CVS Health Q2 2021 Earnings Report

CVS Health EPS Results

• Actual EPS: $2.42
• Consensus EPS: $2.07
• Beat/Miss: Beat by +$0.35
• One Year Ago EPS: $2.62

CVS Health Revenue Results

• Actual Revenue: $72.62 billion
• Expected Revenue: $70.27 billion
• Beat/Miss: Beat by +$2.35 billion
• YoY Revenue Growth: +11.10%

CVS Health Announcement Details

• Quarter: Q2 2021
• Date: 8/3/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 4, 2021
• Conference Call Time: 12:00AM ET

CVS Health (NYSE:CVS) is a diversified healthcare company that operates a large network of retail pharmacies, pharmacy benefit management services and health care solutions. Headquartered in Woonsocket, Rhode Island, the company traces its roots to the early 1960s and has grown into an integrated provider of prescription drugs, over‑the‑counter products, clinical services and health insurance offerings. Its operating model combines retail pharmacy locations and in‑store clinics with broader pharmacy and health plan capabilities.

Key business activities include CVS Pharmacy retail operations, MinuteClinic walk‑in medical clinics and HealthHUB locations that offer expanded clinical services. The company also operates a major pharmacy services business (often referred to as Caremark) that manages prescription benefits for employers, insurers and other clients, along with specialty pharmacy and long‑term care services. CVS expanded into the health insurance and managed care market through its acquisition of Aetna, enabling the company to offer health plans and care management alongside traditional pharmacy services.

CVS serves customers primarily across the United States, including U.S. territories, through thousands of retail locations and a national pharmacy services network. The company emphasizes integration of retail, pharmacy benefit management and care delivery to lower costs and improve access to care. Karen S. Lynch serves as president and chief executive officer, leading CVS Health’s efforts to coordinate pharmacy, health plan and in‑person clinical services as part of its broader health care strategy.

CVS Health Q2 2021 Earnings Call Transcript

Key Takeaways

• Q2 financial results: Revenue grew 11% to $72.6 B, adjusted EPS was $2.42 and operating cash flow reached $5.8 B, prompting a raise in full-year EPS guidance to $7.70–$7.80.
• Employee investment: CVS will raise its minimum hourly wage to $15 by July 2022, adding $600 M in labor costs over three years (about $125 M in H2 2021) to enhance recruitment and retention amid a tight labor market.
• COVID-19 response: CVS administered 30 M vaccines and 29 M tests to date, with ~40% of recent vaccinations delivered to underrepresented communities; vaccine rates have slowed, but testing demand remains strong.
• Segment outperformance: Pharmacy Services revenue rose 9.8% (specialty +8.9%) with a 98% client retention rate and $8 B in new sales; Healthcare Benefits saw 11% revenue growth (MBR at 84.1%) and filed for 2022 CVS Aetna exchange plans in eight states; Retail scripts were up 14% and front-store sales climbed 13%, driving pharmacy market share above 26%.
• Digital and technology: CVS now serves over 35 M unique digital customers—who spend 2.5× more in stores and fill 1.5× more prescriptions—and is deploying AI, blockchain and automation to streamline specialty pharmacy processes (eliminating 30+ manual steps).

Presentation

[Operator]

Ladies and gentlemen, good morning, and welcome to the CVS Health second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks, at which point we will review instructions on how to ask your question. As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Thank you, and good morning, everyone. Welcome to the CVS Health Q2 2021 earnings call. I'm Susie Lisa, Senior Vice President of Investor Relations for CVS Health. I'm very excited to be on the call with you today and to have the opportunity to work with you going forward. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Shawn Guertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will host a question-and-answer session that will include Alan Lotvin, President, Pharmacy Services, Dan Finke, President, Health Care Benefits, Neela Montgomery, President, Retail and Pharmacy, and Jon Roberts, Chief Operating Officer. Our press release and slide presentation have been posted to our website, along with our Form 10-Q that we filed with the SEC this morning.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

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.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

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, it's my pleasure to turn the call over to Karen.

[Karen Lynch, President and CEO at CVS Health]

Good morning, everyone, and thank you for joining our call today. This was another strong quarter for CVS Health. We are playing an integral role in connecting experiences across the healthcare system to deliver better health outcomes. This is what truly differentiates us and generates our growth. In the rapidly changing U.S. healthcare environment, we have proven that we can bring solutions at scale to meet individual health needs however they evolve. Our COVID-19 testing and vaccination campaigns for millions of Americans are just one example. We meet customers where they are. We are there when and how they want to access care. That is what's driving growth across our company, and it's where we'll continue to focus our innovation and investments. During the second quarter, we delivered revenue growth of 11%. We generated adjusted earnings per share of $2.42 and strong cash flow from operations of $5.8 billion.

[Karen Lynch, President and CEO at CVS Health]

We are raising our adjusted earnings per share guidance to $7.70-$7.80. This reflects the continued positive momentum across our business with growth both in new and current markets. Today, we announced an important investment in our employees. We will raise the minimum wage for our colleagues to $15 an hour by July 2022. This wage increase will boost our competitive edge in a tight retail labor market. We estimate it creates an incremental $600 million in labor costs over three years. Approximately $125 million of that impact will be in the final four months of this year. Increasing our minimum wage for hourly employees will help attract and retain the talent needed for our customer-centric business approach. Just as critical, it aligns with our values and our purpose and builds on a history of our investment in our people.

[Karen Lynch, President and CEO at CVS Health]

Each of our businesses delivered strong performance, highlighted by overall sales and earnings outperformance and sequential margin improvement. Customers realize the value we are providing across our CVS Health assets, which results in increased customer retention rates and new wins. In Health Care Benefits, results were powered by growth in our government business. Our medical benefit ratio of 84.1% was modestly above expectations, driven by COVID-related costs. Underlying non-COVID costs emerged favorably. We continue to believe aggregate medical costs will modestly exceed baseline levels during the second half of the year. In addition to strong performance in our core business, we are leveraging our broad and unique portfolio of assets with our first CVS-Aetna co-branded offerings. We have submitted our exchange regulatory filings for a January 2022 entrance in 8 states outlined in our supplemental earnings materials.

[Karen Lynch, President and CEO at CVS Health]

With Aetna's strong networks and CVS's significant local presence, we believe we are creating a compelling new offering that combines health insurance, pharmacy, our retail presence, and behavioral health services. This is something that no one else can deliver. The 2022 national account selling season in healthcare benefits has been marked by a somewhat compressed industry-wide pipeline. Employers have been focused on developing strategies for vaccinations and other return-to-work activities. As a result, we concentrated on client retention, delivering a strong result of 97%. For those cases that were out to bid for 2022, we have been successful in securing new business and introducing new differentiated products. For example, our Virtual First Primary Care product is the only nationwide program to offer long-term dedicated virtual primary care and a traditional in-person national network, including MinuteClinics and HealthHUB.

[Karen Lynch, President and CEO at CVS Health]

Turning to Pharmacy Services, we outperformed expectations, delivering 9.8% revenue growth and very strong operating income growth. We continue to build momentum in specialty pharmacy with revenue up 8.9% year-over-year. Looking ahead, we have maintained an impressive 98% retention rate with more than 80% of renewals complete. We have also driven strong new business results, winning over $8 billion in new growth sales for next year. We remain well-positioned for continued specialty and pharmacy growth in 2022. The differentiation we offer is particularly important. It reflects our integrated offering with in-store, mail order, and specialty services. We added nearly 1 million new integrated pharmacy and medical members through the 2021 and 2022 selling seasons alone. This is a testament of our success in the marketplace from the aligned interests and value we bring to our customers.

[Karen Lynch, President and CEO at CVS Health]

Our retail segment continues to play a crucial role as part of our community-focused strategy. We are a vital local health destination for millions of Americans who are resuming more normal activities and fueling macro improvements in the economy. Our second quarter results for retail outperformed our expectations and the market. In our pharmacies, we grew prescription market share to over 26%. Importantly, our customer-centric programs continue to improve adherence for our patients. At the same time, we saw a solid rebound in front-store sales, which increased nearly 13% in the quarter, with strength across all categories. Nearly two-thirds of that growth was driven by health and wellness products. Similarly, pharmacy script growth in the quarter was strong, up more than 14% year-over-year, one-third of which is attributable to COVID vaccines. We now administered 30 million vaccines and 29 million tests through the inception of the program.

[Karen Lynch, President and CEO at CVS Health]

Approximately 40% of vaccines we administered over the past two months were to members of underrepresented communities, a rate at or higher than the benchmark population. Our effort to make the vaccine accessible and convenient for all Americans continues. However, vaccination rates are slowing from a peak in April despite the impact of new variants. Our COVID work is a powerful example of the trust and relationships we are building with consumers, augmented by our local presence and digital tools. For customers introduced to us through COVID testing, approximately 12% have subsequently chosen to fill new prescriptions or get their COVID vaccine at CVS Health. This helped drive overall strong script growth in the quarter. The COVID testing outlook remains strong. As public health recommendations evolve, we are prepared and continue to play a critical role in helping Americans prevail against the pandemic.

[Karen Lynch, President and CEO at CVS Health]

I am grateful for the continued dedication and tireless efforts of the nearly 300,000 colleagues. We are making considerable progress across key drivers of our growth. The first is our role in care delivery. We continue to focus on our integrated platform to expand access to care that is local, affordable, and connected. HealthHUBs represent one of many channels and lower-cost sites of care that allows us to address individual health needs. Aetna commercial members in the no-copay, low-copay product are utilizing our MinuteClinics and our HealthHUBs more frequently, more than twice as often as members without these benefits. We expanded the spectrum of health services we offer to include common services usually done in primary care settings, such as chronic care management like diabetes and behavioral health, a critical area of need that will continue beyond the pandemic.

[Karen Lynch, President and CEO at CVS Health]

We expanded our Care Concierge program to support our Medicare members, rolling out as planned the HealthHUB Stars program, designed to close gaps in the quality of care. Early intervention results are promising, as they are demonstrating strong reach and a high engagement rate of 67% for a variety of health screenings such as diabetes and cancer. The second key area is technology. We are using the power of our digital capabilities to reinvent how consumers experience their care by creating choice, expanding access, and reducing complexity. We are creating new sources of value while accelerating the speed, flexibility, and launch of new health solutions. Today, we regularly serve more than 35 million unique digital customers across our CVS Health assets. Our digital customers are important.

[Karen Lynch, President and CEO at CVS Health]

Digital retail customers spend 2.5 times more in our front store, manage 1.5 times more scripts, and remain customers longer than other pharmacy patients. Customers who engage with us digitally have lower medical costs related to personalized data insights that guide health behaviors. This quarter, we also saw more than 37% of specialty prescriptions initiated digitally from the 85% of our pharmacy specialty members who have opted into our digital program. Building these trusted digital relationships with customers generates new growth opportunities across all of our businesses. At the same time, we are re-engineering our cost structure by simplifying operations to benefit both customers and our own colleagues. Our technology-driven programs are leveraging blockchain, driving cloud migration, and intelligent automation, and streamlining processes to accelerate results and generate greater impact.

[Karen Lynch, President and CEO at CVS Health]

One example is a specialty pharmacy script automation program that uses AI to yield better results more quickly while eliminating more than 30 manual steps, such as benefit verification and prior authorization. Our commitment to shareholders, customers, and communities we serve does not stop at commercial product offerings. CVS Health plays an important role in the health and vitality of the communities where we live, work, and serve. Our longstanding commitment to corporate social responsibility focuses on four areas: healthy people, healthy business, healthy communities, and a healthy planet. Together, these efforts create our sustainability roadmap, known as Transform Health 2030. It represents an ambitious but achievable agenda that aligns with eight of the UN's Sustainable Development Goals. CVS Health is investing in inclusive wellness, economic development, and advancement opportunities for our colleagues and our suppliers.

[Karen Lynch, President and CEO at CVS Health]

We are also making social impact investments that will improve health outcomes nationwide, which is already making a critical difference in our pandemic work. In addition, we have set science-based targets to reduce our greenhouse gas emissions by 67% by 2030 from a 2014 baseline. I am proud of what we've achieved, but there is much more to do, and I'll provide regular updates about our continued progress. In closing, CVS Health is the leading health solutions company with a broad and unique set of assets. We are accelerating our pace of progress to drive value for our customers, our communities, our people, and our shareholders. Our unparalleled capabilities reach an enduring relationship with the consumer, uniquely positions us to support them throughout their lifetime while also providing multiple avenues for sustained growth for our company.

[Karen Lynch, President and CEO at CVS Health]

I'll turn now to Shawn Guertin, who recently joined CVS Health as Executive Vice President and Chief Financial Officer in late May and has already made an impact. His deep healthcare expertise, financial acumen, and strategic mindset will be instrumental to the successful execution of our strategy. Shawn?

[Shawn Guertin, EVP and CFO at CVS Health]

Thank you, Karen, and good morning, everyone. I'm very excited to be at CVS Health, particularly at such a dynamic and important time, not only for our company, but for our healthcare system as a whole. Our differentiated portfolio of capabilities and local community presence creates a compelling competitive advantage that improves healthcare access and outcomes across a broad population while generating strong cash flow and value for all our stakeholders. I look forward to executing on our growth strategy and reshaping the healthcare experience for the people we serve. I'll first discuss our second quarter financial results. As Karen stated, we delivered another quarter of outperformance across each of our businesses, exceeding our expectations and further demonstrating the strength of our combined enterprise. Total revenues of $72.6 billion grew 11% year-over-year and reflected strong contributions from each of our segments.

[Shawn Guertin, EVP and CFO at CVS Health]

We reported adjusted operating income of $4.9 billion and adjusted earnings per share of $2.42. We continued to generate excellent cash flow in the second quarter, with year-to-date cash flow from operations now exceeding $8.7 billion. Further, we have repaid $5.4 billion in debt during the first half of the year. All our cash flow metrics exceeded our internal forecast during the quarter. Moving to the segments, Health Care Benefits total revenue increased 11% year-over-year, driven by our continued growth in our government services business, slightly offset by the repeal of the Health Insurance Fee or HIF. Our Medicare franchise continues to perform very well, with quarterly sequential membership growth across all products. Medicare Advantage membership is slightly exceeding our prior expectations and is now on track to be up 9%-10% for the full year.

[Shawn Guertin, EVP and CFO at CVS Health]

Dual Special Needs Plans membership grew by double digits sequentially and has more than doubled year-over-year, reflecting our strategic focus in this business. Medicare Supplement and Prescription Drug Plan membership also increased in the quarter, providing a sustained strong pipeline of opportunities for future conversions to Medicare Advantage. Our mid-year Medicare risk-adjusted revenue settlement was in line with our expectations. Finally, for our Prescription Drug Plan business, we are pleased with our bid position below the 2022 low-income benchmark in all our targeted regions. Health Care Benefits adjusted operating income exceeded our projections for the quarter, but was down materially on a year-over-year basis due to the depressed levels of utilization observed in the second quarter of 2020 at the start of the pandemic.

[Shawn Guertin, EVP and CFO at CVS Health]

The medical benefit ratio for the quarter of 84.1% was slightly higher than our forecast, driven by higher-than-expected COVID related costs, which, while materially lower than the first quarter, did not fall off as much as we had forecast. Underlying non-COVID utilization continued its return toward normal baseline levels and was slightly favorable versus our expectations. The combined result was an MBR slightly higher than our forecast for the quarter. We remain comfortable with the adequacy of our reserves, recording a modest amount of favorable prior year development in the quarter, while days claims payable of 48 is consistent with both the first quarter of this year and the fourth quarter of 2020. Turning to Pharmacy Services, we continue to deliver exceptional value for our customers by producing industry-leading low single-digit drug trends.

[Shawn Guertin, EVP and CFO at CVS Health]

This value proposition allowed us to produce strong revenue growth of nearly 10% versus last year, primarily driven by network volume and specialty pharmacy growth. Total pharmacy claims process increased by more than 11% versus last year, with approximately one half attributable to net new business wins from our 2021 selling season and another one quarter due to COVID vaccine administration. Our specialty network and Maintenance Choice business lines all delivered sequential claims growth in the quarter. Pharmacy services adjusted operating income exceeded expectations in the second quarter, up more than $400 million, or 32% year-over-year. The three major drivers of this increase are improved purchasing economics, reflecting the products and services of our group purchasing organization launched in the second quarter of 2020, specialty pharmacy, including our 340B claims administration business, and increased pharmacy claim volumes. These favorable items were partially tempered by ongoing client pricing pressure.

[Shawn Guertin, EVP and CFO at CVS Health]

Lastly, it's important to note that the initiation of our group purchasing organization and certain generic specialty launches in the second quarter and second half of 2020 respectively, created relatively low comparisons in the first half of 2021 that will increase significantly in the second half of the year. Therefore, we expect a much smaller incremental year-over-year improvement in operating income in the second half of this year. Retail also delivered strong results this quarter, exceeding expectations. Total revenue of nearly $25 billion increased by $3 billion, or 14% year-over-year. This improvement is driven by three main components. One, approximately 1/3 or $1 billion, is attributable to the nearly 17 million COVID vaccines and more than 6 million COVID tests administered during the second quarter.

[Shawn Guertin, EVP and CFO at CVS Health]

Two, an additional 1/3 or another $1 billion is due to the broad quarantine restrictions and civil unrest experienced last year that depressed results in the second quarter of 2020. Three, the final 1/3 or remaining $1 billion, was driven by a combination of improved pharmacy growth and mix during the second quarter, as well as broad strength in front store trends. Front store revenue increased by nearly 13%, while pharmacy prescription volume was up 14%, including COVID vaccines. This strong revenue growth, combined with a 340-basis point improvement in adjusted operating margin, produced adjusted operating income well ahead of our forecast and an increase of nearly $1 billion year-over-year. COVID testing and vaccines, which were immaterial in Q2 2020, represent approximately half of the operating income increase.

[Shawn Guertin, EVP and CFO at CVS Health]

Second quarter 2021 results also reflect a gain from a legal settlement related to an antitrust matter worth $125 million, which is included in both our GAAP and non-GAAP results. Turning to cash flows and the balance sheet, cash from operations remained strong at $5.8 billion for the quarter and $8.7 billion year-to-date. We paid down $2.4 billion of long-term debt in the quarter while returning $650 million to shareholders through dividends. Since the close of the Aetna transaction, we have paid down a net $17.6 billion in long-term debt. Our commitment and discipline in this area was recognized during the quarter as S&P raised our credit outlook from stable to positive. Let me now turn to our updated guidance for 2021 and share some preliminary thoughts regarding 2022.

[Shawn Guertin, EVP and CFO at CVS Health]

First, I want to provide a framework of the pandemic related dynamics that will impact our business over the remainder of the year and the interplay between the Retail segment and the Health Care Benefits segment. As mentioned, our Retail segment benefited from strong COVID testing and vaccine administration services in the second quarter, began to see vaccines fall below expectations in May and June. As a result, we have reduced our forecast for vaccine earnings to below the midpoint of our original range for the full year. In Health Care Benefits, given the ongoing fluidity of the current environment, we have incorporated a higher estimate of COVID related costs in the second half of the year.

[Shawn Guertin, EVP and CFO at CVS Health]

As a result, our full year MBR, while still well within our range, is approximately 20 basis points-30 basis points higher than our previous forecast. We believe the combined impact of a reduced outlook for vaccines in retail and a slightly higher MBR in health care benefits now make the pandemic a modest negative for 2021. Despite this, given our strong performance in the quarter and solid outlook, we are increasing our guidance. We are raising full year 2021 total revenue guidance to a range of $280.7 billion-$285.2 billion, representing year-over-year adjusted revenue growth of 4.5%-6.25%. We are also raising adjusted EPS guidance to $7.70-$7.80 per share. The significant earnings outperformance in the second quarter is reflected in our updated full year guidance but is partially offset by three key headwinds during the second half of 2021.

[Shawn Guertin, EVP and CFO at CVS Health]

The first is expectations for full year COVID-19 vaccine volumes to be below the midpoint of our original guidance. As I mentioned earlier, we saw vaccinations peak in April, then begin to decline in May and June. Although the recent rise in COVID-19 cases has caused a re-acceleration in 1st dose trend, we believe it to be prudent to adjust our full year outlook for vaccines to a range of 32 million-36 million. This includes a limited contribution from the administration of pediatric vaccines but does not assume any contribution from booster shots. Overall, despite the slowdown in vaccine administration, we continue to be pleased with our expanded and strengthened customer relationships stemming from our local presence and see ongoing customer connectivity from the significant role we play in combating the pandemic in our local communities. The second item is the investment in wages that Karen highlighted.

[Shawn Guertin, EVP and CFO at CVS Health]

Our work to retain and attract talent includes an additional $600 million investment in wages over three years, primarily for our retail colleagues and pharmacy technicians, with approximately $125 million impacting the last four months of 2021. Finally, the third item is increased investments in the second half of 2021, reflecting our efforts to drive and support growth, enhance our consumer experience, and improve our cost structure in 2022 and beyond. In aggregate, these three items are expected to negatively impact second half adjusted EPS by approximately $0.25 per share. In addition to increasing our EPS guidance, we are also raising our expectations for cash flow from operations by $500 million to a range of $12.5 billion-$13 billion. Our expectations for gross capital expenditures remain in a range of $2.7 billion-$3 billion to fund organic growth initiatives and our expanded investments in technology and digital.

[Shawn Guertin, EVP and CFO at CVS Health]

We remain committed to ongoing deleveraging and our investment-grade rating target. By segment, for Health Care Benefits, we are maintaining our full year adjusted operating income guidance of $5.25 billion-$5.35 billion. As discussed, our outlook assumes a slightly higher full year MBR by 20 basis points-30 basis points to reflect the higher COVID costs observed in the second quarter and our expectation that slightly higher COVID costs will continue into the second half. Our forecast assumes that non-COVID utilization will return to normal baseline levels by the fourth quarter. This MBR pressure is largely being offset by an improved revenue outlook and operating expense management. It's also worth recalling the natural seasonality of the Health Care Benefits segment, with fourth quarter operating income typically the lowest of the year.

[Shawn Guertin, EVP and CFO at CVS Health]

We believe that our forecast is appropriately positioned given that there remains a high degree of uncertainty in terms of how COVID will play out during the second half of the year. For pharmacy services, given the strength in the quarter and visibility to the remainder of the year, we are increasing our full year 2021 adjusted operating income guidance to $6.45 billion-$6.55 billion, representing year-over-year growth of 13.5%-15.25%. While we expect the factors driving second quarter performance to continue to benefit the second half of 2021, due to the timing elements I discussed earlier, we do not anticipate the same level of year-over-year growth observed in the first half of 2021. For retail, we are maintaining our full year 2021 segment guidance for adjusted operating income in a range of $6.6 billion-$6.7 billion.

[Shawn Guertin, EVP and CFO at CVS Health]

Given the dynamic environment relative to the pandemic and its impact on vaccines, testing, and front store sales, we have taken what we believe to be a prudent posture in our outlook and have not fully pulled through the favorability we observed in the second quarter to the full year. This full year guidance also reflects the reduced outlook for vaccines and the impact of the wage investment, approximately 80% of which is experienced in the retail segment. You will find further details in the slide presentation we posted to our website this morning. Moving on to 2022. While it is premature to provide forward year guidance at this time, I want to share some preliminary thinking on some of the more visible puts and takes we are considering for 2022. Starting with tailwinds.

[Shawn Guertin, EVP and CFO at CVS Health]

It is reasonable to expect benefits from, one, strong selling seasons in the Pharmacy Services Segment and in commercial national accounts in the Health Care Benefits Segment. Two, anticipated lower COVID-related costs and improved Medicare risk-adjusted revenue reimbursement in the Health Care Benefits business. Three, continued contributions from our ongoing cost savings initiatives. For headwinds, we anticipate, first, consistent pressure in Pharmacy Services from client price improvements and reimbursement pressure in retail, both of which are consistent industry headwinds, which we seek to mitigate through improved purchasing economics. Second, the impact of annualizing the increase to minimum wage across the company. Third, uncertainty regarding the expected revenue from COVID vaccines and testing in our retail operations. Lastly, I'd remind you that our standard practice is not to include any estimates of prior year development or realized capital gains in our forward-looking guidance.

[Shawn Guertin, EVP and CFO at CVS Health]

On a year-to-date basis, these two items comprise approximately $0.15 per share. This is not a comprehensive outlook for 2022 but represents some of the key items likely to influence performance next year. To conclude, CVS Health continues to produce strong results as we execute on our differentiated strategy, putting the consumer at the center of what we do and redefining the integrated delivery of healthcare. I look forward to updating longer-term financial targets at our Investor Day event this December in detailing our key priorities: positioning CVS Health to deliver sustainable, long-term, profitable growth, and to return to a more balanced and strategic program of capital deployment. We will now open the call to your questions. Operator?

[Operator]

At this time, if you wish to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing the pound key. In the interest of time, we do ask that you please limit yourself to one question and one quick follow-up. We'll take our first question from Lisa Gill with JPMorgan. Please go ahead.

[Lisa Gill, Analyst at JPMorgan]

Thanks very much. Thank you for all the detail. Shawn, just going back to your thoughts around 2022, am I thinking about this correctly if I take the midpoint of this year at $7.75, add back the $0.25 that you talked about, we get to $8, -$0.15 as we think about PPD and capital gains gets us to $7.85? How do I think about the headwinds and tailwinds that you talked about? Are they fairly equal between them? Is there any other color that you can give us as we think about the puts and takes going into next year?

[Shawn Guertin, EVP and CFO at CVS Health]

Yeah. I think I'd be careful on the specific math there because to some extent, as I mentioned, for example, about vaccines and testing revenue, there's just an uncertainty about the level of those things. I'd also not add back the full $0.25 as an example because the minimum wage impact in that is only for four months, and obviously, that will annualize next year. There's some moving pieces sort of in there. Honestly, some of these things I think we can see are going to be factors, but we don't have completely quantified at this point. I do think, when we talk about 2022, it's worth talking about a couple things. I would say at the outset, we remain very well-positioned in our core businesses, and our operating performance is very strong, as evidenced by the last couple of quarters of results.

[Shawn Guertin, EVP and CFO at CVS Health]

As I mentioned in my remarks, I don't want to provide 2022 guidance today, but I do recognize that there's previous targets out there for a low double-digit earnings growth for 2022. What I would say is make no mistake, double-digit adjusted EPS growth remains the benchmark that we're always trying to achieve, and frankly, the benchmark that we're using in considering the strategic choices that we'll make. An awful lot has changed since 2019 when that target was out there and stated. It's not just the composition of our earnings, but sort of to the point of your question, Lisa, what's the visibility that we have into how those components are going to trend forward? Again, the vaccines and testing and COVID treatment costs are just two good examples of factors, but the direction and the degree is a bit hard to see.

[Shawn Guertin, EVP and CFO at CVS Health]

A lot of this will come down to thinking about what baseline we're measuring from and how we see these factors playing out here. As I sit here today, if I consider a starting point of 770-780, I would say at this point, no, that from this forecast baseline, I wouldn't reiterate the double-digit sort of growth target for 2022. Again, as I mentioned, this has more about the shifting factors. It does not have anything really to do with the core performance of our business, which has been really outstanding. Obviously, we hope to talk in much more detail about 2022 at our Investor Day, as well as some of the longer-term financial targets and the earnings power of the business.

[Lisa Gill, Analyst at JPMorgan]

Shawn, just as my follow-up, I just want to understand, you talked about COVID costs returning as we go into the back half of the year. Can you talk at all of what you've seen in the last few weeks with the Delta variant and potential increase to cost on the COVID side? Are you seeing any non-COVID costs coming down that people are pushing off elective surgeries because of COVID? Any incremental color would be helpful there. Thanks again for the comments.

[Shawn Guertin, EVP and CFO at CVS Health]

Yeah. What I would say is in the HCB business, obviously, there's a lag in sort of what we see in any real time. We don't have great insight necessarily into July. What I would say, there certainly has been I've seen a number of media reports about various facilities beginning to cancel elective procedures again, and so it does feel like there's certainly some push in the system on the deferred utilization side again. Again, premature to conclude for HCB. I would say, though, that what we do see on the retail side is pretty strong momentum continuing in testing in particular. Again, while vaccines are still down in July versus the prior month, they've probably had a bit of an uptick, as I mentioned in my remarks.

[Shawn Guertin, EVP and CFO at CVS Health]

I think clearly, you could reasonably infer that there's sort of the ongoing COVID treatment costs are persisting, certainly into early July here, and again, thus why we thought it made sense to be a bit more cautious in our MBR outlook for HCB.

[Lisa Gill, Analyst at JPMorgan]

Great. Thank you.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Next question.

[Operator]

We'll take our next question from A.J. Rice with Credit Suisse. Please go ahead. Your line is open.

[A.J. Rice, Analyst at Credit Suisse]

Hi, everybody. Welcome, Shawn and Susie. Anyway, I appreciate the conversation the last couple conference calls about how the three businesses can work together. When you look at it today, what are the leading opportunities for the businesses to the retail pharmacy services, and the benefits business to capitalize on that are still in front of the company? Can you highlight maybe a couple things that you guys are particularly focused on and see as opportunities?

[Karen Lynch, President and CEO at CVS Health]

Good morning, A.J. I would highlight a couple of things in front of us. One is that, as you know, we have more opportunities in expanding our digital access and digital connections. We've seen across the board with our next best actions using digital connections, for those individuals, we've seen reductions in overall medical costs. We also have the opportunity to expand our home service and delivery. As you know, we are in Coram today. We have Kidney Care, but I do think that there's more expansive opportunities. It's $100 billion+ market that I think we have more opportunities to penetrate and really enhance our overall care delivery. I would point to those two as ones.

[Karen Lynch, President and CEO at CVS Health]

I think there's more that we can do with just the fundamental core business through integration, through selling more of our products, capturing more share of wallet, driving benefit designs across to support lower sites of care like MinuteClinic and the HealthHUBs. Those would be a few I would comment on. Thanks for the question, A.J.

[A.J. Rice, Analyst at Credit Suisse]

Great. Yeah. Maybe just a quick follow-up. I know the slide deck says that the priority remains to continue to pay down debt. With Shawn on board, what point do you think you might look at tuck-in acquisitions a little more actively, share repurchase, any of those types of things? What's the timeframe on that?

[Shawn Guertin, EVP and CFO at CVS Health]

Yep. Thanks, AJ. Good to hear from you again as well. If I thought about the near term, being sort of the rest of this year, but primarily 2022. We have $4 billion of debt, or thereabouts, a little more than that, maturing, and it would be our intention to continue to delever by paying that off. However, if you think about the level of our cash flows in 2021, if we achieved a similar level of cash flow next year, even with the dividend, that would still leave a lot of room for other capital deployment, potentially M&A, potentially dividend increase, and potentially share repurchase. I think 2022 is a year where we can begin to do that in a potentially more limited way, but still meaningful.

[Shawn Guertin, EVP and CFO at CVS Health]

What I would say is longer term, as I think about this, and as you've heard me just say before, my first use of that and my most preferred use of that capital all the time is to grow the business. Undoubtedly that there are capabilities that we will need over the next few years to sort of affect our strategy as efficiently as we can, and so M&A is a part of that. I've also found that balanced deployment of capital tends to produce sort of the best long-term results. That is a combination of M&A, a dividend that moves up as EPS moves up, and share repurchase that's accretive to your EPS growth on sort of a steady basis.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Next question, please.

[A.J. Rice, Analyst at Credit Suisse]

Great. Thanks a lot.

[Operator]

We'll take our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead, your line is open.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Yeah. Hi, good morning. Thank you for all the details, and congrats on a very good quarter. My main question, Karen, is around sort of the relationship and how you think about your Medicare Advantage book of business, and your vision for how you're going to evolve the HealthHUB presence. I think you talked about Care Concierge for Medicare. Just curious to see how that kind of marketplace is really kind of shaping your think of what HealthHUBs would look in the future versus what it is today. Then, the follow-up question would be to Shawn. To Shawn, when you talked about second half guidance, you mentioned investments in future growth as a headwind. You didn't mention it as a headwind for fiscal year 2022.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Just from a modeling perspective, should we think about these investments just as happening in second half, or should we also run rate them as we adjust our models for next year?

[Karen Lynch, President and CEO at CVS Health]

Good morning, Ricky. Let me just start with relative to Medicare. First of all, that is one of our single biggest growth opportunities, continuing to sell more Medicare, driving the duals. So we do think that is a big opportunity for growth on an ongoing basis. As we think about care delivery and you'll think about Stars performance, the HealthHUBs will play a critical role. As I said, we have to have a broad expansive approach to care delivery, particularly as it relates to the Medicare patients. The HealthHUB will play a role. As you know, we have the zero copay, low copay now, demonstrating that we can have follow-ups, visits at our HealthHUBs, but we need to expand our capabilities in the home, and we need to make sure that we're staying digitally connected to them.

[Karen Lynch, President and CEO at CVS Health]

This new program that we had just recently introduced as part of our planned rollout in the HealthHUBs is really intended to close gaps in care. The more that we close gaps in care, the better stars performance we get, the better revenue we get. You can see that cycle, and that really is a big opportunity for us. I really want you to think about Medicare care delivery in a broader role with HealthHUBs being part of that care delivery strategy. Shawn, let me turn it over to you.

[Shawn Guertin, EVP and CFO at CVS Health]

Yeah. In terms of the second half guidance, Ricky, I do think there's sort of two levels of investment here, and one of them each year is when we do have growth, better than our original plan, for example, as we foresee, in PSS now, we do then have to sort of staff up and be prepared for that higher growth. That's always an element. Part of your question is how you feel about, in essence, 23 growth that we'll achieve in 2022. I think, broadly, I would not run rate the whole thing, but I do think there are pieces that tend to run rate forward in the business, whether they're ongoing investments we make in Medicare distribution, and as I mentioned, in staffing up for customers. As I sit here today, I wouldn't run rate the whole thing.

[Shawn Guertin, EVP and CFO at CVS Health]

A lot of this is still to be determined. There probably is a piece that kind of continues if we continue on the trajectory that we're on. The other element I'd say about second half guidance with some of this is, some of this spending gets sort of pushed back into the year, more towards the end. I think you sort of take that with the natural seasonality of the healthcare benefits business. That would tend to get sort of a slope of earnings for the rest of the year, where Q4 is likely less than Q3.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Thank you.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Next question.

[Operator]

We'll take our next question from Ralph Giacobbe with Citigroup. Please go ahead, your line is open.

[Ralph Giacobbe, Analyst at Citigroup]

Great. Thanks. Good morning. Yeah, maybe just on the labor commentary. First, are you seeing underlying wage pressure outside of the minimum wage lift? Then just wanted to clarify the numbers, because I think you said the cost would be $600 million, $125 the last four months of this year. I think you also said it would stretch over three years. Just wanted to reconcile that versus that July 2022 date that you put out there.

[Karen Lynch, President and CEO at CVS Health]

Hi, Ralph. Let me just start with the minimum wage adjustment. You know, it's a series of investments that weve been making for our employees since the pandemic. We are seeing 65% of our employees that are hourly are already at or above $15 an hour. This is a very targeted investment for our pharmacy technicians, our front store colleagues, and we will start a series of wage increases beginning in September, which is really what's driving that $125 million impact to the latter half of the year. Obviously, it's a tight labor market. We are paying attention. We've got a lot of hiring to do to support growth. So far, we see pressure, but we've been managing through it. We're watching that labor market. We're seeing impacts in the stores, and that's part of why we're making this wage investment today.

[Karen Lynch, President and CEO at CVS Health]

Shawn, do you want to answer the three-year question?

[Shawn Guertin, EVP and CFO at CVS Health]

Yeah. Ralph, the way this will play out over the next few years is, as you mentioned, the change in September would be $125 million for the last four months of this year. That will annualize next year, there'll also be a second change sort of in July of next year, I believe. The total cost of this in 2022 will be $485 million, which is a step up, if you will, of about $360 million from the $125 million. That second step in July 2022 will annualize again in 2023, not to the same degree. The total cost is right around $600 million by the time you get to 2023, that's a step up year-over-year from 2022-2023 of about $115 million.

[Ralph Giacobbe, Analyst at Citigroup]

Got it. All right. That's helpful. Then just quick follow-up. Just want to clarify, Shawn, I think you said you would not factor in low double-digit growth on the 7.75 base. I think I heard that. If I do look at consensus, it factors about 7% growth, so we're not at that double-digit level. Given your commentary around capital deployment alone, are you willing to say if there is comfort in that sort of mid-single digit EPS, or is it just still too early to even give that comfort or clarity? Thanks.

[Shawn Guertin, EVP and CFO at CVS Health]

I would say it's too early for me to give you specific guidance. If you go back to what I said, I think the businesses are performing very well. We will have the ability potentially to deploy some capital next year. I certainly wouldn't dismiss

[Shawn Guertin, EVP and CFO at CVS Health]

that as something that's not in the thinking or not a viable target. Again, I want to stay away from giving precise guidance. The core fundamentals of our business are excellent right now, and again, with the return to a more balanced capital deployment, I certainly feel good about the longer-term trajectory.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Next question.

[Ralph Giacobbe, Analyst at Citigroup]

Okay, fair enough. Thank you.

[Operator]

We'll take our next question from Mike Cherny with Bank of America. Please go ahead, your line is open.

[Mike Cherny, Analyst at Bank of America]

Good morning, everyone. Thanks for all the color so far. I'm going to dance around the 2022 outlook a bit without obviously trying to hold you to anything, Shawn. As you talked about some of the tailwinds, in particular, with regards to the strong PBM and commercial selling season so far, can you give us any characteristics of the type of customers that you're winning, what the real pitch that they're looking at relative to how you're going to market, and what that driving force is? Obviously, you have the Federal Employee Program specialty that came back that we know about in the pharmacy services. Beyond that, any characteristics that you can point to that are really resonating in the strong performance year-to-date?

[Karen Lynch, President and CEO at CVS Health]

Michael, it's Karen. As I mentioned in my opening remarks, we're very much having a strong one-one. Part of it is due to the integration and the products and services that we're offering, and part of it's just due to the service delivery that we've been delivering to our customers and the value that we've been delivering to our customers. I'm going to ask Alan and then Dan to talk about specifically what they're seeing and the types of customers that we're winning in the market. Alan?

[Alan Lotvin, President of Pharmacy Services at CVS Health]

Thank you, Karen. When you look at the Caremark selling season and the Caremark array of clients, it is a, I would say, relatively normal distribution of clients. We won, obviously, the Federal Employee Program specialty, but we won in the health plan segment, we won in the employer segment, and we're winning in the coalition segment. Across the board, we continue to win, and I think the key drivers there are, one, delivering on what is most important to our clients, which is controlling their drug trend. Number two, providing kind of an outstanding level of service. Not just avoiding service issues but proactively addressing our clients' needs. The third, sort of related to the first, is innovating, particularly around new programs and specialty, like our oncology program, medical benefit management program.

[Alan Lotvin, President of Pharmacy Services at CVS Health]

There isn't a specific segment that's over-performing, other than specialty, obviously, because of the FEP win.

[Dan Finke, President of Health Care Benefits at CVS Health]

I would just add that, similar to Alan, we have quite a few areas of focus that are resonating in the market that's leading to that improved persistency that Karen stated, but also some really strong wins in the market. Alan and I have been working really close together on improving the further penetration of our integrated offerings, specifically in pharmacy, which is resonating really strongly. Also, dental and behavioral health. Like Alan, with our innovative solutions, we're targeting some new capabilities for chronic disease that use the breadth of the assets of CVS, like Transform Diabetes and Transform Oncology, which are resonating, as well as our new access point products like our Virtual Primary Care. That's really what's leading to a strong and improved national account selling season.

[Mike Cherny, Analyst at Bank of America]

Got it. If I can just ask one more. You highlighted a lot of the investments that you made into the store base, prepare for the COVID vaccines, COVID testing. As you think about your outlook going forward and the uncertainty around what the pacing will be of vaccines, pediatric boosters, et cetera, what happens to a lot of those costs, the incremental labor, the incremental staffing that you've done in terms of how that should factor into the model on a go-forward basis?

[Shawn Guertin, EVP and CFO at CVS Health]

Michael, you're right. We did have to stand up a fairly sizable operation to handle volume like this. It's a delicate balance of trying to adjust that as you see volumes change, but we sort of see how quickly volumes can go up and down. I think we've been a bit cautious with that and tried to make sure that we have the capacity if things go in a different direction. This is kind of an important role that we play, even more important now without as many large-scale sites up, and so we want to make sure we have the capacity. The thing I think that kind of comes off of that is, as you think now about vaccine volume up and down, the marginal impact of those vaccines is probably greater than average.

[Shawn Guertin, EVP and CFO at CVS Health]

It is something that we're paying very close attention to, but a balance.

[Neela Montgomery, President of Retail and Pharmacy at CVS Health]

It's Neela. I'll just add to that and Shawn's comments, which is that we started the vaccine campaign with a number of dedicated clinics, which had dedicated labor. Since then, we've expanded to all stores and are seeing about 40% of the appointments are now walk-in appointments. They are really within our existing labor model within the pharmacy. That does help us to flex up and down much more with demand that we're seeing on a weekly basis.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Next question.

[Operator]

We'll take our next question from Kevin Caliendo with UBS. Please go ahead, your line is open.

[Kevin Caliendo, Analyst at UBS]

Hi, thanks. I just want to go through the headwinds and tailwinds. I think we're all trying to figure out sort of what is the baseline. I know Lisa tried earlier. When we think about the vax benefit, when you sized it earlier as $500 million, was that for the quarter? How should we think about that benefit for the full year net net?

[Kevin Caliendo, Analyst at UBS]

I guess the question really is how to think about what that headwind could be for next year. What can we anticipate? Will the economics of the vaccine change, in your opinion? That's the first one. The second one is, do you think you can still get the same purchasing synergies that you're seeing this year, next year in the PBM? It sounds like you're getting massive new growth there. I'm just wondering if you can continue to see this sort of year-over-year kind of growth, which I'm guessing is driven by the purchasing synergies, next year.

[Shawn Guertin, EVP and CFO at CVS Health]

Yeah, I can let Alan comment more deeply on the second one. What I would say is recall that some of these initiatives, as I mentioned in my comments, were launched sort of midway or in the second half of last year. The effect we're seeing year-over-year is more pronounced than sort of the first half of the year than we'll see in the second half of the year. Alan can comment on the longer-term potential. On the vaccine and the testing economics, as we mentioned, $1 billion of the revenue increase is attributable to those two things. In our full-year outlook, the full-year revenue is probably double that. The margin dynamics are probably a little high just in this quarter, just because of some of the timing issues.

[Shawn Guertin, EVP and CFO at CVS Health]

To date, I don't have any insight into sort of changing reimbursements or changing the labor model we're using to deliver those. I think that's as reasonable baseline to begin to work off of as we can and as we think about next year. Again, as you think about the dynamics here, as you have FDA approval, mandates, booster shot, there's a lot of things. Listen, you could make a bull case if you wanted to on this, certainly with what's going on now, and I wouldn't dispute that, and I'd acknowledge that if our guidance has some upside, this could be a place, depending on how things play out. The only kind of caution I would put there, though, is to think about some of the interplay of just looking at this in isolation.

[Shawn Guertin, EVP and CFO at CVS Health]

Even in sort of inside retail, if we do see an uptick and it does see increased activity, well, what does this mean for cough, cold, and flu for this? What does it mean for front of store? Obviously, the HCB ripple. Again, I'd acknowledge that there is a bull case that you could make here, but I'd also say this has changed rapidly over the last couple of months, and I'd just ask you to sort of think about it in a broader context.

[Alan Lotvin, President of Pharmacy Services at CVS Health]

Kevin, it's Alan. When I think about the drivers of purchasing economics on the manufacturer side and the sustainability, the first thing I'd acknowledge is, as Shawn has said, when you launch something new, there's always going to be an outsized step-up. Having said that, I think the future viewpoint on the ability to create more competition through, whether it's biosimilars and biosimilar interchangeability, as we saw recently through generics, particularly in the specialty area, we see that as we're at the beginning of the specialty era or the generic era, biosimilar era of specialties. I think that's sustainable and a good opportunity longer term. I think the growth of our value creation will grow as volume grows. As we continue to win new business, we'll continue to grow there.

[Alan Lotvin, President of Pharmacy Services at CVS Health]

The last is, we built this platform as a platform for a series of services. We've just launched our first set of services. We think there's a number of other ones that we can continue to launch into the market within the GPO that will create meaningful value for both us and for our customers.

[Susie Lisa, Senior VP of Investor Relations at CVS Health]

Great. With that, it brings us to nine o'clock. We appreciate your interest and time. Ashley, if you could please give the replay information. Thank you all.

[Operator]

Thank you. This concludes today's CVS Health second quarter 2021 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.

Participants

Executives

• Alan Lotvin, President of Pharmacy Services
• Dan Finke, President of Health Care Benefits
• Karen Lynch, President and CEO
• Neela Montgomery, President of Retail and Pharmacy
• Shawn Guertin, EVP and CFO
• Susie Lisa, Senior VP of Investor Relations

Analysts

• A.J. Rice, Analyst at Credit Suisse
• Kevin Caliendo, Analyst at UBS
• Lisa Gill, Analyst at JPMorgan
• Mike Cherny, Analyst at Bank of America
• Ralph Giacobbe, Analyst at Citigroup
• Ricky Goldwasser, Analyst at Morgan Stanley