CVS Health Corporation · NYSE:CVS
CVS Health — Investor Day (December 2015)
59 slides from CVS Health's investor day presentation, Dec 16, 2015
Slide 1: Maximizing Long-term Shareholder Value
Maximizing Long Long-term term Shareholder Value Dave Denton Executive Vice President & Chief Financial Officer
Slide 2: Non-GAAP Financial Measures
Non-GAAP Financial Measures Free Cash Flow and Cash Available for Adjusted Earnings per Share Enhancing Shareholder Value Net cash provided by operating Income before income tax provision activities + Amortization - Additions to property and - Adjusted income tax provision equipment - Earnings alloc
Slide 3: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions Looking Ahead: 2016 Guidance Review Driving Sustainable Enterprise Growth 3
Slide 4: Continuing Focus on Enhancing Shareholder Value
Continuing Focus on Enhancing Shareholder Value Generating Productive Op Optimizing g Si ifi Significant t Long-term Capital Free Cash Growth Allocation Flow Enhanced Shareholder Value 4
Slide 5: Our Leadership in Multiple Competencies Continued to Drive Shareholder Value in 2015
Our Leadership in Multiple Competencies Continued to Drive Shareholder Value in 2015 Revenues and • Driving top- and bottom-line results through an Operating Profit enterprise focus • Delivering Adjusted EPS at high end of initial targets Earnings per Share • 1¢ accretion from Omnicare acquisition a
Slide 6: 2015 Guidance Reaffirmed
2015 Guidance Reaffirmed Full-year 2015 Net Revenue Growth 9.75% to 10.25% Adjusted EPS From $5.14 to $5.18 Continuing Operations Year-over-year Growth 14.25% to 15.25% Free Cash Flow $5.9 to $ $ $6.2 billion Year-over-year Growth Down 4% to 10% Notes: 1. Excludes acquisition-related bridge financin
Slide 7: Original Steady State Targets
Original Steady State Targets Enterprise Growth Model from 2010 Five-year CAGR 2010 - 2015 Net Revenue 8% to 11% Operating Profit 8% to 10% Adjusted EPS From Cont Ops 7% to 9% Average Annual Cash Available $5.5 billion For Enhancing Shareholder Value to $6.5 billion $ Share Repurchase Contribution 3
Slide 8: Enterprise Expansion Has Happened as Originally Targeted
Enterprise Expansion Has Happened as Originally Targeted Operating Profit Adjusted EPS ($, billions) ($) 9 9.8 8 5 5.18 18 to to 9.7 5.14 10% 14% CAGR CAGR 2.68 6.1 2010 2011 2012 2013 2014 2015E 2010 2011 2012 2013 2014 2015E Growth at higher end of original long-term targets Note: 1. CAGRs use mid
Slide 9: Strategic Capital Deployment with Acquisitions of Omnicare and Target Pharmacies and Clinics
Strategic Capital Deployment with Acquisitions of Omnicare and Target Pharmacies and Clinics OMNICARE TARGET • Brings a new pharmacy • Enhances network and dispensing channel to CVS as relevance of CVS Health’s the leading g provider p of integrated g offerings g pharmacy services to long- • Enables
Slide 10: Well-laddered Debt Maturities Remain Core to Strong Balance Sheet
Well-laddered Debt Maturities Remain Core to Strong Balance Sheet Debt Maturity Profile (Bonds) ($, billions) 1.7 1.2 1.1 1.3 1.2 1.3 1.0 0.7 0.8 0.5 0.6 0.5 0.5 2016 2017 2018 2019 2020 2021 2022 2023 2024 2027 2039 2041 2043 10
Slide 11: Well-laddered Debt Maturities Remain Core to Strong Balance Sheet
Well-laddered Debt Maturities Remain Core to Strong Balance Sheet Debt Maturity Profile (Bonds) ($, billions) 3.5 3.5 3.2 3.2 3.0 2.0 1.2 1.1 1.2 1.3 1.0 0.6 0.7 0.8 0.5 0.5 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2027 2035 2039 2041 2043 2045 Balance sheet remains healthy y with addition
Slide 12: Committed to Maintaining a Healthy Balance Sheet
Committed to Maintaining a Healthy Balance Sheet Adjusted Debt-to-EBITDA As expected expected, new debt increased leverage ratio above 3.4 3.30 target of 2.7X 3.2 2.94 • Committed to returning to a 3.0 leverage ratio at target 2.8 Target = 2.70 – Driven mostly by strong EBITDA 2.6 growth 2.66 2.4 –
Slide 13: $41 Billion Available to Enhance 2014 Through 2018 Returns
$41 Billion Available to Enhance 2014 Through 2018 Returns $10 ~$39 ($8) billion billion billion ~$31 $31 $41 billion billion Operating Free Incremental Cash Net Capex Cash Flow Cash Flow Debt Available 13
Slide 14: Efficient Cash Deployment 2014 Through 2018
Efficient Cash Deployment 2014 Through 2018 Cash Available for Enhancing g Shareholder Value $41 billion Dividends Share Return on Repurchases Target payout ratio Invested Capital of 35% by 2018 $4 billion to $5 Drive ROIC with billion per year value-enhancing ~18% implied projects dividend CAGR Val
Slide 15: ~$23 Billion Available for Returns in 2014 and 2015
~$23 Billion Available for Returns in 2014 and 2015 Effective allocation of cash Cash Available & Capital Allocation available in ‘14 and ‘15 through: g ($, billions) • 56% increase of annual dividend 22.9 23.8 – Payout ratio estimated to be nearly Share 29% at year-end year end 9.0 repurchases h •
Slide 16: Solid History of Enhancing Returns Using All Three Pillars for Efficient Cash Deployment
Solid History of Enhancing Returns Using All Three Pillars for Efficient Cash Deployment Annual Dividend Acquisitions Share per Share and Ventures Repurchases ($) ($ billions)) ($, Apr ’11 Apr ’12 29% Universal Health $20b CAGR American Net Total PDP PDP 1.40 50 5.0 1.10 4.3 4.0 4.0 Feb ’13 Mar ’13
Slide 17: 2016 Capital Deployment to Include Dividend Increase and Further Repurchases
2016 Capital Deployment to Include Dividend Increase and Further Repurchases 2016 Annual Dividend • Increasing 21%, 21% from $1.40 to $1.70 $1 70 $1.70 2016 Share Repurchases • Currently $7.7 billion authorized and remaining from 2014 share $4 repurchase program billion More than $ $5 billion expect
Slide 18: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions Looking Ahead: 2016 Guidance Review Driving Sustainable Enterprise Growth 18
Slide 19: Myth #1: All Specialty Pharmacies Are Similar
MYTH #1 ALL SPECIALTY PHARMACIES ARE SIMILAR IN PRACTICE TO THE CAPTIVE “SPECIALTY” PHARMACIES THAT HAVE COME UNDER RECENT SCRUTINY 19
Slide 20: Fact #1: True Specialty Pharmacies Have a Different Business Model
FACT #1 TRUE SPECIALTY PHARMACIES LIKE CVS/SPECIALTY HAVE A DIFFERENT BUSINESS MODEL THAN THESE CAPTIVE PHARMACIES 20
Slide 21: FACT #1: CVS/specialty Is Different
Misconceptions in Marketplace Are Creating Noise FACT #1: CVS/specialty p y Is Different • These captive pharmacies are NOT specialty pharmacies – Derive D i vastt majority j it off pharmacy h volume l ffrom one manufacturer f t – Many don’t dispense specialty medications – Attempting to circumvent
Slide 22: Myth #2: The RxCrossroads Business Could Be a Big Risk
MYTH #2 THE RxCROSSROADS BUSINESS COULD BE A BIG RISK FOR CVS HEALTH GIVEN THAT IT IS AT ODDS WITH CLIENTS CLIENTS’ OBJECTIVES 22
Slide 23: Fact #2: RxCrossroads Is Aligned and Immaterial
FACT #2 THE RxCROSSROADS BUSINESS IS ALIGNED WITH OUR FOCUS ON COST, QUALITY AND ACCESS, AND IS IMMATERIAL TO OUR FINANCIAL RESULTS 23
Slide 24: FACT #2: RxCrossroads Is Aligned
Misconceptions in Marketplace Are Creating Noise FACT #2: RxCrossroads Is Aligned g • RxCrossroads follows CVS Health’s philosophy of: – Controlling C t lli costs t and d utilization tili ti ffor our clients li t – Promoting better health outcomes for the patients we serve – Promoting access to appr
Slide 25: Myth #3: Always Participate in Preferred Networks
MYTH #3 ALWAYS PARTICIPATE IN PREFERRED NETWORKS FOR OPTIMAL SUCCESS IN MEDICARE PART D 25
Slide 26: Fact #3: Not All Medicare Part D Networks Are Created Equal
FACT #3 NOT ALL MEDICARE PART D NETWORKS ARE CREATED EQUAL … FINANCIAL DISCIPLINE IS REQUIRED 26
Slide 27: FACT #3: Med D Networks Are Not Equal
Misconceptions in Marketplace Are Creating Noise FACT #3: Med D Networks Are Not Equal q • In preferred networks, plan designs must offer pharmacies enough share gain to more than offset reduced margins – Significant incentive must be offered to patients to switch pharmacies • Key areas of considera
Slide 28: Myth #4: Underlying Growth in Each Segment Fuels Value Creation
MYTH #4 UNDERLYING GROWTH IN EACH SEGMENT IS WHAT ULTIMATELY FUELS THE CVS HEALTH VALUE-CREATION ENGINE 28
Slide 29: Fact #4: Success Driven by Enterprise Growth
FACT #4 CVS HEALTH’S SUCCESS WILL BE DRIVEN BY ENTERPRISE GROWTH … SOMETIMES AT THE EXPENSE OF ONE OF THE SEGMENTS 29
Slide 30: FACT #4: Enterprise Growth Drives Success
Misconceptions in Marketplace Are Creating Noise FACT #4: Enterprise p Growth Drives Success • Critical to focus on enterprise growth • Unique offerings are aligned across the company in support of the enterprise growth strategy – For F example, l SSpecialty i lt CConnectt shifts hift virtually i t
Slide 31: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions Looking Ahead: 2016 Guidance Review Driving Sustainable Enterprise Growth 31
Slide 32: 2016 Guidance: Healthy Enterprise Growth
2016 Guidance: Healthy Enterprise Growth Full-year 2016 Net Revenue Growth 17.0% to 18.5% Adjusted EPS $5.73 to $5.88 Year-over-year Growth 11.25% to 14.25% GAAP Diluted EPS $5.28 to $5.43 Notes: 1. EPS growth estimates exclude acquisition-related transaction and integration costs. 2 Year 2. Year-ov
Slide 33: 2016 Guidance: Substantial Free Cash Flow, Growth Impacted by Acquisitions
2016 Guidance: Substantial Free Cash Flow … Growth Impacted by Acquisitions in billions Full-year 2016 Operating Cash Flow $7.6 to $7.9 Gross Capital Expenditures ($2.6) to ($2.5) Sale-leaseback Proceeds $0.3 to $0.2 Net Capital Expenditures Approximately ($2.3) Free Cash Flow $5.3 to $5.6 Year-over
Slide 34: Healthy Enterprise Growth Expected to Continue
Healthy Enterprise Growth Expected to Continue Operating Profit Adjusted EPS ($, billions) ($) 10.8 to 5.88 10.5 to 5.73 10% 14% CAGR CAGR 8.0 3.96 2013 2014 2015E 2016E 2013 2014 2015E 2016E 2016 growth expected to be within or above target ranges Notes: 1. CAGRs are calculated using 2016E midpoint
Slide 35: 2016 Guidance: Strong Growth in Retail/LTC
2016 Guidance: Strong Growth in Retail/LTC Full-year 2016 Net Revenue Growth 14.25% to 15.5% Same store sales 2.75% 5% to 4.0% 0% Same store adjusted scripts 3.5% to 4.5% Gross Profit Margin g Significant g decline Operating Expense (% of revenue) Moderate improvement Operating Profit Growth 6 25% t
Slide 36: 2016 Guidance: Even Stronger Growth in PBM
2016 Guidance: Even Stronger Growth in PBM Full-year 2016 Net Revenue Growth 20.25% to 21.75% Total Adjusted Claims 1.33 billion to 1.35 billion Gross Profit Margin Moderate decline Operating Expense (% of revenue) Modest improvement Operating Profit Growth 9.75% to 13.25% Operating Profit Margin Do
Slide 37: Key Drivers of 2016 Expectations
Key Drivers of 2016 Expectations • Reimbursement/pricing pressure and timing of share gains • Growth in Specialty a plus • Mix of business pressures margins • Net benefit of Omnicare and Target assets • Smaller incremental benefit from break-open generics • Smaller incremental benefit from Red Oak S
Slide 38: Mix of Business Lowers Gross Margin %, but Drives Volumes and Gross Profit $
Mix of Business Lowers Gross Margin %, but Drives Volumes and Gross Profit $ Over Time • At enterprise level, lower-margin PBM segment is growing faster than Retail/LTC segment • Multiple mix-driven impacts compressing underlying gross margins within underlying retail business: – Pharmacy growth is
Slide 39: Acquisitions Expected to Help Fuel Growth
Acquisitions Expected to Help Fuel Growth • Omnicare expected to deliver ~20¢ to Adjusted EPS in 2016 – ~ 19¢ iincrementally t ll accretive ti year-over-year – Includes associated financing and excludes amortization and integration expenses • ~6¢ of Adjusted EPS dilution expected from Target in 2016
Slide 40: While the Level of Generic Introductions Ebbs and Flows Over Time
While the Level of Generic Introductions Ebbs and Flows Over Time … Enterprise E t i profit fit growth th will continue to benefit f from generics i 40
Slide 41: Generics Drive Financial Performance at CVS Health in Two Ways
Generics Drive Financial Performance at CVS Health in Two Ways Increasingly effective sourcing of Brand-to-generic generics in CVS Health’s existing conversion base of business 41
Slide 42: Generics Remain an Opportunity
1 Generics Remain an Opportunity Total Brand Market Sales of Expected Generic Launches ($, billions) 23.9 Abilify 16 16.5 Nexium 17 3 17.3 Copaxone Crestor Celebrex Namenda Gleevec Diovan Zetia Lovaza 5.5 Seroquel XR 3.6 Viagra Cialis 2014 2015E 2016E 2017E 2018E $40.4 billion $26.4 billion Expected
Slide 43: Incremental Break-open Benefit in 2016 Less Than 2015
1 Incremental Break-open Benefit in 2016 Less Than 2015 Total Brand Market Sales of Expected Generic Launches in Break-open p Period ($, billions) 14.4 15.5 11.1 8.7 5.0 2014 2015E 2016E 2017E 2018E Notes: 1. Break-open period for generic launches = 12 months from the point at which there are 3+ via
Slide 44: Biosimilars Represent an Additional Opportunity
1 Biosimilars Represent an Additional Opportunity Total Market Sales ($, billions) Total brand market sales of Total market sales of specialty expected generic launches drugs losing exclusivity 19.5 in break-open break open period 14.4 15.5 11.1 8.7 5.0 2014 2015E 2016E 2017E 2018E 2016E – 2019E Not
Slide 45: With Incremental Generic Benefits Declining, Biosimilars Will Become a Bigger Opportunity
1 With Incremental Generic Benefits Declining, Biosimilars Will Become a Bigger Opportunity Total Market Sales of • Biosimilars are expected to act more like Specialty Drugs brands than generics Losing Exclusivity ($, billions) • Expected to increase competition in specialty categories 19.5 • Expect
Slide 46: Red Oak Sourcing to Add Smaller Incremental Value in 2016 But Opportunity Remains
2 Red Oak Sourcing to Add Smaller Incremental Value in 2016 But Opportunity Remains Venture withVenture Cardinalwith Cardinal Health Health continues tocontinues to to CVS provide value provide Health in three ways:value to CVS Health in three ways • Fixed quarterly payments from Cardinal Health … $
Slide 47: Combined Procurement Has Grown 50% Since Inception of Red Oak Sourcing
2 Combined Procurement Has Grown 50% Since Inception of Red Oak Sourcing Relative Dollar Amount of Generics • Red Oak is the largest generic Procured Using Red Oak sourcing entity in the U U.S. S ~50% • Generic volumes sourced by Red Oak continue to grow A Acquisitions i iti • Scale matters … increm
Slide 48: 2016 Earnings Growth Significantly Back-half Weighted
2016 Earnings Growth Significantly Back-half Weighted EARNINGS GROWTH TIMING FACTORS EARNINGS GROWTH TIMING FACTORS Generic introductions / break-opens L Leap day d Medicare Part D Easter Shift benefits Q1 Front store strategies’ benefits to the detriment of Q2 Share repurchases Tax rate 1st Half 2n
Slide 49: 2016 Q1 Guidance: Challenging EPS Growth Due to Timing Factors
2016 Q1 Guidance: Challenging EPS Growth Due to Timing Factors Q1 2016 Net Revenue Growth 17% to 18.5% Adjusted EPS $1.14 to $1.17 Year-over-year Growth Flat to up p 3.0% GAAP Diluted EPS $1.03 to $1.06 Notes: 1. EPS estimates exclude acquisition-related transaction and integration costs. 2. Estimat
Slide 50: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions Looking Ahead: 2016 Guidance Review Driving Sustainable Enterprise Growth 50
Slide 51: Steady State Targets Affirmed
Steady State Targets Affirmed Five-year CAGR (2013-2018) Net Revenue Growth 9% to 13% Operating Profit Growth 7% to 9% Preliminary Adjusted EPS Growth 6% to 8% Average Annual Cash Available for Enhancing Shareholder Value Approximately $8 billion Share Repurchase Contribution 4% to 6% Final Adjusted
Slide 52: Capital Allocation Priorities Guide Use of Cash
Capital Allocation Priorities Guide Use of Cash Organic Growth Operational p Investments • Sto Store eggrowth o t aand d remodels e ode s • Continued technology improvements Maintain capital structure Capital Structure • Credit rating of BBB+ • Goal G l off 2.7X 2 7X Adj Adjusted t d Debt-to-EBITDA
Slide 53: Many Initiatives You'll Hear About Today to Continue to Drive Enterprise Profit Growth
Many Initiatives You’ll Hear About Today to Continue to Drive Enterprise Profit Growth Health plans represent significant opportunity to drive value and capture share, whether or not we’re the PBM Our specialty business has unmatched assets and continues to outpace the market Target and Omnicare acq
Slide 54: The Right Strategy for an Evolving Health Care Market
The Right Strategy for an Evolving Health Care Market Demonstrating Value Capturing significant share of new prescriptions to People, Payors and Providers Ability to pivot and provide value as market evolves Growing g the Core,, Driving business decisions with enterprise mindset Broadening the Base
Slide 55: Appendix
Appendix pp , CVS Caremark, Omnicare, CVS/specialty, CVS/caremark, CVS, Maintenance Choice, Coram, Navarro, Novologix, Omnicare, and Specialty Connect are trademarks or registered trademarks of CVS Pharmacy, Inc.
Slide 56: 2016 Guidance: Consolidated Income Statement
2016 Guidance: Consolidated Income Statement Full-year 2016 Corporate Segment Expense $860 million to $870 million Intercompany Eliminations (% off combined bi d segmentt revenues)) ~ 11.6% Gross Profit Margin Significant decline Operating Expense (% of consolidated revenue) Moderate improvement Ope
Slide 57: 2016 Guidance: Consolidated Income Statement
2016 Guidance: Consolidated Income Statement Full-year 2016 Net Interest Expense $1.13 billion to $1.14 billion Effective Tax Rate ~ 39.0% Weighted Average Shares ~ 1.08 billion Consolidated Amortization ~ $800 million Consolidated Depreciation & Amortization ~ $2.5 billion Notes: 1. EPS estimates a
Slide 58: 2016 Q1 Guidance: Segment Performance Reflects Impact of Timing Factors
2016 Q1 Guidance: Segment Performance Reflects Impact of Timing Factors Q1 2016 Net Revenue Growth 19% to 20.5% Retail/LTC Same store sales 4.5% to 6.0% Same store adjusted scripts 4.75% to 5.75% Operating Profit Growth 5.0% to 7.0% armacy Services Net Revenue Growth 18% to 19.25% Pha Operating Prof
Slide 59: Steady State Targets: Key Assumptions to Keep in Mind
Steady State Targets: Key Assumptions to Keep in Mind Anticipated Impact F Favorable bl iindustry d t demographics d hi Utili ti Utilization Generic pipeline Gross margin Utilize compelling scale Gross margin Retail share gains / SG&A leverage Operating profit Net-new Net new PBM contracts Mix/volum