M&A announcement

Dec 4, 2017

Summary

The deal combines pharmacy, medical benefits, and community care in a consumer-focused platform, with a $77B transaction value and H2 2018 close target. Management expects $750M in synergies and low- to mid-single-digit accretion in the second full year after closing.

Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health and Aetna joint call to discuss this transaction. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Monday, December 4, 2017. I would now like to turn the conference over to Mike McGuire, Senior Vice President of Investor Relations at CVS Health. Please go ahead, sir. Thank you, Susie, and good morning, everyone. Thanks so much for joining us this morning to hear about the definitive merger agreement we announced yesterday to acquire Aetna, one of the nation's leading diversified healthcare benefits companies. I am here this morning with CVS Health's President and CEO, Larry Merlo, and CFO Dave Denton, as well as Aetna's Chairman and CEO, Mark Bertolini, and CFO Shawn Guertin. Following our prepared remarks, we will open it up for your questions. During the Q&A, we ask that you please limit yourself to one question with one quick follow-up to allow more people a chance to ask their questions. At last count, combined, we have 53 analysts who cover us, so it will be a challenge to get to everyone during this call. Before we get into our remarks, in light of this pending transaction, I want to announce the cancellation of the CVS Health Annual Analyst Day scheduled for December 12, as well as the cancellation of Aetna's Investor Day, which was scheduled for December 14. We apologize for any inconvenience this might cause. Because the CVS Health Analyst Day is typically our forum to provide guidance for the upcoming year, please note that we now plan to issue 2018 guidance during our fourth quarter 2017 earnings call in February. Additionally, please note that today's presentation is neither an offering of securities nor solicitation of a proxy vote. The information discussed today is qualified in its entirety by the registration statement and joint proxy statement that CVS Health and Aetna will be filing with the SEC in the future. The shareholders of CVS Health and Aetna are urged to read those filings carefully when they become available, because they will contain important information about the proposed transaction. Additionally, during this presentation, we will make certain forward-looking statements that reflect our current views related to our future financial performance, future events, and industry and market conditions, as well as forward-looking statements related to the acquisition, including the expected consumer benefits, financial projections, synergies, financing, and the timing for the completion of the transaction. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what may be indicated in the forward-looking statements. We strongly encourage you to review the information in the reports CVS Health and Aetna file with the SEC regarding these specific risks and uncertainties, in particular those that are described in the risk factor section of CVS Health and Aetna's most recently filed annual reports on Form 10-K and the cautionary statement disclosures in our respective quarterly reports on Form 10-Q. During this call, we will also use some non-GAAP financial measures when talking about the performance of CVS Health and Aetna, including adjusted EBITDA. 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. Also on the investor relations portion of CVS Health's website, you can find a page dedicated to this transaction, including a presentation that outlines the strategic rationale of the transaction, as well as the compelling benefits this transaction will create for our stakeholders. The page also contains the press release we issued yesterday, an investor fact sheet, and will include a link to the relevant SEC documents associated with the transaction. That website will be updated as we work to close the transaction during the upcoming months. As always, today's call is being webcast on our website, and it will be archived there following the call for one year. With that, let me turn it over to Larry Merlo. Okay. Well, thanks, Mike, and good morning, everyone. Thanks for joining us again on short notice. Yesterday, we announced that we have entered into a definitive merger agreement to acquire Aetna, a leading healthcare benefits company that serves more than 22 million medical members across their diverse book of business for a purchase price of approximately $69 billion. With the assumption of Aetna debt, the total transaction value is $77 billion. This transaction will create a leading healthcare platform that will revolutionize the consumer healthcare experience. This compelling strategic combination will unlock meaningful value for patients, payers, providers, and shareholders. For healthcare stakeholders, we will deliver high-touch connectivity to consumers and improve the quality of life while driving efficiencies and lowering the cost of care. For shareholders, not only does this transaction make sense strategically, but it also makes sense financially. As many of you know, CVS and Aetna have been close partners for most of the past decade since we entered into a strategic agreement to provide pharmacy benefits to Aetna members. We shared a vision of the critical role that pharmacy care plays in delivering quality outcomes with lower overall healthcare costs. As partners, we have worked diligently together to deliver on those goals to improve care for Aetna members while providing competitive pharmacy pricing to allow Aetna to continue to expand its book of business. Although we have taken steps to deepen our relationship, we both recognize that to truly impact patient health and lower costs, more needs to be done. What we are announcing today is the natural evolution of our two companies, a combination of two great organizations with the expertise to remake the consumer healthcare experience. Together, we plan to build an entirely new healthcare concept based on the principles of making care easier to use and more affordable while offering consumers the ability to interact with trusted and familiar healthcare experts in their communities all across the country. Independently, CVS and Aetna have been able to utilize their enterprise strengths to deliver significant value, both to the clients that we support, as well as the members that we serve. CVS delivers value through its unparalleled reach, significant scale, and deep clinical expertise to support healthcare stakeholders. Aetna delivers value through its world-class consumer health and engagement model, offering innovative plan designs and best-in-class service. We know this value can only be enhanced by tighter integration of pharmacy and medical benefits management with unmatched consumer touchpoints. The current U.S. healthcare system is failing too many people. Healthcare costs continue to rise, and a paradigm shift is needed to bend the cost curve and put spending back on a sustainable path. Our current system of fragmented care has made some strides to control costs, but more is needed to truly impact the trajectory of healthcare spending. Through our integrated healthcare management and delivery platform, we will be able to better coordinate care, eliminate waste and unnecessary spending, and drive efficiencies throughout the entire healthcare system. This will not only lead to better care for patients, but also lower costs for payers. We also see the ongoing aging of America, with more than 10,000 baby boomers turning 65 every day. By combining Medicare Advantage with our Medicare Part D assets, we can more effectively serve our Medicare beneficiaries, and this will enable us to improve our quality metrics and become more competitive in this fast-growing segment of the market. We continue to see the shift of healthcare decision-making into the hands of the consumer, and this trend was intended to empower healthcare consumers, but has frequently left them without the tools necessary to make informed decisions. So we will use our high-touch connectivity to become the front door to healthcare for consumers. We will also improve consumer engagement by marrying physical and digital touchpoints with a broader use of data and analytics capabilities to inform healthcare decision-making and help patients navigate the complex healthcare system. Additionally, we see the healthcare marketplace evolving into a more value-based system, where a premium is placed on the efficiency with which care is delivered, and we will become a leader in driving further adoption of value-based care models through our combined assets, promoting lowest cost sites of care, eliminating unnecessary spending, and enhancing our clinical programs. By integrating data across our enterprise assets and through the use of predictive analytics, we will create targeted interactions with patients to promote healthy behaviors and drive adherence, and this will further improve the quality of care for patients while also resulting in healthier outcomes. Before passing this over to Mark, I want to emphasize a few important points. First, this transaction will not in any way diminish the strong relationships CVS and Aetna have with our clients and their healthcare partners, nor will it reduce the value that we both create for them every day. CVS has a long history of developing solutions that deliver on the cost-quality access goals of our partners, and we see no reason for that not to continue into the future. As we have shown with the merger of CVS and Caremark, we have the ability to integrate where needed while maintaining the necessary firewalls in order to protect client data and ensure competition. Second, upon the closing of the transaction, Mark and two other Aetna directors will be joining the CVS board of directors, and I am excited to welcome Mark and the others as we embark on this shared purpose, and I look forward to continuing to benefit from Mark's vision and expertise. Lastly, members of the Aetna management team will play significant roles in the newly combined company. Aetna will operate as a standalone business unit within the CVS Health enterprise and will be led by members of their current management team. Mark has assembled a great team, and I look forward to their contributions as we revolutionize the consumer healthcare experience. Again, this transaction fills an unmet need in our current system, and it presents a unique opportunity to remake the healthcare experience. With that, let me turn it over to Mark and welcome him and his team to CVS Health. Thank you, Larry, and thank you all for joining us today. This deal represents a major step forward in creating consumer-centric healthcare. We believe with these two great companies coming together, we will remake the consumer healthcare experience. We will not only improve affordability and quality, but we will eliminate the unnecessary complexities that frustrate today's healthcare consumers. This combination will enable us to accelerate our strategy and more effectively deliver on our mission to build a healthier world. By creating a new front door to the healthcare system, the combined company will be able to gain the trust of consumers in new ways. We will provide services, products, and information that will enable consumers to get more value out of the healthcare system when they need support or as they look to maintain their best health. This is also a transaction that I believe has incredible potential for Medicare and Medicaid members by providing them some of the high-touch interaction they need to navigate the complexities of the healthcare system. It holds great potential for group commercial clients as well in the form of lower costs and more productive employees. We could see a very different type of benefit plan for these groups that truly puts the financing in the background and rewards the consumer for being proactive about their health. This transaction will also give us an opportunity to drive costs out of the system by increasing patient access to quality, lowest cost site of care. The overuse of emergency department adds an estimated $38 billion in wasteful spending every year. Tremendous savings can be realized by utilizing local care solutions in a more integrated fashion. Lower-cost sites of care are often more convenient for patients, so in addition to saving money, it also improves their experience. Additionally, our combined data and analytics will provide a more holistic view of each individual. This will enable us to use pharmacy care to not only drive down prescription costs, but to drive down overall healthcare costs. We have demonstrated that integrating medical with pharmacy has resulted in a 45% increase in case management engagement and a $20 PMPM reduction in total medical costs. For members with chronic conditions, the savings can approach $117 per member per month. These medical savings have tremendous implications for our financial performance as well. Every 50 basis points that we can reduce medical cost trend results in nearly $500 million of additional underwriting margin for our customers and for Aetna. This improvement in margin will enable us to reinvest in the health of our members, helping to improve their health and drive increased loyalty and retention, continue to improve the quality and affordability of the products and services we offer, and expand into new geographies, enabling us to serve additional members and drive profitable top-line growth. In closing, we believe this deal can revolutionize the consumer experience in healthcare. As our combined strategy matures, I am confident that we will redefine and modernize the consumer healthcare experience in ways that meet and exceed the expectations of the modern consumer. I want to say that I'm excited about the new opportunities this transaction creates for our combined enterprise. Aetna has a talented and dedicated group of employees who are working to build a healthier world every day, and I believe that our combined company will be more competitive in the marketplace and accelerate progress toward achieving this mission. We are bringing together two premier healthcare companies that individually have demonstrated they can deliver meaningful value to all stakeholders. Together, we believe we can achieve even more. With that, let me pass it to Dave Denton to discuss the financial implications of the transaction. Thank you, Mark, and good morning, everyone. Let me start by providing a brief overview of the transaction. Under the terms of the agreement, Aetna shareholders will receive $145 per share in cash and 0.8378 CVS shares for each Aetna share. The transaction values Aetna at approximately $207 per share, or approximately $77 billion, including the assumption of Aetna's debt. We expect the transaction to close sometime in the second half of 2018, subject to both regulatory and shareholder approvals. After it closes, CVS Health shareholders will own approximately 78% of the combined company, while Aetna shareholders will own approximately 22%. This transaction will create a new leader in healthcare with pro forma revenues of more than $220 billion and more than $18 billion in adjusted EBITDA. Together, we will generate strong, highly diversified, and stable cash flows. In addition to the strategic benefit of this transaction, it also offers significant financial benefit to our shareholders. While this transaction will not have a meaningful impact on our performance in year one, we expect low to mid-single-digit accretion in the second full year after close. This transaction has the potential to deliver $750 million in near-term synergies in the second full year after close through activities such as streamlining of redundant corporate functions and combining PBM and PDP operations. In addition, the near-term synergies include reducing medical costs through improved care management and shifting care to lower-cost settings. Importantly, these synergies can be realized with our existing capabilities, with limited incremental investments needed. Over the longer term, we see the potential to deliver significant incremental savings and value. These synergies include further reducing medical costs, increasing our presence in Medicare and Medicaid, and growing our customer base across all of our platforms. Moving to the financing of the transaction, the cash portion will be financed with existing cash on hand, as well as through $45 billion of new debt. After the closing of the transaction, our adjusted debt-to-EBITDA ratio is expected to increase to approximately 4.6 times, well above our current target ratio. Additionally, our debt-to-capitalization ratio is expected to climb to approximately 60%, largely dependent upon the month in which we close. It is our intention to quickly get back to the leverage that is in line with our ratings category, and we have a goal of mid-three times leverage in two years post-acquisition. Our ultimate longer-term goal is to get down to the low three times. Maintaining our strong credit ratings, including our tier 2 commercial paper rating, is very important to us, and we are very focused on debt paydown. To achieve this, we plan to suspend our share repurchase program, maintain our current dividend per share, and forego any large-scale M&A activities. It is our strong belief that this plan, along with the significant diversified cash flow that this new enterprise will generate, will allow us to maintain an investment-grade ratings. Additionally, we plan on sustaining the insurance subsidiaries' investment-grade ratings by maintaining their existing capitalization structure. With that, let me now turn it back over to Larry Merlo for some closing comments. Okay. Thanks, Dave. As you have heard from our prepared remarks, this new platform will unlock significant value for healthcare consumers, clients, the healthcare system at large, and our shareholders. Healthcare consumers will benefit from a uniquely integrated community-based healthcare experience, helping them better navigate the system to achieve their best health. Clients, through the combined entity, will be able to help address the growing cost of treating chronic conditions through the broader use of data and analytics, leading to improved patient health at a substantially lower cost. The healthcare system will be able to reduce wasteful spending by promoting lowest cost sites of care and helping to avoid costly hospital readmissions. For investors, this transaction is attractive, accretive in its second full year after close, with the real power lying in its long-term value creation. With that, let us go ahead and open it up for your questions. Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. Our first question coming from the line of George Hill with RBC Capital Markets. Please proceed with your question. Good morning, Larry, Mark, and Dave, and thank you guys for taking the question, and congrats on getting this to the goal line. I have a couple questions. I am just going to lump them all together. I guess my first one is, which sub-segments or which markets do you guys feel like this deal allows you to attack most aggressively? Is it commercial plans, or is it government business, or is it something in pharmacy? How do we think about the penalty box aspect in the first couple years for both businesses and the ability to impact growth? What metrics are you guys using to measure the success of the deal? Thanks. Well, George, it's Larry, let me start, I think we'll be tag-teaming this. But in terms of your market question, I think the real opportunity lies in the government businesses, George, the ongoing growth in Medicare, what we can do there, along with Medicaid. George, in terms of the penalty box question, I think the opportunity that we have here is the innovation and growth that we're talking about, I think it creates a unique opportunity for us to apply these capabilities more broadly in the marketplace with our respective clients and partners, that's something that we'll be looking to do. George, certainly as it relates to metrics, obviously, as we put the companies together, we'll be putting together a series of metrics that you can establish our performance and measure our performance. Clearly, hitting our financial projections will be a critical component of that. Okay. Maybe if I could just I'd love Mark's comment on just, Mark, how close are we to the healthcare market kind of hitting this tipping point where it's a consumer market versus the B2B market? Or how close are we to seeing kind of real enhanced consumer engagement? Well, I think this combination right out of the box can address a couple of really important issues. Number one, 41% of the healthcare dollar is pulled out of pocket by the consumer today. So, through the right appropriate site of care, we can offer people a better cost experience, being more convenient and local. So, I think that's one of the big ideas here, is the arbitrage on site of care and the opportunity to make it more convenient. On the Medicare-Medicaid side, I think really people are confused. They are wandering through the system, multiple doctors, multiple medications, and the opportunity to help them navigate that system, put them on a plan, and actually make this a place, these new front doors of healthcare, 10,000 of them, a place where people want to go because they get better help, they get a lower-cost product, and they get navigated through the system over time. We can eliminate prior authorizations, we can set up appointments, do all those sorts of things. I would say eliminate the confusion, number one consumer issue. Number two, highest out-of-pocket cost for most households in America, it is 41% of the spend. We are going to make that cheaper for them. Okay. I appreciate the call. Thanks, guys. Thanks, George. Thank you. Our next question coming from the line of A.J. Rice with Credit Suisse. Please proceed with your question. Thanks. Hi, everybody. Maybe one question for each side. Definitely understand where the market's going, and this sort of feeds into what Aetna's laid out, what I understand CVS has laid out over time. I guess I'm just trying to get my arms around what does coming together in a merger that's going to take time, et cetera, give you that just maintaining and enhancing the existing PBM contract would not have given you? Maybe delineate that, because obviously everything's not always in a vacuum. Then for the Aetna side, just a question on, obviously, this deal is being done at a time when we got major tax reform potentially on the table. I wonder if Mark or Shawn can talk about how they thought about that relative to their view of value for the company and potentially significant EPS upside if the tax reform bill goes through and you can take some of that to the bottom line. A.J., it's Larry. I'll take the first one and then flip it over to Mark and Shawn for the second one. A.J., I think one of the things that we had learned from CVS and Caremark coming together, it's been a decade now, that an integrated entity that has aligned incentives, there is an incremental opportunity to what can be accomplished and achieved over and above the benefits of a partnership. And those aligned incentives enabled us over time to make incremental investments because we were able to equitably share the value that was being created. And we see the same opportunity here. We have a tremendous partnership today that has certainly enhanced our respective businesses and, more importantly, enhanced the value that we're bringing for consumers. But I think in all the discussions that Mark and I had, recognizing there's more that can be done, I think we both agreed that bringing the two companies together was an important enabler to unlocking that value. Yeah. A.J., the tax reform item is certainly something that we considered and analyzed throughout this process. It's often, I think, thought about as the immediate benefit, which on the front end immediately would be large. But as you know, a lot of this would be reduced on our side because of minimum MLRs, of which this is a deduction in that calculation. I also think the effective date of this change will be relevant. I think the more lead time that exists in the system, i.e., if it's the Senate bill in 2019, the benefit that's inherent in here would probably be lower as rates are adjusted and things like that in anticipation. Ultimately, the initial benefit, the real question is, what will the markets sort of sustain? In the simplest sense, right, today's after-tax returns are good, and there's no particular reason why those returns would have to be higher in the long run. The competitive market, especially around things like Medicare, will determine ultimately how much of this is retained over the long term. Back to a point that Larry made about putting the organizations together, owner economics matter here, and how you track the profits of the organization, how you manage the business going forward will be incredibly important in understanding where all that margin resides across the business mix. Okay, great. Thanks a lot. Thank you. Our next question coming from the line of Lisa Gill with JP Morgan. Please proceed with your question. Thanks very much. Good morning. I understand the strategy, revolutionizing consumer and healthcare. Larry, can you help me to think about what the store of the future looks like? One, when we think about, obviously, I understand the MinuteClinic, but what other kinds of things? Dave, when you talked about limited investments, if you're really truly thinking about changing those nearly 10,000 storefronts, how do we think about the composition of what you sell today versus bringing in incremental healthcare services and the types of things that the CVS of the future is going to bring to the consumer? Yeah. Lisa, it's Larry. I'll take the first part, and then I know Dave will jump in and others here. Lisa, you've heard us talk for a while now about how the front of store evolves and the realities of that being a combination of not just products that we sell, but also service offerings. You've seen us begin that journey, whether it I think it started with MinuteClinic, but over the last two years, you've seen us pilot vision centers, audiology centers. There's no question that we have the opportunities to repurpose some of the space in our stores to enable that to happen. I think from the discussions that the two organizations have had, let me give you an example of how we see this coming to life in a more meaningful way. Because while it's about the store, it's also about how we use digital tools, perhaps care that we can provide in the home. There's a surround sound component to everything that we're talking about here. I know Mark talks a lot about the incidence of chronic disease and the fact that today we've got over half of the country with one or more chronic diseases. It's accounting for 80% of overall healthcare costs. We all know somebody that has diabetes, and that person may visit their physician three or four times a year, and they leave the physician's office with a care plan. We also know there's billions of dollars being spent on healthcare today unnecessarily because those care plans are not being followed between physician visits. When we talk about creating a new front door to healthcare, we talk about how we can ensure, because we're in the community, we're seeing those patients, we're becoming part of their daily lives and routines, we can get them on that care plan, help them achieve their best health, and at the same time, reduce the cost of care that we're incurring today. Whether it's the role of the pharmacist, the role of the nurse practitioner at MinuteClinic, the expansion of services at MinuteClinic that could include blood draws, or the role that a nutritionist can play in a CVS, or perhaps the role of durable medical equipment, those are all the things that, in addition to what already exists today, that we're going to be piloting, okay? We'll test, learn, we'll modify from there, but we know that there's a solution there in terms of being a complement to the physician and the medical team for those patients. By the way, I used diabetes as one example. That story goes on and on and on every day for chronic disease. It goes well beyond diabetes. The opportunity, Lisa, to use the store as a place to provision care in the home and keep people at home and connect them as like a hub-and-spoke strategy is really powerful as well. Lisa, let me just put synergies kind of in two buckets. As I said, we see line of sight to $750 million in synergies in the second full year after we close. That bucket of synergies, we see us being able to realize that using the existing capabilities and infrastructure that the two companies have together today. So we don't look at that as any significant new investments. Now, longer term, we see a potential to drive significant incremental value. Realizing some of that incremental value over time will require some investment. I will tell you, the companies today both have very robust capital expenditure plans. Ours is in excess of $2 billion. I think Aetna's in the $300 million-$500 million basis. Now, we may repurpose some of that CapEx in the future to envision our stores or make our stores or modify our stores differently so that they are more of a healthcare hub, if you want to use that term. So the incremental CapEx required to support that vision is not that significant. It is probably more of a repurpose of the CapEx that we currently have in our plans. Okay, great. Dave, just so I understand, the suspension of the share repurchase, is that as of today? So as I think about my 2018 model, I should pull out any share repurchase that I currently have in the model? That is correct, Lisa, as of today. Okay, great. Thank you. Thanks, Lisa. Thank you. Our next question coming from the line of Kevin Fischbeck with Bank of America. Please proceed with your question. Great. Thanks. I want to go back a little bit to a point Mark made about looking at the company and kind of inter-company and where you think CVS is going to be making its money. I guess in five years, when everything is kind of put together and well-integrated and we follow that money flow, is CVS going to be a company, like a managed care company, that makes most of its money through its differentiated providers and pharmacy capabilities? Or is it a provider pharmacy company with medical management and insurance kind of on the side? How do you think this model actually looks, and how will CVS make money on the capabilities that it's putting together? Two things, Kevin. I think first, pilot, test and learn, test and learn how it works, what's best for the consumer, where people spend their money will be really important to understand the economic model. We're not all the way there yet. We have a lot of work to do as we integrate the companies, et cetera. I think the second part of it is that the financing of healthcare should be in the back room. It should be all about the services and the experience for the customer up front, and that's where we want people to find value. Margin should follow value where customers are willing to pay for it versus how you finance something. We want to make sure that it's not about buying insurance, it's about getting an experience that we finance for you in the most affordable way. Yeah, I mean, I guess maybe just to follow up on that, though, I guess when I think about companies that have combined like this in the past, like United has done it well or Kaiser, usually the companies who start with the mindset of controlling costs, kind of with the insurance mindset, are the ones who are most successful, and then the ones who kind of are providers and just kind of say, "I'm going to take this insurance arm and try and shift more volume through what I already have to keep my business as usual," those things usually fail. I guess I'm just trying to think about strategically, how different is CVS Health going to look from a financial model perspective five years from now? Well, I'll just reiterate a little bit what Mark said. At the end of the day, we're creating a platform that's going to engage consumers and ultimately reduce costs and improve outcomes. Through that, there's going to be a lot of value created in the system. To Mark's point, the insurance component of this is kind of in the background, the financing vehicle's in the background. As the company matures and as we touch, I'll say, more consumers in all the various touchpoints that we have, both in the store, in the home, and from a digital platform perspective, I would envision that the economics of this enterprise will follow that. Yeah, so let's describe what it could look like, Kevin. It's a store which builds a network around it, where the members that we then move into the marketplace go into the provider system prepared. They know what their path is going to be. They know what their services are going to be. We encourage them to use us as a navigator up front. They keep coming back to the store because we can coordinate care better that way. As a result, the experience is better for them. It's simpler, it's cheaper because we find the lowest cost site of care. So we're getting both, but we're not going to do it by forcing the managed care model on the member. What we're going to do is build the experience for them using lowest cost site of care arbitraging, the lower sites of care arbitraging, the ability to get more in the store as a focal point for the rest of the healthcare system. All right, great. Thanks. Thank you. Our next question coming from the line of Eric Percher with Nephron Research. Please proceed with your question. Thank you. Eric Percher and Josh Raskin from Nephron. Larry, early on you commented on the ability to add value across all customers. Extending on that, could you speak to your thoughts on managing conflict with the large number of health plans you serve, and maybe specifically the recent PBM agreement with Anthem? Yeah, Eric. As you saw, I guess about a month ago, we were quite excited to be awarded the Anthem business. And yesterday's announcement has no bearing on our ability to continue to move forward and provide a high level of service for Anthem, IngenioRx, and certainly its members. And that planning process has already begun. We have a dedicated team spun up, and the planning phase is well underway. I think some of this goes back to, I think, the first question that was asked, and it also picks up one of the themes that Mark just talked about, that our ability to build a model that customers want to use because of the value that it provides, I think that becomes a key guiding principle of bringing these two companies together. As we had mentioned earlier, the innovation, this new healthcare platform that we are talking about, our goal is to apply those capabilities broadly across the industry. So, you think about our other clients, our other partners, in achieving that goal, why wouldn't they want to participate in those capabilities? Because it is something that their members, the consumer, is going to want to participate in. That is our thought process, that is our guiding principle, and everything that we do going forward is going to be with that goal and objective in mind. Hi. Sorry, Eric. I was going to jump in on the Aetna side as a follow-up. I guess in light of the canceling of the investor days, it sounds like we are not going to get an outlook specifically for Aetna, but maybe, Shawn, if you could just comment broadly, top line, bottom line, expectations. Consensus expectations are sort of slightly up on the top line, and then a number just north of $10 in terms of EPS for 2018. Could you just directionally give us commentary as to whether you think those are reasonable starting points? Well, as you alluded to, Josh, I am not going to give guidance. However, at some point when the S-4 comes out, we will have our sets of financial projections in there, and you will be able to see them. I think on our earnings call, we talked about next year being a flat revenue year. I do not think that is new news, nor would I think that that has changed. The way we talked about our sort of jump-off earnings and the headwinds and tailwinds would probably be the same thing that I would say today that we said on the earnings call. Eric, let me go just back to your question, just to follow that up. Keep in mind, you have heard us talk about this in the past, that in Medicare Part D, we have created one of the leading standalone products in SilverScript. At the same time, today, we manage the Med D pharmacy benefit for more than 40 health plan clients. We have demonstrated the value that our capabilities bring, and the fact that those health plans have been able to grow their Med D business faster than the overall market. So, I think it is an important proof point in that guiding principle that if you are able to create something of value, okay, then people are going to want to engage and participate. So again, that is an important guiding principle as part of our strategy moving forward. That's very helpful. Thank you. Josh, just to make sure you get complete, in addition to CVS not repurchasing shares, obviously, we will not be either. So, that is the one difference that I would point out from our Q3 earnings call. Okay. Got it. Thank you. Our next question coming from the line of Justin Lake with Wolfe Research. Please proceed with your question. Thanks. Good morning. First question for Aetna would be around Medicare Advantage. Can you talk to any negative short-term impact you might see on the broker distribution side from the deal? What are the longer-term benefits of marketing through the retail stores here at CVS Health? Then for the CVS Health team, with Mark exiting the day-to-day, there's going to be a focus on retaining key managers. Can you talk to how you're planning to incentivize folks like Shawn Guertin and others to stay with the entity for the longer term? Thanks. Well, I'll answer the first one, Justin. I'll let Larry answer the second one. On the first one, I don't think there's any impact short term. As a matter of fact, there's an opportunity to start the store marketing with brokers as we look forward. I think there's a huge opportunity to capture more share over time as we go forward. I think the longer term is when you start having these convenience places, these new front doors for healthcare for Medicare, there's great opportunity because it's in the retention. Our numbers show that there's $2,500 more in lifetime value of the customer for each year you keep them. This idea of getting them on a project, engaging them in a program, having them find the store convenient and capable to use, will allow us to keep more of those customers over time, as well as by word of mouth attract their friends and family. I think it's a bigger idea. It's a safer place. It's got higher credibility. Trust is a big part of what we want to accomplish. Today, we're a bit remote. In some markets, we get into homes, but not like we'll be able to do with the CVS Health partnership. Justin, it's Larry. Shawn said he'll pay you after the call for Nicole's singing voice. I think that is. But as you heard in our prepared remarks, I'm going to continue to benefit from Mark's presence on the board, to continue to pick his brain with not just his expertise, but his vision. And that'll be a tremendous benefit for myself and our management team. As we mentioned earlier, we're going to continue to run Aetna as a separate business unit within CVS. Mark has built a terrific team, and we're confident that we'll be able to work out the specifics so that there are many of those individuals that will want to continue on and be part of this exciting journey. Great. Thank you. Thank you. Our next question coming from the line of Kevin Caliendo with Needham. Please proceed with your question. Hi. Thanks. Thanks for taking my call. Just a couple of housekeeping questions. On the $750 million in synergies, if we were to break it out between cost synergies and potential revenue enhancements, I know you talked about medical costs being lowered. Is there any sort of revenue synergy number built into that $750 million? The second question is, what are you assuming for your cost of debt for the company post this transaction? Yeah. Kevin, this is Dave. On the $750 million synergies, there's virtually no revenue synergies tied to this. This is mostly cost and a little bit of, I'll say, care management synergies as we think about getting or helping consumers get the lowest cost site of care for the most part. I wouldn't think about this as revenue synergies at this moment. I do think longer term, there are opportunities to grow revenues as we think about the enterprise and all the capabilities that we'll have here. As it relates to the permanent financing and the cost of that debt, it will depend a bit about the tenor in which we place our portfolio, but you would think about it probably in the 4% zip code is our current thinking. That could wiggle a bit based on the amount of short versus long-term debt that we ultimately place at the end of the day. Got you. One quick question on the store. If in five years, I mean, obviously every store is different and the like, but given the makeup of what a retail store looks like now, a traditional CVS retail store, what percent of the front of the store do you think will be traditional sort of retail versus more health-oriented? Just percentage basis. Yeah, Kevin, as we said earlier, we're going to pilot some different concepts. It's a little early to answer that definitively. I think you can think about this as probably more of a hub-and-spoke model, that there'll be a core set of services that would be available broadly, and there likely would be a subset of stores that would have enhanced services. That delta would certainly be reflected in the space allocation within the store. But obviously, we'll have a lot more to say about that as we get these pilots underway and go from there. Great. Thank you, guys. Thanks, Kevin. Thank you. Our next question coming from the line of Peter Costa with Wells Fargo. Please proceed with your question. Absolutely, guys. Let me get a couple of the terms of the deal down to the extent you'll disclose them. Are there any collars on CVS Health share price? Are there breakup fees involved? Then can you talk about the $22.4 billion in eliminations, if there's any revenue eliminations, if there's any earnings impact to that? And what are you planning to do with their Part D solutions? Peter, this is Dave. I would say, why don't you wait for the merger agreement to be filed, and you can see all that material at that point in time. So we're not going to comment on that specifically. As far as the regulatory process, Peter, we are pretty confident that this transaction is very complementary to the value that can be created for the consumer and the payer. And keep in mind that one of the big payers is the federal government, and we'll certainly be sitting down with regulators to show them how that value is created and how it comes to life. Okay. Thank you. Okay. Well, I think we have time here for two more questions. Thank you. Our next question coming from the line of Ann Hynes with Mizuho. Please proceed with your question. Ann? Unfortunately, she just de-queued. Very good. The next question coming from the line of John Heinbockel with Guggenheim. Please proceed with your question. Hey, Larry. Two quick things. Maybe touch on the pace at which you can sell your new capabilities and maybe the pace at which you think the market takes up those capabilities, also in the context of what you learned from the Caremark process, right? Because you've obviously done some innovative stuff before doing it again. How that process works, you will think. And then secondly, is it too early to say whether the 10% secular growth rate is still applicable or not? Yeah, John, it's Larry. I'll start and then flip it over to Dave. John, you're right. We did learn an awful lot in terms of the CVS Caremark merger and all that coming together. I think one of the important themes around all this is, what is it that the customer wants and needs and is looking for? I think what we learned through Caremark is the ability to create that, and having customers ask for that is as big a selling proposition as what we can do going out as a sales organization selling that to clients. Another example, John, of where we saw that was Genius Bar. I think important in all of that is, I'm emphasizing the partnership aspect of this, that we can make this broadly available, okay, to others. The second important point is, everything that we're talking about is a complement to the care that is provided for by the physician. Somebody described it to me a long time ago, when you think of the interventions that occur in healthcare, they have always been there, but what they lack is the element of convenience and coordination. When we talk about this unmet need, that's really the unmet need that we're filling. Again, there's a common theme to this this morning in terms of that will be one of our guiding principles as we move forward and begin to pilot and get these in the marketplace. Hey, John, this is Dave. I'm not 100% sure of the question you're asking about the 10% growth. I'm assuming you're referencing the financial targets that CVS Health has established in the marketplace. I'm- Yeah, that is. Is it too early to say whether 10% is still doable post this deal? Well, I think it's probably too early as you think about adjusted EPS and that kind of a growth rate at this point in time. I will say, though, if you step back and you look at the markets in which the company competes in, and you think about the, I'll say, the competitive landscape and the capabilities that we'll have as a company, we should be as well positioned, if not better positioned over time, to grow our business longer term. So, I think from that perspective, you should count on the company being able to perform well as it relates to those financial targets. Okay. Thank you, guys. Thanks, John. Thank you. Our last question for today is from Charles Rhyee with Cowen and Company. Please proceed with your question. Yeah. Thanks for taking the question. Just a quick couple follow-ups. Maybe Larry, you guys talked a lot about getting some pilots under the way, getting more into the store. Can you give us a sense on the timing and the timeline that you would expect to maybe start these pilots post-close the deal, sort of in your mind when you're thinking about when we could see some of these new offerings introduced? Secondly, maybe for Mark, you talked about using the store sort of as a hub-and-spoke for care and sort of being a navigator in the front. Where does the patient or the consumer in this case, as you discussed that person, where does their primary care physician play into this? Do you envision yourself becoming the PCP for patients? Just trying to figure that part out. Thanks. So, I think on the last part, Charles, the real important part here is that we need to understand that almost 60% of Americans don't have a regular doctor. A lot of people can't get in to see the doctor they want to see. I view the offering, so I think it's less about what the store looks like and more about the offering and the experience the customer gets, is really about a patient-centered medical home model where we're supporting interaction with the medical community, preparing people for appropriate compliance, preparing them for their visits, setting up appointments, eliminating prior auths, doing all those other sorts of things to help navigate that system for them. So, the relationship becomes one of trust and one I want to use over and over and over again because it makes it so much simpler. Think of the Genius Bar at Apple, for example, and this ability to walk in the store and get help. So, I think this is the kind of idea we want to create in the stores, and I think we want to get going on the projects and pilots as soon as we can. Yeah. Charles, I think Dave mentioned this in talking about the synergy, that there are existing capabilities with our respective companies today that we will be looking to capitalize on immediately upon closing. You think about the ongoing number of visits to the emergency room that can and should be treated for in a lower acuity setting like a MinuteClinic. That becomes an immediate opportunity. As Mark said, we will be looking to pilot the enhanced versions as soon as we possibly can and go from there. Great. Maybe one last question for Dave. You talked about Aetna as the insurance subsidiary will be keeping its existing capital structure. As you think about the regulatory process here, I imagine that is sort of to be able to get the sign-off from the state insurance agencies, but does that affect any way in terms of the ability to use the cash flow of the overall enterprise to pay down debt over the next couple years? Thanks. I guess we have modeled that into our projections and understanding that the capital structure in those insurance companies need to be maintained, if not enhanced over time. We have factored that into our financial projections from a cash flow perspective. And obviously, we continue to have dialogue, not yet with the Department of Insurance, but more importantly with our rating agencies to understand the implication of this transaction. Great. Thanks a lot, guys. Welcome. Okay. Just wrapping up, we appreciate everybody's interest and time this morning, and I am sure there are follow-up questions that many of you have, and the respective IR organizations of both companies will be available for those follow-ups. Thanks, everyone. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.