WOLFE RESEARCH HEALTHCARE CONFERENCE 2026 - CVS HEALTH CORP

Financial Performance:

• The company reported strong earnings alongside a surprise announcement to split into two entities: CVS Health and CVS Pharmacy.
• Both standalone entities are projected to maintain solid investment-grade balance sheets with strong free cash flow generation.
• CVS Health (the PBM/Insurance arm) is in a "trough year" for earnings due to 340B pressures and rebate guarantees, with a return to growth targeted for 2028.
• CVS Pharmacy achieved low-single-digit growth in the most recent period, marking 27 consecutive years of AOI growth at the pharmacy level.
• Management estimates dis-synergies (operational costs of running two companies) to be approximately $500 million annually, significantly lower than the ~$1 billion market speculation.
• A one-time separation cost is anticipated but will not impact reported EPS; it is a cash cost associated with setting up separate public structures.

Guidance and Future Outlook:

• CVS Pharmacy aims for mid-to-high single-digit growth post-2028, contingent on stabilized reimbursement pressures and script volume growth driven by an aging population.
• CVS Health targets a return to mid-to-high single-digit growth by 2028, fueled by the recovery of Oak Street Health (previously estimated at ~$500M loss) and mitigation of rebate guarantee losses.
• Medicare Advantage margins are expected to stabilize and recover to 3% or better by 2028.
• The combined deployable capital of $35 billion will be split between the two entities, with both retaining the ability to pursue dividends, buybacks, and strategic M&A.
• Management emphasizes a "local" strategy for CVS Pharmacy, leveraging 9,000 physical locations to expand into direct-to-consumer (DTC) services and weight loss programs.

Business Segments and Product Lines:

• CVS Pharmacy: Focuses on retail prescription growth, generic drug sourcing (via Red Oak Sourcing), and the rollout of "CostVantage" transparency models to replace cross-subsidization.
• CVS Health: Retains the PBM (Caremark), specialty pharmacy, and the Oak Street Health delivery network, positioning itself in high-acuity, high-cost markets.
• Specialty Pharmacy: Kept within CVS Health to allow control over formulary management and brand purchasing, creating a competitive dynamic for the fastest-growing segment of healthcare.
• Oak Street Health: Projected to move from losses to positive contribution as pricing models evolve and rebate guarantees are renegotiated.
• CostVantage/TrueCost: Both entities utilize cost-based pricing models to pass through industry-leading generic drug costs to payers.

Market and Competitive Landscape:

• The separation is designed to address regulatory pressure targeting vertically integrated PBMs with retail pharmacies, specifically distinguishing the high-acuity specialty market from the general retail market.
• CVS Pharmacy is expected to compete more aggressively against independents due to the removal of the PBM retail connection, while retaining its dominance in generic purchasing volume.
• The Medicare Advantage market is identified as a high-growth area where CVS Health holds a competitive advantage with established products and cost positions.
• Management believes both companies will grow faster as standalone entities, capitalizing on their respective market dynamics without the constraints of a larger conglomerate.

Risks and Challenges:

• Regulatory Environment: Continued pressure on PBM pricing models, potential fee-based shifts, and state-level regulations targeting retail/PBM integration.
• 340B Program: Ongoing uncertainty and pressure regarding the 340B drug pricing program affecting profitability in the short term.
• Rebate Guarantees: Pending resolution of rebate guarantees and potential new pricing conventions from the FTC, DOL, and CAA.
• Operational Separation: Execution risk involved in splitting operations, including potential one-time costs and the need to establish two separate corporate infrastructures.

Management Commentary and Tone:

• The tone is highly confident and strategic, framing the breakup as a value-creation opportunity ("one great company becoming two great companies") rather than a defensive reaction.
• CEO David Joyner emphasized that the split allows each business to optimize for its specific market dynamics (high-acuity vs. retail access).
• New CEO Prem Shah expressed excitement about leading CVS Pharmacy, highlighting a turnaround from a -5% growth trajectory to low-single-digit growth through operational fixes like CostVantage.
• Management rejected the notion of a loss of competitive advantage regarding cost of goods, asserting that generic purchasing power and PBM brand pricing controls remain intact post-split.

Analyst Questions and Answers:

• Synergies/Dis-synergies: Clarified that operational synergies between CVS Pharmacy and Caremark were minimal (separate operations for 20 years), so dis-synergies are limited to new corporate overhead (~$500M), not a loss of core business value.
• COGS Structure: Confirmed that CVS Health retains control over brand COGS for competition, while CVS Pharmacy retains its generic purchasing advantage via Red Oak Sourcing; both will pass savings to payers.
• Leadership Transition: Assured that the core leadership teams for Aetna, Caremark, and retail pharmacy are tenured and high-performing, with minimal disruption to operations.
• Debt Structure: Confirmed both entities will maintain investment-grade status; CVS Health will shift to debt-to-cap metrics, but leverage is not expected to deteriorate significantly.
• Growth Drivers: Q&A on CVS Pharmacy growth confirmed that share gains are now driven by value propositions (service, cost) rather than PBM network leverage, as narrow/broad network deltas have narrowed.

Other Key Points:

• The decision to split was driven by the maturity of the Aetna recovery and the success of the retail turnaround, signaling a "position of strength" rather than distress.
• Management highlighted that 80%+ of specialty products flow through limited distribution channels, naturally insulating the specialty pharmacy business from independent pharmacy regulatory pressure.
• The "CostVantage" model has successfully migrated all commercial and MA scripts to a cost-based pricing structure, eliminating cross-subsidization.
• The separation allows CVS Pharmacy to pivot towards adjacent healthcare services (e.g., DTC weight loss, clinical services) at scale in local communities.