CVS Health Corp (CVS) — Q4 2015 Earnings Call Transcript

Thank you, Suzy. Good morning, everyone, and thanks for joining us today. I'm here this morning with Larry Merlo, President and CEO; and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS/caremark; and Helena Foulkes, President of CVS/pharmacy, are also with us today. And they will participate in the Q&A 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 a chance to ask their questions. Please note that we posted a slide presentation on our website before this 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'll be filing our Form 10-K and it will also be available on our website at that time. In addition, note that during today's presentation we'll make forward-looking statements within the meaning of the Federal Securities 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 factor section and cautionary statement and disclosures in those filings. During this call, we'll also use some non-GAAP financial measures when talking about our company's performance including free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the reconciliations 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.

Well, thanks, Nancy. Good morning, everyone, and thanks for joining us. Our fourth quarter results wrapped up a terrific 2015, and during the year, we achieved strong performance across our enterprise and completed key acquisitions that will support our strategy for growth in the evolving healthcare market. We grew our core business with the acquisition of Target's pharmacies and clinics and we expanded our reach with the acquisition of Omnicare, the leader in long-term care pharmacy. And we remain very optimistic that these acquisitions will help drive our long-term growth and I'll update you shortly on our integration progress. Now for the full year 2015, we delivered 10% growth in consolidated revenues, 11% growth in consolidated operating profit, and 15% growth in adjusted earnings per share, excluding amortization, any acquisition-related items, and the legal charge we mentioned in this morning's release. As expected, growth in the fourth quarter was especially strong with revenues increasing 11% and adjusted earnings per share increasing 26.5% to $1.53, right in line with our guidance. We generated approximately $3.1 billion of free cash during the quarter and $6.5 billion for the full year, above the high end of our guidance, and our continued ability to deliver substantial free cash is enabling us to return significant value to our shareholders. Now for 2016, we are confirming the guidance we provided at Analyst Day back in December. As a reminder, we expect adjusted earnings per share for the full year of $5.73 to $5.88, reflecting year-over-year growth of 11% to 14%. And Dave will review the details for the year and the first quarter in his remarks. So let me turn to the business update and start with our very successful 2016 PBM selling season. Gross client wins for 2016 have increased, and they now stand at $14.8 billion with net new business at $12.7 billion. The increase in net new business of about $1.2 billion from our last update largely reflects incremental growth from our new health plan clients as they closed out their enrollment year. These numbers exclude enrollment results from our SilverScript PDP, and I'll touch on that shortly. And our 2016 retention rate remains at approximately 98%. Now our success is a testament to our unmatched products and services, our strong service and execution along with our competitive pricing. And surveys continue to show that our ability to manage costs is our clients' top priority, and this is followed by a variety of additional factors with each of our client channels having different priorities. Our flexibility and expertise in addressing those varying priorities has certainly been a key to our success. Now with so much new business being transitioned in January, I'm also very pleased to report that we have had an extremely successful welcome season. We effectively added more than 9 million new members, 9 million new members who generated a significant year-over-year increase in January's claims volume, and clients have given us very positive feedback on our diligence and process, and we're pleased with the level of oversight we provided to ensure success. It's also worth noting that in the past two welcome seasons combined, we have successfully added nearly 16 million new Caremark lives. Looking ahead to 2017's selling season is just underway, and we are well positioned competitively for another strong year. Now it's too early to provide a specific update, but our size, scale, service record and unmatched capabilities make us confident that we will continue to be successful in the marketplace. Now as we've been discussing, top of mind for our clients is their rapidly growing specialty costs, and our specialty pharmacy business offers a comprehensive set of programs to help clients effectively manage specialty trend. As a result, we continue to outpace the market and gain share. In the fourth quarter, specialty revenues increased 32% and continued to outpace market growth rates. Our Medicare Part D business has risen to a leadership position. We had a successful 2016 annual enrollment period. Consistent with our expectations we added approximately 0.5 million net lives and began the 2016 plan year with more than 5 million captive PDP lives, and that includes EGWPs. Now when you add in the Med D lives that we manage for our health plan clients, the non-captive lives, our total rises to 11.3 million Med D lives under management, and that's up 41% from the prior year. Furthermore, our enterprise clinical capabilities combined with our strong operational execution enable us to drive Med D Star ratings, not only for our own SilverScript PDP but also for our health plan clients' Med D offerings. In fact, SilverScript was the largest PDP to achieve a four-star rating, and 73% of our clients' lives are now enrolled in a high-performing plan for the 2016 year. Now turning to our Retail/Long Term Care Segment, and I'll start with an update on the integrations, Omnicare and Target, which are well underway. In the fourth quarter, Omnicare performed well and in line with our expectations as we began to realize some of the anticipated synergies. As we detailed at Analyst Day, there are multiple opportunities for driving enterprise value from Omnicare in both the near and long term. In the first half of this year, we expect to achieve the benefits of purchasing synergies, and by the end of the year we will phase in technology to support high-quality customer service and leverage best practices across the organization. We are combining operational infrastructures and developing programs to improve work streams and enhance delivery service. And we expect to complete the vast majority of the Omnicare integration activities by year end. Now, opportunities are also being pursued across the continuum of care that will drive long-term enterprise value. For example, we are developing an enhanced offering for skilled nursing that's driven by improving coordination during care transitions, which should lead to better outcomes for patients, providers and payers. We are also developing segmented assisted-living offerings to better align with residents' varying needs. And to better target the rapidly growing independent living market, we have a consumer-driven effort underway that utilizes existing CVS Pharmacy capabilities, including the on-site delivery of healthcare services. So we expect to generate revenue synergies focused on the transitions of care, market adjacencies, and differentiated offerings. And these should begin to be realized in the second half of this year and grow in future periods. And we remain very excited about the opportunities created by this combination along with our enhanced ability to serve seniors across their continuum of care. Now as for the Target pharmacy and clinic acquisition, our highly detailed integration plan is complete. The integration activities are underway, and we have already successfully converted a handful of pilot stores. As a result, the conversions will begin to ramp up throughout this quarter and next, and we expect to complete all store conversions by the end of summer. Now as we complete each store conversion and it's rebranded as CVS Pharmacy, at that point we launch our additional core offerings, core pharmacy offerings, to include Specialty Connect, ExtraCare Pharmacy Rewards, along with our digital tools. And that's in addition to Maintenance Choice that was available upon the transaction close. We'll begin adding marketing elements as geographies convert, all with the goal of converting Target guests who currently don't use the pharmacy. Now moving on to the fourth quarter results in the retail business, pharmacy same-store sales increased 5%. This was negatively impacted by approximately 470 basis points due to recent generic introductions. Pharmacy same-store prescription volumes increased 5% on a 30-day equivalent basis, outperforming overall market growth. And our retail pharmacy market share, again on a 30-day equivalent basis, was 21.8% in Q4, and that's up about 65 basis points versus the same quarter a year ago. For the full year 2015, CVS Pharmacy's Med D share increased 35 basis points versus 2014, and we continue to gain share in this growing market while maintaining a disciplined approach to evaluating participation in preferred Med D networks. And we expect to maintain our market share position in 2016, helped by our preferred positions in a variety of national and regional plans. So overall, our pharmacy business remains quite strong and continues to gain share. Our digital team has been working to create a connected health experience that makes it easier to save time and money and to stay healthy by connecting patients to our unique assets when, where, and how they want. To date, we've seen 12.7 million downloads of the CVS Pharmacy app, 18 million members enrolled in text messaging, driving adherence, and more than 300 million text messages sent by CVS Pharmacy this past year, enhancing the patient experience. So we continue to focus on driving member adoption of our highly related apps. In the front store business, comps were down slightly, 0.5% in the quarter, and reflected softer customer traffic partially offset by an increase in basket size. However, front store margins increased notably in the quarter, benefiting from efforts to rationalize our promotional strategies along with growth in the higher-margin health and beauty businesses. ExtraCare continues its commitment to reward our loyal customers with savings through weekly ads and personalized offers as well as ExtraBucks Rewards. And in 2015, this generated about $4 billion in savings for our loyal customers. So we continue to see ExtraCare as a source of growth as we leverage customer data to create even more relevant and personalized communications. Our store brand penetration was 22% in the quarter. That was down slightly from the prior year. And for the full year, store brand penetration was 21.3%, and that's up about 75 basis points. In 2015, we gained within the drug channel about 140 basis points of share in overall brand sales and about 60 basis points of share in store brand healthcare. And there remains significant opportunities to expand our share of store brand products by building on core equities in health and beauty and seeking opportunistic growth in other areas where we can link new products to our customers' path to better health. Turning to our store base, we ended the year with about 9,600 retail pharmacies. And for the full year 2015, we opened 130 net new stores, equating to an increase in retail square footage of 2.2%. And when you add in the acquired Target pharmacies, our retail square footage growth for the year comes to 3.1%. In the fourth quarter in addition to the acquired pharmacies, we opened 53 new stores, relocated 19 stores, closed 14 stores, resulting in 39 net new stores. We also continued to grow the number of clinics. MinuteClinic is the largest walk-in clinic operator in the country, and in the fourth quarter, we opened 36 new clinics in addition to the 79 acquired clinics in Target, ending the year with 1,135 clinics across 33 states plus the District of Columbia. Now excluding the Target clinics, MinuteClinic revenues increased 4.4% in the quarter, that's below our usual trend due to the mild cold and flu season versus a year ago. However, we achieved our full year 2015 revenue target of about $345 million. And with that, let me turn it over to Dave for the financial review.

Thank you, Larry, and good morning, everyone. This morning I will provide a detailed review of our 2015 fourth quarter results and briefly touch upon our 2016 guidance, which remains unchanged from what we outlined in December at our Analyst Day. First, I'll start with a summary of last year's capital allocation program, which should clearly demonstrate how we're continuing to use our strong free cash flow to return value to our shareholders through both dividends as well as share repurchases. I'm pleased to say that we continue to drive steady improvement in our dividend payout ratio. Recall that back in 2010 that our payout ratio was approximately 14%. We finished 2015 with a payout ratio of 30.1%, more than double 2010's level and 240 basis points higher than 2014 on a comparable basis. We paid approximately $1.6 billion in dividends in 2015 and $391 million in the fourth quarter alone. Our strong earnings outlook this year combined with the 21% increase in the dividend that we announced at our Analyst Day keeps us well on track to achieve our targeted payout ratio of 35% by 2018. Along with the significant increases in our dividend, we have continued to repurchase our shares. For all of 2015, we repurchased approximately 48 million shares for about $5 billion, averaging $101.23 per share. In the fourth quarter alone, we repurchased approximately 10.2 million shares for $1.1 billion. Now if you look back over the past three years, we've repurchased approximately 166 million shares for about $13 billion at an average price of $78.37 per share. For the year 2015, between dividends and share repurchases, we returned a very significant $6.6 billion to our shareholders. Now looking forward, we have nearly $7.7 billion left in repurchase authorizations and we continue to expect to repurchase $4 billion this year. Our expectation is that we'd return more than $5 billion to our shareholders in 2016 through a combination of dividends and share repurchases. We generated $3.1 billion of free cash in the fourth quarter. In all of 2015, we generated approximately $6.5 billion of free cash, which exceeded the high end of our guidance by about $200 million, but was essentially flat year-over-year. The outperformance was driven by client collections. At the same time, we improved our cash cycle by approximately two days, thanks to continued improvements in payables management that were partially offset by growth in receivables. We remain committed to further improvements in working capital as we move forward. For the year, our net capital expenditures were approximately $2 billion. This included $2.4 billion of gross CapEx, offset by about $410 million in sale-leaseback proceeds as well as capital spend associated with the acquisitions. As for the income statement, adjusted earnings per share came in at $1.53 per share, at the midpoint of our guidance, up 26.5% over LY. As you can see in our press release, in 2015, this excludes amortization, the impact of transaction and integration costs related to the Omnicare and Target acquisitions as well as a $90 million legal charge. The charge is related to a legacy lawsuit challenging the 1999 settlement by MedPartners of various security class actions and a related derivative claim. For those of you who may not be familiar, MedPartners was the former parent company to Caremark. So this issue goes back a long time. The growth rate also excludes the loss on early extinguishment of debt that we recorded in 2014. GAAP diluted EPS was $1.34 per share. Results across our operating segments were strong as expected. And with that, let me quickly walk down the P&L. On a consolidated basis, revenues in the fourth quarter increased 11% to $41.1 billion. In the PBM segment, net revenues increased 11.1% to $26.5 billion. This growth was attributable to specialty pharmacy as well as increased volume in pharmacy network claims. Overall, PBM adjusted claims grew 6.4% in the quarter. Partially offsetting sales growth was a 165 basis point increase in our generic dispensing rate to 83.7%. In our Retail/Long Term Care business, revenues increased 12.5% in the quarter to $19.9 billion, driven primarily by strong pharmacy same-store sales growth as well as the addition of the Omnicare business. Retail/Long Term Care exceeded our revenue guidance primarily due to the addition of the Target assets, a couple of weeks earlier than planned as well as a lower generic dispensing rate than expected. During the quarter, GDR increased by approximately 155 basis points to 84%. Turning to gross margin, we reported 17.7% for the consolidated company in the quarter, a contraction of approximately 15 basis points compared to Q4 2014, and again, consistent with our expectations. Within the PBM's segment, gross margins improved approximately 45 basis points versus Q4 2014 to 5.6% while gross profit dollars increased 20.5% year-over-year. The increase in gross profit was primarily due to increases in volumes, the improvement in GDR, and favorable rebate and purchasing economics. Partially offsetting these drivers was the impact of client and drug mix as well as continued price compression. The improvement in gross margin rate in the PBM was primarily due to the timing of Medicare Part D profits. Now gross margins in the Retail/Long Term Care Segment was 30.2%, down 125 basis points from LY. The decline was primarily driven by continued pressure on reimbursement rates and to a lesser degree the addition of the Omnicare business, which carries a lower margin than retail. Partially offsetting these were the increases in GDR and a strong front store margin improvement, aided by continued rationalization of our promotional strategies and improved product mix. Gross profit dollars increased 8% throughout the quarter. Turning to operating expenses, operating profit and the tax rate, the numbers that I'm citing exclude acquisition-related costs and the legal charge where applicable. Total operating expenses as a percentage of revenues notably improved from Q4 2014 to 10.7%. The PBM segment's SG&A rate improved 10 basis points to 1.3% and SG&A as a percent of sales in the Retail/Long Term Care Segment improved significantly by 190 basis points to 19.4%. This was driven by lower advertising costs due to last year's rebranding campaign following our tobacco exit, lower legal costs, and the addition of the Omnicare business, which carries lower SG&A relative to sales. Within the corporate segment, SG&As were up approximately $10 million to $215 million within our expectations. Operating margin for the total enterprise improved approximately 75 basis points in the quarter to 7%. Operating margin to PBM improved by approximately 55 basis points to 4.3% while operating margin at Retail/Long Term Care Segment improved approximately 65 basis points to 10.7% on our adjusted basis. For the quarter, operating profit growth in each segment was in line with expectations, with the PBM increasing a very solid 26.8% and the Retail/Long Term Care Segment growing 19.8%, again on our adjusted basis. Going below-the-line on the consolidated income statement, net interest expense in the quarter increased approximately $145 million from LY to $276 million, due primarily to the debt associated with the acquisitions that we took on last year. Our effective tax rate in the quarter was 38.9% and our weighted average share count was 1.1 billion shares. For the year, our effective tax rate was 39.1%, just slightly lower than expected. So with that, now let me touch on our 2016 guidance, which again remains essentially unchanged from Analyst Day. You can find the details in the slide presentation that we posted on our website, but I'll focus on the highlights here. In 2016, we continue to expect to deliver adjusted earnings per share which excludes amortization in the range of $5.73 to $5.88, reflecting very healthy year-over-year growth. GAAP diluted EPS from continuing operations is still expected to be in the range of $5.28 to $5.43. Keep in mind that we have not included any estimate of integration costs from Omnicare nor Target in either range. We'll of course report those as we progress throughout the year, but they are excluded from our guidance. We expect consolidated net revenue growth of 17% to 18.5%, reflecting solid growth across the enterprise, and we expect consolidated operating profit margin to decline by 40 basis points to 50 basis points. The first quarter guidance also remains unchanged. We expect consolidated net revenue growth of 17% to 18.5%. And as you may recall, we highlighted several timing factors at Analyst Day that affect the cadence of profits delivery throughout the year. And while 2016 is expected to be a strong year, the cadence of profit growth is expected to be significantly back half weighted. We expect adjusted earnings per share which excludes amortization to be in the range of $1.14 to $1.17 while GAAP diluted EPS from continuing ops is expected to be in the range of $1.03 to $1.06 in the first quarter. Additionally, our free cash flow guidance for the year, which includes acquisition-related activities, remains in the range of $5.3 billion to $5.6 billion. In closing, I want to say that I'm very pleased with the company's significant cash flow generation capabilities. I believe these capabilities will continue to play an important role in driving shareholder value over the long term. To that point, 2016 will be another year in which we demonstrate our ongoing commitment to returning value to our shareholders through both share buybacks as well as through the increase in our dividend. And with that, I'll now turn it back over to Larry.

Okay. Thanks, Dave, and let me just reiterate how pleased we are with our strong performance across 2015 along with the continued progress that we're making in leveraging our integrated assets at CVS Health that's bringing innovative channel agnostic solutions to the market. I also want to take a minute to thank and recognize the efforts of our more than 240,000 colleagues that are committed to our purpose and working hard each and every day helping people on their path to better health. So with that, let's go ahead and open it up for your questions.

Hi. Great. Thanks very much, and good morning. Thank you very much for all the detail. I just wanted to follow up on a couple of things. The first of which is maybe can you talk about the 2016 opportunities for uptake in some of the different programs, whether you talk about specialty on both sides? Larry, you talk about the opportunity at Target to bring people into your specialty program, Maintenance Choice, et cetera. What do you have specifically in the guidance? And then secondly, Jon, can you talk about again as you think about what people are taking on in 2016 whether it's National Preferred Formulary or Specialty or some of the other programs that we see, and as we move throughout the year, what's some of the opportunities are?

Yeah, Lisa, good morning. I'll take the first part and then flip it over to Jon. As you think about, Lisa, the benefits from the acquisitions, we touched on it at a very high level in the prepared remarks. If you look at Omnicare, we've got a number of pilots that have just begun to kick off that would focus on the revenue synergy side of the equation, acknowledging that we see opportunities across the spectrum in skilled nursing, assisted living and the independent living spaces. And I think as we've been talking for quite a while now, those opportunities will really manifest themselves across our retail business. So I think again, it's early in the process, and the benefits that we'll see from that, we don't expect to begin to come online until the second half of the year. And I think, Lisa, it's a similar story with Target. We've got a lot of heavy lifting to do when you think about the store and system conversions, 1,700 of those. At the same time, we've had a lot of practice with that. And as I mentioned in the remarks, the pilot stores have gone extremely well. So we are now in rollout mode, and it'll take the better part of the next six months, seven months to complete those activities. So that's really when you'll begin to see the marketing efforts ramp up. So the benefits that we'll see from beginning to create customer conversion within the Target stores with the Target guests, again, I think that's going to be more of a second-half impact.

And, Larry, is the right way to think about this is that this will be a multiyear growth opportunity from margin as well as rolling out these programs, so it's not just the back half of this year but to layer on to this over a multi-year period? Is that the right way to think about this?

Lisa, that's exactly the right way to look at it, because again, it's going to take time to market and on both, whether we're talking about Target or Omnicare in terms of the opportunities. So it will phase in over time, and you're right, we see it as a multiyear opportunity.

And then, Lisa, as far as what we're seeing in 2016, as you recall, back in 2014, we saw double-digit pharmacy trend. That was primarily driven by branded inflation, branded price increases, and we're seeing that same dynamic in 2016 as well. So clients have never been more open to adopting plan designs to control these costs. And I'd really think about that it in three primary buckets. First is channel. So the ability to adopt our Maintenance Choice programs which were now up over 23 million members participating in that program and network solutions, preferred network solutions for Medicare as an example, and narrowing the network in commercial and managed Medicaid. So continue to see lots of interest in those plans designs. And also, lots of interest with formulary plan designs, and we offer options from excluding formulary for our template clients. We introduced that back in 2012, all the way to much more aggressive formularies where we essentially take most of the brands off the formularies that really is the most effective tool we have to managing trend because it gets rid of the branded inflation. And then the third primary bucket is really all the solutions we have in specialty from exclusive specialty to site of care to aggressive formulary solutions and specialty. So we do continue to see a lot of interest. We see employers able to make decisions faster in adopting these plan designs. We do see health plans much more interested than they've ever been in these plan designs, but their adoption rate is slower. They may have to sell these plan designs into their downstream clients. And as you recall, as our clients adopt these plan designs and we lower their costs, we generally see more share move into our channels. So it clearly is a win-win.

Is there any way for you or for Dave to actually quantify some of these numbers? You talked about Maintenance Choice being in 23 million members, but can you give us an idea of how many people have adopted this year to go into more of a narrow formulary or any, your narrow specialty or any of those other things? Just so we can get an idea of what the progression has been like and what we should expect it to look like in 2016?

Lisa, we don't disclose that information at this point in time. So unfortunately we can't do that right now.

Okay. I had to try. Thanks, Dave.

You're welcome.

Thanks, Lisa.

Yeah, hi. Good morning, guys.

Good morning, Ed.

So I have a question for you on the retail gross margin. Just the headline number itself, the decline was a little bit more I think than what the Street was looking for and obviously the Street number maybe wasn't right. But I guess the question really is how do you think about you mentioned reimbursement rate pressure, how do you think about reimbursement rate pressure look this quarter relative to trend and your expectation? And was the margin this quarter really any different than what you were sort of thinking about going in?

Yeah, Ed, it's Larry. It's a great question. I mean what we saw in the fourth quarter, Ed, was consistent with our expectations and, quite frankly, consistent with what we saw in the third quarter. And as we've been talking about the reimbursement pressure, the way we think you should be looking at this is we're not seeing really any dynamic change in the cadence of reimbursement pressure. As we look forward into 2016, we've got the ebbs and flows in terms of the offsets that exist in terms of how we can leverage against that reimbursement pressure, and we outlined many of those variables at Analyst Day last month.

Yeah, Ed, this is Dave. I'd begin – consistent with what Larry said, is that our gross margin was in line with our expectations, but a couple of things to just note is obviously we added the Omnicare business which carries a little bit lower rate. Secondly, our GDR, as we said, was a little light in retail as brand was a little heavy. So therefore that affected the gross margin but still well within our guidance expectations.

Okay. And just one quick follow-up here for you on the upcoming or current PBM selling season. Can you maybe just talk a little bit about how the opportunity looks from a mix standpoint? So last year, you had a lot of success, right, a lot of it was in the health plan side. How does the mix of the opportunity look like in the current year coming up? Is there potential for more self-insured employer type wins? Any color that you can provide there would be good.

Well, Ed, again, it's early. I mean, as we look at where we stand at this point in time, the RFP activity is probably on par with what we've seen in prior years. If you looked at our renewal business, we've got about $22 billion up for renewal. There is nothing out of the norm in terms of it skews within a segment one way or another. So we kind of view it as just a normal selling season, and I'll flip it over to Jon and see if he has any.

Yeah, remember, we had just $14 billion selling season with 80% of it health plans but we still had a very successful selling season with employers and with state government. So if our win rate returns to a more normal selling season, I think the mix that you'll see will be more normal than what we saw this past year. So we're expecting a very active selling season. Obviously, the health plans are out now and we expect the large employers and the state plans to be out over the next several months.

Great. Thanks, guys.

Okay. Thanks, Ed.

Thank you. Eric Percher and Meredith Adler here from Barclays. So maybe staying with the health plan topic, I guess, my first question would be, are there unique challenges in on-boarding this level of or this magnitude of health plan customers or is the primary challenge getting the margin and getting the adoption that you want to occur over the year? And then also, have there been particular tools or studies on adherence on cost over the last year that you've seen really drives the adoption and wins in the health plan segment?

Yeah, Eric, it's Larry. Maybe I'll start then ask Jon and Dave to jump in. Eric, in following your questions there, in terms of on-boarding, those clients, again, I think the investments that we've made over the last couple of years from a technology and process and organization alignment I think have really paid off the last two welcome seasons. Back to my prepared remarks, you think about the fact, 9 million new members, this past January, 16 million new CVS Caremark lives over the last two years combined with very high levels of service. We are extremely pleased with the work of the organization in terms of on-boarding those clients with no disruptions. So that has been checked the box there. I think if you go back to some of the things we talked about at Analyst Day, I think the challenge different than the employer segment is how we create more alignment with the health plan sales organization to sell in those unique and differentiated products and services, and begin to do some different things there in terms of creating better incentive alignment to allow that to be more of a priority among the many priorities that these health plans have. And I think we're beginning to get some traction around that.

And .I think, this is Jon, on the adherence front, I think you just have to look at the Medicare Star plans and what they measure and about half of what they measure for MAPD as an example, was around adherence. And so we've done our own internal studies that say if you have 100,000 seniors, they have about $1.1 billion in overall healthcare costs, and if we could make every one of those members adherent to their medication and we could fill in gaps in therapy that they have then we could reduce the overall medical cost by over $200 million. So CMS gets this. This is why they weight adherence so heavily in their evaluation of plans, and nobody is better positioned than we are with our integrated channels to reach members and talk to them about adherence and improve their adherence, and that's why three out of four of the health plans that are in the Medicare business that we support are either four-star or five-star plans. And we see similar activity in the commercial space as well.

And, Eric, just two other points reinforcing Jon's comments. We just published a study within the last couple of weeks that when you look at Specialty Connect, there is an 11% improvement in adherence for those patients who utilize that service. At the same time, reflecting on Jon's comments, when you think about some of the expectations that have been set for value-based reimbursement or outcomes-based reimbursement, whatever phraseology you want to use, and some of the targets that have been established for 2018 and beyond, I think our differentiated products and services are really in a great sweet spot to be able to deliver on those expectations.

Very good. Thank you.

Thanks, Eric.

Hey. Good morning, and thanks for taking the question. I guess, Larry, if we come back to reimbursement pressure on the retail side, can you talk about the pockets where you're using the most pressure, either from a product perspective or from a payer perspective? We know the Med D books are competitive. We know pressure on generics is competitive. But I guess any kind of incremental color you give there would be helpful.

Well, George, I would say it probably has more to do with the mix shift. Okay? And when you look at – as you look at pharmacy growth, we are seeing higher growth rates in government-sponsored care, Medicare and Medicaid. And as we've said, those segments, while very productive from a utilization and a revenue growth perspective, typically carry lower margin rates.

Okay. That's helpful. And maybe a quick follow-up is, Larry, I'd just love your broader thoughts around the growing negative drug industry rhetoric. It just seems to be getting more aggressive at every angle and targeting every participant in the system, whether it's Med D, you had the formation of the health transformation alliance last week, you have CMS taking another look at Med D it seems. I guess just how do you combat that? And how do you quantify the risks of more dramatic government intervention in the space?

Well, George, listen, it's a great question. And when you think about responding to that, you really think about what clients hire us to do. Okay? And they expect us to work hard on their behalf in terms of how do we provide high levels of service for their members at the lowest possible costs. And we've talked about the variety of ways in which we do that, and we're very pleased with what we've been able to do. Okay? And the tools that we've been able to provide for our clients, again, they've got the option of how aggressive they want to be in terms of utilizing those tools. But we think the results of that will be reflected in our trend report that will be coming out within the next several weeks. Okay. And it's our focus. And I think, George, we've got to be careful that private-sector innovation I think has done a lot with which to satisfy the objective, right drug, right patient at the lowest possible cost. And if you look at Med D as an example, it was 2006. It's almost a decade later now, and when you look at the estimates of what CBO had predicted the cost of that would be 10 years ago, and what it's costing today, it's a fraction of that, which I think is one of the key reasons for that is private-sector innovation and the fact that competition ultimately drives down costs. So I think there's going to be a lot of crosscurrents as we go through an election year, and we'll just continue to work hard to tell our story and bring innovation in an effort to do what clients are hiring us to do. And quite frankly, we believe they are satisfied in what we're doing apropos to the new business that we've won the last couple of years.

Okay. I appreciate the color. Thank you.

Thanks.

Hey, Larry. A question about the sort of evolution of new customer acquisition. So when you look at on-boarding the 16 million lives here in the last two years, as they go into your system, you think about the first couple of years they are with you, is the growth rate with those customers, those lives, a lot higher than kind of more mature lives, right, because of all the different products you're selling to them, is that the case? And then in a case where you have 16 million lives over two years, if that's true, is that enough? You think of the growth coming from those 16 million lives, is that enough to move the overall enterprise growth rate in a visible way? Or no, just kind of blends into your historical growth rate?

Well, John, it's Larry. I'll start and I know others will jump in here. John, your answer to that in part lies in terms of the client makeup and the client adoption of those differentiated services. So a client who is adopting Maintenance Choice and it's a new client, obviously we're going to see a rapid uptake of share coming into one of our distribution channels because that's the nature of that plan design. I think if you go back and, again, reflecting on some of the things we talked about at Analyst Day, this past year, a big piece of that new growth is in the health plan segment, and as you look at our enterprise share of those health plan clients, it's in the low 20%s. So obviously that creates a big opportunity, and that's something that will occur at a much slower rate than a client who adopts Maintenance Choice. So obviously a lot of opportunity, and opportunity that we'll see cascade over the life of that contract.

So I mean this is not only, I don't know if this is the biggest two-year period of customer acquisition that you've had. I think it may be. It's not only that, but also the makeup and where you are with your programs. This actually is probably a more significant driver or could be than what you've seen historically. Right, because of the mix of the plans and where you are with your programs.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from a assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from a assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories. I think from a skilled nursing facility perspective, it's all about growing the number of beds, I think, from an assisted living facility it's really designing products and solutions that capture more of those members within the beds that we have while adding beds as well. But there's more of, I'd say, a product development set that needs to happen there for share capture and share gain.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business. And then I think as you look at the long-term care business, you're going to need to look at it in kind of different client categories.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, that there we've spent enough time with the long-term care clients to understand their pain points and their needs, and that's what's driving some of the pilots that we have underway. And I do believe that recognizing that to some degree long-term care is episodic, and you got 2 million patients that are being discharged each year back into the home. And being able to provide differentiated services for the client and the facility operator, okay, and then again, be able to follow those patients across their continuum of care is a significant opportunity to grow share, and again, that will continue to evolve over time over a multiyear period. But I think we're excited by the opportunities that we see there.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there are, I'll say, (50:45) type opportunities within the market space and you'll see us continue to probably do that within the long-term care business.

And, John, I think, the only thing I'd add that goes back to Lisa's question earlier, is we have a significant opportunity to provide value in this space, consistent with your point earlier, to grow and leverage the integrated resources here to capture more share on behalf of our clients. We see it as a great opportunity for CVS Health.

Yeah, John, it's Dave here. I do think that the market is still pretty fragmented, so I do think there is more optionality to capture sales here.