. But also our specialization in this area likely allows us to take some additional share over time as we generate expertise in biosimilars and more and more employers or health plans are looking for a package of solutions from us, whether that be PBM and specialty pull through the biosimilars value, et cetera. So that's an opportunity for us in addition to the economics at a drug level is to generate some additional new business for the Evernorth portfolio.

Okay. Okay. And then thinking about some of the just PBM traditional selling season. So for the '22 selling season that took place last year, it was probably slightly disappointing for you guys from a retention standpoint. I think there were a couple of larger customers that were lost. Maybe you could talk about going now into the '23 PBM selling season that's basically starting kind of right about now. And what you guys are doing, anything different as far as your messaging, your marketing pitch and any visibility on any contract wins where maybe you think you're off to a better start this year?

Yes. Based on what we see today, our retention for 2023 will be similar or better than 2022 based on the totality of what we see today. And keep in mind, this is just retention. So it doesn't include new business that we may win in 2023. And important here to distinguish health plan market from employer market. Our health plan contracts are typically multiyear in nature, often 3 years, some longer than that. So they don't renew every year. The employer market tends to have more frequent renewal, so important to bifurcate that a little bit. But we're seeing strong demand for the value proposition that we bring to market in the PBM through Express Scripts. And we're seeing continued strong demand for the Accredo specialty pharmacy capabilities that are both embedded in that, but also in some cases, sold as point solutions. So we recently renewed the Department of Defense on a 7-year contract that's effective 1/1/23 through the end of '29. That includes some expansion of services, particularly in the specialty arena since the DoD saw the value that we're able to create for them in that lane. We also have a health plan that we've won for '23 as well. That was an existing Evernorth client but not on the PBM that we were able to expand that relationship. So that's an important part of the overall Evernorth portfolio is we're able to bring to bear a wider range of solutions in '23 than we had in '22, which is more than we had in '21. So as each year passes, we're able to bring more solutions to our employer clients and our health plan clients as they think about whole person health and the importance of managing the total person.

Okay. Yes. From all the survey work that we've done historically, the ability to control specialty pharmacy spend still ranks #1 as far as the priorities of the customers of PBMs and which ones they're choosing and why. I can't imagine you guys would be disadvantaged in any way around that. But do you still think that's a point of distinguishment for you guys in the RFPs? Or among some of the bigger guys, is the level -- is there more of a level playing field, and does it come down to price? Maybe just talk about some of those components on what's winning and losing contracts and then the selling season.

Specialty pharmacy is extraordinarily important to our clients. So the specialty spend as a percentage of pharmacies tipped over 50%. Right now, it's in the 51%, 52% range. So if you're not strong in managing the specialty dollars, it almost doesn't matter because it's such a big component of the overall spend. Our Accredo specialty pharmacy has an industry-leading capability in a number of different aspects of specialty pharmacy management. Our therapeutic resource centers, we have hundreds of clinicians and pharmacists who are managing at an individual patient level, what they need to do to stay adherent, when they need to check in with their doctor. We have [ Acaria ] script distribution capability that uniquely adds value to those drugs where you have temperature control requirements or you may have a finite shelf life for the drug. That's a distribution capability that helps, and then we partner with last-mile shippers to get the drugs to people's homes and/or retail locations. Those are all really important aspects in addition to the supply chain economics in terms of procuring the drugs themselves. But these specialty pharmaceuticals are extremely high cost, and so they require a high level of specialization. That creates a strong economic moat for the business as we think about the potential for others to compete against us. So the specialty dollars are extraordinarily important. They're also extremely important as people think about their medical benefits because you have more and more injectables that are in the medical benefit and that we're able to pull that through as well in terms of the Evernorth capabilities to Cigna's Healthcare business for purposes of managing affordability for our clients there.

Okay. If we talk about the cash pay side of the prescription market for a moment, obviously, a lot of attention, I think, from investors around that area right now. I guess, first, is there anything that PBMs are doing to maybe slow the progression of third-party's impetration into cash pay markets? And also, you guys had your collaboration with Amazon and Inside Rx. Maybe talk about how the evolution of the growth has slowed for that joint venture? And was there a notable pickup maybe in calendar '22 versus '21 from that particular enterprise?

Yes. So the cash market, while we pay attention to it, monitor it, respect it, remains a very small fraction of the overall prescription drug spend. So earlier, we're talking about specialty drugs. For the most part, specialty drugs are not in the cash market today. Cash market is predominantly going after lower-cost generics as the focus area. So it's an area we monitor. Our Inside Rx capability within Evernorth is what's essentially powering the Amazon cash card that you made reference to, but it remains less than 10% of all the drug spend in the prescriptions in the total market. So it's an area we continue to monitor. We're willing to serve clients like Amazon, who want access to our supply chain and our expertise. But it's not an area that we see as having a significant impact on funded benefits that we have through our employers or our health plan clients at large that we serve in Evernorth in the near term. So it's a monitor area for us but not an area of significant disruption today.

Okay. Then just kind of bouncing around, Express Scripts had a recent contract renewal with your largest -- your primary distributor, ABC. Was that just kind of a standard renewal? Or was there anything to call out there as far as any extra bells and whistles around that renewal? And should investors expect that to be a material source of savings on that renewal versus the price that might have been embedded within the prior contract?

Our ABC contract just renewed through '26 so it was a good multiyear renewal with them. As with any negotiated contract, there were gives and takes in there. But at the end of the day, I think both parties found it acceptable. And there were not really material changes in any of the contractual terms. And anything that was in there has been contemplated in our '22 guidance as well as our long-term expectations for Evernorth. So nothing particularly material I'll call out, Steve.

Okay. And then just for all the assets that are underneath Evernorth beyond the PBM, any other ones you want to call out? Do you think it would really be potential major growth drivers for '22 and/or '23 specifically?

Sure. As you think about our Evernorth business, as I made reference to earlier, it will continue to evolve, and the scope of services will continue to expand. So today, you can think of there being 3 scaled assets in Evernorth. We've got the Express Scripts PBM, the Accredo specialty pharmacy and the Express Scripts mail order capability. Those are all scaled assets today that are strategically complete assets. Meaning they compete, and they win every day for business. And we don't need to significantly change the composition there. We'll continue to invest in each of those assets, but they're strategically complete today. We have other parts of the Evernorth portfolio that are more nascent. One of those is our Care Plus business. So within Care Plus, you can think of care delivery, you can think of care coordination and care management. Virtual care falls into that space. So we acquired MDLIVE last year, off to a great start and the year since we've owned them. Behavioral health care falls into the Care Plus vertical, home-based care, remote monitoring. These are all areas that we expect to see meaningful growth in the future in the Evernorth portfolio. They're getting a lot of our investment dollars in terms of organic investment. And they're on our M&A priority list as we think about where we might look to deploy capital from an inorganic standpoint. Additionally, in the data and analytics space, our intelligence vertical is an area that today predominantly serves our internal clients like Cigna Healthcare, but tomorrow, will also serve more external and affiliated clients. So those are areas outside of the 3 scaled assets in Evernorth that will be growing and will help to contribute to the 4% to 6% long-term growth in the top and bottom line for Evernorth.

Okay. And then just quickly, you don't have to go into heavy detail on this, but as far as just the outlook for drug price reform, anything. It's kind of run hot and cold as far as the temperature in Washington, but also there was some particular draft legislation on DIR fees. I think you kind of mentioned that given enough time, you could probably derisk that. But maybe just spend a minute or less on that, I guess, just your outlook for drug price reform.

Yes. Obviously, drug pricing continues to ebb and flow in terms of the intensity from politicians and legislators. And it's something that we obviously monitor closely. At the current point in time, it feels to be a little bit less intense in terms of the focus on it, the DIR proposal that came through as an example of people looking to make some degree of change. But as you said, provided that there's adequate lead time, our Evernorth business has many value creation levers and therefore, many value capture levers. So we're not necessarily reliant on DIR as a vehicle or a mechanism by itself. If there were changes there, we would rearchitect our value capture and value creation models accordingly. So provided there's adequate lead time, we're fully confident in our ability to navigate through changes such as that.

Okay. All right. Well, we're in our final minute here, so I do want to tackle a couple of audience response survey questions here. So you guys have your BlackBerry-like devices in front of you. So we can tee that up in the back. So I guess notwithstanding Cigna's press release on February 28, I want to ask the investors in the audience how would you like to see the company deploy its excess capital in 2022? Number one would be managed care-related M&A; number two would be pharma services M&A; number three would be greater share repurchases if that's even possible; number four would be repay debt, and number five would be invest in core growth. We've got a timer here counting down 5 seconds. [Voting]

So 50% is the #1 answer at greater share repurchases, 45% for managed care M&A and 0% on pharma services M&A, 0% repay debt. Interesting feedback, I guess, for the company on that one. Okay. And then number two, we talked about some of that debate point around biosimilar Humira. So the question is, do you believe that biosimilar Humira will drive meaningful accelerated profit growth for the overall company in 2023? Just a simple yes, no question where 1 is yes, and 2 is no. You got about 5 seconds left to put the response there. [Voting]

Oh my gosh, exactly 50-50. Oh, well, so okay. Inconclusive, I guess. All right. Well, we're going to end it right there. So thanks, everyone, for your time. Thanks, Brian.

Thank you.

Everyone, enjoy the rest of the conference. Thank you.