CVS Health Corp (CVS) 2005 Q2 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Caremark Rx Second Quarter 2005 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

[Operator Instructions].

I would now like to turn the conference over to Mr. Mac Crawford, Chairman, President and CEO. Thank you, Mr. Crawford. You may begin.

Okay. Thank you, operator, and good morning everybody. And thank you for calling in. With me, today, are Howard McLure and Pete Clemens. As you know, Howard was recently named Chief Operating Officer, and Pete was promoted to Chief Financial Officer. Before we get started, let me go through the "forward-looking statement." Then, we'll get into the presentation, and then come back and answer your questions.

This conference call contains statements that constitute forward-looking statements within the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1944, as amended by the Private Securities Litigation Reform Act of 1995. Forward-looking statements discussed on this conference call include the intent, belief or current expectations of the Company and members of the senior management team, with respect to the anticipated growth rates of the Company's business, including revenue growth and earnings per share projections as well as the assumptions upon which our statements are based.

Respective investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainty, and actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements on this conference call include, but are not limited to the adverse developments with respect to the Company's operating plan and objectives as well as adverse developments in the healthcare and pharmaceutical industry generally.

Additional factors that could cause actual results to differ materially from those contemplated on this conference call can be found in the Company's annual report Form 10-K for the year ended December 31, 2004, and the Company's other periodic filings from time to time with the SEC. This conference call includes certain non-GAAP financial measures, as defined under SEC rules. As required by the SEC rules, we have provided, in the footnotes to the press release issued today, a reconciliation of those measures to those most directly comparable to GAAP measures.

Well, again, thank you for dialing in, and we appreciate you being on the New York call this morning. Well, we are now 16-plus months post the acquisition of Advance PCS. And for the most part, we have completed the integration of the two companies. This is the first quarter that we've got the full quarter-to-quarter comparisons, since the transaction closed on March 24th. So we've got a full quarter of last year to compare with post the transaction of the companies.

During the time since the acquisition, we've also brought on a record book of new business. We continue to see strong operating performance out of the Company, as evidenced by the earnings that we released this morning. I'm going to give you an overview of those results. Pete will give you more details. And then, Howard, Pete and I will take your questions.

This morning, we reported record diluting earnings per share of $0.47 for the second quarter, or a penny above First Call consensus. Net revenues were 8.2 billion, an increase of 13% over the same period in 2004. EBITDA for the quarter, excluding integration and other related expenses, was $395 million, or an increase of 40% over the second quarter of 2004 and operating cash flows of $304 million. Again, obviously, a very strong quarter.

To give you a little bit of color on the drivers of the results, let me just give you the following information. Mail revenues for the quarter were $2.8 billion, which is an increase of 34%. Included in the mail revenues are the PBM revenues, which increased 30%, and specialty revenues, which increased 46%.

Both of these numbers are very impressive, and especially growth is particularly strong. On the PBM mail business, obviously, FEP is helping to drive this growth, as the program has gone very well. We're also seeing a lot of usage out of these people being via electronic means, such as the Internet.

In specialty, we are continuing to see strong growth in this business, particularly in rheumatoid arthritis, MS, asthma and psoriasis therapies. And the FEP book of business also is performing well in the specialty, as is the Medicare Demonstration Program that we are a part of. And both of those programs have come on well for us, FEP and the Medicare Demonstration. But we're also seeing growth out of other parts of our business.

Retail revenues were up 4% in the quarter, while retail claims were actually declined 10%. Remember that we told you after the first quarter that as results of some of the retail-oriented clients that left after the transaction closed that we would see a decline in retail scripts during the remainder of the year. Some of the revenue from these retail scripts also is recorded on a net basis. As you can see from the results, these were primarily low-margin accounts that have migrated out of our home book of business.

Turning to margins. Our EBITDA margin was 4.8% compared to 3.9% in 2004. We continue to control expenses well, and that combined with the growth in the PBM and specialty mail and our continued generic penetration has resulted in a margin expansion.

Looking at the balance sheet. It remains very strong. We've continued to repurchase stock with excess cash. During the quarter, we've purchased 5 million shares at a gross cost of $208 million. Since the end of the quarter, we've purchased an additional 2 million shares for approximately $85 million. This leaves with us $366 million available under the $1.25-billion repurchase program. The impact on earnings per share from shock repurchases during the second quarter was approximately 1.5%.

Regarding new business, as I've mentioned above, we have lost some business after the transaction closed, primarily in the state employee arena as well as some health plan business. And again, this was primarily retail in nature. We've also had a couple of recent Fortune100 company wins, which has historically been our strong suite. We still have a good number of opportunities available for 2006, and we will give you further color on this next quarter.

We continue to get ready for the Medicare drug benefit. As we've previously stated, our primary focus in this area is to support our existing customers, which include health plans and employers. We do have some health plan customers that are aggressively pursuing this marketplace, and we will see incremental business come to us, as they are successful.

Before you ask me the question, incremental expenses during the last half of the year, or incremental expenditures rather, will be approximately $20 million with 7 million of this being expense and $13 million being capitalized. If enrollment is higher than we expect, then we could end up spending more. But the spend will not impact the income statement, as the most of that drive will be deferred as it relates to future revenue growth.

In summary, we've had a very strong quarter, and you did see raised guidance for the year. I feel our employees have done an outstanding job of putting these businesses together of obtaining the synergies that have translated into value for our shareholders and also for our customers. Our customers' drug trends remains among the lowest in the industry, which is what they're paying us to achieve.

So again, another strong quarter from our perspective. Our employees have done a great job, and we stayed very focused on what we have to do. And as I've said, we brought on a record new book of business during the mist of this integration. A lot going on including the Medicare drug benefit, but very pleased with the results that we've been able to put up. At this time, I'm going to turn it over to Pete. He will give you much more detail. And we will come back and then take your questions. Pete?

Thanks, Mac, and good morning everyone. I will go through our GAAP performance for the second quarter and the first-half 2005 as well as our performance on a pro forma basis for the first-half 2005, assuming that Advance PCS was included for all the first half of 2004.

As you know, Caremark closed the acquisition of Advance PCS on March 24th 2004. As a result, Caremark's GAAP results for the first half of 2005 include the operations of Advance PCS. However, as Mac said, the first half of the 2004 only includes the Advance PCS operations for March 24th through the end of the quarter -- through the end of the 6 months.

First, our GAAP results. In the second quarter of 2005, Caremark reported diluted earnings per share of $0.47, which includes integration and other related expenses of $5.9 million, or $3.6 million after taxes. The integration and other related expenses during the quarter primarily consisted of the final retention payments to legacy Advance PCS employees.

Excluding the integration and other related expenses, earnings per share for the second quarter were also $0.47, one penny above consensus First Call estimates. These estimates do not include the integration and other related expenses. This represents diluted earnings per share growth over the comparable period of last year of 57% for the quarter.

Revenues were $8.2 billion for the quarter, an increase of approximately 13% over the same period in the prior year. Higher generic expensing rates, which I will discuss specifically in a minute, dampened the revenue growth by roughly 5.5 percentage points during the quarter.

In other words, the revenue growth would have been over 18%, if the generic dispensing rates had remained constant with the second quarter of the prior year. As you know, the increases in the generic dispensing rates result in significant savings for our clients as well as higher earnings for Caremark.

For the quarter, Caremark's mail prescriptions processed were 14.5 million, an increase of 26% over the second quarter of 2004. As Mac said, the large increase in mail claims is primarily the result of the addition of the Federal Employee Health Benefit Plan mail business, which began in January.

The retail claims processed totaled 120 million, a decrease of approximately 10% from the second quarter of 2004. As we indicated to you on prior conference calls, this anticipated decrease is primarily the result of the termination of certain large clients that were predominately retail-oriented.

Caremark's mail penetration rate was 26% in the second quarter of 2005 compared to 20% in the same period of 2004. The Company's mail generic dispensing rate for the quarter was 39.7% compared to 37.0% last year, while the retail generic dispensing rate was 52.9% compared to 48.1% in comparable period of 2004.

During the second-quarter 2005, Caremark's gross profit grew by 25%, to $513 million. Additionally, Caremark's gross margin was 6.2% compared to 5.6% in the same period of 2004. The increase in gross margin can be primarily attributed to the strong mail order growth and the higher generic dispensing rates experienced during the period.

As Mac highlighted, EBITDA for the quarter excluding integration and other related expenses, was $395 million, an increase of 40% over the second quarter of last year. EBITDA per adjusted script was $2.42 for the quarter compared to $1.68 in the same period last year, representing an increase of 44%.

For the first half of 2005, Caremark reported diluted earnings per share of $0.90, which includes integration and other related expenses of $7.1 million, or $4.3 million after taxes. Excluding integration and other related expenses, earnings per share for the first half of 2005 were $0.91. This represents diluted earnings per share growth over the comparable period of last year of 49%.

Revenues were $16.6 billion for the first half of 2005, an increase of approximately $6.3 billion over the same period in the prior year. EBITDA for the 6 months, excluding integration and other related expenses, was $763 million, an increase of $307 million over the first half of 2004.

Now, I'll turn to the pro forma comparisons for the first 6 months -- for the 6 months ended June 30th 2005, assuming that the Advance PCS operations were included in the full first half of 2004. For the 6 months ended June 30th 2005, revenues increased approximately 11% from the comparable period in 2004. Mail prescriptions grew by 26%, to 28.8 million claims, while retail claims decreased by 8%, to 250.6 million for the period.

EBITDA for the first half of 2005, excluding integration and other related expenses, increased by 43% over the same period of 2004, on a pro forma basis. EBITDA per adjusted claim in the first half of 205 was $2.27, an increase of 44% over the pro forma first half of 2004. Diluted earnings per share, excluding integration and other related expenses, of $0.91 for the first half of 2005 increased by 60% compared to the pro forma diluted earnings per share of $0.57 in the same period of 2004.

Turning to the balance sheet. Our June 30th 2005 cash and short-term investments were $1.4 billion, and total debt outstanding was $450 million. Cash flow from operations during the second quarter was $304 million compared to $499 million in the second quarter of last year. As we have discussed on our prior calls, the cash flow in the second quarter is lower due to 3 primary reasons.

First, the termination of certainly predominantly retail accounts already mentioned. Second, the significant payments made to client for legacy Advance PCS manufacturer accounts receivable that was collected in prior years but was due to be paid this year. And finally, during the second quarter of 2004, cash flow from operations was positively impacted by a reduction in inventory levels at the Advance PCS mail pharmacies.

For the 6 months ended June 30th 2005, Caremark's cash flow from operations was $571 million compared to $702 million in the same period of 2004. Capital expenditures totaled $29 million for the quarter and $56 million year-to-date. During the second quarter, we used a significant amount of our free cash flow to repurchase stock.

During the quarter, we've purchased 5 million shares of our common stock for a total expenditure of approximately $208 million. Since the end of the second quarter, we have purchased an additional 2 million shares for approximately $85 million. As noted in our press release, we now have approximately $366 million remaining in our $1.25-billion repurchase authorization.

Now, I'll discuss guidance. As noted in our press release, we have increased our diluted earnings per share guidance for 2005 to the range of $1.95 to $1.97. This is up from previous guidance of $1.92 to $1.94. We expect our 2005 revenue growth will be approximately 28% to 30%, when compared to 2004 GAAP-based revenue. This guidance is based on a number of assumptions including the following.

Stock option expense is expected to total $11 million in 2005. Amortization expense related to certain identifiable and tangible assets is estimated to be approximately $47 million and depreciation expense is expected to total approximately $101 million in 2005. Net interest expense for 2005 is expected to be in the range of $3 million to $5 million. The Company's guidance is based on an effective accounting tax rate of 39.5%.

Our 2005 earnings guidance does not include integration and other related expenses associated with the acquisition of Advance PCS. As you are aware GAAP requires the costs associated with the integration and rationalization of legacy Caremark operations to be expensed while certain costs associated with the Legacy Advance PCS operations are able to be capitalized. While a vast majority of these items have already been expensed, we continue to expect certain additional items to be recorded in the last 2 quarters of 2005.

In terms of share counts, we expect weighted average shares outstanding assuming full dilution of approximately 455 million shares in the third quarter and roughly 457 shares for the year of 2005. These numbers take into account only share repurchase activity to date and will vary based on the market value of the stock and future option activity. As you will recall, our previous guidance had estimated shares outstanding to be approximately 460 million for 2005.

We expect capital expenditures for 2005 to total approximately $140 million to $150 million. From a cash flow perspective, I will remind you that the Company will fully utilize the net operating loss carry-forward for tax purposes in the second half of 2005 and we will begin paying taxes at a higher rate. In addition, cash flow from operations is expected to be lower in the third quarter sequentially, simply due to the timing of our collection and payable cycles. However, we continue to expect that our cash flow from operations for the full year 2005 will be in excess of $1 billion. As we announced in our press release today we expect third quarter 2005 diluted earnings per share, excluding integration and other related expenses to be $0.51.

In summary, the quarter was extremely strong financially, earnings growth again leads the industry and the cash flow remains strong. The Company has a lot of momentum as we enter the second half of the year. Thanks and I'll now turn it back over to Mac.

Okay. Thank you Pete. And now, Operator, let's go ahead and take questions.

[Operator Instructions].

Your first question comes from Lisa Gill with JP Morgan.

Thanks very much, and good morning. Mac, I was wondering if, perhaps, you could comment around your 2 closest competitors now have both bought specialty pharmacy companies in the last several months. And I'm just wonder as you look at your specialty pharmacy business and have exceptional growth, A, do you have any businesses coming from either Medical Express Scripts today.

And then just secondly, I was wondering what your thoughts would be around the competitive landscape as they now will have increased offering compared what they had in the past. And then secondly, if you could just comment on actual commitment you received from existing clients on the managed care side around the Medicare Drug Benefit. Thanks, very much.

Lisa, as far as the specialty side, the amount of business that comes from those 2 companies is just not significant or if you take (inaudible) in there as well. So no, it is not a significant amount of business that would have the material impact on us. As far as competition, yes, we will continue to see increased competition in this marketplace but it's not like new competitors have entered the marketplace it's consolidation of competitors and I think that people have probably seen the success that we had selling an integrated package and I'm sure that will be some of the strategic reasons that they did it.

But we just have to continue to mind our business. If you look at 46% growth rate in the quarter, then, I think it indicates that our business is doing pretty well. But it is -- this isn't a sprint, it is a marathon so you keep doing your business everyday and keep working everyday and keep going and doing the things that we have to do strategically also. So far it has worked. I didn't quite catch all of the question on the Medicare benefit and appliance.

Yes. I am just trying to understand on the managed care side the number. Do you have any kind of numbers as far as those clients who currently have committed to utilizing you for their Part D program? I know that publicly I think well care -- WellChoice has come out publicly and has said something, I just was wondering if you have a number around that?

Yes. Lisa, I don't have an exact number but it's, some of our significant health plans are the ones that are doing it. So -- I mean it's -- I don't -- from a number of accounts exactly, I don't even know what it is, Howard I don't know if you know or not.

I could check back you later, Lisa. I have seen a number but it is that you can imagine increasing everyday. As we go through the contracts for our account.

Yes. We are doing fine with it. But some of the big health plans, some that -- some of the plan to make up a major presence in this marketplace. So -- and we hope they are successful with it.

Great. And just lastly, any thoughts around potential -- as your cash flows continue and they are obviously very strong, you are expecting over $1 billion for the year, any additional thoughts on utilization of that cash?

Same as it has always been. We will continue to look very aggressively at strategic transitions that we think will benefit our customers and our shareholders. I have said we will not do that until we are comfortable. But we have got the company integrated fairly well and I think we are in that position. Bill Spalding who we brought on, just made the announcement. They have the M&A activity who is partner with King & Spalding, we have been associated with them a long time, done a lot of transaction that is fully focus.

Also, we have seen that we have been very active in the share repurchase side, and we will continue to do that. If we feel the stock is not at levels that are at levels that are good value for our shareholders to buy the stock back in and then we continue to look at whether it a dividend makes sense or not. But, we are in the fortune position of having strong cash flow and we will be utilizing it.

Great. I appreciate the comments.

Your next question comes from David McDonald (ph) with SunTrust.

Good morning, guys. Hi, Mac, just a couple of questions on new businesses. I was wondering if you could give us a sense of revenues, what we still get sitting out there on the table and then you mentioned a couple of recent Fortune 100 wins. Just some color around do you think the added bulk of ADPC (ph) is helping you with some of these bigger customers? Or you know just anything you could give us on that front? Thanks.

As far as '05, business starts in '05 are pretty much over, we haven't finished '06 for the pipeline. So the numbers are same. And this is not an annual affect for '06 but is the total opportunity for '06 is sitting around $7 billion, which is pretty consistent with what has been. We'll see some falloffs; we'll see some add-ons.

I think, clearly, the acquisition of Advance PCS -- I don't know that it has necessarily given us with a particular customer type, but I think just the breadth and depth of all the offerings and the various things that we bring to the table today, including the Accordant, including the TheraCom businesses, including clinical programs that we've been able to combine -- I think, it made our product offering stronger.

You know, we've gone through the typical integration that you go through and the turning inward and getting everything put together, but we're beginning obviously and some folks who will love this comment.

Okay. And, Pete, just one quick question. I missed the generic numbers. So I was wondering if you could give those to me again.

Okay. The mail generic dispensing rate to-date was 39.7%. That compares to 37.0%. And let me find the retail one. I can come back to that. I've just got to find it again.

Okay. Thank a lot, guys.

Your next question comes from Robert Willoughby with Banc of America Securities.

Good morning, guys. This is Matt Jackson sitting in for Bob.

Hi, Matt.

Yes. Given the success of some of the captive PBMs recently, what are your thoughts on further PBM consolidation and maybe that becoming a greater theme in 2006?

Well, I mean, there are some good smaller PBMs. When you say, "captive," you are talking about?

I think, within the managed care companies.

Okay. Well, we've not seen them in our marketplace a great deal. So I don't -- we really haven't seen them in a lot of accounts that we've been involved with, which is no different that where we've been before. So if you are talking about consolidation of smaller players, I think, you will continue to see consolidation of smaller PBMs potentially into some of the larger players.

Okay. Thanks, guys.

Sure.

Your next question comes from Larry Marsh with Lehman Brothers.

Thanks. Good morning. First of all, congrats to Howard and Pete on expanded rolls within the Company. Let me see. Just a couple of things. Top line -- you are confirming or I guess you're taking up your top line, Mac, about equivalent about $0.5 billion, if you take the midpoint. Are you confirming that that's due to some additional Fortune100 customers or just tone of business a little bit better than you thought?

No. It's just where our revenues are growing, because those customers won't come on until next year.

Okay. Let's see. Second quick thing. You're naming, I guess, your subsidiary that's going to be participating in Part D. Is that just basic disclosure? Should we read anything more into that? And over what period of time is the 13 million capitalized going to be amortized that you talked about?

On the first, don't read anything into the -- talking about the name. I mean, we have to have a name.

Okay.

Do you know what the use for life is?

The 13 million is mainly IP (ph) components and use for life in general for IP components is 45 years.

Okay. Great. And then let's see -- generic penetration -- I think, Pete, what you said is that's 550 basis points off the top line, a little bit higher than last quarter, which I guess is good news for your margin. I think, Mac, last quarter you said that could continue to creep up into '06, is that still the case? And I guess a question on your ability to buy generics in the marketplace, do you feel like the environment has gotten better for you, worse or is that the same here in the last 3 to 6 months?

As far as ability to buy, Larry, we continue to have good success from that standpoint. So, I think we've actually -- probably getting better over the last 3 to 6 months from a buying prospective and that part of that, obviously, is the size that we bring to the marketplace today. As far as the generic penetration continuing into '06, when you look at generics that are scheduled to come to marketplace next year and the next and the next, yes, the penetration rates should continue to climb.

Very good. Thanks.

Larry, this is Pete. Let me add -- let me answer Dave -- accounts question on the retail side. Again, it was 52.9% generic dispensing rate at retail in the second quarter of 2005 compared to 48.1% in the same period of '04.

Okay. Thanks a lot.

Thanks.

Your next question comes from Ricky Goldwasser with UBS.

Yes, good morning. My first question, virtually, in the generic dispensing rates. We've seen for the last 3 quarters an expansion of about 20 basis points in the generic dispensing rates at mail and -- versus retail, which I think last quarter it's been about 90 basis points on a sequential basis. As we look ahead to the second half of '05 and into '06, should we expect mail to lag retail and kind of continue that modest 20 basis points expansion until second half of '06 when we get kind of this flow of new product introductions? And then, my second question is around the selling season. I understand that you're still in the midst of the '06 selling season. But can you give us some color as to the business doing so far, are they more heavily weighted toward mail-oriented clients or towards retail?

As far as the difference between mail and retail on the generic dispensing side, given if everything else being equal, given that we've got more maintenance medications that are going generic over the next several years, then you would look and expect that mail to close the gap from that standpoint. However, we are also seeing opportunities on the retail sides, and we're seeing the retailers themselves work hard on the generic dispensing arena to do a better job at that. So, it's a little hard to say does it close the gap, does it change, where does it go, simply because you have a lot of different factors that move around with it.

But no doubt that with what the maintenance mix it will come to marketplace then we should continue to see that side of business grow, but we also hope to see the retail side grow as we work closer with the retailers to drive generics, and it's good for them, it's good for us, it's good for our clients. So, it's really hard to differentiate between those. On the selling season, yes, I would say the wins, since they are Fortune 100 accounts, will tend to be more like the traditional Caremark accounts that we've seen in the past rather than retail-oriented businesses that some of which have rolled out. So we should have a higher penetration may (inaudible) some of those customers.

And then a follow-up question on the generic side. There has been a lot of debate on the generic and specialty pharma side as far as what pricing would look like next year on the generic manufacturers. For Caremark -- for PBM, when - even if we are going to see intense price competition on the specialty side, would you say that you would continue to benefit both on gross margins level and at the dollar margin level? So the lower the pricing on the generic side goes, the better the margins would look for you?

Well, generally, that's the way it works for us if we can buy it cheaper than, everyone benefits. And it does help our margins.

Is there kind of a level kind of that pricing could come to at that point, you're not going to benefit on the dollar margin or you don't see that happening?

We are having a little trouble hearing your question, but if your question is, do we see a point where it's just a margin increase but not a dollar benefit, we don't see that at this point. We still feel we have an absolute -- a better absolute dollar margin for prescription generics than we do with brand products.

Thank you.

Your next question comes from Michael Maguire with Susquehanna.

Thanks. Good morning. Just a couple of quick questions. With regards to the top line growth across the company and in particular, the specialty business, given that's well ahead of market growth rate, I mean except for the FEP mail contract. Could you just give us some color as to where some of that incremental growth is being driven relative to the market?

Well, we've had good impact on other clients from a mail standpoint, and increasing the mail penetration that we've had there. On the specialty side, I mentioned that with the Medicare demonstration project, that we are involved in, I think we saw almost $80 million of business come out of that in the last quarter. So we had good growth there. FEP Specialty is separate from the PBM mail piece and we've seen good pickup in that book of business as well. So those are some areas that's coming out of.

Okay. And thanks. A quick follow up on the contract renewal side. Given the exposure you have with some of the legacy AdvancedPCS clients last year, would you characterize this year as on average may be a little bit less in terms of contract renewal exposure going into '06?

And then just a quick follow-up to that as well, are you seeing anything in terms of disease management in increased demand from employer clients as you bid on some of these PBM services, is Accordant becoming a competitive differentiation when you look at some of these new contracts?

Yes. In '06, yes, we will see a different level of exposure -- a lower level of exposure on renewals than that we've seen across the transaction in '04 as well as, as '05. From Accordant standpoint, yes and that's obviously in the specialty space primarily but we have signed some nice contracts recently for the quarter and we are seeing as a differentiator in the marketplace in our opinion.

Great. Thank you.

Your next question comes from Glen Santangelo with CSFB.

Yes Mac, I just want to follow up few second on the specialty question. The 46% growth, obviously pretty impressive, we are trying to get a better understanding, if I heard your last answer correctly, it sounds like its incremental market share gains, and if that's true could you give us a sense from where this market share is coming from so we can access the ability of the Company to continue to take this type of market share?

Well, don't look at 46% growth every quarter because the reality is that as you get bigger it gets harder to do that. But, you know that the Medicare program is a new program, the demonstration project that we are part of and so that's a new program. And this one there is started out of the first of this year and has grown every quarter. FEP is a new account so we had that new business coming in, but we have just got a lot of irons in the fire and a lot of opportunities out there that we continue to pursue on the specialty side and we have been successful at -- selling it. And then what our model is and this is it according there is, we think a differential in that model date compared to what everyone else has and we have been successful in doing it.

Hey, Mac does is that 46% growth includes some loss business from Aetna, and if so --?

...No, we didn't allow that.

No we had (inaudible) for sometime.

Yes, we hadn't done that in a long time (ph).

Okay. And just my last question is, there is still a handful of standalone specialty pharmacy companies out there, both public and private, do you think this is an area that makes sense from an acquisition standpoint for Caremark?

We look at everything. Glen, and it is really, you know, I can't say that we have got one on the horizon right now that I say that makes sense, but it's not an area that I'll shut the door on.

Okay. Thanks for the comments.

Your next question comes from Tom Gallucci with Merrill Lynch

Good morning. Two quick questions, First, I was just wondering, if there is any update on any of the legal situations that we have heard about over time. And then the second is just kind of a broader question for Mac. This is a business is clearly evolved over a number of years, just wondering when you sit back and think about where is the business 3 to 5 years from now, is it more PBM consolidation as you mention before or is it, -- new legs for growth out there that you could see? If you could maybe just think about that a little bit, that would be helpful. Thank you.

Okay. As far as on the legal front, I don't think there is anything that's changed significantly, since last quarter that's all that we disclosed in the last Q and we will be filing the Q shortly. But I think pretty much status growth from that standpoint at this time. I would rather not sit here and speculate where I think things are going to be 3 to 5 years because it will give up some of our strategic views about what we want to do and what we want to do with the company because obviously what our views are will make an impact on where we move the Company or what we do. So, I think I will dodge that one.

Fair enough. Thank you.

Your next question comes from Andrew Speller with AG Edwards.

Thanks, good morning. Can you guys tell me, is there any meaningful midyear starts that you guys won this year or is the rate we saw in the second quarter. About what -- what we have got for the balance of the year in terms of volume?

No, it's -- well, we had -- we have some accounts that will actually terminate...

...Right.

...July 1. But those will follow through for the rest of the quarter. But no significant midyear starts.

Okay. So, no big gains, just losses that we know that are out there.

Correct.

And then Pete, can you just remind us on the impact of not having NOL for cash flow from operations for '06 is going to be?

Well, I mean, it depends on ...

...You are going to get into us projecting income for '06, but they -- we can't do that. But it is going to be taxpayer.

And just depends on your -- how you have your income forecasted out.

Okay. And then, Mac, several year ago, you thought in -- you know, the '06 timeframe, you thought you were going to see more carve-out coming from managed care, employer clients. Is that coming to fruition as you are looking at your '06 RFPs that are out there? Are the employers carving out more to the PBMs or is it just kind of status quo?

Well, I'll say they continue to do so. And I have not looked at the pipelines from that perspective, and I really don't even know because I haven't looked at it from that standpoint.

Okay. Thanks.

Thanks.

Your next question comes from Kemp Dolliver with SG Cowen & Company.

Thanks, and good morning. Any further clarity with regard to the timing of the managed transition? I think when you had discussed this earlier, it wasn't clear if they will go September 1st or October 1st?

It's actually -- split the 2 it is the middle of September.

Okay. Secondly, with regards to the growth in specialty, what success are you having in converting that, some of that spend out in retail channel? That has always been a big opportunity for you. Are you making any more headway in gaining share versus retail in that regard?

Yes, we think we are.

Any numbers?

Dollars. Kemp, I don't.

Okay.

Can you follow back up with Peter Howard, he may have more information than I do.

Okay that's great. And the last question relates to the Fortune 100 wins, you said you didn't have a census to -- the role of the carve-outs in the pipeline but were these wins from other -- were they from your health plans carve-out or were they from your independent peers?

They were both from independent peers.

Great. Thank you.

Your next question comes from Matt Perry from Wachovia Securities.

Hi. A couple of questions on Advance PCS one year after the transaction. As you look back, you know, with these synergies in line or ahead of your original expectations? And secondly, as you look at the mail order penetration in those legacy Advance PCS clients, can you talk at least directionally about, how you have been able to improve that mail order penetration and whether or not there is quite a bit ways to go there?

As far as synergies, we've achieved the synergies that we said we would achieve and are in line with -- achieving what we said we would take care of in that standpoint. Mail penetration has increased. I don't know if you have any exact numbers based on the Advance PCS book. We still have a lot of way to go there, but the programs that they had put in place, the ones that we've added to it, I think have clearly made a difference in that book of business.

All right. And I might have a piece of paper here on that.

If we have another question, we will come back to it.

Can I actually just ask one more?

Sure.

You know as you talk about excluding further integration expenses from your from your second half EPS estimate, if we looked at it on a GAAP basis, do you think those expenses would be material to EPS?

I don't think so. If you look at this quarter, we earned $0.47, excluding, we earned $0.47 if it was in there.

Right.

And the last significant payment was made last quarter.

Yes. The biggest thing we had left was the retention payment, bonus payment, in the Advance PCS side and that payment has been taken care of.

Okay.

Yes, if you can get back to us Matt, we got that number and we will be glad to give it to you.

All right. I'll follow up offline.

Okay.

There are no further questions at this time. Gentlemen, do you have any closing remarks?

Yes. Everyone again, hank you for dialing in. Again another good quarter, we'll be around today if you need us so give us a call. And thank you very much. And operator, thank you.

This concludes today's Caremark Rx Second Quarter 2005 Earnings Conference Call. You may now disconnect.