Cvs Health Corporation · NYSE:CVS
Cvs Health — Investor Day (December 2016)
63 slides from Cvs Health's investor day presentation, Dec 15, 2016
Slide 1: Maximizing Shareholder Value With an Enterprise Mindset
Maximizing Shareholder Value With an Enterprise Mindset Dave Denton Executive Vice President & Chief Financial Officer
Slide 2: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 2
Slide 3: Continuing Focus on Maximizing Shareholder Value
Continuing Focus on Maximizing Shareholder Value Productive Long-Term Growth Generating Enhanced Significant Shareholder Value Free Cash Flow Optimizing Capital Allocation 3
Slide 4: Key Financial Accomplishments of 2016
Key Financial Accomplishments of 2016 Adjusted Earnings Per Share • Delivering strong Adjusted EPS growth of ~12% Prescription and • Enterprise script and claim growth of ~19%, including the Claim Growth additions of Omnicare and Target pharmacies • Successfully refinanced debt to take advantage of
Slide 5: Solid Performance Expected in 2016
Solid Performance Expected in 2016 Full-Year 2016 Net Revenue Growth 16.0% to 16.5% Adjusted EPS $5.77 to $5.83 Year-Over-Year Growth 11.75% to 13.0% Free Cash Flow $6.8 to $7.0 billion Year-Over-Year Growth Up 5% to 8% GAAP Diluted EPS $4.82 to $4.88 5 Refer to endnotes for additional information.
Slide 6: Meeting Enterprise Growth Targets Through 2016
Meeting Enterprise Growth Targets Through 2016 … Operating Profit Adjusted EPS ($, billions) ($) 5.77 10.5 to to ~10% 10.6 ~14% 5.83 CAGR CAGR 8.0 3.96 2013 2014 2015 2016E 2013 2014 2015 2016E 6 Refer to endnotes for additional information.
Slide 7: And Generating Significant Free Cash Flow
… And Generating Significant Free Cash Flow Free Cash Flow Key drivers: ($, billions) • Enterprise prescription dispensing 6.9 share gains 57% • Specialty pharmacy 4.4 • Improved purchasing • Working capital management 2013 2016E Free cash flow has increased by $2.5 billion over the last three years
Slide 8: Committed to Maintaining a Healthy Balance Sheet
Committed to Maintaining a Healthy Balance Sheet Adjusted Debt-To-EBITDA • Committed to returning to 2.7x targeted leverage ratio 4.0 3.39 3.02 – Driven mostly by EBITDA growth and debt repayments 3.0 Target = 2.70 2.66 – Modified long-term debt 2.0 2.39 structure in 2014 and 2016 to take advantage
Slide 9: Well-Laddered Debt Maturities Remain Core to Strong Balance Sheet
Well-Laddered Debt Maturities Remain Core to Strong Balance Sheet Debt Maturity Profile (Bonds) 3.5 ($, billions) 3.5 3.1 2.8 2.8 2.4 1.8 1.3 0.9 0.9 0.8 0.7 0.4 0.4 0.0 0.1 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2035 2039 2041 2043 2045 Debt refinancing reduced interest expenses by
Slide 10: Efficient Cash Deployment 2014 Through 2016 Focused on Three Pillars
Efficient Cash Deployment 2014 Through 2016 Focused on Three Pillars Cash Available for Enhancing Shareholder Value $32 billion Dividends Acquisitions Share Repurchases and Ventures Nearly $5 billion More than $13 billion returned to Nearly $14 billion in in value-creating shareholders acquisitions
Slide 11: Solid History of Enhancing Returns Using All Three Pillars
Solid History of Enhancing Returns Using All Three Pillars for Efficient Cash Deployment Annual Dividend Acquisitions Share Repurchases Per Share and Ventures ($, billions) ($) Jan ’14 Jul ’14 24% Coram Red Oak 5.0 Sourcing CAGR 4.5 1.70 4.0 1.40 Sep ’14 Aug ’15 1.10 Navarro Omnicare Dec ’15 '14 '15
Slide 12: 2017 Will See a Dividend Increase of 18% and Further Share Repurchases
2017 Will See a Dividend Increase of 18% and Further Share Repurchases Annual Dividend Per Share ($) more than 18% 1.10 1.40 1.70 2.00 $18 billion authorized and remaining for share repurchase '14 '15 '16 '17E 12
Slide 13: 2017 Will See a Dividend Increase of 18% and Further Share Repurchases
2017 Will See a Dividend Increase of 18% and Further Share Repurchases Annual Dividend Share Repurchases Per Share ($, billions) ($) 18% 5.0 5.0 4.5 2.00 4.0 1.70 1.40 1.10 '14 '15 '16 '17E '14 '15 '16E '17E Nearly $7 billion expected to be returned to shareholders in 2017 13
Slide 14: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 14
Slide 15: Myth #1: If Rebates Disappeared, PBM Profits Would Substantially Drop
MYTH #1 IF REBATES DISAPPEARED, PBM PROFITS WOULD SUBSTANTIALLY DROP 15
Slide 16: Fact #1: Rebates Are But One of Many Elements of PBM Profitability
FACT #1 REBATES ARE BUT ONE OF MANY ELEMENTS OF PBM PROFITABILITY 16
Slide 17: FACT #1: Rebates Are but One of Many Elements of PBM Profitability
FACT #1: Rebates Are but One of Many Elements of PBM Profitability A Number of Elements Drive PBM Profitability • Manage to overall profitability margin more than • Clients’ contracts structured differently, 90% per client needs • Profitability elements include: - Margin on: • Dispensing mail and sp
Slide 18: Myth #2: Changes in Rate of Drug Price Inflation Are a Meaningful Driver
MYTH #2 CHANGES IN RATE OF DRUG PRICE INFLATION ARE A MEANINGFUL DRIVER OF PROFITABILITY 18
Slide 19: Fact #2: Overall Impact From Slowing Drug Price Inflation Is Not Meaningful
FACT #2 OVERALL IMPACT FROM A SLOWING RATE OF DRUG PRICE INFLATION IS NOT MEANINGFUL 19
Slide 20: FACT #2: Overall Impact From Changes in the Rate of Drug Price Inflation Is Not Meaningful
FACT #2: Overall Impact From Changes in the Rate of Drug Price Inflation Is Not Meaningful • Drug price inflation changes affect businesses within the enterprise in different ways … some positively, some negatively – For example, SilverScript is an insurance company that is negatively impacted by in
Slide 21: Myth #3: The CVS Health Integrated Model Is No Longer the Model of Choice
MYTH #3 THE CVS HEALTH INTEGRATED MODEL IS NO LONGER THE MODEL OF CHOICE 21
Slide 22: Fact #3: Our Model Continues to Gain the Most Share
FACT #3 OUR MODEL CONTINUES TO GAIN THE MOST SHARE AND IS BEST POSITIONED TO CONTINUE TO DO SO 22
Slide 23: FACT #3: Our Model Continues to Gain Share
FACT #3: Our Model Continues to Gain Share Broadest Assets and Advantages • Suite of assets enable solutions to meet diverse client and payor needs enterprise script • Being truly integrated yields enhanced patient growth experience helping to drive better health outcomes • Face-to-face patient inte
Slide 24: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 24
Slide 25: 2017 Guidance: Enterprise Outlook
2017 Guidance: Enterprise Outlook Full-Year 2017 Net Revenue Growth 4.0% to 5.75% Adjusted EPS $5.77 to $5.93 Year-Over-Year Change (0.5%) to 2.5% GAAP Diluted EPS $5.02 to $5.18 25 Refer to endnotes for additional information.
Slide 26: 2017 Guidance: Continued Strong Free Cash Flow
2017 Guidance: Continued Strong Free Cash Flow in billions Full-Year 2017 Operating Cash Flow $7.7 to $8.6 Gross Capital Expenditures ($2.0) to ($2.4) Sale-Leaseback Proceeds $0.3 to $0.2 Net Capital Expenditures ($1.7) to ($2.2) Free Cash Flow $6.0 to $6.4 Year-Over-Year Change (13%) to (7%) 26 Ref
Slide 27: 2017 Guidance: Healthy Growth in PBM
2017 Guidance: Healthy Growth in PBM Full-Year 2017 Net Revenue Growth 8.5% to 10.5% Total Adjusted Claims 1.46 billion to 1.48 billion Gross Profit Margin Modest decline Operating Expenses (% of net revenue) Modest improvement Operating Profit Growth 6.5% to 9.5% Operating Profit Margin Flat to Dow
Slide 28: 2017 Guidance: Retail/LTC Outlook
2017 Guidance: Retail/LTC Outlook Full-Year 2017 Net Revenue Change Flat to (1.5%) Same Store Sales (1%) to (2.5%) Same Store Adjusted Scripts Flat to 1% Gross Profit Margin Modest decline Operating Expense (% of net revenue) Moderate decline Operating Profit Change (7%) to (9.5%) Operating Profit M
Slide 29: Key Drivers of 2017 Expectations
Key Drivers of 2017 Expectations • Reimbursement and pricing pressure • Impact of recent network changes • Accretion from Omnicare and Target assets • Timing of generic launches and biosimilars • Enterprise streamlining initiative 29
Slide 30: Generics Remain an Opportunity
Generics Remain an Opportunity Total Brand Market Sales of Expected Generic Launches ($, billions) 23.8 20.9 Abilify Nexium Crestor Copaxone Gleevec Namenda Zetia 6.9 6.5 Seroquel XR 5.3 Benicar Viagra Lyrica Cialis Strattera Sensipar Vesicare 2015 2016E 2017E 2018E 2019E $44.7 Billion $18.7 Billion
Slide 31: Generics: Break-Open Generic Benefit Expected to Slow in Coming Years
Generics: Break-Open Generic Benefit Expected to Slow in Coming Years Total Brand Market Sales of Expected Generic Launches in Break-Open Period ($, billions) 14.5 15.6 13.2 5.6 4.7 2015 2016E 2017E 2018E 2019E Refer to endnotes for additional information. 31
Slide 32: Backlog of Generic Approvals Creates an Opportunity
Backlog of Generic Approvals Creates an Opportunity FDA Workload Industry Workload 97 Pending Review 1,275 Responding to 369 Review Initiated Comments 300 Tentative Approval- 1,995 Comments Issued Follow-Up Needed 2,461 With FDA 1,575 With Industry 32 Refer to endnotes for additional information.
Slide 33: Backlog of Generic Approvals Creates an Opportunity
Backlog of Generic Approvals Creates an Opportunity Total Backlog 4,036 Expect increased effort to bring generics to market faster 33 Refer to endnotes for additional information.
Slide 34: Biosimilars Represent an Additional Opportunity
Biosimilars Represent an Additional Opportunity 2015 U.S. Sales and Projected Year of Earliest Possible Market Entry ($, billions) Rituxan 3.9 Humira Herceptin 8.4 2.5 Epogen Avastin 1.8 Enbrel Remicade 3.2 5.1 4.4 Neulasta 3.9 2016E 2017E 2019E 2022E 2029E Refer to endnotes for additional informati
Slide 35: While Incremental Generic Benefits Are Declining, Biosimilars Will Become a Bigger Opportunity
While Incremental Generic Benefits Are Declining, Biosimilars Will Become a Bigger Opportunity • Biosimilars are expected to act more like brands than generics; they will have less of a margin benefit • As specialty pipeline evolves, biosimilars are expected to provide competition, accessibility and
Slide 36: Embark on Streamlining Initiative to Maximize Use of Enterprise Assets
Embark on Streamlining Initiative to Maximize Use of Enterprise Assets What we will do… …in order to: 1 • Maximize consistency and Store Rationalization efficiency of patient experience 2 • Reduce redundancies Enhance Efficiency of Corporate Shared Service • Maximize productivity of our assets 3 Opt
Slide 37: Embark on Streamlining Initiative: Store Rationalization
Embark on Streamlining Initiative to Maximize Use of Enterprise Assets What we will do… …in order to: 1 Store Rationalization • Opportunity to trim our store base, closing 70 stores, while … 2 Enhance Efficiency of • … continuing to provide Corporate Shared Service convenient local access to the mil
Slide 38: Embark on Streamlining Initiative: Corporate Shared Services
Embark on Streamlining Initiative to Maximize Use of Enterprise Assets What we will do… …in order to: 1 Store Rationalization • Consolidating similar activities across business units 2 Enhance Efficiency of • Early results are promising Corporate Shared Service – 15% to 20% reductions in labor costs
Slide 39: Embark on Streamlining Initiative: Pharmacy Delivery Platform
Embark on Streamlining Initiative to Maximize Use of Enterprise Assets What we will do… …in order to: 1 Store Rationalization • Will seamlessly redistribute various aspects of pharmacy 2 workload Enhance Efficiency of Corporate Shared Service • Better maximize script fulfillment capacity 3 through u
Slide 40: Streamlining Initiative Expected to Deliver Nearly $3 Billion in Savings
Streamlining Initiative Expected to Deliver Nearly $3 Billion in Savings From 2017 Through 2021 $700 to $750 Million in Estimated Savings Annual Savings • Two-thirds in Retail/LTC; one-third PBM Estimated Cost To Achieve • Operating Expense: - ~ $700M in total 2016–2021 - Store rationalization: - 20
Slide 41: 2017 Earnings Growth Significantly Back-Half Weighted
2017 Earnings Growth Significantly Back-Half Weighted EARNINGS GROWTH TIMING FACTORS EARNINGS GROWTH TIMING FACTORS Lack of leap day Generic introductions/break-opens Easter shift benefits Q2 Medicare Part D to the detriment of Q1 Enterprise Streamlining Initiative 1st Half 2nd Half 41
Slide 42: 2017 Q1 Guidance: Challenging EPS Growth Due to Timing Factors
2017 Q1 Guidance: Challenging EPS Growth Due to Timing Factors Q1 2017 Net Revenue Growth 2.5% to 4.25% Adjusted EPS $1.07 to $1.13 Year-Over-Year Change (9.75%) to (4.75%) GAAP Diluted EPS $0.82 to $0.88 42 Refer to endnotes for additional information.
Slide 43: Agenda
Agenda Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 43
Slide 44: Steady State Enterprise Targets
Steady State Enterprise Targets Long-Term Growth Targets Net Revenue Growth ~11% Operating Profit Growth ~6% Preliminary Adjusted EPS Growth ~5% Average Annual Cash Available for ~$7 to $8 billion Enhancing Shareholder Value Share Repurchase Contribution ~5% Final Adjusted EPS Growth ~10% 44 Refer t
Slide 45: Illustrative Example of Meeting Growth Expectations
Illustrative Example of Meeting Growth Expectations Revenue Operating Profit Adjusted EPS ($, billions) ($, billions) ($) +5% eBay Inc. +5% Mattel, Inc. Molson Coors +5% Brewing Company ~180 ~10.6 5.80 2016E 2016E 2016E 45
Slide 46: Steady State Target Assumptions
Steady State Target Assumptions Positive Retail/LTC new product offerings & partnerships Increased use of value-based care Compelling scale and Enterprise streamlining Net-new PBM expertise initiative contracts & Specialty Favorable industry dynamics Generics & biosimilars High return acquisitions R
Slide 47: Continue to Enhance Shareholder Return
Continue to Enhance Shareholder Return Cash Available for Enhancing Shareholder Value ~$7 to $8 billion annually Dividends Return on Invested Share Repurchases Capital Target payout ratio of ~$5 billion per year 35% by 2018 Drive ROIC with value- enhancing projects Value-creating 47 Refer to endnote
Slide 48: Cash Allocation Priorities
Cash Allocation Priorities Dividends • Maintain 35% target payout ratio Capital Returned to Shareholders Repurchase stock • Absent more attractive alternatives, take advantage of share valuation • Continued technology improvements and other Value-Enhancing Investments investments in the business • C
Slide 49: 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 Continued innovation will fuel future PBM success Our specialty business has unmatched assets and conti
Slide 50: Today's Key Takeaways
Today’s Key Takeaways Driving More Affordable, Accessible and Effective Care Proven track record of success meeting long-term growth Unmatched Track targets, generating significant free cash flow and optimizing Record capital allocation to drive shareholder value Powerful Cash On average, expect to
Slide 51: Appendix
Appendix ¥CvSHealth
Slide 52: Non-GAAP Financial Measures
Non-GAAP Financial Measures Free Cash Flow and Cash Available for Adjusted Earnings Per Enhancing Shareholder Share Value Net cash provided by operating Income before income tax activities provision - Additions to property and +/- Non-GAAP adjustments equipment - Adjusted income tax provision + Proc
Slide 53: Additional Non-GAAP Financial Measures
Additional Non-GAAP Financial Measures Adjusted Debt and EBITDA and Adjusted Net Present Value of Adjusted Debt-To- EBITDA Operating Leases EBITDA Total borrowings Net income Future minimum lease payments + Income tax provision under operating leases + Net present value of operating leases Income be
Slide 54: 2017 Guidance: Consolidated Income Statement
2017 Guidance: Consolidated Income Statement Full-Year 2017 Corporate Segment Expense $890 million to $900 million Intercompany Eliminations ~12% (% of combined segment revenues) Gross Profit Margin Notable decline Operating Expense Modest improvement (% of consolidated revenue) Operating Profit Mar
Slide 55: 2017 Guidance: Consolidated Income Statement
2017 Guidance: Consolidated Income Statement Full-Year 2017 Net Interest Expense ~$1.01 billion to $1.02 billion Effective Tax Rate ~39% Weighted Average Shares ~1.04 billion Consolidated Amortization ~$825 million Consolidated Depreciation & ~$2.5 billion Amortization Refer to endnotes for addition
Slide 56: Share-Based Compensation Accounting Change
Share-Based Compensation Accounting Change • Share-based compensation accounting change effective January 1, 2017 − All excess tax benefits and deficiencies should be recognized in the income statement; previously they were recorded to equity − Impacts the income, income tax provision and earnings p
Slide 57: Defined Benefit Pension Plan Settlement to Affect Only GAAP Results
Defined Benefit Pension Plan Settlement to Affect Only GAAP Results • Estimated settlement charge of $220 million − In September 2015, four of our defined benefit pension plans merged into one plan − In December 2015, the merged plan was terminated − The settlement of the terminated plan is expected
Slide 58: 2017 Q1 Guidance: Segment Performance Reflects Impact of Timing Factors
2017 Q1 Guidance: Segment Performance Reflects Impact of Timing Factors Q1 2017 Net Revenue Change (1.25%) to (3.0%) Retail/LTC Same Store Sales (2.25%) to (4.0%) Same Store Adjusted Scripts Flat to (1%) Operating Profit Change (14.5%) to (17.5%) Pharmacy Services Net Revenue Change 7.0% to 8.75% Op
Slide 59: Endnotes
Endnotes Slide 4, 5 1. Refer to non-GAAP tab in Analyst Day presentation book or the Investor Relations portion of the CVS Health website for Adjusted EPS reconciliation for the year ending December 31, 2016 and the year ended December 31, 2015. 2. CVS retail and mail scripts include the adjustment
Slide 60: Endnotes
Endnotes Slide 7 1. Refer to non-GAAP tab in Analyst Day presentation book or the Investor Relations portion of the CVS Health website for Free Cash Flow reconciliation for the year ending December 31, 2016 and the year ended December 31, 2015. Slide 8 1. Figures shown are as of the end of the fourt
Slide 61: Endnotes
Endnotes Slide 27 1. Year-over-year growth based on the midpoint of 2016 guidance. 2. Total adjusted claims include the adjustment to convert 90-day, mail choice claims to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately t
Slide 62: Endnotes
Endnotes Slide 31 1. For each year (2015-2019), slide provides brand market sales for generic products that are expected to break open. These estimates are based off IMS data. 2. Brand market sales are at the time of first generic launch or last 12 months for pipeline products. Impact may span conse
Slide 63: Endnotes
Endnotes Slide 52 1. CVS Health finances a portion of its store development through sale-leaseback transactions. Use of sale-leaseback financing is subject to change as a variety of financing vehicles for future development are evaluated. Slide 54 1. Corporate segment expense for the year ending Dec