The Cigna Group (CI) Earnings Call Transcript & Summary

So good morning, everyone, and welcome to our next fireside conversation here at Morgan Stanley's 2022 Global Healthcare Conference. I'm Ricky Goldwasser, and I am one of Morgan Stanley's health care services analyst. And it is my pleasure to have David Cordani, CEO of Cigna joining me this morning. So with not much ado, first of all, disclosures; for any regulatory disclosures, please see the Morgan Stanley website. And with that, I will pass it to David for some introductory remarks.

Sure. Thank you, Ricky, good to be with you today, and thank you for hosting this. Hello, everyone. Good morning. I'll just be brief 5 minutes or less and just highlight a few headlines. First, stepping back, we're quite pleased with the performance of our organization broadly across our franchise as we stepped into this year and through the first half of this year. We recognize the environment is dynamic, it's fluid, it's changing. And the marketplace has continued to do that. Against that backdrop, as you think about the future, so the next 5 years that sits in front of us, we believe quite strongly that there are 3 indisputable forces that are rapidly reformatting and forming the health and well-being space. And those are: the rapid evolution of and change around pharmacological innovation; second, the acceptance of globally, the indisputable connection between physical health and mental health and the opportunity to coordinate both together as opposed to separate; and third, with more advanced technology, data availability and consumer orientation and interest, what we call alternative sites of care. How do you bring care and service closer to the individual to make it much more personalized, coordinated, convenient and of higher value? And we've worked to position our organization to take advantage of those trends to deliver differentiated value. To do so, we have 2 operating platforms. We have our Evernorth service platform, which we'll come back to in a moment; and our Cigna Healthcare platform. So think about one as a health service portfolio. Think about the second one, Cigna Healthcare as a benefits portfolio. Within those 2 business platforms, they're independent in terms of their growth objectives and then codependent from a leverage standpoint at some levels. You can think about our business and our value creation of framework in 3 ways. We have foundational businesses. And the 3 big foundational businesses you should think about are: core pharmacy services; U.S. commercial; and our International Benefits business. Those businesses are mature, well-established, scaled and will generate low- to mid-single-digit sustained growth rates. They also happen to oftentimes establish core relationship foundations with corporate clients, health clients and governmental entities. Today, that's about $100 billion of our revenue. Second, we have our Accelerate businesses. Our Accelerate businesses are our specialty pharmacy business, both direct to patient through Accredo and direct to health care professionals through CuraScripts; our Evernorth Care business, which is over $10 billion of revenue already; and our U.S. government business. That's a bit over $70 billion of revenue within the franchise. Those businesses, because of positioning and secular tailwinds, will have high single-digit or double-digit growth rates. And then third to our value creation framework is our enterprise leverage. How do we leverage enterprise assets and the combination of those to cross-pollinate. That could be talent, it could be data, it could be capital in terms of the way we're generating capabilities across the organization. When you take that as a whole, we have a track record -- if you look back over the last decade of generating and delivering on our targets, not establishing targets but delivering them, which are to deliver 10% to 13% on average compounded EPS growth, plus in the present state, an attractive dividend. And going forward, we remain committed to leveraging that franchise to be able to deliver 10% to 13% on average compounded EPS growth plus an attractive dividend. So to wrap up, strong start to the year, 2 well-positioned growth platforms, a clear eye view relative to a changing dynamic marketplace but a few forces of changes that are indisputable, positioning of our businesses to be responsive to and, in many cases, lead into those trends for the benefit of those we serve, and therefore, be in position to deliver that sustained attractive again, EPS growth as well as dividend performance for the organization. Ricky, with that, I'll turn it back to you.

Great. Thank you for the overview, and we're going to touch on each of these. But before we do, I wanted to start with the macro environment. Clearly very hard to predict. We've seen on the one hand, unemployment data being -- staying fairly stable, right, and low. On the other hand, we're hearing kind of like data and news on corporates laying off people. Starting with utilization environment that you're seeing, what are you seeing in the marketplace now?

You mean employment or utilization?

Let's start with utilization and then we're going to get to the employment.

So big picture, you step back first half of the year, in aggregate, we take utilization and use utilization as a proxy for overall cost. Overall costs came in a bit better than our expectations. We stepped into the year with an underlying expectation set that the cost structure from a health care standpoint, which is where the question goes, was going to remain at an elevated level to, if you will, pre-pandemic baseline. And it came in a little bit better, both COVID and non-COVID costs. We're obviously in a quarter, right now in the third quarter, so we'll be reporting 1 month, 1.5 months down the road early into the quarter in terms of the [indiscernible] you see, generally in line with our expectations is what I would say. So no major movement there from that standpoint. And then just to jump in on the employment landscape, we stepped into this disruptive environment in a case where most employers, not all, but most employers in the United States remain in an active hiring process while some employers are reevaluating their workforce. So whether you look at the 10 million to 12 million open jobs in America, most employers are still struggling to get the full employment while we see some employers going through some rightsizings that are manifesting themselves. And on average, those that are looking to rightsize are either slowing down the rate of hiring, stopping the rate of hiring, but risks or reductions are outliers in the current state. Lastly, for our book of business, remember the services book of business, which is a larger portion of our portfolio in the benefit book of business. Within the benefit book of business, the portion of that, that is commercial. So it's a subset of the benefits book of business, tends to be under-indexed on employment-agitated industries and over-indexed on more stable. So more indexed on services, less indexed on travel and leisure as an illustration. So our book of business has performed well over time. But stepping back to the agitation, again, we see it as a dynamic market. We have not seen either of those forces create disruption thus far.

I have a few follow-up questions. First of all, on utilization. To your point, first half, cost came below your expectations. But you also said it's so far into the third quarter, costs are in line with your expectations. So are they in line with your expectations that they're going to be somewhat elevated as we thought about the year? Or are they in line with what you've seen in the first half of the year?

So let's go back to all the same context. As we -- last year, 2021, midyear when we're looking at 2022, we said our posture for 2022 was going to be that we took a position at costs. Now we're into the benefit side of the equation. We're going to be moved from somewhat elevated to elevated. So we took a posture that the cost would remain at an elevated level. Said otherwise, the pattern in 2022 was going to more approximate 2021. Through the first half of the year is a bit better than that assumption. On our second quarter call, our CFO indicated that for the last part of the year, our expectations are more like what we had for the full year. And it becomes better than that materially, that may create some additional opportunity. We're not commenting on that yet. I'd just say, broadly-speaking, in line with our expectations.

Okay. My second follow-up question is on employers. So I understand you're levered to the part of the market where there's -- we see less attrition and still sort of hiring. But how are employers kind of like thinking of the type of benefit they're going to offer? We've gone through a couple of years with benefit expansion. What are you seeing now?

Yes. So really important, Ricky. So one, if you go back in time, the mental health and physical health benefits were typically viewed as discrete. We'll continue unless we're directed otherwise. So back to speaking of reason one, anxiety, the mental health and physical health were historically separable.

They're [indiscernible] hereafter?

Yes. Absolutely. Secondly, over time, more and more point solutions were being purchased by employers to meet individual needs. And employers were aggregating more and more point solutions and their employees or customers were confronting, I use my hands, multiple touch points that were less connected. Themes today are more directionally pointing toward, a, integrated or coordinated solutions where mental health and physical health are more meaningfully tethered together; and evolution of the definition of mental health solutions beyond comprehensive mental health toward depression, anxiety, stress management, et cetera. Third, ensuring that they are integrated into medical solutions around chronic care and then bringing more point solutions back into combined solutions. That is positive for us. So that is a positive for our go-to-market proposition; a, the diversity of what we offer; but b, our preferred approach, which is to coordinate solutions and leverage solutions. We see more of that, not just at the larger account, at the mid account and the small account level. So those would be the trends we're seeing currently. Still pressing toward improved affordability unequivocally, but also trying to point towards can you increase the engagement and productivity of my coworkers by bringing these programs to market.

So I have a question on M&A for later. But what you said now just made me think, so I have to kind of ask that. From your perspective, employers are looking for integrated solutions, does this mean that as you think about kind of like your portfolio, that you should have a more active role in bringing these assets together and consolidating them to offer a solution to your employers? Or is that something that you expect will happen naturally in the marketplace?

So broadly speaking, when you think about the core pieces of what comes together, you have medical, pharmacy and behavioral in the broader suite. There's navigation capabilities into the derivatives and all of the above. Big picture, we're well positioned with all of the above. We're well positioned with medical services. We're well positioned with leading pharmacy services across all aspects, including the most acute and complicated pharmacy services through specialty. And from a behavioral health service standpoint, the legacy of Cigna Behavioral Health remains one of the biggest behavior health chassis in America today. That doesn't mean, Ricky, there may not be tuck-ins to expand capabilities. But the big innovation for us is how do you continue to innovate new products, programs and services. So we've launched a digital-first depression and anxiety program in this fiscal year, specifically targeting. We have a pilot of an MSK, musculoskeletal program that takes mental, physical and pharmaceutical services and drives an integrated MSK program that takes all those services that we're manufacturing internally with new innovation and development. But broadly-speaking, we have the capabilities we need. There may be bolt-ons within Evernorth Care that are attractive to us, but the underlying chassis positions us really well today.

So my next question relates to Evernorth, and we've seen Evernorth fits Accredo in specialty pharmacies and biosimilars, which obviously is a large opportunity, especially with HUMIRA, second half of '23 and into 2024. You've talked about it at your Investor Day. You even raised the guidance, right, for the segment, incorporating sort of the drivers. It's interesting to me in -- because this is a new concept, I think investors not necessarily appreciate yet the opportunity. So I wanted to spend a little bit of time of kind of like Evernorth's role, right, in shaping and changing the marketplace?

Yes. So when you think of Evernorth, think about a few services that are within the portfolio. Most people come into the doorway thinking about, what I call, the core pharmacy services or better stated through many people's minds of a PBM. Attached to that specialty pharmacy services and think about the breadth of what specialty pharmaceuticals are today and with the pharmacological innovation, gene therapies, biosimilars, new vaccines, personalized medications, et cetera. And to give you a little color and context, think about within our Accredo operation, which is 1 of the 2 largest, I would submit leading specialty pharmacy services. Think about 15 subspecialties that are managing there through therapeutic resource centers. So clinical units that specialize on individual drug classes. And in the case of oncology, 5 different subsegmentations of oncological themes, focusing on tumor types, drug regimens, the specialists across the country. So the value creation there is not just an access to a medication. It's the coordination and cultivation of the care journey. And in many cases, the pharmaceutical manufacturer wants to ensure that there's a care team that wraps around a patient to get the clinical efficacy on the back end, and especially pharmaceuticals continue to be manufactured. The cost profile and the complexity requires an intense clinical understanding of how to manage that. That is a core aspect of what sits within the Evernorth portfolio. Adjacent to that then is Evernorth Care. Within Evernorth Care, we have our virtual care capabilities, our behavioral care capabilities and what you would know as chronic care management capabilities. Those are being leveraged for some of the new innovations that we're making reference to relative to a longitudinal musculoskeletal or diabetes program, et cetera, from that standpoint. So stepping back, Evernorth is quite well-positioned to deliver services in today's procurement or purchasing pattern for the largest, most sophisticated employers, health plans, governmental agencies like the DoD or state carve-outs, and increasingly and importantly, health care delivery systems that need extension of their services to either take risk or to have performance-based contracts or who are actually the supplier of specific drugs to health care professionals to deliver those specialty drugs at point of consumption or point of service from that standpoint. So that broad services portfolio positioned us well both to lead in today's model paradigm, but innovate as the marketplace is changing on a go-forward basis. And hopefully, the little illustration I gave you, the Specialty Pharmaceuticals help. Lastly, if you click that down, if you think about biosimilars, there's going to be equivalents and similars. The clinical excellence you have to have and the physician relationships you have to have to be able to figure out what's right for an individual patient and coordinate with the practicing physician and patient is a deep clinical acumen. We have that. It's not as simple as, here's the similar, have the similar be prescribed for somebody. It's a care coordination decision, one patient at a time with a medical professional. Those are leading capabilities we have within Evernorth.

Switching to another growth opportunity, Medicare Advantage. Clearly, an important market. And you've been vocal, right, about kind of like your targets and growth opportunities. The market is increasingly more competitive. How should we think about for a multiyear sort of strategy and target, about your positioning in that marketplace?

So again, history for some that don't know the book of business is completely -- historically, we've only participated in a small section of the addressable marketplace, less than 20%. Individual HMOs, so not individual PPO, not group and in the limit number of MSAs, about 19% of the addressable market. We said we would systematically expand our footprint and our offerings to be 50% of the addressable market by 2025, and we're well on our way. We're well on our way to the 19%, eclipsed 30%, steering through 40% of the addressable market. That's a lot of investment. Over the last couple plus years, we've incurred a lot of investment for geographic expansion and platform expansion. So adjacent to the individual HMO is an individual PPO as well as the ability to accommodate on an employer [indiscernible]. That's the journey we've been on sitting in front of us today. As it relates to going forward, we expect to be able to grow this business on average 10% to 15% customer growth, because of our geographic profile expansion, the capabilities we have in targeted markets that exist, and importantly, our ability to tap into and leverage an under-levered capability that we have, which are the agents out of the Cigna's commercial book of business, which are about 150,000 lives a year, that are essentially geographically matched up pretty well relative to our opportunities, we've historically not leverage that at all. So an attractive market, a growth opportunity. It fits into our Accelerate, that second category of platforms. The last couple or 3 years have had a significant amount of investment in to position us from a growth standpoint. And then lastly, I would note that, yes, it is a competitive market, Ricky, I agree with you, and it will remain a competitive market. The last 1.5 years has also reinforced that if you enter that market only with a revenue growth orientation, it's also a capital-intensive market with a finish margin. Single-digit margins are finished when it's capital-intensive, so you need to do it well. So there's a little shaking out happening in the market right now for some of the players. We remain optimistic for the long-term growth there.

When you think about your Evernorth capability and especially Evernorth Care, right, because I think care delivery is becoming increasingly important in the Medicare Advantage market, do you think that you have that kind of like the right tools there in order to manage that population?

We do, and it's important, and I appreciate your question. So Evernorth, the Evernorth services create meaningful opportunity for our business, and in the case of Medicare Advantage, unequivocally. So for example, we stood up a post-acute service that's up and running already. That was stood up in Evernorth. It's an Evernorth service designed specifically for the needs of the -- for the Medicare Advantage population for post-acute care, coordination and direction. So that leverage and the illustration of the post-acute care program is a great example of harnessing the Evernorth capabilities, designing a solution, and that solution is now available to other health plan clients of ours. So yes, we have the capabilities. And again, within Evernorth Care, we were clear at our Investor Day, we will look at bolt-on acquisitions to further expand those capabilities. However, there are great proven capabilities to be able to deliver real meaningful value for Medicare Advantage today.

So staying on the topic of government regulation. I think regulation or lack of more regulation, I'm probably surprised; some people, indeed, surprised the marketplace, surprised some people in the industry. What are you looking for as we head into the midterm elections? And second of all, just wanted to get sort of your view on the inflation reduction. There are a lot of questions about that addressed towards pharma company's executive. But clearly, given sort of your role, you have a stake in that as well?

Yes. So you referenced relative to the midterm elections and moving back. We operate in a regulated space globally; have, do and will on a go-forward basis. Hence, our space tends to be more active at times versus a little less active at time in terms of new legislation, regulation, et cetera, which is a fundamental part. That doesn't mean I'm numb to it or we're numb to it from that standpoint. It's just a fundamental part of the business. Second, as we position our portfolio of services, both the Benefit Services as well as the Evernorth services capability and the business model we have, we're mindful of what we think the regulatory environment is and will be on a go-forward basis. Hence, movement relative to more services, more transparency, more aligned incentives from a structural standpoint. There's nothing specific as it relates to midterm elections that are -- to me, the midterm elections would say, student body left or student body right that sit in front of us. Obviously, the nation will look at the midterm elections and maybe as a proxy towards the '24 elections in terms of what might transpire. We think health care and health-related services will remain front and center because of the societal need from that standpoint. But we're quite proud of the level of value and service we deliver as reinforced by our retention rates, our satisfaction rates including for governmental entities that we serve. As it relates to the Inflation Reduction Act, there's a lot of moving parts within there. There are no one component within the Inflation Reduction Act that dramatically changed our portfolio. There will be some adjustments to the PDP side of the framework for the industry as a whole. We're confident in terms of our leading posture relative to our capabilities, relative to procurement, clinical management and service that on a relative basis, we'll be able to have our differentiated value proposition. So I think it's just an indication of a relatively active environment, but not one that affects our well positioned and smartly diversified benefits and services business.

So we talked a little bit about the managed care side. We talked about Evernorth. I think that one of the things that are underappreciated is that enterprise leverage and the cross synergies. Can we spend some time on that and the opportunity, and what's the time frame to capture that opportunity?

So a simple way of thinking about that is, today, Evernorth services about 30% of Cigna Healthcare's spend for need. That's up over the last few years, but it's still materially lower than it could be. At our Investor Day, Eric Palmer, who leads the business and Brian Evanko, our CFO, both referenced the fact that we are on a path to move that from 30% to 50%. A significant opportunity. And by the way, the Cigna Healthcare portfolio is a growing portfolio. So it's not going from 30% to 50% on a static population, it's going from 30% to 50% which is growth, and 30% to 50% on a growing block of business. What transpires around that is continued service innovation. I use the simple example of a post-acute care program for Medicare Advantage. Some of the new longitudinal programs we're designing around oncology, MSK, diabetes, depression and anxiety are all examples. They will be designed and delivered and fulfilled through Evernorth. They will be availed to Cigna Healthcare, be it the commercial book of business, the Medicare book of business or the individual exchange book of business. But importantly, it will also be offered to the marketplace through Evernorth to help plans that we serve today to governmental agencies, to integrate a delivery system from that standpoint. So we see it as a significant opportunity, and it's an opportunity to create value, first and foremost, for the customer and the patient and then to capture an appropriate amount of value within both Cigna Healthcare and within Evernorth. And the illustration of 30% to 50% is quite tangible. And the 30% to 50% takes place on a growing book of business that we've proven the ability to grow our Cigna Healthcare portfolio quite nicely.

So have -- we have a couple of more minutes. I'm going to try to squeeze 2 questions.

Sure.

One for one. So when we think about the M&A environment overall, we've seen a pickup in activity, not just in health care services, but over in health care. I think what's unique about health care services is really that we're starting to see these sort of nontraditional players becoming more active. What do you think about the evolution right of the marketplace? How do you think there are sort of decisions, right, how they're going to impact the business, speed of things, the pace of change?

I think if you look at it through the -- if we were to go back a decade ago, and look at the space and then look back a decade and then try to project forward, you'd see a pace and rate of disruption. And you see companies no longer exist. You see companies get reconfigured, you see new companies come into the space, you see small players become large players, et cetera. It's a natural part of the process. It's a wonderful part of a capital-intensive industry and the capital marketplace. So change is ever present. What's pushing on that, 2 big forces: demands of the consumer, and rate and pace of innovation largely enabled by technology and data. You may have regulation that accelerates or decelerates it, but it's essentially demand, need, state of the buyer and financier and consumer, and then what's available through technology and data in terms of accelerate, if you will, disintermediate, accelerate innovation, bring new services, et cetera. From our point of view, we don't resist that at all. We don't resist. In fact, we lean into it. So we're more services-based franchise today than we ever were. If you think about where our innovation is coming from, our innovation is coming from the services side of the equation. Importantly, we're open in terms of our architecture, more broadly than that, in terms of partnering, collaborating and working with others. Our Cigna Ventures portfolio is a great proof relative to that in terms of how we partner with others. And as it relates to the space, to accelerate the pace of change, you might see us instead of acquiring something, partnering or taking a minority interest to drive accelerated change because sometimes you think acceleration comes from solely owning, it may come from the leverage effect of partnering or having a minority interest going forward. So I think your point is spot on. We don't resist it. We actually lean into that. And we have a pretty proven track record of leaning into it more correctly than incorrectly in terms of innovation, partnership, collaboration and value delivery.

So I will still kind of like ask the last question because I think it's an important question. So I follow you on LinkedIn. And recently, I've seen that you've added some pretty prominent hires to your executive team. How do you sell them on Cigna?

So thank you, and we're proud and we feel fortunate when individuals who join pretty much anywhere, seek to join your team. And if you step back, a lot of we just talked about is technological enablement, our CIO, our CTO, our Chief Architect, our Chief Digital Officer, they all come from outside space because we don't think the space has defined itself as it relates to the innovator. Now it's augmented by experts in the space. Most recently, we were fortunate to add a Chief Health Officer to the organization, who's well-known through a variety of circles from an innovator, both as an MD as well as an academic PhD, government service, entrepreneurial service, et cetera, from that standpoint. The basic part of how we sell them on Cigna is 2 pieces: a, we're a mission-based company still, and we proved the thesis that you could be mission-based to have a purpose and change people's lives for the better and not apologize for being publicly traded, performance-oriented and growth-oriented and showed that the 2 cohabitate. So that's the first piece of the equation. It's and; it's not or, it's and. And that's deeply rooted in our company's culture. And then second, we don't resist the change agenda that your prior comments reference, we actually are agitating ourselves and want to move faster toward that, and we want leaders who are part of that change agenda to collaborate with us. It's really those 2 pieces. But the first piece is really important. It sounds like words, they're not. It's a deep belief set. We're not perfect, but it's that we have a responsibility to make a difference in over 180 million customer relationships around the world every day. And we put that upon ourselves because, by the way, we take care of our own level and our own level of consumer services and the ability to deliver more. But be publicly traded, growth-oriented, performance-oriented and return to fair profit. Those 2 things have to cohabitate for sustainability in our belief set, and we make no apologies for it, and it's attractive to a lot of people who want to drive change and who have a great track record of making a significant impact.

Great. Well, David, thank you very much.

Thank you. I appreciate being with you. Thank you for your time. Sorry for the inconvenience through the alarm.