CVS 1Q17 Earnings Call Notes

Larry J. Merlo – CVS Health Corp.

Generics are 87% of scripts

“We effectively purchase generics through Red Oak Sourcing using our size, scale and expertise. And we encourage generic utilization to drive down costs, with generics now comprising about 87% of scripts filled across the enterprise. To more effectively manage the cost of the remaining scripts, we employ sophisticated formulary management tools to ensure that the right patient receives the right drug at the lowest possible cost.”

Jonathan C. Roberts – CVS Health Corp.

Using AI to crawl through claims

The other thing I would add is that there’s been a lot written about the disruption that happens when you move business, and the industry has evolved a lot over the last four or five years. We now have automation, so a lot of these new clients are implemented in an automated way. And then, our testing platform now employs artificial intelligence, where we crawl through the claims and look for anything that’s unusual. And so that has resulted in what I think have been very successful welcome seasons over the last several years. So we’re very confident in our ability to implement new business, large and small.

CVS 4Q16 Earnings Call Notes

Larry Merlo

Extremely difficult to comment on ACA scenarios

“So with that, let me move on to the topic of the potential repeal and replacement of the ACA. We believe it’s important to provide affordable coverage for all Americans, which both Democrats and Republicans have acknowledged. However, at this point, it’s extremely difficult for us to comment on the possible scenarios that may play out in the coming months.”

We are the solution not the problem to rising drug prices

“I also want to address the ongoing rhetoric around drug pricing. And whether it’s new launches at elevated price points or increasing prices of older drugs, those contributing to a sense that government interventions are necessary and any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem. And that’s why both public and private payers continue to count on PBMs as indispensable partners that help to manage their drug trend.”

Managing specialty pharma is top of mind for clients

“, top of mind for our clients continues to be managing their rapidly growing specialty trend. And we offer a comprehensive set of solutions and continue to see solid growth in specialty. And specialty revenues increased 12% in the fourth quarter, continuing to outpace the market.”

Pharma copmanies have lost $100 B of branded drugs

“you look back and you think about just the sheer number of branded products that have come off patent over the last four, five years. We’ve got nearly $100 billion of branded drugs that have lost patent protection. Obviously, that’s created somewhat of a headwind for the pharmaceutical industry. You’ve got new products that have entered the market that to some degree I describe as me-too products that are entering the market at inflated price points with no incremental effectiveness over the existing therapies. So why should sponsors of care pay for a higher price of those drugs, especially when many of those drugs are the ones that we’re seeing advertised on TV, okay, countless times; and there’s a cost to that. So I think when you start connecting the dots in terms of why the rhetoric now, what has changed in the marketplace that is driving this, it starts to bring some of that dialogue to the discussion.”

CVS 2Q16 Earnings Call Notes

CVS Health’s (CVS) CEO Larry J. Merlo on Q2 2016

You see more care being chosen individually

“At the same time, back to your question, if you ask why we’ve been successful and why we expect to continue to be successful, we continue to see this retailization of healthcare. And you see more people in consumer-directed health plans. You see more care being chosen individually, when you think about some of the government-sponsored care with Medicare. And that points to the value associated with multiple consumer touch points.”

Renewal is 75% done, expecting ~97% retention

” the year ended up at 97.2%, okay, for last year’s selling season. And, as we mentioned, we have about 75% of the renewal is done, so we’re in the homestretch there. I don’t know what the retention rate was at this time last year. It probably wouldn’t be that far off with where we are.”

There is a lot of data out there. It’s one thing to collect it, another thing to use it

” I think you’re hearing a theme emerge. And it’s not a new theme, but whether we’re talking about your point on the front store or some of the things that have come up earlier with some of the questions about the pharmacy, there is a tremendous amount of data out there, okay? And it’s one thing to collect the data. It’s another thing in terms of how do you use the data to create an outcome or a behavioral change. And that’s where we’ve made significant investments in our business, whether it’s ExtraCare or whether it’s the capabilities back in the pharmacy, that is allowing us to do things in a very differentiated way that we think that is giving us an advantage in the marketplace.”

Biosimilars will behave more like brands than generics

” while biosimilars are just beginning to enter the market and their impact will be will be nominal or minimal, okay, in the near-term, we believe that they will grow in importance. And they will behave more like brands than generics, which create opportunities within the formulary management area. So that’s how we’ve thought about it at a very high level. “

CVS 1Q16 Earnings Call Notes

Larry J. Merlo – President, Chief Executive Officer & Director

Cost management is our PBM clients’ top concern

“we held our client forum in late March, which was attended by about 900 people, and clients acknowledged that their top concern is cost management, with service running a close second. And I’m pleased to report that we have been able to deliver on both fronts. Now in this environment of rising healthcare costs, clients are looking to us for proactive cost management solutions that anticipate market changes that impact trend. And they are adopting more aggressive strategies, particularly formulary design and specialty management, to mitigate these trend drivers.”

Pulled back on broad promotions in front of store

” we’ve continued to pull back on broad-based promotions, which has resulted in fewer visits from lower-value customers. Front store margins once again increased notably in the quarter, benefiting from these efforts to rationalize our promotional strategies, along with growth in the higher-margin health and beauty businesses. So we continue to test, learn and refine strategies to achieve the optimal balance between traffic and profitable growth.”

Margin compression in Pharmacy

“you’ve heard us reference that margin compression in pharmacy is – you really have two drivers behind it. You’ve got the mix change into some of the lower-margin businesses, principally Medicare and Medicaid. Again, very productive on top line, okay? And then you have on an apples-to-apples basis just the sheer step-down in profitability. So you’ve got both of those forces creating some downward pressure.”

May be seeing some impact from consumer directed health plans

David M. Denton – Chief Financial Officer & Executive Vice President

Expect to produce $5.3-$5.6B in FCF this year

“Our expectation is that we’ll return more than $5 billion to our shareholders in 2016 through a combination of both dividends and share repurchases. As Larry mentioned, we generated approximately $1.8 billion of free cash in the first quarter, and we continue to expect to produce free cash of between $5.3 billion and $5.6 billion this year.”

Helena B. Foulkes – Executive Vice President, President – CVS Pharmacy

Front of store is important as a door to pharmacy especially health and beauty

“Yeah, it’s a great question, something we spent a lot of time thinking about because ultimately we see the role of the front store as essentially a door into the pharmacy. This is where consumers get connected to CVS, and ultimately over time, they start using us for prescription. So it’s a very important part of the business is consumers think about us. And it’s why we’ve been shifting more and more of our focus towards health and beauty. Because when our customers think about healthcare, obviously they think pharmacy first, but they think health and beauty”

CVS 4Q15 Earnings Call Notes

Larry J. Merlo – President, Chief Executive Officer & Director

Top of mind for our clients is specialty pharma cost

“Now as we’ve been discussing, top of mind for our clients is their rapidly growing specialty costs, and our specialty pharmacy business offers a comprehensive set of programs to help clients effectively manage specialty trend. As a result, we continue to outpace the market and gain share. In the fourth quarter, specialty revenues increased 32% and continued to outpace market growth rates.”

Front of store comps down 0.5%

“In the front store business, comps were down slightly, 0.5% in the quarter, and reflected softer customer traffic partially offset by an increase in basket size”

Med D cost is lower than was expected in 2006 when it was launched

“we’ve got to be careful that private-sector innovation I think has done a lot with which to satisfy the objective, right drug, right patient at the lowest possible cost. And if you look at Med D as an example, it was 2006. It’s almost a decade later now, and when you look at the estimates of what CBO had predicted the cost of that would be 10 years ago, and what it’s costing today, it’s a fraction of that, which I think is one of the key reasons for that is private-sector innovation and the fact that competition ultimately drives down costs.”

David M. Denton – Chief Financial Officer & Executive Vice President

Jonathan C. Roberts – Executive Vice President & President, CVS/caremark

Hep C volume has leveled off, down a bit from last year

“Hey, Dave. This is Jon. So Hep C volume I think has leveled off as we are into 2016, down a little bit from where we were last year. Merck launched their new product, had a list price $54,000, and that is less expensive than the other products on the market like Harvoni. So we’ll evaluate these new products and negotiate the best deal for our clients, and we continually evaluate our formulary selections. And we’ll do the same as these new products come to market.”

Helena B. Foulkes – Executive Vice President, President – CVS/pharmacy

Haven’t seen any change in the consumer from what we saw in 4Q

Yeah, I would just say overall I’d say things are holding fairly steady. We certainly have seen the consumer – I wouldn’t say any change, really, from what we were seeing in the fourth quarter. I think the big thing we’ve been focused on and continue to focus on is being smart about where we invest our margin dollars, so you can see us continue to downplay our circulars and really focus on ExtraCare, which is allowing us to find those high-value customers and make sure they’re coming into our stores.

CVS 2Q15 Earnings Call Notes

Acquiring omnicare

“In May, we announced we entered into an agreement to acquire Omnicare, a leading provider of pharmacy services to long-term care facilities. The Omnicare acquisition provides a new pharmacy dispensing channel for us, enhancing our ability to provide the continuity of care for patients as they transition through the healthcare system and we remain very excited to assume leadership in this adjacent space.”

PBM Marketplace has been active

“Now turning to the business update and I’ll start with the 2016 PBM selling season. The marketplace has been active. Overall, RFP volume is consistent with last year and I’m pleased to report that we are having a very successful selling season.’

Specialty pharma revenue strong growth but slowing as flattening utilization trend of new Hep C drugs

we continue to grow faster than the market with specialty revenues increasing a healthy 28.4%. Now, this growth is very robust and more than double the market growth rates, but less than recent quarters as we have cycled the addition of Coram and have seen a flattening in the utilization trend of the new Hep C drugs.”

Script volumes up 4.8%

“Now moving on to the Retail business, pharmacy same-store prescription volumes increased 4.8% and that’s on a 30-day equivalent basis and we continue to gain pharmacy share. Our Retail Pharmacy market share was 21.6% in the quarter and that’s up about 60 basis points versus the same quarter a year ago. Pharmacy same-store sales increased 4.1% and were negatively impacted by about 370 basis points due to recent generic introductions and another 80 basis points from the implementation of Specialty Connect”

Front store comps flat w/o tobacco. Decrease in traffic but larger basket

“In the front store, comps were down 7.8% and, on a comparable basis, front store sales would’ve been essentially flat after adjusting for the tobacco impact. And while we experienced a decrease in front store traffic, that was partially offset by an increase in the average customer basket. ”

Customers have redeemed $4B in extracare bucks in TTM

“On a rolling 12 month basis through Q2, customers redeemed savings and ExtraBucks totaling more than $4 billion.”

Returning $6B to shareholders this year

“For the full year, as we have noted, we expect to complete $5 billion of share repurchases. This reflects an increase of approximately 25% versus 2014 despite the $1 billion acquisition related reduction to our share repurchase plans for this year. So between dividends and share repurchases, we have returned more than $3.7 billion to our shareholders in the first half of 2015 alone and we currently expect to return more than $6 billion for the full year.”

Raised $15B at 3.75%

“we recently issued a series of senior notes totaling $15 billion. The tranches are well laddered, the terms range from three years to 30 years and there is no one year in which the maturities are especially large. And despite rising interest rates over the past couple of months, we were able to secure the debt at a favorable blended rate of approximately 3.75%”

3.2x Debt to EBITDA

“This new debt increases our leverage ratio to approximately 3.2 times adjusted debt-to-EBITDA and we are committed to getting back to our target of 2.7 times.”

80% of PBM wins are coming from the Health Plans segment

“about 80% of the gross wins coming out of the Health Plans segment. The vast majority of that is clients switching PBM. I think Jon touched on some of the key elements earlier that when you look at the makeup of the Health Plan business and you think about commercial, Medicare, Medicaid, exchange products, we can bring solutions in a very differentiated way for each of those segments within the Health Plan.”

Independent pharmacies continue to play a role in the industry

“here continues to be more than 60,000 pharmacies operating across the country and that number has not changed in a significant way over the last couple of years. To include the role that the independents play and the independents continue to grow.”

Generic drug inflation is modest

“As far as generic inflation, I think it’s – the overall marketplace continues from a generic perspective to be deflationary in totality. That has been true throughout the year. We expect that to be true as we forecast out the balance of this year. I think just, in general, generic inflation has been modest this year as compared to, I’ll say, last year at this point in time”

CVS 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

10% revenue growth

“We delivered approximately 10% growth in consolidated revenues, 14% growth in PBM operating profit, 8% growth in retail operating profit and 13.5% growth in adjusted earnings per share on a comparable basis.”

Clients are focused on controlling specialty costs

“many of you have asked what our clients are focused on, and the number one priority centers on controlling their rapidly rising specialty costs. And we’re bringing them an array of differentiated solutions. ”

Script volumes up 5.3% including share gain

“Pharmacy same-store prescription unit volumes increased 5.3% on a 30 day equivalent basis and we continue to gain pharmacy share. Our retail pharmacy market-share was 21.1% in Q4 and that’s up about 55 basis points versus the same quarter a year ago.”

Front store comps 0.7% excluding tobacco

“Turning to the front store, we saw continued decrease in traffic. That was partially offset by an increase in the average customer basket. Our front store comps were down 7.2% and adjusting for the tobacco impact, front store comps would have been up 0.7%. The impact of the tobacco exit was about 800 basis points and that’s about 100 basis points less than we anticipated. So again four months into it, it’s still early but we’re very pleased with these results.’

CVS 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Pretty solid growth

“Our adjusted earnings per share increased from 9% to $1.15 per share, a penny above the high end of our guidance range. Both the PBM and retail segments exceeded our revenue expectations along with the retail business delivering expanded gross margin. Operating profit in the retail business grew 8.8% at the high end of our expectations while operating profit in the PBM grew 8.5% exceeding our expectations.”

PBM clients are focused on controlling specialty spend

“Our clients continue to be very focused this season on achieving better control of specialty spend and we continue to differentiate our specialty offerings to provide a high level of clinical support to patients while managing trend for our clients and driving continued share gains in the business.”

Modest positive benefit from health reform

” Regarding health reform, not much is new since our last update and we continue to see a modest positive benefit to our script transform reform and that’s largely from the expansion of Medicaid. ”

Front store traffic was down

” turning to the front store, we saw a continued decrease in traffic that was partially offset by an increase in the average customer ticket. Our front store comps were down 4.5% and adjusting for the tobacco compact costs would have been approximately 480 basis points higher.”

Plans are emphasizing consumer driven plans with narrower networks

“I think as far as plan design changes we’re obviously see more movement consumer driven health plans. Where the member there’s more financial responsibility particularly upfront. So we are seeing providers, a high interest of providers in fact most of 50% providing coverage of generics so that there isn’t a negative impact on adherence which we are very pleased to see. I think other things around plan design are I think you are going to see more interest in narrow networks as we are kind of, as we are returning to higher trend I think plans are going to be looking to at the lower cost and ways like that. And I think when you think of narrow networks you really got to just aggregate the different segments.”

CVS 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Raising and narrowing guidance range

“given our strong performance year-to-date, we are raising and narrowing our adjusted earnings per share guidance for the year to a range of $4.43 to $4.51 and that’s up from our previous range of $4.36 to $4.50”

Unclear how many exchange insurance buyers are newly insured

“The mix of individuals who were newly insured as opposed to those who previously had coverage, it still remains unclear with various sources quoting anywhere from a low of 27% of individuals newly insured up to a high of 85% with multiple data points suggesting it might be somewhere in between.”

Newly covered is a positive secular trend for the next several years

“we can be confident that several million Americans have gained coverage in recent months and this should provide a positive secular trend in pharmacy volume growth for the next several years.

Set up Red Oak Sourcing with Cardinal Health

“Now let me update you on our 10-year agreement with Cardinal Health that’s built upon our combined sourcing expertise. As you’re aware, last month we completed the formation of Red Oak Sourcing, the largest generic sourcing entity here in the U.S. and located in Foxborough, Massachusetts. And at that time, the employees and functional responsibilities were transitioned from CVS Caremark and Cardinal to Red Oak Sourcing.”

Clients concerned about managing specialty spend

“top of mind for clients this selling season is achieving better control of their specialty spend. Among our clients, specialty represents about 22.5% of total drug spend under the pharmacy benefit and projections have this continuing to grow at a mid-teens rate.”

“all specialty spend including that paid under the medical benefit will likely to grow to as much as 50% of total drug spend by 2018.”

“n addition to benefits from new business and the addition of Coram, another driver of specialty revenue growth was Sovaldi, the new hep C drug.”

Thoughts on Sovaldi

“There are estimated to be roughly 3 million people in the U.S. requiring treatment and as everyone knows, the potential costs of treatment is very high. As you might imagine, the growing costs in this category are of significant concern to our clients and we have a number of programs in place to ensure appropriate utilization and cost management. And as competing products become available late this year and next, we will look for opportunities to introduce formulary management to further drive down costs.”

Increased spending coming from medicaid expansion

“I think we’re seeing utilization pretty flat I think from the exchanges I think as had previously talked, I think we’re seeing more of a benefit coming out of the Medicaid expansion. I think there’s still some uncertainty as we mentioned in our prepared remarks in terms of when you look at the exchange population, just how many of those are incremental to health insurance coverage.”

Not seeing much change in the consumer, still cautious

“I don’t think we’re seeing any changes in the consumer. I think that the consumer continues to be a cautious purchaser of products. At the same time, I don’t think we’ve seen a change in the competitive environment. We still see an awful lot of promotion across competitors.”

M&A is part of our DNA

“M&A has been part of our DNA for a long time in our company. We’ve been very clear that as we think about capital deployment, one area to deploy capital is in kind of investing backward in organically in our business and we will continue to do that. I would say that at the same time, we’re going to be to your point very disciplined in how we approach the market. If you look at our asset base today, we don’t have any glaring gaps or holes in capabilities at this point in time. But as we said, to a degree that we can bolt-on assets that make sense that we have line of sight to both synergies and returns, we’ll do that.”

CVS 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Drawing the line at tobacco

“let us be clear. You cannot compare a bar of chocolate or a bag of chips to a pack of cigarettes. Those products used in moderation will not harm one’s health. The same cannot be said about tobacco. There is no amount of tobacco use that’s considered safe.”

Negative comps at CVS front of store

“As for the front store business, comps decreased 1.9%, reflecting a decline in traffic partially offset by an increase in basket size. Recall that we are comping against a very strong cough and cold season we experienced in December of 2012, and our cough and cold business was down about 5% in the quarter.”

Giving up tobacco to cost 2.1B in revenue

“As you know, last week we announced our planed exit from the tobacco category. On a 12 month basis, we estimate that we will lose $2 billion in revenues, about $1.5 billion directly from tobacco sales and other $0.5 billion from the rest of that shoppers’ basket. That equates to approximately $0.17 per share on an annual basis.”

This is about the larger role CVS is playing in healthcare

“This decision is about CVS Caremark playing a growing role in our healthcare system”

New customer to think about

“You think about the retail customer, you think about know whether it’s the client, be it the employer, health plan, but there’s also a new customer emerging, okay? Provider groups and hospitals”

New customers reimbursed by outcome. Tobacco a big problem driving up cost

“I will give you two examples of where we think that the decision will make a difference. If you look at ACOs and physician practice groups today, they are increasingly focused on outcomes, because more and more of it is being linked to their reimbursement rates and a key areas that ACOs are focused on, is the role that tobacco place in exacerbating a lot of chronic conditions that are driving cost up in the healthcare systems, so many of these ACOs have developed number of metrics to track this. The results their programs take aim at smoking cessation, again, the use of these products as part of their part of their reimbursement models.

If you think about all the different ways that we serve, millions of customers each and every day through our retail pharmacies, our MinuteClinics, our patients and pharmacy counseling through Caremark channels and we see our decision more fully aligning with your outcomes-based reimbursement models [taking] and you and we think that we will become the pharmacy of choice for these entities and physicians.”

This decision checks a box for the client, but doesn’t win business on its own

“as we have discussed, we think that our decision creates even further alignment with our client. So I would think that all things being equal, okay, that this certainly gives us another check next to our name. But I think that we still have to be priced correctly and we still have to serve the client correctly.”