CVS Caremark Corp. CEO Per GH Lofberg bought 45483 shares on 4-01-2010 at $ 32.98
CVS Caremark Corporation (â€śCVS Caremarkâ€ť, the â€śCompanyâ€ť, â€śweâ€ť or â€śusâ€ť) is the largest provider of prescriptions and related health care services in the United States. We fill or manage more than one billion prescriptions annually. As a fully integrated pharmacy services company, we drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our approximately 6,900 CVS/pharmacy Â® and Longs Drug Â® retail stores; our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services Â® ; our retail-based health clinic subsidiary, MinuteClinic Â® ; and our online pharmacy, CVS.com Â® . We currently operate two business segments: Pharmacy Services and Retail Pharmacy. Our business segments are operating units that offer different products and services and require distinct technology and marketing strategies.
The Caremark Merger
Effective March 22, 2007, we closed our merger with Caremark Rx. Inc. (the â€śCaremark Mergerâ€ť). Following the Caremark Merger we changed our name to CVS Caremark Corporation and Caremark Rx, Inc. became a wholly-owned subsidiary, Caremark Rx, L.L.C. (â€śCaremarkâ€ť). The Caremark Merger has positioned our Company to deliver significant benefits to (i) health plan sponsors through effective cost management solutions and innovative programs and (ii) consumers through expanded choice, improved access and more personalized services.
The Caremark Merger has enabled us to achieve significant synergies from purchasing scale and operating efficiencies. The purchasing synergies include additional purchase discounts (including rebates obtained from pharmaceutical manufacturers) and cost efficiencies obtained from our national network of retail pharmacies. Operating synergies include cost savings resulting from productivity increases and other efficiencies obtained by eliminating duplicate facilities and excess capacity and combining complementary operations.
The Caremark Merger has also created significant incremental revenue opportunities for our Company through a variety of new programs and plan designs that benefit from our client relationships, our integrated information systems and the ability of our more than 25,000 pharmacists, nurse practitioners and physician assistants to interact personally with the millions of consumers who shop our stores every day. In that regard, during 2008, we introduced Proactive Pharmacy Careâ„˘, an earlier, easier, more effective approach to engaging plan participants in behaviors that can help lower costs, improve health, and save lives. Examples of Proactive Pharmacy Care programs include: Maintenance Choiceâ„˘ (a flexible fulfillment option that affords eligible plan participants the convenient choice of picking up their 90-day supply of maintenance medications at any CVS/pharmacy store or obtaining them through mail order in either case at the cost of mail for both the payer and the plan participant); Bridge Supply (which enables eligible plan participants to avoid gaps in care while waiting for their medications to arrive in the mail by obtaining a bridge supply of their prescriptions at any CVS/pharmacy store at no additional charge); and a new ExtraCare Â® Health Card program (which offers discounts to eligible plan participants on certain Flexible Spending Account-eligible and over-the-counter health care products sold in any of our CVS/pharmacy stores). We are also creating new compliance and persistency programs designed to ensure that patients take their medications in the correct manner as well as enhanced disease management programs that are targeted at managing chronic disease states. In addition, we are working with our clients to (i) decrease unnecessary and expensive emergency room visits by encouraging plan participants to use our MinuteClinic locations for everyday common ailments and (ii) create pilot programs that offer convenient, unique services available at MinuteClinic such as injection training for specialty pharmacy patients.
While certain of these programs (like Maintenance Choice, Bridge Supply, and the ExtraCare Health Card program) have already been adopted by many CVS Caremark clients, others are still in the formative stage and require additional information system enhancements and/or changes in work processes. Accordingly, over the long-term, there can be no assurance as to the timing or amount of incremental revenues that can be achieved with these kinds of programs.
We believe the breadth of capabilities resulting from the Caremark Merger are resonating with our clients and contributed to our success at renewing existing clients and obtaining a significant number of new clients in the 2008 selling season.
The Longs Acquisition
Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which includes 529 retail drug stores (the â€śLongs Drug Storesâ€ť) and RxAmerica LLC (â€śRxAmericaâ€ť), which provides pharmacy benefit management services, and certain other related assets (collectively the â€śLongs Acquisitionâ€ť).
Pharmacy Services Segment
The Pharmacy Services business provides a full range of prescription benefit management (â€śPBMâ€ť) services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our customers are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States. In addition, through our SilverScript Insurance Company (â€śSilverScriptâ€ť) and Accendo Insurance Company (â€śAccendoâ€ť) subsidiaries, we are a national provider of drug benefits to eligible beneficiaries under the Federal Governmentâ€™s Medicare Part D program. Currently, the pharmacy services business operates under the Caremark Pharmacy Services Â® , Caremark Â® , CVS Caremarkâ„˘, CarePlus CVS/pharmacyâ„˘, CarePlusâ„˘, RxAmerica Â® , AccordantCare Â® and TheraCom Â® names. As of December 31, 2008, the Pharmacy Services segment operated 58 retail specialty pharmacy stores, 19 specialty mail order pharmacies and 7 mail service pharmacies located in 26 states, Puerto Rico and the District of Columbia.
Our Strategy ~ Our business strategy centers on providing innovative pharmaceutical solutions and quality customer service in order to enhance clinical outcomes for the participants in our customersâ€™ health benefit plans while assisting our customers in better managing their overall health care costs. We believe the Caremark Merger has positioned our company to deliver significant benefits to health plan sponsors through effective cost-management solutions and innovative programs and to consumers through expanded choice, improved access and more personalized services.
Our Services ~ The PBM services we provide for our customers involve the design and administration of programs aimed at reducing the cost and improving the safety, effectiveness and convenience of prescription drug use. These services are described more fully below.
Plan Design and Administration ~ Our customers sponsor pharmacy benefit plans which facilitate the ability of eligible participants in these plans to receive medications prescribed by their physicians. We assist our customers in designing pharmacy benefit plans that minimize the costs to the customer while prioritizing the welfare and safety of the customersâ€™ participants. We also administer these benefit plans for our customers and assist them in monitoring the effectiveness of these plans through frequent, informal communications as well as through a formal annual customer review.
We make recommendations to our customers encouraging them to design benefit plans promoting the use of the lowest cost, most clinically appropriate drug. We believe that we help our customers control costs by recommending plans that encourage the use of generic equivalents of brand name drugs when such equivalents are available. Our customers also have the option, through plan design, to further lower their pharmacy benefit plan costs by setting different participant payment levels for different products on our drug lists.
Formulary Management ~ We utilize an independent panel of doctors, pharmacists and other medical experts, referred to as our Pharmacy and Therapeutics Committee, to select drugs that meet the highest standards of safety and efficacy for inclusion on our drug lists. Our drug lists provide recommended products in numerous drug classes to ensure participant access to clinically appropriate alternatives under the customerâ€™s pharmacy benefit plan. To improve clinical outcomes for participants and customers, we conduct ongoing, independent reviews of all drugs, including, but not limited to, those appearing on the drug list and generic equivalent products, as well as of our clinical programs.
Discounted Drug Purchase Arrangements ~ We negotiate with pharmaceutical manufacturers to obtain discounted acquisition costs for many of the products on our drug lists, and these negotiated discounts enable us to offer reduced costs to customers that choose to adopt our drug lists. The discounted drug purchase arrangements we negotiate typically provide for our receiving discounts from established list prices in one or a combination, of the forms. In that regard, these discounts generally take the form of a direct discount at the time of purchase, a discount for prompt payment of
invoices or, when products are indirectly purchased from a manufacturer (e.g., through a wholesaler or retail pharmacy/chain), a retroactive discount, or rebate. We also receive additional discounts under our wholesale contracts if we exceed contractually-defined annual purchase volumes. We record these discounts, regardless of their form, as a reduction of our cost of revenues.
Prescription Management Systems ~ We dispense prescription drugs both directly, through our own pharmacies, and indirectly, through a network of retail pharmacies. All prescriptions, whether they are filled through one of our mail service pharmacies or through a pharmacy in our retail network, are analyzed, processed and documented by our proprietary prescription management systems. These systems assist staff and network pharmacists in processing prescriptions by automating tests for various items, including, but not limited to, plan eligibility, early refills, duplicate dispensing, appropriateness of dosage, drug interactions or allergies, over-utilization and potential fraud.
Mail Pharmacy Program ~ We currently operate 7 large, automated mail service pharmacies in the continental United States, including one located in Largo, Florida, that we expect to consolidate during 2009. Our customers or their physicians submit prescriptions, primarily for maintenance medications, to these pharmacies via mail, telephone, fax or the Internet. We also operate a network of smaller mail service specialty pharmacies described below. Additionally, we operate a United States Food and Drug Administration (â€śFDAâ€ť) regulated repackaging facility in which we repackage certain drugs into the most common prescription amounts dispensed from our automated mail service pharmacies. Our staff pharmacists review mail service prescriptions and refill requests with the assistance of our prescription management systems. This review may involve communications with the prescribing physician and, with the physicianâ€™s approval, can result in generic substitution, therapeutic interchange or other actions to affect cost or to improve quality of treatment. In these cases, we inform participants about the changes made to their prescriptions.
Specialty Pharmacy ~ Our specialty pharmacies support individuals that require complex and expensive drug therapies. Our specialty pharmacies are comprised of 19 specialty mail order pharmacies located throughout the United States and are used for delivery of advanced medications to individuals with chronic or genetic diseases and disorders. One of our mail service specialty pharmacies, TheraCom Â® , provides new product launch services for manufacturers of specialty drugs. Substantially all of these pharmacies have been accredited by the Joint Commission, which is an independent, not-for-profit organization which accredits and certifies more than 15,000 health care organizations and programs in the United States. The Company also operates a network of 58 retail specialty pharmacy stores (which operate under the Caremark, CarePlusâ„˘ or CVS/pharmacy name). These stores average 2,000 square feet in size and sell prescription drugs and a limited assortment of front store items such as alternative medications, homeopathic remedies and vitamins.
Onsite Pharmacies ~ We also operate a limited number of small pharmacies located at client sites under the CarePlus CVS/pharmacy, CVS/pharmacy or CarePlusâ„˘ name, which provide participants with a convenient alternative for filling their prescriptions.
Retail Pharmacy Network ~ We maintain a national network of approximately 60,000 retail pharmacies including CVS/pharmacy and Longs Drug stores. When a customer fills a prescription in a retail pharmacy, the pharmacy sends prescription data electronically to us from the point-of-sale. This data interfaces with our proprietary prescription management systems, which verify relevant customer data, including eligibility and participant information, and perform a drug utilization review to determine clinical appropriateness and safety in addition to confirming that the pharmacy will receive payment for the prescription.
Quality Assurance ~ We have adopted and implemented clinical quality assurance procedures as well as policies and procedures to help ensure regulatory compliance under our quality assurance programs. Each new mail service prescription undergoes a sequence of safety and accuracy checks and is reviewed and verified by a registered pharmacist before shipment. We also analyze drug-related outcomes to identify opportunities to improve the quality of care.
Disease Management Programs ~ Our clinical services utilize advanced protocols and offer customers convenience in working with health care providers and other third parties. Our AccordantCare health management programs include integrated disease management, which includes 27 diseases such as asthma, coronary artery disease, congestive heart failure, diabetes, hemophilia, rheumatoid arthritis and multiple sclerosis. The majority of these integrated programs are accredited by the National Committee for Quality Assurance (â€śNCQAâ€ť), a private, not-for-profit organization that evaluates, accredits and certifies a wide range of health care organizations.
Medicare Part D Services ~ We participate in the administration of the drug benefit added to the Medicare program through Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (â€śMMAâ€ť) (the â€śMedicare Drug Benefitâ€ť) through the provision of PBM services to our health plan clients and other clients that have qualified as Medicare Part D prescription drug plans (â€śPDPâ€ť). We also participate (i) by offering Medicare Part D pharmacy benefits through our subsidiaries, SilverScript and Accendo, which have been approved by the Centers for Medicare and Medicaid Services (â€śCMSâ€ť), as PDPs, and (ii) by assisting employer, union and other health plan clients that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS in order for them to obtain the subsidy. During 2008, our PharmaCare Management Services subsidiary, through a joint venture with Universal American Corp. (â€śUACâ€ť), also participated in the offering of Medicare Part D pharmacy benefits by affiliated entities of UAC that qualified as PDPs. The Company and UAC dissolved this joint venture at the end of the 2008 plan year and have divided responsibility for providing Medicare Part D services to the affected UAC plan members beginning with the 2009 plan year.
Information Systems ~ We currently operate primary information systems platforms to support our PBM services, which are supplemented by additional information systems to support our pharmacy operations. These information systems incorporate integrated architecture that centralizes the data generated from filling mail service prescriptions, adjudicating retail pharmacy claims and fulfilling other customer service contracts.
Customers ~ Our customers are primarily sponsors of health benefit plans (employers, unions, government employee groups, insurance companies and managed care organizations) and individuals located throughout the United States. We provide pharmaceuticals to eligible participants in benefit plans maintained by our customers and utilize our information systems to perform safety checks, drug interaction screening and generic substitution. We generate substantially all of our Pharmacy Services Segment net revenue from dispensing prescription drugs to eligible participants in benefit plans maintained by our customers. During the year-ended December 31, 2008, we managed over 633 million prescriptions for individuals from over 3,300 organizations.
Competition ~ We believe the primary competitive factors in the industry include: (i) the ability to negotiate favorable discounts from drug manufacturers; (ii) the ability to negotiate favorable discounts from, and access to, retail pharmacy networks; (iii) responsiveness to customersâ€™ needs; (iv) the ability to identify and apply effective cost management programs utilizing clinical strategies; (v) the ability to develop and utilize preferred drug lists; (vi) the ability to market PBM products and services; (vii) the commitment to provide flexible, clinically-oriented services to customers; and (viii) the quality, scope and costs of products and services offered to customers and their participants. The Pharmacy Services segment competes with a number of large, national PBM companies, including Medco Health Solutions, Inc. and Express Scripts, Inc., as well as many smaller local or regional PBMs. We also compete with several large health insurers/managed care plans (e.g. UnitedHealthcare, Wellpoint, Aetna, CIGNA) and retail pharmacies, which have their own PBM capabilities, as well as with several other national and regional companies which provide services similar to ours.
Retail Pharmacy Segment
As of December 31, 2008, the Retail Pharmacy Segment included 6,923 retail drugstores, of which 6,857 operated a pharmacy, our online retail website, CVS.com Â® and our retail health care clinics. The retail drugstores are located in 41 states and the District of Columbia operating primarily under the CVS/pharmacy Â® , or Longs Drug Â® names. We currently operate in 89 of the top 100 U.S. drugstore markets and hold the number one or number two market share in 60 of these markets. Overall, we hold the number one or number two market share position in 67% of the markets in which our retail drugstores operate. CVS/pharmacy stores sell prescription drugs and a wide assortment of general merchandise, which we refer to as â€śfront storeâ€ť products. Existing stores range in size from approximately 8,000 to 25,000 square feet, although most new stores range in size from approximately 10,000 to 13,000 square feet and typically include a drive-thru pharmacy. During fiscal 2008, we filled approximately 559 million retail prescriptions, or approximately 17% of the U.S. retail pharmacy market.
As of December 31, 2008, we operated 560 retail health care clinics in 27 states under the MinuteClinic name, of which 534 were located within CVS/pharmacy stores. The clinics utilize nationally recognized medical protocols to diagnose and treat minor health conditions and are staffed by board-certified nurse practitioners and physician assistants.
Our Strategy ~ Our goal is to be the easiest pharmacy retailer for customers to use. We believe that ease of use means convenience for the time-starved customer. As such, our operating strategy is to provide a broad assortment of quality merchandise at competitive prices using a retail format that emphasizes service, innovation and convenience (easy-to-access, clean, well-lit and well stocked). One of the keys to our strategy is technology, which allows us to focus on constantly improving service and exploring ways to provide more personalized product offerings and services. We believe that continuing to be the first to market with new and unique products and services, using innovative marketing and adjusting our mix of merchandise to match our customersâ€™ needs and preferences is very important to our ability to continue to improve customer satisfaction.
Our Products ~ A typical CVS/pharmacy store sells prescription drugs and a wide assortment of high-quality, nationally advertised brand name and private label merchandise. Front store categories include over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. We purchase our merchandise from numerous manufacturers and distributors. We believe that competitive sources are readily available for substantially all of the products we carry and the loss of any one supplier would not have a material effect on the business. Consolidated net revenues by major product group are as follows:
Pharmacy ~ Pharmacy revenues represented approximately 68% of Retail Pharmacy revenues in 2008, 2007 and 2006 respectively. We believe that our pharmacy operations will continue to represent a critical part of our business due to our ability to attract and retain managed care customers, favorable industry trends (e.g., an aging American population consuming a greater number of prescription drugs, pharmaceuticals being used more often as the first line of defense for managing illness) the proliferation of new pharmaceutical products, the federally funded prescription drug benefit promulgated in 2006 as part of the MMA and our on going program of purchasing customer lists from independent pharmacies. We believe our pharmacy business benefits from our investment in both people and technology. Given the nature of prescriptions, people want their prescriptions filled accurately and ready when promised, by professional pharmacists using the latest tools and technology. As such, our Pharmacy Service Initiative, which is designed to resolve potential problems at the point of drop-off that could delay a prescription being filled, has enabled us to improve our dispensing process resulting in improved customer service ratings. Further evidencing our belief in the importance of pharmacy service is our continuing investment in technology, such as our Drug Utilization Review system that checks for harmful interactions between prescription drugs, over-the-counter products, vitamins and herbal remedies; our Rx Connect system; our touch-tone telephone reorder system, Rapid Refill TM ; CVS/pharmacy Health Savings Pass; Proactive Pharmacy Care TM ; and our online business, CVS.com.
Front Store ~ Front store revenues benefited from our strategy to be the first to market with new and unique products and services, using innovative marketing and adjusting our mix of merchandise to match our customersâ€™ needs and preferences. A key component of our front store strategy is our ExtraCare Â® card program, which is helping us continue to build our loyal customer base. In addition, the ExtraCare program is one of the largest and most successful retail loyalty programs in the United States. The ExtraCare program allows us to balance our marketing efforts so we can reward our best customers by providing them automatic sale prices, customized coupons, ExtraBucks Â® rewards and other benefits. Another component of our front store strategy is our unique product offerings, which include a full range of high-quality CVS brand products that are only available through CVS. We currently carry over 3,300 CVS brand and proprietary brand products, which accounted for approximately 15% of our front store revenues during 2008.
Store Development ~ The addition of new stores has played, and will continue to play, a major role in our continued growth and success. Our store development program focuses on three areas: entering new markets, adding stores within existing markets and relocating stores to more convenient, freestanding sites. During 2008, we opened 188 new retail pharmacy stores and 2 new specialty pharmacy stores, acquired 529 stores as part of the Longs Acquisition, relocated 129 retail pharmacy stores and 3 specialty pharmacy stores and closed 39 stores. During the last five years, we opened
more than 1,300 new and relocated stores, and acquired approximately 2,500 stores. More than two-thirds of our store base was opened or significantly remodeled within the last five years. During 2009, we expect to open between 250 and 300 new or relocated stores. We believe that continuing to grow our store base and locating stores in desirable geographic markets are essential components to compete effectively in the current managed care environment. As a result, we believe that our store development program is an integral part of our ability to maintain our leadership position in the retail drugstore industry.
Information Systems ~ We have continued to invest in information systems to enable us to deliver a high level of customer service while lowering costs and increasing operating efficiency. We were one of the first in the industry to introduce Drug Utilization Review technology that checks for harmful interactions between prescription drugs, over-the-counter products, vitamins and herbal remedies. We were also one of the first in the industry to install a chain wide automatic prescription refill system, CVS Rapid Refill TM , which enables customers to order prescription refills 24 hours a day using a touch-tone telephone. We continue to enhance our Visible Improvement in Profits, Execution and Results (â€śVIPERâ€ť) system, a transaction monitoring application designed to mitigate inventory losses attributable to process deficiencies or fraudulent behavior by providing visibility to transactions processed through our point-of-sale systems. In addition, we operate distribution centers with fully integrated technology solutions for storage, product retrieval and order picking. In addition, in 2009, we plan on implementing a new pharmacy fulfillment system Rx Connect, which will reengineer the way our pharmacists communicate and fill prescriptions. Further, we continue to enhance our Assisted Inventory Management system, which is designed to more effectively link our stores and distribution centers with suppliers to speed the delivery of merchandise to our stores in a manner that both increases in-stock positions in the stores and lowers our investment in inventory.
Customers ~ Managed care and other third party plans accounted for 96% of our 2008 pharmacy revenues. Since our revenues relate to numerous payors, including employers and managed care organizations, the loss of any one payor should not have a material effect on our business. No single customer accounts for 10% or more of our total revenues. We also fill prescriptions for many government funded programs, including State Medicaid plans and Medicare Part D drug plans.
Seasonality ~ The majority of our revenues, particularly pharmacy revenues, are generally not seasonal in nature. However, front store revenues tend to be higher during the December holiday season. For additional information, we refer you to the Note â€śQuarterly Financial Informationâ€ť on page 64 in our Annual Report to Stockholders for the fiscal year ended December 31, 2008, which section is incorporated by reference herein.
Competition ~ The retail drugstore business is highly competitive. We believe that we compete principally on the basis of: (i) store location and convenience, (ii) customer service and satisfaction, (iii) product selection and variety and (iv) price. In each of the markets we serve, we compete with independent and other retail drugstore chains, supermarkets, convenience stores, pharmacy benefit managers and other mail order prescription providers, discount merchandisers, membership clubs, health clinics and Internet pharmacies.
Working Capital Practices
We fund the growth of our business through a combination of cash flow from operations, commercial paper and long-term borrowings. For additional information on our working capital practices, we refer you to the caption â€śLiquidity and Capital Resourcesâ€ť on page 29 in our Annual Report to Stockholders for the fiscal year ended December 31, 2008, which section is incorporated by reference herein. The majority of our non-pharmacy revenues are in cash, while managed care and other third party insurance programs, which typically settle in less than 30 days, represented approximately 98% of our consolidated pharmacy revenues in 2008. Our customer returns are not significant.
As of December 31, 2008, we employed approximately 215,000 associates, which included more than 25,000 pharmacists, nurse practitioners and physician assistants. In addition, approximately 90,000 associates were part-time employees who work less than 30 hours per week. To deliver the highest levels of service to our customers, we devote considerable time and attention to our people and service standards. We emphasize attracting and training, knowledgeable, friendly and helpful associates to work in our stores, clinics and throughout our organization.
Nonqualified Deferred Compensation â€“ Fiscal Year 2008
Name & 2008 Principal
Positions Type Executive
in Last FY
($) (1) Registrant
in Last FY
in Last FY
($) (4) Aggregate
Thomas M. Ryan
Chairman of the Board, President and Chief Executive Officer
Cash 3,102,034 301,460 -744,140 â€” 11,788,815
Stock 7,466,716 â€” -11,513,107 15,143,903 31,045,163
David B. Rickard (6)
Executive Vice President, Chief Financial Officer and Chief Administrative Officer
Cash 1,032,521 119,750 -2,548,268 â€” 13,638,708
Stock 1,144,028 â€” -1,081,020 25,407 2,947,459
Chris W. Bodine
Special Advisor to the CEO
Cash 132,500 139,899 -327,104 118,119 5,171,990
Stock 1,144,028 â€” -2,847,060 66,795 7,677,953
Howard A. McLure
Executive Vice President and President - Caremark Pharmacy Services
Cash â€” â€” 21,433 63,878 4,365,399
Stock â€” â€” -254,654 6,102 682,835
Larry J. Merlo
Executive Vice President and President
- CVS/pharmacy - Retail
Cash 136,251 143,740 -136,273 â€” 3,933,512
Stock 1,144,028 â€” -4,267,289 100,076 11,482,136
Douglas A. Sgarro
Executive Vice President, Chief Legal Officer and President - CVS Realty Co.
Cash 287,500 108,751 -418,965 217,859 4,645,882
Stock 1,144,028 â€” -1,335,278 895,865 84,934
MANAGEMENT DISCUSSION FROM LATEST 10K
We refer you to the â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations,â€ť which includes our â€śCautionary Statement Concerning Forward-Looking Statementsâ€ť at the end of such section, on pages 35 through 36 of our Annual Report to Stockholders for the fiscal year ended December 31, 2008, which section is incorporated by reference herein.
Thanks, Regina. Good morning, everyone and thanks for joining us today for our third quarter earnings call. I'm here with Tom Ryan, Chairman, President and CEO of CVS Caremark, who will provide a business update, and Dave Rickard, Executive Vice President and CFO, who will provide a financial review and guidance. During the Q&A that follows, we ask that you limit yourself to one to two questions, including follow-ups, so that we can get to as many analysts and investors as possible.
Please note that we expect to file our 10-Q by the end of day today and it will be available through our website at cvscaremark.com/investors.
This morning we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I just mentioned as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at cvscaremark/investors.com.
As always, today's call is being simulcast on our IR website. It will also be archived there for a one-month period following the call to make it easy for all investors to access it.
Now before we continue, our attorneys have asked me to read the safe harbor statement --during this presentation, we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning forward-looking statements in our most recently filed quarterly report on Form 10-Q.
And now I will turn this over to our CEO, Tom Ryan.
Thomas M. Ryan
Thanks, Nancy, and good morning, everyone. We reported another excellent quarter this morning and I am certainly pleased with our results across the company, especially given the economic climate we are in.
Let me give a few highlights for the quarter -- total revenues increased 18%. Our PBM revenues increased 23% while retail revenues were up 18%. Retail comps up 5.7 and I should point out without any benefit from flu shots. Our adjusted EPS from continuing operations was $0.76. If you exclude the $0.11 tax benefit, adjusted EPS was $0.65, up more than 8%. And we maintained a healthy balance sheet and generated more than $490 million of free cash flow for the quarter, so a pretty good quarter all the way around.
On the retail side of our business, I am happy to report that we continue to outperform the industry. We are achieving healthy share gains in pharmacy. Our share in markets in which we operate grew over 100 basis points.
Total same-store sales increased 5.7% in the third quarter and when we came into this year, we told you we expected to see comps accelerate, pharmacy comps accelerate in the second half and we are seeing it -- pharmacy comps increased a solid 8%, better than the last quarter and in fact the highest level we have seen in two years and I guess almost close to twice the industry average. And that occurred even as our generic dispensing rate surpassed 70% on the retail side. Our pharmacy comps were negatively impacted by about 380 basis points due to recent generic introductions and further generic expansion.
As I said earlier, unlike some competitors, our pharmacy comps had little if any benefit from flu vaccines, vaccinations. Thatâ€™s because we donâ€™t count flu vaccinations administrated at minute clinic or outside flu clinics as a prescription. We saw approximately 250 basis point benefit in pharmacy comps from maintenance choice. Thatâ€™s up 190 basis points in the second quarter and 120 from the first quarter.
Our integrated products continue to gain traction in the marketplace and they gained traction for two simple reasons -- they helped reduce -- help clients reduce pharmacy and overall healthcare costs and they help save patients time and money.
Comp scripts increased 4.9% in the third quarter. You should recall that our 90 day maintenance choice scripts filled at retail we count as one script rather than three -- in fact, if we counted maintenance choice as three scripts like some others, then our comp scripts would have been 8.1%.
Pharmacy growth was also helped by a double-digit increase in flu related prescriptions, which I expect will continue through the fourth quarter.
Front store comps increased just under 1%, with more customers seeking out promotional prices and private label products in the quarter. Consumers I think continue to be conservative with their spending and they opt for higher value, certainly and are looking for lower price points and as I said, more value. In fact, growth in private label sales during the quarter more than doubled the rate of other sales in the front store. Obviously this is good for us from a margin standpoint. [Moody Longâ€™s] in the third quarter private label accounted for 17% of front store sale, up 120 basis points versus last year. We added about 250 new private label items and we expect to add over 900 for the full year.
We had pretty good growth across most of our categories and obviously as you would expect in light of the flu, we had especially strong growth in cough and cold. Conversely, back to school was relatively flat while photo and greeting cards were slightly down.
Like last quarter, our average front store transaction on a comp basis grew slightly in the third quarter. The better news is that this quarter we saw comp traffic up slightly. Thatâ€™s a positive sign that the economy has started to improve. Having said that, we expect consumers to remain value conscious on a go-forward basis for a few quarters, at least.
Let me update you on the Longâ€™s integration -- we completed the systems integration in May. We closed the headquarters in July and we completed all store remodels in October. We are right on track. We are introducing the stores to the marketplace with a multimedia advertising blitz as we speak.
Even before the promotions, however, the early results of store remodels have been very encouraging. The post remodel script performance has shown steady improvement while the post remodel front store sales have shown an immediate response since the resets. And as you all know, when you do remodels, you have a disruption of service so the disruption was lower and the comeback was certainly faster and better than we thought once the remodels are completed.
Since the acquisition, we have surveyed over 125,000 customers across the board. We track this data pre and post conversion. Our pharmacy service, neatness, and cleanliness metrics have improved dramatically and what is especially encouraging to me is that when you compare these service metrics with other acquisitions that we have done at the same point and time, we are virtually ahead on every dimension. We are already exceeding our profitability targets for Longâ€™s, driven by strong margin performance as well as good expense management.
In the Longâ€™s stores, many private label products were introduced in the spring with the initial update of Longâ€™s merchandise assortment. The rest of the proprietary products weâ€™ll introduce later. So right now we have private label is about 11% of front store sales. Thatâ€™s obviously lower than our core business but up 700 basis points since the second quarter.
As a reminder, the Longâ€™s acquisition was completed in October last year so the stores will be included in our comps for the first time in November. As we said before, we expect the initial impact of the comps to be slightly negative because of the remodels but we look forward to continuing to narrow the sales productivity and margin gaps between the former Longâ€™s stores and core CVS stores.
As for new stores, on the real estate side we reached a milestone this quarter. Larry Murlow, our President of CVS Pharmacy, opened our 7,000th store in Little Canada, Minnesota -- who knew? In total, we opened up 87 new and relocated CVS pharmacy stores in the quarter and closed six others, resulting in 59 net new stores in the quarter.
Year-to-date, we opened or relocated 256 stores, so we are right on track to add about 3% retail square footage growth for â€™09.
We also completed 37 file buys in the quarter and we expect to do about 250 for the year, which is up about 10% versus last year and itâ€™s good to have this obviously because this is a great return for us and in fact many times the pharmacy staff and the owners actually come to work for us.
Let me touch on minute clinic, which has now surpassed 5 million patient visits since its inception. We opened up eight new clinics during the quarter and now we have 565 clinics across 25 states, about 100 of those operate seasonally. In the third quarter, we saw better than expected growth in the clinics, and this growth was really excluding the flu shot. So we had traffic up 77% in minute clinic and thatâ€™s not counting the flu shots. These are just people coming for acute sick visits. So it was really driven for three reasons -- one the severity of the flu like symptoms and people just coming in; second, we are benefiting from increased public awareness, which is one of our goals we had to get the consumer more aware of minute clinic and where we are and what we have to offer. And third, we increased third party coverage. As you know, third party coverage leads to higher utilization. We added another 4.5 million additional lives to the network in the third quarter so now 80%, slightly over 80% of the visits are third party paid.
We are focused on improving the returns at minute clinic. One step towards that goal is our recent decision to move the majority of minute clinicâ€™s corporate functions from Minneapolis to Rhode Island. The move will facilitate sharing of infrastructure function and services and will improve speed to market for CVS Caremarkâ€™s chronic care and patient engagement and disease management initiatives. The cost of this move is approximately a penny a share, which will be primarily in 2010.
We remain very enthusiastic about the prospects for minute clinic. As you know, we are investing about $0.05 to $0.06 in minute clinic this year. We expect somewhat less next year, maybe $0.04 to $0.05 and we expect to break-even in 2011 on an all-in basis.
Now let me turn to the PBM business, which also had a very good quarter. Let me give you some highlights -- pharmacy network revenues were up 28%. Mail choice revenues were up 14.8, and recall that mail choice is our metric which includes mail order plus 90 day claims filled at retail via maintenance choice.
Our generic dispensing rate increased 320 basis points to a best-in-class 68.3 versus LY. Operating profit in the PBM was up 13% and EBITDA per adjusted claim increased 8% to 489 on an apples-to-apples basis. You have to adjust out the RX America which was not in last yearâ€™s results.
As I mentioned earlier, our new products are gaining traction. Today I am pleased to report that we now have 417 clients representing over 5 million lives who have adopted maintenance choice or will adopt it in the first quarter of â€™10. Thatâ€™s up from 270 clients in the second quarter and 200 at the beginning of the year, so clearly maintenance choice is gaining acceptance in the marketplace.
The 417 clients adopting maintenance choice represent only about 13% of our book, so there is clearly room to grow. Our early adopters of maintenance choice are telling us they are satisfied with the implementation process and that their members view the offering as a major enhancement to their benefit since now they have the convenient option of obtaining their prescriptions at any CVS retail store or mail order and they still get the benefit of mail order pricing.
Remember, this program is just an extension of our mail offering. It lowers cost for patients and payers. That is why it is being so well-received in the marketplace.
One of our next innovations we are working on is the consumer engagement engine. It is not a product like maintenance choice. Itâ€™s a data management system with a clinical rules engine which will combine and analyze data to provide us with a single view of every CVS Caremark patient. Of course the data analysis and other CEE initiatives are performed in compliance with applicable privacy laws. Whether a patient uses mail pharmacies, our minute clinics, our retail pharmacies, our specialty pharmacies, the CEE will further enhance the benefits of our integrated model by distilling data down to actionable messaging for our clients and our pharmacists. It may highlight opportunities for cost savings around formula recompliance or generic substitution. It may improve patient care through better compliance. Patients using our call centers, using our website, receiving outbound letters or interacting with pharmacists will all receive targeted messages to help them save money, save time, and stay healthy.
As an example, CVS pharmacists will be able to restart someone on therapy from a mail order prescription that they may have discontinued, or help a member at retail get started on mail order.
This will provide us with an unprecedented capability to engage patients and to eliminate gaps in care, improve adherence, and help drive cost savings. It will be rolled out to our core channels in mid 2010 and we will have evidence in the -- and drive it in the selling season for 2011.
Speaking of 2011, we announced on Monday that we renegotiated and extended our $4 billion contract to provide retail pharmacy benefit services and all clinical services for Blue Cross Blue Shield and known as the federal employee program, FEP. The three-year contract originally due to expire at the end of 10 has been extended through the end of 11. While it will cost us some margin dollars in 2010, I am certainly pleased with the extension.
So let me talk about the selling season -- we had some good wins. We had about 125 new clients. We had a retention rate of about 92%. Having said that, we had some big client losses and let me recap those for you so everybody is on the same page.
We had $1.4 billion in wins in 2010. Approximately $600 million of those gross wins came since the last quarterly call.
We had $4.5 billion in losses and approximately $2 billion plus of those came from the last call, since the last call, and those would be Horizon, I think you know about the State of New Jersey. This was a bid that the state wanted on a standalone basis so it was kind of a price and carve out issue. We lost the State of Ohio on the managed Medicare business. It was carved in, which was about $500 million plus. And then we had another $600 million miscellaneous. These were basically smaller clients around RX America or Pharmacare that just really wanted essentially smaller PBMs. So in total, that was about $2 billion plus since the last call.
And then lastly, we had $1.7 billion that we lost in Med D business. This was the 500,000 lives that we lost in the [duos], and once again this was since the last call. So net net, itâ€™s about $4.8 billion in net loss for 2010 and approximately almost $3.7 billion since the last call.
If you look at the losses, total losses with Med D and the $4.5 billion contract losses, they really come from four contracts plus the Med D lives, the two really that I mentioned and then Chrysler and Coventry.
So what does this all mean for 2010? As you all know, on our last quarterly call, I said I would -- we were not in a position to provide 2010 guidance at that time, which we werenâ€™t because we hadnâ€™t done our budget. But I also said I would be disappointed if we didnâ€™t have an EPS growth of at least 13% to 15% next year for the enterprise. To get to that 13% to 15% growth rate, I expected strong double-digit growth in our retail business, which I still do, and I expected low to mid single digit in our PBM business, which is not going to happen.
What has changed? Well, as I just said, we lost more PBM business than we expected since the call, $2 billion in contracts. We lost the Med D duos in 15 regions, which was $1.7 billion, which I just referred to. And we extended the $4 billion FAP contract through 2011 at the clientâ€™s request. This was an early renegotiation, not at our request but at the clientâ€™s request. So we are going to have obviously some margin implications in 2010.
Given all of that, it now looks like operating profit in the PBM will decline in 2010, perhaps as much as 10% to 12%. I want to point out that approximately 10 basis points of that -- 10 percentage basis points of that change is Med D alone. While our retail business is still expected to achieve strong double-digit operating profit growth in 2010, which will likely be -- the retail range will likely be in the 13% to 16% range.
With regards to the PBM, I want to announce the following changes in our organization. Howard McClure, President of Caremark, will be retiring effective November 27th. I will be the President of the PBM on an interim basis while we conduct a search and will keep you posted on the progress.
As you know, Howard was one of the chief architects of our integrated model. His experience has been invaluable to our company, yet after 30 plus years Howard felt it was right for him to retire and we wish him well in the next chapter of his life.
We also announced yesterday we hired a new senior VP of marketing for the PBM, Len Greer. Lenâ€™s knowledge of our industry and strong marketing skills make him qualified to deliver or help deliver our messages in the marketplace.
Now before turning it over to Dave, I am also pleased to announced that our board of directors approved a new share repurchase program for up to $2 billion of outstanding common stock. This reflects our confidence in the future growth of our business and our ongoing commitment to improve and increase shareholder value. We expect to repurchase the shares from time to time from now through 2011.
Now I will turn it over to Dave for his financial review and then I will be back with some additional remarks.
David B. Rickard
Thank you, Tom. Good morning, everyone. This morning I will walk you through our third quarter financial results. Then I will update full year 2009 guidance. But before I do that, let me highlight some key improvements that we have made to the way we report our segment financials, all of which I mentioned on last quarterâ€™s call.
These changes reflect the way we look at the performance of our businesses, develop our strategies, and allocate resources. We hope they will make it easier for you to understand what is going on in our operating divisions.
The first change involves the reclassification of certain administrative expenses previously recorded within the PBM and retail segments to a new corporate segment. The corporate segment consists of certain costs which benefit both operating divisions equally. These are primarily associated with executive management, corporate relations, legal, compliance, human resources, corporate information technology, and finance.
Of course, this change had no impact on our consolidated results of operation but we now report on three operating segments -- pharmacy services, retail pharmacy, corporate. You will see that our historical segment disclosures have been revised to conform to the current presentation and we have made available on our website all the quarters going back to the first quarter of 2008. We believe that this change will give better visibility to the operating dynamics of both our retail and our PBM segments.
Secondly, we made a change to our PBM segment as it relates to our inter-segment activity, such as the maintenance choice program. This change impacts the gross profit and operating profit lines within the PBM segment. Under the maintenance choice program, a PBM client member can elect to pick up his maintenance prescriptions at one of our CVS pharmacy stores instead of receiving it through the mail. When this occurs, both the retail and the PBM segments now record the revenue, gross profit, and operating profit associated with this maintenance prescription on a standalone basis and corresponding inter-segment eliminations are created. Previously only the revenue was recorded by both segments.
We believe that this new method more clearly portrays the true performance of the individual operating segments, regardless of which segment creates the sale or dispenses the product or service. This change is reflected in our segment results for the third quarter and in the year-to-date results. The maintenance choice comparative amounts for 2008 were also revised, although the program was still in a pilot phase at that time and consequently the amounts were quite small.
Lastly, also beginning with the third quarter, we are now reporting mail choice volumes and related statistics as opposed to mail order volumes. Recall that mail choice is our metric that includes mail order claims plus 90 day claims filled at retail via maintenance choice. We believe that this provides a clearer picture of our business as it has become more channel agnostic in regard to 90 day claims. Those were previously overwhelmingly filled in mail order facilities.
Related to this, since maintenance choice is included in our mail choice metric, what we now refer to as pharmacy network is simply the PBMâ€™s retail network less those maintenance choice scripts that moved to mail choice.
Now on to revenues -- Tom covered the highlights but let me add several details worth mentioning. The $24.6 billion in consolidated revenues is net of $2 billion of inter-segment eliminations. The inter-segment eliminations as a percent of PBM retail network revenues increased by approximately 400 basis points over the prior year period, from 18.1% to 22.2%. This is up sequentially from last quarterâ€™s 330 basis point increase, further tangible evidence that there is an expanding base of our PBM customers choosing CVS as their retail pharmacy and an expanding number of PBM clients who choose to leverage the CVS retail service offerings, including maintenance choice.
In our PBM segment, third quarter net revenues of $13 billion increased 23.4%. RX America contributed approximately $1 billion of that growth during the quarter, while one extra day this year added approximately $136 million. So the underlying growth rate was 12.2%.
Drilling down a little deeper, the PBM pharmacy network revenues in the quarter rose 28.3% over 2008 levels to $8.8 billion. That was largely due to the change in revenue recognition method from net to gross for the RX America contracts that began in the second quarter. Pharmacy network claims grew 9%. This growth was driven by the addition of RX America, as well as the impact of net new business.
Total mail choice revenues grew by 14.8% to $4.2 billion. Our overall mail choice penetration rate of 23.8% was up approximately 50 basis points from the rate in the third quarter 2008 on a reported basis. However, RX Americaâ€™s claims mix, which is heavily weighted toward retail network claims, diluted the mail choice penetration rate by 240 basis points. So adjusting for this factor, our underlying mail choice penetration rate grew from 23.3% to 26.2%, up 290 basis points.
Now what about the retail drug store side of our business? We saw revenues increase by 17.9% to $13.6 billion in the third quarter. Longâ€™s contributed approximately $1.0 billion of that growth during the quarter, while one extra day this year added approximately $167 million. So the underlying growth rate was 7.5%.
As Tom mentioned, our third quarter comps increased 5.7%, with pharmacy comps up a very solid 8% and front-store comps up 0.8%.
Moving on to gross profit, the overall dollars improved by 14%, despite percentage margin dropping by 75 basis points. Within the PBM segment, the gross profit margin was down approximately 50 basis points. That was expected due to the change in the revenue recognition method for RX America, as well as the pricing decisions we made last year for a few key contracts.
The gross profit margin in the retail segment declined by approximately 100 basis points in the third quarter to 29.4%. That reflects pressure on third party reimbursement rates as well as a higher mix of promotional sales, which more than offset the positive impact of new generics.
And what about expenses? Overall operating expenses as a percentage of revenues improved by approximately 10 basis points. The PBM segmentâ€™s percentage stayed flat at 1.8%. That was despite the impact of the elimination of the universal American joint venture, the income from which was historically an offset to expenses.
We also saw some integration expenses for RX America flow through in the third quarter. So excellent expense control there.
In the retail segment, the improvement was approximately 20 basis points to 22.7%. We saw good spending discipline at the store level, as well as favorable timing of advertising spending in the quarter. Of course, partially offsetting that were the one-time expenses from the Longâ€™s integration.
Within the corporate segment, we saw expenses rise by approximately 20%. The larger than normal increase was due primarily to the addition of Longâ€™s and RX America corporate expenses, as well as some compensation and benefit costs.
So with the gross margin decline only partially offset by improvements in SG&A as a percentage of sales, operating margin declined as expected. It was down approximately 67 basis points to 6.4% of revenues.
Moving to the consolidated income statement, we saw net interest expense in the quarter increase to $123 million, largely reflecting the increased debt position due to Longâ€™s. Our effective income tax rate was 29.1% in the third quarter. The large improvement was due to the recognition of approximately $155.7 million of previously unrecognized tax benefits relating to the expiration of various statutes of limitation and settlements with tax authorities. Excluding the impact of this reserve release, the effective income tax rate for the third quarter would have been approximately 39.8%.
Our weighted average diluted share count was 1.44 billion shares. Through the end of October, we have repurchased 57.7 million of our shares for $1.99 billion at an average share cost of $34.66, including commissions.
So we nearly completed our $2 billion share repurchase authorization and we expect to complete the remainder this month.
And then as Tom said, the board of directors just approved a new $2 billion share repurchase program and we expect to purchase shares from time to time between now and the end of 2011.
Adjusted EPS from continuing operations was $0.76; excluding the $0.11 tax benefit, it was $0.65, an increase of 8% over last yearâ€™s third quarter and just [above] guidance.
GAAP diluted EPS from continuing operations came in at $0.71 for the quarter, or $0.60 when adjusted for the tax benefit. Thatâ€™s also approximately an 8% increase over last year.
Turning to the balance sheet and cash flows, we generated over $490 million in free cash flow in the third quarter. That compares to $386 million in the prior yearâ€™s third quarter, so weâ€™ve made some nice progress there.
Net capital expenditures amounted to approximately $416 million in the third quarter. This was the result of offsetting the $661 million of gross capital expended with approximately $245 million worth of sale leaseback proceeds.
Barring any new and currently unforeseen financial market problems, we still expect that we will be able to complete the sale of the remaining $900 million or so in properties we had planned when the year began.
Lastly, in September, we issued $1.5 billion of 30-year unsecured senior notes that were well-received by the market. We used the proceeds primarily to repay a portion of our outstanding commercial paper borrowings, as well as a $650 million senior note that was due in September.
So we ended the quarter with total debt net of cash and cash equivalents of $10.8 billion. Thatâ€™s up approximately $400 million from year-end and largely reflects normal swings in our working capital.
Now on to guidance for the year -- for the retail segment, we continue to expect revenue growth of between 12% and 14% for the year with total same-store sales in the range of 4% to 6%. For the PBM segment, revenues should be up between 16% and 18% for the year. For the total company, we expect revenue growth of around 12% to 14% for the full year after inter-company eliminations of over $7.5 billion.
Gross profit margins still are expected to be modestly below 2008 with retail flat and the PBM segment down. We expect total company operating expenses as a percent of revenues will be modestly up. That reflects the integration and one-time cost of Longâ€™s, the increase in litigation reserves we saw in the first quarter, as well as the first year economics of a large amount of new PBM business. All of that will lead to operating profit margins for the total company which are moderately below the record levels of last year.
We expect EBITDA for adjusted claim to be down slightly on a reported basis but up mid-single-digits when normalized for RX America and the increase in litigation reserves.
We forecast net interest of about $530 million to $545 million. We expect our tax rate in the fourth quarter to approach 40%. Keep in mind that the full year rate will be impacted by the tax benefit we recognized in the third quarter.
And we are forecasting approximately 1.45 billion weighted average shares for the year.
We expect total consolidated amortization for 2009 to be a little shy of $450 million. Depreciation should be just under $1 billion.
Net capital expenditures are expected to be in the range of $1 billion to $1.2 billion for 2009. Free cash flow is expected to be in the neighborhood of $3.5 billion.
So given our continued strong performance year-to-date, we are narrowing our earnings guidance range for 2009. We expect to deliver adjusted earnings per share from continuing operations excluding the effect of the tax benefit of $2.61 to $2.64, up from our previous guidance of $2.59 to $2.64.
Now I will turn it back over to Tom for some closing remarks.
Thomas M. Ryan
Thanks, Dave. Before opening it up for questions, I want to update you all on the CFO search. Earlier this year, as you know, Dave Rickard announced his intention to retire and we launched an internal and external search for our new CFO. Today I am extremely pleased to announce the appointment of Dave Denton to the role of Executive Vice President and Chief Financial Officer effective January 2, 2010. Currently our senior VP, Controller, and Chief Accounting Officer, Dave brings nearly 20 years of financial management experience with a focus on healthcare and retail drug to his new position. Dave has been with the company for more than 10 years, working almost exclusively for Dave Rickard. He has experience in all key areas of finance, including serving as a CFO of our PBM PharmaCare, as well as in retail and corporate positions. His broad financial experience, industry expertise, and a deep understanding of our customers will help make him an outstanding CFO.
So in summary, we certainly have had a lot of news today. I donâ€™t want to lose sight of the solid quarter we had, with great revenues and profits and cash flow and leading comps and private label sales and maintenance choice up. We locked in a new important contract for 2011, Longâ€™s is in good shape. We had record results for minute clinic and obviously we named a new CFO.
So while it was a good quarter, we are not in this for quarterly results. We are about growing the company for the long-term. I am pleased with the consistent industry-leading performance of our retail business and the plans we have in place to ensure that continues.
While there are a lot of positives on the PBM side of our business, I am obviously not pleased with our 2010 outlook. We will be making appropriate changes to restore the [PBMâ€™s] appropriate level of growth.
So with that, I will open it up for questions.