Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, November 8, 2016. I'd now like to turn the call over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead.

Thank you, James. Good morning, everyone, and thanks for joining us today. I'm here this morning with Larry Merlo, President and CEO; and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS Caremark; and Helena Foulkes, President of CVS Pharmacy are also with us today and will participate in the question-and-answer session following our prepared remarks. We want to leave as much time as possible for questions today. 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 a question. We have a lot to cover this morning, and we plan to make only brief remarks about the third quarter, so we can spend the majority of our time talking about our guidance for the remainder of this year, our 2017 preliminary outlook, and our longer term targets. You can find all the usual details of the quarter on the slides we posted on our website just before the call. We also filed our Form 10-Q this morning, and it's available on our website as well. I have one quick reminder, Annual Analyst Day is 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. The meeting will be webcast for those unable to attend in person. 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. And now, I'll turn this over to Larry Merlo.

Okay. Thank you Nancy and good morning everyone and thanks for joining us. While we announced solid results this morning for the third quarter, as Nancy mentioned, we want to spend most of this call addressing the recent changes in the marketplace, what they mean for CVS Health in the short-term, and most important our plans to address these issues, so we can resume our robust growth trajectory. You can find the detailed business and financial review of the quarter in the slides we posted before the call. So let me touch briefly on our strong third quarter we announced this morning. Net revenues increased 15.5%, rising 19.2% in the PBM, 12.5% in the Retail/Long Term Care segment. Adjusted earnings per share increased 28% to $1.64, including approximately $0.05 related to a lower tax rate, primarily due to the resolution of certain tax matters previously anticipated to occur in Q4. So this is basically a timing shift benefiting the third quarter at the expense of Q4. Our results in the third quarter also include another penny related to below the line items. So putting those benefits aside, we posted strong adjusted earnings per share growth at the high end of our guidance range. The PBM performed slightly above the high end of our expectations, mostly due to Medicare Part D profitability, while the Retail/Long Term Care segment performed at the lower end of our expectations. Retail same store sales grew 2.3%, with Pharmacy comps up 3.4%, and comp scripts up 3%, and that's on a 30-day equivalent basis. Script growth was at the low end of our expectations, reflecting the slowing script growth trend in the overall market and a soft seasonal business. However, our retail pharmacy share grew more than 200 basis points to 23.8% versus the same quarter…

Thank you Larry, and good morning to everyone. I'll start today with our revised guidance for this year. We currently expect to achieve adjusted earnings per share for 2016 of $5.77 to $5.83 per share, reflecting year-over-year growth of 11.75% to 13%. We've effectively lowered the midpoint by $0.05 per share compared to our prior range of $5.81 to $5.89 per share. This takes into account the recent competitor actions restricting us from pharmacy networks as well as current trends in the Retail business, including the slowing script growth in the overall market and a soft seasonal business which is affecting both the Pharmacy as well as the front store. GAAP diluted EPS from continuing operations is expected to be in the range of $4.84 to $4.90 a share. This now includes the addition of the integration costs in the third quarter, which we explicitly excluded from our prior guidance. Keep in mind that our GAAP guidance for the remainder of the year excludes the impact of acquisition-related integration costs, and we will update for those costs at year end. Before moving to the fourth quarter guidance, let me quickly remind you of the timing factor affecting Q3, Q4 profit cadence. As Larry mentioned, we had a timing shift related to a lower tax rate that benefited Q3 by approximately $0.05 a share, primarily due to the resolution of certain tax matters. These matters were previously anticipated to occur in Q4, which I talked about on our last earnings call. So in the fourth quarter, we expect adjusted earnings per share to be in the range of $1.64 to $1.70, up 7% to 10.75% from Q4 of 2015. GAAP diluted EPS from continuing operations is expected to be in the range of $1.52 per share to $1.58 per share. And…

Well, thanks, Dave. Well, obviously, we are not satisfied with next year's growth projection. We have a plan in place to return to healthy operating profit growth, and let me provide a high-level outline of that plan. First, we will leverage our enterprise capabilities and CVS Pharmacy's compelling value proposition to partner more broadly with other PBMs and health plans. We have capabilities that generate results that other retail competitors simply cannot match, so we'll begin to offer a suite of bundled services, including exclusive capabilities such as MinuteClinic services, infusion and long-term care capabilities as a component of the CVS Pharmacy value proposition. And as the healthcare market continues its evolution to a value-based environment, the clinical capabilities that are resident today at CVS Pharmacies will become increasingly important, making us a clear partner of choice. Second, we'll focus on driving growth through new PBM product introductions that capitalize on the benefits inherent in our unique integrated model. Some offerings by others in the market, they have attempted to mimic the success of our programs, such as Maintenance Choice, and while they may get part of the way there, we don't believe they can extract the full value that we do through our truly integrated model. Our ongoing innovations will encompass clinical solutions to support all stages of care: new value-based contracting approaches in specialty and traditional pharmacy, including partnering with pharma in different ways to drive savings; new CVS Caremark retail network strategies including performance-based networks; as well as a new generation of Maintenance Choice that will offer even more convenience and help drive further adoption. Third, in this environment, it's critical to continue to be a low-cost provider. And to that end, we've begun work on a new multi-year enterprise operations improvement initiative that will generate significant…

Thank you. And our first question is from the line of Lisa Gill from JPMorgan. Please proceed.

Thanks very much for the detail, and good morning. Larry, I just want to better understand competitively what's happening on the retail side of the business. So you talked about Walgreens and their new relationship with Prime and Department of Defense, but yet said these 90-day programs not really having much of an impact. Can – one, can I just better understand the make-up of the 40 million prescriptions you're talking about? Is that just Prime and Department of Defense? Or is there some assumption around these 90-day programs? Or any other restrictions around network? And then secondly, can you maybe just give us a better understanding of what the opportunities are in your own Caremark book of business to try to replace some of this volume over time? I know you've talked in the past that especially with health plan business, it takes time to work these programs in. But is that an incremental opportunity over the next couple of years of hey, you know what, they might be taking away some market share from others, but we've got this really big business that we've won over the last few years and we can pull it into our own store?

Yeah, Lisa. It's Larry. Let me start, and then I'm sure others will jump in here. Lisa, if you go back to the 40 million scripts that we talked about, and if you looked at the make-up of that, it's probably about 40%; 40% of that 40 million is the TRICARE impact, and then the Prime impact, and the balance of that is just the normal churn that takes place in any particular selling season. So it's really a function of the restricting of those networks.

Yeah, Lisa, this is Dave. Just to be clear, this is not necessarily a 90-day offering; these are restricted networks which takes CVS fully out of the network offerings.

No. I understand that. I understand that, but I'm just saying that I think you made the comment that that's specific to this, but you're not really seeing any shift in the 90-day. Is there the risk, Dave, that we do start to see some of these 90-day programs pick up, and so it would be more than 40 million scripts that need to come out next year? That's what I was trying to get at.

Lisa, I think we've contemplated that into our outlook for 2017. As you know, when we sell in a 90-day network with co-pay incentives, either into our book or somebody sells it into their book, there is movement of scripts, and that's contemplated in our script forecast for next year. So those are fully contemplated. And then...

Okay. And then what about on the other side, though? Like, for your own book of business, do you see an opportunity? I just look at how much business you've won in the last few years. Is there that opportunity to start pulling more of that into your store, maybe not in 2017, but beyond 2017?

Yeah, Lisa, listen, we think that we compete very effectively on price, and our network strategies are a critical part of that value proposition. We always offer our clients a variety of network options to meet their specific needs of their members, and certainly, the results prove out that CVS Pharmacy drives better outcomes and better overall performance as a result of our integrated model. And we look to aggressively sell that to our clients to help them achieve better outcomes and lower overall costs. And at the end of the day, we have multiple network options, and the choice is up to our clients. We have continued to see steady progress, alluding to the new business that we picked up over the last couple of years, especially last year as we've talked about it, it is a longer tail, if you will, on the health plan side of the business than the employer side, but we've seen steady progress there, and there's certainly more opportunity that remains.

Thank you.

Thanks, Lisa.

Our next question is from the line of John Heinbockel from Guggenheim Securities. Please proceed.

So, guys, if you think about that 10% growth rate long-term, that would sort of suggest I think mid-single digit EBIT growth. Is it fair to think the PBM would grow faster than Retail? And any thought on where you think Retail can grow? I assume you would think after 2017 you would be back to gaining share and leveraging the Retail business.

Yeah, John, it's Dave. Obviously, we do expect to return to healthy growth in 2018 and beyond. And yes, I think if you look at our long-term growth rate at approximately 10%, the company generates a significant amount of cash. That cash can be effectively utilized to return value to shareholders through value-enhancing share repurchases, which if you look at the past practices, we've delivered somewhere between 4% to 5% to 6% adjusted earnings per share growth just from the cash that we generate out of the business, which is significant. Obviously, we do believe that the underlying business organically is going to be able to grow healthy. We don't really provide guidance by segment because our businesses are really integrated today, but we do expect to return to that healthy growth outlook in 2018 and beyond.

And, John, and keep in mind, to Dave's last point, we've got – as you look at our model, some of the dispensing channels that may fall traditionally under the Retail umbrella in other businesses like specialty or mail, that's flowing through the PBM segment in our reporting.

And when you – do you think when you think about restrictive networks and your approach to them, do you think about that a little bit differently going forward, or pretty much the same as you had? And you talked about sort of going after enterprise-wide cost reduction. Does that tie-in at all to how you think about attacking restrictive networks?

Well, John, listen, in the environment in which we're all operating, being the most efficient and productive, that continues to be a key guiding principle, if you will. And we've done a number of things over the years. We have historically been a very efficient and productive provider when you look at our cost metrics, and as I mentioned in the prepared remarks, leveraging many of the investments that we've made in technology over the last few years, we have another opportunity to do that. And again, as Dave mentioned, we'll outline the details around that at Analyst Day.

Okay. Thank you.

Thanks, John.

Our next question is from the line of Robert Jones from Goldman Sachs. Please proceed.

Great. Thanks for the questions. I guess just – I have to imagine the Retail network rates needed to shift this level of share away from CVS, it'd obviously have to be pretty meaningful. Can you guys give us any sense of the discounts that you've seen offered in the marketplace to exclude CVS Pharmacies? And then I guess as it relates specifically to the Prime example, were you given the opportunity to match the pricing that was offered to create these restrictive networks?

Yeah, Bob, this is Dave. Maybe I'll start with that. I think what was interesting about these couple of market moves is that typically we see a pretty competitively bid process. These major network changes quite honestly happened without a chance for us to actively engage and really tell our value proposition as these changes were contemplated in both Prime and with TRICARE. So from that perspective, we were kind of caught a little bit off guard.

Understood. And then I guess just looking at the math for 2017, it seems like the majority of the kind of below long-term EPS growth is really from this share shift, these 40 million scripts you guys highlighted, but you did then put out the long-term expectation for 10% growth. Given that there does seem to be this price for volume trade-off occurring in the marketplace, how can you get comfortable that we really kind of see the end of this, or more of a stabilization of this as we move beyond 2017?

I think a little bit around that, if you look at the – some of the competitive pressures that we're seeing right now are not necessarily new. We face reimbursement pressures and network changes on an ongoing basis. And you think about it the way we've offset it really is three ways. One's, we've lowered our cost of goods sold, and our Red Oak joint venture is a great example of that. We've improved the efficiency, and we're continuing to launch a new program this year to further improve the efficiency across our network. And then finally, we've been able to increase the capture of dispensing share into one of our channels. Obviously, in 2017 that lever is not really available to us. But I do think, if you look at how we're positioned in the marketplace, and our ability to plug in and really add a lot of value to the payers, that we serve, I think we're really nicely positioned in a world of which networks begin to narrow and outcomes become more important.

And, Bob, it's Larry. Just a couple of other additional points. As we mentioned in our prepared remarks, the point about CVS Pharmacy's ability to provide incremental offerings, leveraging the assets that emanate out of CVS Pharmacy besides simply dispensing, I think that becomes an important component of the story, recognizing the cost savings opportunities that result from MinuteClinic or infusion, as it relates to site of care management, and now long-term care pharmacy. And we believe that we can enhance our value with other PBMs, okay, not just Caremark, in making those services available that will be very much aligned with their clients in an effort to provide high quality, and at the same time, lower costs. So we believe we can be a partner of choice as we go forward.

Make sense. Thank you.

Thanks, Bob.

Our next question is from the line of George Hill from Deutsche Bank. Please proceed.

Good morning, guys, and thanks for taking the questions. Maybe just to look at the PBM side a little bit from this angle. I guess, Larry, can you talk about what you're seeing in the PBM selling season as it relates to pricing, and what I'm wondering is have Walgreens pharmacies, PBM competitors, ESI, Optum Prime with lower network rates that are going to pressure you on that side of the business as well, and make it harder to retain PBM business?

Well, George, it's Larry. I'll start. Others may want to jump in. As we've said for probably the last couple years now, pricing certainly is competitive, but we've seen it remain rational in the marketplace. We haven't seen anything on the horizon that changes our view of that, and we're beginning the 2018 selling season, as we speak. So obviously we'll be talking more about that as we get into the new year, but it seems to be lining up very consistent with prior years.

Okay. And then maybe a quick follow-up with Dave, I guess, anything you can give us to make us more comfortable with that medium-term earnings growth profile of 10%, given that these issues in retail are likely to persist because these market share gains and these pricings and these multi-year contracts, it's going to be hard to turn in one year or even two years maybe. How do we think about the mix of operating earnings growth versus capital deployment? Just how do we get to the 10%?

Yeah, we'll talk, I'm sure, a little bit more about that in December, but I will go back to say if you look at our past track record, when you look at our ability to gain share both from a PBM perspective and then turning that share into dispensing channel share gain in our network, we've been quite productive at doing that, and I think the outlook for that remains strong. Keep in mind we still have a very robust specialty business. It continues to perform well. We have a very large Medicare Part D business that is performing quite well, and we've done two fairly sizable acquisitions in the form of Omnicare and Target, both while are not being as accretive as we once thought, as we cycle into 2017, but as we look long-term have a real opportunity for us to grow and develop that business in a meaningful way. And again, and finally, not to put this – to minimize this, if you look at the cash that our organization throws off, we can get a substantial amount of accretion just from the share buy-back program as you look at deploying that capital in a very effective way, keeping in mind, we might also deploy that capital from a strategic lens to make sure that we bolt on the right businesses to enhance the infrastructure that we have today.

Okay. Thanks, guys, I appreciate the color.

You're welcome.

Thanks, George.

Our next question is from the line of Eric Percher from Barclays. Please proceed.

Thank you. Another question related to the profitability of the 40 million scripts, and maybe I'll come at it this way: if you hadn't seen the unexpected or kind of non-competitively bid pieces move away, would your earnings growth have been within shouting distance of the 10% guidance that you're providing?

Yeah, Eric, the – as you think about the answer to that, it brings us back to – going – I guess it would've been 2012/2013 when Walgreens and Express had a dispute, and certainly, many capitalized on that in the marketplace. And if you looked at the profitability associated with those incremental scripts at that point in time, it parallels what we talked about this morning, extracting from that the advertising and labor investments that we made in an effort to gain a disproportionate number of those scripts. So again, factoring that in, we certainly would have been within striking distance of that 10% target that Dave outlined.

Yeah, Eric, just keep in mind, too, that if you look at the, as we cycle into 2017, there were really three, I guess, topics that I outlined that were headwinds. One is obviously the loss of prescriptions in the marketplace. Two is slightly less accretion in the two acquisitions. And third, I'll say the competitive reimbursement pressures and the mix in our business. All three of those contribute to our slower growth or lack of growth in 2017.

That's helpful. And on the third one, if we look at the PDP performance, it looks like this quarter was in line with what you expected. We see fewer preferred relationships next year. Can you speak to the way in which that may be impacting the next year, kind of the outlook on PDP?

Yeah, we have, I think, a very nice growth plan for 2017 in SilverScripts. Our PDP business continues to take share and perform well, both this year, and we expect the same next year.

And, Eric, obviously, we're in the annual enrollment period, so it's open for another month, and from early indications, we've gotten off to a good start. Obviously we'll provide a recap once the season closes, and we'll probably talk a little bit more about that at Analyst Day. Eric, on the Retail side, I'm not sure if your question was really looking at SilverScript or CVS Pharmacy's presence in the Medicare Part D networks. It would be on par with our various relationships this year, absent some of the changes that took place in the Prime sponsored Med D network.

That's helpful. Thank you.

Our next question is from the line of David Larsen from Leerink Partners. Please proceed.

Hey. Can you talk about the timing of these retail network contracts? Like, how long do they last for? And are there any other sort of large, I guess, PBM contracts on the retail side that are up that would (39:16) perhaps enable you to win all or some of that business back over the next year or two?

Well, David, as you look at the retail contracting cycles, they are probably, I would describe them as more frequent than they once were, acknowledging that the Medicare space is an annual cycle. And some of this gets back to, in our prepared remarks, our plan to respond to these marketplace changes, the opportunity that we see us having with other PBMs, recognizing our goal of providing more bundled services. So we have – today we have contracts with – retail contracts with all the PBMs, and we'll be working with those goals and objectives in mind that we outlined, again, in our prepared remarks, to enhance our offerings with them.

Okay. That's great. And then in terms of like drug pricing, like, let's say, there's been a deceleration of brand inflation, there's generic deflation. Has that had any impact on your 2017 guidance, or not? And then is there any update to the net new wins for the PBM and also your retention rate? Thanks.

Yeah, David, this is Dave. I think from an inflation standpoint, no real material change to our outlook in both branded and generic, and that is not presenting either a headwind or a tailwind as we cycle into 2017. So that's not really a factor in all the prepared remarks that we just talked about.

And, David, in terms of the update on the selling season, I believe we have a slide in there. It's pretty much on par with what we reported on the second quarter call. The net business is slightly lower, reflecting some of the changes that you've seen in terms of some of our health plan partners exiting the exchange business, and – but it's not really material. And our retention rate remains right around 97%.

Thank you.

Next question?

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

Hey, guys. Thanks for taking my question; hopefully I can articulate it well. But I guess I'm kind of going back to Lisa's question and some of the questions earlier in the call. I'm trying to understand why your vertical model appears to have lost some steam in the marketplace compared to what Walgreens is doing with some of their partnerships, and why those partnerships seem to be having more success on restricted networks, at least right now, and more success on the 90-day retail? It's our understanding Texas is going to have a 90-day retail component in that contract. Is Walgreens and the health care plan attached to a PBM cost advantage to you guys when you look at it with your PBM retail model attached to a health plan? I'm just trying to understand if the model – where the model stands and how you guys are viewing that?

Well, Scott, let me – there's probably a couple questions in there, and let me start, and then I'll ask others to jump in. That first of all, from an integrated model perspective, Scott, I don't believe that we have lost any steam whatsoever, okay? As you heard Dave mentioned in our prepared remarks, Caremark once again had another very successful selling season, despite some of the publicized losses that occurred back in the spring timeframe, with net new business well over $4 billion, compounding prior successful selling seasons. And as we talked, we continue to grow enterprise dispensing share. Obviously, for the reasons that we mentioned earlier, not enough share growth to offset the 40 million script headwind, but we continue to make progress. And back to Lisa's question, we continue to see opportunities beyond that. In your question, Scott, around is Walgreens making some headwind here, listen, we can hypothesize that there may be a perception out there that CVS Pharmacy is not a neutral platform, okay? And by the way, that's reflected in our response to this environment and our efforts to demonstrate that we are the best partner to all PBMs and health plans, given our unique suite of capabilities along with our track record of delivering results. So – and I think we're all very confident that that will make a difference. And obviously, as you've heard us say many times, we believe that we have the right assets in terms of the healthcare environment moving forward. I'm not talking about 2017 now, recognizing this retailization of healthcare and the role that the consumer will play and the migration from a fee-for-service system to one that's more value-based, acknowledging that that migration has been slower than what everyone would like to see, but it is happening.

All right. That was it for me. Thanks, Larry, for the answer.

Our next question is from the line of Priya Ohri-Gupta from Barclays. Please proceed.

Great. Thank you so much for taking the question. Dave, just given some of the moving pieces that we have over the short-term, and then given your moderation in terms of EPS growth over the medium-term, how should we think about your balance sheet usage? Leverage target? Ratings target? Was hoping to get your thoughts on that since we didn't hear that in your prepared remarks. Thank you.

Sure. We're very committed to maintaining our high BBB rating. We're still very committed to returning to the 2.7 times adjusted debt to EBITDA. As you heard as our cash flow performance this year has been quite strong, we're going to probably de-lever a bit more this year than we thought we were going to in our original plan, given that strong cash flow performance. As we cycle into 2017, kind of given all the moving parts and I'll say the headwinds that we have, our leverage will probably, year-over-year, our leverage will be essentially constant. We will not deleverage as we cycle into 2017. We will work to get back down to that leverage target in a reasonable amount of time.

Thank you. That's very helpful.

Thank you.

Our next question is from the line of Peter Costa from Wells Fargo. Please proceed.

Thanks for the question. Larry, do you see this as more of a response to your verticalization of the industry in terms of the industry becoming more vertical? Or do you see this as the start of a price war from Walgreens trying to take more share and fixing their pharmacy counter?

Well, Peter. Listen. There's certainly been competitive pressures; that's nothing new to the healthcare environment. As you've heard us talk many times, we've experienced them for several years now in both Retail and PBM segments. We have several ways in which we manage against those reimbursement pressures, whether it's lowering our cost of goods. And we've gotten some nice synergies from the Red Oak model, and that team continues to work to bring even more innovation. As we talk, continuing to be the most efficient and productive provider of care and then growing our share. And unfortunately, that third lever of growing share will not happen in 2017. And again, as we've been talking this morning, we have a response plan to the market dynamics and a plan to reaccelerate our growth there. So that's how we see the marketplace. And probably not changing beyond that dynamic anytime soon.

So just as a follow-up, do you see yourself then responding to this by trying to lower price to re-win some of those customers that went away from you, or get into those networks again? Or do you see them as vertical networks that have been separated away from you?

Well, Peter, again, as we talked about in our prepared remarks, I don't want to be redundant, but we're very confident that in responding to these market dynamics, the ability to enhance the CVS Pharmacy value proposition and include other services that have been proven to drive down costs, we believe will be appealing for PBMs, because it's very much aligned with the goals for their clients.

Thank you.

Our next question is from the line of Alvin Concepcion from Citi. Please proceed.

Thanks for taking my question. Just a follow-up on that. Just unclear. Beyond TRICARE and Prime, are you seeing the differentiation of your model, your integrated offering? Is that weighing less on the decision of payers? Or are they just more motivated by price at this point? And do you need to consider lowering your threshold on margins? Or are you sticking with your plan?

Alvin, this is Dave. I think our value proposition continues to resonate in the marketplace, both from the PBM perspective and a Retail perspective. A couple of network changes obviously went the other way on us here. But I do believe that the power of our integrated model and the things that we can offer to payers when we're not the PBM or the things that we can offer to the ultimate payer when we are the PBM, really still quite relevant in the marketplace. It's getting a lot of traction, and we continue to perform well from that perspective. And we think the outlook beyond 2017 as we get into 2018 and the years out, I think is quite strong.

Great. And just my follow-up, I don't know if you're planning on providing color on sales longer term relative to the 13% target. I know that the losses are probably impacting that, so I'm wondering if you could give any more color on that.

We'll probably give a little bit more color on Analyst Day, but I expect to walk through the model at a macro level as I've done in prior years and make sure everybody understands our growth algorithm.

Okay. Thank you.

You're welcome.

Our next question is from the line of Mohan Naidu from Oppenheimer & Company. Please proceed.

Thank you so much for taking my questions. Larry, you talked about you're giving your clients option of various network coverages. Can you talk about what portion of your business has restrictive networks that were CVS exclusive?

You know what, we have not provided it as a percentage. We've talked about the number of clients and members and Maintenance Choice, and I believe that number is now over 23 million lives, and that is – Maintenance Choice will constitute our most restrictive network.

Okay. Got it. Maybe if I can – one quick follow-up for Dave. So Dave, you're talking about the 40 million scripts for next year, and that includes the TRICARE and Walgreens. How much of that is unknown that you have baked in for further changes as you go into 2017?

I think as we said here for 2017, we have a pretty good handle on, I'd say, network changes. Keep in mind, most network changes happen kind of in late Q3, early Q4 as you cycle into next year. So we have a pretty good line of sight to our network participation and volume outlook as a network participant as we cycle into 2017. So I think we're pretty good there.

Okay. Thank you.

You're welcome.

Our next question is from the line of Charles Rhyee from Cowen. Please proceed.

Hi. It's James Auh for Charles. So my question is, so you mentioned that you plan to infuse new PBM product in the future to drive growth. What kind of solutions can we expect? One of your competitors is taking a risk on price with inflation protection. Do you plan to provide a similar solution?

Well, Jim, we have that today in our offerings where we have price protection for our clients. In our prepared remarks, we talked about the four areas of new product innovation around clinical solutions, new value-based contracting approaches, both in specialty and traditional pharmacy, and then a new retail network strategies that would include performance-based networks. We have that a little bit today in Medicare Part D, but we see an opportunity to go further with that to be very much aligned with value-based reimbursement and outcomes management. And then a new generation of Maintenance Choice, so again we'll provide a lot more details next month at Analyst Day but that's how we're thinking about it. And by the way, there are elements of risk that we take today, whether it's in Medicare or some aspects of what we do with NovoLogix in terms of managing that portion of pharmacy flowing through the medical benefit.

Also, how much capital deployment is assumed in the preliminary 2017 guidance?

We have $5 billion in share repurchase is within that guidance range, and we'll talk more about the dividend on Analyst Day. But we do expect over time that we will be deploying – raising our dividend up to our 35% payout ratio by 2018. That expectation is still consistent with our thoughts.

All right. Great. Thank you.

You're welcome.

Our next question is from the line of Ricky Goldwasser from Morgan Stanley. Please proceed.

Yeah, hi. Good morning. Two questions here. First one, obviously it seems that growth on the PBM side is going to be key to achieving the 10% long-term earnings growth. So can you just give us some context in how much business you have up for renewal, how much PBM business you have up for renewal for next year, i.e., for the 2017/2018 selling season?

Yeah, Ricky, it's Larry. We've got $22 billion to $24 billion up for renewal. Keep in mind that that's off a much higher denominator. So as a percentage, it would be pretty much on par with prior years.

Okay. Thank you. And --

Ricky, I would also – I would just add that I think it was probably important to step back, and you talked about the PBM being the growth engine, and while it is, we need to really think about the enterprise. Our business is so integrated now that you need to really look at it in totality from that perspective.

Okay. And then, Larry, in response to one of the questions, you really talked about the fact that you think that you have all the assets that you need in your portfolio to succeed longer term. Off the (55:40) health plans are key to longer-term success as we see the Optum-United model developing further. So can you talk a little bit about how you think about that managed care model partnership versus ownership? And obviously, Anthem talked last week about putting an RFP out early next year. So how important do you feel an Anthem-like contract for your long-term strategy?

Well, Ricky, it's Larry. As you know, we typically do not talk about specific contracts or specific RFPs. And as you think about the healthcare business broadly or health plan business broadly, today we have over 70 health plan relationships with the PBM. Obviously, it's an important growth component of the business, and there's nothing that prevents us from adding to that list as we've done the last couple of years. I do think that there is an ongoing evaluation of, does the health plan in-source their pharmacy PBM functionality, or do they outsource it? And we continue to believe that whether you're looking at size and scale or the fact that pharmacy is our focus and the clinical capabilities that we bring to that, along with the challenges of the regulatory environment from a compliance point of view and the investments that need to be made to comply with that for the Medicare and Medicaid businesses, we think that it makes a lot of sense for folks to outsource that business. And quite frankly, that's what we've seen this year, this past selling season, where I think everyone was trying to figure out that, well, wait a minute, how can everybody grow, okay? And part of the answer to that is that the pie got bigger because there were some health plans that outsourced their PBM, their pharmacy business. Ricky, I think the only other point to add to that is we see opportunities that we have, recognizing the assets that we have assimilated are the ones that largely touch the patient or the consumer. And that gives us the opportunity to partner with health plans, whether we're the PBM or whether we're not the PBM. Obviously, if we are the PBM, there is enhanced offerings that we can provide as a result of the integration. But there are also capabilities that we have that we can partner with health plans in a very differentiated way without having to be the PBM.

Okay. And lastly, one last question. You talk about Target and Omnicare and the integration there. Can you maybe give us some more specific color on what's holding back Target and Omnicare from meeting your near-term accretion expectations?

Yeah, Ricky, maybe I'll take Omnicare and ask Helena to comment on Target. With Omnicare, Ricky, it's certainly not a question of if; it's more a question of when. And one of the things that we learned this past year through our pilots in the assisted living space is that we found that we had to target both the needs of the residents in those facilities along with the facility operator needs. And in doing that, we need to make some additional and incremental technology investments. Those investments are underway, and they really need to be completed for us to broadly sell the value proposition that we can bring to the assisted living space. So we'll be getting that work done in 2017, and I'm confident that we'll capitalize on the synergies once that work's complete.

Yeah, and I would say we're actually very happy with Target. As we discussed earlier in the year, the integration certainly led to some disruption which we expected. We've been through a lot of integration and we're on track to achieve the performance we were looking for this year. The most exciting thing I would say is that the Target team has responded in a tremendous way to the new systems and programs that we've delivered to them. So the service levels in those pharmacies are quite strong. We're seeing them come out of the integrations and the system changes at a very strong pace. And what we're starting to do now is turn on our patient care programs which CVS historically had and Target did not. And given their ability to execute and how well they've done all year, we're actually feeling quite confident that they'll be able to do that well into 2017.

Thank you.

Okay. Thanks, Ricky.

Our next question is from the line of Michael Cherny from UBS. Please proceed.

Good morning, guys, and thanks for all the details. So I want to dive in a little bit on -- the question came up about the assets that you have in place. You obviously spent a lot of time about focusing on the enterprise approach and drive incremental services in the business. As you think more broadly about those services, and this can be obviously the thought process on organic versus inorganic. And maybe using, for example, MinuteClinic and acute care as an option. What's the most sense to bundle in, outside of specialty, are you doing relative to the acute care base that you are ready touch?

Well, Mike, I don't think there's one answer to that question. And I think that the benefit that we have is that we have a series of assets that we can bundle in a whole variety of ways that would meet the needs of that particular client and their members. And so I actually think that will be an advantage to us.

Okay. That's all I have for now. Thank you.

Okay. Thanks.

Our next question is from the line of Steven Valiquette from Bank of America-Merrill Lynch. Please proceed.

Thanks. Good morning. I guess just with TRICARE obviously as a government contract, and then Prime Therapeutics as sort of a different type of entity tied to Blue's plans, just curious if you see differences in appetite for restricted pharmacy networks among different customer types in the market. And I guess, just when thinking about government, versus commercial employers, versus health plan customers.

Yeah, Steven; this is Jon Roberts. With the employer clients, we clearly have seen a big appetite to restrict networks, narrow networks, so Maintenance Choice with 23 million members has been very successful. When you move over to health plans, you've seen a big appetite in Medicare with preferred networks, most preferred networks. Most Part D plans have preferred networks. In Managed Medicaid we see many of those plans willing to restrict networks. I think where there has been a reluctance historically has been in the fully-insured market, and I think with Prime making a move to narrow their network in fully-insured that may be a catalyst for the rest of the market. So we view that as an opportunity. And I think with the government programs it's a little bit of a mixed bag. We see some willing to move into either restricted or Maintenance Choice networks and others like full access. So different parts of our client base really do have different priorities and willingness to narrow or restrict networks.

Okay. So there are some changes in the market, maybe some growing appetite. But maybe just to confirm again, this is asked a bunch of different ways, but do you characterize these most recent changes as rational competition? Just to try to confirm that. Just given how some of these stocks are reacting today. I think people are worried about irrational pricing. But just would you characterize these last two changes as rational competition?

Well, Steve, I would say as we've talked many times, whether it's on the PBM or Retail side, we've continued to see margin compression. And I would say that we have not seen anything that we would put under the heading of irrational.

And I guess I would – this is Dave. I guess I would just look at the Prime decision. And it appears to us – and listen, we're a little bit of an observer here is that Walgreens acquired their specialty pharmacy and their mail order pharmacy or at least partnered with them from that perspective. And I'm assuming that as part of the arrangement, there was some network participation agreement that was confirmed through Prime. So I think that might be a little bit of a unique animal compared to other network changes in the marketplace.

And, Steve, again I think Dave mentioned this in response to one of the earlier questions that in the two cases that we've talked a fair amount this morning, we became aware of the network changes after the fact and were not given the opportunity to respond. So in an irrational pricing environment, you would not – you would expect a different type of process associated with that.

Okay. Got it. Okay. Thanks.

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

Our next question is from the line of Eric Bosshard from Cleveland Research Company. Please proceed.

Thanks. In terms of the updated long-term growth target, Dave, I understood some of the measures that you outlined, the size of the company. But curious if there's anything that you could help us with today in terms of different assumptions; if this is a different rate of you gaining share. If this is a different rate of underlying market growth, or an assumption that's different about profitability opportunities. Just curious if you could give us a little bit more color behind what's different with the long-term growth rate going forward.

Yeah, Eric, obviously as I said, we're jumping off a lot bigger base at this point in time given where we were in 2013 as we've grown the company substantially. This is probably a deeper conversation that we probably have time for on the call today, but it was something that we'll talk about more at Analyst Day. I will say though that if you just look broadly, I don't believe the fundamentals of our growth algorithm has substantially changed. Obviously, the marketplace has moved a bit and there's been different offerings in the marketplace. But I think our ability to compete in the market hasn't changed in a substantial fashion. And we do believe that if you look at the market probably where it was a few years ago to where it is now, obviously the government-sponsored plans and health plans have grown, and they continue to be a growth area. Whereas the employer book has been relatively modest and flattish from a growth perspective. So we'll see more of our growth coming out of government-sponsored plans over time. And again, I think we're nicely positioned with all of our assets to compete successfully and gaining share in that marketplace. So that's probably the biggest I'll say underlying change is to – as we pivot to make sure we service that need of the segment of the market.

Okay. Thank you.

You're welcome.

And our final question is from the line of Todd Duvick from Wells Fargo. Please proceed.

Good morning. Thank you for the question. Dave, I had a follow-up for you with respect to your guidance about free cash flow. Given that free cash flow is a little stronger this year and you talked about de-levering in 2016 and probably flat in 2017. You have a debt maturing in December, a $750 million note. Should we assume that you're going to pay that note off as opposed to refinance it? And then with respect to share buybacks in 2017, should we assume that those are going to be fully funded from free cash flow as opposed to partially debt-financed?

Yes. They will not be debt-financed, other than we might need to do a little short-term borrowing to just accommodate the timing of that. But we will not be issuing debt to support a share repurchase program into 2017. I can't really comment about our debt maturities. I do think at the end of the day, we will be expected to be de-levering over time as we grow our way out of our current capital structure. Just a little bit over 3 times, so probably 2.9 times at the end of the year down to 2.7 times in a reasonable amount of time.

Okay. That's helpful. Thank you very much.

Okay. Well, let me just thank everyone for your time this morning. And just wrapping up, obviously we're not happy with our outlook for 2017. At the same time, we outlined our actions in response to some of the marketplace dynamics that are taking place. And we're confident that our response and our actions will allow us to reaccelerate our growth going forward, and we look forward to seeing all of you next month at Analyst Day where we'll provide additional details on many of the things we talked about this morning.

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. Thank you.