CVS Health Corporation (CVS) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 CVS Caremark Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 8, 2012. I would now like to turn the conference over to Nancy Christal, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thanks for joining us today. I'm here with Larry Merlo, President and CEO, who'll provide a business update; and Dave Denton, Executive Vice President and CFO, who will provide a financial review. Per Lofberg, President of our PBM business; and Mark Cosby, President of CVS/pharmacy are also with us today, and they'll participate in the question-and-answer session following our prepared remarks. [Operator Instructions] During this call, we'll discuss some non-GAAP financial measures when talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website. Please note that we also posted slides and supplemental financial schedules on our website this morning that summarize the information on this call, as well as key facts and figures around our operating performance and guidance, so you may want to check those out. As always, today's call is being simulcast on our website, and it will be archived there following the call for one year. Finally, please note that we expect to file our Form 10-K by the close of business on February 21, and it will be available through our website at that time. Now before we begin, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-Looking Statements in our most recently filed quarterly report on Form 10-Q. And now, I'll turn this over to Larry Merlo.

Well, thanks, Nancy, and good morning, everyone. Hopefully, you've had a chance to read through our press release this morning. And we're obviously very pleased with the strong financial results we posted, along with the great progress we made across the enterprise last year. Our accomplishments in 2011 set a solid foundation for future growth, and as we outlined for you in our Analyst Day in December, we look forward to an even better year in 2012. We reported adjusted earnings per share from continuing operations of $0.89 for the fourth quarter, $2.80 for the full year, with Retail results in line with our guidance and PBM results exceeding our guidance. Overall, we generated about $700 million in free cash flow in the quarter, bringing the 2011 total to $4.6 billion, which beats our goal. And Dave will provide the details of our results, as well as guidance during his financial review. So with that, let me address what I know is the #1 question on everyone's mind: What benefit has CVS/pharmacy seen from Walgreen no longer participating in the Express Scripts Retail network? Well, as we have said previously, the benefit was not material to our results in the fourth quarter, although it did start to ramp up late in the year. Now since the start of this year, we are seeing a significant number of transfers from Walgreens into CVS. In fact, the amount is a bit more than we anticipated. We have spent the last several weeks focused on ensuring that Express Scripts members have uninterrupted, convenient access to pharmacy care and excellent customer service, and the feedback to-date from our new customers has been excellent. Our pharmacy teams have been doing a terrific job in making sure that the transfer process is as easy as possible,…

Thank you, Larry. Good morning, everyone. Today, I'll provide a detailed review of our fourth quarter financial results. I'll also update our 2012 guidance for the first quarter, as well as the full year. Now first, let me start with the wrap-up of our 2011 capital allocation program. We paid approximately $670 million in dividends last year, which was an increase of 41% over 2010 levels. And at our Analyst Day, we announced that our quarterly dividend would increase this year by another 30%, our ninth consecutive year with an increase. And given our earnings expectations for this year, we anticipate a payout ratio of 21% to 22%, placing us comfortably on track to achieve our targeted payout ratio of 25% to 30% by 2015. In regard to share repurchase, during the fourth quarter, we completed the buyback associated with the 2010 authorization, for which we had approximately $450 million left at the end of the third quarter. With this, we repurchased a total of 12.6 million shares. We also settled the final balance of our August accelerated share repurchase transaction, adding another 1.6 million shares to our treasury stock. In total, we repurchased 83.7 million shares at an average cost of $35.85 per share, and we spent approximately $3 billion in 2011. So between dividends and share repurchases, we returned more than $3.5 billion to our shareholders last year. It is my expectation that at a minimum, the remaining $3 billion on the 2011 repurchase authorization will be used in 2012, and that will allocate roughly $3.8 billion to enhancing shareholder value through both repurchases, as well as a dividends. Our capital allocation program will remain a vital component of providing shareholder value, taking advantage of the powerful cash flow generation capabilities of CVS Caremark both now and in…

Well, thanks, Dave. Let me just summarize here. I think we closed 2011 with a very good quarter, earnings solidly in line and free cash flow ahead of target. Once again, we delivered on our promises. I think, as you heard, 2012 is off to a great start, and today, we've increased our earnings and cash flow guidance to reflect the industry opportunity we're capitalizing on, as well as greater confidence around our working capital management. We absolutely remain focused on driving shareholder value, and our productive long-term growth, significant cash generation and disciplined capital allocation will continue to be important drivers of returning value to our shareholders. So with that, let's open it up for your questions.

[Operator Instructions] And our first question comes from the line of Deborah Weinswig with Citigroup.

This is Shane on the line for Deb today. Just wanted to talk about the front end a little bit. Obviously, it seemed a little bit weaker than expected, and you mentioned that. I'm just kind of looking of trends in January, and how has that kind of changed, or has there been any differences that you've seen?

Yes, Shane, I think as we outlined in our remarks, we saw some weakness in the flu season, which impacted our front store growth, as well as disappointing holiday sales around the Christmas products. That element of it is behind us, and I think as we outlined our comp guidance for the first quarter, we are expecting to see stronger front store trends than we saw in Q4.

And is that something that you're seeing currently, or is that what you're...

No, we are seeing that currently. Yes.

And then just kind of looking ahead to like the PBM selling season, obviously, you guys seem to have a pretty strong negotiating position. And how are you guys trying to position yourselves with kind of Walgreens and Express and all the other things that are going on in the industry?

It's still very early in the season, as you guys know, and there are a number of RFP processes that are underway and a number -- many more that we expect to begin in a couple months. I don't think the Express-Walgreens issue per se is a particularly significant factor. I think there will be a lot of opportunities for us to feature our set of solutions and our integrated capabilities and so forth. I do think that there will be an interest in comparing the cost savings and the benefits from restricted networks going forward, and that is probably, to some extent, prompted by the Express-Walgreens impasse, but that will be just one factor that people will be interested in.

And Shane, at the same time, we are expecting to see more RFPs out in the marketplace this year. The benefit consultants are driving that with the Express-Medco deal on the horizon. So we do see more activity coming, but as Per mentioned, it's very early, especially on the employer side of the selling season.

And if I could just do one quick follow-up, on that restricted network, what types of savings are you guys hearing, like that clients are -- or people would like to -- if you can -- are looking to get from a more restricted network? If you're allowed to talk about that or are able to...

I think you probably have to show savings of at least a couple of percent for it to be a meaningful benefit to a customer and to justify the disruption that is inevitable when you change the network. Obviously, the more restrictive the network is, the deeper the savings are that you can propose. So it is sort of a sliding scale.

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

Just a follow-up on that line of questioning, Per, Larry. Are you seeing more interest in narrow networks because of this dispute, number one? And then number two, Larry, I know you mentioned that you thought there would be more business out to bid. Can you maybe just help us to frame the amount of business that you have out to bid for 2013?

Yes, Lisa. I'll take the second question, and I'll ask Per to comment. We have about $16 billion up for renewal in this selling season, and that would exclude the Med D business, which, as you know, is kind of up for renewal every year.

And Lisa, just to elaborate a little bit on the restricted networks, I think our expectation is that we will frequently be asked to quote on different network configurations, and that we'll be asked to provide different levels of savings for different sizes of networks, and all of our discussions with the benefit consultants sort of indicate that, that will probably be one of the variables that will be in play this year.

Per, have you been surprised that there hasn't been more noise around the exclusion of Walgreens and Express Scripts network? As you know, we talk to a lot of consultants and plan sponsors, and it doesn't appear to us that there's been a lot of disruption because of this. Obviously, maybe it's because CVS has done such a great job of taking over the scripts, but can you talk about your experience? Are you hearing from any of these clients that say, “I want to switch because I don't -- I do want Walgreens in my network?”

Nothing of that, Lisa. I mean, I have to actually tip my hat here to our competitor, Express. I think they have done an excellent job really making this change very smooth for their customers, and many of their clients that I've spoken to that actually have gone through this have been – they’ve been very clear that this has not really been a big deal for them.

I guess and then just one follow-up to you, Larry, would just be that if they did come to some kind of resolution, generally speaking, how sticky are the scripts that have moved? So those people that have moved in January, how much of that business would you anticipate that you could retain if they ever came to a resolution?

Lisa, that's a great question, and we really don't have a benchmark against this. As I've said in the past, we know that that pharmacy customer is the hardest person to lose, but once you lose them, it's the hardest person to get back. And I believe the longer this goes on, the more sticky the customer will be, especially as they have the opportunity to refill their prescription a few times and get to know the pharmacist and the staff in the store. And obviously, our Retail teams are doing a great job in terms of doing everything that they can to engage those new customers.

And our next question comes from the line of John Heinbockel with Guggenheim Securities.

A couple of things. So Larry, the improvement on the front end, are you seeing anything that you can tie to the Walgreen benefit or really not very much?

Yes, John, there's a little bit there, but as we were just talking with Lisa's question, the focus right now is making sure that, that transfer process and the administrative tasks associated with that, that is front and center in terms of what our store teams are focused on executing. And we're just beginning the process of getting these new customers enrolled in ExtraCare, as an example. So I think it's going to take several weeks to really shake out what the front store impact of this will be. And Mark can talk a little bit about some of the investments that we're making with that in mind.

Well, clearly, when the whole impasse began, we set up a plan to address what the opportunity could be. And we had several initiatives underway. We had several on the marketing front, both in terms of our circular and our TV. And we did a lot in terms of staffing and in terms of the resources by store and in terms of inventory that we deployed by store to be ready for it. But the biggest push was around service, making sure that every new customer that came into our store had a great experience, and that continues to be our biggest push. As we go forward, it's now about retention, so putting programs in place to make sure that the folks that do come into our store have a great experience and they stay with us.

And now the $0.03 benefit is net of whatever investment you're making in staffing and marketing, right?

That's correct, John.

So do you still think -- because that's front loaded, do you still think that if this thing goes on for the rest of the year, there's a bigger benefit in the back half after those investments moderate or no?

Well, I think we'll have -- well, I want to play it quarter by quarter, John. But we're very focused on executing at the store level today, making sure that the transfers -- that we give the best service possible, and we'll assess it after we get a few more weeks under our belt.

And as you look at that windfall, and I asked you at the analyst meeting, is there anything you can find where you can invest some of these onetime windfall in the business, either PBM or Retail, to strengthen the franchise and take advantage of this windfall, or not really?

Well, John, at the end of the day, we look at all the cash generation capabilities of the company and look to invest that money with the highest return possible for our shareholders. So we won't assess this any other way than that. So we'll keep looking for projects to either invest in our core business that has high return on investment for it, or we'll look to dividends and share repurchases to enhance value as well.

Well, I meant more can you add labor in the stores or put it into pricing on the PBM, or not capital so much but on operating expense, so the benefit to the P&L would be less but maybe more lasting and maybe more of an annuity?

Yes. But I think we look at those as the same way, John.

All right. And then one final thing. How did the whole Medco-Express kind of in limbo here impact the timing of selling season decisions? Maybe it's too early. Maybe it has to go on another month or 2, but is that impacting anything you see in terms of how people are making decisions or the timeline?

I don't think it's affecting the timing very much, John. The timing of RFP processes is basically very much driven by the contract term and the time it takes to transition accounts. Health plan accounts take longer to transition than employer accounts, and therefore, they tend to start a little earlier. I don't think that the Express-Medco merger per se is affecting the timing. I do think that the uncertainty around that certainly has given fuel to benefit consultants to really sort of recommend that clients go out to bid, and we'll certainly see market activity as a result of that.

And our next question comes from the line of Dane Leone with Macquarie group.

This one is for Per. As we think about the 2013 selling season, I think we had a case example recently where a large plan reversed course from a prior decision in terms of favoring the financial bid over the technical bid. Are we seeing some change in how plans view the bidding process given kind of maybe a longer economic recovery than some people had previously thought back in 2011?

I'm not sure I know exactly what you're talking about, but I really don't think there is a significant change in the emphasis. People go out to bid, first and foremost, because they want to get the best possible economics they can get for their drug programs. And that, I think, has not really changed at all. Clearly, though, the integrated programs that we have, have made a difference here this past year, and we kind of expect to see that continue as there is broad adoption of this programs and longer track records in terms of the customer experience with them. So Maintenance Choice and Maintenance Choice 2.0, the Pharmacy Advisor program and so on that Larry referenced in his speech, those are really good features that allow us to kind of really highlight how we can add value to our enterprise.

Great. And then on the MinuteClinic side, could you give us an idea of how profitability is expected to ramp up through the course of 2012?

Yes, Dane, I think as we've communicated in the past, in the fourth quarter, MinuteClinic actually hit a breakeven status for the first time at what we define as the enterprise level. And we will expect that to continue even as we expand the MinuteClinics going forward, so we're very pleased with what we're seeing there. And the role that MinuteClinic plays, as Per was talking about our integrated programs, there's an important MinuteClinic component to many of those.

And our next question comes from the line of Scott Mushkin with Jefferies & Company.

Really, two. First, to Per, how important is the Retail pharmacy network when a client is looking at a proposal? I assume it's one of the top 10, but where does it rank in your estimation as people look at proposals?

Well, it's very important, and the primary thing people look at is basically access. So they look at where their employees and dependents, where they live and what geographies have to be covered and the access that they can get to the network configuration that you're proposing. So it definitely is important, and at the end of the day, as you know, you can meet access standards very successfully with much less than 65,000 pharmacies around the country. So there is the trade-off to evaluate in terms of how many pharmacies you have in the network and the kind of economics you can offer up. So that trade-off is very real. But it certainly is a very, very important component of the PBM offering.

And just, I assume though that it's among several things that people look at, or is it top 1 or 2 in your estimation?

No, it's 1 of, let's say, 5 major variables; the mail order program and, in our case, the Maintenance Choice program. It's a very important component that adds additional savings opportunities. The formulary and the rebates that are generated, generic programs that maximize the use of generics, that also offer additional savings. I mean, those are probably the 4 or 5 major items that go into the calculation.

Perfect. And then I wanted to switch gears to Retail and also kind of bring in the free cash flow. As I look at what's going on with your business, there's clearly going to be starting a bubble of, looks like over the next 18 months, of just an enormous amount of traffic into those retail stores. And so that just smacks to me of opportunity. We haven't seen a real big kind of change in the format of the retail stores or a big re-merchandising effort. And I was wondering, as you look at the opportunity here, maybe this is more for Larry, how do you see it? I mean, to me, it seems like there's just a massive opportunity to grow maybe earnings a little bit faster in that Retail segment as you harvest this and also show nice improvements on return on invested capital, as a lot of capital is tied up in the Retail segments. So maybe you could comment on that?

Yes, Scott. Let me make a few comments, and then I'll ask Mark to comment on some of the initiatives that he has underway that I think addresses that question. But I think as we heard earlier, we're focused on making sure that these customers have just a terrific experience and that they continue and we continue to ensure that there's no interruption in their pharmacy care. As we've talked many times in the past, we'll continue to use ExtraCare as a differentiator in terms of how we can add value for those patients, as well as, quite frankly, how we communicate with those customers. And I'll ask Mark to talk about some of the work that he has underway around clustering and what future store may have in store, if you will.

That's a twofold answer, really. There's a number of things, short term, that we're doing between improving effectiveness of our promotion, looking at our productivity of our spaces in our store, particularly the high-traffic areas in our store, and then we have a number of things where we're empowering our store teams to take more accountability for sales. Those are some of the short-term things. The longer-term things that Larry alluded to, the biggest thing we probably have in the works is this clustering initiative. We had success this past year and the year before with the urban initiative, and we have a number of different clustering options that we are looking at right now, which we think will have some play in the second half of this year in a test mode and then rollout mode as we go into 2013. The broader one that Larry alluded to is around what we are calling the store of the future. So we do have a project underway, where we are relooking at everything that we do within our store, from the pharmacy to the front of the house, in terms of how do we really capitalize on the opportunity that's in front of us. And we do plan to have some test stores in place in the front part of next year, which I think we'll learn a lot both in terms of -- for new stores as we go forward, but also for remodel opportunities down the road.

Scott, I think the issue around this is that these are not new ideas. We've talked about this -- many people talked about this in years past. I think what's different today is that we have the information and we have the technology to execute it. And that was always the kind of the barrier to entry, if you will. So I think this is going to take some time, but I think that the prize here in terms of doing it well is pretty big.

And our next question comes from the line of Tom Gallucci with Lazard Capital Markets.

A couple of quick follow-ups. Just first, back on the restricted network idea, 2 questions there. One, how deep do you have to sort of restrict to get toward that 2% type of a savings that you mentioned earlier that might be important for customers to consider it? And is there any, I guess, strategy around maybe preferred-type networks as opposed to just simply restricting them or narrowing them down, where you can go to any network, but one is more expensive than another one, pharmacy is more expensive than another one?

Yes, so to your first question, Tom, I think you have to get to -- to get to like a 2%, 3% saving, you have to make a pretty significant change in the network, maybe bring it down by 20%, 30% or something like that to be able to approach those benefits. It's obviously driven by the value that accrues to people who remain in the network and the increased volume that they can project and the improved pricing that you can derive from that. So that's sort of a ballpark. With respect to the preferred networks, that's primarily been an opportunity recently in the Med D segment. You may have seen that last year, Humana came out with a program where Walmart was a preferred retailer. It was a pretty successful program. They got good traction with that. This year, there were a number of other participants that have similar types of programs, including Aetna together with CVS/pharmacy. So there, you have the ability to meet all of the access standards that CMS require and, at the same time, offer significant copay advantages if members use the preferred retailers.

Do you think the preferred type of a strategy is something that could leak into the private sector, or there it would be more just narrowing it?

It's a good question. I haven't seen much activity around that on the commercial front, but there is no real fundamental reason why that couldn't happen there as well.

Okay. And then just the other follow-up was I think you mentioned some better generic purchasing. I was wondering if you could expand there. Did that sort of more relate to certain new drugs that were launched, or is it older drugs? Or any other color you could offer would be great.

Yes, I think what we -- I would just say that the team from a purchasing standpoint has just done a fabulous job throughout 2011, and we continue to push improvements to improve our cost of goods sold outlook, and that's just kind of us continuing to work pretty diligently in that space. So it's kind of across the generics but also on the branded side as well.

And our next question comes from the line of Edward Kelly with Credit Suisse.

I got kicked off the call quickly, so if somebody asked this question, just tell me, and we'll move on. But your gross margin on the Retail business is something that I want to just ask about. The 140-basis-point decline, it's a little bit of a surprise, I think, to us, even though you guided it down and you had said it was a little disappointing. Can you help us parse out the individual items there? How much for reimbursements, how much for promotions, and then how much of that continues going forward into next year?

Yes, Ed, when we provided guidance for the fourth quarter, we expected margin to be down. We talked about continued pressures on pharmacy reimbursement. What we saw that was incremental to that was largely in the front store as it related to, as we mentioned in the prepared remarks, a disappointing Christmas selling season. And as you know, those products are in a higher margin, and we also incurred some incremental markdowns. That's a onetime event in nature, and it's behind us, so we don't need to worry about that as we migrate into Q1. The other issue really ties to a weaker flu season, which, in the front end, in the OTC categories, that is heavily penetrated by store brands, which, again, higher margin. So that pressured margin, and again, that is seasonal in nature, so we don't see that occurring going forward as well.

And just on the reimbursement side, how much should we be concerned about that?

Well, Ed, as we talked, the reimbursement issues are what we've been managing through for several years now. We don't see that abating, and at the same time, we're comfortable in terms of our abilities to manage that going forward.

And if Express closes on Medco, how does that impact your thought on reimbursements? Is there a risk there? And I guess what I'm getting to is, what have you factored into guidance related to that?

Well, Ed, again, as we said back at Analyst Day, we have worked very hard on the Retail side to position ourselves as a good partner, a good long-term partner, okay, as well as being a low-cost provider. And we have worked with all the major PBMs with those guiding principles, and we see no reason to change that as we go forward.

Okay. And just last question for you. SG&A, down about 3.5% in Retail. It's a pretty big number. Can you just help us understand where it all came from?

Yes, this is Dave. We have been very focused from a cost-containment perspective throughout the Retail division, so there's no one initiative that drove that. I would say that again, we've just continued to put in technologies and processes primarily in the pharmacy that have driven productivity gains across the enterprise, and that's really what continues to drive it.

And Ed, going forward, we will continue with that level of focus. But again, as we've discussed previously, because of the impact of generics, that SG&A leverage that we've seen in the past will be muted to some degree as a result of that.

And our next question comes from the line of Larry Marsh with Barclays Capital.

Just 2 quick ones. One, in January, you announced that you’d settle a 2-year investigation by the FTC and a 24-state task force for nearly $5 million after a lot of complaints by independent pharmacies and consumer groups, after the merger of CVS and Caremark. Based on the feedback you got was a message from the FTC that in their analysis, the PBM-Retail combination clearly didn't drive up costs or that there was clearly no evidence of conflict of interest in a limited network, or was there some other message that you got from that?

Well, Larry, thanks for asking that question because we are very pleased to have reached an agreement with the FTC that ends a very comprehensive and very extensive review of all of our business practices, along with the innovative and differentiated products and services that we're bringing to market. And we're very pleased that there were no allegations of anti-trust violations, no allegations of anticompetitive behavior related to any of our business practices, products or service offerings. So we are full speed ahead in terms of the focus that we have in terms of bringing differentiation that improves health and lower costs. And so that's my sermon, okay? And the other thing that I would acknowledge is that the $5.5 million settlement that related to legacy RxAmerica practices was prior to the acquisition of Longs Drugs, so we were, again, very pleased with the outcome of that, and we believe it's a validation of our business model.

And to the validation, is your message that scale in this case can actually drive down costs and create product innovation, or is it just, no, let's just not be too broad, this is really just about CVS and Caremark?

No, I think this is about CVS and Caremark, and I think it, quite frankly, it speaks to Per's comments earlier in terms of the fact that you have to be priced competitively in the marketplace. But our products and services are allowing a form of differentiation for CVS Caremark that is allowing us to win disproportionately in the marketplace.

Very good. A quick follow-up just on Medicaid, I know you called out some fourth quarter startup costs. There's been a lot of discussion about states moving more to managed care plans both for duals and those covered under CHIP, and I know, Per, you've called out the opportunity. Are you able to elaborate a little bit on the opportunity, potential benefit of Texas moving to MCOs, March of this year? And in that market, how able are you to run restricted retail networks?

Yes. I mean, we expect to participate in the Texas conversion because we have a number of existing clients down there that will benefit from the move of lives into managed Medicaid. And I certainly would expect what Texas is doing and what Ohio and New York have done, and so on, that, that will be replicated by many other states in the years to come. And there are pretty significant cost savings associated with those conversions. And as you've kind of alluded to, restricted networks are possible in the managed Medicaid arena. And so we participate in a number of states with a number of customers where we have restricted networks in place.

And our next question comes from the line of Matt Fassler with Goldman Sachs.

Two quick questions for you. First of all, as you look at the Retail top line and at the front end, in particular, and you think about the magnitude of your inventory declines, which were quite impressive, do you feel like the inventory position or the in-stock could, at this point, given the very sharp declines, be having some impact on your Retail sales?

No, Matt. We don't believe that's the case, and we've monitored that very closely. And there were a few isolated geographic issues that were process-related that were very short in duration, and those were remedied. So we're very focused and very careful that it's not at the expense of service levels to our customers.

Got it. And then my second question, if you think about the Express-Walgreens dispute and the possibility that, at some point, perhaps, this is resolved, what kind of efforts are you implementing to try to ensure that the business that you win through this dispute is sustainable business for you and that these customers can become long-term customers for you, not just temporary customers, if you will?

Well, thanks. This is Mark again. As I said upfront, big push that we had from the get-go was to make sure that we’re providing a great experience to each new customer that walked in the door. And we believe that's the #1 thing that we can do to retain them over time. We do have a number of other things that we can do both in the front store and the pharmacy, including ExtraCare, to try and really pushing that program to encourage more loyalty over time. But probably a big a priority as we have right now is how do we make the experience as good as it can be and retain those customers over time.

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

I have a couple of follow-up questions. First, on the market share gains from Walgreens, can you quantify for us what percent of the business that you gained you would categorize as maintenance scripts? And do you think that maintenance scripts could be more sticky than overall scripts?

Well, Ricky, recognizing that this situation is -- we're 4, 5 weeks into this now, we don't have that level of detail at this point in time. As I mentioned earlier, our focus is getting those customers enrolled in our systems and making that transfer process as seamless as we can. I think it's intuitive that the maintenance customer has the potential to be a stickier customer because they're using the pharmacy on a regular basis versus the individual that has an acute episode that may use the pharmacy once or, perhaps, twice a year. And I think a lot of the things that Mark alluded to will be focused on those maintenance customers.

Okay. And then one other follow-up on the Specialty business, what was the Specialty growth once you exclude kind of the benefit from Aetna?

I don't think we have provided that breakout. We did have very strong growth in Specialty, as was reported earlier, and a significant component of that was Aetna, for sure, but the category itself is growing because of just the increased utilization, and we've had some additional PBM growth that added to it.

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

Just trying to get a little bit better feel for the marketing battle behind the scenes for the Walgreens business that's up for grabs. So I guess my 2 questions are, is there any sense of a tug-of-war between CVS pushing these customers to Retail versus maybe Express trying to push them to mail order? And do you have any sense of whether the mail order industry overall is picking up any share, or do you think that retail scripts are basically just staying in the retail channel?

Yes, Steve, I mean, our retail organization has worked very well and very closely with Express in terms of how we can make this as seamless an experience as possible. And quite frankly, as Per mentioned earlier in terms of giving Express a compliment in terms of how they've handled this, I, too, believe they've done a terrific job with both their clients as well as working with -- and I'm sure it's not just CVS, it's other retailers as well, in terms of working closely to make it as seamless as possible for their members.

And our next question comes from the line of John Ransom with Raymond James.

Just looking at your PBM business, do you anticipate at some point that the revenue growth and the operating income growth will sync up, or do you think this is a business that you'll see better revenue growth than operating income growth for the intermediate term?

I think you know what our long-term guidance has been on that subject, and we've kind of talked about it at Analyst Day. And so certainly, for the foreseeable future, over the next several years, we expect revenues to grow at a higher rate than the operating income.

Okay, and just one more question. Just one other thing, any comments on Lipitor? Are you indifferent as to who has market share on the manufacturing side given your dual PBM retail structure?

Yes, John, what we're seeing over the last 2 months is Lipitor is behaving as we had forecasted. In our Retail business, our substitution rate is in the mid-70s at this point in time. And we expect that, that will continue to increase and probably have an acceleration once the exclusivity period expires in late May, early June.

And our last question comes from the line of Eric Bosshard with Cleveland Research Company.

Two questions. First of all on Walgreens, the $0.03, can you split at all the benefit even roughly that you think you're seeing in the pharmacy relative to the front end?

Eric, we covered that or we touched on that a little earlier, it's very early in the game. We are -- we believe some of the front store lift that we've seen in January is attributable to that, but we will -- I think over the next several weeks, we'll be able to do a better job of quantifying that as we're able to get these customers enrolled in ExtraCare and so on.

Eric, I think, in the short-term here, at least for the first quarter, you think about dominant in pharmacy versus front end.

And then secondly, I think you touched on this a little bit, but in terms of PBM profits growing faster than you thought in 4Q, and I know you didn't do anything different with the '12 PBM profit expectation, what was in 4Q that helped, and is there a potential that, that continues in '12?

Well, I think we had, through 4Q, we did see some accelerated utilization in the quarter, and I think we're very focused on delivering our expectations in 2012. And the guidance that we provided at Analyst Day, we feel very comfortable on where we stand. So I don't know if there's anything that's going to wrap, if you will, into 2012 specifically related on trends in the fourth quarter, but we're very confident where we stand today.

Okay. Well, listen, we want to thank everyone for your interest and your time this morning, and I'm sure we'll talk to many of you soon.

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