The Cigna Group (CI) Earnings Call Transcript & Summary

Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Managed Care and Facilities Analyst here at Barclays. With me on stage, I'm pleased to welcome Brian Evanko, CFO of Cigna Group. Brian, welcome.

Thank you, Andrew [indiscernible].

Let's start with a topic on people's minds in last few weeks Change Healthcare and the disruption there. What have you seen? What's been your experience thus far? And what's Cigna overall exposure to something like this?

Appreciate the question, Andrew [indiscernible]. So the Change Healthcare outage, which transpired a few weeks ago did impact us. So we utilize services of Change in a variety of different ways in the company. If you take our 2 high-performing businesses, Cigna Healthcare, which is our health plan asset, about 40% of the company's income. Evernorth Health Services, a service company business, about 60% of the income. Cigna Healthcare provider of claim submissions and claim payments are one of the big areas where we utilize Change Healthcare. Today, operationally, we have about 10% to 15% of the claims that are still disrupted. That was a higher percentage of the outage first transpired. We were able to move some volumes to other trading partners pretty quickly thereafter. And then we implemented some workarounds as well. Evernorth was a little less impacted. We had some prescription drug eligibility verification skip for a short period of time before you use volumes of other trading partners. Now financially, we do not expect a material impact to this. Obviously, as we look through the first quarter close, we'll have to make some estimates potentially in our reserving. And as we work it pricing and underwriting implications, we'll make sure to keep this top of mind but don't expect there to be a significant financial implication based on what we know as of today.

Got it. Any comments on just the broader promotion of utilization trends this year, whether it's medical visibility into claims [indiscernible] health care, just a broader utilization environment?

So despite the Change Healthcare outage, I just made reference to, we do have a good level of visibility what's transpiring as it relates to care authorization, et cetera, in the environment. As we step into 2024, we expected the strong utilization that existed in '23 to continue in '24. And in fact, our all-in cost trend estimates for 2024 in Cigna Health care part of the portfolio are expected to be a little bit higher than what we saw in 2023, all in. And that reflects the effect of continued provider inflation, in our contracted rates as well as communization patterns, continuing into 2024. So our guidance and our pricing and our forecasting all accounted for that. So far, while it's still early in the year, things are progressing broadly in line with our expectations. And we would expect the MCR guidance we issued in our fourth quarter call, it will be appropriate based on what's transpired thus far in the quarter.

Great. Let's move on to Evernorth. Over the last 5 years, Evernorth's growth profile has increased the number of times. In fact, I think, it's more than doubled from when it was stand-alone Express Scripts, there was a target of 3% to 4%. Now it's 5% to 8% at Evernorth today. How would you bucket the drivers of that accelerating growth within Evernorth?

Yes. So we're really thrilled with our Evernorth business. I'd start there. In terms of the performance that's emerged over the last few years. To your point, we acquired Express Scripts in 2018. We've built out additional services in that part of the company over time. And really, if you think about why the growth rate is accelerated since we made the acquisition of Express Scripts? There's a few things I'd highlight. One would be the megatrends that we expect to transpire in the next 5 to 10 years and have been unfolding. In recent years, one of those as being what we call pharmacological innovation. We're seeing just a wave of new drugs coming through the pipeline, whether those be biosimilars, whether those be GLP-1 drugs, whether those being rare and orphan drugs, all of that innovation is transpiring as we speak. So that's one of the megatrends that's been unfolding and we expect to continue persisting for the next 5 to 10 years. And the Evernorth business has been designed to capitalize on those. A second area is as it relates to technology, we would expect continued tech-led innovation within the ecosystem. And our Evernorth business has been both around choice modularity and the leverage of technology, particularly in the specialty pharmacy and care service platforms. And the final area, the final megatrend we see is vitality amongst all of the individuals in the U.S. is plateauing. And so it's creating a true mental health crisis in the U.S. right now, and we have a leading behavioral health business in Evernorth. That, while small today, is scaling as we speak. So all those things led us to increase the growth algorithm for Evernorth business to 5% to 8% going forward. The specialty and care services part of the portfolio, we expect to be an even faster grower. And then we have a durable pharmacy benefit services business that will be a 2% to 4% grower and the weighted average of that gets you to 5% to 8% expected average annual growth rate.

That's the visibility that you have into that growth at the time you bought Express Scripts. So how much of this is being in the right place with that asset? How much is the Cigna developing and going deeper into these growth areas?

Yes. I mean we designed Evernorth to be responsive to those trends I just outlined. And so the specialty pharmacy, in particular, is an area that's had outsized growth, which was a $30 billion business 5 years ago, $60 billion business in 2023. So it's doubled in 5 years because it's positioned really well to take advantage of all that pharmacological innovation that I made reference to. The pharmacy benefits services business has performed as expected with the one ad being we won the Centene contract effective, 01/01/24, which we would not have anticipated prior to winning that contract. So we are thrilled with that good validation of the value proposition and the core Express Scripts PBM business. But the intentional design of Evernorth is really what we're pleased with when we look back at the growth story there.

Right. And specialty was a big part of the story that you told last week at your Investor Day. What differentiates Cigna in this market and drives your conviction to take up to 200 basis points of market share?

The specialty pharmacy assets we have, whether that be Accredo, the Specialty Pharmacy CuraScript, which is the distribution engine, CarepathRx, which is our pathway into health systems. All of those assets have been built and constructed over time with intention. And so to your point on kind of what led to the differentiation, I'll just speak to that in a minute. But first, the numbers here, I think, are important. We expect a high single-digit secular in the specialty pharmacy market going forward, off of what's already a $400 billion addressable market, $400 billion is actually bigger than what the individual Medicare Advantage market is today. So -- and we expect the specialty market of $400 billion to grow high single digits, faster growth than even what you see in the individual MA market, which I realize those are comparing apples and oranges. But for context, this is a really big market today with really attractive secular growth. And to your point, we expect up to 2 percentage points of additional growth from care gain. So we would expect the specialty pharmacy business that we own to grow 8% to 11% of an already sizable starting point. Now why is that? First of all, important to keep in mind, specialty pharmacies are very different than retail pharmacy. So usually, when we think of filling a prescription, we think of walking or driving to our nearby retail pharmacy, you go to the counter, you pick it up, specialty pharmacies, not like that at all. These are highly complex, really expensive, clinically [ independent ] drugs that often have special handling requirements, whether that be temperature control or other injectables that need to be injected in a certain period of time. So really clinically complex, and we've built clinical expertise over a long period of time that's differentiated from our competitors in this space, meaning we employ 500 pharmacists, and we have 600 home infusion nurses. We have infrastructure that's been built up owned operational infrastructure around the country that's been built up 15 therapeutic resource centers. These are centers of excellence around specific conditions. So take hypertension. And we've seen others like that, that are very specifically targeted at specific conditions. We have 4 state-of-the-art clean rooms. So -- and clean rooms are -- they have licensing requirements to actually establish. They take years to build. Most of our competitors have 0 or may be 1 clean. We have 4 of them around the country. And we have 28 dispensing sites around the U.S. So all those things -- those owned operational assets create competitive barriers to entry and an economic moat that's proven to be really strong for us. So the clinical expertise, the owned operational assets and then the access to these specialty drugs. So one of the things that's not often well understood is, manufacturers of these drugs want to work with specialty pharmacies, who they can trust and who won't impact their own brand. So meaning our clinicians are experts in dealing with patients. If there's a problem there and the delivery from the specialty pharmacy to the patient, the brand of the manufacturer can be put at risk. And so the manufacturer choose to work with us. We have access to over 98% of all the specialty drugs in the U.S., and we have the #1 access to all the limited distribution drugs or LDDs across the U.S. So all those create a leadership position for us in the specialty pharmacy market.

Great. You also size $100 billion biosimilar opportunity by 2030. Are there any drugs in particular that stand out that drive an outsized portion of that outside of Humira?

So one of the things when I spoke to pharmacological innovation earlier that we're really excited about is all the competition that will transpire in this market. So biologics that today you don't have competition. We expect to appoint $100 billion of those sales subject to biosimilar competition through the end of the decade. There's not a single drug that I would point too that's a large driver of the $100 billion. Humira is the biggest -- the next biggest is likely to be [ store up ], which is a 2025 biosimilar launch. Think of that as, call it, $10 billion of the $100 billion. But you're going to have a lot of smaller ones that will aggregate up. And it's an example of the cumulative effect of multiyear biosimilar introduction and the business that we have position to capitalize on that.

Great. Maybe sticking on the biosimilars for a minute. What's been your experience on the uptake of Humira this year? What are your expectations, particularly in light of, I think, the interchangeable high-concentration version of the drug was recently approved a few weeks ago. What does that acceleration curve and uptake look like in '24 and '25?

Yes. So '23, the Humira biosimilars that were introduced in the market took a relatively small share. We expect that percentage adoption of biosimilars to continue growing as '24 unfolds. To your point, the approval of the high-dosage interchangeables, which has recently happened, and we'll introduce later this year. We expect to drive further adoption. So we would expect further share shift as '24 unfolds. And we use the power of competition to drive better economics for our clients. So one of the things we introduced at our Investor Day last week was Evernorth will have a $0 patient out-of-pocket available through Accredo later this year in terms of Humira biosimilars. So that's an example of we're encouraged in biosimilar utilization through aligning incentives with our clients and patients.

Right. And one of your peers has taken the branded biosimilar of formulary for 2024. How are you thinking about changes to the formulary this year and next year? Are there changes you can make in the year? Just curious how the formulary might evolve over the next year or 2 with this increased adoption?

Yes. So we can make changes to the formulary entry here. We did that last year when there were additional biosimilars in the middle of the calendar year. As it relates to our approach here, as I said earlier, lease competition to drive growth that cost. So we have not made a decision yet as to whether we'll have a single biosimilar preferred or multiple co-preferred, whether the reference drug will still be -- we're still working through all of that as we speak. But importantly, the power of the market forces around competition are key to our model ultimately, but we're still working through the specifics of all that. But we can make changes intra-year. And also know we have many client-specific formularies, too. So clients can choose they want to use our national preferred formulary? Do they want to craft their own formulary that maybe prefers a biosimilar or Humira or something else.

Great. And one of the other exciting initiatives you announced last week with the financial guarantee on GLP-1. Can you help us understand how the mechanics and economics of this arrangement work?

Sure. Sure. So I'll go a little bit deeper on this. This has been a common question. I think since we announced the program last week, which is called the EncircleRx. So it's the first of its kind trend guarantee for loans in our Evernorth Health Services business. So if you start with the need state here, employers see GLP-1s could be game-changing drugs for many of their employees or their dependents, provided that they're done -- they're taken in a clinically appropriate way, that there's adherence in all their associated lifestyle management that transpires alongside of that. So there's interest from employers, but there's also concern from employers about the cost, particularly in the early years before you start to see the potential for the clinical payback down the line and lower medical costs. And so the need to be here for the employers, they'd like to be able to provide access, but they want to be able to do it in a way that's controlled and where their costs are manageable. And so the [indiscernible] space we said that's a problem statement. We're going to step into that. And we're going to offer the Encircle Rx program. Now the specific mechanics of it work as follows. So individual or employers who today do not provide any weight management coverage, they buy EncircleRx from us, they'll pay us a monthly fee, and we'll take risk on the fee. So that's the financial component for us, the financial exposure for us. We'll get paid this way. We'll take rest of that fee. If they have an existing weight management program, and therefore, we have a baseline of utilization to start from. We'll provide those employers with a 15% trend guarantee. It's a 1 year guarantee based on our most recent utilization period. So 15% trend guarantee, that's subject to a risk corridor. So our financial exposure is subject to a quarter and after that quarter then the residual risk goes back to the employer. Now we're confident. We have enough experience with other types of drugs and clinical situations that we'll be able to manage within the 15% drug guarantee who are the vast majority of the payers who choose this. And importantly, lifestyle and behavioral modification goes alongside of it from the standpoint of our Omada digital tools, will help us take the GLP-1s and perform the associated lifestyle modifications that we would expect to -- whether that's changes in diet or whether that's changes in exercise patterns, all of that kind of goes alongside of it. But these are types of programs where there are different drug class. We've used these very successfully with our value-based care strategies and Evernorth for many years.

Great. What's been the client feedback on this particular introduction?

There's a lot of interest in it. It's really early because we've only had it in the market for a matter of days. But there's a lot of interest in the program. People want to understand exactly what the fee structure is and how much [indiscernible]. they're interested in the mechanics the same way you are. But there's a lot of interest in this because across our Evernorth book, we have almost half of the employers today cover weight management. Now we tend to have larger employers in our Evernorth book, but that represents opportunity for them to have more predictability in their costs, and it represents opportunity for the other 50% plus go cover it into the space over time.

And if this is taking a more manageable cost out there and you see greater adoption of GLP-1s more broadly in the commercial space?

Over time, we would expect to provide that the clinical efficacy is there and proves to be effective that we would expect there to be more adoption there. You're seeing supply constraints start to ease a little bit, it will be more and more manufacturers next year as well.

Great. But gift to the Commercial segment. And despite all the attention that Medicare gets, interesting that Cigna actually participates in 2 businesses that arguably grow faster than Medicare Advantage, one, specialty that we just talked to, but also the Select commercial segment, which I think I'd like to spend some time on. You seem to prioritize this subsegment of the commercial market more than peers. What differentiates Cigna's value and win rate in this market specifically?

Yes. So we were just talking about Evernorth, the services platform. 60% of the company's income roughly. Now in Cigna Health care, where your question was pointed, the other 40%. The Select segment in the U.S. Employer space define is 50 to 500 employees. So that's just definitional. We have about a 7% market share amongst that employer subsegment today. That compares to we have low double-digit market share in 500 and up, where historically, we've been very successful with multisite employer propositions and product innovations over time. So the 7% share that we have in the Select segment has been growing, but we still see opportunity for that to move into the double digits over time. In terms of why we win, there's a few things I'd call out, one, we take a multifaceted approach to affordability and those employer clients care a lot about affordability in terms of their budgets. So what do I mean by that? We've over time been systematically improving our unit cost reimbursements with providers. We've been using site-of-care optimization approaches. So whether that's moving care from inpatient to outpatient, physical care to virtual care, moving specialty injectables, from facilities to doctor's office. All those things contribute to a more affordable outcome for the employers. Secondly, we've had an agnostic approach to funding arrangement in the 50 to 500 size employer space. So conventional wisdom is employers in that space are basically fully insured or full risk funding arrangement with their payer. We take a funding-agnostic, go-to-market approach where we're willing to do ASO self-funded all the way down to 50 lives, no problem. And ultimately, because we don't have a fully insured book to protect, we don't have to worry about revenue loss or what that does to income contribution. So that represents an upside for us. We've proven to be successful in making a lot of self-funded business, where today, that's 60% of our Select segment, the industry is about 30%. So we have a much greater share that's self-funded than the industry because we take that agnostic approach.

I want to go a little bit deeper on this diagnostic approach. What is that actually from a financial perspective? Does that mean that profit dollar parity with risk, just help me understand what that translates to from a financial perspective?

Yes. So where you want -- profit dollar parity would be the right way to think of it. So not the same percentage profit margin because it's self-funded, revenue is going to be so much lower, but on an earnings per customer basis. The reason for that is, generally speaking, if you're a small employer, you're going to buy all of your solutions from 1 payer. So you want to have a Cigna solution that takes medical for your company, for your pharma you're going to buy 1, generally small employers have very limited HR departments, they want simplicity. And as a result of that [indiscernible] we're able to get most of our offerings in -- at one time, including our stop loss [indiscernible].

Great. And then on the individual market, this is an area that you see as much attention today. It's not a big part of your business today, but where does it fit into the broader strategy at Cigna, you prioritize margins this year? What's going to be your appetite for growth in that market?

So we think it's an important subsegment of the U.S. health care system because there are individuals who don't have access to a government-sponsored plan, whether that be Medicare or Medicaid, TRICARE or they don't have employer-sponsored coverage access. People in the middle, these are -- those who are unemployed or between jobs or early retirees, there needs to be a solution for them. The individual market is that solution. So we've been participating in this market for 10 years since the ACA went live with a measured approach to which geographies that we're in. It's a small part of the overall company today. So when you look at the overall revenue and income contribution, it's a small fraction. I think single-digit 5 percentage of the total company but we see over time 10% to 15% annualized operating income growth in this space because we're only in 14 state today and we expect there will be secular growth in individual market going forward as well.

Great. On the last earnings call, David made an interesting comment that future growth has reached a peak and that market more has an opportunity for expansion at Evernorth. How does that slowing seeing new growth in particular change your view of the Medicare market today versus, say, 5, 10 years ago?

The Medicare market in aggregate, we see as an attractive possibly U.S. health care system. So make no mistake about that. And while we made a strategic decision to divest our Medicare business health care [indiscernible] that was a decision that was made thoughtfully and specifically because of the relative contribution of that business to the overall size of Cigna and the difficulty from a human capital and the financial resources we felt will be needed to really scale it up. So that was the reason we made the decision to divest that business [indiscernible]. We can use the Medicare space that tech subsegment. We serve millions of Medicare lives today through Evernorth, and we'll continue to do that through our service company, [indiscernible]. The comment about growth decelerating, et cetera, we would expect there will be some level of decelerating growth, but it's still an attractively growing space overall in the U.S. Health care system. So we look forward to serving more lives over time than Evernorth and made the decision on the health plan side and made reference to you for the reasons [indiscernible].

Great. Maybe in the last minute here, I wanted to touch on M&A priorities, where do you think the greatest service capabilities that complement your existing portfolio? We just love to hear the kind of the attractive M&A opportunities out there?

Yes. So importantly, as you step back and think about our financial commitments going forward, and our long-term growth expectation is operating income of 6% to 9% and 4% to 5% of the additional EPS accretion to capital deployment, we put those pieces together, 10% to 14% EPS growth, which is higher than our prior expectations and higher than our long-standing commitment into [ 13% ] for [ 10 ] years. So we took the ceiling up on growth rate given all the megatrends that I made reference to in the beginning, the opportunity we see going forward. Now what M&A prospects could be interesting. We're open to a variety of things that are strategically aligned with where the company is headed. Now importantly, we have a leading position in PBM Express Scripts. We have a leading position in the specialty pharmacy Accredo and we have a leading position in our U.S. Employer business. So we don't have gaps in capabilities per se in any of those businesses. So if we were to do anything quite, there will be to extend our leadership position. There are other parts of the company where we have lesser scale or lesser presence, for example, the Evernorth Care services base, we've talked about the opportunity for addressable market expansion organically or inorganically or in the Cigna Healthcare platform, where we have a lesser presence in the benefits those are areas of interest. But importantly, any M&A needs to be basically aligned for the company said financially attractive and have a high probability of those.

Great. We're out of time here. So thank you so much for Brian. Thank you, everyone, for listening. Enjoy the rest of the conference.

Thank you Andrew. Sure.