Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operation Instructions] As a reminder, this conference is being recorded Tuesday, August 2, 2016. I would now like to turn the conference over to Nancy Christal, Senior Vice President, Investor Relations. Please go ahead, ma’am.

Thanks, Ivana. Good morning, everyone. Thanks for joining us today. I’m here this morning with Larry Merlo, President and CEO; and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS Caremark; and Helena Foulkes, President of CVS Pharmacy are also with us today and 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 a chance to ask their questions. I have one announcement this morning. Our Annual Analyst Day has been scheduled for Thursday, December 15 in New York City. You’ll have the opportunity to hear from several members of our senior management team, who’ll provide a comprehensive update on our strategies for driving long-term growth. We plan to email invitations with more specific details at the end of the summer, but please save the date. Again, that’s Thursday, December 15. This morning, we posted a slide presentation on our website, just before this call. The slides summarize 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. In addition, 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 use some non-GAAP financial measures when talking about our company’s performance, including free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the reconciliations of these non-GAAP items to comparable GAAP measures on the Investor Relations portion of our website. And, as always, today’s call is being simulcast on our website and it will be archived there, following the call, for one year. Now, I’ll turn this over to Larry Merlo.

Okay. Thanks, Nancy, and good morning, everyone. Thanks for joining us. And I’m pleased to have the opportunity to discuss the strong second quarter results we posted today. Adjusted earnings per share increased 8.3% to $1.32. That’s $0.01 above the high end of our guidance. And excluding acquisition-related costs in both years, operating profit increased 6.5% enterprise-wide, with operating profit in the Retail/Long Term Care segment in line with our expectations, and operating profit in the PBM exceeding expectations. We generated more than $1.1 billion of free cash during the quarter, more than $2.9 billion year-to-date and, as Dave will describe, we are raising our free cash flow target by $1 billion for the year. Now, given our outperformance this quarter and solid results year-to-date, we are raising and narrowing our adjusted EPS guidance range. Excluding the costs associated with the debt tender and acquisition-related costs, we currently expect to achieve adjusted EPS for 2016 of $5.81 to $5.89, reflecting year-over-year growth of 12.5% to 14.25% and that compares to our previous range of $5.73 to $5.88. And Dave will discuss this guidance in more detail during his financial review. Now, let me turn to the business update, and I’ll start with the PBM. The marketplace has been active. And I’m pleased to report that with our differentiated value proposition, we see 2017 shaping up to be another successful selling season. We currently have gross wins of approximately $7.4 billion and net new business of approximately $4.6 billion. These new business numbers do not include any impact from our individual Med D PDP. I’ll touch on that shortly. And I’d also note that only about 7% of the gross wins relate to the previously-discussed transition of the Coventry commercial business, which was acquired by Aetna back in 2013. To-date, we’ve…

Thank you, Larry, and good morning, everyone. Today, I’ll provide a detailed review of our second quarter results, followed with an update on our improved guidance. And, as I typically do, I’ll start first with a summary of the progress we’ve made in enhancing shareholder value through our strong capital allocation program. During the quarter, we paid $459 million in dividends. Our dividend payout ratio currently stands at 35.5%, but that is artificially high due to the loss on the debt extinguishment we incurred in the second quarter as well as the ongoing integration costs associated with our recent acquisitions. On a more comparable basis, our payout ratio stands at 31.1%, and we remain well on track to achieve our target of 35% by 2018. In addition, we have continued to repurchase shares. During the second quarter, we repurchased 18.5 million shares for approximately $1.9 billion, or $102.32 per share. And we have now essentially completed our planned $4 billion in repurchases for 2016. As I said at our Analyst Day, we expected share repurchases to be front half-loaded, and it very much played out that way. So between dividends and share repurchases, we returned approximately $2.4 billion to shareholders during this quarter and nearly $4.9 billion year-to-date. We continue to expect to return more than $5 billion to our shareholders in 2016 through both a combination of dividends and share repurchases. As Larry mentioned, we generated more than $1.1 billion of free cash in the second quarter, and we have produced more than $2.9 billion year-to-date. We are increasing our full-year free cash flow guidance to a range of $6.3 billion to $6.6 billion from the prior range of $5.3 billion to $5.6 billion. This primarily reflects timing in our Medicare Part D SilverScript’s business, as well as overall…

Okay. Thanks, Dave, and just let me wrap up and then we’ll open it up for Q&A. But obviously, we’re pleased with our second quarter results, confident in our full-year outlook, and we’ve made good progress on integrating our recent acquisitions. The PBM selling season has been very successful, confirming again that our distinctive channel-agnostic solutions resonate strongly in the market. And we remain focused on continuing to provide innovative solutions that enhance access and lower healthcare costs, while, at the same time, improve health outcomes. So let’s go ahead and open it up for your questions.

Thank you. [Operation Instructions] And our first question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your question.

Good morning. This is Nathan Rich on for Bob this morning. Just wanted to start on your comments on the selling season, appreciate all the detail that you gave and definitely nice to see a strong new wins number. I was just wondering if you could talk about the mix of new business that you’ve won; how it looks, you know, for health plan versus employer. And is there anything unique this year with regards to profitability, both from a pricing perspective but also kind of considering the uptake of the suite of programs that you have to offer?

Yeah, Nathan. It’s Larry. I’ll start and then ask Jon to comment as well. But of the business wins, about 75% of the business wins are in the health plan segment; again, recognizing the value that we can bring our health plan clients. I think the themes that you’ve heard us talk about in the past have continued this year in terms of big focus on specialty. And I’ll flip it over to Jon to talk more about our integrated programs.

Yeah. So, Nathan, I would describe the selling season as pretty typical. The number of RPs are comparable. And we’ve been at a consistent level of performance in the selling seasons over the last several years. If you look at the plan designs, which, obviously, drives profitability, clients continue to be focused on the tools to help them manage their pharmacy spend. And their top priority, as we’ve talked about many times, is specialty pharmacy. And we see both health plans and employers adopt our utilization management programs. We’re seeing even stronger movement into exclusive specialty and a higher utilization of our specialty formularies. And clients across our, again, both health plans and employers, are becoming even more aggressive with all of our formulary strategies. So Larry talked about our standard formulary option that we offer clients. Good uptake to that, but we even have more aggressive formularies, advanced control and value formularies, that we continue to see increased interest in. And then our integrated programs, like Maintenance Choice, Specialty Connect and Pharmacy advisor, are becoming even more important as people not only look at the unit cost in pharmacy, but also how pharmacy can help reduce overall healthcare costs, so strong adoption of those programs as well. And so I think it’s been, as I look at this new business mix in wins and profitability, I think it’s pretty consistent with what we’ve seen over the last couple of years.

reat. Appreciate the detail. And then, if I could just move over to the Retail/LTC segment, question on gross margins. It seems like for several quarters now, you’ve seen some nice improvement in the front end margin and you kind of highlighted the changes to the promotional cadence and some mix impact. Could you help us frame the opportunity for front end margins, just around the changes that you have made to promotions? And then any comments on what impact this has had on the top line, as we think about maybe the trade-off that you’re making between top line and margin performance on the front end?

Yeah, Nathan, it’s Larry again. And I think as you heard us comment on in the prepared remarks and prior to today’s call, the ability to utilize our ExtraCare data, okay, to really understand our customers at a micro level, is what’s providing us the opportunity to do what we talked about earlier around this personalization effort and acknowledging that we can derive value in different ways. And there’s an awful lot of trial and error that goes on there. And I would say that we’re still learning from that. I mentioned earlier that Helena will talk more about that at Analyst Day in terms of the learnings that we’ve gotten and where we go from here. So I guess to sum it up, we’re certainly not done. Okay? We still think that we have capabilities beyond where we’re at today. But as I mentioned, you have to take a surgical approach, okay, so that we’re preserving the value of our best customers, okay, and enhancing their experience.

And just to be clear, Nathan, it’s Dave here. Despite the fact of giving up, I’ll say, a little bit of top line from a front store sales perspective, the flow-through to the business is accretive.

Okay, great, makes sense. Thank you.

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

Great. Thank you and good morning. I had two questions on the PBM. So the first question would be, Larry or Jon, can you maybe talk about where you’re taking business from? We’ve now heard from Optum as well as Express Scripts. It sounds like everyone’s having pretty good retention years, but, clearly, with $7.4 billion of gross wins, you’re taking business from somewhere. Is it some of the smaller players? Are we seeing any incremental carve-out activity? How do we think about the competitive market right now and where that business is coming from?

Go ahead, Jon.

Lisa, this is Jon. So I don’t think there’s any one competitor we’re taking business from. I think it’s across the spectrum, both large players and the small players. So I think it’s a very balanced selling season. And, obviously, we continue to be very successful and our message continues to resonate. And, by the way, even on the renewals, when you look at how we’re doing from a renewal perspective, again, very consistent performance relative to the last several years. So I know there’s been a lot in the press about a few contract moves, but when you step back and look at overall retention work, we’re very pleased.

Okay, great. And then, I guess my follow-up would just be around cash flow, Dave. I mean, obviously, great cash flow in the quarter, great cash flow update for this year; how do we think about that on an ongoing basis? Is there some things in there that are one-time in nature? And would you think about doing an accelerated share repurchase with this incremental cash? How do we think about the deployment of it?

Yeah. Lisa, a little bit of the cash flow, I’d say probably 75% of the increased guidance, is probably just - think about that more as timing, as you think about us being in a payable position to the Federal government at the end of the year. That will flip on us in 2017. So think about that as just moving into 2016 from 2017. I would say the balance is just general improved performance across our business, in both PBM and Retail. As it comes to capital allocation, as you know, we will continue to focus on what’s the best use of our cash to drive value for our shareholders. And we will continue to think about that, and we’ll certainly come back to everyone as we think about how to use that cash over time.

Okay, great. Thank you.

Thanks.

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

Great. Thanks. I want to get back to specialty a bit and when you talk about the 22% growth that you saw so far, can you talk about sort of the mix within that? What categories are you seeing this year that are going to be a bit concerning for your clients, as well as sort of the mix between utilization versus pricing?

Yeah. Charles, this is Jon. I mean, we’re seeing continued growth across all categories, so autoimmune, multiple sclerosis and oncology are examples. Hepatitis C, as Larry and Dave mentioned, we’re really seeing a less utilization there. And then, as you look at the specialty category and what’s driving the growth, you have price increase is really driving the majority of the growth. You have pretty strong utilization, north of 3%, more than you see in traditional pharmacy. And then you have new drugs coming into the market that also drive year-over-year growth. So, again, it’s specialty growing faster than - it’s the fastest growing part of the pharmacy benefit. It’s our clients’ highest priorities, and we have solutions for them that can actually help manage that, not only under the pharmacy benefit but also under the medical benefit.

And just for a clarification, can you remind us what percent of the Caremark, the PBM client business, is served by the specialty pharmacy? So basically how much do you cover of the existing client base versus how much of the specialty business is outside the CVS base? Thanks.

Yes. Charles, it’s right around 60%.

Okay, great. Thank you.

Thanks.

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

Good morning. And obviously, you’ve given us a ton of color so far on the success you’ve had, but a lot has been made, at least in the investment community, about sort of a debate on the merits of whether your model, which has been so successful for so many years, will continue to be successful in the changing competitive landscape and, ultimately, what’s happening with managed care. As you think about the outcome as it stands right now in terms of selling season wins and the feedback, Jon, you’ve gotten, and as you continue to evolve the strategy, I guess, where do you think some of us were wrong in terms of the assumptions? Or what are folks not focusing on where you continue to kind of push the needle and evolve the model and push share where maybe folks aren’t seeing it? I’m just trying to get a sense for where you feel like the messaging has been most off from our side of things or the perception, at least, versus kind of the reality of clearly what you’re seeing in the market.

Yeah. Ross, it’s Larry. And first of all, let me just say United Optum, obviously, they’re a highly respected company and their well-publicized wins this selling season demonstrate that they can successfully compete for business in the PBM space. At the same time, back to your question, if you ask why we’ve been successful and why we expect to continue to be successful, we continue to see this retailization of healthcare. And you see more people in consumer-directed health plans. You see more care being chosen individually, when you think about some of the government-sponsored care with Medicare. And that points to the value associated with multiple consumer touch points. And I touched on those in our prepared remarks that, yeah, there’s 9,600 retail consumer touch points. We’ve got 80% of the U.S. population that lives within a couple miles of one of our stores, along with MinuteClinic assets and specialty and mail and infusion and now, long-term care. And we have created a true level of integration across these different assets. And, Ross, you remember years ago, we were talking about the Consumer Engagement Engine, which we now refer to as the Health Engagement Engine. And it’s a piece of technology that connects the dots with these various capabilities, so that it’s not just about collecting data. It’s about how we use that data to affect an outcome. So you combine that with the ability to touch the consumer in multiple different ways, and we think that that is our value proposition that will increase in importance and that has allowed us to bring products in the marketplace that can impact patients, payors and providers.

That’s helpful, Larry. And maybe just in general, it seems like again, another very successful season on health plan side. Obviously, you had that as well last year. Can you just remind us what that means in terms of profit ramp and how we should think about the business won last year and how that’s trended profit-wise, or is expected to over the course of this year into next and that whole dynamic?

Yeah. Ross, this is Dave. I’ll start off here. As you know, the health plan business is a little different than the employer business, whereas in the employer business, typically a benefit manager can make a decision for their population immediately and those programs can be implemented pretty rapidly. In the health plan business, even despite a health plan, let’s say, Chief Medical Officer wanting to adopt one of our programs, they need to in turn, go and sell that through their book of business or, in some cases in the Medicare book of business, the ramp-up of share is just a little slower. So think about us starting off at pretty thin margins and that ramping up over time. And the cadence of that is probably a little slower than the employer book of business.

And, Ross, I guess if we look at 2016 health plan clients that we won, we’re now talking to them about programs that they can implement in 2017. And they have four lines of business that, quite frankly, you have to think about very differently. So in Medicare, they can’t just simply narrow the network. They can have a preferred network. In Medicaid, we see, very aggressively, clients narrowing their network. With their fully insured book of business, they have to work through the Department of Insurance and they historically have opted for consumer choice broad networks. We do see that changing. And for the self-insured, that’s no different than our employer clients. So it’s really arming them with programs and incentives to sell that into their employer book of business. So it does move slower, as Dave said, but we’re confident it will move. And we’re confident we can grow share.

Great. And thanks.

Thanks, Ross.

Our next question comes from the line of Alvin Concepcion with Citi. Please proceed with your question.

Thank you and thanks for taking my question. I think you mentioned the retention rate in PBM was 97.5%. So I’m wondering, would you happen to know what it was last year at this time?

Well, Alvin, the year ended up at 97.2%, okay, for last year’s selling season. And, as we mentioned, we have about 75% of the renewal is done, so we’re in the homestretch there. I don’t know what the retention rate was at this time last year. It probably wouldn’t be that far off with where we are.

Right. And I mean, it’s pretty similar to the selling season, right? The large players have made their decisions and now it’s down to the midmarket and the small players. So I would say it’s pretty comparable to where we were last year.

Great. Thank you for that color. And a question on retail, with things like ScriptSync and Curbside, you talked about it a bit last quarter. And maybe it’s still early, but how should we think about retail comps longer-term, in particular, the front end? I’m wondering if this would pressure your front end comps further or if you see basket sort of offsetting the potential less traffic.

No, Alvin. I don’t see those aspects pressuring front end comps. I think it’s important to emphasize that some of what we’re experiencing is planned, as we think about our front store business and the segmentation or personalization strategies as we had talked earlier.

Yeah. I would say, too, Alvin, we’ve said all along, we’re focused on driving profitable growth. And so when you look at where we’re very pleased in our core Health and Beauty businesses, that’s where we want to win. That’s where our most valuable customers expect us to be unique and that’s going very well. And then, we’re pulling back in general merchandise and edibles businesses, which tend to be very promotional, and reinvesting those dollars in our best customers, so I think you’ll continue to see us do that.

Thank you very much.

Thanks.

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

Good morning and congrats on a very good quarter and thank you for all the details. Question I have here is on Maintenance Choice. Obviously, it’s been proven to be very effective tool to gain market share. Under a scenario that you lose a Maintenance Choice client, how much of the share do you expect to keep?

Well, Ricky, we have had an extremely high retention rate of those Maintenance Choice clients, so there’s really not a good proxy there, okay, to answer that question. In the few cases where that’s happened, CVS continues to be in the provider network, and we’ve retained a large percent of that business.

Okay. And then, when we think about the quarterly result, obviously, you highlight in the press release and the prepared comments that there’s contribution from Omnicare and Target. Can you quantify for us what percent of the operating income growth per segment was from acquisitions versus organic?

Yeah. Ricky, it’s Dave. We haven’t broken than out. Quite honestly, the integration of those businesses are pretty complete now, so actually having them broken out is a little bit more difficult than you might imagine. But they’re part of our forecast for this year and our forecast is very much in line from a quarter perspective.

Okay. And just one last follow-up on the selling season, obviously, last year, you had about 80% of the business came from managed care. When you think about the mix of business, I know that in response to an earlier question, you said that it’s similar to last couple of years, but it seems that every year was a bit unique. So what percent of the net new business, or maybe I should say what percent of gross wins, are from managed care versus commercial book of business?

Yeah. Ricky, it’s around 75%. And if you look at the mix of business within the PBM excluding Med D, the makeup of that business is now 60% health plan, 40% employer.

Okay. Thank you.

Thanks.

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

Sure. So, Larry or Helena, what can you tell us about those most valuable customers? I don’t know how you define them, but when you think about importance to the business, either percent of sales or transactions, demographics and where you see, when you think about your share of wallet with them, where are the biggest opportunities; just curious, some color on those customers?

Sure. We look at it a lot of different ways, but I would say at the most simple level, the top 30% of our customers drive about 75% of our sales and profit. And we are meaningful to them, but we still have significant upside in terms of share of wallet opportunities for them. So what we’ve really been focused on is the personalization strategy that Larry talked about. And essentially, investing in those customers, because we can see from the data where we have upside with them. And we segment them either from a value perspective sometimes or we look at them in terms of their shopping behavior. So we might look at beauty enthusiasts who, for example, tend to be less promotionally-oriented and are very focused on new items and what’s hot and relevant for them. And that might be different than food and family loyalists, who are looking for different kinds of offers and strategies. So for us, it’s all about getting at the very micro level and giving them targeted offers that matter for them. And we can track those customers over time, and we’re very focused and pleased with the fact that we continue to grow sales and profitability among those best customers.

And, John, it’s Larry. If I could emphasize one point, I think you’re hearing a theme emerge. And it’s not a new theme, but whether we’re talking about your point on the front store or some of the things that have come up earlier with some of the questions about the pharmacy, there is a tremendous amount of data out there, okay? And it’s one thing to collect the data. It’s another thing in terms of how do you use the data to create an outcome or a behavioral change. And that’s where we’ve made significant investments in our business, whether it’s ExtraCare or whether it’s the capabilities back in the pharmacy, that is allowing us to do things in a very differentiated way that we think that is giving us an advantage in the marketplace.

And that would obviously, I assume there’s some customers that are truly unprofitable. I mean, how do you think about weaning yourself off of those and then balancing that with, obviously, there’s the direct profit, but there’s also overhead and other costs that they might cover.

Right. Yeah.

Right? So, that’s...

Yeah. Yeah. Exactly.

So that’s an interesting balance, right?

That’s the delicate balance that does not just make this a math exercise. We certainly know, if you look at our bottom two deciles of customers, where there’s potential. And that’s what you saw us doing the last couple of quarters, is pulling back our promotional spend, but weaning those customers off of it. We certainly want to continue to keep their business, and reinvesting that in other segments where we can see more profit upside. But that’s exactly the balance we’re looking at. And we said before, the role of the front store is different in our company than other companies. It represents 11% of our total enterprise sales, but it also is the front door to how people start to use us as a pharmacy. So as we look at those customers, we’re looking not just at their front door sales and profitability, but we also know which of those customers are our pharmacy customers and that’s an important part of the decision-making process as well.

And then, just one last one for Jon, do you think, at this point, competing solely on the basis of price, or largely on the basis of price, is not something your account base is particularly interested in; they’ve kind of moved off of that to capabilities?

John, as we’ve said many times, price has been important. It will continue to be important. We’ve talked about the fact that price is ticket to the game. Q - John Heinbockel Yeah.

And listen, when you look across the PBM business, we’re talking a lot about retention rates. We never want to lose a client. At the same time, we don’t forecast or expect to have 100% retention. And you can look across the landscape and you can see clients who, every contract renewal they migrate to another PBM. Okay? So there are going to be clients out there that have different priorities. And we think that with our differentiated offering, we can appeal to the broadest set of those clients.

Thank you.

And just to add to that, Jon, while we have to continue to be competitive on price, it’s really our differentiated model and our ability to interact with a consumer and impact their behavior and lower overall healthcare costs. That’s what’s resonating in the market. And that’s why we’re continuing to win.

Okay. Thank you.

Thanks, John.

Our next question comes from the line of Eric Percher with Barclays. Please proceed with your question.

Thank you. As we spoke with benefit managers yesterday, I think that there was some interest in the indication-based formulary and cost - or inflation efforts, but what really caught their eye was your aggressiveness relative to biosimilars, particularly as compared to the one competitor whose formulary we’ve seen. Could you speak a little bit about what this represents in terms of your strategy on biosimilars? It seems like a material statement, and also, how you think about the ability to serve and drive adoption of biosimilars, both as a PBM and as a retailer?

Well, Eric, it’s Larry. I’ll start and then flip it over to Jon. But as you’ve heard us talk in the past, okay, while biosimilars are just beginning to enter the market and their impact will be will be nominal or minimal, okay, in the near-term, we believe that they will grow in importance. And they will behave more like brands than generics, which create opportunities within the formulary management area. So that’s how we’ve thought about it at a very high level. I’ll flip it over to Jon to talk more specifics.

Yeah. And then, Eric, maybe I’ll step back and talk about the three dimensions to our formulary strategy for this year, because it’s a little bit different than what we’ve done in years’ past. And it does include these biosimilars, or in the case [ph] of a sidebar, (65:00) it’s a follow-on biologic, but I would think of it as a biosimilar. So first, we’ve got our normal therapeutic review that we started back in 2012. And that’s all about making sure we have cost-effective medications for our clients and their members. And we’ve been able to deliver the $9 billion in savings that Larry talked about. And over the last several years, we’ve been able to negotiate price protection into those contracts. So if a manufacturer raises a price over a predetermined threshold, that comes back to our client in the form of a rebate and lowers their price. What we introduced this year is indication-based formularies. So think about Hepatitis C that has six different genotypes. The genotypes are different. So we will have different formulary options based on the genotype or, in the case of autoimmune, you have the same drugs that treat psoriasis and RA. We may have a different preferred product for psoriasis than we do for rheumatoid arthritis. And the third dynamic is really hyperinflation. And we looked at drugs that had a three-year cumulative WACC increase of greater than 200%. And we’ve taken on 10 of those drugs this year. And our goal is either we’re not going to cover them, or we’re going to get the economics back to prior to these WACC increases that they took. And for biosimilars, I think it’s just part of that theme. How can we get the lowest, most cost-effective drugs for our clients to provide as a benefit to their members? And we think biosimilars will be an opportunity. Now, when you look at biosimilars, most of the pipeline is filled with biosimilars under the medical benefit, with the exception with Humira, but we’ll continue to look to make decisions that are in the best interests of our clients and their members.

Very good. Thank you.

Next question?

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

Good morning, guys. And thanks for taking the question. Jon, we saw the preliminary Med D bid rates come out last week, and it looks like Med D providers’ll be down 2%-ish as it relates to total revenue. And I guess as we think about as the company goes to market and contracts in providing the benefit for 2017, if you think about where you get the cost savings to kind of continue to drive those price declines, do you feel like more of them are coming on the pharmacy network side or are more of them coming on, what I’ll call, the manufacturer side, either through formulary actions or through rebates?

Sure. It’s Larry. I’ll start and then David or Jon, or both, will jump in here, but, George, I would say it’s really the surround sound, okay, that is contributing to that. It’s not just about the procurement side of things or the network side of things. And I do think that Med D is a great example of competition prevailing in the marketplace, okay, to drive down overall costs. And as you look today at the cost of the Med D program against what it was projected a decade ago, it’s a fraction of that.

And the only thing I would add is, I think that’s right. It’s pretty balanced. You know, we continue to get value to have a very competitive product in the market really across all those dimensions. I think the only thing I would add is that I think our expertise and how we’ve been able to help [ph] service reps and our clients is really how you design your plan, how the formulary that supports that plan, what’s your network strategy, all of those need to work together to provide a synergy that gives you a competitive product in the marketplace. And that’s really the expertise that we’ve built over the years that allows us to continue to be successful.

Okay. That’s helpful. And then, just maybe a quick housekeeping question, for the net new wins for the PBM for next year, does that or does that not include the bid balance of the Coventry business rolling on?

No, George, it does. I think in our prepared remarks, I mentioned that less than 7%, you know, of the gross wins are made up of the Coventry business.

Sorry. I missed that section. Thanks for the color, guys.

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

Hey, guys. Thanks for taking my questions. First up is just, and I know we touched on it a little bit for the 2016 and upselling, Jon, and you did a good job of the four different buckets upselling your unique offerings into the healthcare plans, but I just wanted to get any update. I think you guys said you were about 23% penetrated processing scripts, I think it was at year-end maybe. I think I got that right. Any update on that number? And where we’re going as far as like Maintenance Choice and processing the scripts from healthcare plans?

Yeah, Scott, it’s Larry.

[ph] In your own assets, okay?

Yeah, well, I think, as Jon mentioned earlier, you know, we have seen the ramp begin in terms of the clients that came online, you know, in January 2016. At our Analyst Day, we’ll provide more insight and quantify exactly where that sits as we’re able to ramp up through the year.

Would you say, Larry, you’re pleased with how things are going or any thoughts? I know you talked a little bit last quarter about, you know, it’s slow, but kind of methodical. Any updates on kind of how you’re thinking about it?

No, Scott, I think we’re pleased, you know, with where we’re at and, you know, recognizing that as you’ve heard us talk about, this is a marathon. It’s not a sprint, okay? And we’re pleased with the progress that we’re making. And again, for the reasons that we mentioned earlier, okay, we think that the assets and capabilities that we bring will grow in importance, recognizing the direction that healthcare is headed.

Perfect. And then, just a little bit for Dave, you know, the guidance, I think, Dave, you said incorporated a better second quarter and also interest savings. It does seem like the underlying business is performing better than expected just maybe so far in the first couple quarters. Do you think that can actually continue into the back half? And how should we think about that I guess, particularly on the PBM side?

Well, I do think, obviously, the business has performed well, I’d say kind of in both segments, both Q1 and Q2. Obviously, we are driving benefit from, I’ll say, below-the-line as we think about refinancing our debt. But, again, you saw us raise operating performance expectations within the PBM segment for the balance of this year, and I continue to think that we’re well-positioned as we think about delivery for Q3 and Q4.

All right. And I just wanted to sneak one last one in for Helena. Just on your best customers, Helena, where do you think you’re priced compared to mass and online, and then I’ll yield. Thanks, guys, for taking my questions.

Yeah. Sure. So we look at our price, the net price to customers, as you think about all of the promotions, ExtraCare rewards and targeted offers we give them, and we think that’s sort of how the consumer views it. And we think we’re within striking range, essentially, of those competitors when you look at all those offers for our best customers.

Perfect. Thanks.

Thanks, Scott. Next question?

Is from the line of Mark Wiltamuth with Jefferies. Please proceed with your question.

Hi. Congrats on the PBM selling season news. Pleased to see that. But also wanted to ask a little bit about what’s the next step here at Target? The integration has gone well. At this point, can you tell if the stores that have CVS density around them, are those Target stores doing better? And do you plan to add more CVS stores around the existing Targets?

Well, Mark, I’ll start and then flip it over to Helena. But listen, and I’m sure you know this, so just as a reminder, any acquisition, especially on the retail side, you have to do the things you must do before you can do the things you like to do. So I think we’re all really pleased with the work of the team to be able to convert almost 1,700 pharmacies in what amounted to a six-month period. And it was a terrific job by all. And we got tremendous support from our partners at Target. So we’ve completed those activities within the last 30 days. So now, we get to move to the things that we really like to do. And I’ll flip it over to Helena to talk about that.

Right. So, as you can imagine, with all of that conversion, there is always - we’ve done a lot of acquisitions. You do have a fair level of disruption. And, as Larry said, the Target folks have been great in working with us through all that. But we were very pleased. The service scores coming out of those stores are tremendous. The leadership alignment is fantastic. We’re on track to achieve our targeted EBIT for those pharmacies. And now, we’re really focused on ramping up our patient care programs. As we looked at this opportunity, there were really three big areas where we saw opportunity, and those are beginning now. First is the core clinical programs that we’ve always used at CVS. We call them our patient care programs, things like adherence outreach and other ways that we can drive clinical outcomes, which drives scripts. The second is around all the member engagement efforts that we’ve got going on. And these are essentially targeted at our members through the PBM who now have opportunities to fill prescriptions at Target. And so, we’re letting them know about that, inviting them into those Target pharmacies to experience the new offering, as well as some targeted marketing that we’ve been doing in conjunction with Target. Most of that’s been digital. It’s also been radio. And that is really just kicking off now as well. So all those things, together, give us a high level of confidence that with all of these unique programs, as well as our brand recognition, our clinical capabilities and these digital tools that we’ve introduced, that we’ll be able to increase script volumes in these locations.

And my question about your existing footprint where you have CVS stores around an existing Target, are those Targets performing better than the others?

I would say the only thing we would really say is, probably noteworthy in terms of performance is those markets where CVS had very little presence, like a Denver or a Portland, Oregon, those Target pharmacies are probably performing the best, because, as you think about it, that’s where our model of allowing Maintenance Choice members to now fill at a CVS pharmacy inside a Target really is unique. They don’t have a CVS nearby. So that’s probably the one difference we’ve seen so far in performance.

Yeah, Mark, this is Dave. I think what’s important, too, as you think about that combination is the overlap between the Target pharmacies and the CVS pharmacies was pretty minimal. So I think there’s not a lot of those situations where we’re head-to-head, number one. That’s why it was a good match, from that perspective. And number two is that we share customers. Many of our customers shop the Target channel and many of the Target customers shop the CVS channel. And right now, what we’ve done is given those customers options. So I think at the end of the day, it’s going to be enhancing to our overall market share, not just switching from one box to another.

And, Mark, I’ll just kind of wrap it up by saying it’s a hard question to answer, at this point, for the reasons that Helena mentioned. We’re just beginning the broad-based marketing programs. And there is a tremendous opportunity to increase the level of awareness of CVS at Target, and all that work has just begun.

Okay. Thank you very much.

So before we take the next question, we just want to go back and add a little color to the question that came up earlier on the Coventry business.

Yeah, so this is Dave. George Hill, you asked a question about Coventry about, again, for the 1/1/2017 selling season, about 7% of our gross wins is related to the migration of the Coventry business onto the Caremark platform. There is an additional piece of Coventry commercial business that does migrate on to CVS on 1/1 of 2018.

Okay. So next question?

Is from the line of Steven Valiquette with Bank of America Merrill Lynch. Please proceed with your question.

Okay. Thanks. Good morning, guys, congrats on these results. I guess, just for us, really probably another question on this PBM. It does seem that 2016 is a unique year, where your PBM revenue growth is really almost double your operating profit growth. And that’s partially because of the mix of wins you had for this year. I think what everybody is trying to figure out on this call, kind of big picture, without you giving any guidance is can we generally assume that PBM revenue and EBIT growth will hopefully be a little bit more in line with each other for 2017 than what we’re seeing in 2016 or should we still generally assume a large spread there next year? Thanks.

Steve, this is Dave. I would say if you go back and look at our long term targets, which is probably the best way to think about this, and you look at those targets, you’ve seen us give expectations that the top line is going to grow faster than the bottom line as we capture share, as specialty continues to grow, as we continue to invest in our business and do bolt-on acquisitions. I would say that that long term forecast remains intact today, from as you think about the top line growing more rapidly than the bottom line. And so I would expect that to occur.

Okay. Also, since 2016 was kind of a record year for the wins you took on this year, does that $13 billion to $15 billion of business become more profitable and higher margin in 2017 than the 2016 contribution, just generally speaking?

Generally speaking, that’s essentially how this business typically operates. As we’ve always said, is the health plan business, they’re a little slower to kind of adopt our programs and to sell those programs in. It depends upon the complexion of the health plan business. Some might be more Med D-weighted versus commercial. So the cadence of that ramp does vary, but it’s typically a bit slower than the employer book of business.

Okay. And then, finally, just real quick, the FEP mail and retail extension, the January 2019, I kind of missed your comments on that. So is that an early renewal and extension, so that there would be some different pricing on that for next year? Or is that just nothing changes on the pricing front? That was just your disclosure that that’s still intact through January of 2019, just wanted to get the extra color on that. Thanks.

Yeah. So, Steve, they had an option to extend the contract and the economics were already built into that deal, and they chose to extend. So it wasn’t a new financial arrangement. It was an extension of the existing deal we had offered them.

Okay, perfect. Okay, all right, great. Thanks.

Okay. We’ll take two more questions, please.

Our next question comes from the line of Mohan Naidu with Oppenheimer. Please proceed with your question.

Thank you very much for squeezing me in. Larry, maybe given the success you’re seeing with the Target pharmacies [ph] and TNX (81:58), is there any appetite to do more of such partnerships?

Yeah. It’s a great question. And we’re certainly open to that. I think that as you look at how pharmacy is evolving, and the importance of investments in technology to not just satisfy the regulatory priorities that are associated with pharmacy, but how pharmacy becomes an important part of the solution of driving down healthcare costs and serves as something more than just a dispenser of prescriptions, I think that as that increases in importance, I think that there may be more opportunities that present themselves. And we’re certainly interested in those.

All right. Thank you very much.

And our final question comes from the line of David Larsen with Leerink. Please proceed with your question.

Hey, congratulations on an excellent quarter. Can you talk about the impact of generic deflation and the performance of Red Oak? How is that progressing relative to expectations? Thanks.

Dave, Dave Denton here. Obviously, we’re very pleased with the progression of Red Oak. Both us and Cardinal continue to see value from that joint venture. I would say that, as we’ve talked about this in the past, both inflation and deflation across our business has not really been that impactful. So I don’t think that the change in those levels of pricing within generics has been a major impact on us. It certainly has not been material, both this year and in prior years. So it’s progressing very much as planned this year. And we’ll probably have more to update as far as generic introductions as we get to Analyst Day in December.

Okay. And then, in December, will you provide a new sort of five-year guidance range for these different metrics?

We always update kind of our performance, both from a current period perspective and an ongoing perspective. So we’ll certain hit on key topics and the outlook for those key topics over the course of the next several years in December.

Great. Thanks.

Okay, everyone. Thanks for your ongoing interest in CVS. And if there are any follow-up questions, you can contact Nancy Christal. Thanks.

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.