CVS Health Corporation (CVS) Earnings

Management highlights

- GLP-1 Therapy Market Leadership * CVS Health has built end-to-end capabilities to serve GLP-1 demand across both funded employer benefits and unfunded/cash-pay markets, leveraging Caremark formulary management, MinuteClinic virtual care, CVS Pharmacy omni-channel fulfillment, and direct manufacturer partnerships. * Caremark takes formulary actions to lower GLP-1 costs for funded clients; MinuteClinic offers 24/7 virtual weight management visits for $29 (the lowest cost industry option); new partnerships with Eli Lilly and Novo Nordisk enable same-day in-store/app pickup for cash-pay patients, and CVS pharmacists support patient adherence and side effect management. - AI and Technology Transformation * CVS is transitioning to a consumer-centric healthcare technology business, with responsible, deliberate AI deployment across all segments to reduce friction, improve outcomes, and drive operational efficiency. * Key deployments include: the new AI-powered HIO assistant as part of the targeted launch of the Health 100 consumer platform (early feedback is positive, with full expansion planned later in 2026); AI-enabled claims processing that cuts provider processing time by over 20%; 83% of prior authorizations approved in real time (over 95% within 24 hours); AI that cuts case preparation time for Aetna patient advocates from 90 minutes to 2 minutes; conversational AI that removed hundreds of millions of calls from retail pharmacies, freeing 1 million hours of pharmacist time for clinical care; and AI tools that drive 90%+ adherence rates in CVS Specialty, higher than the industry 80% target. - Strategic Business Priorities * Becoming the partner of choice for providers: CVS is focused on reducing prior authorization burden, streamlining claims, and improving access to patient data, with the expanded Aetna Clinical Collaboration Program embedding nurses in hospital facilities to improve care transitions. * PBM pricing model transition: CVS expects the shift to net cost pricing models to accelerate amid new regulation and the proposed FTC settlement, and is executing the transition while preserving value for clients and members. * Margin recovery in Healthcare Benefits: Aetna has delivered over $2 billion of year-to-date adjusted operating income improvement, driven by disciplined pricing and strong medical cost management especially in the Medicare segment.

Guidance

- Full year 2026 adjusted earnings per share (EPS) guidance was raised by $0.60 to a range of $7.90 to $8.10, an 8% increase from prior guidance. - Full year 2026 operating cash flow guidance was increased by $2 billion to at least $11.5 billion. - Full year 2026 total revenue guidance is now at least $414 billion. - Healthcare Benefits 2026 adjusted operating income guidance is updated to $5.03 to $5.37 billion, an increase of over $1 billion from prior guidance, with a prudent outlook for H2 2026 medical cost trends. - Pharmacy and Consumer Wellness 2026 adjusted operating income guidance is increased by $220 million to at least $6.4 billion, reflecting strong Q2 performance and ongoing momentum. - 2026 Health Services adjusted operating income guidance is unchanged, with strong performance across core pharmacy services offsetting updated 340B headwind projections. - No share repurchases are assumed in the 2026 guidance; management will evaluate capital deployment as leverage improves. - Management reaffirmed its long-term target of mid-teens adjusted EPS compound annual growth from 2025 through 2028, first shared at the recent investor day. - For 2027, management provided early preliminary commentary: a baseline adjusted EPS floor of at least $8.44 (consistent with current consensus) is reasonable, representing 13% growth from the 2026 adjusted midpoint baseline, which excludes prior year items and exited individual exchange business. Full 2027 guidance will be shared on the Q4 2026 call per standard practice.

Segment performance

1. Healthcare Benefits (Aetna): Generated $37 billion in Q2 2026 revenue, a 3% increase year-over-year. Growth was driven by the government business, partially offset by the 2026 exit from the individual exchange business. Medical membership ended the quarter at ~26 million, down 700,000 YoY, driven by the individual exchange exit partially offset by commercial fee-based membership growth. Adjusted operating income was ~$2.4 billion, with a medical benefit ratio (MBR) of 87.4%, both improving meaningfully YoY on margin recovery efforts. This segment contributed ~34.9% of total Q2 2026 revenue. 2. Health Services: Generated $52 billion in Q2 2026 revenue, an 11% increase YoY, driven by pharmacy drug mix and brand inflation, partially offset by pharmacy client price improvements. Adjusted operating income was over $1.7 billion, a 10% increase YoY, driven by improved purchasing economics, favorable drug mix, and modest improvement in the healthcare delivery business, partially offset by client price improvements. Within Health Services, Caremark saw 340B business pressure and a pull forward of value originally expected in H2 2026, which was offset by outperformance across the broader Caremark business including higher specialty generic penetration. This segment contributed ~49.1% of total Q2 2026 revenue. 3. Pharmacy and Consumer Wellness (PCW): Generated nearly $34 billion in Q2 2026 revenue, a slight increase YoY, driven by drug mix, higher prescription volume (including contributions from the 2025 Rite Aid acquisition), and brand inflation. These gains were offset by regulatory price reductions, new generic introductions, and pharmacy reimbursement pressure. Same-store total revenue grew modestly, with same-store pharmacy sales up 3% (driven by a 7% increase in same-store prescription volumes) and same-store front store sales up 100 basis points YoY. Adjusted operating income was nearly $1.5 billion, a 10% increase YoY, driven by core pharmacy strength and Rite Aid contributions, partially offset by ongoing business investments and consumer dynamics. This segment contributed ~32.1% of total Q2 2026 revenue.

Risks & headwinds

- 340B program dynamics: Ongoing changes and recent manufacturer restrictions on 340B covered entities are creating incremental pressure that will act as a headwind for Health Services in 2027. - PBM transition headwinds: The shift to net cost pricing requires deliberate underwriting for new client renewals, and product exits/market exits by some health plan customers will create membership headwinds for Caremark in 2027, partially offset by strong specialty pharmacy performance. - No Surprises Act IDR abuse: The independent dispute resolution (IDR) process created by the No Surprises Act is being abused by a small group of providers, creating incremental cost pressure for commercial business, though management has accounted for this in current guidance. - GLP-1 affordability: Even with formulary adjustments, affordability barriers mean not all employers can cover GLP-1s for weight loss, creating uncertainty about the split between funded and cash-pay demand. - Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from projections, with additional details in SEC filings.

Analyst Q&A

• Q: How is CVS planning to offset 2027 HSS headwinds from 340B and the current selling season, and is the long-term mid-teens EPS target still on track?

  A: Management reaffirmed the 2025-2028 mid-teens EPS CAGR target remains intact. The 340B headwind in 2027 is partially offset by the industry-leading CVS Specialty business, which benefits from strong secular growth and a robust 2027 generic portfolio. The disciplined approach to 2027 client renewals has resulted in a retention rate slightly below CVS' historical average but in line with industry norms, and management remains confident PBM margins will return to historical levels over the long term. All headwinds are already more than offset by strength across the rest of the CVS enterprise.

• Q: Can you update us on Medicare Advantage/Part D 2027 bidding, and how meaningful GLP-1 will be to long-term growth?

  A: For 2026, Medicare Advantage performance is ahead of expectations, driven by disciplined bidding in prior cycles, and 2027 bidding follows that same discipline to deliver appropriate margins while improving member outcomes. 75% of group Medicare business is already renewed, and Part D has been de-risked via deliberate product portfolio simplification for 2027. GLP-1 is a meaningful long-term growth opportunity: it drives volume for Caremark and Aetna in the funded diabetes space, and CVS has built a unique direct-to-consumer platform for the fast-growing unfunded obesity cash market, leveraging MinuteClinic, in-store pickup, and manufacturer partnerships to capture new volume across the enterprise.

• Q: Is the strong retail PCW growth sustainable after Rite Aid share gains, and how is cost-plus rollout progressing for gross margin stabilization?

  A: The multi-year retail strategy focused on improving in-store service (driving the highest NPS in years), expanding clinical services delivered by 30,000 pharmacists, and passing industry-leading cost of goods to payer partners has been the core driver of growth. Rite Aid integration provided an incremental tailwind in 2026, but CVS has consistently outperformed market prescription growth, and the current strategy is expected to sustain that outperformance, with ongoing operating leverage across 9,000 stores. Gross margin progress is ahead of expectations, and the business continues to perform in line with the 2026 plan.

• Q: What is driving incremental 340B pressure in 2027, and how is it being offset this year?

  A: Incremental 340B pressure stems from new manufacturer restrictions on 340B covered entities that impacted Q2 2026 results. The Q2 2026 impact was fully offset by outperformance across the broader Caremark business, so the full year 2026 Health Services guidance remains on track. Management does not break out specific sizing of the 340B headwind, but confirms it will pressure 2027 results, and CVS has multiple internal paths to offset the headwind and deliver on long-term investor commitments. Full 2027 headwind/tailwind details will be shared on the Q3 2026 call.