Q3 2019 Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time in lines Mackenzie placed on musicals.

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Thank you and good morning, everyone welcome to the Cvs Health third quarter 2019 earnings call. As a reminder, this call is being recorded I'm Valerie Haertel Senior Vice President of Investor Relations for Cvs Health I'm joined this morning by Larry Merlo, President and CEO Eva Berardo.

Incident and CFO following our prepared remarks will host a question and answer session. When John Roberts, Chief Operating Officer, Karen Lynch President of that not Derica Rice, President of Caremark and Kevin her again president of Cvs Pharmacy will also join us in order to provide more people with the chance to ask their questions during the Q.

Wednesday, please limit yourself to no more than one question with a quick follow up in addition to this call at our press release consistent with our practice, we have posted a slide presentation on our website. Our Form 10-Q was filed this morning and is available. Please note. During this call will make certain forward looking statements that reflect our current views relate.

Due to our future financial performance future events and industry and market conditions and forward looking statements related to the integration of Vietnam acquisition, including the expected consumer benefits financial projections and synergies. These forward looking statements are subject to risks and uncertainties that could cause actual results could differ materially.

From what maybe educated in the forward looking statements. We strongly encourage you to review the information and the reports we filed with the FCC regarding these risks and uncertainties in particular those that are described in the risk factor section Upper end report on Form 10-K , and the cautionary statements concerning forward looking statements disclosures and.

Our quarterly reports on Form 10-Q , you should also review the section entitled cautionary statements concerning forward looking statements in this morning's earnings press release. During this call will use non-GAAP financial measures when talking about the company's performance and financial condition in accordance with FCC regulations, you can find discussion.

These non-GAAP measures and the comparable GAAP measures in the earnings press release and the reconciliation document posted on the Investor Relations portion of our website and there's always today's call is being broadcast on our website, where it will be archived for one year. Following the call now I'll turn the call over Tilera.

Right.

Thanks for already good morning, everyone and thanks for joining us.

In the third quarter, we continue building on our positive business momentum delivering adjusted earnings per share of $1.84 exceeding the high end of our guidance range. Importantly, this performance was driven by strong operational execution across our enterprise with all three segments performing in line with or above.

Our expectations and I'll note that four cents of our Q3 performance was the result of net realized capital gains and favorable prior years development.

We generated strong cash flow from operations, which enabled us to continue to make progress on de leveraging all while investing in our core businesses and returning capital to our shareholders through dividends.

Given our year to date success in executing against our strategic plan, we are raising and narrowing our adjusted earnings per share guidance range to $6, a 97 cents to $7.05 and evil will provide a more in depth repeal bar result in increased guidance in her remarks.

[laughter] cells, we continue to transform CBS into the country's leading consumer health company. We are successfully executing on our long term growth strategy across the four key enterprise wide priorities, we shared at our June Investor Day.

Importantly, our teams are working together across the enterprise to maximize value to our members consumers patient and its shareholders and our operational and financial performance. This year reflects their efforts.

We continue to use our unmatched combination of assets by enhancing and creating products and services to further grow when differentiate our businesses our first strategic priority.

Our retail long term care segment, we continue to drive strong prescription growth using our data and analytics capabilities through targeted proactive member communication.

A key differentiator of our retail stores is our ability to meet members and consumers where they are to deliver local personalized care through our men at clinics and now our health clubs, making health care more accessible and affordable.

And our approach is clearly resonating in the marketplace and its exemplified both by our continued share gains at retail and the early success of the health clubs.

Now in terms of early impact our health hubs in Houston, which now have about eight months of performance have continued to outperform their control group with higher script volume in many clinic visits along with higher front store sales traffic and store margin.

This favorable performance and the incremental value, we expect will be derived from the expanded utilization of the hubs gives us further confidence in our plan to rapid rollout.

And we were on track with three additional metro areas with approximately 50 hubs operational by year end, along with our plans to have 1500 hubs by the end of 2021.

The value, we expect our health clubs to deliver stems from various sources first increased earnings contributions from the greater use of our new and enhanced products and services.

Second improve medical cost savings and at this book of business as we deploy our capabilities to address the unique needs of the member populations, we serve driving value to our health care benefits segment.

Our plan to sign innovations aim to incentivize members to utilize more cost effective settings.

And providing more pharmacies with integrated medical and pharmacy data allows for improving the delivery of a members next best health action to impact behavior changes and improve health outcomes.

Third as our unmatched capability through our open source approach and extending consumer centric offerings to our health plan relationships across the Cvs health enterprise.

And our new product and service offerings have a direct impact on the overall health care costs of the clients and partners serviced by Cvs Caremark, and Cvs pharmacy, and they were making a difference in our market positioning with these clients and partners.

And all of this leads to a fourth driver of value and that's the resultant benefit of increased customer satisfaction and retention.

Now our opportunity to differentiate our offerings at the community level received another boost with our recent designation earned by our men at clinics.

CBS health professionals, who staff, our clinics, which again are foundational to our health top expansion I burned a pathway to excellence designation from the American nurses Credentialing center for the quality services they provide.

Men at clinic is the first and only retail clinic to receive this will lead designation.

So it's more hubs come online toward our goal 1500, we will continue to update you on our performance and the benefits of our integrated health care approach for consumers.

For a pharmacy services segment, we continue to deliver solid performance driven by growth in specialty strong volume in our maintenance choice program and continued improvement in purchasing economics.

As for the 2020 selling season, it's nearly complete with gross new business, increasing 1.1 billion and net new business improving by approximately 1 billion since our second quarter update in August .

The 2021 selling season is now underway and we are well positioned with our product offerings and our sales teams are engaging and productive conversations identifying innovative ways to serve both new and existing clients.

To that end in the quarter, we successfully renewed our relationship with the federal employees health benefits program through December 2021.

And this renewal includes both our mail and retail contracts and represents an opportunity to continue to strengthen our client relationship.

Our health care benefits segment is also well positioned for growth heading into 20, and we are building momentum with our new enterprise offerings, which will differentiate us in the marketplace.

Our customer value proposition has been further reinforced by the most recent Medicare advantage star ratings data released by CMS last month.

And as Medicare advantage plans earned an overall weighted average of 4.3 out of five stars for 2020 with 76% of our Medicare advantage members enrolled in plans rated at least four and a half stars and that's based on our September 2019 membership and that's also the highest.

Percentage among publicly traded companies with over 250000 Medicare advantage enrollees.

Our 2020 star ratings drive more favorable bonus payments and bid rebates, enabling enhance product offerings in 2021.

And this years star ratings demonstrate the success of at this approach to growing our Medicare business across the country, while maintaining best in class quality.

Turning to Medicaid we were recently awarded Medicaid lives in the Texas Star plus program and the West Virginia children and youth program and these wins reinforce our commitment to Medicaid and speak to the strength of our Medicaid services and capabilities, allowing us to build upon existing relationships with.

Two very important stay partners.

Now we're also encouraged by the strong client interest in our new integrated capabilities, including our health hubs and these capabilities will be a core component of our value proposition for the 21 selling season.

We're also excited about our recently launched feeling better program a transitions of care program intended to improve the recovery process from joint replacement procedures.

Feeling better is another example of the power of our combination to provide enterprise solutions to improve patient experiences and we're excited to incorporate this offering into Medicare advantage plans in select geographies in 2020.

Moving to our second strategic priority delivering transformational products and services, we are continuing to advance innovative pilot programs and introduce new and innovative offerings.

The third quarter, our oncology pilot continue to roll out across selected geographies.

We also rolled out the first phase of our chronic kidney care management program to at the end caremark clients for early disease detection and care management development.

And with several hundred members under management, we are moving on to the second phase of the program, which is the face to face counseling around different dialysis modalities and I should also mentioned that our home hemo dialysis clinical trial is progressing as expected with our first two sites active and we're confident that.

We will complete the trial on our previously discussed timeline.

With our third strategic priority, we are developing and enhancing programs that encompass our consumer centric technology infrastructure.

And as previously announced our care pass subscription service went live nationally in the third quarter and we have already enrolled more than 1 billion members in less than two months, which has exceeded our expectations for this recently launched membership program.

And our health care benefits segment, we've expanded the use of our proprietary noble watch Ics technology for prior authorization and claims management in our commercial population.

And given the proven success of Barton Overwatch a capabilities, we are confident in our ability to drive cost savings and efficiencies for our clients who participate in those programs.

Additionally, we now have more than 82 million consumers and members engaging with our enterprise through text messaging and that's an increase of 7% from last quarter and we're encouraged by the increased engagement we are experience across our digital programs.

Moving to our fourth strategic priority modernizing our enterprise functions and capabilities again, we're making progress and are on track to see the initial benefits beginning in 2020.

We have a line teams around simplifying our service operations embedding intelligent automation to streamline routine processes and further advance our digital footprint. These initiatives are expected to further enhance our self service capabilities by eliminating unnecessary member inpatient mailings.

As well as reduced incoming call volume across our businesses.

And we continue to expect to generate 1.5 to 2 billion in run rate net savings in 2022 for enterprise modernization and I should also note. This is in addition to the 900 million run rate of projected integration synergies in 2021 that we have previously discussed.

Yes.

Another exciting accomplishment related to our investments on the CSR front is Cvs health being named to the prestigious Dow Jones sustainability index for the seventh consecutive year and for the first time added to their World Index.

And we're proud of this recognition, which is a true indication of our industry leadership in the area of corporate sustainability and our commitment to improving the health care system.

And with that I'll turn the call over to EBIT to walk through our financial results and guidance.

Thanks, Larry and good morning, everyone as Larry said strong performance across the enterprise drove our third quarter results.

Adjusted earnings per share of $1.84 was above the high end of our guidance, including four cents attributable to nonrecurring items generated by net realized capital gains in prior years development health care benefits exceeded our expectations, while pharmacy services and retail long term care.

Were in line the quarter also benefited from lower interest expense.

Consolidated adjusted revenues grew 37.1% in Q3 of 19 also exceeding our expectations. This year over year increase was largely driven by the addition of that no as well as higher volume in both the PV and retail long term care segment.

Healthcare benefits segment, which includes our Silverscript PDP business contributed 17.2 billion of revenues for the quarter.

Adjusted consolidated operating income grew 48.9% compared to last year, primarily due to the addition of Vietnam business healthcare benefits contributed 1.4 billion and we experienced growth in the PBM, which was partially offset by a decline in retail long term care.

Looking at our results by segment and starting with Pharmacy services total revenues increased 6.4% with adjusted claims volume up 9.3% year over year drivers included net new business, particularly in specialty related to the ingenue Rx Onboarding.

Okay, and the continued adoption of our maintenance choice offerings.

PBM adjusted operating income increased 5.7% versus Q3 of 18 due to increased claims volume the shift event in the mail order and specialty operation into our pharmacy services segment and improved purchasing economics, we continue to mitigate our rebate guarantee exposure.

Sure through formulary compliance and have experienced a larger than expected benefit from generic launches primarily in specialty.

These improvements are partially offset by continued price compression brand drug inflation remains consistent with our previous expectations.

Moving to reach how long term care the segment performed inline with our expectations with total revenues up 2.9% driven by higher prescription volume, we delivered strong adjusted script growth of 6.4% with comps scripts up 7.8% price.

Merrily driven by the continued adoption of our patient care programs.

Our share of retail scripts increased approximately 110 basis points to 26.6% in Q3 versus the same period last year.

Additionally, front store comp sales increased 60 basis points, driven primarily by continued growth in health and beauty sales, including cough and cold.

Retail long term care third quarter, adjusted operating income declined 6.5% year over year, primarily driven by continued reimbursement pressure partially offsetting the decline was continued script growth in front store margin improvement as well as the benefit of generics, where we have seen.

Some improvement.

As part of our ongoing review of our asset portfolio and focus on driving greater returns in the quarter. We made the decision to close approximately 75 retail pharmacy stores. During 2020, the majority of which are nearing the end of their lease term. This resulted in a 90.

6 million GAAP charge in the retail long term care segment. We believe these decisions will generate enhanced longer term performance our real state footprint remains very productive and we will continue to look for opportunities to further improve the performance in our portfolio.

Lastly, our health care benefits segment delivered better than expected results for the quarter due to prior years development and net realized capital gains.

Total revenues of 17.2 billion continue did benefit from strong growth in government business.

Total health MDR of 83.3 benefited from favorable prior period development across all our core products last quarter, we highlighted modest pressure in a specific portion of the lower end of our middle market commercial book during this quarter, we saw much.

Just improvement in this business and we continue to expect our MDR for the full year to be above the midpoint of our guidance range of 84% plus or minus 50 basis points.

Our days claims payable was 51 days for Q3 compared to Q2 days claims payable increased by three days due to the seasonality that is typical of our PDP business. We remain confident in the adequacy of our reserves and our ongoing reserving process within.

Our corporate segment, we've realized 32 million of net realized capital gains in the quarter.

Corporate segment expenses increased sequentially and year over year, primarily due to investments in our transformation and modernization programs.

Moving to capital management during the third quarter, we continue to make progress on our deleveraging efforts, which resulted in a net debt reduction of approximately 2.9 billion. In addition to paying off over 1.5 billion term loan 850 million of scheduled maturities, we completed a four.

Billion tender offer for outstanding senior debt and issued three and a half billion of senior debt at favorable rates during the quarter. We have now repaid approximately 8 billion of net debt since the close of the transaction and we remain focused on deleveraging and achieving our leveraged.

Target of low three times in 2022.

Turning to cash flows and dividends this quarter, we generated strong cash from operations of 2.9 billion from improved working capital and earnings performance. We also returned more than 600 million to shareholders through dividends.

With that let me turn to our revised guidance for 2019 as Larry mentioned in light of our third quarter performance. We are narrowing in raising our consolidated full year adjusted earnings per share guidance range, just 697 to seven no five compared to prior guidance of 689.

$7, our full year guidance reflects an aggregate of approximately 20 cents a prior years development and net realized capital gains that we have recorded in the first nine months of this year.

We are also raising our consolidated full year total revenues expectations to 251.6 to 254.2 billion and raising and narrowing our adjusted operating income expectation to 15.22 to 15.40 billion.

Yes.

Additionally, we're on track to deliver at least 400 million of integration synergies this year.

Now a few highlights on our segment, there's additional detail in the slide presentation, we posted on our website.

We are increasing our expectations for the pharmacy services segment with adjusted operating income now in the range of 5.1 to 5.16 billion, reflecting the momentum in the business, we're maintaining our full year adjusted operating income range for the health care benefits segment.

5.18 to 5.24 billion, reflecting year to date performance, including favorable prior years development and net realized capital gains as well as our latest projection of investments required to onboard 2020, new business. We are narrowing our full year adjusted op.

Operating income range for our retail long term care segment to 6.68 to 6.74 billion.

And we are lowering our interest expense estimates do our strong cash flow and the impact from the net pay down of debt.

Our updated full year 2019, GAAP EPS guidance range is $4, a 90 cents to $4, a 98 cents, reflecting our year to date performance the negative impact of store closures and the loss from the early extinguishment of debt.

We're maintaining our full year 2019 cash flow guidance expecting to deliver strong cash from operations between 10.1, and 10.6 billion and have increased our projected cash available to pay down debt to 4.7 to 5.1 billion of which.

4.7 billion has been used to pay down debt year to date.

Our cash flow projections include the improvements to our underlying business performance as wells early benefit from our initiative to reduce pharmacy inventory in our retail stores by 1.5 billion. In 2022, we continue to expect 2019 net capital expenditure.

Shares of 2.3 to 2.6 billion.

In terms of the fourth quarter, there are few things to keep in mind.

For healthcare benefits the last quarter of the year is typically the lowest adjusted operating income quarter due to the seasonality of the business, including spending to support January one readiness for our Medicare business fourth quarter will also include higher sequential spending for our trends.

Formation programs.

Finally, given the timing of the close of the transaction prior year fourth quarter does not include the full impact of share dilution and interest expense, resulting from the transaction. These differences affect the year over year adjusted EPS compare ability.

As we look ahead to 2020, we feel very good about the momentum in our business and we are even more confident in generating at least $7 of adjusted earnings per share with low single digit growth off our 2019 baseline, which excludes the nonrecurring items of approximately 20 cents.

I mentioned earlier.

These items will not be included in our 2020 guidance consistent with the legacy Aetna practice.

As we've stated previously we will provide full 2020 guidance on our fourth quarter earnings call.

In summary, we continue to execute against our plan and we are confident that we will be able to achieve our financial and operating goals for the full year and over the longer term, we remain focused on strengthening our business to deliver sustainable long term growth and create value for all stakeholders.

Our store our transformation into those consumer centric health company with that I would like to open it up for your questions.

Thank you at this time, we will be conducting a question and answer session in order to ask a question. Please press star and the number one on your telephone keypad. As a reminder, we ask that you. Please limit your questions with one question to one related follow up.

Your first question comes from the line of Lisa Gill with JP Morgan. Please Sir your line is open.

Good morning, everyone.

Larry I want to start with your comments around the health hubs.

Talked about the outperformance versus the control group.

I really have three questions here one.

Any numbers that you can share around that.

Too as we think about the impact of rolling out.

Another 50, this year and as we get into 2020 and will it have any impact on your 2020 numbers and then thirdly I as we think about additional services that will go into those health hubs have you thought more about primary care versus episodic care and as you think about that integrated model with the medical side are you learning anything from those that November .

First of incremental services that you think you need to bring to the hilltop.

Yes.

Good morning, and ill start and then I'll flip it over to Kevin Yes, We said in terms of the numbers themselves as as you know we had been a qualitative in our definition of performance and we've done that it's a very small subset of stores at this point, but as you've heard us say countless times it absolutely has given us.

The confidence in the in the belief in our strategy and.

The need for a rapid rollout so as we get more of a critical mass.

Of stores, you will see us move from qualitative definition to more quantitative definition that you can think about that.

Sometime in the probably in the second quarter timeframe in the spring time frame, where we think we'll have enough of a critical mass.

And.

Multiple geographies across the country lease in terms of 2020 impact is as Weve.

As we've talked you know the the rollout will go through.

2020, as well as 2021 and you really have to dynamics in play here you've got.

Gaming that critical mass of health hubs as.

As well as the opportunities for client adoption. So I do believe that that will take some time.

Yes, I wouldnt expect that you'll see a material impact in 2020, I think it's more 2021.

We'll see that happening, but again.

We're extremely excited in terms of what we have seen what we've learned.

In Houston, and I'll flip it over to Kevin the pickup on that third question. Thanks, Larry and good morning, you. So thanks for the question I'll just go though the second part of your question, which was the services provided.

The new wellness product that we've added to the front store continues to do well, including the products that we're selling in the sleep apnea space, helping fill white space in an unmet consumer demand. We're bullish on the minute clinic expanded services getting into chronic disease management in a more coordinated way we believe it's in collaboration with.

Primary care to answer your question not in replacement of primary care in the pharmacy space. We're excited about what our pharmacists are doing in partnership with data coming to us from the business unit on which patients need our greatest help on a longitudinal ways. So it's not one phone call in one specific day itself over a course of time.

Working with those patients to help introduce them to care coordination services that are available through retina and also working with the PBM sales team on what the members of our Caremark business unit.

Looking forward just an important point to note as it relates to your provider question, 80% of the services that can be provided by our primary care physician can in fact be provided by our nurse practitioners in our pharmacies excuse me in our medical index and again, we view it as complimentary to primary care.

Just as a follow up you brought up caremark are you seeing either John or.

Karen or are you seeing anything as far as this selling season, that's having an impact I know Larry it's still a.

Small market, but as we think about the number mini clinics you have today the services, providing any impact at all on the 2020 selling season the around having these offerings or again is that more of 2021 and I'll stop there. Thanks.

Hi, Lisa Karen Yeah, we've been a couple of things on this topic, we've been talking to our clients throughout the 2020 selling season about how we can deliver that more personal integrated cost effective and holistic care pro.

Our response.

Our customers have been very positive to date and I think we're seeing a fair amount of activity and pipeline build for 2021 as we talked about previously our focus for 2020 was to go to market with a more integrated medical pharmacy offerings and what we've done for the 2025.

Season, I'm very pleased to tell you that we are seeing increased traction in overall pharmacy penetration for our employer sponsored business, particularly where aetna had the medical business and we're now winning significantly greater percentage of pharmacy business.

So there's a lot going on and where.

I can talk later relative to the on some of the pilots that we have I'll, let John cover what where we're headed.

Lisa This is derica, regardless to on the Caremark side, we've had the opportunity to introduce the health hubs to a number of our clients. Both on the health plan side as well as on the employees side and we've had a great deal of excitement and interest and it's clearly playing on not only our 20 twentys selling season, we look to wrap that up but also the 20.

21, and I know there was always add to the with the announcement of the deal between Cvs and that there was some concern amongst investors about potential for channel conflict, we with the interest that we've had from some of the helping clients. We've actually now have listed two that are actually performing some pilots with us related.

To the health hubs itself. So that give you some idea to that type of traction we're getting in that space and then Lisa. This is John if you remember back when Curemark world out maintenance choice in the excitement in the market in the momentum that gave us we're seeing a similar reaction in the market that helps from the clients.

Thank you very much.

Thanks Lisa.

Your next question comes from the line of Lance Wilkes with Sanford Bernstein.

Your line is open.

Yes.

My questions on the on the PBM and looks like a strong performance was wondering in 2019, how much cross sale, you're seeing in the book of business.

For this year as contrasted with maybe some some sort of metrics related to how much progress you're going to see for the beginning of 2020, given the selling season that Karen just mentioned and then what do you see is sort of the upside possibility with that and I guess related to the PBM also is for those additional wins you've got.

Over the last quarter, which segments are those in a set of health plan or employer business.

Lantus, Karen let me just talk about where I see the opportunities on PBM.

As I mentioned, we're having a good 2020 selling season and what we're measuring is really penetration of the book. So we're looking at a number of ways. We're looking at where we have medical and we want to drive pharmacy integration. We are looking at the Derica.

Hi are jointly looking at the pharmacy book and looking at where we want to improve potentially sale medical opportunities and then we're looking to gather holistically to say, hey, where are the opportunities that neither one of us that business and that's where I think we're starting to see that growing pipeline in 2021 and he'll bring.

Taking all the capabilities of the company together and we just recently had a lot of customer interactions weve been out in the market with our brokers I'm talking about this integrated story and we are seeing very positive response.

And Lance just to build upon karen's comment in regards to the impact on the PBM you've seen here of late that we at least since the Q2 call that we've improved our net wins by $1 billion. The vast majority that came and the employer segment and call. It them kind of the middle market and that plays very well with the integration.

And efforts that carrying laid out also and then as you can think about what I talked about earlier about being able to introduce the health hubs and some of the broad array of services to that client group that they've been very receptive to that and actually is playing into the the outlook in the expectations were establishing in the marketplace.

Great and just a quick follow up.

Previously you talked to them.

Standalone Ed.

Efforts in the kind of Downmarket employers segment to do more cross selling more bundled sales and going to go after that self insured market more I'm. Just wondering what was the status of progress on on that for you guys looking at 2020.

Yes, it's obviously early for 2020 for that ended the marketing and we've been very focused on national account higher end of metal. So it's a bit early but we have on the.

Without talking about our.

Our new capabilities relative to the health hubs, which people are excited about where we've introduced our Nova logics capabilities that people are introduced about and then we're excited that people are excited about our new digital capabilities. So we are pushing our integrated message throughout all of our segment and we are seeing some good.

Interest, but it's really too early to tell you about 20 to 20 at this point.

Okay. Thanks.

Next question. Your next question. Your next question comes from the line of Charles Rhyee with Cowen.

Your line is open.

Yes, thanks for taking the question.

When I will give the full year guidance for <unk>.

The rest of this year, you kind of talk about a year to date prior development and.

Net realized capital gains of 20 cents when when when we're thinking about.

Next year in 2020 and sort of look when you initially kind of.

That said better than $7 a share should we be looking at this number including the capital does kind of number.

Assuming that we probably have similar types next year or should we be thinking about it without.

Yes, Charles this is either pay thanks for the question I think as I outlined in my prepared remarks, right, where we're sitting today versus.

Where we sat back in June were even more confident with our with our low single digit growth. We provided the transparency in the color around the 20 cents as as we said consistently we don't guide to that so think about that growth off after you remove that from your from your baseline.

Okay is there any kind of as we think about the fourth quarter is I think typically prior period development is really more of a second third quarter kind of impact typically is FX would you expect more anything in the fourth quarter.

On typically Charles as you think about the fourth quarter, there's there's diminimus prior prior year development. If you look at historical if you look at historical pattern.

We will continue to provide the transparency on this in the realized capital gains as we go forward.

Okay. That's helpful. If I could just sneak one other than on the on the health of going back to at least this question.

You talked about 50 stores by yearend.

5100 stores by 2021.

A good interim target as we think about 2020 number of stores.

Yes, Charles it's Larry you can think about that will probably be in the ZIP code next year of 600 to 650 stores by year end.

Okay awesome. Thank you so much.

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley Ricky Your line is open.

Thank you and good morning, so firstly just to clarify on the EPS guidance question. So even if we think about in your 2019 base of 697 to seven five and we excluded 20 cents than we grow at by those single digit we get to a range of 64 to 712 I noted you said before.

$7, so should we think about.

Would you say that you're comfortable with could affect that high low single digit range.

Yes, Ricky as we said will provide our are more fulsome guidance in in February but.

We reiterated we're comfortable with at least $7 and the low single digit growth and we'll have we'll have more to provide.

Okay. That's helpful. And then my my question is focused on specialty and care and maybe this one is for you.

When we think about the opportunity in specialty.

Specialty ministration within the.

A book of business in how do you think that kind of like.

Going over time.

Ricky Lake just asked point of clarification when you when you're talking specialty are you talking about specialty pharmacy or just the specialty businesses within at now that.

Includes pharmacy and others.

So.

Specialty pharmacy.

So Ricky as you know that one of the highest trending medical costs category that we have and we've been working very closely with Derica team on.

We're managing those specialty drugs to that that the specialty.

Costs, and we are introducing some new capabilities into the market relative to 2020 is a critically important.

Concern for our customers.

Particularly with the new drugs that are coming out that are very high cost. So we are looking at innovative capabilities around stop loss potentially and again, we've introduced our know the logics capabilities across the.

Across our portfolio, which I think we'll bring bring those cost up we're hoping to bring those cost down and in line. So we're really excited and as we've been talking to our customers. They're excited about the possibilities aarons, while they're in Russia, just emphasize the point that Karen was alluding to that we would sit here today and say that there is a large portion.

Of specialty that flows through the medical benefit that has been largely unmanaged.

And that that becomes a big opportunity here.

Yeah, and that's that's really where the question what was it what's the that incremental opportunity where you are currently not not managing and then if I may just one follow up because you talked about long term care.

In Omnicare, how do you think about the progression of Omnicare first half versus second half and how is it performing against your targets and kind of like that opportunity to.

Hi, Omnicare being.

That is.

Contributing positively to next year.

Yes, Ricky this is John so long term care is performing slightly better than expected in 2019, and we've started to see improvement on our new sales in retention given our service improvements.

At the same time, we also continue to improve our cost structure.

I will say this market continues to be challenging as our clients have continued to the best facilities in 2019.

We'll have more to say about it.

Fourth quarter call.

Thank you.

Your next question comes from the line of Michael Cherny with Bank of America, Michael Your line is open.

Good morning, and thanks for taking the question.

I wanted to dive a little bit into the retail TC segment, particularly profit growth in particular, you pointed to allow the moving pieces in the quarter and where things shake out on the positive or negative side also I know at the Investor Day, you did talk about that segment being up the some preliminary expectations low single digit on EBIT I guess based on what you've seen so far.

Our year to date, having just obviously address the long term care question, how is everything tracking relative to the moving pieces within retail that will allow you to drive towards EBIT growth of that low single digit rate into next year.

Hi, Michael This is Eva I'll start and perhaps Kevin will jump in as we look at Q3.

Q3 performed right in line with right inline with our expectations on Q2 performed above our expectation. So we're pleased with how the business is performing and the initiatives, which are underway to enable us to return to growth in the segment.

Exhibit I'll just build on though your second part was our confidence in our being able to it the guidance that we provided back on Investor Day for 2020 is even just said we're on track to be able to deliver against.

That guidance and backed we're more confident now than we were then Vicki did and so that strategy to enable that growth are going and grow our pharmacy business faster than the industry continued to take market share and grow organically, which we've been doing this year and that will continue we will continue to grow both topline and bottom line within our farmers excuse me front store business space.

Civic focus on health and beauty the biggest year over year differences, a meaningful cost take out through the monetization efforts that John Roberts covered back in June those efforts are on track, we will take a significant amount of cost out over both our pharmacy in front store businesses. Those three things working in concert will enable that low single digit growth that we.

Did back in June .

Great and then just one quick clarification make sure we got this.

Based on keeping the guide for the NBR It seems like Theres a pretty implied.

Hi number for Q.

From seasonality is there anything else that we should think about in there that drives that number higher than where it's been trending over the course beer.

No there's fares Michael this is either again, there there's nothing that we would call out.

Okay. Thanks, so much.

Your next question comes from the line of George Hill with Deutsche Bank George Your line is open.

Yes.

Morning team CBS , what kind of want to dovetail write off of Mikes question, which is I.

I guess are you able to quantify maybe the cost take out that you're looking for retail pharmacy next year I guess, just given looking at the pharmacy results for this year and I don't think there's any reason to think that reimbursement mixture is going to meaningfully improve I'm also just trying to bridge. The gap between you know kind of putting their retail pharmacy result, this year and how we get that low single digit.

The growth in the segment next year.

Qualification and the caustic Elton maybe the outlook for reimbursement or the.

The year over year change in reimbursement on how it impacts results would be helpful. Thank you.

George George ancillary good morning, maybe just a couple of things too.

To be reminded of is is we went through the first half of this year keep in mind, we had the additional investments that we made back in 2018 that.

Cycled through the first half.

Largely the investments in tax reform.

As it.

Back into our retail business for our colleagues and.

And then George I would take us back to the analyst day in terms of we provided the headwinds tailwinds as we looked at next year and there's nothing different that that we see today from what we've talked about back in June and.

As you pointed out we don't see reimbursement pressure abating, but you know the offsets to that reimbursement pressure have some dynamics in 2020 that we did not face in 19. When you look at the contribution of generics is one example.

Okay, and maybe just a quick follow up on the PPD in the quarter, We've got and you kind of related that it was was it I guess with positive people during the quarter was in response to the cost pressure that you saw in Q2 or is it separate from a cost pressures on two now Mike.

I would say overall, we had about four cents of of T Y de prior year development as well as net realized capital gains in totality and the development that we saw.

Was across all was across all of our all of our core core businesses.

Okay. That's helpful. Thank you.

Your next question comes from the line of Ann Hynes with Mizuho Securities and your line is open.

Hi, good morning.

I'm just going to the PBM I know.

There are lot of discussion earlier this year about the future of rebates and that has become more clients since the white house pull the rebate real but so can we assume when it comes to rebates, it's business as usual going forward.

That would be my first question into my second question is with the federal employees contract. It looks like you extend that another year or do you ever anticipate that going to full RFP I guess, what was the decision behind them Big I guess thinking about renewing it. So how do you view that contract going forward. Thanks.

Good morning, I'll take your first question then flip it over to Derica, but you'll hear your first question on rebates look yes.

If you go back what the last year year and a half.

The debate was the role of the PBM is what happens to the rebate dollars and as we sit here today I think the debate has now shifted.

Not not on the Ppms, but to the manufacturers in terms of why are the list prices what they are and the data has proven the value. The PBM some brought to the marketplace in terms of reducing the net price of pharmaceuticals through formulary management et cetera. So.

We don't see that dynamic changing in the as matter of fact.

Some of the.

Some of the various bills that are currently in committees today.

Broaden the tools that had been proven to be successful for the PBM send terms of introducing more competition across therapeutic classes to include bio Similars and.

And some of the some of the things that have delayed competition from entering the marketplace.

And this is Derek.

We've we've been able to take advantage of that and as we also shared back in June that we would be able to manage or rebate exposure very efficiently and.

We've seen the peak this year in fact, we're doing slightly better than anticipated that will mitigate overtime and continue to dissipate as we think about 2020 and into your second question regarding FCP.

Along those lines, we're very pleased that we were able to extend our relationship with them. We have me very strong partnership in history with FCP I would anticipate at some point it will go to RFP, but the fact that we've been able to continue that relationship I think bodes very well for us and speaks very strongly to how we've been able to.

Create a partnership Thats left it for a number of years.

Your next question comes from the line of Robert Jones with Goldman Sachs. Robert Your line is open.

Great. Thanks for taking the questions I guess, just a couple more detailed follow ups I mean, one Eva I think you mentioned a larger than expected benefit from generic launches, particularly in specialty. So I was just wondering if you could expand on that dynamic a little bit and was this an area that you guys were expecting or is this actually something.

That could be track trending more meaningfully in your favor as far as.

Following biologics are.

Generic churn or generic biologics.

So Bob I'll take the first part I think John will provide some more color overall there.

The timing of the launches and when they come to market can vary. So this was something we were expecting albeit a team early.

For us and as we continue to focus to to execute and deliver value in savings right driving driving the penetration of generics is as an important priority for us and Bob. This is John So for 2019, we continue to improve our purchasing economics on mature products.

And then when the we looked at some of the new generic launches that we're coming to market, we actually were able to get more favorable rates than than what we historically had so that was a positive and then we had some new generic launches that we did not expect that were favorable and then as we look forward on to 2020 and beyond we still see.

The significant generic launches.

And in launches of bio Similars in between 2020, and 2023, there will be $41 billion of generics and bio similars that will come to the market.

In addition to that we see opportunities to prove to improve how we purchase complex generics generics, where there's only one manufacturer.

So again, a great opportunity around Biosimilar should we still see this is a very attractive area for us.

Got it and I just one quick follow up maybe for Karen we've gotten some questions on some disclosure from Wellcare related to Atanas PDP I think it generated around 300 million in gross profit through the first three quarters of this year is that the right way, we should think about the impact to two at Cvs when that PDB business eventually rolls off next year.

So so Bob we haven't provided that level of detail on specific parts of the business obviously.

There will be of and earnings related to the roll off of the business as well as our need to work through some stranded cost mccarran team is focused on and when we give guidance in February we will try to provide some more color.

Okay great.

Your next question comes from the line of Ralph Jacoby with Citi. Your line is open.

Great. Thanks.

Just one of the health benefits segment, you, obviously last quarter you had noted the pressure in commercial middle markets and the specific geography sounds like you've made some improvements there. So if you could help what sort of the details what what sort of got better but at the same time, you're still expecting MLL R above midpoint. So maybe just help on that more.

Broadly and then if you could just help us with cost trend by segment, just commercial Medicare and Medicaid and within Medicaid specifically, there's a lot around re verification issues. We've heard from some of your peers that hampering your margins in the segment is that driving up the am along as well. Thanks.

So a lot of questions there.

With a commercial and medical cost question, Yes, we mentioned in the second quarter that we had some pressure and utilization.

In our lower end of the middle market during the second quarter. We noted that we took appropriate action to address those elevated medical costs and I would tell you with an additional three months of claims experience, we feel comfortable that the absent that we.

Had to have mitigated the elevated pressures that we.

I thought we saw in the second quarter, specifically, what we did with we had intensified our medical management and the geography.

Claims activity that we now have seen we believe that we've identified the right products the right segments and the right geography, where that business had what we thought was elevated utilization, we feel that weve effectively addressed it.

Relative to medical cost by segment, we have not disclose that let Eva take take that question, Yes, I think as Sheila listen we've indicated all of our businesses are performing are performing well as you look at the mix of our business and as governor.

It has really grown we look at the overall NVR as an indicator around the the health of our business. The other thing that I would highlight is just recall silverscript is now part of the NVR related to the health care benefits segment, which is larger than the legacy yet PDP.

And it performs differently within the MTR.

Centrally reverse some of the typical managed care.

Yes, just a follow up I think you are asking a question on Medicaid Redetermination Lee they've always been and continue to be something that we monitor very closely there's really two impacts on redetermination Earth and most obvious one is enrollment the second one is.

On experience, both impacts have band and continue to be and material for us, but as I said, we closely monitor but it has isn't having any material impact on our Medicaid business.

Okay. So first of all the default.

Thanks, Ralph Amy will take two more questions. Please.

Thank you. Your next question comes from the line of AJ Rice with Credit Suisse AJ. Your line is open.

Hi, Thanks, Hi, everybody.

First of all just maybe.

Get you guys. This fall we got more information about the lay of the land going into 2020 around the Medicare advantage.

Product offering and competitive.

Offering services.

We're in the early stages of the.

Open enrollment period I know at the Investor Day, you guys had said you thought you could grow.

Marketing.

Obviously with the hip and other things coming back any updated thoughts on how that looks how much geographic expansion and things like that will drive your performance next year.

A general range on growth and enrollment in the business.

Hi, Jay its Karen and let me just comment on the competitive landscape and what our go to market strategy as well as you know and as you've seen the and the competitive landscape appears to be a competitive in 2020. However, you know as as you have seen CMS is estimating.

Market growth to be about 10%, we think it'll be a little bit lower than that but we are still optimistic that we can outpace our industry growth. Despite the has headwind and you know we there's a couple of reasons why.

Optimistic one I would say, yes, we continue our efforts around geographic expansion were 81% of Medicare eligible we continue to make investments in our growth and retention of our existing service area. Our stars performance is incredibly helpful to helping us.

In our optimism relative to Medicare growth, we have we maintained our zero premium plans and where the top health plan with respect to zero payment premium plan.

We also had expansion of our decent market and we are also focus as I mentioned at Investor day of converting our PDP business as well as our commercial business as our commercial business ages into retirement age and we believe that we can be successful relative to all those factors.

I also would comment AJ that we have incorporated some of our new and differentiated capabilities at the combined company. So we are offering the health hub in our Houston market, we had zero cost share benefit coverage.

In our Minuteclinics, we introduced our healing better program in select market. We also offered a fall prevention benefit that provides members with an annual allowance or fall safety items that you curated by CBS and then our over the counter benefit provide members.

With an allowance at our Cvs retail store, so they'll all those factors give us optimism that we will have above industry growth.

All right and maybe one quick follow up on pharmacy services I know throughout this year, you've talked about the investments you're making some helping.

And from stand up its in Ginnie Rx it sounds like perhaps there is a.

That may swing to the positive is there any way to talk about the order of magnitude.

Oh that's.

When that now becomes hopefully a little bit of a tailwind heading into 2020.

Hi, A.J. This is Gary go we haven't quantified in terms of putting the specifics what we've stated as that clearly 2019 at least the first half was an investment year for us as we were looking to stand up that business now that we are far into the implementation of Ingenio, which has gone really really very well.

All.

We obviously now transitioning to operating costs. Many of those expenses, we do expect that it will while we will be investment. This year. This year, we will turn profitable in 2020 and Thats what Weve stated.

Okay. Thanks, a lot.

Your final question comes from the line of Steven Valiquette with Barclays. Stephen Your line is open.

Thanks, Greg Good morning, everybody so one of the.

Do you see topics have been covered already so.

Yes, I guess for US just for Medicaid, obviously, the Texas Star plus or was pretty positive for the company is there any additional color you can provide and what you think drove some of your success there either qualitatively or quantitatively just in terms of your ability to analyze the full outcomes for yourself relative to the the other players. Thanks.

So thank you I'm, we're really excited about being awarded the Texas program, we believe that some of the.

Reasons, why we won we really believe we had a compelling RFP response, we have very strong existing value based provider contracts and in Texas. We had a very unique partnership with taxi healthy I'm home area eight.

Hum area aging agency, we made a commitment to the de SNET plan, we offered our Texas health.

And.

That we believe helped us and we believed our Ensiki way ratings helped us as well.

Okay I appreciate the color. Thanks.

Thanks, Steve So let me just wrap up it's it's really hard to believe that.

At the end of the month, we're going to celebrate our first anniversary as one company and.

I could not be more pleased and proud of the commitment and engagement of our nearly 300000 colleagues all across the country and.

As you've heard US talk this morning, our integrated model is designed to drive higher engagement enhancing access to high quality health care and reduce cost and create better health outcomes and ultimately that's going to feel and accelerate our revenue and EPS growth over the long term.

And I think again as you heard this morning, our entire organization is laser focused on executing the plan that brings that strategy. The wife. So let me. Thank everyone for their time. This morning, we'll talk to all of you said.

Ladies and gentlemen. This concludes today's conference call. Thank you for for your participation you may now disconnect.