CVS Health Corp (CVS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the CVS Caremark second-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, Tuesday, August 6, 2013.

I would now like to turn the conference over to the Senior Vice President of Investor Relations, Ms. Nancy Christal.

Please go ahead.

Thank you, Frank.

Good morning, everyone, and thanks for joining us.

I'm here with our President and CEO, Larry Merlo, who will provide an update on the Business.

After Larry, our Executive Vice President and CFO, Dave Denton, will review financial results and guidance.

Jon Roberts, President of PBM, and Mark Cosby, President of our Retail business, are also with us today, and will participate in the Q&A session following our prepared remarks.

During the Q&A, please limit yourself to no more than two questions so we can provide more callers with a chance to ask their questions.

Just before this call, we posted a slide presentation on our website that summarizes the information you will hear today, as well as key facts and figures regarding our operating performance and guidance.

I encourage you to take a look at that.

Additionally, we plan to file our quarterly report on Form 10-Q by the close of business today, and it will be available through our website at that time.

During this call, we will use some non-GAAP financial measures when 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 these non-GAAP measures, as well as reconciliations to comparable GAAP measures, on the Investor Relations portion of our website.

And, as always, today's call is being simulcast on our website, and it will be archived there following the call for one year.

Now, I have one key date to announce this morning.

Please note that we will host our Analyst Day on the morning of Wednesday, December 18 in New York City.

At that time, we will provide 2014 guidance, as well as a comprehensive update on our growth strategies.

In addition to Larry and Dave, you'll have the opportunity to hear from additional members of our senior management team.

We plan to send invitations with more specific details via eMail by next week, but please save the date.

Again, that's Wednesday, December 18.

If you don't receive an invitation, and would like to attend, please contact me at your earliest convenience.

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 Risk Factors section of our most recently filed annual report on Form 10-K, and in our upcoming quarterly report on Form 10-Q.

Now, I'll turn this over to Larry Merlo.

Thanks, Nancy.

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

Let me begin by saying we are very pleased with our strong operating results enterprise-wide in the second quarter.

Operating profit increased 15% overall, with the PBM growing about 32%, and the Retail business growing nearly 9%.

Adjusted earnings per share from continuing operations for the quarter came in at $0.97; that's at the high end of our guidance.

And we also generated a substantial amount of free cash, totaling $1.7 billion for the first half of '13.

And we remain committed to our disciplined approach to capital allocation, continuing to focus on returning significant value to our shareholders through both dividends and share repurchases.

Now, considering our strong operating results to date, and all other factors affecting our outlook for the remainder of the year, we are narrowing our earnings guidance for 2013 to a range of $3.90 to $3.96, and that's from our previous range of $3.89 to $4.

And while Dave will provide more details around the drivers of our revised guidance during his financial review, I do want to mention that a key driver of lowering the high end of our guidance range is a higher-than-forecast weighted average share count.

As we announced last week, we have reached an agreement in principle with the SEC to resolve its investigation of various Company matters that occurred back in 2009.

During the second quarter, we engaged in extensive settlement negotiations with the SEC.

And, as a result, we suspended our share repurchase activity until we had reached the agreement in principle.

Now that it has been reached, we plan to resume our repurchasing efforts this quarter.

And we still expect to complete the $4 billion in share repurchases that we had planned for this year.

So, if you do the math, with our share repurchases now back-half weighted, as opposed to occurring ratably throughout the year as we had originally anticipated, this timing shift is estimated to dampen the accretive impact of the share repurchase program for the year, by as much as $0.04.

Despite this timing shift in share repurchases, our updated guidance for '13 equates to excellent adjusted EPS year-over-year growth in the range of 13.5% to 15.25%.

So, we are still anticipating a very successful 2013.

Now, let me provide a brief business update, and I will start with the 2014 PBM selling season.

Our model continues to resonate well in the marketplace, and we are very pleased with our results to date.

Gross wins for 2014 are $4.4 billion to date, while net new business stands at $1.7 billion, and that's despite lower RFP activity this season.

We've been successful across all segments, and this net new business excludes any impact on our Med D PDP business, which I will come back to in a minute.

There are still some modest opportunities remaining for 2014 -- most of those are on the employers' side, and work is already underway for the '15 selling season.

As for renewals, we've completed almost 50%, and have a retention rate of 97%.

So, overall, again, we are very pleased with our selling season to date, and confident that we continue to be well-positioned in the marketplace, with our unique products and services.

I thought I would just spend a minute touching on what clients have been focused on this selling season.

One area of both employer and health plan client concern is managing their specialty spend across the pharmacy and medical benefits.

As a result, we are seeing interest across our entire suite of specialty capabilities, including utilization management programs, specialty guideline management, formulary strategies, as well as our site-of-care and medical claims editing products.

We believe our differentiated approach to specialty is driving lower overall costs, while improving health and providing value for both payers and patients.

Our specialty revenues grew 19% year over year in the second quarter.

That was driven by drug price inflation, utilization, new product launches and new PBM clients.

Our continued focus on managing specialty costs for clients will help us continue to drive our share of specialty going forward.

In addition to managing specialty costs, our clients are also focused on the changes resulting from the Affordable Care Act.

We continue to believe that Medicaid expansion and individual small-group coverage in the public exchanges will be a long-term secular growth trend, resulting in a significant amount of new coverage for people who had previously been uninsured.

Details around the exchanges, including plan participants, plan designs and rates -- they continue to emerge.

We believe we are very well-positioned, given our retail footprint, along with our existing relationships with health plans and managed Medicaid plans.

We've had a lot of dialogue with health plans about collaborating with us on innovative programs that support their overall exchange strategy.

And these discussions often encompass how they can partner with us across our Retail touch points, while tapping into our direct-to-consumer marketing expertise to attract and retain members.

We also discuss how MinuteClinic can support care management and wellness programs for the newly insured.

And how a plan can maximize the benefits from all of the unique clinical and member engagement programs that we can offer through our CVS Pharmacy network.

We believe all of the activity around the exchanges will serve as a catalyst for broader collaboration opportunities with our health plans.

I do want to touch briefly on the PBM streamlining initiative, which, as you are aware, launched in late 2010, and is near completion.

We are on track to achieve the expected annual savings run rate of $225 million to $275 million in 2014.

As for the consolidation of adjudication platforms, we have now completed 11 waves of migration.

We continue to leverage our resource and technology investments to refine our processes and improve efficiencies, resulting in moving more clients and limiting potential disruption in each of those successive waves.

85% of our business is scheduled to be on the destination platform by year end.

So, overall, the streamlining initiative has been very successful.

Let me turn to our Medicare Part D business.

Just as a quick review, we currently serve 6.8 million members in our Medicare Part D business.

And we do that through the health plans we serve, as well as our individual SilverScript PDP, including EGWP.

Our individual PDP currently serves approximately 3.4 million of our 6.8 million members.

Last week we received the preliminary benchmark results from CMS for 2014, and we are pleased with the outcome.

SilverScript was below the benchmark or within the de minimis range in 31 of the 34 regions.

We missed the benchmark only in one small region in which we qualify today, where we have about 2,000 lives that will be subject to reassignment to another plan.

So, aside from any normal attrition, these benchmark results should enable us to retain the vast majority of the auto assigns we currently serve.

Let me update you on where we stand with respect to the sanction imposed by CMS earlier this year.

As you know, the sanction prevents us from marketing our SilverScript PDP or enrolling new members.

And, as we've said, our goal has been to complete our remediation efforts, so that the sanction would be lifted before the annual enrollment period begins for the '14 plan year.

Given some additional complexity that we uncovered while working to resolve the issues, along with our strong commitment to ensuring that we are ready to operate at best-in-class levels, we have revised our plan and expanded the timeline for remediation.

Based on our latest estimate, we now expect our remediation efforts will be completed sometime near the end of the year.

Once our remediation has been completed, CMS will conduct its review to determine whether the issues have been fixed or not likely to recur, and when the sanction will be removed.

So, what does all that mean?

Given this current timeline, we do not expect that we will be able to participate in the 2014 annual enrollment period when it begins in October.

In addition, until the sanction is lifted, we do not expect to receive new auto assigns from CMS for 2014 in the regions where we qualify.

The sanction primarily affects our individual SilverScript PDP, which, as I mentioned, has about 3.4 million lives.

It does not affect the Medicare Part D business through the health plans we serve.

And as a reminder, our EGWPs are also not affected by the sanction, since we continue to operate under a limited waiver from CMS that allows us to enroll newly eligible retirees into our existing plans.

So, let me put some parameters around the situation.

First of all, assuming the sanction is not lifted prior to the end of the year, here are a few factors that we can roughly estimate at this point.

First, based on the preliminary results of our bid, we do expect to be able to retain the vast majority of our current 2.5 million low-income subsidy enrollees.

Second, based on the historic competitiveness of our products, we do expect to retain the majority of our 900,000, non-low-income subsidy chooser lives.

These enrollees have previously chosen SilverScript as their PDP.

Third, and consistent with a typical Medicare Part D plan, there will be some normal attrition of our enrollees due to death, relocation, other normal member eligibility factors.

And we estimate this attrition will continue at the rate of roughly 25,000 lives per month.

In January, rates of attrition are generally a bit higher after they have gone through their typical decision processes during the annual enrollment period.

So, to put some preliminary numbers around this, again, using historical attrition rates, we estimate our PDP lives could decrease by about 350,000 lives, leaving us with approximately 3.1 million lives in our individual SilverScript PDP by the end of January 2014.

So, clearly, the sanction limits our ability to expand our Med D lives for '14.

And we will continue to work diligently to have the sanction lifted as soon as possible, in order to be able to enroll new members and participate in the individual agent process next year in the regions where we have qualified.

Now, obviously, we take this issue very seriously.

We have devoted additional resources to fully meet the needs of this important customer base.

While this does present a challenge for '14 in our Medicare Part D business, it's important to note that we still see significant opportunity to grow our Med D business over the long term.

And the remediation steps that we are taking will allow us to do just that.

Now, moving on to the Retail business, we had another very solid quarter.

Total same-store sales increased 0.4%.

Revenue growth was muted by the impact from new generics, which had a 670-basis-point negative impact on pharmacy comps in the quarter.

Pharmacy same-store sales increased 0.8%, with pharmacy same-store scripts increasing 1.8% when counting 90-day scripts as one, and increasing 5% when counting 90-day supplies as three scripts.

And we have seen a greater than historical rate of conversion to 90-day from 30-day scripts, which is driven by the strong growth in our Maintenance Choice programs.

Our retention of the scripts gained during the impasse between Walgreens and Express Scripts continues to exceed our expectations.

And, as you know, our goal is to retain at least 60% of the scripts gained during the impasse.

And given our outperformance to date, we remain very confident that we will continue to retain at least 60% of the scripts in '13.

As for the front-store business, comps decreased 0.4%.

That was impacted largely by the shift in the Easter holiday from April of '12 to March of '13, which had a negative impact of front-store comps of about 65 basis points.

During the quarter, pharmacy traffic was up, while front-store traffic was down.

At the same time, average front-store ticket continued to increase.

I think it's important to note that, despite the slight decrease in front-store comps, our front-store margins expanded nicely in the quarter.

And we continue to focus on driving more profitable sales through the targeted promotions we offer to ExtraCare cardholders.

We are focused on increased personalization to accomplish this.

To gain a bigger share of wallet, we have identified customer-specific opportunities for increasing frequency of both the shop and the basket size.

To drive this conversion, we continue to dramatically expand our personalized offers that are delivered at the point of sale.

In the second quarter alone, we issued more than 3 billion such offers.

And we've also significantly expanded our personalized offers that we deliver via eMail.

So, ExtraCare provides extraordinary precision due to the scale of customer engagement, along with the 15 years of data that has provided us unique insights into consumer behavior trends.

We continue to use these valuable insights from our ExtraCare program to drive the evolution of how we tailor our stores to better meet local needs.

Our latest data shows that we continue to gain market share.

Our front-store market share growth in the second quarter versus a year ago was 71 basis points and 8 basis points, and that's when compared to drug and multi-outlet competitors, respectively.

As for new stores, we opened 47 new or relocated stores.

We closed 1 during the quarter, resulting in 22 net new stores in the second quarter.

This puts us on pace to achieve our 2% to 3% square-footage growth target for the year.

Let me turn briefly to MinuteClinic, which once again recorded exceptional revenue growth, with sales up 32% versus the same quarter last year.

We opened 35 net new clinics in the quarter, ending Q2 with 684 clinics in 25 states and the District of Columbia.

Our expansion plans call for the opening of 150 clinics this year, and to end '13 with just under 800 clinics, with around 30% of our expansion this year in new markets.

Our longer-term goal is to create a national primary care platform to provide integrated, high-quality care that is convenient, accessible and affordable.

New services will continue to be developed to address the shortage of primary care physicians, and to support patients impacted by the epidemic of chronic disease.

Our positioning further supports the primary care medical home model, along with connectivity through electronic health records to numerous health system alliances.

So, with that, let me turn it over to Dave for the financial review.

Thank you, Larry.

Good morning, everyone.

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

And then I'll provide guidance for the third quarter, and update our full-year 2013 outlook.

But first, I'd like to highlight how we've been enhancing shareholder value through disciplined capital allocation programs.

During the second quarter, we paid approximately $276 million in dividends, bringing our year-to-date payout to $553 million.

Given our continued strong earnings outlook this year, we remain on track to achieve our targeted payout ratio of 25% by the end of this year.

As a reminder, that is two years ahead of the schedule that we laid out back in 2010.

Additionally, we repurchased approximately 6.4 million shares for approximately $355 million in the quarter, at an average price of $55.39 per share.

As Larry indicated, we ended the quarter with more shares outstanding than we had planned, because of our decision to suspend share repurchases until we were more fully certain of the outcome of our negotiations with the SEC.

Despite our slower pace in the second quarter, we still expect to complete $4 billion of share repurchases in '13, consistent with our original plan.

Note that the guidance we are providing today assumes the $4 billion of share repurchases will be completed this year.

So, between dividends and share repurchases, we have returned more than $1.3 billion to our shareholders through just the first half of this year.

And we continue to expect to return approximately $5 billion for the full year.

We've generated approximately $1.7 billion of free cash the first two quarters of '13.

And improving our cash-generation capabilities by enhancing our working capital management remains an area of focus for us.

We've made excellent progress over the past several years in reducing our cash cycle.

As I pointed out on our last call, we've taken nearly two weeks out of our cash cycle over the course of the last 10 quarters.

Inventory has seen the greatest amount of improvement, but all areas have benefited from our focus on extracting value from our balance sheet.

We remain committed to further improvements as we look further into the future.

As previously highlighted in our last earnings call, we noted that we may have some timing issues with respect to CMS payables and receivables that may affect our free cash flow delivered for the year, given the issues we experienced following our Med D plan consolidation.

While we are maintaining our guidance for free cash flow of between $4.8 billion and $5.1 billion this year, we are still working to offset this headwind to our free cash flow target, and we'll continue to update you on our progress as we go forward.

Turning to the income statement, adjusted earnings per share from continuing operations came in at $0.97 per share, at the high end of our guidance.

GAAP diluted EPS was $0.91 per share.

And, as we've said, weighted average share count was higher than planned, but the impact of that in the second quarter was negated by a slightly more favorable tax rate and good expense management within the corporate segment.

Now, let me quickly walk you through our results.

On a consolidated basis, revenues in the second quarter increased 1.7%, or approximately $534 million, to $31.2 billion.

This was near the top of our guidance range.

Solid increases in revenues in both the PBM and Retail segments were offset only slightly by an increase in inter-segment activity, which was primarily driven by the increase in adoption of our Maintenance Choice program.

Within the segments, PBM net revenues increased 2%, or approximately $377 million, to $18.8 billion.

This growth was approximately 55 basis points above the high end of our guidance.

The outperformance was driven by higher-than-anticipated claims volume, primarily from Maintenance Choice and Medicare Part D utilization.

Claims growth year over year was driven by new client wins and increased membership within our existing book of business.

Specialty pharmacy was also a key driver.

This was largely offset by the significant impact from new generics.

The PBM's generic dispensing rate increased nearly 275 basis points versus the same quarter of last year to 81%.

Note that the year-over-year increase is down sequentially from last quarter's year-over-year increase by about 125 basis points.

This is a trend that should continue throughout the year, given that fewer generic conversions are expected for the remainder of this year versus last year.

Revenues in the Retail business increased 1.9% in the quarter, or approximately $294 million, to $16.1 billion.

New generic introductions also negatively impacted Retail sales, with our Retail GDR increasing approximately 280 basis points versus the second quarter of '12, to 82%.

Offsetting that phenomenon was the growth of our Maintenance Choice program, which contributed to sales performance coming in near the higher end of expectations.

Turning to gross margin, we reported 18.7% for the consolidated Company in the quarter, an increase of approximately 95 basis points compared to Q2 of '12.

Within the PBM segment, gross margin increased by approximately 90 basis points versus the same quarter of LY, to 5.1%, while gross profit dollars increased approximately 24% year over year.

The increase year over year was primarily driven by increasing in GDR, higher volumes from new clients and new members, and better acquisition costs and rebate economics.

These positive margin drivers were partially offset by price compression, and remediation in operating costs in our Medicare Part D business.

Gross margin in the Retail segment was 31%, also up about 90 basis points over LY.

As with the PBM, this improvement was driven primarily by the increase in GDR, and also by improvement in front-store margins.

Additionally, gross profit dollars increased 4.8% year over year within the Retail segment.

Expense leverage was also impacted by the growth in GDR.

While the deleveraging was optically negative, the growth of expense dollars was within normal parameters.

Total operating expense as a percent of revenues increased approximately 20 basis points from Q2 of '12 to 12.4%, while total SG&A dollars grew by just 3.4%.

The PBM segment's SG&A rate was essentially flat to LY at 1.5%.

The benefits from the PBM's more efficient cost structure versus the same quarter last year was basically offset by the deleveraging effect of an improved GDR and costs related to remediation efforts within Medicare Part D. In the Retail segment, SG&A as a percent of sales increased approximately 25 basis points to 21.1%.

As expected, this, too, was mainly due to the deleveraging effect of the growth in generics.

Overall, SG&A expenses grew by 3.2%.

Within the corporate segment, expenses were virtually flat year over year at $176 million.

Adding it all up, operating margin for the total enterprise improved approximately 75 basis points to 6.3%.

Operating margin in the PBM improved by approximately 80 basis points to 3.6%.

While operating margins at Retail improved about 60 basis points to 9.9%.

For the quarter, we are comfortably within the high end of our guidance for operating profit growth in both Retail and the PBM segments.

Retail operating profit increased a very healthy 8.6%, while PBM operating profit was once again solid, growing at 32%.

Now, going below the line on the consolidated income statement, net interest expense in the quarter declined approximately $5 million from last year to $127 million.

The debt refinancing we did in the fourth-quarter last year was the primary driver of the decrease.

Additionally, our effective tax rate was 39.1%, which was slightly better than expected.

And, as we discussed, our weighted average share count was higher than anticipated at about 1.24 billion shares in the quarter.

Now, let me update you on our guidance.

I'm going to focus on the highlights here, but you can find additional details of our guidance within the slide presentation we posted on our website early this morning.

As previously stated, we narrowed our EPS range for the full year of '13 to reflect our strong operating results, and to incorporate our current plan for the timing of share repurchases.

We are taking down the top end of the PBM operating profit forecasted growth to reflect some incremental remediation costs related to our Medicare Part D sanction.

However, these costs are expected to be more than offset by an increase in our Retail operating profit growth forecast, all of which is reflected in our revised guidance.

All things considered, we've raised the low end of guidance by $0.01, and lowered the high end by $0.04.

We currently expect to deliver adjusted earnings per share in 2013 in the range of $3.90 to $3.96 per share, reflecting excellent year-over-year growth of 13.5% to 15.25% after removing the impact related to the early extinguishment of debt in 2012.

GAAP diluted earnings per share from continuing operations is expected to be in the range of $3.65 to $3.71 per share.

We've narrowed our top-line outlook, and now expect consolidated net revenue growth of 2% to 3%.

This guidance reflects the solid performance across the enterprise year to date, driven by better volumes, as well as inflation.

We've raised the PBM segment's revenue guidance to 2% to 3% growth, while narrowing Retail's expected revenue growth to 2.25% to 3.25%.

We expect total comp same-store sales of 1% to 2%.

We are maintaining our prior guidance for script comps of 1.5% to 2.5%.

We are also introducing a new guidance metric, adjusted script comps, adjusting 90-day sales for the 30-day equivalent.

Given the high rate of conversions from 30-day fills to 90-day fills, we believe this is a better indication of pharmacy performance.

We expect adjusted script comps to be in the range of 4% to 5%.

As I said, guidance for operating profit growth in our Retail segment has been raised, while we have brought down the high end of the range for the PBM segment.

We now expect Retail operating profit to increase 9% to 10% year over year, and PBM operating profit to increase 11% to 13%.

We now expect net interest expense of between $500 million and $510 million, a slight increase over our prior guidance.

We are increasing our weighted average share count forecast to 1.23 billion shares, up from 1.22 billion.

As I said previously, our free cash flow guidance for the year remains in the range of $4.8 billion to $5.1 billion.

In the third quarter, we expect adjusted earnings per share to be in the range of $1 to $1.03 per share, reflecting growth of 17% to 21% versus the same period of LY.

GAAP diluted EPS from continuing operations is expected to be in the range of $0.94 to $0.97 in the third quarter.

Within the Retail segment, we expect revenues to increase 4% to 5.5% versus the third quarter of last year.

The revenue increase will be driven by solid volume growth, while we expect a sharp decline in the dampening effect from new generic introductions.

We expect same-store sales of 3% to 4.25%.

Script comps are expected to increase in the range of 1.25% to 2.25%, while adjusted script comps are forecasted to be 3.75% to 4.75%.

Within the PBM, we expect revenue growth of between 4.5% and 5.5%, driven by volume growth and inflation, and also benefiting from the decline in the effective new generics.

Operating profit in the Retail segment is expected to grow 7.5% to 9% in the third quarter, while operating profit in the PBM segment is expected to grow 19% to 23%.

So, again, we expect another very solid quarter.

Before I turn it back over to Larry, I want to touch on the quarterly flow of profits in the back half of '13, and particularly within the PBM.

If you take the full-year and third-quarter guidance that I just laid out, and plug that into your models, you might note that our implied Q4 operating profit growth in the PBM is anemic.

Here are a few points you should keep in mind that should help you better understand why Q4 is somewhat atypical this year.

First, we've consistently stated that the positive impact of new generics in 2013 would be front-half loaded, given the timing of break-open generics in 2012, and the resulting wrap affect into the first half of '13.

We'll be lapping the impact of a substantial amount of break-open generics, so the comparison year over year's are tough.

Second, the timing of Medicare Part D profits in '13 is turning out to be different than 2012, due to a number of factors.

These include the impact of the sanction, changes in earned rebates and the mix of the business across our choice versus basic products.

And, as a result of these factors, we are seeing a shift of profitability this year from Q4, which has historically been our most profitable Med D quarter, into Q3.

So, while the year, and even the back half of this year, remains very profitable, the comparison year over year in the third and fourth quarters are not expected to be typical.

I hope this helps put in context the flow of profits in both Q3, as well as Q4.

So, in summary, the second quarter was a very strong quarter, and we continue to expect strong earnings growth for the year.

I want to assure you that we remain committed to utilizing our substantial cash-generation capabilities to deliver shareholder value.

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

Okay.

Thanks, Dave.

Again, we are very pleased with our strong operating performance this quarter, along with our strong outlook for the 2013 year.

Despite the near-term challenges in our Med D operations, we do remain excited about the long-term opportunity for the growth in the Medicare business.

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

(Operator Instructions)

John Heinbockel from Guggenheim Securities.

Larry, two things I wanted to touch on.

The first is the whole personalization effort.

Where do you guys stand with that in terms of being fully functional?

Then, what are you seeing with regard to redemption of your offers and vendor support for that program?

And then, finally, do you think that has a greater impact, will have a greater impact on top line or gross margin?

John, let me take the second half of your question and then I will ask Mark to come back to your first points.

John, I think, consistent, as we have talked many times, and as I mentioned in my prepared remarks, we have continued to use Extra Care to create value for customers, and to gain a bigger share of wallet.

We are always experimenting and working to find that appropriate balance, in terms of driving profitable sales.

So, there is a sales margin equation there.

We continue to finesse our strategy with the goal of, we are not going to chase empty sales out in the marketplace.

I will say, in response to your second question, that I think the way we use Extra Care benefits margin as much as sales.

Because you are not going to target the cherry pickers in terms of your Extra Care offerings.

And I think that over time the supplier community has grown to appreciate the value that Extra Care brings them, in terms of their ability to target specific customers, based on whatever the product is and whoever they define as the user for that product.

So, they find Extra Care is a very effective tool, versus some of the other tools that are available in the marketplace, like the freestanding coupon inserts.

As a result, I think that we have been able to demonstrate to them a higher return on their investment, as a result of higher redemption rates.

I will let Mark talk a little bit about where we are with personalization and some things we have coming online later this year.

Thanks, Larry.

One of our founding truths, really, within the retail world is personalization.

Most of our initiatives are geared around bringing that to life.

The foundation of that is Extra Care, as Larry talked about earlier.

We do have the biggest program by a long shot work.

But, issuing cards really is the easiest part.

The tough part is behavior change.

That's where the 15 years of history that we have in place has really helped us with improving the productivity of the program over time.

We know what works, we know what doesn't work.

And that helps us improve the sales and profits over time.

I think the other thing I'll note, we do track our Extra Care program religiously versus our competition.

All of our customer satisfaction scores from a loyalty perspective are higher.

With that said, we are not resting on our laurels.

Earlier this year, we did rollout a pharmacy and health rewards program.

3 million folks now enrolled in the program.

It's very distinct from what you will find out in the open market.

It's an opt-in program where we can motivate our highest-value customers.

Its individual-based versus household-based.

So it's powerful for encouraging adherence and retention.

All of our customers can participate in the program, regardless of the payment structure.

I think the biggest thing that we did earlier this year around personalization was a program we call Conversion.

It's customer-specific offers with two big goals in mind.

They are what we call conversion offers, which encourage customers to shop probably across the store.

So if they shop in a couple of categories we try to work them across the entire store.

And then we have what's called share of wallet offers where we encourage our customers to spend more on the categories that they are already shopping in.

Every customer receives both of these types of offers.

This program is new this year and has been very successful for us.

Also doing a lot to try and improve how we deliver the offers.

Our e-mail program is up 2X from where it was at this point last year.

We also rolled out earlier this year a big program against our Extra Care Center, which is what our bloggers call our Magic Coupon Machine.

We have a lot of programs in place that have led to a 40% improvement in the usage of that program.

It is one of our biggest conversion drivers, because the coupons come out in advance of the transaction, not after the transaction, leading to a 15 times increase in redemption versus a standard coupon.

Later this year, probably the biggest thing that coming out is what we are calling our personalized circular, which will take our traditional mass circular approach and do a circular for each individual customer.

We will deliver that mechanism both online and via mobile applications.

So, a tremendous amount happening in the personalization front.

It is one of our foundation principles.

And we will continue to take it to the next level.

John, in terms of your other question around what are we seeing around redemption, we are seeing redemption on a per customer basis up year over year.

Okay.

Thank you.

Lisa Gill, JPMorgan.

I just have some questions around the selling season.

Larry, or if John is there, can you just talk about your expectations for 2014, your ability to sell Maintenance Choice 1.0, 2.0?

I think, Larry, you talked about specialty specifically in the quarter.

Can you talk about where you are on penetration for specialty?

And where you see the opportunity as we move into 2014?

Lisa, as we look at the selling season, and if you disaggregate the overall healthcare spend that a payers sees -- so they disaggregate inpatient spending, outpatient spending, pharmacy spending -- pharmacy is now one of the largest categories of cost and is a high priority for payers.

When you look at pharmacy, specialty is an increasing focus and is now one of the top priorities.

And we are seeing trends of around 20%, and in some cases higher.

So, our capabilities in specialty are resonating extremely well with both our existing clients, as well as prospective clients.

And have led to some of our successful selling season.

So, we have capabilities to manage the specialty spend not only in the pharmacy benefit, but also in the medical benefit.

And, as you are aware, about 50% of the specialty spend is covered in the pharmacy benefit and the other 50% is covered in the medical benefit.

And our new integrated specialty model also has appeal similar to Maintenance Choice.

And we roll it out across all of our CVS stores, beginning early next year.

So, you combine these capabilities with all of our integrated capabilities, such as Maintenance Choice, pharmacy and MinuteClinic, payers are seeing the value of our integrated model.

So, specifically with Maintenance Choice, we are at about 16.5 million members.

We introduced Maintenance Choice 2.0 this year.

We see a runway to grow that to 30 million members.

So, we are very excited about that.

When we look at our penetration in specialty, when you look at our employer book of business, we have most of their specialty spend.

We are looking to expand our reach into the medical side that today we see as mostly unmanaged.

When you look at our health plan space, they have multiple providers.

And we think, with our capabilities, we can get them to reduce the number of providers they have and grow our share.

So, we are very excited about both of those products.

And all of our capabilities have had a lot to do with our success in the selling season.

And also the retention of our existing clients.

John, when we think about the 2014 selling season and specialty, are you doing things around the formulary?

I know you've been successful in the formulary side for just regular chemical compounds.

But what are you seeing on the specialty side?

Are you starting to see where you can have multiple manufacturers competing against each other for a class, and, therefore, that's something you can bring to the table?

Clearly, prices keep going up on specialty.

But what are some of the things that you have won business on that you are a little bit differentiated in the marketplace?

It sounds like one of the things is being able to pick up the prescription at a CVS store.

What are some of the other things?

Lisa, I think as it relates to formulary in specialty, we have begun that process.

You look at a category like growth hormone, we have brought a formulary process that exists in the traditional spend to specialty in that regard.

I think the opportunities there will continue to grow over time, as more products enter the marketplace, that do not have clinical differentiation.

Can that drive your profit?

Is that are profit driver over the next couple years?

Clearly it's a savings driver for your customer but is it also a profit driver for CVS?

Yes.

As you know, Lisa, the client gets a disproportionate share of those rebates.

But, while that's the case, and it's definitely a cost savings for the client, there is enhanced profitability for the business, as well.

Great.

Thank you.

Scott Mushkin from Wolfe Research.

I really wanted to delve into the free cash flow, if I could, for a little bit.

We're behind this year, Dave.

I was wondering if you could maybe walk me, first, to how we get to about $5 billion.

Maybe there's some timing issues there.

The second question is with the CMS issues and other things.

It sounds like maybe we won't get there.

And my question around that, is that just a timing issue?

Will that money show up eventually?

Or is it more of a permanent factor?

And then the third thing on cash flow, if CMS and the way things are going with that, and hurting cash flow a little bit, does that have impact as we look into '14?

Okay.

Scott, thanks.

Great question.

Just a couple things.

First and foremost, as you look year over year through the first half of this year compared to last year, if you recall, last year, the timing of payments from CMS happened right on the quarter end, in advance of the next quarter.

So, last year, for the first half, free cash flow was somewhat inflated compared to a normal trend.

So, you have tough comparisons from that standpoint.

So, that's just a flip between first half, second half.

So, no big deal, if you will.

Keep in mind, as you think about free cash flow yield for this year, we are not changing our guidance of $4.8 billion to $5.1 billion.

And there's two items that are in play here.

The first, is, from a CMS payment cycle, is a bit longer for closed plans.

Upon the first of this year, we consolidated our plans at the beginning of this year.

And the result of that is one of our plans -- one of our historical plans -- is considered closed.

So, this is just simply a timing issue, as we think about that receivable probably flowing not into '13, but probably into the first half of '14.

The second item is due to our service challenges in the first of the year, where we wanted to ensure that all members had adequate access to pharmacy, despite some of the systems issues that we were experiencing.

So, to ensure that that access happened with all of our members, some additional utilization took place, which is putting pressure on our cash flow delivery.

Having said all that, most of that is a timing issue and we are working hard to make sure that we get to within our guidance range this year.

So, I hope that puts it in context, Scott.

It sounds like it doesn't have real much impact -- timing issues aside -- '14 is really not impacted by these same issues?

Or is that not the right way?

That is correct, Scott.

Okay.

That's perfect.

That was great.

I really appreciate the clarity there.

The second question I have was for Mark.

It seems like we have lots of flow into, or traffic, that's going into these pharmacies.

Likely to pick up again next year with how you guys are positioned with the Affordable Care Act.

So, what I'm looking for, and if I was going to say that the front end was a little weaker than we anticipated, how do harness all that traffic into, maybe above -- profits are good -- but getting those people to utilize the front end and maybe drive incremental profit as we look to '14?

And then I will yield.

Thank you.

Scott, I think the answer around that is consistent with what you've heard us talk about in the past.

As we introduce new customers to CVS Pharmacy, and if that point of introduction comes from the pharmacy first, we have a unique opportunity to introduce them to the other products and services available across the entire store.

Getting them enrolled in Extra Care, a prime example of t hat.

I think that becomes the pathway to engaging those customers in a differentiated way that allows us to harness some front-store impact.

Thanks, everybody.

I appreciate it.

Ricky Goldwasser from Morgan Stanley.

This is Zach for Ricky.

Thanks for the color.

I wanted to ask another follow-up question on the front store.

The negative foot traffic in the quarter, I was just curious, is this a trend that you see continuing?

And was this in line with your expectations, given that you were expecting the trade for some bigger basket size?

Also, if you could color that around your market share on the front store for the quarter.

Zach, in terms of customer traffic, it was pretty much in line with what we expected, recognizing that there was a calendar shift with Easter that negatively impacted traffic.

I think, as both Mark and myself had mentioned earlier, we are certainly mindful of how we manage that balance between driving traffic and managing promotional spend with both sales and margin in mind.

We look to bring, I will say, a surgeon's knife, so to speak, in terms of finding that right balance.

We continue to see a very cautious consumer out there.

And we don't see that changing throughout the balance of this year.

Okay, great.

Thank you.

On a completely separate topic, there have been some rumors throughout the quarter of you guys being tied up with and being interested in a European partner.

Without addressing those specific rumors, could you just refresh us, after having expanded a little bit in Brazil, what your thoughts are on global and particularly in the European market?

Zach, we are not -- as you know, we have a policy of not commenting on rumors out in the marketplace.

But, as we've discussed in the past around our international strategy, it was not a question of if, it was more a question of when and where.

And, as you know, earlier this year, we acquired the Onofre pharmacy chain in Brazil.

And we are six months into that.

We're very pleased with how that's going in terms of the learnings that we are getting and the opportunities that we see for bringing synergies with our US operations.

We are opening some stores this year, we will accelerate our openings next year.

And so far, so good.

We will use those learnings to further our agenda internationally, where it makes economic sense.

And, again, as we've talked in the past, we will approach that with financial discipline.

Great.

Thank you.

Edward Kelly from Credit Suisse.

Nice quarter.

Larry, I just want to clarify what you said about the Med D business and the impact for next year.

It seems like the match should be about 350,000 year over year that you would be down on.

Is that correct, first?

I just want to make sure that's right.

And then, as we think about the impact, should we be thinking about average revenue probably just under $1,000 per member per year and maybe a mid single digit type EBIT margin on that business?

I will take the first part and probably the second part, and maybe Dave will jump in here, as well.

Your takeaway in terms of the lives impact was right, in terms of we are expecting a year-over-year compression in the range of 350,000 lives, for the reasons that we had mentioned.

We do not disclose the revenue or profit per life in the Med D business, for competitive reasons.

But I would also, again, back to the earlier comments, the 350,000 life adjustment represents about 10% of our overall individual SilverScript EDP lives and right around 5% of our total Med D lives.

This is Dave.

I just want to make sure I clarify one point.

What we said is that, as you roll forward from where we are today to, I will say January of '14, that's our estimate of 350,000 lines coming out at that point in time.

Right.

Okay.

Perfect.

And, Larry, just a similar follow-up on the idea of generics procurement and the opportunities available through things like partnerships.

Could you just give us an update on how you're thinking about the opportunity out there for CVS in this area?

Obviously, one of your competitors sees a lot of opportunity.

And it would be great just to get your updated thoughts on this area and the potential for you to generate savings at some point, going forward, if it's there.

I think, as everyone's aware, we've renewed our wholesaler agreements with Cardinal and McKesson a few months ago.

We were very pleased with the results of that.

And we believe that the relationship that we have with both of those wholesalers, first of all, they both do a great job.

And we believe that that makes the most sense for us, from both an economic, as well as an efficient distribution network.

Now, we are certainly constantly evaluating opportunities out in the marketplace.

If we thought that there were further opportunities for us to enhance our efficiency from both a cost as well as a distribution network point of view, we certainly wouldn't hesitate to pursue those opportunities.

So, I think that's something that we are watching closely and we will continue to evaluate.

Great, thank you.

Dane Leone from Macquarie.

Maybe I'll ask the topical question of Medicare PDP a different way.

I appreciate that over the past year or two, you focused your strategy over to overall EBITDA growth versus EBITDA per script growth.

And with the PDP headwind going into 2014, and thinking about the optionality you have with the balance sheet, could you just update your strategy of what you see in the areas of organic versus inorganic EBITDA growth, as consolidation rolls through the entire industry, in the context of the plan and, obviously, at this point, with CMS.

Thank you.

This is Dave.

First and foremost, let me just point out that from using our capital structure, we've been very disciplined in the program that we have in place to drive value for our shareholders.

First, in three areas.

One, increasing our dividend.

But probably more importantly in this aspect, investing back in our business.

That we see good line of sight from a return on investment perspective and we will use our balance sheet to do that.

Furthermore, our cash flow yield and generation is pretty substantial.

So we'll continue to use that to drive our share repurchase program.

That will continue to work to enhance shareholder value.

And if you keep in mind, we said very clearly that our adjusted debt to EBITDA target was 2.7 times.

We are a little better than that at this point in time.

So it gives us some additional flexibility as we think about using our balance sheet to drive value for our shareholders.

And we will continue to do that, both, as you just heard, through this year, but certainly into next year, as well.

Okay.

Great.

Thank you.

Eric Bosshard of Cleveland Research.

Curious on the PBM growth outlook as you think and even frame where you think we are in terms of generic benefits to profitability in the PBM, relative to share penetration of 90 day and the efforts you are making with the formulary.

I'm curious how you would mix all that together and think about the growth curve of PBM profits over the next 12, 24, 36 months.

Eric, this is Dave.

I don't know if I can get you really specific here.

But I think, in general, as we've talked about, there is a few things that are driving growth in our business over time.

Clearly our ability to garner lives and share in the PBM space has been pretty important to us.

As you've even seen this year, very successful selling season, as we continue to get more lives into the PBM, is pretty important to us.

The question, then, is how do we make sure that those lives -- we increase our share of dispensing across both of our channels of distribution, both within the PBM but also in the Retail segment.

Clearly, generics, while over time, we are in the peak of the generic introductions, as we look forward, there's still plenty of run room for new generic introductions over the next three to five years.

Despite it being somewhat of a slower pace than what it has been over the last year and a half or so.

So, all those components that we've put in place are things that we look to drive value for our clients and for our members, but also drive profits for ourselves.

Eric, it's Larry.

Just on the generic piece that Dave mentioned, keep in mind we've got $15 billion, on average, over the next three years, $15 billion worth of branded product coming off patent.

And then just one additional point.

You mentioned the formulary.

While that's gotten a lot of discussion and attention over the last couple years, what we refer to as our template formulary, it has, today, about 50% penetration with clients.

We continue to see opportunity for further adoption, especially as clients will be looking for additional ways to reduce cost.

And then we talked about specialty earlier as a key growth driver, as well.

Great.

And then if I could just circle back on the front-end growth, which was a little slower.

Just wondered if you could characterize why that business is slower.

I appreciate the focus on profitability.

But if you would frame what's different in terms of the growth rate in the front end being a little bit slower.

Eric, I don't know that there's anything new from what we've talked about in the past.

I think that we are continuing to see cautious consumers.

As you look across some of the external data available in the second quarter, whether it's IMS or some of the other data, it did show some consumer spending slowdown in the quarter.

So, I think it has to do as much about that as anything else.

That's helpful.

Thank you.

John Ransom from Raymond James.

I just wanted to get into the weeds a little bit with specialty.

A couple of questions.

One is, are you distributing more and more of your specialty drugs out of your retail locations?

Or is it still primarily a mail-order business?

Do you see advantages to doing it more retail?

And then, secondly, I am curious about oncology, because it's a directed physician drug.

It flows on the medical benefit.

I just wondered if there is any emerging strategies that might tame that piece just given all the drugs in the pipeline?

Thanks.

John, this is John.

Specialty primarily is distributed by our specialty pharmacies via mail order.

There is some specialty revenue that flows through retail.

I talked earlier about our integrated specialty strategy, which is really providing access for members across all 7,400 CVS retail locations, but leveraging our clinical, our billing and our fulfillment capabilities in the back end.

So, we will be rolling that model out next year.

In a pilot that we've done, what we've seen is about 50% of the patients like to have their specialty script mailed to their home and about 50% of the patients like to pick up their specialty script at their local CVS pharmacy.

So, we believe we are going to be able to grow specialty fulfillment in retail, but we are not going to have to actually house the inventory in the retail stores, because we're going to be leveraging our back end.

And then we are also going to leverage our billing and our clinical capabilities.

As far as oncology, you are right, that's a buy-and-bill that is done by the oncologists in their office.

I would say it's not well managed today.

And the incentives are aligned for physicians to actually utilize the higher cost oncology medications.

So, there are solutions that are in the marketplace that we have and others have, where we look to realign the incentives for physicians and incentivize them to utilize the most cost-effective combination of oncology drugs that that patient needs.

So, I'm not sure in the near future you will see a movement away from that buy-and-bill model, but I do think there's an opportunity to more effectively manage it.

My other question, are you seeing -- potentially, by '15 or '16 we could be back into a pretty high top-line drug trend.

Are clients focused on this?

Practically speaking, how much can you really help them take, say, a 9% drug trend and turn it into a 7% drug trend or something?

What do you see as specialty comes to be the lion's share of the growth in spend?

John, when you think of drug trend, you think of there's inflation, there's utilization and then there's mix changes because of new drug introductions.

So, we are actually seeing trends today around 20%.

So it really is becoming a very high priority for our clients.

We have solutions that can help them manage.

It's utilization solutions, it's formulary solutions, it's consolidating, where they purchase their specialty products through our channels that provides them better economics.

So, we believe there are a lot of solutions that take a higher level of sophistication than what we see in the commercial space.

But, we've made significant investments and we believe we have best-in-class capabilities to enable our clients to more effectively manage their spend.

So, we are very bullish in this space and believe that not only will it continue to grow, but that our tools will distinguish us in the marketplace and allow us to grow disproportionately.

Thank you.

Frank Morgan from RBC Capital Markets.

Dave, you mentioned the tail off in the operating profits in the PBM segment in the fourth quarter.

That was a good explanation there.

But I'm curious, I think you also mentioned there would be a ramp up in the operating profits on the retail that would offset that.

Could you talk just conceptually about you what you expect to see specifically on the retail side in the fourth quarter?

Thanks.

Good question.

I think, as we continue to work from a retail perspective, we continue to see very solid volume growth, particularly within the pharmacy segment.

As you think about where we started this year, and our expectation for script retention within the pharmacy business, that continues to hold steady and continues to drive performance there.

Also, from a front-store perspective, we have been very diligent on managing, I'll say, volume and margin.

So, as we pointed out during the call, our front-store margin continues to progress nicely.

We continue to, I'll say, balance, if you will, the top-line front-store growth outlook with our expectations for margin.

So, we continue to be more efficient across most of our outlets around the country.

I would say that one thing that's important to think about our business -- and we've talked about this in the past -- we can continue to progress from a financial perspective very nicely with a fairly modest, I will say, 1% comp growth in the front of our business.

That consistency is probably more important than driving out-of-market growth, if you will.

I hope that helps, Frank.

Thank you.

Robert Willoughby with Bank of America Merrill Lynch.

Just a clarification.

Does the $1.7 billion in new PBM business, does that include any adjustment for the Medicare losses that you mentioned?

Then just, secondarily, John, can you speak anecdotally to what you found here?

What incremental work do you need to do for that CMS sanction to be lifted?

I wonder why this might not have been identified at your first pass at this?

Bob, it's Larry.

In terms of the business that we called out on both a gross and net basis, that does not include the Medicare Part D business.

And in terms of the second question, as we went and conducted our own audit of the success of the remediation efforts, we did uncover some additional elements that need to be completed, that ensure that we have our systems and processes working at best-in-class levels.

That's what we need to continue, and to finish up on the remediation.

It's that straightforward.

Okay.

Thank you.

David Magee, SunTrust.

Two questions.

First has to do with what you are seeing with the cautious consumer that you referenced earlier.

Are you seeing that situation getting any better at all as the year progresses?

And are you seeing any differences with regard to geography or demographics in that regard?

And then my second question has to do with generic benefits being more muted in the second half of this year.

At what point next year do you expect that to swing positive again in terms of comparisons?

Thank you.

Why don't I start with the generics a little bit.

As we said, really, what's happening here, as you look back really last year, the back half of last year, those break-open generics accelerated.

So, you saw that comp itself into the first half of this year.

So, now, we are facing pretty tough comparisons in the back half.

I think as we think about moving forward, there's still plenty of opportunities for break-open generics over the next several years.

The timing of which, quite frankly, is probably a little too early to give you a sense of specifically how '14 will shape up from that perspective, year over year.

But, rest assured, if you look ahead for the next two to five years, generic introductions are still pretty robust, despite the fact that we are in a peak at this point in time.

From a consumer perspective, maybe I will ask Mark to comment on that a bit.

We are seeing some divergence of results, based on where our stores are.

And most notable between lower income, higher income areas.

That's where we see the most difference.

And it's most noticeable in those areas between, mostly on the front versus the pharmacy, which tends to be more flat.

So we are doing some things in those lower income areas to try to help the value perception.

And we will begin rolling those out in the second half of this year.

Okay.

Great.

Thank you.

Meredith Adler from Barclays.

I'd just like two questions.

The first is, you talked about losing the 350,000 lives.

The remediation costs seemed like they were noticeable so far this year.

Do you expect that cost to continue at the same level, or to be higher in the second half?

And are there likely to be any costs next year, as well?

Meredith, this is Dave.

We haven't broken out those cost specifically.

I would just say that all those costs are baked into our outlook for '13.

I think we're pretty confident that we have our hands around the cost spend for that.

But as we cycle into '14, it's probably just a little too early at this point in time to give you some clarity around that, specifically at this point.

But, clearly, as we said, our expectation is to have the remediation effort complete, if you will, near the end of the year.

So that would say that most of those costs would not continue.

Okay.

Then I have a question about reimbursement for generics.

I was recently talking to Walgreens and I know that they have chosen to sign slightly different contracts with payers, in order to spread out the benefit from generics.

So, instead of being very high in the front, and then dropping very sharply at some point, they were spreading it out.

I think you guys have always said that the best profit comes when you have three suppliers.

But have you look at all about smoothing out the benefit from generics, in terms of gross margin?

Meredith, it's Larry.

I think there's been a lot of dialogue around the use of, I will call it, market basket or capped generic effective rates over the last 12, 18 months.

From a CVS Pharmacy perspective, we started using those a few years back.

From our perspective, not much has changed.

I think that we continue to think about the cadence of generic reimbursement very consistent with how we've talked about it in the past, and how you mentioned it.

And I think it's important to note that, despite the dialogue around these things, this does create more predictability from a forecasting and a budgeting point of view.

It does not alleviate the fact that there continues to be ongoing reimbursement pressures across the business.

Right.

I'm still not quite -- did you say that you haven't made any changes at all?

You still have this pattern of dropping at a certain point?

Meredith, I'm saying that what's being talked about in the marketplace, we started doing several years ago.

So, from our perspective, we haven't seen a change.

Got it, okay.

And then my final question, I think, is for John.

There was a question before about managing the oncology spend and doctors buy-and-bill.

You had a program that you were working on that had to do with getting doctors to call a certain pathway and generally keeping their reimbursement the same but encouraging them to use the lowest-cost oncology treatment.

I was wondering, you didn't mention it today and I'm wondering if that test is still there, and whether you feel like you're getting traction with physicians, without getting a big pushback from them in terms of that program.

Meredith, we still have that program.

It's out in the marketplace.

I would say that the payers are probably a little more reluctant to take on oncologies.

And they're focused on other areas that are less sensitive.

But we still believe that the oncology space needs a solution.

And we think the solution and the approach that we are taking is the most prudent approach.

And delivers savings without creating patient and physician disruption.

We are still committed to that program.

And when you say the payers are attacking other things, are you talking about mostly the pharmacy benefit?

Or, they're also looking at other areas funded under the medical benefit?

They are looking at both.

So, formulary and utilization programs across both pharmacy and medical benefits.

And they are coming to us and asking us to take our capabilities that we have demonstrated on the pharmacy side of the specialty spend and extend that into the medical spend.

So, again, it's a capability that we have, that we think not only makes sure that the right drug gets utilized, but that the billing is appropriate.

Medical claims systems don't have good editing capabilities in them, so we provide that editing capability to make sure the appropriate charges are paid.

So, a lot of interest in this space.

Again, 50% of the spend is on the medical side, and you are seeing specialty growth faster than any other part of the pharmacy business.

Great.

Thank you very much.

Appreciate the help.

Okay.

Thanks, Meredith.

Let me just thank everyone for their time this morning and your interest in CVS Caremark.

If there are any further questions that you have, you can reach out to me and see Christal.

Thanks.

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

Have a great day, everyone.