CVS Caremark's CEO Hosts 2013 Analyst Day Conference (Transcript)

| About: CVS Health (CVS)

CVS Caremark Corporation (NYSE:CVS)

2013 Analyst Day Conference Transcript

December 18, 2013 8:00 AM ET


Larry Merlo - President and CEO

Dave Denton - Executive Vice President and CFO

Jon Roberts - President, CVS Caremark Pharmacy Services

Alan Lotvin - Executive Vice President, Specialty Pharmacy

Helena Foulkes - Incoming President, CVS Pharmacy

Josh Flum - Senior Vice President, Retail Pharmacy

Andy Sussman - President, MinuteClinic


Lisa Gill - J.P. Morgan

John Heinbockel - Guggenheim

Ricky Goldwasser - Morgan Stanley

Ed Kelly - Credit Suisse

Debra Levin - MetLife

Dane Leone - Macquarie Group

Mark Wiltamuth - Jefferies

Scott Mushkin - Wolfe Research

Tom Gallucci - Lazard Capital Markets

Meredith Adler - Barclays

George Hill - Deutsche Bank

Ajay Jain - Cantor Fitzgerald

Ross Muken - ISI Group


Ladies and gentlemen, please welcome Larry Merlo, President and Chief Executive Officer, CVS Caremark.

Larry Merlo

Well, good morning, everyone. And welcome to the CVS Caremark 2013 Analyst Day. This is actually our third year of hosting an Analyst Day in December. We understand it is a very busy time of the year for everyone and the weather challenges this week have certainly added some additional difficulties. So we really appreciate all of you joining us today.

Yeah, we hold these meetings once a year to provide you with an in-depth review of our strategies to drive long-term growth and enhance shareholder value. We also view this meeting as an important opportunity for you to hear from members of our executive team, so you can see for yourself the depth and breath of our senior management team.

And we have included biographies on all of our speakers in your booklets for background information. I think we have got a great day lined up and we hope you will find that to be good use of your time.

I think today’s meeting is particularly timely given all that is happening in the health care industry as we enter 2014. I think is we are all acutely aware of the industry is undergoing its most transformative shift in decades and CVS Caremark is extremely well-positioned to thrive in this changing health care landscape. And I think you have a very good perspective of that by the end of this meeting.

So before we get started, I want to draw your attention to our Safe Harbor statement. This statement is also posted on our website and in your books. We asked that you take a moment to read it.

Since I know you are all speed readers, here is our agenda for the day. First, Dave Denton will discuss our strategy for enhancing shareholder value. He will walk you through our guidance for 2014, as well as our new long-term growth targets. And then, Dave and I will hold a Q&A session focused specifically on our guidance and outlook for ’14.

I’ll take the next slot and discuss our enterprise growth strategy with a focus on key changes in the environment, along with our unique ability and agility to respond to these changes.

Next, Jon Roberts will discuss how we are succeeding in this evolving PBM marketplace. Followed by Alan Lotvin providing a deeper dive on specialty pharmacy and how we're capitalizing on the opportunities as specialty presents.

Then Helena Foulkes, our incoming President of CVS Pharmacy will discuss our retail growth strategies with a focus on our personalization efforts and as you are aware, we announced Helena’s appointment three weeks ago. Helena has got more than 20 years of experience with the company, serving in a variety of roles in merchandising, marketing and operations in both our retail and PBM businesses.

Then following Helena, Josh Flum will do a deeper dive on pharmacy and discuss our efforts to unlock adherence across the CVS Caremark enterprise. And finally, Andy Sussman will provide an update on our MinuteClinic business, with a focus on our efforts to transform primary care.

So, with that, let me turn it over to Dave.

Dave Denton

Thank you, Larry, and good morning to everybody. I really appreciate you’ve been here on such a snowy day. As Larry said, I'm sure you're all very eager to get some color around our 2014 guidance and I am going to provide that in just a few minutes. But my most important goal for the day is to enhance your understanding of how CVS Caremark will continue to drive shareholder value over the longer term.

Please note that over the course of this morning, we will discuss certain non-GAAP financial measures, free cash flow, cash available for enhancing shareholder value and adjusted earnings per share.

They are defined here on the slides, as well as in your books and in accordance with SEC regulations. You can find the reconciliation of these non-GAAP measures to comparable GAAP measures on the Investor Relations portion of our website.

So let’s begin and here is my agenda for today. First, I will touch upon our accomplishments for 2013. Then I’ll show you how we've been able to generate a significant amount of value using the framework of our steady-state -- five-year steady-state growth targets that we established back in 2010. After that, I’ll provide some specific details around our guidance for 2014. And lastly, I’ll introduce our new steady-state growth targets that outline how our business might look by 2018.

These long-term targets highlight our keen focus on enhancing the overall enterprise growth as we used the many assets across our business segments to maximize the potential for the total enterprise.

And later this morning, presentations by my colleagues will provide this specific context around the specific initiatives and strategies designed to fuel our growth, enabling us to achieve our long-term financial targets and generate additional shareholder value.

So let’s just jump right into 2013. This has been our roadmap for driving shareholder value. And it will remain our GPS for enhancing value going forward. And it includes three main pillars. First is our focus on driving productive long-term growth. Second is our expectations to generate significant levels of free cash flow. And finally is our disciplined approach to capital allocation.

In 2013, we have continued our strong track record of successfully managing all three pillars. There was only a couple weeks left this year, we are on target to deliver solid results.

We expect to deliver earnings per share at the high end of our initial full-year guidance range despite an unexpected headwind in our Medicare Part D business. Our core businesses have continued to grow at a significant pace this year.

On the retail side, we expect to surpass our original growth expectations by some 200 to 400 basis points. Our retail growth has been aided impart by our ability to retain more than expected of Walgreen’s patients who -- that we gained during their impasse with Express Scripts back in 2012.

In our PBM business, we expect results near the top of our initial expectations. And quite frankly that’s phenomenal performance especially given the sanction that was opposed on our SilverScript PDP at the beginning of this year. We're gaining share in claims dispensed and managed across the enterprise and those share gains are driving productive growth.

We expect to generate a substantial amount of free cash flow yet again, which is driven by solid earnings growth as well as our continued focus on improvements in working capital. And we’ve returned more than $5 billion to our shareholders through a combination of dividends and a substantial amount of share repurchases.

A few weeks ago, we announced the acquisition of Coram, one of the nation’s largest providers of comprehensive infusion services. This is yet another example of what I call bolt-on acquisitions. These types of acquisitions supplement our existing assets. They provide additional areas of growth and provide us with stronger offerings in the marketplace and doing that while we enhance returns.

Obviously, the deal is not closed yet but is expected to close by the end of the first quarter and later this morning, Alan Lotvin will have much more to say about Coram. On our last earnings call, we both narrowed and raised our 2013 EPS guidance range.

Putting aside the benefit from a legal settlement that we booked in Q3, we continue to expect to deliver adjusted earnings per share from continuing operations between $3.94 and $3.97 a share. And this takes into the account the additional interest we’ll incur from the $4 billion of senior notes that we placed earlier this month.

So while we are not changing our guidance today, I'm pleased to say that the impact from this additional interest is absorbed within our current range. Additionally and consistent with our prior guidance, we expect to generate free cash flow for the year of between $4.8 billion and $5.1 billion.

Now before walking through our guidance in our new five-year steady-state model, I thought we just quickly review the targets that we first introduced back in 2010 and the performance that we have against them. These targets provided a framework from mapping out our growth through 2015.

Although we count all the details on the slide that are in your books and as you can see these targets aim to generate a substantial amount of cash flow through the productive use of our assets driving solid growth across our business. At that time, we’re targeting about $31 billion of cash that would be available to enhance shareholder returns to a combination of dividend increases, value-enhancing share repurchases and investments in our core business such as with bolt-on acquisitions.

We laid out some very specific objectives and overall we have tracked very nicely towards our goal, creating significant shareholder value. Back in 2010, we generated a little more than $6.1 billion in operating profit. Our target growth rate was 8% to 10% annually and we’re on track towards achieving that goal.

In addition to a 10% compounded growth in adjusted claims across the enterprise, we’ve seen an unprecedented conversion of branded drugs to generic equivalents while also we’re moving cost from the business to gain efficiencies. This has led to a generation of significant free cash.

In 29 -- in 2009 and 2010, we averaged a little more than $2.8 billion in free cash flow. We targeted free cash flow of about $4.5 billion on average through 2015 and we’ve been meeting or exceeding that target in each year by about $380 million on average.

In addition to operating profit growth, we’ve benefited from a significant swing in working capital. Quite frankly, turning an area that was consuming our operating cash into one that has become a cash generator of its own.

Now underlining and enhancing our performance, it has been our effective management of our debt. In 2008, our adjusted debt-to-EBITDA ratio stood at more than 2.8 times. We introduced a target of 2.7 times as a way of providing more transparency to how we would manage our debt levels over time.

And over the past three years, we’ve seen our profits steadily increase while we have effectively managed our debt levels quite frankly dropping below our target. Over that period, we’ve seen our credit ratings improve while we’ve replaced some of our more expensive debt with less expensive notes.

With the issuance of $4 billion in senior notes earlier this month, our ratio has now increased, but it still remains below our target. The environment was favorable. So we decided to issue debt not only to fund the Coram deal but to also support our cash needs throughout 2014.

So what has all this cash allowed us to do. In 2010, our annual dividends was $0.35 a share while our payout ratio was only 14%. Given our cash expectations, we targeted an increase of about 25% annually, which would produce a payout ratio between 25% and 30% by 2015.

With the cash we generated, we raised our dividends to $0.90 a share and we’re running ahead of our annual growth target. And as a result, we are well -- we expect to be well within our targeted payout ratio range more than a year early.

Additionally, the cash has allowed us to create value for our shareholders through share repurchases. In 2010, we bought back about $1.5 billion of our stock. We targeted share repurchases of between $3 billion and $4 billion annually and we have been delivering on that goal.

We’ve removed more than 260 million shares from the open market in the past three years and over the course of the current buyback period, we're generating an internal rate of return of approximately 24%. We are buying opportunistically and outperforming while doing so, clearly value-enhancing allocation of capital.

Now today we’re announcing that our Board of Directors has approved an annual dividend in ‘14 of $0.10 per share, up $0.20 per share. This is a 22% increase and puts us solidly on track to meet our ‘15 dividend payout ratio target at some point over the course of the coming year.

I'm also very pleased to announce that our Board has approved a new $6 billion share repurchase program. This reflects the Board’s ongoing commitment to returning value to shareholders and gives us the ability to continue our successful buyback program.

And with that, we expect to complete another $4 billion of share repurchases in 2010 continuing on our current pace. So all this adds up to stronger returns and excellent result since 2010. Back then, we delivered adjusted earnings per share of $2.65 per share.

We set a growth target of 10% to 15%, given all the metrics that I just walk you through. And we are delivering on our promises at the high end of our goals. So that’s where we stand on our targets and while they were aggressive, we also have demonstrated that they were also very achievable. So that's enough about history. I want to spend the rest of my time this morning on the growth over the next five years and importantly starting with 2014.

This morning, we are providing guidance for the full year as well as the first quarter of ‘14. Our growth comparisons versus ‘13, exclude the impact of the Q3 legal settlement of approximately $0.04 per share. For the year, we expected consolidated net revenue growth of 4% to 5.25% and adjusted earnings per share to be in the range of $4.36 to $4.50 a share, reflecting solid year-over-year growth of 10.25% to 13.75%.

GAAP EPS is expected to be in the range of $4.09 to $4.23 per share. And as I said, we plan to complete $4 billion of share repurchases throughout the year. And for modeling purposes, the timing of this, of ‘14’s repurchase program is expected to be more evenly distributed throughout the year versus what we saw this year. This reflects solid underlying growth across the enterprise.

Among the specific assumptions we made are the addition of Coram at the end of the first quarter. And revenues for this business are expected to be approximately $1.4 billion in the first 12 months after we close the deal. However, with respect to Coram, we expect Coram to have an immaterial impact on our overall financial results in ‘14. This reflects the inclusion of one-time transaction and integration costs, as well as the interest associated with the $2 billion of senior notes issued to fund this transaction.

From an interest expense perspective, the guidance also includes the full year impact of not only the Coram debt, but also the interest expense associated with the $2 billion and opportunistic non-deal debt that we placed at the same time. This additional $2 billion of non-deal debt will reduce EPS by $0.03 in 2014.

And the guidance also includes the benefit we expect from -- to receive from our venture with Cardinal Health. I will share more of the strategic value with you in just a few minutes. But for modeling purposes, we have assumed a $0.02 per share benefit in ‘14, reflecting the July start date.

We expect to generate a substantial amount of free cash. We expect cash from operations to be in the range of $6.6 billion to $6.9 billion. And after capital expenditures and sale-leaseback proceeds, free cash flow is expected to be between $5.1 billion and $5.4 billion, up 3% to 9% versus LY.

For the retail segment, we expect a healthy increase in operating profit of between 7% and 8.75%, reflecting another year of solid growth across this business. Retail should capture the greatest benefit from our venture with Cardinal, given the amount of generics that are filled at retail versus filled at mail.

We expect net revenue growth of 2% to 3.25%, and same-store sales growth of 3.75% to 2%. For 2014, we are expecting same-store adjusted scripts growth of between 3.25% and 4.25%. And just as a reminder, the same-store adjusted script metric converts 90-day prescriptions to the equivalent of 330-day prescriptions. And given the growth of 90-day scripts in our stores, we feel this is the more appropriate measure of comp script performance.

We expect retail gross margins to be up moderately, driven largely by an increase in generics, which is expected to more than offset any pharmacy reimbursement pressures. We expect to see expense leverage at similar levels to 2013. And as a result of all of the above, our retail operating margin is expected to expand between 40 and 45 basis points.

So let’s switch to the PBM segment, where we are expecting the year of solid growth with operating profit expected to increase 6.75% to 10.75%. This includes the profits associated with Coram. We expect net revenue growth of 7.25% to 8.5%, and we expect total adjusted claims of approximately $1.1 billion.

Gross margin is expected to modestly improve. And again, this improvement is mainly due to generics as well as the incremental benefits we are expecting from our streamlining effort within the business. Recall that we are expecting to be at a run rate of between $225 million and $275 million in annual savings in 2014. So these drivers, combined with some other factors such as improved rebates are expected to more than offset renewal pressures.

We also expect PBM operating expense as a percent of revenues to be flattish, as improvements in our core business are largely be an offset by costs associated with the integration of our Coram business. And as a result of all of that above, we expect PBM’s operating margin to improve slightly by up to 10 basis points. So, overall, we are extremely pleased with our outlook for ’14.

Now, before I provide the details of our first quarter guidance, I'd like to discuss some of the key factors impacting our profitability for next year. First, while the introduction of new generics will continue to improve our profitability, there will be fewer break-open generics in ’14.

Second, we'll see benefits beginning mid-year with our venture with Cardinal Health to create the largest generic sourcing entity in United States. Third, the fact that we were not able to market our SilverScript products and missed out on open enrollment in 2013 means that we have missed an opportunity to grow the individual Medicare business next year.

And then there is the rollout of the Affordable Care Act and health care reform. I will touch on the financial applications, but both Larry and Jon will speak later about reform and what it means for our business. Generic introductions and the ongoing growth in generic dispensing rates will continue to drive profitability across our enterprise. While the level of generic introductions have been slow from year-to-year, our profits continued to benefit from the fact that we fill more than 80% of prescriptions today using generic drugs. There are $50 billion of branded drugs expected to move from brand to generic status between 2014 and 2016.

Compare that against the approximate $50 billion of brand conversions we’ve seen during the last two years, and you can see that there is still a very significant opportunity for earnings growth in the years to come. That said it is important to keep the specific timing of generic introductions in mind, as well as how these generics come to market as that impacts the cadence of profitability.

This year’s generic introductions will continue to have a positive impact as they wrap into 2014. However, the incremental impact will be minimal, as much of the generic activity in ‘13 occurred in the first half of the year as opposed to the second half of the year. There are two ways in which generics entered the marketplace that drive their economics -- limited supply and break open. Our profitability is highest during the break-open period and that period occurs when there are three or more suppliers in the marketplace.

And this slide illustrates the amount of generics that are in the break-open period during any given year. And as you can see, we are coming off two of the best years the industry has ever seen. And while over the next three years, we will continue to benefit from break-open generics, when compared to 2012 and 2013, there will be a stepdown. And 2014 is the trough year.

We expect to see less of an impact in ’14 than we have in recent years. However, we expect to see that benefit reaccelerate in both ’15 and into 2016. Of course, the big news concerning generics occurred last week, when we announced the signing of a 10-year agreement with Cardinal Health to form the largest generic sourcing entity in the United States, which is the world's largest generic market.

Each of us is a leader in our respective business with deep expertise in sourcing and supply chain management. We have a longstanding track record of working together collaboratively and together, we are partnering to maintain our leadership positions while driving value for our customers and our clients, and our shareholders in a very capital efficient manner.

We will collaborate with generic manufacturers to develop innovative purchasing methodologies, to improve supply chain efficiencies and to use our compelling scale to create attractive offerings for these suppliers. We believe our model will be very attractive to suppliers as it will be U.S. focused taking full advantage of the uniformity of requirements related to regulatory approvals, packaging and labeling.

It will be designed to be flexible and were to quickly react to marketplace changes, operating in the same general time zone as our customers and leadership of many of the world’s largest generic manufacturers. And finally, it will be an easy entity with which to do business, having centralized decision making authority.

As for opportunities outside the U.S., the potential does exist for us to include non-U.S. participants in the future, if we see a compelling strategic or financial rationale. And we’re to establish equitable value sharing, reflecting our larger purchasing volume. The agreement includes an annual payment of $100 million.

This will be paid quarterly over the life of the agreement from Cardinal to us, beginning once the venture becomes operational which is expected to be as soon as July of next year. While, we are not providing specific estimates of the benefit beyond what I provided for ’14, our assumptions are built into our long-term financial targets.

The U.S. generic market is the largest in the world and possesses the most significant opportunity to drive efficiencies in the generic supply chain. As I said, the venture makes us the largest group in the U.S. and many analysts have tried to estimate the size of our combined scale compared to the size of other purchasing groups.

And while we can't provide specifics, I just want to note that many of the estimates that we have seen for the combined purchasing volumes of the various purchasing groups are too high across the board.

In 2014 and beyond, we expect that we will be able to drive incremental value for our shareholders through this venture. We are excited to bring together our capabilities to better serve our customers while creating long-term value for our shareholders.

With respect to Medicare Part D for modeling purposes we have assumed that the sanction will be lifted at some point near the end of the first quarter of ’14. It primarily affects our individual SilverScript PDP and it’s prevented us from marking our product or enrolling new members.

We have completed our remediation work and we have let CMS know that we are ready for their review. However, to be clear, the decision to take us out of sanction rest solely with CMS, so we cannot predict with certainty when the sanction will be lifted.

While we have 3.5 million SilverScript lives at the beginning of ’13, we expect to have roughly 3 million lives in our individual SilverScript PDP by the end of January. This loss of 500,000 Medicare lives represents $1.3 billion in revenue and approximately 18 million of adjusted claims within the PBM business. And this decline of lives as a result of the natural attrition in this business, which because of the sanction we were not able to offset with new members who aged into the Medicare program.

With the sanction in placed we were not able to participate in the annual open enrollment for ’14 and missed out on the opportunity for eligible members to choose one of our products.

Additionally, we did not receive any auto assignments of low-income subsidy lives from CMS for ’14. But the bright spot is that our bids in the various regions across the country were successful. So that while we did not receive auto assignees, we will retain the vast majority of the auto assignee lives that we currently cover.

So the overall PBM growth in ’14 will be less robust, as we missed an opportunity in ‘13 to grow the Medicare Part D business. And finally, we see the changes that are expected from the implementation of the Affordable Care Act to be a net positive to our business in ’14. As Larry said on our last call, we would participate in coverage expansion in the public exchange as well as in Medicaid. Additionally, we will participate in the private exchange market for both active employees as well as retirees.

And it's important to remember that our opportunities to participate are not just limited to the PBM, but span across our entire business including our retail pharmacies as well as our MinuteClinic business. And as a result, we are very well positioned to grow and gain share. Now, we do expect some churn in PBM lives as some members may move from their current coverage provided through their employer to coverage provided by health plans within the private exchange.

However, we expect less than 1% of covered lives to move into these exchanges in 2014. Now, in some cases this may result in margin compression but we expect to be able to mitigate it. We will do this not only by gaining incremental share, but also through the use of cost management tools such as narrow networks, our maintenance choice offering, narrow formularies and step therapies. Nevertheless, we have made conservative assumptions and we expect the change in totality to be incrementally beneficial to us in 2014.

So, let’s turn to the first quarter. We expect consolidated net revenue growth of 2.75% to 4.25%. We expect adjusted EPS to be in the range of $0.96 to $0.99 per share, reflecting year-over-year growth of 15% to 19%. For the retail segment, we expect operating profit to increase 6.75% to 8.75%, and net revenue growth is expected to be up 3% to 4.5%. Same-store sales are expected to be up 1.75% to 3.25% and same-store adjusted scripts are expected to grow 2.75% to 3.75%.

Now, I expect tough comparisons to LY due to strong cough and cold season that we saw in Q1 of ‘13 as well as the shift of Easter into the second quarter. Now for the PBM segment, we expect operating profit growth of 21.25% to 28.25%. Net revenues were expected to be up 5.5% to 6.75%.

In general for the enterprise, we expect profit growth to skew slightly to the first half of ’14, though there is no notable sequential trends really to highlight. The first half waiting is mainly due the strong growth expected in the Medicare Part D business, which of course shows up in the PBM segment. Remember that the sanction was opposed in January of this year and that’s when the remediation cost began, so the comparisons to LY for the quarter will be favorable.

The only other point that I would like to note for modeling purposes is that Q3 is expected in the quarter with the lowest growth of the year and this is given our outlook for the timing of break-open generics.

So I think that sets the stage for next year, let me introduce you now to our new steady-state growth targets. Over the course, the next five years we are targeting compounded annual growth rates of between 9% and 13% of the topline, 7% and 9% on operating profit and 6% to 8% on adjusted earnings per share.

Although and to some of the high levels assumptions after I walked down the page, but suffice to say that given what we see as likely possibilities between now and 2018, this is our educated best guess estimate of our future performance.

Now note that the operating profit growth target is slightly lower than our prior goal of 8% to 10%. However, if you take into account the law of large numbers, we are actually targeting a significant amount of nominal growth.

Remember, our starting point in 2010 was an enterprise EBIT of approximately $6 billion versus our ’13 jump off of nearly $8 billion in EBIT. As a result of a higher jump off point, our new targets will generate approximately 12% more operating profit on average. This equates to more than $400 million of additional EBIT by the fifth year, despite the growth rate being 100 basis points lower. So even though the targeted growth rates are slightly lower, we are targeting the generation of a significant amount of incremental operating profit.

And given the earnings progress plus continued improvements in capital management, we could have on average $7.5 billion to $8.5 billion annually in cash available to enhance shareholder value.

And again, assuming that a certain portion of that cash is used to repurchase shares throughout this period, we could enhance EPS growth by another 4% to 6%, leading to compounded annual growth rates and total adjusted earnings per share of between 10% and 14% over the next five years.

Now let me walk you through several high level assumptions that are inherent in these targets and I will try to summarize a few of the more significant once that you should consider when modeling our longer term growth.

Obviously the continuing industry-wide pressure on pharmacy pricing and reimbursement is a factor not to be ignored. Additionally, we have even more requirements in regulations concerning compliance that must be addressed and sometimes at a significant cost.

However, historically we have been able to successfully manage our business to compensate for these margin pressures and our new steady-state targets assume that we will continue to successfully manage these issues over the course of the next five years.

There are several positive drivers that over time we can reasonably assume will help offset this pressure and while not necessarily preventing margins from compressing a bit drive profitable growth.

We continue to expect a benefit from the grain of America and the resulting increase in prescription volumes. Additionally, with the introduction of health care reform, we expect utilization to be further enhanced. This growth in volume and increase in utilization will be among the biggest drivers of future pharmacy growth.

As I said, there are more than $50 billion of branded drugs losing patent protection between now and 2016 that also could help offset the continuing pressure on reimbursement. And being the largest purchaser of generic drugs in the country, we have modeled our ability to continue to benefit from our compelling scale.

We have targeted continued gains in our industry share based on several factors, they include the traditional growth driver such as square footage, [far bias] and new clients but perhaps more importantly, we expect to gain share from the ongoing introduction and adoption of our innovative unique products and services across our enterprise.

And lastly, we should be able to continue to make high return bolt-on acquisitions that support our business and enhance our reach and again I think Coram is a perfect example of that. So as I said, there are many assumptions that have gone into these targets but these are the key assumptions you should keep in mind as you build your models.

Now, you may have noticed that we have not provided long-term targets for our segments both the retail and PBM business. This is by design as I want everyone focused on our long-term enterprise growth. That’s how we are thinking about our business and that’s how you should think about it too.

We are focused on growing share. Our share of pharmacy dispensing volume, no matter what channel that may be in. As such, growth in covered lives remains an important factor and with increase share comes the ability to increase savings for our clients, as well as the members.

Our focus isn’t limited to just one channel, mail or retail as it is from many of our competitors. Our channel and business segment agnostic offerings will enhance the performance of the enterprise sometimes at the expense of one individual segment.

And as I reviewed at our last Analyst Day, as our innovative programs are introduced or as they gain increased adoption, focusing the growth -- focusing on the growth of the enterprise will be the best way to gauze our success.

So where does all these targets lead us? They lead us to a substantial amount of cash that could be generated over the next five years. During the five-year time horizon from ‘14 to ‘18, approximately $39 billion of cash could be generated by the earnings targets we have established coupled with strong working capital management.

Now its reasonable to assume that we invest 20% of that cash back into the operations of our business and once that is used more than $31 billion of free cash could be available to enhance shareholder returns.

An additional $9 billion of cash can be made available by simply maintaining our 2.7 times adjusted debt-to-EBITDA ratio for a total of approximately $40 billion. That would allow us to maintain financial flexibility, while also enabling us to preserve our high BBB credit ratings. And the results of this new target is the generation of about $9 billion in addition cash, nearly a 30% increase over the prior five-year targets.

So what’s our priority for this cash? First, we have set a dividend payout ratio target of 35% by 2018 versus our current level of approximately 24%. This implies a compounded annual dividend growth rate of nearly 18%.

We will use additional liquidity to invest in high ROIC efforts and then absent internal project perhaps $4 billion to $5 billion of annual value enhancing share repurchases could be executed under normal conditions.

And here is a handy summary of our capital allocation priorities and as before, our cash deployment will be guided by disciplined risk adjust decisions. We will invest in projects that help us grow our business with good long-term returns.

We will look for risk adjusted hurdles in the mid teens in order to ensure a significant value creation and we are committed to either funding these types of projects or returning the cash to the shareholders if that creates the best value. And I think our track record demonstrates our ability to do just that.

So in summary, CVS Caremark has posted a strong track record of meeting or exceeding our financial targets. We believe the outlook for ’14 is bright and we are focused on strategies that will lead to solid long-term growth.

We continue to generate a substantial amount of cash and we will follow a disciplined capital allocation strategy designed to drive long-term returns. And keep in mind, the growth of the overall enterprise, not anyone segment is the key to enhancing shareholder value.

Thank you for your time. With that, I’ll ask Larry to join me on stage.

Larry Merlo

Okay. Thanks Dave. And what we thought we would do is open it up for Q&A, specific to our ‘14 guidance as well as our long-term targets. We’ll have another Q&A later on after the rest of the presenter speak. So I would ask, we have folks in the audience with microphone so when I call on you, please wait until you get the mike so those on the webcast can hear the question. And we would ask you to state your name and affiliation. So if it’s all right. Lisa?

Question-and-Answer Session

Lisa Gill - J.P. Morgan

Thank you. It’s Lisa with J.P. Morgan. I had just two quick questions. The first would be around the JV with Cardinal. If we look at the $0.02 that would imply roughly $37 million of EBIT, yet Cardinal talked about paying you $25 million a quarter. Is that $50 million next year included in that assumption?

Dave Denton

Yes Lisa. That $0.02 basically equates to the $50 million payment.

Lisa Gill - J.P. Morgan

Okay. So there -- you’re not expecting then any incremental opportunity around the purchasing power of the two entities for 2014?

Larry Merlo

Lisa, we don’t have anything baked into our forecast for that at this point.

Lisa Gill - J.P. Morgan

Okay. And then my second question was around ACA and in 2014, you talked a little bit on the PBM side but can you maybe talk about your assumptions on the drug retail side for ACA?

Larry Merlo

Yeah, Lisa, we’ll get into that a little later. But as David mentioned, we are expecting overall, it will be a net positive. We'll probably see more of an immediate benefit from Medicaid population expansion and obviously our retail assets are in a better good position than capital asset on that.

Lisa Gill - J.P. Morgan

Thank you.

Larry Merlo

Up, front here, John, second row, [Rob].

John Heinbockel - Guggenheim

John Heinbockel, Guggenheim. So two things, I really want to talk about enterprise growth but maybe high level, if you think out over the next five years, retail growth versus PBM. What are the big -- any big changes? My assumption would have been maybe the PBM would have grown a little faster because of specialty. And maybe retail margins are getting closer to the peak and so the retail EBIT might grow a little slower. But just some color on that, how you think the next five years might have been different than the last five? And then one follow-up.

Larry Merlo

Yeah, John. I mean as Dave mentioned, you think about the graying of America or the silver tsunami as we’ve referred to. We get 10,000 people turning 65 every day for more than the next decade. So we do see growth in script utilization which we think will benefit both our retail and PBM businesses.

At the same time, I think, as you’ll hear throughout the morning, one of the great opportunities that we have is to bring integrated products and services into the marketplace that meet an unmet need especially with so much of health care changing. And you’ll hear about some of those opportunities from the various presentations this morning.

And as David just mentioned, as we move forward, it is possible that those products could sub-optimize one aspect of our business that have a greater benefit to the overall enterprise. So it's hard for us to project with that thought process, when you start looking at retail growth, PBM growth, we think it's getting on front of our skis to think about it that way.

John Heinbockel - Guggenheim

And then secondly, you talked about the $9 billion potential incremental debt. Dave, you just raised $2 billion. Is there any thought that a good -- well 2 billion on top. What’s the thought that some of that could go into buy back in ‘14?

Dave Denton

Well as we always do, as we always look at our capital allocation priorities and we go through them very specifically, run dividend, investment, get back in the business and share repo, we’ll continue to focus on all three of those leverages. We look not only to ‘14 but also into next four years after that.

Larry Merlo

Question on. Carry right in the middle here, okay. Someone here.

Ricky Goldwasser - Morgan Stanley

Good morning. Ricky Goldwasser from Morgan Stanley. Given the focus on the enterprise growth, can you show with us what percent of script fielding retail are originated by Caremark today and how you think that will progress in a longer-term?

Larry Merlo

Yeah, Ricky, I’m going to ask if we will -- I’ll actually answer that in my presentation coming up next. It's a great question. It's key to our growth strategy and I’ll show you some slides on that in few minutes.

Ricky Goldwasser - Morgan Stanley

Okay. So then one follow-up question. In your long-term growth, you give a range 10% to 14% and you highlight continued contract renewals and net new wins under PBM side as a tail wind. When we think about that range, when you think as low end to that 10%, are you also factoring potential losses in the marketplace, given that there is some -- there is a large contract coming up for renewal next year?

Larry Merlo

Obviously, Ricky, that range represents a complete view of many different variables in our business and clearly in our PBM space and new contracts, we win and lose. We are not 100%, so obviously built into that range is some natural attrition that we’d have in our business as well. So yes, it does. Right here in the middle.

Ed Kelly - Credit Suisse

Hello. Thanks guys. My question for you is on -- it's Ed Kelly, Credit Suisse. My question for you is on long-term guidance. Can you provide a little bit more color on the drivers of the 9% to 13% revenue growth that is a little bit higher than what you're projecting in last five-year forecast?

And specifically how much of that growth do you think is driven by net new PBM wins. And then the second part of my question is that your operating profit growth over the next five years is projected to lag the revenue growth which is not something you're projecting in the prior forecast. So can you talk about the drivers of that as well? Thank you.

Larry Merlo

Yeah, I think, may look at this offer. Obviously when you think about the next several years, you think about from a revenue perspective. Specifically, we’ve gone through a fairly sizable amount of, I’ll say, revenue compression as we converted brands to generic equivalents. Now if you look forward that level of generic introductions is still not as relevant anymore.

So that enables if you will the top line to grow little more rapidly, number one. Number two is you have one of our growth drivers that you hear later today in a lot of detail, is what’s happen at specialty. So that will be also a fairly sizable growth driver over the next several years.

Dave Denton

And Ed, I think, I would just add to that. We expect to continue to see margin pressures on the pharmacy side of our business. And we don’t see that -- I mean, we've been dealing with that for years now. We don’t see that abating.

Unidentified Analyst

Can you give any color on like how much of net -- thank you. Any color on how much you expect net new contract wins to drive in terms of that revenue growth and profit growth?

Larry Merlo

Yeah, we haven’t really broken that out specifically. It does depend a little bit on each seasons a little bit differently. I think, probably its even more important to that is with the lives that even that we currently have is how rapidly they adopt some of our innovative programs and services because that really enhances the value for us. And it senses as people move into one of our channels whether that be mail or retail, moving that claim into a dispense claims is pretty important. So I think that's probably as big of a driver quite frankly. Up in over here.

Debra Levin - MetLife

Hi, Debra Levin at MetLife. I’ve got a question regarding your financial policy and acquisitions. You had mentioned that in all likelihood, there would be bolt-on acquisitions. But if you found something larger, would you let your leverage target -- would you surpass your leverage target and would you potentially put your credit rating at risk?

Larry Merlo

Debra, we’ve been very focused on our credit ratings. I think you can’t ever get a 100% each quarter or each year. But we’re going to try to stay pretty close into that 2.7 times target. And you’ve see this in the past, it would be a little above or little below at. But we always try to get back to that zip code.

Dane Leone - Macquarie Group

Thank you. Dane Leone with Macquarie Group. Regarding acquisitions, what are you currently using for your ROIC hurdle rate and how many years out do you need to get that?

Larry Merlo

We typically target in kind of mid-teens from a hurdle rate perspective. We do that to make sure that we can create significant value for our shareholders on those targets. And each businesses little differently -- a little different as far as how quickly we can get to that level.

Dane Leone - Macquarie Group

Regarding ACA, what’s the incremental profit contribution you are expecting from the MinuteClinic program 2014 and how is that evolved into 2015?

Larry Merlo

Yeah. As you think about that as Dave mentioned, there are lot of moving parts for ‘14 overall. We believe that it would be a net positive for the business. I think, you’re hearing the subsequent presentations from myself, Jon and Andy, the role that MinuteClinic plays in our exchange offerings and we have not broken that specifically out in terms of that piece attributed to MinuteClinic.

Mark Wiltamuth - Jefferies

Hi. Good morning. It’s Mark Wiltamuth from Jefferies. First, on the utilization point, you talk about the aging of the baby boomers, health care reform, where do you think prescription volume growth can be two to three years out for the industry.

Larry Merlo

While, I think what you are going to see is you are going to see utilization. I can’t give you a specific number, but you are going to see utilization began to tick up and is really been fuel by a few things. One is -- and probably the most dominant one is been the -- as the Affordable Care Act gets rolled out and those $30 million Americans come into the system, now once they come into the system they will have access to coverage and what we've seen with coverage comes utilization.

Secondly, this long tailwind of the grain of Americas is people ageing to the over 65 category, you see there is over 65 patients today taking prescriptions roughly at the 40 to 45 level, 40 to 45 prescriptions per year level versus the under 65 population usually around seven or eight prescriptions per year. So as that happens that will be a nice tailwind to our business.

And then finally, we’ve been working very hard to improve adherence. And if you think about all the programs we’re doing around Pharmacy Advisor or even around some of the -- benefit plan designs that we put in place will allow for that utilization to also increase which drives significant savings in health care market place. So all those will…

Mark Wiltamuth - Jefferies

Could you give a little more color on the first half weighting to the 2014 numbers because you are lapping the peak of the generic wave in the first half of -- yet you are sourcing a bigger first half weighting. Is it just a remediation on the PBM that was affecting that?

Dave Denton

That largely, that’s largely.

Larry Merlo

But we -- Mark, we don’t expect it to be to the degree that we experienced first half cadence versus second half this year in ‘13?

Mark Wiltamuth - Jefferies

Okay. Thank you.

Larry Merlo


Scott Mushkin - Wolfe Research

Hey, thanks Larry and thanks Dave. So Scott Mushkin, Wolfe Research. Quick questions on your long-term key assumptions says bolt-on acquisitions, is that future bolt-on acquisitions or is that just current?

Larry Merlo


Scott Mushkin - Wolfe Research

Future. Okay. Great. Then the second question I had is regard to the ACA and Medicaid. It’s coming in -- I mean it’s mostly what’s coming in about, it was over -- little over $1 million but we’ve heard, I think some projections out. We’re just seven million Medicaid patients. In your guidance for ‘14, what are your assumptions on ACA, Medicaid, you play pretty big in that? Thank you.

Larry Merlo

Yeah. Scott, it’s more in the middle of those two guard rails, if you will and Jon will talk a little more about that in this presentation. Tom?

Tom Gallucci - Lazard Capital Markets

Thank you. One clarification or follow-up from before, on the faster growth of specialty as one of the reasons for sort of the faster top line and little less on an operating line. Is that already naturally lower margin or do you expect some sort of incremental compression there just to be clear?

Larry Merlo

Well, we’d like to think about specialty coming from a dollar perspective. If you think about it, the specialty businesses is largely a branded category at the moment. There is some opportunities that you’ll hear from with Alan around how we can manage that business little differently going forward. But from a dollar contribution perspective that has a -- that’s a nice business for us because they are such high cost dollars. And quite frankly the margin rates vary quite significantly between therapeutic classes. So there is not -- I don’t want to give you just an average.

Tom Gallucci - Lazard Capital Markets

Okay. Right. And then just to follow-up also on -- you mentioned some of the private exchange issues in ‘14 to a net positive benefit design issues and things, how do you incorporate your expectations over the five-year period as opposed to sort of less than 1% live that you mentioned for ‘14?

Larry Merlo

Yeah. A couple of things. One is we do believe the private exchanges are going to grow. We are going to participate in those in a lot of different ways and you will hear more about that this morning. I think the other things that’s important is as -- as people migrate into the private exchange, we believe that is real opportunity for us to gain additional lives in the market. So net-net, we believe that to be a tailwind to our business.

Dave Denton

The thing that I would ask you is to think about and you’ll hear that throughout the presentations this morning, this is not just about our PBM’s in terms of how we can participate and play. It’s not just the PBM, it’s our retail assets. It’s our MinuteClinic assets. So we will take two more questions.

Meredith Adler - Barclays

You do talk about and the use of cash, bolt-on acquisitions, can you give us any comment -- I don’t want you to tell us, so we should rush out and buy the stock of proper companies. But can you just give us a sense of where you see -- I don’t want to see close exactly, but places you need to bloke up. I would have said bank home filled in the hole perhaps and anything else you see where you do have those holes?

Dave Denton

Meredith, I don’t believe that we see any major holes in our business. I think if -- as you here us talk about where we see the growth opportunities, I think the bolt-on opportunities would link to where we see our future growth coming from.

Meredith Adler - Barclays

And by the way this is Meredith Adler of Barclays.

Dave Denton

Right here in.

George Hill - Deutsche Bank

Good morning. Thank you. George Hill from Deutsche Bank. Just in the key assumptions that you highlighted, the pharmacy pricing and reimbursement trends are expected to weigh on gross margin. I guess kind of two parts to the questions. Can you provide any color on severity of impact and maybe then by product or payor bucket, where do you feel like you are seeing the most pressure on reimbursement at the pharmacy levels? Thanks.

Dave Denton

I don’t know that we expect to see any difference going forward from what we’ve seen in the past. I think across the -- I will refer to it as supply chain. There’s going to be a focus in terms of continuing to manage and reduce overall cost.


Larry Merlo

Okay. Dave, thank you and again, we’ll have an opportunity to have a second Q&A after we hear from the rest of our presenters this morning. So, with our financial goals for 2014 and beyond on the table, I’d like to shift gears now and focus on our strategies for achieving the growth targets that Dave just reviewed. And throughout the rest of the morning, here we hear about this unique combination of ability and agility that positions CVS Caremark to thrive in this changing health care landscape.

Now our ability is defined by the fact that we have brought together an unmatched breadth of assets and expertise to drive innovation. And that innovation has delivered results for our clients, for our customers and for our shareholders. Our agility is rooted in the fact that while we’re laying out a clear direction and a long-term strategy, the marketplace is undergoing significant change.

And we have the agility and nimbleness to respond to those changes while continuing to deliver strong results. To say it in another way, we have an in-depth understanding of the health care landscape along with the challenges and opportunities that lie ahead. And this unique combination of ability and agility positions us to capitalize on the opportunities created by the changing marketplace, however, they take shape.

So with that in mind, I know we cover a lot of ground over the next couple hours and to simplify it, here are four key insights that we’d like you to take away from today's meeting. First we believe changes in the health care environment are creating unique opportunities for CVS Caremark.

Today you’ll hear us talk about what we call the retailization of health care which is a reflection of the rise of consumerism, driven in large part by the increasing numbers of individuals and consumer-driven health plans. And we’ll provide examples of the purposeful innovation to better meet the changing needs of both clients and customers.

Second, our unique model creates a sustainable competitive advantage. We’re focused on enhancing access, lowering costs and improving health outcomes and our consumer driven, channel agnostic solutions are creating real value for patients, customers and clients. And this is how we’ll continue to win share in marketplace.

Third, we continue to migrate towards a greater focus on enterprise growth. We’re focused on winning lives and capturing a greater share of pharmacy spend whether or not we’re the PBM. We’re a category of one and only CVS Caremark has the integrated assets to deliver breakthrough products like Pharmacy Advisor or Maintenance Choice and now Specialty Connect which is what we’re calling our integrated specialty product.

And then fourth, as you just heard, we remain committed to enhancing shareholder value. And we’ll accomplish that through strong earnings growth, substantial cash generation along with disciplined capital allocation practices. We’ll continue to make investments that meet our return hurdles and we’ll deploy excess cash towards value-enhancing share repurchases and dividends.

Now at last year’s Analyst Day, we laid out our enterprise growth strategy along with the initiatives that we would be focused on as we advanced that strategy in 2013. And today, our speakers will update you on our progress within each of those areas along with our innovative client and consumer solutions that we’re working on going forward.

And as we move throughout the day, I think it's important to remember why we’re doing the things we do. Our purpose as a company to help people on their path to better health and to do this we’re reinventing pharmacy. And as Dave said, we’re working towards this goal as an enterprise and will measure our success at the enterprise level.

So we’ve got the talent, we’ve got the assets in place to succeed in this changing environment. And throughout this morning, I think you will see that our very capable management team is highly focused on working across the enterprise to deliver innovation and deliver results.

Now with that said, let me turn to the two key areas that I want to focus on this morning. First, I’ll talk briefly about our accomplishments over the past year. And then second and more importantly, I’ll discuss our strategies to drive enterprise growth in this evolving health care landscape.

So let’s start with a look at our recent accomplishments. As we near the end of 2013, I’m pleased to say that we continue to deliver on our promises. As Dave mentioned, we are on a pace to come in at the high end of the growth targets we laid out a year ago, with earnings per share up more than 14% and solid operating profit growth across the business.

We continue to grow share in our retail business after gaining 24 million new scripts in 2012 as a result of the Walgreen-Express impasse, we met our goal of retaining at least 60% of those scripts in ‘13 while continuing to drive share gains in the underlying business.

We made our first foray into the international market with the purchase of Drogaria Onofre in Brazil. Our expansion plans for our MinuteClinic business are on track. We’ve added more than 150 new clinics this year.

We had another successful PBM selling season with more than $5 billion in gross new business and 96% retention rate and this marks our fourth consecutive year of significant new business wins with cumulative net new business of approximately $25 billion over that time period.

We successfully laid the groundwork for a significantly expanded role in the infusion market with our pending acquisition of Coram. This acquisition will expand our competitive offerings in the specialty market with infusion being a valuable component of our broader specialty offering.

And finally, we've enhanced our position as the largest purchaser of generics domestically. And as we just discussed, the agreement with Cardinal Health creates the largest generic sourcing entity here in the U.S.

So when you take a step back now and look at how the company has evolved and what we have accomplished over the past few years, I think it's clear that we have leveraged our unique model to succeed the marketplace.

We have almost doubled our dispensing share for Caremark members at CVS pharmacy meeting a much greater share of PBM scripts now flow through our distribution channels. We’ve transformed and significantly advanced pharmacy convenience with our Maintenance Choice product, driving greater stickiness with PBM clients.

We’ve capitalized on recent wins with health plans, again across the enterprise with new PBM clients, leveraging the full suite of our enterprise assets and many other non-PBM health plans, leveraging our enterprise assets to advance their exchange strategies.

And finally, we’ve applied data to drive our adherence advantage. We’ve developed predictive modeling through our consumer engagement engine to deliver meaningful and actionable data to the pharmacist at the point of care. And we’re building the next-generation of pharmacy care products by infusing behavioral economics in more advanced analytics into those products.

Now working through the future, our enterprise growth strategy will continue to capitalize on those unique competitive advantages because we’re focused on winning new lives whether or not we're the PBM. And we’re focused on capturing a greater share of pharmacy spend across all channels.

We’ll excel in driving operational efficiencies and excellence in execution and we’ll continue to drive innovation to better meet the changing needs of our customers. So with the building blocks of our strategy in place, we do have a strong outlook for 2014 and beyond.

So with that being said, let me now turn to the specifics of how we plan to drive enterprise growth in this changing health care landscape. When we evaluate all the moving parts in the health care marketplace, we actually see four key trends that are most important and most impactful to how we’re positioning the company for the future.

First, we see the Affordable Care Act expanding coverage to more than $30 million Americans and the payor mix changing substantially with more lives, shifting to health plans. Second, we see a continued shift towards this retailization of health care with consumer choice and accountability growing.

Third, we see a greater focus on cost and quality as the Affordable Care Act is rolled out and then payors and providers begin to look for new ways to improve the health care value equation. And finally, the economics of pharmacy continue to evolve.

If you think about the introduction of new generics slowing over time and specialty pharmacy continuing its rapid growth, we believe the greatest growth opportunities will come in the form of share gains and volume growth. And I’ll discuss each of these in more detail along with our core beliefs about how these changes will play out driving our growth strategy.

So let me start with a closer look at the market structure. We all know how much we’ve heard about the bumpy rollout of the Affordable Care Act over the past couple of months. But this isn't the end of this, it's the beginning and we expect coverage expansion will provide a long-term secular tailwind.

More than 30 million Americans will gain insurance coverage by 2018, and there will be many more million since coverage changes. We expect employer-sponsored coverage will remain relatively flat with Medicare, Medicaid and individual purchase growing rapidly.

Now given the strong growth in these areas, the importance of government payors and health plans is clearly rising. And we believe we are very well positioned for this trend. When you look at government payors, our advantage comes from our strong positions in both the Medicare and Medicaid businesses across both our retail and PBM channels.

We’ve made investments in building these businesses and you can see our significant share in these markets. Our ability to gain share of pharmacy spend across the enterprise from lives in our PDP and managed Medicaid business is a significant advantage over our stand-alone competitors.

And we’re especially well positioned to participate in coverage expansion through Medicaid as the leading PBM in the managed Medicaid market along with our strong retail footprint in the majority of states that are expanding the Medicare population.

Now in terms of health plans, we have the ability to gain share of this growing market through our existing PBM relationships. Today we have more than 80 health plan clients representing about half of our PBM lives. And over the past few years, we've made significant investments in solutions that address the changing needs of our health plan clients.

And just as one example, we can leverage our expertise in the government lines of business to help health plan clients win in this growing market. Another example, our expertise in clinical programs and best-in-class adherence programs are supporting their goals of reducing overall health care costs.

We play a supporting role in new health care value models such as patient-centered medical homes as we move to outcomes-based reimbursement environments. And we’ll grow with our health plans as they grow and gain share in both the public and private exchanges.

Now the truly unique aspect of our model is the ability to support health plans through our assets across the enterprise whether or not we’re the PBM. And our consumer expertise in this new business-to-consumer world of health care is being welcomed by health plans across the country.

As leveraging our retail footprint, we can support health plan marketing initiatives, ranging from limited pilot marketing programs to full-scale educational programs. Some of these health plan partnerships also include participation in preferred or restricted pharmacy networks and many are taking advantage of the convenient and affordable MinuteClinic services as well as cost-saving PBM services and programs to better manage that specialty pharmacy segment.

Now we’ll talk about this in greater detail throughout the day but you can see on the slide just a few examples of some large national and regional health plans that are leveraging our enterprise capabilities even though they are not PBM clients. Now, although there are a number of moving parts related to changes in payor mix and the growth in exchanges, collectively we do expect these changes will be a net positive for our business in 2014 and beyond.

Now when you think about the exchanges, we'll participate in coverage expansion in both a public and private exchanges. And as a PBM, we’ll participate in the public exchanges through our health plans on a carve-in basis where the health plan offers integrated medical and pharmacy benefits and we provide the PBM services.

In fact, our health plan client footprint spends 25 states covering about 70% of the eligible exchange population. In the private exchanges, we'll participate through both a carve-in basis again through our health plan clients, as well as on a carve-out basis as a standalone PBM where we have direct prescription benefit offerings on the exchange products and also play an important role in providing coverage to retirees through our SilverScript prescription drug plan as well as through our health plan clients PDP and MA-PD businesses.

It’s also important to remember that our opportunities to participate are not limited to just the PBM but spend across the entire enterprise to include our retail pharmacies in our MinuteClinic's. In particular, our retail business will benefit from expansion of coverage and our ability to drive incremental prescriptions through our fixed cost structure. So while there are certainly a lot of moving parts, all things considered, we're very well positioned.

Let me move on to the second key trend, what we’re calling the retailization of health care because with the implementation of the Affordable Care Act and continued growth in Medicare, we are seeing a rapid increase in the number of consumers choosing their own health plans.

In 2014, we expect 2% to 3% of lives will be on the exchanges and this is projected to grow to 5% to 8% by 2016. Now a substantial portion of seniors will also choose their own plans and by some estimates 20% of consumers will be direct choosers of their health plan purchasing by 2020.

And beyond this, many, many people will have new expanded choices in benefit designs through their employers. So with consumers growing as let’s call them choosers, choosers of plans and cost pressures continuing unabated, we're seeing the rapid growth of consumer directed health plans or high deductible health plans and as a result a push for greater transparency in the health care marketplace.

And as this trend continues, we expect both consumers and plan sponsors will increasingly consider tighter pharmacy management tools to achieve more cost-effective solutions because consumer directed health plans shifts the balance of accountability and decision-making to consumers, we expect those consumers will increasingly be seeking greater value for their health care dollar.

Now the advantage at CVS Caremark lies in our consumer friendly, channel agnostic solutions that deliver greater value for clients and their members. We have decades of experience in a business to consumer environment. And as a result, we have a trusted brand, we have name recognition with both consumers and plan sponsors and that really underscores our ability to capture share and win new business in this era of consumer-driven health care.

Our innovative, channel agnostic offerings, whether you're talking about Maintenance Choice or Pharmacy Advisor, they transform the value equation for PBM clients and their members, delivering a unique combination of savings, quality and convenience. And our ever-growing footprint of convenient retail and MinuteClinic locations extends our reach with consumers.

We’ve also invested significantly in new digital capabilities to enable a stronger multi-channel reach in integrated digital offering. And finally our low cost transparent pricing model at MinuteClinic, we expect will be especially attractive to cost conscious consumers and payors. Those seeking greater value through the most cost effective channel of care.

Now moving on to the next key trend. We are also beginning to see a much greater focus on cost and quality in the payor and provider communities. And with the major trust of the Affordable Care Act focused on access, payors and providers are being pressured to solve four of the quality and cost dilemma.

Health plans, they are working for ways to win in this new world with the majority of plans piloting some type of new outcomes-based payment model. Physicians have traditionally operated in a fee-for-service environment, compensated for volume not outcomes. And this is beginning to change as they now take on more risk, and are incentive to focus on quality improvement and cost efficiency.

We also expect plan sponsors and health plans to make a significant shift to narrow networks. Many plans are developing their own medical network for the exchanges. We believe a greater narrowing of pharmacy network is likely to follow over the next few years.

And last, specialty pharmacy cost continued to grow rapidly. We believe that plan sponsors are beginning to hit a tipping point in their appetite for more aggressive management of specialty trend. So, I think you can see that the needs of payors and providers are changing. Again, we are well positioned to address their changing needs. First, we have the ability to support payor and provider goals as payment models change and risk sharing actually increases is an example.

We can help lower costs for health plans to support new place new sensitive offerings that they are using to attract those individual choosers. The expanded role of providers in population management is going to require a greater level of coordination and integration among stakeholders. And again, we can play an important role here through our own participation in health information exchanges and EMR connectivity with health systems.

And as the industry moves towards outcomes-based models and provider risk increases, providers are going to become increasingly interested in pharmacy programs that lower cost through improved quality. In CareFirst and HMSA, which is the Hawaii Blues, those are just two key examples of some large insurers that are pursuing patient centered medical home strategies with tailored CVS Caremark programs supporting their efforts. And Jon and Andy will talk about this in greater detail in their presentations.

Now, one of the key reasons that payors and providers are looking to us as a partner of choices in our clinical leadership, we deliver industry-leading adherence rates across all of our distribution channels, whether you are talking about retail, mail, specialty. And our integrated model has enabled even greater performance over time. And as an example, adherence rates at CVS pharmacy, they were significantly better than the top three retail competitors back in the 2008, 2009 time period.

Our medication possession ratio, which is a standard measure of adherence, was almost 5 full percentage points higher than the top three retail competitors. And over time, we have been able to drive substantial improvements to those adherence rates at a pace well above the competition. With a 400 basis point improvement over the past four years, our adherence rates are now almost 9 full percentage points above the competition.

Now, this is due in large part to our technology investments, the development of the consumer engagement engine along with the unique clinical programs that we’ve brought to the market such as Pharmacy Advisor. It's also important to acknowledge the growing body of evidence that is demonstrating how optimal medication adherence significantly reduces overall health care costs, because there are several studies out in the marketplace that have quantified that a dollar spent on adherence is producing anywhere from $5 to $10 in medical cost savings.

So as health care payment models change, providers will increasingly look to partner with high-quality pharmacy programs to reap the financial benefits of better adherence and lower incidence of gaps in care. Now, we are also able to support and collaborate with providers through our industry-leading retail clinic business.

You know, it is MinuteClinic. Today, there is a growing shortage of primary care physicians. It's expected to exceed 45,000 doctors by the end of the decade. And while that’s occurring, we are expanding on MinuteClinic footprint and broadening our services to help fill this gap.

Our MinuteClinic provides substantial value to both payors and patients with the unique combination of high-quality care in a low-cost setting. In addition, we have clinical affiliations with major health systems across the country where we are integrating electronic records to allow for transmission of clinical information between our systems, ultimately leading to better care and lower costs.

Now as I mentioned earlier, we expect to see a greater prevalence of narrow networks as plan sponsors and consumers grow increasingly open to this as a means of cost savings and quality improvement. And you can see a 50% increase in the percent of employers whose benefit plans include a high-performance provider network in just the past three years.

Now, CVS pharmacy will be a partner of choice for many health plans, considering narrow networks due to our better adherence, our better health outcomes as well as our deep consumer insights and our strong BBC marketing capabilities. We’ve had good success in gaining preferred status and exchanges with many of our health plan partners. And our differentiated offerings in many Medicare Part D preferred networks have also been successful.

Additionally, we’ve been able to provide significant value to PBM clients through network management. We’ve got a continuum of network solutions including our flagship Maintenance Choice program. And combine with our other enterprise programs that leverage our retail assets, our network and channel strategies drive substantial cost savings to both clients and their members.

Now, the last key area of focus for our clients and customers lies in the area of specialty pharmacy. With specialty expenditures growing some 15% to 20% annually, our payors are increasingly focused on controlling the specialty trend. And with about 50% of the specialty spend expected to flow through the medical benefit by 2018, our payors are increasingly looking to their PBM to help manage this portion of spend as well, which they could all agree, historically has been largely unmanaged.

Now, we have both the tools and the technology to manage specialty spend across both the pharmacy and medical benefit. We have an industry-leading 21% share of the specialty market with more than $20 million in specialty revenues, either filled or managed across our enterprise. We’ve taken a leadership role in the industry in terms of expanding the use of formulary management into the specialty area. Our new Specialty Connect product fills an unmet consumer need for more convenience and access to specialty meds. And as we’ve discussed, the pending Coram acquisition further expands our competitive specialty offerings.

Now, the last key topic I would like to touch on is the economics of pharmacy, because with so much change occurring in the broader health care market, we are seeing the economics of our business evolve. Within the PBM business, we expect that the traditional sources of growth will slow in the coming years. Now, we’ve talked about this in the past and quite frankly our thinking has not changed much here.

We continue to expect a significant amount of generic conversions over the next few years. However, we expect this trend to begin to flatten somewhat post 2015. And as I mentioned earlier, we expect strong growth in the Medicare and Medicaid spaces, while the commercial employer market will remain somewhat stagnant.

Now, given the limited use of traditional mail plans in both Medicare and Medicaid, we do expect that this mix shift will make it difficult to grow traditional mail volumes. Now, you maybe thinking that the glass is half-empty but quite frankly, I think it's more than half-full and here's why. We do expect strong growth in script demand to create new opportunities for growth and share gains. With the ageing of more seniors into Medicare along with the Affordable Care Act creating a substantial pool of newly insured, we do expect a very favorable long-term tailwind in prescription volumes and utilization growth.

Now, we believe that the greatest opportunities for either growth will come from winning new lives and gaining a greater share of prescription, dispensing and consumer wallet. And this belief is absolutely core to our strategy in the coming years. Now, we have been very successful in growing our PBM book of business over time with total adjusted claims up some 42% since 2008. And we now manage about a quarter of all scripts here in U.S., as our integrated model has gained significant traction in the PBM marketplace.

And our advantage from a value creation standpoint comes from our ability to capture an outsized share of PBM clients spend across the CVS Caremark enterprise. Now at last year’s Analyst Day, we showed you some data that I think truly demonstrates the power of this business model.

Now since the merger of CVS and Caremark, we have grown CVS pharmacy share of the Caremark book of business substantially, going from 19% in 2008 to 30% today. And we believe this is absolutely an important proof point that our channel-agnostic approach is better positioned to capture share over the long-term regardless of changes in payor mix, changes in payor strategies or changes in patient preference.

Now, in addition to growing our overall PBM book of business, I think the key takeaway here is that we have been very successful in gaining a greater share of PBM clients spend across our enterprise channels. Now since 2008, PBM claims filled in CVS Caremark channels, meaning either CVS retail or Caremark mail are up 55%. And that compares to the 42% growth in claims that we just showed.

So the takeaway here is that we are gaining a growing share of our growing pie, which we see as a formula for success. In the figures from the previous slides really speak to the value of a life to CVS Caremark as an enterprise. And by combining our mail and our retail capabilities, we can drive greater value in savings for our clients and their members, while also maintaining an attractive economic profile on our business from CVS Caremark's perspective. And despite the progress that we’ve made, we do see significant opportunity to continue to grow our enterprise share of our PBM client spend.

Now, beyond our channel agnostic approach to prescription, dispensing, I think another important driver of our future success will be leveraging our substantial size and scale in the markets in which we operate. Today, we generate over $100 billion in pharmacy and health related revenues and we hold a commanding share in our key markets. We see underlying demand growing across the markets in which we participate, and we believe significant opportunity remains for continued market consolidation and share gain opportunities for CVS Caremark.

So before I hand things over to Jon, again, let me thank you for joining us today. We hope you will get the sense throughout the morning that we are very optimistic about the opportunities ahead for our company. We believe changes in the health care environment are creating significant opportunities for growth, and we are focused on innovative solutions to better meet the changing needs of both clients and customers. Our unique model creates sustainable competitive advantages for us and real value for our patients, our customers and our clients. This is how we will continue to win share in the marketplace.

We will continue to migrate towards a greater focus on enterprise growth defined by winning lives and capturing a greater share of pharmacy spend, even if we are not the PBM. And our management team along with our 200,000 thousand colleagues across the company are committed to enhancing shareholder value. And we will do that through strong earnings growth, substantial cash generation and disciplined capital allocation practices. And we are highly confident that our unique combination of ability and agility positions us to capitalize on the opportunities created by the changing marketplace and to thrive in the new health care environment.

So with that, let me turn it over to Jon.

Jon Roberts

Thanks, Larry. Good morning, everyone. I’m happy to have the opportunity to update you on our PBM business. I plan to cover two key areas this morning. First, I'll provide a business review, including our current performance, capabilities and recent success in the marketplace.

Then, I will discuss our view on changes occurring in the marketplace that affect the PBM and why we are well positioned to continue to grow and take share across all of our lines of business. I think you will conclude as we have that our integrated business model is best positioned to succeed as the health care market continues to evolve rapidly.

With that backdrop, let’s much jump into review of our business performance. I'm very pleased with the growth that we have delivered on both the top and bottom line. From 2010 through 2014, we expect to deliver a 14.8% revenue CAGR, and an 8.8% operating profit CAGR based on the midpoint of our guidance. This strong growth reflects the success of our offerings as well as our strong execution. We rebuild on this momentum as we continue to gain share in the marketplace.

Starting with the 2014 selling season, we delivered gross new business wins of $5.3 billion. And as I said last year, while price is still a very important part of the decision process, clients are telling us we're being selected not only because we're competitive on price, but also because of the unique capabilities we deliver, capabilities that enabled them to better managed their costs, enhance access and improve their members health.

Let’s start a little deeper on our gross wins. First, CareFirst, a progressive BlueCross BlueShield account selected us because of capabilities only CVS Caremark can provide and I will cover that a little bit later this morning.

Second, we are excited to be the exclusive pharmacy benefits provider for the Xerox private exchange which includes Xerox employees and finally Medicare y Mucho Mas or MMM is a Medicare Advantage plan in Puerto Rico serving 230,000 members.

Moving onto net new business, our client net new business for 2014 is $2.3 billion. Our net new business includes a $500 million unfavorable impact from industry consolidation and these are clients who are moving as a result of an acquisition such as Amerigroup that was acquired by WellPoint.

The net result all in is a solid retention rate of 96%. Additionally, as Dave mentioned, not reflected in these amounts is the $1.3 billion loss revenue in 2014 resulting from a Medicare Part D sanction. Overall, I am very pleased with the selling season and the feedback we are getting from clients and consultants on our model.

Our long-term partnership with Aetna continues to expand. We have successfully completed the migration of Aetna’s commercial membership to our destination platform and Aetna Medicare Part D business will transition on January 1st of 2015. With the Aetna commercial business now on our platform, they have the ability to sell and market our integrated offering such as maintenance choice and Pharmacy Advisor.

We are supporting Aetna across all their lines of business including both public and private exchanges. And finally we have successfully completed our market check with Aetna and I am pleased to report that along with the market check we have an agreement to transition the Coventry book of business to CVS Caremark as Coventry’s existing PBM contract expires. Med D lives will transition in 2016 and commercial and Medicaid lives will transition in 2017. With the addition of Coventry, we project Aetna revenue to more than double since our initial contract was signed in 2010.

Moving to our operations as many of you know back in 2010, we undertook an extensive streamlining initiative to change Caremark’s internal infrastructure. The initiative included consolidating our facilities, redesigning our pharmacy front-end processes and implementing two automated mail order pharmacies and finally consolidating our claims adjudications system.

So, how we are doing? Well, I am happy to report that these programs are on track to deliver cumulative savings of more than $1 billion over a five-year period 2011 through 2015 and the initiative is winding down towards completion.

Going forward, we will maintain a continuous improvement mindset and we will make investments to improve our cost structure while enhancing service to our customers. We are now focused as an example on optimizing digital communication further automating and streamlining the manual processes and increasing member and clients of service. We believe these investments will yield saving while improving customer service.

Now let me turn to a few of our unique products and services in the marketplace. Pharmacy Advisors are clinical program designed to address adherence in gaps in medication care. We continue to expand this program with 10 chronic conditions deployed. We have also expanded this program in the Medicare where we are helping our health plan clients achieve their clinical star rating which enables them to receive bonus payments from CMS.

As you can see, our cumulative interventions through third quarter 2013 have grown to 6.2 million with the majority of our interventions conducted face-to-face in our CVS retail stores. Our programs deliver the best results in the industry. Our more recent data shows that our interventions in cardiovascular as an example drove an incremental lift of 3% in optimal adherence. And as a result, clients can achieve health care savings of $1.9 million per 100,000 lives across these cardiovascular conditions.

And the impact is more than double in our top quartile clients who have had Pharmacy Advisor in place for more than a year. Another important area where we generate significant savings for our clients is formulary management.

As you know, clients are always looking for options to reduce their drug trend. In response to this, back in 2011, we were the first PBM to roll out a formulary exclusion process for our clients. This program was aimed to reduce drug cost, increase rebates and increase generic dispensing rate and the program has been extremely successful. Our clients have realized annual planned savings of nearly $342 or 17% per converted prescription while the average annual member savings is a $195 or 37% per converted prescription.

Additionally in these classes, the clients’ generics dispensing rate increased an incremental 200 basis points versus clients not adopting the strategy. In total, this program is expected to save our clients approximately $1 billion in 2014.

And we will continue to expand this program to yield additional savings for our clients. And we believe significant opportunity remains particularly with specialty pharmacy products and Alan will discuss formulary management opportunities we see in specialty later this morning.

Finally let’s review maintenance choice, our flagship product. As you know, this program was introduced several years ago and it has been very successful for the company, maintenance choice continues to be a unique offering in the market that no one has been able to replicate.

This year, we fully launched Maintenance Choice 2.0, which has aimed at clients with the voluntary mail plan design. We see this design particularly interesting for our health plan clients who have historically designed full access benefits for their members.

In 2013, we have 15.8 million lives that have adopted Maintenance Choice, up from nearly 11 million lives in 2012. And we currently have 17 million lives enrolled for 2014. And we see significant runway for future adoption of Maintenance Choice, in fact, we continue to believe the potential adoption among current clients represents up to 34 million members in total.

So what is all this mean to our business? Larry discussed total prescription growth through our channels. Here I am reflecting enterprise share based on revenue and the numbers are just as compelling. In 2008, one year after CVS and Caremark came together, client spend through our distribution channels was 49%, that has grown to 57% in 2013, an increase of 800 basis points.

This migration into our channels benefits our clients due to programs like Maintenance Choice where clients and members both realize savings. And there is an opportunity to grow even further with continued client adoption of our programs that deliver savings to clients and members while driving share into our channels.

From a CVS Caremark prospective, this increase represents approximately $4 billion in incremental revenue dispensed through our channels which care a more favorable overall economics to the enterprise.

Now let me turn to the changing landscape and how well position I believe we are to thrive in this new marketplace. As you heard us say before, the health care landscape is expected to change more in the next few years than it has in the last several decades. Although there will be many changes in the marketplace, I want to highlight three of the most significant trends that are likely to affect the PBM landscape.

First, the retailization of health care; second, the growth of Medicaid and Medicare; and third, the increasing importance of specialty pharmacy. We strongly believe that CVS Caremark is best positioned to capitalize on the new market dynamics with our integrated retail PBM model.

As Larry said, consumers are playing an increasingly active role in health care decisions. The growth of private exchanges and the emergence of public exchanges will put the decision of play and choice directly into the hands of the consumer.

The growth of consumer directed health plans will also drive consumers to be more involved and take more physical responsibility for their health care choices and cost. This increased consumer involvement will push payors and providers to provide more personalized and cost effective solutions. So let me show you why we are so well positioned to compete in these market developments.

CVS has a much deeper understanding in the consumer and what drives consumer behavior than anyone else in the PBM industry. Our unique model with more than 7600 CVS drug stores along with our many clinics puts us in context with millions of health care consumers every year.

We assist over 33 million callers annually at our Care call centers and we have 6 million registered web users. And finally, we touch and help millions of people with our ExtraCare health cards and Pharmacy Advisor interventions.

This consumer contact combined with our research partnerships with leading academic institutions arms us with unique, unmatched insights to design our marketing and member engagement strategies. It is this knowledge and access to patients gained through a unique model that allows us to align our patient focused products, services and capabilities to deliver a personalized end-to-end patient experience.

One area where our consumers will make choices is in the private exchanges. Beginning with active employees, where their plan designs have a carve-in with the medical benefit or carve-out standalone pharmacy benefit, we have partnerships to capture lives. We will do this through our commercial health plan partners and through direct relationships on key exchange products where we are either one of two pharmacy options or in the case of the Xerox exchange, we were the only PBM carve-out option offer.

And when I speak to large employer clients, most of them tell me that they are taking a wait-and-see approach regarding their active employees and private exchanges. In addition, they are telling us that if they are self-insured today, they will likely stay soft insured in the future to avoid the incremental cost and taxes of a full year insured benefit design.

While it’s still early, one of the major benefit consultant exchanges has told us that among employers that are moving to their private exchange in 2014, if they have a carve-out option today, they are generally staying carved out and if they are carved in today they are generally staying carved in.

Now moving into the Medicare eligible retirees, we have MA-PD and PDP health plan partners and of course our CVS Caremark SilverScript product where we participate again on the benefit consultant exchanges. And speaking with our large employer clients, they tell us it is more likely that retirees will eventually move to the private exchanges over time. Many of those clients view health care coverage as an important employer acquisition in retention strategy which makes retirees more likely to move early on.

We are well positioned to compete and win share in this area with the trusted name, strong brand recognition and competitive products. Another area that’s contributing to the retailization of health care is a new public exchange marketplace. Our PBM cover 70% of the eligible public exchange population through our health plan customer relationship which you can see shaded in orange.

When you layer on a state where we had at least one CVS pharmacy retail preferred relationship, we are covering 82% of the exchange population and of course that expands even further with CVS pharmacy participation in open pharmacy networks in all exchange networks where we have stores. Thus regardless of the speed of adoption of the public exchanges, our enterprise assets give us a real competitive advantage to capture lives in this market.

So how do we support our health plan clients on exchanges? As we work with health plans across the country, we gained a clear understanding of their priorities to be successful on the first on the public exchanges. Their first priority is to win new members, second to accurately and rapidly assess their newly acquired members health status and finally to manage care of these new members.

We are well positioned to help health plans on all three of these dimensions. And we’re already helping health plans, where new members by leveraging our CVS retail stores. We are enabling over 6,000 store based events, where clients have agents in our stores providing an opportunity for face-to-face communication of their programs. This helps health plans promote their brand and at the same time helps consumers navigate the public exchange marketplace.

We also work with health plans on network strategies to help them reduce their cost and ultimately lower their premiums so they can more effectively compete in the exchange marketplace. We are seeing much more answers from health plans in narrow networks than we have seen previously in the individual market.

We build new services to help target and engage members to leverage our PBM claims data in our many clinics. This helps them quickly asses and determine their newly acquired members’ health status and this is important for the new members’ health care and also to support the small group in individual market risk adjustment program.

Finally, we are leveraging on unique clinical program such as Pharmacy Advisor and other integrated programs like Maintenance Choice and Specialty Connect to deliver cost savings to both health plans and their members along with an enhanced access to care.

Let’s transition to trend number two, the expansion of Medicaid and Medicare. Today 25 states in the district of Columbia have committed to expand their Medicaid program, 22 states have said they will not expand and a handful of states are still working through the process.

This expansion is estimated at 3 million to 5 million lives to this market. And it’s important to note that this expansion is not affected by the challenges in the public exchange market, in fact, the benefits from ACA that Larry and Dave mentioned will be driven early on primarily by the expansion of Medicaid.

We participate through our health plans where Medicaid is in a managed program versus a fee-for-service program. Today 30 million people are enrolled in managed Medicaid. This number is expected to increase to 43 million people by 2016, representing a 42% growth over three years. And this growth is going to come from two sources, first from the continuing transition of fee for service Medicaid members in the managed Medicaid and second from new enrollees resulting from the Affordable Care Act’s expanded eligibility.

Today we have a 28% share of the managed Medicaid market and we are poised to maintain our leadership position in this growing market given our capabilities and knowledge. We also see interest from managed Medicaid providers and narrowing their retail pharmacy networks, where we also have the opportunity to gain enterprise share through our retail drug stores.

Now let me update you on the status of our Medicare Part D sanction. As you know, the sanction was put in place in mid-January of this year and it has prevented us from marketing and enrolling new members in our SilverScript PDP. It has not impacted on Medicare Part D health plan clients or existing EGWP clients.

In August, we indicated that we expected our remediation efforts to be completed sometime near the end of this year. Our first priority was to fix the problem and I am pleased to report that we done everything we’ve needed to do. We have attested the CMS that we have corrected our deficiencies and that they are not likely to recur.

CMS is currently conducting the validation process and we are going to be working closely with CMS to ensure they have all the information they need to complete their validation. Both CMS and CVS Caremark of the same objective to ensure that seniors have access to cost effective pharmacy care. And we are prepared to begin enrolling new members, the moment CMS lifts the sanction.

While the sanction has presented a challenge for 2014 in our Medicare Part D business, it’s important to note that we still see significant opportunity to grow our Med D business over the long-term and the remediation steps we've taken will enable us to do just that.

The Medicare Part D market remains a very important part of our growth strategy. With 15 million people aging into Medicare by 2020, drugs spend in the Medicare space is expected to grow at an 8.6% compounded annual growth rate. Individual PDPs will be fueling this growth and EGWP growth will continue through 2015 and then we expect moving from EGWP’s into the individual market.

We remained the number three player in the supporting market. As of this October we covered 6.8 million lives through our PDP and Health claim clients who sponsor their own PDP and MA-PD programs.

When you look at captive lives in blue, these are the lives where our plan as the ensuring entity we are also the number three player with 4.3 million lives behind Optum and Humana. And as of January 14 we expect to serve 4.2 million members in our SilverScript products as we bring on new EGWP lives offset by the monthly attrition as well as the expected attrition from open enrollment.

The third key trend that’s important to understand is the rapid growth expected in Specialty Pharmacy. Better managing the growth in specialty trend is our clients number one priority and they're looking to us for solutions that can help them manage their spent while supporting their members.

You can see the extraordinary growth in this area with specialty forecasted to grow to 50% of the overall pharmacy spend by 2018. And you will hear from Alan Lotvin about the important investments we are making in this area and the unique capabilities that we have delivered.

Now I would like to demonstrate how all of our capabilities come together to support one of our key enterprise initiatives, which we call partner with Health Plans. CareFirst is a new CVS Caremark client starting January 1, 2014. They are the Blue’s Plan in Maryland, District of Columbia and Northern Virginia marketplace, representing the largest private payor in the region in terms of total lives covered.

CareFirst has developed a primary care medical home model that is we believe one of the largest and most successful of its kind in the country. The model is focused on improving quality and reducing costs with the primary care doctor functioning as the health care quarterback for their patients. The doctors are measured on over 20 quality and efficiency metrics and they are given annual spending targets for their attributed patient group based on patient-specific historical all-in health care costs.

From a high level perspective, if the primary care doctor achieves the quality expectations, while at the same time reducing overall health care costs, they get a portion of that medical savings in the form of a bonus payout. This clearly aligns the incentives for the payor, the provider and the patient.

CareFirst believes this model is working and has seen very strong results in the overall trend reductions, as well as changing physician behavior based on the initial phases of the program.

However, CareFirst sell additional care and cost improvements could be achieved by leveraging CVS Caremark’s capabilities. All of the back-and-forth communication with the plan and various points of care is handled through a narrow network that CareFirst has designed called iCentric.

So where does CVS Caremark come in? We have the ability to support the primary care physicians by improving quality and lowering overall health care costs for their patients through the work our enterprise assets can deliver. We are in the process of integrating our technology platform along with our retail pharmacies, mail, specialty pharmacies and MinuteClinic into iCentric.

Let me walk you through how this might look with an example based on a fragile patient taking numerous medications that’s about to be discharged from the hospital. On the day of discharge, CareFirst signal CVS and a pharmacy technician based at the local CVS retail store delivers all of the discharge medications to the patient and introduces the patient to the MinuteClinic and retail pharmacy working with the patient's medical home team.

This patient was actually rated a sufficiently fragile to want an in-home visit by CVS pharmacy for a full medication reconciliation. All the data from this visit is then transmitted to iCentric so that the medical home providers are aware of all the issues the pharmacist uncovers and addresses.

Since this patient is not scheduled to see their primary care doctor for a week and evaluation minute -- the evaluation visit to MinuteClinic is scheduled three days later, or any questions or concerns the patient might have are evaluated, vital signs are checked, the physical exam is done and follow-up instructions are given. Again, all of this is noted in iCentric and calls are made to the medical home is necessary.

As you can see the pharmacy in the MinuteClinic are acting as extensions of the medical home itself. The physicians in the medical home see the patient with all this extra support clearly documented.

This fragile patient will need more support, we plan to have specific pharmacies paired with specific medical homes in the CareFirst local coordinators who support those medical homes, so that together we can make sure this patient stays well and out of the hospital.

Our rule is to ensure the best possible pharmacy care which improves patient outcomes and reduces costs. We anticipate that the medical homes will come to see us as their partnering care integrated as we are through CareFirst with their medical home organization.

Overtime they will want more of their patients take advantage of our capabilities and it's a great example of how our pharmacy benefit management assets are synergistic with our retail pharmacies and clinics.

So to summarize, our business and fundamentals are strong. Our enterprise assets and capabilities are clearly resonating in the marketplace as we continue to win new clients and retain our existing clients. We have continued to further develop our unique program such as Pharmacy Advisor, Maintenance Choice, Specialty Connect and MinuteClinic.

As the health care landscape continues to evolve we are well-positioned with our integrated model which is channel agnostic and will help drive enterprise share gains. We have strong physicians and unique capabilities in the highest growth markets, Medicaid Medicare and Specialty. And finally, our ability to reach and influence the consumer will be a real competitive advantage in the retailization of health care.

So thank you for your attention. We are now going to take a 15 minute break. So if we can please be back at 10:17 that will be great. Thank you.



Ladies and gentlemen, please welcome, Dr. Alan Lotvin, Executive Vice President, Specialty Pharmacy.

Alan Lotvin

Thank you. Good morning, everyone. I am pleased to have the opportunity today to speak to you and provide you some insight into the CVS Caremark approach to the Specially Pharmacy market.

I plan to cover three key areas this morning. First, as Larry and Jon highlighted, Specialty is a rapidly growing market and our business is growing even faster. Second, I will give you an overview of the differentiated products that are driving that growth. And finally, I will discuss the expansion of our infusion offering with the planned acquisition of Coram’s specialty infusion.

At the end of this presentation, I hope to leave you with the clear understanding of our integrated business model will allow us to succeed in this critical market with agility and ability.

Let’s start with the look at the underlying specialty market. Our projection for this market to grow from $92 billion last year to $235 billion in 2018, a 17% compound annual growth rate. At that point, specialty will represent approximately 50% of the total drug spend and there are a number of factors contributing to this growth.

First, the number of specialty products has nearly doubled in the last 10 years. The combination of new drugs for previously untreated diseases, new indications for existing agents and an aging population has more than doubled the number of patients receiving these drugs over the same time period.

And finally, drug prices have accelerated, both inflation and existing products and aggressive pricing of new agents, and all of these trends will continue out into the intermediate future. Result that the specialty has become the number one area of focus in pharmacy for our payor customers.

Now, Larry talked about growing share and growing market, and I am happy to report we delivered this in 2013 and looking into 2014, we are going to continue and even accelerate this momentum.

These bars represent total revenue, every claim that we manage or dispense. The increase in revenue shown here is an 18% compound growth rate. If we look one level deeper at our dispense volume and here I am referring to volume that comes through either our centralized specialty mail service facilities or CVS retail, we see even stronger performance with 22% compound growth rate.

Now embedded within the dispensed volume is a particular fast growing segment, dispensing where we are not the PBM. As both Larry and Jon discussed, a key initiative for our enterprise is to win whether or not we're the PBM and in specialty we have invested in this market segment over the last two years.

Now this strong growth reflects the positive reaction of the market to our offerings and the high level service provided to patients and clients. We expect this momentum to continue as we bring more products and services to market that leverage the unique assets, our CVS Caremark in the specialty space.

Now before we go too far into the discussion, let me spend a couple of minutes level setting around what makes us specialty drugs special. In many ways, specialty medications represent a panicle of achievement in biologics science and have revolutionized the treatment of a host of debilitating and life-threatening illnesses. But they bring along a fair amount of complexity and thus the management of these agents needs to be as relatively sophisticated as the drugs themselves.

I thought it would be helpful to give an example of why this is so and we’ll compare Lisinopril for high blood pressure to Tysabri for multiple sclerosis. First, the potential size of the patient populations differs by a factor of more than 100 and the number of physicians actively treating each disease is similarly disparate.

Looking at the financial burden, the annual cost per patient for Tysabri is more than 1,000 fold that of Lisinopril. This makes insurance verification critical. It creates co-pay challenges for patients and our payor customers demand a higher level of oversight simply because of the cost.

If we look at clinical complexity, Tysabri and infused agent delivered as a powder, they need to be carefully reconstituted, patients need to be screen to minimize the risk of rare but fatal viral infection. Conversely, Lisinopril tablet with cough as the most significant side effect.

And finally, if we look at dispensing complexity, Tysabri has an FDA mandated, risk evaluation and mitigating strategies program, that’s a requirement to dispense the product. The drug is temperature sensitive so maintenance of the [co-chain] is critical. Now, doing all these things correctly and efficiently requires dedicated experts in each functional area and in each disease state.

Now we’ve recently collaborated with the third-party actuarial firm Milliman to more deeply understand specialty patients. What we saw was that not only of the drugs complicated but so the patients.

Specialty utilizer represents just 3.6% of the population. However, they consume 25% of the planned or employer’s total health care expenditures, and 50% of these costs are for non-specialty conditions and indication of the significant co-morbidity seen in these patients.

As a marker of how critical these patients are to the CVS Caremark enterprise. If we shift the comparator to drug costs this small patient population less than four in 100 consume 38% of all drug spend for payors.

Now this concentration spend is clear to payors and they are looking for an integrated coordinated solution to address the complex needs of this patient population. And CVS Caremark is the only PBM to assemble the sweet of services to address each piece of this pie.

Novologix, a company we purchased earlier this year provides an automated claims editing technology that enables the plant to manage drugs paid under the medical benefit with the same level of precision we repeatedly expect from pharmacy benefit managers.

Integration of Accordant, a rare disease case management with specialty pharmacy, again an initiative we began this year allows us to coordinate the care delivered by nurse case managers, specialty pharmacies and others to address total health care costs, while still managing pharmacy costs.

And Specialty Connect, the new name for our integrated specialty offering provides choice and convenience for members while preserving the central clinical expertise that leads the better health outcomes.

And finally, Coram will provide a new set of capabilities to manage not just the cost of infused drugs but to reduce length of stay and help move patients from higher costs side of service like hospital outpatient centers to more cost-effective location such as home or physician offices.

Now let me turn to how we bring these assets to market and how these programs create better outcomes for patients and payors. Earlier, Larry talked about how our enterprise is uniquely positioned to optimize costs, quality and access. As an overview, let me pick up on that theme as it to specialty and show how CVS Caremark is raising the bar.

From the cost perspective, the old approach to trend management specialty was pharmacy benefit focus with relatively limited management tools. The CVS Caremark comprehensive trend management program utilizes assets, including the Novologix platform and eventually Coram to aggressively manage all drugs irrespective of route of administration, site of service or type of coverage, medical benefit or pharmacy benefit.

On the quality front, traditional specialty is focused on medication management, side effects, logistics, injection, training for example, all very important but no longer sufficient to maximize outcomes or meaningfully differentiate a program there.

The CVS Caremark clinical care model integrate of accordant and will incorporate Coram to better manage the patient and reduce total health care cost associated with specialty patients.

And finally, from an access perspective, in the old world the patient use mail or retail, acceptable options, but both with its own challenges. In the CVS Caremark integrated delivery model, we will utilize our enterprise assets to enable patients to choose mail or retail without sacrificing the clinical expertise of dedicated expertise working centrally.

Now let’s take a look at these assets in a little bit more detail, trend management and specialty can be organized around interventions that address unit price. Interventions are address utilization or the number of units and those that address mix or choice of drug.

What’s listed here under basic trend management are larger table stakes today in order to have a viable offering for payors. To this, we have a specific set of programs. So first, put the managed price we deployed a very successful side of service management program to redirect care out of the hospital outpatient setting to more cost effective locations.

Coram will provide the ability for us to create preferred infusion networks, much as we have now specialty in pharmacist and mail service networks in the past, to meet payor needs. So, I am sorry, Coram will also do in infusion space.

From a utilization standpoint, Novologix is the market leader in the management of medical claims and I will show you specific example of the impact of this technology shortly.

And finally, CVS Caremark led the PBM market in establishing exclusions as a standard approach to formulary management. This is an exceptionally important tool in specialty given the prevalence of pharma-sponsored co-pay assistance programs which subvert other formulary approaches.

We will expand this program to cover a greater range of specialty drugs in 2014 and will be evaluating the ability to use the Coram assets to further extend this capability for drugs paid under medical benefit. And all in these programs can save payors up to 19% of pharmacy -- specialty pharmacy costs.

Now let me use some data to demonstrate the impact of the Novologix platform and this is a real world example, the claims date is from group of payors for one drug Remicade in one condition inflammatory bowel disease. The Y axis is the paid amount, the X axis is the number of billed units and the yellow dotted line represents the Medicare billing rate as a benchmark.

Now let me add in the claims. Each figure represents the paid claim. The triangles are hospital claims, square and circles represent office and homes, respectively. Now the first opportunity is to better manage the significant number of claims that are above the maximum dose for this condition, which we show here in the vertical dotted line at 50 units. This represents over dosage, over billing and waste, and it is not uncommon to see the claims at two, three or more times the maximum dose.

The second opportunity is to improve pricing accuracy. If we look at one dose, 40 units circled here. There is almost a 10 fold range in cost compared to the Medicare benchmark rate. Now well not every payor has Medicare’s pricing power, this is still an excessive amount of variation.

And finally, there is a significant difference in cost, between hospital and other settings and this provides another lever for management. When these claims are managed appropriately, nearly all should fall into the purples box at the lower left and for this specific example, one drug one condition, the savings could be more than 30%.

Now as I mentioned earlier, Novologix is the market leader with 30 million lives under management. One of these customers have been using this system for several years to manage a relatively limited set of drugs paid under the medical benefit and prior implementing the Novologix system the payor had a largely manual egregious outlier sort of program with nurses individually reviewing frames.

Once we implemented the claims management section of the Novologix solution and automated the work, we uncovered and eliminated a significantly greater number of aggressive billing patterns and this resulted in a 6% savings on the spend for these drugs and the client was so satisfied that they expanded the management program to cover all drugs paid under the medical benefit and this expansion of services went live this quarter and we are currently reviewing about 9,000 claims lines daily, well above what can be managed manually.

Now we will move off of trend management and turn to the CVS Caremark clinical model. As I mentioned earlier, we have moved the accordant organization underneath specialty and have been developing integrated programs where we have coordinated interventions, changed workflows and collocated staff to optimize the experience of specialty patients.

The traditional specialty pharmacy is focused on adherence, side effects and safety, and again all very important and we continue to do this while we add nurse case managers to the mix and they focus on the symptoms of the disease and disease progression and assist patient with self care, they are also trained to manage co-morbidities and to help patients avail themselves of the complete range of tools with which they can optimize their care.

Now when you manage the whole patient, here is what happens, hospital admissions related to the disease being treated go down by 23%, all cause admission rates were down by 4% and ER visits dropped by a similar amount. And finally, re-admissions which are particularly important to hospitals are down by 16% and in fact, we have started to see early interest in hospital systems as potential customers largely driven by this last result and the net is an 11% reduction in total health care costs related to these disease states from a program at CVS Caremark uniquely brings to the market.

The last piece in our cost, quality and access structure is obtaining specialty medications and this can be a challenge for patients. At retail, the drug may not be stopped, the pharmacists maybe unable to verify coverage or maybe uncomfortable with the nature of the disease or the therapy.

By and now patients need to coordinate delivery for these temperature sensitive products often waiting at home or worrying about the integrity of the drug. That’s why we built Specialty Connect and you can think of this as an analogue to our Maintenance Choice program. Patients and physicians can send prescriptions into our enterprise via the retail channel or directly to the specialty pharmacy.

Either way the prescriptions electronically routed to be appropriate therapy specific specialty care team, the patients gets the same clinical, financial and logistics support no matter how the prescription came to us.

And at the end of the call a simple choice is offered, would you like the medication sent to your home or to the local CVS for pickup. Now, I would like to show you a very brief sort of 1 minute that help illustrate this and how it’s experienced by patients.


So we manage this process seamlessly, creating choice while maintaining the advantages of centralized experts in these rare disease states and we have piloted this program for about a year in one market, the Mid-Atlantic states and as one of the pharmacists in the video noted we haves seen significant improvement in adherence.

In fact, we can bring the adherence of patients accessing specialty via retail to the same high levels as patients being serviced exclusively through the mail and like Maintenance Choice when given the option about 50% of patients chose to use the retail pharmacy to pick up their meds.

So, now onto our last topic, Coram and our planned expansion in infusion. First, let me a little bit about Coram. We announced the acquisition just before Thanksgiving and as Dave noted, plan to close the acquisition by the end of the first quarter.

The company is $1.3 billion in revenue in 2013, 45% is in specialty infusion, 36% in acute infusion, think antibiotics, hydration, cardiac agents and 19% in Enteral Nutrition which is feeding via tube into the gastrointestinal tract.

There are about 4,600 employees largely operating through 85 branch locations and three centers of excellence for patient intake. The company has 600 infusion nurses around the country, 250 dieticians and cares for about 165,000 patients annually.

And throughout the diligence process and since the announcement we have been impressed with the talent in the organization and the commitment to patient care and Coram is an organization whose culture and values closely mirror that as CVS Caremark.

Now we undertook this deal to expand our presence in the market for several reasons. First, it’s a natural adjacency that expands the addressable market for us. Second, we saw an opportunity to catalyze transformational change in the home infusion industry. And finally, this planned acquisition in the infusion space broadens the capabilities we can bring to our payor customers.

Now the specialty segment of the infusion market is forecast as especially strong growth going forward. The overall infusion market is growing in a relatively modest 11% clip, but this is a blended average of non-specialty infusions in the low single digits and the specialty infusion growing three times faster.

Now in 2013, CVS Caremark had about $1.5 billion in revenue in a variety of infusion categories, in 2014 the combined entities planned to grow to over $3 billion. Now importantly, this specific drugs and core capabilities of each organization are very complementary.

Now payors are becoming a much more important driver of the infusion market and much like specialty, infusion is a growing pain point for payors. There is an unmet need for cost control, for assistance in managing the robust pipeline and for doing so without creating undue administrative burdens on the plans.

By integrating the management of infused agents into CVS Caremark’s comprehensive specialty management program we will meet the market needs for preferred networks that create savings for payers and drive volume through our channels.

We will able to provide tools to select the right drug from the broadest array of possible choices, including oral, self injectable and infused. And finally, for PBM customers we will able to create the first comprehensive view of the patient’s entire medication profile no matter where they access their drug.

So to summarize the discussion of Coram, this planned combination creates a market leader, the product lines and core competencies of each organization are complementary and will enable significant cross-selling opportunities.

And additionally, other CVS Caremark specialty assets like the Novologix technology platform will be powerful enablers of Coram’s growth under the CVS Caremark umbrella.

Now clinically, no other organization brings the range of assets, the depth of experience and integration of care that the combination of CVS Caremark and Coram can deliver and ultimately these results in improved clinical outcomes and lower total health care costs.

Now as we step back and evaluate case capabilities as a whole, how are we positioned in the market? If we look at the four key domains that drive the decision-making process for payors, physicians and patients, CVS Caremark excels versus our competitors.

From a trend management perspective, no other large PBM brings the automated medical claims management capabilities of Novologix. Our retail competitors do not view this as a core part of their mission.

Looking at clinical care, the integration of accordants rare disease case management into our specialty programs creates a unique offering in the market. If we turn to access, in the year since the merger of CVS and Caremark no one has created a viable competitor to Maintenance Choice.

And we think Specialty Connect will join a similarly unchallenged position as the most convenient highest-quality way for patients to access all specialty drugs. And finally from the payor perspective, no other entity combines the infusion capabilities of CVS Caremark and Coram with a focus on the needs of the payor to control costs.

So to summarize the key takeaways. We will succeed in this market as a result of our ability to innovate and deliver meaningfully differentiated offerings to patients and payors.

We have a strong record of growth in a favorable market and we have made strategic investments that allow us to expand the addressable segment of that market. And finally the set of assets that we have carefully deteriorated and integrated into our enterprise gives us the ability -- give us the agility to continue to succeed in this rapidly changing marketplace.

So I would like to thank you for your time and attention. And now I will introduce Helena Foulkes, incoming President of CVS Pharmacy.

Helena Foulkes

Good morning. I am pleased to be here to provide you an update on how we are driving growth in our retail business through personalization. First, let me tell you how excited I am about my new world leading CVS Pharmacy. This is a fantastic business with a great brand having celebrated its 50th anniversary this year.

I have been with the company for 21 of those 50 years and I firmly believe that consumers are at center of all that we do. Understanding their unmet needs is a starting point for every product and service innovation we offer.

Given my experiences across so many parts of the company both retail and PBM, I know what works and I am confident that we can build on CVS Caremark’s great track record for innovation.

Here is what I plan to cover with you today. First, our retail business is performing well and physicians for the future. I will go into more detail about our performance in just a moment.

Second, consumers trust us and our brand is a real source of strength in a changing health care landscape. I will speak to how we are capitalizing on this to grow our business.

Third, we will continue to leverage personalization and our enterprise assets to drive long-term growth. Let’s start by looking at the strength of our business performance.

Our retail business continues to turn in solid performance with a strong history of market share gains in both front store and pharmacy. When you look at total U.S. drug outlets, we have grown our front store market share despite the fact that consumers continue to exhibit costs conscious shopping behaviors, the same is true when you locate U.S. multi outlet share. Our front store growth speaks to our strong brand and the trust consumers place in us. We continue to be keenly focused on our strong positions in health and beauty.

We experience significant pharmacy market share growth in 2012, 90 basis points of organic growth and another 60 basis points attributed to the scripts we gained from the Walgreens Express Scripts impact.

We have exceeded our goal to retain at least 60% of those scripts in 2013 as these customers have chosen to stay with CVS as their preferred pharmacy home. This is driven largely by the differentiated customer experience we deliver and Josh Flum, will speak more about that in a bit.

We have a powerful two-year growth story compared to our peers, with a two-year stat comp script performance year-to-date of 9.6%. As you can see this script growth represents nearly $4 billion in annualized sales.

Our front store two-year stat comp performance year-to-date increased 3.2% representing $600 million in annualized sales. Here are few of my early observations. Front store needs to continue to focus on profitable growth and health and beauty as an extension of how our core pharmacy customers use us. Our goal is to drive pharmacy share and front store is a key tool.

Second, our pharmacy operations team has built in infrastructure to scale and to drive customer differentiation with a particular focus on enterprise opportunities. Third, we have significant digital upside. We have the basics to invest in and we can take our digital presence to the next level.

I get incredibly excited about the opportunities the changing health care landscape creates for us. We’ve given a lot of thought to how we can capitalize on these changes to grow our business. First, as Larry mentioned there’s what we’re calling the retailization of health care. We know that consumers are looking for health, navigating the complexities and the confusion of the health care system.

We are well positioned here with the power of our CVS brand and the trusting relationships build through face-to-face interactions between our 26,000 pharmacist and millions of patients. In fact, the annual Gallup poll consistently ranks pharmacist among the top three most trusted professional.

Second, more than four out of five consumers consider CVS a shopping destination with 7600 CVS pharmacy locations serving 5 million people everyday. We’re well positioned to help consumers with the information and the medications they need to manage their health.

Many other players in the health care industry envy the brand and the frequency of experiences we have with our consumers. Health care reform and Medicaid expansion will bring coverage to even more Americans who will need a pharmacy help. We are prepared to serve them. This chart shows you the opportunity. In these 10 states alone, there’s a potential for 13.5 million new lives by the year 2020.

Now add in our market share and you can see that we are already well positioned in these 10 states. We have great fixed assets. So each incremental script becomes more profitable. So you can see why we consider health care reform a significant tailwind. We also remain committed to our strategy of growing 2% to 3% square footed annually. And we’re intently focused on filling in those counties where we have more opportunity to expand our presence.

We’re focused on driving pharmacy growth and enabling our enterprise offerings. We’re doing so through best-in-class clinical and adherence programs and Josh will speak more about that in a moment. We’re focused on being the partner of choice for health plans and payors through our participation in the exchanges, narrow networks and whether are expanding MinuteClinic footprint.

We have the ability to drive cost savings and improve health outcomes for PBM clients and their members through our unique market place offerings like Maintenance Choice, Pharmacy Advisor and Specialty Connect. These are the opportunities that changing health care landscape presents and how we’re capitalizing on them to drive growth.

Let me shift gears and give you an update on how we’re using personalization to drive a differentiated consumer experience. Personalization is core to our retail strategy. We have a number of initiatives underway, all of them design to help us connect directly with individual consumers to deliver personalized experience.

I’ll start with ExtraCare which is the engine behind all of our personalization efforts. You’ve heard us talk about ExtraCare before. In fact my team and I started ExtraCare back in late 1997. We tested various iterations until we launched it nationally in 2001.

It's important to listen carefully to the metrics used to describe various loyalty programs. If we focused on cards issued since launch, we’re close to 350 million today, one for every American. But the key really is active card users, those who’ve used the card in the last six months. We have 70 million active card holders.

We’re also proud of the 69% of front store transactions that involve ExtraCare. Our field organization and our merchants are invested in the success of ExtraCare. We spent more than 15 years perfecting it and have 15 years of data. This means the depth of our customer analytics cannot be matched which makes us truly industry leading. While other retail pharmacies have loyalty programs, they don't have the depth of experience that we do and we are investing in ExtraCare to stay on the leading edge.

We've done a lot of work to identify who our top customers are and a significant share of wallet opportunity they represent. We work to ensure our ExtraCare program as simple to use and highly engaging. We leveraged the insights we get from our ExtraCare program to convert customers to categories they’re buying elsewhere. We used the learnings from the program to impact core product decisions and ExtraCare is behind our highly personalized, digital circulars we recently introduced as we begin the transition away from mass media.

We have a track record of designing a program that people understand and that is easy to use. Our ExtraCare program users get 2% back everyday. In fact, they printed or sent a card a total of $9 billion in savings and rewards through the third quarter of this year. Consumers appreciate that they get offers targeted to the categories they buy along with the related categories.

The ExtraCare coupon centers is a source of value and engages the consumer before the shopping experience. In fact, we created so much value that our longer seats became a source of humor for our customers. Recently talk show host, Ellen DeGeneres to calling it to a new level as she thought about how to use her coupons. Let’s watch the video.


We’re glad that Ellen is a CVS shopper. In fact, at the end of this segment, she encouraged her audience to return to CVS and redeem their coupons which is exactly what millions of our ExtraCare card holders do everyday.

Our top 40% of ExtraCare members represent 87% of front store spending in our stores. You maybe surprised but my guess is that most retailers have a similar ratio. All real advantage is that we know exactly who these 40% are. And yet even with them, we have significant upside. As an example, we know that our top customers spend only 30% of their total beauty spend at CVS.

We have them in our stores. So there’s a great opportunity to capture more of their share of wallet. Let me give you a sense of the opportunity. We have roughly 50 categories in our stores and yet almost one quarter of our customers only shop in one or two categories. So that’s a tremendous opportunity for us to get our customers shopping more of the store for their needs.

We’re providing the customer with conversion offers that encourage her to shop in categories she hasn’t shop before. The coupon she receives will also drive greater share of wallet in those categories she does shop. And we’re giving her offers to increase the frequency of visits and the size of her basket. Year-to-date, we delivered 2.5 billion targeted offers to drive profitable growth.

We’ve also reinvented the way our customers experience the weekly circular. This is allowed us to address the consumer shift away for mass media options such as newspaper and TV, and we’re spending less on mass media and shifting our funding toward highly productive personalized spending.

While the traditional circular won’t go away anytime soon, we’ve introduced an all-new circular called myWeekly Ad. It’s an online platform that delivers weekly individually tailored information that highlights the categories, offers and items we know that particular customer is most interested in, combined with all of her ExtraCare offers.

The program act like the personal shopper for the customer, recommending products and providing offers tailored to each cardholder based on their previous purchase experience. Through more than 15 years delivering the ExtraCare program, we’re in a unique position to implement something like our personalized circular.

I’ll shift gears now and discuss how we're delivering differentiated service in our 7,600 stores. This year we launched the chain-wide program we call myCustomer. It’s built on three simple service actions, Greet, Offer to Help and Thank. Our field colleagues have embraced the program and our customers have notice the difference. It’s creating greater customer loyalty and helping to drive increase sales.

We introduce the new internal scorecard called myCustomer Experience to help us measure and track our performance. Using our ExtraCare data we can measure the script growth and basket growth of the customers that provide high marks on the service behaviors we track.

Since launching in the first quarter of this year we’ve seen steady progress in our myCustomer Experience scores. We seen a direct correlation between the improvements in our myCustomer Experience scores and increase total store comps.

In 2014 we’ve build a successful launch by adding new point-of-service interactions for our top customers and growing our ExtraCare conversion rate by offering to help customers in new ways.

Let me provide you an update on another important front store growth initiative, Store Brands. We know that Store Brand margin is significantly higher than the margin of our national brand products. In 2013, our focus is been setting on the -- setting the foundation to deliver future Store Brand growth. Let me give you a few examples.

Earlier this year we gave our Gold Emblem brand a new look and improve flavors. Our focus was on creating a much better product, so we consciously selected better ingredients for snack items than you might find among competitive national brand items to maintain the promise of the Gold Emblem brand. Our consumers have come to understand that with Gold Emblem they’re getting a premium product.

Since as launched 10 years ago, Essence Of Beauty has consistently been one of our best-selling fragrance and beauty care and body care brands. We launched a new line of Essence Of Beauty care products in August, designed by master perfumers and the line is of to a very nice start.

We delivered innovation in the digestive health category. In fact CVS was first to market ahead of national brands and other Store Brands with innovation in soft chew assets. We continue to develop and add national brand substitutes that our customers are looking for.

This year in a cold-flue line we added items that are comparable to Mucinex and Delsym and quickly achieved dominant unit share. And we know that we have opportunity for even better penetration. The recession of the last five years has created a new normal for how customers value Store Brands.

As slide shows, year-to-date, our store penetration as measured by IRI is even higher than the rest of drug in our most important categories, health that close to 35% and beauty and personal care at roughly 10%, we are encourage by this.

Our aggressive Store Brand strategies paying off and we’re making steady progress against our sales goals, moving from our current penetration of 17.8% toward a goal of well over 20%. We continue to look around the world to see where the category opportunities are and then apply those key learning’s to our Store Brand strategy.

I’ll now shift to a discussion of our store clustering initiative. Our stores must reflect the needs of each community we serve. We’ve defined clusters for urban and suburban areas. The first cluster we rolled out urban was designed around the fact that the story is in a dense trade area with limited competition. So we designed it as a general store with expanded grocery, fresh foods from the go and faster check out.

We’ve delivered 560 of these urban clusters to date. We’re executing our cluster strategy through our existing asset program, Plan-o-grams and Remodels, along with when we open stores.

We are also focused on the suburban cluster. The suburban cluster integrates and enhanced pharmacy and MinuteClinic with an elevated health and beauty assortment. We’re piloting this cluster in 2013 and have completed roughly 60 stores in the fourth quarter. It's too early yet to talk about results, but we’ll evaluate, learn what worked and what didn’t and adjust as needed.

The key takeaway regarding our cluster strategy is that we’re continually evolving based on early wins and other key learning’s that we incorporate into our ongoing Reset and Remodel program as quickly as prudent and possible.

We spoke about our integrated digital strategy last year and I'm pleased to provide you an update. Here the big picture goals for enterprise digital and why we're investing in it. We know, it can deliver a differentiated customer experience, digital can help drive greater share of wallet in the health and prescription area. It helps reduce the total cost to serve our customers and ultimately it helps us deliver better health outcomes for our patients.

We’re already delivering a superior mobile experience for CVS pharmacy. We have a great retail app, it’s rated four and a half stars and we saw traffic from our CVS mobile site and the app increased 250% in the last year.

We’ve extended many of the retail app features to our Caremark clients and members, re-launching our PBM app to make it even better. There's an easy refill process, a pill identifier feature and the ability to check whether OTC medications will interact with your prescription.

Traffic to continues to increase, an early indication of success. Every retail organization is expanding its digital presence because of the integrated nature of our business model, we’re bringing together all of our digital assets to create a seamless experience for our customers.

In 2014, we’ll focus on revamping the specialty pharmacy digital experience. We’ll also begin to deliver on our vision of allowing our customers to manage all of their retail and mail order scripts in one place, a real breakthrough experience, which only CVS Caremark can deliver.

Let me conclude by saying that we're driving retail growth through both ability and agility. Consumers trust us and our brand is a real source of strength in this changing health care landscape.

Our retail business on the pharmacy side is strong and we’re well positioned for the future. In the front store, we continue to leverage ExtraCare and we’re focused on driving profitable growth through our top customer work.

Personalization and an integrated digital strategy are key elements of our plan, driving future growth. I'm confident we have strategy, the initiatives and the team to deliver future success.

Now I'll turn it over to Josh Flum for more on a retail pharmacy performance.

Josh Flum

Thank you, Helena. Good morning, everyone. I have a few key themes that I’ll cover today over the following 15 minutes.

First, retail pharmacy business has significantly outperformed its competitors over the last five years. Second, our best-in-class clinical and adherence programs are a key driver of our growth and we've invested in our people, processes and systems to create a sustainable advantage in the space. Third, we're advancing to the next generation of our clinical programs, further driving our growth and enhancing our value proposition for patients, payors and all stakeholders in the health care system interested in lowering costs and improving patient care.

Turning to our retail pharmacy business, the best way to sum up that business is that it is strong and it is growing. As Helena shared with you, we have gained significant share over the last several years and now fill one in every five prescriptions in the United States.

What underlies that growth of course is our significant increase in prescriptions filled over the last five years versus other chains and the overall retail market. There are several drivers of this over performance.

We spoke in today about our gaining more than our fair share in the ESI-Walgreen’s dispute and our retention of a high percentage of those customers. We’ve grown our store base over time as of our competitors and we’ve advanced our core customer service, enabling us to win and to retain our best customers.

Larry also referenced the growth of lives under management of Caremark and our growing share of that business. And you can see on this chart that our growth in the Caremark book of business has helped to fuel our retail outperformance. However, you’ll also note that we have outperformed the competition, even adjusting for this Caremark synergy.

Today I want to focus on what is becoming an increasingly important driver of our growth. The significant investment we have made in our adherence programs, helping our patients to get on and to stay on the right medications thereby generating significant benefits for our patients and for our business.

Our clinical journey started back in 2007 following a merger with Caremark. At that time, we recognized the power of combining our retail reach and local access with Caremark’s deep clinical expertise to create broad retail-based programs for all our patients and targeted [white club] programs for our Caremark PBM members.

Leveraging Caremark insights and clinical expertise, we built and launched our first retail adherence programs in 2008. That year, we perform 13 million live clinical interventions. Over the next several years, we enhanced these offerings, moving from paper-based programs to full integration of our clinical workflow within our pharmacy systems.

We added new interventions targeted at the root causes of non-adherence and we trained our people on how to have greater clinical influence and impact with their patients. In 2013, we will execute close to 80 million live clinical interventions at retail and we’re not stopping there. We’re building on this platform to unlock additional patient care breakthroughs by further integrating across our channels and creating seamless, tailored and even more effective clinical interventions to further separate us from our competitors.

Many of these interventions will focus on medication adherence but we will expand our clinical services, as appropriate to benefit our patients and our other health care partners. As discussed, we have significantly grown the type and the number of our clinical interventions over the last several years.

So the point today was our store teams will perform close to 80 million live interventions in this year alone. Now when I share these numbers, I'm often asked how our pharmacy teams can perform these interventions in addition to their core prescription dispensing activities. That's a very good question.

We have a strong and growing prescription fulfillment business and the expansion of our clinical capabilities is in addition to, not in place of, this business. This means, we need to always maintain a relentless focus on driving efficiency and prescription fulfillment.

As you can see, we have improved on labor productivity significantly over time through continuous enhancements to our systems, processes and workflow. Our increasing prescription volume has allowed us to more fully leverage our fixed labor capacity and this phenomenon will continue as our volumes increase due to the tailwinds that we have discussed throughout the day today.

We also recognized early on to ensure optimal patient care, we had to fully integrate our clinical interventions directly into our workflow. Our head start in this area allowed us to invest the time and the resources necessary to achieve this integration, resulting in a sustainable, long-term advantage as we extend our clinical reach and impact over the coming years.

I think the best way to demonstrate how we have integrated clinical care into our pharmacy workflow and systems is through an example of one of our clinical interventions closing a gap in care, leveraging this simple framework of how our systems help identify, optimize, support and track these interventions.

A gap in care occurs when a patient is not taking all of the recommended therapies for their condition. For example, medical guidelines recommend that diabetics take a class of medications called ACE inhibitors to protect their long-term kidney health. Yet there are times when these medications have not been prescribed or when the patient has stopped taking the medication.

Now it would be very challenging for our pharmacy teams to review millions of patient profiles to determine if there are potential gaps in the patient's care. Instead, leveraging our integrated enterprise view of a patient profile, we are able to systematically identify when Caremark members in our Pharmacy Advisor program are not taking all of the medications that guideline suggest and therefore have a gap in their care.

Once the system determines that there is a gap in care, it helps ensure that the pharmacist speaks to the patient at their next visit. Again we can expect our pharmacist to track each patient that requires an intervention and watch for them to come to the pharmacy. Instead, we have integrated our point-of-sale system with our pharmacy workflow allowing us to systematically stop the appropriate patients at the register and inform them that the pharmacist needs to speak with them.

For any intervention including a gap in care, we need to provide our pharmacy teams in outpatients with the right clinical information to support an appropriate discussion that influences the right behaviors. We have built this clinical information directly into our systems. We will make it available to our pharmacists during the intervention.

We also need to support any required follow-up activities. For our gap in care, if the counseling the patient, pharmacist needs to follow-up with the patient's physician to discuss the gap in care and to obtain a new prescription.

System will automatically send the appropriate message to the physician, track whether the physician has responded and ensure that our pharmacy teams to follow-up as appropriate.

Finally, we need to track and report on both activities. Did we counsel the patient and the clinical outcome, did we close the gap in care. This reporting creates a feedback loop that helps us to continuously improve and optimize our clinical programs. It also helps us to identify and to work with store teams that have an opportunity to improve their clinical effectiveness.

Well, our pharmacy systems help ensure that we deliver the right interventions at the right time and that we optimize the work invested by our pharmacy teams. They are not by themselves sufficient to drive superior clinical outcomes.

In the end the results are driven by the quality of our people and their ability to change patient behavior through their impact and their influence. With this in mind we have invested significantly over the last several years in support of our workforce.

We have not focused our training just on specific programs, we have also focused our efforts on developing and enhancing clinical influence. In term we have created clinical performance measures that impact our decisions on merit and promotion, and we have enhanced our recruiting profiles to focus even more on individuals who demonstrate the ability and the desire to improve our patient’s lives through enhanced clinical care.

Now one nice thing about clinical performance is that it is measurable. This chart shows how we are doing versus other pharmacies within the Caremark Book of Business and we are doing quite well.

When we look at the appropriate utilization of medications used to treat chronic conditions, CVS pharmacy is far exceeding other providers on measures of medication adherence and these clinical results are important because of the broad impact that they have on our patients and the health care system.

To illustrate the impact of adherence, let take a look at just one of these drug classes, antihypertensive to treat high blood pressure. As you can see, we outperformed competitors in improving adherence to these medications.

Taking these results across all of the CVS pharmacy patients that utilize antihypertensive leads to the prevention of an additional 20,000 heart attacks, 5,000 strokes and 3,000 deaths each year.

These outcomes are not only meaningful to our patients and their families, which of course, is what motivates and provides the most satisfaction for pharmacy teams, but they also broadly benefit the health care system by reducing the medical costs associated with treating the progression of chronic disease.

This example is for high blood pressure, but as you consider the impact across all drug classes and disease states, you can imagine the impact that we will have in terms of meaningfully reducing the close to $300 billion in avoidable medical costs incurred each year as a result of medication non-adherence.

As a focus of the health care system shifts to improving patient outcomes and lowering total health care costs, the results from our clinical programs will become an even larger driver of enterprise and shareholder value. Our broad adherence programs meaningfully support all of our retail patients and drive appropriate prescription utilization.

We also increase the loyalty of our best customers by providing excellent service and clinical care. In addition, we have grown the CVS retail share of Caremark lives by providing enhanced clinical solutions, such as Pharmacy Advisor, the lower total health care costs for PBM clients.

And finally, our ability to improve patient outcomes also makes our retail pharmacies a critical partner for other stakeholders in the health care system such as health plans, hospital systems and accountable care organizations.

And as we continue to demonstrate the ability to support them in our shared objectives of improving patient outcomes and reducing health care costs. They in turn are interested in increasing our share of their prescription volume and we are seeing this happen.

In fact there is no greater example that partnerships with over 50 national and regional health plans and bringing individual products to market on the health care exchanges. These represent Caremark and non-Caremark clients, for many we are anchor in their limited or preferred pharmacy networks, our partnerships are rooted in our clinical excellence, as well as the broad range of services and capabilities that we offer as an enterprise, and we are building on this momentum and our aligned objectives to partner even more broadly across the health care system.

We are also continuing to advance our clinical and adherence solutions to widen the gap between ourselves and our competitors, making us the destination pharmacy provider for patients and other stakeholders who desire the best health outcomes.

In fact, we see this such an important opportunity that we have launched across enterprise initiative to deliver breakthrough adherence improvements. Here are some of the key themes of that initiative.

We will further expand our clinical capabilities to include new breakthrough interventions, devices and services, and then deploy these capabilities against the patients where they are most likely to provide a clinical benefit.

We will further personalize our targeting, leveraging advanced analytics and behavioral science to determine for each individual the optimal time, method and manner of delivering interventions.

To this end we are partnering with some of the leading institutions in the world, including Harvard Medical School and Brigham and Women's Hospital to further complement our already best-in-class knowledge and insights about patient behavior.

We will continue to integrate across our channels from retail to MinuteClinic to digital to call centers, we have all of the necessary assets and we see an even greater ability to meaningfully change behavior through an increasingly comprehensive approach to the patient.

And we will continue to integrate outside of our channels, with other stakeholders in the health care system, including providers, accountable care organizations and health plans, whether or not we're the PBM. We have a trusted brand and results that speak for themselves that are driving meaningful improvements in health care and our partnerships are growing as a result.

I would like to thank everyone for your time and your attention today. We're excited about the journey that we have been on to date and believe that the value that we bring for retail clinical care will only increase over time.

With that in mind, I leave you with a few key takeaways. First, our pharmacy teams are at the frontlines of health care in the community and making a difference every day in the lives of their patients. We are truly the leading the increasing retailization of health care.

Second, we have leveraged our unique enterprise assets and insights to create a sustainable competitive advantage in the provision of retail clinical care.

Third, we are building on this foundation to further differentiate through purposeful innovation in the arena of clinical care.

Finally, our retail performance on critical clinical measures makes us the partner of choice for our CVS Caremark clients and for all payors and providers in the health care system that are interested in reducing costs and improving health outcomes.

I had started this area and a distinctive combination of assets that only we have allow us to uniquely meet the needs of patients, clients and providers in an evolving health care landscape. In turn, our clinical excellence enables us to win lives and grow our share through partnerships that result in significant benefits to our enterprise and to our shareholders.

Thank you very much. And I will now turn it over to Dr. Andy Sussman.

Andy Sussman

Thanks Josh, and good morning, everybody. Today, I'll provide an update on our business results at MinuteClinic, and review our growth strategy to transform primary care. Then, I will take an enterprise perspective and provide an overview of our plans to differentiate for providers. We have the ability and agility to integrate services that only CVS Caremark can provide.

MinuteClinic is the largest and fastest-growing retail clinic chain in the country. We now operate 800 medical clinics in CVS pharmacies in 28 states and the District of Columbia. We’ve provided care to over 18 million patients, 10 million in the last three years alone. Our 2,400 nurse practitioners and physician assistants provide high quality, affordable walk-in health care services seven days a week without appointments.

Half of our patients are seen on evenings and weekends. We are often the most cost-effective and convenient option. Now as Larry mentioned, the shortage of primary care physicians is expected to reach 45,000 doctors in 2020. In several markets, more than half of our patients do not have a primary care physician. We continue to integrate MinuteClinic with other sources of care. These include patients-centered medical home practices and accountable care organizations.

We now have affiliations with 30 major health systems, a foundation for our enterprise strategy to differentiate CVS Caremark for providers. Strong revenue growth at MinuteClinic in 2013 was better than expected. Standalone revenue is projected to exceed $240 million. Our compound annual growth rate for revenue for the past six years is 37%.

For 2014, we anticipate revenues of approximately $300 million, nearly tripling our total in the past five years. One driver of our growth is clinic expansion. We've added over 315 MinuteClinics in the last three years, including 160 new clinics in 2013. We now operate over half of all the retail medical clinics in the United States. They form a truly national primary care network. This year, we opened new MinuteClinic states at Louisiana, New Hampshire and Hawaii and seven new markets, including regions like San Jose, South Bend and Roanoke.

Our first clinic in Manhattan recently opened here in Columbus Circle if anyone still needs a flu shot. Our new clinics are performing well. Our recruitment programs continue to attract hundreds of compassionate high-quality clinicians. They provide personalized service excellence in keeping with the retail culture that Helena described.

We are also expanding our payor coverage. 83% of MinuteClinic visits are covered by third-party payors. These include 300 commercial health plans, as well as Medicare and Medicare HMOs, payors benefit from lower costs at MinuteClinic. The cost of care is at least 40% lower than alternate sites, according to a RAND sponsored study and a recent study in health affairs.

We are enrolling in Medicaid in all states and participating in health care exchange plans. For the rapidly growing number of high deductible health plan members and the uninsured, our transparent and low prices are attractive. This marketplace is increasingly driven by consumer price sensitivity. Consumers also value quality and quality of care is our passion at MinuteClinic.

Our joint commission accredited model relies on adherence to evidence-based guidelines. A 2009 study published in Annals of Internal Medicine demonstrated our care was equal in quality to other ambulatory settings and to emergency departments. Our colleagues at Brigham and Women's Hospital and Harvard Medical School have recently repeated this study in a sample of 75,000 patients, this quality data from a national payor with controls for clinical and demographic factors to be published next year.

The results are presented here as a percentage of MinuteClinic’s performance. MinuteClinic providers are represented by the red bars. MinuteClinic had better quality, performance for all condition study, sore throat, ear infection and urinary infection, compared to other ambulatory and emergency department settings. What about our role with Caremark clients?

Well, patient care at MinuteClinic is an important and differentiated part of the enterprise capabilities available to Caremark members. These include partnerships with health plan clients sponsoring patient centered medical homes like CareFirst. We provide biometric screening opportunities for clients. We opened a new on-site clinic at our client Home Depot's corporate headquarters. We’ve opened new markets to support clients such as Hawaii to support HMSA.

Our Pharmacy Advisor program now offers MinuteClinic as a possible site for members to close gaps in care. In our pilot program where clients change their benefits structure to reduce the patient co-pay and encourage use of MinuteClinic, is delivering successful results.

Let me show you. This is data from an employer client with 90,000 members who implemented the reduced co-pay program. Utilization of MinuteClinic increased more than 200%. Member out-of-pocket costs were reduced significantly. Most importantly, total health care costs for a cohort of these numbers seen at minute clinic were 10% lower compared to non-users of MinuteClinic, matched on demographic and health status characteristics.

Now, this is consistent with an 8% reduction in overall health care cost observed in MinuteClinic users among our own CVS Caremark employees published this past year in the American Journal of Managed Care. Our low-cost walk-in access to evidence-based care is helping hold down overall health care costs.

Now, let me turn to our growth strategy for the future as we help to transform primary care. We did not foresee MinuteClinic replacing the primary care physician. But we do believe that with the shortage of physicians, our collaborative and broadening capabilities can make us an important support and complement to primary care practices.

Now, there are four pillars to our strategy. The first is rapid expansion of our footprint to eventually located clinic within 10 miles of 60% of the American population. Second, we're continuing to expand our services, particularly in the non-acute areas such as chronic disease, wellness, health risk assessments and point-of-care testing. Third, we’ve introduced sophisticated high definition camera technology with TeleHealth services that can expand access and lower costs in the future.

Finally, our growing health system affiliations continue to develop from coast-to-coast. Taken together, these strategies will help us to establish a national primary care support platform. Let me describe each of these growth drivers. Expansion continues to be a source of growth.

Looking ahead, we plan to open at least 150 new clinics in 2014. This will include filling in regions of existing markets as well as new states. We plan our footprint of at least 35 states by 2017. For 2014, we are exploring opportunities in new states such as Wisconsin, New Mexico and Nebraska. We are on a solid trajectory to reach our overall goal of 1,500 clinics by the end of 2017.

Regarding new services, non-acute care continues to grow, reaching 18% of our total volume. This has helped to smooth out the seasonality of the practice. In 2013, we rolled out enhanced programs for weight loss and smoking cessation. We piloted treatment of high cholesterol and screening test for HIV and Hepatitis C.

As Jon mentioned, in 2014, we will complement our wellness services with the health risk assessment visit, designed for newly insured patients. And we’ll be piloting treatment component for our hypertension visits in collaboration with local physician groups.

We will continue to extend our point-of-care lab testing capabilities with rapid result turnaround. And for the future, we are planning to provide increased Medicare wellness services as well as enhanced chronic disease care in collaboration with provider organizations.

Now, let me turn to the exciting and innovative work we are doing in telehealth at MinuteClinic. We are currently piloting telehealth visits in Southern California. We employ sophisticated high definition video and audio equipment. Our model differs from some other providers and our use of connected peripheral device, cameras. These transmit physical exam findings such as images of the ears, throat and skin along with heart and lung sounds provided by a digital stethoscope.

We anticipate applications that will include establishment of telehealth sites at Caremark employer locations. We also plan remote physician consultation for MinuteClinic patients, further expanding our scope of services. In the future, we will provide some of this care at home and on secured mobile devices.

Let me describe the economics of our telehealth model. A remote nurse practitioner at half the cost of a physician provides the professional diagnostic and treatment services. A licensed practical nurse, at half the cost of a nurse practitioner attends to the patient directly to assist and to operate the camera technology.

This model of care begins to transform assumptions about bricks and mortar logistics and costs. It leverages the disruptive purposeful innovation of telehealth, with the already disruptive pricing of MinuteClinic. But let me bring you into the office, where this comes together only at CVS.

This video is an abbreviated simulation. It highlights our key telehealth capabilities. Now lights, camera, MinuteClinic.


This is an exciting care delivery innovation that can improve access and lower costs. We are also excited about the progress we are making with health systems affiliations which continue to grow. We formed seven new clinical affiliations in 2013. We now have relationships with 30 major health systems. Several of them are forming accountable care organization and participate in patient's centered medical home projects.

These are some of the largest, most sophisticated and influential providers in the country. They are often led by physicians and physician group. The affiliations represent a fundamental change in the role of MinuteClinic, now a trusted and reliable primary care partner.

Our relationships include health systems physicians, serving as collaborating medical directors for our providers, integration of electronic medical records and chronic disease initiatives. All of this creates a virtual medical neighborhood. Taking an enterprise prospective, in 2013, CVS Caremark also began to introduce enhanced pharmacy care programs for health systems.

Now, let me describe our enterprise strategy to differentiate for providers as we deepen and expand our health system relationships. Providers around the country are in various stages of the risk continuum. As fee-for-service medicine declines and bundled payments, shared savings and risk and global capitation grows, provider organizations, structured ACOs and patient centered medical homes will be taking risk for the cost of care. Unlike employers and payers before them, health systems are attracted to our integrated pharmacy, PBM and MinuteClinic capabilities only available from CVS Caremark.

This graph demonstrates the growth in accountable care organizations, both Medicare and commercial over the last three years. We now cover 20 million Americans, an important and growing segment of the health care system. Many of our current capabilities are applicable to the provider environment. These include adapting our industry-leading Pharmacy Advisor program to provider organizations.

In the future, our pharmacists can encourage health system patients on adherence and gaps in care, just as they do now for other clients as Josh described. We can assist in preventing costly hospital re-admissions. This includes delivering discharge medications to the bedside and scheduling pharmacist’s home visits for more complicated patients.

As Alan noted, our announced Coram infusion capabilities will add to the services we can integrate for providers. Comprehensive electronic medical record and data sharing is also in development. Electronic prior authorization of prescriptions will further streamline the physician workflow. We’ve already established risk-sharing relationships with 10 major health systems for our Medicare Part D SilverScript’s product. This further aligns incentives to collaborate on care and we are working on patient specific clinical messages for physicians, including 90-day and generic switching opportunities.

We are still in the early phases of these relationships, but let me give you examples of what we are doing today and future enhancements. Bob is a 64-year-old diabetic patient who sees a primary care physician at an affiliated hospital. Following an inpatient surgical procedure, CVS pharmacy delivers Bob’s new outpatient medication to his bedside just before discharge and provides him education.

The combination of his diabetes and new medications puts him at increased risk for complications and re-admission. Recognizing this risk, provider systems and CVS Caremark are able to coordinate an in-home pharmacist visit for Bob. The pharmacists will review and reconcile all of Bob’s medications and ensure there are no safety concerns and educate Bob on the plan.

All of this will be reported back to Bob’s doctors eventually through an integrated electronic medical record. Bob recovers from his surgery. He is well enough to visit his local CVS pharmacy. In the future, his doctor will be able to send an electronic message to Bob’s pharmacists that Bob needs to be reminded to check his blood sugar levels either with his physician or at the minute clinic. When Bob picks up his prescription, a pharmacist will deliver the message.

Bob chooses to be seen at MinuteClinic. Our nurse practitioner can check his blood sugar level and report the results directly to Bob’s physician. Bob is also suffering from rheumatoid arthritis. He is cared for by our specialty infusion services in his home. Again, this will be coordinated with Bob’s physician who is well informed of his progress. How is value derived in these relationships?

Well, for the patient, there is value in coordinated lower cost care, easy access to health maintenance testing and coaching and collaboration with his physician. For the physician, value is created with improved adherence, reduced hospital admissions, a team of pharmacists and nurse practitioner collaborators and financial benefits from risk contracts savings and quality. For CVS Caremark, value is created by increased activity in CVS Caremark channels, improved care and enhanced relationships with providers.

In summary, CVS Caremark is uniquely positioned to generate value by combining an array of integrated and synergistic capabilities. Our MinuteClinics have established a leadership position in retail health care. We have strong revenue growth and an expansion plan that continues to accelerate just as millions of patients under our health care system straining to meet their needs. Our new services continue to evolve. We have a focus on capabilities that make MinuteClinic a valuable strategic partner for Caremark clients and provider organizations around the country.

We’ve launched a telehealth program that is the embodiment of our purposeful pharmacy innovation vision. We are developing a set of capabilities and relationships with ACOs and patient center medical homes that only CVS Caremark can provide. They are designed to meet the needs of the health care system of the future as we create a national platform for integrated high-quality care.

And most importantly, we remain committed to the compassionate and professional care of our patients. We are helping them in everyway we can on their path to better health. Thank you for our attention today and now let me turn things back over to Larry for the wrap up.

Larry Merlo

Now, let me just begin by thanking everyone on my team for their presentations. And I certainly hope that this meeting has helped you better understand how this unique combination of ability and agility positions us to thrive in this changing health care landscape that we have talked about throughout this morning.

As I mentioned at the start of the day, we have four key insights that we hope you would take away from the meeting. We believe changes in the health care environment. Those changes are creating unique opportunities for CVS Caremark. Our unique model creates a sustainable competitive advantage. We are focused on enterprise growth and that is the best way to gage our success and we remain committed to enhancing shareholder value.

We’ve said another way and this is a bit of a cliché. But historically, I think you can think of our company as a good athlete who perhaps excelled in one sport. And hopefully as you reflect on the presentations this morning, you can see that we have become more of a triathlete where we are just not good at one thing, but several things that are creating a level of synergy that is unprecedented in the marketplace.

So, let’s open up for a second Question-and-Answer Session. I’m going to ask all of our presenters to join me up here on stage. And as we mentioned this morning, for those here in the audience who want to ask a question please wait for the microphone. So those participating out on the webcast can hear the questions. And again, we would ask that you state your name and affiliation. And I also want to remind those that are out on the webcast that we can take questions from those out there and we will work to read those in as well. So I see the mics. Let’s start there in the back.

Question-and-Answer Session

Ajay Jain - Cantor Fitzgerald

Ajay Jain, Cantor Fitzgerald. There were some slides that showed I think front end market share gaining for CVS against the entire drug store channel I think over the last year or so. And I think over the same period your front end traffic or at least your front end comps declined slightly. So just wondering, is it correct to infer from that that you are gaining share in the front end against the backdrop of declining industry volumes and then to the extent that that’s true, do you think that the entire drug store channel is losing share to other retail formats and that’s part of a secular trend? Do you think that trend would continue going forward? Thanks.

Larry Merlo

Yeah. Let me take the firs part of that and then, I will pass it over to Helena. But we did see some consumer slowdown beginning in the second quarter of this year where we saw some decline in trips. But at the same time, we saw our average basket increasing. I think they are reflecting much of what Helena had talked about this morning and I will flip it over to you to talk a little more about how we think about that and our strategies.

Helena Foulkes

Okay. Just for clarity, I showed you on the slide our increasing share of the drug channels. But I also mentioned in the speech that we are also gaining share of U.S. multi outlets. So we are growing no matter which way you look at it. But I think regardless of it, it reflects the fact that the consumer certainly pulled back this year, and I think there is issues around customer confidence and we continue to see that.

Our challenge is to remain smart around balancing our spend and we really think about it as an art and science. How do we find the right balance to bring the right customers into our stores? And for us, I spent a lot of time talking about ExtraCare because that allows us to really drive profitable growth, which is much more important to us than some of the other ways that we might measure the business.

Larry Merlo

Scott, up in the front.

Scott Mushkin - Wolfe Research

Yeah. Hi, Scott Mushkin from Wolfe Research. Just wanted clarification there -- Dave and I talked couple years ago about data sharing between Caremark and the retail side and ExtraCare. Are you guys able to share data and where does that stand between that and I have a couple of follow-ups?

Larry Merlo

Yeah. Scott, we have all of the appropriate firewalls in place that actually wall off information between our PBM and our retail business. I think much of what Helena was talking about is within our retail sector in terms of understanding those customers and their shopping habits, and how we can work hard to gain a bigger share of their wallet.

And then when you think about the pharmacy customers as Josh presented this morning, we have visibility into elements like, have they -- are they late on getting their prescription. And for the reasons that Josh talked about, we can proactively reach out to those patients and intervene in terms of improving their adherence or closing a gap in care et cetera.

Scott Mushkin - Wolfe Research

I guess, what I was driving out, Larry, is are you able to understand that the Caremark person is filling at your pharmacy because they are Maintenance Choice and is an ExtraCare card member and what they are buying, are you able to see everything on that customer or no?

Larry Merlo

Today, we do not see everything on that particular customer.

Scott Mushkin - Wolfe Research

Okay. Thanks. And then the second question, I have is on the CareFirst example. Is that a Caremark PBM client and a specialty client as well or is it just what you described?

Larry Merlo


Jon Roberts

Yeah. So they -- there are new client that are going to start 1-1-14 and we are providing the full suite of services to them including specialty.

Scott Mushkin - Wolfe Research

Okay. Thank you.

Ross Muken - ISI Group

Hi. Ross Muken from ISI. So, I thought the talk on specialty was quite interesting in topical, just giving a lot of the debate on the cost management that needs to come to sort of that area. Obviously, there’s not -- at least in medium term a lot of opportunities around biosimilars.

You had a lot of success in other parts of the business on sort of formulary control, formulary management. How do you think you can sort of take that experience and potentially translate it to the specialty functions, and then what other types of tools or differentiators are you sort of working on giving your kind of unique asset based in terms of being able to be differentiated in that market?

Larry Merlo

Yeah, I will flip that one over to Jon and Alan. And John maybe you can talk a little bit about formulary management in general and then, Alan, maybe a deeper dive in terms of where we are at the specialty?

Jon Roberts

I talked about how back three yeas ago, we started the formulary exclusion process and by -- we were tightly managing our formulary. You can get value from pharma as you either -- as they look to grow share. Historically, clients have been reluctant to tightly managed formularies of specialty space. But as specialty has become their number one priority and as I talked to large clients I consistently hear that. They are now much more willing to allow more rigorous management of specialty formularies. So we do some of that today, but we clearly see many more opportunities moving forward.

Alan Lotvin

So, I will just pick up on Jon’s point. Clients are much more willing to be more prescriptive around what they do in specialty, both from a formulary perspective but also from utilization perspective. And so the expanding number of drugs in every category creates both clinic opportunities as well as formulary management opportunities. It’s really where we are saying the most activity and interest from customers.

Josh Flum

And then our ability to differentiate ourselves we -- Alan talked about Specialty Connect, which is very similar to Maintenance Choice that nobody has been able to replicate. We also have Rare Disease Management, accordant that we linked through our specialty offering that again is unique. It differentiated to the marketplace. NovoLogix, which is our platform to manage the spend under the medical benefit that is the leading solution in the marketplace and is differentiated. And then we just added to that Coram and we believe all this pieces together are synergistic. The clients looking for help in specialty space are going to want us to manage their specialty spend across both pharmacy and medical as well as their patients.

Jon Roberts

And, Ross, the other thing I would add to that -- you mentioned biosimilars and we’re doing formulary management and specialty today within growth hormone and rheumatoid arthritis. I think that, as we’ve talked about in the past, we shouldn’t be thinking about biosimilars as we think about generics. I will call it the traditional pharmacy spend today. And we think biosimilars will be a bigger opportunity to introduce even additional formulary management into other drug classes or disease states that are not well represented today from a drug competitive point view.

Ross Muken - ISI Group

And maybe just on big quick picture question for you or Dave. As I think about the guidance for 2014 and vis-à-vis the long-term plan and you are kind of still at the midpoint of the long-term range despite a number of headwinds in the business this year between the interest expense, the lack of accretion from Coram, the Part D issues so.

And as we think about that adding to the business, hopefully our incremental basis as well as with Cardinal next year, what do you think is going to be the key variants over the next couple of years other than the obvious things like capital deployment of generics to kind of put you at the upper end of the range or above the range or toward the low end. I mean, where do you have the most variable in the model? Is it the revenue growth line which I think to many of us is sort of surprising or is there something else flex wise that kind of gives you a bigger deviation there?

Dave Denton

Well, I think we kind of touched on that throughout this morning. We see one of our greatest opportunities for growth in our continued ability to gain share and win disproportionately in the market. And you heard a common theme throughout this morning that whether or not, we are the PBM. And hopefully, one of your takeaway is we’ve been successful in the marketplace. There is a synergistic affect if we happen to be the PBM for a respective client, but we still have opportunities if we are not.

Meredith Adler - Barclays

This is Meredith Adler from Barclays. I have two kind of related questions. The first would be to talk about capacity at retail. You did talk about in a slide that one of the things is driven by the productivity in the pharmacy has been better utilization of capacity. I’m just wondering -- there should be big increase in the number of scripts they get filled at the stores, how do you feel about the capacity and the availability of the pharmacist or technology to improve productivity?

Larry Merlo

Yeah. Let me -- I’ll take the first part of that and then flip it over to Josh. But just emphasizing one of Josh’s slides that showed a 12% improvement in labor efficiency or productivity, however, you want to refer to it in a retail business over the past couple of years. So, Josh?

Josh Flum

Yeah. No -- I think it’s a great question. I mean, the focus for us is always on how do we drive increased productivity on whatever the unit of measure is. So, for example, it could be infilling a prescription. How do we ensure that we allow a, our pharmacist labor that’s a highest cost to be at the top of their license, do the thinks that they are require to do?

How do we through designing our work flow and our systems unable to hold process including the technicians to take less time? And that makes each unit of work we have to do more efficient. When we can create more efficiency in the unit of work, then we can look at it within a given store and a given staffing period. We have a certain amount staffing that’s on duty relative to regulation at times to have pharmacists seen to be open or tax an issue.

Now those employees can do more within that time because we’re more efficient in the work that we need to do. So they continued to build on each other as we move forward. So we’re consistently working on that average productivity, which makes the next marginal thing we have to do significantly less expensive. And of course it varies in different stores, at different labor breaks, but across the system, we’re able to consistently work on generating more capacity.

Larry Merlo

Yeah. Meredith, there is one other thing that’s happen in just from in our business as you’re seeing this migration of 30-day prescriptions and the 90-day prescriptions.

Meredith Adler - Barclays


Larry Merlo

And that also creates efficiencies in our stores when that occurs.

Meredith Adler - Barclays

And then just sort of a related question, you’re growing MinuteClinic very quickly, you’re going to provide more intensive services as patients are discharged from hospitals. What is the availability of nurse practitioners and I’ve read that there are shortages.

Andy Sussman

Yeah. Thank you for your question. We continue to be effective in recruiting. We’ve added 1000 new nurse practitioners this year. It’s a rare situation when we struggle to find somebody.

We have relationships with 100 nursing schools around the country which is been a great source of new providers. We have a brief residency program for new graduates and our engagement among our staff is been going up for the last couple of years. So allowed us to retain the staff that we have and allowed us to continue to expand around the country.

Larry Merlo

Meredith, it’s a great question and we’ve talked, I guess I am going back, maybe either 10 years about some of the challenges that we had as the pharmacy curriculum went from a five to a six-year program. I think what, Andy is describing as a lot of those earnings that we’ve had in terms of hiring, recruiting, retaining pharmacist and applying them to nurse practitioners. And I will say, we conduct an engagement survey across our company every year and the results out of the MinuteClinic business segment have been quite impressive.

Andy Sussman

There are also some opportunities for physician assistants. We had -- in some state physician assistants concern was capacity, that’s another source of provider for us.

Larry Merlo

It’s all here.

Dave Denton

I can’t see with the light off, so.

Mark Wiltamuth - Jefferies

Hi. It’s Mark Wiltamuth from Jefferies. Part of the core story in the drug retail side, is that 2% or 3% square footage growth that you add new stores every year. How do you really protect against cannibalization for the markets that are kind of getting dense? And then regionally where do you really see the opportunities for more store growth? Is it still down on those Sun Belt areas where the retiring population is growing?

Larry Merlo

Yeah. Mark, over the years we have built, I’ll describe it is a pretty sophisticated model that we can look at the variables that make a retail store successful and be pretty accurate in terms of the prediction of potential cannibalization.

So that’s part of the evaluation in working at potential new sites. We have not been shy about cannibalizing stores, quite frankly for, again another common theme that you heard this morning that we’ll see a greater benefit across our market or across our submarket.

I think the second part to your question, we still see opportunities for growth across the country and we continue to have all described. It is a rich pipeline. We’ve probably opened a dozen new markets over the past three to four years and we see opportunities for geographies that we’re not in today, as well as densing up in some of the geographies where we have a good presence. Lisa, in front, yeah.

Lisa Gill - J.P. Morgan

Lisa Gill with J.P. Morgan. And I just had a follow-up question around formulary management and how we think about it from our financial prospective Dave. So, is there if any rule of thumb that if you share or save X number of dollars for a client, what it means to CVS, because if I look back at what you said you’ve do in the PBM in the last couple of years and I look at what’s happening on the formulary side? It appears that there is probably some correlation from your profits and I’m just wondering if there is a ruler of thumb and how do you think about that?

Dave Denton

Okay. Good question Lisa. I will say, first and foremost, our job is to do everything we can to reduce cost for the clients that we serve. And using the formulary the nice way of been able to do that.

Still today the vast majority, the lion share of those savings pass directly back to the client, yeah. In some cases we might have some incremental benefit but the lion share that’s going back to the client. And I wish I can give you kind of the good rule of thumb but it varies pretty greatly based on each client's relationship if you will to us.

Lisa Gill - J.P. Morgan

Great. And then my second question just was for Andy, just a follow-up to MinuteClinic, I think a couple of years ago we talked about lab and the value of lab was appeared in the MinuteClinic. Can you just give us any updated thought, do you feel like you have to provide lab services or looking into that?

Andy Sussman

Yeah. I am happy to discuss that. We, first of all right now, we have labs being done in 800 stores and next year close to 1000 around the country. The basic labs like cholesterol panel, hemoglobin A1C, blood sugar, stress testing, mononucleosis testing, actually this year we added HIV and hepatitis C testing, and we are piloting liver test and thyroid test.

So actually there’s an enormous amount of lab work going on in our stores at the point of care. The advantage of that model is that you’re giving the result to the patient immediately and you can coach the patient immediately on the results. So it's a very efficient model and many employers are interested in that kind of an approach.

For next year, we’re going to expand that and add more electrolyte testing, kidney testing, just various types of testing, that’s increasingly available through technology in small boxes.

And for the future, we’re talking to other technology vendors and it maybe the case overtime that we would expand that to our pharmacy, where the pharmacists could be involved in lab testing, that technology is moving quickly and we have a close eye on it. But I would say, probably more than any other pharmacy today, we’re doing lab testing in our stores in MinuteClinic across the country.

Larry Merlo

I keep walking around this side of the room but there are no questions, so. [Burney]?

Unidentified Analyst

Yeah. This is for Andy. With MinuteClinic really two questions. First, do you have measurements of what the knock on effect us to the front-end and backend at the store for MinuteClinic, because we see $300 million in sales estimated for the upcoming year…

Larry Merlo


Unidentified Analyst

… but curious about the backend and front-end knock on?

Larry Merlo

Yeah. Yeah. Burney, maybe I’ll start and then, Dave might jump in on this one. But we’ve talked about the fact that when you recognize MinuteClinic for the prescriptions that are filled, okay.

MinuteClinic today is performing at breakeven. We say breakeven at the enterprise level. And that -- we’re very pleased with that recognizing that we are in a growth mode with 150 clinics this year and you saw Andy’s scale up to 1,500 clinics over the next few years. So, we have not quantified that benefit in the front-end of our business.

Dave Denton

And I would say as Larry described remained better than breakeven on enterprise basis. We’re still in investment mode, we’re adding new clinics and when you do that there is period in which they are slow until they ramp up patients come to know them well.

Having said that, if you look at the environment we are in, we have as Larry described an aging population with thousands of baby boomers turning 65 everyday who will need more care. We have an epidemic of diabetes in our country with 25,000 -- 25 million diabetics and 70 million pre-diabetics who are probably going to get diabetes in the next 10 to 15 years.

And of course, we have the Affordable Care Act, so we’ve got a millions of patients coming into the system. So and we think certainly overtime there are significant tailwinds to our business that certainly justify this kind of expansion.

Larry Merlo

Yeah. John?

John Heinbockel - Guggenheim

John Heinbockel from Guggenheim. So if you think about the four big buckets, retail pharmacy, mail, specialty, front-end, take those four. Did you talked about gaining share. When you think about those four, where do you think you can gain the most share over the next five years in those four buckets and why, if you have to pick one or two?

Josh Flum

John, I think it’s hard to answer the question in that fashion again for many other reasons that we talked about this morning. We will bring products and services into the market. It may sub-optimize retail, okay, for a greater benefit across the enterprise or sub-optimize mail.

So I mean, I think, the goal and that’s what we’ve talked about today. You measure our success by our performance at the enterprise level. And that’s how we’ll talk about it as we go forward.

John Heinbockel - Guggenheim

What beyond things you would do to yourself, when you look at how you’re positioned at the competitive environment. Is there any one of those four you feel there’s a particular share opportunity or one that there isn’t? The share opportunity beyond which you are going to do to yourself?

Larry Merlo

John, I think we see opportunity across all of them. I mean, if you think about the growth in specialty and the opportunities that we have there as Alan outline this morning. And then you start thinking about the baby boomers aging in and 30 million Americans who don't have coverage today, being afforded some type of coverage and the impact that that has across our retail assets, perhaps our mail assets. So a tough question to answer.

John Heinbockel - Guggenheim

All right. And secondly, if you think about the suburban cluster test, what are you doing or are you doing anything to tweak price in the suburban test or thus that -- will that get addressed ultimately through personalization because you sort of think about much as the dollars stores but people responding to Wal-marts with market responding prices more important. And obviously there is a price for convenience, how do you address that. Does it get address through personalization long-term?

Helena Foulkes

So the project that I talked around clustering is really source specific. It’s around layout ad mix. So pricing has not been a part of that. That being said, I have been involved in our pricing work for long time. I think it’s gotten increasingly sophisticated as we understand that we have been priced right for the market we’re in. So that’s always something we’re tweaking.

John Heinbockel - Guggenheim

So you talked a lot today about the enterprise and growing enterprise and growing, covered lives. But you’re not the only player out there that’s talking about growing covered lives either as an enterprise. So to what extent do you think pricing still has to play a role in the way you grow. Do you think you’re getting to the point where the differentiation of the model begins to weigh more on the decisions of the payors. Can you just talk about how you think all this plays out and what you’ll expect the reaction to be from your competition?

Larry Merlo

I’ll let Jon start on.

Jon Roberts

Yeah. That’s a good question and we still see price as a very important dimension that what’s your client makes a decision but it’s not the only dimension. And it’s a very competitive market as you know and I expect it to continue to be a rationale but competitive market. I think what has really helped us is that when price becomes very close then our capabilities become a tie breaker and CareFirst is a very good example of that.

Well, our unique integrated capabilities are going to help them with their goals around their primary care medical homes. So I don’t expect the importance of price to diminish. I don’t think people will pay a premium. I think they’ll buy our services that can deliver savings. But I expect the competitive nature of the market place to continue.

Alan Lotvin

I do think one thing that’s going to change over the next several years -- I think you saw it throughout in the presentations today is that there are just moved outcomes and to the degree that you saw that our performance is out pacing kind of others in the competitive set. And you start really been rewarded if you will from the outcomes perspective will become, I’ll say that the vendor of choice, if you will, from that perspective. And I don’t think we’re quite there yet but there is lot of really positive signs that are coming and pointing us in that direction.

Jon Roberts

I think Dave’s point is critical because as that migrates then price becomes redefine from what it historically has been. And now I think it gets evaluated a little different.

John Heinbockel - Guggenheim

Okay. And just a second question for you, it’s been almost a year since Brazil was announced. Could you talk little bit about what you’ve learnt how close you are to figuring out if it’s a market you want to be in long term and what’s the next step for the company?

Larry Merlo

And it’s probably a little less than a year but we are very pleased with how all that’s gone. There has been a lot of learning from the team that has been working on Brazil. And we continue to be excited by the opportunities we’re beginning to pilot some, I’ll call it some programs if you will. And it’s very early in that regard but yeah we think we’re moving down to continuum of gaining the experience and really defining what constitutes success.

We continue to see Brazil as an attractive market for the growth opportunities. And yeah the fact that it is a very fragmented market, where the number one player has about 10% market share. So as we’ve discussed many times, we’ll pursue our growth strategy here with an appropriate financial discipline. But we don’t have any specific timeframes around answering that question.

John Heinbockel - Guggenheim

Could you give an update on the IT platform upgrades. I don’t know if that’s all behind you but -- and along with it is that more of a cost item that gives you efficiency or does it also help you -- lots of the new products that you’ve talked about today?

Larry Merlo

Yeah. Jon, you want to…

Jon Roberts

Yeah. So on the adjudication platform consolidation by the end of this year. We’ll have 85% of our clients on the destination platform. We’ll wrap up just about all of that work next year. Once we’re on one platform, it allows us to be much more efficient, effective and also even quicker to market with capabilities because we’re building it one time as opposed to multiple times. And that was an important component of our streamlining initiatives. We’re making great progress and that work should be wrapped up next year.

Larry Merlo

Okay. We’ll take two more questions. Peggy, behind you there?

Unidentified Analyst

I don’t need to get too specific but a competitor had made some comments about the Hep C market related to specialty. I was wondering what your thoughts vis-à-vis formulary exclusions and convenience for a surprise?

Alan Lotvin

So the Hepatitis C market has been one of the most dynamic markets over the last several years. You are seeing tremendous changes in both utilization and competiveness of the classes as drugs have come in -- new agents have come in. I think what we’re seeing now is obviously a new product from one manufacturer just launched, substantial change to part of the patient population.

And people are looking out towards next year with two new entries from that. And that’s really going to be a very different dynamic in the market because it moves the Hep C market to overall market. So the amount of competition that will be then be available between those products and than the products that are just launched and its follow on would be the real opportunity to start to create meaningful -- meaningfully differentiated or meaningful competition among the classes. So it’s really a little bit of forward-looking statement to say the ‘15 is when you really need the next kind of drug in the category to be really competitive.

Larry Merlo

It looks like we’ve answered everyone’s questions. So again let me thank you for taking the time to join us today. We appreciate your ongoing interest in our company and let me wish you and your family, say, very happy and healthy holiday season. I’m sure we’ll see many of you in the New Year.

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