Q1 2022 CVS Health Corp Earnings Call
Turn the call over to Tom Cowie Senior Vice President of capital markets for Cvs Health. Please go ahead.
Good morning, and welcome to the Cvs Health first quarter 2022 earnings call and webcast I'm, Tom Cowie Senior Vice President of capital markets for Cvs Health I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Sean Girton, Executive Vice President and Chief Financial Officer.
Knowing our prepared remarks, we will host a question and answer session that will include Jon Roberts Executive price, President and Chief operating Officer, Dr. Alan Lockman, President Pharmacy services.
Dan Thinky, President healthcare benefits, and Michelle <unk>, Chief customer Officer, and <unk> Shah Chief Pharmacy Officer, both co presidents of the retail segment, our press release and slide presentation have been posted to our website along with our Form 10-Q that we filed this morning with the SEC.
Today's call is also being broadcast on our website, where it will be archived for one year.
During this call we will make certain forward looking statements, reflecting current views related to our future financial performance future events industry and market conditions as well as the expected consumer benefits of our products and services and our financial projections are forward looking statements are subject to significant risks and uncertainties that could cause actual.
<unk> results to differ materially from currently projected results.
Strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, including our most recent annual report on Form 10-K. Our recent current reports on form 8-K in this morning's earnings press release, and our Form 10-Q.
During this call we will use non-GAAP measures when talking about the company's performance and financial conditions and you can find a reconciliation of these non-GAAP measures in this morning's press release and the reconciliation document posted to the Investor relations portion of our website.
With that I'd like to turn the call over to Karen Karen.
Thank you Tom Good morning, everyone and thanks for joining our call today.
We entered 2020 tail with significant momentum and delivered strong first quarter results across our business.
We grew revenue by over 11% to $76 $8 billion and increased adjusted operating income by nearly 7% to approximately $4 5 billion.
Adjusted EPS was $2.22.
Above our eight 5% over the prior year in the quarter, we generated $3 6 billion of operating cash flow representing growth of over 20% as compared to the prior year quarter.
Our foundational businesses performed well in the quarter and health care benefits revenue increased by 12, 8% year over year, we achieved adjusted operating income of $1 8 billion.
We grew membership sequentially and year over year overall medical costs remain consistent with projected baseline trends.
These results reflect our strong product portfolio, our deep understanding of consumers health needs and service excellence and.
In pharmacy services revenue increased by nearly 9% year over year adjusted operating income grew eight 6%. Despite a flat year over year contribution from our 340 <unk> product lines.
<unk> demonstrates a consistent value and savings that we deliver to our customers.
In retail we strengthened our position as a leading community health destination for millions of Americans. We grew revenues by approximately 9% with approximately 15% adjusted operating earnings growth over the prior year.
We grew same store retail scripts by approximately 6% approaching twice the growth in the marketplace.
Visit increased over prior year as more Americans see Cvs health as central to their health needs.
We administered more than 6 million COVID-19 test and more than 8 million COVID-19 vaccines nationwide in the first quarter of 2022.
Given these results we are raising our full year 2022 adjusted earnings per share guidance to $8 20 to $8 40.
Our cash flow guidance for the year remains strong in a range of $12 billion to $13 billion.
We are well positioned to achieve near term and longer term growth goals.
We're doing this across five strategic value, creating imperatives, which we outlined at our Investor Day, Let me just share a few examples of the strong progress we are making in each.
First we are advancing our all payor primary care delivery capabilities, our community health destinations are engaging more consumers with $6 5 million in person and virtual visits in 2021, approximately one 5 million visits in the first quarter up nearly 35% from the prior year, our virtual care.
<unk> represents one of many care delivery channels and lower cost sites of high quality of care.
We will be broadening our virtual care services in the next 30 days more people are accessing health care using digitally enabled solutions pre pandemic back in 2019, we supported 10000 virtual mental health visits last year, we supported 10 million virtual visits just for mental health. This.
Dramatic increase demonstrates the power of our ability to drive innovation at scale.
Second we are optimizing our retail portfolio that will be comprised of three models advanced primary care clinics enhanced health hub locations and our traditional Cvs pharmacy locations.
As of today, we have closed approximately 100 stores out of the 300 planned for this year and the 900 planned by the end of 2024.
Our early experience suggests we are retaining nearly 70% of the prescription volume within our network demonstrating strong evidence of our value to consumers. Additionally, we retained more than 95% of colleagues and redeploy them to other Cvs locations.
Third we are diversifying our growth portfolio with new health services.
We are expanding our capabilities in home health as we prepare for the 2023 launch of a post acute transitions pilot for our Aetna membership in select geographies partnering and technology and home based care will allow us to reduce readmissions and improve care for our customers at this critical juncture on their path to recovery.
We broadened our capabilities to create new sources of value, we continually evaluate our portfolio for non strategic assets, our recently announced sale of pay flex and selected assets from our international businesses are two recent examples of our actions. These transactions are in line with our commitment to invest.
In areas that are aligned with our strategy.
Fourth we are focused on our digital first technology, Florida approach, we serve nearly 44 million unique digital customers as of the end of the first quarter.
Up by over 7 million customers since our Investor Day, a testament to the value and ease of our digital offering.
Digital customers are omni channel and on average visit Cvs health two times more often than traditional customers. We also continue to expand our digital first health dashboard offering. This dashboard makes managing your family's health more seamless convenient and personalized.
It does so by putting critical health information into one place Health Records pharmacy medications and next best action.
We have 5 million active health dashboard users up over 25% in the past quarter, and we will continue to enhance connectivity to more services later this year.
Finally, we are making progress serving our consumers wherever and whenever they receive health care in the first quarter, we launched a new fulfillment option for consumers as part of our Omnichannel health experience consumers can purchase health and wellness products online with an option for free same day pickup that will be available.
In approximately 6000 Cvs community health destination later this year.
We are partnering with Google and Microsoft in ways that deliver real benefits to consumers. For example minute clinic scheduling is now integrated into Google search driving new and more convenient appointment bookings in our specialty pharmacy, we are using Microsoft text analytics and robotics to automate the 40% of prescriptions that.
Still paper or fax space, making it easier and faster for us to fill the patients prescription.
We are increasingly using technology to improve our business process and reduce costs. Here are just two examples are specialty intelligent medication monitoring and adherence engine uses machine learning to help our most at risk patients by predicting the likelihood of individual patients, becoming non adherent to their medication.
This approach then prompts ways in which we can coach and help them maintain their overall health.
Also using machine learning and robotics, we can now resolved a wide range of prescription drug claims, which previously required the attention of our pharmacists freeing them up to spend time with patients. This advanced approach reduces overall costs and improve the patient experience.
These five strategic imperatives taken together placed the consumer at the center of everything we do.
Consumer value is behind the integration of our businesses and we are making steady and real progress.
Ultimately, it's the hard work and commitment of our dedicated colleagues that makes our strategy and results achievable at Cvs health. We are committed to fostering a culture of values, we have made increasing workforce representation promoting inclusion and belonging and equitable access to growth and development.
<unk> priority.
Our commitment to shareholders customers and communities remains steadfast in.
In our 2021 environmental Social governance report released last month, we highlighted our sharpened focus on sustainable business practices and our priority to advance health equity in America, you can find a report on our website.
Our work to fundamentally reshape the delivery of healthcare in our country is well underway.
Before I turn it over to Sean I am pleased to announce we have named a new Chief Medical Officer, Dr. Shree Charcuterie.
Also I'd like to acknowledge John Roberts, who will be retiring at the end of June and thank him for his many contributions to Cvs health over its 42 year career at our company I am grateful to our dedicated colleagues who continue to deliver every day, helping millions of Americans and bringing bear.
Heart to every moment of our customer sell let me now turn it over to Sean for a deeper look into our operational results and outlook for the remainder of the year.
Thank you Karen and good morning, everyone. Our first quarter results reflect strong performance from all our core business segments with continued momentum in revenue growth cash flow generation and adjusted earnings per share growth position.
Positioning us to increase our 2022, adjusted EPS guidance to a range of $8 20.
$8 40 per share.
As we continue making progress towards our financial targets, we remain focused on growth.
Operational execution.
And supporting the communities we serve.
A few highlights of total company performance.
First quarter revenues of $76 8 billion increased by 11, 2% year over year, reflecting robust growth across all business segments.
We delivered adjusted operating income of approximately $4 5 billion and adjusted EPS of $2 22.
Representing an increase of six 6% and eight 8% versus prior year respectively.
Our first quarter adjusted EPS performance reflects both a higher adjusted operating income contribution and lower interest expense versus prior year due to our proactive deleveraging campaign in 2021.
Importantly, our first quarter 2022, adjusted EPS was impacted by 75 million of net realized capital losses, which lowered adjusted EPS performance by <unk>.
Of the losses noted approximately $40 million or <unk> <unk> per share related to write downs of sovereign bonds in Ukraine and Belarus.
Turning to the health care benefits segment.
First quarter revenue of $23 1 billion increased by 12, 8% year over year, driven by membership growth across all product lines.
We delivered sequential membership growth of over 670000, reflecting growth across all product lines.
We continue to be pleased with the performance of our Medicare franchise, which has been a key growth engine over the years.
Medicare advantage grew about 200000 members sequentially up six 7%.
Our momentum in dual eligible plans enrollment also continued into the first quarter growing 28% sequentially.
In our commercial business, a strong national accounts selling season contributed to membership growth along with growth in commercial risk membership drew.
Driven by group commercial and our reentry into the individual exchange marketplace.
Adjusted operating income of $1 8 billion was down slightly as compared to the prior year as.
As the previously mentioned net realized capital losses impacted growth.
Long with the continued progression towards normalized medical cost trends.
Our medical benefit ratio of 83, 5% increased approximately 30 basis points year over year reflective of the same continued progression towards normalized total medical costs.
In total medical cost trends in our commercial business remained in line with pre pandemic trended baselines with.
With government remaining slightly lower than pre pandemic baselines.
Consolidated days claims payable at the end of the quarter was $51 seven up.
Two six days sequentially as we brought on new government and other membership in the first quarter.
Overall, we remain confident in the adequacy of our reserves.
In pharmacy services, we continue to achieve strong revenue and adjusted operating income growth.
This is a natural outcome from our execution.
Delivering industry, leading drug trend on behalf of our clients.
Providing leading specialty management capabilities and outstanding customer service.
During the first quarter revenue of $39 5 billion increased by eight 6% year over year.
Driven by pharmacy claims growth growth.
Growth in specialty pharmacy and brand inflation.
Partially offset by the impact of continued client price improvements.
Total pharmacy membership was roughly flat from year end at 110 million members.
As underlying growth in commercial and other government laws helped to offset significant membership losses from the California, Medicaid carve out that started this year.
Total pharmacy claims processed increased by five 8% above prior year, primarily attributable to new business in 2022.
Currently we are approximately 60% through renewals for the 2023 selling season with over 98% core client retention.
Adjusted operating income of $1 6 billion grew eight 6% year over year, driven by improved purchasing economics, reflecting.
Increased contribution from the products and services of our group purchasing organization.
In specialty pharmacy.
Really offset by continued client price improvements and increased expenses to onboard new business at the beginning of the year.
As Karen mentioned, our 340 <unk> product lines did not grow inside the quarter.
In our retail long term care segment, we delivered strong revenue and adjusted operating income growth versus prior year.
First quarter revenue of $25 4 billion grew nine 2% year over year, largely due to increased prescription and front store volume, including the sale of COVID-19, OTC test kits.
Adjusted operating income of $1 6 billion grew 15, 1% versus prior year driven by a few key components.
Strength in pharmacy and front store sales.
The administration of COVID-19 vaccines.
And demand for over the counter test kits and related treatment categories, particularly at the beginning of the quarter when omicron incidents was high.
These positive factors were partially offset by the impacts of <unk>.
Ongoing but stable reimbursement pressure.
Business investments, including the minimum wage increase and store improvements.
And investments in store labor as we were consciously slow to drawdown staffing in response to declining omicron case levels to ensure we had sufficient capacity to meet consumer health needs.
Our liquidity and capital position remains strong at the end of the first quarter Jenner.
Generating cash flow from operations of $3 6 billion.
And ending the quarter with $3 billion of cash at the parent in unrestricted subsidiaries.
We remain committed to maintaining our investment grade ratings.
We'll also having the flexibility to deploy capital strategically for capability focused M&A.
The announced sales of our pay flex and Aetna International business in Thailand are expected to provide us with additional deployable capital later this year.
We repurchased approximately $19 1 million shares of common stock during the three months ended March 31 2022.
Marking the first time the company has repurchased shares of its common stock since 2017.
We also increased the quarterly shareholder dividend by 10% effective with the February one 2022 dividend distributions.
Which resulted in the return of $722 million to shareholders through dividends. During the three months ended March 31 2022.
In March we also announced we had entered into an agreement with the state of Florida to resolve claims dating back more than a decade related to opioid medications.
Under the agreement, we will settle all opioid claims by Florida for $484 million.
We paid over a period of 18 years.
As a result upon satisfaction of the settlement terms by the state.
Cvs will be released from the pending litigation in Florida.
Associated with this settlement, we have taken a charge of approximately $370 million after tax in our first quarter 2022 financials, which has been excluded from our adjusted operating metrics.
As a.
<unk> of our first quarter performance, we are raising our full year adjusted earnings per share guidance to $8 20 to $8 40.
Which represents three 5% to 6% growth versus our 2021 adjusted earnings per share baseline.
The increase reflects the favorable impact of prior year's development.
Net of realized capital losses experienced in our health care benefits business.
Both of which we do not forecast.
As such.
We are raising full year healthcare benefits guidance as follows.
Membership increases to a range of 24 to $24 3 million members.
Revenue increases to a range of 89 $3 billion to $98 billion.
Adjusted operating income guidance increases by $180 million at the midpoint to $5 $94 billion to $6.04 billion.
Similarly, MBR guidance is updated to $83 five to 84, 5% to reflect our first quarter experience.
We are maintaining all other guidance shared during our fourth quarter earnings call.
Our updated guidance now reflects the assumption that a fourth COVID-19 booster will be administered to adults, aged 50 and older.
And to certain immuno compromised individuals as per the guidelines set forth by the CDC.
Administration of a fourth booster is expected to have a net neutral impact to our enterprise.
Representing an incremental cost to our health benefits segment, but helping to maintain our full year outlook for our retail segment by offsetting first quarter 2022 expense pressures previously mentioned.
As we evaluate the progression of earnings for the remainder of the year.
We would remind investors of our prior statements that we expect 2022 earnings to be modestly higher in the first half of the year.
Similar to 2021 earnings progression, we currently project that 47% to 49% of adjusted EPS will occur in the back half of 2022.
Which we split between the third and fourth quarters.
You will find additional details regarding our updated guidance in the slide presentation, we posted to our website. This morning.
We continue to anticipate strong cash from operations in 2022 between 12, and 13% matures in the range of $2 eight in technology and digital enhanced.
Instruments to improve the consumer experience.
Patients.
Full year deployable free cash will activity, while any earnings.
Impact from these divestitures our inquiry.
Chris.
To conclude.
This quarter results and improved 2022 outlook, particularly.
Truly at this early stage in the year as we continue to sharpen our focus and execute our strategy.
As a leader and we strive to deliver a superior.
Health care experience for our consumers.
Through lowering the cost of care improving access.
And building engagement and convenience to our consumers and their communities.
We will now open the call to your questions operator.
Thank you.
At this time, if you wish to ask a question. Please press had you may remove yourself from the queue by pressing the pound key.
In the interest of time, we ask that you. Please limit yourself to one question and one quick follow up.
Our first question from Lisa Gill of Jpmorgan.
Alright, thanks, very much and good morning, first let me John and his retirement, it's been great.
Getting to know you also.
Alright, all these serious John so I wish you well in your retirement.
And Mike My question, if I look at the guidance, Sean the one area, where you raised guidance versus previous was in the health benefits business. So can you talk about what the key drivers are of the better MLR going forward Karen talked about digital is that playing a part of it.
Talking about virtual so if you can just give us more color as to how we think about what some of the key drivers are to better MLR in your guidance.
Yes, so I think the easiest way to sort of think about that is.
Largely what's being sort of pulled through here is the prior year development that we experienced in the first quarter.
Less the realized capital losses.
And just to be clear on that we talked in my remarks about $75 million of realized capital losses about 16.
So the net of those two.
Two things is right around $180 million.
I mean, thats really the guidance increase.
To round out the story, though as mentioned we now have incorporated the fourth booster for the specific populations.
It has been recommended for so that's going to be a cost item, obviously for HCV, but as you saw we've had strong volume growth and an excellent.
Performance sort of specialty post January .
That side. So the biggest thing is the is the product.
For your development of the realized capital losses, but we should have ongoing strengths from volume that should be able to absorb the cost of the fourth booster.
Okay great.
Then just as a I guess my follow up from my questions that I have been asking for the last year and thats around the primary care strategy I really thought we would have had an announcement by now.
You did talk in your prepared remarks about making headway around primary care and some of the offerings you have in the marketplace, but maybe can you talk about are you still looking to make a larger scale acquisition or will this be more of.
Internal growth.
Any update on that would be helpful. Thanks very much.
Good morning, Lisa Yes, let me just comment on that yes, we are continuing to look for a broader range of primary care capabilities.
An interesting market, we are trying to make sure that <unk> and financially.
But it is part of our strategy and where more conversation to come.
John you want to ask about capital, Yes, I'll talk a little bit about.
What about the M&A specifically on this and we say I certainly understand your question.
And I want to be careful because different people will define large different ways I think we've been pretty clear.
We're not talking about a jumbo acquisition here, we're talking about a capability based acquisition.
Of some size, but but not necessarily anything jumbo we've been very active in this space, we've evaluated a range of assets in and around the care delivery space I'll remind you most of these assets aren't out for sale.
So that dialogue starts a process.
Our priority areas remain primary care.
And NSO capability into home health capability.
These assets will serve as the foundation of the platform upon which we will pursue our strategic vision. So it's essential that we fully evaluate their defining characteristics and capabilities and.
And so while the valuation environment continues to present its own set of challenges.
I am cautiously optimistic with our ability to begin to execute on our strategic plan in 2022.
And Lisa this is Jon Thanks for your kind words, obviously have had a very rewarding career at Cvs and I feel really good about the leadership team that's now here.
And their strategy and the team's ability to execute so thanks.
Thank you.
We'll take our next question from Ricky Goldwasser of Morgan Stanley .
Yeah. Thank you and good morning, So clearly 2023 is progressing in line with your expectations.
Back in December you also gave us.
Targets for 2023, and 2024, so with kind of like of everything thats happening in the macro environment.
How is your thinking of 2023 and 2021 stands now is this is it has it changed in December or are we still on track.
With those targets.
Yes.
We remain committed to achieving those EPS targets for 'twenty, three and 'twenty four and we're certainly off to a good start in doing that.
It may be more immediately to 'twenty three.
While we are not.
Providing specific guidance as it sort of too early there's a lot of moving parts, but to your point I understand why the questions being answered when you think about macro factors like COVID-19 and the uncertainty about the future testing and treatment protocols, there as well as all of the macroeconomic factors that are at work right now in the market.
When I think about 'twenty three at this very early stage and I sort of think about our businesses I do think there is there is certainly some some headwinds, but there's also an <unk>.
Yes.
We're having a very good retention.
Jen season, the sales season is still in progress there, but we have the tailwind of specialty.
Specialty generics and Biosimilars and Theres a lot of good things happening there for that I expect to continue into the future.
On HCV.
Obviously, we expect some loss in Medicaid.
As the Redetermination as kick in.
But we have as good a momentum as we've had in a long time in commercial we have a strong individual Ma franchise.
The group MA business is always about jumbo accounts and so we have some of those that are up for renewal.
But we will also have our ongoing exchange expansion.
But maybe most importantly for that business.
Is the outlook on margin and we've had actually a really good start here with excellent baseline development and I would point out that.
In light of the macroeconomic conditions today much of our 23 pricing is still yet to be set.
The question, obviously, we get a lot about 'twenty three ends up kind of pointing often at retail.
And so I think it's worth spending a few minutes there.
Many like to model Covid going to zero for retail and that's a convenient modeling assumption, but I think a very highly unlikely outcome.
For 2023, as we move from pandemic to endemic.
We have a very strong testing and treatment franchise, there as well.
We've had particular strength in the front of the store both OTC COVID-19 testing as well as other categories. Our care pass membership is up 33% year over year to 6 million members.
And while in the pharmacy reimbursement pressure continues it has stabilized and moderated a bit in 2022.
We will continue to do all we can to reduce that pressure further but we're also going to continue to combat this by trying to increase volume and reducing costs.
We took share again in retail pharmacy in other words, we are growing faster than the market. This is probably at least the eighth quarter in a row.
That's happens.
We're implementing buy online pickup in store, which should help increase volume overall both.
Omnichannel pharmacy, which can both help volume.
But also give us new ways to fulfill customers.
Prescriptions and in so doing potentially have a more efficient cost efficient way to fulfill that.
Customer.
And 23 will be the second year of our store closures and so far in 2022 of those are going at or better than expected in terms of the number of stores in the script retention we're having.
And as always we're going to aggressively push on the cost of goods sold.
Maybe most importantly, though as we think about the next couple of years.
I continue to feel very positive about our significant capacity to deploy capital.
And you'll recall that our 'twenty three guidance only assumes that we repurchase shares enough to offset dilution.
So this is this is a lever that not only helps advance our strategy, but it's also a lever that can be used to deliver on our EPS targets as well.
Yeah.
Great. Thank you and just one quick follow up there.
As we think about those efficiencies and investment in the future.
Karen talked about the fact that digital customers visit the stores I think two times more.
Thing.
And then the average customer can.
Can you just give us maybe a sense of also how the profitability of those customers compared to sort of the brick and mortar customers, yes, I think.
It's probably a comparable sort of set when you think about things like that but it's been more of a frequency.
Okay. Okay.
Thank you.
It's from Michael Cherny of Bank.
Of America.
Good morning, and thank you for a ton of details so far.
Sean you mentioned the.
Dynamics around 23 than there was on specialty and specialty biosimilars.
Having during this selling season.
And there was some potential blockbusters coming on the Biosimilar side as soon as customers across the enterprise.
Are preparing.
Both interchangeable and non interchangeable biosimilars and how willing are they do they appear to be at this point in time to work with you on driving greater adoption, which obviously seems like it's going to be nice.
Alright.
Michael its Alan.
Very timely question, so I would say that our customers are.
Anxiously awaiting.
Kind of way that that's really starting in 2003 and continue.
What they're looking to us.
To do is to deliver to them strategies plan designs programs approaches.
That lower their net cost of product and they are very willing to entertain.
I'm not going to say whatever it takes but they're very willing to entertain the approach is needed to drive to the lowest net cost and so as you pointed out there are there are products that will be interchangeable so on that will be substitutable.
Manufacturer pricing strategies aren't entirely set yet so it's.
I would say, it's not quite clear exactly how thats going to come to fruition, but we are very very confident that the biosimilars will be SaaS and lowering specialty trend.
And overall trend for our customers and as we've said many times.
Generally when we create that sort of value of our customers are happy to pay us for it.
And if I can just add one more question on pharmacy services and growth you did mentioned 340 <unk> in terms of not growing year over year, whether it's within this year's guidance or this multiyear plan what is the assumption for 340 <unk> growth within your overall book of business.
So.
And finally, Michael So 340, B, obviously, the way I would think about 340 basis think about it as a volume discussion right. So subsequent to when we put guidance out.
Last year, there were a number of.
I guess I would phrase it as the manufacturers continuing to write their own regulations in deciding what they were and we're going to apply pricing too and so that reduced the volume. So when the volume goes down by covered entities make less money, which is the entire reason for the existence of the $3 40 B program.
Our clients don't have access to lower cost drugs.
Well partner, our third party administrator doesn't have the volume to reprocess claims in our dispensing pharmacies donor.
<unk> earned the dispensing fees. So that's when volume goes down.
We've now seen going into the into the first quarter of 2022 is that manufacturers have articulated the.
Conditions by which they will open up contract pharmacy, 340, <unk> pricing for covenant.
So that volume come through right, how fast to covered entities make the decisions they needed to make what are the restrictions that are placed on it.
So and then there is a an ultimate volume, which manufacturers decide to do so within all of those.
Variability so as the volume comes back covered entities make money our clients save money well partner has more volume to process. So within all of the totality.
We're estimating basically flat in the program year over year.
Which.
Which sort of our best thinking right now.
Thank you that's very helpful.
Youre welcome.
Our next question from Steven Valiquette of Barclays.
Great. Thanks, good morning, everybody.
Just for the LTC sub segment, the former Omnicare operations that nobody ever really asked about this.
I wanted to ask we've seen some pretty notable increases in the skilled nursing facility or a sniff industry occupancy gains in the first three four months of 'twenty two.
After a slower occupancy recovery in calendar 'twenty, one so I'm just wondering if that's translating into just better Rx volume results for <unk>.
The LTC omnicare operations in early 'twenty two.
Stephen we've seen that volume come up a little bit.
And for the most part that business is tracked with our expectations. This year, but I certainly wouldn't characterize it as a inflection point or anything like that its definitely been recovering from its bottom during COVID-19 and has more or less been consistent with expectations. This year.
Okay, Alright, that's it for me thanks.
We will take our next question from Nathan Rich of Goldman Sachs.
Hi, good morning, Thanks for the questions maybe.
Maybe just start on the retail business, Sean could you give a little bit more detail on the margin dynamics that you saw play out in the first quarter gross margin was.
Down a little more than we expected year over year can you, maybe just talk about what's driving that and kind of what you expect over the balance of the year and then it looks like on the cost side SG&A came in favorable can you maybe just talk about how wage increases.
Have trended relative to.
To your expectations.
Yes.
Obviously, we had we had a very strong quarter.
There are some dynamics in the quarter year over year that.
Have to do with sort of the vaccine program, starting last year, and we have very high expense levels last year in the vaccine.
Business and that's obviously been fine tuned now so year over year. Despite the fact that vaccine volumes were down which I think is a little bit of the gross margin question answer, we actually did better or kind of bottom line wise because of sort of the G&A components and some of the reimbursement has changed over that period of time too.
<unk>.
Testing.
Again.
That's probably been down sort of sort of year over year, but but overall.
We probably had a contribution towards growth of a couple of hundred million dollars.
From Covid in Q1.
The other dynamics I think were very so we had a light kind of cold and flu season right. So there was that going on both in the front store in the back of the store, but again script growth was good there was nothing particularly surprising on the reimbursement side. The front store was good across sort of a broader set of categories.
And just just OTC and fairness last year's first quarter 'twenty, one was still probably somewhat depressed.
Or what was going on but overall the metrics look good.
Okay, Great if I could just ask a quick follow up.
On.
Your comments on the M&A landscape and I guess it sounds like there is still a disconnect on valuations between buyer and seller I guess have you seen that conversations start to shift at all just given what we've seen kind of play out in the market. So far this year.
Yes and.
It's been an interesting dynamic right when we set out on this journey. Some of these companies were valued at seven to eight times revenue right and nowadays.
And that probably wasn't right right, but now some of them have regressed, maybe one or two and that may not be completely correct either so.
I mean, the answer is the longer this persists right. The greater this becomes sort of the reality upon which people make make some decisions and so I would say sort of directionally.
Yes.
But it still remains challenging.
Given give it given sort of the memories of where some of these values were.
That's helpful. Thank you.
We will take our next question from Justin Lake of Wolfe Research.
Thanks, Good morning.
First question just Sean appreciate your comments on on.
On Covid, but you talked about $200 million contribution year over year in retail.
Yes, I was getting to an estimate of about 800 million benefit to the year is that a reasonable ballpark and then how much was the total benefit in the first quarter.
Does.
Does this completely get offset in your mind.
The weakness in Covid negative COVID-19 impact.
And the benefits business.
Yes so.
The.
Let me, let me just sort of talk a little bit about what our COVID-19 expectations are.
And the answer to your question eventually will be that's probably in the neighborhood, albeit we've gotten there with a little bit different path now with the fourth booster.
We expect now about 18 million vaccines for 2022 includes.
Including the provision for the fourth booster for the defined populations.
This would be a decline of about 70% versus 2022.
Testing, excluding OTC is expected to be down, 50% plus or minus and in the OTC tests will be in the same neighborhood, maybe a little bit higher but overall, that's going to probably produce a contribution year over year, that's down 60% 65%.
On Covid and if you do the math.
Youre not going to be far off your number.
A lot of that.
Maybe half ish.
Of this year and it is more front end loaded than than back end loaded going forward and again to some extent endemic.
<unk> situation in term.
No boosters testing.
And test the tree and things like that so theres more to play out is in terms of how that ripples out in the second half of this year, but internet.
Next year.
For HCV.
The picture is more nuanced in the sense that 2019 baseline.
But maybe most importantly, the COVID-19 expenses in product pricing.
And so as I mentioned.
Overall cost trends came in consistent or slightly better.
Versus our trended baseline.
Which while I'm not going to declare a <unk> encouraging result.
Both for 'twenty, two and potentially 23 as well, though is I think we have to.
Return to how we've traditionally looked at this.
This business, which is by matching price increases with <unk> managing revenue growth.
And operating margin levels.
Got it okay, and if I can just ask a follow up you mentioned capital.
So running some numbers there on getting to over that three year period, you talked about in Investor day 22 to $24.
Bob.
Potential capital above and beyond what you've already kind of earmarked for that.
About two thirds of that coming from free cash flow generation of about a third from potential.
Leveraging up to about three and a half ballpark number in terms of what you think youre at.
Excess capital could be thats already not in guidance.
Okay.
I think we have probably assumes.
Some leverage ratio, that's a little bit higher than where we are today, but still consistent with sort of our investment grade rating strategy, but I think thats ballpark.
Is in the neighborhood.
Thanks.
We will take our next question from a J rice of credit Suisse.
Line is open.
And a J rice. Your line is open please check your mute switch.
Hi can you hear me now.
Yes. Please proceed with your question.
Yes, sorry about that.
So as you commented it's primary care.
The area is still a little pricey.
You also mentioned home health I Wonder if maybe you could flesh out a little more what the capabilities you would I mean are you looking.
Looking at some of your peers have done for something that's got a platform that fee for service that you get.
Pivot to value base, because there are other aspects of our home health platform that would be of interest to you and I think.
I think there is anxiety in the marketplace, a little bit that you sort of setup.
On ideas.
One of these areas 24, it's been about it.
The year since the Investor day, not quite but about an.
Can you maybe get a little anxious, but nothing has been announced can you give us maybe your perspective on your ability to how important is doing some sort of deal to being able to deliver on some of your long term objectives are you do you feel.
Pressure that you need to do something maybe just have a few comments on that.
Jay It might feel like a year since investor day, but it's actually only been or and a half months since investor day.
Right.
I think we all look like its about a year.
But anyway.
Let me just comment broadly on our home health strategy, and then I'll kick it to Sean to talk a little bit about kind of what we're thinking obviously as a company. We are uniquely positioned to integrate our existing capabilities as we think about primary care and extending into the home. We there's a number of opportunities for us we're starting.
Very early with our.
Post acute care transitions will look at opportunities to support first and foremost the aetna membership, particularly to support improvement in medical care costs, and then expand into a a payer agnostic. So theres a lot in the home, but clearly and as you know we're already in the home with Korlym with our <unk>.
Virtual care with our with our new post acute transitions and then we will expand coverage, where we can link it into primary care. So theres a number of options and we are looking at that too is part of our of our acquisition strategy as well as our first and foremost priority is really to advance our primary.
Care capabilities and as Sean mentioned, we continue to.
<unk> our way through the evaluation of Sean you want to talk about 'twenty four.
Yes, so what I would say.
Hey, Jay on this is we certainly remain committed to delivering the EPS target for 2024, and what we described in Investor day was a pathway.
To sort of get there with the with an M&A contribution and I certainly wouldn't step away from that yet, but it was a pathway and.
Inevitably pieces of that pathway might be different.
And I am not I am not I am not.
Sort of advocating the number that we won't get the earnings contribution, but I do want to go back to the capital point.
If we were hypothetically.
In that position capital continues to be a lever that we can use you'll recall at investor day.
When you just looked at the pure capital. If we did just sort of deploy all that capital you can get on top of these numbers. So this is about the longer term strategic positioning.
That that we're doing and again I.
I think it's important that we do the right deal for us and for the strategy and I'm going to do everything in my power to make sure that we can satisfy both commitments.
I also want to make sure we do the right deal because it's that important for our future.
Okay. Just a brief follow up you haven't been asked this late in the call sort of surprising on inflation supply chain labor.
David thoughts already have that.
Yes, a J on inflation, obviously, we're incredibly mindful of this topic.
As you know the U S hasn't seen these kinds of inflationary pressure.
Pressures in decades.
Some aspects of inflation that impact that could be very positive to us, but as we think about each business and inflation there is varying.
Reactions to inflation and I'll ask Sean to kind of go through a lot of those businesses to give you a affirm our view of what it looks like.
Yes, and I would say in the quarter.
Mainly I think because we made wage moves last year I don't think we felt a lot of pinch but the one obviously the one place that we did see it is actually a result of the cousin of inflation and Thats interest rates.
And some of the.
The losses that that they'll realized capital losses that we took in the portfolio related related to that and that and that will be something to keep in mind going forward, we have a $20 billion plus <unk>.
Fixed income portfolio that has moved from about $1 billion gain position unrealized gain position at the end of the year to approximately $1 billion unrealized loss position.
And there's always some element of portfolio turnover in management during the year, So that's something that.
That I think we'll continue to monitor closely.
As you mentioned I mean, as we think forward. There is there is a potential across all of our businesses for.
Both the labor and G&A aspects, but I think as I've thought about this it's the cost of goods sold aspect.
That I have.
Certainly thought about a lot.
I would remind everyone that historically.
Higher inflation has also driven a higher.
Our topline particular in the HCV in the PSS businesses.
From a Cogs standpoint, I wouldn't say, we're seeing it show up in pharmacy yet.
'twenty two I think we're in very good shape as most of our contracts are all locked down.
<unk>.
Our average HCV contract is about three years in duration.
So obviously some number of those will be coming up for 'twenty three but.
Also point out one of my earlier comments that we still have a lot of pricing leverage on 2023, and we will certainly fully reflect our thinking on inflation as we think about forward forward pricing.
On retail, obviously, we'll be watching that as well, but it is a dynamic that can actually help.
Frankly, with our with our membership programs and also make our store brands more attractive relative to other products. So.
There are certainly a lot of fingers of this but but I do think we're we're looking at this kind of thoroughly and thinking about all the levers we can pull to mitigate the impact and a J.
Jay on your Labor question, obviously, we continue like everyone else to experience a very tight labor market, but as I mentioned in the prepared remarks, when we're closing stores, we've been able to retain those retail colleagues, which has been really helping us out.
Those locations, we also had very strong retention.
Our business and we've been very successful in hiring some of the key areas that.
And our company like digital and Tech and analytics, though.
And the other thing I would just say is we're very pleased with that more than half of our hires are diverse and are reflecting the communities that we serve.
Okay.
Great alright, thanks, so much.
We will take our next question from Eric Percher Nephron Research your line is open.
The color on the factors impacting quarterly profit in HCV and pharmacy I wanted to drill into pharmacy services.
The year do you expect fluctuation given COVID-19 and large onboarding.
And is there any fluctuation from sourcing benefit or $3 40 would be through the year.
On PSS to your point I think when you.
We've looked at our first quarter result, and this is something we anticipated, but we did have a very successful growth season, and a very successful welcome season.
And we did staff to sort of create that positive experience for our new customers. So expense levels are certainly a little bit higher in Q1, and then sort of the run rate for the rest of the year.
Theres some theres some movement, but the rest of the year the quarters are generally sort of in the same neighborhood as each other.
For the rest of the year.
Alan mentioned before from a 340 <unk> standpoint, we're largely assuming a flat year over year contribution so.
A lot of the increases are coming from the core element on growth in specialty and things like that.
And to Allen's comment if I caught it correctly was that.
There are ways to expand volume does that suggest that your view is that youre support covered entities, providing data and that's key to seeing the volumes increase which ultimately catch you flat for the year.
So so.
Eric It's Alan.
The volume growth is off of the kind of depressed base from the actions that.
The manufacturers tuck right. So it's not year over year volume growth is just to kind of a recovery of the volume and so that's the first thing I'd say the second thing is ultimately the decision about whether or not they supply data to the manufacturers is up to covered entities and so they will they will work with us and tell us when.
They are arent ready to turn the program back on and under what conditions.
Alright, thank you.
We'll take a question from Brian <unk> of Jefferies. Please go ahead.
Good morning.
Alan just just a follow up question on <unk>.
On your side of the business as I think about some of the changes that we saw we've seen with site of service shift because of the pandemic.
Things normalize in terms of hospital visits and physicians physician visits what are you seeing in terms of the durability of state Youre corium home infusion side or maybe even specialty mail.
Just in terms of volumes and how.
Let's shift if that's.
Sticking on those sides.
Yes, so I guess I think of the three business units within within the company.
Pharmacy services segment, probably had the least.
<unk> ability in terms of underlying core business activity so the specialty.
Pharmacy itself.
There was a little bit of a dip along the way in new and new prescriptions as you saw people not going to the doctor, but by and large the side is the side of service shifts there were non material the corn business was a little bit more impacted obviously a lot of the.
Acute scripts.
Infusion and antibiotics there weren't as many hospitalizations that was offset to some extent by more.
Sure.
Oncology things that were kind of traditional hospital outpatient that we've picked up on so.
Net net I would say, it's probably not a material change that impacts the pharmacy services segment, just given the relative size of of quorum versus the rest of the rest of the company.
Alright, and then just one quick follow up as I think about buybacks.
A little probably a little earlier than I would've expected. So is this just capital deployment because youre.
Cash was really strong during the quarter or is.
Is it because of the delays with some of the acquisitions that you had planned and should we expect potential upside from the buybacks as a result.
I mean it certainly.
Emanates in some ways right from the strength of our ongoing ability to generate sort of deployable capital and I want to make sure people understand that.
It's less that it's something that we're going to rush out to do than it is to fully understand the strength of that capital and the fact that that remains a lever that that we can pull.
Over time and in some ways has the potential to be a safety net.
From year to year, given just the normal fluctuations of the business.
I want to thank you all for joining our call today and just leave you with a few comments as you can see we our team continues to execute we entered into 2022 with very powerful momentum and strong growth across all of our businesses.
We remain confident we will continue that momentum for the remainder of the year and beyond and we look forward to updating you on our progress throughout the year. Thanks for joining the call.
This concludes today's Cvs health first quarter 2022 earnings call and webcast.
You may disconnect your lines at this time and have a wonderful day.
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