Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CVS Caremark Corporation (NYSE:CVS)

Q3 2009 Earnings Call

November 5, 2009 8:30 am ET

Executives

Nancy Christal - Senior Vice President, Investor Relations

Thomas M. Ryan - Chairman of the Board, President, Chief Executive Officer

David B. Rickard - Executive Vice President and Chief Financial Officer

Analysts

Tom Galucci - Lazard Capital

Eric Bosshard - Cleveland Research Company

Lisa Gill - J.P. Morgan

Robert Willoughby - Banc of America Merrill Lynch

John Heinbockel - Goldman Sachs

Ed Kelly - Credit Suisse

Ann Hynes - FTN Equity

Scott Mushkin - Jeffries & Company

Matt Perry - Wells Fargo

Meredith Adler - Barclays Capital

Helene D. Wolk - Sanford C. Bernstein

Neil Currie - UBS

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Corporation’s third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Nancy Christal, Senior Vice President, Investor Relations. Ms. Christal, you may begin the conference.

Nancy Christal

Thanks, Regina. Good morning, everyone and thanks for joining us today for our third quarter earnings call. I'm here with Tom Ryan, Chairman, President and CEO of CVS Caremark, who will provide a business update, and Dave Rickard, Executive Vice President and CFO, who will provide a financial review and guidance. During the Q&A that follows, we ask that you limit yourself to one to two questions, including follow-ups, so that we can get to as many analysts and investors as possible.

Please note that we expect to file our 10-Q by the end of day today and it will be available through our website at cvscaremark.com/investors.

This morning we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I just mentioned as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at cvscaremark/investors.com.

As always, today's call is being simulcast on our IR website. It will also be archived there for a one-month period following the call to make it easy for all investors to access it.

Now before we continue, our attorneys have asked me to read the safe harbor statement --during this presentation, we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning forward-looking statements in our most recently filed quarterly report on Form 10-Q.

And now I will turn this over to our CEO, Tom Ryan.

Thomas M. Ryan

Thanks, Nancy, and good morning, everyone. We reported another excellent quarter this morning and I am certainly pleased with our results across the company, especially given the economic climate we are in.

Let me give a few highlights for the quarter -- total revenues increased 18%. Our PBM revenues increased 23% while retail revenues were up 18%. Retail comps up 5.7 and I should point out without any benefit from flu shots. Our adjusted EPS from continuing operations was $0.76. If you exclude the $0.11 tax benefit, adjusted EPS was $0.65, up more than 8%. And we maintained a healthy balance sheet and generated more than $490 million of free cash flow for the quarter, so a pretty good quarter all the way around.

On the retail side of our business, I am happy to report that we continue to outperform the industry. We are achieving healthy share gains in pharmacy. Our share in markets in which we operate grew over 100 basis points.

Total same-store sales increased 5.7% in the third quarter and when we came into this year, we told you we expected to see comps accelerate, pharmacy comps accelerate in the second half and we are seeing it -- pharmacy comps increased a solid 8%, better than the last quarter and in fact the highest level we have seen in two years and I guess almost close to twice the industry average. And that occurred even as our generic dispensing rate surpassed 70% on the retail side. Our pharmacy comps were negatively impacted by about 380 basis points due to recent generic introductions and further generic expansion.

As I said earlier, unlike some competitors, our pharmacy comps had little if any benefit from flu vaccines, vaccinations. That’s because we don’t count flu vaccinations administrated at minute clinic or outside flu clinics as a prescription. We saw approximately 250 basis point benefit in pharmacy comps from maintenance choice. That’s up 190 basis points in the second quarter and 120 from the first quarter.

Our integrated products continue to gain traction in the marketplace and they gained traction for two simple reasons -- they helped reduce -- help clients reduce pharmacy and overall healthcare costs and they help save patients time and money.

Comp scripts increased 4.9% in the third quarter. You should recall that our 90 day maintenance choice scripts filled at retail we count as one script rather than three -- in fact, if we counted maintenance choice as three scripts like some others, then our comp scripts would have been 8.1%.

Pharmacy growth was also helped by a double-digit increase in flu related prescriptions, which I expect will continue through the fourth quarter.

Front store comps increased just under 1%, with more customers seeking out promotional prices and private label products in the quarter. Consumers I think continue to be conservative with their spending and they opt for higher value, certainly and are looking for lower price points and as I said, more value. In fact, growth in private label sales during the quarter more than doubled the rate of other sales in the front store. Obviously this is good for us from a margin standpoint. [Moody Long’s] in the third quarter private label accounted for 17% of front store sale, up 120 basis points versus last year. We added about 250 new private label items and we expect to add over 900 for the full year.

We had pretty good growth across most of our categories and obviously as you would expect in light of the flu, we had especially strong growth in cough and cold. Conversely, back to school was relatively flat while photo and greeting cards were slightly down.

Like last quarter, our average front store transaction on a comp basis grew slightly in the third quarter. The better news is that this quarter we saw comp traffic up slightly. That’s a positive sign that the economy has started to improve. Having said that, we expect consumers to remain value conscious on a go-forward basis for a few quarters, at least.

Let me update you on the Long’s integration -- we completed the systems integration in May. We closed the headquarters in July and we completed all store remodels in October. We are right on track. We are introducing the stores to the marketplace with a multimedia advertising blitz as we speak.

Even before the promotions, however, the early results of store remodels have been very encouraging. The post remodel script performance has shown steady improvement while the post remodel front store sales have shown an immediate response since the resets. And as you all know, when you do remodels, you have a disruption of service so the disruption was lower and the comeback was certainly faster and better than we thought once the remodels are completed.

Since the acquisition, we have surveyed over 125,000 customers across the board. We track this data pre and post conversion. Our pharmacy service, neatness, and cleanliness metrics have improved dramatically and what is especially encouraging to me is that when you compare these service metrics with other acquisitions that we have done at the same point and time, we are virtually ahead on every dimension. We are already exceeding our profitability targets for Long’s, driven by strong margin performance as well as good expense management.

In the Long’s stores, many private label products were introduced in the spring with the initial update of Long’s merchandise assortment. The rest of the proprietary products we’ll introduce later. So right now we have private label is about 11% of front store sales. That’s obviously lower than our core business but up 700 basis points since the second quarter.

As a reminder, the Long’s acquisition was completed in October last year so the stores will be included in our comps for the first time in November. As we said before, we expect the initial impact of the comps to be slightly negative because of the remodels but we look forward to continuing to narrow the sales productivity and margin gaps between the former Long’s stores and core CVS stores.

As for new stores, on the real estate side we reached a milestone this quarter. Larry Murlow, our President of CVS Pharmacy, opened our 7,000th store in Little Canada, Minnesota -- who knew? In total, we opened up 87 new and relocated CVS pharmacy stores in the quarter and closed six others, resulting in 59 net new stores in the quarter.

Year-to-date, we opened or relocated 256 stores, so we are right on track to add about 3% retail square footage growth for ’09.

We also completed 37 file buys in the quarter and we expect to do about 250 for the year, which is up about 10% versus last year and it’s good to have this obviously because this is a great return for us and in fact many times the pharmacy staff and the owners actually come to work for us.

Let me touch on minute clinic, which has now surpassed 5 million patient visits since its inception. We opened up eight new clinics during the quarter and now we have 565 clinics across 25 states, about 100 of those operate seasonally. In the third quarter, we saw better than expected growth in the clinics, and this growth was really excluding the flu shot. So we had traffic up 77% in minute clinic and that’s not counting the flu shots. These are just people coming for acute sick visits. So it was really driven for three reasons -- one the severity of the flu like symptoms and people just coming in; second, we are benefiting from increased public awareness, which is one of our goals we had to get the consumer more aware of minute clinic and where we are and what we have to offer. And third, we increased third party coverage. As you know, third party coverage leads to higher utilization. We added another 4.5 million additional lives to the network in the third quarter so now 80%, slightly over 80% of the visits are third party paid.

We are focused on improving the returns at minute clinic. One step towards that goal is our recent decision to move the majority of minute clinic’s corporate functions from Minneapolis to Rhode Island. The move will facilitate sharing of infrastructure function and services and will improve speed to market for CVS Caremark’s chronic care and patient engagement and disease management initiatives. The cost of this move is approximately a penny a share, which will be primarily in 2010.

We remain very enthusiastic about the prospects for minute clinic. As you know, we are investing about $0.05 to $0.06 in minute clinic this year. We expect somewhat less next year, maybe $0.04 to $0.05 and we expect to break-even in 2011 on an all-in basis.

Now let me turn to the PBM business, which also had a very good quarter. Let me give you some highlights -- pharmacy network revenues were up 28%. Mail choice revenues were up 14.8, and recall that mail choice is our metric which includes mail order plus 90 day claims filled at retail via maintenance choice.

Our generic dispensing rate increased 320 basis points to a best-in-class 68.3 versus LY. Operating profit in the PBM was up 13% and EBITDA per adjusted claim increased 8% to 489 on an apples-to-apples basis. You have to adjust out the RX America which was not in last year’s results.

As I mentioned earlier, our new products are gaining traction. Today I am pleased to report that we now have 417 clients representing over 5 million lives who have adopted maintenance choice or will adopt it in the first quarter of ’10. That’s up from 270 clients in the second quarter and 200 at the beginning of the year, so clearly maintenance choice is gaining acceptance in the marketplace.

The 417 clients adopting maintenance choice represent only about 13% of our book, so there is clearly room to grow. Our early adopters of maintenance choice are telling us they are satisfied with the implementation process and that their members view the offering as a major enhancement to their benefit since now they have the convenient option of obtaining their prescriptions at any CVS retail store or mail order and they still get the benefit of mail order pricing.

Remember, this program is just an extension of our mail offering. It lowers cost for patients and payers. That is why it is being so well-received in the marketplace.

One of our next innovations we are working on is the consumer engagement engine. It is not a product like maintenance choice. It’s a data management system with a clinical rules engine which will combine and analyze data to provide us with a single view of every CVS Caremark patient. Of course the data analysis and other CEE initiatives are performed in compliance with applicable privacy laws. Whether a patient uses mail pharmacies, our minute clinics, our retail pharmacies, our specialty pharmacies, the CEE will further enhance the benefits of our integrated model by distilling data down to actionable messaging for our clients and our pharmacists. It may highlight opportunities for cost savings around formula recompliance or generic substitution. It may improve patient care through better compliance. Patients using our call centers, using our website, receiving outbound letters or interacting with pharmacists will all receive targeted messages to help them save money, save time, and stay healthy.

As an example, CVS pharmacists will be able to restart someone on therapy from a mail order prescription that they may have discontinued, or help a member at retail get started on mail order.

This will provide us with an unprecedented capability to engage patients and to eliminate gaps in care, improve adherence, and help drive cost savings. It will be rolled out to our core channels in mid 2010 and we will have evidence in the -- and drive it in the selling season for 2011.

Speaking of 2011, we announced on Monday that we renegotiated and extended our $4 billion contract to provide retail pharmacy benefit services and all clinical services for Blue Cross Blue Shield and known as the federal employee program, FEP. The three-year contract originally due to expire at the end of 10 has been extended through the end of 11. While it will cost us some margin dollars in 2010, I am certainly pleased with the extension.

So let me talk about the selling season -- we had some good wins. We had about 125 new clients. We had a retention rate of about 92%. Having said that, we had some big client losses and let me recap those for you so everybody is on the same page.

We had $1.4 billion in wins in 2010. Approximately $600 million of those gross wins came since the last quarterly call.

We had $4.5 billion in losses and approximately $2 billion plus of those came from the last call, since the last call, and those would be Horizon, I think you know about the State of New Jersey. This was a bid that the state wanted on a standalone basis so it was kind of a price and carve out issue. We lost the State of Ohio on the managed Medicare business. It was carved in, which was about $500 million plus. And then we had another $600 million miscellaneous. These were basically smaller clients around RX America or Pharmacare that just really wanted essentially smaller PBMs. So in total, that was about $2 billion plus since the last call.

And then lastly, we had $1.7 billion that we lost in Med D business. This was the 500,000 lives that we lost in the [duos], and once again this was since the last call. So net net, it’s about $4.8 billion in net loss for 2010 and approximately almost $3.7 billion since the last call.

If you look at the losses, total losses with Med D and the $4.5 billion contract losses, they really come from four contracts plus the Med D lives, the two really that I mentioned and then Chrysler and Coventry.

So what does this all mean for 2010? As you all know, on our last quarterly call, I said I would -- we were not in a position to provide 2010 guidance at that time, which we weren’t because we hadn’t done our budget. But I also said I would be disappointed if we didn’t have an EPS growth of at least 13% to 15% next year for the enterprise. To get to that 13% to 15% growth rate, I expected strong double-digit growth in our retail business, which I still do, and I expected low to mid single digit in our PBM business, which is not going to happen.

What has changed? Well, as I just said, we lost more PBM business than we expected since the call, $2 billion in contracts. We lost the Med D duos in 15 regions, which was $1.7 billion, which I just referred to. And we extended the $4 billion FAP contract through 2011 at the client’s request. This was an early renegotiation, not at our request but at the client’s request. So we are going to have obviously some margin implications in 2010.

Given all of that, it now looks like operating profit in the PBM will decline in 2010, perhaps as much as 10% to 12%. I want to point out that approximately 10 basis points of that -- 10 percentage basis points of that change is Med D alone. While our retail business is still expected to achieve strong double-digit operating profit growth in 2010, which will likely be -- the retail range will likely be in the 13% to 16% range.

With regards to the PBM, I want to announce the following changes in our organization. Howard McClure, President of Caremark, will be retiring effective November 27th. I will be the President of the PBM on an interim basis while we conduct a search and will keep you posted on the progress.

As you know, Howard was one of the chief architects of our integrated model. His experience has been invaluable to our company, yet after 30 plus years Howard felt it was right for him to retire and we wish him well in the next chapter of his life.

We also announced yesterday we hired a new senior VP of marketing for the PBM, Len Greer. Len’s knowledge of our industry and strong marketing skills make him qualified to deliver or help deliver our messages in the marketplace.

Now before turning it over to Dave, I am also pleased to announced that our board of directors approved a new share repurchase program for up to $2 billion of outstanding common stock. This reflects our confidence in the future growth of our business and our ongoing commitment to improve and increase shareholder value. We expect to repurchase the shares from time to time from now through 2011.

Now I will turn it over to Dave for his financial review and then I will be back with some additional remarks.

David B. Rickard

Thank you, Tom. Good morning, everyone. This morning I will walk you through our third quarter financial results. Then I will update full year 2009 guidance. But before I do that, let me highlight some key improvements that we have made to the way we report our segment financials, all of which I mentioned on last quarter’s call.

These changes reflect the way we look at the performance of our businesses, develop our strategies, and allocate resources. We hope they will make it easier for you to understand what is going on in our operating divisions.

The first change involves the reclassification of certain administrative expenses previously recorded within the PBM and retail segments to a new corporate segment. The corporate segment consists of certain costs which benefit both operating divisions equally. These are primarily associated with executive management, corporate relations, legal, compliance, human resources, corporate information technology, and finance.

Of course, this change had no impact on our consolidated results of operation but we now report on three operating segments -- pharmacy services, retail pharmacy, corporate. You will see that our historical segment disclosures have been revised to conform to the current presentation and we have made available on our website all the quarters going back to the first quarter of 2008. We believe that this change will give better visibility to the operating dynamics of both our retail and our PBM segments.

Secondly, we made a change to our PBM segment as it relates to our inter-segment activity, such as the maintenance choice program. This change impacts the gross profit and operating profit lines within the PBM segment. Under the maintenance choice program, a PBM client member can elect to pick up his maintenance prescriptions at one of our CVS pharmacy stores instead of receiving it through the mail. When this occurs, both the retail and the PBM segments now record the revenue, gross profit, and operating profit associated with this maintenance prescription on a standalone basis and corresponding inter-segment eliminations are created. Previously only the revenue was recorded by both segments.

We believe that this new method more clearly portrays the true performance of the individual operating segments, regardless of which segment creates the sale or dispenses the product or service. This change is reflected in our segment results for the third quarter and in the year-to-date results. The maintenance choice comparative amounts for 2008 were also revised, although the program was still in a pilot phase at that time and consequently the amounts were quite small.

Lastly, also beginning with the third quarter, we are now reporting mail choice volumes and related statistics as opposed to mail order volumes. Recall that mail choice is our metric that includes mail order claims plus 90 day claims filled at retail via maintenance choice. We believe that this provides a clearer picture of our business as it has become more channel agnostic in regard to 90 day claims. Those were previously overwhelmingly filled in mail order facilities.

Related to this, since maintenance choice is included in our mail choice metric, what we now refer to as pharmacy network is simply the PBM’s retail network less those maintenance choice scripts that moved to mail choice.

Now on to revenues -- Tom covered the highlights but let me add several details worth mentioning. The $24.6 billion in consolidated revenues is net of $2 billion of inter-segment eliminations. The inter-segment eliminations as a percent of PBM retail network revenues increased by approximately 400 basis points over the prior year period, from 18.1% to 22.2%. This is up sequentially from last quarter’s 330 basis point increase, further tangible evidence that there is an expanding base of our PBM customers choosing CVS as their retail pharmacy and an expanding number of PBM clients who choose to leverage the CVS retail service offerings, including maintenance choice.

In our PBM segment, third quarter net revenues of $13 billion increased 23.4%. RX America contributed approximately $1 billion of that growth during the quarter, while one extra day this year added approximately $136 million. So the underlying growth rate was 12.2%.

Drilling down a little deeper, the PBM pharmacy network revenues in the quarter rose 28.3% over 2008 levels to $8.8 billion. That was largely due to the change in revenue recognition method from net to gross for the RX America contracts that began in the second quarter. Pharmacy network claims grew 9%. This growth was driven by the addition of RX America, as well as the impact of net new business.

Total mail choice revenues grew by 14.8% to $4.2 billion. Our overall mail choice penetration rate of 23.8% was up approximately 50 basis points from the rate in the third quarter 2008 on a reported basis. However, RX America’s claims mix, which is heavily weighted toward retail network claims, diluted the mail choice penetration rate by 240 basis points. So adjusting for this factor, our underlying mail choice penetration rate grew from 23.3% to 26.2%, up 290 basis points.

Now what about the retail drug store side of our business? We saw revenues increase by 17.9% to $13.6 billion in the third quarter. Long’s contributed approximately $1.0 billion of that growth during the quarter, while one extra day this year added approximately $167 million. So the underlying growth rate was 7.5%.

As Tom mentioned, our third quarter comps increased 5.7%, with pharmacy comps up a very solid 8% and front-store comps up 0.8%.

Moving on to gross profit, the overall dollars improved by 14%, despite percentage margin dropping by 75 basis points. Within the PBM segment, the gross profit margin was down approximately 50 basis points. That was expected due to the change in the revenue recognition method for RX America, as well as the pricing decisions we made last year for a few key contracts.

The gross profit margin in the retail segment declined by approximately 100 basis points in the third quarter to 29.4%. That reflects pressure on third party reimbursement rates as well as a higher mix of promotional sales, which more than offset the positive impact of new generics.

And what about expenses? Overall operating expenses as a percentage of revenues improved by approximately 10 basis points. The PBM segment’s percentage stayed flat at 1.8%. That was despite the impact of the elimination of the universal American joint venture, the income from which was historically an offset to expenses.

We also saw some integration expenses for RX America flow through in the third quarter. So excellent expense control there.

In the retail segment, the improvement was approximately 20 basis points to 22.7%. We saw good spending discipline at the store level, as well as favorable timing of advertising spending in the quarter. Of course, partially offsetting that were the one-time expenses from the Long’s integration.

Within the corporate segment, we saw expenses rise by approximately 20%. The larger than normal increase was due primarily to the addition of Long’s and RX America corporate expenses, as well as some compensation and benefit costs.

So with the gross margin decline only partially offset by improvements in SG&A as a percentage of sales, operating margin declined as expected. It was down approximately 67 basis points to 6.4% of revenues.

Moving to the consolidated income statement, we saw net interest expense in the quarter increase to $123 million, largely reflecting the increased debt position due to Long’s. Our effective income tax rate was 29.1% in the third quarter. The large improvement was due to the recognition of approximately $155.7 million of previously unrecognized tax benefits relating to the expiration of various statutes of limitation and settlements with tax authorities. Excluding the impact of this reserve release, the effective income tax rate for the third quarter would have been approximately 39.8%.

Our weighted average diluted share count was 1.44 billion shares. Through the end of October, we have repurchased 57.7 million of our shares for $1.99 billion at an average share cost of $34.66, including commissions.

So we nearly completed our $2 billion share repurchase authorization and we expect to complete the remainder this month.

And then as Tom said, the board of directors just approved a new $2 billion share repurchase program and we expect to purchase shares from time to time between now and the end of 2011.

Adjusted EPS from continuing operations was $0.76; excluding the $0.11 tax benefit, it was $0.65, an increase of 8% over last year’s third quarter and just [above] guidance.

GAAP diluted EPS from continuing operations came in at $0.71 for the quarter, or $0.60 when adjusted for the tax benefit. That’s also approximately an 8% increase over last year.

Turning to the balance sheet and cash flows, we generated over $490 million in free cash flow in the third quarter. That compares to $386 million in the prior year’s third quarter, so we’ve made some nice progress there.

Net capital expenditures amounted to approximately $416 million in the third quarter. This was the result of offsetting the $661 million of gross capital expended with approximately $245 million worth of sale leaseback proceeds.

Barring any new and currently unforeseen financial market problems, we still expect that we will be able to complete the sale of the remaining $900 million or so in properties we had planned when the year began.

Lastly, in September, we issued $1.5 billion of 30-year unsecured senior notes that were well-received by the market. We used the proceeds primarily to repay a portion of our outstanding commercial paper borrowings, as well as a $650 million senior note that was due in September.

So we ended the quarter with total debt net of cash and cash equivalents of $10.8 billion. That’s up approximately $400 million from year-end and largely reflects normal swings in our working capital.

Now on to guidance for the year -- for the retail segment, we continue to expect revenue growth of between 12% and 14% for the year with total same-store sales in the range of 4% to 6%. For the PBM segment, revenues should be up between 16% and 18% for the year. For the total company, we expect revenue growth of around 12% to 14% for the full year after inter-company eliminations of over $7.5 billion.

Gross profit margins still are expected to be modestly below 2008 with retail flat and the PBM segment down. We expect total company operating expenses as a percent of revenues will be modestly up. That reflects the integration and one-time cost of Long’s, the increase in litigation reserves we saw in the first quarter, as well as the first year economics of a large amount of new PBM business. All of that will lead to operating profit margins for the total company which are moderately below the record levels of last year.

We expect EBITDA for adjusted claim to be down slightly on a reported basis but up mid-single-digits when normalized for RX America and the increase in litigation reserves.

We forecast net interest of about $530 million to $545 million. We expect our tax rate in the fourth quarter to approach 40%. Keep in mind that the full year rate will be impacted by the tax benefit we recognized in the third quarter.

And we are forecasting approximately 1.45 billion weighted average shares for the year.

We expect total consolidated amortization for 2009 to be a little shy of $450 million. Depreciation should be just under $1 billion.

Net capital expenditures are expected to be in the range of $1 billion to $1.2 billion for 2009. Free cash flow is expected to be in the neighborhood of $3.5 billion.

So given our continued strong performance year-to-date, we are narrowing our earnings guidance range for 2009. We expect to deliver adjusted earnings per share from continuing operations excluding the effect of the tax benefit of $2.61 to $2.64, up from our previous guidance of $2.59 to $2.64.

Now I will turn it back over to Tom for some closing remarks.

Thomas M. Ryan

Thanks, Dave. Before opening it up for questions, I want to update you all on the CFO search. Earlier this year, as you know, Dave Rickard announced his intention to retire and we launched an internal and external search for our new CFO. Today I am extremely pleased to announce the appointment of Dave Denton to the role of Executive Vice President and Chief Financial Officer effective January 2, 2010. Currently our senior VP, Controller, and Chief Accounting Officer, Dave brings nearly 20 years of financial management experience with a focus on healthcare and retail drug to his new position. Dave has been with the company for more than 10 years, working almost exclusively for Dave Rickard. He has experience in all key areas of finance, including serving as a CFO of our PBM PharmaCare, as well as in retail and corporate positions. His broad financial experience, industry expertise, and a deep understanding of our customers will help make him an outstanding CFO.

So in summary, we certainly have had a lot of news today. I don’t want to lose sight of the solid quarter we had, with great revenues and profits and cash flow and leading comps and private label sales and maintenance choice up. We locked in a new important contract for 2011, Long’s is in good shape. We had record results for minute clinic and obviously we named a new CFO.

So while it was a good quarter, we are not in this for quarterly results. We are about growing the company for the long-term. I am pleased with the consistent industry-leading performance of our retail business and the plans we have in place to ensure that continues.

While there are a lot of positives on the PBM side of our business, I am obviously not pleased with our 2010 outlook. We will be making appropriate changes to restore the [PBM’s] appropriate level of growth.

So with that, I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tom Galucci with Lazard Capital.

Tom Galucci - Lazard Capital

I guess just to be clear then, Tom, relative to the 13% to 15% for next year that you had initially discussed, when you talked about the PBM being down 10% or 12% on operating profit, are we looking at something more like a 2.75 or 2.80 number on an EPS basis?

Thomas M. Ryan

Well, you can -- we are not going to obviously give you the totals but you can kind of roll it up and get to the number. But it’s -- as I said, when we did these and I gave you those projections, it was basically single to mid -- single mid digit -- low mod digit single growth for the PBM, so we were looking in the 2% to 4%, 2% to 5% range for growth when we gave you those numbers and obviously it is going to be less than that, as I said, in the 10 plus range. So you can kind of roll it up and get in the ballpark.

Tom Galucci - Lazard Capital

Okay. Obviously the Achilles Heel I think for the stock and certainly it looks like for next year in terms of overall growth is going to be the selling side on the PBM business. Can you give us maybe some more granularity as to why in the long run you are still optimistic about the combined model and maybe sort of what has gone wrong in the last year or two and why you think that is going to get better in the next year or two?

Thomas M. Ryan

The reason I still have confidence and we continue to have confidence in the combined model is because of the -- what we are seeing in the marketplace from new clients and the money and the time that we are saving not only the plan but the members. So there is uptake on it and listen, this is all about results, so I am not Pollyanna here. We get it. We have to produce better results on the PBM side.

Having said that, I think it’s important to segment the pieces. We had some big losses. We had a lot of wins. We renewed contracts. We are getting more share of the spend from those contracts but we in fact when you lose -- we lost Coventry, which we lost the Med D business and then we obviously expected to lose the commercial business. Chrysler, we lost the retirees. It’s the smallest piece of it. It went to where Ford and General Motors was with Michigan Blues. We didn’t lose the actives. And then the Med D was a really big headwind for us. That was a huge hit when you look at obviously the spread issue and then also the live.

And I am still not happy with it but if you look at where we were, I mean, we were thinking that we were going to be in the 3% to 5% growth, 3% to 5% growth range for the PBM. That was with the kind of Med -- even with the -- so you back out the Med D, Med D was 10 percentage points, right, the spread. So we are not going to have that headwind in ’11. Obviously we are going to have -- we believe we are going to have more time in the selling season. Listen, this has taken more time than we thought, right? We developed these programs in ’08. We started selling them in ’09 and we got less uptake in ’10 and then we got hit with some big losses and then the Med D.

So we are confident. We’re making some changes but it’s -- if you look at these contracts that we lost, none of them were because of the model. There were varying reasons, some price, one service -- there were varying reasons but none of them because of the model. Having said that, we know we’ve got to produce results and produce results going forward.

Operator

Your next question comes from the line of Eric Bosshard with Cleveland Research Company.

Eric Bosshard - Cleveland Research Company

With the growing number of clients that you have on maintenance choice, can you talk about the success you are having in growing 90 day penetration with those accounts?

Thomas M. Ryan

Yeah, we -- when you think about the -- I think we said 13% or so of the clients have it now. The issue is clients have to move -- obviously the clients with mandatory mail were the first clients to move and then now clients are looking for new ways to save money. They are moving, changing plan design to get to drive people more to mail and they are willing to do that because we have the combined offering, right? They can get it at mail or retail. So we are going to continue to drive that. You saw the up-take -- I mean, it doubled from where we were and we expect it to geometrically increase going forward.

Eric Bosshard - Cleveland Research Company

I guess more specifically, the clients that have adopted it, how much more mail penetration is taking place as a result of -- or coincident with them putting the program in place?

Thomas M. Ryan

It’s significant. I mean, typically the -- obviously the mandatory mail clients, there is no change, essentially but they double their mail share. I mean, it’s -- and that’s on the low side. They move up a significant amount of mail share, sure.

Eric Bosshard - Cleveland Research Company

And then secondly on the retail gross margin where the trend was weaker this quarter than we saw in the first half of the year, and I know you talked a little bit about promotions but can you or Dave just provide a little bit more color on what took place there and if this is something that is a one quarter phenomena or if it is likely to sustain?

Thomas M. Ryan

I think it is really RX reimbursement. I mean, that’s kind of the main focus which you will see across the board. We expected a little more. It’s around the -- especially around the state Medicaid issues. Some private payers, but more around the states. So I don’t think it’s any significant trend. Do you have anything to add?

David B. Rickard

I think that’s right. I mean, clearly the percent from on promotion in the front of the store is well up and I think that must relate to the economy and so -- you know, you tell me when the economy gets better, I’ll tell you when that gets better. So I think that’s economically related. The rate pressure is what it is. I mean, it’s always been there. It’s been there for the last 10 years.

Thomas M. Ryan

Our rate, front store margin rate is actually holding up considering some of the promotional activity.

David B. Rickard

Yes, absolutely.

Eric Bosshard - Cleveland Research Company

Thank you.

Operator

Your next question comes from the line of Lisa Gill with J.P. Morgan.

Lisa Gill - J.P. Morgan

Tom, can you talk about the strategy on the PBM side, naming Len Greer? You said that you didn’t feel that you lost business because of the messaging but do you feel like maybe you didn’t win your fair share of business because of the messaging coming out of the PBM? Can you maybe talk about that?

And then secondly, can you talk about benefit design changes for 2010? We talked about maintenance choice but what else are you seeing as far as benefit design changes go?

Thomas M. Ryan

I mean, I think it’s fairly common knowledge that our message early on was not clear, to be honest. It was not simple for managers, benefit managers to understand. It focused a little too much on the retail side of the business as opposed to a coordinated effort and Len has deep PBM experience, he has disease management experience on the marketing side, so yes, he’s brought in to help change that message on a go-forward basis and we’ve had a lot of discussions with clients and consultants around that, so that message has changed as we speak and he starts obviously in about a week.

As far as plan design, we are seeing obviously people reaching out for step therapies, for high performance formularies, for generic first, and obviously a move to the maintenance choice because they obviously can save money but we are seeing more people thinking about high performance formularies and obviously any way to get faster uptake on generics, whether it is through co-pays or step therapies.

Lisa Gill - J.P. Morgan

And then just one follow-up -- what are your plans for the PBM with Howard retiring? Are you looking outside of the company for someone to come in and replace that role?

Thomas M. Ryan

We are going to do a search, a complete search and obviously we know the internal candidates. We are going to do -- but we want to do a complete search outside, so it will be comprehensive inside and outside and we have started the process, so we’ve done some groundwork and we will be on it shortly. We will give you an update.

Lisa Gill - J.P. Morgan

Thank you.

Operator

Your next question comes from the line of John Heinbockel with Goldman Sachs. Mr. Heinbockel, your line is open.

Our next question comes from the line of Robert Willoughby with Banc of America Merrill Lynch.

Robert Willoughby - Banc of America Merrill Lynch

You know, Tom, how do we look at the revised PBM outlook as anything but proof that no real clear synergy does exist here? You speak about improving the business but I mean, what are the credible data points we can put forward that this can happen? I just don’t see how you can restore growth given the performance over the past couple of years.

Thomas M. Ryan

Well, we had $9 billion of new business ’08 and we have new clients. I get the question but the issue is you have to back out the big losses and the losses really, really weren’t related to the model. And you can go through the losses of the four big contracts this year and then obviously the significant impact on Med D, both lives and spread.

Robert Willoughby - Banc of America Merrill Lynch

But without a PBM management team in place, does it make more sense to spin the thing now while there is still more value there or you are committed to this business to the end?

Thomas M. Ryan

Well listen, the PBM is not performing at the level so you wouldn’t spin it. I mean, the issue if you are getting -- if both groups are performing at the right growth rate and you are not getting -- and you are not getting a multiple, then one can talk about that, right? But -- and then we will look at shareholder value. But you have an issue right now that the PBM is underperforming the peers and so to spin it, that doesn’t really do anything and we still believe that the combined company is the right approach for payers and plan participants. And you know, so we had some stutter styles, we had some marketing issues, we’ve acknowledged that. We had the Med D issue, which is separate, and we had some contract losses. So we are certainly not happy with it but it is not the model and I certainly don’t think spinning off a PBM that’s not performing the way it should be is right for shareholders.

Robert Willoughby - Banc of America Merrill Lynch

My only comment would be I guess a credible action plan to improve the results is what we will need more details on going forward.

Thomas M. Ryan

You will get that and you will get that shortly.

Robert Willoughby - Banc of America Merrill Lynch

Thank you.

Operator

Your next question comes from John Heinbockel with Goldman Sachs.

John Heinbockel - Goldman Sachs

Just one qualification on next year, is it fair to say because obviously the CVS retail business is larger than the PBM, that if the large one is growing at 13% to 16%, that overall EBIT would be up next year because of that mix.

Thomas M. Ryan

Yes, that’s correct.

John Heinbockel - Goldman Sachs

Okay. Secondly, when you think about your free cash flow for next year, I think you said $2 billion to buy back through the end of 2011 -- I mean, given where the stock is today or trading today, I mean, you would think that you would complete that relatively quickly, i.e. in 2010. Is there anything that would prevent that from happening?

Thomas M. Ryan

John, we will obviously consider the stock price as well as the ebb and flow of cash within our business, but those decisions will be made weekly and monthly as we go, so I don’t want to give you an indication that we are going to front-load or middle load or back load right now.

John Heinbockel - Goldman Sachs

But is there anything in terms of CapEx next year or anything the cash flows of the business that would preclude you from doing the $2 billion if you wanted to?

Thomas M. Ryan

I don’t think there is anything unusual about next year’s CapEx expectations or anything else, so I think we will have a degree of flexibility and then it’s a question of how we use that flexibility.

John Heinbockel - Goldman Sachs

All right, and then finally, you guys said not -- you sort of referenced the flu for the fourth quarter. At this point, including both H1N1 and seasonal, how difficult is it to get your arms around not just the fourth quarter benefit but I assume there probably will be a first quarter benefit as well.

David B. Rickard

I think that’s absolutely right, yes. And you know, different knowledgeable people are talking about how long this thing is going to go on but it could go on for quite a ways.

Let me back up though to the share repurchase question and answer that we just had and add one other thing -- I just want to be clear that the board authorization is from now to the end of 2011 so it is entirely conceivable that some of that activity will be yet in the year 2009.

John Heinbockel - Goldman Sachs

Right, and that was incremental to the amount that is still left on the old buy-back or --

David B. Rickard

That’s correct. It’s incremental.

John Heinbockel - Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Ed Kelly with Credit Suisse.

Ed Kelly - Credit Suisse

If I just think about the industry on the PBM side and the pricing environment, I mean, it’s pretty clear to most in the industry that pricing was fairly aggressive last year generally. This year seems to be a bit more benign but I was hoping to get your thoughts on next year. I mean, it’s obviously very important for you to go out and end the year next year with net wins. So doesn’t this almost ensure a more aggressive pricing environment as we look out into next year?

Thomas M. Ryan

No, I don’t think so -- it’s -- this is all -- pricing environment is relatively rational, sans a few big contracts and I think that has been the policy of the program for PBMs for the last 10 years. And on a go-forward basis, we are certainly going to be appropriately aggressive on price and where we should be for appropriate contracts but the wins are really around the service level and the clinical opportunities and savings that we can provide our clients.

So no, I don’t see -- this is not going to be a case of CVS Caremark out in the marketplace just [lowering] pricing to get contracts. We are going to be appropriate, we are going to look -- you have to look at this from a return standpoint and we will be -- we will measure our pricing appropriately.

Ed Kelly - Credit Suisse

All right, and just my second question for you is on the retail business -- what is your level of confidence in this 13% to 16%? I mean, the business itself in this given quarter, this current quarter, was up 5%. Q4 is probably going to be [inaudible] the flu, so you’ve -- you know, you obviously have to start to anniversary that.

You know, is there any risk to the retail side of the business? I know there’s a lot of time being spent today on the PBM but your thoughts there would be helpful.

Thomas M. Ryan

Listen, we’ve been fairly consistent in our performance in the retail business, even in this climate. PBM is helping the retail business. The retail business is taking share from other players in the business. The quarter was obviously depressed a little because of Long’s, which is obviously going to change in 2011.

So I mean, I feel as I said earlier on the call when we did the projections, when I talked about the 13 to 15, I talked about where I thought the retail business would be and that has not changed. That has not changed from the second quarter call to now and obviously we are further along in the planning process and we have more confidence in the -- I am confident in the retail number not only next year but on a go-forward basis on what we have in the hopper. Obviously the issue was the PBM side.

Ed Kelly - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Ann Hynes with FTN Equity.

Ann Hynes - FTN Equity

I guess on the PBM, the 10% to 12% decline for 2010, you broke out one part that is 10%, I think you said was coming from the Med Part D. Can you break out the other components? Is there anything coming from a decline in maintenance choice, maybe profitability leaving the PBM going to the retail? Pricing and contracting, can you just kind of give me what is driving the 10% to 12% besides 10% from Medicare Part D?

David B. Rickard

Yeah. Ann, I think it’s quite obviously the loss of business, the contracts that we have lost. There’s no negative effect of the shift of maintenance choice business. That’s incrementally positive for us, so it really does come down to those contracts.

Ann Hynes - FTN Equity

All right.

Thomas M. Ryan

It’s the contracts and -- you know, and the Med D. You put those together, it’s $6 billion plus of business.

Ann Hynes - FTN Equity

All right, and secondly I guess going back to the question that was just asked on the retail business, the 13% to 15%, I guess I question how comfortable you are with that given the economy. I mean, it seems front store same-store sales only grew 0.8% and I think when we look into 2010, I don’t think anyone is really projecting an economic recovery. So on the front store sales of that 13% to 15%, I guess what is your assumption for front store sales?

Thomas M. Ryan

We haven’t -- we won't give out the individual assumptions but we have always said that even if the front-end sales were 1% comps, we could certainly make the numbers I am talking about, so we are pretty confident in the pieces on the retail side.

Ann Hynes - FTN Equity

Okay, thanks.

Operator

Your next question comes from the line of Scott Mushkin with Jeffries & Company.

Scott Mushkin - Jeffries & Company

So Tom, it seems like as kind of a good news and then I guess very bad news, but the maintenance choice, you know, you had a real big acceleration there. I know on the last conference call I was asking you questions about that and you said you know, really it’s going to be a lot slower as we get to Jan 1 and then lo and behold, we have a huge amount of more lives coming in, which is suggestive that something is working right here. But then you look at the PBM numbers and it gives everyone heart palpitations, so number one is why are people kind of shying away from Caremark’s PBM? If it is not the combined model and you kind of said maybe it’s -- there must be some reason that you are not proving that you are a good enough standalone PBM to keep those businesses -- how do you change those people’s minds? And -- so I guess that’s my first question.

Thomas M. Ryan

Execution and performance. It’s not the products. Believe me, the products that we are offering are accepted in the marketplace. Now, I have to tweak the marketing message a little, which we are doing, to make sure it’s clear about how those operate and what those actually are and when they hit and what the savings are, and the benefit to the payer. So there is clearly receptivity to the new products.

There were some standalone issues. I mean, I hate to keep harping on it but listen, the Coventry piece when we lost Med D and we knew we were going to lose the commercial business, there were some service issues on that one. The [VIBA], Chrysler, we still keep the actives. We lost the retirees, the Med D I’ve talked about so I won't go through it all again but there were a variety of issues but none of it was -- we didn’t lose anybody. I will tell you this, we didn’t lose anybody that said well, because you guys are combined with a retailer, we are leaving. None of that. And there’s actually a lot of uptake in the marketplace, as I said, for the products and we are obviously taking retail share. We are gaining some retail share. We are increasing the free cash flow. We’ve got new products, we’ve got the synergies, and -- but at the end of the day, we’ve got to have the clients. And we’ve lost some big clients. We’ve gained a lot of clients, smaller ones, and I think on a go-forward basis there will be stickiness to those clients, as long as we are obviously giving them the price, saving them money and producing the right service. And which we have had and intend and will do on a go-forward basis.

Scott Mushkin - Jeffries & Company

So another -- and I guess a little bit kind of off of Bob’s question but maybe a little different question earlier on getting, breaking the company back up, I guess the question really is how confident are you that you are going to be able to do all these silos well? You know, we were out and we’ve done a lot of store walking at Long’s and it is clear to us that the conversion there, you can tell you are spending less money. That doesn’t mean you are a bad retailer all of a sudden but how confident are you that you can maintain optimal performance in retail and a standalone PBM, and in a combined company that this isn’t just going to end up being very messy?

Thomas M. Ryan

Well, we’re not going to let it happen. I mean, there’s -- we are not short-changing retail because of this combined company. In fact, retail is benefiting from the combined merger.

What we did in Long’s, we would have done even if we didn’t have and didn’t do the Caremark deal. It’s just we’ve done acquisitions enough, we know where the savings are, we get better each time at it, we get better returns on it. Long’s is outperforming where we thought it was going to be. And each acquisition we’ve done on the retail side, we’ve done better and better.

So we are very happy with Long’s. When you go out -- anytime you do an acquisition, anybody who has been involved, there’s 500 stores, you go out to some stores, you will see some things that aren’t right. But in the long run, we are very confident in what we are doing at Long’s, how the team is working at Long’s, and where the performance is going to be. So there is no distraction -- let me make this clear, there is on distraction on the retail side of the business. We had a retail group that is focused on retail. We have a PBM group focused on the PBM and then we have a separate group that is focused on the integrated offering and we have some work to do on the PBM side as you indicated and -- which is obvious and we are on it.

Scott Mushkin - Jeffries & Company

Thank you for answering my questions. I really wish you a lot of luck. I was a big believer in this combined model.

Thomas M. Ryan

You still should be.

Operator

Your next question comes from the line of Matt Perry with Wells Fargo.

Matt Perry - Wells Fargo

Just trying to clarify -- I guess I don’t have a good understanding of the impact of the loss of the Med D lives due to the different bidding and the low income subsidy in 2010 versus 2009. The press release you guys put out maybe a month ago, you talked about a $0.03 to $0.04 hit. Is that -- is that number still good or does this kind of what you are talking about is a 10% of the deterioration [inaudible] -- just trying to square those two things.

David B. Rickard

The $0.03 to $0.04 relates to the revenue loss and it’s on top of the $0.05 to $0.07 of lock or spread loss that we had before. We lost about 0.5 billion lives -- sorry, 0.5 million lives and that represented about $1.7 billion of revenue and yes, that’s about $0.03 to $0.04.

Matt Perry - Wells Fargo

Okay, so the combined kind of swing in earnings from Med D is still the combination --

David B. Rickard

Eight to 11.

Matt Perry - Wells Fargo

Okay, 8 to 11, okay. And then maybe you can talk about -- I mean, I guess PBM segment renewals next year, how much of the current book is up for -- or will be up for renewal?

Thomas M. Ryan

For when?

Matt Perry - Wells Fargo

For next year, I mean, maybe give us a sense of how much of the business is potentially at risk -- is it a lighter year for renewals than this year was?

Thomas M. Ryan

No, well, we obviously -- we had a big renewal with the FEP, so that will obviously impact, will be less renewals and less out there. You know, as far as 2010 goes, 85%, almost 88% of them where decisions have already been made and 2011, there’s some fairly large opportunities for some new business in 2011. And as I said, renewals will be slightly less because of the big FEP renewal already.

Matt Perry - Wells Fargo

Okay, and then I just want to make sure I understand, the 13% to 16% EBIT growth in the retail side, that doesn’t require any kind of economic recovery, is that right?

Thomas M. Ryan

That’s correct.

Matt Perry - Wells Fargo

Okay. Thanks.

Operator

Your next question comes from the line of Meredith Adler with Barclays Capital.

Meredith Adler - Barclays Capital

I would like to actually talk a little bit more about the Med D business. You had earlier in 09 you had said that the business was going to be less profitable because it wasn’t underwritten properly. Would it be fair to say that you went to an opposite extreme when you bid for low income subsidy business for 2010?

Thomas M. Ryan

No, we didn’t go to an extreme. We actually -- we used the same approach we used in the past and as you know, Meredith, we had, as David said, about 500 million lives and half of those -- 500,000, excuse me, 500,000 lives and 1.7 billion but the -- half of those lives, you lose it on a premium that is $0.50 to $0.75 off, so obviously we thought we made a good bet on the premiums and it’s a balance depending on the region and we used the same approach with our actuaries and we lost those lives. But we didn’t get -- we didn’t really raise the prices significantly because we just -- we thought we appropriately bid them.

Meredith Adler - Barclays Capital

And my understanding of the Med D business is that once you lose those members, it is fairly hard to get them back, just because of the way the math works if you hit the benchmark for the following year, you are still not going to get all those numbers back.

Thomas M. Ryan

Well, you -- yeah, you know, there’s going to be some other members -- there’s some regions that others lost that we are still in that we may pick up business in but you are right -- it’s hard once they move to get them back. We think we’ve got some up-take on some regions that we are in where there will be few players, so we might have some upside there but you are right -- it’s hard once they make the decision.

Meredith Adler - Barclays Capital

And then I want to go back to this guidance you are giving -- I’m not exactly sure why you gave us earnings per share guidance for 2010 earlier that was for the entire company, 13 to 15, and then you are not giving us a comparable revised guidance. I am coming up with earnings per share of --

Thomas M. Ryan

Well, we didn’t -- let me be clear on that. I did not give guidance then. I said I would be disappointed if we weren’t in that range and I said it was too early to give guidance from a budgeting standpoint but now I’m just giving you full disclosure -- I’m telling you what we were thinking about on the 13 to 15 and how one could get there, and one could get there very easily with a PBM growth rate in the 2% to 4% range, when you look at where the retail side was growing, interest rates and share buy-back, et cetera, and all the pieces, it was pretty straightforward. Obviously when we lose significant business that we lost, almost $4 billion of business since the call, that 2% to 4% changes on the PBM side.

So I want to be clear -- we were not giving guidance, we never really haven’t. What I am doing now is telling you that I wanted to make it clear in the marketplace that I am not comfortable with that 13 to 15. I am telling you where and one of the pieces is the PBM side of the business is going to be down 10 plus, and for the reasons I cited.

Meredith Adler - Barclays Capital

Okay.

Thomas M. Ryan

So we are in the process of doing the budget and we will have it definite for you shortly.

David B. Rickard

In the fourth quarter call as usual.

Meredith Adler - Barclays Capital

Okay, and then just another question about the front-end in the retail business -- I am under the impression that you guys chose not to be particularly aggressive in terms of your own promotional activity. You’ve got the extra care card, it helps. Is that [safe to say] and would you do it any differently, are you thinking about doing it any differently to drive front-end comps say into the holiday season or next year?

Thomas M. Ryan

No, we are pretty happy with our promotional spend the way it is. I mean, you look at our numbers for the last few quarters or during this 2010, our front store as well as our pharmacy are growing significantly so we got two more quarters and we think we are in pretty good shape. We have obviously a good holiday plan in place for Christmas. I think our folks have done a good job. You know, good news, bad news, we’re getting more private label business and -- which is obviously helping margin and lowering some front-end comps but we are in good shape. We feel good where the front-end comps are now and our promotional plan.

Meredith Adler - Barclays Capital

Okay, great. Thank you.

Thomas M. Ryan

All right, I’ll take two more questions.

Operator

Your next question comes from the line of Helene Wolk with Sanford Bernstein.

Helene D. Wolk - Sanford C. Bernstein

I have two questions -- first on the math that you just provided on Medicare Part D, you talked about the two pieces, revenue, loss from membership, losses as well as the spread piece. What about the sort of base line change in the premium on the existing membership? Is that also factored in?

Thomas M. Ryan

Yes.

David B. Rickard

Yes, of course.

Thomas M. Ryan

Yes, it is.

Helene D. Wolk - Sanford C. Bernstein

Okay, and then I guess a second question, in terms of the PBM expectations for 2010, what are you contemplating around sort of operating expense changes or potential resizing, if anything, on the PBM front?

David B. Rickard

That’s really what we are doing in the budgeting [process] right now and we will comment more specifically on that on the fourth quarter.

Helene D. Wolk - Sanford C. Bernstein

Great. Thank you.

David B. Rickard

You know, there’s a lot of work going on around that, obviously.

Operator

Your last question comes from the line of Neil Currie with UBS.

Neil Currie - UBS

I just want to ask a question about your approach to the last couple of selling seasons because I think you are probably right in saying the integrated model per se is probably not putting people off the business and in the longer term, I am sure maintenance choice and other programs are going to be an enhancement to employers. But at the heart of this deal between CVS and Caremark, you created the biggest buying organization around generic drugs possibly in the world. Why did you not go to market on the basis of being able to offer people lowest possible cost and almost be the Walmart of your industry? Thank you.

Thomas M. Ryan

This was not just about price. We obviously had a fair amount of synergies when we did the deal and you are right, we are in the right spot from a purchasing standpoint and -- but this deal wasn’t just about being a price driven model. We -- price gets you in but it’s service, it’s the relationships, it’s the clinical offerings, it’s lowering overall healthcare costs that keep you there. So you know that we did obviously invest some price in some large clients, which we talked about and which is similar to what other PBMs would do and have done in the past and I think all PBMs will continue to do in the future on selected clients. But this was not about putting these two companies together and then coming in and just having a nuclear explosion on price. That’s not what the returns will be for this business.

So it’s about getting the appropriate price, a competitive price in the marketplace, one on new business and two on retained business, but then growing a share of that business and getting that client more profitable going forward.

Neil Currie - UBS

But it seems to be that you are being out-priced by others who have less scale than you, so I mean, is that the right way to look at it or why are you losing contracts?

Thomas M. Ryan

Well, we can go through the individual pieces but as I mentioned, the $5 billion that we lost, one was service on one of the health plan side and we lost on the Medicaid Med D business last year, and it was just a natural move to move the commercial business. The Ohio Medicaid was a regulatory issue, it was a carve-in. Med D we explained. Chrysler, Viva we explained.

So I guess the Horizon one from the standpoint of the State of New Jersey, that they wanted a standalone PBM model and there was some price issues there, I guess that was more aggressively priced from a competitor than we would have done. So this much business, Neil, it wasn’t -- the majority of that business was not lost on price.

Neil Currie - UBS

Okay. Thanks a lot.

Thomas M. Ryan

Okay, thank you all. I know this was obviously a difficult call and there’s going to be a lot of questions and we will be having answers for you on a go-forward basis. We are committed to turn the PBM performance around, we are committed to this model and in the long run, this is going to be right for the payers and the shareholders, so thank you very much and we will talk to you later.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CVS Caremark Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts