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CVS Caremark Corporation (NYSE:CVS)

Q4 2009 Earnings Call

February 8, 2010 8:30 am ET

Executives

Nancy Christal – Senior Vice President, Investor Relations

Thomas M. Ryan – Chairman, President, Chief Executive Officer

David M. Denton – Executive Vice President, Chief Financial Officer

Larry J. Merlo – President, CVS/Pharmacy Retail

Per G. H. Lofberg – President, Pharmacy Benefit Management

Analysts

Deborah Weinswig - Citigroup

Thomas Gallucci - Lazard Capital Markets

Edward Kelly - Credit Suisse

Lisa Gill - J.P. Morgan

John Heinbockel - Goldman Sachs

Robert Willoughby - BofA Merrill Lynch

Scott Mushkin - Jefferies & Co.

Helene D. Wolk - Sanford Bernstein

Mark Wiltamuth - Morgan Stanley

Meredith Adler - Barclays Capital

Operator

Good morning. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Corporation fourth quarter 2009 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Miss Nancy Christal, Senior Vice President of Investor Relations. Please go ahead, ma’am.

Nancy Christal

Thank you, Celeste. Good morning everyone and thanks for joining us today for our fourth quarter earnings call. I’m here with Tom Ryan, Chairman, President and CEO of CVS Caremark, who will provide a business update, and Dave Denton, Executive Vice President and CFO, who will provide a financial review of the fourth quarter and guidance for the first quarter and full year 2010. Larry Merlo, President of our Retail Business and Per Lofberg, President of our PBM Business are also here with us today, and both of them will participate in the question-and-answer session that follows our prepared remarks.

During the Q&A session we ask that you limit yourself to one to two questions, including follow ups, so we can get to as many analysts and investors as possible.

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 mentioned, as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at info.cvscaremark.com/investor.

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

Now I want to quickly let you know about an important upcoming event. Please save the date for our 2010 Analysts Day, which will be held in the fall this year as opposed to the spring. We think that will be a better time of year to provide a more meaningful update on our progress in the PBM selling season. Our Analysts Day will be held on the morning of Friday, October 8 in New York City. We’ll provide more specific details in the coming months, but please mark your calendars. Again, that’s the morning of October 8.

Also please note that we expect to file our annual report on Form 10-K by February 26 and it will be available through our website.

Now, before we continue our attorneys have asked me to read the following 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 recent 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’ll turn this over to our CEO, Tom Ryan.

Thomas M. Ryan

Thanks Nancy, and good morning everyone. While we reported another solid quarter this morning rounding out 2009 ahead of our initial plan, we did accomplish a lot last year and while we were not happy with our overall PBM selling season, our enterprise wide financial performance was very good.

For the full year, net revenues increased 13% to a record $98.7 billion; adjusted EPS from continuing operations excluding the tax benefit increased 7.3%; and we generated more than $3 billion in free cash flow. Lastly, we completed one $2 billion share repurchase program and also began another.

Throughout 2009 we continued to enhance our position as the largest pharmacy healthcare provider in the nation. Highlights of our progress include improved performance on key PBM metrics; our mail choice penetration was up 290 basis points; our generic dispensing rates up 200 basis points; and sizable growth within our specialty Pharmacy, which was up 14%. We had a successful repositioning of our sales message to focus on our leading PBM capabilities first, and we’re seeing a positive response from the consultant community as well as clients as we head into the 2011 selling season. We made investments in technology that will position us well for the evolving healthcare environment. We began the roll out of our new Pharmacy Retail system, RX Connect, which will be the enabler to roll out the consumer engagement engine in our stores. We achieved industry leading results again in our Retail business, with total comps for the year up 5% and Pharmacy comps up 9%.

The integration of Longs was successfully completed and will drive improved profitability in 2010 and the years ahead. We opened up one retail call center that will eliminate 85% of the call volume in our busiest stores. We announced a strategic alliance with Inverness Medical Innovations through its Alere management business. This alliance with Alere further enhances our industry leading important disease management capabilities, strengthening the clinical options we have for our PBM clients.

Do you know we also increased our investment in Generation Health? That accelerates our commitment to personalized medicine and will make [Genonly] benefit management an integral part of our PBM offering.

We also strengthened our senior management team, bringing in Dr. Andy Sussman to head up Minute Clinic. We hired Len Greer as the new Senior VP of Head of PBM Marketing. And of course as you all know, we hired Per Lofberg as President of our PBM.

Let me talk a little bit about the trends in our business and I’ll in fact start with our PBM. Here are some of the highlights. We have net revenues up 14.5%. Our Pharmacy revenues are up 19.1% and mail choice revenue is up 6.3%. Our generic dispensing rate as I said is up 220 basis points versus last year to a record 68.9%. And our EBITDA per adjusted claim is up 7%, which was up $4.89. And this is on an apples-to-apples basis excluding RX America.

Here’s a brief wrap-up on last year’s selling season for 2010. Last quarter I said we had about 1.5 billion remaining to be renewed in 2010. As you know we successfully renewed the Teachers Texas Retirement System contract as well as some others. So now we have about 500 and 550 million remaining for renewal in 2010. These contracts start at various points through 2010 but mostly in the last quarter, so they won’t be decided for a while.

We are obviously well underway working on opportunities in 2011. There are significant large numbers of prospects out to bid. I’m optimistic about the selling season and I can tell you at our National Sales Meeting last week our sales force was equally excited and energized about the selling season.

We’re talking to clients now about how we can lower their costs and improve the member experience. We’ve had a long history of top notch customer service at Caremark and our latest surveys show service metrics are better than ever and that last year’s isolated service issues are definitely behind us. We also have data that show we have best in class generic dispensing rate, the best specialty trend, the best clinical outcomes as evidenced by our industry leading adherence stats. They also show that we can achieve channel optimization and savings for our clients because we have more effective ways to drive 90 day utilization, especially with Maintenance Choice.

Let me give you an update on Maintenance Choice. We have 412 clients represent about 5.1 million lives already implemented on Maintenance Choice with an additional 70 clients and over 400,000 lives in the process of being implemented. So now we’ll have over 470 clients and over almost 5.5 million lives on Maintenance Choice. That’s up from 130 clients at the beginning of 2009. We expect that number to grow even more. You should know that 10% of the clients on Maintenance Choice are new to CVS Caremark. Clients switching from voluntary mail to Maintenance Choice see a significant increase in 90 day utilization with a substantial savings for the client and their members. It’s important to note that our GDR and adherence measures also improve with Maintenance Choice, so it’s really a win-win.

While 17% of the lives adopting Maintenance Choice in 2009 came from voluntary mail plans, about 41% of the lives adopting it in 2010 came from these voluntary mail plans, so clients will see some significant savings. We’re also seeing increasing adoption of our high performance formulary and step therapy plan as clients continue to look for creative ways to save money. Clients are increasingly concerned about controlling specialty spend. We have long been the clinical leader in specialty, providing programs that improve patient engagement and better managed costs and health. Our care team approach leverages the expertise of our clinical pharmacy staff that specializes in managing the needs of patients taking specialty medications. Through proactive outreach and communications to patients at mail and retail, we identify potential clinical and compliance issues before they become a problem, both prior to treatment initiation and throughout the treatment. Our latest data shows that on an annual basis, our specialty guideline management program has saved clients over $200 million in avoided drug costs.

We currently have about a 60% penetration in our PBM book, so we see an opportunity to increase PBM client pull through. We are also seeing an increased interest in the marketplace in our high performance specialty formulary, which includes step edits and obviously our specialty guideline management program.

Clients are slowly beginning to discuss genetic testing, both pharmacogenonomics, which is the right drug to the right patient, and medical genomics, which is patients with genetic predisposition to certain diseases, such as breast cancer. We believe our investment in Generation Health positions us to take a leadership role in the utilization management of genomic testing.

Another tool that will help broaden our clinical capabilities across our asset base is what we are calling consumer engagement engine or CEE, which provides us with a single view of the patient. The CEE started rolling out in the fourth quarter of last year where we implemented first in our PBM customer care center. When members call in we are able to message them on some important opportunities for health improvement or cost savings, whether it’s a savings from preferred formularies, generic savings or gaps in care. The CEE will be across all our channels, that is it will be live at retail in mid 2010.

Moving on to the Retail side of our business, I’m very happy to report that we continue to lead the industry. Our Retail team continues to do a terrific job in merchandising, marketing and of course store level execution. This quarter our Retail business delivered significant margin improvement driven by Pharmacy in front, store margin increases and disciplined expense control. We continue to gain Pharmacy share. Our Retail share, excluding Longs, grew 68 basis points nationally versus last year’s fourth quarter. And our Retail share in markets in which we operate grew 85.

Recall that Longs stores are included in our comps for the first time this quarter beginning in November. And as we expected, the inclusion of Longs had a slightly dilutive impact on our fourth quarter comp performance. We expect that to continue through the first half of 2010 and it should turn positive in the second half. Note the impact on our comps from Longs for the full year 2010 should be neutral to slightly negative. Keep in mind that we don’t expect Longs to provide a major boost in comps in the back half. The Longs story, like the Savon-Osco acquisition, is more about driving improvements in margin and profitability than it is about driving dramatic top line improvements.

For the fourth quarter total same-store sales increased 4.9% and the Longs stores had a 66 basis point negative impact on comps in the quarter. Pharmacy comps increased a solid 7.3% and that was despite 34 basis point impact from the inclusion of Longs. Our Pharmacy comps saw 290 basis impact from generic introductions. Our generic dispensing rate rose to an all time high of 70.6 in the fourth quarter. Our Pharmacy comps saw a positive impact of 270 basis points from Maintenance Choice. That’s up from 250 in the third quarter, 190 in the second and 120 in the first, so we continue to drive Maintenance Choice throughout the company.

Comps scripts increased 5.4% in the quarter. We saw a significant growth in the flu related prescriptions in October and November which then fell off significantly in December. And flu indications have dropped even more sharply throughout the country in January, which you should keep in mind as you model the quarter. Now having said that, our comps have led the industry for the past couple of years and January was no exception.

Turning back to the fourth quarter, front store comps increased 0.3% but note the inclusion of Longs had 104 basis points negative impact on comps. We had good growth in most of our core categories across the chain. In light of the high incidence of H1N1 virus we had especially strong growth in the cough and cold category in October and November. We had a very successful Christmas selling season with sales, margin and sell throughs up versus last year. Our merchants really did a great job placing a heavier emphasis on the value of traditional gift giving products with less emphasis on light sets and gift wrap.

Like last quarter our average front store transaction on a comp basis grew slightly in the fourth quarter despite the fact that customers are seeking to buy more on promotion. And like the third quarter, we saw comp traffic up slightly again. Private label accounted for 17.6% of front store sales in the quarter. We introduced 108 private label items in the fourth quarter and added 913 items throughout 2009. In the Longs mainland stores, private label increased to nearly 16% of front end sales. That’s up over 1,000 basis points from last year’s quarter.

To update you a little bit on Longs, we introduced the newly renovated re-merchandised stores to the marketplace in November and the response has been excellent. We’re basically changing the way customers are using our stores. We’re focusing more on healthcare and core offerings and store brands and less on low margin consumables. Front store traffic and average ring improved 178 basis points and 137 basis points respectively compared to the fourth quarter. We’re already exceeding our profitability targets at Longs driven by strong margin performance as well as solid expense management. As I mentioned, the introduction of private label products has been very successful and will help drive margin improvement at Longs.

Our ExtraCare program usage continues to increase in the Longs stores and we’re basically almost at the same levels of core CVS stores. So the Longs acquisitions add over 4 million ExtraCare cardholders and our active card base is now 64 million people. I’m extremely pleased with our progress at Longs and I fully expect the acquisition to benefit us in 2010 and beyond.

Let me update you on some real estate. We opened 31 new or relocated stores in the quarter, closed 6, resulting in 17 net new. For the full year we opened up 287 stores, resulting in 102 net new stores or 3% square footage growth. That equates to about 2% retail square footage growth when you include the Longs in the store base. So this once again is consistent with our past plans of steady and profitable growth.

We completed 200 file buys for 2009 and expect to do the same number in 2010. We’ll open about 250 to 300 new stores, 100 of these will be relocations in 2010, once again 2% square footage growth. We entered some new markets, St. Louis in January, Memphis in late January. We’ll open up four stores in Puerto Rico where our first stores in mid February.

Let me provide a quick review of Minute Clinic, which has now surpassed 6.2 million patients since its inception. We opened seven clinics since the fourth quarter and now have 570 clinics in 56 markets. Traffic was up 50% versus last year’s quarter for acute visits. We continued to expand our third party coverage, adding about 9.9 million lives and now over 80% of the business in the quarter are third party paid. Andy Sussman and our team continue to add new products and services. For example, we rolled out asthma monitoring screening on a national basis in the fourth quarter, piloting the diabetes monitoring service for patients already diagnosed with diabetes. In 2010 a key focus will be adding protocol driven monitoring services for common chronic illnesses such as hypertension and high cholesterol. This will be done in coordination with a patient’s medical home and is designed to improve adherence and outcomes.

So we remain enthusiastic about the long term prospects of Minute Clinic. As you know we invested $0.05 to $0.06 in Minute Clinic last year and this year we expect to invest a little less so it should dilute about $0.04 to $0.05 a share, including the $0.01 to share we related to the move for Minute Clinic’s offices in Minneapolis to Rhode Island. We believe the move will facilitate sharing and will improve the speed to market for our new products. We still expect Minute Clinic to breakeven by the end of 2011 on all in basis.

Now let me turn it over to Dave Denton, our new CFO, who I’m pleased to have with me today. And this is Dave’s first earnings call so go easy on him. David?

David M. Denton

Thank you, Tom, and good morning everyone. While I’ve had the pleasure of meeting some of you, I look forward to working with all of you in the coming weeks. I’m happy to be here today to provide a detailed review of our fourth quarter financial results. I will also provide guidance for 2010 on a full year and first quarter basis.

Before I begin to review our financial performance, I thought I might touch upon our approach to capital allocation. As Tom stated at a conference last month, we have modest financial leverage and we’re comfortable with our current credit ratios. We expect to generate significantly more free cash flow over the next five years than we generated in the past five years. And we expect to use the majority of our free cash flow in the near term to enhance shareholder returns. As you know in January we announced a 15% increase in our dividend. This is the seventh consecutive year of dividend increases and it’s been growing at a compounded annual growth rate of 18%. We intend to continue to review the dividend annually and to do share repurchases that are value enhancing.

During the quarter we began our new $2 billion share repurchase program, which our board authorized in November, and we repurchased about $500 million worth of our stock. While this authorization extends through 2011, given our current share price we think it’s a great investment to complete the remaining $1.5 billion of our current authorization in the first half of this year, and we plan to do so.

Turning to the income statement, adjusted earnings per share was $0.79, an increase of 14%. Excluding the tax benefit, which amounted to about a penny, it was $0.78, an increase of 13%. GAAP diluted EPS came in at $0.74 for the quarter. Keep in mind that the fourth quarter of 2009 had three fewer days than the fourth quarter of 2008, which I’ll refer to throughout my financial review as the calendar impact. On a consolidated basis, revenues in the fourth quarter increased 7% to $25.8 billion. Revenue growth was muted by the calendar impact but it benefited from a full quarter of sales in 2009 for both Longs and RX America versus a partial quarter last year. These two factors more or less offset each other.

In our PBM segment, fourth quarter net revenues increased 14.5% to $13.5 billion. RX America contributed approximately $1 billion of that growth, largely due to the change in revenue recognition method from net to gross, a change that began in the second quarter of 2009. Adjusting for the calendar impact and RX America, our underlying revenue growth in our core PBM was 8.6%. Drilling down a little deeper, PBM Pharmacy network revenues in the quarter rose 19.1% to $9.1 billion. Pharmacy network claims were down 5.6%. This decline was driven again by the calendar impact, the net impact of new business and terminations, and importantly the increase in mail choice penetration as we saw claims move from network to mail. Offsetting these of course was the addition of RX America.

Total mail choice revenues grew by 6.3% to $4.3 billion. Our overall mail choice penetration rate of 23.6% was up 190 basis points from the rate in the fourth quarter of 2008 on a reported basis. However, RX America claims mix, which as you know is heavily weighted toward retail network claims, diluted the mail choice penetration rate. So without RX America, our core PBM mail choice penetration rate grew from 23.2% to 26.1%.

In our Retail business, we saw revenues increase 12.5% to $14.5 billion in the quarter. A full quarter of Longs versus a partial quarter last year was responsible for about one third of that growth. By excluding Longs and adjusting for the calendar impact, the underlying growth rate of the core retail business was 7.4%.

Turning to gross profit, the overall dollars for the company improved by 7% despite percentage margin dropping by 8 basis points. Within the PBM segment, gross profit margin was down 69 basis points. That was expected due to the change in the revenue recognition method for RX America, as well as pricing decisions we made during the 2009 selling season. These were offset to some degree by an increase in GDR as well as growth in the Medicare Part D business, year-over-year. The gross profit margin at the Retail segment improved by 81 basis points in the quarter to 32.1%. This largely reflects the positive impact of new generics as well as increased private label penetration, especially in Longs stores, offset by continued pressure on pharmacy reimbursement rates, especially those associated with state Medicaid programs.

Our overall operating expenses as a percentage of revenue improved by 24 basis points, but PBM’s segment’s percentage was flat at 1.8% despite the impact of the elimination of the Universal American joint venture and the additional expenses incurred for the RX America integration effort. So the PBM turned in some excellent expense control.

The Retail segment held steady with last year’s fourth quarter, even though we invested in name change events associated with the Longs acquisition. So we saw good spending discipline at the store level as well.

Within the corporate segment, expenses were $140 million, less than 1% of consolidated sales. So with improvements in SG&A as a percent of sales outpacing the slight decline in gross margin, operating margins for the total enterprise improved as expected. It was up 17 basis points to 7.3%.

Moving to the consolidated income statement, we saw net interest expense for the quarter decline by $18 million to $133 million, largely reflecting lower interest rate on our floating rate notes as well as the retirement of the bridge loan associated with the Longs acquisition. Our effective income tax rate was 40.3% in the fourth quarter. As we did in the third quarter, we again recorded previously unrecognized tax benefits related to the expiration of various statutes of limitations with tax authorities. The benefit this quarter was approximately $7 million, significantly smaller than the previous quarter.

Turning to the balance sheet and cash flows, we generated over $1.8 billion in free cash flow in the fourth quarter. That compares to $1.1 billion in the prior year period. That was of course driven by the large increase in proceeds from sale leasebacks year-over-year. We successfully completed $814 million of properties in the fourth quarter of 2009 versus only $7 million in the prior year period. Given this, we saw an inflow of net capital expenditures during the quarter of $18 million. This was the result of offsetting $796 million of gross capital expenditures with the sale leaseback proceeds. For the full year, we generated free cash flows in excess of $3 billion, lower than we had forecasted. We missed our working capital targets specifically within inventory and accounts payable. This reflected in part from Pharmacy pre-buys as well as our decision to build up inventory for the flu and cough, cold categories. The severity of the flu has been lower than anyone had predicted. Having said that, we view working capital management as an area of opportunity for us going forward.

Let me now turn to our guidance for 2010. We expect to deliver adjusted EPS from continuing operations in the range of $2.74 to $2.84 and GAAP diluted EPS of $2.56 to $2.65. That includes our expectations that we’ll complete the remaining $1.5 billion in authorized share repurchases by the end of the second quarter. It also includes our expectations that Longs will add about $0.10 per share versus last year.

For the PBM segment, we expect operating profits to decline by 10 to 12%, while we expect operating profit to grow from 13 to 16% in the Retail segment. We expect operating margins for the total company to be modestly up from 2009 levels. For the PBM segment we expect revenue to decline 4 to 6% for the year. For the Retail segment we expect revenue to 5.5 to 7.5% and same-store sales to increase 4 to 6% for the year. For the total enterprise, we expect revenue to be roughly flat to 2% up from 2009 levels. That is after inter-company eliminations, which are projected to equal about 7 to 7.5% of combined segment revenues.

For the total company, gross profit margins are expected to moderately improve relative to 2009 levels, with the PBM segment modestly down and retail flat to down. To be clear, total company margin will moderately improve due to segment mix. We forecast a total company operating expense as a percent of revenue when moderately declined with Retail moderately improving, the PBM modestly declining. The corporate segment will grow more or less in line with the blended rate of the other two segments.

We forecast net interest of about $590 to $620 million, a tax rate of 40% and approximately 1.39 billion weighted average shares for the year. We expect total consolidated amortization for 2010 to be roughly equivalent to the levels in 2009. Combined with estimated appreciation, we project approximately $1.4 billion in D&A. We expect gross capital expenditures to be in the range of $2.4 to $2.7 billion, essentially flat to 2009. However, our net capital expenditures are expected to be higher than 2009 due to our expectations for lower proceeds from sale leasebacks in 2010. As you know, during 2009 we completed nearly $1.6 billion in sale leaseback transactions. That was significantly higher than a typical year, given that we carried some over from 2008’s pipeline as we waited for the financial markets to improve. For 2010, we estimate that we will return to a more normal, pre-acquisition level of sale leaseback transactions, which is about $500 to $600 million annually. In light of the lower amount of sale leasebacks, we expect free cash flow to be in the range of $2 to $2.5 billion in 2010. I expect free cash flow to accelerate in 2011 and beyond.

Turning to the first quarter, we expect revenue growth for the total company to be in the range of 3 to 4%. In the Retail segment, we expect total same-store sales growth to be in the range of 3 and 5%. We expect adjusted EPS from continuing operations to be between $0.57 and $0.59 per diluted share compared to last year’s $0.55 per share. GAAP EPS is expected to be in the range of $0.53 to $0.55 per diluted share. We project that Retail operating profit will be up mid to high single digits in the first quarter, but that will quickly improve as we move through the year as easier comparisons occur and our initiatives kick in.

More specifically, there are a few things you need to keep in mind when modeling our quarterly results for the Retail segment. First, most of the integration costs associated with Longs occurred in the second half of 2009. The comparison this year to last year then is more difficult in the first half. Second, we expect the Longs stores to see an improving profitability, weighted towards the second half of 2010. As Tom said, Longs will likely cause a drag on total comps in the first half of 2010. Finally, the timing and mix of new generics is also a factor in the first quarter. Note that full year generics are less helpful in 2010 versus last year, due to the timing of the generic pipeline. From an earnings growth perspective, all the other quarters this year will show good progress versus last year.

I also want to note that PBM operating profit is expected to be about flat to slightly down in the first quarter as we have an easy comparison to last year’s first quarter due to the litigation reserve at quarter end 2009. I hope that helps you with your models and provides a comprehensive picture of our forecasted performance.

With that, let me turn it back to Tom.

Thomas M. Ryan

Thanks, Dave. As Nancy said we have Larry Merlo and Per Lofberg with us today, and we’ll ask them to participate in the Q&A discussion on each of the earnings calls going forward. I thought though, however, given the fact that Per’s just joined the team, I’d like to ask him just to say a few words on his early days at CVS Caremark before we open it up for questions. Per?

Per G. H. Lofberg

Thanks, Tom, and good morning everyone. I’m very glad to be here at CVS Caremark and I look forward to talking with all of you in the investment community from time to time throughout the year.

I will focus my brief comments here on some introductory remarks about the upcoming 2011 selling season, since that seems to be a topic of great interest to many of you out there. The bottom line is that I’m very encouraged and confident about everything I’ve seen so far in the month since I joined the company. I don’t see any important barriers to our ability to participate proactively and successfully in the competitive bidding process that we have ahead of us.

As I think many of you are aware, the season is just getting started, with a large number of plans expected to go through an RSP process this year. This will play out over the next six to nine months and I look forward to giving all of you an in depth briefing on our business later on in the year, including a summary of progress on both renewals and new business.

Since I started the job a month ago, I have looked carefully around the company for any signs of serious client dissatisfaction or service problems, which could hold us back in the upcoming selling season. So far I’m glad to say I’ve not come up with anything of concern and the customers I’ve met personally have not expressed anything but satisfaction with the work done by the company.

Also, the January installation process, which is always a sensitive time in this industry, where new clients are installed beginning on January 1, has gone very well for us. If you stumble in this process, as can happen from time to time, it certainly can cloud the outlook for the upcoming season. I view the problems, which clearly caused some setbacks for the company last year, as isolated issues which have been corrected and I don’t see any systemic issues that could hold the company back this coming year.

As I’ve traveled around the company this past month, I’m continued to be impressed by the breadth and depth of talent in the organization and the number of innovative programs underway, which can offer new improved solutions to customers. These include, among other things, programs which integrate both benefit designs and member and physician interaction across Caremark’s main service platform and CVS retail stores. And Tom alluded to some of them in his presentation a few minutes ago. And they can deliver greater savings to customers and better experience for consumers. The early results here are extremely intriguing and encouraging. When scaled out across the enterprise, they could offer compensative advantages which cannot easily be replicated by others.

I plan to be heavily engaged with our organization in the business development activities this year and as I said earlier I look forward to giving all of you an update on our progress later on in the season. Thank you very much.

Thomas M. Ryan

Thanks, Per. Okay, now I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Deborah Weinswig – Citigroup.

Deborah Weinswig - Citigroup

Tom, I wanted to get your take on what’s happening out there in the front end space. I wanted to start there since there seems to be a lot of confusion. Your traffic and ticket were up in the fourth quarter yet the same cannot be said for your sheer play drugstore competitors. Also it sounds like CVS took an interesting approach to holiday. What do you think is really setting you apart? Your ExtraCare loyalty card is often pointed out as one of the best in Retail. Do you think it’s ExtraCare? Do you think it’s Maintenance Choice? Can you maybe go through some of the details for us today?

Thomas M. Ryan

Listen, the Retail is a lot of detail and it’s a lot of different initiatives in the marketplace. And you know we’ve spent a lot of time in the last few years changing our front end stores, looking at different layouts in our stores. As you pointed out, using the ExtraCare loyalty card to maybe direct our promotional spend a little better. And I think the merchants and our operators have just done a great job. You know, it’s about execution in the stores. And you know people come into our stores, they find what they need and they find it at the right value. When you think that the average person in our stores buying three or four items, so they’re in and out. And I think we’ve done a great job. I think the merchants got ahead of it during the holiday season, when they saw what was happening with the economy and how people were thinking about their spending patterns. And we bought differently. We lowered expectations on some of the gift giving items, as I mentioned earlier. So I think it’s really a combination of things.

And then lastly would be Maintenance Choice. Maintenance Choice has certainly helped our overall comps and increased our traffic. But, you know, if you bring people in the store and you don’t have the right product, and the right merchandise at the right price, it doesn’t matter what you do. So I think it’s really a combination of things and I couldn’t be happier.

Deborah Weinswig – Citigroup

My follow up question, we’ve spoken with several different consultants and the overall theme seems to be that RX Connect is a real differentiator for CVS. Can you potentially elaborate on that?

Thomas M. Ryan

Well, the RX Connect is really the new Retail Pharmacy system, right? We’ve rolled out a system, it will be six years ago, and now we’ve rolled out the latest development of our new Pharmacy Retail system, RX Connect. And we’re still in the process of rolling that out. As I mentioned earlier, we started with the Longs roll out and then, because we didn’t want to put the old system in and then put a new one in as you can imagine. So the Longs system is in place and we continue to roll out our existing stores.

But the real linchpin after that will be the consumer engagement engine, which really allows us to essentially leverage our clinical capabilities across our asset base. We can do all that we can do in the mail center in our call centers around adherence and gaps in care and improved generic dispensing and preferred formularies. This will allow us to leverage it across the retail base easier. Right? And the pharmacist will have messaging that’s easier and direct. It’ll be included in the work process flow. And people always ask how can you do this in the stores and pharmacists are busy, how can they possibly do these clinical interventions? This is, in some cases, you know, 10, 20, 30 people a day in a store that takes two or three minutes. So it’s not like we have to pull some people into a consultant booth and talk to them for a half hour. This is about making it easy and simple in our stores to address the clinical opportunities we have for patients, whether it’s diabetic patients or hypertensive patients or asthma patients. So that’s the real win for us, to be able to leverage our clinical capabilities across our asset base.

Deborah Weinswig – Citigroup

So the bottom line here will be the opportunity to provide counseling plus driving adherence.

Thomas M. Ryan

Yes, counseling and gaps in care, adherence. You know, it’s all about saving our clients’ money and improving healthcare and the member experience. Thanks a lot.

Operator

Your next question comes from Thomas Gallucci - Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets

Just first, I want to make sure, where do we stand on the selling season? You have about 7 billion up for renewal this year. Did you get the two accounts nailed down that you had said previously were certainly near the finish line?

Thomas M. Ryan

Are you talking for ’10 or ’11?

Thomas Gallucci - Lazard Capital Markets

For this year, this coming selling season. I think you said you had about 7 billion up but that included two contracts that were sort of near the finish line.

Thomas M. Ryan

Just ask the question again, because there’s some confusion here. Are you talking about ’10 or ’11?

Thomas Gallucci - Lazard Capital Markets

’11.

Thomas M. Ryan

Okay. We’ve got 7.5 billion out there.

Thomas Gallucci - Lazard Capital Markets

7.5. Okay. I wondered if Per could follow up on his opening remarks there. You said you haven’t really detected any service issues or other major areas of dissatisfaction among customers. What kind of feedback are you getting from customers, more concrete and maybe from a positive standpoint? And what kind of things are they asking about as you think about the upcoming year and benefit design changes, etc.?

Per G. H. Lofberg

Yes. I think for the most part everyone who is a payor of health benefits is under pressure to maintain the funding for their programs and to maintain programs within financial constraints. So I’d say customers are very much focused on how they can kind of control the costs of their benefit programs going forward. They’re looking for new benefit designs and sort of innovative programs that can help maintain control over those kinds of costs. They’re also obviously looking for flawless execution in the way we and other PBMs are interacting with their organizations.

Another couple of areas that are very important I think in this upcoming season is the growth in specialty pharmacy. As you guys know that is probably the fastest growing part of the drug expense today for payers, maybe 15, 20% year-over-year growth rates. So some of the same techniques and principles that have helped PBMs control costs for regular medication, we play an increasingly important role in the growing single specialty. And that’s an important focus for us and for our customers.

And finally I can sort of comment briefly on Medicare D. As I think many of you know, many health plans out there are actively engaged in the Medicare D program and the ability to support them in that field is also an important factor in what they’re looking for in this upcoming season.

Operator

Your next question comes from Edward Kelly - Credit Suisse.

Edward Kelly - Credit Suisse

Dave, could you provide a little bit more color on your Retail guidance for EBIT? If you’re looking at EBIT up 13 to 16%, how much of that is the core business, so excluding what Longs will contribute?

David M. Denton

Well, as I said, if you look at both the impact of the Longs business TY to LY, ’10 versus ’09, it’s about a $0.10 swing, so you really need to factor that into your model and think about it from that perspective.

Edward Kelly - Credit Suisse

But is most of that $0.10 swing in Retail, Dave? Because it was originally a PBM component, right?

David M. Denton

Yes, most of that is in Retail.

Edward Kelly - Credit Suisse

And then the gross margin has been fairly choppy the last couple of quarters. I mean, it was great this quarter, it was disappointing in Q3. Can you help us understand the volatility of that a little bit? And then how do we think about that as we go through 2010? I mean the inventory build up in cough, cold and flu, does that impact you in the first half of the year? Some color there would be great.

David M. Denton

Well, certainly the inventory build up, I don’t know if it will help or hurt us, but we’re positioned well to the extent that a flu season does materialize of any substance, we’re in great position there. Secondly, as far as gross profit margin and the spread of that, a lot of that’s based on introductions and timing of generics throughout the year. So when those generics are available and as we overlap those generics year-over-year, it does have an implication marginally.

Edward Kelly - Credit Suisse

As we think about the performance of Longs, how does Longs so far compare to Eckerd and Savon? And it sounds like the front end is negative. Is that a surprise? Is it not a surprise? Could you just help us understand that?

Thomas M. Ryan

We’ll let Larry Merlo answer that question.

Larry J. Merlo

Yes, it’s not a surprise that our comps right now are negative and I’m very pleased with where we are. If you look at some of our internal metrics and keep in mind we finished the integration activities in November, so it’s only been a couple months where we’re coming out of the disruptive phase and, you know, that development. But when you look at think like private label penetration as Tom mentioned earlier, our service performance around how we’re doing in the Pharmacy and the front end, recognizing the system conversion, you go back and bounce that up against where we were at a similar point in time again at Osco, Savon or Eckerd, we are well ahead of the performance curve. So you know we’re entering phase two, think about that as the marketing phase where we’re reintroducing the former Longs stores to new customers and changing the way customers use and shop those stores. So I feel pretty good where we’re at.

Thomas M. Ryan

And just to add to that, remember that Eckerd’s was really a revenue play. Right? Their sales productivity per stores was significantly lower than core CVS stores. The Osco, Savon and Longs is more of a profitability play because they had the revenue. So around shrink, around Larry’s point, around P&L, etc., so it’s more of a margin play.

Operator

Your next question comes from Lisa Gill - J.P. Morgan.

Lisa Gill - J.P. Morgan

Tom or Per, can you quantify the opportunity around planned design changes for 2010? Are there a bunch of mid year opportunities to be able to drive Maintenance Choice? And then secondly on 2011, are there new market opportunities? Maybe can you talk about are you seeing opportunities for carve out that we haven’t seen in the past?

Thomas M. Ryan

I can take a shot at it and Per can jump in. I mean there are opportunities for us, existing clients keep looking for ways that we can obviously continue to save them money. And I think clients that were maybe not as receptive to some plan design changes, whether it was preferred formularies or generics first or even Maintenance Choice, are more open to those plan designs. Right? To Per’s point, it’s just a fact of life. People are under pressure. They’re looking for ways to not only save on drug costs but they’re looking for ways to save healthcare costs, which is really the ultimate win here for us. And we’re doing it through our client value campaign where we’re driving generics, driving mail channel optimization. So there are opportunities and we can see it across big and small accounts.

Lisa Gill - J.P. Morgan

One thing is we’re thinking about the PBM being down 10 to 12% in 2010. Is there opportunities for you to go out to existing clients and say okay, let’s put Maintenance Choice in place and if they do it for July 1 that the margin could actually look better in 2010 than what you’re currently expecting? And is there any way to quantify some of the people that you’ve had conversations with, they weren’t ready for January 1 but perhaps there’s going to be an opportunity mid year?

Per G. H. Lofberg

I think the way we work, too our account management organization is very much focused on opportunities like the ones you describe where the dialog between our account management people and the clients will continue to introduce new programs that can help them save money and that can be beneficial to us. One example that I think will be new this year is that we will be introducing the pharmacogenomic programs that have sort of evolved out of the partnership with Generation Health. So during the second half of this year, we will be introducing to certain customers that program as an additional feature to the benefit programs.

Thomas M. Ryan

Lisa, to your point, we always look to beat and improve. Right? I mean, these are the expectations that we have, this is what we roll out. But we’re always trying. Our people are out there, whether it’s on the Retail side or the PBM side, always looking to drive and improve profitability and savings for our customers and clients. So to Per’s point, we’re out there working it the first and second half.

Lisa Gill - J.P. Morgan

When we look at 2011, you quantified that you have 7.5 billion up for renewal. Beyond just your other two large competitors, are there new market opportunities that you’re seeing? Are we seeing more carve outs in 2011 than we’ve seen in the past?

Per G. H. Lofberg

Well, there are some plans that I think are continuously kind of evaluating whether it makes sense for them to have inhouse PBM functionality, whether it’s mail service Pharmacy or whether it’s claim processing or formulary programs. So in some of the health plans there are occasionally opportunities to talk about different types arrangements than just the straight outsourcing arrangement they have. You know that’s kind of an ongoing part of the discussion with those types of accounts.

Operator

Your next question comes from John Heinbockel - Goldman Sachs.

John Heinbockel - Goldman Sachs

Tom, when you think about the selling season, and obviously there’s a lot of new business potentially out there for you guys, how much do you think you have to be a competitor by on price to get someone to take the risk of converting over? And has that changed during this economic downturn?

Thomas M. Ryan

No. There’s no scientific number for that, John. They look at the total value offering, right? Price certainly has to be competitive and then they’ll look for a three year contract, do we want to partner up with this PBM because we have more opportunities on a go forward basis. Right? We’re aligned around improving the member experience, we’re aligned around clinical outcomes, we’re aligned around lowering the healthcare costs. So it’s more than just price. I mean you have to have price to be in the game, but you need to have the whole to complete offering.

John Heinbockel - Goldman Sachs

And you think the pricing environment this year, you said consistently not that much different than last year and it won’t be. Is that still your thought?

Thomas M. Ryan

Yes. I don’t think the pricing environment is that much different. I think it’s more about unique plan designs and clinical capabilities. Obviously you read what’s out in the literature and what people are publishing and you know we’re going to go out and we have the opportunity to go out and do some pricing investments. And we’re not going to do anymore of that than we normally have. But there are a significant number of new opportunities out there, more this year than in the past.

Per G. H. Lofberg

This industry has always been very competitive and to just sort of emphasize what Tom was saying, I think a lot of it has to do with the ultimate value that are generated through a combination of commercial terms and plan design and innovative programs. So that’s really the totality of what people are interested in. We certainly have no plans and no interest in being kind of sort of a buying business at a loss or anything like that. We can expect to have a very rational approach to the way we participate in the marketplace.

John Heinbockel - Goldman Sachs

Tom, two quick things on the environment. What do you think the outlook is for Medicaid changes in 2010, particularly given the pressure the states are under? Is that going to be a constant battle, although it seems to be a manageable one? And secondly, what about the fallout of independents? Do you think for the same reason that that might accelerate and you could do more than 200 file buys? What’s your thought there?

Thomas M. Ryan

Well, the states will obviously continue to be under pressure. Right? They’ve always been under pressure. I think it’s going to get worse now with some of the federal sharing arrangements. So we’ve obviously had discussions with various states, not only around reimbursement rates but around payment terms, around timing, around receivables. So it’s not just pure rate. There are opportunities. The second piece is we believe we can bring some oil to the squeak, right? We fully believe that we can actually save states money and we’re going to the states and talking to them about that. I mean because you can imagine, these guys are up against it, whether it’s California, New York, Texas, wherever. And everyone’s trying to reach in and say we need more money, so we’re trying to be a solution for the states. And given our assets, right? Our PBM, our Minute Clinic, our Retail stores, our disease management programs, we think we have an opportunity, our specialty business, we think we have an opportunity to save them some money.

The independents? You know, the stronger ones are left. They’re more focused on specialty medications. So, could there be more? That’s a possibility, John, but when we look at what our plans are, we plan for a similar amount. I will tell you they’re getting more expensive because there’s fewer left, but having said that, it’s probably one of the best returns from a capital investment standpoint. So we have a team on it and if there’s more out there, we’ll be getting it.

Operator

Your next question comes from Robert Willoughby - BofA Merrill Lynch.

Robert Willoughby - BofA Merrill Lynch

Per, if I could touch on your prior experience at Medco, I would just as an independent entity, that asset has fared better than it did as a captive. What do you see as the challenges or differences here with the CVS Caremark model today?

Per G. H. Lofberg

Well, first of all, I’m not sure I kind of agree with your premise that Medco fared better as an independent than as a captive. During my time we grew from $3 billion to almost $30 billion when it was owned by Merck. So I don’t think that’s necessarily a given. I do think that the assets that CVS Caremark has offers some really interesting potential features in the marketplace that if they really scale up on an enterprise basis, they will have the potential to drive some competitive advantage in this business. And you know we listed some of them before, but the mail service model that I’ve been involved in for almost 20 years now, that model has basically sort of grown, largely in the past decade by putting in benefit designs that are quite disruptive to the members, where they literally cease to have coverage if they stay at the retail stores. So you know that type of plan design has been necessary to get the significant portion of the drug spend to migrate over to mail. And obviously it’s worked to a very significant degree.

I think the model that’s been introduced by CVS Caremark, by basically including the mail service financial plan features and the benefit design to the retail stores in the Maintenance Choice program, it’s a way to kind of expand the concept but in a gentler way for the members. So that the plan can continue to save money or maybe expand the savings without the same disruption to the members. That’s an example of the value of integration that could really offer some significant additional mileage for us.

And then the ability to communicate with members, both through [center life] call centers and through face-to-face interaction with the retail pharmacist, I think that’s a feature that also shows some really interesting early evidence here that, when scaled up, could really be a unique feature in the industry that offers new improved benefits to the marketplace.

Robert Willoughby - BofA Merrill Lynch

How would you characterize the competitive landscape today versus back when you were a Medco person?

Per G. H. Lofberg

Well, obviously the business has consolidated somewhat in the past decade. So we’re now three major PBMs, are making up a greater portion of the marketplace than it did a decade, 15 years ago. But it’s always been a very competitive industry. That’s part of the fun with it. And you compete based on innovation to a very large extent and I don’t see that really changing. We have a whole new frontier of clinical opportunities that can be built on top of the PBM platform, that can offer significant benefits both to members in terms of their health outcomes but also in terms of the payers through more efficient use of healthcare resources.

So I do think it continues to be a very, very dynamic, very competitive and very exciting industry.

Operator

Your next question comes from Scott Mushkin - Jefferies & Co.

Scott Mushkin - Jefferies & Co.

Per, I just want to get your opinion, I know there’s been a lot said about the marketing message went a little off last year, but it seems to me your old customers or your current customers don’t leave because of a marketing message. So I was wondering as you look forward into next year, how do you get that attrition rate down to a more normalized level? And then kind of off your comments about Maintenance Choice, where do you see that program going into the future? I know we’re about 5.5 million. I mean, is that a program that could have 10 to 15 million people in it?

Per G. H. Lofberg

Well I think to the first point, as I mentioned in my introductory comments and really the conclusion I reached after this first month, is that the problems that caused some account defections last year, they really were quite isolated issues that at this point have been corrected and are not really a factor. I don’t think there’s any issue that customers have with the integrated model per se. I think customers are first and foremost interested in how can they save money on their benefits programs, how can they get good service for their members. And they don’t really care that much if we are also a retail pharmacy chain in addition to being a PBM.

Obviously if we can add value, if we can save them money or improve member experience through the combination, that’s sort of gravy or icing on the cake if you will. First and foremost, they’re really interested in the core PBM functionality and that’s really where the company is centered at this point.

Thomas M. Ryan

I would just add, too, it’s important to remember those were concentrated in four or five clients and then Med D. And if you look at our retention rate across the employer base, it’s very high. We had some issues with the health plan which was a service issue, which we’ve corrected. We had some acquisitions and we had some carve ins, so it wasn’t a service issue throughout the whole company, as Per said.

Scott Mushkin - Jefferies & Co.

And Per, any speculation on how big Maintenance Choice could get over time? And then I had one for Larry, if I’m allowed.

Per G. H. Lofberg

I think we’re at the early stage of really rolling out that program to our customer base, and so far it’s been very nicely adopted. I haven’t yet had a chance to really model out what the longer term potential might be, but I can imagine it’s quite a bit beyond where we are today.

Scott Mushkin - Jefferies & Co.

And then, Larry, this is for you, we’ve got a big chunk of people that are going to mandatory comply April 1 into Maintenance Choice and I’m just wondering if you could give us some thoughts about staffing levels at the stores? I mean, we have seen from time to time last year some lines building up at the pharmacies and do you think that’s been an issue? And what are you going to do come April 1 to handle the probably spike in volume?

Larry J. Merlo

Scott, the volume, when you think about our base of 7,000 stores, it’s scattered across the country. So there are a handful of stores that see a tremendous spike that we know that in advance and we’re able to plan for that accordingly. But it’s fairly invisible, when you look across our base. And actually when you look at our service metrics for the Maintenance Choice customers, they’re absolutely in line with the rest of our customer base. So we’re pleased we have the right process in place to make sure that they have a very good retail experience.

Thomas M. Ryan

Our service metrics around waiting time and in stock in the pharmacies is the best it’s ever been.

Operator

Your next question comes from Helene D. Wolk - Sanford Bernstein.

Helene D. Wolk - Sanford Bernstein

First a question on retail. You had provided guidance for four to six same-store sales in 2010. I wonder if you can give us any perspective on the breakdown between pharmacy and front end? And then also comment on the January report from your peer and what that’s just around pharmacy numbers.

Thomas M. Ryan

We don’t break that out, but obviously Pharmacy’s a big, big driver on the mix. And I would just point out, and people have asked this and we’ve said it consistently, that we can hit our earnings targets and projections even if we have a 1% front end comp. So it’s not obviously that big a base for us but we continue to focus on it and improve the profitability and our merchants are doing a great job around that, around some of the private label and some of the categories. But from a pure comp standpoint, we can hit our numbers at a 1% front end.

Helene D. Wolk - Sanford Bernstein

And then on the PBM side, I’m just curious around PBM operating expenses for 2010. Can you just give us a flavor for whether the revenue impact has any de-leverage or there’s any opportunity to actually change a profile here? Or alternatively, are you actually making operating investments in the business in 2010?

David M. Denton

No, a couple of things. One is, as you know, in the PBM business specifically in some of the operational function areas of the business is highly variable. So when volume comes out, SG&A comes out correspondingly. So we have factored that into our plans for next year. And we aggressively manage our operating performance based on those metrics. And as always, we do make investments in certain areas of our business over time, but nothing of big significance for 2010.

Per G. H. Lofberg

There’s a number of kind of ongoing systems development programs that you can sort of put under the operational excellence rubric. And they’re all very important and they’re basically going to make our internal processes faster and more efficient on many, many different fronts. But it’s sort of an ongoing program that’s likely to continue for quite some time.

Thomas M. Ryan

Okay, we’ll take two more questions.

Operator

Your next question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

Per raised the issue of benefits accruing to members versus what would accrue to the employer. The feedback we were getting from a lot of the consultants was that if you look at Maintenance Choice, pharmacist counseling and front end discounts, those things all are aimed at the individual consumer but are viewed as more neutral to the employer. Do you have anything that really shifts that to make the economics look better for the employer? For example, would Maintenance Choice really be more effective than mail in terms of saving costs?

Per G. H. Lofberg

I think if you look at Maintenance Choice and you break that down a bit, if it is a mandatory choice program, where you add the 90 day option at retail, then basically a significant portion of the change is basically for the benefit of the member. The pricing kind of stays the same for the plan. There’s a portion of the growth in Maintenance Choice that clearly is a migration from network pharmacists into the CVS retail stores or the mail order pharmacies. That obviously is a win-win. I mean, it both benefits the plan, because they now have a greater percentage of the drug spend where they benefit from the lower pricing. And it’s a benefit to us, because we make margin on the prescriptions.

Thomas M. Ryan

Just to add to that, one of the issues that had come up was that very fact, right? It was mostly mandatory mail and it wasn’t savings for the clients. But to Per’s point, we’re seeing clients that are voluntary mail. When they switch to Maintenance Choice, they go from anywhere to 20 to 40 to 50% mail penetration, which saves them money. Secondly, we’re seeing better GDRs. So it’s a win-win on both sides of the equation. We’re having better compliance, better performance around generic dispensing, so they get the mail pricing plus the generic dispensing.

And, you know, the clinical programs, the first [pill] counseling, you hit adherence, that’s all about lowering healthcare costs. And the sophisticated clients get that in the long term. So that’s where we’re focused.

Mark Wiltamuth - Morgan Stanley

And that component, the counseling part, really we have to kind of wait until middle of 2010 when the single view of the patient comes in?

Thomas M. Ryan

Well, we’re doing it now with some pilot programs, but yes. When you get to the second half of ’10 and out to ’11, that’s what we’re talking about with clients in the selling season. It’ll just be easier to do. It’s more automated, if you will.

Mark Wiltamuth - Morgan Stanley

And also just want to get a thought on how far through the Longs margin recovery you are. I think when they started they only had about a 2.7% margin and how far are you to getting that closer to the CVS core margin rate?

Thomas M. Ryan

We’re in the fifth inning of a nine inning game.

Operator

Your last question comes from Meredith Adler - Barclays Capital.

Meredith Adler - Barclays Capital

I’d like to go back, Tom, to something you said about working with states on helping them become more efficient. Are they responsive? The states are a big bureaucracy. Do they get it and are they making changes?

Thomas M. Ryan

Some get it. You know, we’re working through individually and collectively as associations when we go to the states. And they do get it. But you can imagine, some are more receptive than others. Any change is difficult and this notion that I think the bigger is philosophically does the Medicaid patient have to have, to use the phrase that’s bouncing around, a Cadillac plan? Or can the plans be more similar to the private sector? That’s where it’s headed, right? That’s a little bit of a paradigm shift in their eyes that says listen, most of the private and public companies in your state are looking at these type of benefit designs. You should be looking at that for your Medicaid population. And there’s some receptivity to it. At least it gives us a way to say we’re trying to provide a solution. And you can imagine the uptake’s different on different people.

Meredith Adler - Barclays Capital

And then maybe you could just comment on some of the things that, I think it was AT&T and maybe IBM who signed up to test some of the counseling programs and you hadn’t really updated that. Maybe that was what Per was referring to a few minutes ago, but would you say that that has in fact proven to be a success? And how hard is it to tell those early results to other customers?

Thomas M. Ryan

Yes, I think one of the changes that we’ve made in kind of the selling season this year and the marketing message is not only move the marketing message around PBM capabilities, but we’re able to talk about some results. Right? We have pilots in program. We have large clients. AT&T is a client of ours. IBM is not a client of ours. But we do have some programs with large employer groups, small employers and working on some health plans that show the improvement around the gaps in care, around adherence and around compliance, around generic dispensing, around preferred formulary. So we can actually go into clients now and show them results, where before it was more this is what we’re planning, this is what we expect to see. Now we can show them actual results.

Meredith Adler - Barclays Capital

In total generics for 2010, how does that compare with 2009 and what you expect for 2011?

Thomas M. Ryan

2010 is significantly below 2009. It’s maybe 60% of it or something. It’s significantly less. It’s more weighted to the back half than what we’re going to get. And then 2011 is obviously a huge pop on the back end of 2011 and then into 2012. So it’s obviously a big opportunity for us.

Meredith Adler - Barclays Capital

But if you look at the aggregate number of branded drugs going off, forgetting about the timing in the year, is it similar in 2010?

Thomas M. Ryan

It’s less. Than ’09?

Meredith Adler - Barclays Capital

Yes.

Thomas M. Ryan

It’s less than ’09 and then ’11 is two-and-a-half to three times more for them than ’10.

Meredith Adler - Barclays Capital

Thank you very much.

Thomas M. Ryan

Okay. Thanks a lot and as usual if you have any questions you can call Nancy Christal. Thanks.

Operator

Ladies and gentlemen, this concludes today’s CVS Caremark Corporation fourth quarter 2009 earnings conference call. You may now disconnect.

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