CVS Health Corporation (CVS) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the CVS Caremark Second Quarter Earnings Call. (Operator Instructions) I would now like to turn the conference over to Nancy Christal. Please go ahead.

Thank you, Tara. Good morning, everyone, and thanks for joining us today. I’m here with Larry Merlo, President and CEO, who will 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 will participate in the Q&A session following our prepared remarks. During the question-and-answer session, please limit yourself to one or two questions so we can provide more analysts and investors the chance to ask the questions. During this call, we will discuss some non-GAAP financial measures in 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. I also recommend that you download the slide presentation we posted on our website this morning. The slides summarize the information on this call, as well as key facts and figures around our operating performance and guidance. In addition, note that we plan to file our Form 10-Q today before the close of business and it will be available through our website at that time. As always, today’s call is being simulcast on our website and it will be archived there following the call for one year. Now before we continue, 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.

Thanks, Nancy, and good morning, everyone. Thanks for joining us today to hear more about our strong second quarter results, as well as our outlook for the remainder of the year. Adjusted earnings per share from continuing operations were $0.81. That’s up 25% from the second quarter last year and $0.01 above the high-end of our guidance. Our retail operating profit increased 18.5%. Our PBM operating profit jumped 14.3%. Both at or above our expectations. So we’re very pleased with this strong operating performance. The retail business continued to take advantage of the unprecedented opportunity presented to us by the stalemate between Walgreens and Express Scripts. This resulted in significant market share growth in the quarter, and as anticipated, we realized about a $0.035 benefit in Q2 from the impasse. Now with the recent news that Walgreens will re-enter the broadest Express Scripts network this September 15, we estimate that we will generate an additional benefit of approximately $0.05 per share in the second half of the year. That estimate assumes that in the fourth quarter, we retain at least 50% of the prescription volumes gained from the stalemate. Additionally, the $0.05 per share benefit is net of the estimated investments we’ll make to maximize retention. Now given our strong results year-to-date and our outlook for the rest of the year, we are raising and narrowing our guidance for the full year. We now expect to achieve adjusted earnings per share for 2012 in the range of $3.32 to $3.38. That’s up from our previous range of $3.23 to $3.33 and up approximately $0.15 from our initial 2012 guidance of $3.15 to $3.25, which we provided last December at our Analyst Day. So we’re very pleased with the upward trend in our expectations, and Dave will provide the details of…

Thank you, Larry, and good morning, everyone. I plan to walk you through a detailed review of our second quarter financial performance, as well as our 2012 guidance. I’d like to start with a summary of how we’re using our strong free cash flow to return value to our shareholders. In the second quarter, we paid approximately $209 million in dividends. We still anticipate a payout ratio of approximately 21% this year and are well on track to achieve our targeted payout ratio of 25% to 30% by 2015. Additionally, we repurchased a total of 26.6 million shares during the quarter at an average cost of $44.65 per share, drawing upon approximately $1.2 billion of our current repurchase authorization. So between dividends and share repurchases, we’ve returned more than $1.4 billion to shareholders just in the second quarter and year-to-date we’ve returned more than $2.4 billion to our shareholders. We continue to target an adjusted debt to EBITDA ratio of 2.7 times. And even with our focus on maintaining our current credit ratings, I continue to expect that at a minimum we will complete the remaining $1 billion of the current authorization throughout this year. So between dividends and share repurchases, we’ll allocate roughly $3.8 billion to enhancing shareholder value during 2012. We expect to continue to generate very substantial free cash flow in the near-term, as well as the longer-term, and our disciplined capital allocation program will remain a vital component of our efforts to drive shareholder value. We generated $3.2 billion of free cash year-to-date and $790 million in the second quarter. The advance payments we received from CMS in the first quarter are driving the outsized free cash flow generation year-to-date but we expect this to reverse itself in the third quarter given a normal CMS payment…

Okay. Thanks, Dave. And as I said, we are very pleased with our strong operating results this quarter across the company and as we look forward we’re confident that we have the right plans in place to achieve significant retention of our new retail prescription volumes. And additionally, while the PBM selling season continues, we have achieved positive net new business to date and we’re focused on the opportunities that remain. And we believe that our competitive position remains very strong, given our differentiated suite of services that cannot be easily replicated and we will continue to reinvent pharmacy for better health and for better shareholder value. So with that, let’s open it up for your questions.

(Operator Instructions) And our first question comes from the line of John Heinbockel with Guggenheim Securities. Please go ahead.

Good morning, John.

When you think about the progression of generics, how do you think we’re going to experience the MACing progression here versus past cycles? And when you look at how generics fall fiscal 2013 versus 2012, 2013 will be bigger but could it be as big as 50% or 75% bigger or more balanced than that?

Well, John, I think as we’ve been talking about generics for more than one year now I think what we’re seeing is it’s performing exactly the way we believed it would and the way we’ve modeled. And we had said that we would maximize profitability for those drugs that had exclusivity periods once the 180-day exclusivity period expired and that’s what we’re seeing with Plavix and with Lipitor. And with drugs like Plavix that do not have an exclusivity period, we’re able to maximize that profitability on day one. I think, again, as we acknowledge that during that break-open period where the exclusivity period is no longer in effect, while we see MACing increase, we also see significant reductions in cost of goods and that’s what makes a net positive for the business. So we have not seen any surprises from the way we’ve modeled things from an acquisition cost, as well as MACing, as well as what we’re seeing in terms of the actual penetration of the percent of the brands that have now switched to the generic.

But it is – the impact will be greater in 2013 or now?

Well, John, I mean we’ll talk more about that as we provide 2013 guidance. Obviously, when we think about the first half of 2013, we’ll be comping up against the exclusivity period of Lipitor and we’ve just got to model the rest of the year beyond that. And again, we’ll talk more about that as we get closer to providing 2013 guidance.

All right. And then with respect to front-end, which was actually pretty good. Did you see, as others have, sort of a slowdown toward the end in June specifically? And have you seen any signs of the consumer retrenching? And then to go along with that, what do you think happens promotionally in the back half of the year with respect to the front-end? Not with Walgreens trying to recover Express business so much, but as they launch their loyalty program do you think the promotional environment heats up or not so much?

Yeah John, let me – the first part of your question, I think that we saw the second quarter get off to a slow start for some of the reasons that we had acknowledged in the prepared remarks in terms of the allergy season being frontloaded, if you will, as well as the Easter comp. And quite frankly, a slow start to the summer selling period as we had a pretty rainy May. So we saw things improve as we ended up going to the latter part of the quarter. I think the consumer still remains cautious and is looking for value and as we’ve talked many times, we look to ExtraCare to provide that value in a very differentiated way. I think if you back out the activity associated with the Walgreens/Express issue, we see the promotional environment being relatively normal as we move into the second half of the year.

Okay. And there’s really no reason for you to have to respond to their loyalty program, correct? That’s – I would think.

Well, John, listen, we – again, as we’ve been at the loyalty program for the better part of 15 years. Okay? We’ve got tremendous learnings. We’ve got over 70 million active cardholders and we’re not done. We’re continuing to look for ways to enhance value and continue to take ExtraCare to new heights. So we’re always trying to figure out how we can do that and you see that come to life in the marketplace. But in terms of your specific question, in terms of do we respond to a competitor introducing a loyalty program, no, we respond to continuing to bring enhancements that add value to our existing program.

Okay, thank you.

Thank you. And our next question comes from the line of Dane Leone with Macquarie. Please proceed.

Hi. Thank you for taking the question. Congrats on a great quarter. I guess just a question on the PBM side. Can you just remind us how the progression usually goes throughout the year with renewals, retention rates seemed a little lower than how you ended the year last year, is this expected to increase as you complete the remainder of your renewals? Or are you seeing something different competitively on the PBM side? Thanks.

This is Dave. Maybe I’ll start with that. Our retention rate is slightly lower than it was last year, as you recall. Larry mentioned it on the call that we had started the year with a couple of losses. I would say that kind of where we are from a renewal standpoint through this period of the year is fairly consistent with where a typical year would land so we’re not seeing anything too abnormal there. And I think that retention rate should be – our expectation is that’s probably where we’ll end the year as well.

Okay.

Acknowledging that that would be slightly less than last year.

Okay. And just a point of clarification on a previous remark that you made regarding narrow networks, that 20% of was it new clients signed up, looking to enter into a narrow network excluding Maintenance Choice or – sorry, could you just clarify that comment?

Yeah, that 20% was excluding Maintenance Choice and it was looking at new client revenues.

So typically, a restricted network is one approach for customers to save money, Maintenance Choice is an alternative approach. In a way, that’s a restricted network too because for maintenance meds it dramatically focuses patients on mail order or CVS retail for maintenance meds so both of those are in play with many customers currently.

And so this is – was noted as being an uptick year-over-year. You’re seeing an increase in the amount of interest into entering in narrow networks, correct?

Yep.

Okay, thank you.

Thank you. And our next question comes from the line of Deborah Weinswig with Citi. Please proceed.

Great. Thanks so much, and congratulations on a great quarter. Actually building on the last question, can you just talk about how CVS is in a unique position to really capitalize on your networks?

Yeah. Deb, thanks for the comment. And as we’ve discussed many times, our retail organization has worked very hard with all of the PBMs to establish long-term relationships. And relationships that focus on serving the respective client members in an effort to manage costs and improve the health of those that we’re serving. And I think that strategy will continue to serve us well as we move into the future. And the dialogues that the retail organization is having with other PBMs about the opportunities that we bring from an execution point of view with narrow or more restricted networks.

Great. Thanks. And then a follow up question, I was very impressed with the specialty growth this quarter. Can you discuss both on the retail side and the PBM side what you’re seeing on the specialty side?

Well, the specialty growth is heavily focused on the PBM part of the business. And it’s driven by a couple of different factors. I mean one factor is simply signing up more PBM lives. That in and of itself drives specialty growth. But also the underlying utilization of specialty due to new drug introductions and the inflation of the AWPs in the specialty category are driving the revenues. So both SAP and Aetna, which were large new accounts, they contributed significantly to the growth of our specialty business.

Okay. And the last quick question – I believe you said Maintenance Choice 2.0 is currently in pilot. I don’t know if you have any feedback at this point?

Well, it’s a very good extension of the current Maintenance Choice program. And the basic changes to that program has to do with the plan designs, where we can now offer access to CVS retail for plans that don’t have a mandatory mail-order program. So people can have access to CVS retail using the lower mail-order co-pay, as long as we have the ability to contact those members and inform them of those savings. And the second feature associated with Maintenance Choice 2.0 has to do with flexibility for the consumer where we’re building the capability to allow consumers to basically decide for every prescription they get, whether they want to have it sent to their home or whether they want to pick it up at a CVS retail store. And they will be able to use their smartphones or go to website to just decide, based on what’s most convenient for them, where they would like to pick up the prescription. So it’s very easy plan for our customers to adopt because it doesn’t require them to change the basic benefit design, like what they have to do with a mandatory mail-order program.

Great. Well, thanks so much, and best of luck.

Thanks, Deb.

Thank you. And our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch. Please proceed.

Hi. Larry or Dave, can you prioritize possibly the PBM profit drivers here sequentially? Is it generics, first? Deal synergy, second? PBM streamlining and then maybe Aetna or other factors that drove that improvement? And then the other question, just with the Walgreens resolution, is there any change in the economics you have with Express or changes in your pharmacy network positioning whatsoever?

Well, Bob, maybe I’ll just touch upon the progression around the earnings sequentially. Keep in mind too that, from a cadence perspective, Medicare Part D, as we talked about on the call, the cadence of that earnings progression is slightly different this year than has been historically. Typically, you see the front half pretty modest, the back half of the year more accelerated from a profits progression perspective. I think it’s clear that, as we think about the PBM business in general, generics are a big driver of economics in this space. And you’re seeing the generic wave begin to take effect in 2012. And I think progression from a generic standpoint is pretty impactful this year, and probably into the future as well.

And I think, Bob, the other thing to note is, as we’ve discussed previously, that we talked in the prepared remarks about the streamlining initiative, and the benefits outweigh the costs in 2012, so that’s also contributing to the performance. Your other question, Bob, in terms of economics on the retail side with Express Scripts – the settlement between Walgreens has no impact in terms of the relationship that we have. As we’ve acknowledged, we’ve had a very good relationship with Express on the retail side of the business, and I know our retail organization continues to look forward to working with them into the future.

Thank you.

Thank you. And our next question comes from the line of Scott Mushkin with Jefferies. Please proceed.

Hey, guys. Thanks for taking my questions. I was hoping you could talk at least conceptually about profit growth as we move out of 2012, as almost all the questions I’m getting are on that issue. It appears the level of new business coming into the PBM will not be as great, which is usually good for profits. Retail, on the other hand, would seem poised for much slower growth going forward. I guess I’m looking for any thoughts on how we get an encore on what looks like just a spectacular 2012.

Hey, Scott. This is Dave. I’ll start this off. I think I’d hearken you back a little bit to the Analyst Day presentation, where we laid out our roadmap for – I’ll say profit growth projections over the next several years, as well as the cash flow projections that we have for our business. And I think both of those, as we look at where we are, and as we think about the next several years, are pretty impactful. And we laid out, I think, a series of items that we believe are going to drive our performance from an enterprise perspective. As we’ve talked about, we’re beginning a phase of the generic wave that will be very impactful from a profit-growth perspective. We’re beginning a wave of utilization that we’ve not seen before, as the baby boomers turn into the over-65 population and utilization trends will begin to increase over time. And then furthermore, both the PBM and retail business have very specific plans to both gain share, to reduce costs and improve the underlying performance of their business, top to bottom, as they drive more share through their fixed asset base. So I think without giving specifics to 2013 because it’s clearly we’re way too early for that, there are some very macro trends and efforts that we’re focused against, day in and day out, to drive – also to your point – an encore of 2012, as we think about the next couple of years.

All right, perfect. And I also I guess I have a little housekeeping item but also another question. Mail choice, I think is now about 9.5% of PBM script volumes with the growth being driven by new Maintenance Choice adopters. Where can mail choice go over the next few years? And how does that impact overall enterprise profitability? And then the housekeeping items, I think you said 20% of the $3.5 billion in gross wins are narrow networks, but I didn’t hear how much of that is also Maintenance Choice. So I was wondering if you could give us that data? And then I’ll yield. Thank you for taking my questions.

Scott, let me take the housekeeping issue, and then I’ll ask Per to go back to your question. The 20% that – just to be clear, the 20% that we talked about in terms of net business from a revenue perspective – excludes Maintenance Choice. So those clients adopting Maintenance Choice would be on top of that 20%.

And do we have how much that is, Larry? That’s what I was looking for.

We do not have that at this point. There’s more dialogue taking place. That’s something we’ll talk about later in the year.

With respect to the growth potential, you recall that Larry pointed out that we currently have about 10.8 million lives that are using our legacy Maintenance Choice program, and that’s the program that requires a – essentially a mandatory plan design. We presented, I think, at Analyst Day last December that when we roll-out Maintenance Choice 2.0, that really allows us to access a large portion of our customer base that have a mail-order benefit but that don’t require people to use mail order for maintenance meds. So that will probably triple or so the potential in our book of business. So we – I think we projected back at Analyst Day that we could reach in excess of 30 million lives with that type of program.

And, Scott, I would also go back and look at – as we introduced Maintenance Choice a few years ago, keep in mind the progression of adoption. It started off relatively slow. And as more people adopted it, it began to accelerate into either existing clients or new clients. We expect that Maintenance Choice 2.0 will also follow that same pattern as people – first-movers will try the program, test it, make sure it works to their satisfaction, and then can communicate that broadly into the benefit community.

Another thing that might be worth mentioning is that you may recall from our Analyst Day presentation that, last year, in going into 2012, we had a number of new customers that adopted Maintenance Choice right out of the box, that came from other PBMs with mandatory mail-order programs. And we see the same pattern in this year’s selling season. So we have a number of new customers that are coming on board in 2013 that are putting in Maintenance Choice right out of the gate.

And how is affecting enterprise profitability? And that’s it for me.

When we introduced Maintenance Choice, either 1.0 or 2.0, the enterprise benefits at the end of the day, so it drives disproportionate performance for us.

Thank you. And our next question comes from the line of Steven Valiquette with UBS. Please proceed.

Hi. Thanks. Good morning, Larry and Dave. So I guess – just separate from the loyalty card discussion earlier on the call, it just seems like over the past several weeks that some in the investor community have been concerned about the Express/Walgreens settlement maybe leading to some sort of overall general pricing battle on the retail side of the business to either get back or retain customers that are in transition this year. So I guess in light of that, are you able to just at least confirm that the upcoming marketplace dynamics post-September 15 are unlikely to lead any material change in overall pricing behavior on the part of CVS? I mean, is this going to be sort of business as usual, generally speaking? Or is it just too premature to make that statement? I’m just trying to get more color on that. Thanks.

Steve, we see business as usual. If the question is really targeted to our relationship on the retail side with other PBMs, we don’t see that changing, as I mentioned earlier. And as it relates to the incremental scripts that we picked up over the past several months, as I acknowledged in the prepared remarks, we will be doing some promotional efforts to maximize our retention. But we’ve reflected that in our outlook for the balance of the year.

Okay. But nothing out of the ordinary that’s going to lead to...

Nothing out of the ordinary, Steve.

Okay. Okay, thanks for the clarification. Thanks.

Thank you. And our next question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed.

Thanks a lot. Good morning. It’s Matt.

Hi, Matt.

Sorry about that. Thanks a lot. Good morning. It’s Matt. Can you hear me?

Yep. We can hear you. Good morning.

Good morning.

Great. Good morning. Just a follow-up question on Walgreens. You talked about your plans for fourth-quarter retention. How do you think about the longer-term prospects for the remainder of that business? Is 50% a transitional number? Is there some expectation that, over time, some of that business sticks with you? And how have you gone through the thought process about those numbers?

Yeah, Matt, I think – first of all, let me just mention, as we’ve talked many times, that pharmacy customer is a sticky customer – the hardest person to lose, and once you lose them, the hardest person to get back. And our pharmacy and store teams have done an outstanding job of introducing the CVS brand to those new customers over the last several months. And the feedback we’ve gotten from those customers has been very positive. I’ll let Mark talk in a little more specifics in terms of what we learned over that period of time that brings us to the point that we made about how we see the retention in the fourth quarter. And we’ll talk more about that as it relates to 2013 at Analyst Day. But I’ll flip it over to Mark.

Thanks, Larry. We’ve been working on this retention plan for nine months, and as Larry said, we are definitely ready. Just a few facts I think to bolster that. 70% of our ESI customers are within two miles of an existing CVS store, and 90% of those customers are within five miles of a store. So that speaks to the stickiness of those customers. And we know the value of each of those customers, and we will be particularly focused against those top customers. So our number one focus has been providing a great customer experience for those new customers. Some good evidence for you might be that 55% of those customers have signed up on our auto-refill program, and 83% of those customers are signed up on our ExtraCare loyalty program. So they are well ingrained in the services that we provide within the company. And then customer service has been a big focus for us. Our measures are strong, and our feedback has been very positive. When you think about the response, our response will be very comprehensive. It will focus on our top customers, as I mentioned earlier. The actions will include various advertising methods, promotions to retain the customers, particularly our top customers. We will also do a series of customer outreach programs in advance of the 9/15 date as well as post the 9/15 date, and we will have a number of customer touch points within the store. So we value our new ESI customers, and we will do everything possible to retain them in the coming months. And as we transition into 2013, we do have a strong retention game plan in place.

Mark, those numbers are extremely helpful. Just one follow up for you or for Dave. I don’t know if you mentioned the private label penetration within the front end this quarter on a year-to-year basis. Any color on the progression of that would be very great.

Our private label penetration is about 17%. Essentially flat year-over-year at this point in time. We continue to focus on it, Matt. And as we’ve said, we see opportunities to improve that over the coming years to get that mix up to 20%.

Got it. Thank you, guys. Appreciate it.

No problem.

Thanks, Matt.

Thank you. And our next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. Going back to that last question, the 50% retention, is it primarily tied to the statistic you gave on the amount of new customers that have already enrolled in the auto-refill? Is that the primary driver for the assumption behind retention?

Frank, it’s one of many estimates we have, as far as how we think we’re going to drive retention into the business. I would say the teams have done a very specific analysis – I’ll say at store, at customer level, to understand the retention. And we feel very good about our – the outlook for this year with that.

Okay. One more and I’ll hop. Just curious if you could kind of give us, as it related to the selling season this year, have you seen more interest from say the new Catamaran or the Optum in the selling season? Have they become a bigger player? Have they migrated more upstream into some of the larger employer markets? Thanks.

They certainly are, both serious competitors and we see them being active and aggressive and certainly will count them as serious competitors going forward.

Next question.

Thank you. And our next question comes from the line of Ross Muken with ISI group. Please proceed.

I guess as we look at the selling season sort of the outcome I think this is certainly better than many of us were looking for. I guess in terms of the progression or the competitive landscape or how some of the newly formed entities kind of approach retention, et cetera, I mean what was sort of the bigger surprises to you just in terms of what others were doing? And how did you think about that as it relates to 2014 and kind of how some of the newer entrants are going to be positioning themselves going forward? And how do you feel like that matches up against what you’ve been doing with your offering?

I can’t say that there are any surprises in that regard. I think it’s a healthy competitive environment where you now have multiple business models to sort of choose from. I think we feel very good about our ability to differentiate what we offer in ways that are not easily replicable by others. So as I mentioned earlier, I think Maintenance Choice clearly is a competitive edge for us especially with customers that previously have had mandatory mail order programs and likewise with health plans there is a lot of interest in our retail sort of footprint and the ability to use both the pharmacists as well as the MinuteClinics as adjuncts to the way they manage their healthcare services. So we have I think a pretty interesting suite of services that will serve us well in the future competitive environment.

Thanks, guys.

Thank you. And our next question comes from the line of Lisa Gill with JPMorgan. Please proceed.

Thanks very much, and good morning. I just had a couple of...

Good morning, Lisa.

Good morning. Couple quick follow up questions around the selling season. Clearly we all know about the lessons that you’ve had on the health plan side but the $3.5 billion of net wins was much better than we’re anticipating. Can you just help us understand how much of that is maybe health plans versus corporate business as we start to think about profitability going into next year? And then as a follow up to that, Per, we’ve talked to some of your customers, Maintenance Choice has been a big driver around retention. Can you talk about retention rates around Maintenance Choice and the competitive dynamic that that brings in maintaining some your customers?

Sure. First, Lisa, as you know, we probably will defer until much later in the year to give you sort of a more in-depth view of the specific wins and so on in the selling season but as Larry mentioned in his introductory comments it really kind of cuts across the board both Fortune 100 type companies that have joined us and a number of them with Maintenance Choice right out of the gate. But also in the health plan segment both the commercial health plan segment as well as the Medicare, Medicaid segments and as you look from prior presentations the managed Medicaid area is one that is growing very rapidly for us both in terms of new customers but also existing customers taking on new states or new populations that are rolled into the managed Medicaid program. So that’s the big picture and I think later on in the fall we’ll probably be able to share with you more details in terms of the specific accounts and so on.

And then I guess just one other follow up question around narrow networks, and I guess, Larry, this would be for you, or for Mark. If we look at the settlement between Walgreens and Express Scripts, it’s only for them to participate in the broadest networks for Express Scripts so clearly they’re pushing narrow networks as well this selling season like you did. What are you hearing from those in the marketplace? My guess would be that you’re part of many of the narrow networks for Express than some of the others. Are you starting to hear that we’re seeing traction with others in the marketplace around narrow networks as well?

Well, Lisa, I mean as we talked we’re seeing what’s happening in the Caremark book of business with new clients and we’re hearing and seeing similar results from the retail side of the business. And I think, as we mentioned earlier, having a long-term relationship with the other PBMs becomes extremely important in terms of being a partner with others as they’re looking to create narrow or differentiated offerings in the marketplace.

Great. Thank you very much.

Okay. We’ll take one more question, please.

Thank you. Our last question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed.

Good morning, and thank you for taking my question.

Good morning.

I have a follow up on the selling season and then another question. So when you look at your net new business of $600 million, which came in ahead of expectations, can you provide some color on your underlying assumption? Specifically, does the number include some second half 2012 business wins that’s spill into 2013? Or only 2013 new starts? And are you also taking into account growth that your managed care partners are seeing?

It does include the annualization of some of the accounts that came on in the second half of 2012.

Okay.

Which is consistent with our methodology.

That’s the way we always report it.

Right.

Okay.

But, Ricky, it would not include anticipated growth that is not quantified at this point in time. That would not be in that number.

Okay, that’s helpful. So you’re not assuming growth of your base business in it?

That’s correct.

Okay. And then when we think about the year-over-year impact from Walgreens, just to help us sort of model, did you see some benefit already in 4Q 2011 that we should kind of like factor in as we think about 4Q 2012?

Ricky, in the fourth quarter, we saw a very small benefit. We really began to see most of the benefit in the January timeframe. We saw a little bit in December. But as we stated back then, it was not material to our results.

Ricky, just to clarify one thing. As I said in response to an earlier question, we do include new lives that are added in the managed Medicare space to some of our existing customers as some of the states roll in, new lives into the managed Medicaid program from fee-for-service Medicare. And so, some of our existing customers pick up additional lives as a result of that.

But that is known, it’s not estimated at this point in time.

Exactly.

Okay. But that’s helpful because that could help us bridge the difference between the losses we’ve heard of and some of the wins versus the number that you’ve provided today.

You’ll get more detail later on in the year as we get closer to the end of the selling season.

Okay, thank you.

Thank you.

Okay, everyone, thanks for your interest in CVS Caremark, and we’ll talk to you soon.

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.