The Cigna Group (CI) Earnings Call Transcript & Summary

Ralph in IR is out there, somewhere. Thanks, Ralph, all for being here. Why don't we -- obviously, a lot to talk about, but I thought I'd give Brian a couple of minutes to kind of give us a state of the union kind of coming out of the third quarter and into '24, and then we'll do -- we'll fill up the rest with plenty of Q&A. Brian?

Thanks, Justin. I appreciate you and the Wolfe team hosting us here today. We reported our third quarter results about 10 days ago. And if you didn't see, we had another strong quarter. Really all of our critical metrics were in line or better than expectations. So we're really pleased to deliver another strong quarterly performance. Our EPS was a bit ahead of our expectations as was our revenue. And EPS, our performance was driven by our Cigna Healthcare business, in particular, and specifically within that, the Cigna Healthcare U.S. Commercial medical care ratio came in favorable to expectations. And broadly speaking, the rest of the company was in line with what we were looking for in the quarter. So the outperformance we had in the third quarter was specifically U.S. Commercial, our medical cost performance. But all in, another strong order for the Cigna Group. That gave us the confidence to increase our full year outlook for a number of metrics. So our full year EPS is now expected to be at least $24.75. We raised the full year revenue by another $2 billion as it relates to the outlook there, raised our cash flow from operations outlook by another $1 billion to be at least $10.5 billion for the full year. And we also increased our Cigna Healthcare customer growth outlook by another 200,000 customers. And we'll show net growth of at least 1.6 million for the full year 2023. And finally, the medical care ratio was improved at the midpoint by 15 basis points from where we had currently been projecting for the full year 2023. So really proud of that performance that we delivered in the third quarter and the strength that will carry through the balance of the year. As it relates to 2024, we're entering the year with momentum. So we have reiterated our expectation to deliver at least $28 per share of adjusted EPS, representing EPS growth in excess of our 10% to 13% long-term algorithm. And that's really driven by 3 e-tailwinds that you'll see emerge. One is revenue growth, which includes the effect of our Centene contract onboarding, which will be fully live January 1, 2024. Secondly, we expect another strong year of contribution from biosimilars as it relates to the drug innovation trend that's underway as we speak. And then thirdly, we do expect some improved profitability in our individual exchange business in particular, within the Cigna Healthcare business. We had some pressure on that from a financial standpoint in 2023. We've taken pricing actions to improve that in 2024. So we'll see some improved earnings off of that book of business, likely with lower customers. From a headwind standpoint, we do expect to continue making strategic investments back into the business and the rate and pace of that will influence the cadence with which earnings emerge in 2024. But all in, really pleased with the momentum we have carrying into 2024 and expect to deliver at least $28 per share of adjusted EPS. And again, as I said earlier, 10% to 13% EPS growth is our long-term expectation. Over the past decade, we've delivered 14% compounded to give you context. So we continue to be comfortable and confident in our ability to deliver at or above that level over the longer run. Justin, just to be upfront about the Medicare Advantage media that came out next week, I thought I would address that quickly, before...

I wasn't even going to mention that. I'm surprised you brought it up.

Your questions -- So as consistent with our historical policy, we're not going to comment on specific rumors and speculation. That said, we continue to see the Medicare Advantage space in the U.S. government business is broadly as an attractive part of the U.S. health care system. We've taken steps over the years to expand our presence in that business. So even just in 2019, we only covered about 20% of the addressable market. We've methodically expanded that over the past few years. We have over 40% of the market covered now. We'll have 45% of the addressable market covered in 2024. We're actively working with our distribution channel partners as we speak. We've got competitive offerings in place for this AEP, and expect to show growth in 2024 on that book of business. In addition, our Evernorth business already serves millions of customers in government programs, whether those be Medicare, Medicaid or TRICARE, and we expect another step-up in that contribution in 2024 when the Centene relationship is fully onboarded and about 20 million additional customers will be served through our Evernorth subsidiary. So happy to turn it over to you, Justin, to wherever you want to go with questions.

I appreciate that, Brian. It's a good overview, and you definitely headed me off on the pass on my first question, so well done.

Just to follow up a little bit there. Do you see those rumors having any impact first on your Medicare Advantage selling season? Sometimes I remember back when Aetna and Humana were trying to get together, the brokers were a little hesitant to sell product when something like that was out in the market.

The early returns here and it's only been a few business days, we have not seen a noticeable impact yet as it relates to anything on sales or disenrollments, and I think that speaks to the strength of the underlying offerings, the relationships we have with the broker community as well as the strong NPS we have with our customers is ultimately the solution with which we're providing is what ends up selling not necessarily any rumors or speculation that are out in the marketplace.

And then walk us through the -- how a Medicare Advantage member -- I think we all understand, I think you have a 3% to 5% margin target there. You're a little bit below because you're investing in the business, right? You expect that to kind of improve over time, maybe not next year. But how does it impact the rest -- go below the line of the health insurance business, go over to Evernorth. And how does a Medicare Advantage member kind of impact Evernorth? I know there's PBM and specialty. Delivery, you've got a telehealth business, you've got a medical management business at eviCore, right? Kind of walk us through maybe -- I don't need it piece by piece, but just maybe some of the bigger buckets of kind of how the synergies kind of roll through as you add a Medicare Advantage member.

Sure. And on the health plan side, where you started, our long-term goal is 4% to 5% target margins. We are below that now. You should think of that as primarily driven by administrative costs as we continue to invest in new geographies, new products and new capabilities. That's weighing down the margin profile in that business today in the health plan specifically. And over a multiyear period, we would expect it to get back in target margin range. To your point, our Evernorth service company has a whole variety of capabilities that are highly relevant for a Medicare Advantage member, and we use those. So they create value from the standpoint of affordability for the customer and they create additional economic value for us as a company from the standpoint of additional profit deals provided that they are market clearing. So in the Express Scripts PBM, the Medicare Advantage customer is filling prescriptions, right? And those are processed on the rails of Express Scripts and think of if the average Medicare beneficiary consumes 3 prescriptions a month, so you've got quite a lot of utilization there that is mutually beneficial for the health plan and the service company. Our Accredo Specialty Pharmacy, which now represents about 40% of the Evernorth overall business and continues to grow at high single digit to low double-digit rates is also highly relevant for Medicare Advantage populations given the nature of a lot of the conditions that our Medicare Advantage beneficiaries have, which tend to be higher cost and sometimes rare. And then to your point on all the health care services in Evernorth, we have a variety of capabilities there that are relevant, whether that be the eviCore medical benefits management capability. So think of things like radiology, PT, et cetera. Think of MDLIVE, where we have virtual care offerings for those seniors who are comfortable with the virtual care interaction, and our behavioral health capabilities are also relevant for those individuals that want to utilize those types of services. But there are others as well, but those are probably the ones that are most relevant for us today.

Is there any way to kind of put that together and just say, I think all of us think about a Medicare Advantage member being worth, give or take, $1,000 PMPM and growing. And the 4% to 5%, that's $40, $50 PMPM, right, on the insurance side of the target margin. Any way to think about that on the Evernorth side, right, maybe a dollars PMPM of potential profit pull for every member you put on?

Yes. So one area about our service company that's important to keep in mind is we do not have a lot of owned care delivery relative to primary and even [indiscernible] care, and that's an area that others, I believe, are very active in, in terms of monetizing their health plan lives. So for us, most of the monetization comes through the prescription drug channels. But you can think of for every dollar we earn in the health plan, that it's between $0.50 and $1 in the service company as well of opportunity.

That's helpful. So then walk us through kind of given the discussion and the inevitable kind of second step, if this is actually potentially happening out there, what's out there in the news, give us sort of updated view on M&A priorities. I know you have 3 criteria, walk us through them and maybe you can even rank them for us in terms of how you think about the importance of each one. And I'm talking about big deals in particular.

Okay. Yes. And relative to M&A, just to be clear, we've been consistent over time on our posture here. So you should not view anything that I walk through here as a change in our posture. We've had 2 areas of focus from an M&A standpoint, one being U.S. government programs and services, two being our Evernorth health care services platform. So those have been the 2 areas of focus we've had for the past several years. Secondly, 3 primary criteria for evaluating M&A. We've also been consistent on these over time: the first one being strategically aligned with the company's long-term goals; the second one being financially attractive; and the third one being having a high probability of closing. So those are the 3 things we tend to look at from a criteria standpoint. We've been consistent over time on all those different components. As it relates to the financial component, which I think is underlying your question, again, we've been good capital stewards over time. Hopefully, it's been apparent to you. Next month will be the 5-year anniversary of us closing the Express Scripts acquisition. We haven't done any large-scale M&A since then. We've think about it. And that reflects the fact that those 3 primary criteria that I made reference to, we have not met those. It's not that we haven't had the financial capacity to do large deals we have. We've not found assets that made sense through those 3 lenses of strategically attractive, aligned; financially attractive; and high probability of close, but we're always looking for assets that are of interest. The other thing I'd mention is smaller deals, which tend to be bolt-ons or up to maybe low single digits. We tend to focus a little more on the strategic side and are a little more flexible as it relates to the financial side.

Got it. So double-clicking on the financial side. A little over a year ago, you guys held -- you held an Investor Day and you talked about the 3 criteria. When you talked about large deals, my recollection is that you specifically said accretive in year 1. And now you've kind of changed that over the last year to be financially attractive. So obviously, accretive in year 1 is pretty definitive and obvious. Maybe you can walk us through financially attractive and how you think about that different in terms of if a deal isn't accretive in year 1, if it could -- if it's even materially dilutive, I'm talking about 5% plus, how would you think about that, the other points of financial attractiveness, like changes to your growth level, your strategic opportunities and potentially the market's value of the company overall, right? You can get a higher P/E for better growth that could offset lower earnings.

Yes. And again, I'd start with what I said earlier, we've been consistent over time with our M&A framework. So the exact vernacular language may have evolved over time, but the broad framework with which we evaluate M&A has not. We start there. As it relates to financial attractiveness, though, think of it through a few different lenses. On the accretion lens, we look at cash and EPS accretion. So first of all, cash accretion is kind of a knockout criteria for us. If it's not immediately cash accretive, we wouldn't even consider it. And I only say that because there have been deals in our sector that have been done over the past few years that don't meet that threshold. But for us, it has to be cash accretive. EPS accretive over time, critically important to us relative to alternative uses of capital. And I say that over time, whether it's year 1, year 2, et cetera, but importantly, it needs to be EPS accretive to us over time. Second category we look at is ROICs and IRRs because they're important cross tabs, if you will, relative to the EPS picture as we think about the financial attractiveness in any deal, the emergence of synergies, and how we think about the pace of deleveraging. And the third thing we look at is the capital structure. So does the deal require debt to transpire and to what degree does delevering occur? Is it over a year, 2 years, 3 years, et cetera. So those are the things that inform our financial picture. But of course, every single situation when you talk about large M&A is unique. And at this stage, it's hypothetical. So we're talking about things that are very much aspecific and hypothetical. But those are the things we tend to look at. As I said earlier, we think we've been good capital stewards over time. We've taken out some 25% of our share count since the Express Scripts closed, which demonstrates we will use the repurchase lever aggressively if we don't have alternative use to our capital.

And when you say cash accretive, tell me what you mean by that?

This is immediately additive to income. So there are instances where people will talk about accretion in that context, and we view that as a threshold matter.

Additive to net income?

Yes.

Got it. Got it. And in terms of probability of close, right, we all know that this is not exactly a friendly DOJ out there to large-scale M&A. But they certainly have not been undefeated in the courts. And tell us a little bit about how you think about, when you think about probability of close, the piece of DOJ versus some of the other impacts. For instance, a friendly management team, right, that is also fully engaged with you on the other side of the deal and any other criteria that you think about in terms of that probability of close?

When we talk about probability of close, it's specifically through the antitrust lens, when we're talking about that. And so it's our assessment of both on a textbook basis, but also at the current point in time, politically our deal's able to get consumed -- or consummated, I should say. So the antitrust environment right now is obviously tightened from a scrutiny standpoint relative to where it was even just a few years ago. That said, there are a number of examples of transactions making their way through. But this comes back to each one is unique, and again, at this stage, hypothetical in terms of this conversation, but we take that very seriously, and we wouldn't put shareholders into a situation where it's uncertain whether a deal will get consummated.

Got it. Got it. Just lastly on capital deployment. A couple of things. One, the VillageMD deal, remind me how much cash you put into that, and when you -- when that matures?

Sure. Yes, so the VillageMD investment was made in the first quarter, 2 different tranches, but the total was $2.7 billion, and that got us a mid-teens equity ownership percentage. So there are -- there's a dividend payment off of that, that transpires over time. There's not a natural maturation point of it. The deal has different triggering points in 2 years, 3 years, et cetera, but there's not a natural expiration per se, of the arrangement.

You said -- like I know you have the ability to call the capital back or to take the ownership, I believe. If you wanted your $2.7 billion back, when's the earliest you can get your hands on it?

Yes. There's not a put-call structure the way that you're describing it exactly, but the dividends, I think, are the point you're talking about. They're either PIK or accrued over time. So that's the triggering item that has a future point associated.

Got it. Got it. So there's no maturation of this deal. Again, I probably am off-base, but my recollection was that it was kind of a debt/equity and therefore, would have some kind of maturity if you decided not to convert to equity. Or is it automatically converted that way?

If there's, for example, a public transaction, it would naturally convert.

Got it. Got it. And then just in terms of leverage. Lastly, I think you had historically said you would go to 50% for a deal, maybe a little bit above that in terms of debt-to-cap. Is that still your thought process?

For larger M&A, yes. Yes, so we're currently right around 40%, which is our debt-to-cap target. The Express Scripts transaction is a good indicator of the boundaries with which we would consider pushing leverage, which got you to that 50% zone, to your point, Justin. Now it's very important to us to maintain investment-grade ratings in any scenario. So anything we would do is conscious of that. And then the pace of delevering, as I made reference to earlier, is another consideration.

My recollection was Express Scripts, was that 2 or 3 years that you got back to the target?

2 years.

And anything else you want to add on this topic before we actually talk about the business a little bit? Are we thinking we fully vetted it?

I think we've covered it. I just would reiterate, we're good capital stewards. We wouldn't do anything to put shareholders into a bad spot ultimately.

Got it. The latest on GLP-1s, right? So obviously, we had the SELECT readout over the weekend. Just give us your kind of latest on how -- what are you doing with these drugs in terms of -- I know a lot of it is up to the employer, but you have your own kind of therapeutic kind of trigger. So maybe you could talk about any step therapy. I've heard people using plans, using WeightWatchers, right, asking for some behavioral change maybe over 6 months before you get a new script. What are you doing there? And how do you think the SELECT readout kind of changes that?

GLP-1s are obviously an exciting part of the drug innovation pipeline that we're participating in right now. When you think about our company and our business, I would encourage you to think of drug innovation as thematically a really important part of our Evernorth story. Again, whether that takes the form of biosimilars, GLP-1s, specialty generic launches, et cetera. So a really important part of the Evernorth growth journey that we're on. Obviously, they've taken off the last few years, not just for diabetic indications, but increasingly for weight management uses as well. We've seen significant growth both in the Evernorth on affiliated clients we serve, but also in the Cigna Healthcare, health plan clients who we serve through that chassis. So significant growth on both sides. It's been a net tailwind for the company when you think about the all-in contributions to us financially. That said, we have not accepted that the current status quo is sustainable or acceptable, quite frankly. We have examples of non-adherence over time. We know that cost is a pressure. We know that there are supply constraints. So there are a number of considerations in here as we think about the long run. One of the ways we're stepping into this is within Evernorth, we have a program we just introduced, first-of-its-kind clinical program called EnCircleRx, which is designed to give employers some financial corridors to work within and to make sure that the clinical guidelines are being properly met and that there's strong adherence is one of the things our employer clients are most concerned about is if they're investing the funds in getting the person into the drug that they're going to be adherent through it so that they get the benefits on the back end when the medical cost savings start to transpire. So this EnCircleRx program, we just recently launched, something that our Evernorth employer clients are interested in as a way to essentially gate the amount of spending, but also make sure it's clinically appropriate.

Got it. Talk a little bit about the individual exchanges. Maybe you can start with kind of how do you think the market kind of grows in '23 or '24 versus '23? How you expect to perform relative to it? And how you see the opportunity from a margin perspective into '24 and then beyond?

Maybe I'll just remind a little and talk about '23 for the baseline and then roll it to '24. We've had some pressure in our individual exchange business, I made reference earlier, specifically in 2023. It was predominantly in our 2 larger states, Texas and Georgia, where we've seen much greater risk-adjustment payables into the program than what we had anticipated stepping into the year. So that put pressure on our financials. We talked about that in our second quarter release and that then run rates for the full year. So we've been able to overcome that given the strength of the broad portfolio that we have across the company in both Cigna Healthcare and Evernorth and raised our guidance, as I said in the beginning, in spite of that pressure point in the year. Next year, we've taken price actions that are sizable in those 2 geographies, in particular, that are likely to result in fewer customers in our individual exchange book but more profitable customers, which is why I flagged it as one of our 3 tailwinds as we step into '24. So those actions have been taken. They're underway. We're in the middle of the open enrollment period as we speak that just commenced on November 1st. We'd expect fewer customers but more profitable in 2024. And as it relates to the industry in aggregate, we'd expect to see continued growth in the exchanges given the subsidies continue at the attractive levels that they've been and there continues to be a good level of awareness both between the navigators and the broker communities because we'd expect to see growth at the end of [indiscernible].

So where are your margins in '23 relative to target? And where do you expect them to be in '24?

In the exchanges?

Yes.

Yes. So our target margins over time are 4% to 6% in the individual exchanges. Given the pressure that I made reference to that we're seeing in '23, we're south of that. You can think of it in the zone of breakeven, give or take. And we would expect to see a step up from that in '24. Whether we get all the way to the 4% to 6% or not is going to be a function of the geographic mix and the customer duration mix that we end up with. But we would expect to see -- take a step forward on that with fewer customers as I made reference to earlier.

Got it. Any ballpark of what would be a reasonable expectation on that customer change? Is it down modestly? Down 20%?

Yes. The 2 largest states I made reference to where we have the pressure represent about 1/2 of the book. So if you think of a portion of that likely going away, I think it'd be reasonable to be modeling something less than 50%, but more than 10% if you will.

Got it. Got it. And then maybe we wrap up with your thoughts on the PBM regulatory backdrop. What is the latest you're hearing out of D.C. on -- I know there are multiple pieces of legislation that have been discussed? And then just in terms of timing, I know there's a year-end build that's got to move that it could [ attack us ] to. What have you heard on that? And then if they don't, do you think it rears its head again in 2024 in an election year? Or do you think it backs off, and we get a kind of a clearing event?

The PBM regulatory environment continues to be fluid. So I'd start there. But as you take away the implications of investing in us, it's manageable. Everything we're seeing is manageable. And I'd start with we've been hitting a few key themes on behalf of our clients, specifically not eliminating choice. Particularly in the commercial markets, it's really important that our clients can take advantage of all the different choices that are available to them in terms of how they pay us, in terms of how we service their customers, et cetera. So that's been one theme that's been really important. Additionally, modularity relative to our solutions, we've been able to meet, whether that's points about delinking list prices, whether that's greater transparency and regular reporting. All those things are important from the standpoint of the modularity of our solutions. We're able to meet all those different need sets that are coming through. So there tends to be right now a little bit of momentum around additional transparency and reporting. There tends to be a little bit of momentum around Medicaid spread pricing, but all those things from the standpoint of investing in us feel like they're manageable items, given the multitude of value-creation levers and value-capture levers we ultimately have. Many of the provisions are longer dated as well in terms of when they go into effect, which would give us and our clients the opportunity to evolve to the extent that we needed to. From the standpoint of timing, obviously, it's pretty speculative, but year-end omnibus package is a natural time when you might see something but -- and there was obviously a bill advance last week that really there's some different state bills working their way through in different stages. But the year-end cycle is a natural window to look. And then to your point, next year's presidential elections did present another cycle of uncertainty [indiscernible].

Got it. All right. I want to wrap it up there. Brian, thanks again for your time today. Appreciate it. Ralph, thanks for having him here. And thanks, everybody, for being with us. Thanks, Brian.

Appreciate it.

Great.