Greetings and welcome to the CVS Health Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Christal, Senior Vice President, Investor Relations. Thank you. You may begin.

Thanks, Christine. Good morning, everyone, and thanks for joining us. I'm here this morning with Larry Merlo, President and CEO; and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS/caremark; and Helena Foulkes, President of CVS/pharmacy, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up so we can provide more people with the chance to ask their questions. I have one important reminder today. Our Annual Analyst and Investor Day is scheduled for the morning of Wednesday, December 16 in New York City. At that time, you'll have the opportunity to hear from several members of our senior management team, who'll provide detailed 2016 guidance, as well as a comprehensive update on our strategies for growth. If anyone has signed up and is no longer planning to attend, we'd greatly appreciate it if you could let us know as soon as possible so that we can include others who would like to attend given our limited seating. Keep in mind that our Analyst Day will be webcast to provide access to anyone who is unable to be there in person. If you have any questions about this event, please contact me. We look forward to seeing many of you there. This morning, we posted a slide presentation on our website, which I think you will find helpful. This slide summarizes the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance. Later this afternoon, we'll be filing our Form 10-Q and it will also be available on our website at that time. Please note that during today's presentation, we'll make forward-looking statements within the meanings of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the risk factor section and cautionary statement disclosures in those filings. During this call, we'll 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'll turn this over to Larry Merlo.

Okay. Well, thanks, Nancy. Good morning, everyone, and thanks for joining us. I'm very pleased with the solid third quarter results we posted today. Revenues increased 10.3%, while adjusted earnings per share increased 12.5% to $1.29, coming in at the higher end of our guidance range. And adjusted EPS excludes any acquisition-related items, consistent with how we provided guidance. And Dave will cover how you should be modeling our adjusted EPS for the rest of the year now that the Omnicare acquisition has closed. For those of you who may not be aware, I'm pleased to announce that Rocky Kraft, previously CFO of Omnicare, is now the President of our Long-Term Care Pharmacy group and you'll have an opportunity to hear from Rocky at our Analyst Day. In the third quarter, excluding transaction and integration costs, operating profit in the Retail Long-Term Care business increased 8.4%, while operating profit in the Pharmacy Services Segment increased 7%. Now those numbers do include Omnicare's operating results as of August 18. On an underlying basis, versus our guidance, excluding the acquisition, Retail operating profit growth was in line with expectations, while the PBM was just above our guidance range. We generated approximately $1.3 billion of free cash during the quarter, $3.4 billion year-to-date, enabling us to continue to return significant value to our shareholders. Now given our solid performance this quarter and the closing of the Omnicare transaction, we are narrowing our guidance range by raising the lower end. We currently expect to achieve adjusted EPS for 2015 of $5.14 to $5.18. And this guidance includes the Omnicare operations and the debt we issued in July. It excludes acquisition-related bridge financing, transaction and integration costs. And Dave will provide more detail during his financial review. Before providing a business update, acknowledging the complexities in modeling our business, as a result of two acquisitions, we want to provide you with some early clarity for 2016. We outlined it in this morning's press release and I'm going to turn it over to Dave to cover the details.

Thank you, Larry, and good morning, everyone. As you know, there are a lot of moving parts in our business, especially with the recent debt financing, the timing of the Omnicare acquisition and the pending acquisition of Target pharmacies. So this morning, I'm going to try to help you model the company and level-set our expectations for next year starting with a wider-than-normal EPS range. We'll provide detailed guidance as usual on Analyst Day once our comprehensive plan is finalized. Back in December of 2013, we provided our five-year financial targets, which included many assumptions. We said that we expect our top-line to grow faster than our operating profit, suggesting continued margin compression. And we said that our growth strategy is to focus on winning lives and gaining share across the enterprise to offset those pressures, and that we assumed that we would continue to gain share in our core business and make value-enhancing acquisitions to accomplish these targets. We also said that we would employ a disciplined approach to capital allocation that would further enhance our EPS growth rate and we reiterated those expectations at our last Analyst Day. And none of that has changed. From our jump-off point of $3.96 in 2013, we said that we would target adjusted EPS to grow 10% to 14% on average from 2013 through 2018. Today, we are providing a preliminary outlook for 2016 in the range of $5.68 to $5.88, reflecting growth in adjusted EPS of approximately 10% to 14% in 2016, again, right in line with our five-year compounded annual growth rate target using the $5.16 midpoint of our 2015 guidance range. Now, if you look at our cumulative performance from our jump-off point in 2013, we are tracking to the higher end of our targets with a compounded annual…

Okay. Thanks, Dave. I think you can see that 2016 is shaping up to be a very good year. Our long-term outlook remains strong and we remain confident in the multi-year targets that we provided at previous analyst days. And consistently growing an organization of this size at this very healthy pace is really a testament to the quality of our people, and I want to take a minute to thank everyone in the CVS Health family for their contributions and dedication. So with that, let me update you on current developments in the business. Turning to the PBM, and let me start with the 2016 selling season, which continues on its healthy trajectory. Gross wins currently total approximately $13.3 billion with net new business of $11.4 billion. Now these net new numbers do not include any impact from our individual Med D PDP, which I'll touch on shortly. Today, we've completed 80% of our client renewals for 2016, that's consistent with past years and we continue to have a strong retention rate of about 98%. Our specialty business continues to outpace the market and gain share. In the third quarter, specialty revenues increased 32%. This was driven by claims growth, inflation and the inclusion of Omnicare's complementary specialty business. As you know, we've developed a comprehensive set of programs to effectively manage specialty trend and we'll provide a deep dive on those strategies at our Analyst Day. Before turning to Retail, let me touch briefly on our Med D PDP, SilverScript. As we reported last quarter, SilverScript once again qualified in 32 of the 34 regions, which enables us to retain the vast majority of auto assignees we currently serve. And we're well positioned in the 2016 annual enrollment period that is currently underway. We're offering two plans that…

Thank you, Larry. As you can tell, it's certainly been an eventful quarter with a lot of moving parts in our business. So this morning, I'll try to frame up our results with an eye to making easy comparisons to what we have previously expected. But first, as I typically do, I'd like to begin by highlighting how our disciplined approach to capital allocation continues to enhance shareholder value. I'll follow that with a detailed review of our solid third-quarter results and an update on our 2015 guidance that now includes Omnicare. So as it relates to our capital allocation program, let's begin with our dividend payout. We paid $391 million in dividends in the third quarter and $1.2 billion year-to-date. Our dividend payout ratio stands at 28.9% over the trailing four quarters, after excluding the impact of non-recurring items in both years. We remain well on track to achieve our target of 35% by 2018. During the third quarter, we repurchased approximately 9 million shares for $937 million. And year-to-date, we've repurchased approximately 37.8 million shares for about $3.9 billion, or $102.47 per share. For the full year, we continue to expect to complete $5 billion of share repurchases, reflecting an increase of approximately 25% versus 2014 levels. So between dividends and share repurchases, we returned more than $5 billion to our shareholders in the first nine months of 2015 alone, and we continue to expect to return more than $6 billion for the full year. And as I noted on our last earnings call, to fund the Omnicare and target acquisitions, we issued a series of senior notes in July totaling $15 billion, which raised our leverage ratio to approximately 3.2 times. We also assumed about $700 million of remaining Omnicare debt, which increased our leverage ratio a…

Okay. Thanks, Dave. And just wrapping up, obviously we're confident, we believe we have the right strategy for long-term growth in this evolving health care marketplace. Our integrated model and unique suite of assets remain unmatched and we remain focused on driving sustainable growth with an enterprise mindset. So again, we're pleased with the quarter we announced today and remain well positioned to continue to grow, gain share, deliver on our targets and return value to our shareholders. Let me just add that we hope you found all of the details that we provided this morning very helpful. I know we covered a lot of ground and I'm sure you have questions, so let's go ahead and open it up for those questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Ross Muken with Evercore. Please proceed with your question.

Good morning, guys. So, getting a lot of questions in the inbox, obviously, with all of the moving parts. Can you just help us understand first, in terms of the fourth quarter on the retail side, and on the pharma services side, what are the key changes on the base business on a sequential basis versus the last time we spoke regarding the second quarter, as we think about the implied fourth quarter from that guide versus where we are today. What are the moving parts, and how is the underlying kind of change, because to us it sort of seems like it's come down from maybe the mid to upper teens to the low to mid-teens, so we are just trying to get some clarity on that. Is that the case, and what's sort of the driving factors?

Hey, Ross. This is Dave. I think if you go back and look at how we guided on Q2 and looked at our Q3 guidance and then therefore our implied Q4 guidance, Q4 has not from a core basis, changed. Essentially what we've done, we've added a couple of pennies into Q4 based on the inclusion of Omnicare's business, but fundamentally Q4 from our expectations has not deteriorated. In fact, it has remained solid and has remained consistent from our projections.

That's helpful, Dave. So I just wanted to get that out of the way. I guess, big picture wise, there's a lot going on, right? So we obviously saw (42:53) your peers earlier in the week getting together. The results on the pharmacy side at least across the spectrum and across the whole supply chain have been pretty mixed. How do you characterize the current environment, I guess, overall, and the pushes and pulls? And then as you think about longer-term, I guess, vis-à-vis what was implied in the 2016 guide, it still feels like you've got this winning business model that can kind of endure. And so how should we put sort of the competitive noise, some of the near-term noise in perspective, relative to how you feel about kind of the long-term positioning? I don't want to pre-pull ahead to Analyst Day, but as you can just help us here, I think all of us are just trying to put this into context.

Ross, good morning. It's Larry. It's a great question, Ross. And we feel really good about our positioning in the marketplace and our strategy and as you've heard us talk in the past, we've talked about aggregating lives and growing share and recognizing the multitude of ways in which we can manage those lives with access, quality and cost in mind, and our focus around that has been to look at the differentiated ways that we can grow our core business and at the same time broaden our base of services. So, I think many of the variables that we've talked about in the marketplace, I don't think those variables have changed. Whether it's talking about margin compression or the contribution from generics, obviously there're going to be ebbs and flows in terms of the timing of those variables, but we feel that we're very well positioned recognizing that the health care marketplace is evolving and we see ourselves as an important player.

That's helpful. I guess, I don't mean to be a question hog, but I will be very direct, so I guess, just to be clear, your confidence in your business model over the long-term and your ability to deliver the long-term targets, no change whatsoever?

Absolutely.

We remain very confident in those long-term targets, Ross.

Well, if you're confident, I'm confident. Thanks, guys.

All right. Thanks, Ross.

Thanks, Ross.

Our next question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your question.

Thanks for the questions. I guess just to put a little more specificity around the 2016 guide, it looks like a lot of moving pieces, and Dave, definitely appreciate all the detail. But even adjusting for Omnicare and Target, it certainly seems like you are below your steady-state range that you've shared before of 7% to 9%. And it does seem like it's actually moderating in both segments. Can you maybe just – if I'm thinking about that right, first off, and then more importantly, can you maybe just give us a sense of what's changing in your minds for next year, relative to what we have experienced the last few?

Well, I'm not sure that I see much change in our business from that perspective. As we look at our business and we look at how we're performing, we continue to grow and gain share in both segments of our business. Now we have an additional channel to serve from an Omnicare perspective, and obviously we look forward to the addition of the Target pharmacies in our base business. So I think our outlook remains strong from that perspective and we see solid growth across both segments, excluding the acquisitions.

And, Bob, it's Larry. As you know, for some time now, we've messaged our focus around enterprise growth and as we've talked and we've provided some examples, the reality of that is, we could have a segment of our business be sub-optimized for a greater enterprise growth and a good example of that is the high-growth specialty business that as we talked about how Specialty Connect works and the fact that it leverages our retail channel assets, but as a result of fulfillment occurring through the PBM channel, you see that economically flow through the PBM segment. So, we always appreciate the fact that you'd like to have an apples-to-apples comparison to our primary Retail and PBM competitors, but the reality is that's not how we're running the business, and by the way we think that's a good thing because of what we've been able to do when you look at enterprise growth and I think as we bring more innovation into the marketplace, those lines continue to get more and more blurred and it becomes harder and harder to create that apples-to-apples comparison.

No, I appreciate that. I guess it's more directionally, I think, the concern in the marketplace, if we just look at – even take the core retail drug business. It does seem like this year the progression on the gross margin has been negative. If I back out some of the moving pieces, it certainly seems the growth you're calling for, for next year, not that it's not healthy, it is just below what we have become accustomed to. So I guess the real question is just are there things changing in the underlying fundamentals, whether it'd be script trends, reimbursement rate pressure, are there any things that are notably different in your mind, as you look into 2016 relative to 2015 or even 2014?

No, I think what is important is as you think about our business, and to your point, there's a lot of moving parts here, but the thesis of our financial performance has not changed. I think the cadence in some cases changes based on when generics come to market, as an example, or when competition enters into one of our formulary classes, all of which can influence the cadence of when profits occur, not that they're going to occur over time. So I think the fundamental thesis of our financial model and our business model remains intact.

Got it. All right. Thanks, guys.

You're welcome.

Thanks, Bob.

Our next question comes from the line of Edward Kelly with Credit Suisse. Please proceed with your question. Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker) Yeah, hi. Good morning, guys. I was hoping that we could maybe unfortunately zero back in on this gross margin issue here, within retail. Because it does seem like within your guidance, you are expecting a more material decline than what you maybe alluded to last quarter, and I don't know if I'm right or wrong about that. You did mention reimbursement rate pressure not accelerating, and maybe there being less offsets than what there's been in the past. So I don't know, maybe you could just pile this together for us, and maybe help us understand if there really is a difference in how you are looking at the gross margin in retail. And then how reimbursement pressure is impacting that, or potentially what offsets are not there, that may have been before.

Well, Ed, it's Larry. And when you – as we've said – as we talked about margin compression in the past, we haven't seen that change. As Dave outlined in his remarks, we've got the ongoing pricing pressure, and as you look at the sub-segments within pharmacy, we are seeing higher growth coming out of those segments that carry with it lower margins, so when you look at the Medicare, the Medicaid segments. And as we've have talked and as you just alluded to, there are a lot of things that we've done to offset margin compression, whether you think about purchasing economics, Red Oak Sourcing, as an example, our focus on formulary management becomes an example of that. You think about what we've been able to do in terms of bringing innovative products into the marketplace that create value for clients and at the same time drive share shift into one of our distribution channels, as well as our ongoing focus on technology and process improvements in an effort to become even more efficient and productive. So those things have not changed in terms of where our focus lies. And as we talked earlier, we can have some ebb and flow issues in terms of the timing and the syncing up of those. And a good example of that is the timing of generics, whether it's new introductions or the timing of generics entering their break-open period. And again, we'll talk more about that and provide some additional color around that at Analyst Day. Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker) And just one follow up related to next year. I mean this is kind of asked but it does seem like Retail operating profit growth, maybe excluding Omnicare, is not really going to grow next year, is that right, I guess, first of all?

That's not correct. You will see growth in the core. That's not correct. Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker) Okay. But you did guide to mid-single-digit retail operating profit growth next year; is that right?

I did. I did. Edward J. Kelly - Credit Suisse Securities (USA) LLC (Broker) Great. Thank you, guys.

Yes.

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

Yeah, hi. Good morning. So not to beat on a dead horse, but maybe a little bit differently. So when we back out kind of like the acquisitions, right, EPS growth for – excluding Omnicare and Target about 7% to 11%. So is this basically when we think about kind of like industry dynamics and kind of like the fact that kind of like Medicare and Medicaid is a bigger part of the customer mix, is this kind of like the growth profile that we should be thinking about longer-term for a core organic business, i.e. excluding capital deployments?

Ricky, This is Dave. And I'm sure Larry will tag on here. I think – I don't think that's the correct thesis here. I think what you see is that in some of these businesses, especially I'll use our selling season of next year as a good example, as we won a lot of health plan business. It takes us time to kind of sell in different programs and services that add value to them and add value to us, and that value to us is driving share into one of our dispensing channels. So the reimbursement pressure happens more rapidly and the share gains happen over time, so this is more of a cadence issue or a cadence discussion than it is a long-term financial outlook discussion.

And, Ricky, I think you can – there's a parallel example with the acquisitions and I think as we may have communicated when we announced Omnicare, we'll see the benefit of cost synergy and purchasing synergy sooner than we will revenue synergy. And we see the opportunities, we've talked about the opportunity to grow share, especially in the assisted and independent living space, but it will take some time to sell in those programs.

Okay and then on the follow-up, obviously you are seeing some softer customer traffic on the Retail side. Obviously the PBM is growing nicely through share gains. I think the utilization environment continues to be a dynamic. You are in best position to see trends in 2016, because you see what your customers are doing on the plan side. When you think about kind of like the co-pay structures for next year, the cost sharing for next year, what is kind of like your view on next year's kind of like utilization trends?

Ricky, it's Dave. It's probably a little too early to go through that at this point in time. It's certainly something we'll discuss at Analyst Day. I just will step back and remind you that I do think that if you look across the industry, the pharmacy utilization or prescription utilization across the industry is still pretty solid. I think we've experienced a little bit of weakness as we're cycling, quite frankly, the bolus of Medicaid expansion last year and probably a little bit of softness in some seasonality scripts. But for the most part, utilization has been pretty good and we think that long-term secular trend in utilization should be robust as pharmacy is the most economical way to treat many of these chronic disease states, and you see that chronic disease states increase as age increases and the over 65 population continues to expand as a percent of total. So, I think the outlook for utilization is strong over the long-term.

And, Ricky, just to add to Dave's point, you think about the impact of the Affordable Care Act. Dave talked about the bolus that we've seen from the rapid Medicaid expansion. And we're going to continue to see more lives enter into the health care system as the Affordable Care Act further evolves. And I don't want to make a political statement about Medicaid expansion, but we still have approximately 20 states that have not expanded Medicaid and there is a question in terms of is that more a question of when versus if and so there is still opportunity for more lives to enter the health care delivery system.

Okay. Thank you.

Thank you.

Thanks.

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

Thanks very much and good morning. Larry, can we take a step back and have a bigger discussion around 2016, as we think about what you've tried to do in putting all these pieces together? I think when you bought Omnicare, we had a discussion around fee-for-value and the way the world is moving in that direction, and your ability to touch a patient beginning of life to end of life. Are you in those discussions? Do you see anything in 2016 that having all the pieces on your enterprise is really coming to fruition, and we'll start to see that impact in 2016, or are those things that are going to come longer-term on this platform?

Yeah, Lisa, it's a great question. I think it kind of goes back to the conversation we were just having. We definitely see the opportunities there as we've begun to have some discussions. But I do think that maybe we see a little bit in the later part of 2016. I really think it's more a 2017 and beyond opportunity. There is a parallel to how Dave was talking about the health plan business that you garner the business and then you have to sell in those programs. And we're in the process of doing the evaluation and the understanding of exactly what is the optimal value proposition that adds value for the long-term care operators and their residents. So more to come on that. As I mentioned earlier, we will see the benefits of purchasing and cost synergy as we go through our integration activities throughout 2016.

And then just on the backside of that, as you think about your PBM for 2016, and the guidance that you gave, high single to low double-digit, but again realizing a lot of this is health plan, can you or I don't know if Jon is on the call today, maybe just give us some indication as to what plan design looks like for next year? What about the rest of your book? How about your existing book? Do you have people buying into more programs as we think about 2016?

Lisa, I'll go ahead and start and Jon is here. He'll jump in. We are continuing to see adoption of programs like Maintenance Choice, Pharmacy Advisor. We'll put some – once we – once – as Dave mentioned, once we finalize everything for 2016, we'll provide some additional color and details at Analyst Day. So, those programs are continuing to add value. I'll turn it over to Jon.

Yeah, I mean, Lisa, this is Jon. As we talk to our clients, we just had advisory council meetings on both the employer and the health plan side. Pharmacy is their highest priority when they look at their overall health care costs and they are – they will be much more aggressive moving forward in plan designs than they have historically been. So, they're looking for us to show them opportunities to more tightly manage their benefits, which will save them money and at the same time, we believe, in many cases drive more share into our channels.

And also drive profitability right? That's the correct way to think about this?

That's correct.

Yes.

Okay.

Next question?

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 the question. I'm going to go back to the dead horse here and talk about the Retail side a little bit. I guess can you give us any color or quantify the impact of mix and kind of changing script mix on the margin profile of the business? You've talked – mentioned a couple times on the call about the growth in Medicaid and Medicare. We continue to see the reimbursement compression in Med D. I guess, can you kind of quantify the mix effect, or talk a little about the mix effect of kind of who's walking in the door in the prescription dispensing and regional business?

Yeah, George, that's a great question. We're not going to – we can't do that today. We're not going to do that today. I will say one thing about that is that you've heard Larry and I speak and others speak about this in the past. As we've been very focused on as we think about our participation in Medicare Part D in preferred situations in the sense that being a preferred provider in some of those networks, we look at the economics, we model the economics and we make decisions that's in the best interest of our company on how we participate in those. And so we have chosen in many cases not to participate but it doesn't make good economic sense and we participate where we can actually drive value for the plan participants in the plans and the payers that we support in that space. And we're very focused, we're very disciplined on that and we make very I think rational decisions there.

Okay and then maybe my quick follow-up would be, so Larry has said that reimbursement pressure has not changed. As I think about the store, is kind of reimbursement pressure in the different silos constant and mix is changing, and that's kind of driving the impact? Or is just the rate of decline across the book of business kind of the same, and then maybe just the tackle, a quick comment on what you're seeing in preferred or restricted network strategies in commercial? Thanks.

Well, what we have said is that the reimbursement, the intensity of the reimbursement pressure has not changed, but we have seen obviously consistent with what we said at last Analyst Day is that Medicare and Medicaid are really the areas of growth in this business at the moment and they carry a lower margin rate and that's the reality. And as we indicated before, we work kind of three ways to kind of offset that reimbursement pressure in our business. First, we work to improve our purchasing economics. And we've been pretty creative in that fashion. Red Oak's a great example, or exclusive formularies are a great example of how we reduce our cost of goods sold. Secondly, we work hard to improve the efficiency across our operation. We put in technologies and processes to make us fill our scripts more efficiently throughout all of our store base and in our mail centers. And finally, and most importantly, we work to put programs in place that drive value for our payers but also drive share into one of our dispensing channels. And those efforts, they take time. They take time to implement. And we're working hard at that. You've seen rapid adoption of Maintenance Choice. There's – and you see, you are beginning to see some adoption of, I'll say, limited networks in some Medicaid areas. But we continue to push in that area to offset those margin pressures.

And, George, I do – it's Larry. The second part of your question, I do think we're seeing and we will see a growing appetite for preferred or premium or restricted networks, whatever verbs or words you want to use. And if you look at the Medicaid space, we've seen that. Okay? We've got – today we've got more than half the Medicaid business that is now no longer fee-for-service. It's managed Medicaid. And I think as Jon mentioned a minute ago, clients are continuing to look for cost saving ways in which they can reduce their overall pharmacy spend.

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

Hey. Can you talk about pricing a bit and how that impacts your overall book? So, if we see a deceleration in generic inflation, how will that impact your enterprise? I mean isn't that a tailwind to your retail gross margins? And then also, your specialty products, if the rate of inflation starts to decelerate, what sort of impact could there be on your book? Thanks.

Dave, this is Dave. Just a couple of things. First and foremost, our focus is to lower cost for the payers and clients that we serve. And every day we come to work focused against that. I would say that from a generic standpoint, there has been a lot of chatter around generic inflation in the industry. Keep in mind, generics overall are a deflationary category for us, and they continue to be a deflationary category. We have been effective at managing that, and that has had essentially an immaterial impact on our performance. And we expect that inflation events going forward to have an immaterial effect on our performance as well. On the branded side of the world, we continue to model specifically what's happening from a branded inflation standpoint. We look at that very specifically molecule-by-molecule. Our expectation is that branded inflation will continue to occur. And again, we use many tools across our business to drive costs down in those categories, particularly within our formulary management aspect. We do think that if there's a deceleration or an acceleration of branded inflation, we don't believe it to have a material effect across our line of business, all of our businesses.

Okay, that's very helpful, thanks. And then in terms of the PBM wins, if I understand you correctly, these are large wins that will roll into 2016, but it can time to basically drive incremental earnings from those. You've got to sell your managed choice program and as you're successful in that, you can drive more store traffic to the CVS channel. And over time, you will realize incremental earnings from those new client starts?

That's correct. I think the challenge, as I said in my prepared remarks, an employer with one decision maker can make the decision for their entire book of business. So at a stroke of a pen, an employer who has 100,000 member group can offer Maintenance Choice. In health plans, that's not how it works. A health plan might really want to adopt Maintenance Choice, as an example, but then they have to go get their sales teams to go out and call upon all of their clients. And they sell that program in client by client by client. And that just takes time.

And, Dave, if you go back to our Analyst Day last December, I think it might have been in Jon's presentation when we looked at the employer segment and the health plan segment. And we showed what percent of pharmacy business went through one of our distribution channels, and in the employer segment, that number was in the high 50%s, in the health plan segment that number was in the high 20%s, recognizing the point that you and Dave were just making, and obviously, it takes a while, but at the same time, there's a lot of white space there and a big opportunity for growth as we go forward

Great. Thank you.

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

Hey, Larry. A big, big, big picture question, if you look at the pure Retail business, and I know you look at it holistically but that business as it is presently constituted, do you think we are approaching a profit margin ceiling? And if not, what are the one or two kind of big ideas that can change that? Is personalized digital circulars and doing away with print, is that one of those things that can move the needle a lot from where we are today?

Well, John, I'll take the first part, and then ask Helena to comment on our personalization efforts. But John, as you know, we have been one of the leaders in that space and I would turn around and tell you that we have not capped our opportunity in terms of operating margin performance. And if you think about the fact that, again, we continue to be focused on ways in which we can become even more productive and efficient, but it's also about growing the top line and the benefits in growing share, the leverage that that creates for the bottom line as we're able to leverage a lot of those fixed costs across that next sales dollar. So, we certainly see opportunities for more growth there.

Right. And just building on that, I agree with Larry, the number one way that we think about it is that idea of script growth and leveraging our fixed assets, but we're also really excited about all the opportunity that exists in the front store, and we'll talk more about this at Analyst Day, but you heard me say last year that we've got five key elements of our growth strategy, and they were around better health made easy, elevating beauty, customer-driven personalization, myCVS Store, and digital innovation. And I think the combination of personalization and digital innovation really strikes us as our biggest opportunity. And certainly, we have a 17-year history of using ExtraCare. We have 70 million active members. But I have to say in the last year, the work that the team has done to really identify even further opportunities to continue to pull back on our core mass circular efforts and reinvest that margin in higher-performing opportunities with customers who have lots of upside, that's where we're excited. And I'd be happy to share more of that when we see you in December.

All right. And then just secondly, where are we with the uptake on Maintenance Choice 2.0? Is there yet an acceleration or is it too early? Starting with 2.0 and moving to sort of core Maintenance Choice; is that likely a couple of years down the road or are we seeing any of that yet?

Well, John, we continue – this is Jon. We continue to see growth in Maintenance Choice. 2.0 made it attractive to a broader suite of clients. So we have 2,400 clients, we're approaching 23 million lives. We saw the ceiling on it is 34 million lives, so we're continuing to grow. And I think as with pharmacy being such front-and-center as payers look for opportunities to manage those costs, I think Maintenance Choice becomes a great opportunity for them to bring their pharmacy costs down.

Okay. Thank you.

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

Hi. Good morning. I wonder if you could give us the specialty growth number in the quarter, excluding Omnicare? And then digging in a little more on specialty big picture, how would you be impacted if the space does come under a little more regulatory scrutiny and we put some price controls on some of the manufacturers there?

Yeah, Mark, it's Larry. Our growth without Omnicare in specialty was 27%. I think in our prepared remarks, we said it was 32% with Omnicare included. Mark, our views on all this noise about price controls, it's not the first time we've heard that rhetoric in the market. As Dave mentioned, we get up every day and focus on how we can reduce costs for our clients and we've got a multitude of ways that we have done that across both the traditional pharmacy business, as well as the specialty business, and there are solutions to further reducing costs. And the umbrella centers around introducing more competition within therapeutic classes that would allow us to do an even more effective job with what we do today. And I'm sure you are aware there is a backlog of approvals, awaiting decision in the FDA. That's certainly one way to increase competition and at the same time, there is a huge opportunity to reduce costs by focusing on site of care administration and getting the right reimbursements aligned that promotes that method of delivery versus care being delivered in an outpatient center and we've been able to demonstrate the savings that we can create for clients and their members through Coram with infusions in our retail infusion site or at home.

I think what I was trying to get at is what does that do to your profitability outlook, if things come under controls?

Well I think it goes back, Mark, a little bit to what Dave was talking about in terms of, as you look across the enterprise, okay, we could see different effects and different segments, but across our enterprise we believe that it would have a muted and immaterial effect.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Priya Ohri-Gupta with Barclays. Please proceed with your question.

Thank you for taking the question. Just shifting gears a little bit. Dave, it looks like you still need to undertake the vast majority of your sale leaseback actions for the year. Are you seeing any shifts in market dynamics that might support most of that coming out of the 144A market that you use, or should we think about you guys undertaking a more balanced approach, similar to what you've done across markets in prior years?

Priya, good question. I think what we have – I think the market is still robust for us from a sale leaseback perspective. I think we have used multiple mechanisms to support our program; I think that has allowed us to ensure that we competitively price all of our programs. We are – I think it's a great program. I think we've done a good job of making sure that we have a lot of active participants in the program, and that has allowed us to, I think, drive costs out of the program quite frankly. Again, like the pharmacy business, competition especially helps and we work hard to create competition in the space

Okay. Thank you.

You're welcome.

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

Hey, guys. Thanks for taking my questions, and really appreciated all the detail, Dave, in the spreadsheets and the presentation. So what I wanted to get into, and I know people have been talking about it a lot, but I'm just trying to understand, you guys talked about reimbursement pressures, and that there is always offsets, and I think Dave, you outlined three different offsets. So I guess what I'm trying to frame is what's missing in 2016 or maybe is a little less of an offset when compared to 2014 and 2015 of the three buckets that you outlined for us?

Scott, that's a great question. Listen, I think that's probably a topic mostly for Analyst Day, quite frankly at this point in time. I would say as we look forward, our growth rate is still pretty robust. I think that we continue to work to gain share, we are gaining share and growing our business across both segments. And as we indicated a little bit, the opportunity really is probably to grow dispensing share over time. And that just – unfortunately that just doesn't happen out of the gate. We have to work hard to do that over time, and I think you are seeing some of that.

Okay. And then this is kind of just – two little follow-ups. Do you expect any divestitures needed with Target?

The data doesn't support that.

Okay.

But we'll have to see.

And then the second thing that kind of caught my attention and you said I believe there is some recent utilization softness, and I was wondering, we have seen indications very recently of some softness out of the consumer. What's your take on that? I think you gave us some explanations, but I don't know what your take on that was.

Yeah, I think, I am sorry, maybe I will clarify my comment. The softness that we've seen a little bit is mainly around the acute seasonal business.

Seasonal business.

And I don't know if that is due to dynamics from a weather perspective, over what have you, but that's really been the softness. And then secondly, we are cycling the expansion of Medicaid, the Medicaid programs from last year. So that kind of I'd say, dilutes the year-over-year growth rate, if you will.

Okay, so you don't really see it as a consumer issue, don't see anything in the front-end?

No. There's nothing that indicates there's a consumer issue here. No.

Perfect. Thanks, guys. Appreciate it.

Thank you. See you.

Thanks, Scott.

Our next question comes from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.

Good morning.

Good morning

Wanted to circle back, I don't know if you agreed with the math discussed earlier of the underlying 7% to 11% growth in 2016 excluding the benefit from the acquisitions, but comment on if you think that's in the right range, and what you think that number looks like in 2017? And I appreciate sort of the 10% to 14% long-term, but just curious if the underlying in 2016 you would think would look different in 2017, or is that the right way to think about the underlying ex-acquisitions going forward?

Eric, you're getting way ahead of it here, buddy. 2017. I think let's just focus on 2016 at the moment. Listen, again, I think we're pretty confident in our outlook for next year. We continue to make progress, as I say, gaining and growing share across both of our business segments. I would say that as we talked about our financial plan, we always talked about the fact that we include bolt-on acquisitions in our plan, and that is consistent with our expectation.

Okay, and then if I could just – and I appreciate that year-by-year thought process.

But I will go back. Eric, one thing. As I said earlier, when we made those financial targets, we set those financial targets, we have been, I'd say, trending to the high side of those targets through 2013 through 2016. And those financial targets remain in place. We think they're appropriate for our business and our business model and the environment we compete in. And so we are not – we stand behind those and none of that has changed.

Okay. I guess the follow up, if you could just provide a little bit of clarity, the 2013, 2014, 2015 at the high end of that without acquisition benefit, there's more acquisition benefit in 2016, and you're still in the same range. So what's different ex the acquisition in 2016 relative to the 2013, 2014, 2015?

We also did – we did Coram and other acquisitions as well. So you can't predict the timing of some of these acquisitions. They happen when they happen when the market's available, so...

Okay. Okay. Very good. Thank you.

Thank you. Take care.

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

Thanks. You mentioned Omnicare didn't meet your expectations for the quarter, but can you give us any greater detail on the performance so that we could see what kind of disruption, if any, happened in the latest period with the transition?

Yeah, Eric, it's Larry. There's really, I'm sorry, Bob. Okay. We just hung up with Eric. So, sorry, Bob. Okay. I'm going to pay a dear price for that, I know. Okay. Bob, there's really – the business has been performing as it had earlier in the year as an independent public company. We haven't seen anything material in terms of client changes or anything of that nature. So, as I mentioned, we feel good with the performance and the integration activities are off to a very good start.

Is there any possibility we get like a one last bed count or script count number for the business before it's consolidated?

Probably not. Good question though.

All right. Thank you.

Thank you.

Go ahead. I was going to say we'll take two more questions. But please go ahead.

Okay. Our next question comes from the line of Charles Rhyee with Cowen & Company. Please proceed with your question.

Hi. I don't know – this is actually James Auh on for Charles. I don't know if this was asked before, but has OC's generic volume shifted over to Red Oak yet?

It has not yet.

It has not yet. But as we stated when we announced the acquisition that our plan would be and our plan is to migrate the generic sourcing to Red Oak and that activity is being executed as we speak. And we'll be completed early next year.

Also, recently, the biosimilar Neupogen was launched. Can you maybe talk about the uptake you have seen, and how that's shaping your view of biosimilars going forward?

That particular product is really not a good proxy for us to comment on because it's largely a product that is utilized in a hospital setting. So it really is not largely dispensed within our distribution channel.

Okay. Thank you.

Okay. Last question please?

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

Thanks. Good morning. So a lot of the critical questions have been asked at this point. The one I wanted to still touch on a little bit here was just, without giving any specific numbers around Red Oak, just trying to get a sense for how material your overall volume discounts on generic procurement will be by adding Omnicare and eventually Target? And really, just the thought pattern is, is it more about improving the COGS just for those two additional books by leveraging your current pricing and procurement levels, or is there still adequate runway to improve your overall COGS by adding this volume?

This is Dave. I think obviously in the short run the real opportunity – the immediate-term opportunity is improving the COGS within those businesses, specifically as they transition into our program. As you know, Red Oak is focused on partnering with generic manufacturers to drive, I'll say, win-win scenarios that drive cost improvements for us and also savings for them from a manufacturing perspective. And I think the team has done just a terrific job getting our program up and running and this is a job that's not done, we're constantly working on this and we're constantly figuring out ways to improve our supply chain, reduce cost of generics that we procure.

Okay. All right. By the way, as far as maybe slightly softer 2016 outlook, are we sure it's not because you're taking Philidor out of the network for next year? Don't answer. I am kidding. Thanks.

Okay. Thanks, Steve.

Thank you.

See you soon.

Listen, everyone, we know this was a rather lengthy call with an awful lot of information and we certainly appreciate the questions and we will look forward to seeing everyone on December 16 in New York.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.