Ladies and gentlemen, thank you for standing by. Welcome to the CVS Caremark Q1 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, May 02, 2014. I would now like to turn the conference over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead Ma’am

Thanks Matt. Good morning, everyone, and thanks for joining us today. I am here this morning with Larry Merlo, President and CEO, who will provide a business update and Dave Denton, Executive Vice President and CFO, who will review our first quarter results as well as guidance for the second quarter and year. Jon Roberts, President of PBM and Helena Foulkes, President of the Retail Business, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up, so we can provide more callers with the chance to ask a question. Please note that just before this call, we posted a slide presentation on our website that summarizes the information you will hear today as well as some additional facts and figures regarding our operating performance and guidance. Additionally, please note that our quarterly report on Form 10-Q will be filed by the close of business today and it will be available on our website at that time. During today’s presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties, actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings including the risk factors section and cautionary statement disclosure in our most recently filed annual report on Form 10-K. 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 definitions of these non-GAAP items as well as reconciliations to comparable GAAP measures on the Investor Relations portion of our website. And as always, today’s call is being simulcast on our website and it will be archived there following the call for one year. And now, I will turn this over to Larry Merlo.

Well thanks, Nancy. Good morning everyone, and thanks for joining us today. We posted solid results in the first quarter with adjusted earnings per share growing 22.5% to a $1.02 per share. Both our PBM and retail segments delivered solid operating profit growth despite the impact of a fair amount of unforeseen weather related issues. And when combining the weather issues with the higher than anticipated tax rate, the estimated impact to our adjusted earnings per share versus our expectations was at least, $0.03 per share. Now, let me just say that it’s unusual to hear us talk about the impact of weather on our business, historically it’s been our practice to not blame the weather when we explain our results. But this quarter, the amount of severe weather was so abnormal that quite frankly it’s hard not to talk about it. I want to emphasize that our underlying trends were very strong and given the weather issues noted, retail operating profit increased a very healthy 14.2% just below the low end of our expectations. PBM operating profit growth was slightly above the high-end of our expectations increasing a very strong 28.5%, also of note is the $1.8 billion of free cash generated in the quarter, which puts us well on our way to achieving this year’s free cash flow goal. So while disappointed that the severe weather put a damper on an otherwise excellent quarter we remain very confident in our outlook for the full year and Dave will discuss our financial results and guidance in greater detail during his financial review. So with that let me turn to a brief business update and I’ll start with Health Reform. As I am sure everyone is aware the latest available data suggests that 8 million individuals have enrolled in the…

Thank you, Larry. Good morning, everyone. As always our plan to provide a detailed review of our first quarter results, followed by a review of our guidance. But before I get to that, I want to highlight how we continue to enhance shareholder value through our disciplined capital allocation program. During the quarter, we paid approximately $325 million in dividends and given our continued strong earnings outlook for the year; we remain on track to surpass our targeted payout ratio of 25% at some point during this year, more than a year ahead of our original schedule. Additionally, we repurchased 11 million shares for approximately $801 million, at an average price of $72.69 per share. And we still expect to complete at least $4 billion of share repurchases for the full year ‘14. So between dividends and share repurchases, we’ve returned more than $1.1 billion to our shareholders in the first quarter alone and we continue to expect return more than $5 billion for the full year. And as Larry mentioned, we generated approximately $1.8 billion of free cash in the first quarter. Strong growth in earnings and working capital improvements were the key drivers of this large year-over-year increase. And we continue to expect to produce free cash flow of between $5.5 billion and $5.8 billion this year. Now turning to the income statement, adjusted earnings per share from continuing operations came in at $1.02 per share up 22.5%, reflecting very solid growth across all of our segments, despite be in one sample of our EPS guidance range and as Larry stated earlier, the estimated impact to adjusted earnings per share from the combined effect of the unforeseen bad weather and the higher than anticipated tax rate was at least $0.03 per share. GAAP diluted EPS was $0.95 for…

Okay. Thank you Dave. And let me just wrap-up with a reminder that all the ongoing changes that we are seeing in the healthcare environment are certainly creating unique opportunities for CVS Caremark and our unmatched model in innovative solutions make us well positioned to capitalize on these opportunities and we believe create a sustainable competitive advantage. And our management team remains laser focused on driving enterprise growth while enhancing shareholder value. So with that let’s go ahead and open it up for your questions.

(Operator Instructions). Our first question comes from the line of Charles Rhyee with Cowen and Company. Please go ahead.

Yes, thanks guys for taking the question here. Larry, Dave I wanted to talk about on the PBM side here lot of decisions over the last few months particularly around all the new drugs and HepC and just want to talk about what your experience has been so far on the PBM side and then also particularly on our specialty pharmacy but also on your Part D lines. I think you talked about 3 million members in individual Part D plans, do you have a sense on your exposure there as the more of the risk bearing entity? And can you kind of talk about per patient what your exposure would be in Part D? Thanks.

Yes, Charles this is Larry. Let me just start and then I’ll ask Jon to jump in here. But I think as we have alluded to in our prepared remarks specialty patients are dealing with complex issues and again as we heard last month at our client forum, our clients are more focused than they have ever been on managing this trend without compromising care. And the private market has solutions that have proven to be successful and there is an acceptance and a growing interest in terms of bringing some of those tools to that they’ve been successful on the traditional side of pharmacy to specialty. And in addition to that we talked about some examples this morning where we believe we have unique integrated products that even take that one step further. So our goal is to bring these tools to the entire specialty market HepC just becomes one of those categories. So Jon why don’t you….

Yes, okay. And Charles, Sovaldi is about $80,000 per 12 weeks of therapy. We do have prior authorization programs in place today to ensure appropriate utilization. And I think the most important thing is we’re expecting new drugs and to the marketplace in the fourth quarter that will create competition and allow us to leverage our formulary capabilities that we introduced three years ago very successfully. So it is getting a lot of attention, I agree with Larry that the tools that we have can appropriately manage this and we’re expecting to be able to leverage those as new drugs come to the marketplace. As far as our Part D plan, there is usage in there and we expect that to continue but we do have protection in the risk quarters. So we expect the impact to be minimal for this year.

Okay, that’s helpful. And maybe just Jon, just a follow-up there, talk about your formulary tools. Can you talk about some examples in specialty where your formulary tools have been able to leverage the pricing, I guess an example would be maybe you experienced in multiple sclerosis because if you look at the list price for some of these drugs like even and Avonex which is an older therapy relative to some of the other one. The price has still increased over the years, but is that an issue that we’re looking at the list price versus maybe what the prices that your clients are actually paying? Thanks.

Well, Charles, how we leverage our formulary strategy is, formulary placement access to the drugs for our clients and their members and we negotiate with pharma rebates that those past back to our clients and reduced the cost of that drug, the gross cost that you see they get a rebate on top of that and reduces the ultimate price of that they pay. So that’s how it works, we have done it, with specialty growth homeowners is a good example and we have been very successful and that will expand to other categories and HepC is a very good example of how we will expand that moving forward.

And Charles, the only thing I would add is that among clients there has been a growing interest formulary management. And I think as you are aware we have seen that competitors introduce very similar strategies and we introduced our formulary programs some three years ago, so we think it’s a real opportunity to drive down cost.

Our next question comes from the line of Robert Jones with Goldman Sachs. Please go ahead.

Thanks for the question. Just looking at the pharmacy same store sales results, pretty impressive in considering the weather impact, factoring the impacts from generic and it would appear that pricing was up about 300 basis points, obviously it is still very healthy but a pretty significant step down from the pricing impacts from the previous quarter. We have heard some comments around inflation moderating, just wondering what you guys are seeing on the pricing front and have trends in pricing on both generic and branded changed at all in your views since you gave guidance back in December?

Bob I will start and Dave May want to jump in here as well. But we haven’t seen anything out of the ordinary that we have been anticipated or comprehended in our outlook. And on the branded side I think that the trends there have been very similar to what we have seen in prior years. And in the generic market, there has been -- we’ve seen some price increases, but it’s relatively off of -- it’s a small number off our entire book of business and really not material in our results.

Yes. I’ll just add just a bit to that more around the generic side. As we look at it from a generic marketplace, there is a lot of generic capacity in the marketplace today and there is a lot of generic competition. So, as we think about it long-term, we think there is a lot of opportunity remaining in our book of business to continue to drive down our cost of goods sold and we’re doing that both on our own, but importantly here in the next several periods beginning to do that through our joint venture with Cardinal Health.

Got it. And I guess just a follow-up around pharmacy moving over to scripts; obviously I appreciate all the detail on the impact from the weather. Scripts looked like they still grew 2% on a same store basis; I think you said 180 basis points to 200 basis points was the negative impact from weather. So really would have been pretty impressive growth on the script front. I think I saw on the slide, Dave you might have mentioned that the outlook for 2Q is 2.75% to 3.75%. I think this is clearly a step forward from what we’ve been seeing as far as prescription growth really over the last few years. Can you guys just maybe talk about or breakout what the drivers are from the underlying growth in both the quarter and behind your expectations for script growth going forward?

Yes, maybe I’ll start and maybe I’ll ask Larry and Helena, if they want to add to this. We as you know, we continue to take share in the marketplace. And I think importantly as you look at our business over the past couple of years, we’ve continued to take more share of the Caremark clients dispensing volume into the CBS channel and/or into the Caremark mail channel. And that has enabled us to, I’ll say outpace in the marketplace in general. And if you look at our script trends, you look at how we performed in Q1 and in our expectations for the next several periods, we’re continuing that process and we have not really fundamentally changed our strong underlying trajectory there. Next question, please?

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

Good morning guys.

Good morning Ross.

Good morning Ross.

On the PBM selling season, if you had to sort of break it down into the key drivers of why you think you are sort of seeing more interest in the platform and why you sound, I would say incrementally more enthusiastic on sort of your potential capture rate this year; do you think you are getting some positive tailwind from the tobacco announcement, do you feel like it’s maintenance choice driving it, do you think some of your home strategy and specialty strategy is resonating? I’m just trying to get a sense for where you think you are kind of -- the key points where you’re getting momentum.

Yes Ross, its Larry. Let me start and then I think others will jump in here as well. I think that the ticket to the game is you still got to be right on price and you got to have demonstrated high levels of service performance. And I think that once you get the ticket to entry from that, I do think many of the elements that you mentioned and some that we alluded to in our prepared remarks, become differentiators where the client can check the box there and in some cases, there is not a competing offering. And I think tobacco is another one of those items that you check the box on, recognizing that there is more and more and growing evidence in terms of the cost of tobacco in overall healthcare costs and the desire of health plans and employer sponsor coverage to begin to curve the costs associated with that. And I think in many cases, they see us as leading the way to bring solutions to that.

Yes Ross, this is Jon. Let me just add that we feel very good about our positioning in the marketplace. So, our service levels are strong, Larry talked about that in his opening remarks. Our differentiated capabilities are resonating in the marketplace, like maintenance choice, what we’re able to do with MinuteClinic, what we’re able to with specialty. Specialty is clearly our client’s top priority. And we talk about our capabilities with Specialty Connect, NovoLogix and Accordant as an example. I will tell you that as I sit in front of clients, tobacco always comes up, and they applaud our move. And I think it’s just another intangible that as they’re making decisions around which provider they want to go with, they feel really good about a company that’s made a move like that. And then the last question you asked about was platform; that does not come up in our client meetings. They’re on a platform, they’re on one platform; it’s really a non-issue for them, it’s an internal opportunity for us around efficiency and productivity.

Great. And maybe just one question on capital deployment. I mean Dave you’ve done a fantastic job, you talked about where the payout ratio’s gone and you guys have obviously been buying the stock. Do you still have room on the M&A front? There has been some more chatter in the public markets about you may be doing more down in Latin America and Brazil. I mean how has that venture gone so far? How are you -- updated thinking about that market, and is that still your sort of preference in terms of some of these higher growth markets for kind of expansion versus maybe other more developed markets that have lower growth?

Ross, this is Dave. I’ll kick it off and then I’ll ask Larry to chime in here. As you pointed out, we’re fortunate, the fact that we have a very robust cash flow generation organization in a sense that we’ll throw awful lot of cash, both this year but more importantly over the next several years. As you said, we’ve been very focused on the fact of using that cash to put it to use in the most effective manner to drive shareholder value. And we have -- we still have opportunities, importantly to increase our dividends to do meaningful share buybacks. But importantly we can also add to and invest in to our business when it makes sense. And there is opportunities, both here in the states, but also opportunities elsewhere around the globe. And I’ll ask Larry to transition into maybe a conversation around what we’re seeing in Brazil at this point in time.

Yes. Ross, we’ve been -- I guess it’s been just under a year since we’ve been operating and operated results have been in line with our expectations. And we remain focused on learning from our international operations. We’ve got several pilots that are underway that are allowing us to bring expertise to the market and at the same time understand which of our capabilities can work in Brazil, we’ve seen good results from those tests. And today, we’ve got I think it’s 47 stores. We want to take accelerate that growth in future years, both organically as well as inorganic. And as we’ve stated in the past and as Dave alluded to, we will take a disciplined approach to our international expansion plans.

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

So Larry, two things, one on specialty. If you take Coram out, the impact of Coram, would the growth rate have been similar to the last few quarters? And then…

Yes.

Would have been?

Yes, it would have been.

Okay. And then, do you think as you build out your capabilities in specialty, so for the last four quarters roughly 20% or so, is there a scope for that to accelerate much, say over the next couple of years?

John, I think there is and I think that the significance around the Coram acquisition was our ability to not just manage the specialty drug but to manage the specialty patient holistically. And the infusion component was kind of that missing piece of the puzzle that would allow us to do that. So we are very excited about the capabilities that we have. And we touched on some of the unique offerings that we can bring to market. And that combined with just the anticipated growth in the specialty market, I think that we are in a very good place.

And John, this is Jon. So, with the Coram acquisition, with the NovoLogix acquisition, when you think about specialty pharmacy, half of the spend is on the pharmacy side which PBMs have traditionally managed. We have essentially doubled the size of the pie. With those assets we can now participate in specialty pharmacy across both pharmacy and medical. And we’ve built out our specialty strategy really across three pillars, cost; quality; and access. And we have solutions; the marketplace is looking for solutions. This is our top priority. And we believe that our assets will allow us to disproportionately grow in this area.

And maybe I’ll just close on the statement that as you look at the specialty market, we’re plugging ourselves into payers and to capturing more share of the payer spend, but we’re also importantly plugging ourselves into the patients and using our Specially Connect, our retail and MinuteClinic assets to capture more wealth in market and all of that from an environment perspective is being fueled yet again by new products over the next several years coming in the marketplace, as that will further drive utilization in this category.

So, John obviously you can tell that we are excited about it.

So, just transitioning to retail for a second, you guys have done an incredibly good job of improving retail profitability. So the question becomes and I guess the moving target, but how close do you think we are to getting to peak margins in that business do you know? And then let’s assume that there are things with personalization that kind of are game changers. How much more upside is there to retail EBIT margin? And is personalization what you do with the circulars, that’s the single biggest driver?

Yes, John. Let me take the first part of that and then I’ll flip it over to Helena to talk more about the personalization strategy. John when you think about the opportunities at a very high level of retail, our ability to from an operating margin point of view okay. Our ability to pump more volume through our box is what the key driver is there, and especially when you think about the pharmacy opportunities acknowledging the fixed costs that exist, not just with the bricks and mortar, but the cost of the pharmacies. So I think that many of our strategies and our thought processes with that in mind. And then I’ll ask Helena to talk a little more about the personalization strategies as it relates to the front end business.

Sure. So, overall you can see that we continue to focus on driving the long-term profitable growth in this front and while front store sale are small part of our overall business, we see a growing role of both digital and personalization. So our personalization efforts are really at the key and some of what we hear from our suppliers is given that we’ve been added for 16 years with extra care, they are definitely noticing our unique ability to use the data to drive profitable growth. So in particular if you look at areas like health beauty and personal care, these are areas where we continue to grow share in the market place and we are essentially staying out of the promotional fray and growing our margins and our profits in these businesses. So this continues to be a very important part of our overall growth strategy.

And John as we alluded to in our comments, I mean obviously we would like our front store comps to be better and I think as I have talked about on past calls, there is a balance there, it’s a little bit of art and science and we’ll continue to work to innovate to find that sweet spot there, but I think that again as you heard from my earlier remarks, our goal is to create a sustainable front end strategy and quite frankly we think there are elements of the current promotional market place that are sustainable for the long-term.

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

Hey guys and I actually wanted to follow-on with John was kind of talking about, Larry what you were talking about, just basically as you look at your kind of a strategic question, as you look at your asset base, whether it be the clinics, the stores, specialty to push the backend of the stores, how interconnected do you believe the businesses are?

Well, Scott, I’ll start and other may want to jump in here. Okay I actually thing that, if I can use a baseball analogy that we’re I actually think that we’re probably in the second inning in the nine inning game. I mean I think that we’re doing some things that you don’t see in the marketplace largely driven by plan design for our PBM clients and their members, but I think there is so much more that we can do, and that’s what our team and I’d say teams because it’s not just the retail focus it’s an enterprise focus when you think about our retail offerings and how that intersects with our PBM offerings and plan design as well as MinuteClinic.

Hey Scott, this is Jon. I mean let me bring what Larry talked about for life. So there is, we have a client that’s health plan that has a focus on the primary care medical homes. And so we’re connecting into their technology platform, our PBM services, our stores, our MinuteClinics and Coram and we’re able to work with the primary care doctor and message patients message the providers message the pharmacy message the MinuteClinics with the goal of being all align to influencing that number in a way that ultimately reduces overall costs. So we positioned ourselves as an integral part of the healthcare network, leveraging our assets and our technology capabilities. So I think that’s a very good example of how the assets all come together in interplay.

Yes. And just building on Jon’s point I think if you look at and Larry alluded to just before, but we have spent a great deal of time Jon’s team and my team working together on the rollout of specialty connect. We’re really excited about where that’s going. The great example of how we’re working together to bring a solution for the marketplace that is truly unique and holistic and thinking more from an enterprise perspective than our individual business units.

So if you guys think and it sounds like that you do that you would agree with this idea that the stores can be kind of become a center for health and wellness. And looking at that asset base, where do you think the biggest lever is in that store to increased return on invested capital, return on assets?

Well, Scott, I think it goes back to the question John asks. So I think ultimately it’s generating more volume through the box. Okay, and that’s what we’ll see the biggest ROI.

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

Hi, thanks very much. Good morning, everyone.

Good morning, Lisa.

Larry, I noted that when you talk about the 2015 selling season you said more RFPs than we’ve seen historically. Is there any way for you or for Jon to size the potential pipeline or opportunities for 2015?

Well, Lisa, I think that’s hard, I mean, we look at the I guess, the season opportunities more based in terms of the RFPs that are out in market and as you will know RFPs are not all April as you look at volume.

Right.

I mean, I think that one other questions that we always get as how much business to we have up for renewal, and we see it has kind of normal renewal season less FEP. And I think we’ve said on past calls, we had $16 billion to $17 billion up for renewal and again that excludes FEP. But I think that again as people compare this year to last year recognizing the last year was down year from RFP activity, the marketplace is very active at this point in time.

Lisa this is Jon. Obviously it’s just still very early, so we have more to say on our next call.

Jon, could you characterize that you see more manage care business is up renewal this year more employer business any color around how we should think about this year selling season?

I think, it’s hard to say. Clearly you see the manage care business come out early in the season, so we have seen that and we are just now beginning to see the employer business come to the markets. So and activity is tracking essentially to what we saw couple of years ago, so I’d probably think about it in those terms.

Our next question comes from the line of Dane Leone with Macquarie. Please proceed with your question.

Hi, thank you for taking the questions. On mail choice penetration it dipped down to a low 19 in many years this point, I was just curious to get some inside into the cause of that, whether it has to do with PTP volume loss from the CMS sanction or something more fundamental in the market, so anything there would really help us.

Okay, let me start and again others may jump in, but the as we have said in the past that we did not, we don’t see traditional mail as a growth driver, we saw that slowing okay, and one of the drivers behind that is payer mix shifts as more business migrates into the Medicare and Medicaid segments. The traditional drivers of mail just don’t exist within those government programs, and I think we are beginning to see that.

And Dane, Jon again. But we are seeing our mail, the Maintenance Choice volume grow at retail, while not enough to offset what we’re seeing at mail. So, we do think as we look at, we’ve about $17 million lives on our Maintenance Storage program, we have talked about the opportunity to grow that to $34 million lives. So, we still think it is an opportunity to grow. Larry talked about the mix shift difference and specifically about our PDP plans, Part D plans have very low mail penetration. So, it’s really not a factor here.

And so as we think about your unique model versus some of our competitors from the outsider view generally we hope that mail volumes carry a much higher margin for the business than retail volume. Does that still whole true or is that really changed overtime as you’ve developed your integrated model?

Dane, this is Dave. That’s a little different for us. You think about the economics of let’s say a 90 day maintenance prescription be that at mail or at retail. They carry the same economics for us. So, we’re truly financially agnostic to that. And what’s nice about our models as we plug into payers and as we work with patients, we can give them that opportunity at the same economics as a I’ll say mandatory program pushing them into a channel that they may not chose to utilize.

Our next question comes from the line of Peter Costa with Wells Fargo Securities. Please proceed with your question.

Thank you for squeezing me in here. Regarding your assumptions on weather, do you assume the basket size increase had to do to some extent with the severe weather or do you think that that’s sustainable going forward? And then how do you know that some of the impacts weren’t from the competitors advertising programs or perhaps from the greater seasonality that you should probably expecting relative to higher deductible plans being sold, so many changes going on this year with healthcare reform? How were you able to parse away some of the weather impacts from some of those other impacts?

This is Helena, Peter. I would just say that our basket size growth continues on its normal trend, we haven’t seen anything out of the ordinary and for us as I said before, it’s a continued focus on personalization, we have as Larry mentioned before, as others have increased their promotional activity, we have actually reduced ours and instead or spending this on our top customers. That is our particular focus, these are the top customers, we are typically looking at the top 20% or 30% of our customers who are driving the lion share of our volume and profits and we have a continued focus on increasing the number of personalize outreaches we have to those folks.

And Peter keep in mind that when we are talking about basket size, it is just the front end basket and does not encompass, anything in, excuse me, in the pharmacy.

I understand. My question is more of the how were you able to parse away the weather impacts from all the other things going on, because the weather erratically is impacting not just the front end but back end as well?

Yes. This is Dave. I think the team does a pretty good job of annualizing kind of by market and understanding where we quite frankly have stores that are on limited hours or stores that are closed and/or whether a severe weather, whether we can see the traffic patterns. And so I think we can do it kind of by day, by store. And so it’s not we can’t 100% lock that down but I think the team does a pretty good job of kind of analyzing that and that’s why we give you a little bit of the range in the commentary we’ve provided today.

Our next question comes from the line of Edward Kelly with Credit Suisse. Please proceed with your question.

Yes, hi good morning guys.

Good morning.

Couple of quick questions for you, first I don’t know if you can I know you don’t usually do this, but since we have the impact of weather in Q1 could you help us at all in terms of how things sort of shaped up in April, couple things within that. One it seems like underlying script growth for the industry to accelerate and I was wondering if you saw any of that and what you thought might be the drivers? And then second how the front end business looked through Easter with better weather or anything better there?

Ed those are great questions unfortunately we can’t comment on that at this point in time.

Okay. Question on tobacco, any thoughts on what you might do with the space behind the store and whether there is an opportunity to maybe offset some of that sales loss in the back half of this year?

Hey this is Dave. I’ll start and then I’ll ask Helena to chine in. Just I want to be clear on the tobacco category and as we exited while we will come up with ways to use that space. There is unlike, that product line. As you know the tobacco category at least from a financial metrics perspective is very productive. So with that maybe I’ll turn it to Helena.

Yes, that’s totally right. So we’re still working on our plans. We’ve been testing a number of things. But as Dave said we certainly don’t expect that what we put a high in that space we’ll make up for the lost tobacco sale. What we have really been looking at is as a question before alluded to we’re increasingly positioning ourselves as a health care company and making sure that our store more and more represents ourselves as the healthcare company.

Our next question comes from the line of Steven Valiquette with UBS. Please proceed with your question.

Hi, thanks, good morning.

Good morning, Steve.

So I guess maybe just a quick question on the JV with Cardinal. Aside from the $100 million in annual payment that you’ll get from them I guess the question is do you expect a fairly quick turnaround time after July and improving your overall costs by pulling the purchasing with Cardinal or will that happen slowly overtime. And the reason why I asked is that before about some letters being send out by the various parties in the other procurement collaborations in the supply channel to the generic suppliers with (inaudible) capital as on the script. So I’m just kind of curious of your thoughts on what’s going to happened after July whether there will be quick improvement or is it gradual, just any color that would help? Thanks.

This is Dave. Maybe I’ll start here. Clearly we’re working a pretty aggressively right now with both folks from CVS as well as folks from Cardinal to get the joint venture up and running. We still have a little bit of work to make that happened. So I think the teams are working very collaboratively to make it happen productively. I do think that it is probably just a little too early to provide too much color on that. I will think it’s important that, we’re going to figure out ways and which we get the joint venture up and running that we’re going to partner with generic manufactures that working to create win-win scenarios for them. And you could imagine that some of that would happened quickly I think some of that could happened overtime. So the cadence of an improvement I think it’s probably too early to give us much color to at this point.

Okay. Great, thanks.

Our next question comes from the line of Mark Wiltamuth with Jefferies. Please proceed with your question.

Hi. On the specialty, what’s the primary lever on getting some of that specialty spend out of the medical benefit and into the pharmacy benefit, is it just the changes in benefit design?

Yeah, Mark this is Jon. So that’s essentially it. So if a payer allows it to be paid under the medical benefit and its build that way it goes through. They do have the ability to say we are not going to allow that to be paid under the medical benefit, it has to be moved over the pharmacy benefit and the value proposition there is lowering cost of goods. So we think it’s an opportunity for the marketplace and again we feel like our assets position us to help our clients find ways to save money in this rapidly growing area.

And the Coram fits into that as well?

I am sorry.

The Coram fits in that as well, so you can aim people towards your Coram business on infusion rather than going to a medical facility?

Yes, it’s interesting when you look at Coram, they have people out in 1,200 hospitals across the country and they essentially recruit patients one at a time. We believe the opportunity is very fragmented market working with payers to reduce the infusion network on a more volume through Coram. And there is a value proposition there for the payer. And it’s not just in drug cost but it’s we can help get patients out of the hospital faster, because of our capabilities to do many of the procedures at home versus in the hospital and we could also help to reduce readmission rates. And so as we have been out in the market place, payers are very interested in these capabilities. And I think very open to skinning down those infusion networks which means more volume through Coram.

Mark, the only other point I want to emphasize is back to the first part of your question is that I think the data is powerful here and showing clients whether it’s a health plan and employer, the cost savings opportunities is an important part of the story.

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

Yes. Hi, good morning. I couple of broad questions. First of all, on the specialty and especially on Sovaldi. I mean we are hearing that the payers are looking to narrow the network they are using in order to save cost, i.e. just gearing their patient population toward pharmacy, their own specialty pharmacies. So, when you think about your specialty scripts or maybe Sovaldi as an example, what percent of that script is coming from the Caremark population and your other health plan partners?

Ricky, this is Dave. We don’t provide that level of detail at this point of time. I would say that, just as Jon maybe indicated earlier today in his remarks around how we manage specialty, one lever that is available to specialty is I’ll say narrowing the network and pushing those and centralizing those fills into a centralized provider. And we do that in some cases where it makes sense or in some cases we have an open network. But that’s an opportunity.

Yes. And Ricky, so we have not heard a lot of activity in Sovaldi from payers around narrowing the network, most of the activity is around making sure which patient should be placed on the medication. And really, the biggest opportunity to lower the cost for Sovaldi is going to be around formulary management. And that will happen in the fourth quarter, when these new drugs come to the market, and there is more competition in the Hep-C class.

Okay. And then secondly just on generic Nexium obviously there is some uncertainty around the drugs so do you a Nexium benefit into ‘14 guidance?

Ricky this is Dave, we Nexium like many other products there is always some level of uncertainty in our guidance range is comprehend, I guess a series of different scenarios around both that product and another products.

Our next question comes from the line of David Larsen with Leerink Partners. Please proceed with your question.

Hi, can you comment on how you would enhance the level or number of services that a retail store could provide to become more primary care physician like, in particular around lab is that something you are contemplating bringing to the stores? Thanks.

Yes, David I mean we are doing a number of point of sales lab testing today, whether in A1C, we’ve piloted some testing for some other disease baits, we’re, there is a lot of technology out there, the technology in that space is moving very quickly and we’re evaluating what is in the marketplace, and I think it’s not a question of if that’s more question of when and finding the technology that we believe is right for MinuteClinic.

Okay. And just in your view in a perfect world I mean would these be lab tested are done in the store or would be drawn on the central lab and then brought back in or a combination of both?

No, I think we are thinking about it as, lab testing that’s done in the store that really satisfies the goal of increasing the services that we can provide around the management of chronic disease.

Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.

Hi, I know this is getting late in the call. I just had a quick follow-up to make sure I understand something, when you’re talking to clients now about their specialty trend. What do you think the market specialty trend is now and what can you bring that number to using the most aggressive tools that you have? Thanks.

Well John, it’s Larry, I mean I think as I mentioned, in 2013 we saw the specialty trend at approach I think it was just a tick under 16%. And we have a variety of models that we share with clients that if left unmanaged that trend is going to be in the high teens and I’ll flip it over to Jon because he has got a very nice presentation for our clients to show by adopting all of these various programs, what the trend could ultimately come down to.

Yes and John so we think we can actually get a double-digit trend like that down to almost flat. And there are programs that we have such as advantaged control specialty formulary that we can reduce trend by 1.5%. Medical claims averaging and repricing that can bring it down 2.5%, side of care medical carve out that can bring it down 3.6%. I will go to all of them, but there is numerous programs that we have that we’ve been building over the last several years that can take these high trend rates in specialty and really make a huge impact on them, I mean get them down to almost zero if they adopted everything.

Right. And as you look in your crystal ball say out 2016-2017 what do you see the overall drug trend being including specialty let diminish?

That’s a good question and at our client forum I spend some time to actually talking to our clients about how they should begin to think about their pharmacy benefit because if you look at utilization being somewhere in the 2% to 3% range moving forward you see inflation overall across their book being somewhere in the 7.5% range. You see the generic pipeline subsiding as an example. So we think that trend overall can be somewhere in the 6% to 10% range of unmanaged, and obviously we’re encouraging them to adopt strategy such as more aggressive formularies, narrower networks to bring those, to bring that trend down. And it’s interesting, the marketplace, I think is very open to these types of solutions that have been developed.

John, I think in Jon’s presentation at the client forum I think there was one of those aha moments for our client that recognizing that over the last several years, the influx of generics has been a key driver to bringing the cost trend pretty flat. And a reality that is we migrate post ‘15 and generic centering the marketplace while they’re still there it is slower rate than historical averages that they’re going to have to do some things differently and think about things differently. And they appreciate the fact that we’re thinking about those things for them and bringing them solutions.

Our next question comes from the line of Meredith Adler with Barclays. Please proceed with your question.

Thanks. A lot of questions have been asked. Maybe I will ask something that hasn’t been asked at all, you did mentioned that the strong free cash flow in the first quarter was tied to working capital and could you just talk a little bit about sort of what you’ve accomplished in managing working capital and what you think the opportunities are?

Yeah, sure, Meredith. There is really two things, one is we also posted very aggressive growth rates from an earnings perspective so that obviously helps free cash flow yield. But secondly, as we continue to push on our working capital, I would say Meredith there is not kind of one program that we have there, that’s driving all that. We continue to push on AR and AP. I think as we have talked about in the past probably our biggest opportunity continues to be to enhance our inventory position, from a supply chain perspective within the retail stores. If you look and you try to compare our performance with kind of the, I will our top performance in the marketplace, we still have anywhere from the $1.5 billion to $2 billion of inventory that I think we can get out of the pipeline overtime. And the team is working on that today. There is not one silver bullet to that. It’s going to be a lot of little changes that we need to do to really enhance I would say our safety stock as opposed to really dramatically changing our SKU count in the stores, if you look at it from that perspective.

Great, and then I have a question probably for Helena. Based on everything you are saying it doesn’t sound like there is a point in time in which you will cycle reduced page count or anything like that, is that the right way to think about it that this is an ongoing process of using your marketing funds more wisely or will we see less impact at some point?

Yes. No I think that your first assumption is right Meredith. If you look at on overall household penetration of the Sunday circular in the last five years and projections for go forward, it continues to decline. We see that, discontinuing I have turned page. And so to be ahead of that curve, we have really been investing outside of the circular. So there is no one silver moment where we are going to cycle something, I think this will continue.

Okay. We will take two more questions.

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

Hey, good morning guys and thanks for taking my questions.

Good morning George.

How are you guys?

Good.

I guess, first thing I wanted to talk a little bit more about the PBM, results were pretty impressive. And if I kind of boil it down to profitability per adjusted script, really strong growth year-over-year. I guess, can you talk about what’s driving that there? How much should we think about that as to contribution of mix more for acquisitions versus just continued improvements in the business or kind of what else is the key there?

This is Dave, George. I’ll touch upon that. We don’t really use that metric that much, we think it can give you a false -- that metric can give you a false positive or false negative depending upon the applied mix where you are in the profitability cadence of Medicare Part D as if the risk order is to through all the cycles and the benefit levels. I would say though, having said that there is a couple of things that are driving our profitability we talked about. We continue to push on specialty and specialty is becoming a bigger portion of our business and we continue to enhance our performance from a specialty perspective. We further more have worked aggressively to improve our cost structure from a cost of goods sold perspective. And you have seen us continue to [wretch] it down and improve our buy side economics. And then finally from the PBM perspective driven somewhat by our formulary strategy have improved our rebate yield overtime. So, all three of those continue to enhanced our profitability. And then I will just say sliding on top of that is we made some investments over the past several years, from a streamlining perspective and our cost structure is in a much better position today than probably what it was three or four years ago. So, all those components are contributing to that growth and profitability.

Yes, I remember that you guys didn’t see that as a core metric, but even as it’s a metric that I continue to look at because other companies in space use it, very strong improvement even on the tough comp year-over-year. And then I’d follow with one more quick one and I don’t know, do you guys have any data and are you able to break them kind of what is the capture rate, or what is the cross sale as the MinuteClinic business continues to grow pretty strongly, you guys are posting very strong script volume like kind of what the script capture from people who shop at a MinuteClinic and how should we think about the tie between the growth in the MinuteClinic business to the tie in the pharmacy sales?

Yes. There is a tie between patients who utilize the MinuteClinic typically when a prescription is written at MinuteClinic is 95% plus of the time filled at CVS pharmacy something like that. I would say that MinuteClinic is still relatively small in the grand scheme of as it relates to CVS pharmacy, so it is not a major contribution of script comp growth, but it is a nice compliment to our business. And quite honestly we don’t really think about MinuteClinic as it relates to the front although there is probably some hallow into the front of our business as well.

Our final question comes from the line of Robert Willoughby with Bank of America Merrill Lynch. Please proceed with your question.

Larry, given vision adding oxygen therapy or durable medical equipment to your stable businesses there on top of the infusion business and then just secondarily, your primary competitor on the PBM world was graced with three subpoena do you anticipate same similar disclosure of in your queue this evening?

Yes, Bob good morning, in terms of I think you will see in our queue later today that we did receive subpoena from the U.S. attorney’s office for the district of Rhode Island, request to documents concerning some drugs very similar to one of our competitors as it relates to feeds and rebates and obviously we’re cooperating fully on that matter. We have not received the subpoena from the Department of Labor. And then on your first question we do not have any plans to get into the oxygen space. We have that opportunity when you look at the Coram acquisition it was part of Apria and we purchased the infusion and the investor kept the oxygen business. Durable medical, I think we continue to explore what options we may have. We do a little bit of that today and I think it’s something that continues to be on our radar screen that can we do it in an effective fashion, when I say effective I am thinking of convenience of the patient in mind as well as obviously the economics as it relates to the business.

That’s great. Thank you.

Okay, thanks Bob. Well, so appreciate everyone’s time this morning. It was a long call, but we want us to get to everyone’s questions and if there is any follow-up Nancy and her team will be available and again thanks for your ongoing interest in CVS Caremark.

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