CVS Health Corp (CVS) 2007 Q4 法說會逐字稿

Good morning, my name is Amanda and I will be your conference operator today.

At this time I would like to welcome everyone to the CVS Caremark corporation fourth quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Nancy Christal, Senior VP, Investor Relations.

Please go ahead, ma'am

Thank you, Amanda.

Good morning everyone and thanks for joining us today for our fourth quarter and year end earnings call.

I'm here with Tom Ryan, Chairman, President and CEO of CVS Caremark, Dave Rickard, Executive Vice President and CFO of CVS Caremark, and Howard McLure, President of Caremark Pharmacy Services.

Howard's joined us today for the year end call.

Tom will provide highlights of the year and a business update, while Dave will provide a financial review of the fourth quarter.

He will also provide our initial guidance for 2008 and the key assumptions we've made to get there.

During this call we'll discuss some nonGAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS.

Free cash flow is defined as earnings after taxes plus non-cash charges plus changes in working capital less net capital expenditures.

So free cash flow excludes acquisitions and dividends.

EBITDA is defined as operating profit plus depreciation plus amortization.

Adjusted EPS is defined as diluted EPS, eliminating the effects of amortization only, and assuming our overall effective tax rate for the amortization.

We'll provide guidance today using adjusted EPS, in order to improve our comparability with various competitors that you monitor.

And to ensure consistency within the investment community, we recommend that all analysts use adjusted EPS when inputting their estimates into first call.

In accordance with SEC regulations, you can find a reconciliation of the nonGAAP items I mentioned to comparable GAAP measures on the Investor Relations portion of our website at investor.CVS.com.

As always, today's call is being simulcast on our IR website.

It will also be archived there for a one-month period following the call, to make it easy for all investors to access the call.

Following our remarks we will have a Q&A session and we ask that you limit yourself to one to two questions, including follow up, so we can get to as many analysts and investors as possible.

Let me quickly provide one other reminder.

Our next analyst and investor meeting will take place on the morning of Wednesday, May 21, at the Mandarin Oriental Hotel in New York City.

Invitations will be sent in March but please save the date.

This is the one time per year that we provide access to a broad group of our senior management team, so we hope you can be there.

Now before we begin, our attorneys have asked me to read the Safe Harbor statement.

During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the risk factors section of our most recently filed annual report on Form 10(K) and under the caption, cautionary statement concerning forward-looking statements, in our most recently filed quarterly report on Form 10(Q).

Now, we announced nine months ago that we would no longer be releasing monthly statements or sales figures beginning in 2008.

That decision was driven by our view that those measures are of decreasing importance to the overall performance of our new company, especially for any one-month period, and particularly in the front of the store.

However, in light of the concern around December comp industry-wide, I want to put you at ease and provide some color around our January results.

When we reported December, I recall telling many of you that one month doesn't necessarily make a trend.

Well the good news is that same store sales in January were healthy.

Our preliminary data reflects total comps up over 4%, with pharmacy comps up about 4.5%, despite continued significant negative impact from recent generic introductions.

Front store comps were up just under 3%.

Tom will provide more color on these results but I'll point out that we are clearly off to a good start in 2008.

And now I will turn this over to our Chairman, President and CEO, Tom Ryan.

Thanks, Nancy.

And good morning everyone.

I know you're all anxious to here about 2008, but I'd like to take a moment to reflect on 2007, which was a milestone year for our company, to say the least.

I couldn't be happier with our fourth quarter results and our full year results we announced this morning.

Throughout the year we told was we were going to accomplish and we did it.

Our two underlying businesses are achieving steady, high quality growth, both in top and bottom line, and we have a significant opportunity to gain share and create new sources of revenue going forward.

Let me quickly review the '07 highlights.

One, we completed the transformational merger of CVS and Caremark, and we've integrated our PBM, CVS' PBM into Caremark's operations, we've integrated Caremark and CVS' back end systems, HR, financial, tax, et cetera.

We've over-achieved our initial synergy targets and we've made important progress on driving a differentiated marketing strategy, based on engaging the consumer.

We've opened 275 new or relocated CVS Pharmacy stores, which added about 3% square footage.

We've added $2.1 billion in new PBM business for 2008, including significant new MedD business.

We opened 316 MinuteClinics.

We launched a $5 billion share repurchase program that will be completed in the first quarter of this fall, first quarter of this year, and we saw continued improvement in sales and profits in the former Osco and Sav-On stores.

Through it all, as we have done in the past, we remain keenly focused on service, execution and expense control across the company.

And that's obviously evidenced by our terrific performance.

Dave will go into the quarterly results, but let me give you a quick highlight on the financial achievements.

Total revenues are up 74%.

Gross margins improved in our PBM and retail segments, both in front and pharmacy.

Excluding merger costs, operating expenses reflected disciplined cost control.

Operating margins expanded by 71 basis points.

Adjusted EPS grew 20%.

And we generated $2 billion in free cash flow.

Not many companies can achieve those results in a year that we've had all this transition and merger activity.

So I really want to take the opportunity to thank all the high quality and dedicated people across our company for making this happen.

I said it before, we have the best people in the industry and they proved me right again.

All right, let me give you some updates on the PBM business.

First, and I want to make a point that I made on the last earnings call.

In light of the pre-merger government contract losses, we initially thought our PBM revenues would be down about $2 billion for '08, versus the full year '07 on a comparable basis.

We are now obviously further along and the good news is the final tally is much better.

We now expect our PBM revenues to be down about $1 billion on a comparable basis.

We have retained and won more business than we initially forecasted.

For example, we ended up with more MedD lies, as I mentioned earlier.

We saw strong gains in dual eligibles and existing client growth, due to the competitive premiums and broad drug coverage of our PDP's.

We will serve over 1 million enrollees in 30 regions in '08, through our SilverScript as well as our joint venture with Universal American.

As far as new PBM contracts, we recently won some incremental business.

Two that come to mind are the Core Trust Group, which is a group purchasing organization, that added hospitals like Health Management Associates, HMA, Community Health Systems and Triad.

For Amerigroup, we were successful in not only renewing the base business but also picking up a Georgia plan that we actually loss last year and gaining a plan in South Carolina.

So these are just a few of the positive developments in the PBM that accounted for this differential from our initial loss we thought was going to be 2 billion, now it's around 1 billion loss in sales.

Looking ahead to next year, our 2009 selling season is off to a great start.

As you know, about a third of our contracts come up for renewal each year.

For 2009, we've already renewed about a quarter of our business that's up for renewal.

That's at or above what we've done in recent years.

So we are well-positioned on renewals at this early stage in the game.

We also see significant progress for new business.

There are a number of large clients that are coming out for bid that are currently not our clients.

It's always hard to estimate this but we feel new business is about two times larger than it's been in the recent past.

In addition to renewals and potential new contract wins, we see significant opportunity to leverage our existing client base.

We expect to grow our share of the business across Caremark lives we manage, whether it's in our mail order facilities, our disease management programs, our stores, our specialty business or our MinuteClinics.

Let me talk about the revenue synergy targets that we have set in the heat of the merger battle.

You may recall that last year we said we expected to achieve 800 to $1 billion in revenue synergies.

We also said half would come from retail, the other half from the PBM.

We currently expect approximately $400 million in revenue synergies in '08.

This will be included in our guidance and Dave will -- retail.

This will be, the $400 million in revenue synergies, that's correct, that will be included in our guidance in '08.

And more than that on the PBM side.

This will be delivered in a variety of new programs.

Program such as new compliance and persistency programs that tap into our multiple consumer touch points, increasing specialty pull-through from retail to our mail centers, leveraging our ExtraCare card and all its unique benefits, to over 10 million PBM customers to enhance our disease management programs, and obviously increase use of MinuteClinic by our PBM clients.

As we said on the last call, while it's hard to know exactly the cause of each contract decision that's made, many discussions with clients highlighted our new value proposition.

So our new model clearly played into our success with respect to retention and new business in '08.

And I am confident it will be, help us in '09 and beyond.

As I said, as for the cost synergy target, we told you we expected a minimum of 660 million in cost synergies for 2008.

We now expect a little more than 700 million in total cost synergies.

Once again, the vast majority of those cost synergies coming from purchasing.

Roughly half of that is incremental in 2008 versus 2007.

Obviously this will clearly help offset the absence of FEP mail and specialty business in 2008, which have been, we were in the third and most profitable year of FEP in 2007.

So I think we've gotten the synergies we were able to get on the purchasing side, and for the most part, you can put your pencils down.

We've achieved over $700 million in synergies, which is almost 50% higher than our original target of $500 million.

I am extremely pleased with the efforts our teams have made here in both sides of the synergy, on the revenue side and also the purchasing side.

Let me touch on MinuteClinic, which had really a terrific year of rapid growth.

We started with 146 clinics in 2007 in 18 states.

We ended the year with 462 clinics in 25 states.

In fact, we opened 169 clinics in the fourth quarter alone.

Here are a couple of interesting facts about MinuteClinic.

As many of you know, it was founded in the year 2000 and we recently saw our 1,000,000th patient in September of '07.

In the past four months since then, we've seen over 500,000 patients.

We are ramping up faster than anyone in the industry and have approximately four times more clinics than our closest competitor.

Our customers feedback continues to be highly positive.

We are clearly filling an important need to provide quick, cost-effective, high quality healthcare for every day illnesses.

We plan to add approximately, we'll add some new services to those, to our existing services in 2008.

Our plan calls for opening up 2 to 300 clinics in 2008, mostly in fill-in markets but also in a couple of new markets.

And we'll work with our PBM clients on new and innovative ways to leverage and use our MinuteClinics.

Let me talk a little bit about the retail side of our business, which continues to perform solidly despite the mild flu and cough season, contrary to what I have.

As Nancy said, nine months ago we made the decision to move away from monthly reporting because it really just isn't a good bell-weather for our performance, especially in light of our new company.

The PBM and pharmacy portions of our business comprise about 85% of our total revenues.

The non-pharmacy, or front store business, is about 15% of our fully allocated profits.

So within the front store only about 20% of the items we sell are discretionary.

These are items that are seasonal, small appliances, as seen on TV items, et cetera, et cetera, so really only 3% of our overall profits are considered discretionary.

Put that in perspective, let's just say market goes to hell in a hand basket, the economy, we lose 25% of that.

Then it's less than 1% of our overall operating profit, or about $0.01 per share.

So when you boil it down, the potential impact of a more cautious consumer on our company is limited in our overall results and very manageable.

I would also add that on the pharmacy side, monthly comps become less of a useful measure.

No one month will define our success.

As there are aberrations caused by flu, allergy comparisons, retail to mail shifts, et cetera.

And as we have in the past, we should continue to be pharmacy share gainers as opposed to share givers.

In fact, IMS data for the fourth quarter shows CVS script volumes growing 30 basis points higher than all other chain drug stores, so we continue to gain share in retail pharmacy side.

Now I know some retail drug store chains will continue to report monthly comps.

I would just like to you keep in mind that their results are probably not an indication of our performance.

I know this will require you to think a little differently about our company but we are a different company today than we were a year ago.

We are a pharmacy health care service company.

Now let's review the pharmacy trends in the fourth quarter.

Pharmacy comps were up 3.6%.

In addition to light flu sales, we were cycling up against 10%, which we achieved in the fourth quarter from the last year from the growth of medD sign ups.

In addition, our pharmacy comp growth rate included 450 basis point negative impact from new generics.

Adjusting for new generics, we would have reported 8.1% comps.

So 3.6% comps in the quarter, butting up against tough flu sales comparisons from last year and high medD sign ups.

On the front end of our business, we continue to demonstrate strong growth and increased customer traffic in the fourth quarter.

Front store comps increased 2.9%, and as we stated previously, we had a slow start to cough and cold and flu, which impacts obviously both front and pharmacy.

In fact, it was the lowest flu season we've seen in nine years.

However, we continued to grow share in categories that make up the vast majority of our sales.

Our front end sales, OTC, beauty, private label and digital photo.

In fact, we experienced share gains versus food, drug en masse, in categories representing 95% of our sales volume.

Our private label business, which is a high growth, high margin business for us, represents about 14.5% of our front store sales.

We remain comfortable that we will grow our private label and proprietary brand sales to represent 18 to 20% of our front end sales in the next three to five years.

In both the front store and pharmacy, comps in the former Osco and Sav-On stores that we acquired in '06, outpaced core stores for the fourth quarter.

Here's an interesting factoid.

Southern California, which is the second largest drug store market in the country, is now the largest sales producing market in our chain.

So I'm very pleased with the progress in the acquired stores and we expect continued progress on sales and margin expansion in these stores.

Now let me briefly touch on our January comps.

As Nancy said, we are off to a solid start, with the preliminary numbers of about 3% and that was up against 8% last year.

So we had a two-year stacked of 11%, which is pretty spectacular when you think about overall comps.

Our results reflect broad-based growth in our core categories, even with a modest cough and cold in January.

We saw a return to solid trends in customer traffic, so we are off to a strong start in the retail side, both in front and pharmacy.

Let me touch briefly on our real estate program.

In the fourth quarter we opened 60 stores, including 45 new and 15 relo's.

We closed six others and we added 39 net new stores for the quarter.

We achieved our plan for the full year.

We told you that we were going to open up about 275 stores and we did it.

Of that, 139 were new, 136 were relo's.

With closings, we achieved net unit growth of about 3% square footage or 95 net new stores.

For 2008, our plan is to open up 300 to 325 new stores, about 175 to 185 will be new and the rest will be relo's.

We expect to achieve the same 3 to 3.5% retail square footage growth.

In addition, we will obviously continue to actively pursue file buy opportunities.

In fact, in 2007 we purchased about, files from about 200 pharmacies and we expect a similar number in 2008.

So, I know I gave you a lot, went through a lot but 2007 was just an outstanding year for our company, across all quadrants of our company.

We had record sales, record earnings.

And as you will hear in our guidance, I expect 2008 to be another outstanding year with solid revenue and earnings growth across all our businesses.

Now I'll turn it over to Dave for some more detailed financials and then we'll come back for Q&A.

Thanks, Tom, good morning everyone.

I'll walk you through our fourth quarter financial results, with an emphasis on the segment details.

Afterward I'll provide initial guidance for the first quarter and the full year 2008.

On a consolidated basis, revenues in the fourth quarter increased 82% over 2006, to $21.9 billion.

This includes 1.3 billion of interest segment eliminations, produced as a result of our PBM clients filling their prescriptions at CVS Pharmacy stores.

In our PBM segment, if you adjust to put Caremark and CVS' Legacy PBM, PharmaCare, into both years to make the results comparable, net revenues of 11.6 billion increased 12.7%.

Adjusting that growth rate for the impact of new generics, net revenues would have grown 19.8% for the PBM.

That number, of course, is helped by the change in PharmaCare's revenue recognition, which I've discussed on previous calls.

Bust just to be sure everyone is clear on that, we changed to the gross method from the net method for recognizing service revenue at PharmaCare.

That was due to the conversion of PharmaCare retail contracts to the Caremark contracts structure, effective September 1 of last year.

The impact on the fourth quarter was the addition of approximately $775 million in reported revenues before inter-company eliminations.

Or about 600 million after eliminations.

The 2007 full year impact on reported revenues was 1.02 billion, before eliminations, and 783 million after eliminations.

However, given a parallel increase in annual cost of goods sold, there was no impact on operating profit for the quarter or the year.

So on a comparable basis what drove the growth of PBM revenues?

The growth was driven by an increase in mail sales and within that, specialty mail.

Total mail revenues increased 7% to $4.3 billion.

Within total mail revenues, our specialty pharmacy unit experienced a hefty increase of 14.4%, compared to the fourth quarter of 2006, while our PBM mail revenues grew 3.3%.

Total mail claims grew by roughly 1% in the quarter.

This is primarily driven by the net impact of client additions and terminations, as well as a significant add on business with existing clients compared to the prior year period.

The mail generic dispensing rate rose to 49.7% from 45.5% a year ago.

That's a significant increase of 420 basis points.

Our overall mail penetration rate decreased 30 basis points, from 2006 fourth quarter to 28.0%, primarily due to client mix.

Meanwhile, retail revenues at the PBM were $7.2 billion, rising 16.6% from 2006 levels.

Of course you should adjust for the change in PharmaCare's revenue recognition method, and once you do you'll see retail revenue growth of 4.1% on this basis.

The retail generic dispensing rate increased to 63.5%, compared to 58.9% in the fourth quarter of 2006.

At the same time, retail claims grew 2.3%.

This growth was primarily driven by utilization, as well as an increase in lives in 2007.

So what about the retail drug store side of the business?

It also turned in a fine quarter.

Tom covered the highlights of retail sales for the quarter, so I won't repeat those numbers here.

Moving on to gross profit, the overall business did extremely well, thanks to the strong performances within both segments.

Within the PBM segment, on a comparable basis gross profit margins were up 100 basis points, despite the 62 basis point drag from the conversion of PharmaCare's contracts.

The primary drivers of this continued to be the margin expansion we experienced from the increased utilization of generics, as well as purchasing synergies.

Gross profit margin on the retail segment expanded to 29.6%.

That's up over 90 basis points versus 2006 fourth quarter.

Like the PBM segment, our retail pharmacy margin continued to benefit from a substantial increase in the conversion of branded drugs to generic equivalents, as well as the purchasing synergies derived from the merger.

Concurrently, front store margins improved, continuing to reflect not only an improved product mix and reduced shrink in our acquired stores over the last year, but also benefits from the ExtraCare card.

Offsetting these gains somewhat was the continued pressure on generic reimbursement rates, as well as the increase in the percentage of pharmacy sales handled by third party insurance.

What about expenses?

More good news.

In the PBM segment, comparable operating expenses as a percentage of revenues improved by 40 basis points to 2.1%.

Merger synergies and disciplined expense control were the key drivers of the improvement here.

Let me also note that the valuation work on the Caremark customer relationships is done.

This has had the effect of modestly reducing our annual amortization expense versus what we thought three months ago.

As a result, there was a true-up in the fourth quarter of approximately $20 million.

In the retail segment ,operating expenses met expectations despite the increase as a percentage of sales from 22.8% to 23.4%.

When one time items such as integration costs in 2007, and the benefit from the adoption of the SEC's staff accounting bulletin 108 in 2006 are excluded, the rate would have been nearly flat, so we continued to demonstrate excellent cost control.

Given everything I've just discussed, solid revenue growth, healthy margin increases due to generics and merger synergies, solid expense control, we continue to expand operating margins throughout the business.

The PBM segments operating profit margin improved by over 130 basis points versus 2006.

Our PBM's industry leading EBITDA for adjusted claim increased to $4.48, excluding integration costs in the fourth quarter.

We are 33% over last year's $3.36.

And the retail segments operating profit margin grew by 30 basis points over 2006 to 6.2%.

Moving to the consolidated income statement, we saw net interest expense in the quarter increase to $137 million, reflecting additional net interest from our increased debt position.

Furthermore, this year's fourth quarter experienced 150 basis point rise in the effective income tax rate, to 39.1%, as expected and in line with my discussion of this on previous earnings calls.

As a reminder, this is due to the addition of several higher rate states in which Caremark operates but CVS did not, as well as the impact of reserve releases in the '06 period.

Our weighted-average diluted share count was 1.48 billion shares.

This difference from the weighted-average diluted share count for the full year of 1.37 billion, due to the timing of the closing of the merger near the ends of the first quarter.

So what did all this mean for EPS?

Adjusted EPS rose to $0.58, up from $0.52 in 2006.

However, if you exclude from the 2006 figure, the gain associated with the adoption of SAB 108, and also exclude from the 2007 figure, integration expenses, adjusted EPS actually rose a superb 23%.

So we produced solidly robust earnings year over year despite the additional financing cost and slightly higher tax provisions.

GAAP diluted EPS rose about 13% to $0.55 for the quarter.

That compares to $0.49 in 2006, and is at the high-end of the guidance we've provided at the beginning of the month in our December sales release.

Turning to the balance sheet and cash flows, we generated over $1.3 billion in free cash flow in the fourth quarter, easily meeting our guidance for the year of $2 billion.

And this was accomplished after our net capital spend of $1.2 billion for the year.

We ended the year with net debt, defined as total debt net of cash and cash equivalents, of $9.4 billion, up approximately $1 billion from the prior quarter and up 5 billion from the end of 2006.

The increase over the third quarter was primarily due to the payment of $2.3 billion as part of our share repurchase program.

More on that in a bit.

It was partly offset by the 1.3 billion in free cash flow.

Net capital expenditures amounted to only $9 million in the fourth quarter.

This was the result of offsetting the 573 million of gross capital expended with 564 million worth of sale lease-back proceeds.

This is typical of our fourth quarters.

Now during our last conference call, I discussed our share repurchases and what to expect over the ensuing quarters.

I mentioned that in the fourth quarter we would receive approximately 6 million shares from our bankers, marking the completion of the ASR program, or accelerated share repurchase program, that commenced in May.

We did receive those shares and placed them into our treasury account.

Today's financial statements reflect this.

Additionally I mentioned that we were in the midst of an open market repurchase program.

Today I can tell you that we repurchased about 5 million shares for approximately $200 million, through this program during the course of the quarter.

And have also placed those shares into our treasury account.

I also reminded you on the last call that we had board authorization to repurchase a total of up to $5 billion worth of stock.

And hope to complete the last piece of that soon.

While in November, we entered into a $2.3 billion accelerated share repurchase agreement, which expends the authorization.

In return for the cash we received approximately 52 million shares.

So in total we received about 63 million shares during the quarter from our various repurchase programs.

There is the potential to receive up to an additional 5 or 6 million shares when the ASR is complete, which should occur -- actually will occur during the first quarter.

I will of course update you on the next call with the conclusion of our $2.3 billion ASR.

Now the use of a relatively small open market program between two large ASR programs may seem odd.

The reason we did it was that it was the fastest way to get the shares in, given the technical requirements of each tool, relative to our blackout periods.

Now let me turn to our initial guidance for 2008.

As you know, as a matter of policy we do not comment on first call consensus estimates.

We provide guidance independent of those estimates; a policy we intend to continue.

However, I'll make one observation.

It appears that a number of analysts are building their earnings projections based on an average number of shares that's far too low.

This may be attributable to the fact that there models have likely accounted for the previously announced share buybacks, but may not have taken into account the impact of options activity over the course of the year.

To be clear, our plan calls for 1.49 billion weighted-average shares for the year.

It looks to me like consensus weighted-average share count is about 1.45 billion shares.

That's quite a difference.

Think about this.

If we were to use our earnings to which we are guiding today and use 1.45 billion shares rather than 1.49 billion shares, a difference of 40 million shares, our earnings per share range would rise by roughly $0.07.

But the very good news is that even using the higher share count of 1.49 billion, our revenue and operating profit growth is so strong that we expect to show excellent earnings growth.

In fact, our total operating profit growth in 2008 is forecasted to be in the range of 27 to 31%.

So where will earnings come out?

Based on the share count of 1.49 billion, we expect to deliver adjusted EPS of $2.43 to $2.50, and GAAP EPS of $2.26 to $2.33.

That represents growth of 16 to 20% on an adjusted EPS basis, and 18 to 21% on a GAAP basis.

Let me dig into the assumptions to put some context around this initial guidance.

For the PBM segment, as Tom said, on a comparable full year 2008 versus full year 2007 basis, we expect PBM revenues to be down a little under $1 billion, but we expect reported revenue growth of over 20% for the full year.

Of course 2008 is a full year and 2007 was a partial year, since the merger closed in late March.

The revenue projection also includes an impact of approximately $2 billion year to year from the change in PharmaCare's revenue recognition method, from the net to the gross basis for the full year as opposed to a partial year.

For the retail segment, we expect revenue growth of between 7 and 10% for the year.

Same store sales are expected to be in the range of 4 to 7% for the retail segment for the year.

For the total company, we expect revenue growth of roughly 13 to 16% for the full year.

That is, after inter-company eliminations of approximately $1 billion per quarter.

That again is for prescriptions filled for Caremark members in CVS Pharmacy stores.

For both segments, generics will play a role in dampening top line growth, and as Tom said, this does include the benefit of 800 plus million dollars in revenue synergies.

I know there are various assumptions out there on the expected impact on industry profitability from new generics.

Some optimists are projecting more generic conversions in 2008 compared to 2007.

Other people are projecting less.

Our 2008 plan assumes that generics do help our gross margins but are less favorable to margins than they were in 2007.

That's because we are assuming fewer new generics in 2008 versus 2007.

It also looks to us that the generic conversions will be seriously back end loaded.

We'll get some benefit in the first quarter but we won't see the bulk of them until the third quarter.

Of course if the optimists are right, that will be helpful to our results.

But overly optimistic planning in this industry is the beginning of bad news, so we won't do it.

In addition to the impact on gross margins from generics, our gross margin will be helped by purchasing synergies.

As Tom said, we expect more than 700 million in synergies in 2008, much of which is from purchasing.

One other assumption to note is the negative impact on gross margin we're assuming related to the change to AMP for Medicaid reimbursement.

As you know, the expected late January start has been delayed.

Given the uncertainty about how long the delay will be, we've built in a negative hit to earnings of approximately $0.02 to $0.03 per share for the year.

For the total company, gross profit margins are expected to be down modestly due to the mix of our businesses, as we average in a full 12 months of Caremark.

However, gross margins are expected to increase roughly 25 to 50 basis points for each of the PBM and retail segments individually.

We forecast our total company operating expenses as a percentage of revenues will improve significantly, also largely due to mix.

Again, each division will show positive progress.

Total operating expenses as a percent of sales will improve slightly for the PBM and moderately for the retail segment.

Most of the merger integration costs are behind us.

And close to 100 million of the 700 million in cost synergies, will show up on the SG&A line.

So that's another benefit here.

All of that will lead to solid improvement in operating profit margins for each segment and for the total company.

In fact, we could very well nicely exceed the record operating margin level of 6.5%, that CVS achieved in the year 2000.

Over the years, many of you have asked me whether we would ever get back to that margin level.

Well, the answer is yes and the time is now.

We forecast net interest of about 500 to 525 million, and a tax rate approaching 40%.

As I said, we are forecasting approximately 1.49 billion weighted-average shares for the year, including the completion of the share buy-back program, by the end of the first quarter.

No other share repurchases are included in this guidance.

We expect total consolidated amortization for 2008 to be approximately $410 million.

Add in projected depreciation and the number becomes about 1.25 billion.

Net capital expenditures are expected to be in the range of 1.3 to $1.4 billion for 2008.

Free cash flow is expected to be around $3 billion.

That's a terrific increase versus last year's $2 billion, driven largely by the strong earnings growth we expect to deliver in 2008.

Now I want to give you first quarter guidance and note the other key factors that you should keep in mind when preparing your quarterly models in 2008.

In the first quarter of 2008 we expect revenue growth for the total company to be in the range of 60 to 63%.

This is the final quarter in which the PBM segments growth rates will be skewed by the absence of Caremark's results in the prior year period.

Given this, we expect PBM revenue growth of nearly 400% in the first quarter before the impact of eliminations.

After eliminations, it's about ten points lower.

Retail revenue growth is anticipated to be in the range of 4 to 7%.

We expect total same store sales growth to be between 3 and 5%.

Remember that you'll see a major decline in consolidated gross margin, as well as a major improvement in consolidated total operating expenses.

Both due to the change in the mix of our business as we are comparing the combined CVS Caremark against only CVS' results plus ten days of Caremark in last year's first quarter.

Gross margin percentage should be up solidly for the retail segment and down for the PBM segment, due to the effect on margins of a full year of the PharmaCare revenue gross up.

And we expect total operating expenses as a percentage of sales to be a bit higher for the retail segment, primarily due to MinuteClinic and higher D&A expenses.

In contrast, we expect total operating expenses as a percentage of sales to improve notably for the PBM, primarily due to the absence of last year's merger and integration costs.

We expect first quarter adjusted EPS to be between $0.53 and $0.55 per diluted share, up from last year's 46 per share.

GAAP EPS is expected to be in the range of $0.49 to $0.51 per diluted share, up from last year's $0.43 per share.

It's important for you to note that our growth in EPS in the first half of 2008 will be lower than our growth in the second half, especially in the first quarter.

The first quarter's EPS growth will be dampened by higher weighted-average shares versus the prior year, as 2007's shares were only weighted with Caremark shares for the final ten days of the quarter.

We'll also see the full quarter impact from the depreciation and amortization, as well as the interest associated with the merger.

And as I mentioned previously, with fewer generics being introduced this year and with those generics that are anticipated predominantly being introduced in the latter half of the year, we expect to see this dampen first quarter growth as well.

Finally in our PBM segment, the insurance portion of our medD business will have higher profitability in the second half than it will in the first half, due to the expected change in Medicare Part D plan design by CMS.

As you may know, in 2009 the risk quarter has widened from 2.5% to 5%, and the government funds a somewhat smaller percentage of the losses outside of the corridor.

Due to the resulting higher loss ratios and the accounting methodology for the PDP, this drives higher losses into the earlier months of the year and higher profits into the later months of the year, with no change to the year overall.

So we will see the most growth in this portion of our business in the fourth quarter.

Of course partially offsetting these factors will be the merger synergy benefits that were absent from last year's first quarter.

Overall the first quarter will be a nice solid start to the year.

So in summary, on a financial basis, CVS Caremark had an outstanding 2007.

Record sales for retail pharmacy.

Record sales for the PBM and record sales for the company overall.

Record gross margins for retail, pharmacy and the PBM.

Solid expense control on both sides of the business.

Significant operating margin improvement.

Record earnings.

Confirmation that CVS Caremark is a cash machine, $2 billion in free cash flow.

And decidedly positive momentum going into 2008, with or without a robust economy.

And now I'll turn this back over to Tom.

Thanks, Dave.

Obviously 2007 was clearly a great year of accomplishment for our company, when you think about all the merger and integration activity, as well as the work we did in the acquired Albertsons stores.

Through it all we kept our eye on the ball and we achieved terrific numbers.

As you also heard we expect another outstanding year in 2008, with solid growth in both the retail and PBM business.

We expect improved gross margins, disciplined expense control and with a significant expansion of operating margins.

So I'm confident more than ever that our new consumer engaged model is resonating with clients and consumers, and I'm optimistic about our prospects for 2008 and well beyond.

So with that, we'll open it up for questions.

(OPERATOR INSTRUCTIONS).

Your first question is from John Heinbockel with Goldman Sachs.

A couple of things.

Can you touch on, what is the pace of retail macking of generics look right now and is the reimbursement environment, is it tougher than it was six months ago?

Is it going to get tougher because the generic environment is a little weaker this year or how do you see that?

We don't see much of a change in the pace of macking, John.

Obviously payers are looking to control cost and as more generics come on or more multiple companies come out, people continue to mack the prices, mack generics but we don't see the trend any faster than it was in the past, although, listen, we are talking about degrees here.

There is still going to be, depending on the numbers, you look at some 6 to $8 billion of brands coming off patent, so it's still a fair amount of money, it's just obviously less than it was last year and it's more trended towards the back end.

And what is, you talk about the 3 billion of free cash, what is the philosophical or practical idea about using that, and I would guess share buy-back, more share buy-back would rank more highly than debt pay down, but how do you think about that and what might the timing be of going back in with another buy back.

I'll just take that a minute and then I'll ask David to commend, but you heard us before, we think this business should have debt.

We are obviously doing a significant share buy-back now.

We'll look at all the options.

At the end of the day we are going to use the, use our balance sheet and use the money to drive shareholder value and there's a lot of ways to do that, and we obviously have to have discussions with our board about that and how we go about it.

But it's a good place to be.

Yes, John.

We obviously don't have a board authorization for any further steps at this point and we'll certainly keep you apprised as we get them.

So the guidance doesn't really have you doing anything with the 3 billion this year, is that fair?

The guidance numbers do not include any share buy-back beyond completion of the $5 billion program that we are wrapping up right now.

And no debt pay down of an abnormal size.

No.

Okay.

Thanks.

Thanks.

Your next question is from Lisa Gill with JP Morgan.

And, David, thank you for all the detail on the guidance.

Just wondering, when we think about generics, do you include any of the at-risk launches in that guidance and, as we look at '08 versus '07, I do agree that it's somewhat more back end loaded but with Protonics potentially a full launch, 2008 could also be a good year.

And then just secondly, I know that in the past, Tom, you've been a little bit apprehensive about talking about some of the programs that you are putting in the marketplace but can you just talk about, from a retail perspective, you said clients are excited about some of these things, is it beyond what we are seeing at MinuteClinic, can you talk to us at all about anything that's, that you are doing that's differentiated from a client perspective?

Sure.

The first part of your question, Lisa, we typically, there's obviously, people are talking about the top of mind issue is Protonics, it's obviously a moving target and you can see what's happening, it's fluid in the marketplace now with the recent announcement from Wyeth about authorized generics.

So, those are still in active negotiations.

The good news there is if you have more suppliers you have lower cost and more continuous supply.

So, from that standpoint that's really all we can say about that.

We do have some, we do factor in some at-risk generics.

There's some in the earnings.

But not a significant amount because it's always a risky piece to do it.

We try to handicap these as best we can from past experience, so we do have something in the numbers for that.

Obviously if it breaks differently, we will adjust those numbers during the year.

Exactly.

If it does turn out to be a full launch and Wyeth isn't able to win the court case, then things could potentially change.

Yes, there's a lot of things that could change, around other generics coming in and timing, up and down, obviously we could have some in there that we think are coming off in the second quarter and they come off in the third quarter.

But as in the past, we'll keep you updated and if things change in a positive way we'll obviously let you know.

Then any thoughts on the consumer engagement on the model side?

As you are out talking to both clients as well as consultants, what are you hearing back from them as far as, beyond MinuteClinic, what are some of the other things they would like to see in the market?

The whole reason we did this deal was really to have an integrated approach to healthcare.

People talk about this, the Wal-Mart deal that was announced around generics and around limiting the stores that people can go to, that's not what this is about.

I mean, to lower costs on some generics and tell you that you can only go to 1500 stores, that's not going to win in this marketplace.

The payer's looking for an integrated, fully integrated model that has the infrastructure and the capabilities to control trends and lower their overall healthcare costs.

And one of the ways is to have more face to face interaction with the consumer.

Now, we know compliance and adherence is important to lower healthcare costs.

We also know face to face interactions with pharmacists or nurse practitioners improves that.

We also know that disease management enrollment.

We know disease management works.

We know it's difficult sometimes to enroll people over the phone.

We know we can enhance that with face to face interaction at the pharmacy and in the stores.

We know there are some gaps in care, either people are not adherent, people are probably not taking some additional medication that they could.

We know that we can have some, whether it's biometric screenings or others, in our stores that will enhance that.

So it's more the issue of, there's probably 80% of the activity happening in the marketplace that's pretty good now, we are trying to enhance it and add that other 15 to 20% that's really going to improve healthcare on a go forward --

Lastly, as a follow up to that, is this what's going to help you retain and win business or is this something that you are going to get paid additionally for some of these programs?

Well, both, depending on the program.

We think it's going to obviously help us retain and gain new business in our PBM, and obviously we will gain some share across all our pieces of business.

Thank you.

Thanks, Lisa.

Your next question is from Deborah Weinswig with Citi.

In your comments you talked about leveraging the ExtraCare card to PBM customers.

Can you provide some more details around that?

We have, as you may know, we have about I guess 55 or close to 60 million of active cardholders with ExtraCare.

And we are looking at how we can, what's the mix, what's the cross section of PBM clients that actually have ExtraCare.

And in addition to that, not only getting the ExtraCare in their hands but also offering some opportunities for selected purchases and selected offerings that would tie into improving healthcare.

Whether it's for the asthma patient or the diabetic patient or whether it's for health savings accounts and as you start to get into more consumer directed healthcare programs, we think this is a big opportunity and I can tell you it's resonating with our clients.

I know a big focus has been on the specialty pharmacy side and trying to really stop the leakage there.

Can you also talk about initiatives that are in place in '08 to help you continue to charge forward with that business?

This is once again about trying to lower cost for the payer.

A lot of the specialty business is still in Major Medical.

It's still filled outside the quote, unquote, specialty pharmacy channel.

And what we are trying to do is, one, improve service to the consumer by making sure that they get the specialty meds they need but also controlling the cost because we can buy it better, we can distribute it better, we can negotiate better.

So if we get as much leakage as we can, that's going outside the specialty channel that we control, it's going to be better for the payers.

So that's the opportunity.

And is Accordant a tool that you think will help you --

Accordant will help.

We are the only one that really has -- we've been in that business longer than anybody else.

We are the only one that really has a specialty in disease management combined, because it's not, they are not separate stand alone entities.

We combine the organization.

We think about it that way so Accordant will only help that.

Thanks so much and congratulations.

Thanks.

Your next question is from Matt Perry with Wachovia Capital.

Hi, good morning, I was wondering if you could clarify a little bit on the revenue synergies.

I'm not sure I quite understood your comments there.

Was it 400 million in retail and then greater than 400 million on the PBM side.

That's correct.

And should we, what kind of margin should we think about on that?

Similar to the consolidated company margin?

Yes.

Yes.

Okay.

Okay, and then secondly, it looks like the last couple of quarters, I think you've given some very positive data points on new PBM business wins in '08 and then it seems like you are optimistic about '09.

Any thought that '09 could be an even better year than '08 for PBM wins?

Listen, we are out there fighting for the business and the direction we gave, I think we would stand by, and it's better you will hear about it but we feel pretty comfortable in the direction that we've given.

Okay.

And then, maybe Howard could give us just a little more detail on the specialty revenue.

I mean, very strong specialty of mail in the fourth quarter, what kind of run rate does that look like in 4Q '07 and should we continue to think about that growing much faster than the overall PBM revenue in '08?

Matt, you have to keep in mind that as FEP left, it was, a big part of that to be mail contract was specialty.

What we expect to see and I think what they talked about, as we see going forward, our, we won't have the extended double-digit growth rates that we've seen, especially it grew about 14% in Q4, it will probably be single digits next year because you are running a comp against a very solid FEP book of business.

We were able to penetrate that very well, given what we were able to do and get very solid market share there.

And -- so that's what we are running against.

But we expect our business to run.

Tom talked about the pull through of the leakage right now.

That's one of our, always has been a strong target of ours and as new business comes on there is leakage just built into it.

So we expect to see some solid growth.

But with FEP going away, the growth rates we're looking at, we're pretty pleased with where we are positioned.

If I could just squeeze one in for Dave, all the free cash generated in '08 and no kind of clear -- nothing included in the guidance for uses of that cash, is that simply because you are going to leave open your options for uses of it or is there the potential that you accumulate a significant amount of that cash through '08?

I thought about gathering it all up and going to Brazil but that didn't seem like a good option.

We will be discussing with our board ways to use it.

We are currently, as you know, at the tail end of a $5 billion program.

It didn't seem like it was all that urgent to make an announcement today on that.

We have here the largest cash flow in the industry.

We have a lot of flexibility.

We will be using that flexibility both to tend to the health of our balance sheet and our flexibility for strategic steps going forward and for shareholder wealth improvement.

That's the direction we are going in.

Thanks a lot.

Thank you.

Your next question is from Eric Bosshard with Cleveland Research.

Good morning, just a quick follow up on that.

Dave, so there's no assumption for the use of that 3 billion in the guidance for '08.

Is that correct?

The assumptions that we've made and the guidance that we've given you does not include a further share buy-back, that's correct.

And does it include any interest expense reduction related to that 3 billion?

Well, of course it includes the consequence of having that cash, which would be, pay down of commercial paper and so forth and so implicitly there is some interest saving in the numbers.

Secondly, there's been some rumblings lately that I thought might be helpful if would you address, in terms of potential risk of planned departures in '08, there's been some discussion about AT&T, I don't know if you can talk a little bit about what it is up in '08 and give us any --

We are not going to talk about individual clients here but the numbers we have, I mentioned the retention rate that we have for clients now, we are at or slightly ahead of where Caremark has been in the past.

I can tell you that I've been to, two recent finalists meetings where big renewal contracts and without going into the details, I wouldn't believe all the rumors that are out there and the numbers we have expect our normal retention rate.

That's very helpful.

And then lastly, as you've had these discussions for planned retentions and planned wins and started to roll-out more of what you're doing, can you just talk a little bit about how pricing is behaving and what you're seeing in terms of the response of customers today versus a year ago, what you think is getting people's attention now that wasn't perhaps prior to the merger.

Well, listen, pricing has always been competitive.

It was competitive when we had just PharmaCare.

Obviously it was competitive in Caremark stand alone and continues to be competitive in the marketplace.

I think it's the offering, though, it's the integrated offering that people really are reaching for to say, help me control my trends in ways that are different.

We can control it with some formularies and we can control it with generics and we can control it with rebates and tiered copays, et cetera, et cetera, but how do you help me engage my employees and my enrollees to help them get more involved.

So that's really what they are reaching for, but from a pricing standpoint, it's always been competitive and the old joke is you never see many price increases in this business and we don't see that now.

And at the end of the day we are dealing with a lot of smart, sophisticated buyers that, they are not just into unit costs.

They are into looking at overall trends and their healthcare costs.

That's very helpful.

Thanks.

Your next question is from John Ransom with Raymond James.

I had two questions for Dave.

The first one is, why Brazil?

No extradition for financial crimes.

Carnival is over, you're a little late, so I was just curious.

If you look at 2008 versus 2007, how should we think about the net cost savings slash acquisitions synergies in the comparative years, broadly speaking?

Well, the synergies in 2008 are about half again what we had in 2007.

I guess what I'm -- okay.

Could you add to that a little bit?

I'm still not clear.

Well, you heard that we are projecting over 700 in 2008.

Okay.

In 2007 we had slightly under 400.

Okay.

I gotcha.

A little more than a net 300 difference year over year.

Slightly more than half.

And that is grossed up for the cost as well.

That's net of cost.

Okay.

Thank you.

That's it.

Thanks.

Your next question is from Meredith Adler with Lehman Brothers.

A lot of questions have been asked but maybe I'll talk about a topic that I don't think is a big issue but, your thoughts about the consumer and what you think will be happening, sort of behavior you're seeing?

I'm not terribly worried about it but just want to here your thoughts.

Well, obviously the consumer sentiment is a little shaken now with credit and housing and mortgage rates and people, what they are seeing in the stock market, but obviously we see it cyclical and in our business it's less impactful but the consumer's not as resilient and upbeat as they were a year and a half ago.

But I expect as Feds continue to cut rates and rates continue to go down, I don't believe we are going to go into a full recession.

By the way, I'm not an economist, this is one man's opinion.

I don't think we are going into a full recession and I do think we will get more recovery in the second half of the year.

Either way from our standpoint we are in good shape.

And I assume that attitude is basically reflected in your numbers?

Yes, it's reflected in our numbers.

You look at our core business and the projection that Dave gave you for comp sales in the overall retail business and those numbers are, reflect that attitude and that feeling.

Great.

And then another question about, when you think about holes you might have in your business, whether it's on the healthcare side or retail geographically, do you start thinking about making additional acquisitions?

Obviously right now you're leaving a lot of money in your pocket with a lot of flexibility, should we be thinking about the potential for other kinds of acquisitions to round you out?

No, I don't think you should be thinking about that now.

I mean, we have, obviously have a lot on our plate right now.

We have a lot of room to grow and ground to hoe here, so after that in a few years or down the road we will always look at it.

You have your head down and you're running the business and we want to make sure we also have our head up looking for opportunities.

As you know, we've been a fairly opportunistic company over the past few years and we will continue to do that but I wouldn't be sitting waiting for any announcements.

But having said that, if something should be appropriate for us we will look at it when the right time and the right price and the right business.

One final question for Dave, you've been very helpful about talking about incremental synergies in '08 versus '07.

When we think about how that's going to show up, you did say that the synergies are more likely to help the first half.

Is it fair to say that you meaningfully started getting synergies last year in the second quarter, and so we shouldn't expect as much benefit in the second half.

Well, your observation is correct.

I mean obviously, first quarter last year had ten days of the combination and therefore roughly 80 days without the combination.

We will cycle that and we did ramp up fairly quickly, quicker than I thought, once we got after the synergies.

So they were meaningful beginning in the second quarter and they were full blast by the fourth quarter.

So I don't know offhand what the percentage is but maybe we were at 70 or 80% in the second quarter of what we achieved by the fourth quarter, something like that.

Great.

Okay.

Thank you very much.

Your next question is from Ed Kelly with Credit Suisse.

I had a little bit of a different question for you.

We've heard that Estee Lauder may be looking to broaden its distribution of the Clinique line of cosmetics beyond the department stores and to me it seems like drug stores are an obvious choice, within drug stores it seems like you are the best choice given your success in that area.

Could you maybe just give us your thoughts on the potential of brand prestige cosmetics actually moving to drug stores and what it would mean for you?

I won't comment on particular brands but just directionally, I think you know we've spent a lot of time and a lot of focus on beauty in our business.

We think it's a customer that 75% of our retail customers are in fact women.

They are the healthcare providers, they are the healthcare givers.

And if you look at our promotions when you think about pharmacy or beauty, we spend a lot of time talking about that.

Our recent beauty advisor program and our healthy skin program has emphasized that.

You look at some of our, special lines that we've brought in, proprietary lines in beauty, I think that enhances it.

I think at the end of the day these companies are looking for new doors and new distribution points because the department stores are what they are and where they are and so we think there are some opportunities around that and I guess that's how I'll leave it.

And on the PBM side of the business now, you've heard from a number of payers that the belief there is that the potential for synergy and value-add, when combining the administrative function of the PBM with the patient contact and the pharmacy is real and impressive.

But how far does it, to sort of sell that model in without real empirical evidence or sort of history of cost savings given that it is basically new, right?

Sure, that's a valid point.

It's a, we have some history on some smaller pilot programs and we have pilot programs going on as we speak that will address that.

But there is so much data out there in the marketplace around clinical programs that work, that it's just a matter of execution.

So keep in mind these are three-year contracts and they know that we are going to work together over the years.

So it's not like we have to turn on the spigot right away when we get the contract.

But payers get it.

They get, they understand what they are up against.

And keep in mind, we've got 190,000 people in our company, so we get it, we are a payer and a provider.

And they understand the concept but you're right, it's hard stuff, it's hard stuff and we are working on it and we feel good about it and we have the right people working on it with the right technology, and a lot of the right payers.

We have very sophisticated clients that are working with this with us on this in a partner, in a partnership way.

And so we have, we have the, as I said there's not only anecdotal evidence but there's actual evidence in the marketplace, in the healthcare marketplace around different programs whether they are compliance and persistency programs or whether they are programs around disease management that in fact work.

So it's not as hard a sell as you might think when you start talking to people and working as a partnership.

Okay.

Great.

Thank you.

Thanks.

Your next question is from Scott Mushkin with Banc of America.

Two quick questions.

First of all, Wal-Mart made a big announcement about getting into the PBM business and I guess my take on it maybe validates what you guys have done and I want to see if you have any comments on that.

Second thing is, we've heard that you started to do some experimenting with central fill it retail and I was wondering if you could give us any color on how that's going.

Final question for Dave, amortization expense, 410 million, how does that compare year over year?

Is that down a little bit compared to where you thought you would be for '08?

That's it for me.

I will take the first two and then you can take the third one.

First, the Wal-Mart announcement obviously there's not a lot of details around it and it was very little impact on the first announcement that was made around the retail generic side of the, of their announcement and this one, as I said, there are not a lot of details but as I mentioned earlier, this is not about going to a payer and saying we can lower the prices of 300 or 400 of your drugs if you just come to our stores.

That's not how this game is won, that's not how you are going to be successful in this marketplace.

So, listen, this business is fairly sophisticated.

It's technology intense.

You have to have the right infrastructure, whether it's the mail facility, specialty business, the disease management business, the tie in with clinical programs, the connection with retail pharmacy.

So this is not about a one off, going in thing, lower the prices and come to our stores.

It's a little more sophisticated than that.

So I guess that's all I'd say about that on the Wal-Mart side.

As far as the -- what was the other one.

The central fill.

We are experimenting with that.

You can imagine there's all sorts of challenges around that and we are looking at it in some urban markets but we are really experimenting with how we can take some more back end administration out of the pharmacy, as opposed to the filling process out of the pharmacy.

When you think about the administration of the dispensing of prescriptions, whether it's phone calls or third party adjudication or physician calls, that's a lot of the work, it's not the actual filling of the prescription.

So central fill is an area that we stuck our toe in but there's other opportunities that are bigger and broader that we can leverage across all our stores, as opposed to just some stores in urban markets and I will let Dave answer the third.

You asked two questions, how does it compare year over year, we said we were looking at 410 for '08.

The comparable number in '07 is 344 or 345 million and that's a partial year obviously.

And the other question was, is it lower than we had thought and the answer to that is, yes, it is.

We were hopeful of getting to the number that we got to at the time of the third quarter call, we just weren't there yet.

We had a bunch of remaining detail to go through.

We've now gone through it and satisfied ourselves, the outside firm that we used for valuation and our auditors that we have arrived at the right place, I'm happy with it and it's where we wanted to go.

So as we looked at it, Dave, did FEP and the loss of FEP in the state of New York bring that number down for '08, compared to where you were at the third quarter when I think it was pushed up a lot?

Yes, no, don't think of it in terms of individual contracts.

It's sort of the book of business and what are the characteristics of the book.

And the detail that you have to go through is digging down into all those individual contracts and then you have to get back up and make an overall assessment, and that's the work we've completed but I wouldn't hang it on any one contract.

Okay.

Great.

Thank you.

We will take two more questions.

Your next question is from David Magee with SunTrust Robinson Humphrey.

Good numbers here, the question I have is actually two-part, one is, as you go through the selling season this year, this spring, do you have any contracts that are as big and as high profile as that contract last year.

And then secondly, although I know it's not important to the overall numbers, I'm just curious with regard to the contracts or the networks that Walgreen's pulled out of last year Caremark, what is the status of that right now, have those customers found other retailers to go to or is that situation still dynamic at all at this point in time?

I will take the first part of that and I will ask Howard to talk a little bit about the selling season.

We don't negotiate and we don't discuss individual contract negotiations with any of our network providers.

As you do know, we have close to 60,000 pharmacies in our network and so for this two providers we have 56,000 pharmacies in the network.

And most of those, in fact all of those prescriptions have gone obviously elsewhere and we continue to have negotiations with all our network providers on a regular basis.

So this goes on in the business.

I don't think you would have heard about it at all if it, if it wasn't brought up in the courts.

So it's a small piece of the business and once that happens we have to listen to the payer.

We work for the ultimate payer here.

And once they decided that they didn't want to do that, they didn't want to deal with it, we just made calls to the appropriate people and had our people work on it and found homes for the rest of the people.

But we are confident and comfortable and positive that we have a good relationship, and we will continue to work together.

And part of your question about, do we have any large contracts like we did last year and the answer is no, last year was a big year with FEP and the state of New York.

So this year, of our business is coming up, there is one large employer there that we are looking at but other than that we are about where we are positioned.

And the point on the FEP, keep in mind that FEP contract I think it changed three times in four years or five years, between moving people around and the mail and the retail side.

So it was a little different animal than the contracts that we are talking about.

Thanks a lot.

Thanks.

Your final question is from Mark Wiltamuth with Morgan Stanley.

One of the attributes of your new PBM retail model is to be able to switch people back and forth between retail and mail.

Just want to do get an update to see if your systems are ready to handle that today and if they are not, when do you think they will be ready to handle that seamlessly?

We are working on the, we're doing some now on some work around with some pilots and we expect to have that, have it seamlessly done in probably eight to ten months.

Okay.

And on the clinics, we've done some work there and it seems like you'd really need to be above two visits an hour to really hit good profit levels on the clinics.

What do you do to kind of manage dead time in the middle of the day and also seasonal dead time, obviously in the summer you have not going to have as much visit action as you are going to get in the flu season.

Correct and I won't comment on the actual numbers but I will comment on that you have fixed cost in that business and to your point it is a seasonal business and June, July and August are the slower months.

And those are some opportunities that we are working with our PBM clients on.

And I won't go into all the details on that but there are opportunities when you have fairly sophisticated and well educated health professionals that you can use and leverage during those down times we are going to do that with our clients and our clients are actually very happy about it.

Okay.

On the merger cost savings number of $700 million, is there still room for that number to grow as you go back to negotiate rates with pharmaceutical companies?

You know, what I think you should be thinking of when you think about that is that we have gotten the bulk of what we are going to get out of the combination of the two companies.

There will always be negotiations for better prices on everything, nature of the business.

So we will get more cost savings as we go forward and part of that's built into our plan.

But the actual synergy benefit of the combination of these two companies is done.

And the synergy benefit obviously that was a big contributor to your PBM gain of 33% on EBITDA per script, how big do you think that gain would have been if you had not had the cost savings there?

I don't know the answer to that.

It would have been smaller and probably you could estimate it, I don't have that at the tip of my fingers, though.

Okay.

Thanks a lot and as always if you have any questions you can call Nancy Christal.

Thanks a lot.

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