CVS Health Q1'16 Earnings Conference Call: Full Transcript

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the one followed by the four on your telephone. If anytime during the conference you need to reach an operator, please press the star followed by the zero. As a reminder the call is being recorded, Tuesday May 3, 2016. And I would now like to turn the call over to Nancy Christal, Senior Vice President of Investor Relations.

Nancy R. Christal:Senior Vice President, Investor Relations, CVS Health:

Thank you, James. Good morning, everyone and thanks for joining us. 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.

During the Q&A, please limit yourself to no more than one question with a quick follow-up so we can provide more people with the chance to ask their questions. Please note we posted a slide presentation on our website before the call. It summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance. Later this afternoon, we’d 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 will 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 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 reconciliation of these non-GAAP items 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 I’ll turn this over to Larry Merlo.

Larry J. Merlo:President and Chief Executive Officer, CVS Health:

Well, thanks Nancy. Good morning everyone and thanks for joining us to hear about the solid first quarter results we posted today. Adjusted earnings per share increased 4% to $1.18 that’s $0.01 above the high end of our guidance.

In total company revenues increased a very healthy 19% also above our high end guidance number. Excluding acquisition-related integration costs and the true-up of a legal charge, operating profit increased 5% enterprise wide with operating profit in the retail long-term care segment inline with our expectations and operating profit in the PBM notably exceeding expectations.

We generated $1.8 billion of free cash during the quarterly and continued to return significant value to our shareholders through both dividends and share repurchases. Now its still early in the year so we are maintaining our adjusted EPS guidance range that we provided to you at our December Analyst Day and Dave will get into the details of our results and guidance in his remarks.

So let me turn to the business update and I will start with the PBM selling season. Since our last update, the expected revenue impact for 2016 has grown with gross new business at $15.2 billion, net new business of $13.1 billion, both up above $400 million from our last update and the vast majority of these increase relates to a new health plan client which will increase our revenues in both 2016 and ‘17. We also closed out the ‘16 selling season with the retention rate of 97.3%.

Now turning to the 2017 selling season, it’s early but we are off to a very good start. To date we have completed just over a third of our client renewals which is pretty typical for this time of the year. As for new business, our integrated model continues to resonate strongly and we have already had some nice wins. Prospective clients value our strong service and execution, competitive pricing, unmatched products and services along with our ability to meet their unique needs.

Now many of you have asked about the magnitude of the ‘17 selling season and at this point we are seeing more RFPs and potential revenues in the marketplace than we did at the same time last year. But keep in mind that it ebbs and flows throughout the season and some of that could simply be timing. Now given that it’s still early and consistent with our past practices, we will provide a quantitative update on our next earnings call once we have a more complete picture of the selling season.

Now we held our client forum in late March which was attended by about 900 people and clients acknowledge that their top concern is cost management with service running at close second. And I am pleased to report that we have been able to deliver on both fronts. In this environment of rising healthcare costs, clients are looking to us for proactive cost management solutions that anticipate market changes that impact trend. And they are adopting more aggressive strategies particularly formulary design and specialty management communicate to mitigate these trend drivers.

Now we believe we are offering our clients the most comprehensive suite of formulary choices to achieve their savings goals while addressing member impacts and transition to new therapies.

In addition specialty drug management has been emphasized in the plan design elections and clients are looking for solutions for managing specialty in both the pharmacy and the medical benefits. Among our unique specialty management programs we are seeing a growing interest in our infusion and site of care services as well as our medical claims management services. In addition, innovations in specialty include indication-specific pricing where the cost to the payer is aligned with a drug’s effectiveness for a specific indication.

In the first quarter, specialty revenues increased 23% and our volumes continued to outpace the market. So through our unique suite of specialty capabilities, we remain highly focused on helping our clients manage cost and improve outcomes.

Now let me turn to the retail long-term care segment and I will start with an update on the integrations of the Target and Omnicare.

The integration of the acquired Target Pharmacies and Clinics is proceeding according to plan and as of the end of April, about half of the 1,670 acquired pharmacies have been successfully converted to the CVS Pharmacy brand and systems. As planned we expect that all store conversions will be completed by the end of this summer and as the stores are converted and rebranded, we are launching our additional core pharmacy offerings and these include Specialty Connect, ExtraCare Pharmacy Rewards and our digital tools, and this is in addition to Maintenance Choice which is been available since the transaction closed.

So we are pleased with our early progress and remain very enthusiastic about this opportunity to drive growth.

Turning to Omnicare, the long-term care pharmacy business performed in line with our expectations as we benefited from some of the anticipated cost and sourcing synergies. Currently, we are working to combine operational infrastructures and further develop programs to improve work streams and enhanced service delivery and we are on track to complete the vast majority of the Omnicare integration activities by year-end.

Now in addition to the integration work we have several initiatives underway. We have piloted and have already rolled out the use of CVS Pharmacies as an extension of the Omnicare Pharmacies to speed the delivery of first pills or emergency order prescription in the skilled nursing facilities. We are also currently piloting an integrated service offering to the assistant and independent living communities where we can offer residents enhanced medication delivery options based on their preference and acuity level, all supported by our high touch patient care teams. And with a targeted marketing approach that focused on when people enter these facilities along with our name brand recognition, we are confident that we can increase our penetration in these segments.

In pending the pilot resolve this program will begin to roll out later this year.

So with the combination of CVS and Omnicare, we remain very excited about our enhanced ability to serve seniors along their continuum of care.

Now moving on to first quarter results in the retail business; total same-store sales increased 4.2% and were positively affected approximately 125 basis points due to the additional day related to leap year. Pharmacy same-store sales increased 5.5%. This was negatively impacted by approximately 360 basis points due to recent generic introductions and about 50 basis points related to the softer flu season and the flu was pretty soft in the first two months in the quarter but strong in March somewhat mitigating the quarterly impact.

Pharmacy comps were positively impacted by about 130 basis points related to the extra leap day and pharmacy same-store prescription volumes increased 5.9% on a 30-day equivalent basis continuing to outperform overall market growth. And our retail pharmacy market share on a 30-day equivalent basis with 23.9% in Q1 and that’s up about 245 basis points versus the same quarter a year ago. And while the primary driver of share growth is the addition of the Target Pharmacies, we continued to experience strong organic share growth as well.

Now an important driver of script growth has been our clinical outreach programs which have allowed us to continue to improve adherence and provide patients helpful reminders.

Part of the strength of these programs has been the integration of our digital tools and today nearly 90 million people receive text alerts from CVS on a variety of topics, all of which help to enhanced the service experience.

Among other recent pharmacy innovations, ScriptSync retail is expected to continue to improve medication adherence and patient satisfaction. Since the launch, more than two-thirds of the patients offered ScriptSync have adopted the service and with nearly 350,000 patients enrolled in ScriptSync during the first quarter, we now have more than 1 million patients enrolled since its launch in the third quarter of last year.

In the front store business, comps increased 0.7% and this includes the benefit of the extra day from leap year of approximately 105 basis points as well as the shift of the Easter holiday from April last year to March this year positively impacting front store comps by about 80 basis points. And the negative impact of a late flu season was immaterial to the front store in the quarter. Now, we’ve continued to pull back on broad based promotions which has resulted in fewer business from lower value customers. Front store margins once again increased notably in the quarter, benefiting from these efforts to rationalize our promotional strategies along with growth in the higher margin health and beauty businesses.

So, we continue to test, learn, and refine strategies to achieve the optimal balance between traffic and profitable growth.

Now ExtraCare continues to reward our loyal customers with savings and we continue to leverage our ExtraCare data to create even more relevant and personalized communications, and we know that our top customers drive the at disproportionate amount of our sales and margins so while store traffic overall is down, our loyal customers are shopping frequently and driving our front store sales and margins. As for store brands they represented 21.9% of front store sales in the quarter. That’s up 100 basis points from the same quarter last year and there remain significant opportunities to expand our share of store brand products by building our core equities in health and beauty and seeking opportunistic growth in other areas where we can provide customers a superior value.

Among our recent front store innovations, we recently announced the partnership with Curbside to bring a new level of convenience to our customers. CVS Express is the industry’s first retail solution that integrates Curbside’s market leading technology right into the CVS pharmacy app. Customers can make mobile in-app purchases from their local CVS Pharmacy and have the products directly delivered to them when they pull up to the store -- about an hour with no added costs. This service is currently available in select markets including San Francisco, Charlotte and Atlanta pending a successful pilot, our goal is to roll out the program to the majority of our markets later this year and this exciting new initiative really embodies the digital mission of CVS Health to make healthy lifestyles more accessible and convenient for our customers all across the country.

Now turning to store openings. In the first quarter we opened 24 new stores, relocated 14 others, closed five, resulting in 19 net new stores and we expect to open about 100 net new stores for the full year. As for MinuteClinic, the Target integration was completed in 24 clinics converting them to MinuteClinic’s branding, electronic health record systems and health offerings and we expect the balance of the clinics to be converted by the end of the summer.

We now operate 1,136 clinics across 33 states plus the District of Columbia and including Target MinuteClinic’s revenues increased 17.7% versus the same quarter last year despite the mild and late flu season. Another digital innovation is what we call the hold my place in line online queuing tool that was launched nationally at MinuteClinic in late March and this tool enhances convenience by allowing patients the view wait times online and hold their place in line through any digital channel. So MinuteClinic continues to advance in innovative ways to increase convenience in access to cure.

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

David M. Denton:Executive Vice President and Chief Financial Officer, CVS Health:

Thank you Larry and good morning everyone. This morning I will provide a detail review of our first quarter results followed briefly with an update on our guidance. And as always I will start first with the summary of the various ways we continue to enhance shareholder value through our capital allocation program.

Throughout the quarter, our quarterly cash dividend increased by 21% per share and we paid approximately $470 million in dividends. Our dividend payout ratio currently stands at 31.9% and we’ve remained well on track to achieve our target of 35% by 2018. In addition, we have continued to repurchase our shares. In the first quarter we repurchased approximately 22.4 million shares for $2.1 billion for approximately $98.52 per share.

So between dividends and share repurchases, we’ve returned approximately $2.5 billion to our shareholders in the first quarter alone. Looking forward to remainder of the year, we continue to expect to repurchase an additional $1.8 billion worth of our stock completing the planned $4 billion in repurchases for the full year. Our expectation is that we will return more than $5 billion to our shareholders in 2016 through a combination of both dividends and share repurchases.

As Larry mentioned, we generated approximately $1.8 billion of free cash in the first quarter and we continue to expect to produce cash of between $5.3 billion and $5.6 billion this year.

Turning to the income statement. Adjusted earnings per share came in at $1.18 per share $0.01 above the top of our guidance range and 4% over LY. GAAP diluted EPS was $1.04 per share. The retail long term care segment delivered solid earnings within expectations while the PBM segment posted profit growth above the high end of our guidance.

The outperformance in the quarter was primarily driven by stronger than expected volumes and better purchasing economics within the PBM.

With that, let me quickly walk down the P&L. On a consolidated basis, revenues in the first quarter increased 18.9% to $43.2 billion. In the PBM segment, net revenues increased 20.5% to $28.8 billion. Given the large amount of new business that came on board on 1/1, this growth is attributable to the increased volume in pharmacy network claims as well as growth in specialty pharmacy.

Overall PBM adjusted claims grew 19.4% in the quarter partially offsetting the sales growth was a 170 basis point increase in our generic dispensing rate to 85.2%.

In our retail long term care business, revenues increased 18.6% in the quarter to $20.1 billion, driven primarily by the addition of Omnicare and the Target Pharmacies. Solid pharmacy same-store sales contributed as well. This revenue growth was just below our guidance range.

While script unit growth remained strong, the mix of branded drugs deferred slightly from our plan resulting in a lower average script price. To be clear, we have not seen a change in the level of branded drug inflation. It was simply mix that effected the weighted average script price. In addition, front store revenues were impacted by our promotional strategies in our non-health and beauty categories as we gave up some lower value customer traffic to drive an increasingly profitable front store sales mix.

GDR increased by approximately 125 basis points to 85.7%.

Turning to gross margin, operating expenses, operating profit, and the tax rate. The numbers I’ll site exclude non-GAAP adjustments mainly amortization, acquisition related costs, and the legal charge where applicable. Keep in mind that our guidance for the quarter also excluded these items.

We reported gross margin of 15.6% for the consolidated company in the quarter, a contraction of approximately 135 basis points compared to Q1 ‘15. Gross profit dollars increased a healthy 9.5%, in line with our expectations. Within the PPM segment, gross margins contracted by approximately 45 basis points versus Q1 of ‘15 to 3.8% primarily due to the mix of new business and price compression partially offset by the GDR improvement and favorable purchasing economics.

However hHwever, gross profit dollars increased 7.4% year-over-year due in part to strong volumes, specialty pharmacy, the improvement in GDR, and again favorable purchasing economics. Partially offsetting these drivers was continued price compression.

Gross profit dollars increased approximately 10% year-over-year in the retail long-term care segment while gross margin declined approximately 225 basis points to 29%. Now about 40% of the decline in the gross margin rate was mix driven due to the inclusion of the Omnicare and Target businesses that we acquired. The decline in gross margin was also due to continued reimbursement pressures.

Gross margin was positively impacted by the increase in GDR as well as increased front store margins due to our continued rationalization of our promotional strategies and improved mix of the products that we sold.

Turning to expenses, we saw strong improvement in total operating expenses as a percent of revenues from Q1 of ‘15 to 10.4%. The PBM segment SG&A rate improved about 10 basis points to 1.1% benefiting from additional sales leverage. SG&A as a percent of sales in the retail long-term care segment improved significantly by approximately 120 basis points to 19.9%. These too was driven by leverage from revenue growth as well as the addition of the Omnicare business which carries a lower SG&A relative to sales.

Within the corporate segment, expenses were up approximately $20 million to $209 million slightly better than expectations.

Operating margin for the total enterprise decreased approximately 70 basis points in the quarter to 5.2%. Operating margin in the PBM decreased approximately 35 basis points to 2.7% while operating margin at retail long-term care, decreased approximately 105 basis points to 9.1%.

For the quarter, operating profit growth in each segment was in line with or better than expectations with the PBM increasing 6.6% and retail long term care growing 6.4%. Going below the line on the consolidated income statement, net interest expense in the quarter increased approximately $149 million from OI to $283 million. This was due primarily to the debt associated with the acquisitions that we took on last year.

Our effective tax rate in the quarter was 39.3% and our weighted average share count was 1.1 billion shares.

Now let me update you on our guidance. I’ll focus on the highlights and you can find the additional details of our guidance in the slide presentation that we posted on our website earlier this morning.

As Larry said, we are confirming our 2016 adjusted earnings per share guidance range of $5.73 to $5.88 which reflects strong year-over-year growth of 11% to 14%. We are very pleased with our strong performance year-to-date and its still early the year.

With respect to GAAP diluted EPS, we are revising our full year guidance to reflect the integration cost and the legal charge that we saw in the first quarter which we explicitly excluded from our initial guidance. So we now expect GAAP diluted EPS to be in the range of $5.24 to $5.39. Keep in mind that our GAAP guidance for future periods excludes the impact of acquisition related integration costs and we will update for these costs that we incur throughout the year.

In the PBM segment, with the better than expected increase in network volume from our new business in Q1 expected to flow throughout the full year, we are increasing revenue guidance by 150 basis points to a range of 21.75% to 23.25%. This increase takes into account more than anticipated volumes of the Hep-C and PCSK9 therapies. As a result of this, along with stronger expected purchasing economics, we are narrowing and raising the midpoint for the PBM operating profit guidance by taking the low end up 125 basis points resulting in a new range of 11% to 13.75%.

In the retail long term care segment, we are lowering our revenue growth guidance and maintaining our operating profit growth guidance. The reduction in our revenue growth expectations reflect several factors including our decision to discontinue certain RX crossroads program to more fully align this business with our focus on cost, quality and access. Additionally, the reduction in revenue growth reflects the shift in the mix of branded drugs along with the earlier than anticipated launch of generic as well as slightly weaker front store sales trends as we continue to execute on our targeted promotional strategies.

We now expect retail long term care revenue growth of 13% to 14.25%, a reduction of 125 basis points on both ends and we now expect total cost of one and three quarters percent to 3% while continuing to expect script cost of 3.5% to 4.5%.

Despite the revenue change, we remain confident in our prior operating profit expectations given the immaterial impact to changes I noted are expected to have on profitability.

Consolidated net revenue growth is now expected to be 17.5% to 19% with the increase in network volume and higher a GDR inter-company revenue eliminations are now expected to be approximately 11.4% of segment revenues. And as the mix of generics increases within our Maintenance Choice product, we expect higher inter-company profit eliminations. This change essentially offsets the improvement in PBM offering profits.

And as I said before, our free cash guidance for the full year remains in the range of $5.3 billion to $5.6 billion.

And with that, now let me provide guidance for the second quarter which excludes all acquisition related integration costs.

We expect adjusted EPS to be in the range of $1.28 to $1.31 per share in the second quarter reflecting growth of 4.75% to 7.5% versus Q2 of ‘15. GAAP diluted EPS is expected to be in the range of $1.17 to $1.20 per share in the second quarter.

Starting with Analyst Day and continuing over the past several months, we have been highlighting several timing factors that will affect the cadence of profit delivery throughout this year.

I want take a moment and remind you of those factors. The introduction and timing of break-open generics, the timing of profitability in our Medicare Part D business, the timing of the benefits from our strategies to drive growth in the front end, and the timing of share purchases and certain tax benefits were all factors expected to impact in the cadence the most and while we delivered a strong first quarter 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 second quarter is very much inline with our budget and what we said at Analyst Day.

All things considered, we see a ramp up in growth and we still expect a strong back half of the year.

Within the retail segment, we expect revenues to increase 15.5% to 17% versus the second quarter of LY driven in part by the addition of the acquired businesses. Adjusted script comps are expected to increase in the range of 3% to 4% while we expect total same store sales to be up 1.25% to up 2.5%. These were shipped out of Q2 is expected to have about 20 basis point impact on comp growth.

In the PBM business we expect second quarter revenue growth of between 22% and 23.25% driven by continued strong growth in both volumes and specialty. Consolidated revenues are expected to grow 18.5% to 20%. We expect retail operating profit to increase 5% to 7% and PBM operating profit to increase 4% to 8% in the second quarter. Consolidated operating profit is expected to go 3.75% to 6.5%.

In closing I am very pleased with our start and first quarter results and remain confident in our full year outlook. As we noted, we gave guidance at Analyst Day our growth this year will be back half weighted and that is playing out just as we anticipated. We continued to expect to deliver solid growth in our core businesses along with the anticipated benefits from our acquisitions and more importantly, our growth will be very strong at the enterprise level. This growth will help us maintain and generate substantial free cash flow and we will continue to execute on our commitments to return significant value to our shareholders through both dividends and share repurchases.

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

Larry J. Merlo:

Okay, thanks Dave. Again I think as you heard from Dave d and myself, we’re off to a solid start in 2016 and our distinctive channel-agnostic solutions are resonating strongly in the market as they continue to control patient and client costs while improving health outcomes and we continue to believe that we have the right strategy for success in this evolving health care marketplace and with that let’s go ahead and open it up for your questions.

Question & Answer

Operator:

Thank you. Our first question is from the line of Peter Costa from Wells Fargo Securities. Please proceed.

Peter Costa:Wells Fargo Securities:

Thanks for the question guys. I would like to get to understand a little more about the second quarter comp guidance and some of the factors that you mentioned seem to mostly argue for improving dynamics over the course of the year towards the back half but yet you showed stronger growth in Q1 relative to what you are sort of projecting for Q2. Can you help me understand what’s making the pressure on Q2 or is it just some earnings move from Q2 into Q1? Help me understand what’s going there?

David M. Denton:

Yes. Peter, this is Dave. I would say that our budget and our cadence for profit delivery in Q2 is essentially on plan with what we created at the beginning of the year.

There has been no movement in that perspective. Again, all the factors that I sided are really first half versus second half versus second half versus first quarter versus second quarter. So again our plan remains largely intact, our EPS guidance for the second quarter is very consistent with our budget and our outlook as we created our plan for 2016.

Peter Costa:

Okay.

David M. Denton:

Next question.

Operator:

Our next question is from the line of Charles Rhyee from Cowen. Please proceed.

Charles Rhyee:Cowen and Company:

Yes. Thanks for taking the question. I actually had a question around the Target stores and what you are seeing in terms of the traffic into the stores now that you know that you have now re-branded in CVS relative to sort to what the -- is there doing for. Have we seen a sort of a pick-up there and maybe to the extent that what are you seeing in terms of traffic around other stores regular CVS stores outside of the Target areas?

Larry J. Merlo:

Charles, I’ll start and then I’ll flip it over to Helena but keep in mind that as I mentioned in our prepared remarks, we’re about half way through the heavy lifting part where rebranding, the system conversion and everything to create the look and feel of the CVS along with all the products and services that we offer. So, that as I mentioned earlier, that work won’t will be done until the end of summer and I’ll flip it over to Helena to pick up from there.

Helena B. Foulkes:Executive Vice President, CVS Health and President, CVS Pharmacy:

Yes. I would say we are pleased so far with the performance. I would start actually with the fact that we have a retention rate of those Target employees of over 98%.

So the first thing we know when customers come into those stores is they want to know that their Target pharmacists are still with them and so we feel very good about that. As Larry and David said and our services of course are strong so we are coming out of these recess feeling good about the service experience.

I would say it’s too soon to see any impact on script trends. We are continuing the see in our clinical programs and we’ll see more of that in the second half of the year.

Larry J. Merlo:

And Charles keep in mind that you won’t see any broad-based marketing until we have completed the integration activities. So that in terms of awareness and all of those things that ultimately drive utilization, you won’t see that until the fall timeframe.

Charles Rhyee:

Yes, I just wanted to see what the early kind of signals were and is the purchasing seamless, I guess someone just bought like a wellness product that might still be under Target, can they still pay for that at the pharmacy desk?

Helena B. Foulkes:

Yes. Absolutely.

Charles Rhyee:

Okay.

Helena B. Foulkes:

It feel very similar to what it was before, wanted to make sure that those Target guests have a great experience and I would say our pharmacists at the new stores are still opening aisles and talking to patients and customers and so the feedback so far has been very good.

Charles Rhyee:

Great. Thank you.

Operator:

Our next question is from the line of Robert Jones from Goldman Sachs. Please proceed.

Nathan Rich:Goldman Sachs:

Hi. This is Nathan Rich on for Bob this morning. Dave, I just wanted to go back to your comment on generic nasonex is coming a little bit earlier than expected. I mean it seems like there is a pretty can I help you calendar of new launches coming over to the next several months.

Just wanted to ask around the profitability of those launches. Is there any reason, why the profitability of the new generics that are coming this year would be any different than what we have seen in past years and may be even a little bit better you know now that guys are able to buy through Red Oak?

Larry J. Merlo:

Yeah Nathan the possibility is, I won’t say better or worst, I think it is depending upon how those products are launched. Many of those products are generics and have an exclusivity period of typically of several months so during that exclusivity period, those products behave more like a branded product versus a breakover generic product and again all profits are maximized once those products break open. So, if you just look at cadence of delivery this year, a lot of those products as they come to market are in the exclusivity period.

Nathan Rich:

Okay. So, the break open period will probably be more kind of late this year and in to 2017 for those drugs that are launching?

Larry J. Merlo:

That’s correct. You would see it happen late in the year which is part of the cadence of our profit delivery and you’ll see that wrap into ‘17.

Nathan Rich:

Okay, it makes sense. And then if I could just ask one follow up going back to your comments on the selling season. You guys highlighted an increase in RFP activity. Should we think about this kind of mainly coming from health plans given where we are in the selling season at this point and any color on kind of what you think is driving this kind of overall increase in RFP activity this year.

Jonathan C. Roberts:Executive Vice President, CVS Health and President, CVS Caremark:

Yeah Nathan. This is John. So, health plans are pretty much completed.

They have made their decisions and we saw similar activity to prior years. So, we’re in the process of working through employer and government. It’s too early to say whether overall RFP activity is going to be up or its just the cadence in the timing. But we feel pretty good about our value prop and as we are out with clients our integrated model continues to resonate and you combine that with our high levels of service, it creates a compelling value proposition.

So, we’ll give as Larry said we’ll give you more details on August on our Q2 earnings call.

Nathan Rich:

Great, thanks so much.

Operator:

Our next question is from the line of George Hill from Deutsche Bank. Please proceed.

George Hill:Deutsche Bank:

Good morning Larry and Dave and thanks for taking the question. Maybe just talking about the retail pharmacy business for a second. Two questions. First is can you talk about the demand that your seeing from the retail pharmacy side as it relates to preferred pharmacy networks and the impact on the pricing? And then the second question is post the close of the Target acquisition, have you guys seen any positive lift on reimbursement rates in the Target Pharmacies now that its owned by you guys.

Larry J. Merlo:

Yes George it’s Larry. Let me upstart with your first question and, in terms of the preferred Med-D networks George I don’t think there is anything new to reference from what we’ve talked about in the past from a contracting perspective we look at the make up of the Med-D population in terms of the we call choosers versus the low income subsidies and evaluate potential share shift against margin pressure as a determinant of our desire to participate in the preferred network and from a consumer perspective, that carries the fact that the low income subsidies are not subject to the co-pay differentials that you see in the choser market and the fact that the Med-D plans have a variety options in terms of what those deltas are. So I would say at this point we are not seeing anything that would surprise us from those guiding principals that I just referenced.

George Hill:

Yeah, I am sorry if I miss-spoke I didn’t mean to say Med-D I was actually thinking more about the commercial book and what’s happening in the some of the exchange business and Medicaid business versus Med-D. I am sorry.

David M. Denton:

George this is Dave. I don’t know if you have seen anything substantially different at the commercial businesses probably hasn’t adopted kind of narrow or preferred network as rapidly or as completely as Medicare has. In the Medicaid market, its a little bit more narrow network focused and that’s really where we at CVS Health from a PBM and a retail and MinuteClinic perspective can really plug into these Medicaid programs, managed Medicaid programs in a pretty meaningful way.

So I think it’s a little bit of a sweet spot for us right now down.

Larry J. Merlo:

And George...

George Hill:

Okay.

Larry J. Merlo:

On the second question I would just simply say that as we think about contracting or our retail pharmacy group is contracting for CVS Pharmacy in totality which would include the Target pharmacies as well as our long term care pharmacies.

George Hill:

Okay. Thanks for the color.

Larry J. Merlo:

Thanks.

Operator:

Our next question is from the line of John Heinbockel from Guggenheim Securities.

John Heinbockel:Guggenheim Securities:

hey guys. So two things, you said 40% of the retail margin pressure was the new business mix. I don’t think the other 60% was reimbursement pressure or was that right and just how would you characterize the reimbursement compression say versus a year ago.

David M. Denton:

John this is Dave. As I said, obviously 40% of the down draft in the margin was related to the mix...

John Heinbockel:

Right.

David M. Denton:

..of businesses that we acquired. The remainder of that is largely the effect of a reimbursement pressure within the market place. So that is in fact the case.

Think about, we have been focused from a front store perspective on really detailing our promotional strategies to drive improvements in front store margin rates and we see that play out at the, I guess the detriment of probably some topline trade off.

David M. Denton:

And John keep in mind as you heard us reference that, that margin compression in pharmacy is you really have two drivers behind it. You’ve got the mix change into some of the lower margin businesses principally Medicare and Medicaid, again very productive on topline okay and then you have on an apples-to-apples basis just the share stepped on and profitability. So you’ve got both of those forces creating some downward pressure.

John Heinbockel:

Okay and then secondly, a different topic, when you think about creatively, are there other ways for you to work with Target you are already obviously collaborating a little bit on with respect to the pharmacy you think about will it be -- loyalty are there any other ways creatively for you guys to work together either kind of drive success in pharmacy versus HBA or is that really will end up being limited to pharmacy alone?

Helena B. Foulkes:

Well this is Helena. It’s something we’ve talked a lot about with the Target folks and essentially what we’ve agreed to is right now all hands on deck and making sure that the promised conversion goes really well and as I said before, we’re happy with where we are. There is a lot of work that goes into converting all of those pharmacies over and having a great experience.

But we think there are other opportunities for both of us when we think about for example loyalty, we think about different categories in the sun where we have relative strength and Target has relative strength and we haven’t gone into the specifics of those because again we wanted to focus on the pharmacy but those things would come down the road.

John Heinbockel:

Okay. Thank you.

Operator:

Our next question is from the line of Ricky Goldwasser from Morgan Stanley. Please proceed.

Ricky Goldwasser:Morgan Stanley:

Yes hi. Good morning. When you talk about kind of like the topline results in the retail segment, you talked a lot about kind of like the generic comps but I was wondering what you are seeing in the market place in terms of branding inflation because there is some conflicting data points in the market place that we are hearing. That’s one and the second one from your seat and obviously you see both kind of like the PBM side and the retail, you have a very unique perspective. How do you think, what do you think we’ll see in terms of just kind of like the branded price increases in the environment for the remainder of the year and know that even in to 2017 in light of the controversy and very public debate around the gross versus the net trend.

Larry J. Merlo:

Yes Ricky its Larry on the branded side we are really not seeing anything out of the norm. I mean if you go back and look historically this industry has seem branded inflation in the low to mid double digits and so far this year we are not seeing anything different than that and really don’t anticipate seeing anything different based on our view of the market place.

I think what Dave was alluding to in his remarks in terms of brand mix that again no change in the inflation or in the assumptions that we’ve made around that we maybe seeing the impact of consumer direct health plans in terms of driving some mix changes within brand where you can say that the patient is becoming more of payer until they reached their out of pocket mix deductible. and this is really driving patients to lower cost brand options where a generic is not available and that’s why what we see is simply an impact on revenue but not an impact on prescription unit growth or profitability.

Ricky Goldwasser:

Okay, and do you expect any kind of like changes in the gross price versus rebate dynamic on more than longer term aspect?

David M. Denton:

Ricky this is Dave. I do believe as you’ve seen over the past several years, Jon and team in PBM have really reduced a pretty comprehensive management strategy, what the exclusionary strategy you seen us improve our rebates and therefore as you know the vast majority of those rebates go back to our clients in the form of the buy cost and I think we’ll continue to innovate in that category, in that process to continue to drive value for our clients.

Jonathan C. Roberts:

Ricky, just to add to this, this is Jon, I mean obviously we’ve demonstrated we can move market share based on access when we introduced our formulary strategy back in 2012. That has created a significant amount of value but we’ve also evolved a strategy to begin to negotiate price protection so that as manufacturers raise prices, a portion of that comes back to our clients in the from of a rebate and I think some of the next things we’re beginning to see is contracting by diseases state. So, as an example in the autoimmune category, we might have one way for drugs that treat rheumatoid arthritis where you have 13 drugs that can treat that condition, in a different rate for those same drungs that are prescribed for crohn’s disease where there is only four drugs in that category.

So and we see similar opportunities in oncology. So I think we are going to continue to see these negotiations and opportunities evolving and we believe we are very innovative in this area and actually leading the industry.

Ricky Goldwasser:

Thank you.

Operator:

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

Mike Otway:Wolfe Research:

Hey. Good morning everyone. This is Mike Otway in for Scott. Thank you for taking the questions.

Here is first question I think Mail Choice was 6.6% in the quarter driven mostly by Maintenance Choice. Are you guys seeing some initial success with the health plan clients and adoption of the company’s proprietary programs like Maintenance Choice or Pharmacy Advisor. I think Larry you said the new business warrants since the last update was a health plan. I am just wondering what is driving that and what are you guys seeing?

Larry J. Merlo:

Yes Mike it is Larry and I will start and Jon I am sure will jump in but if you go back and look at the new business, almost half of the new business adopted one of the Maintenance Choice programs and I think consistent with what we have talked about in the past, we have begun to see some uptick of Maintenance Choice in the health plan segment recognizing that that lifecycle is longer for the reasons that we have got to sell those programs through the sales organization and I think Jon’s team has done a good job in terms of creating more alignment across all the stakeholders so that we have shared goals and incentives in that regard.

Jonathan C. Roberts:

And then Mike this is Jon so we have begun to see health plans adopt this so I would say its still slower than what we would like to see. So we think there continues to be significant opportunity to see even more adoption and a good place for health plans to start is Maintenance Choice 2.0 that has been very successful in the market place and as clients get experience with Maintenance Choice 2.0, we see them move up to for 1.0 product that moves more volumes through the Maintenance Choice channel. So we are still very bullish on plan design.

Mike Otway:

Okay that’s helpful. Thanks both and I guess the next one probably for Helena, it sounds like the front end traffic’s negative in the quarter and you guys pulled back on some promotions, targeted promotions. It’s clearly a much more portion of the overall business these days but and to some extent how consumers see CVS. You guys have invested in Curbside but Helena can you talk about the longer term strategy in the front end to make sure that you guys are still continuing to stay relevant given things like online incursion and ultimately what’ your vision for how you want consumers to interact with the front end and with CVS.

Helena B. Foulkes:

Yes it’s a great question, something we spend a lot of time thinking about because ultimately we see the role of store as essentially a door in to the pharmacy business where consumers get connected to CVS and ultimately over time they start using us for prescription so it’s a very important part of the business as consumers think about us. And it’s why we’ve been shifting more and more of our focus towards health and beauty. When our customers think about healthcare, obviously they think pharmacy first but they think health and beauty and we so are in a process essentially of putting more and more effort around the health and beauty businesses and our top customers.

Those have been the crux of the two places we spend time and energy. And I am actually quite pleased with where we are. If you look at our health and beauty category for example we continue to grow share across the market place in health and beauty. Now where we are pulling back are the categories Dave was speaking to earlier the promotional business where it might be edibles or general merchandise non-categories we need to win in from the consumer’s perspective as we think about health care.

So, I think that piece of it is generally how we’re seeing about the roles of fund, connected to that is the role of extra term and loyalty and personalization, 30% of our customers drive 80% of our sales and profits. Again we are focused on those customers giving similar value, more reasons to shop and we are very happy. So far, we continue to see more trips and more sales and more profits from those customer segments.

And then as you said we certainly are looking very hard at the world of digital. We know that the consumer is living in a omnichannel world and we need to be relevant. We are excited about Curbside because we thought to ourselves, we don’t need to out-Amazon, Amazon. We certainly have an ecommerce place.

We really wanted to take advantage of 7800 convenient locations and the fact that when the consumer needs help in beauty aid products or some milk on the way home from work or diapers, we’re the convenient go to location for her.

So the fact that she can order online from the office and pick it up on the way home and not have to get out of her car, we think is a very big winning proposition and as Larry said, we are still in the early phases of testing that in some markets but the research we have done consumers is really quite encouraging.

Larry J. Merlo:

And Mike, just one other point to emphasize when you drive drop the two acquisitions into our revenue denominator, the front now represents about 11% of our revenues. So it really affords us the opportunity to think about the front story in a very differentiated way with a different set of goals and objectives as Helena outlined.

Mike Otway:

That’s really helpful. I appreciate the time. Thank you.

Operator:

Our next question is from the line of Ross Muken from Evercore ISI. Please proceed.

Ross Muken:Evercore Group:

Good morning, gentlemen. So, as we think about just go back to the selling season, are you seeing any change in competitiveness within certain segments whether it’d be health plan or government or employee or any notable trends that are different year-on-year relative to benefit design requests or interest in one service versus another or some new program you have that’s may be they are garnering more traffic I’m just trying to get a feel for how all of the RFP interest and sort of your reason success kind of translates to the ultimate outcome here?

Larry J. Merlo:

Well Ross it’s Larry. I’ll start and then flip it over to Jon but I’ll just share my observation from our client form and if you go back to our Analyst Day and remember the tools that the Jon demoed, RX insights told that can provide real time meaningful data for clients in terms of kind of where they are at and what they can do to bend that cost curve. There was a lot more discussion around that at the client form and my observation was a tremendous amount of excitement and enthusiasm in terms of the ability to make that very, very actionable and to serve as a decision tool for payors in terms of the options and choices that they have.

Jonathan C. Roberts:

Ross this is Jon. The other thing I would add is pharmacy is a meaningful piece of the overall health care cost now so I think what’s changed is the sea suite is much more involved in the process than what we have seen historically and I think was that translated to is very focused on cost, very focused on service and that means they are looking for a PBM that can implement plan designs and move their members to either new channels or new therapies. So much more of a focus on members of their employees.

And so as we are out in the market place our integrated assets really position us to work with their employees or their members, through all the touch points that we have to communicate and transition them to the new plan design. So this is really resonating I think to an even greater degree today than what we have seen historically. So I think from a competitive standpoint, not much change in what we have seen historically but from a capability perspective, people are much more interested in what we can do to help them manage cost and deliver great service to their members.

Ross Muken:

That’s helpful and just maybe quickly can you update us, last year you had a very successful health plan selling season. One of the big focus points is sort of converting some of those new members into the drug store and to you know Maintenance Choice like program. How does that sort of progress, what are the key sort of benchmarks we should be looking at to sort of judge how much progress you are making there?

Larry J. Merlo:

Well. So if we start with employers, I mean no surprise there, they continue to move faster to these solutions. We seen that historically, we continue to see that.

I think health plans are much more interested than what we’ve seen in the past. But they do continue to make decisions at a slower pace and they have to sell to their downstream clients. So, we’ve done a lot to work with them on educating them on the programs as well as incentivizing their teams to sell our products and services to the downstream clients.

And it’s a win for them. If health plans can help their clients save money, it turns into a retention tool for them. If they’re doing a good job on their client’s we have and it’s a win for us as they implement plan designs we will generally see more share. So I think the metrics that we’ve shown at Analyst Day around enterprise share will continue to be how we’ll measure our success in this area.

Larry J. Merlo:

I do think as you think forward and if you look at the contributions from generics, through a pair win, the fact that they will still contribute but the year-over-year benefit is not going to be what it’s been for the last couple of years. I do think it’s going to very much align to what Jon was talking about in terms of people looking at some of the things that have been available but maybe I didn’t need to go there because I had another avenue to achieve my objective. So, I do think that it will looked at differently as we go forward and I think the point that was made earlier in terms of we’ve worked hard to create more alignment around goals and incentives I think we’re at a good place with that in mind.

Ross Muken:

Thanks.

Operator:

Our next question is from the line of Lisa Gill from JP Morgan. Please proceed.

Lisa Gill:JP Morgan:

Hi, thanks very much. I just wanted to follow up as to one of your comments Larry where you talked about more aggressive plan design formulary et cetera. Do you see incremental opportunities for mid year plan design changes where it could actually impact the back half of this year or is that what you are seeing, that was implement for 1-1-16 or is like your future thoughts on ‘17?

Larry J. Merlo:

Lisa I’ll start and flip it over to Jon. I do think Lisa there is the option for that to happen largely because that design tool that I referenced earlier, it gives people real time data. I do think that there are going to be some employer groups that are going to find that probably more challenging or difficult especially if they have a bargaining unit as an example.

I don’t think it would happen there for obvious reasons and I think that would break the paradigm that has existed within employers in terms of they’ve kind of got their cycle of when information goes off and then it gets updated on a manual basis but there may be an opportunity to make some subtle changes along the way that I think could be meaningful.

Jonathan C. Roberts:

So one example Lisa and particularly around as it pertains to formulary, we now are rolling out programs on a quarterly basis. So in April we rolled out a dermatological bundle that really focused on UM programs to manage the cost in this area. So I would say that helps clients manage their cost much more effectively and they’re willing to do that throughout the year as opposed to just ones a year and we’ll continue to look for opportunities not just around therapeutic categories but even specific drugs that we think we need to take action against.

I think the broader moves network moves is an example we’ll probably still happen on the cadence that we have historically seen them occur. It’s a little more disruptive and they like to do that when they are making all the other changes. And then I guess my second question would really around the new Optum, Walgreens Boots Alliance offering in the market place, can you just comment on do you think that’s going have any impact on the selling season? I am trying to replicate or emulate something that you have it and CVS secondly Helena or Larry, do you see any of that impact in our ability to shift scripts away from your CVS stores?

Larry J. Merlo:

Lisa, this is Larry. I will go ahead and start and then others may jump in I think as you know this is not the first time that a competitor’s tried to create a Maintenance Choice like program and we have been able to affectively compete against those programs in the past where we are still the only one for the fully-integrated products and you know you think about that integration, it applies both clinically as well as operationally and Maintenance Choice is the only 90-day program that is truly channel-agnostic with the ability to realize the same enterprise economics regardless of the channel that the patient chooses. And our offering is becoming even more relevant with the addition of Target’s 1600 pharmacies into the Maintenance Choice network and I guess just one other example of that clinical and operational integration is as you know we’ve talked about Specialty Connect which is a more recent roll out we simply define that as Maintenance Choice product for the specialty patients so I think that’s another proof point in terms of the real integration that exists that does provide elements of differentiation from those other programs that are attempting for mimic Maintenance Choice.

Lisa Gill:

Great. Thank you.

Operator:

Our next question is from line of Robert Willoughby from Credit Suisse. Please proceed.

Robert Willoughby:Credit Suisse:

Hi. Just one, Larry or Dave you mentioned that CVS retail and mail penetration of the PBM volume had been in the 40% range and obviously comes down after the big selling season you had last year. But could -- guess maybe where that stands and how quickly you could ratchet that back up to the 40% range and any longer term target you might have for that metric.

David M. Denton:

Bob It’s Dave. We will update that more broadly again well say coming up in December. I will say that as Jon indicated earlier, clearly we have a lot of programs that has been adopted pretty completely within our employer book and that continues to resonate.

The opportunity we have really is in our heath plans book and not all health plans are created alike. Those health plans that are largely Medicare focused will have a different solution set and product offering that we would sell into those that group of health plans that will likely not have all the mechanisms to aggressively move share compared to health plans that are more commercially focused that can sell Maintenance Choice as an example so they will happen over different cadences. I think clearly with the adoption of the onboarding of a bunch a new clients on 1/1 our first job was to get them on board get their service levels at their stable levels and then work to sell a new programs into 2017. So probably more to come on that Bob.

Robert Willoughby:

WOuld there be a general rule of thumb I can think about the if you win X amount of business one year by the end of year three kind of be at that range or is just absolutely impossible.

David M. Denton:

I think it’s impossible and the reason being that each one those health plans they have very different business models and they compete in very different business segments and so again a Medicare dominated health plan that the shares going to move very slowly compared to a commercially dominated health plan.

Robert Willoughby:

Okay, thank you.

Operator:

Our next question is from the line of David Larsen from Leerink. Please proceed.

David Larsen:Leerink Partners:

Hey guys. Congratulations on a good quarter. Can you talk a bit more about your indications pricing capabilities? It sounds to me like that gives you a bit of a head start with this proposed Part B Rule that was recently published and also can talk about scripts and exactly what is that and how does that serve your client base? Thank you.

Jonathan C. Roberts:

Yeah David. So, this is Jon. So, I talked about the autoimmune opportunity RA where there is more drugs that treat that disease state so more competition we believe we can get better rebates versus Crohn’s disease I think there are similar opportunities in oncology.

So, we are still early but we’re working on that. I think again there has been a lot a talk about outcomes based contracting. We think that as a good idea but practically very challenging. So, EHR’s don’t communicate with each, members move between health plans.

The information often doesn’t move with them. But we believe with the tools and capabilities we have that we’re best situated to make progress in this area and we are continuing to look at and work it and we’ll be able to talk more about it we believe on Analyst Day.

Helena B. Foulkes:

And then I’ll pick up on ScriptSync, this program is really as you can imagine the million people who signed up for there are basically those patients who are feeling filling roughly four prescriptions or more per month and as we did our research with them, what we saw and heard is their number one pain point is they have got a lot of complexity health care wise in their life, pharmacy is a piece but there is other elements of it. So they are making lot’s of trips to the pharmacy and that’s hard from many of them. So a big solve for them is consolidating all of it.

The way it works is we help those patients and we line them up to one date per month which they can come in.

It sounds simple but as you can imagine with all of the insurance plans out there, we have got to work behind the scenes to get them. So that’s sort of the hard part behind the solution from a consumer perspective. I think what’s exciting for both the patients and the plans that we are serving is that ultimately this leads to very high consumer satisfaction and much higher levels of adherence and that’s ultimately the healthcare outcome that we were looking for as we developed ScriptSync.

David Larsen:

Great. Thank you.

Operator:

Our next question is from the line of Steve Halper from FBR Capital. Please.

Steve Halper:FBR Capital:

I appreciate your comments on the Target Pharmacies but one point of clarification, would you suggest that the performance of the Target Pharmacies at least on a volume perspective are equal to where they were before the acquisition?

Larry J. Merlo:

Steve I guess you have to look at that based on timing from a seasonal perspective given year-over-year overlap of the flu I would think we’ve seen a material change in the volumes at this point in time absent that.

Steve Halper:

Of course. Thank you.

Operator:

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

Mohan Naidu:Oppenheimer:

Thanks for taking my questions. Maybe this question maybe is for Jon or Larry. So given the focus from clients on the cost and increasing mix of the specialty prescriptions, how are you guys seeing the change in the PBM landscape especially with the smaller PBMs presumably cannot impact the specialty drug cost as much as you guys can do. This is coming up in non-going selling season with the client.

Larry J. Merlo:

No harm, there is no question that size and scale in this business matters probably more today than it ever has with thoughts in mind and I do believe that as we go through the RFP process, you know it starts with price and service, and you got to be right there and then we can certainly add to our offering with the differentiation that we provide in the market place. So yes I do believe that it is harder, if one is lacking size and scale to effectively compete.

Jonathan C. Roberts:

Mohan, this is Jon. So, client’s biggest concern when they think about cost, they’re really thinking about specialty. And about half of their specialty spend is on the pharmacy benefit which PBMs historically have managed and the other half of the specialty spend is under the medical benefit which is not being managed very well today by the health plans, the platforms that they manage specialty medical and just more feel for managed drugs.

So we actually have a capability to manage that benefit across the pharmacy and medical benefit and we think about unit cost Larry talked about that and so size and scale and capabilities really make a difference there and we are seeing specialty drugs come to market and be limited to a few providers. So our capabilities enable us to have access to those want that distribution drugs.

The other side of it is what can we do clinically to manage the 3% of our client patients that are driving 25% of their overall healthcare cost and so we have integrated a capability that allows us to not the just manage the specialty prescription but to manage that patient not just with a specialty condition but with all the -- and we have demonstrated that we can reduce overall healthcare cost. So as we tell that story to clients it resonates and I think it’s a key decision point for them as they’re making a selection in the marketplace.

Mohan Naidu:

Thank you so much Jon and Larry.

Larry J. Merlo:

Okay thank you. We will take one more question please.

Operator:

And our final question is from the line of Mark Wiltamuth from Jefferies. Please proceed.

Mark Wiltamuth:Jefferies:

Thank you. So I wanted to ask a little bit for Helena on the front end margins. Do you think there is a case to be made for more margin discipline for the industry in general? You’re clearly working a margins strategy here, Walgreens trying to enhance their margins and I am also just curious that Friday has been behaving any differently while we’re waiting for their deal to close.

Helena B. Foulkes:

Yes, I think we are seeing that pretty rational market place especially in the drug store business we haven’t seen any major moves I would say the last six months or so it may be even longer among our key drug store competitors and so I feel like it allows us to focus on what I said before which is driving profitable growth focusing on that 30% of our customers where we really are seeing some nice sales and margin growth and being aware of the market place but being rational as you said in terms of our approach there.

David M. Denton:

And Mark probably one thing is a little different with CBS is just given our tenure and the depth of extra keys we have from royalty card program, we know who our best customers are. We’re engaging with them and we design strategies that’s about us to really tailor our marketing programs and our promotional offers to them. So we’re probably at a different spot than some of the other industry participant at this point in time.

I think we have the ability if you will, we saw it through this quarter the trade off a little bit of tough line that really focus our promotional dollars on those customers that really matter to drive margin expansion in the front.

Mark Wiltamuth:

And Walgreens is also emphasizing cosmetics and beauty. Do you feel that at all? I know you mentioned your share is still gaining there but have you noticed them changing things and has that affected your sales that all.

Helena B. Foulkes:

No. I think that’s I think that we’ll continue to watch them and they are doing a nice job. It’s a big market place and -- share in that category.

Mark Wiltamuth:

Okay. Thank you.

Larry J. Merlo:

Okay. Everyone thanks for your time this morning and again we appreciate your on going interest in CVS Health and if you have any follow up questions you can reach out to Nancy or Mike.

Operator:

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. Thank you.