CVS Health Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Solid Results: Another consecutive quarter of solid results with adjusted operating income of $3.8 billion and adjusted earnings per share of $1.81 in the second quarter. Full year 2025 adjusted EPS guidance increased to a range of $6.30 to $6.40.
• Aetna Business: Recovery is a top priority. Organization realigned, talent strengthened, operations enhanced using technology. Seeing results but work continues on margin recovery plan.
• Health Care Delivery: Pressure in the business driven by higher medical benefit ratios at Oak Street, partially offset by strong performance at Signify Health. Value-based care remains critical for Medicare Advantage strategy.
• Pharmacy Businesses: Caremark delivering on commitments, managing drug cost trends. Took step to create competition in GLP-1 drug category. Retail pharmacy business strong with solid script and front store performance.
• Important Announcements: Pledge with CMS to simplify health care, $20 billion commitment over next decade to transform health care, aiming for reduced friction, greater visibility, and stronger partnerships with doctors and hospitals.

Segment Performance

• Health Care Benefits: Generated over $36 billion in revenue in the quarter, an increase of over 11% from the prior year. Adjusted operating income in the quarter was approximately $1.3 billion, an increase of nearly 40% from the prior year quarter. Medical membership of approximately $26.7 million as of the end of the quarter decreased by approximately 350,000 members sequentially.
• Health Services: Generated revenues of over $46 billion in the quarter, an increase of over 10% year-over-year. Adjusted operating income in the quarter of approximately $1.6 billion decreased approximately 18% from the prior year quarter. Total revenues in the health care delivery business grew approximately 19% compared to the same quarter last year, excluding the impact of certain program exits and sales.
• Pharmacy and Consumer Wellness: Generated revenues of over $33 billion in the quarter, an increase of over 12% versus the prior year quarter and over 15% on a same-store basis. Adjusted operating income increased nearly 8% from the prior year to over $1.3 billion.

Guidance

• Increased full year 2025 adjusted EPS guidance to a range of $6.30 to $6.40 from prior range of $6 to $6.20.
• Expect full year total revenues of at least $391.5 billion.
• Health Care Benefits now expect full year adjusted operating income of approximately $2.42 billion at the low end of guidance range. Medical benefit ratio at low end of guidance range to be approximately 91%.
• Health Services now expect full year adjusted operating income of at least $7.34 billion, decrease due to higher medical benefit ratio at Oak Street.
• Pharmacy and Consumer Wellness now expect full year adjusted operating income of at least $5.68 billion, increase due to strong first half performance.
• Full year enterprise adjusted operating income expected to be in range of $13.77 billion to $13.94 billion.
• Revising full year cash flow from operations to at least $7.5 billion.

Risks

• Medical cost trends remain uncertain and elevated, impacting financial performance.
• Group Medicare Advantage business trends remained elevated during the quarter, leading to a premium deficiency reserve.
• Health care delivery business pressured due to higher medical benefit ratio at Oak Street Health.

Q: Congratulations on the results. And welcome, Brian. I look forward to meeting you. Obviously, Q2 strong performance and HCB, up 40%, $600 million beat on the core side by our numbers. Underlying assumptions and visibility, when we think about how that looks post the quarter and the guidance that you've given, there's a lot of moving parts here. Can you maybe just talk about the level of visibility you have, what some of the underlying assumptions are, your level of conviction moving into the back half of the year?

A: Yes. Thanks, Lisa, and appreciate the question. Before I turn it over to Brian, let me just make a couple of high-level comments about the Aetna business. One is, we know this has been one of the top priorities of the enterprise. It's been an enterprise focus on the multiyear recovery. And I'm really pleased with the progress to date, and we'll share some color on the back half of the year as well. One of the things I think is equally as important is the innovation that Aetna is driving. So while they're focusing on the recovery, they're equally focused on driving innovation, simplifying health care. You've seen this in the work we've done with the prior authorizations with a bundled PA process as well as the new care path and technology that we're rolling out. So I'm really bullish on the progress that Aetna is making. And so I'll turn it over to Brian to give some of the financial details, then I'm going to have Steve provide some color more broadly on the Aetna business. Brian?

Q: Wanted to get your early view on 2026 headwinds and tailwinds. Specifically, your thoughts on expectations for continued improvement in MA margins post you're putting in your 2026 bids, your thoughts on the sustainability of outperformance and share gains in the pharmacy business versus your long-term expectation of mid-single-digit OI declines. And then lastly, potential for improvement in the value-based care business versus current losses.

A: Yes. Justin, thanks for the question. I think we're early yet in terms of forecasting or giving guidance on '26. So at this time, I think there's obviously strength in '25. We feel good about the progress that we're making and the plan is to -- by end of year, give you more perspectives and insights in terms of how we're looking at '26.