CVS Caremark Corporation (CVS)
William Blair Growth Stock Conference
June 12, 2013 11:00 a.m. ET
David M. Denton - Executive Vice President and Chief Financial Officer
Mark Miller - William Blair & Company
Mark Miller - William Blair & Company
Okay for those of you that have not met, my name is Mark Miller. I follow the pharmacies and the healthy living sector at William Blair. And we are required to inform you that for a complete list of disclosures, potential conflicts of interest please see williamblair.com.
My pleasure, this morning to introduce to you the management of CVS Caremark. We are glad to have the company back with us again this year. As you all know CVS Caremark is the largest integrated pharmacy company in the U.S. Though the company is still big and powerful today you can't take it for granted, but I was looking back at our first model on what was then CVS at that time and the company had 15 billion in revenues, they are today 125 billion were it for not growth of generics this would be ten-fold. And I think it's great that our presenters here today have been with the company and important contributors through this entire period.
Dave Denton, Executive Vice President and CFO will be making the presentation. Dave joined the company in 1999 and has been Chief Financial Officer for the past three years. Nancy Christal is as well with us, as Senior Vice President, Investor Relations has led the efforts since 1996. So welcome.
David M. Denton
Good morning, everybody. Thank you for joining me today. I really appreciate you being here to learn a little bit more about CVS Caremark. And before I forget my attorneys have asked that I post the Safe Harbor statement. So I will just give you a moment to look over that. And as you do it I will say that back in probably when I started, the company was about $15 billion in revenue. We are now in excess of 120 billion. I hope that, it's in correlation exactly to me joining the company, but maybe. Anyhow I appreciate those kind words.
But today for those of you that are kind less familiar with our company CVS Caremark is the largest integrated pharmacy company in United States with offerings across the entire spectrum of healthcare. And we have brought together a suite of assets to drive pharmacy innovation and deliver pharmacy service in a way that is unmatched in the marketplace today. And today we are the leading player in several growth markets, including retail pharmacy, pharmacy prescription benefit management, specialty pharmacy, Medicare Part D and retail health clinics.
And today I'd like to focus on three key areas. First is our unique position in the marketplace as the only fully integrated pharmacy company in the United States. With our breadth of capabilities, our scale and agility we are uniquely positioned to both identify and address emerging opportunities in this rapidly changing healthcare environment.
Second, I will touch upon our strategic growth framework which aligns our priorities with the emerging healthcare opportunities while leveraging our distinct business model. We are focused on continued strong growth in our core businesses while we also began to shift to an increasing focus on the growth of the total enterprise. And third I will discuss our continued commitment to enhance this shareholder value through productive long term growth, substantial cash flow generation capabilities and disciplined capital allocation practices.
And let me start with a brief review of our core businesses. On the retail pharmacy business we are an industry leader with a strong track record of consistent execution. In 2012 our operating profit in our retail business segment increased by more than 15%. We operate more than 7,500 retail drug stores in 41 states, including Washington DC, Puerto Rico and now Brazil. We are number one or number two in the top 25 U.S. drug store markets with a 21% share of the U.S. prescription marketplace and each and every day we service about 5 million customers in our retail drugstores.
In last year in 2012 our retail business capitalized on one of the significant opportunities created by the nine month impasse between Express Scripts and Walgreens. And our retail team did an excellent job of attracting new script Express members as we gained over 24 million prescriptions, well ahead of our initial expectations. And following the resolution of this impasse in September our goal was to retain at 60% of the scripts that we gained. Retention thus far has exceeded our expectations and we remain extremely confident that we will retain at least 60% of those prescriptions throughout 2013.
With the ongoing transformation of the pharmacy industry and the increase in demand from providers from across the entire healthcare spectrum it is evident that all drugstores are not created equally. And with our best of assets we continue to find new and better ways to differentiate our model. Our patient care initiative is a great example of a differentiated pharmacy programs. Our patient care programs address the issues of not adherence to medications which is costing the U.S. healthcare system nearly $300 billion annually in avoidable healthcare costs.
We have a number of programs to address this issue, that often make adherence more challenging for our patients. And those programs include First Fill Counseling, Adherence Outreach, Refill Reminders and our Ready Refill program. Since the inception of these programs in 2008 we've conducted over 230 million interventions, and the results of these interventions is that we are keeping our patients healthier. CVS Caremark has best-in-class adherence rates compared to top retailers delivering benefits to both our patients our payers as well as CVS Pharmacy.
Another important driver of our success in engaging consumers and patients has been our ExtraCare loyalty card program. With more than 327 million cards issued, 70 million active card holders and more than 15 years of history we are well ahead of competition in this area. ExtraCare gives us insights to provide personalized offerings that are more meaningful to our customers and more effective at driving sales. Today more than 68% of our store transactions use the card, accounting for more than 84% of all front store sales. ExtraCare provides the primary framework for our personalization efforts and related initiatives which include our store clustering programs as well as our enterprise digital offerings.
Expanding our retail footprint also remains an important driver of growth. We have consistently added between 2% and 3% retail square footage annually which has allowed us to keep pace with the demand of prescription utilizations. With demographics pointing to continued growth in demand, plenty of room remains for this kind of measured expansion that we have been doing for quite some time. We have entered 14 new markets since 2009 and we expect to extend our reach by filling in our top markets and by expanding into select new markets.
We have also recently announced our first foray into the international market, completing the acquisition of Onofre, a privately held drugstore chain in São Paulo Brazil with 44 stores. This transaction while not financially material is the first step in our international growth strategy that will play out in the years to come. We plan to approach the international market in a measured way, exuding financial discipline.
Another important part of our retail business and key enabler of our integrated Pharmacy care offerings is our MinuteClinic business. MinuteClinic is the largest and fastest growing retail clinic business in the United States with nearly 650 clinics in 25 states in the District of Columbia. Our walk-in clinics offer convenient cost effective care without an appointment seven days a week. MinuteClinic has provided care for more than 15 million patients with more than eight million visits in the last three years along. We care for patients with both acute and chronic medical problems and we have been adding new services including sports physical, chronic disease management, immunization and wellness programs.
We have also expanded our affiliations with major healthcare systems and now have a total of 25 affiliations in place. The relationships are based on healthcare systems physicians serving as MinuteClinic Medical Directors. This creates the opportunity for a variety of collaborative programs including the integration of electronic medical records and the development of joint clinical programs.
With 30 million Americans expecting to gain some form of healthcare coverage over the next few years we are expanding our MinuteClinic business in a way to help leap the growing demand and alleviate a growing primary care shortage. We plan to add approximately 150 clinics in 2013 and we expect to have more than 1,500 clinics by 2017.
Now moving on to our Pharmacy Benefit Management business 2012 proved to be a year of breakout performance with operating profit growth of more 20%. We are long standing leader in the PBM industry with a 26% share of the market, serving more than 63 million members. We operate our own state-of-the-art mail order pharmacies and we maintain a network of about 68,000 retail pharmacies. Our deep clinical expertise allows us to create innovative plan designs for clients and deliver a wide array of best-in-class services. We have also established a leadership position in a fast-growing market such as Medicare and Medicaid as well as specialty pharmacy.
And due to a number of initiatives and new business wins during the past few years we have grown our PBM book of business by more than 60% since 2010. We operate in every part of the PBM marketplace and have built programs to support virtually every type of customer. Our integrated business model is resonating in the marketplace and allowing us to put in a differentiated and attractive option for all clients. PBM clients are looking for aggressive solutions across a broad suite of services.
Our unmatched solutions leverage our multi-channel, multi-delivery systems enabling us to make them relevant to each of our clients depending upon their needs as well as their priorities. For example our innovative Maintenance Choice program has been highly successful in the marketplace. Maintenance Choice offers both plan sponsors and their members lower 90 day pricing while providing the convenience to members of prescription pick-up at a CVS retail location. No other PBM in the marketplace offers this.
Given these benefits Maintenance Choice has proven to drive better adherence among those that participate in that program than those that do not. And as clients continue to look for ways to manage and control costs Maintenance Choice continues to be an attractive option generating savings of up to 4% of their pharmacy costs. In 2013 our Maintenance Choice 2.0 program became broadly available and now clients with either a mandatory or a voluntary 90 day plan design can participate in Maintenance Choice and achieve additional savings.
We currently have more than 16 million lives enrolled in Maintenance Choice, up from nearly a 11 million in 2012. And we see a significant run way for future adoption of Maintenance Choice. And in fact we believe the potential adoption among our current clients represents up to 34 million members in total. With the early success we have seen with the new 2.0 program we expect overall adoption will accelerate in the years to come.
An important part of our PBM growth strategy is building upon our leadership positions in both Medicare and Medicaid. With 10,000 baby boomers becoming Medicare eligible each and every day the drug spend in this space is expected to grow by 8.5% annually. We are currently the number three player in the Medicare Part D market with 6.9 million lives serviced through our own prescription drug plan as well as through our over 40 health plan clients who sponsor their own PDP or MA-PD programs.
With healthcare reform underway approximately 11 million people are expected to gain healthcare coverage through Medicaid over the next few years. And in the managed Medicaid market we are the leading provider with an estimated 31% share.
Now moving on to specialty pharmacy, this is another area where we see tremendous growth opportunities. The current pipeline for new prescription drugs is dominated by specialty medications with total specialty sales expected to double between 2010 and 2016. As you can see from this slide how our revenue is expected to almost double between 2010 and 2013 alone as we anticipate crossing the $20 billion threshold this year. Our clients' costs are growing significantly as they are looking across the entire spectrum of specialty care for ways to curb this growth.
Historically PBMs have managed the portion of specialty spend covered by the pharmacy benefit. However about half of all specialty spend flows through to medical benefit. So to address the evolving needs of our clients we expanded our capabilities and now are managing specialty across both the pharmacy as well as the medical benefits. Through investments in new capabilities such as this we plan to capture more than our fair share of this rapidly growing marketplace.
So you can see that we are very well positioned for continued strong growth within our core businesses. At the same time we are very focused on positioning the company to thrive in a rapidly changing healthcare environment. Healthcare in the U.S. is going through a period of intense change due to the implementation of the affordable care act as well as underlying demographic shifts, advances in technology and changes in consumer and patient behavior. And given the confluence of all these events the healthcare industry itself is expected to change more in the next 10 years than it has in the past 50 years.
And so what does this change really look like? First we see more than 30 million newly insured Americans as a result of the affordable care act. And as this coverage expansion occurs we also see growing importance of health plans as well as government payers given their role in the coverage of these newly insureds.
Physicians will be increasingly incented to improve outcomes, cost and quality, which will help solve the cost quality challenges that's facing the U.S. healthcare system. And while chronic disease prevalence will likely continue to rise we believe the healthcare system will be forced to focus on more low cost high quality solutions. And those that are effective like improving medication adherence will prevail. In pharmacy the branch of generic shift will continue but at a declining rate as the introductions of new generics begin to moderate post 2015.
The greatest growth in pharmacy will be the continued innovation in patented and biologic specialty drugs. And finally the transition to a digital society will accelerate and new text driven message for informing and engaging patients will fundamentally reshape individual behavior as well as the healthcare delivery system. And now given all that these changes are underway in healthcare it's critically important that we are able to pivot to address these changes and to serve the evolving needs of both our clients as well as our consumers.
In bringing together our integrated model more than six years ago we had three key goals in mind. First is greater access and convenience. Second is to improve health comes and finally just to lower overall healthcare cost. And we continue to believe that these goals are very aligned with the direction in which healthcare is headed and that will play an important role in solving the cost quality access challenge.
Leveraging our integrated assets to deliver innovative solutions to our customers and our clients will be an important driver of our long term growth. And when you look at our enterprise-led assets there are four key areas that differentiate our offering and enhance our value proposition. First is our substantial purchasing scale. We buy pharmaceuticals for both our leading PBM and our more than 7,500 drug stores and across our distribution channel we are the largest provider of prescriptions in the U.S. with more than 1 billion prescriptions filled annually.
Second is our deep clinical expertise which is built on diverse insight from across the enterprise. We have deep understand of consumer behavior through our retail drug stores, actionable insights from research collaborations with top tier medical organizations and predictive analytic capabilities that drive best-in-class adherence across all of our channels.
Third is our strong end-to-end relationships across client and consumer spectrums, our unmatched ability to coordinate plan design and to influence consumer behaviors will serve us well as consumer driven healthcare gains steam and payers look for greater effectiveness. And fourth is our channel agnostic approach to prescription delivery. By combining our mail order and retail capabilities we have enhanced patient access and choice while reducing cost. This channel agnostic approach allows us to gain share of prescription volume regardless of changes in payer mix, payer strategies and patient preferences.
And this slide is, this next slide I have, is since we merged in 2007 CVS Caremark has been focused on developing innovative products and successfully growing the overall enterprise. As we grow larger and our offerings expand and gain more adoption the impact on the individual segments both positive and negative may become more pronounced. And this will make the focus and full focus on a particular segment's performance somewhat blurred in comparison to many of our peers. And as a pharmacy innovation company we are focused on growing our share of pharmacy dispensing volumes. As such growth in covered lives remains an important factor and with increased share comes the ability to increase savings per clients as well per members.
Our focus isn't limited to just one channel, mail or retail as it is for some of our competitors. Our channel and business segment agnostic offerings enhance the performance of the overall enterprise. And this is well demonstrated by the success of our Maintenance Choice program. CVS Pharmacy share of the Caremark book of business has grown dramatically over the past five years, from 18% in 2007 to over 30% today. And this significantly outpaces the growth in CVS Pharmacies overall retail market share and provides solid evidence of the value of the enterprise of our unique business model.
And to take this one step further when clients choose to implement our integrated programs we often see the consolidation of their prescriptions into the CVS Caremark book of business, meaning either the retail or mail channels. In fact for 18% of our current PBM clients over 80% of the prescription volumes flows through one of our pharmacy channels and for another 22% of our clients we have between 60% and 80% enterprise share.
Our ability to deliver greater access, higher quality and lower cost for clients while driving share to the CVS Caremark enterprise demonstrates the success of our integrated model in delivering win-win solutions. And as this slide suggests we see significant opportunities to continue to grow our enterprise share of our PBM client spend. So in the light of our distinct business model and the rapidly changing environment we have done a significant amount of work over the past two years to more clearly define our long term strategic framework. And we landed on a three-pronged strategy to capitalize in the market opportunities we foresee with our unique set of assets.
First we will create greater healthcare value by increasing the convenience and quality of care, expanding and differentiating our services for better health at lower cost. Secondly we will serve new and existing customers in new ways. Our teams from across our enterprise are focused on identifying and targeting opportunities to better serve the fastest growing customer segment. And third we will continue to optimize our enterprise assets by delivering innovative solutions that leverage our unmatched breadth of capabilities.
And at our Analyst Day last December we discussed six of the highest priority initiatives that we have identified through the lens of the strategic growth framework and we have made substantial progress in building the infrastructure to support these and other projects that will support our long term growth and continue to build upon our unique innovative model. And we will certainly have much more to share on these in the years to come.
And before I wrap up I'd like to briefly discuss our roadmap for enhancing shareholder value. We have been focused on this roadmap for the past several years and it includes three main pillars. First is our focus on driving productive long term growth. Second is our expectation to generate significant levels of free cash flow, and finally, our disciplined approach to capital allocation. Together these lead to enhanced shareholder value.
Now as part of this roadmap we laid out our steady state growth targets for the time period from 2010 through 2015. Enterprise wide for the five-year period we are targeting compounded growth rates of between 5% to 8% on the topline, 8% to 10% in operating profit and 7% to 9% in adjusted earnings per share from continuing operations. And if you were to assume that a certain portion of our significant cash can be used to repurchase shares throughout this period we can enhance the bottom line by another 3% to 6%. And this leads to compounded annual rates and total adjusted earnings per share of between 10% to 15% over the five-year period. And as you may know our business has been performing extremely well during the first few years of a five-year plan and we are well on track to achieve our enterprise state targets.
When we laid out our five-year target in late 2010 we said these targets will allow us to generate approximately $31 billion in cash that could be available to enhance shareholder returns. So on average over the time period we could have between $5.5 billion and $6.5 billion available annually and our focus is to deploy our substantial cash available with the goal of achieving the highest possible returns for all of our shareholders.
When we first laid out our targets we also said a dividend payout ratio goal of approximately 25% to 30% by 2015 versus our level of approximately 13% at that time. That implied a compounded annual growth rate and a dividend of nearly 25%. And we will use additional liquidity to invest in high ROIC efforts such as bolt-on acquisitions that can supplement our existing asset base. And absent more attractive value enhancing internal projects we will do share repurchases with approximately $3 billion to $4 billion expected to be available annually on average.
Our cash deployment strategy is guided by disciplined risk adjusted decisions. We will invest in projects that will help us grow our business and generate solid long term return and we are committed to funding these types of projects or returning the cash to our shareholders whatever creates the best value. And during the past few years we have continued to generate significant levels of free cash and we have remained focused on deploying cash in a shareholder friendly manner.
Late last year we announced a 38% increase in our quarterly dividend for 2013 and over the past three years we have raised our dividend a total of 160%. This puts us on track to meet our 2015 dividend payout ratio target of 25% this year, two years ahead of our stated goal that we had in 2010. And beyond funding this dividend increase we expect to complete another $4 billion of share repurchases throughout 2013. So between dividends and share repurchases we will allocate approximately $5 billion towards enhancing total returns for our shareholders this year alone.
Our disciplined capital allocation practices are a vital component of driving shareholder value. We will continue to take advantage of the powerful cash generation capabilities of our company with a focus on returning value to shareholders through both dividends and share repurchases.
So in summary we believe we are well positioned for continued growth. Our unique integrated model position us to identify and capitalize on emerging opportunities from across the healthcare spectrum, while our core businesses are positioned for continued growth on a standalone basis. We are migrating to a more integrated view of the company with a greater focus on growing its overall enterprise. And lastly we remain focused on enhancing shareholder value through healthy earnings growth strong cash flow generation and disciplined capital allocation methods.
So with that I thank you for your attention and time. I will be happy to turn it over to you for questions.
David M. Denton
Yeah, great question. I think there is two things that we think are going to accelerate Maintenance Choice performance. One is and we have begun to see it as now that Maintenance Choice has been in the marketplace for a while we have demonstrated results and so we can go to a client and say, listen if you implement this program here is the expectations you should see from a cost saving and adherence performance improvement. So we can demonstrate that specifically and we can commit to that.
We also have a lot of qualifications, so if that client would like to talk to hundreds of other clients about the program what they should expect when they implement it. And so that is a really nice tailwind to that business and so they can speak to people who are in the industry and actually have real life examples of how powerful the program is, number one.
Number two is as we implement Maintenance Choice, certain Maintenance Choice 2.0, the first Maintenance Choice program really appealed to people who want to put in a mandatory program of some type. Maintenance Choice 2.0 is more of a voluntary program so it aligns the incentive with the payer and the consumer to drive share to the CVS channel to capture those savings. And so for those payers who did not want to take off a more of a heavy hand and put something in that's mandatory this is a nice way for them to generate savings also aligns the incentives with the payer or the patient in CVS Caremark to drive value for them. So with that nuance I think you will see more people who are sitting on the fence of implementing something like this, that will accelerate overtime.
And the other part of the question is given it is more (inaudible) can it have a bigger percentage to CVS Pharmacy then…
David M. Denton
It would depend on how rapidly those consumers adopt the program. So in some cases we will share shift at a very high level. So it will be close to our Maintenance Choice 2.1 -- 1.0 program. In other cases it might not be as much but will depends on how that client's member population behaves if you will.
So but you will see, at the end of the day we are agnostic to where that script filled, whether it's in the mail center or CVS Pharmacy. So but I think because of -- if you look at the demographics and the changing landscape in healthcare. I think you will see more of (advances) probably on the retail setting because you will see more of a newly insureds as they come into the marketplace are going to access the retail drug store versus the mail order center as an example. Mark?