Ladies and gentlemen, good morning, and welcome to the CVS Health First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode, a question-and-answer will follow CVS Health’s prepared remarks at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded.

Thank you, and good morning, everyone. Welcome to the CVS Health First Quarter 2021 Earnings Call. I'm joined this morning by Karen Lynch, President and CEO; and Eva Boratto, Executive Vice President and CFO. Following our prepared remarks, we will host a question-and-answer session that will include Jon Roberts, Chief Operating Officer; Alan Lotvin, President, Pharmacy Services; Dan Finke, President, Healthcare benefits; and Neil Montgomery, President of Retail and Pharmacy. Our press release and a slide presentation have been posted to our website, along with our Form 10-Q that we filed with the SEC this morning. During this call, we will make certain Forward-Looking Statements reflecting our 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. Our Forward-Looking Statements are subject to significant risks and uncertainties that could cause actual results to differ materially from what may be indicated in them. We strongly encourage you to review the information in the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning Forward-Looking Statements and Risk Factors section in our most recent annual report on Form 10-K this morning's earnings press release and included in our Form 10-Q. During this call, we will use non-GAAP financial measures when talking about the Company's performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning's earnings press release and the reconciliation document posted on the Investor Relations portion of our website. Today's call is being broadcast on our website, where it will be archived for one year. Now I would like to turn the call over to Karen.

Good morning, everyone, and thank you for joining our call today. In what continues to be an unprecedented environment, CVS Health has delivered strong first quarter results. For all of us, the past year has been defined by the pandemic and our response to it. In the first quarter, CVS Health orchestrated an all-out effort to vaccinate Americans against COVID-19. I’m proud to say we have helped achieve the President's accelerated 100-day goal of 200 million vaccines. This would not have been possible without the dedication and effort of our approximately 300,000 colleagues who worked tirelessly throughout the pandemic and delivered when they were needed the most.

Thanks, Karen, and good morning, everyone. As Karen stated, our strong performance across the enterprise continued in the first quarter. We delivered solid revenue growth of 3.5%, as a result of strong net new business, plus the expansion of our successful COVID-19 testing and vaccine programs. Adjusted earnings per share of $2.04 increased 6.8% and exceeded our expectations. Our cash flows remain strong, generating $2.9 billion of cash from operations. We paid down over $3 billion of long-term debt in the quarter, while returning $656 million to shareholders through dividends. Since the close of the Aetna transaction, we have paid down a net of more than $15 billion in long-term debt, and we remain on track with our low three times leverage goal in 2022. We are maintaining our discipline in capital allocation strategy and managing our balance sheet to generate additional cash flows. Across the Company, we are executing on our modernization and cost savings initiatives, for which technology is at the core. As mentioned last quarter, we implemented an AI-enabled capability to efficiently address COVID-related calls. This intelligent agent addressed over eight million calls for frequently asked questions. And we are expanding this technology to call centers across the enterprise.

We will take our first question from Ricky Goldwasser with Morgan Stanley.

Congratulations on a very good quarter. So my question is focused on the PBM segment. I mean, clearly, very strong performance, and really trying to understand the moving factors. You mentioned specialty and improved purchasing. So on the specialty side, maybe you can give us a little bit more color on what are the specific products. It seems like you are alluding to biosimilar performance so what type of adoption are you seeing? And then also on the improved purchasing, there are a lot of questions we are getting from investors around the generic pricing environment. So I wanted to see what you are seeing there. Thank you.

Good morning, Ricky. I will start and I will hand it off to Alan to give you more specifics. But as we mentioned, we continued to see very strong growth in the PBM business, really fueled by strong purchasing economics, the wrap of our specialty trend programs. And more importantly, we announced last week that we had really strong trend management with an average trend of 2.9%, truly resonating in the marketplace. The other thing I would mention, Ricky, is that the integrated value story between medical and pharmacy continues to resonate with our employer groups, and we have had strong success there. But let me turn it over to Alan; he can give you some more detail.

Yes, good morning Ricky, how are you? So as you think about kind of the economics across specialty, you sort of think about it in a couple of categories. So one is just generally improved purchasing economics across brands as well as generics, right. So that allows us to create greater value for our customers as well as meet all the obligations that we have created there. Then, successfully executing against programs that take advantage of the generics that launched late last year were also critically important, right. So we were able to drive generic dispensing rates to levels a little bit higher than I think we initially thought, and that both benefits us as well as our clients. Those are the principal drivers of the economics within specialty. And then as Karen and Eva mentioned in their remarks, continuing to drive outstanding specialty trend is what allows customers to continue to choose us to manage their specialty spend as FEP did. So again, it becomes a self-reinforcing cycle.

Great and just a quick follow-up on the vaccine. Just to clarify, when you think about the vaccine benefit, clearly, you saw an improvement in reimbursement rates. Given that we are seeing some hesitancy around vaccines, and it seems that we might have seen a peak in growth there, are you now assuming lower vaccine volumes for the year versus what you assumed in prior guidance?

Ricky, this is Eva. I will take that one. Overall, as you said, recently, we have seen some vaccine hesitancy. We have seen a drop-off of around 30%, as you look at some of the recent data there. The additional outlook we had provided was it was about a 2% to 3% contributor to our overall volume growth. Right now, we are probably trending at the lower end of that range given performance to-date and what we are seeing in the market. In our outlook, we are assuming the pediatric vaccine. But not included in our current estimates is the impact of a booster should there be one later this year.

Thanks. Next question please.

We will go to Steven Valiquette with Barclays. Your line is open.

Great, thanks. Good morning, everybody. So within the HCB or Aetna segment, the MLR came in better than expected. There also seems to be some investor focus on the better than expected SG&A, which in that segment as well. So I'm curious if you can some of the operating expense.

Hey Steve, we are having a hard time hearing you. So I wonder if you could speak up.

Okay. Sorry. I'm not sure what happened there, so I apologize. My question was just on the HCB retina segment. The MLR came in better than expected, but there also seem to be some investor focus on better than expected SG&A within that segment as well. So I was curious if you are able just to speak to the operating expense trends within Aetna. And also, if I missed it, if you gave the prior year development number, just to have that handy as well within HCB. Thanks.

Yes. I will start, and I will hand it to Eva for prior period development. On the expenses for Aetna last year, and we continue to do this every year is to continue to look for ways to improve our overall cost efficiency. We embarked on initiatives last year using technology, looking at ways we can be more competitive. And that is reflected in the first quarter results in the segment. And as you might expect, we continue to do that across the company, as I mentioned in my prepared remarks, we every year continue to look at ways to become more efficient and we are really trying to harness technology to make those efficiencies real. And the health care benefit really did see the effects of that in the quarter. Eva, do you want to talk about the prior year development?

Sure, Karen. Thanks. Good morning Steve. Overall, we did experience elevated prior year development in the quarter. However, when you look at it on a financial statement net basis, given the MLR MBR contractual requirements, I would say it is really not that unusual compared to prior years.

Okay. Got it, okay, thanks.

Thanks. Next question please.

We will go now to Lisa Gill with JPMorgan. Your line is open.

Thanks very much. Karen, I want to go back to your earlier comment when you talked about behavioral health and connecting the consumer with the best site of care. Can you talk about how you are doing that specifically, how you are contracting with behavioral health specialists there - if these are psychiatrists or psychologists? And how that really feeds into a broader comment that you made around the consumer talking about the home, virtual community. How do I think about all those elements working together when we think about both mental health and physical health?

Good morning Lisa. Well, I think relative to behavioral health, it is critically important for us to focus on it. The pandemic has increased the number of behavioral health interactions and I think what we have seen is with individuals, we have seen increases in substance abuse. We have seen increases in domestic violence, we have seen increases in depression and anxiety. What we have done is we have put licensed clinical social workers in a certain number of our HealthHUBs, and what we are trying to do is really connect the physical health with the mental health. In every single MinuteClinic, we do behavioral health screenings, they then will be referred to our licensed clinical worker that is in the facility in the HealthHUB. And then we can connect with them digitally as well through our e-clinic capabilities. And we are actually seeing very strong results in this program. We are seeing three visits in a month from those individuals that have already engaged with us. So clearly, there is a need to make those connections. It is a differentiator for us and something that I believe is important as you think about mental health and physical health combining to take care of the holistic person and then meeting them where they want to be met. Quick customer story, Lisa. We had an individual reach out to us; she was trying to get into see a behavioral health provider, she couldn't. And when she took her month, and then after a month, they told her that it would take another month for her to get an appointment. She learned about CVS Health, and we got her in the same day. So there is definitely a need, and I'm very excited about the possibilities for us to really enhance our products and services to support the holistic health of individuals.

And how do we think about that from a financial perspective, Karen? Is this that these are Aetna members, and therefore, you are going to be able to lower overall health care costs for that member because we keep them well both mentally and physically, or is this a program where you are charging fees for service to other planned members? And is this going to be a big enough driver, and is there an attachment rate to this? Just how do we think about some of the opportunities around that?

Yes. The way to think about it, and I will hand it over to Neela, is broader than just Aetna because we have contracts with other managed care plans. So they are coming in. It is part of their insurance coverage, and that is how kind of the economics of it. Let me ask Neela to talk a little bit more in detail.

I would say that we are using insurance at the moment, and that is the main way in which people are accessing care. As Karen mentioned, access is a huge factor, and the convenience of evenings and weekends in our proposition makes it very desirable to customers. Over time, we do expect to grow the sort of D2C fee-for-service business because we do recognize that is a large part of the market and we expect to launch that next month.

Thanks.

Our next question comes from A.J. Rice with Credit Suisse. Your line is open.

Just to start out, I really appreciate the comments about how Aetna is integrating with MinuteClinic and HealthHUBs for new product offerings. That seems like the principal way the three businesses are maybe integrating. But I wonder, two years into the deal, are there other things you would highlight as to why the three individual businesses are better all together and things you have realized from the deal that may be worth highlighting some people beyond that.

Good morning, AJ. I think there are a number of things. You mentioned MinuteClinic. I would say the integration of medical pharmacy is another area. We have also put out a number of clinical programs that we are advancing as part of the overall combination of the three companies. Our diabetes program, our chronic kidney program, our oncology program. All those programs demonstrate the value of an integrated offering where we have those programs, and we can meet people either in the MinuteClinics, or we can meet them at home, and obviously manage their insurance coverage. So there are a number of different proof points. We are also leveraging technology and analytics through our next action. And then I would say our new programs like our Return Ready program is another demonstrable impact of having a combined company where we have the ability to sell our testing and our vaccine programs to our employer groups and then engage them on their sites or in our MinuteClinic. So a number of things that I would point to that demonstrate the value of the combined three companies.

Okay. Maybe just a quick additional question. We are seeing a lot of the companies in the sector pursue incremental service opportunities through acquisition. I know you guys are still highlighting a priority for capital deployment is just to continue to reduce debt. But how should we think about your interest in some of the service line, extension provider, extensions that we are seeing others do? Is that of interest to you how should we think about that?

Yes. A.J., thank you for the question. Obviously, you mentioned our first and foremost priority is capital deployment to pay down debt. But clearly, we are looking at all of our options around additional services, as demonstrated by our virtual care offerings and things like that. But yes, that is something that would be of interest to us. And let me turn it over to Eva.

Thanks, A.J, good morning. What I would add to Karen is certainly paying down our debt remains a top priority. Additionally, I would remind you that, in the outlook provided, we did provide for what I will call smaller M&A to fill out the businesses and where there are needs. And we continue to invest organically as well in terms of our CapEx spending and building out the services and capabilities to drive the business forward.

Okay. Thanks.

Thanks, AJ. Next question please.

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

Good morning, and thanks for the colors so far. I wanted to dive a little bit back into some of these sourcing dynamics that you are seeing. As you think through the component in particular on both generics and specialty, you called it out for the Pharmacy Services segment as a whole. How does that factor in across the entire enterprise and how should we think about the durability, especially given that you are easily the largest purchaser in the world of drugs on some of these ongoing sourcing efficiencies, especially in a world where generics as a whole are pretty close to 90% of the total market?

Mike, it is Eva. Thanks for the question. Overall, we source our generics consistently for the entire enterprise, whether it is the Retail/Long-term Care segment or the PBM segment. And obviously, there have been some specialty generics launches that we have been able to optimize the benefit of that given our size and scale and our capabilities within the company. I would just remind you the economics of specialty manifest themselves on the PBM segment with our Specialty Connect program. And so you will see the benefits from that program there. And I think to your question around durability, right, we do see new generics continuing to come to market, availability of biosimilars to provide longer-term benefits. And Alan will provide a little bit more color on that.

Yes, Michael, if I could just add. As you know, specialty is somewhere north of 50% of the total drug spend right now. And given the evolution of the FDA around substitutability biosimilars as well as traditional generics for older small molecules, the specialty businesses are sort of entering that phase of increased competition. So as we look forward over the next two, three, four years, we see a very robust pipeline of both generics and biosimilars and specialty, which while, to your point, the generic dispensing rate is now 90% given the dollar volume is still largely in specialty creates ongoing opportunities for us.

Thanks. Just one more really quick question. I know you don't guide quarterly, but what is implied on the next year's cough/cold flu season in terms of how to think about the trajectory of the business since the end of the year?

Mike, if I could predict the cough/cold season, that would be a great skill to have. But what I would say is, as you look, we are assuming the economy continues to return to normal levels as people are vaccinated, what happens with the cough/cold flu season will affect the segments differently. Obviously, lower medical cost, if it is a weak cough/cold flu season again, and lower scripts on the Retail/Long-Term Care segment. So overall, I think about it at a more normal-ish level. But when there is variability, it will affect the different segments differently.

Understood. Thanks.

Next question please.

Our next question comes from Eric Percher with Nephron Research. Your line is open.

Thanks. A question on the Retail segment and Pharmacy reimbursement pressure. As we enter a new year, we always see a comment on reimbursement pressure. And I know that there have been strategies to drive volume or increase pharmacy services, and of course, integrated opportunities. But when you look at reimbursement pressure itself, does it remain the same type of headwind that it has over prior years, and what are the strategies you have implemented that can offset that actual reimbursement pressure?

Hi Eric and Josh. A couple of things on reimbursement, we recognize that this continues to be a challenge for us. And what we are currently working on are revising our contracting strategies, continuing to manage cost initiatives and clearly managing our supply chain in an appropriate way. As I mentioned on the call, we are exploring all of our options here, and I think we will have more to talk about in December. And let me just see if Eva has anything to add here.

As Karen said, Eric, right, we have volume, we have cost, and we have Red Oak to continue to unlock value. As you saw, we are looking on the costs front beyond the purchasing side, we are looking at ways to continue to reduce operating costs in our operations, utilizing technology and really trying to lower the cost.

Thank you. And on the biosimilars side, when we see the sourcing benefits, is that in part reflecting success with the new Zinc entity or does that fall into Red Oak?

So biosimilars would flow through our traditional Caremark contracting. Part of that is within Zinc and part of that is directly through Caremark, not through Red Oak.

Thank you.

Next question please.

We will go now to Bob Jones with Goldman Sachs. Your line is open.

Hi, great. Thanks for the question. Maybe just to go back to the HCB segment and the strong performance there and the subsequent guidance raise of 150 million at the midpoint. I know there are obviously a number of moving pieces that inform the guidance. But I was hoping maybe you could just break out and talk a little bit specifically about the sequestration extension. And how maybe any updated views on utilization help inform that raise for the full-year.

Good morning Bob, it is Eva. And as you said, we delivered strong performance in the quarter, and our outlook remains strong. So I will try to give you four key pieces of what we reflected in that outlook. Our performance to-date and I commented earlier the benefits from prior year's development. Think about that generally on a net basis, not that different from what we have seen in previous years given where MDRs were for 2020 and our client and contractual requirements. We have included sequestration through the end of the year. And as you think about medical costs, we have updated our medical cost assumptions for two areas. One, we continue to incur COVID-related costs, driven largely by testing and vaccine spend. And those costs are at lower levels than the first half of the year, given as people become immunized, the treatment costs we expect to decline. As it pertains to non-COVID utilization costs, we expect them to return to more normal seasonal baseline levels, particularly in the second half. And our outlook for membership remains consistent with what we provided previously.

Great, that is helpful. I guess just one quick follow-up within HCB around the decision to get back into the exchanges in a more meaningful way. Any updated thoughts or latest thoughts on the strategy, kind of what the go-to-market will be? Who you will be targeting within the exchanges relative to some of the other offerings out there? That would be helpful to get your latest thoughts on that.

Hi Bob, it is Karen. First, I would say, given that we are entering into the exchanges, that is a market that we have 12 million to 15 million people that we don't have access to today. We are clearly going to offer an Aetna-CVS branded product. We will continue to have our narrow networks and we are in the midst of filing rates. So I don't want to give too much competitive insight or information. And let me see if Dan Finke has anything else he wants to add here.

Sure. Thanks, Karen. So as Karen said, we are excited about the opportunity to enter the individual market. We are in the middle of the filings. As Karen stated, we are taking a really disciplined and deliberate approach to selecting those states. One of our opportunities is really to connect our strategies around the use of CVS assets. And so we are really looking forward to opportunities around our digital and physical assets, enhancing some of our pharmacy support with those offerings, and of course, giving access to our MinuteClinics and our HealthHUBs. And so we are really excited to bring this new and different offering to the marketplace.

Next question please.

Our next question comes from Justin Lake with Wolfe Research. Your line is open.

Thanks, good morning. First question, I just want to follow-up on the PBM outperformance. It has been pretty incredible over the last three, four, five quarters. I know your purchasing is very strong there. But not seeing the same performance at your peers. I'm wondering if there is anything you feel like you are doing differently in terms of that generic specialty opportunity, your purchasing with Zinc, etc., that might be allowing for that outperformance versus your peers here.

Hi, it is Alan. Thank you for the question. I think the key drivers here are paying really close attention to creating competition, right, to driving more value for our customers, which enables us to bring on more volume. I think one of the things that we should also talk about is two things, right. So first is the purchasing and the performance around generics and specialty agents. The second is, we have a good portion of our business is what we would call open market where there is choice. We are very aggressive in talking about the benefits to members and patients from an experience perspective of both Specialty Connect and Specialty Expedite. And so that is, again, an example of how we use the entire enterprise to create better experiences and ultimately more value because it drives volume. So it is a combination of volume, it is a combination of attention to detail and performance on the generic side. And it is, as you said, purchasing economics that continue to drive and look for opportunities where we can create more competition to drive more value.

Sorry, Justin, it is Eva. Alan, just to add, your performance overall remains very strong, we had a very strong welcome season this year, and client satisfaction remains high, which, Justin, as you know, in the PBM sector is critical.

Sure. Thanks for that. And then just a quick follow-up on the transformation targets you laid out with the deal. Those are expected to be a big benefit for 2022. So I was hoping to get some any kind of updated color on HealthHUBs versus the 1,500 target. And how you feel about that transformation number of 850 as you kind of look ahead to next year.

Hey Justin, I will comment on the HealthHUBs and Eva can give the transformation update. Just on HealthHUBs, we have about 800 health hubs now. We built about 250 during the quarter. We do expect to get to about 1,000 by the end of the year. What I would tell you, I'm not really looking at the number. I'm looking at coverage. I think coverage is the more important metric here. And right now, by the end of the year, it will be 60% coverage on the Aetna Caremark business will be about almost 50% of the U.S. population. So that is really how I think about the hubs and how we get coverage versus the exact number.

And Justin, on the transformation, you heard throughout Karen's comments and some of the proof points that we brought, I would say how we are unlocking value is: A, focusing on driving medical cost savings; two, our ability to win new lives in the marketplace by having these differentiated products and services; and continuing to sell into new customers in an open-market type of way. So as you look specifically, we are pleased with how transformation is running. And as Karen said, we will outline more in December Investor Day.

Thanks.

Operator we have time for one more question.

We will go to Lance Wilkes with Bernstein. Your line is open.

Good morning. Could you just talk a little bit about the omni-channel strategy, in particular, in the home health or the home focus, what sort of populations and offerings are you looking at there? And then just maybe secondarily, just asking about how you are going to organize these efforts and manage them within the company, is HealthHUB home and virtual going to be managed together or how are you going to work that out as well?

Well, Lance, on the operating model, we continue to evaluate the best approach to managing our business, and more to come on that. Let me ask Alan to talk about our home strategy as he is developing our overall home services strategy.

Yes, thank you, Lance. So it is Alan. As we think about home, I think about home as a really important channel as part of that evolving care delivery. We have seen a change in how people expect to receive many things after the pandemic, including care. So as we think about it, it is how do we create products and services that are either partly or entirely delivered in home, that help us both differentiate on the medical cost savings side, create new experiences for customers, or take advantage of specific technologies. So whether it is our home dialysis program, which is in process, our quorum or new virtual care products that support specific populations, that is how we are thinking about home. But it is about meeting the customer need or the member need first rather than focusing especially on the channel and how do we integrate across all of the touch points we have, whether they are digital, virtual, physical in the home or local.

Great. And just understanding it for the home aspect, obviously, infusion and some of the drug-specific opportunities present themselves there. In addition, there is kind of a stabilization that might be important for an MA population like home health, and there is the emerging spaces and kind of frail elderly with physicians. As you are talking about home, are you thinking about one area over another as far as your areas of focus?

And I'm sorry, I wasn't clear enough. So when we think about specific population, exactly the populations you are talking about, people transitioning out of the hospital who are frail, keeping them out of the hospitals, keeping them out of skilled nursing facilities by using more virtual services and physical services in the home are a core population. That is an example of how we would enable, for example, the health care benefits business to be more effective at managing their risk. So that is exactly a population we would be looking at, in addition to the ones you traditionally expect us to look at like drug and dialysis.

Before we conclude today, I would like to leave you with three points that I hope you took away from the call. First, our integrated health care model is unique, and it is driving growth. You can clearly see that in our financial results across our business, but you can also see it in different ways that we are interacting with our customers. Secondly, we are increasingly using digital and technology to redefine the health experience and to improve our cost structure. And finally, we are making significant progress and are well positioned to deliver growth against our strategy. So thank you all for joining us today.

This concludes today's CVS Health First Quarter 2021 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.