CVS Health (CVS) Earnings Report: Q4 2015 Conference Call ...future periods, and we remain very...

CompanyName:CVSHealthCorpCompanyTicker:CVSSector:HealthCareIndustry:HealthServices

EventDescription:Q42015EarningsCallMarketCapasofEventDate:103.09BPriceasofEventDate:90.6

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

CVSHealth(CVS)EarningsReport:Q42015ConferenceCallTranscriptThefollowingCVSHealthconferencecalltookplaceonFebruary9,2016,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

NancyChristal;CVSHealthCorporation;SeniorVP,InvestorRelationsLarryMerlo;CVSHealthCorporation;President&CEOJonRoberts;CVSHealthCorporation;PresidentofCaremarkDaveDenton;CVSHealthCorporation;CFOHelenaFoulkes;CVSHealthCorporation;PresidentofCVSPharmacy

OtherPart icipants

LisaGill;JPMorgan;AnalystEdwardKelly;CreditSuisse;AnalystEricPercher;BarclaysCapital;AnalystGeorgeHill;DeutscheBank;AnalystJohnHeinbockel;Guggenheim;AnalystDavidLarsen;LeerinkPartners;AnalystMarkWiltamuth;JefferiesLLC;AnalystRickyGoldwasser;MorganStanley;AnalystScottMushkin;WolfeResearch;AnalystStevenValiquette;UBS;AnalystRobertJones;GoldmanSachs;AnalystMohanNaidu;Oppenheimer;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Welcometothefourth-quarter2015earningsconferencecall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecordedTuesday,February9,2016.

IwouldnowliketoturntheconferenceovertoNancyChristal,SeniorVicePresident,InvestorRelations.Pleasegoahead,ma'am.

NancyChristal(SeniorVP,InvestorRelations):

Thankyou,Suzi.Goodmorning,everyone.Thanksforjoiningustoday.I'mherethismorningwithLarryMerlo,PresidentandCEO;andDaveDenton,ExecutiveVicePresidentandCFO.JonRoberts,PresidentofCVSCaremark;andHelenaFoulkes,PresidentofCVSPharmacy,arealsowithustodayandtheywillparticipateintheQ&Asessionfollowingourpreparedremarks.

DuringtheQ&A,pleaselimityourselftonomorethanonequestionwithaquickfollow-upsowecanprovidemorepeoplewithachancetoasktheirquestions.




Pleasenotewepostedaslidepresentationonourwebsitebeforethiscall.Itsummarizestheinformationinourpreparedremarksaswellassomeadditionalfactsandfiguresregardingouroperatingperformanceandguidance.Laterthisafternoon,wewillbefilingourform10Kanditwillalsobeavailableonourwebsiteatthattime.

Inaddition,pleasenotethatduringtoday'spresentation,wewillmakeforward-lookingstatementswithinthemeaningoftheFederalSecuritieslaws.Bytheirnature,allforward-lookingstatementsinvolverisksanduncertainties.Actualresultsmaydiffermateriallyfromthosecontemplatedbytheforward-lookingstatementsforanumberofreasonsasdescribedinourSECfilingsincludingtheriskfactorssectionandcautionarystatementdisclosuresinthosefilings.

Duringthiscallwewillalsousesomenon-GAAPfinancialmeasureswhentalkingaboutourCompany'sperformanceincludingfreecashflowandadjustedEPS.InaccordancewithSECregulations,youcanfindthereconciliationsofthesenon-GAAPitemstocomparableGAAPmeasuresontheInvestorRelationsportionofourwebsite.Andasalways,today'scallisbeingsimulcastonourwebsiteanditwillbearchivedtherefollowingthecallforoneyear.

AndnowI'llturnthisovertoLarryMerlo.

LarryMerlo (President&CEO):

Wellthanks,Nancy.Goodmorning,everyone.Thanksforjoiningus.

Ourfourthquarterresultswrappedupaterrific2015andduringtheyearweachievedstrongperformanceacrossourenterpriseandcompletedkeyacquisitionsthatwillsupportourstrategyforgrowthintheevolvinghealthcaremarket.

WegrewourcorebusinesswiththeacquisitionofTargets,pharmaciesandclinics,andweexpandedourreachwiththeacquisitionofOmnicare,theleaderinlong-term-carepharmacyandweremainveryoptimistictheseacquisitionswillhelpdriveourlong-termgrowthandI'llupdateyoushortlyonourintegrationprogress.

Nowforthefullyear2015,wedelivered10%growthinconsolidatedrevenues,11%growthinconsolidatedoperatingprofit,and15%growthinadjustedearningspershare,excludingamortization,anyacquisition-relateditemsandthelegalchargewementionedinthismorning'srelease.

Asexpected,growthinthefourthquarterwasespeciallystrongwithrevenuesincreasing11%andadjustedearningspershareincreasing26.5%to$1.53,rightinlinewithourguidance.Wegeneratedapproximately$3.1billionoffreecashduringthequarterand$6.5billionforthefullyear,abovethehighendofourguidance,andourcontinuedabilitytodeliversubstantialfreecashisenablingustoreturnsignificantvaluetoourshareholders.

Nowfor2016,weareconfirmingtheguidanceweprovidedatAnalystDaybackinDecember.Asareminder,weexpectadjustedearningspershareforthefullyearof$5.73to$5.88,reflectingyear-over-yeargrowthof11%to14%.AndDavewillreviewthedetailsfortheyearandthefirstquarterinhisremarks.

Soletmeturntothebusinessupdateandstartwithourverysuccessful2016PBMsellingseason.Grossclientwinsfor2016haveincreased,andtheynowstandat$14.8billionwithnetnewbusinessat$12.7billion.Theincreaseinnetnewbusinessofabout$1.2billionfromourlastupdatelargelyreflectsincrementalgrowthfromournewhealthplanclientsastheyclosedouttheirenrollmentyear.ThesenumbersexcludeenrollmentresultsfromourSilverScriptPDP,andI'lltouchonthatshortly,andour2016retentionrateremainsatapproximately98%.




Nowoursuccessisatestamenttoourunmatchedproductsandservices,ourstrongserviceandexecution,alongwithourcompetitivepricing.Andsurveyscontinuetoshowthatourabilitytomanagecostisourclients'toppriorityandthisisfollowedbyavarietyofadditionalfactorswitheachofourclientchannelshavingdifferentpriorities.Ourflexibilityandexpertiseinaddressingthosevaryingprioritieshascertainlybeenakeytooursuccess.

NowwithsomuchnewbusinessbeingtransitionedinJanuary,I'malsoverypleasedtoreportthatwehavehadanextremelysuccessfulwelcomeseason.Weeffectivelyaddedmorethan9millionnewmembers,9millionnewmemberswhogeneratedasignificantyear-over-yearincreaseinJanuary'sclaimsvolumeandclientshavegivenusverypositivefeedbackonourdiligenceandprocessandwe'repleasedwiththelevelofoversightweprovidedtoensuresuccess.

It'salsoworthnotingthatinthepasttwowelcomeseasonscombined,wehavesuccessfullyaddednearly16millionnewCaremarklives.

Lookingaheadto2017,sellingseasonisjustunderwayandwearewell-positionedcompetitivelyforanotherstrongyear.Nowit'stooearlytoprovideaspecificupdate,butoursize,scale,servicerecordandunmatchedcapabilitiesmakeusconfidentthatwewillcontinuetobesuccessfulinthemarketplace.

Nowaswe'vebeendiscussing,topofmindforourclientsistheirrapidlygrowingspecialtycostsandourspecialtypharmacybusinessoffersacomprehensivesetofprogramstohelpclientseffectivelymanagespecialtytrend.Asaresult,wecontinuetooutpacethemarketandgainshare.

Inthefourthquarterspecialtyrevenuesincreased32%andcontinuedtooutpacemarketgrowthrates.OurMedicarePartDbusinesshasrisentoaleadershipposition.Wehadasuccessful2016annualenrollmentperiod,consistentwithourexpectations.Weaddedapproximately0.5millionnetlivesandbeganthe2016planyearwithmorethan5millioncaptivePDPlivesandthatincludeseggwhips.

NowwhenyouaddintheMedDlivesthatwemanageforourhealthplanclients,thenon-captivelives,ourtotalrisesto11.3millionMedDlivesundermanagementandthat'sup41%fromtheprioryear.FurthermoreourenterpriseclinicalcapabilitiescombinedwithourstrongoperationalexecutionenableustodriveMedDstarratings,notonlyforourownSilverScriptPDPbutalsoforourhealthplanclients'MedDofferings.Infact,SilverScriptwasthelargestPDPtoachieveafour-starratingand73%ofourclients'livesarenowenrolledinahighperformingplanforthe2016year.

Nowturningtoourretaillong-term-caresegmentandI'llstartwithanupdateontheintegrationsonthe[Coram]Target,whicharewellunderway.Inthefourthquarter,Omnicareperformedwellandinlinewithourexpectationsaswebegantorealizesomeoftheanticipatedsynergies.AswedetailedatAnalystDay,therearemultipleopportunitiesfordrivingenterprisevaluefromOmnicareinboththenearandlongterm.

Inthefirsthalfofthisyear,weexpecttoachievethebenefitsofpurchasingsynergiesandbytheendoftheyear,wewillphaseintechnologytosupporthighqualitycustomerserviceandleveragebestpracticesacrosstheorganization.WearecombiningoperationalinfrastructuresanddevelopingprogramstoimproveworkstreamsandenhancedeliveryserviceandweexpecttocompletethevastmajorityoftheOmnicareintegrationactivitiesbyyear-end.

Nowopportunitiesarealsobeingpursuedacrossthecontinuumofcarethatwilldrivelong-termenterprisevalue.Forexample,wearedevelopinganenhancedofferingforskillednursingthat'sdrivenbyimprovingcoordinationduringcaretransitionswhichshouldleadtobetteroutcomesforpatients,providersandpayers.

We'realsodevelopingsegmentedassistedlivingofferingstobetteralignwithresidentsvaryingneeds




andit'sabetterTargettorapidlygrowingindependentlivingmarket,wehaveaconsumer-driveneffortunderwaythatutilizesexistingCVSpharmacycapabilitiesincludingtheonsitedeliveryofhealthcareservices.

Soweexpecttogeneraterevenuesynergiesfocusedonthetransitionsofcare,marketadjacencies,anddifferentiatedofferings,andtheseshouldbegintoberealizedinthesecondhalfofthisyearandgrowinfutureperiods,andweremainveryexcitedabouttheopportunitiescreatedbythiscombinationalongwithourenhancedabilitytoserveseniorsacrosstheircontinuumofcare.

NowasfortheTargetpharmacyandclinicacquisition,ourhighlydetailedintegrationplaniscomplete.Theintegrationactivitiesareunderwayandwehavealreadysuccessfullyconvertedahandfulofpilotstores.Asaresult,theconversionswillbegintorampupthroughoutthisquarterandnextandweexpecttocompleteallstoreconversionsbytheendofsummer.

NowaswecompleteeachstoreconversionanditsrebrandedasCVSPharmacy,atthatpointwelaunchouradditionalcoreofferings,corepharmacyofferings,toincludeSpecialtyConnect,ExtraCarePharmacyRewards,alongwithourdigitaltollsandthat'sinadditiontoMaintenanceChoicethatwasavailableuponthetransactionclose.We'llbeginaddingmarketingelementsasgeographiesconvert,allwiththegoalofconvertingTargetguestswhocurrentlydon'tusethepharmacy.

Nowmovingontothefourthquarterresultsintheretailbusiness,pharmacysame-storesalesincreased5%.Thiswasnegativelyimpactedbyapproximately470basispointsduetorecentgenericintroductions.Pharmacysame-storeprescriptionvolumesincreased5%ona30-dayequivalentbasis,outperformingoverallmarketgrowth,andourretailpharmacymarketshare,againona30-dayequivalentbasis,was21.8%inQ4andthat'supabout65basispointsversusthesamequarterayearago.

Forthefullyear2015,CVSPharmacy'sMedDshareincreased35basispointsversus2014,andwecontinuedtogainshareinthisgrowingmarketwhilemaintainingadisciplinedapproachtoevaluatingparticipationinpreferredMedDnetworksandweexpecttomaintainourmarketsharepositionin2016,helpedbyourpreferredpositionsinavarietyofnationalandregionalplans.Sooverall,ourpharmacybusinessremainsquitestrongandcontinuestogainshare.

Ourdigitalteamhasbeenworkingtocreateaconnectedhealthexperiencethatmakesiteasiertosavetimeandmoneyandtostayhealthybyconnectingpatientstoouruniqueassetswhen,whereandhowtheywant.Todatewe'veseen12.7milliondownloadsoftheCVSPharmacyapp,18millionmembersenrolledintextmessaging,drivingadherence,andmorethan300milliontextmessagessentbyCVSPharmacythispastyearenhancingthepatientexperience.Sowecontinuetofocusondrivingmemberadoptionofourhighlyrelatedapps.

Inthefrontstorebusiness,compsweredownslightly,0.5%inthequarterandreflectedsoftercustomertraffic,partiallyoffsetbyanincreaseinbasketsize.However,frontstoremarginsincreasednotablyinthequarter,benefitingfromeffortstorationalizeourpromotionalstrategies,alongwithgrowthinthehighermarginhealthandbeautybusinesses.

ExtraCarecontinuesitscommitmenttorewardourloyalcustomerswithsavingsthroughweeklyadsandpersonalizedoffers,aswellasExtraBucksrewards.Andin2015,thisgeneratedabout$4billioninsavingsforourloyalcustomers,sowecontinuetoseeExtraCareasasourceofgrowthasweleveragecustomerdatatocreateevenmorerelevantandpersonalizedcommunications.

Ourstorebrandpenetrationwas22%inthequarter.Thatwasdownslightlyfromtheprioryear,andforthefullyear,storebrandpenetrationwas21.3%,andthat'supabout75basispoints.In2015wegainedwithinthedrugchannelabout140basispointsofshareinoverallbrandsalesandabout60basispointsofshareinstorebrandhealthcare,andthereremainssignificantopportunitiestoexpandourshareof




storebrandproductsbybuildingoncoreequitiesinhealthandbeautyandseekingopportunisticgrowthinotherareaswherewecanlinknewproductstoourcustomers'pathtobetterhealth.

Turningtoourstorebase,weendedtheyearwithabout9,600retailpharmaciesandforthefullyear2015,weopened130netnewstoresequatingtoanincreaseinretailsquarefootageof2.2%.AndwhenyouaddintheacquiredTargetpharmacies,ourretailsquarefootagegrowthfortheyearcomesto3.1%.Inthefourthquarter,inadditiontotheacquiredpharmacies,weopened53newstores,relocated19,closed14,resultingin39netnewstores.

Wealsocontinuedtogrowthenumberofclinics.MinuteClinicisthelargestwalk-inclinicoperatorinthecountryandinthefourthquarterweopened36newclinicsinadditiontothe79acquiredclinicsinTarget,endingtheyearwith1,135clinicsacross33statesplustheDistrictofColumbia.

Now,excludingtheTargetclinics,MinuteClinicrevenuesincreased4.4%inthequarter.That'sbelowourusualtrendduetothemildcoldfluseasonversustheyearago.However,weachievedourfull-year2015revenuetargetofabout$345million.

Withthat,letmeturnitovertoDaveforthefinancialreview.

JonRoberts (PresidentofCaremark):

Thankyou,Larry.Goodmorning,everyone.

Thismorning,Iwillprovideadetailedreviewofour2015fourthquarterresultsandbrieflytouchuponour2016guidance,whichremainsunchangedfromwhatweoutlinedinDecemberatourAnalystDay.

FirstI'llstartwiththesummaryoflastyear'scapitalallocationprogram,whichshouldclearlydemonstratehowwe'recontinuingtouseourstrongfreecashflowtoreturnvaluetoourshareholdersthroughbothdividendsaswellassharerepurchases.

I'mpleasedtosaythatwecontinuedtodrivesteadyimprovementinourdividendpayoutratio.

Recallthatbackin2010thatourpayoutratiowasapproximately14%.Wefinished2015withapayoutratioof30.1%,morethandouble2010'sleveland240basispointshigherthan2014onacomparablebasis.

Wepaidapproximately$1.6billionindividendsin2015and$391millioninthefourthquarteralone.Ourstrongearningsoutlookthisyear,combinedwitha21%increaseinthedividendthatweannouncedatourAnalystDay,keepsuswellontracktoachieveourtargetedpayoutratioof35%by2018.

Alongwiththesignificantincreasesinourdividend,wehavecontinuedtorepurchaseourshares.Forallof2015,werepurchasedapproximately48millionsharesforabout$5billionaveraging$101.23pershare.

Inthefourthquarteralonewerepurchasedapproximately10.2millionsharesfor$1.1billion.

Nowifyou'lllookbackoverthepastthreeyears,we'verepurchasedapproximately166millionsharesforabout$13billionatanaveragepriceof$78.37pershare.

Fortheyear2015,betweendividendsandsharerepurchases,we'vereturnedaverysignificant$6.6billiontoourshareholders.Nowlookingforwardwehavenearly$7.7billionleftinrepurchasedauthorizationsandwecontinuedtoexpecttorepurchase$4billionthisyear.Ourexpectationisthatwe'dreturnmorethan$5billiontoourshareholdersin2016throughacombinationofdividendsandsharerepurchases.




Wegenerated$3.1billionoffreecashinthefourthquarter[and]allof2015wegeneratedapproximately$6.5billionoffreecashwhichexceededthehighendofourguidancebyabout$200million,butwasessentiallyflatyear-over-year.Theoutperformancewasdrivenbyclientcollections.Atthesametime,weimprovedourcashcyclebyapproximatelytwodays,thankstocontinuedimprovementsinpayablesmanagementthatwerepartiallyoffsetbygrowthinreceivables.

Weremaincommittedtofurtherimprovementsinworkingcapitalaswemoveforward.Fortheyear,ournetcapitalexpenditureswereapproximately$2billion.Thisincluded$2.4billionofgrossCapExoffsetbyabout$410millioninsaleleasebackproceedsaswellascapitalspendassociatedwiththeacquisitions.

Asfortheincomestatement,adjustedearningspersharecameinat$1.53pershare,atthemidpointofourguidance,up26.5%overLY.AsyoucanseeinourPressRelease,in2015thisexcludesamortization,theimpactoftransactionandintegrationcostsrelatedtotheOmnicareandTargetacquisitions,aswellasa$90millionlegalcharge.

Thechargewasrelatedtoalegacylawsuitchallengingthe1999settlementbyMedPartnersofvarioussecurityclassactionsandrelatedderivativeclaim.Forthoseofyouwhomaynotbefamiliar,MedPartnerswastheformerparentcompanytoCaremark,sothisissuegoesbackalongtime.

Thegrowthratealsoexcludesthelossonearlyextinguishmentofdebtthatwerecordedin2014.GAAPdilutedEPSwas$1.34pershare.Resultsacrossouroperatingsegmentswerestrongasexpected.

Andwiththat,letmequicklywalkdowntheP&L.Onaconsolidatedbasis,revenuesinthefourthquarterincreased11%to$41.1billion.InthePDMsegment,netrevenuesincreased11.1%to$26.5billion.Thisgrowthwasattributabletospecialtypharmacyaswellasincreasedvolumeinpharmacynetworkclaims.

Overall,PBMadjustedclaimsgrew6.4%inthequarter.Partiallyoffsettingthesalesgrowthwas165basispointincreaseinourgenericdispensingrateto83.7%.Inourretaillong-term-carebusiness,revenuesincreased12.5%inthequarterto$19.9billion,drivenprimarilybystrongpharmacysame-storesalesgrowthaswellastheadditionoftheOmnicarebusiness.

RetaillongtermcareexceededourrevenueguidanceprimarilyduetotheadditionoftheTargetassetsacoupleweeksearlierthanplanned,aswellasalowergenericdispensingratethanexpected.Duringthequarter,GDRincreasedbyapproximately155basispointsto84%.

Turningtogrossmargin,wereported17.7%fortheconsolidatedCompanyinthequarter,acontractionofapproximately15basispointscomparedtoQ42014andagainconsistentwithourexpectations.WithinthePBMsegment,grossmarginsimprovedapproximately45basispointsversusQ4of2014to5.6%whilegrossprofitdollarsincreased20.5%year-over-year.Theincreaseingrossprofitwasprimarilyduetoincreasesinvolumes,theimprovementinGDR,andfavorablerebateandpurchasingeconomics.

Partiallyoffsettingthesedriverswastheimpactofclientanddrugmixaswellascontinuedpricecompression.TheimprovementingrossmarginrateinthePBMwasprimarilyduetothetimingofMedicarePartDprofits.

Nowgrossmarginsintheretaillong-term-caresegmentwas30.2%,down125basispointsfromLY.Thedeclinewasprimarilydrivenbycontinuedpressureonreimbursementrates,andtoalesserdegree,theadditionoftheOmnicarebusiness,whichcarriedalowermarginthanretail.PartiallyoffsettingtheseweretheincreasesinGDRandastrongfrontstoremarginimprovementaidedbycontinuedrationalizationofourpromotionalstrategiesandimprovedproductmix.Grossprofitdollarsincreased8%throughoutthequarter.




Turningtooperatingexpenses,operatingprofitandthetaxrate,thenumbersthatI'mcitingexcludeacquisition-relatedcostsandthelegalchargewhereapplicable.TotaloperatingexpensesasapercentageofrevenuesnotablyimprovedfromQ42014to10.7%.

ThePBMsegmentsSG&Arateimproved10basispointsto1.3%andSG&Aasapercentofsalesintheretaillong-term-caresegmentimprovedsignificantlyby190basispointsto19.4%.Thiswasdrivenbyloweradvertisingcostduetolastyear'srebrandingcampaignfollowingourtobaccoexit,lowerlegalcosts,andtheadditionoftheOmnicarebusinesswhichcarrieslowerSG&Arelativetosales.

WithintheCorporatesegment,SG&Aswereupapproximately$10millionto$215million,withinourexpectations.Operatingmarginforthetotalenterpriseimprovedapproximately75basispointsinthequarterto7%.OperatingmargininthePBMimprovedbyapproximately55basispointsto4.3%,whileoperatingmarginatretaillong-term-caresegmentimprovedapproximately65basispointsto10.7%onouradjustedbasis.

Forthequarter,operatingprofitgrowthineachsegmentwasinlinewithexpectations,withthePBMincreasingaverysolid26.8%andtheretaillong-term-caresegmentgrowing19.8%,againonouradjustedbasis.

Goingbelowthelineontheconsolidatedincomestatement,netinterestexpenseinthequarterincreasedapproximately$145millionfromLYto$276million,dueprimarilytothedebtassociatedwiththeacquisitionsthatwetookonlastyear.

Oureffectivetaxrateinthequarterwas38.9%andourweightedaveragesharecountwas1.1billionshares.Fortheyear,oureffectivetaxratewas39.1%,justslightlylowerthanexpected.

Sowiththat,nowletmetouchonour2016guidancewhichagainremainsessentiallyunchangedfromAnalystDay.Youcanfindthedetailsintheslidepresentationthatwepostedonourwebsite,butI'llfocusonthehighlightshere.

In2016,wecontinuetoexpecttodeliveradjustedearningspersharewhichexcludesamortizationintherangeof$5.73to$5.88reflectingveryhealthyyear-over-yeargrowth.GAAPdilutedEPSfromcontinuingoperationsisstillexpectedtobeintherangeof$5.28to$5.43.

KeepinmindthatwehavenotincludedanyestimateofintegrationcostsfromOmnicarenorTargetineitherrange.We'll,ofcourse,reportthoseasweprogressthroughouttheyearbuttheyareexcludedfromourguidance.Weexpectconsolidatednetrevenuegrowthof17%to18.5%reflectingsolidgrowthacrosstheenterprise,andweexpectconsolidatedoperatingprofitmargintodeclineby40to50basispoints.

Thefirstquarterguidancealsoremainsunchanged.Weexpectconsolidatednetrevenuegrowthof17%to18.5%.Andasyoumayrecall,wehighlightedseveraltimingfactorsatAnalystDaythataffectthecadenceofprofitdeliverythroughouttheyear.Andwhile2016isexpectedtobeastrongyear,thecadenceofprofitgrowthisexpectedtobesignificantlyback-halfweighted.

Weexpectadjustedearningspersharewhichexcludesamortizationtobeintherangeof$1.14to$1.17,whileGAAPdilutedEPSfromcontinuingopsisexpectedtobeintherangeof$1.03to$1.06inthefirstquarter.Additionally,ourfreecashflowguidancefortheyear,whichincludesacquisition-relatedactivitiesremainsintherangeof$5.3billionto$5.6billion.

Inclosing,IwanttosaythatI'mverypleasedwiththeCompany'ssignificantcashflowgenerationcapabilities.Ibelievethesecapabilitieswillcontinuetoplayanimportantroleindrivingshareholdervalueoverthelongterm.Tothatpoint,2016willbeanotheryearinwhichwedemonstrateourongoing




commitmenttoreturningvaluetoourshareholdersthroughbothsharebuybacksaswellasthroughtheincreaseinourdividend.

Andwiththat,I'llnowturnitbackovertoLarry.


Okay.Thanks,Dave.Andletmejustreiteratehowpleasedwearewithourstrongperformanceacross2015,alongwiththecontinuedprogresswe'remakinginleveragingourintegratedassetsasCVSHealththat'sbringinginnovativechannelagnosticsolutionstothemarket.Ialsowanttotakeaminutetothankandrecognizetheeffortsofourmorethan240,000colleaguesthatarecommittedtoourpurposeandworkinghardeachandeverydayhelpingpeopleontheirpathtobetterhealth.

Sowiththat,let'sgoaheadandopenitupforyourquestions.

QUESTIONS&ANSWERS

Operator :

Thankyou.

(OperatorInstructions)

LisaGillwithJPMorgan.

LisaGill(Analyst-JPMorgan):

Great,thanksverymuchandgoodmorning.Thankyouverymuchforallofthedetail.Ijustwantedtofollowuponacoupleofthings.Thefirstofwhichismaybecanyoutalkaboutthe2016opportunitiesforuptakeinsomeofthedifferentprograms,whetheryoutalkaboutspecialty.

Onbothsides,Larry,youtalkabouttheopportunityatTargettobringpeopleintoyourspecialtyprogram,MaintenanceChoice,etcetera.Whatdoyouhavespecificallyintheguidance?

Andthensecondly,Jon,canyoutalkabout,again,asyouthinkaboutwhatpeoplearetakingonin2016,whetherit'snationalpreferredformularyorspecialtyorsomeoftheotherprogramsthatweseeand,aswemovethroughouttheyear,whatsomeoftheopportunitiesare?


Yes,Lisa,goodmorning.I'lltakethefirstpartandthenflipitovertoJon.Asyouthinkabout,Lisa,thebenefitsfromtheacquisitions,wetouchedonitataveryhighlevelinthepreparedremarks.

IfyoulookatOmnicare,we'vegotanumberofpilotsthathavejustbeguntokickoffthatwouldfocusontherevenuesynergysideoftheequation,acknowledgingthatweseeopportunitiesacrossthespectruminskillednursing,assistedlivingandtheindependentlivingspaces.AndIthinkaswe'vebeentalkingforquiteawhilenow,thoseopportunitieswillreallymanifestthemselvesacrossourretailbusiness.SoIthink,again,it'searlyintheprocessandthebenefitsthatwe'llseefromthatwedon'texpecttobegintocomeonlineuntilthesecondhalfoftheyear.

AndIthinkLisait'sasimilarstorywithTarget.We'vegotalotofheavyliftingtodo.Whenyouthinkaboutthestoreandsystemconversions,1,700ofthose.Atthesametime,we'vehadalotofpracticewiththat.AndasImentionedintheremarks,thepilotstoreshavegoneextremelywell,sowearenowinrolloutmodeanditwilltakethebetterpartofthenextsix,sevenmonthstocompletethoseactivities.Sothat'sreallywhenyou'llbegintoseethemarketingeffortsrampup.




Sothebenefitsthatwe'llseefrombeginningtocreatecustomerconversionwithintheTargetstores,withtheTargetguests,again,Ithinkthat'sgoingtobemoreofasecond-halfimpact.


Larry,istherightwaytothinkaboutthisisthatthiswillbeamulti-yeargrowthopportunityfrommarginaswellasrollingouttheseprograms,soit'snotjustthebackhalfofthisyearbuttolayerontothisoveramulti-yearperiod?Isthattherightwaytothinkaboutthis?


Lisa,that'sexactlytherightwaytolookatitbecause,again,it'sgoingtotaketimetomarketandonboth,whetherwe'retalkingaboutTargetorOmnicareintermsoftheopportunities,soitwillphaseinovertime.Andyou'reright,weseeitasamulti-yearopportunity.


Andthen,Lisa,asfaraswhatwe'reseeingin2016,asyou'llrecallbackin2014,wesawdouble-digitpharmacytrend.Thatwasprimarilydrivenbybrandedinflation,brandedpriceincreasesandwe'reseeingthatsamedynamicin2016aswell,soclientshaveneverbeenmoreopentoadoptingplandesignstocontrolthesecosts.

AndIwouldreallythinkaboutitinthreeprimarybuckets.Firstischannel.SotheabilitytoadoptourMaintenanceChoiceprogramswhichwe'renowupover23millionmembersparticipatinginthatprogramandnetworksolutions,preferrednetworksolutionsforMedicareasanexampleandnarrowingthenetworkincommercialandmanagedMedicaid.

Socontinuetoseelotsofinterestinthoseplans'designs.Andalso,lotsofinterestwithformularyplandesignsandweofferoptionsfromexcludingformularyforourtemplateclients.Weintroducedthatbackin2012,allthewaytomuchmoreaggressiveformularieswhereweessentiallytakemostofthebrandsofftheformulary.Thatreallyisthemosteffectivetoolwehavetomanagingtrendbecauseitgetsridofthebrandedinflation.

Andthenthethirdprimarybucketisreallyallthesolutionswehaveinspecialty,fromexclusivespecialtytositeofcaretoaggressiveformularysolutionsandspecialty,sowedocontinuetoseealotofinterest.Weseeemployersabletomakedecisionsfasterinadoptingtheseplandesigns.

Wedoseehealthplansmuchmoreinterestedthanthey'veeverbeenintheseplandesigns,buttheiradoptionrateisslower.Theymayhavetoselltheseplandesignsundertheirdownstreamclients.Andasyou'llrecall,asourclientsadopttheseplandesignsandwelowertheircosts,wegenerallyseemoresharemovingtoourchannels,soitclearlyisawin-win.


IsthereanywayforyouorforDavetoquantifysomeofthesenumbers?YoutalkedaboutMaintenanceChoicebeing23millionmembers.Butcanyougiveusanideaofhowmanypeoplehaveadoptedthisyeartogointomoreofanarrowformularyoryournarrowspecialtyoranyofthoseotherthings?Justsowecangetanideaofwhattheprogressionhasbeenlikeandwhatweshouldexpectittolooklikein2016?

DaveDenton (CFO):

Lisa,wedon'tdisclosethatinformationatthispointintime,sounfortunatelywecan'tdothatrightnow.





Okay,Ihadtotry.Thanks,Dave.

DaveDenton (CFO):

Thanks,Lisa.

Operator :

EdwardKellywithCreditSuisse.

EdwardKelly(Analyst-CreditSuisse):

Yes,hi,goodmorning,guys.


Goodmorning,Ed.


SoIhaveaquestionforyouontheretailgrossmargin.Justtheheadlinenumberitself,thedeclinewasalittlebitmore,Ithink,thanwhattheStreetwaslookingforandobviouslytheStreetnumbermaybewasn'tright.ButIguessthequestionreallyishowdoyouthinkabout--youmentionedreimburseratepressure,howdoyouthinkaboutreimburseratepressurelookedthisquarterrelativetotrendandyourexpectation?Andwasthemarginthisquarteranydifferentthanwhatyouwerethinkingaboutgoingin?


It'sLarry.It'sagreatquestion.Imean,whatwesawinthefourthquarter,Ed,wasconsistentwithourexpectationand,quitefrankly,consistentwithwhatwesawinthethirdquarter.Andaswe'vebeentalkingaboutthereimbursementpressure,thewaywethinkyoushouldbelookingatthisiswe'renotseeingreallyanydynamicchangeinthecadenceofreimbursementpressure.

Aswelookforwardinto2016,we'vegottheebbsandflowsintermsoftheoffsetsthatexistintermsofhowwecanleverageagainstthatreimbursementpressureandweoutlinedmanyofthosevariablesatAnalystDaylastmonth.

DaveDenton (CFO):

And,Ed,thisisDave.ConsistentwithwhatLarrysaid,isthatourgrossmarginwasinlinewithourexpectations.ButacouplethingstojustknowisobviouslyweaddedtheOmnicarebusiness,whichcarriesalittlebitlowerrate.SecondlyourGDR,aswesaid,wasalittlelightinretailasbrandwasalittleheavy.So,therefore,thataffectedthegrossmargin,butstillwellwithinourguidanceexpectations.


Justonequickfollow-uphereontheupcomingorcurrentPVMsellingseason.Canyoumaybetalkalittlebitabouthowtheopportunitylooksfromamixedstandpoint?Solastyearyouhadalotofsuccess,right?Alotofitwasinthehealthplanside.Howdoesthemixoftheopportunitylooklikeinthecurrentyearcomingup?Istherepotentialformoreself-insuredemployertypewins?Anycolorthatyoucouldprovidetherewouldbegood.


Well,Ed,again,it'searly.Aswelookatwherewestandatthispointintime,theRFPactivityisprobablyonparwithwhatwe'veseeninprioryears.Ifyoulookedatourrenewalbusiness,we'vegotabout$22




billionupforrenewal.Thereisnothingoutofthenormintermsofitskewswithinasegmentonewayoranother,sowekindofviewitasjustanormalsellingseason.AndI'llflipitovertoJonandseeifhehasanything.


Rememberwehadjusta$14billionsellingseasonwith80%ofithealthplans,butwestillhadaverysuccessfulsellingseasonwithemployersandwithstategovernments.Soifourwinratereturnstoamorenormalsellingseason,Ithinkthemixthatyou'llseewillbemorenormalthanwhatwesawthispastyear,sowe'reexpectingaveryactivesellingseason.Obviouslythehealthplansareoutnowandweexpectthelargeemployersandthestateplanstobeoutoverthenextseveralmonths.


Great.Thanks,guys.


Thanks,Ed.

Operator :

Thankyou,ournextquestioncomingfromthelineofEricPercherwithBarclays.

EricPercher (Analyst-BarclaysCapital):

Thankyou,EricPercherandMeredithAdlerherefromBarclays.Somaybestayingwiththehealthplantopic,Iguessmyfirstquestionwouldbearethereuniquechallengesinonboardingthisleveloforthismagnitudeofhealthplancustomers,oristheprimarychallengegettingthemarginandgettingtheadoptionyouwanttooccurovertheyear?Andalsohavetherebeenparticulartoolsorstudiesonadherenceoncostoverthelastyearthatyou'veseenreallydrivetheadoptionandwinsinthehealthplansegment?


Eric,it'sLarry.MaybeI'llstartandthenaskJohnandDavetojumpin.Eric,infollowingyourquestionsthere,intermsofonboardingthoseclients,again,Ithinktheinvestmentsthatwe'vemadeoverthelastcoupleofyearsfromatechnologyandprocessandorganizationalignment,Ithinkhavereallypaidoffthelasttwowelcomeseasons.

Backtomypreparedremarks,youthinkaboutthefact[9million]thispastJanuary,[16million]overthelasttwoyearscombinedwithveryhighlevelsofservice.We'reextremelypleasedwiththeworkoftheorganizationintermsofonboardingthoseclientswithnodisruption,sothathasbeenchecktheboxthere.

IthinkifyougobacktosomeofthethingswetalkedaboutatAnalystDay,Ithinkthechallengedifferentthantheemployersegmentishowwecreatemorealignmentwiththehealthplansalesorganizationtosellinthoseuniqueanddifferentiatedproductsandservices.Andwe'vebeguntodosomedifferentthingsthereintermsofcreatingbetterincentivealignmenttoallowthattobemoreofapriorityamongthemanyprioritiesthatthesehealthplanshaveandIthinkwe'rebeginningtogetsometractionaroundthat.


ThisisJon.Ontheadherencefront,IthinkyoujusthavetolookattheMedicareStarplansandwhat




theymeasure.AndabouthalfofwhattheymeasureforMAPD,asanexample,isaroundadherence.Sowe'vedoneourowninternalstudiesthatsayifyouhave100,000seniorstheyhaveabout$1.1billioninoverallhealthcarecosts.Andifwecouldmakeeveryoneofthosemembersadherenttotheirmedicationandwecouldfillingapsintherapythattheyhave,thatwecouldreducetheoverallmedicalcostsbyover$200million.

SoCMSgetsthis.Thisiswhytheyweightadherencesoheavilyintheirevaluationofplans.Andnobodyisbetterpositionedthanwearewithourintegratedchannelstoreachmembersandtalktothemaboutadherenceandimprovetheiradherence.Andthat'swhythreeoutoffourofthehealthplansthatareintheMedicarebusinessthatwesupportareeitherfour-orfive-starplans.Andweseesimilaractivityinthecommercialspaceaswell.

DaveDenton (CFO):

And,Eric,justtwootherpointsreinforcingJon'scomments.WejustpublishedastudywithinthelastcoupleofweeksthatwhenyoulookatSpecialtyConnect,there'san11%improvementinadherenceforthosepatientswhoutilizedthatservice.

Atthesametime,reflectingonJon'scomments,whenyouthinkaboutsomeoftheexpectationsthathavebeensetforvalue-basedreimbursementoroutcomes-basedreimbursement,whateverphraseologyyouwanttouse,insomeofthetargetsthathavebeenestablishedfor2018andbeyond,Ithinkourdifferentiatedproductsandservicesarereallyinagreatsweetspottobeabletodeliveronthoseexpectations.

EricPercher (Analyst-BarclaysCapital):

Verygood,thankyou.


Thanks,Eric.

Operator :

GeorgeHillwithDeutscheBank.

GeorgeHill(Analyst-DeutscheBank):

Hi,goodmorning,andthanksfortakingthequestion.Iguess,Larry,ifyouthinkifwecomebacktoreimbursementpressureontheretailside,canyoutalkaboutthebucketswhereyou'reseeingthemostpressure,eitherfromaproductperspectiveorfroma[tire]perspective?WeknowtheMedDbooksarecompetitive.Weknowpressureongenericsiscompetitive,butanyincrementalcoloryoucouldgivetherewouldbehelpful.


George,Iwouldsayitprobablyhasmoretodowiththemixshift.Andwhenyoulookat--asyoulookatpharmacygrowth,we'reseeinghighergrowthratesingovernment-sponsoredcare,Medicare,Medicaid.Andaswe'vesaidthose,thosesegments,whileveryproductivefromautilizationandourrevenuegrowthperspective,typicallycarrylowermarginrates.


Okay,that'shelpful.Andmaybeaquickfollow-up.Larry,Iwouldjustloveyourbroaderthoughtsaroundthegrowingnegativedrugindustryrhetoric.Itjustseemstobegettingmoreaggressiveateveryangle




andtargetedateveryparticipantinthesystem,whetherit'sMedD,youhadtheformationoftheHealthTransformationAlliancelastweek,youhaveCMStakinganotherlookatMedBitseems.Iguessjusthowdoyoucombatthatandhowdoyouquantifytheriskofmoredramaticgovernmentinterventioninthespace?


Well,George,listen,it'sagreatquestion.Andwhenyouthinkaboutrespondingtothat,youreallythinkaboutwhatclientshireustodo.Andtheyexpectustoworkhardontheirbehalfintermsofhowdoweprovidehighlevelsofservicefortheirmembersatthelowestpossiblecosts?

Andwe'vetalkedaboutthevarietyofwaysinwhichwedothatandwe'reverypleasedwithwhatwe'vebeenabletodoandthetoolswe'vebeenabletoprovideforourclients.Again,they'vegottheoptionofhowaggressivetheywanttobeintermsofutilizingthosetools,butwethinktheresultsofthatwillbereflectedinourtrendreportthatwillbecomingoutwithinthenextseveralweeks,okay?

Andit'sourfocusand,yes,Ithink,George,we'vegottobecareful--thatprivatesectorinnovation,Ithink,hasdonealotwithwhichtosatisfytheobjectiverightdrugrightpatientatthelowestpossiblecost.AndifyoulookatMedDasanexample,itwas2006,it'salmostadecadelaternowandwhenyoulookattheestimatesofwhatCBOhadpredictedthecostofthatwouldbe10yearsagoandwhatit'scostingtoday,it'safractionofthat,whichIthinkisoneofthekeyreasonsforthatisprivatesectorinnovationandthefactthatcompetitionultimatelydrivesdowncosts.

SoIthinkthere'sgoingtobealotofcrosscurrentsaswegothroughanelectionyearandwe'lljustcontinuetoworkhardtotellourstoryandbringinnovationandefforttodowhatclientsarehiringustodo.And,quitefrankly,whatwebelievethey'resatisfiedinwhatwe'redoingapropostothenewbusinessthatwe'vewonthelastcoupleofyears.


Okay,Iappreciatethatcolor.Thankyou.


Thanks.

Operator :

JohnHeinbockelwithGuggenheimSecurities.

JohnHeinbockel(Analyst-Guggenheim):

Larry,questionaboutevolutionofnewcustomeracquisitions.Sowhenyoulookatonboardingthe16millionherethelasttwoyears,astheygointoyoursystem,youthinkaboutthefirstcoupleofyearsthey'rewithyou,isthegrowthratewiththosecustomers,thoselives,alothigherthanmorematurelivesbecauseofallofthedifferentproductsyou'resellingtothem?Isthatthecase?

Andtheninacasewhereyouhave16millionovertwoyears,ifthat'strue,isthatenough?Youthinkofthegrowthcomingfromthose16million,isthatenoughtomovetheoverallenterprisegrowthrateinavisiblewayor,no,itjustkindofblendsintoyourhistoricalgrowthrate?


Well,John,it'sLarry.I'llstartandIknowotherswilljumpinhere.John,youranswertothatinpartliesintermsoftheclientmakeupandtheclientadoptionofthosedifferentiatedservices.Soaclientwhois




adoptingMaintenanceChoice,andit'sanewclient,obviouslywe'regoingtoseearapiduptakeofsharecomingintooneofourdistributionchannelsbecausethat'sthenatureofthatplandesign.

Ithinkifyougoback--and,again,reflectingonsomeofthethingswetalkedaboutatAnalystDay,thispastyear,abigpieceofthatnewgrowthisinthehealthplansegment.Andasyoulookatourenterpriseshareofthosehealthplanclients,it'sinthelow[20%s],soobviouslythatcreatesabigopportunity.Andthat'ssomethingthatwilloccuratamuchslowerratethanaclientwhoadoptsMaintenanceChoice.Soobviously,alotofopportunityandopportunitythatwe'llseecascadeoverthelifeofthatcontract.


Sothisisnotonly--Idon'tknowifthisisthebiggesttwo-yearperiodofcustomeracquisitionthatyou'vehad.Ithinkitmaybe.It'snotonlythatbutalsothemakeupinwhereyouarewithyourprograms,thisactuallyisprobablyamoresignificantdriverorcouldbe,thanwhatyou'veseenhistorically,right,becauseofthemixoftheplansandwhereyouarewithyourprograms?

DaveDenton (CFO):

John,thisisDave.Ithinkthat'sright.Iwouldjustcautionyoualittlebit.Ifyoulookatthesaleswind,certainlyaswecycleinto2016largelyhealthplan,healthplansasJonarticulatedearlier,takesawhileforthemtosellintheirprograms.

Soobviouslythenameofthegameherehasbeenlet'sgainthelifeandthen,quitefrankly,makethelifemoreproductiveaswemovesomevolumeintoourchannelandsavetheclientmoney.Inhealthplansthatjusttakesalittlelonger.I'llthinktherampofthatwill--theslopeofthatwasalittle--it'snotassteepasincomparedtotheemployerclients.


QuicklyonOmnicare,whenyouthinkaboutmarketshareevolutioninthevarioussubsegmentsthey'rein,sohowdoyouthinkaboutthat?Ismostofthesharegain,Iassume,willbeorganic.DoyouthinkM&Aplaysarole?Andthenwhenyoulookatsharessayrelativetoyourshareintheretailbusiness,ultimatelydowntheroadIwouldguesstheshareinlongtermcarecouldbe,wouldbesubstantiallygreaterthanwhatyouhaveontheretailsideorcouldbe.

DaveDenton (CFO):

Yes,John,thisisDavehere.Idothinkthemarketisstillprettyfragmented,soIdothinkthere's[file-by]typeopportunitieswithinthemarketspaceandyou'llseeuscontinuetoprobablydothatwithinthelong-term-carebusiness.AndthenIthinkasyoulookatthelong-term-carebusiness,youkindofneedtolookatitindifferentclientcategories.

Ithinkfromaskillednursingfacilityperspective,it'sallaboutgrowingthenumberofbeds.Ithinkfromanassistedlivingfacilityisreallydesigningproductsandsolutionsthatcapturemoreofthosememberswithinthebedsthatwehavewhile,addingbedsaswell.Butthere'smoreofa,let'ssay,aproductdevelopmentsetthatneedstohappenthereforsharecaptureandsharegain.


John,IthinktheonlythingI'dadd,itgoesbacktoLisa'squestionearlier,thatwe'vespentenoughtimewiththelong-term-careclientstounderstandtheirpainpointsandtheirneeds.Andthat'swhat'sdrivingsomeofthepilotsthatwehaveunderway.AndIdobelievethatrecognizingthattosomedegreelongtermcareisepisodic.




Andyou'vegot2millionpatientsthatarebeingdischargedeachyearbackintothehome.Andbeingabletoprovidedifferentiatedservicesfortheclient,thefacilityoperator,andthen,again,beabletofollowthosepatientsacrosstheircontinuumofcareisasignificantopportunitytogrowshare.Andagain,thatwillcontinuetoevolveovertime,overamulti-yearperiod.ButIthinkwe'reexcitedbytheopportunitiesthatweseethere.


Thankyou.

Operator :

Thankyouforyourquestion.OurnextquestioncomingfromthelineofDavidLarsenwithLeerinkPartners.

DavidLarsen (Analyst-LeerinkPartners):

Hi,canyoutalkaboutyourexpectationsforHepCspendin2016and2017?Andasnewproductscometomarketfromadditionalmanufacturers,howcanyouhelpyourclientsreducetheiroverallspendwhileearningincrementalprofitsforyourself?Andthenwhatappetiteistherefromyourclientbaseintermsofpushingspecialtyspendfrommedicalintopharmacyandusingrestrictednetworksmoreaggressively?Thanks.


Hi,Dave,thisisJon.SoHepCvolumeIthinkhasleveledoffaswe'reinto2016,downalittlebitfromwherewewerelastyear.Mercklaunchedtheirnewproductatalistpriceof$54,000andthatislessexpensivethantheotherproductsonthemarketlikeHarvoni.Sowe'llevaluatethesenewproductsandnegotiatethebestdealforourclientsandwecontinuallyevaluateourformularyselectionsandwe'lldothesameasthesenewproductscometomarket.

Ithinkaswelookoutto2016or2017,wehaven'tseenalotoftreatmentintheMedicaidspace.They'vehadrealstringentutilizationprograms,soIthinkthequestionisasthesedrugsbecomemoreaffordable,canwebegintoseemoretreatmentinthatarea?AndCMScameoutwithguidanceactuallyencouragingtheMedicaidproviderstodothat.So,yes,youcouldpotentiallyseeanuptickintreatmentifweseethatmovementfromtheMedicaidplans.

Ithinkasfarasspecialty,weseeclientsveryinterestedindoingmoretomanagespecialtyunderthemedicalbenefit.Itisnotbeingwellmanagedtoday,sowehaveatooliftheydon'twanttomoveitovertothepharmacybenefit,that'sNovalogics,wehaveover30millionmembersthatwe'remanagingwiththattooltoday.Anditbringsallofthemanagementwehaveonthepharmacyside,butwealsohaveanopportunitytomovespecialtyfromthemedicalsideintothepharmacybenefit.And,yes,notthatyou'llevergetthemajorityofitovertherebutthereareopportunitiestodomore.

DavidLarsen (Analyst-LeerinkPartners):

Great;thanksverymuch.

Operator :

MarkWiltamuthwithJefferies.

MarkWiltamuth (Analyst-JefferiesLLC):

Hi,goodmorning.Wantedtoaskaboutthespecialtygrowthof32%.WasthatinclusiveofOmnicareor




Omnicareabout5%ofthatnumber?Ifyoucouldgiveustheorganicgrowthrate,thatmighthelp.AndthenisthereanywayyoucanreallycharacterizehowmuchtheSpecialtyConnectishelpingyouwithcustomeracquisition,becauseIwouldimaginethat'shelpingkeepsomeofthespecialtycustomersfromleakingouttootherchannelsasyoucapturethemonthefront.


Yes,Mark,the32%growthdoesincludetheACS,thespecialtycomponentfromOmnicare.Itwasarelativelysmallpieceofthegrowth.AndI'llaskJontocommentintermsofthemarketreactiontoSpecialtyConnect.


SpecialtyConnectreallyopenedupapainpointinspecialtythatexistsinthemarketplacetodayandthat'saccess,sonowaspecialtypatientcanwalkintoanyoneofour9,600retailpharmaciesandgetthesamehighlevelsofservicebecausewe'veintegratedintoourback-endspecialtyplatform--yougetthesamehighlevelsofservice.Weseesimilaradherence,soitis,ithasbeenfavorablyreceivedbyspecialtypatients.

AndhowweknowthatisitactsverysimilarlytoMaintenanceChoice.WeseehalfthepatientswanttopickuptheirspecialtyprescriptionattheirlocalCVSthatareusingSpecialtyConnectandtheotherhalfwantitmailedtotheirhome.Soitreallyopensuptheconveniencesoforourclientswherewearetheexclusivespecialtyprovider,itenhancesservice.

It'senhancingrevenuefromtheopenmarketwherewe'recompetingwithotherspecialtypharmacies,sophysiciansthataremuchmoreactiveinreferringpatientsinthespecialtyspacethaninthenon-specialtyspacelikethecapabilitiesandtheservicethatwedeliver.Sowethinkit'sarealcompetitiveadvantageinthemarketplace.


Andanyroughvolumesyou'redoingtherethataregoingthroughthepharmacyitself?Iknowyousaid50%,butwhat'sthevolumenumbercomingthroughthere?


Well,itwas50%--ofthemembersthatarecomingthroughSpecialtyConnect,50%ofthemwanttopickuptheirspecialtyscriptsatCVSpharmacy,sojusttobeclearit'snot50%ofouroverallvolume.


And,Mark,theotherthingI'djustpointoutasareminder,thisgetsbacktoourfocusonmanagingtheCVSHealthEnterprise,becausefromafinancialpointofview,everythingthatJonarticulated,whetherthepointofaccessistheretailpharmacy,fromafinancialpointofview,itgoesthroughthePBMsegment.Andwearen'tworriedaboutinthisexample,youcouldsaywe'repenalizingtheretailpharmacy.

Wedon'tlookatitthatwaybecausewebelievethatit'sauniqueandintegratedproductthatisallowingustocaptureincrementalshareinthemarketwhichisgoodfortheCVSHealthEnterprise.

DaveDenton (CFO):

Mark,thisisDave.BacktoyouroriginalquestionaboutACS.Ifyoulookinspecialty,forthefullyeargrowthratewasapproximately34%,ifyouexcludedthespecialtythatcamethroughACSthroughOmnicare,growthwouldbeabove30%.Sofairlysmallimpactfromagrowth-rateperspective,mostofthegrowthiscomingfromthecore.





Okay,thankyouverymuch.


You'rewelcome.

Operator :

Thankyou,ournextquestioncomingfromthelineofRickyGoldwasserwithMorganStanley.

RickyGoldwasser (Analyst-MorganStanley):

Yes,hi,goodmorning.Coupleofquestionshere.Firstofall,front-endcompsareholdingreallywellinDecember.We'rehearingalotofquestionsaboutrecessionandimpacttoconsumerbehavior.Maybeyoucansharewithuswhatyou'reseeinglikeyeartodateintoFebruaryinthestoresfromaconsumerbehaviorside.

HelenaFoulkes (PresidentofCVSPharmacy):

Yes,Iwouldjustsay--overall,I'dsaythingsareholdingfairlysteady.Wecertainlyhaveseentheconsumer--Iwouldn'tsayanychangereallyfromwhatwewereseeinginthefourthquarter.Ithinkthebigthingwe'vebeenfocusedonandcontinuetofocusonisbeingsmartaboutwhereweinvestourmargindollars,soyoucanseeuscontinuetodownplayourcircularsandreallyfocusonextracare,whichisallowingustofindthosehighvaluecustomersandmakesurethey'recomingintoourstores.


Okay,andthenonthe2016cadence,obviously,Dave,theyearissecond-halfloaded.Socanyoujustreminduswhatarethedriversthatwillkickinlaterintheyearwhenwearegoingtoseeliketheacceleratedearningsgrowth?Andjusttomakesureintermsofthecadence,canyoumaybejustlikehelpusclarifytomakesurewegetitrightonthemodelhowweshouldthinkaboutwhatpercentofearningsisgoingtobeinthefirsthalfversussecondhalf?

DaveDenton (CFO):

Yes,wellfromacadenceperspective,alot--I'llpointyoubacktoacoupleslidesthatIputtogetheratAnalystDaybackinDecember.Butitreallyrelatesbackto,one,istheaccelerationofgrowthfromaMedicarePartDperspectiveandasthatgrowthoccurs,thoseprofitsareback-halfweighted,sothatclearlytiltsthecadencedelivery,profitdelivery,tothebackhalfversusthefirsthalf.

Secondly,wehaveseveralinitiativesunderway,bothaswelookattheacquisitionsbutmoreimportantlyaswelookatdifferenteffortsthatwehaveacrossourbusiness.Manyofthoseinitiativesdeliverbenefitinthebackhalfversusthefirsthalfandprobablymostimportantlyisthetimingandcadenceofbreak-opengenerics.Thosearelargelyback-halfweightedsoyou'llseetheimpactofthatflowthroughinthreeandfourversusQ1andQ2.Sothosearethemajorelementsofhowtothinkaboutthat.Andwehavenotbrokenoutspecificallythepercentoffronthalfversussecondhalf.


Okay,thankyou.

DaveDenton (CFO):

You'rewelcome.




Operator :

CharlesRhyeewithCowen&Co.


Charles?

Operator :

Mr.Rhyee,wecannothearyou.


Okay,whydon'twegoontothenextone,maybeCharleswillgetbackinthequeue.

Operator :

ScottMushkinwithWolfeResearch.

Scott Mushkin (Analyst-WolfeResearch):

Hi,guys,thanksfortakingmyquestion.SoIjustwantedtogetbackintoatopicthatwasearlieronthecalltalkingaboutthehealthcareplansandupsellingyourguys'productsandservicesthroughthem.Iguesswhatarethemechanismsthatyoucanusetogetthehealthcareplansto--ortheincentivesyoucanusetogetthemtodoit?

Andthenalsoacorollary,doesthepressureonhealthcarecosts--wetalkedabouttheelection--doesthatactuallyhelpyou?Youobviouslyhaveverygoodcostsavingtools.Andthenthefinalpartofthatisshouldwethinkofanyupsellsasmoreimpacting2017orcanthatactuallyhelp2016?


Well,Scott,it'sLarry.LetmetakethelastquestionandthenI'llflipitovertoJonbacktothefirstquestion.I'mgoingtogobacktoaslidethatwehadatAnalystDaythatshowedthat--andImentionedthisinresponsetoanearlierconversation.

Thehealthplanbusinessthatcameonlinelastmonth,wehave22%shareacrossourdistributionchannels.Whenwelookattheoverallhealthplanenterpriseshare,it'srightaround28%forexistinghealthplanclients.So,again,thereisanawfullotofwhitespace,aswe'vebeentalkingabout,intermsofopportunitiestogrowthat,acknowledgingthatthatgrowthisovertime.

Wetalkalotaboutthefactthatwhenyoulookattheemployersegment,withthestrokeofonesignaturetheHeadofHRortheHeadofBenefitscanmakeadecisionthatseveralthousandemployeesaregovernedby.Andaswe'vebeentalkingthismorning,itworksalotdifferentlyacrossthehealthplanspace.Sowiththatcontext,I'llflipitovertoJon.


Yes,sowithourhealthplans,theyhavetheirowndownstreamclientsandtheirdownstreamclientsarenodifferentthanourclientsthatpharmacyisabiggerpartoftheirhealthcarespendthanitseverbeenandit'sthefastestgrowingpartoftheirhealthcarespend.Sothey'reveryinterestedandmotivatedtosellourproductsandservicesthatbettermanagethesecosts.

Whatwehavebeenabletodooverthelast12monthsto18monthsisactuallycreatefinancial




incentivesforthehealthplansalesteamtoactuallycreatecompensationforthemastheyselltheseprogramsin,sotheirclientswin,theywinandwewin.Sowethinkwe'vegotverygoodalignmentwithourhealthplansnowandtheyareverymotivated,basedonwhat'shappenedinthemarketplaceoverthelastseveralyears,togettheseplandesignsimplemented.


And,Scott,yourotherquestionjustdoestheelectionhaveanyimpactintermsofhowclientslookatthis?Idon'tthinkitdoes,okay?Ithinkwhetherit'sahealthplanclient,anemployerclient,everyoneisfocusedonlisten,howdoIprovidetherightlevelofserviceformymembersatthelowestpossiblecost?SoIthinkwhatwe'reseeingplayouteverynightonTVIthinkiskindofirrelevanttotheirgoalsandobjectives.


Andaquickfollow-uptothat,Larry.Doyouthinkthe--becauseyouguysdosavepeoplemoney.DoyouthinkaneconomythatmaybehasalittletroublecouldactuallyhelpyouupsellandwoulditcomethroughIguessitcomesthroughyourpharmacycompswherewe'dseesomeofthis;isthatcorrect?


Yes,Scott,Ithinkitdoesbecausewe'vegotproductsandservicesthatIknowasourHeadofSalestalksabout,IcouldrememberyearsagowhenIwasoutsellingthedreamofwhatwemightbeabletodoandtodayI'msellingtheresultsofwhattheseproductsdo.Sothey'vebeenprovento--whenwethinkaboutaccess,qualityandcost,wecansitdownandquantifythosebenefitsaroundeach.


Perfectthanksverymuch.Appreciatetheanswers.

Operator :

StevenValiquettewithUBS.

StevenValiquette (Analyst-UBS):

Thanks,goodmorning,LarryandDave.Sojustacouplequickonesforme.First,IthinkthenewAMP-basedFULreimbursementisfinallygoingintoeffectonApril1.Anyexpectedimpactonyourretailamp?IknowMedicaidisalittlebitsmallerpartofthemix,butalsomaybeforOmnicareinparticular,giventhatitmightbealittlebitlargerpartoftheirmix.Curioustogetyourthoughtsonthat.


Yes,Steve,it'sLarry.Whenyoulookat--keepinmindthisisnowprobably10yearsinthemakingthatasyoulookacrossthestatesabouthalfofthestateshavealreadyimplementedsometypeofacquisitioncost-basedreimbursementormanagedMedicaid.Sothey'reimmunetoamp,andIthinkit'sconsistentwithwhatwe'vebeentalkingaboutthattheobjectiveofamp,wehavebeenseeingforthelastseveralyearsintheformofreimbursementpressures.

Ithinkasyoulookattheremainingstates,theywillbe--it'sourunderstandingthatstateswillhave12monthswithwhichtoimplementsometypeofacquisitionreimbursement,acquisitioncostreimbursementmodelandalongwithcorrespondingchangesanddispensingfees.SoIthinkaswesitheretoday,webelievethattherolloutacrosstherestofthecountrywiththiswillbeimmaterialtoourresults.But,again,Ithinkthat'sgoingtoplayoutonastate-by-statebasis,acknowledgingthatstatesthathaveimplementedthathavemadeadjustmentsindispensingfees,somoretocomeonthat.





Theotherquickone,I'mnotsureifyouheardbutthere'salargehealthplanPBMcontractinthemarketplacethatmaybeyou'dliketodoamarketcheckwithoneofyourpeers.MyonlyquestiononthisiscuriousifyouhaveanygeneralthoughtsyouwanttoshareonthesituationfromtheCVSCaremarkperspectiveordoyoupreferjusttoleavethatalone?IthoughtI'dthrowitoutincaseyouwantedtocommentonthat.Thanks.


Youknowwhat,Steve?IguessI'danswerthatquestionbysayingnicetry.Okay?


Okay,fairenough;thanks.


We'llgoaheadandtaketwomorequestions.

Operator :

RobertJoneswithGoldmanSachs.

RobertJones (Analyst-GoldmanSachs):

Great;thanksforsqueezingmein.Justtogobacktotheretailgrossmarginquestion,ifIrecall,youguyswerecallingforamoderatedeclineinQ4anditsoundsliketheresultsthisquarterwere,ifI'mhearingyoucorrectly,inlinewithyourexpectations.Ithinkweweredownabout125basispointsyear-over-year.IthinkifIlookoutacross2016,thisobviouslyseemstobeametricthatobviouslycanbeprettyvolatileandmovetheneedleforfolks.

Theguidancefor2016isdownsignificantly.Nottogettoocutewiththewordshere,butshouldwetakethattomeanthatyou'reexpectingthecoreretailgrossprofitmargintobedownmorein2016thankindofwhatwesawin3Qand4Qof2015?

DaveDenton (CFO):

Well,thisisDave.Westandbyourguidance.Aswelookatthetrendsgoingthroughwherewearetoday,weseenothingthat'sanydifferent.Againthiscontinuestobeanevolvingmarketplacedrivenlargelybythemixofourbusiness.MedicareMedicaidcontinuestoaccelerateandgrowmorerapidlythansomeotherlinesofbusiness.

Secondly,asweindicatedbefore,withalargewininthehealthplanbusinessfromaPBMperspective,theadoptionofthoseprogramsthatmoveshareintoourchanneljusttakelonger,it'slongerforthosetomatureandforthatadoptiontooccur.Andsotheoffsetsaswethinkabout2016arejustnotavailabletous.


Okay,andthenIguessjusttofollowupactuallyonthelastquestion.I'mnotgoingtoaskyouspecificallytocommentontheverypublicnegotiationgoingonwithyourlargePVMcompetitor,butwhatIdothinkisimportantistherepercussionsitcouldhaveonthe2017sellingseason.

Soonthatspecifically,I'mcuriousifyouguyswouldhaveanycommentsorquestionsoranyearlyreadsonsomeofthefeedbackyou'regettingfromthemarketasfaraswhatclientsareaskingforasfaras




pricing,givenobviouslyIthinkthispublicnegotiationhasdrugalotofthingssofarintothelight.Itobviouslycoulddragalotmorethingsintothelightasweprogressthroughthesellingseason.


ThisisJon.Wemadeadecisionseveralyearsagothathealthplansweregoingtobeanimportantgrowthvehicleforus,particularlywhenyoulookedatthegrowthcomingfromMedicareandMedicaid.Soweworkhardtokeepourhealthplanscompetitiveinthemarketplace,sowearen'treallyseeingrepercussionsorhalotopricinginthemarketplacefromthatevent.IthinkitcontinuestobecompetitivebutrationalandIdon'texpecttheretobeanimpact.


Okay,thanksforthequestions.


Thanks,Bob.Finalquestion?

Operator :

Thankyou.OurfinalquestioncomingfromthelineofMohanNaiduwithOppenheimer.

MohanNaidu (Analyst-Oppenheimer):

Thankyouverymuchforsqueezingmein.Larry,maybecanyoutalkabouttheeffortsyouguysaretryingaroundtheMinuteClinics?Isthereanopportunitytoexpandbeyondthebasicservicesthatyouguysproviderightnowandanyleveragethatitcanusefromyourhealthsystemrelationshipsinthere?


Yes,Mohan,it'sagreatquestion.Andaswe'vestatedprevious,thispastsummerwecompletedtherolloutofourepicEHRacrossallofourclinicsandthatdoesacouplethingsforus.One,isitdoesprovideaninfrastructurethatallowsustoexpandourscopeof--andbroadenourscopeofpractices.

Andyou'rebeginningtoseethatnowaswe'regettingintothetreatmentofsomeadditionalconditions.Andthatdoescreateatighterinterfacewiththehealthsystemaffiliationswherewecantransmittheinformationaroundaparticularpatientinaseamlessfashion,sowe'rebeginningtogetsometractionintermsoftriagingpatientsacrossthedeliveryofcare.


That'sgreat.Maybejustaquickfollow-up.Youguysarestilltargetingabout1,500clinicsby2017?


Yes,we'vesaidthatwehadthattargetof1,500clinics.Ithinkwiththeacquisitions,wemaynothitthatnumberby2017.Obviously,we'regoingtobefocusingontheTargetintegration,whichincludesabout80clinicsthisyear,sowemaybeayearortwobehindthatoriginaltargetof2017,butwecontinuetobecomfortablewiththerollout.Asamatteroffact,aswesitheretoday,about50%oftheUSpopulationactuallyliveswithin10milesofaMinuteClinic.


That'sgreat.Thanksalotfortakingmyquestions,Larry.





Okay,thankyou.AndletmetakeaminutetothankeveryoneforyourcontinuedinterestinCVSHealth.Andasalways,ifanyonehasanyfollow-upquestions,youcancontactNancyChristal.Thanks,everyone.

Operator :

Ladiesandgentlemen,thatdoesconcludetheconferencecallfortoday.

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