The Cigna Group (CI) Earnings Call Transcript & Summary

Good afternoon, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the facilities and managed care analyst here at Barclays. And I'm pleased to be joined on screen with CFO, Brian Evanko from Cigna Group. Brian, welcome.

Thanks for hosting us, Andrew, virtually.

Absolutely. Any prepared or opening remarks you have today? Or should we dive right into Q&A?

If you give me just a minute or 2, maybe just a few thoughts to get us kicked off, and then I'll turn it back over to you. For those of you that saw our fourth quarter earnings report would have realized we had a difficult fourth quarter and that was driven by our Cigna Healthcare business, specifically our stop-loss products. Now on the bright side, this business is something we're very familiar with. We've been in it for decades. We've taken the corrective actions that we need to take to get the business on to the right track. And we put forth a 2025 outlook that reflects the best set of information that we had at the time of our fourth quarter earnings release. And we continue to be really excited about the future of the company, not only in our specialty pharmacy, which has been growing leaps and bounds, but also in our pharmacy benefit services businesses Evernorth as well as our Cigna Healthcare portfolio. So our 3 high-performing growth engines continue to deliver. As it relates to the rest of '25, we'll continue to generate a lot of cash. As you all know, that's one of the things we're fortunate to have here at the Cigna Group is a strong cash-generating business. We're on track to have $10 billion plus of cash flow from operations this year, which gives us quite a bit of flexibility to deploy that cash between internal reinvestment, shareholder dividend as well as the flexibility to have strategic bolt-on M&A, coupled with share repurchase. And we've already repurchased over $1 billion of our stock year-to-date. And finally, while it's early in the year through the first couple of months, the first quarter is tracking in line with expectations. That's both at the Evernorth platform level, the Cigna Healthcare platform level as well as our all-in EPS. And you would have seen we recently reaffirmed our enterprise EPS in an 8-K that we issued. So just a few things I thought I'd kick off with, Andrew, but back over to you to wherever you'd like to take the conversation.

Great. Let's start with the stop-loss. As you just mentioned, you had a bit of a setback on that product in 4Q, attributed some of the pressure to specialty and higher acuity surgeries. I think if any company was ahead of the curve on the acceleration of specialty drugs, it was probably Cigna. So taking a step back, why do you think specialty pharmacy has emerged as such a pressure point across the industry now when many of the drugs seemingly causing the pressure, drugs like KEYTRUDA, OCREVUS have been around for a number of years.

Yes. So broadly speaking, the specialty drug wave that we're seeing is right in its infancy actually in terms of where we see the next decade going. And it's already a $400 billion addressable market, as we've talked about, for example, at our Investor Day last year, right around this time. And it's been growing high single digits. We expect it to continue growing at that rate from the standpoint of secular growth moving forward. And part of that is drug innovation as you're seeing more and more drugs being approved by the FDA and part of it is also a broader set of indications for the existing drugs. So you referenced KEYTRUDA, OCREVUS, et cetera. Some of those are being now prescribed for additional indications or additional conditions. And on top of that, we're also seeing a dynamic where there are -- there's a greater level of comfort by the prescribers with using specialty drugs as maybe the first place to go as opposed to traditionally starting with a nonspecialty brand or a different alternative. So all those forces are leading to this wave of specialty drug innovation that's transpiring across the health care system. We benefit from that in our Accredo specialty pharmacy in the specialty and care services platform within Evernorth. Now to the core of your question, this was a pressure point for us within Cigna Healthcare in 2024. Those specialty drugs, particularly specialty injectables and infused specialty drugs were a source of pressure for us in 2024. And we view that as a structural shift that's transpired for some of the reasons I made reference to earlier in terms of the new drugs coming to market, the broader range of indications and the greater level of comfort with prescribers using those as the first-line medication. So for all those reasons, we think there's a structural shift transpiring. Our 2025 outlook reflects that as does our most recent set of pricing assumptions that we put in place for our later renewals in 2025 and 2026. So when you put all those pieces together, difficult 2024 driven by that. '25 will also be weighed down a bit as our 2025 outlook reflects. And then we're confident in the ability to recover that margin shortfall over the course of the next 2 sales cycles.

Great. And when I think about just kind of broader acceleration of specialty, it looks like, at least from our viewpoint, it started to pick up meaningfully in the back half of 2024. And if I think about a 12-month accumulation of specialty drugs and spend, I think it's reasonable to assume that it might peak in the second quarter of 2025. So I guess, given that, what gives you confidence that the updated guidance fully captures the accelerating specialty trend, and we're talking about pricing in the stop-loss business, for instance.

Sure. Within our stop-loss business and within the Cigna Healthcare portfolio more broadly, we have assumed that our 2025 pricing does not catch all of the uptick that transpired, most notably in the back half of '24. And specialty drugs weren't the only source of upward pressure in stop-loss. We also saw higher cost surgical procedures, some of that being cardiac, some of that being oncological. So there are a few different forces that led to some of the pressure we saw in the stop-loss business. But our outlook for '25 assumes that our early '25 pricing did not catch all of that. Our later 2025 pricing, which we believe is now prudent and appropriate, does capture that. And then 2026 pricing will more fully capture the updated assumptions that we've made going forward. So again, our view here is there has been a structural shift for these higher cost claimants, partly driven by specialty drugs, and we think the '25 outlook properly reflects that.

Right. And this isn't just an issue for Cigna that you're dealing with. This is clearly an issue across the industry. I guess, what are you seeing from a competitive standpoint? What level of price increases are you able to pass through? And how does that compare to what you might see from your competitors?

There's a couple of things here as it relates to the pricing environment. So if you take -- we'll take the commercial employer space broadly. It's a pretty firm market. So we were able to get our 2025 all-in rate increases at a higher level than our 2024 all-in rate increases for the commercial employer portfolio. So elevated cost trends in '24, the expectations of continued elevated cost trends in '25, our pricing yields are higher in '25 than they were in '24. Now that's the overall commercial employer portfolio. Then you move to stop-loss specifically, which I think is where your question was headed. Important to keep in mind, our stop-loss portfolio is all integrated clients. So we don't write any stand-alone stop-loss. It's all first dollar relationships, self-funded, that are then wrapped with a stop-loss coverage over the top. Most of that's individual stop-loss for an individual claimant level. Some of that is aggregate stop-loss. So it's a little bit difficult to do a direct comparison of that to other stop-loss carriers who might be stand-alone in nature. But similar to my comments on the first dollar side, we're seeing what I would characterize as firm rational pricing in the stop-loss market as opposed to anyone coming in with irrational pricing. And the yields we've been able to get on the later '25 renewals reflect the most recent updated assumptions that I made reference to. But again, these are integrated overall client relationships where often the employers are making trade-offs between pulling points, deductible levels and premium contributions as part of their benefit strategies.

Right. And it sounds like the individual stop-loss book was the primary source of the pressure. Can you share with us the premiums, what level of premiums you have on the individual side versus the aggregate stop-loss book?

Yes. So for 2024, the full year, we had about $6.7 billion of premium across the entire stop-loss portfolio. And so that represents about 15% of the Cigna Healthcare premium in 2024. Most of the $6.7 billion is an individual stop-loss. So these would be employers who buy protection for individual claimants above a certain threshold. Some might but very low pooling points like $25,000 or $50,000. Larger employers might buy much larger pooling points, maybe $300,000 or $500,000. And then there's -- the minority of the $6.7 billion is an aggregate stop-loss where the employer just wants protection against their all-in budget. So they might buy 110% or 120% aggregate stop-loss. But the majority, think of it as maybe 3/4, 1/4 individual versus the aggregate within the $6.7 billion.

Got it. Okay. And despite that stop-loss pressure, I think you've noted that your broader commercial trends, both aggregate, fully insured have been relatively in line. Yes, I think you're expecting growth in your Select and Middle markets again in 2025. Can you give more color on the group risk competitive landscape and where your products are gaining traction on the Select and Middle markets?

Sure. Sure. Happy to. Important here, our Select and Middle market is actually mostly self-funded, mostly ASO. I know inherent in your question were some comments about the group risk market, but the majority of the Middle market business is ASO, self-funded. And then as you go to the smaller employers, the Select segment, which is under $500, you get more of a mix, more of a balance between the self-funded and the fully insured. So when you think about our expectation of growth in both Middle market and Select segment, it's a combination of self-funded and full risk business. And generally speaking, if a self-funded employer, particularly at the larger end is making a choice, it's usually not going to be a price-driven choice. Price is a consideration and usually more of a knockout criteria, but typically, it's other factors and other variables that are driving the final decision on particularly Middle market and larger self-funded business. Now on the risk side, to the core of the question, it continues to be a rational and firm market. So those rate increases I made reference to, which for us are higher in '25 than they were in '24, we're still seeing good persistency as it relates to the retention of those employers even with the more elevated rate increase environment we're seeing here in '25. And the Select segment growth we expect this year, you can think of it as broadly directionally in line with what we've been putting up the last few years as opposed to outsized growth in '25 or anything along the lines of that. So I wouldn't draw any conclusions here about pricing adequacy or anything along the lines of that. We feel good about the prices that we have in the market and the employers are choosing us for a wide variety of reasons, which generally prices more of a knockout criteria than the sole factor for why people are choosing us.

Great. And going down -- further down the commercial segment to your ACA exchange business, you've reduced your footprint there for a number of years as you've prioritized margin over membership. How are you thinking about your competitive positioning now in that market? And do you view that as an area of growth from here?

Yes. So the ACA market for us, important when we kind of step back from this because we think you need a functioning individual market in the U.S. in order for the entire health care system to work. So we been participating in this market for a decade plus and continue to refine our footprint over the course of this. But there is a need here when you think about all the people who don't have access to employer-sponsored plans or government-sponsored plans. So we've been active in this space as a participant to help make sure that the market is functioning and working effectively. Started small. We gradually expanded our footprint over the years. And coming off of 2023, 2 years ago now, which was a difficult year for our individual business, we needed to do some reconfiguration of the geographic footprint and also the pricing strategy. So we did that from '23 to '24. The book shrunk pretty meaningfully from '23 to '24. And then as we stepped into '25, we did some further adjustments to the geographic footprint and took pricing actions to get our target margins for this business, which are meant to be 4% to 6%. We took pricing actions to get ourselves into that zone here in 2025. So we're tracking to that. We do expect to have fewer customers in '25 than we had in '24. That's been reflected in the 2025 customer outlook that we put forth alongside of our fourth quarter earnings release. So you can think of the individual exchange will probably be down 20% or so from where they were at year-end '24, in line with where we expected. And from here, we would expect to grow off this base. And over the long term, consistent with our growth algorithm and our Investor Day outlook from a year ago, we would expect 10% to 15% average annual growth on a go-forward basis off that new base.

Great. And are you able to share anything you're seeing as it relates to effectuated enrollment for the exchange population? Is that playing out relatively in line with expectations? Or are there any observations to call out there?

So far for us, I'd say it's in line with expectations. There's a little bit more dust to settle because April, I think, is when the final eligibility verifications will be completed. Also, when you think about our mix, we have a little bit less subsidized silver. We have a little bit less of the CSR silver plans than the market. And so we feel we'll be a little bit less exposed to whatever transpires there. But the outlook we put forth here for '25 contemplates all those moving pieces.

Great. Let's move on to the Evernorth side of the business. It sounds like you and the rest of the industry are making a concerted effort to pass along close to, if not 100% of rebates. What's driving that decision? And if that's the case, what do you think is misunderstood about the PBM model with respect to rebates and potential reform?

Yes. So our pharmacy benefit services business, which the brand is Express Scripts that people tend to relate to us, high-performing business. It's been delivering strong results for many years in a row, had another good '24, and we're off to a good start, as I said, in '25. Now the PBM market more generally has been moving toward more of a pass-through rebate model anyway, kind of regardless of regulatory forces. That's just been the direction of travel, if you will, relative to client choice. So we believe it's important to have a variety of ways in which employers or health plans can contract with us as opposed to having just one vehicle. So some employers prefer that 100% of the rebates are passed through to them. Others prefer that we retain a portion of the rebates because they view it as driving better economic alignment. But we currently pass through over 95% of the rebate dollars for us at any given point in time might be higher than that. But the industry has been heading in that direction for some time already and some 75% of our clients are in a full pass-through rebate situation already. So I think the industry, ourselves, some of our competitors have been also trying to gradually nudge employers in that direction because we know it's such a lightning rod from a regulatory standpoint. And there's receptivity to moving in that direction anyway because at the end of the day, our role here is to keep net prices as low as possible and retained rebates are just one mechanism through which we capture the value that we create through our mission here of driving net prices as low as possible. So that's broadly how we think of the picture.

Great. Shifting to biosimilars. Since the launch of the interchangeable biosimilar HUMIRA in July, I think you've converted nearly 50% of eligibles onto the biosimilar. Can you talk about your learnings from that and compare that to your strategy for STELARA in 2025?

Sure. Yes, biosimilars are a very important part of the broader drug innovation that I made reference to earlier in your question about specialty drugs. But more generally, they're a good example of something that is a win-win-win from the standpoint of the patient gets a better net cost. The plan sponsor, whether it's an employer or health plan has a lower price point. And then we as the -- essentially the facilitator of all that are able to capture an appropriate return on all that. So it's a win-win-win across all those stakeholders when someone moves from a high-cost brand drug over into a biosimilar. And HUMIRA is a great example of that, where we introduced a $0 patient out-of-pocket through our Accredo subsidiary in the middle of the year. We have 50% uptake on that by the end of the year, to your point, and that number will continue to track higher here in 2025, and our guidance contemplates that. Now to your point on STELARA, that's another example of a new drug, a drug that will have a new biosimilar available in '25. And so we plan to broadly use the same recipe as we did with HUMIRA, where we'll have a $0 patient out-of-pocket available. We would expect the penetration of that to gradually uptick over the course of the year. It's important to keep in mind here, things like the interchangeability of the drug matters, having different dosage levels can matter and whether someone is a new patient or an existing patient can matter. All those things influence the rate and pace of the adoption of the biosimilars, but this is an important lever for the U.S. health care system, and it's a driver of our long-term 5% to 8% average annual growth rate of income in Evernorth.

Great. Sticking with some of the high-cost of drugs. You've made a lot of inroads with employers on the GLP-1 cost guarantees. What's the latest feedback from the market? And what guardrails do you put in place on the usage of these drugs to deliver on those cost outcomes?

Yes. So we introduced a program last year called EnCircleRx, which was meant to be a GLP-1 for weight management program that an employer can adopt, have all their employees and their family members that move into, which allows for what we view as a more controlled environment for purposes of using GLP-1s. And what do I mean by that? It's only the FDA-approved GLP-1s that are part of the program. So employers and their employees and dependents don't have to worry about things like safety concerns or quality concerns because it's the FDA-approved versions. Secondly, there is a lifestyle modification component to this where an eligible person will use our Omada digital app to make sure that they're staying on track with the treatment regimen and the associated components that are attached to that. And then, of course, there are clinical guidelines relative to BMI and such to qualify for the program. So employers like this program because it gives them a greater degree of budget certainty with the financial guarantees that we've embedded in it. They also like the fact that they know it's safe for their employees and family members who are using the drugs. They don't have to worry about compounded versions or others maybe off-label where there's some risk. And we currently have over 9 million eligibles that have opted in here to the EnCircleRx program. That number is higher than it was even earlier this year. So there's been good demand for this program, and we see GLP-1s continuing to grow in the future as well.

When we think about the guardrails that you mentioned, things like maybe BMI, do you find yourself needing to revise those higher to combat the high usage and adoption of the drugs as we look at '24 to '25 to '26?

We have not because we've let the clinical guidelines dictate what's appropriate here. So there has been high growth rates in GLP-1s for the past few years. When you think about '23 was a high trend year, '24 was a high trend year, '25, we expect to be another high trend year, albeit at a decelerating rate, but still at a high rate of growth in GLP-1 scripts. But ultimately, we let clinical guidelines dictate that as opposed to financial considerations.

When we think about the Evernorth business more broadly, there's been a number of big customer wins over the years. Centene was one of the biggest wins, I think, for the business, probably as big of a client as it gets. You onboarded that contract in 2024 and previously cited expectations to breakeven in 2024, run rate target margins in 2025. Are you still on track to be at those target margins with this contract for this year?

You could think of the broad kind of multiyear arrangement with them is tracking to what we expected. So to your point, '23 was an investment year. '24 was onboarding the first year of a breakeven type of a year and '25, we're hitting our stride more at the run rate. There'll be a little bit of a growth in the contribution over the course of '25 as you think about how to model the quarterly pattern. But overall, the relationship is tracking to expectations. Our '25 outlook reflects those dynamics when you think about the full year Evernorth outlook as well as the seasonal pattern that we described in our fourth quarter call. So overall, good relationship. To your point, it's the largest client we have at this point, and we're working constructively with them.

Great. And with the fourth quarter earnings, you guys also announced an incremental $150 million of investments across the health care segment and Evernorth. What exactly do those investments entail? And is that a recurring expense item or kind of a onetime investment?

Yes. So as we teed this up alongside our fourth quarter earnings release, importantly, we felt like we had an obligation here to step into a little bit of the void in the health care system in terms of consumers, patients that are asking for the health care system to work better. We decided as a company to step into that with these commitments that we outlined as well as putting our money where our mouth is, which led to the $150 million of initiative investment that we've earmarked here for '25. You can think of that as divided between Cigna Healthcare and Evernorth. And you can think of that as patient-facing and provider-facing. Some of that will be kind of run ratable from the standpoint of some of its head count. So as an example, we're adding advocates and navigators to help with some of the most clinically complex customers and patients that we serve. So that type of thing will be in our baseline. There are other things that are more onetime in nature as it relates to technology investments. So for example, in Cigna Healthcare, we're developing a prior authorization tracker so that as a customer, you can understand where your prior authorization is in process, if you think about package delivery or pizza deliveries as an analog to that. So that's the type of thing. There will be more one-off spend. And then in Evernorth, there's investments that we're making in our patient level drug reporting. So you'll get a personalized statement at the end of the year, which will be available digitally. That's the type of thing that will be mostly nonrecurring in nature, but you can think of a blend of some recurring and some nonrecurring spend in that $150 million.

Great. And last question here as we're coming up on time. the new administration has brought forth a lot of potential change for the health care industry, including potential regulatory change for M&A. How does that backdrop impact your appetite for M&A going forward?

Our framework for M&A really is unchanged from what we've talked about in prior quarterly reports and prior conferences, meaning any asset that we consider needs to be strategically attractive. It needs to make financial sense for us, and it needs to have a high probability to close. So that criteria is unchanged. New administration or not, those 3 things need to be true. And for '25, as I indicated earlier, and we talked about in our fourth quarter call, we'll focus on the potential for strategic bolt-on transactions. So think of those as up to single-digit billion type price tags. But each time we evaluate any of those, it competes up against share repurchase. And with our shares trading where they are, we continue to view that as a very attractive lever. The pending Medicare divestiture, which we still expect to complete this month, we expect to use the majority of those proceeds for share repurchase. So we will anticipate a balanced capital deployment framework for the balance of 2025.

Great. With that, we're out of time. Brian, thank you so much for joining us today, and please enjoy the rest of the conference.

Thank you, Andrew. Appreciate it.

Thank you.