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CVS Caremark Corporation (NYSE:CVS)

Q2 2012 Earnings Call

August 7, 2012 8:30 AM ET

Executives

Nancy Christal – SVP, IR

Larry Merlo – President and CEO

Dave Denton – EVP and CFO

Per Lofberg – President, PBM Business

Mark Cosby – President, CVS Pharmacy

Analysts

John Heinbockel – Guggenheim securities

Dane Leone – Macquarie

Deborah Weinswig – Citi

Robert Willoughby – Bank of America Merrill Lynch

Scott Mushkin – Jefferies

Steven Valiquette – UBS

Matthew Fassler – Goldman Sachs

Frank Morgan – RBC Capital Markets

Ross Muken – ISI group

Lisa Gill – JPMorgan

Ricky Goldwasser – Morgan Stanley

Operator

Welcome to the CVS Caremark Second Quarter Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Nancy Christal. Please go ahead.

Nancy Christal

Thank you, Tara. Good morning, everyone, and thanks for joining us today. I’m here with Larry Merlo, President and CEO, who will provide a business update; and Dave Denton, Executive Vice President and CFO, who will provide a financial review. Per Lofberg, President of our PBM business; and Mark Cosby, President of CVS/pharmacy, are also with us today and will participate in the Q&A session following our prepared remarks.

During the question-and-answer session, please limit yourself to one or two questions so we can provide more analysts and investors the chance to ask the questions.

During this call, we will discuss some non-GAAP financial measures in talking about our company’s performance, namely free cash flow, EBITDA, and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned, as well as the reconciliations to comparable GAAP measures, on the Investor Relations portion of our website.

I also recommend that you download the slide presentation we posted on our website this morning. The slides summarize the information on this call, as well as key facts and figures around our operating performance and guidance. In addition, note that we plan to file our Form 10-Q today before the close of business and it will be available through our website at that time. As always, today’s call is being simulcast on our website and it will be archived there following the call for one year.

Now before we continue, our attorneys have asked me to read the safe harbor statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, for these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently-filed Annual Report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-Looking Statements in our most recently filed quarterly report on Form 10-Q.

And now I’ll turn this over to Larry Merlo.

Larry Merlo

Thanks, Nancy, and good morning, everyone. Thanks for joining us today to hear more about our strong second quarter results, as well as our outlook for the remainder of the year.

Adjusted earnings per share from continuing operations were $0.81. That’s up 25% from the second quarter last year and $0.01 above the high-end of our guidance.

Our retail operating profit increased 18.5%. Our PBM operating profit jumped 14.3%. Both at or above our expectations. So we’re very pleased with this strong operating performance.

The retail business continued to take advantage of the unprecedented opportunity presented to us by the stalemate between Walgreens and Express Scripts. This resulted in significant market share growth in the quarter, and as anticipated, we realized about a $0.035 benefit in Q2 from the impasse.

Now with the recent news that Walgreens will re-enter the broadest Express Scripts network this September 15, we estimate that we will generate an additional benefit of approximately $0.05 per share in the second half of the year. That estimate assumes that in the fourth quarter, we retain at least 50% of the prescription volumes gained from the stalemate. Additionally, the $0.05 per share benefit is net of the estimated investments we’ll make to maximize retention.

Now given our strong results year-to-date and our outlook for the rest of the year, we are raising and narrowing our guidance for the full year. We now expect to achieve adjusted earnings per share for 2012 in the range of $3.32 to $3.38. That’s up from our previous range of $3.23 to $3.33 and up approximately $0.15 from our initial 2012 guidance of $3.15 to $3.25, which we provided last December at our Analyst Day.

So we’re very pleased with the upward trend in our expectations, and Dave will provide the details of our results as well as guidance for the third quarter and full year during his financial review.

Now I’ll turn to a brief business update, and I’ll begin with our PBM. I think as all of you know, the 2013 selling season is well underway. RFP activity is up about 7% year-over-year, and we’re pleased with our overall success in the season thus far. As in prior years, most health plans and large employers have made their decisions for January 1, and our focus is now on the mid-2013 opportunities plus a significant number of 2014 opportunities. The pricing environment remains competitive but rational, and we continue to provide consistent and differentiated offerings that continue to serve us well.

Now as previously reported in the marketplace, we experienced some contract losses earlier in the selling season. However, I’m happy to report that we have continued to win new business along the way, with gross wins totaling $3.5 billion, resulting in net new business of $640 million to date, and that is on a 2013 impact basis. Our new client wins include major Fortune 100 companies as well as regional health plans in both the commercial and Medicare or Medicaid segments.

I think it’s important to note that we are seeing increased interest in narrow networks, and obviously, with 1%, 2%, 3% savings possible, some clients took a hard look at this option and have come to the conclusion that this makes sense for them. In fact, clients representing about 20% of the new revenues signed for 2013 have adopted a limited pharmacy network, and that excludes those clients who signed on for Maintenance Choice.

The clients adopting limited networks are a mix of both employers and health plans. So while we are not seeing a watershed change in the adoption of limited networks, it’s clearly a factor in the selling season, and it will continue to be on the table as a cost-savings opportunity for clients. Additionally, just over half of our scheduled renewals for 2013 have gone through the renewal process. That’s pretty typical for this time of year. And our retention rate currently stands at 96.3%.

Now we continue to see strong interest in the proprietary programs we offer – what we call our integration sweet spots. And let me review our progress with two of our flagship products, Maintenance Choice and Pharmacy Advisor.

We currently have approximately 10.7 million lives covered under 880 plans that have implemented or committed to implement Maintenance Choice, and we’re seeing more of our new clients adopting Maintenance Choice right out of the gate. So to put that into perspective, 63% of the lives adopting Maintenance Choice in 2012 were from new clients, and that compares to only 14% back in 2009.

We also have compelling data demonstrating that Maintenance Choice has been successful in broadening access while reducing costs and improving prescription adherence. As we’ve discussed previously, we’re making enhancements to the program to provide a more transformative member experience that will further differentiate CVS Caremark in the marketplace.

The next generation of Maintenance Choice, which we have been referring to simply as Maintenance Choice 2.0, includes a less restrictive or voluntary plan design option that we’ll offer, in addition to our legacy Maintenance Choice program. And this new option, along with the enhancements we are making for all Maintenance Choice clients, is currently in pilot and expected to be broadly available in January of 2013.

Another of our flagship programs, Pharmacy Advisor, is also using our integrated assets in a very differentiated way to lower healthcare costs and improve the health of those we serve. We now have 16.2 million lives covered by more than 900 clients committed to implement Pharmacy Advisor for diabetes. And additionally, I’m pleased to report that we have 10.7 million lives covered by 550 clients already enrolled in Pharmacy Advisor for cardiovascular conditions, which launched this past April. And given our success to date, we expect to go live next year with five more Pharmacy Advisor programs addressing additional chronic diseases.

Now let me touch briefly on some other highlights of the second quarter PBM results. First, our specialty pharmacy business continued to achieve significant growth with revenues increasing a very healthy 44%. That growth was driven by new PBM clients, new product launches as well as drug price inflation.

Another important PBM growth driver is Medicare Part D. We currently have more than 4 million lives in our PDP, and just last night, CMS released the benchmark results of the 2013 Medicare Part D competitive bidding process. Now of those low-income members assigned to us, we expect to retain our current members in 30 of the 34 regions that compares to 33 of 34 last year.

We are below benchmark status in 20 regions, de minimis in 10 others. In the three regions where we lost represent approximately 240,000 low-income subsidy lives that are subject to reassignment. Now we will of course know more about our total number of beneficiaries for the 2013 plan year when CMS announces later this year the low income subsidy auto-assignees along with the results of the annual open enrollment period.

Now before turning to retail, let me briefly touch on that Aetna contract and PBM streamlining initiative. With regards to Aetna, our focus remains on the migration of Aetna’s clients onto our platform, and we successfully transitioned the first waves of Aetna clients on July 1st and August 1st.

As for the streamlining initiative, we are on track to deliver over $1 billion of cumulative cost savings from 2011 through 2015. And as we’ve stated previously through this initiative, we’re streamlining PBM operations to improve productivity, rationalizing capacity and to consolidating our adjudication platforms to one destination platform with enhanced capabilities. And today approximately 60% of our book to business now on the destination platform with nearly 70% expected to be transitioned by year-end.

Some other examples of the progress we’re making as part of our streamlining efforts include a new set of features to our caremark.com website that includes a faster and easier prescription refill process along with the ability to present cost-effective drug alternatives and other cost savings opportunities. Additionally, we’ve made significant process on our new state-of-the-art automated mail order pharmacy in Illinois, which is on track to begin filling prescriptions in Q3 of this year. As we’ve stated previously, we expect to hit the full run rate of annual savings from the streamlining initiative of $225 million to $275 million beginning in 2014.

So with that, let me turn to the retail business. In the second quarter, our same-store sales increased 5.6%, in line with our 5% to 6% guidance. Pharmacy comps increased 7.2% in the quarter with front store comps increasing 2.3%. Script comps increased 9.8% on a 30-day supply basis and 7.7% when counting 90-day supplies as one script. Now this reflects strong underlying performance as well as a significant benefit from the Walgreens/Express impasse. We estimate that the stalemate added 410 to 430 basis points to our pharmacy same-store sales and 400 to 430 basis points to our script comps in the quarter, equating to about 6.5 million to 7 million scripts. Now on the flipside, pharmacy comps were negatively impacted by approximately 500 basis points in the quarter, which is related to the recent generic introductions.

Now in light of the timing of the recently announced settlement by our competitors, we expect to retain the vast majority of the scripts we gained through the third quarter and to retain at least 50% in the fourth quarter. Many of you have asked how we expect to accomplish that level of retention. And while it obviously wouldn’t make sense to discuss our specific retention strategies for competitive reasons, I can assure you that we have a highly detailed multifaceted plan in place to achieve our goals. It includes customer outreach, in-store touch points, advertising and promotions. And our plan is based on sophisticated analytics and it makes economic sense. So we are very confident that we will retain a significant portion of that business.

It’s also important to note that we have continually searched for ways to improve and differentiate our pharmacy offering. For example, our Retail Pharmacy adherence program is now in its fifth year and we continue to be pleased with its strong performance. In the first half of this year alone, our pharmacy teams proactively delivered 40 million live customer interventions across all of our stores helping to improve adherence and keep our customers healthier. And I just want to say that I am very proud of the hard work and efforts of our pharmacy teams, they’re doing a great job.

As for the front store business, both customer traffic and average front store ticket increased in the quarter. We estimate that the Walgreens/Express impasse positively impacted our front store comp by more than 100 basis points in the quarter. In contrast, front store comps were negatively impacted by the seasonal compression of two fewer selling weeks in the Easter holiday period, as well as the early end to the allergy season.

The latest data shows that CVS has gained front store share versus last year when compared to drugstore and multi-outlet competitors. Our market share growth in the second quarter was 123 basis points and 18 basis points respectively. Our ExtraCare loyalty program continues to be a key differentiator and now with more than 15 years of history, today we have roughly 70 million active cardholders. And our vast wealth of experience enables us to continue to develop both new and better ways to enhance the offering for our customers.

As for our real estate program, we opened 60 new or relocated stores, closed 9, resulting in 27 net new stores in the quarter and we remain on track to increase our retail square footage growth by approximately 2% to 3% for the year.

Now before turning it over to Dave let me just briefly touch on MinuteClinic. Revenues increased 17% in the second quarter and MinuteClinic continued its strong growth. We opened 14 net new clinics ending the quarter with 584 clinics in 25 states and the District of Columbia. About 85% of the visits were paid through third-party insurance in the quarter and we continue to enhance MinuteClinic’s role as a collaborator with integrated health networks, adding three new affiliations to the 15 health system affiliations already in place. And physicians from these new affiliates will serve as medical directors for local MinuteClinics and the organizations will collaborate on patient education and disease management initiatives. We’ll also work toward fully integrating electronic medical record systems to streamline communications around all aspects of patient care.

We continue to focus on new programs at MinuteClinic aimed at identifying and monitoring chronic conditions. As an example, we’re focused on identifying patients with elevated blood pressure and encouraging them to follow-up with MinuteClinic or their primary care physician. As a result, we’ve seen a 50% increase in blood pressure evaluations compared to the same quarter last year. And we believe our plans to enhance our services and to double our clinic count over the next several years should position us well to play an important role in helping solve the primary care physician shortage, especially with millions of newly insured individuals expected to enter the healthcare marketplace.

And on that positive note, let me turn it over to Dave for his financial review.

Dave Denton

Thank you, Larry, and good morning, everyone. I plan to walk you through a detailed review of our second quarter financial performance, as well as our 2012 guidance. I’d like to start with a summary of how we’re using our strong free cash flow to return value to our shareholders.

In the second quarter, we paid approximately $209 million in dividends. We still anticipate a payout ratio of approximately 21% this year and are well on track to achieve our targeted payout ratio of 25% to 30% by 2015. Additionally, we repurchased a total of 26.6 million shares during the quarter at an average cost of $44.65 per share, drawing upon approximately $1.2 billion of our current repurchase authorization. So between dividends and share repurchases, we’ve returned more than $1.4 billion to shareholders just in the second quarter and year-to-date we’ve returned more than $2.4 billion to our shareholders.

We continue to target an adjusted debt to EBITDA ratio of 2.7 times. And even with our focus on maintaining our current credit ratings, I continue to expect that at a minimum we will complete the remaining $1 billion of the current authorization throughout this year. So between dividends and share repurchases, we’ll allocate roughly $3.8 billion to enhancing shareholder value during 2012. We expect to continue to generate very substantial free cash flow in the near-term, as well as the longer-term, and our disciplined capital allocation program will remain a vital component of our efforts to drive shareholder value.

We generated $3.2 billion of free cash year-to-date and $790 million in the second quarter. The advance payments we received from CMS in the first quarter are driving the outsized free cash flow generation year-to-date but we expect this to reverse itself in the third quarter given a normal CMS payment schedule. Nonetheless, we’re on track to reach our free cash flow target range for the year of $4.6 billion to $4.9 billion.

Inventory days within the Retail segment have improved by nearly three days from the end of last year and combined with gains in both DPO and DSO, we have reduced our retail cash cycle by nearly four days so far this year. And that’s despite our efforts to stock up to meet demands created by the Walgreens/Express Scripts impasse.

As we continue to make process improvements, the retail team remains committed to its inventory reduction target of $500 million for the full year and working capital improvements such as these are expected to continue to enhance our cash generation capabilities. Given the lack of any sale-leaseback activity, net and gross capital spending in the second quarter were both $441 million, an increase of $40 million from the prior-year period.

Turning to the income statement, as Larry mentioned, adjusted earnings per share was $0.81 for the quarter while GAAP-diluted EPS from continuing operations came in at $0.75 per share, both $0.01 above the high-end of our guidance. The EPS beat was driven by the strong performance in the PBM, a more favorable tax rate, and a slightly lower weighted-average share count than expected. And I’ll address all of these in a moment but first let me walk you down the profit and loss statement.

On a consolidated basis, revenues in the second quarter increased more than 16% to $30.7 billion. Within the PBM segments, net revenues increased 28% in the PBM to $18.4 billion. The majority of growth from last year was driven by new client starts as well as the acquisition of the Universal American Medicare Part D business in late April of last year. Additionally, revenues were aided by higher drug price inflation which was partially offset by increases in the generic dispensing rate.

PBM pharmacy network revenues in the quarter increased 30% versus last year’s second quarter to $12.6 billion while pharmacy network claims expanded by 14%. Total mail choice revenues increased 25% to $5.7 billion while mail choice claims increased more than 15%. Our overall mail choice penetration rate was 22.9%, up 30 basis points versus last year. The continued adoption of Maintenance Choice by our clients and use of the program by their members helped to drive the mail penetration rate upward while the substantial growth in Medicare and Medicaid within our book of business tempered that growth.

In our retail business, revenues increased 7% in the quarter to $15.8 billion. This growth was primarily driven by our same-store sales increase of 5.6% as well as net revenues from new stores, relocations, and MinuteClinic which accounted for approximately 140 basis points of the increase. And Larry talked about our pharmacy and front store comps in some detail so I won’t go into those here.

Turning to gross margin, the consolidated company reported 17.7% in the quarter, a contraction of approximately 150 basis points compared to Q2 of 2011. The decline is largely a mix issue given the lower gross margin PBM business grew revenues faster in the quarter than the retail business.

Within the PBM segment, gross margin was down approximately 80 basis points versus last year’s second quarter. The decrease was driven primarily by price compression and changes within the PBM mix of business. Partially offsetting these negative impacts was a 390 basis point increase in the PBM’s generic dispensing rate which grew from 74.1% to 78%.

New generic drug introductions had a positive impact, as did our continuous efforts to encourage plan members to use generics wherever available and clinically appropriate. Gross margins in the Retail segment was 30.1%, up approximately 35 basis points over LY. This was driven primarily by the 350 basis point increase in retail GDR expanding from 75.6% to 79.1% which was partially offset by continued pharmacy reimbursement pressure.

Additionally, in the second quarter, the change in inventory accounting that I highlighted on our last call was a drag on profits as we expected, had we not made this accounting change we estimate that retail gross margin would’ve been up approximately 55 basis points, gross profit dollars would’ve been approximately $31 million higher and our adjusted EPS would’ve been approximately $0.02 higher in the second quarter.

This impact though was considered in our prior guidance so there is no need to adjust your models for this. For the year, we continued to expect the accounting change to add approximately $0.01 to our EPS.

Total operating expenses as a percent of revenues improved by 140 basis points versus the second quarter of last year. The PBM segment SG&A rate improved 45 basis points to 1.4%. This was primarily driven by strong revenue growth as well as improvements derived from the streamlining initiative. These were partially offset by a full quarter of expenses associated with our acquisition of the Universal American Medicare Part D business versus the partial quarter we had last year given the late April close.

In the Retail segment, SG&A as a percent of sales improved approximately 55 basis points to 20.8%. This improvement in expense leverage was again driven by solid sales growth and continued discipline around expense controls. Within the Corporate Segment, expenses were up approximately $14 million to $176 million. And with the changing gross margin nearly matching the improvement in operating expenses as a percent of sales, operating margin for the total enterprise was roughly flat at 5.6%, slightly better than our expectations. Operating margin in the PBM was 2.8% down about 35 basis points while operating margin at Retail was 9.3%, up about 90 basis points.

Retail operating profit increased a very healthy 18.5% at the high end of our guidance range. PBM operating profit exceeded our expectations and increased 14.3% above the top of our guidance range given the timing of certain expenses.

Let me also note that the cadence of earnings in the PBM this year is expected to be slightly different from the quarterly pattern we see in a typical year. And I’ll speak to that in a few minutes as it affects your models for both the third and the fourth quarters.

Going below the line on the consolidated income statement, net interest expense in the quarter declined approximately $16 million from last year to $132 million. Additionally, our effective income tax rate was 38.7% better than we expected and our weighted average share count was 1.29 billion shares, approximately 3 million shares lower than we anticipated.

Now let me update you on our guidance for both the full year and provide guidance specifically for the third quarter. And I’ll review many of the highlights here but you can also find the details of our guidance in the slide presentation that we posted on our website this morning.

As Larry said, we currently expect to deliver adjusted EPS for 2012 of between $3.32 and $3.38 per share, reflecting very healthy year-over-year growth rate of 18.5% to 21%. GAAP diluted EPS from continuing operations expected to be between $3.09 and $3.15 per share. Now this guidance contains the $0.05 benefit we expect to see during the second half of the year from the Walgreens/Express Scripts impasse. It includes our projected retention benefit, offset by the investments in marketing and promotions that we anticipate making to achieve that level of retention.

At a minimum, we expect to generate approximately $0.03 per share of benefits in the third quarter and approximately $0.02 per share of benefit in the fourth. We now anticipate consolidated net revenue growth for the year between 14% and 15%. Both segments of our business should see robust revenue growth, especially the PBM which continues to benefit from the addition of new clients following last year’s strong selling season.

Also, recall that our retail estimates include a one extra day in 2012 versus 2011 for leap year. Within the Retail segment, we now expect revenues to increase 5.5% to 6.25% year-over-year, an increase of 25 basis points at the high end over the prior guidance. We expect same-store sales growth for the year to be in the range of 4% to 4.75% and same-store script growth to be in a range of 6% to 7%.

We are seeing greater pressure from generic introductions on the top line, and as a result we expect the impact on pharmacy same-store sales from recent generic launches to ramp-up to more than 800 basis points in the third quarter and more than 1,000 basis points in the fourth. We expect gross margin in the segment to be notably up over 2011 while operating expenses as a percent of revenue are expected to modestly deteriorate. As a result, operating profit in the Retail segment now is expected to grow between 14% and 15%, an increase of 250 basis points at the high end from prior guidance. Retail operating margin is now expected to increase by 65 to 70 basis points.

And as you think about your quarterly models for the remainder of the year, please note that we expect an above-trend increase in Retail SG&A growth in the fourth quarter. There are essentially three factors driving this. First, we expect to incur expenses related to transition of our photo business from wet to dry photo processing. Second, we plan to make greater marketing investments. And third, we are comparing against disproportionally lower spending levels in Q4 of last year. Recall that expenses were down 3.5% in the fourth quarter of last year as we responded to the softer sales trends we were experiencing at that time. So that is just something to bear in mind as you do your quarterly models.

Within the PBM segment, we are narrowing the range to the high end of our revenue growth expectations by 100 points – 100 basis points to between 24.5% and 25.5%. We continue to expect gross margins in the PBM to be down notably while we anticipate moderate improvements in operating expenses as a percent of revenues. We expect a decline in PBM operating margins of between 30 and 35 basis points and an increase in PBM operating profit of between 13% and 15% for the year, bringing the bottom of the range up by 200 basis points.

There are several expectations at the consolidated level that have been updated so let me quickly review those here. Given the strength that we’re seeing in the use of Maintenance Choice program, we’ve increased our outlook for the intercompany revenue eliminations as a percent of combined segment revenues to about 10.25%. Additionally, for the full year, we now expect expenses in the Corporate Segment to be between $680 and $690 million and interest expense of between $530 and $540 million. We also have increased our amortization outlook by approximately $5 million to $480 million and expect the full-year tax rate of approximately 38.7%. Weighted average share count for the full year is expected to be 1.29 billion shares. Our free cash flow guidance remains unchanged for the year at the range of $4.6 billion to $4.9 billion.

And while we are not changing guidance for free cash flow, there’s one timing headwind that I want to mention. At year-end, the Health Net PDP is expected to be in the receivable position from CMS for the plan year 2012. This is primarily due to higher low-income subsidy in catastrophic utilization. This cash will not be received from CMS until February of 2014 as we consolidate Health Net into the core’s SilverScript’s PDP business. So this may cause us to come up – to end up near the lower end of our free cash flow guidance range. However, I’m optimistic that our strong underlying free cash flow will offset this timing headwind, but we’ll see how the second half goes and we’ll monitor the situation very closely.

For the third quarter, we expect to achieve adjusted EPS in the range of $0.81 to $0.83 per share, reflecting growth of 15% to 18% over the same period of LY. GAAP diluted EPS from continuing operations is expected to be in the range of $0.75 to $0.77 in the third quarter. Operating profit in the Retail segment is expected to grow between 15% and 17% during the quarter, capturing our retention assumptions that I discussed earlier. PBM segment operating profit is expected to grow modestly at 4% to 7.5% in the quarter.

Now it’s important to note that we’ve a few factors this year that will affect the timing of profit flows between the third and fourth quarters, impacting our expected PBM operating profit growth rates. One factor affecting the quarterly cadence of PBM profits is our Medicare Part D PDP business. This business runs as an insurance company with profits based on where the plan is performing versus its bid. As most of you know, there is a tiered risk share between the plan and the government based on performance levels versus that bid.

With that as a background, in Q3 of last year, we began realizing synergies from the acquisition of the Universal American’s PDP business that was not included in the Universal American’s bid, resulting in more favorable performance and lower than normal loss ratios in the third quarter. This resulted in higher profits in the third quarter of 2011. As we then move through the risk sharing tiers in the fourth quarter we ended up sharing more of this favorable performance with CMS than we normally would have, was reduced profits in the fourth quarter.

This year, the progression is more typical and it will result in a tough year-over-year comparison in the third quarter and a favorable comparison in the fourth. In fact our implied expected growth in the PBM operating profit in the fourth quarter based on the assumptions I just gave you is more than 30%. So again, this is only a matter of timing between Q3 and Q4 as our full-year growth outlook in the PBM operating profit remains solid at 13% to 15%.

Wrapping up the quarterly guidance, consolidated revenues are expected to increase 11.75% to 12.75%. In the Retail segment, revenues are expected to increase at 3.5% to 4.5% versus the third quarter of 2011, taking into account the share gains from the impasse. As I said, new generic introductions are expected to greatly deflate our top line growth with the impact expected to be greater in the third quarter than we experienced in the second quarter. Same-store sales growth is expected to be the range of 2.5% to 3.5% while same-store script growth is expected to be in the range of 6.5% to 7.5%. Revenues of the PBM are expected to grow by 22% to 23% largely reflecting new client additions and some branded drug inflation.

So in closing, the second quarter was a very strong quarter and our earnings and cash flow outlook for the remainder of the year is excellent. We will continue to apply a disciplined approach to capital allocation using our strong free cash flow to enhance shareholder value.

And with that, I’ll turn it back over to Larry.

Larry Merlo

Okay. Thanks, Dave. And as I said, we are very pleased with our strong operating results this quarter across the company and as we look forward we’re confident that we have the right plans in place to achieve significant retention of our new retail prescription volumes. And additionally, while the PBM selling season continues, we have achieved positive net new business to date and we’re focused on the opportunities that remain. And we believe that our competitive position remains very strong, given our differentiated suite of services that cannot be easily replicated and we will continue to reinvent pharmacy for better health and for better shareholder value.

So with that, let’s open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of John Heinbockel with Guggenheim Securities. Please go ahead.

Larry Merlo

Good morning, John.

John Heinbockel – Guggenheim securities

When you think about the progression of generics, how do you think we’re going to experience the MACing progression here versus past cycles? And when you look at how generics fall fiscal 2013 versus 2012, 2013 will be bigger but could it be as big as 50% or 75% bigger or more balanced than that?

Larry Merlo

Well, John, I think as we’ve been talking about generics for more than one year now I think what we’re seeing is it’s performing exactly the way we believed it would and the way we’ve modeled. And we had said that we would maximize profitability for those drugs that had exclusivity periods once the 180-day exclusivity period expired and that’s what we’re seeing with Plavix and with Lipitor.

And with drugs like Plavix that do not have an exclusivity period, we’re able to maximize that profitability on day one. I think, again, as we acknowledge that during that break-open period where the exclusivity period is no longer in effect, while we see MACing increase, we also see significant reductions in cost of goods and that’s what makes a net positive for the business. So we have not seen any surprises from the way we’ve modeled things from an acquisition cost, as well as MACing, as well as what we’re seeing in terms of the actual penetration of the percent of the brands that have now switched to the generic.

John Heinbockel – Guggenheim securities

But it is – the impact will be greater in 2013 or now?

Larry Merlo

Well, John, I mean we’ll talk more about that as we provide 2013 guidance. Obviously, when we think about the first half of 2013, we’ll be comping up against the exclusivity period of Lipitor and we’ve just got to model the rest of the year beyond that. And again, we’ll talk more about that as we get closer to providing 2013 guidance.

John Heinbockel – Guggenheim securities

All right. And then with respect to front-end, which was actually pretty good. Did you see, as others have, sort of a slowdown toward the end in June specifically? And have you seen any signs of the consumer retrenching? And then to go along with that, what do you think happens promotionally in the back half of the year with respect to the front-end? Not with Walgreens trying to recover Express business so much, but as they launch their loyalty program do you think the promotional environment heats up or not so much?

Larry Merlo

Yeah John, let me – the first part of your question, I think that we saw the second quarter get off to a slow start for some of the reasons that we had acknowledged in the prepared remarks in terms of the allergy season being frontloaded, if you will, as well as the Easter comp. And quite frankly, a slow start to the summer selling period as we had a pretty rainy May. So we saw things improve as we ended up going to the latter part of the quarter. I think the consumer still remains cautious and is looking for value and as we’ve talked many times, we look to ExtraCare to provide that value in a very differentiated way. I think if you back out the activity associated with the Walgreens/Express issue, we see the promotional environment being relatively normal as we move into the second half of the year.

John Heinbockel – Guggenheim securities

Okay. And there’s really no reason for you to have to respond to their loyalty program, correct? That’s – I would think.

Larry Merlo

Well, John, listen, we – again, as we’ve been at the loyalty program for the better part of 15 years. Okay? We’ve got tremendous learnings. We’ve got over 70 million active cardholders and we’re not done. We’re continuing to look for ways to enhance value and continue to take ExtraCare to new heights. So we’re always trying to figure out how we can do that and you see that come to life in the marketplace. But in terms of your specific question, in terms of do we respond to a competitor introducing a loyalty program, no, we respond to continuing to bring enhancements that add value to our existing program.

John Heinbockel – Guggenheim securities

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Dane Leone with Macquarie. Please proceed.

Dane Leone – Macquarie

Hi. Thank you for taking the question. Congrats on a great quarter. I guess just a question on the PBM side. Can you just remind us how the progression usually goes throughout the year with renewals, retention rates seemed a little lower than how you ended the year last year, is this expected to increase as you complete the remainder of your renewals? Or are you seeing something different competitively on the PBM side? Thanks.

Dave Denton

This is Dave. Maybe I’ll start with that. Our retention rate is slightly lower than it was last year, as you recall. Larry mentioned it on the call that we had started the year with a couple of losses. I would say that kind of where we are from a renewal standpoint through this period of the year is fairly consistent with where a typical year would land so we’re not seeing anything too abnormal there. And I think that retention rate should be – our expectation is that’s probably where we’ll end the year as well.

Dane Leone – Macquarie

Okay.

Larry Merlo

Acknowledging that that would be slightly less than last year.

Dane Leone – Macquarie

Okay. And just a point of clarification on a previous remark that you made regarding narrow networks, that 20% of was it new clients signed up, looking to enter into a narrow network excluding Maintenance Choice or – sorry, could you just clarify that comment?

Larry Merlo

Yeah, that 20% was excluding Maintenance Choice and it was looking at new client revenues.

Per Lofberg

So typically, a restricted network is one approach for customers to save money, Maintenance Choice is an alternative approach. In a way, that’s a restricted network too because for maintenance meds it dramatically focuses patients on mail order or CVS retail for maintenance meds so both of those are in play with many customers currently.

Dane Leone – Macquarie

And so this is – was noted as being an uptick year-over-year. You’re seeing an increase in the amount of interest into entering in narrow networks, correct?

Per Lofberg

Yep.

Dane Leone – Macquarie

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Deborah Weinswig with Citi. Please proceed.

Deborah Weinswig – Citi

Great. Thanks so much, and congratulations on a great quarter. Actually building on the last question, can you just talk about how CVS is in a unique position to really capitalize on your networks?

Larry Merlo

Yeah. Deb, thanks for the comment. And as we’ve discussed many times, our retail organization has worked very hard with all of the PBMs to establish long-term relationships. And relationships that focus on serving the respective client members in an effort to manage costs and improve the health of those that we’re serving.

And I think that strategy will continue to serve us well as we move into the future. And the dialogues that the retail organization is having with other PBMs about the opportunities that we bring from an execution point of view with narrow or more restricted networks.

Deborah Weinswig – Citi

Great. Thanks. And then a follow up question, I was very impressed with the specialty growth this quarter. Can you discuss both on the retail side and the PBM side what you’re seeing on the specialty side?

Per Lofberg

Well, the specialty growth is heavily focused on the PBM part of the business. And it’s driven by a couple of different factors.

I mean one factor is simply signing up more PBM lives. That in and of itself drives specialty growth. But also the underlying utilization of specialty due to new drug introductions and the inflation of the AWPs in the specialty category are driving the revenues.

So both SAP and Aetna, which were large new accounts, they contributed significantly to the growth of our specialty business.

Deborah Weinswig – Citi

Okay. And the last quick question – I believe you said Maintenance Choice 2.0 is currently in pilot. I don’t know if you have any feedback at this point?

Per Lofberg

Well, it’s a very good extension of the current Maintenance Choice program. And the basic changes to that program has to do with the plan designs, where we can now offer access to CVS retail for plans that don’t have a mandatory mail-order program. So people can have access to CVS retail using the lower mail-order co-pay, as long as we have the ability to contact those members and inform them of those savings.

And the second feature associated with Maintenance Choice 2.0 has to do with flexibility for the consumer where we’re building the capability to allow consumers to basically decide for every prescription they get, whether they want to have it sent to their home or whether they want to pick it up at a CVS retail store. And they will be able to use their smartphones or go to website to just decide, based on what’s most convenient for them, where they would like to pick up the prescription.

So it’s very easy plan for our customers to adopt because it doesn’t require them to change the basic benefit design, like what they have to do with a mandatory mail-order program.

Deborah Weinswig – Citi

Great. Well, thanks so much, and best of luck.

Larry Merlo

Thanks, Deb.

Operator

Thank you. And our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch. Please proceed.

Robert Willoughby – Bank of America Merrill Lynch

Hi. Larry or Dave, can you prioritize possibly the PBM profit drivers here sequentially? Is it generics, first? Deal synergy, second? PBM streamlining and then maybe Aetna or other factors that drove that improvement?

And then the other question, just with the Walgreens resolution, is there any change in the economics you have with Express or changes in your pharmacy network positioning whatsoever?

Dave Denton

Well, Bob, maybe I’ll just touch upon the progression around the earnings sequentially.

Keep in mind too that, from a cadence perspective, Medicare Part D, as we talked about on the call, the cadence of that earnings progression is slightly different this year than has been historically. Typically, you see the front half pretty modest, the back half of the year more accelerated from a profits progression perspective.

I think it’s clear that, as we think about the PBM business in general, generics are a big driver of economics in this space. And you’re seeing the generic wave begin to take effect in 2012. And I think progression from a generic standpoint is pretty impactful this year, and probably into the future as well.

Larry Merlo

And I think, Bob, the other thing to note is, as we’ve discussed previously, that we talked in the prepared remarks about the streamlining initiative, and the benefits outweigh the costs in 2012, so that’s also contributing to the performance.

Your other question, Bob, in terms of economics on the retail side with Express Scripts – the settlement between Walgreens has no impact in terms of the relationship that we have. As we’ve acknowledged, we’ve had a very good relationship with Express on the retail side of the business, and I know our retail organization continues to look forward to working with them into the future.

Robert Willoughby – Bank of America Merrill Lynch

Thank you.

Operator

Thank you. And our next question comes from the line of Scott Mushkin with Jefferies. Please proceed.

Scott Mushkin – Jefferies

Hey, guys. Thanks for taking my questions. I was hoping you could talk at least conceptually about profit growth as we move out of 2012, as almost all the questions I’m getting are on that issue.

It appears the level of new business coming into the PBM will not be as great, which is usually good for profits. Retail, on the other hand, would seem poised for much slower growth going forward. I guess I’m looking for any thoughts on how we get an encore on what looks like just a spectacular 2012.

Dave Denton

Hey, Scott. This is Dave. I’ll start this off.

I think I’d hearken you back a little bit to the Analyst Day presentation, where we laid out our roadmap for – I’ll say profit growth projections over the next several years, as well as the cash flow projections that we have for our business. And I think both of those, as we look at where we are, and as we think about the next several years, are pretty impactful.

And we laid out, I think, a series of items that we believe are going to drive our performance from an enterprise perspective. As we’ve talked about, we’re beginning a phase of the generic wave that will be very impactful from a profit-growth perspective. We’re beginning a wave of utilization that we’ve not seen before, as the baby boomers turn into the over-65 population and utilization trends will begin to increase over time.

And then furthermore, both the PBM and retail business have very specific plans to both gain share, to reduce costs and improve the underlying performance of their business, top to bottom, as they drive more share through their fixed asset base.

So I think without giving specifics to 2013 because it’s clearly we’re way too early for that, there are some very macro trends and efforts that we’re focused against, day in and day out, to drive – also to your point – an encore of 2012, as we think about the next couple of years.

Scott Mushkin – Jefferies

All right, perfect. And I also I guess I have a little housekeeping item but also another question. Mail choice, I think is now about 9.5% of PBM script volumes with the growth being driven by new Maintenance Choice adopters. Where can mail choice go over the next few years? And how does that impact overall enterprise profitability?

And then the housekeeping items, I think you said 20% of the $3.5 billion in gross wins are narrow networks, but I didn’t hear how much of that is also Maintenance Choice. So I was wondering if you could give us that data? And then I’ll yield. Thank you for taking my questions.

Larry Merlo

Scott, let me take the housekeeping issue, and then I’ll ask Per to go back to your question. The 20% that – just to be clear, the 20% that we talked about in terms of net business from a revenue perspective – excludes Maintenance Choice. So those clients adopting Maintenance Choice would be on top of that 20%.

Scott Mushkin – Jefferies

And do we have how much that is, Larry? That’s what I was looking for.

Larry Merlo

We do not have that at this point. There’s more dialogue taking place. That’s something we’ll talk about later in the year.

Per Lofberg

With respect to the growth potential, you recall that Larry pointed out that we currently have about 10.8 million lives that are using our legacy Maintenance Choice program, and that’s the program that requires a – essentially a mandatory plan design.

We presented, I think, at Analyst Day last December that when we roll-out Maintenance Choice 2.0, that really allows us to access a large portion of our customer base that have a mail-order benefit but that don’t require people to use mail order for maintenance meds. So that will probably triple or so the potential in our book of business. So we – I think we projected back at Analyst Day that we could reach in excess of 30 million lives with that type of program.

Dave Denton

And, Scott, I would also go back and look at – as we introduced Maintenance Choice a few years ago, keep in mind the progression of adoption. It started off relatively slow. And as more people adopted it, it began to accelerate into either existing clients or new clients.

We expect that Maintenance Choice 2.0 will also follow that same pattern as people – first-movers will try the program, test it, make sure it works to their satisfaction, and then can communicate that broadly into the benefit community.

Per Lofberg

Another thing that might be worth mentioning is that you may recall from our Analyst Day presentation that, last year, in going into 2012, we had a number of new customers that adopted Maintenance Choice right out of the box, that came from other PBMs with mandatory mail-order programs. And we see the same pattern in this year’s selling season. So we have a number of new customers that are coming on board in 2013 that are putting in Maintenance Choice right out of the gate.

Scott Mushkin – Jefferies

And how is affecting enterprise profitability? And that’s it for me.

Dave Denton

When we introduced Maintenance Choice, either 1.0 or 2.0, the enterprise benefits at the end of the day, so it drives disproportionate performance for us.

Operator

Thank you. And our next question comes from the line of Steven Valiquette with UBS. Please proceed.

Steven Valiquette – UBS

Hi. Thanks. Good morning, Larry and Dave. So I guess – just separate from the loyalty card discussion earlier on the call, it just seems like over the past several weeks that some in the investor community have been concerned about the Express/Walgreens settlement maybe leading to some sort of overall general pricing battle on the retail side of the business to either get back or retain customers that are in transition this year.

So I guess in light of that, are you able to just at least confirm that the upcoming marketplace dynamics post-September 15 are unlikely to lead any material change in overall pricing behavior on the part of CVS? I mean, is this going to be sort of business as usual, generally speaking? Or is it just too premature to make that statement? I’m just trying to get more color on that. Thanks.

Larry Merlo

Steve, we see business as usual. If the question is really targeted to our relationship on the retail side with other PBMs, we don’t see that changing, as I mentioned earlier.

And as it relates to the incremental scripts that we picked up over the past several months, as I acknowledged in the prepared remarks, we will be doing some promotional efforts to maximize our retention. But we’ve reflected that in our outlook for the balance of the year.

Steven Valiquette – UBS

Okay. But nothing out of the ordinary that’s going to lead to...

Larry Merlo

Nothing out of the ordinary, Steve.

Steven Valiquette – UBS

Okay. Okay, thanks for the clarification. Thanks.

Operator

Thank you. And our next question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed.

Matthew Fassler – Goldman Sachs

Thanks a lot. Good morning. It’s Matt.

Larry Merlo

Hi, Matt.

Matthew Fassler – Goldman Sachs

Sorry about that. Thanks a lot. Good morning. It’s Matt. Can you hear me?

Larry Merlo

Yep. We can hear you. Good morning.

Dave Denton

Good morning.

Matthew Fassler – Goldman Sachs

Great. Good morning. Just a follow-up question on Walgreens. You talked about your plans for fourth-quarter retention. How do you think about the longer-term prospects for the remainder of that business? Is 50% a transitional number? Is there some expectation that, over time, some of that business sticks with you? And how have you gone through the thought process about those numbers?

Larry Merlo

Yeah, Matt, I think – first of all, let me just mention, as we’ve talked many times, that pharmacy customer is a sticky customer – the hardest person to lose, and once you lose them, the hardest person to get back.

And our pharmacy and store teams have done an outstanding job of introducing the CVS brand to those new customers over the last several months. And the feedback we’ve gotten from those customers has been very positive.

I’ll let Mark talk in a little more specifics in terms of what we learned over that period of time that brings us to the point that we made about how we see the retention in the fourth quarter. And we’ll talk more about that as it relates to 2013 at Analyst Day. But I’ll flip it over to Mark.

Mark Cosby

Thanks, Larry. We’ve been working on this retention plan for nine months, and as Larry said, we are definitely ready. Just a few facts I think to bolster that.

70% of our ESI customers are within two miles of an existing CVS store, and 90% of those customers are within five miles of a store. So that speaks to the stickiness of those customers. And we know the value of each of those customers, and we will be particularly focused against those top customers.

So our number one focus has been providing a great customer experience for those new customers. Some good evidence for you might be that 55% of those customers have signed up on our auto-refill program, and 83% of those customers are signed up on our ExtraCare loyalty program. So they are well ingrained in the services that we provide within the company.

And then customer service has been a big focus for us. Our measures are strong, and our feedback has been very positive.

When you think about the response, our response will be very comprehensive. It will focus on our top customers, as I mentioned earlier. The actions will include various advertising methods, promotions to retain the customers, particularly our top customers. We will also do a series of customer outreach programs in advance of the 9/15 date as well as post the 9/15 date, and we will have a number of customer touch points within the store.

So we value our new ESI customers, and we will do everything possible to retain them in the coming months. And as we transition into 2013, we do have a strong retention game plan in place.

Matthew Fassler – Goldman Sachs

Mark, those numbers are extremely helpful. Just one follow up for you or for Dave. I don’t know if you mentioned the private label penetration within the front end this quarter on a year-to-year basis. Any color on the progression of that would be very great.

Dave Denton

Our private label penetration is about 17%. Essentially flat year-over-year at this point in time.

We continue to focus on it, Matt. And as we’ve said, we see opportunities to improve that over the coming years to get that mix up to 20%.

Matthew Fassler – Goldman Sachs

Got it. Thank you, guys. Appreciate it.

Dave Denton

No problem.

Larry Merlo

Thanks, Matt.

Operator

Thank you. And our next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Frank Morgan – RBC Capital Markets

Good morning. Going back to that last question, the 50% retention, is it primarily tied to the statistic you gave on the amount of new customers that have already enrolled in the auto-refill? Is that the primary driver for the assumption behind retention?

Dave Denton

Frank, it’s one of many estimates we have, as far as how we think we’re going to drive retention into the business.

I would say the teams have done a very specific analysis – I’ll say at store, at customer level, to understand the retention. And we feel very good about our – the outlook for this year with that.

Frank Morgan – RBC Capital Markets

Okay. One more and I’ll hop. Just curious if you could kind of give us, as it related to the selling season this year, have you seen more interest from say the new Catamaran or the Optum in the selling season? Have they become a bigger player? Have they migrated more upstream into some of the larger employer markets? Thanks.

Per Lofberg

They certainly are, both serious competitors and we see them being active and aggressive and certainly will count them as serious competitors going forward.

Larry Merlo

Next question.

Operator

Thank you. And our next question comes from the line of Ross Muken with ISI group. Please proceed.

Ross Muken – ISI group

I guess as we look at the selling season sort of the outcome I think this is certainly better than many of us were looking for. I guess in terms of the progression or the competitive landscape or how some of the newly formed entities kind of approach retention, et cetera, I mean what was sort of the bigger surprises to you just in terms of what others were doing? And how did you think about that as it relates to 2014 and kind of how some of the newer entrants are going to be positioning themselves going forward? And how do you feel like that matches up against what you’ve been doing with your offering?

Per Lofberg

I can’t say that there are any surprises in that regard. I think it’s a healthy competitive environment where you now have multiple business models to sort of choose from. I think we feel very good about our ability to differentiate what we offer in ways that are not easily replicable by others.

So as I mentioned earlier, I think Maintenance Choice clearly is a competitive edge for us especially with customers that previously have had mandatory mail order programs and likewise with health plans there is a lot of interest in our retail sort of footprint and the ability to use both the pharmacists as well as the MinuteClinics as adjuncts to the way they manage their healthcare services. So we have I think a pretty interesting suite of services that will serve us well in the future competitive environment.

Ross Muken – ISI group

Thanks, guys.

Operator

Thank you. And our next question comes from the line of Lisa Gill with JPMorgan. Please proceed.

Lisa Gill – JPMorgan

Thanks very much, and good morning. I just had a couple of...

Larry Merlo

Good morning, Lisa.

Lisa Gill – JPMorgan

Good morning. Couple quick follow up questions around the selling season. Clearly we all know about the lessons that you’ve had on the health plan side but the $3.5 billion of net wins was much better than we’re anticipating. Can you just help us understand how much of that is maybe health plans versus corporate business as we start to think about profitability going into next year? And then as a follow up to that, Per, we’ve talked to some of your customers, Maintenance Choice has been a big driver around retention. Can you talk about retention rates around Maintenance Choice and the competitive dynamic that that brings in maintaining some your customers?

Per Lofberg

Sure. First, Lisa, as you know, we probably will defer until much later in the year to give you sort of a more in-depth view of the specific wins and so on in the selling season but as Larry mentioned in his introductory comments it really kind of cuts across the board both Fortune 100 type companies that have joined us and a number of them with Maintenance Choice right out of the gate.

But also in the health plan segment both the commercial health plan segment as well as the Medicare, Medicaid segments and as you look from prior presentations the managed Medicaid area is one that is growing very rapidly for us both in terms of new customers but also existing customers taking on new states or new populations that are rolled into the managed Medicaid program. So that’s the big picture and I think later on in the fall we’ll probably be able to share with you more details in terms of the specific accounts and so on.

Lisa Gill – JPMorgan

And then I guess just one other follow up question around narrow networks, and I guess, Larry, this would be for you, or for Mark. If we look at the settlement between Walgreens and Express Scripts, it’s only for them to participate in the broadest networks for Express Scripts so clearly they’re pushing narrow networks as well this selling season like you did. What are you hearing from those in the marketplace?

My guess would be that you’re part of many of the narrow networks for Express than some of the others. Are you starting to hear that we’re seeing traction with others in the marketplace around narrow networks as well?

Larry Merlo

Well, Lisa, I mean as we talked we’re seeing what’s happening in the Caremark book of business with new clients and we’re hearing and seeing similar results from the retail side of the business. And I think, as we mentioned earlier, having a long-term relationship with the other PBMs becomes extremely important in terms of being a partner with others as they’re looking to create narrow or differentiated offerings in the marketplace.

Lisa Gill – JPMorgan

Great. Thank you very much.

Larry Merlo

Okay. We’ll take one more question, please.

Operator

Thank you. Our last question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed.

Ricky Goldwasser – Morgan Stanley

Good morning, and thank you for taking my question.

Larry Merlo

Good morning.

Ricky Goldwasser – Morgan Stanley

I have a follow up on the selling season and then another question. So when you look at your net new business of $600 million, which came in ahead of expectations, can you provide some color on your underlying assumption? Specifically, does the number include some second half 2012 business wins that’s spill into 2013? Or only 2013 new starts? And are you also taking into account growth that your managed care partners are seeing?

Per Lofberg

It does include the annualization of some of the accounts that came on in the second half of 2012.

Ricky Goldwasser – Morgan Stanley

Okay.

Dave Denton

Which is consistent with our methodology.

Per Lofberg

That’s the way we always report it.

Dave Denton

Right.

Ricky Goldwasser – Morgan Stanley

Okay.

Larry Merlo

But, Ricky, it would not include anticipated growth that is not quantified at this point in time. That would not be in that number.

Ricky Goldwasser – Morgan Stanley

Okay, that’s helpful. So you’re not assuming growth of your base business in it?

Larry Merlo

That’s correct.

Ricky Goldwasser – Morgan Stanley

Okay. And then when we think about the year-over-year impact from Walgreens, just to help us sort of model, did you see some benefit already in 4Q 2011 that we should kind of like factor in as we think about 4Q 2012?

Larry Merlo

Ricky, in the fourth quarter, we saw a very small benefit. We really began to see most of the benefit in the January timeframe. We saw a little bit in December. But as we stated back then, it was not material to our results.

Per Lofberg

Ricky, just to clarify one thing. As I said in response to an earlier question, we do include new lives that are added in the managed Medicare space to some of our existing customers as some of the states roll in, new lives into the managed Medicaid program from fee-for-service Medicare. And so, some of our existing customers pick up additional lives as a result of that.

Dave Denton

But that is known, it’s not estimated at this point in time.

Per Lofberg

Exactly.

Ricky Goldwasser – Morgan Stanley

Okay. But that’s helpful because that could help us bridge the difference between the losses we’ve heard of and some of the wins versus the number that you’ve provided today.

Per Lofberg

You’ll get more detail later on in the year as we get closer to the end of the selling season.

Ricky Goldwasser – Morgan Stanley

Okay, thank you.

Per Lofberg

Thank you.

Larry Merlo

Okay, everyone, thanks for your interest in CVS Caremark, and we’ll talk to you soon.

Operator

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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