Ladies and gentlemen, thank you for standing by, and welcome to the CVS Health First Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded today, Friday, May 1, 2015. And now it gives me pleasure to turn the conference over to Nancy Christal, Senior VP, Investor Relations. Please go ahead.

Thank you, Milan. Good morning, everyone, and thanks for joining us. I'm 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 -- they'll participate in the Q&A session following our prepared remarks. [Operator Instructions] Just before this call, we posted a slide presentation on our website. The slides summarize the information you'll hear today as well as some additional facts and figures regarding our operating performance and guidance. Additionally, our Form 10-Q will be filed later this afternoon, and it will be available on our website at that time. Please note that, during today's presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the Risk Factors section and cautionary statement disclosures in those filings. During this call, we'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 1 year. And now I'll turn this over to Larry Merlo.

Okay, thanks, Nancy. And good morning, everyone, and thanks for joining us to hear more about the strong first quarter results we posted this morning. Adjusted earnings per share increased 12.2% to $1.14 per share, and that's $0.05 above the high end of our guidance range. Operating profit in the retail business declined 1.3%, in line with expectations, reflecting the tougher comparison due to the tobacco exit. Operating profit in the PBM increased 14.6%, well ahead of our expectations. We generated approximately $1.6 billion of free cash during the quarter. And we continued to return significant value to our shareholders through our disciplined capital allocation practices. Now it's still early in the year, but given our outperformance in the first quarter, we are narrowing our adjusted EPS guidance range for 2015 to $5.08 to $5.19, and Dave will provide the details of our guidance during his financial review. So let me turn to the business update, and I'll start with the 2015 PBM selling season. Now the expected revenue impact for '15 has grown since our last update. Our gross new business currently stands at $7.5 billion, with net new business of $4.1 billion, and that's up about $0.5 billion on both the gross and net lines from our last update. The increase was driven primarily by the growth in membership within some health plan clients, as well as some additional wins. Now turning to the 2016 selling season. I would describe pricing in the industry as competitive yet rational. And to date, we've completed about 1/3 of our client renewals, which is typical at this time of the year. And while it's too early to give you specific data points for '16, I will note that the selling season is off to a good start. Our integrated model allows…

Thank you, Larry. Good morning to everyone. Today, I'll provide a detailed review of our first quarter results, followed by an update on our guidance. However, before I do that and as I often do, I want to highlight the ways in which we are using our strong free cash flow to enhance shareholder value through our disciplined capital allocation program. During the first quarter, we paid $399 million in dividends. Our dividend payout ratio now stands at 28.7%, and we remain well on track to achieve our target of 35% by 2018. Additionally, in January, we entered into a $2 billion accelerated share repurchase program. At that time, in exchange for $2 billion, we received approximately 16.8 million shares at a price of $94.49 per share, which represented 80% of the notional amount of the ASR. The program concluded yesterday, and we expect to receive approximately 3 million shares today, making the average share price of the ASR $100.64 per share. For the full year, we still expect to complete $6 billion of share repurchases. So between dividends and share repurchases, we've returned more than $2 billion to our shareholders in the first quarter alone. And we continue to expect to return more than $7 billion for the full year, more than a 30% increase over last year's levels. As Larry mentioned, we generated approximately $1.6 billion of free cash in the first quarter. And we continue to expect to produce free cash of between $5.9 billion and $6.2 billion this year. Now turning to the income statement. Adjusted earnings per share from continuing operations came in at $1.14 per share, $0.05 above our guidance range and up a solid 12.2% over LY. GAAP diluted EPS was $1.07 per share. The retail segment performed within expectations, while we saw…

Okay, thanks, Dave. And again, we are very pleased with our solid start to the year; and our strong, competitive position. And our distinctive channel-agnostic solutions are resonating strongly in the marketplace. Before we open it up for your questions, just a couple comments that we've all witnessed the unfortunate events unfold in Baltimore over the past several days. And I think, as you know, we operate countless stores in major cities and urban centers all across the country, and despite these acts of violence, we remain committed to these markets. We look forward to working together with community and business leaders in the rebuilding process. And I want to take a minute and pay a special thanks to our colleagues who have worked tirelessly this past week to ensure that Baltimore residents continue to have access, in need of medications and prescriptions. I think we're -- all of us are very proud of the job that they've been doing in a very difficult environment. So with that, let's go ahead and open it up for your questions.

[Operator Instructions] And our first question comes from the line of George Hill, Deutsche Bank.

I guess where I would start off first is that the cost-containment in SG&A in PBM has been pretty impressive, and the cost cuts are pretty good. How much room should we think is left there to do considering the growth in the higher-touch specialty medications? And I guess, how should we think about how much lower SG&A can go?

Look, George, I'll start, and I think Jon will jump in as well. But keep in mind that we had embarked upon a pretty sizable initiative as part of our platform consolidation that was targeted to deliver well over $200 million in annual SG&A savings. And we have largely completed that initiative, and obviously, we're always looking to be more efficient and identify opportunities. And I'll let Jon pick up from there.

Yes, George. So the way we're thinking about our cost structure in the PBM is continuous improvement. So how can we leverage automation, technology; streamline processes to make those processes more predictable and deliver them faster and at a lower cost. I think specialty is an opportunity as we look forward. PCSK9s are coming to the market. They're going to be lower cost than typical for the average specialty drugs in the market today. So we're actually looking at a delivery in a more efficient way than generally specialty, which is higher touch, higher cost than what we see in mail. So it's we're continuing to focus on it and we make progress every year.

Okay, that's helpful. And maybe a couple quick housekeeping items. Larry, did you say -- that $4.1 billion, that was net wins for 1/1/16 starts?

No, that was for '15, George. That was a true-up of the '15 selling season. And as I mentioned, it's up about $0.5 billion from our update on our Fourth Quarter Call. And there were some late new wins that got added to '15 and probably, for the most part, mid-year introductions.

Okay, I wrote that down wrong. And then the adjustment for the California Medicaid comp, that was combined retail-PBM, or just the retail side?

On the retail side, between California and tobacco is about 490 basis points just in retail. There's about 200 basis points as it relates specifically to the PBM in the quarter of operating profit.

Yes.

And our next question comes from the line of Edward Kelly, Crédit Suisse.

I wanted to ask a question actually about the PBM and EBIT growth. I mean you actually -- you meaningfully exceeded your guidance this quarter. Could you maybe just talk a little bit more about the drivers outside there relative to your expectation? And then just a question on the outlook because you only raised the low end of the outlook in the PBM, as well as for the company, in terms of EPS. Is that just conservatism? Is there something else that we should think -- be thinking about there?

Yes, Ed, this is Dave. Maybe I'll touch upon that. As you know, we obviously had a very solid -- we're off to a very solid start to the year, quite frankly, in both businesses and certainly within the PBM versus our expectations. Just a couple things: Obviously, volumes in the PBM continued to be strong, and we continue to be pleased with that. Secondly, we've worked hard both from a cost of goods sold perspective and some of the buy-side economics, as well as the rebate yield has been productive for us. And as you know, a vast majority go back to our clients in the form of lower cost into their pharmacy benefit. And we see -- and so that's really produced the over-delivery in the first quarter. As we look through the balance of the year, it is very early. We've gone through a quarter. We've had a great quarter. I think our core businesses are performing well and nicely. I think there's -- as you know, we have a philosophy of looking through the full year. We're still focused on delivering a very solid year. Continually, there tends to be shifts in the marketplace as it relates to timing of certain aspects of our business, primarily the introduction of generics, and so we'll continue to monitor that as time goes on.

Okay, great. And just one quick, one follow-up. You did mention reimbursement rate pressure in the release this quarter. I don't think you typically put it in there. Is there something new or different or more intensive about that? Or is it we're just reading too much into that?

Ed, this is Dave. We continually talk about that, so there's nothing new or unique about that at this point in time.

And our next question comes from the line of John Heinbockel, Guggenheim Investments.

So Larry, a strategic question. Obviously, you have the financial wherewithal to do a lot of things, but when you think about footprint in the U.S. versus where you are globally, is there a priority of you'd like to fill in? And I'm thinking different kinds of businesses but fill in, in the U.S., as opposed to accelerate the global footprint. Or are they of equal priority?

Look, John, I think, as you know, we've talked a lot about we feel very good about the opportunities that we still have here domestically. And we've been talking about that for the last couple of years, and we continue to feel good about it. And as you think about international, as -- again as we've alluded to in the past, we wanted to understand and build some, I'd describe it as, muscle in terms of what it takes in terms of being successful as a global operator. And that's what led to the Brazil decision. And we've been at it about 2 years now. We've gotten some very good learnings. And I think it's -- any next step there would be pursued with the same financial discipline that I think we've demonstrated in the past.

And just going back to the PBM EBIT issue. Most of the time, right, in the last 2.5 years, you have exceeded expectations. There's been the rare quarter where you haven't. You've been in-line but have exceeded pretty significantly, and that sort of dovetailed with volume. Is it really sort of that simple that, if you can beat on the volume side, you'll handily beat on the bottom line? And does that speak to, I guess, the -- right, the incremental flow-through margin is simply that high?

John, this is Dave. I don't know that, that's exactly true. But within -- as you know, within the PBM business, obviously, volume certainly helps, but there's a lot of factors that drive profitability in that business. And I'll just take a good example: Medicare Part D within our insurance company, additional volumes in some categories there actually hurt the profitability from an insurance perspective. So there's a lot of different levers there. I'll just conclude with saying that we've had a great first quarter, and I think our outlook for the year remains extremely strong within the PBM and, quite frankly, within retail.

Our next question comes from the line of David Larsen, Leerink.

Can you just talk about the 2016 and 2017 selling seasons? Where are you? Is -- the 2016 selling season, are you largely through it? Have most health plans made most of their decisions? And what are they looking for this year that's maybe new relative to last year?

Well, Dave, it's Larry. I'll go ahead and start, and then I'm sure others will jump in. But Dave, I think we've mentioned this in the past that, if I start with our renewals, we've said that this '16 renewal season was typical, recognizing we didn't have a -- the big FEP contract. We said it was around $14 billion to $16 billion and that, as I mentioned in our prepared remarks, we're about 1/3 of the way through the renewal process, which is typical at this time of the year. I would say the selling season again has gotten off to a solid start. We're seeing RFP activity pretty similar to what it was last year, which was a big increase over the prior year, recognizing the -- 2 years ago, there was -- I think there was kind of a lockdown as people were preparing for all the administrative responsibilities of the Affordable Care Act. So we certainly have a long way to go in the '16 selling season. And we'll have a lot more to talk about on the Second Quarter Call.

And David, just to build on what Larry has said. This is Jon. We're through most of the health plan, large health plan, opportunities, probably halfway through the large employer opportunities, and then you move into the balance of the market. And as far as what people are looking for, they're obviously looking for us to be competitive on price. And we have to be delivering good service to our members and clients. So the fact that we've had 2 very successful welcome seasons has helped us from a service reputational standpoint, and obviously we continue to be competitive yet rational on price. And then you add to that all the things that we can do that are unique to our model that, quite frankly, is -- supports our clients with where health care is going: the fact that we've integrated assets and can deliver capabilities like Maintenance Choice, Specialty Connect, MinuteClinic; our leadership position in specialty, so our ability to manage specialty spend not only under the pharmacy benefit and the medical benefit, and this is, as we've talked about, a very fast-growing part of the overall spend; and then third, our leadership in consultative services and Medicare Part D. So yes, as I'm out talking to clients, they're looking for somebody that they know can deliver great service, deliver savings. And then all these unique offerings we bring, I think, has really had a lot to do with our success. 2017, we're beginning to see some activity in 2017, again, large health plans, but I'd say we're very, very early with any '17 opportunities.

And David, it's -- I'll just emphasize one other point. We had our Client Forum back in April. We had record attendance. There was an extremely high level of engagement, recognizing, as I mentioned, clients have seen cost trend go from around 4% to double digits. So we have -- to Jon's point, we have solutions for them. And there was an awful lot of engagement and education and understanding in terms of what that can specifically mean for their respective business. So there's certainly a lot of follow-up work from the Client Forum, but I think we feel very good about the tools and products and services that can be an important part of the solution for our clients.

And our next question comes from the line of Meredith Adler, Barclays.

I was wondering if there's any update you can give us on whether -- Specialty Connect has led to an increase in volume. Are people responding? I know you're talking about everybody -- that customers liking everything you're doing, but can you identify anything specific from Specialty Connect?

Well, Meredith, if you look at our specialty revenues, we are growing faster than the market even after adjusting for Coram. So we believe Specialty Connect is delivering additional share, and it is outperforming our initial expectations. And we already have more than 50,000 patients that -- new patients that are utilizing the Specialty Connect product.

Great. And then I was just wondering if you could talk about what benefits, so far, if you've seen anything, from eliminating tobacco. Have you seen a meaningful change in either the partnerships or the dialogue you're having with physician and hospital groups?

Well, Meredith, the answer to that is yes. I mean it's I've sat in some of those meetings where we're talking about things that we can do. And then historically, the question would come up about, "But you guys sell tobacco products, don't you?" and it literally deflects all the energy out of the room. So I think it's reflected in the fact that, since the announcement just over a year ago now, we've been able to accelerate the partnerships that have been established with leading health systems across the country. And I think we're approaching 60 of those affiliations. And while it's a category of one at this point and it did get some publicity, we've talked about pharmacy networks migrating to more performance-based networks. And we had one particular client, City of Philadelphia, that decided to, as a nucleus of that performance network, tie it around pharmacy providers that do not sell tobacco products. So I think we see some tangible benefits that they're probably more qualitative than quantitative at this point in time, but I think we all believe that it will lead to further differentiation of our business model as we go forward.

And the next question comes from the line of Priya Ohri-Gupta with Barclays.

Dave, you guys have been pretty clear about your lease-adjusted leverage target. And you continue to have some capacity in the balance sheet to manage towards that, but can you just remind us about sort of how much flexibility you might have around moderating some of your future share repurchase activity; were you to engage in some sort of strategic activity, that might temporarily take you above that leverage target in order to maintain your current rating?

Yes, that's a great question. We, as you know, have been very focused on our leverage target at 2.7x adjusted debt-to-EBITDA. We currently have been cycling a bit below that target, but we have additional capacity as we sit here today. We, as you know, have -- continue to have many dialogues with the rating agencies. We're very focused on maintaining our BBB rating status. We do think we have flexibility over time to move our leverage target if strategically it made sense to be a tad over that, as long as we commit to get ourselves back down to that level. We've been very focused over time to make sure that our balance sheet maintained its leverage target at 2.7x, and we work aggressively to get there. We think it's important that we've maintain that rating.

And the next question comes from the line of Lisa Gill, JPMorgan.

I just wanted to follow up on a couple of things. First, you had talked about -- earlier, Larry, about the formulary management and the trend there. Can you or Jon just give us any indication as to the penetration that you have currently with your client base around these kinds of programs just to get an idea of how much future opportunity there is?

Yes, Lisa, it's a great question. And today, we've got about -- probably about half of our book that is in our formulary program. Now at the same time, there are -- and by the way, that's largely in the employer space. There are health plans that adopt components of the formulary program. So I think there is certainly white space for that to grow. And I think -- as our program continues to evolve and further develop and drive additional savings, I think that there will -- there is already additional dialogue on those programs.

And then Lisa, this is Jon. Larry talked about our trends for 2014 at 12.7%. About 60% of that trend is really driven by branded inflation. And the best way for our clients to manage overall trend of branded inflation is through formulary. So we believe the marketplace is going to get much more aggressive. Our clients are going to get much more aggressive in adopting even more aggressive formulary strategies beyond what they already have. And so it's probably the best way to manage their benefits.

And so would you expect that uptick as we go into '16? I know I saw Jon recently. We talked about your Client Forum and people really focused on where costs are going and what we're seeing as far as price increases go from the manufacturers. So should we see some kind of inflection in '16 if you're having the conversations today? Or is it you think it's going to be a several-year playout around increase in penetration?

Yes, I mean, Lisa, that's a good question. Yes, as Larry said, our employers, which is half our book of business, the vast majority of those, 80% of those, have adopted our template formulary strategy that we introduced back in 2012. So we -- they've actually taken a big step forward. And then there are other opportunities for them to even get more aggressive. With health plans, the majority of our health plans have adopted our Med D formulary strategies, which again are very tightly controlled. So the market, I think, is primed. And I think, coming off this double-digit trend year of 2014, I have never seen people more open to understanding what opportunities they have to manage this. And as I said, formulary is going to be a big part of that. So we're talking to people now. I think we'll see -- I do think it's going to take a few years to play out, just like everything in our space, so I don't know that there's going to be a single inflection point. But I do very strongly believe that this is going to be a significant lever for our clients to manage this trend..

And if I can just understand, Dave, on the -- if you think about you held out rebates in the first quarter, if I remember correctly, it's usually on a lag. So should we expect rebates to get better as we move throughout the year based on the programs that Jon is talking about? Just trying to figure out the timing. So the rebates that we found in the first quarter, was that primarily from things you initiated in the back half of '15? And is that part of the driver for the back half results? And then I'll stop there.

Yes, Lisa, it's a great question. I'm not going to get into too much detail there. I would just tell you that, as we think about the long-term view of our business, we've been very focused on, from a buy-side economics perspective, what can we do to further reduce the cost to our clients and think about that as our procurement efforts around generics; and then secondly, how do we reduce costs and continue to control costs in the branded category. And that continues to be a focus from a rebates perspective in the formulary management. Now I expect those to be continued, to be drivers for this business at some level in the longer term.

And the next question comes from the line of Robert Jones, Goldman Sachs.

I guess, maybe just move over to the retail side, Dave. And I know you walked through the retail gross margin pushes and pulls in your prepared remarks, so I wanted to make sure I understood the dynamics in the quarter, especially relative to your full year guidance for this margin to be flat. So I know tobacco would have been a good guy year-over-year for the margin, so I was hoping you could maybe just walk through again what weighed on the margin in the quarter. Was there anything abnormal with pharmacy reimbursement, promotional activity? Just looking for a little more insight there.

No, I don't think there's anything that's really unique in the quarter from that perspective. I -- as we've said many times, it's that the cadence of profit delivery will be back-half weighted versus front-half weighted. And most of that ties to obviously the tobacco exit and how we overlap that; the California Medicaid comparison in Q2 of '14; but probably more importantly, the delivery of break-open generics and the timing of that driven really more back-half weighted versus front-half weighted.

Okay. And then just one more on the timing technical side. I was wondering if there was anything between 1Q and 2Q that may be pulled 1Q up, as far as the timing around EPS. I mean I know the foreset [ph] headwind from the California Medicaid reimbursement benefit a year ago will make 2Q a little bit worse off, but anything else that we should be aware of, as far as just timing between 1Q and 2Q?

No. I don't think there's anything that's really of material nature there.

And our next question comes from the line of Scott Mushkin, Wolfe Research.

So I wanted to follow up a little bit on John Heinbockel's question on but a little bit different take on it, not necessarily acquisitions but kind of looking internally. Larry, when you look at opportunities in front of you with your current assets, where do you think there is the biggest potential to kind of improve what you're already doing? I mean, obviously, the business is humming along, but where do you see some of the levers to get things even better?

Well, Scott, we're always looking to do better, whether it's to be more efficient with our business and in terms of attempting to deliver high levels of service at the lowest possible cost. And we're always focused on opportunities there. And we continue to be focused on share growth opportunities. We've -- and I think we've gotten some tractions in terms of some of the things that we've been able to do through our partnerships, whether it's with health plans or other providers. Obviously, there's a lot that we can do when we happen to be the PBM, but those opportunities are not limited to employers or health plans where we have to be the PBM. And we've gotten some traction there.

Scott, this is Dave. What -- we've talked and we've been talking a lot on the call about the PBM and some of the growth engines and around pharmacy. Maybe we'll just spend a minute and ask Helena to talk a bit about what we're doing to drive growth in the front of our business, the retail business.

Yes. I think that one of the things that I'm encouraged by, and it goes back to Meredith's question as well, is since we announced our exit of tobacco, I think the marketplace is seeing a real focus that we have around driving health and beauty. And we talked about this at Analyst Day in December, about the journey that we're on to really reposition ourselves as a leading health and beauty destination. So when we met in December, we talked about 5 key themes as part of that growth. One was better health made easy; elevating beauty; our customer-driven personalization; myCVS store; and digital innovation. And I'm really pleased we're making a lot of progress on each of these areas. Just a couple examples: This year, we're launching phase 1 of our healthy food rollout. We've got expanded fresh offerings and healthy snacks. We've -- also have a beauty elevation program, which is launching across several thousand stores this year. And really, there we're in the process of repositioning CVS as the leader in beauty. We've always had a leading market share, but we are really sort of doubling down on the in-store experience and differentiating for our customers. We talk a lot about personalization. Larry mentioned it in his speech, but I think there's even more opportunity there to grow share and be more relevant for consumers and ultimately drive traffic and profitable sales. And then we have a focus this year. We're resetting 500 stores with something we call, take high higher, and these take several of these elements together. We have expanded beauty. We've got this healthy food set. And so this really starts to take the old photo department out and put in healthy food and give customers a very different feel. Those stores are performing well. We've also, within this myCVS store piece, really been looking at different clusters. And I think the thing that we're very excited about is the Hispanic-dominant cluster. We're starting to learn from our Navarro experience. And we've actually started to reset some CVS stores to take up learnings into place. And then we continue to invest in digital and in innovation; see a lot of opportunities, as Larry mentioned, there to drive adoption and have people using both our stores and digital assets. So a lot of things happening that we really haven't talked about so much since December Analyst Day, but I think I'm really proud of the team. I think both the merchants and the operators have a every strong focus on how we want to be unique and different and really own health and beauty.

And the next question comes from the line of Steven Valiquette, UBS.

So I guess, just for me, the -- obviously, the 46% revenue growth in 1Q in specialty is pretty impressive. How do you think that stacks up versus your estimation of industry growth in specialty pharmacy in early 2015? And also, beyond Hep C, are there any other therapeutic categories worth mentioning that were growth drivers?

Well, Steve, we actually see it outperforming the market growth and, I think, as I mentioned earlier with one of the questions, even after adjusting for Coram, acknowledging that Coram was not comparable for the full quarter. I think we closed towards the end of January. So we're pleased with the results that we're seeing. And some of it is coming from new customer growth. Some of it is coming from our unique products. And I'll ask Jon to comment on therapeutic classes.

Yes. What we have seen over the last 3 years is over 100 new indications for existing specialty drugs, so we're seeing growth really across all categories. Obviously, Hep C is the poster child for growth, but we're seeing growth in RA and oncology, as an example. And the other factor is, as the populations gets older, the older population uses 6x as many specialty drugs as the balance of the population. So we're just seeing really tremendous growth across the entire spectrum of specialty. And that's going to be fueled even further by new drug introductions, 88 new drugs over the last 3 years. We're going to see the PCSK9s be introduced later this year. While we think that's going to be a slow ramp, we think 1 in 4 people that are on statins today could be candidates for these new therapies that are, quite frankly, more expensive than the generic statins that are available today. So we really view specialty as a growth driver as we look forward.

And Steve, I'll just conclude this question a bit with just maybe just a data point. As you said, specialty in the first quarter grew by about 40%, 46%. It's not just Hep C. If you back, if you take away Hep C and you look at our underlying growth in specialty, it's in the mid-30s. So we continue to perform well at the core in this business.

Okay, that's helpful. The one quick tie-in to this: I forgot if you disclosed this at the Analyst Day or not, but the -- within the PBM, I forgot, are you disclosing just a rough range of what percent of the total PBM sales that you'd categorize as specialty? I'm guessing it's somewhere maybe in the 20% to 25% range, but is that just a good approximation?

So there is a chart in Jon Roberts' presentation or -- and/or Alan Lotvin's presentation that shows that number, last year's number, which I believe is around...

$31 billion, Dave.

$31 billion and will be moving to $37 billion, was our expectations for this year.

And just to add on to that because those are a couple of important slides. We talked about the addressable specialty market. We described it as excluding infused oncology. And I think, in '14, we estimated that market at $86 billion growing to more than $150 billion by 2018, so we see a lot of opportunity for growth even without including the oncology space.

And our next question comes from the line of Ricky Goldwasser, Morgan Stanley.

I have 2 follow-up questions here. First of all, about the membership growth, the script growth, obviously, very strong claim growth. What percent of the growth is coming from your PBM members?

Ricky, are you talking about on the retail side?

No. I'm talking about pharmacy network claims.

Yes, Ricky, maybe we're not following the question because we would -- that's why we're not seeing...

I think that, in the past, you -- kind of like you gave some details on Caremark membership accounting for 34%, 35% of your pharmacy scripts.

Yes.

So when you think about kind of like the growth that you've seen year-over-year, obviously, it's pretty impressive. What percent of it is coming from kind of like your PBM client? Just trying to assess kind of like the share gain that was in Caremark versus the rest of the market.

Yes, we kind of report that on an annual basis because we monitor and we report on the annual basis. Because when we win a client, typically we then -- the work begins in the sense of understanding how to help that client become more productive and manage their costs better. And part of that might be narrowing -- or introducing a product and/or narrowing that network into one of our channels. And so that kind of grows over time. So we've chosen to do that on an annual basis because of that. I will say, just from a Caremark perspective, one thing that we do disclose, and you can see it in the press release and you'll also see it in the Q later day today, is that we do talk about the -- just the network claims volumes that we process on a quarterly basis. And so you can see that kind of within those releases.

And Ricky, we had shown in the past that if you looked at on the retail side of the business, if you looked at the script growth and the share growth, about half of it was coming from the Caremark book of business, and the balance from the rest of the marketplace.

Okay, that's very helpful. And then one follow-up on the specialty side. When you think about kind of like your membership, what percent of your PBM clients manage their specialty spend through you, and what percent carving out? Just to kind of like understand the opportunity there in terms of penetration.

Yes, Ricky, it's about -- today, it's about 60%.

Okay. And that's 60% of the employers, or 60% of the total?

Total...

Of the total.

And our next question comes from the line of Mark Wiltamuth of Jefferies.

I wanted to dig in a little bit on the generic drug margin swings factors you see over the next couple years. And maybe if you could let us know how you feel relative to your December analyst pronouncements. Because it seems like Nexium launched earlier than you expected, and I'm curious where you stand on ABILIFY and just in general how you're feeling about the break-open pipeline.

Mark, it's Dave. I think, obviously, as we discussed a little bit earlier, as you know, the generic launch dates continue to obviously move around a little bit. I'll just characterize this. It's not a matter of if these drugs are going to be productive for us from a break-open status. It's just more an issue of when they become productive for us from a generic -- a break-open status. Our main thesis -- as we talked about kind of the 3 categories of drugs, be it branded drugs, limited-supply generics and break-open generics, our thesis for over the long term continues to hold as you increase both savings to customers and clients when you move down that spectrum but also increase profitably to us as you move down that spectrum.

Okay. And just on generics, maybe give us an update on Red Oak. You said you transferred the sourcing over to Red Oak. And where do you stand on, I guess, achieving cost savings there?

That's a great question. We have transitioned all of that into Red Oak. They -- we now have virtually all of our generic manufacturers on our program. And we continue to be very excited about where we are but also the opportunity over time to continue to derive value from that program. And kind of beyond that, we don't disclose much more than that from a buy-side's perspective.

And Mark, I'll just reiterate. We've talked about this, the 3 ways in which value is extracted from Red Oak. One is the fixed payment schedule from Cardinal, which began in Q4 last year. The second ability is through some established achievement of milestones that have been established between the 2 parents. And then the third is just further reductions in our overall cost of products. So -- and as Dave mentioned, we've kind of -- we've framed it up under that umbrella, but we haven't gotten more granular.

And on that third point on the achieving of the actual cost savings, is that something that ramps over, like, a 2- to 3-year period? Or does it happen pretty quickly?

Well, Mark, you're never done, okay, in terms of how to make the supply chain more efficient. So I think it's something that will be ongoing.

And our final question comes from the line of Ross Muken, Evercore.

So I'm going to ask a big picture question, to close. So Larry, lots going on in your industry. So one of your competitors is attempting to mimic your model at a smaller scale. Another one of your competitors is moving more in the direction of retail and beauty. One of your PBM competitors was acquired. Another is declaring its independence. As you think about CVS' positioning and strategy and how you continue to evolve the model, what are the things you're kind of looking for as the industry changes to kind of give you further confirmation that the share gains you've enjoyed are sort of sustainable and that you have all the assets and the pieces you need to kind of continue to do what you've done, which is put up tremendous results for many years here?

Ross, you did a really good job of summarizing the marketplace, but I mean, so we have always believed that the integrated PBM retail model, we think, is the optimal model. And I think that gets further highlighted by the fact that we're entering an era of, we've been describing as, the retail-ization of health care. Others are talking about it in terms of an era of consumer-directed health care. And you think about our model. It's really the only one that has deep connections and expertise in dealing with both payers of health care as well as consumers of health care. And we've talked about, and we've reiterated it on the call today, all the different ways in which we can help solve this cost-quality-access conundrum that our health care system faces, so -- and I think, as I mentioned earlier, we believe that we're in a great place. And at the same time, we're always looking for ways that we can be more efficient and speak to payers and customers in a more surround-sound fashion. And I think we see opportunities domestically to continue to do that. Okay, thanks, everyone, for your ongoing interest in CVS. And as always, if you have any follow-up questions, you can reach Nancy.

Ladies and gentlemen, this concludes the conference for today. We thank you for your participation. Have a great rest of the day, everyone.