CVS Health Corp (CVS) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Caremark Rx first-quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Mac Crawford, Chairman, President and CEO.

Please go ahead, sir.

Thank you, operator and welcome everyone.

Good morning and thank you for joining us today for Caremark's Q1 2006 earnings conference call.

Joining us today is Pete Clemens, our Chief Financial Officer and Howard McClure, our Chief Operating Officer.

We'll go through a brief presentation and then take your questions, but first let me read the forward-looking statement.

During this conference call we anticipate making projections and forward-looking statements including earnings per per share projects, revenue growth forecast, the anticipated impact of Medicare part D and other assumptions about our future including assumptions related to our 2006 guidance.

Current and perspective investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actually results may differ materially due to the various factors.

For example, adverse developments respect to the Company's operating plan and objectives competitive development, the success of Medicare part D, the timing and launch of new branded and generic pharmaceuticals, regulatory and legal matters, and government investigations and governmental action regarding pricing and reimbursement.

Additional factors that could affect our business can be found in forms 10-K, 10-Q and other SEC filings.

We are pleased to report results for the the first quarter.

Revenues increased 7% to a record $l8.9 billion for the quarter and diluted EPS was $0.51 up a solid 19% from last year.

These results exceed consensus estimates by $0.01 per share.

Cash flows continue to be strong as cash flow from operations totaled $364 million for the quarter.

We have also continued to repurchase shares on the share repurchase program and we currently have 121 million remaining on the $1.75 billion authorized by the Board of Directors.

To date we have a acquired 42.6 million for total expenditure of $1.36 billion and Pete will give you impact on the Q1 results when he gets through with his comments.

We're going reevaluate the share repurchase at our next regularly scheduled Board meeting which will take place next week and consider whether or not to increase the share repurchase authorization.

Regarding the remainder of the year we've increased our previously-issued guidance for the year.

In February we gave you a range of $2.25 to $2.30 for 2006.

We have now increased the guidance to a range of $2.29 to $2.35 per share.

Today we have also given guidance to the second-quarter of 2006 and we expect earnings to be in the range of $0.54 to $0.55 per share for the quarter.

We have not previously given guidance for this quarter.

Let me turn a minute to strategic issues and Pete will give you details on financials in a moment.

The Company is well-positioned and continues to focus on providing returns over the long-term.

We have a very strong balance sheet with a net cash position of approximately $1.5 billion, the environmental trends favor our industry and we continue to develop and provide high quality services that provide quality to our customers.

In addition to the stock repurchase program that I previously discussed, we have recently announced we'l begin paying a quarterly dividend of cash of $0.10 per share.

The first payment will be in July.

We're continuing to pursue strategic acquisitions that are fairly priced.

We have looked at a lot of deals, but I remind you that we remain a disciplined buyer.

One of the 10 largest PBM's in the Medicare Part D program.

But participation includes enrollment of dual eligible participants in 27 of the 34 regions, assisting our clients that have elected to take the subsidy and providing administrative and other support for our healthplan clients in their PDP and MAPD programs.

The program is beginning to run smoother at this point.

We're beginning to get some of the eligibility issues sorted out and we continue to expect that we'll be significant player in this market on a good forward basis.

Regarding new business for the year, we're in the midst of the selling season and we'll give you updates on this in future calls.

Let me address the ruling that came out in the last few days on generic Zocor for a second.

The recent ruling regarding exclusivity certainly has clouded the issue of when we'll be able to get the most aggressive pricing on this product.

As I understand the matter the court remanded the matter back to the FDA and they are evaluating their next steps.

We know that there will at least be one one generic and one authorized generic in the marketplace regardless of what is decided by the FDA.

We also know know the discounts will be less than if there were multiple generics if the situation stays as it currently is.

In any event the range of guidance that we've given you today covers the situation as it now stands.

Let me point out this is why we consistently tell you when we have discussions with you that the timing of generic launches is difficult to pinpoint.

There is a lack of precision in forecasting the exact impact of these generics because of these timing issues and this is a very perfect example of it.

At this point, let me turn the call over to Pete and let the him go through the financials then we'll come back and go through the Q&A.

Pete?

Thanks Mac and good morning everyone.

Let's begin with the income statement.

Caremark's financial performance for the first quarter was very strong.

Net revenue reached a record high, $8.9 billion in the first-quarter, up 7%.

The top line performance was driven by solid growth in both retail and mail revenues.

I will discuss more details about our revenue line following a brief review of the rest of the income statement.

Gross margin for the quarter was 6%.

As expected, gross margin was down sequentially from the fourth-quarter, but improved on a year-over-year basis.

During the first-quarter of 2006, SG&A expense of $130 million increased by 13% primarily due to the recognition of FAS 123r shared-based compensation expense, as well as expensed related to the Part D program.

FAS123r expense totaled just over $10 million in the quarter, compared to about $3.5 million of stock option expense recorded in the first-quarter of 2005, under the previous accounting rules.

Assuming FAS 123r share-based compensation expense had been recorded in the first-quarter of 2005 it would have been $8.6 million.

Combined depreciation and amortization expenses were approximately flat compared to the first-quarter of 2005.

For the quarter net interest income increased to nearly $11 million, reflecting our healthy balance sheet, as well as higher interest rates in today's environment.

The effective tax rate remained at 39.5%.

Remember that beginning with the first-quarter of 2006, Caremark is a cash payer of federal income taxes because we have substantially utilized our federal net operating loss carry forward.

Net income for the quarter was $229 million, up 16%.

With 450 million weighted average shares outstanding, diluted EPS were $0.51 up 19% and $0.01 above our guidance range.

Remember, we are now recognizing FAS 123r option expense beginning with the first quarter.

Had we recognized this experience from prior periods our EPS would have been $0.42 per share in the first quarter of 2005 compared to the $0.43 per share reported in our tables.

So EPS growth would have been 21% had the FAS 123r expense been reflected in both periods.

As I mentioned earlier, total revenues grew by 7% to $8.9 billion, but as in the past, higher generic dispensing rates dampened our topline growth.

Our overall GDR for the quarter was 53.2%.

If generic dispensing rates were the same in both periods, our topline would have been grown by almost 11%.

Our overall mail penetration rate for the quarter was 27.5% up 3 percentage points from the first quarter of last year.

Keep in mind that our PDP Silver Script which began accepting dual eligibles in January had a mail penetration rate relatively low compared to the remainder of our book of business.

Mail revenues for the quarter were $3.1 billion, up 11%.

Our mail generic dispensing rate climbed to 40.4% from 39.5% a year ago.

Within our total mail revenues PBM revenue grew 13% and speciality mail revenues increased by 7% compared to the first quarter of 2005.

Keep in mind that we were not a preferred distributor for Synergist in the first-quarter of 2006.

Excluding Synergist, our direct mail revenues grew by 18% from the first quarter of last year.

Retail revenues were $5.7 billion, up 4% from the first quarter of last year.

Our retail generic dispensing rate was 55.7% compared to 52% in the first quarter of 2005.

In the first quarter of 2006 mail claims increased by 5% over the first quarter of 2005.

Retail claims decreased by 10% compared to the first quarter of 2005, but increased sequentially as compared to the fourth quarter of 2005 with new business starts and Medicare Part D volumes.

Regarding the decrease in retail claims compared to an increase in retail revenues, this is primarily due to the loss of Humana account in October of 2005.

This account had high claims levels, some 10 million plus per quarter, with low revenues, $6 million per quarter because we only did claims processing for Humana.

Therefore we had a large reduction in claims with only a very small reduction of revenues on a quarter-over-quarter basis.

EBITDA grew 10% to $404 million compared with the quarter ending March 31, 2005.

Also, EBITDA per adjusted claim which leads the industry increased to $2.50 in 2006.

This compares to $2.13 last year, a 17% increase.

The business continues to generate healthy cash flow from operations.

Cash flow from operations with a $364 million, compared to $267 million last year.

Our cash flow in the first quarter was supplemented by the early receipt of payments on the last day of the quarter from customers totaling more than $120 million.

As of March 31, our cash and short-term investments totaled nearly $2 billion.

Total debt outstanding is $450 million of senior notes that mature in the fourth quarter of this year.

As we have indicated in the past, our intent is to refinance these notes upon maturity.

During the first quarter we spent $29 million on capital expenditures and approximately $400 million repurchasing 8 million shares of our common stock.

Since the end of the first quarter we have purchased additional 5 million shares at a cost of approximately $240 million leaving approximately $120 million available under our current share repurchase authorization of $1.75 billion.

Due to the weighing of shares that were re purchased during the first-quarter, the impact of buyback on the first quarter 2006 EPS was only 1/5th of $0.01.

Moving on to our outlook for the year.

We continue to be very optimistic about the remainder of 2006.

As you all know there are a number of trends that should provide strong growth for the PBM industry.

Part D generics and specialty continue to be focus areas for the Company We also continue to focus on growing our revenues, gaining operational efficiencies and managing costs.

We are taking steps to invest our cash further to increase shareholder returns.

This includes continuing to evaluate potential strategic acquisitions, as well as other ways to deploy cash.

As Mac said we initiated a quarterly dividend on April 5th.

Shareholders of record on June 30th will be paid a dividend of $0.10 per common share on July 17.

This quarterly dividend translates into about $180 million in dividends on an annual basis.

As I have already indicated we have deployed significant amounts of our cash through share repurchases.

Since the beginning of year we have repurchased 13 million shares of our stock.

Turning now to 2006 full-year guidance.

We announced this morning that we're raising our full-year guidance, EPS guidance, to a range of $2.29 to $2.35 including FAS123r stock option expense.

The higher range translates into higher EPS growth rate of 16% to 19%.

If we had recognized stock option expense in 2005, our year-on-year earnings growth guidance would have been 19% to 22%.

This guidance assumes no further share repurchases for the remainder of the year.

There are several key assumptions underlying our full-year earnings expectations.

We project 2006 revenue to grow in the range of 5% to 10%.

Stock option expense under FAS 123r is expected to be $40 million to $45 million before taxes.

Depreciation expense is expected to be $105 million to $110 million.

Amortization expense is estimated to be $43 million to $44 million, net interest income is estimated to be $45 million to $55 million, but is subject to change on interest rates, share buybacks and magnitude of cash flows.

The effective tax rate is expected to be 39.5%, and weighted average shares outstanding for 2006 should be in the range of 444 million to 447 million on a diluted basis.

We still expect capital expenditures to be range of $150 million, but could be higher or lower depending on the timing of certain projects.

As you know compared to prior years cash flow from operations will be negatively impacted by the payment of cash taxes in 2006.

As I indicated on our last call while modeling cash flow from operations on a quarterly basis, our tax payments will be heaviest during the second quarter, so cash flow from operations will be less in the second quarter than we reported in the first quarter.

Second quarter cash flow from operations will also be less than in the first quarter because of the payments received early from the customers, which I highlighted previously.

With that said, our cash flow from operations for the year will be very strong.

We continue to expect cash flow from operations to exceed $1 billion again this year.

For the second quarter we expect diluted EPS to be in the range of $0.54 to $0.55.

With that I will turn it back over to Mac.

Okay.

Thank you, Pete.

This time before we turn it over to Q&A, I want to address an issue that has been asked quite often of our investor relations people and Pete since the United article came out in the Wall Street Journal.

And the question is: Has any of my stock options been back-dated and the answer to that is no.

I have not received back-dated options.

Our option grants coincide with regularly scheduled Board dates.

Please keep in mind that these regularly scheduled meetings are set well in advance and the options are priced fair market value on the date of the grant.

The option grants therefore are approved by the Board, and granted on the date approved and that is just the way that has run in the past.

Also, there has been some questions regarding my recent stock sales and let me go ahead and address those.

First, a portion of these sales related to a trust I established previously for my children.

Second, my wife was diagnosed with cancer two years ago and as a result of her illness, she can't work in the future and I realize that if something happened to me, the vast majority of my estate would be tied up in stock options.

Therefore I exercised my options and sold stocks to diversify my holdings and provide security for my family.

We have generated a lot of shareholder value in this company in my tenure as CEO, and I think we have performed well and I don't think it's unreasonable that my family shouldn't have some of that security, just as you shareholders have the option to sell when you would like to as well.

I would also point out that the sales under both of these were done pursuant to 10B5A programs that I had put in place.

So if there are any questions on that as we get into the Q&A, I'll be happy to deal with it.

But we have gotten a lot of questions from shareholders after that article came out and I wanted to go ahead and address those for you.

At this point, Dennis, the operator, will turn it back over for Q&A.

[ OPERATOR INSTRUCTIONS] Your first question is from the line of Lisa Gill from J.P. Morgan.

Good morning and thanks very much, Mac, for those comments.

I was wondering if you could discuss what is going on with the business on the Medicare side and last quarter you were apprehensive about how things would work out and it seems your body language is telling us things are much better, you are and talk about some of the opportunities on the mail and generic side on those numbers.

And secondly, if you could walk us through a little bit on Zocor?

My understanding is that even when there is only one or two players in the marketplace it's still more profitable than a branded product and I wanted to better understand that and lastly on specialty, the growth rate looks like it's slightly lower than what we would have expected, even excluding Synergist.

Is there anything else that is playing in that number in the quarter?

I hope you remember all those things you asked me, because I'm not sure I do what was the first one?.

The first one was around Medicare.

The Medicare program, obviously the first several weeks of that was very, very challenging.

We have now seen our enrollment stabilize and we have seen eligibility issues from CMS beginning to clear up.

We have end up being one of the ten largest players in that business, so I think it's going to be a good program, and you know, we're putting a lost resources it and staffing up to accommodate what we need to do both on the business and marketing side as well as from the operational side, so I think right now it is mainly providing drugs to seniors that didn't have access to drugs at more efficient pricing than the past, and that is working and if it works well, it will work well for us as as far as as the mail opportunities this is a population that is retail-oriented and that is what we're seeing in the claims that are coming through the system right now.

It's a longer term mail opportunity and it's not something that you change overnight.

You have got to get the population stabilized.

You have got to know who your members are going to be, and I do see that as a year 2 and 3 opportunity as we go forward.

When you have people that you can reach out and show the benefits of mail, they get used to how the program goes.

Clearly, a lot of opportunity, given what drugs they take, but realizing that you are dealing with a unique population that will take some time to convert.

They are also cost conscious and so overtime there is an opportunity?

Is that correct?

It's just a matter of being able to reach them and do the conversion over time.

I don't think it's something you do right out of the gate.

Then on Zocor and I know you don't like to talk about specific drugs, but maybe talk about in one when is authorized and then one other generic manufacturer in the market, place, those providing a rebate still provide better cost to the member, wore o will the generic still be better for the member, as well as from a profitability standpoint?

When you have a situation here with a generic and an authorized generic you are going to end up with certain client's strengths.

You are going to end up with better pricing than you have seen on the straight branded product.

So comparative basis, yes, it's still cheaper, but it's not where you are going to get to when you have multi-source manufacturers silting there with the product on the generic side.

So even with the authorized generic, you are going end up with a good discount, but not nearly what you would get on a go forward basis.

And lastly on speciality, any additional comment around growth in the next quarter?

We had 17%, 18% growth without taking into account the Synergist, which we think we're going back into that network starting in fall.

Keep in mind that last year we had 35%+ growth in the speciality business, but that was driven a lot by FTP which was started up Jan. 1, which was a very big book of business that we brought in.

We're still seeing growth there, but compared on a year-over-year basis you don't get the significant increase for it.

We also had the demonstration project last year, the Medicare demonstration the project, that brought in significant new revenue to it.

So I think it's performing pretty much as we expected it to.

We have got some launches that start later in the year and we have a lot of programs that we're working on that will ramp it up, but I think just coming off comparison is what you are looking at.

Great.

Thanks for all the comments and congratulations on a great quarter.

Your next question from David MacDonald with Sun Trust.

A couple of quick questions and first, on rebating.

With all the generics coming and some of your competitors moving around drugs in terms of preferred drug list, have you seen any response out of the pharmaceutical manufacturers with any change to the rebating policy, maybe an opportunity to do a little better on the rebate and then I have a couple of follow-ups.

We really don't talk about that from a strategic standpoint, because everyone is doing a few things that little differently had in that regard.

Our philosophy is really to provide low-net domestic to that member and to that plan and that includes a branded strategy, and it includes a generic strategy and certainly the rebates and discounts fall through both of those, is what we'll drive it, so competition never hurts anything though.

Okay

That is what drives the world.

Mac on the Medicare population and you get a look at these folks and product theorize talking, et cetera and I don't know how much you can comment for competitive reasons, but any kind of no-brainer or cross-selling opportunity in additional products that these products taking, obviously in addition to oral meds you guys can provide and cross

this selling to that book of business?

Certainly that is one of key strategic initiatives we have underway.

We're not looking for big things to have a huge impact in year, but over a longer term, I think that is an opportunity for you.

Okay Pete, one final question, did you say the forward guidance assume share repurchases past today?

That is right.

Thank you.

Your nest question comes from the line of Robert Willoughby with Banc of America Securities.

Thanks, it's John Wood.

Mac or Pete, there has been some legal noise between Caremark and SEC lately, should we expect any update in the 10Q on that front?

And who?

Did you say FDA or SEC?

SEC.

Well, if there was anything material that we would be required to report, we would have already done so.

Okay and I think, if we're not mistaken with changes to the FloFlonaseLan network in there will that have any material impact on your speciality business this year?

No, it won't.

Next question is from the line of Thomas Galucci with Merrill Lynch.

Tom?

I'm sorry, can you hear me now?

Yes.

Sorry about that and good morning everybody.

A couple of quick follow-ups and first on Medicare and you have 400,000 and are you offering any kind of breakdowns duals versus any walk-in members?

No, we have not giver that any breakdown on that at this point.

And then, you still kind of got a 5% range on revenues and how is Medicare flowing through the income statement in terms of revenue recognition, and is that one of issues around the wide revenue guidance range?

No, I mean we're in the early part of the year is the reason for the wide revenue range here, Tom.

On the Medicare Part D and we have premium revenues and then we have revenues that just flow through our MAPD plan.

So they are recognized just like we would any other revenue.

Pretty good handle on that is what going to be for the year.

So all of that goes through, guess to your comment, Pete, utilization seems to be similar to what you guys have projected?

Yes and we do have the SEC guidelines account for the silver script program and we actually have to recognize revenues, not on an expected MRL, but yeah, I think that we still think we're right only top of it, and we'll analyze that as we go on.

Okay and we're getting to the middle of the year and maybe a little early, but I'm sure there are some conversations.

What are you hearing from your employer-customers in terms of their retiree population and thinking about '07 and what they will do with those lines?

I don't think we're hearing a great deal other than we're running analysis and looking at things, but it's not a great deal of noise about it.

Okay.

Thanks a lot.

Your next question is from the line of Ricky Goldwasser with UBS

Good morning, I have a follow-up question and one on Part D, just to clarify, could you provide us any numbers on then 400,000 you are servicing what the incremental line?

And as to the 180-day exclusivity type product, when you report these products, do you treat it as generics or should we just see an increase in your dispensing rate in the thirst and fourth-quarter, or do you treat it as branded, at least for the first period of exclusivity?

I did not understand the first question.

The first question on Part D is just if you are going to give us update on the lines you have not serviced before and net new lives that you are servicing?

Ricky, are you asking how many lives we do until total with our PDP plus our Medicare advantage plans?

New lives that Caremark did not service last year?

Approximately 400,000 that we talked about -- when you look at it from components and they are incremental pieces that that, but it has (inaudible?

The 400,000 is basically all incremental with the exception that we had two customers that put some lives into the PDP, but they were small.

Okay and then on the 100,000 --

Is it of [inaudible] On the second part, I think your question was on the authorized generics and how we report them during the 180-day exclusivity?

They would be treated a generic

Okay, thank you.

Your next question from the line of Larry Marsh with Lehman Brothers.

Thanks and good morning.

Mac, I know you stated that a couple of times what your acquisition criteria is in the past, but I was wondering if you could remind us again what you define as those criteria, and you mentioned pricing and discipline, could you talk about how you define the acquisition environment from a pricing standpoint today?

Sure, the first transaction to even get through the door has to be something strategic in nature and will add to the products and services that we handle for our customers.

Then when you get into that, it's an aversion to doing dilutive transactions, they need to be tractions that will provide us growth for the shareholders.

From a pricing standpoint, what we see today is a very expensive environment where you have a lot of financial buyers in the marketplace with a lot of money and we're seeing prices paid, whether you want do it on an earnings per share basis or multiple EBITDA, that in our opinion are very high and very expensive.

So I think you have got to be careful not to get caught up in the beauty and enamored of the deal, but stick to the financial side, because transactions can be hugely "Strategic," but if you can't buy it at the right price, it's not going to deliver value to your shareholders.

Okay, I know in the past you said you would look for products and services that would be complementary to what you are already providing to your customers, is that still very much the days?

Yes, it is.

Second question, just to make sure that I heard it correctly, Mac, you are basically communicating your guidance covers the generic situation as it now stands.

I'm assuming that you wouldn't need to change guidance would there be a change to a multisource manufacturer of Zocor, is that the case?

What kind of change do you mean, when I say as it stands now, I'm assuming that we end up with 180-day exclusivity period, if that is the question you are asking.

That is what we're assuming right now.if that happens, then the numbers, the range that we have given, we still should be within.

Okay.

Just so that I understand correctly, some have suggested that the low-end the range would suggest exclusivity and the high-end would not.

I have never heard you say that specifically and I have certainly say what you mentioned which was a lot of caution around building something into your guidance.

Is that the case that there is no such specific targeting around the low and high-end relative to exclusivity?

Well, I mean, if if we have no exclusivity, then logic tells you are going to make more money, so maybe you are higher than if you don't have exclusivity, you are going to make less, so maybe you are lower.

I will let you guys figure that out.

I'll just say because there is also a lot of other moving parts that go on.

When I talked about forward-looking statements and the reason we read is that is the reality is that it's note just this one thing going on in the quarter and we could have other positive things that happen and we have been other negative things that could happen, but that is our best guess on the range from everything that we know today where the earnings will fall for the year.

One question, Pete your dispensing rate as slightly down from the fourth-quarter, is that just a function of product mix, and I would assume that fix picking up a good bit through '06?

It's primarily a mix issue, bringing on new business with lower GDR's and we expect it to take up during the year.

With Flonase coming out we have seen a pick up.

Keep in mind a big account was the state of New York and lower generic dispensing rate.

Low-dispensing rate?

Yes

Thank you.

Your next question from the line of Michael Baker with Raymond James.

Yes, I was wondering if you could give us a sense for what percentage of claims are attributed to the Medicare eligibles?

Just to give a sense of how meaningful they are?

We don't give out those number on a client by client basis.

Not even the segment as a whole?

It's not a segment; we don't do segment reporting.

Okay, how about can you give us a sense for what Medicare cost you in the quarter?

You mean operating expenses or incremental spend?

I mean in terms of the net impact to the bottom line?

No, once again you are trying to do segment report and that is not what we do.

It's part of our mail business.

It's part of our retail business.

Okay, thank you.

Your next question from the Kemp Dolliver with SG Cowen & Co.

Thanks.

Good morning.

One point of clarification for my understanding and you mentioned Zocor in your comments, but isn't' Pravachol a more significant product for you in that category, given it's position on the formulary?

Pravachol is a little bit more market share [inaudible] They are roughly comparable.

Okay.

That is helpful. secondly, with regard to your part D lives, any sense what percentage of the lives in your PDP are nursing home residents?

I don't know, Kemp off the top of my head, I think it's pretty small.

And could you give us the mail mix in the PDP?

In the PDP it's less than 2%.

That is the PDP and what you throw in Medicare advantage plans, it's about 8% overall is the lives come through the health plans are included.

That is great.

Thank you.

Your next question comes from the line of Matt Perry with Wachovia Securities.

Hi, a couple of follow-ups , could you maybe provide a little more color on what drove the upside in the first quarter?

I mean can you cite any particular part your business or volume, pricing, just a little more color would be helpful?

We had a fairly strong retail quarter.

Some of that was new business coming on and some was increased utilization.

Its was really kind of in a lot of different areas, but that is one, least in my mind pops up, and probably had stronger revenues there than we forecasted earlier in the year.

Okay, and then secondly, following-up on a prior question on M & A, and you talked about product and services that I think are complementary to your customer basis, I mean, is there any way you can refine that?

Should I think of that, what we think of tradition PBM or speciality-type businesses, or are there opportunities because of mail distribution to distribute other types of non-traditional products?

Yeah, we have said in the past that given our strength in distribution, that it's logical that we would sell things other than are driven by a prescription that someone has to write.

So there are a lot of different complementary health care needs that people have that we think there is an opportunity to capitalize on.

Okay.

That was exactly what I was looking for.

Thanks.

Your next question comes from the line of John Kreger with William Blair.

Thanks, a couple of questions on generics.

Following up on Kemp's question on Part D population and could you give us a sense of the generic dispensing rate for this population, compared to the Company overall?

Yeah, it's just a little bit higher than our book of business on the retail side.

The mail side is so small, it really doesn't make a difference.

[inaudible] and then the other question more broadly, can you comment on the pricing environment for generics as you move through '06 compared to last year?

Is it getting more competitive and therefore better for you or stable or perhaps less so?

Well, I mean I think just the fact that if you looked at size and scales that we have today that we're seeing an ability to, we think, get very good prices in the marketplace on the generic side.

You know, as I said, the competition drives discounts and so the more competition you have in these products, the better discounts you are going to get.

You are only going to get discounts if you have the right volumes to justify and drive them.

That is the one of things that the acquisition with Advance PCS has given us and that is the ability to go in with significant enough volumes that it's good for the generic manufacturer and it's good for us as well.

Great, thanks.

Your next question comes from the line of Charles Dunleavy [ph] with Citigroup.

Good morning and on the Medicare PDP, could you tell us approximately what the retention rate has been, and whether you are seeing pick up in enrollment as we approach the deadline for that?

It's hard to, in my mind, quantify retention rates that point, because the eligibility issues were bounced around so much the first couple of months of the year.

You didn't know, you know you get a tape that said this person is enrolled and you get transaction files or tape that says they are not enrolled.

So that is a little bit of a moving target.

I will say overall the amount of the attrition we have had has not been that significant.

I think most people that we have had we picked up, but just given the confusion over eligibility, I think it's been a little difficult to track.

And any pick up going into the deadline?

Going into the deadline, I don't think we have seen a great deal.

We have seen a little bit, but nothing with people rushing to the telephones.

So some modest pick up, but not a substantial amount.

All right.

On branded drug, some of the manufacturers in their first-quarter calls talked about some very high price increases and it sounded like a bit of an acceleration and heard some number in the 6% range here.

Are you seeing that magnitude of price increases being put through by the branded-manufacturers?

Yes, we are.

And how does that impact your results in the quarter?

you know, that higher increase?

I don't have any idea on a specific dollar amount.

That would have some impact, but I couldn't quantify it for you.

Is it immaterial basically?

I don't think it would be significant.

And on the biotech side, a lot of biotech company were talking about a slowdown and it sound like there is a slowdown and I didn't get enough of the specifics, but you and your speciality business see any signs of what would have led the manufacturers to be reporting slowing revenues?

Maybe people like ourselves that do the guideline management programs and try to make sure that only the right patients get the right products.

I mean that is part of what we do.

But no, I don't know what they are referring or talking about specifically.

It may be and I don't know whether it's distinguished between oncological product and other products, but that may be where you are seeing some of the people talk about slowdown .

One of the common themes sounded like could have been inventory related?

Have you seen any changes in inventory levels for the specialty-type products?

No.

Okay.

Thanks a lot.

Your next question from Glen Santangelo from Credit Suisse.

Two quick questions and could you give us around the mail trends you are seeing?

You indicated some growth, with maybe federal employee bringing on State of New York and if could you talk about some of the contracts that have come in and out and give us a sense of what the underlying organic growth has been would be helpful?

And my second question is around specialty pharmacy as well.

You experienced 18% growth in the quarter ex Synergist.

Is that growth still coming from the growth of incremental products to your offering, or is it continued penetration within your customer base?

Any type of additional information would be helpful.

Okay.

As far as the mail growth,,I don't think we have seen anything unusual popping out of that from any other year we have seen.

I don't really see anything there that is really different.

Customer mix always adds a big difference, but when you look at individual customers, we don't see any trends that jump out and say anything is different than in the past.

On the speciality side of the business, I will let Howard take that.

We have seen growth and new products come online and we have seen good growth in some of our existing products.

M&S for example, and [inaudible] group well into double-digits.

This our [inaudible] we're seeing good growth, but also seeing growth in oncology areas.

Mac, just a quick follow-up to your mail-order and if I baked out the state of New York would you be fair to say -- how should I think about that?

I would have to go calculate for it, I don't know right off the top of my head.

You can call us back later.

Okay thank you.

Your next question comes from the line of Glenn Garmont with First Albany.

Thanks just two questions and Mac, are you seeing anything different in the landscape in terms of how competitors are acting or pricing and what potential clients are asking you for in the RFP process?

And I was wondering, we didn't get the generic dispensing rates first time around.

If you could give those to us again, that would be helpful.

Thanks.

Sure, Glenn, I think from what we have seen this selling season, I don't see any big changes either out of what the customers are asking for or the competitive environment.

It's always going to be competitive, but I think the requests that we're get from thing customers are pretty consistent with what we got last year.

And Pete --

The generic dispensing rates, Glenn, were 53.2% and mail was 40.4% and retail for the first quarter was 55.7%.

That is great.

Thanks.

Your next question is from the line of Bob Willoughby with Banc of America.

Hi Mac.

Robert Willoughby filling in for John Wood here.

How has the acquisition pipeline changed changed over the past six months and has it been correlated with your changes in capital deployment to step up in the share repurchase and in the dividend payment?

I don't think it's changed a lot, Bob.

As I said, the biggest difficulty we see is that I think things are incredibly expensive and we are just not going to pay numbers which when we compare what we can do from a accretion standpoint and return to the shareholders on share buyback or doing a dividend, it's clear that to date we find buying back shares and instituting a dividend in our opinion gives the shareholders higher returns than what we have been able to see in the acquisition marketplace.

Okay.

Great.

Thank you.

Your next question is from the line of Andrew Weinberger with Galleon.

Yeah, hi, just a quick wanted to understand your guidance here and Pete with regard to interest income.

It seems you brought the share estimate down 9 million shares, but still assuming a similar type of interest income.

Could you walk me through those assumptions?

And for Mac, could you help me understand what clients are looking for in this selling season, versus last selling season?

Is there more of a focus for customers around how they are going to save money or is this around how much money they are going to save?

Sort of the transparency selling issues that seemed to come up last season.

Sure.

This is Pete.

On the interest income it's just a function of cash flow and what rates are doing and this our current view.

It just by chance didn't change from our last forecast, although certainly rates have gone up, which helps us out a little bit.

We're not going to be overly aggressive on our interest rate assumptions when we go out.

I think that explains interest income in the same range.

And share count is just a reflection of -- we make a number of different assumptions when we put together the forecast, including where our share price will be for the Treasury method of outstanding shares, how many options we think will be exercised over a period of time.

And those all go into the model and that is how we come up with our range.

And keep in mind also as Pete said, the current projection assumes no share buybacks.

If we do additional share buybacks that is going to change the interest income number but it will change the share number.

You have to pick a point in time to make the estimate, when you make it.

You look that amount of cash we have on the balance sheet from last time or at the end of the last year, 12/31.

You look at where it is today and it's fairly comparable.

You have to put a stake in the ground somewhere at some point in time.

You have to say this is what it is based on and this is really what it's driven by.

As far as what the clients are looking forks clients are look to continue to save money.

It's a combination of what I'm going to save versus how I'm going save it, because the two work hand in hand with each other.

As I said a minute ago, I don't think we have seen things change a great deal as far as last year as far as what they are looking for.

They continue to look for transparency and I guess, we have probably seen somewhat of a shift in a lot of discussions to what value does it bring to the table and how you bring to it?

And so I don't think there is a great overall change.

And today's final question from the line of Andy Speller with A.G. Edwards.

Thanks and I got one question, please.

Mac, could you give me a sense in terms of how you guys are able to negotiate discounts over let's say a 12-month period, where you have the 180-day exclusivity period, versus one where you do not?

And what I'm look for here is that in that time period, do you see a big drop when initially when you don't have that 180 days, and then it doesn't get any better from that point forward?

I know I'm kind of generalizing here, but just trying to get a sense of where we are on that.

Well, typically, if you don't have the 180-day exclusivity period, you are going to very quickly move to a discount that is pretty much where you are going to be at.

So you don't see much movement after that initial period then?

Well, I hate to answer it this way, but it depends.

It depends upon maybe you have got four or five manufacturers that come out initially and maybe you end up with only a couple two years from now or a year from now.

So it can go the other way.

So it really depends upon, again, how much competition you have in the marketplace.

How much share you can bring to that manufacturer, you know, what kind of product runs you can give them in the manufacturing facilities.

It all comes down to you have to have a very good group of people working on this side every day of the week and going out there and negotiating with these manufacturing, staying close to them and knowing what they need and what we have to have, and leveraging off of other people in the industry.

I mean, it is really, and our group has done an outstanding job in the branded generics space of taking this increased volume that we have got as a result of the transaction that we did and it has generated a lost value for our client and for you.

When you have the 180-day exclusivity period and you are negotiating with that limited number of suppliers, do you typically look to commit to them for more than the six-month period or do you just look at them for the six-month period and after that, just let everything fall where it is?

it depends.

Depends on drug.

Depends on the manufacturer.

Depends size of it and that is the level of detail that our people delve into, and again, you have got to know the manufacturer, and have to know the product and where you can push and where you can't.

Okay, thank you.

Appreciate the color.

Before we close one question that we had earlier regarding Pravachol and Zocor share.

I have got those numbers.

Let me just get them to you.

Our Pravachol share was 14% of book and Zocor is about 17%, so you can see they are fairly close with Zocor being a little bit more.

Before we close down, folks, thanks very much for joining us and thanks to our employees on the phone and those that are not, they have done a great job for us.

We'll be around if you have further questions and operator I assume we don't have anymore?

That is correct.

Thank you .

This completes the Caremark RX first quarter 2006 earnings conference call.

You may now disconnect.