CVS Health Corp (CVS) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Q2 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, August 5, 2014.

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

Please go ahead, ma'am.

Thank you.

Good morning everyone, and thanks for joining us.

I am here this morning with Larry Merlo, President and CEO, who will provide a business update, and Dave Denton, Executive Vice President and CFO, who will review our second quarter results, as well as guidance for the third quarter and year.

Jon Roberts, President of PBM, and Helena Foulkes, President of the Retail Business, are also with us today and they will participate in the question-and-answer session following our prepared remarks.

(Caller Instructions)

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

We plan to host our annual Analyst Day on the morning of Tuesday, December 16 in New York City.

At that time, you will have the opportunity to hear from several members of our senior management team who will provide 2015 guidance, as well as a comprehensive update on our growth strategy.

We plan to send invitations with more specific details via e-mail some time in August, but please save the date.

Again that's Tuesday, December 16.

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

Please note that just before this call, we posted a slide presentation on our website that summarizes the information you'll hear today, as well as some additional facts and figures regarding our operating performance and guidance.

Additionally, our quarterly report on form 10-Q will be filed by the close of business today and it will be available on our website at that time.

During today's presentation, we'll make forward-looking statements within the meaning of the federal securities laws.

By their nature, all forward-looking statements involve risks and uncertainties.

Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the risk factors section and cautionary statement disclosures in those filings.

During this call we will also use some non-GAAP financial measures when talking about our Company's performance, including free cash flow and adjusted EPS.

In accordance with SEC regulations, you can find the definitions of these non-GAAP items, 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.

And now let me turn this over to Larry Merlo.

Thanks Nancy.

And good morning everyone, and thanks for joining us to hear more about the strong results we posted for the second quarter.

I'm pleased to say that we met or exceeded our expectations on every key major measure of performance.

Our adjusted earnings per share increased 16.5% to $1.13 per share.

That's $0.02 above the high end of our guidance range.

Both the PBM and retail segments exceeded our revenue expectations and delivered strong gross margins.

And as a result, operating profit in the retail business grew 6.5% and (technical difficulties) in the PBM grew 30%, exceeding our expectations.

Additionally, we generated nearly $400 million of free cash, keeping us on track to achieve our full-year free cash flow goal.

Now given our strong performance year-to-date, we are raising and narrowing our adjusted earnings per share guidance for the year to a range of $4.43 to $4.51.

And that's up from our previous range of $4.36 to $4.50.

And Dave will provide the details behind our financial results and guidance during his review.

But before I move on, I do want to say that I'm extremely proud of the work our colleagues are doing to drive continued strong results across the enterprise.

So let me turn to a brief business update, and I'll start by level-setting how we see the current state of health reform.

I think as everybody knows, there are reported to be about 8 million individuals who have enrolled in the public exchanges, and we saw the biggest increase occur toward the end of open enrollment.

The mix of individuals who were newly insured as opposed to those who previously had coverage, it still remains unclear with various sources quoting anywhere from a low of 27% of individuals newly insured up to a high of 85%, with multiple data points suggesting it might be somewhere in between.

With regard to Medicaid, available data indicates that 6.7 million individuals have gained coverage, which is up from 3 million at the time of our last earnings call.

Now while the net number of newly insured remained somewhat of a mystery, we can be confident that several million Americans have gained coverage in recent months.

And this should provide a positive secular trend in pharmacy volume growth for the next several years.

Our experience to date with respect to the combined impact of both public exchanges and the expansion of Medicaid is consistent overall with our expectations, and is expected to yield a modest benefit in 2014.

We continue to expand our focus on building strategic enterprise relationships with health plans, whether or not we're the PBM.

We support more than 25 commercial health plans, co-ops, and Medicaid managed care organizations across 26 states as their PBM, and we expect this number to grow.

We have also implemented preferred pharmacy networks or Maintenance Choice in more than 20 states.

And as we emphasized at our December Analyst Day, we are well-positioned across the enterprise to partner with health plans in a variety of ways.

And we are actively helping them advance their strategies in their respective markets while growing our enterprise share.

Now, let me update you on our 10-year agreement with Cardinal Health that builds upon our combined sourcing expertise.

As you are aware, last month we completed the formation of Red Oak Sourcing, the largest generic sourcing entity here in the US and located in Foxborough, Massachusetts.

At that time employees in functional responsibilities were transition from CVS Caremark and Cardinal to Red Oak Sourcing.

And as we work together to get the venture up and running, we further refined certain aspects of our agreement.

And the structure of the final agreement is slightly different than what we've talked about previously.

So Dave will walk through how the venture works during his financial review, highlighting the three ways in which the venture is expected to deliver value.

So we remain excited about Red Oak, and we look forward to its future contributions.

Moving to our PBM business, I'll start with an update on the 2015 selling season.

And as we noted on our last call, the marketplace has been active.

Pricing remains competitive yet rational.

And I'm pleased to report that to date we have been very successful in this selling season.

Gross wins for 2015 currently stand at $5.4 billion, and span across all client segments, while net new stands $2.6 billion.

And this net new number includes business lost through acquisition, which makes up more than 60% of the lost business.

These net new business numbers do not account for any impact from our individual Med D prescription drug plan, which I'll touch on a little later.

As for renewals, we've completed nearly 70% of the $26 billion in business up for renewal, with a retention rate of nearly 97%.

And I think our selling season reflects -- success reflects our track record of generating savings for our clients through our unique suite of capabilities.

Top of mind for clients this selling season is achieving better control of their specialty spend.

Among our clients, specialty represent about 22.5% of total drug spend under the pharmacy benefit, and projections have this continuing to grow at a mid-teens rate.

Now all specialty spend, including that paid under the medical benefit, will likely grow to as much as 50% of total drug spend by 2018.

So I think you can see it's critical that we bring meaningful solutions to the challenges.

Our specialty business remains strong in the second quarter as revenues were up about 53% year-over=year.

In addition to benefits from new business and the addition of Coram, another driver of specialty revenue growth was Sovaldi, the new Hep C drug.

There are estimated to be roughly 3 million people in the US requiring treatment, and as everyone knows the potential cost of treatment is very high.

As you might imagine, the growing costs in this category are of significant concern to our clients, and we have a number of programs in place to ensure appropriate utilization and cost management.

And as competing products become available late this year and next, we will look for opportunities to introduce formulary management to further drive down costs.

At CVS Caremark we continue to differentiate our specialty offerings in the marketplace with a goal of providing a high level of clinical support to patients while managing trends for our clients and driving continued share gains.

As an example, our Specialty Connect offering has been rolled out.

It's been well received by both clients and patients.

You'll recall that Specialty Connect integrates our mail and retail capabilities, providing choice and convenience for patients while preserving the central clinical expertise that leads to better health outcomes.

No other PBM can offer this today.

And as of late July, more than 60,000 specialty patients have been transitioned to this specialty service model, which again offers enhanced clinical and benefits support.

The program is generating high satisfaction scores with patients.

It resonates with clients as a differentiated approach to simplifying the specialty process for members, and physicians appreciate the ease of use in getting patients started on therapy.

Our medical pharmacy management program also continues to enjoy strong interest and uptake in the marketplace, with several new implementations underway.

And our site-of-care offering through our Coram infusion business enables us to provide patients more convenient low-cost alternatives to hospital infusions, whether at the physician's offices, our retail infusion site, or even the patient's home.

The Coram organization has been fully integrated into the specialty group, and our new capabilities have been a topic of discussion in the current selling season for specialty business on a carve-in or standalone basis.

So we remain optimistic that we can continue to gain specialty pharmacy share as we work to develop innovative offerings that capitalize on our unique ability to optimize costs, quality, and access.

Another important way that we manage trend for clients is through our highly proactive approach to formulary management, which as you'll recall we introduced to the marketplace back in 2011 for the 2012 plan year.

Since then we have updated our formulary on an annual basis, with the mission of being able to manage trend for our clients while providing comprehensive, cost effective, and clinically appropriate options for their plan members.

Now building on our formulary success of the last three years, we recently notified our clients that we will be removing 22 products, in addition to select diabetes test strips, for the 2015 formulary.

And from 2012 through 2015, our rigorous approach to formulary management is expected to result in total savings to our clients of more than $3.5 billion.

Before turning to retail, let me touch briefly on our Med D PDP, SilverScript.

As expected we currently have approximately 3 million lives in our individual PDP, and for the first half of 2014 our normal monthly attrition has been only partially offset by choosers and auto-assignees.

And as we came out of sanction earlier this year, we began to enroll choosers in February, and receive dual auto-assignees in May.

Additionally, as the dual demonstration projects continue to progress in certain states, we do expect to see some transition of dual eligible lives through the second half of this year.

And while we may recapture some of these lives through our health plan partners, it is likely we will lose a modest number of lives as a result.

So we expect to end of the year with about 2.9 million lives in our individual PDP, and we continue to see significant opportunity to grow the individual PDP business over the long term.

As a matter fact, last Thursday we received the preliminary benchmark results from CMS for 2015, and I'm pleased to report that SilverScript was below the benchmark, and therefore qualified in 32 of the 34 regions.

The only regions we didn't qualify were Alaska and Nevada, consistent with prior years.

So these strong benchmark results should enable us to retain the vast majority of the auto-assignees we currently serve.

So we're very pleased with the outcome.

Moving onto the retail business.

Following the effects of the difficult weather and flu season that we experienced in Q1, total same-store sales reaccelerated sequentially in Q2, increasing 3.3%.

Pharmacy same-store sales increased 5% versus a year ago, and were negatively impacted by about 160 basis points due to recent generic introductions.

Pharmacy comps were also negatively impacted by approximately 130 basis points due to the transfer of specialty scripts from our retail segment to our PBM segment as a result of the new Specialty Connect offering, and Dave will talk more about that later.

Pharmacy script comps increased 3.9% on a 30-day equivalent basis, and we continue to gain pharmacy share.

I want to touch on a topic that has received a lot of attention lately based on some competitor commentary, that being generic inflation and pharmacy reimbursement pressures.

You'll recall that when we gave our 2014 guidance last December, we told you that we expected continued pressure on pharmacy reimbursement, and the market is generally consistent with what we anticipated.

As to generic inflation, while the cost-of-goods inflation does exist on some generic items, it is not material in the context of our overall purchasing volume, and again was generally within our expectations.

On balance, the deflationary nature of the generic pharmaceutical market remains intact.

And overall our pharmacy margins increased this quarter for multiple reasons, were in line with our expectations, and again Dave will talk more about this in the financial review.

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

Our front-store comps were positively impacted by approximately 80 basis points from the shift of the Easter holiday, and as we plan for exiting the tobacco category this fall, we have begun to see a sales impact.

Front-store comps would have been approximately 110 basis points higher if you exclude tobacco and the estimated associated basket sales.

Now adjusting for this tobacco impact and the Easter shift, front-store comps were roughly flat in the quarter, sequentially improving from Q1.

Front store traffic declined as customers continue to aggregate their trips, and at the same time our average basket size continued to increase, reflecting the strength of our loyalty program and the personalization it enables us to offer.

And consistent with our prior statements, we are making responsible investments in profitable promotions, and remain committed to not chasing empty sales.

Driving higher-margin store brand sales continues to be another area of focus.

We saw a notable growth in share gains in share brands this quarter, with store brand as a percent of front-store sales increasing about 80 basis points to 18%.

And we see significant opportunities to continue to expand our share of store brand products by building on our core equities in health and beauty, while also seeking opportunistic growth in other areas.

Additionally in order to drive better results, we continue to explore innovative personalization strategies through insights from ExtraCare.

As an example, during the second quarter we expanded our send-to-card digital coupon option for all ExtraCare personalized offers that were historically only available either at the ExtraCare coupon center or on the bottom of a customer's register receipt.

Adoption has been very strong, with over half of our registered users already trying this new feature.

And we also continue to turbocharge our personalized e-mail promotions, with our activate e-mail subscriber list growing 21% versus the same quarter last year.

Turning to our retail drugstore program, we opened 34 new stores, relocated 8, and closed 4, resulting in a 30 net new stores in the quarter, and we're on track to achieve square footage growth of 2% to 3% for the year.

In the quarter, we recently announced that we have a definitive agreement to purchase Navarro Discount Pharmacy.

Navarro is the largest Hispanic-owned drugstore chain in the US, with 33 retail drugstore locations in the Miami Dade County area.

In addition to Navarro Health Services, a specialty pharmacy serving patients with the complex or chronic diseases.

We expect to maintain the current product mix, and we'll learn from our Navarro colleagues about Hispanic marketing and merchandising.

And we expect these lessons to be transferable to certain other CVS markets.

The Navarro brand is one of the most recognizable in the Hispanic marketplace.

We plan to retain it.

If you'll recall, we adopted a similar strategy in maintaining the Longs Drugs name for our acquired locations in Hawaii.

That has been successful, and we expect to complete the Navarro transaction later this year.

Let me touch briefly on MinuteClinic, which continues on its healthy growth trajectory.

In the second quarter revenues increased 24% versus a year ago.

We opened 32 net new clinics in the quarter, bringing our total to 60 year-to-date, and keeping us on track to open at least 150 new clinics this year.

We currently operate 860 clinics in 28 states plus the District of Columbia, and in recent news a new partnership with USA Football named MinuteClinic, their official retail medical clinic and sports physical provider.

And we will offer a special discount for sports physicals to more than 1 million young athletes and their coaches.

CVS Caremark and MinuteClinic also added four new health system alliances during the quarter and another four in July, bringing our total number of affiliations with major US health systems to 40.

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

Thank you Larry, and good morning everyone.

As I typically do, I'll begin this morning by highlighting how our disciplined approach to capital allocation continues to enhance shareholder value.

I'll follow that discussion with a detailed review of our strong second quarter, followed by an update on our guidance.

So let's begin.

During the second quarter, we continued our long track record of paying quarterly dividends to our shareholders, with payments totaling $322 million.

With a strong earnings outlook for the remainder of this year, we expect our dividend payout ratio to surpass 25% at some point during 2014.

We're making continued good progress toward achieving our 35% payout target by 2018.

Additionally, we repurchased 16 million shares for approximately $1.2 billion at an average price of $74.91 per share.

Year-to-date we've repurchased more than 27 million shares, or $2 billion, and we still expect to complete at least $4 billion of share repurchases for the full year of 2014.

So between dividends and share repurchases, we've returned more than $1.5 billion to our shareholders in the second quarter alone, and have returned more than $2.6 billion during the first half of this year.

Our goal has been to return more than $5 billion in 2014, and we remain on track to meet that goal.

As Larry said, we generated nearly $400 million of free cash in the second quarter, bringing our total for the first six months of the year to approximately $2.2 billion.

The key driver continues to be our healthy growth in earnings, coupled with improvements in our working capital performance, fueled mainly by the PBM's growth.

All in, we continue to expected to generate free cash of between $5.5 billion and $5.8 billion in 2014.

Turning to the income statement, adjusted earnings per share from continuing operations came in at $1.13 per share, up 16.5% versus LY, and $0.02 above the high end of our guidance range.

This strong performance reflects solid growth across all of our operating segments.

The retail segment produced results at the high end of our expectations, while the enterprise's out-performance was driven primarily by better than expected results from the PBM.

GAAP diluted EPS was $1.06 per share, and now let me quickly walk you through our results.

On a consolidated basis, revenues in the second quarter increased 10.7%, or approximately $3.4 billion, to $34.6 billion.

PBM net revenues increased 16.2%, or approximately $3 billion, to $21.8 billion.

This strong performance was driven by net new business, specialty pharmacy growth, drug inflation, and product mix.

Offsetting this to some degree were lower mail choice claims, reflecting the decline in traditional mail order volumes, and an increase in generic dispensing.

The PBM's generic dispensing rate increased approximately 180 basis points versus the same quarter of LY to 82%.

Now, revenues in the retail business increased 4.5% in the quarter, or approximately $730 million, to $16.9 billion.

Sales in the retail segment were better than expected, driven primarily by branded drug inflation as well as volumes.

Retail GDR increased by approximately 160 basis points versus the second quarter of 2013 to 84%.

Let me point out that with the second quarter results, we have begun to experience the type of shift between segments that I highlighted at past Analyst Days.

As you know, our focus isn't limited to just one channel, mail or retail, as it is for many of our competitors.

Our channel and business segment agnostic offerings will enhance the performance of the enterprise, and sometimes at the expense of one individual segment.

For that reason, recall that we have been suggesting that you focus on the growth of the enterprise, rather than the individual segment to best gauge our success.

And with the implementation of Specialty Connect this past quarter, we essentially transferred revenues out of the retail pharmacy segment and into the PBM segment, as the PBM took over the dispensing of nearly all specialty prescriptions filled by CVS Caremark.

As anticipated, the transition had a larger impact on sales dollars than scripts, given the high cost of specialty drugs.

The impact on sales dollars in the second quarter was approximately $145 million, and this impact will grow larger as we ramp up in the third and fourth quarters.

Obviously this shift dampened year-over-year top-line growth at retail, while enhancing revenue growth in the PBM.

And as Larry said, it had an approximately 130 basis point negative impact on retail pharmacy comps, but it had an insignificant impact on retail script volume.

Now turning to gross margin.

The consolidated Company posted an 18.3% margin in the quarter, a decline of approximately 40 basis points compared to Q2 of 2013.

This margin decline was the result of a mix shift, as the lower margin PBM segment grew faster than the retail segment, but both operating segments saw their margins improve.

Additionally, margins benefited from the finalization of California's Medicaid reimbursement rates, which I referenced on our last earnings call.

This finalization benefited retail gross margin by $53 million in the quarter and PBM gross margin by $16 million.

This impact was consistent with the guidance we provided earlier this year.

Within the PBM segment, gross margins increased approximately 35 basis points versus the same quarter of LY to 5.5%, while gross profit dollars increased approximately 24% year-over-year.

The increase year-over-year was primarily driven by growth in our specialty business, favorable purchasing economics, and the increase in GDR.

We continue to see these positive margin drivers partially offset by typical client price compression.

Now gross margin in the retail segment was 31.4%, up 40 basis points over LY.

Gross profit dollars increased 5.9% year over year.

Pharmacy margins improved in the quarter as we benefited from the increase in GDR and the finalization of the reduction in California's Medicaid reimbursement rate that I noted earlier.

Our pharmacy margins notably improved, even without the impact of this rate finalization.

At the same time, we saw front-store margins decline as anticipated in the quarter, driven mainly by the mark-down of some tobacco products, as well as the unexpected bankruptcy of one of our vendors.

Total operating expenses as a percent of revenues improved by approximately 50 basis points from Q2 of 2013 to 11.9%, while total SG&A dollars grew by 6.4%.

The PBM segment expenses grew by 10%, and it's SG&A rate was 1.5%, an improvement of approximately 10 basis points versus LY.

In the retail segment, SG&A as a percent of sales declined approximately 20 basis points to 21.3%, while expenses grew by 5.6%.

This reflects the deleveraging effect of generics, as well as the impact of Specialty Connect, as the retail segment transitions sales to the PBM segment without a corresponding expense reduction.

Within the corporate segment, expenses were up $29 million to $205 million.

This increase was primarily related to benefit cost, as well as strategic initiatives.

Now adding it all up, operating margin for the total enterprise improved approximately 5 basis points to 6.4%.

Operating margin in the PBM improved approximately 45 basis points to 4%.

Now, operating margin at retail improved about 20 basis points to 10.1%.

For the quarter, PBM operating profit was strong, growing 30.1%, which is higher than expected.

Retail operating profit increased a very healthy 6.5%, at the high end of our expectations.

Now going below the line on the consolidated income statement, net interest expense for the quarter increased approximately $32 million from last year to $158 million.

The debt we issued in the fourth quarter of LY was the primary driver of this increase.

Our weighted average share count was 1.17 billion shares.

And finally, our effective tax rate was 39.2%.

Now let me update you on our guidance.

As always, I'll focus on the highlights.

You can find the additional details of our guidance in the slide presentation that we posted on our website earlier this morning.

As we stated in the press release, we are both raising and narrowing our full year 2014 EPS ranges, given our strong results to date.

We currently expect to deliver adjusted earnings per share in 2014 in the range of $4.43 to $4.51, reflecting strong year-over-year growth of 11.75% to 14%, and that's excluding the gain of approximate $0.04 associated with the legal settlement in the third quarter of 2013.

GAAP diluted EPS from continuing operations is expected to be in the range of $4.16 to $4.24.

While we beat the high end of our guidance in the second quarter by $0.02, we increased the top of the range for the year by $0.01.

This delta reflects a few moving pieces, among them the minor shift in timing associated with a fixed payment we will receive from Cardinal, as well as a slightly higher tax rate.

As Larry said, the structure of the final agreement is a bit different from what we had previously described.

So let me explain how the venture works.

There are three ways in which the arrangement can provide value to us.

First, as we previously stated, we will receive a fixed quarterly payment from Cardinal that recognizes the greater relative purchasing volume that CVS Caremark has today.

Under the final agreement, we will receive 39 quarterly payments of $25.6 million beginning in the fourth quarter of this year, rather than 40 quarterly payments of $25 million which would have begun in the third quarter of this year.

There is no change in the overall value of the fixed payments; it's simply a timing shift that more accurately reflects the operational ramp-up associated with this venture.

Second, there is a new component to our arrangement providing the potential for additional predetermined quarterly payments from Cardinal to CVS Caremark, beginning in the third quarter of 2015.

These payments will only occur to the extent that certain milestones are achieved.

And finally, as we have explained previously, we believe there will be incremental value to our current generic procurement created through the combination of our purchasing volumes.

So while the fixed payments will now begin a quarter later than originally planned, the overall value of the fixed payments remains the same.

And the potential for incremental value resulting from the venture remains high.

So we continue to be excited about this venture, and we look forward to its future contributions.

And with that, turning back to 2014 full-year guidance, we now expect consolidated net revenue growth to be in the range of 8% to 9%, raising the midpoint by approximately 260 basis points over our prior guidance.

We have increased our top-line outlook in the PBM, and now expect revenue growth of 13.75% to 14.75%, approximately 5 percentage points higher than our prior guidance.

This revised guidance reflects our expectations for better than expected growth within specialty pharmacy, fueled by a combination of both inflation and new product mix.

Additionally, taking into account our performance in the second quarter, we are narrowing the top-line outlook at retail, raising the bottom in the range, and we now expect growth of 1.25% to 2%.

Consistent with that outlook, we are also revising our guidance for total same-store sales, and now expect growth of between 0.25% and 1%.

Keep in mind that these anticipated revenue growth rates reflect our expectations around the impact from our decision to exit the tobacco category.

Larry mentioned the impact to Q2 comps as we approach our target date to be out of the category in the fall.

We expect the impact to grow.

For the full year of 2014, the impact could be as high as 400 basis points from front-store comps.

And given what we've seen to date, we expect front-store comps could be negatively impacted by 400 basis points to 500 basis points in Q3, and roughly double that in Q4.

So when you lay out your models, please keep this in mind.

Guidance for operating profit growth in our segments has also been revised.

We are narrowing retail operating profit by 25 basis points on both ends.

We now expect retail operating profit to increase 7.25% to 8.5% year-over-year.

And in the PBM, given the out-performance in Q2 and increased confidence in the back half of the year, we now expect operating profit to increase 12.5% to 14.5%.

As for our tax rate this year, we now expect it to be approximately 39.4%.

With the narrowing and raising of our EPS guidance range, operating cash flow guidance also changes.

We now expect between $7.2 billion and $7.5 billion of operating cash flow, an increase of $200 million.

And as I said before, our free cash flow guidance for the year remains in the range of $5.5 billion to $5.8 billion, as we expect capital expenditures to be slightly higher than we originally planned.

Now in the third quarter, we expect adjusted earnings per share to be in the range of $1.11 to $1.14 per share, reflecting growth of 5.25 % to 8.25% versus Q3 of 2013, again after removing the gain associated with the legal settlement from last year's results.

GAAP diluted EPS from continued operation is expected to be in the range of $1.04 to $1.07 in the third quarter.

Within the retail segment, we expect revenues to grow 0.25% to 1.75% versus the third quarter of last year.

Adjusted script comps are expected to increase in the range of 3.75% to 4.75%, while we expect total same-store sales in the range of down 1% to up 0.5%.

As I noted before, if sales of tobacco and the associated baskets are excluded, our expectations for front store comps in the quarter would be 400 basis points to 500 basis points higher.

In the PBM, we expect revenue growth of 14.25% and 15.25%, driven by continued strong growth in specialty, mix, and inflation.

We expect retail operating profit growth of 7% to 9% in the third quarter.

We expect PBM operating profit growth of 1.5 % to 4.5% in the third quarter.

So in closing, this was a great quarter with strong financial results across the board.

And as a result, we both raised and narrowed our guidance for the full year.

And we continue to expect strong free cash flow and to deploy it in a way that maximizes value to our shareholders.

With that, let me turn it back over to Larry.

Okay.

Thanks, Dave.

And I couldn't be happier with the work of our colleagues, the work that they are doing to provide good service to our clients, and help people on their path to better health while delivering strong results for our shareholders.

And I think as we've talked this morning and in prior meetings, our unmatched enterprise assets are enabling us to provide innovative integrated solutions and breakthrough products.

And as the healthcare environment evolves, we are uniquely positioned to address the quality, affordability, and accessibility challenges in the healthcare system today.

So we're highly focused on the unique opportunities we see for growth, and we'll continue to take an active and growing role in shaping the future of healthcare.

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

Operator?

(Operator Instructions)

John Heinbockel, Guggenheim.

Larry, so strategic question.

When you think about Specialty Connect, how is that starting to impact your dialogue with potential customers?

And with that in mind, how do you think that will impact your ability to reduce drug spend?

And it does it become a game-changer in terms of market share on the PBM side with new accounts?

Yes.

Good morning John.

I'll start, and then I think Jon will probably jump in as well.

And I think that we really have a surround-sound specialty program, okay?

I mean, we highlighted Specialty Connect this morning, and I think that's one important component.

But I think our ability to not just manage the specialty drug but manage the specialty patient, I think is what is the real differentiator in the marketplace.

And I'll let Jon pick up from there and talk about the various ways we're doing that.

Yes.

So John, as I talk to clients about Specialty Connect, what they really like is opening up the access, because specialty has historically been a mail-order only access for their members with some retail outlets, but not really that accessible.

And as clients become more focused on it, they are really excited about this capability, and they think of it like Maintenance Choice, that as you know has been very successful in the marketplace.

And one of our customers is also a physician.

So as we talk to physicians, they like the fact that we're opening up convenience for their patients.

And specialty today has its business with our PBM clients, but there's also a big open market in Medicare and fee-for-service Medicaid, that again physicians have the ability to influence where those members go.

So we expect to grow within our PBM base through clients selecting us because of these integrated capabilities, but we also believe we are going to get a disproportionate amount of referrals from physicians as well.

Okay.

And then, how much of an issue is compliance in that business, and therefore, is that a significant opportunity on the broader cost side?

Well, as you look at adherence, and when you say compliance I'm thinking adherents to the medication.

Yes.

Historically retail has performed very much under what traditional specialty pharmacies have been able to perform at.

And with Specialty Connect, we have achieved the same levels of adherence with our Specialty Connect patients that we have with our specialty pharmacies because we are able to connect all the clinical capabilities and back ends of specialty.

I know that is a concern that pharma had when we talked to them, but we've showed them results, and have actually demonstrated an even higher level of adherence because now patients can select which channel they go to.

So we think we've solved that, and it's a real benefit.

Okay.

Thank you.

Thanks, John.

Robert Jones, Goldman Sachs.

Thanks for the questions.

Larry, I wanted to go back to your comments on prescription utilization.

You touched on a little bit of what you were seeing from ACA and Medicaid expansion.

As I look at the script growth in the quarter, 3.9%, exceeding the guidance.

It looks like the guide for the next quarter is 3.75% to 4.75%.

So a little bit of an acceleration.

Could you maybe just parse out a little bit what you're seeing from ACA, but also from the broader market utilization?

Yes.

Bob, I think the broader market, I think we're seeing utilization pretty flat.

I think from the exchanges, I think as we had previously talked, I think we're seeing more of a benefit coming out of the Medicaid expansion.

I think there's still some uncertainty, as we mentioned in our prepared remarks, in terms of when you look at the exchange population, just how many of those are incremental to health insurance coverage.

So I think we've talked about the fact that we see 2014 as a transition year.

As we mentioned earlier, we do believe there's a modest benefit, more of it coming from Medicaid in 2014, but I think that we certainly see this ramping up as we move into 2015 and beyond.

That's helpful.

And then I guess just a quick follow-up on the formulary changes you commented on at the Analyst Day.

You mentioned that in 2014, you'd save clients about $1 billion.

I believe the update today was from 2012 to 2015 is $3.5 billion.

I guess just maybe if you could isolate the most recent changes and what kind of savings those would generate?

And then I guess more broadly and more importantly, how successful have you been in shifting clients to these more restrictive formularies?

Yes.

Bob, I mean we're not going to provide any more granular information in terms of to the first part of your question.

I think in terms of the second part, we have been able to manage transition across members as well as physicians in a very seamless fashion.

Recognize that the formulary changes that we're talking about affect a very small percent of our member base.

And that has allowed us to do a lot of, I'll call it seamless transition in terms of making it a non-event for the patient as well as the physician.

And this is Jon.

The only thing that I would add is that we expect pharmacy trend, year-over-year growth of the pharmacy spend to grow due to continued AWP inflation, increase in utilization that we just spoke about, and the growth in specialty.

So we're seeing clients very open and much more receptive than they have been historically about narrowing formularies.

So we're up to about 95 exclusions now.

I'll tell you as we are making these decisions, and these decisions are made through a clinical filter that's reviewed by our P&T Committee, we are still generating tremendous value for our clients each year.

And we think there's -- continues to be opportunity, particularly in the specialty.

Great.

Thanks for the comments.

Meredith Adler, Barclays.

Good morning.

I have one question about the front-end, and then Eric Percher will have a question.

I was just -- I know you've talked about the weakness in traffic in the front end as a function of people consolidating trips.

I was just wondering if you could talk, and of course your own initiatives, but if you could talk a little bit about what you think is going on, both with the consumer, are they in fact pulling back?

And whether you've seen any changes in the competitive environment, anybody responding to weak traffic?

Well, Meredith, I don't think we're seeing any changes in the consumer.

I think that the consumer continues to be a cautious purchaser of products.

I don't -- at the same time, I don't think we've seen a change in the competitive environment.

We still see an awful lot of promotion across competitors.

And as we mentioned earlier, we are continuing to be very disciplined about, and quite frankly find that sweet spot, often times we talk about the art and science in terms of investment spending to drive traffic, and -- but to be able to do that in such a way that we are driving profitable sales.

I would just jump in and agree with that, Meredith.

I think it's fairly consistent with what we've been talking about in the last couple calls.

Consumer's still a bit cautious.

Our -- we are we really -- our focus is health, beauty, and personal care.

And we continue to be encouraged by our performance in those categories.

Clearly our decision on tobacco drove some changes as you look at our share in the general merchandise business.

But overall, I would say competitors continue to be promoting more than they were last year and more than we are.

So we are watching that carefully.

We're really trying to make smart choices so that at the end of the day we are driving profitable growth.

Great.

And Eric, you have a question, right?

Quickly on Specialty Connect.

Are most of the lives that are moving over from the pharmacy to PBM open market today, is that primarily who served at the pharmacy?

And then the lives that we see in Specialty Connect, beyond the movement over, have you begun to see traction in expanding the program?

Or is that over the next several months?

Yes, Eric.

So the mix of customers that are moving over, it is a combination of open and lives that we have.

So, and as we think about growing Specialty Connect, it's going to be by driving a higher share of open lives, which we'll do through working with physicians.

And it's through new client wins as new clients decide to move to us because of all of our integrative capabilities, Specialty Connect which is one of those.

Eric, the other thing that I think you'll find interesting, Jon touched on or made the analogy to Specialty Connect to Maintenance Choice.

And what we have seen out of the gate is about 50% of the customers choose to pick up the specialty script at retail, which ironically is very consistent with what we saw from Maintenance Choice when we first piloted the program a few years back.

That is interesting.

Thank you.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Yes.

Hi.

Good morning.

Can you give us some additional color on the growth at 90-day at retail, and where do you think we are in kind of like in that market shift?

Well, Ricky, we have continued to see accelerated growth in 90-day scripts.

I would say it's growing much faster than the 30-day bucket, if you will.

And today it represents about, I think it's 29% of our retail prescription pie, if you will.

Okay.

And when we think about the opportunity, is the opportunity for that is kind of like 50% to 60% of scripts you are presenting kind of the maintenance scripts?

Is that how we should be thinking about it?

Yes.

I think it's going to -- I mean I think you have it right in terms of how you're thinking about the maintenance bucket of scripts versus the acute side.

And yes, I think it's reasonable to expect it to continue its growth trajectory as we've seen the last couple of years.

Okay.

And then the one follow-up on generic inflation.

Obviously you've done a very good job in mitigating the impact.

Can you share with us your expectations for generic inflation for the remainder of the year, and any thoughts if this is kind of like a sustainable trend that will continue just kind of like longer-term?

Hey Ricky.

This Dave.

We don't really provide our forecast for generic inflation.

I'll just make one comment, just from the nature of the generic marketplace.

And we're encouraged, obviously with the joint venture that we've created with Cardinal, but also encouraged that we believe strongly that the generic marketplace is long term a deflationary market.

And we believe that we are well-positioned to work hard in that marketplace to lower our costs, and also lower the costs for our clients and the patients that we serve.

Okay.

Thank you.

Thanks, Ricky.

Scott Mushkin, Wolfe Research.

Hey, guys.

Thanks for taking my questions.

So first, wanted some clarity on the PBM operating growth in the third quarter.

Just remind us what -- it's quite a bit less than we saw the second quarter.

So I was hoping to just get reminded on why we get some deceleration there.

Yes.

Hey, Scott.

This is Dave.

If you recall back to even to Analyst Day, we fully expected that Q3 was going to be our softness quarter from a growth perspective.

So this is very much in line with that expectation.

Clearly the cadence of profitability is tied to really two events, is the time to break open generics, and when they overlap to LY, and secondly, the timing of profitability as we cycle through Medicare Part D. So both of those events are impacting Q3m and consistent as we thought they would impact Q3.

That's perfect.

And then my second question really goes to, I guess, thinking about the asset and the asset turns as we move into the future, not next year but as we move out.

It seems like CVS is, and CVS Caremark is uniquely positioned to kind of improve their asset turns, and with the clinics, with Specialty Connect, can you guys take us out into the future?

What will a store, if you even want to call it a store, three or five years look like as we move out?

Do you guys have any thoughts around that?

I know it is kind of a pie-in-the-sky question, but I was wondering if you had some thoughts there.

Well, Scott, I think I'll start and others may jump in here.

But I think your hypothesis is correct, that it's going to evolve from what exists today.

And we've talked a lot about the fixed asset base within the store and the fact that that next prescription has a disproportionate flow-through to the bottom line, okay?

At the same time, we do see opportunities to extend the pharmacy experience into the front of store, and I think that Helena has begun some work, some exciting work in terms of the opportunities that that creates.

So we are certainly not in a position where we have cracked the code on that or we're ready to talk about it, other than the fact that I do think that you will see something different in the future from what you see today.

And Scott, this is Dave.

I think the most, at least midterm opportunity we have to improve asset turns, if you will, first is one kind of just the growth of the service model to the degree that we grow services in our outlets.

We do that without deploying a bunch of capital from an asset perspective.

And then secondly, as we've talked about many times, is we do have opportunities from an inventory perspective.

And making sure that we maximize, I'll say the supply chain across all of our channels will be important to us over the long term.

All right, guys.

Thanks very much for taking my questions.

Thanks, Scott.

Lisa Gill.

Thank you.

Jon, I was wondering if I could just maybe start with some questions around the selling season, $5.4 billion of gross new wins.

Can you just talk about what people are buying this year?

Are you seeing Maintenance Choice, specialty, is there any way that you can give us some metrics around who those new clients are and what programs they bought for 2015?

Well, Lisa, we're obviously very happy with this year's selling season.

When you look at the mix of clients I think it's very balanced with employers' health plans and government business.

And I can't really point to really any one program that has moved up in their priority, other than specialty.

But we now continue to expand our integrated offerings, and many of which are unique such as Maintenance Choice and Specialty Connect Pharmacy Advisor and MinuteClinic.

And all those combined resonate.

And then when we talk about our ability to be able to touch members and influence their behavior and impact outcomes, which results in lower prices to the client, that continues to resonate.

And I think I've probably seen a little more interest in specialty, which has become the top priority in the marketplace.

And I believe our assets are unmatched.

We have -- we talked about Specialty Connect earlier, but we also have Accordant, which is a rare disease management company, that we link to our specialty offering.

And that treats not just rare specialty disease state but it treats the co-morbidities.

And most of these patients have other diseases that they are dealing with.

We've talked in the past about NovoLogix, half the spend in the medical benefit not really being managed.

We have that capability.

Home infusion, people are very interested in as well, moving people out of expensive hospital settings into their homes or infusion clinics.

I guess really what I'm trying to get at is more on the other side, Jon.

As we think about 2015 and things that they've signed up for, how does it impact profitability of those clients?

Do the majority sign up of for your specialty programs?

Did you see people that electing to do Maintenance Choice?

I'm trying to get it from more of the finance side of it.

I would say it's pretty consistent with what we've seen in prior years.

So I -- with health plans, probably don't take as many of our programs as employers do.

We are seeing more uptake in our formulary strategy than we've seen in the past.

Maintenance Choice 2.0, we are being to see uptake in the health plans that historically haven't really emphasized a mail benefit.

But I think I would think about it, Lisa, as consistent with what we've historically seen.

Great.

Thank you.

Thanks Lisa.

David Larsen, Leerink Partners.

Hi.

Can you please talk about the joint venture with Cardinal?

And I guess there is some new aspects to it, like just at a very high level, what sort of the nature of those incremental milestones might be?

And I'm assuming that if those milestones are met, it would mean more earnings for all parties involved.

Thanks.

Yes.

David, good morning.

And I guess I'll just start by saying that when we formalized the JV agreement, we had established some guiding principles that spoke to the goals of the entity: to reduce costs for our clients, our customers, while making the supply chain more efficient, and to create win-win opportunities such that there's equity and fairness in the value that gets created.

So obviously over the past six months, we've had a lot more time to dig into the data, and it simply made sense to modify the agreement with those guiding principles that I outlined in mind.

We are not going to provide any granularity around some of those milestones, but I think we have had a terrific relationship with Cardinal for many years.

I think that that's what led to the JV being created.

And I couldn't be more pleased with how the teams from CVS Caremark and Cardinal have come together in the spirit of how do we improve efficiency and drive down costs?

And I think we are off to a terrific start.

Great.

Thanks a lot.

Thank you.

George Hill, Deutsche Bank.

Good morning, Larry and Dave.

Thanks for his my question.

Dave, quick check.

I heard one point that you brought up.

Did you say you expected long-term generic drugs to be inflationary or deflationary?

Part of that broke up on my end.

I'm sorry.

Very much deflationary, George.

Okay.

And then maybe delving into the prepared comments a bit more.

It sounds like you're seeing inflation in the small book of the business and then deflation, significant deflation in the rest of the book.

And I would ask, are you seeing that deflation in acquisition costs?

And is that deflation finding its way all the way to kind of the list price or the AWP price from your perspective?

Hey, George.

This is Dave.

Maybe I'll start.

Clearly what we are signed up to do is, our purpose in life is to work to reduce costs for the clients that we serve and the members that we serve that either use us via mail order, or use us in our retail outlets, or use us in various and sundry other matters.

And so when we look at generic inflation, our focus is to control that and to push down those costs of goods sold at this point in time.

Yes.

And George, I think as Dave pointed out, overall we see a deflationary nature in the generic environment, and we are really not going to comment on specific products or AWPs.

Okay.

And then -- all right.

Then maybe just a quick tack on, from what we hear you guys have been having significant selling success tacking MinuteClinic onto health plans with the zero co-pay option this selling season.

I guess, can you talk about expected growth in MinuteClinic as we look out to 2016?

I think as we pointed out this morning, we continue to see significant growth.

Some of that is organic in terms of the ongoing growth of existing clinics, and some of that is being driven by our expansion.

We said earlier we will open about 150 clinics this year.

I think it certainly is a discussion in the selling season.

I think that kind of the ticket to the game metrics are being right on price and service.

But we've got a lot of other elements with which we can offer clients, the MinuteClinic option of being one, and one that is getting a lot of attention.

All right.

Appreciate the color.

Thank you.

Thanks.

Ross Muken, ISI Group.

Good morning guys, and congrats.

If we look at sort of the pacing of wins in the selling season, one of your competitors was sort of suggesting that as it sort of tailed off, and then as we look into the out-year this sort of momentum of their peers, inclusive of you, was sort of waiting.

If we looked at like your hit rate -- your win rate over the course of the selling season, was it fairly consistent?

Did you feel like you gained momentum as you put up some of these big wins?

It seems like more recently we've seen a number of public names of size.

I'm just trying to get a sense for kind of tone and how you feel like the business had momentum through the most recent RPs you been in.

Yes, Ross.

So I would say we are continuing to win in the marketplace.

I think this year has been particularly good, and I think it has a lot to do with everything I was talking about to Lisa, with our integrated assets, our ability to deliver costs, has a lot to do with what we do with the generics and our formulary strategy and the fact that we focus on service to both our clients and our members.

So they like our story, and we are very happy with the wins that we've had this year.

And maybe Dave, M&A activity has kind of picked.

You guys have obviously been quite selective and strategic the last few years.

As you look at sort of the environment, both in assets here and maybe also abroad, how would you kind of characterize the pipeline and your sort of intent to maybe deploy a little bit more of the balance sheet?

Obviously you've done a great job on returning free cash, but you've also been historically pretty prudent on the tuck-in side.

Yes.

Ross, obviously M&A has been part of our DNA for a long time in our Company.

We've been very clear that as we think about capital deployment, one area to deploy capital is in kind of investing back inorganically in our business, and we will continue to do that.

I would say that, at the same time we are going to be, to your point, very disciplined in how which approach the market.

If you look at our asset base today, we don't have any glaring gaps or holes in capabilities at this point in time.

But as we said, to the degree that we can bolt on assets of that make sense, that we have line of sight to both synergies and returns, we'll do that.

And I think that the market's still active from that perspective.

Great.

And congrats again, guys.

Thanks, Ross.

Steven Valiquette, UBS.

All right.

Thanks.

Good morning.

So just one other quick one on the PBM selling season success that you've had.

I'm just curious with it now 70% complete.

Can you draw any sort of conclusion that the decision to stop the retail tobacco sales may have helped you win some PBM business?

I'm curious whether this has come up frequently in RFPs and investment finals, and has anybody cited that they chose you specifically because of that decision?

Just curious on that.

Thanks.

Steve, it's -- I think it's hard to point to any one win and attribute it to the tobacco decision.

I mean, I can tell you that it's had a lot of discussion with our clients.

Obviously, recognizing our clients and the fact that they are working hard to get their members or their employees to stop smoking, they have applauded our decision.

So listen, I think it's one of those intangibles that, again back to my earlier point about you've got to be right on the basics.

And then once you're right on the basics there, I think we have a lot of intangibles that collectively I think become something very meaningful in the client's eyes.

Okay.

Then just one other quick one on the formulary restrictions.

Pretty topical this week, but it seems a couple years ago this caused a little bit of negative PR for CVS back in 2011, 2012.

But now it seems like these changes are helping you, or at least the negativity seems almost nonexistent now.

So I guess I'm just curious, any thoughts or color you may have on why the psychology may have changed a little bit among your customers on the better receptivity to formulary changes now, let's say versus a few years ago?

Well Steve, it's a great question.

I think as we rewind three or four years, I think what we learned with that decision was the strategy was right.

And I remember talking, as we talked to clients back in late 2011, early 2012, okay, the issue that they had that created the negativity was from an execution largely, the timing of the communication.

That's where we were out of sync.

We weren't lined up with their benefit cycle.

So I think once we made that course correction, which was an easy one to fix, I think that all the noise subsided.

Okay.

That's great.

Thanks.

Thank you.

Peter Costa, Wells Fargo.

Hi.

Thanks, guys.

Appreciate all the discussion about 2015.

But moving back to the tobacco decision, is your view that it's still going to be about $2 billion in annualized sales that would be impacted by that decision?

Or has that number changed, given the fact you talked about sort of a double the 400 basis points to 500 basis points impact on same-store for the fourth quarter?

Yes.

We're still tracking very much towards that $2 billion.

The results we are seeing are in line with what we expected, and we said early on it would have a $0.06 to $0.09 impact this year, and we are tracking towards that.

And in terms of the impact on the same-store in the fourth quarter?

That seems like that would be a bigger number.

Well, if you just look at what we communicated, we said that in the third quarter that the exit of the tobacco category would be somewhere between 400 basis points and 500 basis points to front-store comps impact, negatively impact.

And that that rate would essentially double as we cycle into Q4.

And so that essentially is how you should think about modeling the progression of that.

And keep in mind that the $2 billion reflected tobacco sales, companion items within that basket, and that is a full year revenue number.

Okay.

Thank you.

Thank you.

Robert Willoughby, Bank of America Merrill Lynch.

Just one left.

Do you have any guess or forecast in terms of what your share of the Caremark accounts could be by year end?

Do you mean dispensing share within CVS/pharmacy?

Is that the question?

Yes.

CVS market share with Caremark plans.

It was at 31% at the end of last year.

Where does that trend to?

Yes.

We don't have that.

We don't forecast that and disclose that.

Would it be something you'd give us at the end of the year at the Investor Day?

Typically it's something that we discuss at Investor Day, yes.

Thank you.

Thanks, Bob.

Charles Rhyee, Cowen and Company.

Yes.

Thanks for taking question.

Actually I have another question on the exclusion lists.

It seems like this time around, from what I've read, is you've kind of adopted more of also using prior authorization versus outright exclusion.

Just curious on how you kind of make that decisions?

And then secondly, how do you manage for drugs that you exclude where companies -- where the manufacturers then try to work around that?

How do you communicate with your clients, and how do you stop -- to make sure that your plans don't really -- that you don't end of actually paying for that, or your employers.

Yes.

So Charles, as far as manufacturers working around it, I think that's the beauty of the exclusion program.

They used to try to work around our formulary tiering through co-pay coupons.

So once a drug's excluded, the member would have to pay 100%.

So it would be hard for a manufacturer to work around that.

And our strategy around excluding has really not changed.

We've always had prior authorizations.

We do have the ability, if a physician feels like a particular drug has a medical necessity, that they have the ability to get to that drug.

But it's a very, very small percent of patients that have physicians that want to get them on a particular drug.

So it's really a safety outlet for them.

Great.

And then just a follow-up, just on that in general.

It seems like this is an area that not only yourself, but some of your competitors are starting to really adopt more aggressively.

Do you see that this is the next big tool for you to use, and to really help manage costs down?

How do you see this -- these lists expanding over time?

Is this a big opportunity for you?

Yes.

Well, we have the template exclusion that we've been talking about, but we also have more aggressive formularies that clients can opt into.

So the next step up excludes 170 drugs.

And then there's another step that excludes 300 drugs, which essentially is all generics.

So we do see, as we move into the out-years, we are going to be moving towards some of the more restrictive formularies that we think clients are going to be very interested in.

So there's a lot more work and a lot more runway here.

Great.

Thank you.

We will take two more questions, please.

Mark Wiltamuth, Jefferies

Hi.

Could you give us what the specialty growth was organically, excluding acquisitions?

I don't think we have that, Mark.

We can --

Hey, Mark.

This is Dave.

I don't know that we really had any significant acquisitions in that number.

Most of that is probably in Coram.

Coram is in there, right?

But other than that --

It's still a very (multiple speakers)

Okay.

I don't know that off the top of my head.

It's still -- the growth rate's still organically significant.

Okay.

And then maybe just give us on the generics a little timing on how you look at the break-open market for generics here in the next 12 month or so?

Maybe by quarter, where you think we'll get some better opportunities on generic margins?

Yes, this is Dave.

Maybe I'll touch that.

I just want to say that the generic launch and break-open schedules, if you kind watch the market, those launch dates continue to evolve a bit.

Some move out.

Some move in.

Even since what we talked about at Analyst Day.

And if you look at it, many of the 2014 launches have been in flux.

As we look into 2015, I think some of the break-open generics look a little bit lower than we originally planned when we look back at Analyst Day in December of last year.

But I would say it's still very fluid at this point in time.

We'll continue to kind of assess the situation and give you updates as it becomes pertinent.

And second half of 2014 versus the first half of 2014, better or worse for generics?

Just as we -- you've got to think about how we cycle to LY.

So if you look at the cycle of our back half of this year to back half of last year, is a little worse.

Okay.

Okay, thank you very much.

Okay.

Last question.

Frank Morgan, RBC Capital Markets.

Good morning.

I was hoping to give a little bit more color on the PDP guide for the balance of the year.

Is there any chance that there might be conservatism in the assumptions about the auto-assignees or the choosers you're taking?

And basically give us a longer-term view, how you see next year playing out as well.

Thanks.

Hey, Frank.

This is Dave.

Maybe I'll start here.

I think if you just look at, just from a PDP perspective, the number of lives, the real, I guess, opportunity to gain lives is early in the year.

So I think if you look to the balance of the year, I don't think there's a material change or opportunity that presents itself in the marketplace.

As we cycle into 2015, I think it's -- I think we're encouraged by what we heard from a benchmark perspective.

I think that although that's what we've heard, we don't really know what the opportunities are at this point in time.

I think we have a very attractive product as we cycle into 2015, but as far as the auto-assignees, we'll need to understand more fully how the market will evolve, and we won't know that for several more months yet.

Thank you.

Okay.

And just limping back on Mark's question on specialty.

In our remarks, we said specialty growth was 53%.

If you back Coram out of that number, the growth was around 40%.

So just bringing closure to that.

So with that, let me thank everyone.

I know this was a bit of a long call, but a lot of information.

And thanks for your continued interest in CVS Caremark.

Ladies and gentlemen, this does conclude the conference for today.

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