CVS Health Corp (CVS) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, August 2, 2016. I would now like to turn the conference over to Nancy Christal, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thanks, Silvana. Good morning, everyone. Thanks for joining us today. I'm here this morning with Larry Merlo, President and CEO, and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS Caremark, and Helena Foulkes, President of CVS Pharmacy, are also with us today, and will participate in the question-and-answer session following our prepared remarks.

(Caller Instructions)

I have one announcement this morning. Our annual analyst day has been scheduled for Thursday, December 15, in New York City. You'll have the opportunity to hear from several members of our senior Management team, who will provide a comprehensive update on our strategies for driving long-term growth. We plan to e-mail invitations with more specific details at the end of the summer, but please save the date; again, that's Thursday, December 15.

This morning, we posted a slide presentation on our website just before this call. The slides summarize the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance. Later this afternoon, we'll be filing our Form 10-Q and it will also be available on our website at that time.

In addition, note that during today's presentation, we'll make forward-looking statements within the meaning of the federal securities law. 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 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 reconciliations of these non-GAAP items to comparable GAAP measures on the Investor Relations portion on our website. 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'll turn this over to Larry Merlo.

Thanks, Nancy, and good morning, everyone. Thanks for joining us, and I'm pleased to have the opportunity to discuss the strong second-quarter results we posted today. Adjusted earnings per share increased 8.3% to $1.32; that's $0.01 above the high end of our guidance.

Excluding acquisition-related costs in both years, operating profit increased 6.5% Enterprise-wide, with operating profit in the Retail/Long-Term Care segment in line with our expectations and operating profit in the PBM exceeding expectations. We generated more than $1.1 billion of free cash during the quarter, more than $2.9 billion year-to-date, and as Dave will describe, we are raising our free cash flow target by $1 billion for the year.

Given our outperformance this quarter and solid results year-to-date, we are raising and narrowing our adjusted EPS guidance range. Excluding the costs associated with the debt tender and acquisition-related costs, we currently expect to achieve adjusted EPS for 2016 of $5.81 to $5.89, reflecting year-over-year growth of 12.5% to 14.25%. That compares to our previous range of $5.73 to $5.88, and Dave will discuss this guidance in more detail during his financial review.

Now let me turn to the business update and I'll start with the PBM. The marketplace has been active, and I'm pleased to report that with our differentiated value proposition, we see 2017 shaping up to be another successful selling season. We currently have gross wins of $7.4 billion and net new business of approximately $4.6 billion. These new business numbers do not include any impact from our individual net Med D PDP. I'll touch on that shortly.

I'd also note that only about 7% of the gross wins relate to the previously discussed transition of the Coventry commercial business, which was acquired by Aetna back in 2013. To date, we've completed about 75% of our client renewals for 2017 -- that's a bit ahead of where we were at the same time last year -- and our retention rate is currently at 97.5%. Importantly, we have continued to win in the marketplace while maintaining our pricing discipline.

A lot has been said and written about the competitive dynamics of this selling season. Fact and realities can easily be lost or overlooked, amidst the attention being paid to a few client shifts, so let me remind you of the things that have not changed in the competitive landscape, along with our ongoing strategic advantages. As you look at our key points of differentiation, we see consumer-directed healthcare gaining traction and points of access are critical.

Our more than 9,600 pharmacies give patient immediate access to advice, as they take on more responsibility for their healthcare decisions. The data has shown the undeniable benefit of the face-to-face interactions for better adherence, reducing healthcare costs, and improving health outcomes. We have multiple patient touchpoints through our unique suite of assets, not just our retail pharmacies, but also mail, specialty, infusion, MinuteClinic, and now long-term care.

At the same time, we're the only Company with the ability to impact not only patients, but also payers and providers, with our innovative channel-agnostic solutions. Maintenance Choice continues to be a truly integrated program, delivering financial, convenience, and clinical benefits to clients and members. It's not just about price; it's about enabling clinical programs that require deep integration of data.

Our Health Engagement Engine serves as that enabler, so that products like Maintenance Choice cannot easily be replicated through a partnership or an alliance. Additionally, we have the broadest capabilities to holistically manage specialty, which continues to be a key area focus for clients. We continue to outperform in this area, with specialty revenues increases 22.9% in the second quarter.

Clients continue to expect proactive, innovative realtime solutions to manage their drug trend, and the insight tool that we demoed at our last analyst days is unmatched and it delivers those real-time solutions for our clients. Furthermore, our scale and innovative purchasing strategies are unsurpassed, and they continue to drive meaningful value for our clients.

In summary, those are just some of the factors that have differentiated us in the past and continue to drive our success this selling season. We're certainly not sitting still as we continue to find new and innovative ways to drive value for patients, payers, and providers.

I also want to note that we continue to offer our clients cutting-edge solutions to formulary management, as we believe it is one the most effective ways to manage rising drug costs, while ensuring access to clinically appropriate care. Our 2017 formulated management strategy continues to address emerging cost drivers with new market-leading enhancements, which we have just announced to our clients effective this coming January.

Giving the growing number of supplemental indications for many drugs, we'll be creating opportunities for additional client and member savings through an indication-based formulary. On a quarterly basis, products with significant cost inflation that have readily available, clinically appropriate, and more cost-effective alternatives may be evaluated and potentially removed from the formulary. Effective January 1, 2017, we expect to remove 35 products from our standard formulary, including 10 hyper-inflationary products, as I just described.

These formulary changes effect less than 1.5% of plan members, while helping to reduce costs for clients and their members. In fact, from 2012 through 2017, this rigorous approach to formulary management will help generate total savings of more than $9 billion for our clients without disrupting member care. You can find an overview of our strategy, along with the 2017 formulary details on the Investor Relations portion of our website.

While it's too early to discuss the 2018 selling season, many of you have asked about the timing of the next FEP contract renewal. Let me clarify that the FEP specialty business has a request for information in the marketplace for January 2018; however, the FEP retail and mail order businesses, comprising more than 70% of our total FEP revenues of about $9 billion, have been extended until January 2019.

Before turning to retail, let me touch briefly on our Med D PDP SilverScript. We currently have about 4.1 million captive lives in our individual PDP, about 1.2 million captive EGWP lives, and we serve another 6.4 million lives through our health plan clients. So in total, we currently serve approximately 11.8 million Med D beneficiaries.

Late last week, we received the preliminary benchmark results from CMS for 2017, and I'm pleased to report that SilverScript qualified in 32 of the 34 regions. These strong benchmark results should enable us to retain the vast majority of the auto-assignees we currently serve, along with the ability to track new lives. We're very pleased with these results.

Moving on to second-quarter results in the Retail/Long-Term Care business, total same-store sales increased 2.1%, with pharmacy same-store sales up 3.9%. This was negatively impacted by about 355 basis points due to recent generic introductions. Pharmacy same-store prescription volumes increased 3.5%, that's on a 30-day equivalent basis, continuing to outperform overall market growth.

Our retail pharmacy market share, again, on a 30-day equivalent basis was 23.9%, and that's up about 230 basis points versus the same quarter a year ago, driven by the inclusion of the Target pharmacies, as well as underlying share growth. I'm pleased to report that the Target integration has been completed ahead of schedule.

We converted all 1,667 target pharmacies, 79 clinics to CVS systems, programs, and interior branding. This was one of our most smoothest integrations ever, despite the complexity of the store-within-a store format, and we certainly appreciate the strong communication and collaboration with our Target partners. With CVS systems and branding now in place, we're ramping up our patient care programs along with our marketing and member engagement campaigns that are expected to increase awareness and utilization of CVS at Target.

Our long-term care pharmacy business through Omnicare continues to perform well, and in line with our expectations. Our integration efforts are progressing as planned and we remain on track to complete the vast majority of the integration activities by year-end. In addition to those integration activities, we're working with our long-term care clients to address the currently unmet needs of their residents, all with the goal of improving patient care and driving operational efficiencies.

In Q1, we introduced the use of CVS pharmacies to speed the delivery of first fills and emergency needs to the facilities. This program continues to grow and we now fill nearly one-half of all emergency scripts using a CVS pharmacy. In Q2, we began piloting our transition of care program, to enable us to better serve patients as they transition across different care settings.

We also continue to pilot our integrative service offerings to the assisted and independent living communities, offering residents enhanced prescription delivery options based on their preference and acuity level. So while there's still much work to do, we remain excited about our ability to enhance patient care in these settings.

Turning to the front store business, comps decreased 2.5%, or 1.7% after adjusting for the negative impact of the shift of Easter from April last year to March of this year. We saw softer customer traffic, which was partially offset by a notable increase in basket size. At the same time, we saw notable front store margin gains in the quarter.

Some of the traffic decline was expected, as we continued to optimize our promotional spend for our lower-value promotionally oriented customers. In contrast, we saw front store spend and margin increase with our most valuable customers. Through our personalization efforts, we continue to deliver a value-based offering, derived from longitudinal shopping habits, while increasing engagement through app and e-mail capabilities.

Keep in mind that our front store business accounts for about 11% of Enterprise revenues, and these personalization efforts are allowing us to invest our promotional spend in a very differentiated way, producing a margin flow-through. We'll talk more about these efforts at our analyst day.

We've also been focused on a mix shift towards our higher-margin health, beauty, and store brand categories. We continue to roll out store resets to improve our health and beauty leadership, and following last year's health and beauty enhancements across thousands of stores, we continue to scale our healthy food selection, optimize our key categories in the health quadrant, and elevate our beauty offerings, while improving shopability.

Store brands are another area of significant opportunity. Our store brands represented 21.8% of front store sales in the quarter, and that's up about 85 basis points from the same quarter last year as we continue on our trajectory to a goal of 25%.

Turning to store openings, in the second quarter, we opened 22 new stores, relocated nine others, closed 10, resulting in 12 net new stores, and we expect to open about 100 net new stores for the full year. As for MinuteClinic, we currently operate 1,136 clinics across 33 states, plus the District of Columbia. As I noted earlier, the Target conversion was completed and our nurse practitioner providers are adjusting well to the MinuteClinic scope of services in Epic EHR.

Including Target, MinuteClinic revenues increase 15.2% versus the same quarter last year despite the mild and late allergy season. The hold my place in line on-line queuing tool that was launched nationally in March, continued to gain momentum in Q2, and by the end of the quarter, the use of the tool had increased to 13% of all MinuteClinic visits, so customer feedback is extremely positive and further enhancements are underway to improve the customer experience. With that, I'll turn it over to Dave for the financial review.

Thank you, Larry, and good morning, everyone. Today I'll provide a detail review of our second-quarter results, followed with an update on our improved guidance. As I typically do, I'll start first with the summary of the progress we've made in enhancing shareholder value through our strong capital allocation program.

During the quarter, we paid $459 million in dividends. Our dividend payout ratio currently stands at 35.5%, but that's artificially high due to the loss on the debt extinguishment we incurred at the second quarter, as well as the ongoing integration costs associated with our recent acquisitions. On a more comparable basis, our payout ratio stands at 31.1%, and we remain well on track to achieve our target of 35% by 2018.

In addition, we have continued to repurchase shares. During the second quarter, we repurchased 18.5 million shares for approximately $1.9 billion, or one hundred $102.32 per share, and we have now essentially completed our planned $4 billion in repurchases for 2016. As I said at our analyst day, we expected share repurchases to be front-half loaded, and it very much played out that way.

Between dividends and share repurchases, we've returned approximately $2.4 billion to shareholders during this quarter, and nearly $4.9 billion year-to-date. We continue to expect to return more than $5 billion to our shareholders in 2016 through both a combination of dividends and share repurchases.

As Larry mentioned, we generated more than $1.1 billion of free cash in the second quarter, and we have produced more than $2.9 billion year-to-date. We are increasing our full-year free cash flow guidance to a range of $6.3 billion to $6.6 billion from the prior range of $5.3 billion to $5.6 billion.

This primarily reflects timing in our Medicare Part D SilverScript business, as well as overall improvements from the core. Basically, healthier members and lower utilization than what we assumed when we submitted our bids are leading to changes in the timing of our cash flows, as we expect to continue to be in a payable position with CMS at the end of this year.

Now turning to our debt, in order to take advantage of the current favorable interest rate environment, during the second quarter, we issued $3.5 billion in debt, refinancing approximately $3.1 billion of outstanding debt through a tender offer transaction. As a result, we booked a loss on the early extinguishment of debt of $542 million during the quarter.

Furthermore, last month, we retired an additional $1.1 billion by calling certain debt, and as a result of that, we recorded a $102 million loss on the early extinguishment of debt during the third quarter. Together these actions provide an ongoing benefit in terms of lower interest expense going forward. The benefit to 2016 is expected to be in the neighborhood of $50 million.

Turning to the income statement, adjusted earnings per share came in at $1.32 per share, $0.01 above high end of our guidance range, and up 8.3% over LY. GAAP diluted EPS was $0.86 per share. The Retail/Long-Term Care segment delivered solid earnings within our expectations, while the PBM segment posted profit growth above the high end of our expectations. The outperformance in the quarter was primarily driven by better purchasing economics in the PBM.

With that, let me quickly walk down the P&L. On a consolidated basis, revenues in the second quarter increased 17.6% to $43.7 billion. In the PBM segment, net revenues increased 20.7%, to $29.5 billion. This growth is largely attributable to the increased volume of pharmacy network claims, resulting from the very successful selling season we had last year.

Additionally, and despite a year-over-year decline in Hep C sales, specialty pharmacy growth has been strong, driven in part by the Omnicare acquisition and the addition of its ACS book of business. Overall PBM adjusted claims grew 18.7% in the quarter. Partially offsetting the sales growth was 155-basis point increase in our generic dispensing rate to 85.4%.

While achieving strong growth year-over-year, the PBM's top line did come in below our expectations. The chief drivers were lower than expected specialty revenues from the continued year-over-year decline in Hep C prescription volume due to lower new patient starts and fewer days of therapy.

In our Retail/Long-Term Care business, revenues increased 16% in the quarter to approximately $20 billion, driven by the addition of Omnicare and the pharmacies within Target, as well as solid pharmacy same-store sales. GDR increased by approximately 110 basis points to 86.1%, partially offsetting this increase.

Turning to gross margin, operating expenses, operating profit, and the tax rate, where applicable the numbers I'm citing exclude non-GAAP adjustments in both current and prior periods, which we have reconciled for you on our website. Keep in mind that our guidance for the quarter also excluded those items.

Gross profit dollars for the consolidated Company increased a healthy 9.7% versus the same quarter of last year. Consolidated gross margins contracted approximately 115 basis points compared to Q2 of 2015 to 16.1%. Within the PBM segment, gross margin contracted by approximately 45 basis points versus Q2 of 2015 to 4.6%, primarily attributable to the mix of business and continued pricing compression, partially offset by the GDR improvement and favorable purchasing economics.

However gross profit dollars in the PBM increased 10.2% year-over-year, primarily due to strong claims growth, membership growth in SilverScript, improvements in GDR, and favorable purchasing economics. Of course, partially offsetting these drivers was continued price compression in the market.

In the Retail/Long-Term Care segment, gross margin declined approximately 165 basis points to 29.2%. About 40% of the decline in gross margin rate was mix-driven due to the acquisitions. Lower reimbursement rates also continue to pressure margins.

Partially offsetting those pressures were increasing generic dispensing rates, as well as increased front store margins, as we continue to rationalize our promotional strategies and improve our mix of products sold. Gross profit dollars increased 9.8% year-over-year in the Retail/Long-Term Care segment, largely driven by the addition of Omnicare and Target businesses.

Turning to expenses, we saw strong improvement in total operating expenses as a percentage of revenue from Q2 of 2015 to 10.5%. The PBM segment's SG&A rate improved about 10 basis points to 1.1%, benefiting from the additional sales leverage from the volume increases.

SG&A as a percent of sales in the Retail/Long-Term Care segment improved significantly by approximately 85 basis points to 20.3%. This, too, was driven by leverage from revenue growth, as well as the addition of the Omnicare business, which carries a lower SG&A rate relative to sales. Within the Corporate segment, expenses were up approximately $25 million to $220 million, slightly better than our expectations.

Consistent with our expectations, operating margin for the total Enterprise decreased approximately 60 basis points in the quarter to 5.6%. Operating margin in the PBM decreased approximately 35 basis points to 3.5%, while operating margin at Retail/Long-Term Care decreased approximately 80 basis points to 8.9%.

For the quarter, operating profit growth in the operating segments and at the Enterprise level was in line with or better than expectations with the PBM increasing 10.5%, Retail/Long-Term Care growing at 6.2%, and consolidated operating profit growing at 6.5%. Consolidated EBITDA was up 9.8% over LY to $3 billion.

Going below the line on the consolidated income statement, net interest expense in the quarter increased approximately $150 million from last year to $280 million, due primarily to the debt issued in the third quarter of 2015 to fund the acquisitions we made last year. Our effective tax rate in the quarter was 39.3% and our weighted average share count was 1.1 billion shares.

With that, now let me update you on our guidance. I'll focus on the highlights. You can find the additional details of our guidance on the slide presentation that we posted on our website earlier this morning. As Larry said, we are narrowing and raising our 2016 adjusted earnings per share range to $5.81 to $5.89 from a prior range of $5.73 to $5.88, which reflects strong year-over-year growth of 12.5% to 14.25%.

We've raised the midpoint by $0.045, reflecting the positive impact of the interest benefit derived from the debt extinguishment, as well as our outperformance in the second quarter. With respect to GAAP diluted EPS, in addition to narrowing the range and layering the benefits from interest into second-quarter outperformance, we are revising our full-year guidance to also reflect a couple of additional items.

One is the integration costs that we saw in the second quarter, which we explicitly excluded from our guidance on the last earnings call. These costs totaled approximately $81 million pre-tax. The other is the losses on the early extinguishment of debt that we completed in both the second quarter and now the third quarter.

Those losses totaled $644 million pre-tax, so we now expect GAAP diluted EPS to be in a range of $4.92 to $5 per share. Keep in mind that our GAAP guidance for future periods continues to exclude the impact of acquisition-related integration costs, and we will update for those costs that we incur as the year progresses.

Before I continue, let me remind you that the following guidance excludes all acquisition-related integration costs. In the PBM segment, we are decreasing revenue guidance to a range of 21% to 22%, reducing the midpoint by 100 basis points. This decrease takes into account lower than anticipated volume of Hep C, as well as an associated reduction in days of therapy.

At the same time, we are raising the midpoint of the PBM's operating profit guidance range by about 2.5 percentage point to account for the outperformance in the second quarter, as well as continued expectations for better purchasing economics over the course of the remainder of the year. This results in a new range of 13.5% to 15.5%.

In the Retail/Long-Term Care segment, we are narrowing guidance for revenue growth by taking the top end of the range down by 50 basis points. The reduction in the high end mainly reflects our performance in the second quarter, as well as slightly weak front store trends, as we continue to execute on our targeted promotional strategies. We now expect Retail/Long-Term Care revenue growth of 13% to 13.75% and total comps of 1.75% to 2.5%, while continuing to expect script comps of 3.5% to 4.5%.

Despite the revenue change, we remain confident in our prior operating profit expectations, given the immaterial impact the changes I noted are expected to have on profitability. We are narrowing the range to take into account our performance in the second quarter, so we now expect Retail/Long-Term Care operating profit growth of 6.75% to 8%.

Consolidated net revenue growth is now expected to be 17% to 17.75%, inter-Company revenue eliminations are now expected to be approximately 11.6% of segment revenues, and we expect higher inter-Company profit eliminations. As I said before, we are increasing our free cash flow guidance for the year by $1 billion to a range of $6.3 billion to $6.6 billion.

Now let me provide guidance for the third quarter, which again excludes all acquisition-related integration costs. We expected adjusted earnings per share to be in the range of $1.55 to $1.58 per share in the third quarter, reflecting growth of 21% to 23.75% versus Q3 of 2015. GAAP diluted EPS is expected to be in the range of $1.38 to $1.41 per share in the third quarter, which includes a $102 million loss on the early extinguishment of debt that we completed in July.

At the risk of sounding a little bit like a broken record, I want to take a moment to remind you of several timing factors we've been highlighting since analyst day, that affect the cadence of profit delivery throughout the year. The introduction and timing of break-open generics, the timing in profitability of Medicare Part D business, the timing of the benefits from our strategies to drive profitability in the front end, the timing of share repurchases, and certain tax benefits were all factors expected to impact the cadence.

While we have delivered two strong quarters, slightly above our own expectations, the cadence of profit growth is still expected to be very much back-half weighted. Our EPS guidance for the third quarter is very much in line with what we said at analyst day. All things considered, we see a ramp-up in growth in Q3, and we still expect a strong back half to the year.

As we've seen in years past, the timing of Medicare Part D profits in the third quarter remains difficulty to forecast, since this is the time period where the risk-sharing quarter is usually least effective at providing risk-sharing protection. Thus, changes any estimates such as utilization significantly impacts our timing of profits between the third and fourth quarters. This forecast in challenges is compounded by the significant growth in this business.

We've made our best estimates and included those in our guidance, but keep in mind that there could be a shift of margin between the third and fourth quarters. Additionally, the tax benefits I've mentioned are forecast to occur in the fourth quarter. If those come earlier, that will obviously benefit the third quarter at the expense of the fourth. We'll update everyone on the final timing of these again when we report our results.

Within the Retail/Long-Term Care segment, we expect revenues to increase 11.5% to 13% versus the third quarter of LY, driven in large part by the addition of the acquired businesses, although sequentially you'll notice step-down due to the mid-August anniversary of the closing of the Omnicare acquisition. Adjusted script comps are expected to increase in the range of 3% to 4%, while we expect total same-store sales to be up 1% to up 2.25%.

In the PBM, we expect third-quarter revenue growth of between 21.25% to 22.5%, driven by continued strong growth in volumes, Medicare Part C, and non-Hep C specialty. Consolidated revenues are expected to grow 16.5% to 17.75%. We expect a sequential increase in operating profit growth due to the impact of the timing of this year's generic introductions.

Notably Crestor, Gleevec, Glumetza are all breaking open in this quarter. As a result, we expect retail operating profit to increase 10% to 12% and PBM operating profit to increase 20.25% to 24.25% in the third quarter. Consolidated operating profit is expected to grow 14.75% to 17.5%.

In summary, we've posted strong growth year-to-date, our 2016 outlook is strong across the Enterprise, and we expect to generate very significant free cash this year. We remain committed to using this cash to drive returns for our shareholders through value-enhancing investments, dividends, and share repurchases. With that, I'll now turn it back over to Larry.

Thanks, Dave, and just let me wrap up and then we'll open it up for Q&A. But obviously, we're pleased with our second-quarter results, confident in our full-year outlook, and we've made good progress on integrating our recent acquisitions.

The PBM selling season has been very successful, confirming again that our distinctive channel-agnostic solutions resonates strongly in the market. We remain focused on continuing to provide innovative solutions that enhance access and lower healthcare costs, while at the same time improve health outcomes.

Let's go ahead and open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your question.

Good morning. This is Nathan Rich on for Bob this morning. Just wanted to start on your comments on the selling season. Appreciate all the detail that you gave and definitely nice to see a strong new wins number. I was just wondering if you could talk about the mix of new business that you won, how it looks for a health plan versus employer, and is there anything unique this year with regards to profitability, both from a pricing perspective, but also considering the uptake of the suite of programs that you have to offer?

Nathan, it's Larry. I'll start, and then ask John, to comment, as well. But of the business wins, about 75% of the business wins are in the health plan segment. Again recognizing the value that we can bring our health plan clients, the themes that you've heard us talk about in the past have continued this year in terms of big focus on specialty and I'll let -- I'll flip it over to Jon to talk more about our integrated programs.

Nathan, I would describe the selling season as pretty typical. The number of RPs are comparable and we've been at a consistent level of performance in the selling seasons over the last several years. If you look at the plan designs, which obviously drives profitability, clients continue to be focused on the tools that help them manage their pharmacy spend.

Their top priority, as we talked about many times, is specialty pharmacy, and we see both health plans and employers adopt our utilization management programs. We're seeing even stronger movement into exclusive specialty, and a higher utilization of our specialty formularies.

Clients across our -- again, both health plans and employers are becoming even more aggressive with all of our formulary strategies. Larry talked about our standard formulary option that we offer clients, good uptake of that, but we even have more aggressive formularies, advanced control and value formularies, that we continue to see increased interest in.

And our integrated programs like Maintenance Choice, Specialty Connect and Pharmacy Advisor, are becoming even more important, as people not only look at the unit cost in pharmacy, but also how pharmacy can help reduce overall healthcare costs, so strong adoption of those programs as well. So it's been, as I look at this new business mix and wins and profitability, it's pretty consistent with what we've seen over the last couple of years.

Great. Appreciate the detail. Then if I could just move over to the Retail/LTC segment, a question on gross margins. It seems like for several quarters now, you've seen some nice improvement in the front-end margin and you highlighted the changes to the promotional cadence and some mix impact.

Could you help us frame the opportunity for front-end margins, just around the changes that you have made to promotions? And then any comments on what impact this has had on the top line, as we think about maybe the trade-off that you're making between top-line and margin performance at the front end?

Nathan, it's Larry, again. As you heard us comment on in the prepared remarks, and prior to today's call, the ability to utilize our ExtraCare data, to really understand our customers at a micro level, is what's giving us -- it's what's providing us the opportunity to, to do what we talked about earlier around this personalization effort. Acknowledging that we can derive value different ways, and there's, there's an awful lot of trial and error that goes on there.

I would say that, we're still learning from that. I mentioned earlier that Helena will talk more about that at analyst day, in terms of learnings that we've gotten and where we go from here. So to sum it up, we're certainly not done. We still think that we have capabilities beyond where we're at today, but as I mentioned, you have to take a surgical approach, so that we're preserving the value of our best customers and enhancing their experience.

And just to be clear, Nathan -- it's Dave, here -- despite the fact of giving up, I'll say, a little bit of top line from a front store sales perspective, the flow-through to the business is accretive.

Okay. Great. Makes sense. Thank you.

Our next question comes from the line of Lisa Gill with JPMorgan. Please proceed with your question.

Great. Thank you and good morning. I had two questions on the PBM. The first question would be, Larry or Jon, can you maybe talk about where you're taking business from? We've now heard from Optum as well as Express Scripts.

It sounds like everybody's having pretty good retention years, but clearly with $7.4 billion of gross wins, you're taking business from somewhere. Is it some of the smaller players? Are we seeing any incremental carve-out activity? How do we think about the competitive market right now and where that business is coming from?

Go ahead, Jon.

Lisa, this is Jon. I don't think there's any one competitor we're taking business from. It's across the spectrum, both large players and the small players. So it's a very balanced selling season, and obviously, we continue to be very successful and our message continues to resonate.

By the way, even on the renewals, when you look at how we're doing from a renewal perspective, again, very consistent performance relative to the last several years. So I know there's been a lot in the press about a few contract moves, but when you step back and look at overall retention, we're very pleased.

Okay. Great. Then my follow-up would be around cash flow, Dave. Obviously, great cash flow in the quarter, great cash flow update for this year. How do we think about that on an ongoing basis? Is there some things in there that are one-time in nature, and would you think about doing an accelerated share repurchase with this incremental cash? How do we think about the deployment of it?

Lisa, a little bit of the cash flow, I'd say probably 75% of the increased guidance, is probably just -- think about that more as timing, as you think about us being in a payable position to the federal government at the end of the year. That will flip on us in 2017, so think about that as just moving from into 2016 from 2017.

I would say the balance is just general improved performance across our business in both PBM and Retail. As it comes to capital allocation, as you know, we will continue to focus on what's the best use of our cash to drive value for our shareholders, and we will continue to think about that and we'll certainly come back to everyone as we think about how to use that cash over time.

Okay. Great. Thank you.

Thanks.

Our next question comes from the line of Charles Rhyee with Cowen and Company. Please proceed with your question.

Great. Thanks. I want to talk a little bit -- get back to specialty a bit, and when you talk about the 22% growth that you saw so far, can you talk about the mix within that? What categories are you seeing this year that are going to be a big concern for your clients, as well as the mix between utilization versus pricing?

Yes, Charles, this is Jon. We're seeing continued growth across all categories, so autoimmune, multiple sclerosis, and oncology, are examples. Hepatitis C, as Larry and Dave mentioned, we're really seeing less utilization there. Then as you look at the specialty category and what's driving the growth, you have price increasing really driving the majority of the growth.

You have pretty strong utilization, north of 3%, more than you see in traditional pharmacy. Then you have new drugs coming into the market that also drive year-over-year growth, so again, it's specialty growing faster -- it's the fastest growing part of the pharmacy benefit. It's our clients' highest priorities and we have solutions for them that can actually help manage that, not only under the pharmacy benefit, but also under the medical benefit.

Just for a clarification, can you remind us what percent of the Caremark -- the PBM client business is served by the specialty pharmacy? Basically how much is -- how much do you cover of the existing client base versus how much of the specialty businesses is outside of the CVS base? Thanks.

Charles, it's right around 60%.

Okay. Great. Thank you.

Thanks.

Our next question comes from the line of Ross Muken with Evercore ISI. Please proceed with your question.

Good morning. Obviously, you've given us a ton of color so far on the success you've had, but a lot has been made, at least in the investment community, about a debate on the merits of whether your model, which has been so successful for so many years, will continue to be successful, and the change in competitive landscape, and ultimately what's happening with managed care.

As you think about the outcome as it stands right now in terms of selling season wins and the feedback, Jon, you've gotten, and as you continue to evolve the strategy, where do you think some of us were wrong in terms of the assumptions or what are folks not focusing on where you continue to push the needle and evolve the model and push share where maybe folks aren't seeing it? I'm just trying to get a sense from where you feel like the messaging has been most off from our side of the things or the perception at least, versus the reality of clearly what you're seeing in the market?

Ross, it's Larry. First of all, let me just say, [United off them]. Obviously, they're a highly respected company, their well publicized wins this selling season demonstrate that they can successful compete for business in the PBM space. At the same time, back to your question, if you ask why we've been successful and why we expect to continue to be successful, we continue to see this retailization of healthcare.

You see more people in consumer-directed health plans. You see more care being chosen individually, when you think about some of the government-sponsored care, with Medicare, and that points to the value associated with multiple consumer touchpoints. I touched on those in our prepared remarks, that yes, there's 9,600 retail consumer touchpoints. We've got 80% of the US population that lives within a couple miles of one of our stores.

Along with, MinuteClinic assets and specialty and mail and infusion and now long-term care, and we have created a true level of integration across these different assets. Ross, you remember years ago, we were talking about the consumer engagement engine, which we now refer to as the Health Engagement Engine.

It is a piece of technology that connects the dots with these various capabilities so that it's not just about collecting data, it's about how we use that data to effect an outcome. So you combine that with the ability to touch the consumer in multiple different ways, and we think that, that is our value proposition that will increase in importance, and that has allowed us to bring products into the marketplace that can impact patients, payers, and providers.

That's helpful, Larry. Maybe just, in general, it seems like, again, another very successful season on health plan side. Obviously, you had that as well last year. Could you just remind us what that means in terms of profit ramp and how we should think about the business won last year and how that trended profit-wise or is expected to over the course of next year into next and that whole dynamic?

Ross, this is Dave, I'll start off here. As you know, the health plan business is a little different than the employer business. Whereas in the employer business, typically a benefit manager can make a decision for the population immediately and those programs can be implemented pretty rapidly.

In the health plan business, even despite a health plan -- let's say chief medical officer wanting to adopt one of our programs, they need to in turn go and sell that through their book of business, or in some cases, in the Medicare book of business, the ramp up of shares is just a little slower. So think about us starting off at pretty thin margins and that ramping up over time and the cadence of that is probably a little slower than the employer book of business.

Ross, if we look at the 2016 health plan clients that we won, we're now talking to them about programs that they can implement in 2017. They have four lines of business that, quite frankly, you have to think about very differently. In Medicare, they can't just simply narrow the network; they can have a preferred network.

In Medicaid, we see aggressively clients narrowing their network. With their fully insured book of business, they have to work through the Department of Insurance, and they historically have opted for consumer choice broad networks. We do see that changing.

And for the self-insured, that's no different than our employer clients. So it's really arming them with programs and incentives to sell that into their employer book of business, so it does move slower, as Dave said, but we're confident it will move, and we're confident we can grow share.

Great. Thanks.

Thanks, Ross.

Our next question comes from the line of Alvin Concepcion with Citi. Please proceed with your question.

Thank you and thanks for taking my question. You mentioned the retention rate in PBM was 97.5%. I'm wondering, would you happen to know what it was last year at this time?

Alvin, the year ended up at 97.2% for last year's selling season. As we mentioned, we have about 75% of the renewals done, so we're in the home stretch there. I do not know what the retention rate was at this time last year. It probably wouldn't be that far off with where we are.

Right. And it's pretty similar to the selling season, right? The large players have made their decisions and now it's down to the mid-market and the small players. So I would say it's pretty comparable to where we were last year.

Great. Thank you for that color. And a question on retail. With things like ScriptSync and Curbside, you talked about it a bit last quarter, and maybe it's still early, but how should we think about retail comps longer term, in particular the front end? I'm wondering if this would pressure your front-end comps further or if you see basket offsetting the potential less traffic?

No, Alvin, I don't see those aspects pressuring front-end comps. It's important to emphasize that some of what we're experiencing is planned as we think about our front-store business and the segmentation or personalization strategies as we had talked earlier.

I would say, too, Alvin, we've said all along, we're focused on driving profitable growth, and so when you look at where we're very pleased, in our core health and beauty businesses, that's where we want to win, that's where our most valuable customers expect us to be unique, and that's going very well. Then we're pulling back in general merchandise and edibles businesses, which tend to be very promotional, and reinvesting those dollars in our best customers, so you'll continue to see us do that.

Thank you very much.

Thanks.

Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed with your question.

Good morning. Congrats on a very good quarter and thank you for all the details. Question I have here is on Maintenance Choice. Obviously, it's been proven to be a very effective tool to gain market share. Under a scenario that you lose a Maintenance Choice client, how much of the share do you expect to keep?

Ricky, we have had an extremely high retention rate of those Maintenance Choice clients, so there's really not a good proxy there to answer that question. In the few cases where that's happened, CVS continues to be in the provider network, and we've retained a large percent of that business.

Okay. And then when we think about the quarterly result, obviously you highlight on the [personalized] in your prepared comments, that there's contribution from Omnicare and Target. Can you quantify it for us, what percent of the operating income growth per segment was from acquisitions versus organic?

Ricky, it's Dave. We haven't broken that out. Quite honestly, the integration of those businesses are pretty complete now, so actually we haven't even broken out, so a little more difficult than you might imagine. But they're part of our forecast for this year, and our forecast is very much in line from a quarter perspective.

Okay. Just one last thought on the selling season. Obviously, last year, you had -- about 80% of the business came from managed care. When you think about the mix of business, I know that in a response to an earlier question, you said that it's similar to last couple of years, but it seems that every year was a bit unique. So what percent of the net new business, or maybe I should say what percent of gross wins, are from managed care versus commercial book of business?

Ricky, it's around 75%. If you look at the mix of business within the PBM excluding Med D, the make-up of that business is now 60% health plan, 40% employer.

Thank you.

Thanks.

Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

Larry or Helena, what can you tell us about those most valuable customers? I don't know how you define them, but when you think about importance to the business, either percent of sales or transactions, demographics, where you see, when you think of your share of wallet with them, where are the biggest opportunities? Just curious, some color on those customers?

We look at it a lot of different ways, but I would say at the most simple level, the top 30% of our customers drive about 75% of our sales and profit. We are meaningful to them, but we still have significant upside in terms of share of wallet opportunities with them. So what we've really been focused on is the personalization strategy that Larry talked about.

Essentially, investing in those customers because we can see from the data where we have upside with them. We segment them either from a value perspective sometimes, or we look at them in terms of their shopping behaviors. So we might look at beauty enthusiasts who, for example, tend to be less promotionally oriented and are very focused on new items and what's hot and relevant for them.

That might be very different than food and family loyalists, who are looking for different kinds of offers and strategies. So for us, it's all about getting at the very micro level and giving them targeted offers that matter for them. We can track those customers over time, and we're very focused and pleased with the fact that we continue to grow sales and profitability among those best customers.

John, it's Larry. If I could emphasize one point, you're hearing a theme emerge and it's not a new theme. But whether we're talking about your point on the front store or some of the things that have come up earlier with some of the questions about, the pharmacy, there is a tremendous amount of data out there.

It's one thing to collect the data, it's another thing in terms of how do you use the data to create an outcome or a behavioral change? That's where we've made significant investments in our business, whether it's ExtraCare or whether it's the capabilities back in the pharmacy, that is allowing us to do things in a very differentiated way, that we think that is giving us an advantage in the marketplace.

That would, obviously -- I assume there's some customers that are truly unprofitable. How do you think about weaning yourself off of those and then balancing that with, obviously, there's the direct profit, but there's also overhead and other costs that, that they might cover? Right, so that's an interesting balance, right?

That's the delicate balance that does not just make this a math exercise. We certainly know, if you look at our bottom two deciles of customers, where there's potential, and that's what you saw us doing the last couple of quarters, is pulling back our promotional spend -- weaning those customers off of it. We certainly want to continue to keep their business and reinvesting that in other segments where we could see more profit upside.

But that's exactly the balance we're looking at. And we said before, the role of the front store is different in our Company than other companies. It represents 11% of our total Enterprise sales, but it also is the front door to how people start to use us as a pharmacy. So as we look at those customers, we're looking not just at their front-store sales and profitability, but we also note which of those customers are our pharmacy customers and that's an important part of the decision making process, as well.

And then one last one for Jon. Do you think at this point, competing solely on the basis of price or largely on the basis of price is not something your account base is particularly interested in? They've moved off of that to capabilities?

John, as we've said many times price has been important. It will continue to be important. We've talked about the fact that, price is ticket to the gate. Listen, when you look across the PBM business, we're talking a lot about retention rates. We never want to lose a client.

At the same time, we don't forecast or expect to have 100% retention. You can look across the landscape, and you can see clients who, every contract renewal, they migrate to another PBM. There are going to be clients out there that have different priorities, and we think that, with our differentiated offering, we can appeal to the broadest set of those clients.

Thank you.

Just to add to that, John, while we have to continue to be competitive on price, it's really our differentiated model and our ability to interact with a consumer and impact their behavior and lower overall healthcare costs, that's what's resonating in the market and that's why we're continuing to win.

Okay. Thank you.

Thanks, John.

Our next question comes from the line of Eric Percher with Barclays. Please proceed with your question.

Thank you. As we spoke with benefit managers yesterday, there was some interest in the indication-based formulary and cost for inflation efforts, but what really caught their eye was your aggressiveness relative to biosimilars, particularly as compared to the one competitor who's formulary we've seen. Could you speak a little bit about what this represents in terms of your strategy on biosimilars? It seems like a material statement. And also how you think about the ability to serve and drive adoption of biosimilars, both as a PBM and as a retailer?

Eric, it's Larry. I'll start and then flip it over to Jon. But as you've heard us talk in the past, while biosimilars are just beginning to enter the market and their impact will be nominal or minimal in the near term, we believe that they will grow in importance and they will behave more like brands than generics, which create opportunities within the formulary management area, so that's how we thought about it at a very high level. I'll flip it over to Jon to talk more specifically.

Eric, maybe I'll step back and talk about the three dimensions to our formulary strategy for this year, because it's a little bit different than what we've done in years past, and it does include these biosimilars, or in the case of the Basaglar, it's as a follow-on biologic but I would think of it as a biosimilar.

First, we've got our normal therapeutic review that we started back in 2012. That's all about making sure we have cost-effective medications for our clients and their members. We've been able to deliver the $9 billion in savings that Larry talked about, and over the last several years, we've been able to negotiate price protection into those contracts, so if a manufacturer raises a price over a predetermined threshold, that comes back to our client in the form of a rebate and lowers their price.

What we introduced this year is indication-based formulary. Think about Hepatitis C that has six different genotypes -- the genotypes are different -- so we will have different formulary options based on the genotype. Or in the case of autoimmune, you have the same drugs that treat psoriasis and RA. We may have a different preferred product for psoriasis than we do for rheumatoid arthritis.

The third dynamic is really hyper-inflation. We looked at drugs that had a three-year cumulative WAC increase of greater than 200% and we've taken on 10 of those drugs this year. Our goal is, either we're not going to cover them, or we're going get the economics back to prior to these WAC increases that they took.

For biosimilars, it's just part of that theme: how can we get the lower, most cost- effective drugs for our clients to provide as a benefit to their members, and we think biosimilars will be an opportunity. When you look at biosimilars, most of the pipeline is filled with the biosimilars under the medical benefit with the exception of Humira, but we'll continue to look to make decisions that are in the best interest of our clients and their members.

Very good. Thank you.

Our next question comes from the line of George Hill with Deutsche Bank. Please proceed with your question.

Good morning, guys, and thanks for taking the question. Jon, we saw the preliminary Med D bit rates come back last week, and it looks like you're down a little bit, or it looks like Med D providers will be down 2%-ish as it relates to total revenue.

As we think about it as the Company goes to market and contracts in providing the benefit for 2017, if you think about where you get cost savings to continue to drive those price declines, do you feel like more of them are coming on the pharmacy network side or are more coming on, what I'll call the manufacturer side, either through formulary actions or through rebates?

George, it's Larry. I'll start and then David or Jon or both will jump in here. But George, I would say it's really the surround sound that is contributing to that. It's not just about the procurement side of things or the network side of, of things. I do think that Med D is a great example of competition prevailing in the marketplace to drive down overall costs, and as you look today at the cost of the Med D program against what it was projected a decade ago, it's a fraction of that.

The only thing I would add is, I think that's right. It's pretty balanced. We're getting -- continue to get value to have a very competitive product in the market really across all those dimensions.

The only thing I would add is that, our expertise and how we've been able to help SilverScript and our clients is really how you design your plan, how the formulary that supports that plan, what's your network strategy, all of those need to work together to provide a synergy that gives you a competitive product in the marketplace. That's really the expertise that we've built over the years that allows us to continue to be successful.

Okay. That's helpful. And then maybe a quick housekeeping question. For the net new wins for the PBM for next year, does that or does that not include the balance of the Coventry business rolling on?

George, it does. In our prepared remarks, I mentioned that less than 7% of the gross wins are made up of the Coventry business.

Sorry. I missed that section. Thanks for the color, guys.

Our next question comes from the line of Scott Mushkin with Wolfe Research. Please proceed.

Hey, guys. Thanks for taking my questions. First up is -- and I know we touched on it a little bit for the 2016 and upselling, Jon, and you did a good job of the four different buckets upselling your unique offerings into the healthcare plans. I just wanted to get any update -- I think you guys said you're about 23% penetrated processing scripts, at year-end, maybe. I think I got that right. Any update on that number and where we're going as far as Maintenance Choice and processing the scripts from healthcare plans (multiple speakers) assets?

Yes, Scott, it's Larry. As John mentioned earlier, we have seen the ramp begin in terms of the clients that came online in January 2016. At our analyst day, we'll provide and quantify exactly where that sits as we're able to ramp-up through the year.

Would you say, Larry, you're pleased with how things are going? Or any thoughts -- I know you talked a little last quarter about it's slow but methodical. Any updates on how you're thinking about it?

No, Scott, we're pleased with where we're at, and recognizing that, as you've heard us talking about, this is a marathon, it's not a sprint. We're pleased with the progress that we're making. And again, for the reasons we mentioned earlier, we think about the assets, the capabilities that we bring will grow in importance, recognizing the direction that healthcare is headed.

Perfect. And then just a little bit for Dave. The guidance, Dave, you said incorporated a second quarter and also interest savings, but it does seem like the underlying business is performing better than expected, just maybe so far in the first couple of quarters. Do you think that can actually continue in the back half and how should we -- how we think about that? It was particularly on PBM side?

I do think that obviously the business has performed well in for both segments, both Q1 and Q2. Obviously, we are driving benefit from -- I'll say below the line --as we think about refinancing our debt. But again, you saw us raising operating performance expectations within the PBM for the balance of this year and I continue to think that we're well-positioned, as we think about delivery for Q3 and Q4.

All right. I just wanted to sneak one last one in for Helena. On your best customers, Helena, where do you think you're priced compared to mass and online and then I'll yield? Thanks, guys, for taking my questions.

We look at our price -- the net price to customers, as you think about all of the promotions, ExtraCare rewards, and targeted offers we give them and we think that's how the consumer views it, and we think we're within striking range, essentially, of those competitors when you look at all those offers for our best customers.

Perfect. Thanks.

Thanks, Scott. Next question?

Is from the line of Mark Wiltamuth from Jefferies. Please proceed with your question.

Hi. Congrats on the PBM selling news. Pleased to see that, but also wanted to ask a little bit about what's the next step here at Target. The integration has gone well. At this point can you tell if the stores that have CVS density around them, are those Target stores doing better, and do you plan to add more CVS stores around the existing Target?

Mark, I'll start and then flip it over to Helena. I'm sure you know this, so just as a reminder, any acquisition, especially on the retail side, you have to do the things you must do before you can do the things you like to do. We're all really pleased with the work of the team to be able to convert almost 1,700 pharmacies in what amounted to a six-month period.

It was a terrific job by all. We got tremendous support from our partners at Target. We've completed those activities within the last 30 days, so now we get to move to the things that we really like to do. I'll flip it over to Helena to talk about that.

Right. As you can imagine with all that conversion, there is always -- we've done a lot of acquisitions, you do have a fair level of disruption. As Larry said, the Target folks have been great in working with us through all that. But we're very pleased. The service scores coming out of those stores are tremendous, the leadership alignment is fantastic, we're on track to achieve our targeted EBIT for those pharmacies.

Now we're focused on ramping up our patient care programs. As we looked at this opportunity, there were really three big areas where we saw opportunity and those are beginning now. First, is the core clinical programs that we've always used at CVS, we call them our patient care programs, things like adherence, outreach, and other ways that we can drive clinical outcomes, which drive scripts.

The second is around the all the member engagement efforts that we've got going on. These are essentially targeted at our members through the PBM who now have opportunities to fill the prescriptions at Target, So we're letting them know about that, inviting them into those Target pharmacies to experience the new offering, as well as some targeted marketing that we've been doing in conjunction with Target.

Most of that's been digital. It's also been radio. That is really just kicking off now, as well. So all those things together give us a high level of confidence that, with all of these unique programs, as well as our brand recognition, our clinical capabilities in these digital tools that we've introduced, that we'll be able to increase script volumes in these locations.

And my question about your existing footprint, where you have CVS stores around an existing Target, are those Targets performing better than the others?

I would say the only thing we would really say is probably noteworthy in terms of performance is those markets where CVS had very little presence, like a Denver or a Portland, Oregon, those Target pharmacies are probably performing the best.

Because as you think about it, that's where our model of allowing Maintenance Choice members to now fill at a CVS pharmacy inside a Target really is unique. They don't have a CVS nearby. So that's probably the one difference we've seen so far in terms of performance.

It's Dave. What's important, too, as you think about that combination, is the overlap between the Target pharmacies and the CVS pharmacies was pretty minimal. So there's not a lot of those situations where we're head to head, number one. That's why it was a good match from that perspective.

And number two is that we share customers. Many of our customers shop the Target channel and many of the target customers shop the CVS channel. Now what we've got is giving those customers options. So at the end of the day, it's going to be enhancing to our overall market share, not just switching from one box to another.

And Mark, I'll just wrap it up by saying it's a hard question to answer at this point for the reasons that Helena mentioned. We're just beginning the broad-based marketing programs. There is a tremendous opportunity to increase the level of awareness of CVS at Target, and all that work has just begun.

Okay. Thank you very much.

Before we take the next question, we just want to back and add a little color to the question that came up earlier on the Coventry business.

This is Dave. George Hill, you asked a question about Coventry. Again, for the 1/1/17 selling season, about 7% of our gross wins is related to the migration of the Coventry business onto the Caremark platform. There is an additional piece of Coventry commercial business that does migrate onto CVS on 1/1 of 2018.

Okay. So next question?

Is from the line of Steven Valiquette with Bank of America Merrill Lynch. Please proceed with your question.

Okay. Thanks. Good morning, guys. Congrats on these results. Just for us, really probably another question on this PBM. It does seem that 2016 is a unique year where your PBM revenue growth is really almost double your operating profit growth. That's partially because of the mix of wins you had for this year.

What everybody is trying to figure out on this call, big picture without you giving any guidance is that, can we generally assume that PBM revenue and EBIT growth will hopefully be a little more in line with each other for 2017 than what we're seeing in 2016 or should we still, generally assume a large spread there next year? Thanks.

Steve, this is Dave. I would say, if you go back and look at our long-term targets, probably the best way to think about this, and you look at those targets, you've seen us give expectations that the top line is going to grow faster than the bottom line as we capture share, as specialty continues to grow, as we continue to invest in our business and do [ballpoint] acquisitions. I would say that, that long-term forecast remains intact today from, as you think about the top line growing more rapidly than the bottom line, and so I would expect that to occur.

Okay. Also since 2-16 was a record year for the wins you took on this year, does that $13 billion to $15 billion of business become a more profitable and higher margin in 2017 than the 2016 contribution, general speaking?

Generally speaking, that's essentially how this business typically operates. As we've always said, is the health plan business, they're a little slower to adopt our programs and to sell those programs in, and to -- depending on the complexion of the health plan business, some might be more Med D weighted versus commercial, so the cadence of that ramp does vary but it's typically a bit slower than the employer book of business.

Okay. Then finally, just real quick, the FEP mail and retail extension, the January 2019, I missed your comments on that. Is that an early renewal and extension that there'd be some different pricing on that for next year or is that just nothing changes on the pricing front? That was just your disclosure that, that's still intact through January of 2019? I just wanted to get the extra color on that? Thanks.

Steve, they had an option to extend the contract and the economics were already built into that deal, and they chose to extend, so it was not a new financial arrangement. It was an extension of the existing deal we had offered them.

Okay. Perfect. Okay. All right. Great. Thanks.

Okay. We'll take two more questions please.

Our next question comes from the line of Mohan Naidu with Oppenheimer. Please proceed with your question.

Thanks very much for squeezing me in. Larry, given the success that you're seeing with Target pharmacies and [TNX], is there any appetite to do more of such partnerships?

It's a great question and we're certainly open to that. As you look at how pharmacy is evolving, and the importance of investments in technology to not just satisfy the regulatory priorities that are associated with pharmacy, but how pharmacy becomes an important of the solution of driving down healthcare costs, and serves as something more than just a dispenser of prescriptions, that is -- as that increases in importance, there may more be more opportunities that present themselves, and we're certainly interested in those.

All right. Thank you very much.

Our final question comes from the line of David Larsen with Leerink. Please proceed with your questions.

Congratulations on an excellent quarter. Can you talk about the impact of generic deflation and the performance of Red Oak. How it that progressing relative to expectations? Thanks.

Dave, Dave Denton here. Obviously, we're very pleased with the progression of Red Oak. We continue to -- both us and Cardinal -- continue to see value from that joint venture. I would say that as we've talked about this in the past, both inflation and deflation across our business has not really been that impactful, so I don't think that the change in those levels of pricing within generics have been a major impact on us. They certainly have not been material, both this year and in prior years. So it is progressing very much as planned this year. We'll probably have more update as far as generic introductions when we get to analyst day in December.

Okay, and then in December, will you provide a new five-year guidance range for these different metrics?

We always update our performance, both from a current period perspective and an ongoing perspective, so we certainly hit on key topics, and the outlook for those key topics over the course of the next several years, in December.

Great, thanks.

Okay, everyone. Thanks for your ongoing interest in CVS, and if there are any follow-up questions, you can contact Nancy Christal. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.