CVS Health Corp (CVS) 2006 Q2 法說會逐字稿

Good morning.

My name is [Tanya], and I will be your conference operator.

At the tim,e I would like to welcome everyone to the CareMark Rx second quarter, 2006 earnings conference call. [OPERATOR INSTRUCTIONS].

Thank you.

I would now like to turn the call over to Mr. Mac Crawford, Chairman, CEO, and President of Caremark.

Sir, you may begin.

Thank you, Tanya.

Good morning, everyone.

Thank you for joining the conference call this morning.

On the call with me today are Howard McLure, the Chief Operating Officer, and Pete Clemens, our Chief Financial Officer.

This morning, we'll briefly review our results and progress during the quarter.

Howard will give you an update on the status of operations.

Pete will then review our financial results with you in detail.

Finally, as always, we'll take your questions.

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

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

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

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

This conference call includes certain non-GAAP financial measures.

A complete reconciliation to the most directly comparable GAAP measures can be found in the tables attached to the earnings release dated August 8th, 2006.

You can access the press release, a live and archived webcast of this conference call from the Investor Relations section of www.caremarkrx.com until August 22nd.

Now let's turn over and talk about a little bit about our results.

We're pleased to report very solid Q2 results today.

Revenues increased 15% to $9.4 billion in the quarter.

Earnings per share was $0.58 per share on a reported basis.

Adjusting for a gain on the resolution of a dispute with the former AdvancePCS client of $10.6 million which represents approximately $0.01 per share after tax, diluted earnings per share was $0.57.

Without this item, we exceeded the upper end of our previous guidance by $0.02 per share.

We repurchased a significant amount of stock which contributed just under $0.005 to the better than expected performance versus our Q2 guidance which we provided to you on May 2nd.

I am pleased that our results this quarter were better than expected, but I'd also like to point out that earnings growth was very solid as well.

Excluding the gain on settlement, EPS is up 21% for the quarter.

If we had expensed FAS 123 share based compensation expense in 2005, our adjusted EPS growth for the quarter would have been 24%.

Excluding the $10.6 million gain on the settlement, EBITDA per adjusted claim was up 12% to $2.72 in the quarter.

We have raised our earnings per share guidance range for 2006 primarily based on solid underlying business trends, and accretion that we expect in the share repurchases made during the second quarter.

We now expect diluted earnings per share to be in the range of $2.37 to $2.39 per share, excluding the $0.01 gain on the settlement that we had this quarter with this former client.

This guidance range implies expected earnings per share growth in the range of 20 to 21%, recognizing FAS 123R share-based compensation expense in 2006 only.

Looking ahead, we see the following.

First, we have a very strong net cash position of just under $1 billion, which we intend to invest to generate additional long-term returns for our shareholders.

We remain a disciplined buyer looking for opportunities that represent both strategic and financial sense.

However, this is a priority of ours.

As you know, we have also returned cash to shareholders.

In July we paid our first quarterly dividend of $0.10 per share and we have repurchased a significant number of shares with approximately $650 million now remaining on our $3 billion authorization.

Second, environmental trends over the long term are favorable for our industry.

The aging of America will drive even higher drug utilization, especially maintenance meds which lend themselves well to mail distribution.

Biotech medicines are becoming more and more part of the mainstream treatment, making management, especially cost, an area of growing interest for employers and the other payors that we represent.

Medicare Part D is expanding access and is elevating the importance of this to the consumer and as well as focusing us much more directly on the consumer than we had been in the past, and major generic launches in the future represent a significant opportunity to save money for our clients and benefit our shareholders.

Third, to capitalize on these trends not only are we pursuing targeted strategic acquisitions but we continue to leverage our integrated PBM specialty and disease management services to both win and maintain our business.

Now regarding the selling season, we're still in the midst of it.

We've had some good wins and renewals in PBM.

We'll give you more details later in the year on this.

We expect to continue to be an active participant in the Medicare Part D program for 2007 and we have had some nice specialty wins as well this year.

Some of this comes from within the PBM.

That is, where we are serving PBM client and begin to pick up the specialty as well, but we've also had some nice wins outside of the PBM.

Also pleased that we have earned the status of certified PBM partner to the HR policy association in CHIPS, or Transparency in Pharmaceutical Solutions Coalition.

This opens up additional market places to us and is a certification that we are pleased to have.

The quarter was good.

We performed well.

You've seen the numbers.

At this point in time I'm going to turn the call over to Howard.

He'll give you a status update on the operations of the Company.

He'll turn it over to Pete, then we'll come back and take your questions.

Thank you Mac and good morning.

One of the major developments this year has been the launch of generic Zocor.

It's important to point out there have been additional generic launches so far this year including Flonase, Pravachol, and Zoloft.

Each of these major launches is a maintenance medication, meaning it lends itself well to mail service.

Obviously, when we can shift utilization of branded products to generics, and dispense those generics at mail is a win-win for Caremark clients and shareholders.

The opportunity to save money for clients is large because those four major products that I mentioned and combined annual U.S. sales of nearly $9 billion, Zocor being the largest at nearly $4.6 billion.

To give you an idea of how efficient our mail pharmacies are, after one week we have reached 94% generic substitution rate for Zocor.

This rapid switch is in line with our experience with other major generic launches is very beneficial to our client.

From a pricing standpoint, some of the major generic launches this year were accompanied by a 180-day exclusive tea period.

We do not achieve optimal pricing when a product is single-sourced.

With the advent of [Arthrod] generics to create a more competitive pricing environment which allows us to better leverage our buying power.

At this stage, because of the exclusivity period on several of these recent launches, we expect to see competition increase as more suppliers are likely to offer product.

There are also a number of major branded product that are maintenance medications but which we expect to have generic alternatives over the course of the next 18 months or so.

Of course, anything can happen in the generic space.

Many of these products have substantial U.S. annual sales, so the savings opportunities for our clients should continue to build into next year.

Turning to Medicare Part D, as you know, we became one of the nation's leading PDPs with current enrollment in silver scrip of approximately 425,000.

The significant majority of these beneficiaries are duel-eligible.

Additionally we are providing services to 34 of our managed care customers to assist them in their Medicare offerings.

From our perspective the program is running smoothly at the current time, and our customer service metric, such as average speed of answer, are good.

We continue to make progress in growing our specialty business.

Let me remind you that we have 28 years of experience in specialty.

It has been fully integrated into our business since 1997.

We have added a number of new product to our specialty product portfolios, including most recently Vivitrol for alcohol dependence and Elaprase for Hunter Syndrome.

Now that we are back in the network percentages we will be distributing the product during the upcoming RSV season in addition to offering our very effective prescribing guideline.

We have also added fertility product to our offerings, and oral oncology continues to expand.

I'll now turn over to Pete for a detailed review of our Q2 results.

Thanks, Howard, and good morning, everyone.

I am pleased to report solid results for the second quarter and higher earnings per share guidance for 2006.

This morning I will focus my comments on the second quarter financial performance.

Please reference the press release and tables that are attached to the press release for six-month operating results.

Net revenue was $9.4 billion in the first quarter, up 15%.

Growth in revenue was driven by increases in mail and retail sales, including the addition of Medicare Part D and other new client revenues.

Also during the quarter, we began providing additional Medicare Part D services to an already existing large health plan client under a revised contract, which also contributed to revenue growth.

The second quarter revenues included a $10.6 million gain resulting from the settlement of a contractual dispute with a former AdvancePCS client.

Our tables illustrate what EBITDA, EBITDA per claim, net income and earnings per share would have been without this gain.

Within our top line, retail revenues were $6.2 billion, up 17% from the second quarter of last year.

Retail revenues increased significantly primarily due to new business adds in the first half of the year, including the Medicare Part D program.

Retail claims declined 3% compared to the same period last year, primarily due to the termination of large retail oriented contracts.

I will remind you that during October of last year, our contract with Humana was terminated.

This contract was significant in terms of the number of retail claims we process but was not significant in terms of net revenue or profitability.

Mail revenues for the quarter were $3.2 billion, up 11%.

Within our total mail revenues, PBM mail revenue grew 10%, with mail claims growth of 5%.

Specialty mail revenues increased by 16% compared to the second quarter of 2005.

During the second quarter, SG&A expense increased by 18% to $139 million.

SG&A expense included $10.7 million of FAS 123R share-based compensation expense compared to $2.9 million recorded in the second quarter of 2005 under the previous accounting rules.

Excluding the impact of the share-based compensation expense, SG&A expenses were up 11% during the second quarter of 2006.

Combined depreciation and amortization expense were approximately flat compared to the second quarter of 2005.

For the quarter, net interest income was $8.7 million, reflecting our healthy balance sheet and cash position as well as higher interest rates.

Net income for the quarter was $255 million, with 437 million weighted shares outstanding, diluted earnings per share were $0.58, up 23%, and $0.03 over the upper end of our previously communicated guidance range.

Net income for the quarter excluding the favorable settlement with a former client was $249 million.

Diluted earnings per share were $0.57 on this basis, up 21% from last year.

Share repurchases executed since we provided guidance on May 2nd during our last earnings conference call contributed less than $0.005 of earnings per share this quarter.

Now I'd like to share a few key metrics that reflect the strength of our business.

As I mentioned earlier, total revenues grew by 15% to $9.4 billion.

However, as in the past, higher generic dispensing rates dampened our top-line growth.

Overall GDR for the quarter was 53.4% compared to 50.7% in the second quarter of last year.

If generic dispensing rates were the same in both periods, our top line would have grown by nearly 19%.

The generic dispensing rate at Mail climbed to 41.3% from 39.7% a year ago.

Our retail generic dispensing rate was 55.7% compared to 52.9% in the second quarter of 2005.

Our overall mail penetration rate for the second quarter was 27.9%, up from 26.3% in the same period last year.

Mail penetration grew despite the fact that Silver Script, our Medicare PDP, has a relatively low penetration rate compared to the rest of the book of our business.

EBITDA grew 15% to $449 million in the second quarter.

Excluding the favorable settlement with a former client, EBITDA grew 11% to $438 million.

EBITDA per adjusted claim on this basis was an industry leading $2.72 in the second quarter.

This compares to $2.42 since last year, a 12% increase.

Turning now to the cash flow statement, business continues to generate healthy cash flow from operations.

On our last earnings conference call, I mentioned that our second quarter cash flow from operations would be relatively light due to the schedule for making tax payments.

After making these scheduled tax payments, cash flow from operations during the quarter was $259 million compared to $304 million last year.

The second quarter cash flow benefited from the early receipt of a payment on the last business day of June from a large customer totaling over $100 million.

Because we do not anticipate receiving the October payment from this customer early, the third quarter cash flow from operations will be lower as a result.

While we still anticipate cash flow from operations to be in excess of $1 billion for 2006, the majority of the company's cash flow from operations for the second half of the year is expected to be generated during the fourth quarter.

During the second quarter, capital expenditures were $22 million.

We were very active in the second quarter with our stock repurchases.

We repurchased 19.9 million shares of our common stock for a total cost of $939 million.

This is the largest quarterly stock repurchase that we have made since we initiated the program in the third quarter of 2002.

Since the end of the second quarter, we have purchased an additional 350,000 shares at an approximate cost of $18 million.

We now have approximately $650 million remaining on the current $3 billion authorization.

Cash flow from operations in the six months was $623 million, compared to $571 million during the same period of last year.

We spent nearly $51 million on capital expenditures and $1.34 billion on share buybacks during the first half of the year.

On April 5th we announced that our board of directors declared our first quarterly cash dividend of $0.10 per share to stockholders of record on June 30th.

As expected, we paid the dividend, totaling $42 million on July 17th.

Despite the investments -- the significant investments in our common stock during the first half of the year, our cash and short-term investments as of June 30th, 2006, totaled nearly $1.3 billion.

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

Moving on to guidance for the year, we announced this morning that we are raising and narrowing our full-year 2006 earnings per share guidance to a range of $2.38 to $2.40.

To be clear, this guidance includes the impact of the favorable settlement during the second quarter as well as recognition of share based compensation expense.

Excluding the settlement with the former client, our earnings per share guidance for the year is $2.37 to $2.39.

This is the third time this year that we have made upward revisions to our full-year guidance.

We have raised our guidance this quarter to reflect confidence in the underlying business as well as significant share repurchases during the second quarter.

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

As the press release indicates, there are several key assumptions underlying our full-year guidance.

We project 2006 revenue to grow in the range of 12 to 14%.

This increase from our previous guidance revenue growth reflects the impact of the contractual change with a large health plan client already mentioned.

Stock option expense under FAS 123R is expected to be $40 to $42 million before taxes.

Depreciation expense is expected to be approximately $105 million.

Amortization expense is estimated to be $44 million.

We now estimate net interest income to be approximately $35 million but is subject to change based on interest rate, the level of future share buybacks, and the timing and magnitude of operational cash flows.

The expectation for net interest income is lower than our previous guidance due to the significant investment we have made repurchasing our stock since our last earnings conference call.

The expected tax rate is expected to be 39.5% and weighted average shares outstanding should be in the range of 435 to 437 million on a diluted bays.

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

As I have mentioned, 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 third quarter, we expect diluted earnings per share to be in the range of $0.62 to $0.63.

With that I will turn back to Mac.

Thank you, Howard.

Thank you, Pete.

And again, very good quarter for the company.

We're very pleased with the operations and where we are and look forward to the rest of the year.

At this time, Operator, if we could open it up for questions and answers, please.

[OPERATOR INSTRUCTIONS].

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Larry Marsh of Lehman Brothers.

Thanks and good morning.

Very good results.

I guess one clarification and one question.

You're taking up your revenue guidance for the year looks like somewhere between 1.5 billion to $2.5 billion.

Are you breaking out how much of that is coming from this amended relationship with this health plan customer, and could you elaborate a little about what's changed about it?

Yeah, Larry.

When your revenue recognition, there's a number of criteria that we look, and they're all outlined in our filings, but this particular customer, the change in the contract, we're providing additional services, and it probably drives out, I think in the second quarter about $325 million in revenue based on the contract change.

Okay.

So we should take that on a quarterly basis to assume what contribution will be for all of '06?

Right that.

Would be close to that particular contract.

Okay.

I got it.

So is the message, then, even beyond that, that you would anticipate some upward trend in your revenues, or is that the vast majority of the upward tick in revenue guidance?

That's a big piece of it.

We've also got some clients that roll off that previously had been announced.

Right.

Okay.

I guess the second major question, and, Mac, I have a feeling I know what your answer is going to be, given what you've talked about in the generic marketplace, but obviously some good news on product introduction, even some confirmation today of an additional product in Plavix.

Are you thinking about that specifically in terms of how you think -- thinking about '06, or, is that all encompassed in kind of how you think about the year, and could you remind us about your view of what you're assuming in terms of generic pricing and product in '06?

As we've said before we pretty much take a basket approach when we look at all these generics.

You have to assume some in, some out, various changes.

I assume, if you're talking about the Plavix situation, and obviously I think even while we've been on the conference call there have been some announcements that have come out on that -- announced that they have launched at-risk.

I will point out that is a situation we will monitor very carefully, and as I'm sure all of you know, BMS has come out as well and said they will vigorously defend their rights, and I think they cannot fill a preliminary injunction request until five days after Apitex launches.

So we expect this is going to be one that will be in the courts.

How that plays out, what impact that has on product flow, pricing, et cetera, is something that's going to be dealt with from a legal at the present time and through the courts.

The long way to say is we're watching it, we're monitoring the situation, and what impact that exactly has on us is very difficult to tell for the rest of the year.

All right.

So obviously not building into any end of the year assumptions.

Your next question comes from Lisa Gill of JP Morgan.

Thanks and good morning.

Mac, I was wondering if maybe you could just give us a little more color on the selling season, I'm wondering if maybe you could just talk about size this year compared to previous years from a competitive standpoint, how it looks.

Then lastly, I think that you had a fairly sizable account.

I can't remember which size you had.

You had either AT&T or SBC, and they came together.

There was supposed to be a decision made on that contract.

Aim wondering if there's any kind of update there.

Secondly, Howard, I was wondering if you could talk about specialty wins outside of your PBM book of business and just talk about where you're winning that business from.

Is that from some of the other PBMs or some of the other smaller players in the market?

As for as the selling season we'll give you more color as the year goes along.

We're still in the midst of that.

But currently, you know, we've had some good wins, and we've obviously had some good pickups through the Medicare Part D program and through just our normal PBM type business.

As it relates to the AT&T account, we had the SBC side of that.

They did come together and we were awarded the combined business for AT&T.

So that is new business that will be coming on the first part of next year.

Howard?

Lisa, as far as the specialty wins awards we're starting to see is being able to pick up some large managed care accounts, large managed care plan, some in the north east that are coming in either to one of two arrangements or one of three arrangements that give us the ability to go in and harvest some clients out of -- participants out of existing market.

That's where we're seeing some wins.

I think that a lot of those didn't really have management, if you will, of that disease state, and that's where we're seeing, as I referenced in my remarks, that as the -- we're seeing these higher priced drugs become more and more visible, and make a bigger and bigger impact on these payors that we are seeing turn to companies that can manage the whole spectrum of disease, rather than just a strict product.

Then when we think about that on the PBM side, do they use an outside PBM vendor or are these managed care plans for the most part that have their own PBM function and and just outsourcing the specialty side?

Depends on how they do it.

You know, people do it a lot of different ways.

So you've got some that have their own PBM internally, some that haven't had this going through a PBM that's sitting on the medical side of the house and really not even subjected to the kind of management that a company such as ourselves can bring to it, it's just been managed through the major medical component.

Then, Mac, just to go back to my original question on the selling season I just want to get more of an idea of what people are looking for for 2007.

I mean, is it more of the same, of a combined program of disease management and specialty pharmacy is transparency as important, not as important?

Just trying to get an idea of what clients are looking for more so than, you know, your exact business wins and losses at this point.

Well, I think that it's not a lot different than what we've seen in prior years from the standpoint of you'll get a PBM win, and you'll always put specialty as part of what you're selling, but that's a pull-through opportunity that takes a longer period of time than -- rather than just flipping the switch and coming in.

But people definitely are interested in those players that can provide an integrated offering to them and can manage the whole broad spectrum of the pharmacy spend that they're seeing.

I think that's a trend that we continue to see in the marketplace.

From the transparency standpoint, it continues to be something that people ask about and focus on, but we continue to also see a lot of asking and focusing and then people turning back around and contracting and either staying where they have been in a traditional type contract, or in new wins, and choosing to go with a traditional type contract.

And we've had some some people that want to go the transparent route, which is something that we offer as well.

So it's probably been a combination of the two.

But I've not seen the marketplace move totally over to a transparent model.

Great.

Thanks very much, and congratulations on the quarter.

Thank you.

Your next question comes from David MacDonald of SunTrust.

Mac, first I was wondering if you could give us a little more detail on specialty in the quarter, what it grew, any specific product that stood out.

And secondly, I don't know if you guys are interested in getting into what incremental services you're providing this client on the Part D side but I'm more interested in are there conversations with other clients where you're already seeing some of your existing base looking to potentially outsource more services from you guys?

On the specialty front we've seen some solid growth in the oncology marketplace.

More and more products are coming out in oral fashion, and we've seen very substantial growth.

Pete mentioned the overall growth was 4 to 16% on the specialty line.

We put in a fertility program this year.

We have had no fertility product, and that's progressing very well for us.

It's a good program.

Requires a lot of service, fits very well into the service oriented model that we've had and we look forward to being able to grow that with our PBM customers as well as our managed care customers, providing those services.

Good solid growth in EMS lines and RA lines that we've seen in the past.

Second part of the question was --

Part D. Is there a chance that we see other clients who look for expanded services, like it sounds like you had at least one in this quarter.

Yeah, I think so, but it's a customer by customer kind of basis, and this is one where we are doing more on the retail side for them than we had in the past.

Okay.

Thank you very much, guys.

Your next question comes from Tom Gallucci of Merrill Lynch.

Good morning.

Just a couple of follow-ups here.

On the specialty business I think you've had kind of high teens growth in the last couple of quarters.

You outlined some opportunities for some new penetration.

How should we think about the market growth versus additional new business that you're winning?

Well, you know, as you know, Tom, there are a number of products in the pipeline in this area.

There are a lot of products in the oral oncology area that are coming along.

We're looking at several products in the oral chemotherapy area, some products in Huntington's disease, pulmonary hypertension, so we think we'll continue to see growth as new products are brought into this space.

The additional growth we see are adding additional contracts with managed care customers that we talked about, as well as helping our existing customers with that spend that they have that doesn't run through the drug card, the part that's running through the major medical.

That's where we he think our clients need help, but it's one of the harder areas, slower areas, a client by client or participant by participant bring for us.

So we're looking at multiple ways of growing this business, others are helping the existing clients, adding value there where we can, but we still see solid growth opportunities from all three of those areas.

yes, I think the marketplace continues to grow.

We've obviously got a lot of products in the pipeline.

Always uncertain about timing and when it comes.

I think one of the things that clearly everyone is focused on is having some generic pathways for these biologic drugs, so that it will be probably an expansion of the marketplace, if you can get cheaper product into the marketplace, the people have access to and can afford.

So I think you've got, multiple ways that we'll see growth in this market on a go forward basis.

Do you have any estimate we should be thinking about for the market growth there?

In what part?

In specialty overall.

Over and above, just underlying growth, never mind what you're going to win.

We look at it and say that we're going to be in the high teens kind of area.

Okay.

On Medicare, I think on the last call you said that people were still kind of analyzing what to do with retiree population as we looked at '07.

Do you expect any major changes, thou that we're a little bit more through the year, or what are the employers thinking about?

We haven't seen major changes at this point out of our employer population so we have not seen a mass exodus or movement over to Part D.

Okay, good.

Finally, if I could, on -- you mentioned a little in your prepared remarks, Howard, about single source versus multisource generics.

Can you talk about maybe from a high level, at least, how Merck entering the marketplace kind of impacted either the selling price or the cost price of Zocor as we think about the second half of this year?

Dave, on a hey level basis, as you know, if a product comes out truly single sourced and there's not an authorized generic and no competition, that's a place where we're doing the best thing for our clients, which is moving to it as quickly as possible, but we're probably not moving -- we're moving share but we're probably not buying as well.

Once an authorized generic moves into the marketplace it increases our buying leverage, and once that exclusivity period goes, even if there's two people in the marketplace, more people entering the marketplace increases our leverage.

So what occurred really with this product, which we think is product a one-off event, you essentially had three people in the marketplace.

You had the generic manufacturer, authorized generic, and the branded manufacturer, and it created pricing competition.

No doubt in that case we saw the marketplace work, and we saw pricing reflect the competitive marketplace.

Thank you.

Your next question comes from Bob Willoughby of Banc of America.

Mac, or Howard, or Pete, can you possibly remind us in terms of the contracts that are peeling off what the claims volumes were, split between retail and mail, and general whale have you assumed for the state of Maryland?

I don't think we've ever given -- there's nothing to my mind, I don't think we've ever given what those claims counts are.

I don't have them at the top of may head.

As far as State of Maryland that has not yet been heard by the judge that will hear it.

That will take place in the fall, as I understand it, and that's the protest.

It's a wait and see mode on that.

You can't give specific claims numbers but maybe splits between retail and mail or just some rough guidance?

I don't have it at the top of my head.

All right.

Thank you.

Your next question comes from John Kreger with William Blair.

Another Part D question.

Now that you are eight months or so into it, can you talk a bit about what you are seeing in that program and what, if anything, is surprising you?

For example, how are you seeing the profitability of Part D play out versus what you'd budgeted, and how about mail versus retail mix or generic versus brand mix?

I don't think we're seeing a great deal of difference in profitability than what we budgeted in the business.

The mail versus retail, we're seeing a higher, just not comparing to what we've budgeted, but as far as would we're seeing, for those clients that we're serving on the health plan side, we're seeing a higher penetration rate than we are in the back of business that we serve directly through Silver Script, which is dual eligible, and the -- low mail penetration, higher mail penetration in the retiree population as a whole that's being served through Medicare, which are primarily being served through our health plan clients.

And that's pretty much what we expected to see happening in that book of business as the -- but it's also an opportunity as this matures some and hopefully as we have a stable book of business in the dual eligibles, we're able to educate them as the benefits of utilizing mail order.

But that's primarily the retail environment.

Great.

Thanks.

Then one other question.

Your revenue growth was higher than your claims growth, both in retail and mail.

Can you talk to what was the driver behind that?

On the retail side, which is probably the biggest differential, really driven by this customer of ours that picked up more services.

We had always counted their retail scripts in our script counts, but by virtue of the new contract, the revised contract, and the services that we're now offering, we -- we're required to recognize the revenue on those, so you didn't have increase in script count, but you did have an increase in revenue.

And you had to have some increase in profitability as well.

Now, loss of Humana is also an impact on that.

That was this Pete mentioned rolled off in the latter part of last year.

That is a customer who had very high claims counts but very low revenue counts on it.

Again, by virtue of the services that we provided to that customer.

So that's had an impact also.

On the mail side, I don't know there's a big differential there.

Some of those, pricing differences as well as product mix differences that continue to draw revenue growth..

Great.

Thank you.

Your next question comes from Kemp Dolliver with Cowen and Company.

The hemophilia business used to be your largest specialty business.

How is that particularly relative to the overall growth rate of the specialty business?

As we've said in the past, Kemp, it's pretty flat.

Don't see a lot of growth for a number of reasons, and part of it being just the size of that population.

Okay.

Good.

Second question is on Part D. Huh's the generic mix in the PDP compared to your overall generic mix?

Kemp, it's overall generic dispensing rate there is in the high 50s.

It's overall our -- it's above our book of business average.

I don't have it off the top of my head but it's in the high 50s.

Okay.

Great, thank you.

Your next question comes from Michael Baker with Raymond James.

Yes, now that we've seen a number of chronic generics hit the market, is there any opportunity to kind of refigure the economics with your clients, whether it be at the member level or their level to try and kind of reinvigorate mail growth going forward?

Yes, that's something we focus on all the time, the and with people seeing the ability to drive more of these lower priced generics through mail program, we are seeing more mandatory mail programs being introduced, so, yes.

And if we were to see that dynamic, is there about a six-month lag from when you see kind of this generic wave, which we're seeing now --

No, that's much more driven by plan design and when people put in the plan design programs which are typically once a year, which are primarily 1/1.

So you're not going to see people, in my opinion, make multiple plan design changes throughout the year to try to take advantage of this.

It's either going to be a 1/ 1, or wavy got some July 1 clients that are primarily going to stick to that kind of schedule.

And given that it's happening so late in the selling season this time around, we may not see enough meaningful change for 1/1 of next year?

I don't think we've seen anybody target a specific set of products and try to say, I'm going to make a plan design change to deal just with this it's more of an overall market trend.

But I think Lucy is as I said, more mandatory mail in 1/1 of this year.

But say a Plavix launch, you're not going to see someone necessarily running around making changes for a 1/1 plan design because of that.

Hopefully the cheeks they worked on themselves, anticipate and though what's in the pipeline and try to take advantage of what's going on.

thanks for the update.

Your next question comes from Glen Santangelo from Credit Suisse.

you commented on the accounting changes at this one customer but if you adjust for the $325 million, which I'm not sure if I'm even doing that right, but your revenue per your retail claims still looks to me to be up about 14% kind of year-over-year.

Could you kind of maybe elaborate a little bit further?

Is there any mix of drugs going on there or any kind of -- any changes that we should be aware of?

Hi, Glen, as Mac mentioned, you've got to think about the Humana contract that rolled off.

It was a very large client in terms of retail volumes, but really had no significant revenue associated with it.

So that rolled off in October, and so it was obviously in the second quarter numbers last year and not in the second quarter numbers this year.

So it's largely going to be driven by a mix of those clients -- those claims that were in there last year.

okay.

Pete, so we should expect to see that high revenue per retail claim run rate for the remainder of the year?

Yeah, you'll see the Humana effect through the third quarter.

Through the third quarter.

And then, Mac, I just had one quick question.

You sort of put in your press release you're continuing to pursue strategic acquisitions.

Could you just maybe give us a sense for maybe what areas of your business kind of may be deficient and maybe give us in real broad terms kind of what services you think compliment your existing business?

Yeah, it's not really to try to fill a hole of any deficiency.

We believe that there is an opportunity for us to continue to expand the footprint of the company, and to manage more things than we manage today, and to provide more services to these customers that we serve, not only the payors, as we traditionally served in the past, but now the consumer also.

So without giving away any strategic directions we're necessarily going in, we think this company can play a bigger role in the provision of services to these populations that we've had in the past and you look at the size of the populations we're now serving as a direct to consumer business and how the CDA's plans are coming on slowly but still coming on.

Much more of a consumer focused space to the business is one that we probably have some opportunity to make some acquisitions in.

Okay, thank you.

Your next question comes from Matt Perry with Wachovia Securities.

Hi.

Just a couple of quick questions.

I wanted to make sure I understood this correctly.

Does your updated 2006 earnings guidance contemplate generic Plavix or doesn't it?

As I said, we take it as a market basket type approach, and given the fact that I think there's a lot of uncertainty as to what exactly goes on with this drug, obviously when we're waiting something and we weight it based on probable this is one we've got on the watch list, if you will.

Just a second question.

This gain from the AdvancePCS client, where did that exactly hit the income statement?

In the "other" revenue.

Great.

Thanks a lot.

Your next question comes from Charles Boorady with Citigroup.

Thanks.

Good morning.

On the Part D contract revision, can you give me an example of what a new service would be that would change the required change in that recognition of the revenues?

We don't talk about specific contracts, but we are providing additional services to this client.

Okay.

Just processing of claims.

Okay.

Can you talk about whether those would include marketing or other non-per-prescription related services?

No, not in this case.

Okay.

On Part D, you talked about the -- I think the mail penetration for your silver scripts versus health plan customers.

Within those health plan customers, do those health plans also have duals that would have have a lower penetration rate?

I'm wondering, you know, specifically what the generic substitution and mail experience has been for those nonduals.

What the generic substitution in mail is?

Mail penetration and generic substitution on --

Talking about on the health plan clients?

We don't that have that right now.

It's about 10% overall, but we don't have a way to break out the duals.

Usually dual eligibles have a lower mail penetration rate.

They have a higher generic dispensing rate, but these people typically don't use the mail rate and they have a higher generic dispensing rate.

As we have them in the plan and are able to expose them to the benefit, that's an opportunity for the future.

So you talked earlier about the health plan versus the Silver Scripts.

That health plan statistic would have included the duals that the health plans have as well.

So if we look just at the nonduals of those health plans, some higher number for mail penetration and also generic substitution?

Well, the -- certainly higher for mail penetration.

Whether it would be higher generic substitution, I don't know, but as Howard said, a general role with a lot of these duals came in Medicaid-type programs where they have mandatory generics, so they may have actually a higher generic.

Got you.

Than what your nonduals would.

thanks.

Finally, I was trying to pull together the comments on some of the new wins, like the SBC and also anticipation of some of the losses.

Do you quantify about what percent of the overall book is up for renewal in 2007 and what so far has been locked in for '07?

It's typically close to a third every year because we have three-year contracts, and we're in I think just about through with everything at this point of any significance that we had out there for new and we'll have the same kind of renewal retention rates that we typically have had in the past from what I see right now.

Okay.

What are those rates that they've been in the past, generally?

In excess of 95%.

okay.

Terrific.

Thanks.

Your next question comes from Ricky Goldwasser with UBS.

Hello.

First, on this Plavix issue I understand that from your earlier comments that at this point you cannot estimate the impact of Plavix for the remainder of '06.

Can you confirm to us on whether you expect generic Plavix to be on your shelf in the next couple of days and also what percent of your Plavix scripts do go through the mail?

Do you have a percentage on that?

I think the percentage that goes through the mail order is a minority, but it's a decent number, in the 30 to 35% range.

It's generally a six to nine-month therapy run.

We expect we'll have Plavix.

Question on the SG&A.

SG&A was a little bit higher sequentially.

Is this due to some upfront costs associated with the additional services that you are providing to your existing client or to any contract that you expect to bring on, or is this kind of a new run rate that we should factor in for the remainder of the year and going forward?

Yeah, I don't expect to see significant changes in that line going forward, but we're -- it's not something that we've typically guided to.

Again, it was up about 11% year-over-year without including the additional stock-based compensation expense.

Did it still have some Part D cost in in the.

Sure, hat Part D cost in it, absolutely.

So should we kind of assume Part D cost similar to where they were in 1Q '06?

Ricky are we've never broken out Part D costs given it's its own business in terms of it's got revenues now, so I don't know -- we're not going to break it out.

I think the 11% is, to answer your question, is pretty much what you should lack at for the rest of the year.

Okay.

Thank you.

Your next question comes from Andy Speller with A.G. Edwards.

Hi, guys.

Good morning.

Was hoping to get just some more high level comments around the whole basket of generics that have have come, with Zocor here recently, if Plavix comes here shortly.

How should we look at the profitability of that over a 12 or 18-month time period?

Should it be building over that time period, or does it just kind of get your comments there, Mac.

Depends upon how many entrants you have in the marketplace.

From a manufacturing side, the more entrants you have, typically the more competitive the pricing becomes on that product.

So -- and obviously it depends upon the size of the generic that comes out as well.

So --

I mean, we're looking at something like $14 billion now with Plavix coming this year, so I'm assuming that the impact in '07 would be much greater than what we're going to see in '06.

Assuming that Apitex prevails, and assuming that you have generic in the marketplace, then you would expect that over time pricing get more competitive on that product.

I would.

Okay.

Thank you.

Your last question comes from Greg Haddad with First Analysis.

Greg, your line is open.

Good morning.

Regarding electronic prescribing, grateful if you could provide potential impact to CareMark from growth in E-prescribing and also interested in whether -- to learn whether you might consider subsidizing physician cost to install E-prescribing technology.

E-prescribing is something we had been a leader in and we continue to be a leader in.

We have rolled it out to major health plans in the northeast.

We see that we are certainly more efficient when we can have the script coming in electronically.

We also think that eliminates the possibility -- or difficulty in reading scripts, and errors and so on and so forth.

So, yeah, we're a big proponent of E-prescribing.

From the standpoint of we've got plans that we're working with right now where we're subsidizing part of the cost for those plans as they roll out to their physicians in their communities.

So something we've been very active in.

Great.

Thank you.

Then one other one.

Regarding your rebel being named certified PBM by the HR Policy Association.

Interested in your perspective on what may have changed in 2006 versus 2005 when the initial certification process took place, what's different perhaps about now versus a year ago.

Well, I think the marketplace has evolved.

I think their certification requirements have evolved, and we evolved.

I think at the end of the day, and you saw you had far more people certified this year, and I think it's just a process of the market getting more mature and an evolutionary process that requirements for something that we felt that we could meet and want to be a part of, and, as I said, they evolved in their requirements, and we evolved in what our business model looked like.

Great.

Thanks very much.

Sure.

Any others?

You do have a follow-up from Lisa Gill with JP Morgan.

Mac, I was wondering if you could just tell us if there will be any additional legal disclosures in your 10-Q that I guess would be failed within the next day or so.

We will have disclosures in there obviously dealing with the informal inquiry we got from the SEC as well as what we got from the U.S. attorney general's office, so, yeah, we will have disclosures in there.

But will there be anything else?

Have you received -- I know last Friday with Medco in the afternoon when they filed their 10-Q they disclosed that they have two new whistle blower suits, and I'm just wondering if you have any additional suits or anything that we should be aware of.

I don't know anything about Medco's whistle blower suit.

We'll update based on the previous suits that we have previously disclosed.

We've obvious had some derivative actions that have been fueled as a result of the SEC letter of inquiry and the U.S. attorney's subpoena that we got, so those will be in there also.

Great, thanks very much.

Thank you very much, Operator, and thank all of you for joining the call today, and we will be around if you have further questions.

We appreciate it.

This concludes today's Caremark conference call.

You may now disconnect.