Filed by CVS Health Corporation
Pursuant to Rule 425 under the Securities Act of 1933
And
deemed filed pursuant to Rule 14a-12
Under the Securities Exchange Act of 1934
Subject Company: Aetna Inc.
Commission File No.: 001-16095
Date: December 5, 2017
THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPT
CVS - CVS Health Corporation to Acquire Aetna Inc Joint Conference Call
EVENT DATE/TIME: DECEMBER 04, 2017 / 1:30PM GMT
OVERVIEW:
On 12/03/17, CVS announced the execution of a definitive merger agreement with Aetna for a transaction value, including assumption of Aetnas
debt, of approx. $77b.
CORPORATE PARTICIPANTS
David M. Denton
CVS
Health Corporation - CFO and EVP
Larry J. Merlo
CVS
Health Corporation - CEO, President and Director
Mark T.
Bertolini
Aetna
Inc. - Chairman
& CEO
Michael P. McGuire
CVS
Health Corporation - SVP of IR
Shawn M.
Guertin
Aetna
Inc. - Executive VP, CFO
& Chief Enterprise Risk Officer
CONFERENCE CALL PARTICIPANTS
Albert J. William Rice
Crédit
Suisse AG, Research Division - Research Analyst
Charles
Rhyee
Cowen
and
Company, LLC, Research Division - MD and Senior Research Analyst
Eric Percher
George Robert Hill
RBC
Capital Markets, LLC, Research Division - Analyst
John Edward
Heinbockel
Guggenheim
Securities, LLC, Research Division - Analyst
Josh Raskin
Justin Lake
Wolfe
Research, LLC - MD
& Senior Healthcare Services Analyst
Kevin
Caliendo
Needham
& Company, LLC, Research Division - MD
& Senior Analyst
Kevin Mark
Fischbeck
BofA
Merrill Lynch, Research Division - MD in Equity Research
Lisa Christine Gill
JP
Morgan Chase
& Co, Research Division - Senior Publishing Analyst
Peter Heinz Costa
Wells
Fargo
Securities, LLC, Research Division - MD and Senior Analyst
PRESENTATION
Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the CVS Health and Aetna joint call to discuss its transaction. As a reminder, this conference is being recorded, Monday, December 4, 2017.
I would now like to turn the conference over to Mike McGuire, Senior Vice President of Investor Relations at CVS Health. Please go ahead, sir.
Michael P. McGuire
- CVS Health Corporation - SVP of IR
Good morning, everyone. Thanks so much for joining us this morning to hear about the definitive merger agreement we announced yesterday to acquire Aetna, one
of the nations leading diversified health care benefits companies.
Im here this morning with CVS Healths President and CEO, Larry
Merlo; and CFO, Dave Denton; as well as Aetnas Chairman and CEO, Mark Bertolini; and CFO, Shawn Guertin. Following our prepared remarks, well open it up for your questions.
Before we get into our remarks, in light of this pending transaction, I want to announce the cancellation of the CVS Healths Annual Analyst Day
scheduled for December 12 as well as the cancellation of Aetnas Investor Day, which was scheduled for December 14. We apologize for any inconvenience this might cause. Because the CVS Health Analyst Day is typically our forum to provide
guidance for the upcoming year, please note that we now plan to issue 2018 guidance during our fourth quarter 2017 earnings call in February.
Additionally, please note that todays presentation is neither an offering of securities nor solicitation of
a proxy vote. The information discussed today is qualified in its entirety by the registration statement and joint proxy statement that CVS Health and Aetna will be filing with the SEC in the future. The shareholders of CVS Health and Aetna are
urged to read those filings carefully when they become available because they will contain important information about the proposed transaction.
Additionally, during this presentation, we will make certain forward-looking statements that reflect our current views related to our future financial
performance, future events and industry and market conditions as well as forward-looking statements related to the acquisition, including the expected consumer benefits, financial projections, synergies, financing and the timing for the completion
of the transaction. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what may be indicated in the forward-looking statements. We strongly encourage you to review the
information in the reports CVS Health and Aetna file with SEC regarding the specific risks and uncertainties, in particular, those that are described in the Risk Factors section of CVS Healths and Aetnas most recently filed annual
reports on Form
10-K
and the cautionary statement disclosures in our respective quarterly reports on Form
10-Q.
During this call, we will also use some
non-GAAP
financial measures when talking about the performance of CVS Health
and Aetna, including adjusted EBITDA. In accordance with SEC regulations, you can find the definitions of these
non-GAAP
items as well reconciliations to comparable GAAP measures on the Investor Relations
portion of our website.
Also on the Investor Relations portion of CVS Healths website, you can find a page dedicated to this transaction, including
a presentation that outlines the strategic rationale of the transaction as well as the compelling benefits this transaction will create for our stakeholders. The page also contains the press release we issued yesterday, an investor fact sheet, and
will include a link to the relevant SEC documents associated with the transaction. That website will be updated as we work to close the transaction during the upcoming months.
And as always, todays call is being webcast on our website, and it will be archived there following the call for 1 year.
So with that, let me turn it over to Larry Merlo.
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
Okay. Well, thanks, Mike, and good morning, everyone. Thanks for joining us, again, on short notice.
Yesterday, we announced that we have entered into a definitive merger agreement to acquire Aetna, a leading health care benefits company that serves more than
22 million medical members across their diverse book of business, for a purchase price of approximately $69 billion. And with the assumption of Aetna debt, the total transaction value is $77 billion. This transaction will create a
leading health care platform that will revolutionize the consumer health care experience. This compelling strategic combination will unlock meaningful value for patients, payers, providers and shareholders. For health care stakeholders, we will
deliver high-touch connectivity to consumers and improve the quality of life while driving efficiencies and lowering the cost of care. For shareholders, not only does this transaction make sense strategically, but it also makes sense financially.
Now as many of you know, CVS and Aetna have been close partners for most of the past decade, since we entered into a strategic agreement to provide
pharmacy benefits to Aetna members. We shared a vision of the critical role that pharmacy care plays in delivering quality outcomes with lower overall health care costs. And as partners, weve worked diligently together to deliver on those
goals to improve care for Aetna members while providing competitive pharmacy pricing to allow Aetna to continue to expand its book of business. And although we have taken steps to deepen our relationship, we both recognize that to truly impact
patient health and lower costs, more needs to be done. What we are announcing today is the natural evolution of our 2 companies, a combination of 2 great organizations with the expertise to remake the consumer health care experience. And together,
we plan to build an entirely new health care concept based on the principles of making care easier to use and more affordable while offering consumers the ability to interact with trusted and familiar health care experts in their communities all
across the country.
Independently, CVS and Aetna have been able to utilize their enterprise strengths to deliver significant value, both to the clients
that we support as well as the members that we serve. CVS delivers value through its unparalleled reach, significant scale and deep clinical expertise to support health care stakeholders. Aetna delivers value through its world-class consumer health
and engagement model, offering innovative plan designs and
best-in-class
service. And we know this value can only be enhanced by tighter integration of pharmacy and
medical benefits management with unmatched consumer touch points.
The current U.S. health care system is failing too many people. Health care costs continue to rise, and a
paradigm shift is needed to bend the cost curve and put spending back on a sustainable path. Our current system of fragmented care has made some strides to control costs, but more is needed to truly impact the trajectory of health care spending. And
through our integrated health care management and delivery platform, we will be able to better coordinate care, eliminate waste and unnecessary spending and drive efficiencies throughout the entire health care system. This will not only lead to
better care for patients, but also lower costs for payers.
We also see the ongoing aging of America, with more than 10,000 baby boomers turning 65 every
day. And by combining Medicare Advantage with our Medicare Part D assets, we can more effectively serve our Medicare beneficiaries, and this will enable us to improve our quality metrics and become more competitive in this fast-growing segment of
the market. We continue to see the shift of health care decision-making into the hands of the consumer, and this trend was intended to empower health care consumers, but has frequently left them without the tools necessary to make informed
decisions. So we will use our high-touch connectivity to become the front door to health care for consumers.
We will also improve consumer engagement by
marrying physical and digital touch points with the broader use of data and analytics capabilities to inform health care decision-making and help patients navigate the complex health care system. Additionally, we see the health care marketplace
evolving into a more value-based system, where premium is placed on the efficiency with which care is delivered. And well become a leader in driving further adoption of value-based care models through our combined assets, promoting lower-cost
sites of care, eliminating unnecessary spending and enhancing our clinical programs. By integrating data across our enterprise assets and through the use of predictive analytics, we will create targeted interactions with patients to promote healthy
behaviors and drive adherence, and this will further improve the quality of care for patients while also resulting in healthier outcomes.
Before passing
this over to Mark, I want to emphasize a few important points: First, this transaction will not, in any way, diminish the strong relationships CVS and Aetna have with our clients and their health care partners, nor will it reduce the value that we
both create for them every day. CVS has a long history of developing solutions that deliver on the cost quality access goals of our partners, and we see no reason for that not to continue into the future. As weve shown with the merger of CVS
and Caremark, we have the ability to integrate where needed while maintaining the necessary firewalls in order to protect client data and ensure competition.
Second, upon the closing of the transaction, Mark and 2 other Aetna directors will be joining the CVS Board of Directors. And Im excited to welcome Mark
and the others as we embark on the shared purpose. And I look forward to continuing to benefit from Marks vision and expertise.
And lastly, members
of the Aetna management team will play significant roles in the newly combined company. Aetna will operate as a stand-alone business unit within the CVS Health enterprise and will be led by members of their current management team. Mark has
assembled a great team, and I look forward to their contributions as we revolutionize the consumer health care experience.
So, again, this transaction
fills an unmet need in our current system, and it presents a unique opportunity to remake the health care experience.
So with that, let me turn it over
to Mark and welcome him and his team to CVS Health.
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
Thank you, Larry, and thank you all for joining us today. This deal represents a major step forward in creating consumer-centric health care. We believe with
these 2 great companies coming together, we will remake the consumer health care experience. We will not only improve affordability and quality, but we will eliminate the unnecessary complexities that frustrate todays health care consumers.
This combination will enable us to accelerate our strategy and more effectively deliver on our mission to build a healthier world. By creating a new
front door to the health care system, the combined company will be able to gain the trust of consumers in new ways. We will provide services, products and information that will enable consumers to get more value out of the health care system when
they need support or as they look to maintain their best health. This is also a transaction that, I believe, has incredible potential for Medicare and Medicaid members by providing them
some of the high-touch interaction they need to navigate the complexities of the health care system. It holds great potential for group commercial clients as well in the form of lower costs, so
more productive employees. We could see a very different type of benefit plan for these groups that truly puts the financing in the background and rewards the consumer for being proactive about their health.
This transaction will also give us an opportunity to drive cost out of the system by increasing patient access to quality, lower-cost sites of care. The
overuse of emergency department adds an estimated $38 billion in wasteful spending every year, so tremendous savings can be realized by utilizing local care solutions in a more integrated fashion. Lower-cost sites of care are often more
convenient for patients. So in addition to saving money, it also improves their experience.
Additionally, our combined data and analytics will provide a
more holistic view of each individual. This will enable us to use pharmacy care to not only drive down prescription costs, but to drive down overall health care costs. We have demonstrated that integrating medical with pharmacy has resulted in a 45%
increase in case management engagement and a $20 PMPM reduction in total medical costs. For members with chronic conditions, the savings can approach $117 per member per month.
These medical savings have tremendous implications for our financial performance as well. Every 50 basis points that we can reduce medical cost trend results
in nearly $500 million of additional underwriting margin for our customers and for Aetna. This improvement in margin will enable us to: reinvest in the health of our members helping to improve their health and drive increased loyalty and
retention; continue to improve the quality and affordability of the products and services we offer; and expanding to new geographies, enabling us to serve additional members and drive profitable top line growth.
In closing, we believe this deal can revolutionize the consumer experience in health care. As our combined strategy matures, I am confident that we will
redefine and modernize the consumer health care experience in ways that meet and exceed the expectations of the modern consumer.
I want to say that
Im excited about the new opportunities that this transaction creates for our combined enterprise. Aetna has a talented and dedicated group of employees who are working to build a healthier world every day, and I believe that our combined
company will be more competitive in the marketplace and accelerate progress toward achieving this mission. We are bringing together 2 premier health care companies that individually have demonstrated they can deliver meaningful value to all
stakeholders. Together, we can believe - we believe we can achieve even more.
So with that, let me pass it to Dave Denton to discuss the financial
implications of the transaction.
David M. Denton
- CVS Health Corporation - CFO and EVP
Thank you, Mark, and good morning, everyone. Let me start by providing a brief overview of the transaction. Under the terms of the agreement, Aetna
shareholders will receive $145 per share in cash and 0.8378 CVS shares for each Aetna share. The transaction values Aetna at approximately $207 per share or approximately $77 billion, including the assumption of Aetnas debt. We expect the
transaction to close some time in the second half of 2018 subject to both regulatory and shareholder approvals.
After it closes, CVS Health shareholders
will own approximately 78% of the combined company, while Aetna shareholders will own approximately 22%. This transaction will create a new leader in health care, with pro forma revenues of more than $220 billion and more than $18 billion
in adjusted EBITDA. Together, we will generate strong, highly diversified and stable cash flows.
In addition to the strategic benefit of this
transaction, it also offers significant financial benefit to our shareholders. While this transaction will not have a meaningful impact on our performance in year 1, we expect
low-
to
mid-single-digit
accretion in the second full year after close. This transaction has the potential to deliver $750 million in near-term synergies in the second full year after close through activities such as
streamlining of redundant corporate functions and combining PBM and PDP operations.
In addition, the near-term synergies include reducing medical costs
through improved care management and shifting care to lower-cost settings. Importantly, these synergies can be realized with our existing capabilities with limited incremental investments needed. Now over the longer term, we see the potential to
deliver significant incremental savings and value. These synergies include further reducing medical costs, increasing our presence in Medicare and Medicaid and growing our customer base across all of our platforms.
Now moving to the financing of the transaction. The cash portion will be financed with existing cash on hand as
well as through $45 billion of new debt. After the closing of the transaction, our adjusted
debt-to-EBITDA
ratio is expected to increase to approximately 4.6x, well
above our current target ratio. Additionally, our
debt-to-capitalization
ratio is expected to climb to approximately 60%, largely dependent upon the month in which we
close. It is our intention to quickly get back to the leverage that is in line with our ratings category as we have a goal of
mid-3x
leverage in 2 years post-acquisition. Our ultimate longer-term goal is to
get down to the low 3x. Maintaining our strong credit ratings, including our Tier 2 commercial paper rating, is very important to us, and we are very focused on debt
pay-down.
To achieve this, we plan to
suspend our share repurchase program, maintain our current dividend per share and forego any large-scale M&A activities. It is our strong belief that this plan, along with the significant diversified cash flow that this new enterprise will
generate, will allow us to maintain investment-grade ratings.
Additionally, we plan on sustaining the insurance subsidiarys investment-grade
ratings by maintaining their existing capitalization structure.
So with that, let me now turn it back over to Larry Merlo for some closing comments.
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
Okay. Thanks, Dave. And I think as youve heard from our prepared remarks, this new platform will unlock significant value for health care consumers,
clients, the health care system at large and our shareholders. Health care consumers will benefit from a uniquely integrated community-based health care experience, helping them better navigate the system to achieve their best health. Clients,
through the combined entity, will be able to help address the growing cost of treating chronic conditions through the broader use of data and analytics, leading to improved patient health at a substantially lower cost. The health care system will be
able to reduce wasteful spending by promoting lower-cost sites of care and helping to avoid costly hospital readmissions. And for investors, this transaction is attractive, accretive in its second full year after close, with the real power lying in
its long-term value creation.
So with that, lets go ahead and open it up to your questions.
QUESTIONS AND ANSWERS
Operator
Our first question, coming from the line of George Hill with RBC Capital Markets.
George Robert Hill
- RBC Capital Markets,
LLC, Research Division - Analyst
Congrats on getting us to the goal line. I have a couple of questions. Im just going to lump them all
together. I guess my first one is, which subsegments or which markets do you guys feel like this deal allows you to attack most aggressively? Is it commercial plans? Or is it government business? Or is it something in pharmacy? How do we think about
the penalty box aspect in the first couple years for both businesses and the ability to impact growth? And what metrics are you guys using to measure the success of the deal?
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
Well, George, its Larry, and let me start. I think well be
tag-teaming
this. But in terms of your market question, I think the real opportunity lies in the government businesses, George. The ongoing growth in Medicare, in what we can do there, along with Medicaid.
And, George, in terms of the penalty box question, I think the opportunity that we have here is the innovation and growth that were talking about, I think it creates a unique opportunity for us to apply these capabilities more broadly in the
marketplace with our respective clients and partners, and thats something that well be looking to do.
David M. Denton
- CVS Health Corporation - CFO and EVP
And, George, as it - certainly as it relates to metrics, obviously, as we put the companies together, well be putting together a series of metrics that
you can establish our performance and measure our performance. Clearly, hitting our financial projections will be a critical component of that.
George Robert Hill
- RBC Capital Markets,
LLC, Research Division - Analyst
Okay. And maybe if I could - if - Id love Marks comment on just - Mark, how close are we to the health
care market kind of hitting this tipping point where its a consumer market versus the B2B market? Or like how close will you think kind of real enhanced consumer engagement?
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
Well, I think this combination right out of the box is going to address a couple of really important issues: Number one, 41% of the health care dollar is
pulled out of pocket by the consumer today. So through the right appropriate site of care, we can offer people a better cost experience, being more convenient and local. So I think thats one of the big ideas here, is the arbitrage on site of
care and the opportunity to make it more convenient. On the Medicare-Medicaid side, I think, really, people are confused. Theyre wandering through the system, multiple doctors, multiple medications. And the opportunity to help them navigate
that system, put them on a plan and actually make this a place, these new front doors of health care, 10,000 of them, a place where people want to go because they get better help, they get a lower-cost product, and they get navigated through the
system over time. So we can eliminate prior authorizations. We can set up appointments to do all those sorts of things. So I would say: eliminate the confusion, number one consumer issue; number two, highest
out-of-pocket
cost for most households in America - its 41% of the spend; were going to make that cheaper for them.
Operator
Our next question, coming from the line of A.J. Rice with Crédit Suisse.
Albert J. William Rice
- Crédit
Suisse AG, Research Division - Research Analyst
Maybe one question for each side. Definitely understand where the markets going. And this sort
of feeds into what Aetna has laid out, what I understand CVS has laid out over time. I guess Im just trying to get my arms around what - does coming together in a merger thats going to take time, et cetera, give you that just maintaining
and enhancing the existing PBM contract would not have given you? Maybe delineate that because, obviously, everything is not always in a vacuum. And then for the Aetna side, just a question on - obviously, this deal is being done at a time when we
got major tax reform potentially on the table. I wonder if Mark or Shawn can talk about how they thought about that relative to their view of value for the company and potentially significant EPS upside if the tax reform bill goes through and you
dont have - then you can take some of that to the bottom line.
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
A.J., its Larry. Ill take the first one, and then flip it over to Mark and Shawn for the second one. A.J., I think one of the things that we had
learned from CVS and Caremark coming together, its been a decade now, that an integrated entity that has aligned incentives, there is an incremental opportunity to what can be accomplished and achieved over and above the benefits of a
partnership. And those aligned incentives enabled us over time to make incremental investments, because we were able to equitably share the value that was being created. And thats - and we see the same opportunity here. We have a tremendous
partnership today that has certainly enhanced our respective businesses and more importantly, enhanced the value that were bringing for consumers. But I think in all the discussions that Mark and I had, recognizing theres more that can
be done, I think we can both agreed that bringing the 2 companies together was an important enabler to unlocking that value.
Shawn M. Guertin
- Aetna Inc. - Executive VP, CFO
& Chief Enterprise Risk Officer
Yes. A.J., the tax reform item is certainly something that we considered and analyzed throughout this process. And its often, I think, thought about as
the immediate benefit, which, on the front end, immediately would be large. But as you know, a lot of this would be reduced on our side because of minimum MLRs, of which this is a deduction in that calculation. I also think the effective date of
this change will be relevant. I think the more lead time that exists in the system, i.e., if its the Senate bill in 2019, the benefit thats inherent in here would probably be lower as rates are adjusted and things like that in
anticipation. And ultimately, the initial benefit, the real question is what will the markets sort of sustain. And in the simplest sense, right, todays
after-tax
returns are good, and theres no
particular reason why those returns would have to be higher in the long run, and the competitive market especially around things like Medicare will determine ultimately how much of this is retained over the long term.
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
But back to a point that Larry made about putting the organizations together. Owner economics matter here and how you track the profits of the organization,
how you manage the business going forward will be incredibly important in understanding where all that margin resides across the business mix.
Operator
Our next question, coming from the line of Lisa Gill with JPMorgan.
Lisa Christine Gill
- JP Morgan
Chase
& Co, Research Division - Senior Publishing Analyst
I understand the strategy, revolutionizing consumer and health care.
Larry, can you help me to think about what the store of the future looks like? One, when we think about - obviously, I understand the MinuteClinic, but what other kinds of things? And then, Dave, when you talked about limited investments, if
youre really truly thinking about changing those nearly 10,000 storefronts, how do we think about the composition of what you sell today versus bringing in incremental health care services and the types of things that the CVS of the future is
going to bring to the consumer?
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
Yes, Lisa, its Larry. Ill take the first part, and I know Dave will jump in and others here. But Lisa, youve heard us talk for a while now
about how the front of store evolves and the realities of that being a combination of not just products that we sell, but also service offerings. And youve seen us begin that journey, whether it - and I think it started with MinuteClinic. But
over the last 2 years, youve seen us pilot vision centers, audiology centers. And theres no question that we have the opportunities to repurpose some of the space in our stores to enable that to happen. I think from the discussions that
the 2 organizations have had, let me give you an example of how we see this coming to life in a more meaningful way. Because while its about the store, its also about how we use digital tools, perhaps care that we can provide in the
home, and theres a surround sound component to everything that were talking about here. But I know Mark talks a lot about the incidence of chronic disease and the fact that today, weve got over half of the country with one or more
chronic diseases thats accounting for 80% of overall health care costs. And we all know somebody that has diabetes, and that person may visit their physician 3 or 4 times a year. And they leave the physicians office with a care plan. We
also know theres billions of dollars being spent on health care today unnecessarily because those care plans are not being followed between physician visits. So when we talk about creating a new front door to health care, we talk about how we
can ensure, because were in the community, were seeing those patients, were becoming part of their daily lives and routines. We can get them on that care plan, help them achieve their best health and at the same time, reduce the
cost of care that were incurring today. So whether its the role of the pharmacist, the role of the nurse practitioner at MinuteClinic, the expansion of services at MinuteClinic that could include blood draws or the role that a
nutritionist can play in a CVS or perhaps the role of durable medical equipment, those are all the things that, in addition to what already exists today, that were going to
be piloting. Okay, and well test, learn, well modify from there, but we know that theres a solution there in terms of being a complement to the physician and the medical team
for those patients. By the way, I used diabetes as one example. That story goes on and on and on every day. For chronic disease, it goes well beyond diabetes.
Mark T. Bertolini
- Aetna Inc. -
Chairman
& CEO
And the opportunity, Lisa, to use the store as a place to provision care in the home and keep people at home,
we connect them, as like a hub and spoke strategy is really powerful as well.
David M. Denton
- CVS Health Corporation -
CFO and EVP
And Lisa, let me just put synergies kind of in 2 buckets. As I said, theres we see line of sight to $750 million in
synergies in the second full year after we close. That bucket of synergies, we see us being able to realize that using the existing capabilities and infrastructure that the 2 companies have together today. So we dont look at that as any
significant new investments. Now longer term, we see a potential to drive significant incremental value. Realizing some of that incremental value over time will require some investment. I will tell you, the companies today both have very robust
capital expenditure plans. Ours is excess of $2 billion. Think Aetnas in the $300 million to $500 million basis. Now we may repurpose some of that CapEx in the future to envision our stores or make our stores to modify
our stores differently so that they are more of a health care hub, if you want to use that term. So the incremental CapEx required to support that vision is not that significant. Its probably more of a repurpose of the CapEx that we currently
have in our plans.
Lisa Christine Gill
- JP Morgan Chase
& Co, Research Division - Senior Publishing Analyst
Okay, great. And then, Dave, just so I understand, the suspension of the share repurchase, is that as of today? So as I think about my 2018 model, I should
pull out any share repurchase that I currently have in the model?
David M. Denton
- CVS Health Corporation - CFO and EVP
That is correct, Lisa, as of today.
Operator
Our next question, coming from the line of Kevin Fischbeck with Bank of America.
Kevin Mark Fischbeck
- BofA Merrill Lynch,
Research Division - MD in Equity Research
I wanted to go back a little bit to a point Mark made about kind of looking at the company and kind of
intercompany, where you think CVS is going to be basing its money. I guess in 5 years, when everything is kind of put together and well integrated and we follow that money flow, is CVS going to be a company like a managed care company that makes
most of its money through differentiated providers and pharmacy capabilities? Or is it a provider of pharmacy company with medical management and insurance kind of on the side? How do you think this model actually looks? And how will CVS make money
on the capabilities that its putting together?
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
Two things, Kevin. I think first, pilot, test and learn, test and learn how it works, whats best for the consumer, where people spend their money will
be really important in understanding the economic model. Were not all the way there yet. We have a lot of work to do as we integrate the companies, et cetera. I think the second part of it is, is that the financing of health care should be in
the back room. It should be all about the services and the
experience for the customer up front, and thats where we want people to find value. So margin should follow
value, where customers are willing to pay for it versus how you finance something. And so we want to make sure that its not about buying insurance. Its about getting an experience that we finance for you in the most affordable way.
Kevin Mark Fischbeck
- BofA Merrill Lynch, Research Division - MD in Equity Research
Yes. But I guess, just a
follow-up
on that, though. I guess when I think about companies that have combined like this
in the past, like United has done it well, or at Kaiser, usually the companies who start with the mindset of controlling costs, kind of with an insurance mindset, are the ones that are more successful. And then the ones who kind of are providers who
are just going to say, Im going to take this insurance arm and try and shift more volume through what I already have to keep my business as usual, those things usually fail. So I guess Im just trying to think about
strategically how different is CVS going to look from a financial-model perspective 5 years from now.
David M. Denton
- CVS Health Corporation -
CFO and EVP
Well, Ill just reiterate a little bit what Mark said. At the end of the day, were creating a platform thats going to
engage consumers and, ultimately, reduce costs and improve outcomes. And through that, theres going to be a lot of value created in the system. To Marks point, the insurance component of this is kind of in the background. The financing
vehicle is in the background. So as the company matures and as we touch, Ill say, more consumers in all the various touch points that we have, both in the store, in the home and from a digital platform perspective, I would envision that the
economics of this enterprise will follow that.
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
I would the way Id so lets describe what it could look like, Kevin. Its a store which builds a network around it, where the
members that we then move into the marketplace go into the provider system prepared. They know what their path is going to be. They know what their services are going to be. We encourage them to use us as a navigator up front. They keep coming back
to the store because we can coordinate care better that way. And so as a result, the experience is better for them. Its simpler. Its cheaper, because we find the lowest cost of care. So were getting both, but were not going
to do it by forcing the managed-care model on the member. What were going to do is build the experience for them using lower cost of care arbitraging, the lower sites of care arbitraging, the ability to get more in the store as a focal point
for the rest of the health care system.
Operator
Our next question, coming from the line of Eric
Percher with Nephron Research.
Eric Percher
- Nephron Research LLC - Research Analyst
Eric Percher and Josh Raskin from Nephron. Larry, earlier on you commented on the ability to add value across all customers. Extending on that, could you speak
to your thoughts on managing conflict with the large number of health plans you serve and maybe specifically the recent PBM agreement with Anthem?
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
Yes, Eric. As you saw, I guess, about a month ago, we were quite excited to be awarded the Anthem business, and
yesterdays announcement has no bearing on our ability to continue to move forward and provide a high level of service for Anthem, IngenioRx and certainly, its members. And that planning process has already begun. We have a dedicated team spun
up, and the planning phase is well under way. I think some of this goes back to, I think, the first question that was asked. And it also picks up one of the themes that Mark just talked about, that our ability to build a model
that customers want to use because of the value that it provides, I think that becomes a key guiding principle of
bringing these 2 companies together. And as we had mentioned earlier that the innovation, this new health care platform that were talking about, our goal is to apply those capabilities broadly across the industry. So you think about our
other clients, our other partners in achieving that goal, why wouldnt they want to participate in those capabilities because its something that their members, the consumer, is going to want to participate in. Thats our thought
process. Thats our guiding principle, and everything that we do going forward is going to be with that goal and objective in mind.
Josh Raskin
- Nephron Research LLC -
Research Analyst
Sorry, Eric. I was going to jump in on the Aetna side as a
follow-up.
I guess in light
of the canceling of the Investor Days, it sounds like were not going to get an outlook specifically from Aetna. But maybe Shawn, if you could just comment broadly top line, bottom line expectations. Consensus expectations are sort of slightly
up on the top line, and then a number just north of $10 in terms of EPS for 2018. Could you just directionally give us commentary as to whether you think those are reasonable starting points?
Shawn M. Guertin
- Aetna Inc. - Executive VP, CFO
& Chief Enterprise Risk Officer
Well, as you alluded to, Josh, Im not going to give guidance. However, at some point when the
S-4
comes out,
well have our sets of financial projections in there, and youll be able to see them. I think on our earnings call, we talked about next year being a flat revenue year. I dont think that thats new news, nor would I think that,
that has changed. And the way we talked about our sort of
jump-off
earnings and the headwinds and tailwinds would probably the same thing that I would say today that we said on the earnings call.
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
And, Eric, let me go just back to your question just to follow that up. Keep in mind, youve heard us talk about this in the past, that in Medicare Part
D, weve created one of the leading stand-alone products in SilverScript. At the same time today, we manage the Med D pharmacy benefit for more than 40 health plan clients. And weve demonstrated the value that our capabilities bring and
the fact that those health plans have been able to grow their Med D business faster than the overall market. So I think its an important proof point in that guiding principle that if youre able to create something of value, okay, then
people are going to want to engage and participate. So again, thats an important guiding principle as part of our strategy moving forward.
Shawn M. Guertin
- Aetna Inc. - Executive
VP, CFO
& Chief Enterprise Risk Officer
Josh, just to make sure you get a complete in addition to CVS not repurchasing
shares, obviously, we will not be either. So that is the one difference that I would point out from our Q3 earnings call.
Operator
Our next question, coming from the line of Justin Lake with Wolfe Research.
Justin Lake
- Wolfe Research, LLC -
MD
& Senior Healthcare Services Analyst
First question for Aetna would be around Medicare Advantage. Can you talk to any
negative short-term impact you might see on the broker distribution side from the deal? And what are the longer-term benefits of marketing through the retail stores here at CVS? And then for the CVS team, with Mark exiting the
day-to-day,
theres going to be a focus on retaining key managers. Can you talk to how youre planning to incentivize folks like Shawn Guertin and others to stay
with the entity for the longer term?
Mark T. Bertolini
- Aetna Inc. - Chairman
& CEO
Well, Ill answer the first one, Justin. Ill let Larry answer the second one. On the first one, I dont think theres any impact short
term. And as a matter of fact, theres an opportunity to start the store marketing with brokers as we look forward. So I think theres a huge opportunity to capture more share over time as we go forward. I think the longer term is when you
start having these convenience places, these new front doors for health care for Medicare, theres great opportunity because its in the retention. I mean, our numbers show that theres $2,500 more in lifetime value of the customer
for each year you keep them. So this idea of getting them on a project, engaging them in a program, having them find a store convenient and capable to use will allow us to keep more of those customers over time as well as by
word-of-mouth
attract their friends and families. So I think its a bigger idea. Its a safer place. Its got high credibility. Trust is a big part of what we
want to accomplish. And today, were a bit remote. In some markets we get into homes, but not like well be able to do with the CVS partnership.
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
And, Justin, its Larry. Shawn says hell pay you after the call for negotiating for him.
Shawn M. Guertin
- Aetna Inc. - Executive VP, CFO
& Chief Enterprise Risk Officer
I think there it is.
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
But it was as you heard in our prepared remarks, Im going to continue to benefit from Marks presence
on the board, okay, to continue to pick his brain with not just his expertise, but his vision, and that will be a tremendous benefit for myself and our management team. And as we mentioned earlier, were going to continue to run Aetna as a
separate business unit within CVS. Mark has built a terrific team, and were confident that well be able to work out the specifics so that there are many of those individuals that will want to continue on and be a part of this exciting
journey.
Operator
Our next question, coming from the line of
Kevin Caliendo with Needham.
Kevin Caliendo
- Needham
& Company, LLC, Research Division - MD
& Senior Analyst
Just a couple of housekeeping questions. On the $750 million in synergies, if we were to break it out between cost synergies and potential revenue
enhancements, I know you talked about medical costs being lowered, is there any sort of revenue synergy number built into that $750 million? And then the second question is, what are you assuming for your cost of debt for the company post this
transaction?
David M. Denton
- CVS Health Corporation - CFO and EVP
Yes. Kevin, this is Dave. On the $750 million synergies, theres virtually no revenue synergies tied to this. This is mostly cost and a little bit
of, Ill say, care management synergies as we think about getting or helping consumers get the lowest-cost site of care for the most part. So I wouldnt think about this as revenue synergies at this moment. I do think longer term,
there are opportunities to grow revenues as we think about the enterprise and all the capabilities that well have here. As it relates to the permanent financing and the cost of that debt, it will depend a bit about the tenor in which we place
our portfolio. But you would think about it probably in the 4% ZIP code is our current thinking. That could wiggle a bit based on the amount of short- versus long-term debt that we ultimately place at the end of the day.
Kevin Caliendo
- Needham
& Company, LLC, Research Division -
MD
& Senior Analyst
Got you. And one quick question on the store. If in 5 years I mean, obviously, every store is
different and alike, but given the makeup of what a retail store looks like now, a traditional CVS retail store, what percent of the front of the store do you think will be traditional sort of retail versus more health-oriented, just percentage
basis?
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
Yes, Kevin. Were going to as we said earlier, were going to pilot some different concepts, so its a little early to answer that
definitively. I think you can think about this as probably more of a
hub-and-spoke
model, that therell be a core set of services that would be available broadly,
and there likely would be a subset of stores that would have enhanced services. And that delta would certainly be reflected in the space allocation within the store. But obviously, well have a lot more to say about that as we get these pilots
under way and go from there.
Operator
Our next question, coming from the line of
Peter Costa with Wells Fargo.
Peter Heinz Costa
- Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst
Let me get a couple of the terms of the deal down to the extent youll disclose them. Are there any colors on CVS share price? Are there breakup fees
involved? And then can you talk about the $22.4 billion in eliminations, if theres any revenue in limitations? Is there any earnings impact to that? And what are you planning to do with the Part D solutions?
David M. Denton
- CVS Health Corporation - CFO and EVP
Peter, this is Dave. I would say why dont you wait for the merger agreement to be filed? You can see all that material at that point in time. So
were not going to comment on that specifically.
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
And as far as the regulatory process, Peter, we are pretty confident that this transaction is very complementary to the value that can be created for the
consumer and the payer. And keep in mind that one of the big payers is the federal government, and well certainly be sitting down with the regulators to show them how that value is created and how it comes to life.
Operator
The next question, coming from the line of John
Heinbockel with Guggenheim.
John Edward Heinbockel
- Guggenheim Securities, LLC, Research Division - Analyst
Larry, 2 quick things. Maybe touch on the pace at which you can sell your new capabilities and maybe the pace at which you think the market takes up those
capabilities. Also in the context of what you learned from the Caremark process, right, because youve obviously done some innovative stuff before doing it again, how that process works you will think. And then secondly, is it too early to say
whether the 10% secular growth rate is still applicable or not?
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
Yes, John, its Larry. Ill start, and then flip it over to Dave. John, youre right, we did learn an awful lot in terms of the
CVS-Caremark
merger and all that coming together. And I think one of the important themes around all this is what is it that the customer wants and needs and is looking for? And I think what we learned through
Caremark is the ability to create that and having customers ask for that is as big as selling proposition as what we can do through going out as a sales organization selling that to clients. And another example, John, of where we (inaudible). And I
think important in all of that is, Im emphasizing the partnership aspect of this, that we can make this broadly available, okay, to others. And at the second important point is everything that were talking about is a complement to
the care that is provided for by the physician. And somebody described it to me a long time ago, when you think of the interventions that occur in health care, they have always been there, but what they lack is the element of convenience and
coordination. And when we talk about this unmet need, thats really the unmet need that were filling. So again, theres a common theme to this, this morning, in terms of that will be one of our guiding principles as we move forward
and begin to pilot and get these in the marketplace.
David M. Denton
- CVS Health Corporation - CFO and EVP
Hey, John, this is Dave. Im not 100% sure of the question youre asking about the 10% growth. Im assuming youre referencing the
financial targets that CVS has established in the marketplace.
John Edward Heinbockel
- Guggenheim Securities, LLC, Research Division - Analyst
Yes. Is it too early to say whether 10% is still doable post this deal?
David M. Denton
- CVS Health Corporation -
CFO and EVP
Well, I think its probably too early as you think about adjusted earnings per share in that kind of a growth rate at this point in
time. I will say, though, if you step back and you look at markets in which the company competes in and you think about the Ill say, the competitive landscape and the capabilities that well have as a company, we should be as well
positioned, if not better positioned over time, to grow our business longer term. So I think from that perspective, you should count on the company being able to perform well as it relates to those financial targets.
Operator
And our last question for today is from Charles
Rhyee with Cowen and Company.
Charles Rhyee
- Cowen and Company, LLC, Research Division - MD and Senior Research Analyst
Just a quick couple
follow-ups.
Maybe, Larry, you guys talked a lot about getting some pilots under the way, getting
more to the store. Can you give us a sense on the timing and the time line that you would expect to maybe start these pilots post-close of the deal, sort of in your mind when youre thinking about when we could see some of these new offerings
introduced? And then secondly, maybe for Mark, you talked about using the store sort of as a hub and spoke for care and sort of being a navigator in the front. Where does the patients or the consumer in this case, as you discussed that
person, where does their primary care physician play into this? Do you envision yourself becoming the PCP for patients? Just trying to figure that part out.
Mark T. Bertolini
- Aetna Inc. -
Chairman
& CEO
So, I think on the last part, Charles, the real important part here is that we need to understand that almost
60% of Americans dont have a regular doctor. A lot of people cant get in to see the doctor they want to see. So I view the offering so I think its less about what the store looks like and
more about the offering, and the experience the customer gets is really about a patient-centered medical home
model, where were supporting interaction with the medical community, preparing people for appropriate compliance, preparing them for their visits, setting up appointments, eliminating prior ops, doing all those other sorts of things to help
navigate that system for them. So the relationship becomes one of trust. And what I want to use over and over and over again because it makes it so much simpler, think of the Genius Bar at Apple, for example, and this ability to walk in the store
and get help. And so I think this is the kind of idea we want to create in the stores, and I think we want to get going on the projects and pilots as soon as we can.
Larry J. Merlo
- CVS Health Corporation -
CEO, President and Director
Yes. And, Charles, I think Dave mentioned this in talking about the synergies that there are existing capabilities with
our respective companies today that we will be looking to, to capitalize on immediately upon closing. You think about the ongoing number of visits to the emergency room that can and should be treated for in a lower acuity setting like a
MinuteClinic, that becomes an immediate opportunity. And as Mark said, we will be looking to pilot the enhanced versions as soon as we possibly can and go from there.
Charles Rhyee
- Cowen and Company, LLC,
Research Division - MD and Senior Research Analyst
Great. And maybe one last question for Dave. You talked about Aetna, the insurance subsidiary,
will be keeping its existing capital structure. As you think about the regulatory process here, I imagine thats sort of to be able to get the sign off from the state insurance agencies. But does that affect, any way, in terms of the ability to
use the cash flow of the overall enterprise to pay down debt over the next couple of years?
David M. Denton
- CVS Health Corporation -
CFO and EVP
I guess weve modeled that into our projections, understanding that the capital structure in those insurance companies need to be
maintained, if not enhanced over time. Weve factored that into our financial projections as from a cash flow perspective. And obviously, we continue to have dialogue not yet with Department of Insurance but more importantly, with our
rating agencies to understand the implication of this transaction.
Larry J. Merlo
- CVS Health Corporation - CEO, President and Director
So just wrapping up, we appreciate everybodys interest and time this morning. And Im sure there are
follow-up
questions that many of you have, and the respective IR organizations of both companies will be available for those
follow-ups.
So, thanks, everyone.
Operator
Ladies and gentlemen, that does conclude the
conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.
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No Offer or Solicitation
This communication is for informational purposes only and not intended to and does not constitute an offer to subscribe for, buy or sell, the solicitation of
an offer to subscribe for, buy or sell or an invitation to subscribe for, buy or sell any securities or the solicitation of any vote or approval in any jurisdiction pursuant to or in connection with the proposed transaction or otherwise, nor shall
there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended, and otherwise in accordance with applicable law.
Additional Information and Where to Find It
In connection with the proposed transaction between CVS Health Corporation (CVS Health) and Aetna Inc. (Aetna), CVS Health and Aetna
will file relevant materials with the Securities and Exchange Commission (the SEC), including a CVS Health registration statement on Form S-4 that will include a joint proxy statement of CVS Health and Aetna that also constitutes a
prospectus of CVS Health, and a definitive joint proxy statement/prospectus will be mailed to stockholders of CVS Health and shareholders of Aetna. INVESTORS AND SECURITY HOLDERS OF CVS HEALTH AND AETNA ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS AND OTHER DOCUMENTS THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders will be able to obtain free copies of
the registration statement and the joint proxy statement/prospectus (when available) and other documents filed with the SEC by CVS Health or Aetna through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with
the SEC by CVS Health will be available free of charge within the Investors section of CVS Healths Web site at http://www.cvshealth.com/investors or by contacting CVS Healths Investor Relations Department at 800-201-0938. Copies of the
documents filed with the SEC by Aetna will be available free of charge on Aetnas internet website at http://www.Aetna.com or by contacting Aetnas Investor Relations Department at 860-273-8204.
Participants
in Solicitation
CVS Health, Aetna,
their respective directors and certain of their respective executive officers may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of CVS
Health is set forth in its Annual Report on Form 10-K for the year ended December 31, 2016 (CVS Healths Annual Report), which was filed with the SEC on February 9, 2017, its proxy statement for its 2017 annual meeting of
stockholders, which was filed with the SEC on March 31, 2017, and its Current Report on Form 8-K, which was filed with the SEC on May 12, 2017. Information about the directors and executive officers of Aetna is set forth in its Annual Report on Form
10-K for the year ended December 31, 2016 (Aetnas Annual Report), which was filed with the SEC on February 17, 2017, its proxy statement for its 2017 annual meeting of shareholders, which was filed with the SEC on April 7, 2017 and
its Current Reports on Form 8-K, which were filed with the SEC on May 24, 2017 and October 2, 2017. Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security
holdings or otherwise, will be contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.
Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor for forward-looking statements made by or on behalf of
CVS Health or Aetna. This communication may contain forward-looking statements within the meaning of the Reform Act. You can generally identify forward-looking statements by the use of forward-looking terminology such as anticipate,
believe, can, continue, could, estimate, evaluate, expect, explore, forecast, guidance, intend, likely,
may, might, outlook, plan, potential, predict, probable, project, seek, should, view, or will, or the
negative thereof or other variations thereon or comparable terminology. These forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond CVS Healths and Aetnas control.
Statements in this communication regarding CVS Health and Aetna that are forward-looking, including CVS Healths and Aetnas projections as to
the closing date for the pending acquisition of Aetna (the transaction), the extent of, and the time necessary to obtain, the regulatory approvals required for the transaction, the anticipated benefits of the transaction, the impact of
the transaction on CVS Healths and Aetnas businesses, the expected terms and scope of the expected financing for the transaction, the ownership percentages of CVS Healths common stock of CVS Health stockholders and Aetna
shareholders at closing, the aggregate amount of indebtedness of CVS Health following the closing of the transaction, CVS Healths expectations regarding debt repayment and its debt to capital ratio following the closing of the transaction, CVS
Healths and Aetnas respective share repurchase programs and ability and intent to declare future dividend payments, the number of prescriptions used by people served by the combined companies pharmacy benefit business, the
synergies from the transaction, and CVS Healths, Aetnas and/or the combined companys future operating results, are based on CVS Healths
and Aetnas managements estimates, assumptions and projections, and are subject to significant uncertainties and other factors, many of which are beyond their control. In particular,
projected financial information for the combined businesses of CVS Health and Aetna is based on estimates, assumptions and projections and has not been prepared in conformance with the applicable accounting requirements of Regulation S-X relating to
pro forma financial information, and the required pro forma adjustments have not been applied and are not reflected therein. None of this information should be considered in isolation from, or as a substitute for, the historical financial statements
of CVS Health and Aetna. Important risk factors related to the transaction could cause actual future results and other future events to differ materially from those currently estimated by management, including, but not limited to: the timing to
consummate the proposed transaction; the risk that a regulatory approval that may be required for the proposed transaction is delayed, is not obtained or is obtained subject to conditions that are not anticipated; the risk that a condition to the
closing of the proposed transaction may not be satisfied; the ability to achieve the synergies and value creation contemplated; CVS Healths ability to promptly and effectively integrate Aetnas businesses; and the diversion of and
attention of management of both CVS Health and Aetna on transaction-related issues.
In addition, this communication may contain forward-looking
statements regarding CVS Healths or Aetnas respective businesses, financial condition and results of operations. These forward-looking statements also involve risks, uncertainties and assumptions, some of which may not be presently known
to CVS Health or Aetna or that they currently believe to be immaterial also may cause CVS Healths or Aetnas actual results to differ materially from those expressed in the forward-looking statements, adversely impact their respective
businesses, CVS Healths ability to complete the transaction and/or CVS Healths ability to realize the expected benefits from the transaction. Should any risks and uncertainties develop into actual events, these developments could have a
material adverse effect on the transaction and/or CVS Health or Aetna, CVS Healths ability to successfully complete the transaction and/or realize the expected benefits from the transaction. Additional information concerning these risks,
uncertainties and assumptions can be found in CVS Healths and Aetnas respective filings with the SEC, including the risk factors discussed in Item 1.A. Risk Factors in CVS Healths and Aetnas most recent Annual
Reports on Form 10-K, as updated by their Quarterly Reports on Form 10-Q and future filings with the SEC.
You are cautioned not to place undue reliance
on CVS Healths and Aetnas forward-looking statements. These forward-looking statements are and will be based upon managements then-current views and assumptions regarding future events and operating performance, and are applicable
only as of the dates of such statements. Neither CVS Health nor Aetna assumes any duty to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, as of any future date.
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