CVS Health Corp (CVS) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CVS Caremark third-quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, November 3, 2011.

I would now like to turn the conference over Ms.

Nancy Christal, Senior Vice President of Investor Relations.

Please go ahead.

Thank you, Frank.

Good morning, everyone, and thanks for joining us today.

I am here with Larry Merlo, President and CEO; Dave Denton, Executive Vice President and CFO; and Per Lofberg, President of our PBM business.

After our prepared remarks, we will have a question-and-answer session.

During the Q&A, please limit your questions to one or two including follow-up so we can provide more analysts and investors a chance to ask their questions.

I have just a couple of reminders today.

First, we will host our Analyst Day on the morning of Tuesday, December 20 in New York City.

At that time we will provide 2012 guidance as well as a comprehensive update on our growth strategies.

In addition to Larry, Dave, and Per, you will also have the opportunity to hear from additional members of our senior management team including our new President of CVS Pharmacy, Mark Cosby; our Executive Vice President and Chief Medical Officer, Dr.

Troyen Brennan; and our President of MinuteClinic, Dr.

Andy Susman.

If you haven't received an invitation and would like to attend, please contact me.

We expect a big turnout and look forward to seeing many of you there.

Second, I want to be sure you are aware that we posted slides and supplemental financial schedules on our website this morning that summarize the information on this call as well as key facts and figures around our operating performance and guidance.

This morning we will discuss some non-GAAP financial measures in talking about our Company's performance, namely free cash flow, EBITDA, and adjusted EPS.

In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned as well as the reconciliations to comparable GAAP measures on the investor relations portion of our website.

As always, today's call is being simulcast on our website and it will be archived there following the call.

Please note too that we expect to file our Form 10-Q by end of day today and it will be available through our website at that time.

Now before we continue, 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 risks factors section of our most recently filed annual report on Form 10-K and that you review the section entitled cautionary statements concerning forward-looking statements in our most recently filed quarterly report on Form 10-Q.

Now I will turn this over to Larry Merlo.

Thanks, Nancy, and good morning, everyone.

We reported strong third-quarter results this morning with adjusted earnings per share from continuing operations of $0.70, $0.02 above the high end of our guidance.

This was primarily driven by better-than-expected performance in our PBM as well as the impact of the accelerated share repurchase we announced and executed in the quarter.

We also delivered $1.5 billion in free cash flow this quarter, bringing the year-to-date total to $3.9 billion.

Now recognizing our strong performance year-to-date as well as our solid outlook for the remainder of the year, we are narrowing our 2011 EPS guidance range.

We now expect to deliver adjusted earnings per share from continuing operations of between $2.77 and $2.81 compared to our previous guidance of $2.75 to $2.81.

In addition and consistent with prior guidance, we expect to generate free cash flow for the year of between $4 billion and $4.2 billion.

And Dave will provide the full details on our guidance during his financial review.

So with that, let me turn to our business update and acknowledge that today's update will be a bit more brief than usual since we will have an opportunity to provide additional details at our analyst day next month.

Now you will recall back in March upon assuming CEO responsibilities, I told you we were very focused on turning around the growth trajectory of our PBM in order to unlock the full value of our integrated enterprise.

I am very pleased to report that we are delivering on our promises and we remain confident that the PBM will return to healthy operating profit growth next year.

As Nancy said, we will provide specific guidance at our December 20 meeting but today I want to focus on the successful execution of the five point plan to return the PBM to healthy operating profit growth that we outlined earlier this year.

The first key element of the plan, achieve continued momentum in new business wins and client retention.

With nearly 70% of the contracts scheduled for renewal for 2012 completed, our retention rate stands at 98%.

As for new business, on our last call we reported net new business wins totaling $4.8 billion and since then I'm happy to report that the 2012 selling season has continued to go well resulting in some additional wins.

Now we won't go into the specifics today.

We will save that for Analyst Day to wrap up the puts and takes from the current selling season in a more fulsome fashion.

Now in addition to net new business wins, recall that the PBM contracts associated with our Universal American acquisition are expected to contribute about $5.5 billion in incremental revenue next year.

The majority of that $5.5 billion is associated with Caremark becoming the PBM for the prescription drug plan in 2012.

As we have said previously, this PBM function is largely a claims processing arrangement and therefore yields a thin per claim margin but it is a very nice contributor to the synergy resulting from the UA transaction.

Now throughout the selling season, we have remained focused on retaining and adding lives while maintaining a rational pricing strategy.

All of the new business represents a significant opportunity to upsell our unique win-win programs to the new lives under management, providing opportunities for incremental scale and share gains across the CVS Caremark enterprise.

We believe that driving topline growth will help offset the usual margin compression associated with renewals and driving revenue growth will be an important component of successfully growing our operating profit over time.

The second key element of our PBM growth plan to continue to develop and upsell our unique clinical offerings and we have made great progress here.

As an example, our Pharmacy Advisor program for diabetes that was launched in January will have approximately 12.5 million active members by year-end and another 2.1 million members already committed to the program for next year.

Additionally, we are excited by our ability to offer Pharmacy Advisor to Aetna's 8 million commercial lives as they begin the migration to our systems in 2012 and we expect to build on this year's experience and launch Pharmacy Advisor for four key cardiovascular conditions next year.

We see the opportunity to double or perhaps triple the number of members using Pharmacy Advisor as we expand to other conditions.

So we are very excited with our program and the early results from Pharmacy Advisor are very encouraging.

We will have more data to share at our Analyst Day around the effectiveness and impact Pharmacy Advisor interventions are happening.

Third key element of our plan, aggressively drive growth in mail choice and generics.

Since our last update, we have added 51 new plans and another 1.7 million lives to our Maintenance Choice population, a population which now totals 757 plans representing 9.9 million lives committed to implement by January of 2012.

Over time we see a significant opportunity to increase the number of lives using Maintenance Choice and our data continues to demonstrate that Maintenance Choice has been successful in broadening access while reducing costs and improving prescription adherence.

Equally important now that the early adopters of Maintenance Choice are entering contract renewals, we have retained over 99% of all Maintenance Choice clients demonstrating that our unique integrated programs increase client loyalty and make our contracts a little stickier.

Now moving on to driving growth in generic utilization, we continue to encourage the adoption of plan designs to improve generic dispensing rates.

264 clients representing about 6.8 million lives have adopted generic step therapy plans and given our strong alignment, these generic step therapy programs translate into significant savings for clients and enhanced profitability for our business.

The fourth key element of our plan is a focus on high-growth areas, especially Medicare Part D, Specialty Pharmacy, and our Aetna relationship.

As you know, we are very committed to growing our Med D business.

We view the Med D business as a significant growth opportunity in light of the number of employers who may decide to shift their retirees to an EGWP program or simply into the open PDP marketplace.

Furthermore, despite thinner margins on a per script basis, the value of providing services for Med D Life is significant since people over 65 take three times the number of prescriptions compared to the under 65 population and with that in mind, we completed the acquisition of Universal American's PDP business in April and the integration is going very well.

Now in regard to our bids for low-income subsidy lives in 2012, recall that our PDPs came in below or within de minimis in 33 of the 34 regions where we qualified for 2011.

That was great news and we estimate that we will be awarded more than 100,000 low-income subsidy lives.

Now that being said, the total number of beneficiaries that will ultimately be enrolled in our PDP plans for '12 will not be known until we find out specifically how many low-income subsidy members will be assigned for the 12-plan year along with learning the results of the open enrollment period at year-end.

In addition as an extension of our Aetna relationship in early October, we announced a new cobranded Medicare prescription drug plan now available in 43 states and the District of Columbia.

The Aetna's CVS low-cost plan has a $26 monthly premium and no deductible for generic drugs.

Medicare beneficiaries who sign up for the plan and fill prescriptions at a CVS/pharmacy will realize savings on their out-of-pocket prescription drug costs providing outstanding value as well as the convenience of filling prescriptions at their neighborhood CVS.

Now let me touch briefly on specialty, as that again represents another area of significant opportunity and I'm happy to report this morning that our specialty revenues grew a very strong 26.3% this quarter driven by healthy underlying growth as well as the addition of the Aetna specialty business.

We will talk a lot more about our strategies for driving continued growth in specialty next month at Analyst Day.

The third high-growth area is capitalizing on the long-term potential of the Aetna contract.

The implementation phase is ongoing and we continue to successfully operate within legacy Aetna facilities and on their platforms.

We expect the systems migration to began in 2012 and continue through the first half of 2013.

Now as we said on our last call, the specialty migration has been completed and we are in the process of migrating Aetna mail prescriptions to CVS Caremark facilities with migrations occurring every two to three weeks through year-end.

Furthermore, we continue to work closely with Aetna to help build their messaging around the value proposition for 2012 and beyond.

We'll help them service their clients and build their client base by providing innovative solutions that deliver low-cost high-quality care for their members.

So overall the Aetna relationship is very solid and progressing very nicely.

Finally, the fifth key element of our plan to execute successfully on the PBM streamlining initiative.

We are on track and remain confident that we will achieve more than $1 billion in related cost savings from 2011 through 2015.

As we have said previously, the benefits of streamlining will outweigh the costs in 2012 and we continue to expect to hit the run rate of annual savings of between $225 million and $275 million in 2014.

Now you may recall this initiative is focused across three main categories.

One is streamlining operations to improve productivity.

A second, rationalizing capacity, and the third investing in technology.

And in the interest of time today I will focus on investing technology and the progress that we have made on the migration to our destination platform.

In the third quarter, we completed another successful wave of migrations and we implemented our new business on the destination platform.

For example by January 1, we expect all of our Medicare Part D business to be on one platform.

I think what's exciting about our technology investment is the powerful tools that we are using to seamlessly migrate our clients to the destination platform will also further enhance our ability to onboard large volumes of new business with best in class speed and accuracy.

So our five point plan is being executed successfully and as a result again, I fully expect the PBM to demonstrate healthy operating profit growth in 2012.

Now I will turn to our retail business, which continues to gain share.

Our same-store sales increased 2.3% in the quarter near the high end of our guidance range and we achieved that despite some one-time events in September that affected script utilization including the East Coast storms and a very slow start to the fall flu season.

Pharmacy comps increased 2.4% with script comps up 1% and that's with 90-day scripts counted as one script.

When converting 90-day scripts into three scripts, our script comps increased 3.1% in the quarter.

Our script unit comps continue to outpace all of our primary competitors and our pharmacy share in the markets in which we operate grew approximately 65 basis points versus a year ago.

Our pharmacy comps were negatively impacted by approximately 200 basis points from new generics in the quarter.

In addition, our pharmacy comps benefited from the continued growth in Maintenance Choice, which added approximately 140 basis points on a net basis.

Now we have gotten an awful lot of questions about whether or not we are already achieving benefits from the standoff between Walgreens and Express Scripts.

The answer is it's not material to date.

Their contract runs through the end of this year so while some script transfers began to occur in the third quarter we did not see a material impact to our results.

We may see some transfers in the fourth quarter but the real opportunity begins in January if they haven't resolved their issues by then and we are certainly well positioned to service Express Script members to ensure that they have uninterrupted convenient access to pharmacy care and excellent customer service.

We expect to capitalize on this significant opportunity to grow our business if they don't reach an agreement.

Now turning to the front store, traffic in the quarter was flat but the average transaction size grew versus last year.

We saw some increased inflation this quarter but it did not have a material impact on our results.

Our front store comps increased 2% in the quarter and while cold and flu-related sales were down year-over-year, we saw strength in a number of categories especially allergy, consumables, and store brands.

We recently launched our new proprietary beauty brand, Nuance by Selma Hayek, and its results to date are exceeding plan.

And our store branded proprietary products made up 17.5% of front store sales in the third quarter, up 50 basis points from last year as consumers continue to be value-conscious in this economy.

Now with more than 68 million active ExtraCare cardholders and almost 66% of our transactions using the card, we continue to use our loyalty program to drive profitable front store sales and I'm pleased to report that our targeted promotional strategy enabled us to achieve higher front store margins yet again this quarter.

Our clustering initiatives continue to post very strong results.

Now in the second year of its rollout, the urban cluster encompasses 325 stores with plans to total about 420 stores by the end of this year.

We are currently developing and testing additional clustering concepts and we expect to gain more insights in the coming months.

As for our real estate program, we opened 53 new or relocated CVS/pharmacy stores.

We also closed one store resulting in 38 net new retail drugstores in the quarter and we are on track to open approximately 150 net new stores for the year, delivering retail square footage growth of approximately 2.5%.

Let me turn briefly to MinuteClinic, and we will talk more about MinuteClinic on Analyst Day, but today we now operate 645 clinics in 25 states and the District of Columbia, and we have now served over 10.5 million patients since the Company's inception.

And despite virtually no flu season to date, MinuteClinic revenues increased 15.5% in the third quarter versus the same period last year and we are right on track to break even on an all-in basis by the end of this year.

As you know, we announced plans to open 500 clinics over the next five years and during the third quarter, we opened 48 new clinics bringing us to 87 new clinics as of the end of the quarter.

We believe our plans to double our clinic count over the next several years will position us well to play an important role in providing care to the 32 million newly insured beginning in 2014.

The MinuteClinic also continues to enhance its role as a collaborator in developing integrated health networks and accountable care organizations.

During the third quarter, MinuteClinic entered into its 11th clinical affiliation this time with IU Health, the largest and most comprehensive health system in Indiana.

This is just one more example of a valuable affiliation with the leading health systems that again positions us well for future growth.

So with that, I will turn it over to Dave for the financial review.

Thank you, Larry.

Good morning, everyone.

Today I will provide a detailed review of our third-quarter financial results.

I will also review our 2011 guidance both for the full year and provide guidance for the fourth quarter.

I will start with an update on our capital allocation program.

First, we have paid approximately $510 million in dividends year-to-date.

We raised our quarterly dividend by 43% back in January so we anticipate a payout ratio for 2011 between 19% and 20%.

As you know, last year we set a target payout ratio of 25% to 30% by 2015, which implies a 25% CAGR in our dividend and we are well on our way of achieving this very important goal.

Second, coming into the third quarter, we had approximately $1 billion left on our $2 billion 2010 share repurchase program.

We repurchased 16.3 million shares for approximately $579 million from that program in the third quarter.

Early in the third quarter, we implemented the Rule 10b5-1 plan covering the 2010 share repurchase program and we only purchased shares in accordance with set plan parameters.

We have approximately $450 million left on our 2010 authorization and we expect to complete that by year-end under this plan.

As you know in August, our Board authorized a new share repurchase program for up to $4 billion of our outstanding common stock.

Subsequent to this authorization, we entered into a $1 billion accelerated share repurchase agreement under which we repurchased 25.7 million shares.

So during the third quarter, we repurchased a total of 42.1 million shares at a cost of approximately $1.6 billion.

Year-to-date, we have repurchased 69.5 million shares at an average cost of between $36 and $37 per share and we have spent approximately $2.5 billion.

It is my expectation that the remaining $3 billion of the 2011 authorization will be used in future periods beyond 2011.

So between dividends and share repurchases, we have returned more than $3 billion to our shareholders in the first three quarters of 2011.

As you know, we recently sold our TheraCom asset to Amerisource Bergen.

We are very focused on investing in assets that align with our strategic direction and will drive shareholder value.

We believe TheraCom was a non-core business for us and therefore chose to monetize it for $250 million.

We will use the proceeds as part of our capital allocation program going forward.

Given our strong free cash flow outlook, our ability to return significant value to our shareholders should continue now and well into the future.

As Larry said, we expect to generate between $4 billion and $4.2 billion of free cash this year.

In the third quarter we generated approximately $1.5 billion, an increase of more than $600 million over the same period last year.

This increase was primarily driven by the timing of CMS funds received in September associated with premiums and subsidies for Medicare Part D, which we earned in October.

This was partially offset by larger cash outflows and accounts payables due to the timing of purchases in both the PBM and retail segments as well as the absence of proceeds from sale leaseback transactions in the third quarter of last year.

We expect the timing issues to reverse in the fourth quarter bringing us well within our cash flow targets for the year.

As you know across our retail chain, we set a $1 billion inventory reduction target for 2011.

I'm happy to report that during the third quarter, we reduced our related retail inventories by another $305 million, bringing the year-to-date total to approximately $855 million and placing us well within the reach of achieving our $1 billion inventory reduction goal for the year.

You can see the improvements we have made in accounts payable and inventory on the balance sheet and in our strong cash flow.

Inventory days within the retail segment is more than three days better than it was at the end of last year and DPO has improved by nearly two days, so we are confident that we can meet our targets for 2011 while our teams also lay the groundwork for additional improvements in 2012 and beyond.

Gross and net capital spending in the quarter was $458 million, an improvement from $513 million last year, mostly due to the timing of store construction costs.

Year-to-date, our net capital spending has been approximately $1.2 billion or about $100 million less than last year's comparable period.

Turning to the income statement, adjusted earnings per share was $0.70 for the quarter, $0.02 above the high end of our guidance range.

GAAP diluted EPS came in at $0.65 per share.

The earnings beat was driven by better-than-expected margins and profit in the PBM, the accelerated share repurchase and solid expense control in the corporate segment.

The better-than-expected performance in the PBM accounted for about a penny of the earnings per share beat and was driven by improved rebate performance and the timing of Medicare Part D profitability and expenses.

The $1 billion accelerated share repurchase was responsible for nearly one penny of the earnings beat.

On a consolidated basis, revenues in the third quarter increased by more than 12% to $26.7 billion and drilling down by segment, net revenues grew by 26% in the PBM to $14.8 billion.

The majority of the increase from last year was driven by the additions of the Universal American and Aetna businesses to our book.

PBM pharmacy network revenues in the quarter increased 31% from 2010 levels to $10 billion while pharmacy network claims grew by 40%.

Total mail choice revenues increased by 16% to $4.7 billion while mail choice claims expanded by 8%.

Our overall mail choice penetration rate was 21.8%, down approximately 450 basis points versus last year.

This decrease was driven entirely by the addition of Aetna and the Universal American Med D business, both of which have lower mail penetration rates than the average book of our business.

In the retail business, we saw revenues increase 3.8% in the quarter to $14.7 billion.

This increase was primarily driven by our same-store sales increase of 2.3% as well as net revenues from new stores and relocations which accounted for approximately 150 basis points of the increase.

Pharmacy this unit comps increased 3.1% on a 30-day supply basis.

Pharmacy revenues continued to benefit from our Maintenance Choice product.

As Larry noted, Maintenance Choice had a net positive impact of approximately 140 basis points on our pharmacy comp this quarter.

Additionally a higher generic dispensing rate negatively impacted pharmacy revenue growth.

Turning to gross margin, the consolidated Company reported 19.4% in the quarter while gross margin contracted 174 basis points compared to last year and it has improved 96 basis points since Q1 of this year.

Within the PBM segment, we saw sequential gross margin improvement or approximately 150 basis points but gross margin was down 125 basis points versus last year's third quarter.

The decline versus last year mainly reflects the pricing compression associated with contract renewals including the one-year extension of the FEP contract which became effective in September of last year.

It also reflects the impact of the addition of the Aetna business.

Partially offsetting this was the positive margin impact from the 230 basis point increase in the PBM's generic dispensing rate, which grew from 72% to 74.3%.

Gross margin in the retail segment was 29.3%, a decrease of approximately 25 basis points from last year and approximately 45 basis points sequentially.

Versus last year's third quarter, gross margin was negatively impacted by continued pressure on pharmacy reimbursement rates as well as the growth in Maintenance Choice, which compresses retail gross margin but helps the overall enterprise.

These negative factors were mostly offset by increased generic dispensing rate with retail GDR increasing by 220 basis points to 75.7% that benefits from our various front store initiatives and increases in store band penetration.

Total operating expenses as a percent of revenue improved by approximately 145 basis points versus the third quarter of last year.

The PBM segment's SG&A rate improved by 20 basis points to 1.7%.

Again, this was primarily due to expense leverage gained by the addition of a he large Aetna contract, which was partially offset by the impact of our acquisition of the Universal American Med D business.

The retail segment also saw nice improvement in SG&A leverage, which was largely driven by improved expense leverage from our same-store sales growth and expense control initiatives.

SG&A as a percent of sales improved by approximately 55 basis points to 21.7%.

Within the corporate segment, expenses were down approximately $12 million to $156 million or less than 1% of consolidated revenues, improving by 13 basis points versus the same period last year.

The decrease in expense was primarily related to lower legal and consulting expenses, partially offset by increased employee benefit related expenses and increases in depreciation.

With the change in gross margin more than offsetting the improvement in SG&A as a percent of sales, operating margin for the total enterprise declined by 30 basis points to 5.9%.

Operating margin in the PBM was 4.4%, down about 105 basis points, while operating margin at retail was 7.6%, up about 30 basis points.

Our EBITDA per adjusted claim was $3.35 in the quarter, up sequentially from the second quarter due to the seasonality of the Med D business including Universal American and the improving profitability as we move throughout the year.

Retail operating profit makes up about two-thirds of our overall operating profit achieved continued healthy growth.

It increased approximately 8% near the high-end of our guidance.

PBM profit increased 2%, which was well above our guidance range.

Going below the line on the consolidated income statement, we saw net interest expense in the quarter increase by approximately $18 million to $155 million.

Additionally our effective income tax rate was 39.3% and our weighted average share count was 1.34 billion shares.

Now let me turn to our guidance for the fourth quarter as well as the full year of 2011.

As Larry said, we are nearing our 2011 guidance for adjusted EPS to the higher end of our previous range.

We now anticipate delivering adjusted EPS of between $2.77 and $2.81 and GAAP diluted EPS from continuing ops of between $2.57 and $2.61.

If you adjust last year's EPS figures for our one-time tax benefit of $47 million, we are now expecting underlying growth of approximately 5% to 6%.

This revised guidance recognizes our strong performance throughout the first nine months of this year as well as our confidence in continued solid results for the remainder of this year.

It also includes the accretive impact of our accelerated share repurchase in 2011 of about $0.02 per share and the dilutive impact on both 2011 and 2010 for the reclassification of our TheraCom asset to discontinued operation of $0.01 per share.

Additionally embedded in this guidance is the assumption that we will complete the repurchase of the approximately $450 million worth of our stock left on our 2010 authorization.

This would bring our repurchase total for the year to approximately $3 billion.

Larry also told you that our free cash flow guidance remains unchanged for the full year and that we expect to deliver between $4 billion and $4.2 billion of free cash.

This might seem a little low to some of you given the very robust third quarter we just reported but keep in mind that a good portion of our strong third-quarter performance was related to the timing of a payment from CMS.

So for the full year, our forecast remains unchanged.

Let me walk through the fourth quarter.

With adjusted EPS of between $0.87 and $0.91 per diluted share compared to last year's $0.79 per share, GAAP EPS from continuing operations is expected to be in the range of $0.82 to $0.86 per diluted share.

These estimates do not assume a material impact from either Lipitor or the Walgreens Express Script impasse.

We are assuming that the material benefit from Lipitor will occur after the six-month exclusivity period expires and the clock starts ticking on that once Ranbaxy launches.

We are assuming that if Walgreens and Express do not come to terms, the real pickup in sales in our retail business will begin in January once their contract has expired.

As Larry said, the activity to date has been immaterial.

We expect the PBM segment's operating profit to increase 14% to 18% in the fourth quarter.

Sequentially we are benefiting from the cycling of the impact of the FEP renewal last quarter, the normal progression in our Med D business of increasing profitability as we move throughout the year, and of course the improvement of the net impact of the streamlining costs and benefits.

For the year, we expect the PBM segment's operating profit to decrease by 7% to 8% driven down largely by the FEP repricing impact on the first three quarters, ongoing renewal price compression, and the costs associated with streamlining, which was s partially offset by the addition of the Universal American business and other new business wins.

We expect the retail segment's operating profit to grow 4% to 7% in the fourth quarter and to grow 7.5% to 9% for the year consistent with our previous guidance.

While flu-related script volume has been modest to date, the high-end of our guidance would be achieved if we see a more robust flu season in November and December.

For the PBM segment, we expect revenue to increase by 30% to 32% for the quarter.

For the retail segment, we expect revenue to increase by 2% to 4% and same-store sales to increase 0.5% to 2.5%.

As a result for the total enterprise in the quarter, we expect revenues to be up approximately 13% to 15% from 2010 levels.

This is after intercompany eliminations which are projected to equal about 9.8% of combined segment revenues.

For the total Company, gross profit margins are expected to be significantly down from last year's fourth quarter as both the retail and PBM segments will experience compression.

Expectations are that gross margins in the retail segment for the fourth quarter will be significantly down due to continued pharmacy reimbursement pressure as well as the increased promotions we are planning for the holiday season.

Gross margin in the PBM segment will be notably down mostly due to the addition of the large lower margin Aetna business.

For the total Company, operating expenses now are expected to be approximately 13% of consolidated revenues in the fourth quarter.

The PBM should show moderate improvement mostly due to expense leverage gained by the addition of Aetna.

Retail should show -- should improve significantly as we reap the benefits of our ongoing expense control initiatives.

And we expect operating expenses in the corporate segment to be in the range of $155 million to $165 million.

As a result, we expect operating margin for the total Company in the quarter to be modestly down from last year's fourth quarter.

We expect net interest expense of approximately $145 million and a tax rate of approximately 39% in the fourth quarter.

We anticipate that we will have approximately 1.3 billion weighted average shares for the quarter, which would imply slightly less than 1.35 billion for the year.

In the fourth quarter, we expect total consolidated amortization to be approximately $155 million.

Combined with estimated depreciation, we still project approximately $1.6 billion in D&A for the full year.

As for capital spending for the year, we continue to expect net capital expenditures of between $1.4 billion and $1.5 billion with proceeds from sale leasebacks of approximately $600 million.

Combined with our expectations for operating cash flow, this should lead to approximately $4 billion to $4.2 billion in free cash flow this year, growing by over 20% versus last year.

And we have demonstrated that so far this year we are keenly focused on enhancing our cash flow through solid working capital and CapEx discipline.

The working capital improvements we have achieved and continue to drive specifically with inventory and accounts payable will continue to drive our free cash flow building upon our strong year-to-date performance.

This performance is expected to yield solid cash flow from operations in the range of $5.5 billion to $5.6 billion for the year.

I want to just clarify one point.

In the fourth quarter, we expect total consolidated amortization to be approximately $115 million combined with estimated depreciation, we still project $1.6 billion in D&A for the full year.

Now before turning it back to Larry, I just want to reiterate that our fourth-quarter guidance does not assume a material impact from the Walgreens Express impasse.

Following the expiration of their contract at year-end, we would expect to see a positive impact beginning in January and we will be ready to support the Express Script members and to capture the corresponding financial benefits.

However, that upside will not be included in our 2012 guidance since the situation is fluid and not within our control.

On Analyst Day however, we will outline the upside to CVS/pharmacy in 2012 if this situation continues, but again it will not be within our guidance.

And with that, I will turn it back over to Larry.

Thanks, Dave.

Just as a recap, we are certainly pleased with our results this quarter.

Our third quarter was characterized by continued success in the PBM selling season, great progress on our five point PBM turnaround plan, solid retail performance with healthy sales growth, front store margin expansion and share gains, strong revenue growth of MinuteClinic and right on track to reach breakeven by the end of the year.

Earnings per share $0.02 above the high end of our guidance range and significant free cash flow generation with substantial value, return to our shareholders through dividends and share repurchases.

So with that, let's open it up for your questions.

(Operator Instructions).

Lisa Gill, JPMorgan.

Thanks very much and good morning.

Larry, I was just wondering if you have any thoughts around narrow networks in general.

What kind of interest are you seeing from clients as we move into 2012?

Maybe you can talk about it on the other side as well, if you are seeing other PBMs that are now doing a narrow network, how is that potentially benefiting CVS?

Let me start, Lisa, and then I think Per will probably add some color as well.

But I think certainly what's going on with Express and Walgreens I think raises the dialogue around restricted networks and I think as we know and has always been the case, payers are going to look for savings in every which way they can to find incremental savings in their pharmacy benefit and limited networks are just another way to accomplish that.

So I think as we look into next year's selling season, we believe that that will be a very important topic and probably get an awful lot discussion and dialogue.

On the retail side, Lisa, certainly with our 7400 stores we believe that we are very well positioned to be a beneficiary in an environment of restricted networks.

We think that we have strong relationships with all the major PBMs, a solid reputation among payers across the country, and our retail business unit works very hard with all the PBMs to ensure that we have both stable and long-term relationships.

So we think that that potentially would be an opportunity for us on the retail side as well.

Lisa, this Per.

Good morning, everybody.

I would just add that I think as you guys have heard many times, it is quite -- it is quite possible to service large nationwide customers with networks that are smaller than the big 60,000 plus networks that are common today.

And Express has made that point several times and likewise we have said the same thing.

So I do expect that if the separation between Express and Walgreens continues into next year, benefits consultants in the RFP process will be focused quite a bit on the types of savings that payers can realize with smaller networks than what's been common over the past couple of years.

But, Per, have you seen anybody actually sign up for it for 2012 or do you think that this is just a discussion that leads now into the 2013 selling season?

Yes, it's beginning.

There are several of the managed Medicaid networks that are quite narrow compared to the traditional commercial networks.

You may have seen that state of Florida which changed from us to Medco put in a restricted network excluding Walgreens for the retail side of the business.

So I think it's beginning to happen and I will be very surprised if that doesn't become sort of a frequent topic of discussion going into next year.

Than just one more question if I might.

On Lipitor specifically, we've seen that some of the PBMs have done some interesting contracting around the branded with Pfizer.

There's been a lot of talk about Pfizer talking about keeping 40% of branded even when the generic comes to market.

Can you comment, Per or Larry, on what your strategy is around Lipitor and what clients are thinking as we move into this next big generic wave?

The only thing I think I can say that is sort of public knowledge is that we, like some other plans in the Medicare part of the business, have adopted a Tier 1 strategy for Lipitor.

So we have made it attractive for plan members to use Lipitor as sort of -- with the equivalent co-pay as a generic going into 2012, and that's obviously of interest so that you can maximize the usage of that molecule and then capture as much of the savings benefits once it becomes available generically.

Let me just -- I guess following up on that, Lisa, just talk a little bit about Lipitor because I know it keeps coming up as a question.

But as Dave alluded to in his prepared remarks, it's certainly a situation with a lot of uncertainty.

We still don't know if Ranbaxy launches later this month, which would as we all know begin the exclusivity period.

And there is uncertainty as to the magnitude of plan designs as Per was talking about in terms of treating the brand as a Tier 1 or preferred product versus the generic, and obviously that impacts our retail business.

So it's difficult to quantify the impact of Lipitor and again as Dave mentioned and as we've talked previously, we maximize our profitability during the break open period.

So it's not a question of if for us, it's more of a question of when.

Okay, I appreciate all the comments and I look forward to seeing you in December.

John Heinbockel, Guggenheim Securities.

Good morning, guys, a couple of things.

As a follow-up on the restricted network issue, do you think from a Caremark perspective, how much of an advantage will be in next year's selling season to have Walgreen in your network versus others who don't?

I kind of assume that that would be a notable selling point but how big of an advantage do you think it is?

I don't think it is a big advantage.

I don't think it would be sort of a significance factor.

I do think there will be as I mentioned earlier many customers who will sort of want to compare their cost savings that they can achieve with a somewhat narrower network as compared to the 60,000 plus store network.

And they will evaluate the cost savings in relation to the disruption factor that they will have to kind of live through.

So just I do think it will be on the table in quite a number of conversations next year.

John, a lot of people have done the math.

You've probably done some of that yourself in terms of when you look at the overlap of pharmacies and the number of participating pharmacies even in a more restrictive network in terms of a one-mile, two-mile radius.

So if it doesn't end up helping you in a big way sign up new contracts, do you think it matters at all in helping you retain existing contracts with a little less of a margin hit?

Is that where the bigger impact is to be felt?

I really can't speculate on that.

I think this whole kind of uncertainty will probably cause customers to go out to bid that will sort of look at all of the options that are available to them and so there will be some churn in the marketplace caused by these types of changes.

And of course the pending Express Medco merger likewise I think will cause a fair amount of churn in the marketplace.

All right, then finally just two quick things on retail.

The front-end comp picked up nicely one year and two year but the margins were good, so you didn't -- it wasn't promotionally driven, Larry.

What do you think that came from?

Secondly, you've done a terrific job managing expenses on the retail side and I assume a lot of that is labor.

Where are the bigger opportunities to continue taking labor out of the stores?

John, let me answer the expense question, then I'll come back to the sales question.

But when you look at our expenses, obviously as Dave talked about, we are doing a lot of work around the inventory and I believe that as we look across the supply chain, we do have incremental opportunities to gain some efficiencies as we move those plans forward over the next couple of years.

And I would say that's probably the biggest opportunity that's on the table.

Back to your question about front store sales, as we talked on the last call, we continue to leverage ExtraCare in a way in which we can create value for customers, but to do it in a responsible fashion in terms of creating sales that have a positive margin flow-through.

I think that's what we saw in the third quarter.

Again, as we've talked oftentimes, we are seeing this evolution in terms of mass communication via the Sunday circular for us versus more personalized communication.

And we certainly see us having an advantage with our 68 million active ExtraCare cardholders.

We continue to experiment and learn from that in terms of how far we can push the needle in real-time, recognizing that there is still a big segment of customers that look for that Sunday circular.

So we're trying things.

We're learning some things.

As Dave mentioned, we do expect to promote more in the fourth quarter.

And when I say promote more, promote comparable to last year more than what we saw probably in the second and third quarter.

Because one of the learnings that we got is it's hard to tell that personalized story during a period, a holiday period where you have many, many more products in the store that customers are not used to seeing on a 52-week basis.

So that's the thinking behind that.

We are not changing our promotional strategy from what we've talked about on prior quarters.

Okay, thanks.

Tom Gallucci, Lazard Capital Markets.

Thanks, good morning.

I guess two follow-ups here.

One, just to sort of put all your Walgreens Express related content comments in a nutshell, it seems like if you think not just in '12 but sort of longer term that maybe you are saying you think the bigger opportunity could be on retail as opposed to winning PBM business, is that a fair takeaway from your comments so far?

Tom, it's pretty hard to quantify the big opportunity.

I would say in the near term there's certainly a bigger opportunity on the retail piece if this situation is not resolved come January.

We have all seen the numbers in terms of the Walgreens Express business and the fact that those scripts would be available out in the open market.

And at that point in time, those Express members are going to be looking for a new pharmacy to serve their needs.

And we are certainly ready, willing, and more than capable of capitalizing on that opportunity should it arise.

I think as Per mentioned, I think there could be some downstream benefits as we migrate into next year's selling season, but I think it's easy to see the immediate benefit more on the retail side.

Okay.

Then I think in your prepared remarks you talked about sort of growing revenues on the PBM side, and then over time the opportunity to upsell is important.

Can you give us any examples of sort of upselling more recently so we can sort of understand exactly how that strategy plays out over time?

I will start and then Per will again add some color.

But Tom, I think we're seeing examples that just this year in terms of the selling season, that a product like Maintenance Choice was a very important differentiator in terms of winning new business.

And as we shared earlier in some of the numbers, we are seeing rapid adoption of the new products and services that we are offering, not just Maintenance Choice but Pharmacy Advisor and I think we have opportunities to further capitalize on those as we go forward.

Can you remind us how you get paid for something like Pharmacy Advisor?

The primary focus of Pharmacy Advisor today is basically to identify adherence opportunities and gaps in care that can be filled with medications.

So the primary benefit is in the sort of uptake of prescriptions through CVS/pharmacies for Caremark mail-order pharmacies.

Over time as we get more outcomes-based evidence around these programs, we can certainly expand sort of the financial arrangements around those both in terms of guarantees and gain share opportunities going forward.

Tom, a little bit -- I mean both of these questions really point to the fact that our CVS Caremark offering is a differentiated offering in the marketplace versus the traditional PBM model.

And again, as we have commented in the past, we are very confident in our ability to effectively compete in the marketplace.

Regardless of what goes on, whether it's -- whether we are talking about a bigger Express Scripts as a result of the Medco merger or the issues that are out there brewing between the Express Walgreens dispute.

And the examples that we are talking about are evidence of the differentiation that we carry.

Right.

Thank you.

Edward Kelly, Credit Suisse.

Good morning and congratulations on a great quarter.

Larry, it sounds to me like Walgreens appears ready to make a bet here that payers will -- payers see it as a critical part of the pharmacy distribution network and Express seems ready to make the bet that they can successfully sell a PBM network without Walgreens.

I think the comments that I can hear from you today, it almost sounds like you think Express Scripts is right and I want to get some color on that.

And then if that's true, you own a pretty big retail business so what does that say about retail?

Ed, I'm not going to comment on that question.

I think that we have -- through today as well as past meetings, we've talked about the confidence in the CVS Caremark and the value that we are bringing to the market place both whether its clients and their members or the consumers, and we are excited with the work that we are doing and the opportunities that we continue to have in front of us.

Okay, and in terms of next year, you may not want to comment on this, but there's a lot of moving parts to next year.

It seems like you've been going through some of those parts we're talking about what's probably going to be a more back half weighted year.

Can you maybe at least talk about some of those issues that we should be thinking about going into the Analyst Day and at least help us frame some of those topics?

This is Dave.

Maybe I could just comment very specifically.

We obviously plan in December to kind of lay out our plan for 2012, give some very specific clarity around how we think that the year will shape up.

As you know, we've been very focused on assuring that next year is a very productive year for us in totality with a very specific focus on the PBM business.

Clearly there's two things at a macro level that we will talk about a bit is one as we cycle into 2012 and quite frankly for the next several years as generics will be a very important factor for us and a very important factor across both segments of our business.

And then obviously as we've talked about today and in the past, Medicare Part D will also be a nice contributor as we think about the next several years in our business.

We will begin to lay all those things out for you in the next several weeks.

The one thing to do -- to keep in mind, both of those, both generics and Medicare Part D are quite frankly back half loaded because of the progression in the benefit structure and Medicare Part D and the fact that Lipitor specifically as it's currently contemplated is more impactful for us once it's broken open, and that's in the back half of 2012.

We will help in December lay that out for everyone.

Just to be clear, the issue on Lipitor, if Pfizer ends up keeping a decent share of business there, the exclusivity period for the drug retail business is not going to be anywhere near as good as what it had been maybe on other drugs.

That's right, correct?

That's correct.

That's how we look at it and that's a little bit why we talk a lot about maximizing our profitability once the exclusivity period expires.

Larry Marsh, Barclays Capital.

Thanks and good morning.

Since we are within three weeks of hearing from the Super Committee, I just wanted to get your latest perspectives on the Waxman proposal, that duals should get same pricing as Medicaid, which obviously suggests to save $135 billion over 10 years.

I know you guys believe that's going to be counterproductive but since you have a large dual population, assuming we do get this proposal, remind us of how we should think of impact and how or when it could move from proposal to actual implementation?

I think it might be just a tad early to comment on that.

Some of the specifics around the programs are probably not as defined as -- at a level that we could have a definitive comment on right at this point.

But can you comment as to whether you think will be proposed or how legitimate a proposal is?

Candidly, Larry, I need to hear from our Washington people more about this to be able to give you sort of any kind of meaningful commentary from the Company.

So I will sort of check in with them and make sure we get briefed on the issue in more detail so we can give you a better answer.

Okay, great.

Then just to follow up, I guess one of the themes today has been elements of change in the marketplace certainly for 2012 given a potential merger, other elements of networks.

We have already had a smaller competitor in the benefit management space set an aggressive target of doubling their new business share.

You have been very successful in expanding your customer base the last two years and I know you are going to give guidance in December, but why wouldn't you also think of '12 as being a particularly good time for you to be even more aggressive and capturing additional share given the change in the market?

Larry, I fully anticipate that this coming year will be a very, very active year from a sales and renewal standpoint.

And the factors -- the changes that you are alluding to I do think they will prompt customers to kind of reevaluate their PBM partnerships and look for better solutions or new solutions out there.

So I suspect it will be a very, very active market this year and we fully intend to be quite engaged in that, as you can imagine.

Okay, very good, thanks.

Scott Mushkin, Jefferies & Co.

Thanks for taking my questions.

I wanted to give a shot at Ed Kelly's question and maybe in a little different way and I guess John was touching on it earlier.

As we look to next year, in some ways it seems like the controversy between Walgreens and Express is probably just helping you sell your idea of Maintenance Choice.

If we could get a comment on that.

And then just in the marketplace rather than siding with Express or Walgreens, isn't it just basically maybe both are a little bit right but you are the only one with the right assets?

I wonder if you could comment on that?

Scott, I guess that's one way of looking at it.

I mean, some of the questions that are being asked today I agree it reflects the reason why we -- these two companies came together.

The opportunities that we have to -- as we've talked many times about the goals of reducing costs and at the same time improving the health of client members and retail consumers.

So I agree with that.

I don't -- Per, I guess --

I think this last year's selling season I think was one where there was no question that kind of the integrated solutions that we had available were a factor.

You never know exactly why people make their final decision to change from one PBM to another, but I feel pretty confident that the Maintenance Choice capability, even in a couple of instances the MinuteClinic capabilities were clearly sort of factors in the process.

And I feel very good about sort of going forward with sort of the integrated capabilities.

And I am not going to lose any sleep about CVS not being in the Caremark network.

So I think we're in a very good spot to really build on the integrated assets that we have.

Scott, I think what's a little bit in play and we are looking forward to sharing some of that quantifiable data in December is that the fact that we have had these products in market for a few years now like Maintenance Choice, it's not just qualifiable information in terms of the perceived value that the product brings to the market place.

It is now quantifiable information and I think that what we have seen this year is that that is resonating for clients.

So -- as I mentioned, we'll be sharing some of that next month.

I appreciate the color.

When you look at the Maintenance Choice product, which I guess is $9.9 million and Pharmacy Advisor is about $12.5 million I think you said but they are adding $2.5 million at the end of the year.

As you look at these programs you will get to market place, is it outrageous to think some of these programs could double as we move through as we get to 2013 given what's gone on with the market place or is that too significant do you think?

But setting aside the timeframe, I do think there is a lot of additional runway for these programs.

And we have the opportunity to make them even better, quite frankly.

So I am very encouraged that they can become a component of many, many of our customer relationships going forward.

But I'm not going to try to nail it down in terms of how far we would like it to get by 2013.

Okay.

And then I just want to make sure I heard couple of things correct and then I had something for Dave, just a little housekeeping.

Did you -- did I hear you rights that Lipitor is just not going to be as good as kind of a normal generic?

Was that the comment to Ed's question?

No, that is not correct.

Okay, that is not correct, okay, great.

And then the expected ending share count, Dave, do you have an estimate of that for this year, not for the quarter but for this year, do you have an estimate for the end in the fourth quarter?

Approximately 1.35 billion.

1.35 billion ending share count, not the average but the ending at the end of the fourth quarter?

That's the weighted average.

That's the weighted average.

I don't have the ending with me right now.

That's the average.

Okay, maybe I will call you off-line for that.

All right, guys.

Thanks.

I will yield it.

[John Weiss], Fir Tree Partners.

Congrats on a great quarter.

I know you've talked a lot about the Walgreens dispute but can you comment if you saw any impact in October either on the script or front end side of the retail business?

And the others have alluded to it and it looks like WAG's comp store sales for October have -- were a little bit weaker this morning.

Yes, and John, we have seen script transfers but as we've talked, its immaterial in our results at this point in time.

Got it, and has it picked up in October at all?

Or --?

Again, not materially.

Got it.

Steven Valiquette, UBS.

Good morning, Larry, Dave, and Per.

For the PBM, just the deferral on the update on net wins and the selling season until the Analyst Day, is there any chance you could just at least provide some general comments on just the PBM pricing trends in the selling season, maybe this year versus last year?

Also do you think maybe the proposed Express Medco merger maybe took some pressure off the competitive environment?

Just trying to get a sense -- general sense for PBM pricing trends.

Thanks.

No change of any significance, Steve.

Our business is a very competitive business and as you know, the economics are always sort of in the forefront of the clients evaluating these bits.

But there is no change or any trend break this year versus last year or before or after the announcement of the Express merger.

Steve, again, we will talk more about it in December but I can tell you that all of the new business is profitable.

To Per's point, the pricing strategy has not changed from what it was earlier this year or even last year for that matter and we are underwriting new business to be profitable.

Okay, that's helpful.

Then just quickly on the retail side, just to clarify, you guys mentioned a couple of times the lower retail gross margin is due to pressure on pharmacy reimbursement impacting 3Q and 4Q.

Is there anything new happening there in the back half of '11 or is that just a continuation of the full-year trends that you also saw in the first half?

Just wanted to get some clarity around that.

Thanks.

Steve, as we've talked many times, there has always been margin compression out in the marketplace.

We did see an uptick on reimbursement pressures in the third quarter and we are expecting that to continue through the balance of the year.

It's coming out of the state Medicaid plans as well as in the commercial market.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good morning.

Just a couple follow-up questions here.

You spoke in your prepared remarks about FEP and the renewal of the contract that you cycled in September.

Any residual impact going forward on the PBM gross margin associated with the FEP deal?

One thing you should be aware that we have spoken about in the past is that the renewal of FEP in 2012 and beyond like the other contracts with federal government employees and retirees are being restructured to be essentially a cost plus or a pass-through type arrangement.

So there will be some more decompression associated with that.

And that's above and beyond sort of sector wide margin compression, if you will?

Probably, yes.

But it well -- it's so of unique to that particular segment.

(multiple speakers) Matt, as a talked before, the step down in profitability would not be to the impact that we experienced with the one-year renewal that we cycled around this September.

Got it.

Then just a follow-up to the retail gross margin question, I know that John asked this before, but just to get a sense of it, is there any change in the competitive environment that you have concerns, whether it's consumers value focused, whether it's something that you're seeing out of the discount stores or the dollar stores that is leading you to think about a more promotional stance for the front end business in Q4?

Matt, the answer to that is no.

We continue to see the consumer looking for value and remaining value-conscious and I want to emphasize that the comments that we made about promoting more in the fourth quarter it's comparable with last year but it is an uptick from what we experienced in Q2 and Q3, where an example in Q3, we have a 6% decline in page count year-over-year.

We are expecting our page count in Q4 to be comparable to last year.

And again, it reflects our learnings in terms of how we tell the story around key holiday periods and obviously we're getting ready to enter the Christmas selling season and reflects the fact that there are an awful lot of products that customers are going to see the next three months that they wouldn't see in the first nine months.

Got it.

Thank you so much.

Ricky Goldwasser, Morgan Stanley.

Good morning.

I have a couple of follow-up questions.

First of all on the FEP contract, so just to clarify, when you think about the net impact from both sides of the book, the retail and the new mail business, will the combination be incremental to profits?

Well certainly adding the mail-order and the specialty business is incrementally profitable to us.

Okay, so when we think about mail plus specialty plus the step down in retail, when we add all three components, are we going to see a net step up?

Ricky, this is Dave.

I will just lay all the -- we will talk about guidance for 2012 come six weeks from now, we will kind of outline our expectation for '12.

So I think that's a topic for that matter.

Okay, and the second follow-up on Lipitor, I know you got a lot of questions on that but just that I understand your comment on moving Lipitor to Tier 1 for the Medicare side, so are you moving branded Lipitor to Tier 1 on Medicare?

Yes.

Excuse me, sorry.

That's on the Medicare part of the business, yes.

And not for your commercial book?

Well that's not something that is publicly available today, so we have mainly customers where we have customized formulary discussions and so in due course we will probably have more information on that.

Okay, so when you think about your book of business and you think about kind of Lipitor and just generic penetration rates versus branded, what do you estimate is going to be kind of like the branded Lipitor?

What percent of -- what will be kind of a branded Lipitor share within your book of business for the first 180 days?

I know that Pfizer said on their conference call that they --

We haven't commented on that.

Just keep in mind, this Lipitor and generics in total is a very nice tailwind for us both for next year and ongoing and it's mostly important after the break open period, after the exclusivity period expires.

And we can talk more about that in December.

Okay, thank you.

Deborah Weinswig, Citigroup.

This is Shane on the line for Deb.

I had a quick question on the PBM side.

Just wondering if you seen sort of increased demand for MAC-based pricing as opposed to AWP-based pricing from your commercial PBM client?

On the commercial side of the business, the generics are that MAC pricing is kind of the norm.

So you are then?

It's basically the way that business works on the commercial side.

Okay, all right.

Then just on the retail side of things, just kind of looking at the quarter, obviously your front end sales were pretty strong.

Just kind of wondering what the cadence of the quarter was, whether it was accelerating (inaudible) or --?

Shane, it was pretty consistent throughout the quarter.

There weren't a lot of spikes, albeit we saw a spike in September when the storms hit with battery sales and things of that nature, but other than that, it was pretty consistent for us.

And then if you look at October, has the trend kind of stayed the same or --?

We're not going to get ahead of ourselves and get into the fourth quarter.

Okay, thank you very much and congratulations again.

Mark Miller, William Blair.

Good morning.

As the one large PBM that is supportive of moving to 90-day sales at retail, what portion of the Maintenance Choice savings are coming from that migration of one fill versus three fills?

When we offer Maintenance Choice to customers, it just basically means that they can choose if they want to to get the 90-day prescriptions at the retail -- at the CVS retail pharmacies versus the mail-order pharmacies for the same co-pay and the same price to the plan.

So there is no net change in the economics if a member elects to get the prescriptions in the retail pharmacies versus the mail-order pharmacies.

They just have more flexibility.

But Per, what I'm asking is isn't that a lower cost to the plan if that's member or employee is getting a 90-day fill instead of a 30-day fill?

(multiple speakers) Correct, think about it as implementing a mandatory mail program with the convenience of picking up your script at one of our CVS/pharmacy locations.

Right, right, so when we think about the migration then to the plan I guess I was trying to get at what kind of savings those adoptees are getting from that program?

And then the midyear sign-ups that you're highlighting, is this an acceleration from what you expected or is it progressing as you anticipated?

Keep in mind that the early adopters were clients that had mandatory mail provisions to begin with.

So it was more of a convenience for their members to have a retail option.

As the program got off the ground, we saw more and more voluntary mail clients opt in to the Maintenance Choice product, which did exactly what you are asking.

That's where the real savings were provided and we've talked publicly about clients have seen as much as 4% savings in adopting the Maintenance Choice program.

And then, Larry, is the acceleration -- are the midyear sign-ups happening as you expected or is that moving faster than you planned?

Its pretty much on plan.

Yes.

Okay, then my other question is as you are discussing some reimbursement pressure here, does this indicate potentially that this generic wave that the typical mix shift here that would lift your overall margins that we might see a significant portion of that get competed away?

Or is that the wrong impression from your comments?

Mark, that's the wrong impression.

I want to emphasize that our modeling does not call into question if we are going to see the profits, it calls into question when we will see the profits because you have variables in play that quite frankly as it relates to Lipitor are still unanswered.

There is -- there are differences, whether it's a single source generic, multisource generic, has the exclusivity period, the break open period, and those dynamics change our level of profitability in terms of when we maximize our opportunity.

But as we have talked, this is -- we expect this to be a big benefit for our business over the next several years recognizing we have got almost $100 billion worth of branded products coming off patent between now and '15.

Great.

Thanks.

I'll leave it there.

See you next month.

John Ransom, Raymond James Associates.

Man, it's hard to be clever at the end of a long call.

But my question is can you remind me -- I remember you guys brought a bunch of business forward in '09.

What is the percentage of your PBM contracts going up for renewal of 2012, maybe first half of 2013 to account for that bolus?

Yes, it's roughly a little less than a third, around that ballpark range.

We will talk a little more about that next month and give you a firmer number.

But that's a ballpark number.

So it's not any more than what you would normally see on a three-year cycle, then?

(multiple speakers) Probably a little less, actually.

Okay, but didn't you bring a bunch of contracts forwards in '09?

Why wouldn't that have affected the renewal rate?

Well, we also added a bunch of contracts since '09 as well, too, John, so the average would be proportionately be smaller.

Okay, thanks.

Then my other question is just thinking about your retail business, you lost a little bit of comp relative to your big competitor in Chicago and they count things differently.

I realize that and they've added liquor and stuff like that.

But is there anything that they are doing now but maybe you wish you would have done?

Is there anything you are thinking about with your retail business to maybe try to get back a comp point or two or three relative to what you were doing a year ago?

Well, John, we are always looking for new ways in which we can move the business forward.

We've talked about some of those in terms of whether it's leveraging ExtraCare with a focus on both sales and profitability.

I think we are getting some traction out of the clustering work that we are doing and we see that as a big opportunity as we go forward and we are getting some good learnings from that.

And we are always going to work in terms of what's the next evolution of the store?

As that evolves, we will talk more about it.

Do you think it's more evolutionary or are you thinking about any sort of like store prototype reset or anything like that?

Is it just going to be more evolutionary?

I think it's more evolutionary, John.

Okay, thank you.

Meredith Adler, Barclays Capital.

Thank you very much for taking my question.

I would like to start going back to the subject of limited network and I don't know whether you have a view about whether these things are good for the industry or not.

But if you do, I would be interested in your thinking on that.

I should say good for retail pharmacy.

I will let the retail pharmacists answer that.

I think it can be potentially good for the payers.

How's that?

Yes, I'm sure.

Well, Meredith, I think what is evolving is we are going to have an environment where there are going to be players that can satisfy the needs of clients and payers and then there are going to be pharmacies that are going to be able to satisfy those demands.

So I do see this as a step change in our industry going forward.

And the impact on profitability for even those that stay in these limited networks?

Well, I think, Meredith, as you would expect, there is a share gain and perhaps that share gain is accompanied by some margin pressure, but the math would tell you that there is a positive flow through to the bottom line.

Great, and then I want to go back to what seems like a dead horse, which is Lipitor.

I am listening to the questions and I am not sure that it's all very clear to people that when -- am I right that if Ranbaxy does not get their generic in the market, you don't start the clock for exclusivity until (multiple speakers) So -- and if you don't start the (inaudible) for exclusivity you don't get to the end of exclusivity and get the best pricing once it's over.

Is that right?

Meredith, that's correct and I think accompanying that statement is as a result of our buying scale, we have said that we can maximize our opportunities when there are three or more players in the marketplace and that typically happens once the exclusivity period expires.

So the plan to put Lipitor on the Tier 1 is only a stopgap or an interim measure to drive people into Lipitor so that when you can finally have multi-forcing you have maximized the opportunity?

Yes, that's correct and it's also to kind of to maximize the use of Lipitor versus other branded -- versus other branded statins.

So that when the product breaks open you get the maximum saving for the customer?

Okay, so I have one final question about Lipitor.

I assume that when you give out all your guidance in December that you will kind of try to explain what happens if Lipitor comes -- let's just say Ranbaxy doesn't even come out until March or April, what means for your profitability?

Does anybody have any idea when they are going to be able to put product in the market?

I think -- Meredith, this is Dave.

Yes, by Analyst Day we should have a lot more clarity on the subject given their target launch date.

So we'll have that behind us and we will be able to lay out -- (multiple speakers)

It's basically up to the FDA.

They are still awaiting clearance from the FDA and that's not something we have insight into or control over.

Okay, great.

Thank you very much.

Okay, thanks, everyone, for your time and your interest today and we will look forward to seeing you in December.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

Have a great day, everybody.