Maximizing Shareholder Value With an Enterprise Mindset Dave Denton Executive Vice President & Chief Financial Officer
Agenda Strong Record of Execution Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 2
Continuing Focus on Maximizing Shareholder Value Productive Long-Term Growth Generating Enhanced Significant Shareholder Value Free Cash Flow Optimizing Capital Allocation 3
Key Financial Accomplishments of 2016 Adjusted Earnings • Delivering strong Adjusted EPS growth of ~12% Per Share • Enterprise script and claim growth of ~19% , including the Prescription and Claim Growth additions of Omnicare and Target pharmacies • Successfully refinanced debt to take advantage of Refinanced Debt favorable interest rates • Generating significant free cash flow of nearly $7 billion Free Cash Flow • Returning ~$6 billion to shareholders through dividends Shareholder Value and share repurchases 4 Refer to endnotes for additional information.
Solid Performance Expected in 2016 Full-Year 2016 Net Revenue Growth 16.0% to 16.5% $5.77 to $5.83 Adjusted EPS Year-Over-Year Growth 11.75% to 13.0% $6.8 to $7.0 billion Free Cash Flow Year-Over-Year Growth Up 5% to 8% GAAP Diluted EPS $4.82 to $4.88 5 Refer to endnotes for additional information.
Meeting Enterprise Growth Targets Through 2016 … Operating Profit Adjusted EPS ($, billions) ($) 5.77 10.5 to to 5.83 10.6 ~14% ~10% CAGR CAGR 3.96 8.0 2013 2014 2015 2016E 2013 2014 2015 2016E 6 Refer to endnotes for additional information.
… And Generating Significant Free Cash Flow Free Cash Flow Key drivers: ($, billions) • Enterprise prescription dispensing 6.9 share gains 57% 4.4 • Specialty pharmacy • Improved purchasing • Working capital management 2013 2016E Free cash flow has increased by $2.5 billion over the last three years 7 Refer to endnotes for additional information.
Committed to Maintaining a Healthy Balance Sheet Adjusted Debt-To-EBITDA • Committed to returning to 2.7x targeted leverage ratio 4.0 3.39 – Driven mostly by EBITDA 3.02 growth and debt repayments 3.0 Target = 2.70 2.66 – Modified long-term debt 2.39 structure in 2014 and 2016 to 2.0 take advantage of favorable interest rates 1.0 '13 '14 '15 '16E Focused on maintaining BBB+ credit rating 8 Refer to endnotes for additional information.
Well-Laddered Debt Maturities Remain Core to Strong Balance Sheet Debt Maturity Profile (Bonds) ($, billions) 3.5 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 0.1 0.0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2035 2039 2041 2043 2045 Debt refinancing reduced interest expenses by ~$50 million 9
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 $14 billion in in value-creating shareholders acquisitions repurchases 10
Solid History of Enhancing Returns Using All Three Pillars for Efficient Cash Deployment Acquisitions Annual Dividend Share Repurchases and Ventures Per Share ($, billions) ($) Jul ’14 Jan ’14 24% Red Oak 5.0 Coram CAGR Sourcing 4.5 4.0 1.70 1.40 Sep ’14 Aug ’15 1.10 Navarro Omnicare Dec ’15 '14 '15 '16E '14 '15 '16 Target 11
2017 Will See a Dividend Increase of 18% and Further Share Repurchases Annual Dividend Per Share more than ($) 18% $18 billion 2.00 1.70 1.40 1.10 authorized and remaining for share repurchase '14 '15 '16 '17E 12
2017 Will See a Dividend Increase of 18% and Further Share Repurchases Annual Dividend Share Repurchases Per Share ($, billions) ($) 18% 5.0 5.0 4.5 4.0 2.00 1.70 1.40 1.10 '14 '15 '16E '17E '14 '15 '16 '17E Nearly $7 billion expected to be returned to shareholders in 2017 13
Agenda Strong Record of Execution Marketplace Misconceptions Marketplace Misconceptions 2017 Guidance Review Solid Long-Term Outlook 14
MYTH #1 IF REBATES DISAPPEARED, PBM PROFITS WOULD SUBSTANTIALLY DROP 15
FACT #1 REBATES ARE BUT ONE OF MANY ELEMENTS OF PBM PROFITABILITY 16
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: of rebates overall • Dispensing mail and specialty pharmacy scripts • Network pharmacy benefit management passed to clients - Clinical programs • Clients have audit rights and transparency 17 Refer to endnotes for additional information.
MYTH #2 CHANGES IN RATE OF DRUG PRICE INFLATION ARE A MEANINGFUL DRIVER OF PROFITABILITY 18
FACT #2 OVERALL IMPACT FROM A SLOWING RATE OF DRUG PRICE INFLATION IS NOT MEANINGFUL 19
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 increasing drug price inflation (e.g., pay more in claims while premiums remain constant) – Conversely, rebates grow with increasing branded drug price inflation … however, more than 90% of rebates overall are passed through to clients, minimizing impact on PBM profitability • PBM’s play a key role in helping plan sponsors manage drug price costs and improve overall health outcomes whether or not we are in periods of slowing or accelerating inflation 20
MYTH #3 THE CVS HEALTH INTEGRATED MODEL IS NO LONGER THE MODEL OF CHOICE 21
FACT #3 OUR MODEL CONTINUES TO GAIN THE MOST SHARE AND IS BEST POSITIONED TO CONTINUE TO DO SO 22
FACT #3: Our Model Continues to Gain Share Broadest Assets and Advantages • Suite of assets enable solutions to meet diverse client enterprise script and payor needs • Being truly integrated yields enhanced patient growth experience helping to drive better health outcomes ~3X • Face-to-face patient interactions a significant advantage • Size and scale make us a low-cost provider market growth • Broadest market applicability; diverse client and payor since 2013 base • 2017 selling season: Caremark has won more than 50% of revenue from clients changing PBMs 23 Refer to endnotes for additional information.
Agenda Strong Record of Execution Marketplace Misconceptions 2017 Guidance Review 2017 Guidance Review Solid Long-Term Outlook 24
2017 Guidance: Enterprise Outlook Full-Year 2017 Net Revenue Growth 4.0% to 5.75% $5.77 to $5.93 Adjusted EPS Year-Over-Year Change (0.5%) to 2.5% GAAP Diluted EPS $5.02 to $5.18 25 Refer to endnotes for additional information.
2017 Guidance: Continued Strong Free Cash Flow in billions Full-Year 2017 Operating Cash Flow $7.7 to $8.6 ($2.0) to ($2.4) Gross Capital Expenditures Sale-Leaseback Proceeds $0.3 to $0.2 Net Capital Expenditures ($1.7) to ($2.2) $6.0 to $6.4 Free Cash Flow Year-Over-Year Change (13%) to (7%) 26 Refer to endnotes for additional information.
2017 Guidance: Healthy Growth in PBM Full-Year 2017 Net Revenue Growth 8.5% to 10.5% Total Adjusted Claims 1.46 billion to 1.48 billion Gross Profit Margin Modest decline Operating Expenses (% of net revenue) Modest improvement 6.5% to 9.5% Operating Profit Growth Operating Profit Margin Flat to Down 27 Refer to endnotes for additional information.
2017 Guidance: Retail/LTC Outlook Full-Year 2017 Net Revenue Change Flat to (1.5%) (1%) to (2.5%) Same Store Sales Same Store Adjusted Scripts Flat to 1% Gross Profit Margin Modest decline Operating Expense (% of net revenue) Moderate decline (7%) to (9.5%) Operating Profit Change Operating Profit Margin Notable decline 28 Refer to endnotes for additional information.
Key Drivers of 2017 Expectations • Reimbursement and pricing pressure • Impact of recent network changes • Accretion from Omnicare and Target assets • Timing of generic launches and biosimilars • Enterprise streamlining initiative 29
Generics Remain an Opportunity Total Brand Market Sales of Expected Generic Launches ($, billions) 23.8 20.9 Abilify Crestor Nexium Gleevec Copaxone Zetia Namenda 6.9 6.5 5.3 Seroquel XR Viagra Lyrica Benicar Cialis Strattera Vesicare Sensipar 2015 2016E 2017E 2018E 2019E $44.7 Billion $18.7 Billion Expected 30 Refer to endnotes for additional information.
Generics: Break-Open Generic Benefit Expected to Slow in Coming Years Total Brand Market Sales of Expected Generic Launches in Break-Open Period ($, billions) 15.6 14.5 13.2 5.6 4.7 2015 2016E 2017E 2018E 2019E 31 Refer to endnotes for additional information.
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.
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