Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2017 Earnings Call. During this presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. As a reminder, today's call is being recorded, Tuesday May 2, 2017. Now, I'd like to turn the conference over to Nancy Christal, Senior VP of Investor Relations. Please go right ahead, ma'am.

Thank you, Tommy. Good morning, everyone, and thanks for joining us. I'm here this morning with Larry Merlo, President and CEO: and Dave Denton, Executive Vice President and CFO. Jon Roberts, Chief Operating Officer; and Helena Foulkes, President of CVS Pharmacy, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up, so we can provide more people with a chance to ask a question. Please note that we posted a slide presentation on our website before the call. It summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operational performance and guidance. Later this afternoon, we'll be filing our Form 10-Q, and it will also be available on our website. During today's presentation, we'll make forward-looking statements within the meaning of the Federal Securities Laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the Risk Factors section and cautionary statement disclosures in those filings. During this call, we'll use some non-GAAP financial measures when talking about our company's performance. In accordance with SEC regulations, you can find the reconciliations of these non-GAAP items to comparable GAAP measures on the Investor Relations portion of our website. And, as always, today's call is being simulcast on our website and it will be archived there following the call for one year. And now, I'll turn this over to Larry Merlo.

Well, thanks, Nancy. Good morning, everyone, and thanks for joining us to hear more about our first quarter results. Total company revenues increased 3%, slightly above the high end of our guidance. We delivered adjusted earnings per share of $1.17, a slight contraction versus a year ago, but $0.04 above the high end of our guidance range. We generated approximately $3.1 billion of free cash during the quarter, and we continued on our path of delivering significant value to our shareholders through both dividends and share repurchases. Now, while we're pleased with our financial performance versus our expectations, we won't be satisfied until the total enterprise returns to sustainable, healthy earnings growth. Now, given our Q1 performance and the fact that it is still early in the year, we are maintaining our full year adjusted EPS guidance range of $5.77 to $5.93, and Dave will review the details of both our results and guidance in his remarks. Before diving into the business review, I do want to touch on the continued role that CVS Health plays in making health care more affordable, more accessible and more effective. We are continuously innovating to offer solutions that lower cost for our clients and members, and these efforts are driving meaningful results. Our recently published 2016 Trend report highlighted our PBM's commercial book of business trend coming in at only 3.2% compared to an unmanaged trend of more than 11%. At the same time, our members saw their out of pocket costs decline by 3%. We effectively purchase generics through Red Oak Sourcing using our size, scale and expertise. And we encourage generic utilization to drive down costs, with generics now comprising about 87% of scripts filled across the enterprise. To more effectively manage the cost of the remaining scripts, we employ sophisticated…

Thank you, Larry. Good morning, everyone. This morning, I'll provide a detailed review of our 2017 first quarter results, followed by a brief update on our guidance. As I always do, first, I'll start with a summary of how we continue to enhance shareholder value through our strong capital allocation program. During the quarter, we paid approximately $516 million in dividends, after increasing the quarterly cash dividend by 18% for this year. Our 12-month trailing dividend payout ratio currently stands at 36.8%, but keep in mind that this ratio was artificially high, as it includes some expenses that are more temporary in nature, such as the loss on the early extinguishment of debt that we incurred LY, as well as the other items described in our non-GAAP reconciliations on our website. Nevertheless, we remain well on track to achieve our targeted payout ratio of 35% by the end of 2018. In addition, we have continued to repurchase our shares. In the first quarter, as part of our previously announced accelerated share repurchase program, we bought back approximately 36 million shares for about $3.6 billion. So between dividends and buybacks, we returned approximately $4.1 billion to shareholders in the first quarter alone. You should also note that the final receipt of shares from the ASR occurred in April, closing out the transactions a little earlier than anticipated. In total for the ASRs, we repurchased approximately 46 million shares at an average price of $78.74 per share. Looking forward to the remainder of the year, we have about $14.6 billion left in authorizations to repurchase shares, and we continue to expect to repurchase $5 billion for the full year. As a result, our expectation is that we will return more than $7 billion to our shareholders in 2017 through both a combination…

Okay. Thanks, Dave. And you may recall back in November, we outlined a four-point plan to return to healthy growth, and I think today you heard us describe examples of the progress that's being made in each of those areas. And we're certainly focused on leveraging our enterprise capabilities and CVS Pharmacy's compelling value proposition to partner more broadly with other PBMs and health plans. Second, we're focusing on driving growth through new PBM product introductions that capitalize on the benefits inherent in our unique integrated model. Third, to continue to be a low-cost provider, we're working on a multi-year enterprise streamlining initiative that'll generate cumulative savings of $3 billion by 2021. And finally, we continue to be very thoughtful with respect to using our strong cash generation capabilities to return value to our shareholders. Before we go to the questions, I do want to personally thank Nancy for the terrific job she has done for many years now and congratulate her on her pending retirement, and also congratulate Mike McGuire on his well-deserved promotion. So with that, let's go ahead and open up the lines for your questions.

Certainly. Thank you very much. And we'll get to our first question on the line from Michael Cherny with UBS. Please go right ahead.

Good morning, Michael.

Hi. Good morning and thank you for all the detail so far. I know it's a little early to give exact details on the selling season, but given the volatility seen across the PBM market, could you talk about just also qualitatively how this selling season discussions have changed early on, what people care about in terms of whether it's transparency or network performance, restricted network, I guess, some of the other trends that versus previous years may be different, particularly given a lot of the noise across the market and that question, which I think you did a good job answering, of why the PBM continues to deliver value?

Yeah, Mike. It's Larry. I'll start and I think Jon'll jump in as well. Again, acknowledging that we just had our Client Forum last week, we had a great opportunity to meet with a very, very diverse group of our clients. I would say the dialogue hasn't changed dramatically from what we've seen the last couple of years. I think there continues to be a focus on cost. And obviously, we've got a great story to tell there in terms of the ways that we can deliver value. And, at the same time, your question on transparency, obviously, that had gotten increased dialogue. I would say that clients want the flexibility of plan designs to meet their diverse needs. When it shakes out, I think that we'll continue to see steady movement in adoption of some of the products and services that you've heard us talk about many times.

And Mike, this is Jon. So obviously, cost is very important, but it's not the most important. And the environment remains competitive but rational, so not really a change over the last several years. Clients, something very important to them is the service we provide to them as a client, but also the service we provide to their members. And that's a reason you can actually lose a client if you're not delivering good service. And our service levels are at an all-time high. And thirdly, they're more focused today, than I would say they were several years ago, around this ability to manage overall health care costs. And when we introduced our Transform Care diabetes program, that's really all about managing overall health care cost for diabetics. The response we got was very positive around this program. We also introduced a value-based network, which is going to be a skinnier network, but the network will be expected to perform around certain clinical outcomes around adherence, which clients know lower overall health care costs. So a lot of receptivity and focus around helping them manage their overall health care costs, not just their pharmacy benefit, which I think five years ago, was their primary focus. So this has been a gradual shift in the market over the last several years. And candidly, our assets and how we go-to-market and our ability to reach the consumer and change their behavior and lower overall health care costs, has had a lot to do with our success in the marketplace, and we continue to be very successful.

Great, thanks so much and congrats again to Nancy and Mike on your new roles; Nancy, your retirement.

Thanks.

Thank you very much. We'll get to our next question on the line from Ricky Goldwasser with Morgan Stanley. Go right ahead with your question.

Yes, good morning and congrats on the quarter. Nancy, really enjoyed working with you, so best wishes for the retirement, and, Mike, congratulations for the new role. I have a follow-up question on the selling season. So first of all, Larry, you highlighted HTA in the prepared remarks. What is the key difference between HTA and other coalition businesses that you service?

Well, Ricky I think that with HTA, as we've talked, you've got several Fortune 100 companies, so you've got pretty sophisticated purchasers of health care in there. I would say that, in some respects, short-term, there's probably not a big difference between what HTA is focused on and what are other coalitions are focus on. I think that their short-term goal is to make sure that they're getting unit price right, like all buyers, okay. I think longer term, I think there's going to be a bigger focus in terms of how HTA can lower overall health care costs. And I think that we're in a great position to play a major role in providing solutions by leveraging our integrated assets to improve patient care. It really picks up on what Jon was just talking about. So I see it as a short-term, long-term opportunity.

Okay. And Aetna, on their call this morning, talked about the fact that they're trying to look for ways to work closer with you. So how do you view the relationship with Aetna? What are the ways that you can work closer together? And with that respect also, when do you expect to unload all of the Coventry business? When is that going to be completed?

Well, Ricky, I'll take the first part, and then flip it over to Jon on Coventry. But, Ricky, I think we have a terrific relationship with Aetna. I think our teams have been working extremely well together, recognizing that for the first few years, the focus was all about integration and how do we do all the, I'll call it, the blocking and tackling work to create a common platform that can service the diverse clients that they have across their network. I would say for the last few years, now that we've got that in the rearview mirror, the focus has been how can we create value for Aetna, their members, and obviously for us in there. And I think that we've done some terrific things working together. I think as we go forward, you've heard us talk about how the patient of health care is now becoming a consumer of health care. And if I go back to Analyst Day, we had talked about when you look at all different customer touch points that we have with health care in mind, you can describe it as we have the front door to care and, at the same time, we're delivering the last mile of care. So I think the opportunity is not just in terms of what we can do across our pharmacies, but now you think about Infusion in the home, the role of MinuteClinic, now Long Term Care, I think that there are some exciting opportunities as we think about partnering more broadly. Jon, do you want to cover Coventry?

And then on Coventry?

Yes. So, Ricky, Coventry will be moved by the end of this year. So we've been moving it over the last several years. We're almost complete with that effort.

Okay. Thank you.

Thank you very much. We'll get to our next question on the line from the line of Scott Mushkin with Wolfe Research. Please go right ahead with your question.

Hey, guys. Thanks for taking my question. And, Nancy, I'm not sure I'm going to survive without you, but picking Mike was an outstanding pick, so I'm excited that he got the job, too. So it's great news.

Thanks, Scott.

I have two questions, and I guess the first one's more short- term oriented. Why the slightly worse outlook for Retail?

Yeah. This is Dave, Scott. I think what you're seeing here is probably if you look at our guidance range for Retail, it was probably abnormally high. We've now, I'll say, narrowed that range. And I think it was more of us looking at the future and saying, what would it take us to get to the top end of that range, more than I'll say a disappointment from an outlook perspective. So think about it as narrowing the range and not seeing, at this point in time in the market, a catalyst to get us to the top of that range.

And, Scott, when Dave's talking about range being higher, he's really referring to the guardrails associated with that range. The width of that was broader than it had been historically, simply because of all the change dynamics going on.

Okay. And my second question is more strategic as we think about 2018 and beyond, and I thought it was interesting in the release you said you won't be satisfied until you return to growth. I think, Larry, you said that. I guess my question in 2018, what do you think like the two or three levers are to get you to return to the growth, outside of M&A, like internally in your business, as you think about it as we look at 2018 and 2019, to reinvigorate growth? And then I'll yield. Thanks.

Scott, this is Dave. There's probably not one thing to that. I would say that obviously we have to continue to execute on the plan that Larry articulated around plugging into payors in more meaningful ways to drive value for them, but also move dispensing volume into one of our channels. That'll be key to us as we think about growth over time. We continue to need to execute from a selling season perspective to gain lives within our PBM business, but importantly convert those lives, again, by selling in our integrated products to, again, drive value for those clients and move share into one of our dispensing channels. And we're continuing to focus on the cost side as we think about the things that we need to do to be more productive, both in the PBM business and in the Retail business and the Long Term Care business. We're making investments this year that will deliver for us over the next many years significant savings to drive performance. So all of those collectively need to work together to drive our performance in 2018 and beyond. And don't underestimate the importance of bolt-on acquisitions. Those are part of our targets. We continue to look for ways in which we can supplement our business to drive synergies for our business and expand our scope of services through the enterprise. So I think all of those will be important as we think about 2018.

That's great. Thanks, guys. Good answer.

Take care.

Thank you. And we'll get to our next question on the line from Lisa Gill of JPMorgan. Please go right ahead.

Thank you. And, Nancy, I will definitely miss working with you. I wish you the very best in your retirement. I hope you enjoy it and, Mike, congratulations. But, Larry, let me just follow on to the last question, and as we think about the bolt-on acquisitions and other strategic things that you could do in the marketplace, you talk about managing overall health care costs. I know I've asked this before, but do you think about owning a health plan? Is that something that you think would fit within the core assets of what you're trying to deliver from a health care perspective?

Well Lisa, I think some of this, it does go back to the last couple questions, and if you look over the last couple of years, we have certainly broadened the base of services that we provide. That has enabled us to touch more of the health care spend, creating value for respective stakeholders. And, as I just mentioned a minute ago, we've been talking about this retailization of health care, where patients are becoming consumers. And we've got some very, very important assets. As that continues to gain traction, when you think about all the different consumer touch points that we have and all the different ways we engage with those consumers, whether it's on the front-end or delivering directly the care. So, listen, we're always looking for additional ways to capitalize on that. And that's the work that we do and we remain open to those thoughts and opportunities as they come up.

And as we think about the store, you talked about MinuteClinic Infusion, bringing that to Long Term Care, and I understand the bridge of all of those things. What are some of the other things that you think you could bring into your store to continue to drive the health care offering? I mean, do you think about things like vision or hearing or other services like that?

Yeah, Lisa, I think you'll recall that we've talked about some of the pilots that we currently have underway, okay, with both vision and audiology. I think we're certainly continuing to focus in terms of the role that MinuteClinic plays and how we can broaden the scope of services that we provide, again, with quality as a key attribute. I think we're pretty excited with the opportunity that's been created with the Veterans Administration. I think that is very unique, recognizing some of the challenges that exist in terms of veterans getting timely access to care. And the pilot program that was kicked off last year in Northern California was successful. And as you may have seen two weeks ago, it's been expanded now to the Arizona market. And I think there's optimism that we can expand it even more broadly across that. So I think, again, it's something that continues to be a focus, and more to come.

Hey, Lisa, this is Dave. I also think probably the biggest opportunity we have in the short term is you think about, I'll say, care management and think about care management from a pharmacy perspective, a patient is in our pharmacy typically several times a month. Certainly, patients with greatest needs are in several times a month. We've built an infrastructure within our pharmacies that come to life through our engagement tools at the counter that enable us to really intervene with that patient and coordinate their care across spectrums of health care, much broader than just pharmacy. And some of our health plans are beginning to tap into that capability, but I think if you look to the future, you could see that expanding pretty dramatically for us to even be more impactful as we think about how that patient manages their total health care.

And, Lisa, if you just think...

And do you envision getting paid for that? I'm sorry. Just before, Larry, before you continue, do you envision getting paid for that service or is this just more of how we get paid is we're going to have more scripts through the CVS store?

I think it's a little bit of both, Lisa, but I do think as you think about it, think about if you narrow the network, getting more patients into our channel, we can deliver better outcomes and bend the cost curve even more dramatically. So I think you're going to see a combination of share capture, from that perspective, but also there's probably some revenue stream tied to it as well

And Lisa, some of this goes back to the notion, and you've heard us allude to this in the past, that as you think about a future network, pharmacy network, it won't simply be defined by price. It'll be defined by capabilities through a clinical lens, as Dave outlined. And if you think about, we mentioned Transform Care in our prepared remarks. And the first disease state focuses on diabetes. And you think about the fact that that diabetic patient visits their doctor four times over the course of a year, but they visit the pharmacy more than 30 times. So the opportunity to engage in a differentiated way speaks exactly to what Dave was talking about.

Okay, great, very helpful. Thank you.

Thanks, Lisa.

Thank you. And we'll get to our next question on the line from David Larsen with Leerink. Please go right ahead.

Hi. Congratulations on a good quarter. Can you talk a bit more about the Transform Care program and your value-based clinical programs? Are you working with the manufacturers and like allowing them to bear some financial risk with some programs? And are you working with other retail chains beyond like the CVS stores to engage in some sort of risk-bearing programs with them? Thanks.

Yeah, Dave, this is Jon. So Transform Care, as we talked about, is focused on diabetes. We have for other disease states that'll roll out over the next 24 months. And that program starts by moving their members into one of our channels, so either retail or mail. And that way, we get to apply all of the programs that we have, from connected glucometers to coaching by nurses, free MinuteClinic visits. We put guarantees around the trend. So we will be engaging with pharma around value-based contracts, and diabetes is a good example. We haven't announced those yet, but there are certain drugs in that category, as an example, that may be effective on their own, but sometimes you have to add a second drug. And if you add a second drug, we would get a reduced cost, as an example. So we do believe there's a real opportunity to bring pharma into the fold as we roll-out these programs. And then, as Larry mentioned, we actually launched at our Client Forum last week, a value-based network for the commercial space. And this will be working with other retailers around other programs beyond diabetes, where they will have certain clinical goals that they'll have to execute on, and their reimbursement will partly be tied to their ability to deliver. And that'll be a smaller network, say, in the 30,000 to 40,000 store range, so those retailers will get more volume into their channels. The clients get an actual unit cost savings because they're moving into a smaller channel, and then they get overall health care-lowering programs based on the clinical results that these stores deliver. So it is a comprehensive program. Some of it will be focused exclusively in our channels for very high cost, fragile patients, like diabetics. Other programs will be in value-based networks, so it'll be smaller than the broader networks. And we believe this is where the market is going. And based on feedback we had from our clients last week, they are aligned with the direction we're moving in.

That's great. And then Jon, I think you were recently promoted to the COO role, which I think means that you now have Retail reporting to you as well. Is that true? And then, what are you sort of most interested in doing with regards to the Retail business and the strategy; any general thoughts on how that strategy might evolve, from your perspective? Thanks.

Yeah, Dave, so, yes, I now do have responsibility for Retail and really all the operating units within CVS Health. And the purpose of this role is to bring innovation to the market faster. That is really going to be my focus. And by having these business units actually work more closely together and more coordinated, we think we'll be able to bring innovation to the market much faster than we previously have.

Okay, great. Thanks.

Thank you very much. And we'll get to our next question on the line from Robert Jones with Goldman Sachs. Please go right ahead.

Thanks for the questions, and let me also offer my congratulations to Nancy on the retirement and Mike on the new role. I guess just looking at the decrease in scripts that you guys called out from TRICARE and Prime specifically, sounds like you're saying that it had about a negative $14 million claim impact in the quarter. I'm just curious if you could talk about how that's trending relative to the full year expectations that you guys shared with us back at Analyst Day, if you've seen any changes in the marketplace that were kind of outside of what you had anticipated around those two situations.

Yeah, I don't think we've seen anything dramatically change from our expectations as we think about that. You can't really look at it quarter-by-quarter because you do have some seasonality in there. I do think it's important, if you look at our delivery in Q1 from a script perspective, we were kind of right within the middle of our range. So in totality, our script unit growth has been pretty consistent with our expectation. And if you further fast-forward that through the balance of the year, our expectation for script growth has not changed in any material fashion.

Great. I guess just a quick follow-up on the Aetna relationship, it does sound like they're putting out there that they are looking to evaluate all options with you. So I guess, in your mind, you touched on this a little bit, what could that look like? And I guess the more important question that I'd have is there anything specific within your current Aetna contract that would restrict you from taking on other large health plans?

Maybe I'll hit that one first, and then I'll turn it over to Larry. Obviously, today, we service probably a little over 70 health plans today, many of them in a pretty deep relationship. So there's really nothing that would preclude us from driving value with others in the marketplace from a health plan perspective.

Yeah. And, Bob, I think the first question, I think it goes back to the theme that you heard Jon talk about. I talked about it earlier, deeper integration around the clinical opportunities or clinical products, services that can be provided across our breadth of assets. And I think you heard some examples of that today, and I think there is a lot of white space there that we can work together on.

Got it. Okay. Thanks, Larry. Thanks, Dave.

Thanks, Bob.

See you.

Thank you very much. And we'll get to our next question on the line from Charles Rhyee with Cowen & Company. Please go right ahead.

Yeah. Thanks for taking the questions. And congratulations to Mike and good luck with everything, Nancy, good working with you. My question was going back to Transform Care, and just quickly on the diabetes program, can you talk about what has the uptake been, how it's being packaged in the offering in the current selling season and what kind of guarantees are you giving in terms of managing trend? What are the metrics that you're looking at? Thanks.

Yeah. Charles, this is Jon. So we've got a couple clients that are in pilot now, and we're signing clients up for January 1, 2018. Still early in that process, so we'll have more to say about that later this year, but I would say, again, clients seem very aligned to this concept. And they're thinking about these diabetics very similar to how they're thinking about specialty. So specialty, most of these clients move those members into our channels because they need a higher level of care. Well, now we're extending that to diabetes and to other disease states. And we're guaranteeing a drug trend and that's client-specific based on their mix and utilization, so we actually have to do a specific underwriting for each of those. So there's a unit cost benefit to the clients as well as the ability to lower overall health care costs that we think can be a significant savings for them. So we're very bullish on this program and excited to be launching it.

You talked about providing other services around that in terms of coaching, et cetera, to keep members compliant, adherent to therapy. Can you talk about what kind of technology assets you're using to help drive that as well?

Yeah. So an example is we'll be giving members a connected glucometer. And as they test their blood sugar each day, it goes up into the cloud and is monitored by our teams. And when we see somebody off track, there's an intervention with them with a nurse to talk about what they need to do to get their blood sugar back under control and back on track. These coaches will also work with them on things around diet and making sure they're following up and having the right tests around eye tests and foot tests. We'll be able to offer those services as part of this program for free in MinuteClinic. And so all this information will be collected and monitored. And we think we'll have a very much higher reach rate than you see in a typical disease management program. So all of this is now being implemented in the pilots that we have up, and we think the results are going to be pretty compelling.

Is that a third-party device or is that something self-developed?

Yeah. We'll be working with a third-party on that.

Okay, great. Thanks a lot.

Thank you very much. And we'll get to our next question on the line from Steven Valiquette of Bank of America Merrill Lynch. Please go right ahead.

All right. Thanks. Good morning, Larry and Dave. Let me offer my congrats to Nancy and Mike as well. Hey, Nancy, I think we've spoken for just about all of those 22 years, so I'm clearly doing something wrong if I'm not retiring yet, but that's just...

Steve, you don't know how she's put up with us for 22 years.

Just a question on Anthem. I know there's obviously not too much you can really say at this stage in relation to the Anthem RFP, but just at a high level, I think the investment community is assuming that this is an opportunity that would likely be attractive to you. So I'm hoping you can at least confirm that, if that is the case. And then just further, my belief is that you guys would have no capacity issues or conflicts taking on this business, but some investors still seem to keep asking us about whether any of your existing managed care relationships would make it maybe more difficult for you to take on Anthem. So I'm hoping you could maybe just clear the air on that subject a little bit as well. Thanks.

Yeah, Steve, it's Larry, and I think Dave alluded to this earlier that there is nothing that precludes us, either contractually or capability-wise, from adding to our business portfolio. And we've grown our health plan business quite nicely over the last couple of years. And we've now got more than 70 health plan clients that I think that we can work with each one in a very unique and differentiated way to satisfy their goals and objectives. And we have a guiding principle that as we work with them to make them more competitive in the marketplace, as they grow, we grow. And I think that speaks a lot to the investments that we've made, especially on the PBM side of the business, that we brought on billions of dollars of new business over the last three, four, five years. And our welcome seasons have only gotten better each year as a result of the investments and the capabilities and, quite frankly, the talent that resides within the organization and the learnings that we get from each year that makes next year better. So, listen, we look forward to continuing to grow the business.

The other thing I would add is that there's been a lot written about the disruption that happens when you move business, and the industry has evolved a lot over the last four or five years. We now have automation, so a lot of these new clients are implemented in an automated way. And then, our testing platform now employs artificial intelligence, where we crawl through the claims and look for anything that's unusual. And so that has resulted in what I think have been very successful welcome seasons over the last several years. So we're very confident in our ability to implement new business, large and small.

Okay. That's great. Thanks.

Thanks, Steve.

Thank you very much. We'll get to our next question on the line from Alvin Concepcion from Citi. Please go right ahead.

Thanks for taking my question and, Nancy, Mike, congratulations to you both. It's been a pleasure working with you, Nancy.

Thank you, Alvin.

Just a follow-up on that question, just broadly, your strategy on acquiring large books of business on the PBM side, would you ever make exception and pursue a deal as a loss leader or if not at least significantly below your typical EBITDA for script metrics?

Well, hey, Alvin, this is Dave. As you well know, when we implement a new client, typically, we implement that at very thin margins and then we work to sell in our programs and drive substantial value for that client over the long term. And typically, you see our margins enhanced over that. As I think you know, and we discussed it earlier today, we've been very disciplined in our pricing. We have historically had very high retention rates, but our retention rates haven't been at 100%, indicating that we've been focused on underwriting each client at the appropriate return on investment, looking both to the short term but, more importantly, to the long term in our relationship with that client.

Thanks. And just a follow-up about Maintenance Choice 3.0, I'm just wondering if you could talk about progress there and consumer response and impacts you're seeing.

Yeah, this is Jon. So, again, we introduced Maintenance Choice 3.0 at our Client Forum. The reception was, again, very positive, and you really think about all the ways we can service now a member, and members define convenience in very different ways, from: some people like mail; some people want to go to retail. We now have drive-thrus. We have Curbside. And now, we'll have home delivery within one to two hours. And it's not only for the prescription, but it'll include front store products as well. And so we think that the flexibility, access, and convenience that we will be able to bring to the marketplace with Maintenance Choice 3.0 will, again, make what is a very attractive benefit even that much more attractive.

Great. Thank you very much.

Thank you. We'll get to our next question on the line from Eric Percher with Barclays. Please go right ahead.

Thank you. I think an area we haven't focused much on is specialty and the role that specialty is playing in the coming selling season. I know there's been a lot of focus on Specialty Connect. We saw the EMD Serono report out, and a lot of focus there on data integration and managing medical alongside pharmacy. Could you speak to some of the areas where you've invested and what you're focused on within specialty this year?

Yeah, Eric. So this is Jon again. We have a capability that is fairly unique in the marketplace, and that's NovoLogix, which gives us the ability to manage the specialty spend under the medical benefit, which is, quite frankly, half of the specialty spend. So we're up to now over 60 million members being managed through this capability. And you combine that with what we're able to do on the pharmacy side of specialty through Specialty Connect, through our disease management program, where our nurses not only manage the member's specialty condition, but all their comorbidities, and we have a reach rate that's 13 times greater than a traditional disease management. So we think we have a comprehensive, complete solution for this marketplace. And it's a very high priority for our clients. And our capabilities and story resonate very well.

Jon, what does that NovoLogix 60 million represent? I imagine that's not a full data set of all medical or can it be?

Yeah. We can manage all of the specialty under the medical spend. And it's a combination of prior authorization capabilities, repricing with some of the edits that you see on the pharmacy side that medical platforms aren't capable of managing, and also site of care. So it manages moving specialty from higher sites of care to lower cost sites of care

Eric, it's Larry. One of the things that we heard from the Client Forum last week, with a select group of clients, and it certainly warrants additional follow-up, but I think the lines are blurring more than ever in terms of the component of pharmacy that's going through the medical benefit and the complexities that that's creating for the health plan. And I think there is an opportunity, to pick up on what Jon was talking about, in terms of creating an even more robust and meaningful solution. That's something that we're going to be talking to those folks more about.

And, Eric, the last thing I would add is, as you know, there really hasn't been much control on the medical side because the medical platforms aren't capable of doing that. So this now allows us to begin to manage formularies on the medical side, which we think can bring value to the marketplace and the payors.

Well, thank you for that, and I'll extend my congrats to Nancy and Mike. Thank you.

Thanks.

Thank you very much. We'll get to our next question on the line from Mohan Naidu with Oppenheimer & Company. Please go right ahead.

Thanks a lot for taking my questions. Maybe, Larry, you commented about engaging patients more actively. Can you talk about the role MinuteClinics can play there and perhaps any opportunities to expand your services in the clinics to maybe increase the foot traffic and also offer more services for patients?

Yeah, Mohan. I think if you go back in probably, I'm going to say, over the last two years, as a result of rolling out the [FATHR], (71:26) we have broadened our scope of services. I think we now have over 30 of the top 50 acute conditions with which we're now seeing patients. And I think one of the things that I think is probably an even bigger opportunity is we've established these relationships with some leading health institutions. Some of those institutions are getting into care management in a bigger way. And the opportunity to triage patients back and forth, I think, in the form of chronic care management, I think is a big opportunity. We've talked about some examples of that over the last few months, the VA being one, as an example. So, I think there's more opportunities there. I think as technology continues to move forward, that also may be a conduit for expanding the scope of practice there as well.

Okay. Any thoughts on perhaps adding like labs or leases or anything like that clinics?

Yes. We do. As you think about labs, we do some of that today in the form of point-of-care testing. And I think that's an area that we continue to monitor with technology always changing in that space.

Okay. Thanks, Larry.

Thanks. All right, we'll take two more questions, please.

Certainly. And we'll take our next question from the line of Brian Tanquilut with Jefferies. Please go right ahead.

Hey. Good morning, guys. Just to follow up on the questions on specialty and piggybacking on your comments earlier about maintaining pricing discipline and trying to think about growth going forward, so as we look at the FEP specialty contract loss that's upcoming in 2018 and what Prime is doing in the market, I mean, how do you look at the competitive dynamics that they bring to market in terms of the risk that they would try to shake it up and win more business? How do we get confidence that this is a one-off rather than a possible trend in terms of pricing and just the competitive nature, specifically on the specialty side or even the PBO side?

Well, Brian, listen, as you look at Prime, obviously, they're a well-respected competitor. And we would describe them as competing effectively for business, particularly in the Blues plans. And I think as you know, FEP has a very important relationship with the Blues plans in which their members exist. And that said, it does remain to be seen how attractive their model will be outside of the Blues plans which, I think as you're probably aware of, make up the vast majority of their membership today. Listen, we continue to believe that the alignment and the integrated model that we have continues to give us an advantage in the marketplace. And going back to the FEP contract, we retained the clinical elements associated with managing the specialty patients, which I think is evidence of the integration of our model and the value that that brings for clients.

I appreciate that. And then just a follow-up on the store closings, how much runway do you think you have left in terms of just the number of stores that are out in the market that you could close down or just a cost opportunity, if you're willing to size that?

Yeah, this is Dave. I think our store base, we've been pretty disciplined over the past decade or so in building out our stores. I don't think we have a big store rationalization effort underway, absent I'll say just trimming what we did this year.

All right. Got it. Thank you, guys.

Take care.

Thank you very much. And we'll proceed with our final question on the line from John Heinbockel from Guggenheim. Please go right ahead.

I'll add my congratulations to Nancy and Mike as well, here at the end. And so, Larry, two things; when you think about how difficult the pharmacy business is for those without scale, and I think you just picked up some pharmacies from Marsh, what's sort of the prognosis, do you think, for doing more of that, whether it's a small player like that or someone bigger, like Target? It would almost seem like that's something that would have to happen over time if some of these retailers are going to preserve economics in that business.

I'll start. This is Helena. We continue to look in the marketplace and see opportunities, to your point, just given the pressure in the business. And I would say historically, we would look at smaller players and think about buying their files or opening up a new CVS. And I'd say a recent change in strategy is probably to be a little bit more aggressive around looking for those opportunities. But as well, I think I might have mentioned before, we're looking at more buy-and-operate opportunities, where we can go into a marketplace with a small-scale player who serves a great set of customers – we don't have a CVS nearby, and it allows us to then serve a whole new group of customers, which is not just a retail play but obviously, a PBM opportunity for us to serve these new customers. And for us, ultimately, it's about taking advantage of scale and all these integrated capabilities that we have. So we're thinking very differently, both in terms of how the other players in the industry are reacting to the pressure, but also about building our integrated model as a result.

Do think some of the larger guys are rethinking the need to own that pharmacy relationship, or no? Because I think that's been the hindrance for some of them in getting out of it, right? They want to continue to own that relationship.

Yeah, John, it's Larry. Listen, it's hard to answer that question with a broad brush. I do think that for some of the reasons that you heard Jon talk about in terms of how network constructs evolve with not just price as the variable, but price and clinical capabilities, I do think that that could be the triggering point that gets people to look at things differently because, obviously, a grocer has a different value proposition or a different lens in terms of the role that pharmacy plays. And if all of a sudden, they're on the outside looking in, I think that that may change how they view what's important.

Okay. Thank you.

All right, thanks, John, and let me just take a minute to thank everybody again for your time this morning. And if you have any follow-up questions, Nancy and Mike are available. So thanks, everyone.

Thank you very much. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day, everyone.