Q2 2022 CVS Health Corp Earnings Call
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Ladies and gentlemen, good morning, and welcome to the Cvs Health second quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow Cvs Health's prepared remarks at which point, we will review instructions on how to ask a question.
As a reminder, today's conference is being recorded.
Now I'd like to turn the call over to Larry Mcgrath Senior Vice President of business development and Investor Relations for Cvs Health. Please go ahead.
Good morning, and welcome to the Cvs Health second quarter 2022 earnings call and webcast.
Larry Mcgraw Senior Vice President of business development and Investor Relations.
I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Sean Girton, Executive Vice President and Chief Financial Officer.
Following our prepared remarks, we'll host a question and answer session that will include Dr. Alan Larson President Pharmacy services.
Linky President health care benefits, Michelle <unk>, Chief customer officer, and co President retail.
<unk> Shah Chief Pharmacy Officer, and co president retail as well as Tom Curley Senior Vice President capital markets.
Our press release and slide presentation has been posted to our web site along with our Form 10-Q that was filed this morning with the SEC.
This 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, including potential impacts related to Covid, 19, and industry and market conditions as well as the expected consumer benefits of our products and services and our financial projections.
Our forward looking statements are subject to significant risks and uncertainties.
Could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we filed 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.
<unk> earnings press release, and our Form 10-Q.
During this call we'll use non-GAAP measures when talking about the company's performance and financial conditions and you'll 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 Larry and welcome to the team good morning, everyone and thanks for joining our call today.
Cvs health delivered another outstanding quarter, we grew revenue by 11% versus the prior year to over $80 billion with strong results across all business segments. We delivered adjusted operating income of $4 8 billion and generated adjusted earnings per share of $2.
In Hawaii.
This morning, we raised our full year 2022 adjusted earnings per share guidance range to $8 40 to $8 60.
An increase of 20.
We are also increasing our full year outlook for cash flow from operations to 12, five to $13 5 billion.
These guidance increases reflect the continued positive momentum across all of our businesses, we remain well positioned and confident in our ability to achieve our near term and longer term growth goals.
Our increasingly integrated foundational businesses delivered exceptional results for the quarter.
The health care benefits segment had a strong quarter with revenue growth of nearly 11% year over year, we achieved adjusted operating income of $1 8 billion.
Our medical benefit ratio of 82, 9% improved by 120 basis points versus the prior year as medical cost trends remained favorable.
We generated membership growth across all product lines versus the prior year. These.
These results reflect the end to end value of our assets increasingly working together one customer at a time at national scale.
Our Medicare business remains one of our strongest growth segment, and we increased membership year over year across all Medicare products, our individual Medicare advantage membership continues to grow at a double digit pace and faster than the overall market. This quarter, we achieved a major milestone with more.
And then 2 million individual Medicare advantage members, including dual eligible.
Our PDP portfolio also maintains its momentum with healthy growth that is well ahead of industry trends, providing us future conversion and upsell opportunities.
Looking ahead to 2023, we're maintaining a nearly 98% client retention rate in national accounts. Additionally.
Additionally, we are having a successful group Medicare advantage selling season and expect to show positive membership growth next year as.
As we continue to build our individual exchange business. We're on track to expand coverage, where we currently have individual exchange offerings and are obtaining final approval to add four new states to our portfolio, bringing our total to 12 states.
In pharmacy services revenue grew nearly 12% compared to the prior year and delivered adjusted operating income of $1 9 billion.
Specialty pharmacy revenue is up nearly 21% year over year.
We're a leader in specialty pharmacy with programs that drive value in the marketplace provides substantive savings to customers and differentiate us as repair programs with digital assets.
Looking ahead, we're maintaining a 98% client retention rate for the 2023 selling season with more than 75% of renewals complete.
We drove $3 $1 billion of growth new business, providing evidence of our market, leading trend management transparency and integrated offerings.
Turning to our retail long term care segment, we continued our momentum from the first quarter, our deep customer relationships high quality patient interactions resilient supply chain and agile operating model all contributed to the strong quarterly performance.
Nearly 4.8 million customers engage with US every day at Cvs locations, making us a powerful community health destination.
In the quarter, we delivered over 6% revenue growth versus the prior year and one 9 billion and adjusted operating income are.
Our front store sales grew more than 9% driven by strength in consumer health sales, including strong COVID-19 over the counter test and sales of cough cold and flu products.
Our pharmacy group prescriptions, one, 6% or four 6%, excluding the impact of the COVID-19, vaccination, which declined versus the prior year.
Our retail script growth trend is remarkable as we have consistently increased market share year over year since the first quarter of 2020.
As COVID-19 continues to move towards an endemic phase we will continue to play a critical role in communities across the country.
Millions of Americans depend on us for COVID-19 testing vaccine administration in dispensing antiviral medications for treatment.
We administered more than 4 million COVID-19 tests and approximately $6 million COVID-19, vaccinations nationwide in the second quarter.
The demand for antiviral medications to treat COVID-19 continues to increase as the national positivity rate remains in the double digits.
Overall, we continue to successfully navigate a challenging retail environment, while expanding services and increasing share of wallet by bringing new customers to Cvs health.
Of the approximately 43 million new customers, who have chosen Cvs health for COVID-19 health services, nearly 15% have engaged us for additional services.
Our omnichannel approach connects consumer health experiences driving high satisfaction levels and continuously enabling Cvs health to attract and retain customers. Our leadership on this omni channel experience is a competitive advantage and one we are committed to investing in enhancing over time.
Turning to our strategic imperatives, let me give you a few updates.
We are a leading provider of retail health services nationally and we continue to advance our care delivery capabilities, our Cvs health care teams in our minute clinics have supported more than $2 8 million patient visits year to date, representing a 12% increase from the prior year. We are further enhancing.
Our services and making them more relevant for our customers. We are working closely with the administration offering the test to treat program and our minute clinics and pharmacies and we will be implementing pharmacists prescribing under certain conditions to even more seamlessly serve customers with COVID-19.
This furthers our strategy to expand access to health services and helps consumers to navigate the best site of care.
As we evaluate complementary health services and care delivery capabilities to enhance our overall portfolio. We continue to take a disciplined approach inorganic growth is part of our strategy and we look forward to updating you on our progress.
Relative to store optimization, we've closed 198 stores to date and remain on track to close 300 stores. This year we.
We are successfully minimizing disruption to our customers and maintaining high levels of satisfaction as we maintain our store and pharmacy hours across our locations to meet consumer health needs.
We're retaining over 70% of prescription volume within our network and have redeployed over 90% of impacted colleagues to our other Cvs locations.
Our technology for digital first approach is reducing complexity for our customers and creating new digital health solutions that are convenient.
Cvs Health now serves more than 45 million unique digital customers up one 5 million since last quarter. This increase is driven by our Omnichannel pharmacy strategy focused on simplifying how consumers Phil and receive prescriptions.
Over 60% of our newly acquired digital users are customers of our specialty mail order and retail pharmacies.
We are expanding our digital health services and deepening engagement through personalization to drive convenience for customers, we launched our individualized health dashboard earlier this year and already have 6 million active users up 20% from the prior quarter.
As we successfully execute our strategy, our unified health model growth and relevance and importance everyday for the consumers customers and the communities. We serve and you can see this in our results.
And finally as part of our ongoing commitment to sustainability, we entered into an agreement to purchase renewable energy with one of the nation's largest producers of carbon free energy. This is the latest step on our path to sourcing 50% renewable energy by 2040.
We are positioned to continue our momentum through the second half of this year. None of this would be possible without our talented colleagues who serve America's health needs. Every day. We recently added two proven leaders to the executive team to Lockman Daddy does joined Cvs health as our first chief data digital and technology.
Officer, and Violetta Austin has joined Cvs health as our Chief strategy Officer, both bring deep unique expertise to our diverse leadership team I will now turn it over to Sean for a deeper look into our operational and financial results and our outlook.
Thank you Karen and good morning, everyone, our second quarter.
<unk> results reflect the continuation of outstanding performance from each of our core business segments as we exceeded our expectations for revenue.
Cash flow generation and adjusted earnings per share.
These results are driven by our steadfast focus on growth operational execution and supporting the communities we serve.
This momentum positions us to raise our 2022 adjusted EPS guidance to a range of $8 40 to $8 60 per share.
A few highlights regarding total company performance.
Second quarter revenues of 86 billion increased by 11% year over year, reflecting robust growth across each of our operating segments.
We delivered adjusted operating income of $4 8 billion and adjusted EPS of $2 40.
Importantly, these superb results were produced despite the impact of about $100 million of net realized capital losses inside the quarter, which lowered adjusted EPS performance by <unk>.
These net realized capital losses are reported primarily in the HCV segment, but also impact the retail and corporate segment results in the second quarter.
Looking at performance by business segment, and healthcare benefits, we delivered strong revenue and adjusted operating income growth versus the prior year.
Second quarter revenue of $22 8 billion increased by 10, 9% year over year.
Membership grew 4% year over year. Despite the loss of 266000 lives from the completed divestiture of Aetna internationals business in Thailand.
Excluding the divested business, we delivered sequential membership growth of 176000 members, reflecting growth across all product lines.
Our Medicare franchise remains a key growth opportunity for us, adding approximately 70000 members sequentially across our portfolio of solutions for individuals and employers.
Excluding the divestiture of our international business in Thailand, we continue to deliver sequential membership growth in our commercial business.
We also continue to build out our individual exchange business, which will include 12 states as of January one 2023 pending regulatory approval.
Sequential growth in Medicaid membership is largely driven by the ongoing suspension of Redetermination.
Adjusted operating income of $1 8 billion grew 13, 4% year over year, reflecting improved underlying performance in membership growth.
Partially offset by incremental investments to support growth in the business and net realized capital losses of $67 million.
Our medical benefit ratio of 82, 9% improved 120 basis points year over year.
Reflecting medical cost trends that remain modestly favorable to our pricing assumptions.
Consistent with last quarter medical cost trends in our commercial business remained generally in line with pre pandemic trended baselines.
With government remaining slightly lower than pre pandemic baselines.
Consolidated days claims payable at the end of the quarter was $54 three up.
Two six days sequentially as reserves grew at a modestly higher rate than premium growth displaying a pattern similar to what we experienced in the second quarter of 2021.
Overall, we remain confident in the adequacy of our reserves.
And the pharmacy services business, our ability to deliver industry, leading drug trend for our clients our specialty management capabilities.
Outstanding customer service levels continue to drive growth.
During the second quarter revenue of $42 8 billion increased by 11, 7% year over year.
Driven by pharmacy claims growth.
Growth in specialty pharmacy, and brand inflation, partially offset by the impact of continued client price improvements.
Revenue in specialty pharmacy grew nearly 21% versus prior year, reflecting new business wins and pharmacy claims growth.
Total pharmacy claims processed increased by three 9% above prior year and five 7% when excluding COVID-19, vaccinations, primarily attributable to new business in 2022.
Increased utilization and the impact of an extended cough cold and flu season.
Total pharmacy membership grew sequentially exceeding a 110 million members.
As growth in commercial and government lives more than offset significant membership losses from the California, Medicaid carve out that started this year.
Adjusted operating income of $1 9 billion grew five 7% year over year, driven by improved purchasing economics, reflecting increased contribution from the products and services of our group purchasing organization and membership growth.
These favorable items were partially tempered by ongoing client price improvements as well as $55 million of restructuring and integration costs.
Year over year contributions from our 340 <unk> product lines declined inside the quarter as covered entities were slower to agree to manufacturer conditions than we had previously estimated.
And our retail long term care segment higher than projected COVID-19 related volume combined with strength in pharmacy and front store sales helped to drive strong results specifically.
Specifically during the second quarter revenue of $26 3 billion grew six 3% year over year, reflecting increased prescription and front store volume.
Including increased sales of Covid over the counter test kits and cough cold and flu products.
Adjusted operating income of $1 9 billion declined nine 1% versus prior year, partially due to a $125 million gain from an antitrust legal settlement recognized in the second quarter of 2021 as well as lower COVID-19 vaccine volumes additional drivers include strengthened farm.
<unk> and front store sales improved.
Generic drug purchasing and.
And the favorable impact of business initiatives during the quarter.
These positive factors were offset by <unk>.
Ongoing but stable reimbursement pressure.
And business investments, including the minimum wage increase and store improvements.
Pharmacy prescription volume grew one 6% year over year, reflecting increased utilization and cough cold and flu volume extending later into the spring.
Excluding the impact of Covid.
Pharmacy prescription volume increased by four 6% year over year.
Turning to the balance sheet.
Our liquidity and capital position remains excellent.
Year to date, we generated cash flow from operations of $9 billion.
And ended the quarter with $5 8 billion of cash at the parent in unrestricted subsidiaries.
During the quarter, we repaid $1 5 billion of long term debt.
Further in July we announced that we will be executing a par call redemption on $1 billion of November 2022 notes, yes.
Yesterday, we also announced the par call on all of our notes due in December of 2022 for a combined total amount of $1 65 billion of debt representing the last of our outstanding maturities for this calendar year.
Through our quarterly dividend, we returned $740 million to shareholders we.
We remain committed to maintaining our investment grade ratings, while also having the flexibility to deploy capital strategically for capability focused M&A.
A few other items worth highlighting for investors.
Adjusted EPS in the second quarter was impacted by reserve strengthening of $108 million and our legacy long term care insurance business.
This adjustment, which represented the first time, we have significantly adjusted this reserve since the Aetna acquisition is included in adjusted operating income for our corporate other segment and lowers total company adjusted EPS by <unk> <unk> in the quarter.
From a GAAP reporting perspective in June we also completed the previously announced sale of pay flex, which resulted in a pretax gain of $225 million in our second quarter financials.
Consistent with past practice this gain has been excluded from our adjusted operating metrics.
Turning to our 2022 outlook, we are raising our adjusted earnings per share guidance by <unk> 20.
To a range of $8 40 to $8 60.
This increase reflects both the second quarter performance and an improved outlook for the retail LTC segment as well as strong second quarter underwriting results in the HCV segment.
Tempered by a $140 million to $180 million of lower net investment income contributions over the remainder of 2022, given the uncertainty and volatility of the current capital markets.
As such we are maintaining our full year adjusted operating income guidance and healthcare benefits of $5 94 to 6.04 billion.
This reflects the aforementioned strong underlying fundamental performance.
<unk> offset by $110 million to $145 million of lower net investment income contributions over the remainder of 2022.
As the vast majority of our net investment income is generated in our health care benefits segment.
Our updated outlook also contemplates the extension of the public health emergency through the end of 2022.
We are raising full year retail LTC guidance as follows.
Revenue increases to a range of 101 to $102 7 billion.
Adjusted operating income guidance increases by $575 million at the midpoint to a range of 654 to 664 billion.
We now forecast that we will administer nearly $20 million COVID-19 vaccinations in 2022.
With approximately 75% already administered in the first half of 2022.
We expect full year diagnostic testing volumes of approximately $19 million.
And sales of over the counter test kits to more than double compared to prior year exceeding 50 million units.
In aggregate, we expect these three categories of Covid driven items to now produced nearly $3 billion of revenue in 2022.
A decline of approximately 33% versus 2021, but indicative of the endemic tale of Covid on our retail business.
Our updated outlook also includes a provision for higher levels of investment spending in the back half of the year as we prepare for a potential late year increase in Covid cases.
And includes continued investments in our workforce and to enhance our customer experience.
And pharmacy services, we now expect to be at the low end of our full year adjusted operating income guidance range of 731% to 745 billion based on the following factors.
The continued strength from our core capabilities, including purchasing economics, and strong network volumes, where we have increased the midpoint of our range by 50 million scripts.
Being pressured by the restructuring and integration costs I previously mentioned and a reduced outlook for our 340 <unk> business, resulting in a contribution that will be down compared to prior year.
Looking at the enterprise as a whole.
Due to our sustained operating momentum we anticipate continued strong cash from operations in 2022 and have raised our guidance to a range of 12 five to $13 5 billion with capital expenditures unchanged at a range of $2 $8 billion to $3 billion.
We are raising our full year adjusted effective tax rate guidance from 25, 6% to 25, 7%, primarily a result of the discuss changes to our investment income outlook.
And finally, as we evaluate the progression of earnings for the remainder of the year. We continue to remind investors that we project that earnings per share will be fairly evenly split between the third and the fourth quarters.
All other guidance shared during our first quarter earnings call remains unchanged.
You will find additional details regarding our updated guidance in the slide presentation, we posted to our website. This morning.
To conclude.
Our second quarter results reflect continued strength from all of our core business segments and we are pleased to raise our full year 2022, adjusted EPS guidance.
Our focus on growth and operational execution continues and we continue to progress on our long term strategy.
We remain committed to the EPS targets implicit in our long term model, including as we look to 2023.
We will now open the call to your questions operator.
Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad.
They remove yourself from the queue by pressing the pound Keith in the interest of time, we ask that you. Please limit yourself to one question and one quick follow up.
Thank you we'll take our first question from Ricky Goldwasser with Morgan Stanley . Your line is now open.
Yes, hi, good morning, and congratulate on a great quarter.
So.
My question.
Aaron and Sean is how are you thinking about your primary care strategy on the heels of the recent M&A news.
For the three children on.
That balance between organic and inorganic comments that you referred to care and in your prepared remarks.
Hi, Ricky first of all let me say congratulations and it has been a pleasure working with you and we want to on behalf of the entire Cvs leadership team wish you all the best in your future endeavors.
Relative to your question first let me remind you that we are the largest provider of retail health services in the nation and having said that we we have a strategy that is.
We are expecting to enhance our health services in three categories. As you mentioned primary care provider enablement and home health and as we've talked about in the past there are multiple pathways for us to make a mark on our community healthcare.
Ability to Ah.
Our strategic goals and as we've talked about before Ricky we have very specific criteria that we look at as we're evaluating our many many options we look to see if theres a strong management team, which we're looking to see if there is a very strong tech stack, obviously the ability to scale.
The size of the company that we are and our pathway to profitability and as you know Ricky M&A can be very fluid you don't necessarily design and exactly how these deals and what gets announced we are committed to extending our health services in categories and we are very.
Ari encouraged and confident that we will take the next step on this journey by the end of this year as you would expect we are being very disciplined on both strategically and financially as we pursue our M&A strategy, we can't be in.
And the primary care with Al and then without M&A, we've been very clear about that and let me ask Sean to talk a little bit more about the specific market dynamics.
Yes. Thanks.
<unk> for the quarter. So we've been we've been very active in evaluating a wide range of assets in and around the care delivery space and what I would reiterate is that our priority areas remain.
Primary care provider enablement and home health.
It's really a paramount importance and a capability based play that we fully evaluate.
We're defining characteristics, which would include their capabilities to drive real and lasting value.
The financial dynamics of these different business models, and the Optionality and growth levers that they provide us with including our own ability to deploy our existing assets and create value in these entities and as Karen mentioned, we've consistently stated that there are multiple pathways to follow to achieve our vision.
Our vision is something new and differentiated as you know and thus there is no one and done asset.
There and so we'll certainly know asset is perfect. There are differences as Karen highlighted when you look at the criteria amongst the available assets, particularly in terms of financial performance.
The opportunities for future growth and our ability to drive value.
I continue to believe that we can execute on our strategic vision via M&A and begin to execute on that vision in 2022.
<unk>.
The strength.
Our capital generation is part of what makes this possible, but also provides a powerful lever to.
To supplement our core earnings.
Via share repurchase and I think we can still it still remains our goal to two.
And commit to the targets that we've talked about at Investor day for 'twenty, three and 'twenty four.
So let me just ask a quick follow up you thinking.
Thinking about your existing asset base and footprint and access points.
Excuse me.
Additional.
To add to your portfolio.
Clearly.
Enable that kind of a cloud first strategy.
Maybe you can share with us sort of kind of how are you thinking about sort of breakeven.
<unk>, we're having a hard time hearing you.
Sorry can you hear me now.
Yes, a little bit better. Thank you great. So.
We think about jewelry as you think about your existing F driving the footprint.
And the access points, how are you thinking about kind of like what we were really kind of hard to move your long term strategy, either owning or sorry, the primary care providers versus that kind of like an enabling technology that can connect it all together.
Yes, Ricky I think theres, a number of ways for us to think about kind of our overall strategy and I would just go back to.
We're looking at capabilities, obviously in the primary care space in the home space and in the provider enablement space. So it's a combination of all those and as Sean said, it's not a kind of one and done activity will continue to evaluate.
A number of these options and.
And I think I think Ricky it is both right we do need both and I think part of this is because it goes back to this.
Achieving sort of a new and differentiated vision and you need a platform to do that from right. So it is a.
A set of extent businesses and assets that you can begin to work with but it's also the platform and the technology and what you can then use that to springboard to do new and better things and and I think that's why we really need to move on both fronts with equal importance really yeah, and I think Ricky the important.
To make here is that we have a very strong foundation with the assets that we have and thats evidenced by the strength that we're seeing in our retail health.
Operation, We had two point.
We had a 12% increase in minute clinic visits just this quarter. This quarter. So a lot of opportunity from the strong foundation that we already have.
Thank you and for the best wishes as well.
Thank you. Our next question will come from Lisa Gill with Jpmorgan. Your line is now open.
Alright, great. Good morning, and thank you Karen I wanted to start with the current economic environment and how youre thinking about the overall 2023 selling season. So you talked about a strong selling season.
That the Pbms side, but maybe if you or Alan could maybe talk a little bit about what.
Commercial employers looking for how are you thinking about employee trends.
You talk about the different assets that you have I know you have a new virtual primary care offering that you have in the marketplace. It's almost been four years since Aetna and Cvs care together. So can you maybe just talk about where you see different plan design going in 2023.
And what you are hearing from come and players in the marketplace today as we think about really bringing all of these assets together.
As a whole entity.
Yes, so highly.
I'd say what were seeing and I said in the prepared remarks, having very strong retention results and all of our businesses.
Through our national accounts and through Alan businesses as well what we're seeing is continued focus on access.
Lower sites of care continue.
Continue to look at cost.
Obviously employers are still interested in making sure that there.
Low cost flexibility and and really strong service and thats really consistent across kind of the entire portfolio.
What we're seeing is we continue to see.
Very strong results with our integrated offerings. We've had very good results. We've I think we've benefited from having a integrated sales team out in the market.
Selling our products and capabilities. So we're pleased with kind of what we're seeing in the market. Obviously, it's been somewhat dampened pipeline across both businesses. So we've been as I mentioned, having very strong retention, but let me ask Dan and Alan to give you a little more color on what they are seeing specifically.
Is there.
In the markets and selling business and I'll start with Dan Yes. Thanks, Karen I think you said it well I mean look we're having really good conversations in the top of the house is all about controlling cost access and consumer experience as you think about how that value shows up in those conversations it shows up in some of our integrated benefit designs and cross sell opportunities.
As you can see that we're solving some of those access points with no cost low cost minuteclinic benefit, but we're also seeing it show up in new products and services like our transform diabetes oncology program and then Lisa you mentioned, our virtual primary care, it's not just about virtual primary care, it's about total virtual care and so offering.
Aleutians across the enterprise for virtual care and then really lastly, good conversations about how we're using our local resources like minuteclinic like the pharmacists for access points as well.
Yes, Lisa it's Alan I'll, just add two things one and we've certainly seen at the larger end of the market.
The benefit managers, focusing on bringing people back into the office post COVID-19 and so we have seen.
Contracts that we thought might go out in 'twenty, three and pushing out to 'twenty four and sometimes 25. So I think that's the first thing I think the second part would be we see a continued desire for.
Transparency for cost controls, particularly in specialty and for digital connectivity and the ability to interact with members sort of in that really critical moment, when they're renewing a prescription and they're thinking about their health. So although those things are resonating, particularly in those <unk>.
Areas of the market that are still very active.
On specialty.
Those are the biggest player obviously humira portfolios.
<unk> come to the market next year is that a conversation youre, having with plan sponsors.
How do we think about that is that going to be a big driver phase 2024, as you think about the pbms.
Yes, so so two things one as you look out it's more than just U everyone's focused on 2023 and Humira, but if you look out over the next seven or eight years. It was about $100 billion of product thats going to lose marketing exclusivity. We've started talking with our clients about biosimilars Bakken basal Golar day.
So three or four years ago. So.
We have both prepared the market for.
Articulated the strategies around lowest net cost and are continuing to work with our clients. So I do think that as.
As we create as more competition comes into the market. Historically, that's always been very very good for our for our customers and generally when as I've said many times before when we create value for our customers generally are happy to pay us for it. So I do think this is going to be a substantial.
Impact in the PGM industry over the next.
Seven eight years.
Great. Thank you.
Yes, Lisa.
The thing I would add you did ask specifically about some of the componentry on 2023, and I think it makes sense just offer some high level comments on sort of the broader context, I think that we see for 'twenty three.
Obviously, I'm not providing specific 2023 guidance here, but.
I would expect the construct of 2023 to be one of higher adjusted operating income in PSS sand HEB, given some of the things that Dan and Alan We're just talking about.
And then given a 2020 retail COVID-19 outlook that is nearly double our initial expectations I'd expect that we'd see lower earnings year over year.
In retail.
Below operating income given the activity, we would expect lower interest expense and a flat share count, but I would say that overall at this stage again I'd reiterate that we remain committed to delivering on the adjusted EPS targets for 2003, and 24 that are implied by our December Investor day guidance and as reflected in current consensus estimates.
Thank you. Our next question will come from a J Rice with credit Suisse. Your line is now open.
Hi, everybody.
Maybe first just ask about your experience with the front end store in the retail side.
That continues to be quite strong, even though I think there'd been an expectation that would moderate this year I assume at home test as a part of that can you.
Or is that out and then also just say anything you will about sort of the underlying growth in <unk>.
Youre seeing the strength.
Yes, AJ I'll, let me just offer some kind of a frame for the quarters performance, which you're absolutely right. We've continued to see underlying strength in both the front and the back of the store.
Beyond Covid in the quarter itself I would say about 60% of our outperformance in retail was really driven by those kind of COVID-19 categories that we talk about but the remainder which is still a substantial amount is actually sort of the core strengths and sort of the front store in the retail pharmacy.
Operations, and obviously OTC kits are a big part of the story as I mentioned in my remarks, but ill turn it to Michel to add some more detail on what's going on in the retail operation.
Proud of the strength, we've seen in the front store that's come from a mid single digit increase in trips and also a mid single digit increase in average basket sizes, Sean said, well sort of cough cold Covid was part of that and the strong part of that we did see strength across all categories I would just say two things.
Or do you think the momentum is a result of our continual pivot to fulfill the strategy, we laid out at Investor day to service local community health and wellness destinations.
Secondly that our investments are paying off.
Equally positioned in an omnichannel world and so our strong digital assets plus our community presence and our investments in things like buy online pickup in store omni pharmacy, they're accelerating are helping to fuel our growth.
We've also redesigned CBS dot com, which is driving much stronger engagement.
We're modernizing our fleet and investing in smart supply chain infrastructure. So smart automation is helping us fuel our in stock position, which we feel good about and then finally really doubling down on service.
To ensure our most trusted in the community that trust is a core part of our enterprise strategy as you know.
Just a small note we were happy to see learning consoles recognition of Cvs pharmacy is the most trusted brand in retail and actually one of the most trusted brand across across every industry. So solid performance and we think we're well positioned as be as we head into next year.
Great great. Thanks.
Maybe just quickly on Medicaid rebate applications updated thoughts there about.
<unk> I wouldn't that May go into effect, what your exposure might be.
<unk>.
Analysis about your ability to recapture either through the marketplace or the commercial market. Some of those members that Vegas coverage via Medicaid.
Yes.
Yes, AJ. So now we're assuming obviously that the redetermination is really won't happen until next year or any kind of magnitude obviously with the extension of the pag assumption in our guidance.
We estimate we've added about 400 to 500000 members as a result of that.
And this is a I put a caveat, it's a difficult thing to estimate on the retention side, but.
We might retain 25% plus or minus.
Of that membership obviously, our our individual exchange footprint is expanding but still limited.
In the scope of our overall Medicaid block so.
Some of that will help but.
But still obviously a lot to play out and then obviously so this activity obviously will be more of a 'twenty three.
Activity now than 'twenty, two which we had talked about a quarter ago.
Okay, great. Thanks, a lot.
Thank you. Our next question will come from Michael Cherny with Bank of America. Your line is now open.
Good morning, and congratulations on a nice quarter.
Sean.
Appreciate the early color that you provided on 'twenty three is trying to make.
Maybe take a step back real quick any changes to think about relative to the baseline in terms of what you've reported in how to think through the dynamics of where you sit right now and I guess along those lines as you think about the implied guidance until the end of the year out of the moving pieces on COVID-19 potential for increased.
Costs in health care benefits versus potential upside as boosters.
Actually in testing continue in the store, how do those factor into where we should be considering the jumping off points next year.
Yes, so there is a lot.
There's a lot in there in terms of moving moving parts right. The classic sort of baseline adjustments that we would make.
The prior year's development, that's probably in the neighborhood of I think about 12 right now on a year to date basis.
The Big driver here right is the thing that last year was realized capital gains this year, it's realized capital losses.
And we have about $175 million recognized losses year to date, and obviously year over year investment income so that's a.
A story that will play out through the second half of the year and one that we're going to need to refine expectations on the net investment income for 2023, just with all of the moving parts.
Asleep there were we did talk about sort of the one time adjustment that we had related to the long term care insurance business Thats worth about <unk> <unk>.
Those are some of the big baseline pieces, and then you sort of now pivot to I think sort of the COVID-19 moving parts.
Between retail and.
On HCV.
I think for HCP as I mentioned, we're at a point, where we've priced this.
We're three years away from sort of the last time, we had a baseline without COVID-19 and this really.
I think has to kind of come down to the way we've always talked about this business traditionally right. This is about kind of.
Matching our prudent price increases across all of our products with our expected cost trends and kind of managing the revenue growth and operating margin dynamics and I think we're in a very good place right now for 2022 on that front and as we position for 2023.
I think on retail.
While again, it's logical to think that given the level. We're at this year that will go backwards I think our thinking is we still have.
Sort of an endemic tail and a contribution in 2023.
And.
I think we still anticipate that that business can perform.
At a baseline level thats consistent with what we talked about on Investor day from from sort of the jump off point of around $6 billion that thats still something that that we can operate around in that business. So theres still a lot to be played out obviously here in terms of where we go with future recommendations obviously.
Around booster, so, but I do feel good that we've got our we were in a positive pricing position I think right now in HCV as we think about sort of pricing for Covid and obviously.
I think we are in it we're in a good position in terms of serving the communities and the.
Continuing to serve the communities.
The Covid front.
Thanks, I'll leave it there I appreciate it.
Thank you. Our next question will come from Justin Lake with Wolfe Research. Your line is now open.
Thanks, Good morning first of all congrats on the higher regularity Mcgrath.
Yes.
And then second.
Just on.
I wanted to ask a couple questions on TVN spin.
Specifically.
A lot of questions in terms of how that.
The drug pricing provisions I mean, Felicia adoption to act might impact PVM.
Some color there and then Sean you mentioned.
Yes.
The headwind from $3 40.
Way to size that for us.
Thing about and how that might roll into next year.
I realize this year or could that be a headwind.
Into 2023.
So Justin as Allen. Thank you so first on the on the drug pricing and incentives.
Limited if you look at the details it's 10 drugs in <unk> and.
<unk> 29.
If you look at the way the language is structured it would articulate that these are all products that are unlikely to have material competition.
So I think the overall impact is going to be it will be positive in the sense that.
Pricing will come down for those products.
In advance of competition, but I don't think the impact on the overall model is going to be substantial just given the nature of the way the definition of which drugs fall in work.
That's the first by the second part with respect to $3 40 would be as you know there have been a lot of.
Changes to the way that program is operated.
And essentially if you boil it down it's there are two critical decisions slash actions on behalf of the covered entities in order to re access the financial value, which as I know you know is critically important to many of those.
Critical access hospitals to maintain their financial liability they need to start providing a certain level of data on contract pharmacies to the pharmaceutical industry. Their decision, making process is somewhat slower than I think people expected and then the ability to turn that data on us a little bit slower, but we're seeing.
<unk>.
Decision, making and steady.
Expansion of the number of hospitals that are doing it and we expect that that will continue through this year and into next year.
Yes, Justin just specifically to give you a sort of a sense I mean as I mentioned in my remarks, we still think will be within the range, but probably in the lower half of that range for PSS in the width of the midpoint to the bottom is a little more than $100 million and so it's in that sort of ballpark sort of as the year over year sort of decremental.
Of which by the way, we experienced already a little bit in Q2, but but less about a quarter ago. We thought this could come in flat year over year and now we think it will be down a little bit year over year.
Thank you. Our next question will come from Eric Percher with Nephron Research. Your line is now open.
Got it. Thank you I'll shift back to the retail side and a question really around Covid and the profitability of the vacs scripts that you're seeing I know you held some G&A cost early in the year given some of the increases in demand.
Demand did you see a change in the level of G&A of staffing you're able or have to hold in Q2 do you find that the profitability on Covid Scripps is moving up as you can staff for it and then how does that slip as we think about the second half of the year and I know you mentioned investments.
Yes, so I would say you mean like sort of like anything that you do for a while right you get more and more efficient at how to do it. So I think on the margin Directionally, that's that's sort of gotten.
Gotten better, but we've kind of taken the opportunity obviously with the results to think about how we continue to sort of invest in this business and invest in the customer experience.
Make sure that we can provide sort of the staffing and in all of the services and capabilities that we need on the retail side and so we've made some provision for that in our thinking.
For the second half of the year.
And and that sort of incorporated in our in our outlook.
Okay. As you look at endemic if we think about 10 million flu shots a year with relatively minimal change to the P&L during that season.
To get to a point, where you're able to staff for this and the pharmacy by moving around what you already have or is there always an incremental do you think it becomes even more efficient.
Yes.
Turn it to prime but I think.
Yes, we definitely can plan for it and as part of our modeling we do that with flu season every year I would say is it.
<unk> gotten smarter with Covid, we continue to be very nimble with our models and being able to leverage our staff, whether they're doing prescription related work or vaccination related work. So we're continuing to do that really well and we're also preparing for some of the test to treat thats coming out from HHS.
For the back half of this year and a pilot and then going to scale throughout the year. So we feel really good about it.
Just let me go back because I want to make sure I did.
Eric since usually ESCO <unk> you'd have to go back to Justin's question on the <unk> I want to make sure that I was clear and not confusing on something my commentary about directional contribution of 340 B with specific to 2022 in terms of like what was in our guidance obviously as that volume comes back online. We would expect a different result for 2023.
Going forward so.
Thank you.
Thank you. Our next question will come from Brian Tim Quillin with Jefferies. Your line is now open.
Hey, good morning, guys and congrats on the quarter.
I guess my question as we think about the store the front storefront analysts are right I mean, obviously high inflation rates for product categories across the board.
So how are we thinking about.
First what youre seeing in terms of product inflation, right now where that's trending.
Are you thinking about that as it relates to the guidance.
Yes.
The cemetery embedded.
For the revenue guidance going forward.
Yes, let me start with what we're seeing in terms of just Sean on guidance. So.
For the most part we're able to pass inflation through to our customers, having said that we're super mindful, it's an environment, where we want to make sure. There is value on the shelf at all times for our customers and we think about that and of course, we think about that in terms of how we price, but it's a great time for our store brands our store brands on average of 20% to 40% below.
Our national brand. So it's a great time for consumers to find value in our store brands. We do have a lot of substitutability across categories and last not least we have a very large lever with extra care and care pass although care passes up another 26% year over year, we have a great lever with extra care and care path to make sure we're providing.
Personalized.
Coupons and deals so that our consumers see value on the shelf so wow it's.
A good guy in terms of being able to pricing, we're mindful of value and thinking about that really carefully across categories.
And keep in mind that the significant majority of our revenue in the retail segment is pharmacy, driven and we're not really seeing sort of the inflationary impacts that you kind of hear about in the headlines ripping through that segment. So thats still more of a typical levels of pharmacy inflation that would be embedded in our outlook and even within our front store product mix.
Sort of the inherent inflation rates in that kind of product mix is different and lower than sort of a big kind of got a headline numbers that you hear about.
And kind of when they talk about inflation headlines, but again really it's it's really going to be the pharmacy sort of inflation assumptions that drive our revenue outlook.
Awesome. Thank you.
Thank you. Our next question will come from Nathan Rich with Goldman Sachs. Your line is now open.
Hi, good morning, Thanks for the questions.
Sean you mentioned the <unk>.
Favorable cost trend versus expectations in the second quarter could.
Could you just give a little bit more detail on what drove that and you didn't change the guidance for VR for the full year is there any change to your thinking for how cost trend plays out in the back half of the year and then if I could ask a follow up just upfront I just wanted to clarify the new COVID-19.
<unk> I was trying to follow the numbers.
It seemed like maybe $500 million of incremental revenue and $200 million of incremental earnings, but if you could just clarify that that'd be great.
Yes, let me let me do that one first it's significantly more than that.
Talking about $3 billion, we've raised retail revenue about $2 billion.
Well more than half of that is related to these COVID-19 categories. So it's a significantly bigger contribution for the full year on that totaling about $3 billion of revenue for the year and as I mentioned thats nearly double where we sort of started the expectations for the year.
The on the on the MBR front, that's definitely positive I still think our range is indicative of our performance in there, but obviously.
Just on Q2, we are on the favorable side of that and so that outlook remains I think very very positive from an underlying standpoint as I mentioned the product sort of the way. This is rolling out by product has been very similar commercial really consistent with our baselines and probably a little favorability on Medicare and Medicaid, but I'll ask Dan to comment a little bit on what we're seeing.
And below that.
Let me give you just a little flavor of what we're seeing in some of the service categories first of all across all of our lines of business. We are seeing the inpatient volume favorable we're watching.
<unk> care PCP visits and specialists and generally those have returned to normal levels. We've been really focused on making sure. Our members have access to preventative care throughout the pandemic.
<unk> is still slightly lower than expected and then when you think about the COVID-19 costs overall as well we did see a steady volume of COVID-19 costs, but that had lower severity lower length of stay and lower costs. Overall, so just give you a little flavor of the service categories.
Great. Thank you.
Thank you. This does conclude the Q&A portion of today's conference I would now like to turn the call back over to MS. Karen Lynch for her closing remarks, and before we conclude today I just want to leave you with a couple of thoughts our team is delivering meaningful progress on our strategy is we're striving to become the nation's leading health loose.
<unk> company, we are confident that we will continue to build on this powerful momentum through 2022, and 2023 and we look forward to continuing to update you on our progress thanks for joining the call today.
Thank you. This concludes today's Cvs Health's second quarter 2022 earnings call and webcast. You may disconnect. Your line have a wonderful day.
Okay.
Okay.
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Thanks.
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Okay.