Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2014 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Tuesday, August 5, 2014. 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. I’m here this morning with Larry Merlo, President and CEO, who will provide a business update; and Dave Denton, Executive Vice President and CFO, who will review our second quarter results as well as guidance for the third quarter and year. Jon Roberts, President of PBM; and Helena Foulkes, President of the Retail Business, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up, so we can provide more callers with the chance to ask their question. Now I have one key date to announce this morning. We plan to host our annual Analyst Day on the morning of Tuesday, December 16 in New York City. At that time, you’ll have the opportunity to hear from several members of our senior management team who will provide 2015 guidance as well as a comprehensive update on our growth strategy. We plan to send invitations with more specific details via email sometime in August, so please save the date. Again, that’s Tuesday, December 16. If you don’t receive an invitation and would like to attend, please contact me at your earliest convenience. Please note that just before this call, we posted a slide presentation on our website that summarizes the information you will hear today as well as some additional facts and figures regarding our operating performance and guidance. Additionally, our quarterly report on Form 10-Q will be filed by the close of business today and it will be available on our website at that time. 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 also use some non-GAAP financial measures when talking about our company’s performance including free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-GAAP items as well as reconciliations to comparable GAAP measures on the Investor Relations portion of our website. As always, today’s call is being simulcast on our website and it will be archived there following the call for one year. Now, let me turn this over to Larry Merlo.

Thanks, Nancy. Good morning, everyone, and thanks for joining us to hear more about the strong results we posted for the second quarter. I’m pleased to say that we met or exceeded our expectations on every key major performance. Our adjusted earnings per share increased 16.5% to $1.13 per share. That’s $0.02 above the high end of our guidance range. Both the PMB and Retail segments exceeded our revenue expectations and delivered strong gross margins. And as a result, operating profit in the Retail business grew 6.5% and profit in the PBM grew 30% exceeding our expectations. Additionally, we generated nearly 400 million of free cash keeping us on track to achieve our full year free cash flow goal. Now given our strong performance year-to-date, we are raising and narrowing our adjusted earnings per share guidance for the year to a range of $4.43 to $4.51 and that’s up from our previous range of $4.36 to $4.50, and Dave will provide the details behind our financial results and guidance during his review. But before I move on, I do want to say that I’m extremely proud of the work our colleagues are doing to drive continued strong results across the enterprise. So let me turn to a brief business update and I’ll start by level-setting how we see the current state of health reform. I think as everybody knows, there are reported to be about 8 million individuals who have enrolled in the public exchanges and we saw the biggest increase occur toward the end of open enrollment. The mix of individuals who were newly insured as opposed to those who previously had coverage, it still remains unclear with various sources quoting anywhere from a low of 27% of individuals newly insured up to a high of 85% with multiple…

Thank you, Larry, and good morning, everyone. As I typically do, I’ll begin this morning by highlighting how our disciplined approach to capital allocations continues to enhance shareholder value. I’ll follow that discussion with a detailed review of our strong second quarter followed by an update on our guidance. So let’s begin. During the second quarter, we continued our long track record of paying quarterly dividends to our shareholders with payments totaling $322 million. With a strong earnings outlook for the remainder of this year, we expect our dividend payout ratio to surpass 25% at some point during 2014. We’re making continued good progress towards achieving our 35% payout target by 2018. Additionally, we repurchased 16 million shares for approximately $1.2 billion at an average price of $74.91 per share. Year-to-date, we repurchased more than 27 million shares or $2 billion and we still expect to complete at least $4 billion of share repurchases with the full year of 2014. So between dividends and share repurchases, we’ve returned more than $1.5 billion to our shareholders in the second quarter alone and have returned more than $2.6 billion during the first half of this year. Our goal has been to return more than $5 billion in 2014 and we remain on track to meet that goal. As Larry said, we generated nearly $400 million of free cash in the second quarter bringing our total for the first six months of the year to approximately $2.2 billion. The key driver continues to be our healthy growth in earnings coupled with improvements in our working capital performance fueled mainly by the PBM’s growth. All-in, we continue to expect to generate free cash between $5.5 billion and $5.8 billion in 2014. Turning to the income statement. Adjusted earnings per share from continuing operations came…

Okay. Thanks, Dave. I couldn’t be happier with the work of our colleagues, they work that they’re doing to provide good service to our clients and help people on their path to better health while delivering strong results for our shareholders. I think as we’ve talked this morning and in prior meetings, our unmatched enterprise assets are enabling us to provide innovative integrated solutions in breakthrough products and as the healthcare environment evolves, we are uniquely positioned to address the quality, affordability and accessibility challenges in the healthcare system today. So we’re highly focused on the unique opportunities we see for growth and we’ll continue to take an active and growing role in shaping the future of healthcare. So with that, let’s go ahead and open it up for your questions. Operator?

Thank you. (Operator Instructions). Our first question comes from the line of John Heinbockel with Guggenheim. Please go ahead.

Hi, Larry. So a strategic question. When you think about Specialty Connect, how is that starting to impact your dialogue with potential customers? And with that in mind, how do you think that will impact your ability to reduce drug spend, and does it become a game-changer in terms of market share on the PBM side with new accounts?

Good morning, John. I’ll start and then I think Jon will probably jump in as well. And I think that we really have a surround sound specialty program, okay. I mean we highlighted Specialty Connect this morning and I think that’s one important component, but I think our ability to not just manage the specialty drug but manage the specialty patient I think is what is the real differentiator in the marketplace. And I’ll let Jon pick up from there and talk about the various ways we’re doing that.

Yes, so John as I talk to clients about Specialty Connect, what they really like is opening up the access because specialty has historically been a mail order only access for their members with some retail outlets but not really that accessible. And as clients become more focused on it, they’re really excited about this capability and they think of it like Maintenance Choice that as you know has been very successful in the marketplace. And one of our customers is also a physician, so as we talk to physicians they like the fact that we’re opening up convenience for their patients. And specialty today has its business with our PBM clients but there’s also a big open market in Medicare and fee-for-service Medicaid that again physicians have the ability to influence where those members go. So we expect to grow within our PBM base through clients selecting us because of these integrated capabilities but we also believe we’re going to get a disproportionate amount of referrals from physicians as well.

Okay. How much of an issue is compliance in that business and therefore is that a significant opportunity on the broader cost side?

As you look at it adherence – when you say compliance, I’m thinking adherence to the medication.

Yes.

Historically, retail has performed very much under what traditional specialty pharmacies have been able to perform at. And with Specialty Connect we have achieved the same levels of adherence with our Specialty Connect patients that we have with our specialty pharmacies because we’re able to connect all the clinical capabilities and back-ins of specialty. I know that is a concern that pharma had when we talked to them, but we’ve showed them results and have actually demonstrated an even higher level of adherence because now patients can select which channel they go to. So, we think we’ve solved that and that’s a real benefit.

Okay, thank you.

Thanks, John.

Our next question comes from the line of Robert Jones with Goldman Sachs. Please go ahead.

Thanks for the questions. Larry, I want to go back to your comments on prescription utilization. You touched on a little bit of what you were seeing from ACA and Medicaid expansion. As I look at the script growth in the quarter 3.9% exceeding the guidance, it looks like the guide for the next quarter is 3.75% to 4.75%, so a little bit of acceleration. Could you maybe just parse out a little bit what you’re seeing from ACA but also from the broader market utilization?

Bob, I think the broader market I think we’re seeing utilization pretty flat I think from the exchanges I think as had previously talked, I think we’re seeing more of a benefit coming out of the Medicaid expansion. I think there’s still some uncertainty as we mentioned in our prepared remarks in terms of when you look at the exchange population, just how many of those are incremental to health insurance coverage. So I think we’ve talked about the fact that we see '14 as a transition year. As we mentioned earlier, we do believe there is a modest benefit more of it coming from Medicaid in '14 but I think that we certainly see this ramping up as we move into '15 and beyond.

That’s helpful. And then I guess just a quick follow up on the formulary changes you commented on I think at the Analyst Day. You mentioned that in 2014 you’d save clients about $1 billion. I believe the update today was from 2012 to 2015 it’s 3.5. I guess just maybe if you could isolate the most recent changes and what kind of savings those would generate? And then I guess more broadly and more importantly, how successful have you been in shifting clients to these more restrictive formularies?

Bob, I mean we’re not going to provide any more granular information in terms of – to the first part of the your question. I think in terms of the second part, we have been able to manage transition across members as well as physicians in a very seamless fashion, recognize that. The formulary changes that we’re talking about affect a very small percent of our member base. And that has allowed us to do a lot of, I’ll call it seamless transition in terms of making it a nonevent for the patient as well as the physician.

This is Jon. The only thing that I would add is that we expect pharmacy trend, year-over-year growth to the pharmacy spend to grow due to continued AWP inflation, increase in utilization that we just spoke about and the growth in specialty sourcing and clients very open and much more receptive than they had been historically about narrowing formularies. We’re about to about 95 exclusions now. I’ll tell you as we’re making these decisions and these decisions are made through a clinical filter that’s reviewed by our P&T Committee, we are still generating tremendous value for our clients each year and we think there continues to be opportunity particularly in specialty.

Great. Thanks for the comment.

Our next question comes from the line of Meredith Adler with Barclays. Please go ahead.

Good morning. I have one question about the frontend and then Eric Percher will have a question. I know you’ve talked about the weakness in traffic in the frontend as a function of people consolidating trips. I was just wondering if you could talk – and of course your own initiatives, but if you could talk a little bit about what you think is going on both with the consumer, are they in fact pulling back and whether you’ve seen any changes in the competitive environment; anybody responding to weak traffic?

Meredith, I don’t think we’re seeing any changes in the consumer. I think that the consumer continues to be a cautious purchaser of products. At the same time, I don’t think we’ve seen a change in the competitive environment. We still see an awful lot of promotion across competitors. And we mentioned earlier, we’re continuing to be very disciplined about and quite frankly find that sweet spot. Oftentimes we talk about the art and science in terms of investment spending to drive traffic but to be able to do that in such a way that we’re driving profitable sales.

I would just jump in and agree with that, Meredith. I think it’s fairly consistent with what we’ve been talking about in the last couple of calls. Consumers are still be a cautious. Where we really – our focus is health, beauty and personal care and we continue to be encouraged by our performance in those categories. Clearly, our decision on tobacco drove changes as you look at our share in the general mechanize business, but overall I would say competitors continue to be promoting more than they were last year and more than we are, so we’re watching that carefully. We’re really trying to make smart choices so that at the end of the day we’re driving profitable growth.

Great. And Eric, you have a question right.

Yes, quickly on Specialty Connect, are most of the lives that are moving over from the pharmacy to PBM open market today, is that primarily who served at the pharmacy? And then the lives that we see in Specialty Connect beyond the movement over, have you begun to see traction in expanding the program or is that over the next several months?

Hi, Eric. So the mix of customers that are moving over is a combination of open and lives that we have. And as we think about growing Specialty Connect, it’s going to be by driving a higher share of open lives which we’ll do through working with physicians and through new client wins as new clients decide to move to us because of all of our integrated capabilities, Specialty Connect which is one of those.

Eric, the other thing that I think you’ll find interesting, Jon touched on or maybe an analogy of Specialty Connect to Maintenance Choice and what we have seen out of the gate is about 50% of the customers choose to pick up the specialty script at retail which ironically is very consistent with what we saw from Maintenance Choice when we first highlighted the program a few years back.

That is interesting. Thank you.

Thank you.

Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

Hi. Good morning. Can you give us some additional color on the growth at 90-day at retail? And where do you think we are in kind of again that market shift?

Ricky, we have continued to see accelerated growth at 90 days scripts. I would say it’s growing much faster than the 30-day bucket, if you will. Today it represents about – I think it’s 29% of our retail prescription pie, if you will.

Okay. And when we think about the opportunity as the opportunity for that is kind of like 50% to 60% of scripts you’re presenting kind of like the maintenance script. Is that how we should be thinking about it?

Yes, I mean I think you have it right in terms of how you’re thinking about the maintenance bucket of scripts versus the acute side and yes, I think it’s reasonable to expect it to continue its growth trajectory as we’ve seen the last couple of years.

Okay. And then the one follow up on generic inflation. Obviously you’ve done a very good job in mitigating the impact. Can you share with us your expectations for generic inflation for the remainder of the year and any thoughts if this is kind of like sustainable trend that will continue just kind of like longer term?

Hi, Ricky. This is Dave. We don’t really provide a forecast for generic inflation. I’ll just make on comment just from the nature of the generic marketplace and we’re encouraged obviously with the joint venture that we’ve created with Cardinal but also encouraged that we believe strongly that the generic marketplace is long term a deflationary market and we believe that we’re well positioned to work hard in that marketplace to lower our cost and also lower the cost for our clients and the patients that we serve.

Okay. Thank you.

Thanks, Ricky.

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

Hi, guys. Thanks for taking my questions. So first, wanted some clarity on the PBM operating growth in the third quarter, just remind us what – it’s quite a bit less than we saw in the second quarter, so I was hoping to just get reminded on why we get some deceleration there?

Hi, Scott, this is Dave. If you recall back to kind of even to Analyst Day, we fully expected that Q3 was going to be our softest quarter from a growth perspective. So this is very much in line with that expectation. Clearly, the cadence to profitability is tied to really two events is the time to break open generics and when they overlapped LY. And secondly the timing of profitability as we cycle through Medicare Part D. So both of those events are impacting Q3 and consistent as we thought they would impact Q3.

That’s perfect. And then my second question really goes to I guess thinking about the asset and the asset turns as we move into the future, not next year but as we move out. It seems like CVS Caremark is uniquely positioned to kind of improve their asset turns with the clinics, with Specialty Connect. Can you guys take us out into the future? What will a store, if you really want to call it a store, three to five years look like as we move out? You guys have any thoughts around that. I know it’s kind of a high in the sky question, but I was wondering if you had some thoughts there?

Scott, I think I’ll start and others may jump in here. But I think you hypothesis is correct. It’s going to evolve from what exist today and we’ve talked a lot about the fixed asset base within the store and the fact that that next prescription has a disproportionate flow through to the bottom line, okay. At the same time, we do see opportunities to extend the pharmacy experience into the front store and I think that Helena has begun some work, some exciting work in terms of the opportunities that that creates. So we’re certainly not in a position where we’ve cracked the code on that or we’re ready to talk to about it other than the fact that I do think that you will see something different in the future from what you see today.

Scott, this is Dave. I think the most, at least mid-term opportunity we have to improve asset turns, if you will, first is – one’s kind of the just the growth of the service model to the degree that we grow services in our outlets. We do that without deploying a bunch of capital from an asset perspective. And then secondly, as we talked about many times is we do have opportunities from an inventory perspective and making sure that we maximize I’d say the supply chain across all of our channels will be important to us over the long term.

All right, guys. Thanks very much for taking my questions.

Thanks, Scott.

Thanks, Scott.

Our next question comes from the line of Lisa Gill. Please go ahead.

Great. Thank you. Jon, I was wondering if I could just maybe start with some questions around the selling season, 5.4 billion of gross new wins. Can you just talk about what people are buying this year? Are you seeing Maintenance Choice, specialty? Is there anywhere that you can give us some metrics around who those new clients are and what programs they bought for 2015?

Well, Lisa, we’re obviously very happy with this year’s selling season and when you look at the mix of clients, I think it’s very balanced with employer’s health plans and government business. And I can’t really point to really any one program that has moved up in their priority other than specialty, but we now continue to expand our integrated offerings and many of which are unique, such as Maintenance Choice and Specialty Connect, Pharmacy Advisor and MinuteClinic and all those combined resonate. And then when we talk about our ability to be able to touch members and influence their behavior and impact outcomes that results in lower prices to the client, that continues to resonate. And I think – I’ve probably seen a little more interest in specialty which has become the top priority in the marketplace and I believe our assets are unmatched. We talked about Specialty Connect earlier, but we also have Accordant, which is a rare disease management company that we link to our specialty offering and that treats not just rare specialty disease state, but it treats the comorbidities. And most of these patients have other diseases that they’re dealing with. We’ve talked in the past about NovoLogix have to spend in the medical benefit not really being managed. We have that capability. Home infusion people are very interested in as well, moving people out of expensive hospital settings into their homes or infusion clinics.

I guess really what I’m trying to get at is more on the upside, Jon, as we think about 2015 and things that they’ve signed up for, how does it impact profitability of those clients? So do the majority sign up for your specialty programs? Did you see people that were electing to do Maintenance Choice, I’m trying to get some more of the finance side of it?

I would say it’s pretty consistent with what we’ve seen in prior years. With health plans probably don’t take as many of our programs as employers do. W are seeing more uptake in our formulary strategy than we’ve seen in the past. Maintenance Choice 2.0 we’re beginning to see uptake in the health plans that historically haven’t really emphasized a mail benefit. But I think I would think about it, Lisa, as consistently what we’ve historically say.

Okay, great. Thank you.

Thanks, Lisa.

Our next question comes from the line of David Larsen with Leerink Partners. Please go ahead.

Hi. Can you please talk about the joint venture with Cardinal? And I guess there is some new aspects to it, like just on a very high level, what’s sort of the nature of those incremental milestones might be? And I’m assuming that if those milestones are met, it would mean more earnings for all parties involved. Thanks.

David, good morning. I guess I’ll just start by saying that when we formalized the JV agreement, we had established some guiding principles that spoke to the goals of the entity to reduce cost for our clients, our customers while making the supply chain more efficient and to create win-win opportunities such that there’s equity and fairness in the value that gets created. So obviously over the past six months, we’ve had a lot more time to dig into the data. And it simply made sense to modify the agreement with those guiding principles that I outlined in mind. We’re not going to provide any granularity around some of those milestones but I think we have had a terrific relationship with Cardinal for many years. I think that that’s what led to the JV being created and I couldn’t be more pleased with how the teams from CVS Caremark and Cardinal have come together in the spirit of how do we improve efficiency and drive down costs. And I think we’re off to a terrific start.

Great. Thanks a lot.

Thank you.

Our next question comes from the line of George Hill with Deutsche Bank. Please go ahead.

Good morning, Larry and Dave, and thanks for his my question. I just wanted to quick check, I heard one point that you brought up. Did you say you expected long-term generic drugs to be inflationary or deflationary? Part of that broke up on my end.

I’m sorry, very much deflationary, George.

Okay. And then maybe delving into the prepared comments a bit more. It sounds like you're seeing inflation in the small book of the business and then deflation, significant deflation in the rest of the book. And I would ask are you seeing that deflation in acquisition costs? And is that deflation finding its way all the way to kind of the list price or the AWP price from your perspective?

George, this is Dave, maybe I’ll start. Clearly, what we’re signed up to do is our purpose in life is to work to reduce cost for the clients that we serve and the members that we serve that either use this via mail order or use this in our retail outlets or use this in various and sundry other matters. And so when we look at generic inflation, our focus is to control that and to push down those cost to goods sold at this point in time.

George, I think as Dave pointed out, overall we see a deflationary nature in the generic environment and we’re really not going to comment on specific products or AWPs.

Okay, all right. Then maybe just a quick tack on. From what we hear you guys have been active in significant selling success tacking MinuteClinic onto health plans with the zero co-pay option this selling season. I guess can you talk about expected growth in MinuteClinic as we look out to ‘15?

I think as we pointed out this morning, we continue to see significant growth. Some of that is organic in terms of the ongoing growth of the existing clinics and some of that is being driving by our expansion. We said earlier we’ll open up on 150 clinics this year. I think it certainly is a discussion in the selling season. I think that kind of the ticket to the game metrics are being right on price and service, but we’ve got a lot of other elements with which we can offer clients the MinuteClinic option being one and one that it’s getting a lot of attention.

All right, I appreciate the color. Thank you.

Thanks.

Our next question comes from the line of Ross Muken with ISI Group. Please go ahead.

Good morning, guys, and congrats. If we look at sort of the pacing of wins in the selling season, one of your competitors was sort of suggesting that as it sort of tailed off and then as we look into the out-year, the sort of momentum of their peers inclusive of you was sort of waning. If we looked at like your hit rate – your win rate over the course of the selling season, was it fairly consistent? Did you feel like you gained momentum as you put up some of these big wins? It seems like more recently we've seen a number of public names of size. I'm just trying to get a sense for kind of tone and how you feel like the business had momentum through the most recent RPs you been in?

Ross, so I would say we’re continuing to win in the marketplace. I think this year has been particularly good and I think it has a lot to do with everything I was talking about to Lisa with our integrated assets, our ability to deliver cost has a lot to do with what we do with generics and our formulary strategy and the fact that we focus on service to both our clients and their members. So, they like our story and we’re very happy with the wins that we’ve had this year.

And maybe Dave, M&A activity has kind of picked up. You guys have obviously been quite selective and strategic the last few years. As you look at sort of the environment, both in assets here and maybe also abroad, how would you kind of characterize the pipeline and your sort of intent to maybe deploy a little bit more of the balance sheet? Obviously, you've done a great job on returning free cash but you've also been historically pretty prudent on the tuck-in side.

Yes, Ross, obviously M&A has been part of our DNA for a long time in our company. We’ve been very clear that as we think about capital deployment, one area to deploy capital is in kind of investing backward in organically in our business and we will continue to do that. I would say that at the same time, we’re going to be to your point very disciplined in how we approach the market. If you look at our asset base today, we don’t have any glaring gaps or holes in capabilities at this point in time. But as we said, to a degree that we can bolt-on assets that make sense that we have line of sight to both synergies and returns, we’ll do that. And I think that the market is still active in that perspective.

Great. And congrats again guys.

Thanks, Ross.

Our next question comes from the line of Steven Valiquette with UBS. Please go ahead.

Thanks. Good morning. So just one other quick one on the PBM selling season success that you've had, I'm just curious with it now 70% complete, can you draw any sort of conclusion that the decision to stop the retail tobacco sales may have helped you win some PBM business? I'm curious whether this has come up frequently in RFPs and investment (indiscernible) and has anybody cited that they chose you specifically because of that decision, just curious on that? Thanks.

Steve, I think it’s hard to point any one win and attribute to the tobacco decision. I can tell you that it’s had a lot of discussion with our clients. Obviously recognizing our clients and the fact that they’re working hard to get their members or their employees to stop smoking, they have applauded our decision. Listen, I think it’s one of those intangibles that again back to my earlier point about you got to be right on the basics and then once you’re right on the basics there, I think we have a lot of intangibles that collectively I think become something very meaningful in the client’s eyes.

Okay. Just one other quick one on the formulary restrictions; pretty topical this week, but it seems a couple years ago this caused a little bit of negative PR for CVS back in 2011, 2012. But now it seems like these changes are helping you or at least the negativity seems almost nonexistent now. So I guess I'm just curious, any thoughts or color you may have on why the psychology may have changed a little bit among your customers on the better receptivity to formulary changes now, let's say, versus a few years ago?

Steve, it’s a great question. I think if we rewind three of four years, I think what we learned with that decision was the strategy was right. And I remember talking – as we talked to clients back in late 2011 or early '12, the issue that they had that created the negatively was from an execution largely the timing of the communication, that’s where we were out of sync. We weren’t lined up with their benefit cycle. So I think once we made that course correction, which was an easy one to fix, I think that all the noise subsided.

Okay, that's great. Thanks.

Thank you.

Thank you. Our next question comes from the line of Peter Costa with Wells Fargo. Please go ahead.

Hi. Thanks, guys. Appreciate all the discussion about 2015. But moving back to the tobacco decision, is your view that it's still going to be about 2 billion in annualized sales that would be impacted by that decision or has that number changed given the fact you talked about sort of a double the 400 to 500 basis point impact on same-store for the fourth quarter?

Yes, we’re still tracking very much towards that $2 billion. The results we’re seeing are in line with what we expected and we said early on it would have a $0.06 to $0.09 impact this year and we’re tracking towards that.

And in terms of the impact on the same-store in the fourth quarter? That seems like that would be a bigger number.

If you just look at what we communicated, we said that in the third quarter that the exit of the tobacco category would be somewhere between 400 and 500 basis points to front store comp impact, negatively impact. And that rate would essentially double as we cycle into Q4. And so that’s essentially how you should think about modeling the progression of that.

And keep in mind that the $2 billion reflected tobacco sales, companion items within that basket and that is a full year revenue number.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch. Please go ahead.

Just one left. Do you have any guess or forecast in terms of what your share of the Caremark accounts could be by year end?

You mean dispensing share within CVS pharmacy?

Yes, CVS market share with Caremark plans. It was at 31% at the end of last year. Where does that trend to?

Yes, we don’t forecast that and disclose that.

Would it be something you’d give us at the end of the year at the Investor Day?

Typically it’s something that we discuss at Investor Day, yes.

Thank you.

Thanks, Bob.

Thank you. Our next question comes from the line of Charles Rhyee with Cowen and Company. Please go ahead.

Yes. Thanks for taking the question. Actually, I have another question on the exclusion lists. It seems like this time around from what I've read is you've kind of adopted more of also using prior authorization versus outright exclusion. Just curious on how you kind of make that decision? And then secondly, how do you manage for drugs that you exclude where companies – where the manufacturers then try to work around that? How do you communicate with your clients and how do you stop to make sure that your plans don't really – that you don't end up actually paying for that or your employers?

Yes. So, Charles, as far as manufacturers working around it, I think that’s the beauty of the exclusion program. They used to try to work around our formulary tiering through co-pay coupons. So once the drug is excluded, the member will have to pay 100% so it would be hard for a manufacturer to work around that. Our strategy around excluding has really not changed. We’ve always had prior authorizations. We do have the ability if a physician feels like a particular drug has a medical necessity that they have the ability to get to that drug, but it’s a very, very small percent of patients that have physicians that want to get them on a particular drug. So it’s really a safety outlook for them.

Great. And then just a follow up just on that in general. It seems like this is an area that not only yourself but some of your competitors are starting to really adopt more aggressively. Do you see that this is the next big tool for you to use and to really help manage costs down? So how do you see these lists expanding over time? Is this a big opportunity for you?

Well, we have the template exclusion that we’ve been talking about but we also have more aggressive formularies that clients can opt into. So the next step up excludes 170 drugs and then there’s another step that excludes 300 drugs which essentially is all generics. So we do see as we move into the out years, we’re going to be moving towards some of the more restrictive formularies that we think clients are going to be very interested in. So there’s a lot more work and a lot more runway here.

Great. Thank you.

Okay. We’ll take two more questions please.

Our next question comes from the line of Mark Wiltamuth with Jefferies. Please go ahead.

Hi. Could you give us what the specialty growth was organically excluding acquisitions?

I don’t think we have that, Mark. We can…

Hi, Mark. This is Dave. I don’t know that we really had any significant acquisitions in that number. Most of that is of [Coram] (ph).

But Coram is in there, right?

Other than that.

Okay.

I don’t know that off the top of my head. The growth rate is still organically significant.

Okay. And then maybe just give us on the generics a little timing on how you look at the break open market for generics here in the next 12 months or so? Maybe by quarter, where you think we’ll get some better opportunities on generic margins?

Yes. This is Dave, maybe I’ll touch that. I just want to say that the generic launch and break open schedules, if you kind of watch the market, those launch dates continue to evolve a bit. Some move out, some move in even since what we talked about at Analyst Day. And if you look at it, many of the '14 launches have been in flux. As we look into '15 I think some of the break open generics will look a little bit lower than we originally planned when we look back at Analyst Day in December of last year. But I would say it’s still very fluid at this point in time. We’ll continue to kind of assess the situation and give you updates as it becomes pertinent.

And second half of '14 versus the first half of '14, better or worse for generics?

You got to think about how we cycle to LY, so if you look at the cycle of our back half for this year to back half of last year is a little worse.

Okay. Thank you very much.

Okay. Last question.

Our final question comes from the line of Frank Morgan with RBC Capital Markets. Please go ahead.

Good morning. I was hoping to get a little bit more color on the PDP (indiscernible) for the balance of the year, is there any chance that there might be conservatism in the assumptions about the auto-assignees or the choosers you're taking? And basically give us a longer term view how you see next year playing out as well? Thanks.

Hi, Frank. This is Dave, maybe I’ll start here. I think if you look just from a PDP perspective the number of lives, the real I guess opportunity to gain lives is early in the year. So I think if you look to the balance of the year, I don’t think there’s a material change or opportunity that presents itself in the marketplace. As we cycle into '15, I think we’re encouraged by what we heard from a benchmark perspective. I think that although that’s what we’ve heard, we don’t really know what the opportunities are at this point in time. I think we have a very attractive product as we cycle into '15, but as far as the auto-assignees we’ll need to understand more fully how the market will evolve and we won’t know that for several more months yet.

Thank you.

Okay. And just limping back on Mark’s question on specialty, in our remarks we said specialty growth was 53%. If you back Coram out of that number, the growth was around 40%, so just bringing closure to that. So with that, let me thank everyone. I know this was a bit of a long call, but a lot of information and thanks for your continued interest in CVS Caremark.

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