The Cigna Group (CI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 3 of the Morgan Stanley Healthcare Conference. Before we get started, for more important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you do have any questions, please reach out to your relevant Morgan Stanley sales representative. And with that, yes, happy to -- I'm Erin Wright, health care services analyst at Morgan Stanley. Happy to have with us today Cigna. We have COO, Brian Evanko, with us; as well as Ann Dennison, EVP and CFO of Cigna as well. So thank you so much for joining us. I'm going to first -- before we get into kind of Q&A, I want to hand it off to Brian to talk a little bit about or give a little bit of an intro. Thanks.

Thanks, Erin. Appreciate you and Morgan Stanley hosting us here today. Ann and I look forward to discussing anything that's on your mind. But just maybe a couple of introductory comments before we get going. We just reported our second quarter results last month and delivered a good performance and reaffirmed our full year outlook. And then last week, we reaffirmed the full year EPS outlook yet again. So the company is performing. It's obviously a very disrupted environment that we're operating in right now, but our company continues to deliver. We've delivered historically. We're delivering now, and we'll continue to deliver into the future. In fact, if you go back over the past decade, we've had 13% compounded EPS growth and look forward to another strong year here in 2025. And really, that comes back to our 3 strong scaled growth platforms, our health benefits business, Cigna Healthcare; and then in Evernorth, our service company; we have our pharmacy benefit services business, Express Scripts; and our Specialty Pharmacy business and Specialty Care Services business, I should say. All 3 of those are strong scaled platforms that continue to grow, and we're confident in those businesses continue to grow in the future. The second thing I wanted to highlight that's a net new item is, just last week, we announced a sizable investment in Shields Health services. And so for those of you not familiar with Shields, this is the leading -- by far, a leading company in the specialty space as it relates to serving health systems. So the specialty drug market, if you're not familiar with it, is an over $400 billion addressable market. Today, we have a very strong position in the prescription drug-oriented part of that market, which is about 60% or so with our Accredo specialty pharmacy, but we were comparatively weaker in the medical benefit component of the specialty drug market, which is the other 40%. And so our investment in Shields immediately gives us a very strong presence in that part of the market. And this is, again, $400 billion-plus addressable market, high single-digit secular growth annually going forward. We're already strong in the drug-oriented component with Accredo. And now we've, overnight, become much stronger with our presence in the medical benefit component of the specialty drug market with the investment we made in Shields. And along with that, again, we reaffirmed our 2025 EPS outlook, so the company continues to perform in a difficult environment. So just a couple of comments I want to start with Erin before we get to whatsoever.

Okay. Great. So I want to stay on the topic of Shields since it's so recent as well. And can you give a little bit more detail on the financial and strategic merits of the investment, how you see this kind of integrating over time and some of maybe the more specifics in terms of the genesis of this transaction?

Sure. So I'll start with some strategic aspects of it, and then I'll ask Ann to chime in on the financial components of the transaction. And so as we think about any inorganic opportunities for the company, they go through 3 filters for us. One, is it strategically aligned with where the company is headed? Two, is it financially attractive? And three, is there a high probability of completing the transaction. This one ticks all those boxes. So strategically, as I mentioned earlier, it's an asset in the category of one in this space, far and away the leader as it relates to serving health systems. Two, financially was attractive, and Ann will reference that in just a minute. And then three, we obviously got the transaction completed. But on the strategic merits, really importantly, maybe I'll unpack a little bit more of what I was talking about earlier with the 40% of the specialty drug market that serves providers. Today, we have a strong distribution business in that part of the market with CuraScript, which is about a $25 billion business for us. So think of this as distributing high-cost, complex specialty drugs to providers, to hospitals, to health systems, to clinics. Where we didn't have as strong of a position is in the actual support for those health systems in managing and running their own specialty pharmacies. That's what Shields does at a tremendous level. And so our investment in Shields was designed to get us into that part of the specialty drug market. So think of large health systems, Shields currently serves about 80 of them across the country. And then all the hospitals and clinics that attach to that, there's about 1,000 of those that are in support of the 80 health systems. So they are running their own specialty pharmacies. But in a lot of cases, they're not optimizing the way they're running it. So we help them with drug procurement. We help them with inventory management. We help them with clinical care coordination across different sites. Those are all the things that Shields does to make the hospitals, specialty pharmacy optimized and run more effectively. And the hospitals and health systems are looking for this because increasingly, their core businesses are under financial pressure. If you think about the challenges of payer mix, the challenges of wage inflation and associated dynamics along those lines. So for us, the ability to have this position in Shields gives us exposure to a really high-growth part of the market and a part of the market where the health systems really need help. They need help to optimize and manage their specialty drugs more effectively. So that was the strategic rationale why we did this. It made a ton of sense for us. It was quite honestly, a no-brainer strategically, which leads to the financial component of the transaction. Ann?

Great. So on the financial side, so $3.5 billion investment. The investment is in a noncontrolling preferred. There is an income stream associated with it. We're not -- we haven't disclosed the specific details, but I would describe it as not material to our overall results, excuse me. And so as Brian said, we're extremely excited for the strategic element of this. And when you think about our capital deployment framework and as well as over the long term, sort of the incremental EPS that we get from capital deployment of 4% to 5% is either coming from share repurchase, M&A or debt paydown in those categories. And so Shields fits nicely into this construct with a long-term strategic then to it.

That's great. I want to talk a little bit broader specialty. I just always view that that's an underappreciated part of just the market and part of the Cigna story. And it's a $400 billion market growing high single digits. I mean it's bigger and faster growing than a lot of areas of traditional kind of health care services or the insurance businesses that get a lot more attention. So I want to shift gears to that and just talk about what your long-term prospects are across that business, how you see you're competitively advantaged or the differentiators for Cigna and what that means in terms of potential for growth above the market.

Sure. Sure. So I'll take this one. So again, coming back to the highest level, $400 billion-plus addressable market, high single-digit secular growth. About 60% of that is in direct-to-patient specialty drugs. So we serve that market through Accredo, which is our specialty pharmacy, both in terms of the drugs going direct to the patient, but also our support for those. So we have over 600 home infusion nurses that go into people's houses and help them to inject or infuse these specialty medications themselves. So that business is strong, scaled, continues to grow at really attractive rates. And one of the reasons we win is because of the clinical expertise we have in that business. So I tend to describe it, it's more like a care delivery business as opposed to an insurance business or a PBM business, more like a care delivery business because fundamentally, these are all high-cost clinically intensive drugs that require case by case, in some cases, temperature control or very specific handling. So we serve about 1 million patients today through Accredo. Last year, we filled about 8 million prescriptions on their behalf. And one of the reasons that we've established a differentiated position is the clinical expertise that we have, all the pharmacists, the pharma techs that we employ, the home infusion nurses. And importantly, the manufacturers of specialty drugs, they don't just want to give these drugs to anybody. You have to be someone that they trust as it relates to your specialty pharmacy capabilities in order to get access to some of these specialty drugs. So the limited distribution drugs, which are some of the rarest and most complex, we have the most access to these of any specialty pharmacy in the world. So we have access to over 70% of all the LDDs that exist. So as a result of that, we're not just in Cigna's network with Accredo, our Accredo specialty pharmacy is in many competitor payer networks or competitor PBM networks. And in fact, about 40% of our patients are unaffiliated with our Cigna Healthcare or Express Scripts businesses. So those are the reasons why we win in that part of the market, which again is the more pharmacy direct-to-patient part of specialty. And the other 40%, which is a direct through provider -- direct to provider, we've had this position in CuraScript that I was describing earlier, the distribution to the medical professionals, but we were not as strong in the actual -- helping the providers run their specialty pharmacy capabilities, which is what Shields does. So Shields is a fee-based business. We're getting fees from the health systems and the hospitals to help them assist them in operating their specialty pharmacies, which increasingly are important because many of these systems hadn't historically focused as much on the prescription drug part of their operations, but now they are because prescription drugs continue to be a bigger percentage of the total pie. And it's an opportunity for many of these systems to generate more revenue in a time where they're really constrained financially.

Okay. And I'll switch to biosimilars like biosimilars, STELARA, HUMIRA, like those can be a meaningful opportunity on the specialty pharmacy side. I think $100 billion by 2030 is how you sized it. How is this playing out relative to your expectations given some varying adoption curves across biosimilars?

Yes. We see biosimilars and generic specialty drugs as a great savings opportunity for America broadly. And to your point, there will be $100 billion of drugs today that are subject to biosimilar and generic competition by 2030, and we're right in the midst of that as it relates to the capabilities we have across our Evernorth platform. And so from our point of view, this is a classic case of it's a win-win for the financier, whether it's an employer client, health plan or an individual. It's a win for the patient because it's a lower out-of-pocket. And it's a win for us because whenever we fill a biosimilar or generic instead of a high-cost specialty drug or brand drug, it ends up financially being equivalent or better for us on a per script basis. So for all those reasons, we believe biosimilars and specialty generics are just a huge opportunity for the American health system. HUMIRA was the first really one at scale, right, which hit the market a year or 2 ago. As it relates to where we are now, at the end of the second quarter, we had over 70% of eligible HUMIRA scripts that were filled by a biosimilar. So that's been really good progress. We expect that metric will tick up over the balance of the year as well. And then in May, we introduced a $0 patient out-of-pocket for STELARA, which is the next largest biosimilar that's been introduced. And we've seen good uptick in the 3 or 4 months since we put that opportunity into the market. But both HUMIRA and STELARA, we now have $0 patient out-of-pocket offerings available, which again speaks to the win-win opportunity with these biosimilars.

And then on -- Brian, you mentioned CuraScript several times, and I don't want to go over too much more on that, but I do want a little bit of an update on how much you're doing now in terms of CuraScript. I think the goal was to get to 50% in-house distribution across your specialty business. I think you were at 20% roughly. Or where do you stand today? And how is progress on that front? Do you anticipate taking that entire business in terms of distribution?

Yes. Your numbers are broadly right, Erin, in terms of the way to frame the situation. So CuraScript today for us is about a $25 billion business. It's been growing double digits annually for a number of years in a row. Most of the distribution is focused on the provider community. So meaning we don't really distribute to retail pharmacies, et cetera, with CuraScript. So we do have a partnership -- a long-standing partnership with Cencora, which has continued to be constructive and productive. We just extended that over a multiyear period last year. And so we continue to look drug by drug at what makes sense for us to be able to distribute ourselves through CuraScript versus through a partner who we have a good relationship with in Cencora. Biosimilars, in particular, the ones I just referenced for HUMIRA and STELARA do lend themselves to our CuraScript capabilities. So we've tended to use that capability for the newer biosimilars that come to market. And we expect the CuraScript business will continue to grow attractively in the future.

And before shifting to Pharmacy Benefit Services, I want to ask a little bit about Evernorth just broadly and the seasonality here. This was one area that was a big question for investors after the second quarter call was on sort of the Evernorth earnings progression in the second half. Could you talk a little bit or provide a little bit of an overview on how we should be thinking about that quarterly progression? What are some of the moving pieces, not only, I guess, across Evernorth, but Cigna -- the broader enterprise as well, Cigna Healthcare Evernorth, for you, for the remainder of the year?

Sure. So coming out of the second quarter, we had provided some guidance. I think in some cases, that guidance we were providing was taken as a point estimate. And so I think what's important to note, and if we go straight to Evernorth, there's nothing out of pattern that we would expect in the third or fourth quarter. So when you think about the third quarter and the fourth quarter, the third quarter is going to look and feel distribution-wise in the fourth quarter like it did last year and the levels of growth versus last year for the third and fourth quarter, we expect them to look similar to what we saw last year. So that's on the Evernorth side. On the Cigna Healthcare side, we expect the third quarter to be about a little bit less than 25% of our full year outlook. And then if you look at the entirety of our EPS for the third quarter, we expect that to be a little bit higher than 25% on the full year outlook. So in that vein. But again, these are meant to be directional guidance, not point estimates as folks are thinking about modeling those out.

Okay. Great. Okay. So I'll switch gears to the PBM, and then we'll get to Cigna Healthcare. So on the PBM side of the business, how would you characterize the current 2026 selling season? You've had a multiyear renewal with Prime and are there any other contracts, I guess, up for renewal?

Yes, the '26 season for us in the pharmacy benefit services space specifically is just about wrapped up now, and there's only a few left to go. So broadly speaking, another year of strong retention. So we're on track for that mid-90s or higher level in the Pharmacy Benefit Services business. As you referenced, Erin, earlier in the year, we announced the multiyear renewal of Prime Therapeutics, which we're thrilled to do. They've been a great partner to us. And again, that validates from our point of view that some of the largest, most sophisticated purchasers continue to value the services that we provide, even though there is obviously some buzz and some noise in the market about alternative models to some degree. But we continue to have a strong level of retention, continue to have high satisfaction rates from our clients and are pleased with the ongoing growth of that business.

Okay. Great. GLP-1s. So a little bit of over like 50% or so of an employer relationship currently cover GLP-1s for weight loss. It's flattish year-over-year. I guess how would you characterize that remaining 50% bucket in terms of their readiness to cover GLP-1s beyond the diabetic indications? And then Evernorth has announced several innovative programs around this over the past couple of years, whether it's the $200 out-of-pocket cap, EnCircleRx, EnReachRx, EnGuide Pharmacy, ClearNetwork, and a lot of other initiatives in and around this category. So can you comment on the reception of those, the adoption of those and how you're addressing kind of GLP-1s broadly?

Sure. That was a multi-parter, all of this. But broadly speaking, we're really proud of everything we've been doing in the GLP-1 space across the Cigna Group. Obviously, these are innovative medications. They're making a difference in a lot of people's lives, and we want to make sure that they're accessed in an affordable way that ensures patient safety. So a lot of our programs that we've introduced have been anchored around those themes: access, affordability and patient safety. You mentioned over 50% of our clients have covered GLP-1s for weight management. That's specifically our Evernorth portfolio, where we tend to have larger employers on average and health plans on average. In the Cigna Healthcare portfolio, which is our health benefits business, we tend to skew a little bit to smaller employers. There, we have 15% to 20% that cover it for weight management. So to just give you a little bit of a sense of the contrast there. But to your point, it's been flattish year-over-year in terms of the percentage of employers covering it. And we still are seeing utilization growth because even with the same percentage of employers, there's net utilization growth in those that have access to it. As it relates to those that don't cover it, there's a lot of interest, but the affordability hurdle is a big one for many employers to get over. And some of the employers we cover have higher rates of turnover in their employee base. And so they have questions about whether they'll see the return or whether the return will be to the benefit of a different employer in the future. So those are some of the barriers that still exist. But the programs we've introduced in Circle and REACH and Guide have all been anchored around those themes of affordability, access and patient safety. And importantly, patient safety is one we've been very focused on because there are many non-FDA-approved versions out there, in some cases, compounded versions that more and more you hear stories about the ingredients not being quite right. You also have risk of people micro dosing to try to stretch their finances and things along those lines. And we're very focused on making sure that the drugs are being used in the right way. And so the programs you made reference to EnCircle, EnReach, EnGuide are all designed around that. In some cases, it means lower prescription volumes for us, which we're okay with because over the long run, we think it's the right thing to do to ensure that there's the access but with the right patient safety wrapped around it. And then in May, I think this was also in your question, we introduced a new program, which involved a reduction in the net price for the FDA-approved versions of the GLP-1s and an out-of-pocket cap of no more than $200 per person per month. So if you think about that, it made the financial picture a little more attractive for an employer who's covering it because they got a lower net price and they get the cost sharing from the patient. The patient was capped at $200 in many instances, lower than that, which competes very effectively with direct-to-consumer offerings and other ways that they could access the medication. So that was an example of another program that we introduced to try to encourage affordability access and patient safety. But again, we're really proud of what we've done in this space. There will be more innovations to come in the future, I'm sure of it.