CVS Health Corporation (CVS)

Investor Day 2016

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Dec 15, 2016

Summary

2017 guidance reflects prescription losses, slower acquisition accretion, and margin pressure, while long-term EPS growth is targeted at ~10% on average. Partnerships, new offerings, and a five-year $3B savings plan underpin the return to growth.

Good morning, everyone. Analyst Day. We certainly appreciate everyone taking time out of their busy schedules to attend, along with those tuning in to the webcast. As the healthcare landscape rapidly evolves, these days have become critically important, and they provide a unique opportunity to give the investment community a comprehensive view of our company and how we are positioning ourselves for long-term sustainable growth. I would be remiss if I didn't acknowledge that today's meeting comes at a time when we're facing some near-term headwinds that are impacting next year's growth. As you're aware, we provided 2017 guidance on our third quarter earnings call, and while it was below expectations, we have put in place a plan to return to healthy operating profit growth. Throughout today, you will hear from various members of our senior leadership team as they provide a deeper dive into these actions and initiatives. Before we get started, I want to remind you that during today's presentation, we will be making forward-looking statements within the meaning of the federal securities laws, and we'll also be using certain non-GAAP measures. Please take a moment to read this statement, which also appears in your slide books and on our website, and you will also find reconciliations to comparable GAAP measures there as well. Before laying out our agenda for today, I wanted to highlight and acknowledge some of the many accomplishments we've had over the past year, and at the same time, just take a moment to thank our CVS Health colleagues for their hard work and dedication to our purpose. I'll begin with the solid financial results for the 2016 year. We expect to deliver adjusted earnings per share growth of around 12%, adjusting for unusual factors in each year. We also expect to generate nearly $7 billion in free cash and return significant value to our shareholders through dividends and share repurchases. CVS Caremark continues to deliver very strong selling season results with $7.8 billion in gross new business. That's for the 2017 selling season. These wins, along with a client retention rate of about 97%, demonstrate that our value proposition continues to resonate very strongly in the market. One of the hallmarks of this value proposition, it lies in our ability to help clients more effectively manage their pharmacy spend, and we continue to deliver on this goal with our clients realizing only a 3.3% increase in their pharmacy spend through September of this year. In the fast-growing specialty area, we continue to outpace the market with dispensed revenue growth of about 19%. We have a broad growth portfolio that allows us to win in both the payer-directed and patient choice markets, while being a strong partner to providers and working closely with pharma on the accessibility of limited distribution products. We've also completed the majority of our integration work for the Omnicare acquisition. We're now focused on introducing pilot programs that capitalize on our integrated assets to improve patient care while enhancing our technology to support a broader rollout of new LTC service offerings. We also completed the acquisition, the integration activities for the acquisition of Target's pharmacies and retail clinics, and we are currently in the process of ramping up our patient care programs, as well as marketing and member engagement campaigns, and we have begun to see awareness build and our traffic increase. We continue to advance our front store growth strategies with the goal of driving profitable sales through enhanced health and beauty offerings, ongoing innovations with our ExtraCare program, along with enhanced digital capabilities. Finally, as mentioned earlier, we introduced the plan to re-accelerate growth as we move into next year and beyond. This plan includes partnering with other payers, innovative new PBM products, a cost savings initiative, and using our substantial cash generation capabilities to return value to shareholders through disciplined capital deployment. With that, let me introduce this year's conference theme, driving more affordable, accessible, and effective care. Despite all of the changes that are happening in healthcare, success will ultimately be determined by how effective one is at executing on these three objectives, and we remain very confident that CVS Health is well-positioned to deliver on all three. As healthcare costs continue to mount, we make care more affordable through our PBM cost management solutions, as well as our low-cost sites of care. These assets and capabilities continue to drive real savings in the healthcare economy. With increased consumerism in healthcare, we can make care more accessible through our unmatched breadth of enterprise assets that allow us to connect with patients more fully across the care continuum. These face-to-face interactions, they give us unique insights into healthcare consumers while providing frequent opportunities to affect their behavior. As the market continues to migrate towards a more value-based reimbursement system, we can make care more effective through our analytics capabilities and our clinical programs that are helping to drive adherence, close gaps in care, and improve health outcomes. By making care more affordable, more accessible, and more effective, we can deliver value to all healthcare stakeholders, allowing us to be a partner of choice as they look for ways to achieve their healthcare goals. Before we get into this morning's presentations, I thought it would be helpful to provide what we see as the five key messages that we hope you will take away from today's meeting. First, in an era of rising healthcare costs, we are the optimal partner to deliver savings and help improve outcomes for all healthcare stakeholders. Second, we own the last mile of healthcare delivery. If you think about all of our enterprise assets, each one delivers care directly to the healthcare consumer. Keep in mind that retail pharmacy is quite often the front door to healthcare with the highest frequency of patient interaction. As a result, we have an unmatched ability to help change consumer behavior and drive outcomes. Third, we can be a strong partner for all PBMs and health plans. We have the ability to leverage our enterprise assets and our capabilities to meet the individual and diverse needs of these payers. Fourth, we have built the capabilities to integrate pharmacy care from the payer to the provider to the patient. Our proprietary integrated programs like Maintenance Choice or Pharmacy Advisor, Specialty Connect, they remain unmatched in the marketplace. These programs are seamlessly integrated through our Health Engagement Engine, providing a better member experience, greater adoption, and superior results. Finally, we're focused on maximizing shareholder value with an enterprise mindset. We have very strong cash generation capabilities, and we'll continue to employ a disciplined approach to capital allocation, returning value to our shareholders. Here's our agenda for the day. First, Dave Denton will take you through our guidance for next year, our long-term growth targets, and our plans to maximize shareholder value, and he will also dispel some misperceptions or misconceptions that have been circulating in the marketplace. Then we'll have a 20-minute Q&A session to answer your questions that deal specifically with that guidance. After the Q&A, I'll spend some time talking about the compelling opportunities that we see in the robust healthcare market. I'll also talk about how we're continuing to deliver value for all healthcare stakeholders through our deep integration and our focus on innovation. Then Jon Roberts will address how, in an era of rising healthcare costs, PBMs are needed now more than ever. He'll also discuss how CVS Caremark continues to innovate to meet the healthcare challenges of tomorrow. After John, Alan Lotvin will discuss how our integrated specialty PBM model is best positioned to meet the diverse and complex needs of both patients and payers in the rapidly growing specialty market. Then Helena Foulkes will talk about how we're capitalizing on increased consumerism, or what we've been calling the retailization of healthcare through our retail pharmacies, and how CVS Pharmacy is going to market with a menu of bundled offers that can provide significant value to payers. Helena will also talk about our strategies for the front store, our long-term care pharmacy, and MinuteClinic. Finally, we'll wrap up with a general Q&A session with all of our speakers, along with Troy Brennan, our Chief Medical Officer, and Rocky Kraft, the President of our long-term care group, available to answer your questions. With that, let me turn it over to Dave. Thank you, sir. Thank you, Larry. Good morning, everyone. Happy holidays. Glad you could make it with us today. Today, I want to dive into our outlook for 2017 and really provide some more color about the specific drivers of our expected performance. I'll also discuss our long-term financial targets that align nicely with our goals of creating value for all of our shareholders. First, let me note that over the course of this morning, we'll use certain non-GAAP financial measures to describe our business. The definitions are included in the appendix to my presentation. In addition, in accordance with SEC regulations, you can find the reconciliation of these non-GAAP measures to comparable GAAP measures within your books and on the investor relations portion of our website. With that, here's a look at my agenda. First, I will remind everyone of our strong record of execution over the past several years. Second, as Larry said, I will address some of the misconceptions in the marketplace and hopefully clear those up with providing you with a better understanding of the facts. Then I will share some more details about our 2017 guidance, and I will wrap up with our plan for sustainable enterprise growth in 2018 and the years beyond. Maximizing shareholder value continues to be a major focus of CVS Health, and we have been very successful at producing superior results. The key areas that we focus on to do this are driving productive long-term growth, generating significant levels of free cash, and finally, remaining disciplined in our approach to capital allocation. All three of these areas have contributed significantly to our success in enhancing value for all of our stakeholders. This year's financial accomplishments underscore our continued success. We are pleased with this year's performance, which is delivering strong adjusted earnings per share growth of approximately 12%. We continue to grow scripts and claims across our enterprise, with this year's growth enhanced notably by the successful integration of both Omnicare and the Target pharmacies. We have also successfully refinanced a portion of our debt to take advantage of the favorable interest rate environment and lowered our overall interest expense as a result. We expect to generate significant levels of free cash flow, driven by our earnings growth, our continued working capital improvements. We generated free cash of approximately $6.6 billion through Q3 alone and expect to generate nearly $7 billion for the year. We expect to return approximately $6 billion to shareholders through both dividends and share repurchases. Our expectations for the full year of 2016 remain unchanged from those that we laid out on our last earnings call, with one minor exception. In Q4, we will be incurring approximately $0.02 of GAAP expense related to an asset impairment charge for rationalizing our store base. I plan to cover this in detail later during my presentation as I outline our enterprise streamlining effort. We expect healthy growth in net revenues of 16%-16.5%. Our adjusted earnings per share is expected to be between $5.77 and $5.83 per share, which is a solid growth rate of 11.75%-13%. The items excluded from adjusted earnings per share, all of which we have previously discussed, are listed in your books in the end notes to my presentation this morning. Our growth rate this year continues to stem from our strong script growth across our enterprise. Furthermore, the addition of both Omnicare and the Target pharmacies and clinics has contributed nicely to our performance and also is providing a platform for future growth. Finally, Caremark's string of successful selling seasons continues to grow our membership base and fuel claims growth. Additionally, and consistent with our prior guidance, we expect free cash flow for the year of $6.8 billion-$7 billion, an increase of about 5%-8% over prior years. This growth has been largely driven by the change in our expected annual Medicare Part D settlement with CMS. Both healthy members and lower utilization than what we had assumed when our bid was submitted are leading to the change in timing of our cash flows. We expect to be in a payables position with CMS at the end of this year. Adjusting for this, free cash flows are still substantial, but essentially flat to LY. Reviewing our performance from 2013 through our expectations for 2016, we are at the high end of our steady state targets that we set and we established back in 2013. We originally targeted steady state operating profit growth of 7%-9%, and we currently expect compounded annual growth rate of nearly 10%. For adjusted earnings per share, we originally targeted steady state growth of 10%-14%, and we currently expect compounded annual growth rate of nearly 14%. This is attributable to growth in our core businesses as well as growth from acquisitions. Despite the fact that we are ending 2016 in line with the steady state targets that we laid out back in 2013, given the recent changes in the marketplace and our outlook for 2017, we have put a plan in place to return to more robust levels of growth, much more consistent with what we achieved in the past several years. You will hear much more about that through Larry's presentation this morning in his strategic review. Turning to our free cash flow generation, free cash has increased significantly since 2013, and there are a number of factors that have contributed to that. First has been our ability to gain dispensing share, both organically and through acquisitions. Secondly has been our growth in specialty pharmacy, driven by new products and higher volumes. Third, we have improved our purchasing capabilities with the addition of Red Oak, which has driven down cost. Finally, we have actively managed our working capital to maximize free cash. We continue to target an adjusted debt-to-EBITDA ratio of approximately 2.7 times, and we are focused on maintaining our current credit ratings. As I noted last year, the issuance of $15 billion of debt to finance Omnicare and the Target acquisitions did increase this leverage ratio to a number above our target. Our plan is to use our EBITDA growth to pay down debt as upcoming tranches mature in order to return to a 2.7 times targeted level in a reasonable amount of time. We believe our capital allocation plan allows us the flexibility to do this while taking advantage of the current dislocation in our equity value. We took steps this year to reduce our overall debt and interest, taking advantage of the favorable interest rate environment. This ensures that we do not have any one year that would require a significant outlay of cash to meet our current obligations. A healthy balance sheet is a key element to providing flexibility for the company's strategic direction and allows us to maximize shareholder value over the long term. Over the past three years, our strong earnings growth, solid working capital management, disciplined capital investments, and sound debt management has enabled us to generate a significant amount of cash that has been made available for enhancing shareholder value. This slide illustrates the three pillars we use to enhance value. Over the three years, we have paid out nearly $5 billion in dividend, and we have had a dividend increase in each of the last 13 years. We currently have a payout ratio of approximately 35%, and this is a little artificially high as it includes the integration costs related to both Omnicare and Target. Excluding the impact of those costs, we remain well on track to meet the target of 35% by 2018. We have used our liquidity to invest in high ROIC efforts and have spent about $14 billion in acquisitions that have supplemented our existing asset base. We have continued to seek out opportunities that allow us to grow our business with solid long-term returns. We continue to repurchase shares, completing more than $13 billion of buybacks from 2014 through 2016. So you can see that through these three pillars of capital allocation, we have continued to significantly enhance shareholder value with our efficient deployment of this cash. Here are some additional details of our effective use of capital. We have achieved a 24% compounded annual growth rate in our dividend over the past three years. We have benefited from five notable deals, among others, since 2014, and we have averaged $4.5 billion of share repurchases each year. Today, we are announcing that our board of directors have approved an 18% increase in our annual dividend for 2017, an increase that translates to $2 per share, up $0.30 per share over LY. This will be our 14th consecutive year with a dividend increase. As we stated on our Q3 call, with the new $15 billion share repurchase authorization, we now have more than $18 billion available for share repurchases over the next several years. For modeling purposes, assume $5 billion in share repurchases in 2017, and that the repurchases are more front-half weighted. This will be done to take advantage of the recent decline in our stock price. So between dividends and share repurchases, we will allocate nearly $7 billion to enhancing total returns for our shareholders in 2017. I think that clearly illustrates our strong record of execution to date and our ability to meet our goals. While next year is shaping up to be somewhat of a rebuilding year of sorts, our goals remain clear, and we fully intend to get back to healthier levels of growth. However, before I jump into our future, I would like to spend just a few minutes dispelling some myths that have been circulating in the marketplace. There are three in particular that have been very top of mind. The first misconception relates to rebates in the PBM space. In some areas, there is a belief that manufacturer rebates are a substantial driver of PBM profits. We have heard this belief many times. Some people believe that PBMs earn enormous profits from rebates, and thus, as a result, encourage manufacturers to increase drug prices in order to generate even larger rebates. This is simply not true. The fact is that rebates are only one of many drivers that PBMs use to generate profits. Each of our contracts are structured to achieve an overall profit margin, and the individual profit drivers will vary from contract to contract, depending upon the needs of the clients and the scope of our business relationship. Some of the other drivers of profit include margin on dispensing mail and specialty scripts, and our network pharmacy benefit management, as well as our clinical programs. The extent to which each of these drivers are used depends upon the specific contract, but ultimately, the drivers collectively lead to a profit margin we aim to achieve. Additionally, more than 90% of overall rebates are returned to our clients, and our contracts provide our clients with comprehensive audit rights and transparency. Keep in mind that we have proven our ability to adapt to marketplace developments in the past, as we have done when generics became more prevalent. If rebates were to go away, as some have suggested, or if there is a dramatic change in the pricing methodology, we would adapt our process over time to reach the desired economics to ensure that we are fully compensated for our services. The second misconception out there relates to inflation. There has been a lot of speculation about changes in drug price inflation, and it has been thought to be a meaningful driver of profitability to CVS Health. This myth, too, is simply incorrect. The fact is that the impact of changing in drug price inflation is not meaningful to our business. It affects different parts of the enterprise in opposing ways, typically leading to a combined impact that is not significant. This myth has come about due to the slowdown in generic and brand inflation over the past couple years. As we stated in the past, there are many puts and takes across the enterprise from changes in drug price inflation, some of which are positive and some of which are negative. It is because of this that the overall effect of the change in inflation is not meaningful. Keep in mind that the PBM's role is to achieve the lowest net cost for its clients. PBMs play a key role in helping plan sponsors manage drug costs and improve overall health outcomes, whether we are in periods of slowing or accelerating inflation. This has been demonstrated in the 3.3% drug trend our PBMs helped its clients achieve year to date, despite 9% branded drug price inflation. The final misconception is that our integrated model is no longer the model of choice, and this myth is also wrong. The fact is that our integrated model continues to gain the most share in the marketplace. We have a broad suite of assets that enable us to deliver solutions that meet diverse client and payer needs. With true integration, the patient experience is enhanced, helping to drive better health outcomes. Our model has the highest number of face-to-face interactions with patients that lead to improved clinical outcomes and improved patient satisfaction. The size and scale of our business makes us a low-cost provider, and we have been very successful at attracting new clients that take advantage of all that we have to offer. Our model is attractive to all segments in the marketplace. Today, we serve thousands of clients, including approximately 70 health plans, large and small employers, coalitions, and government agencies. It is also interesting to note that in the 2017 selling season, our PBM won more than 50% of the revenues from clients that changed PBMs. Overall, we have grown enterprise scripts approximately 33% since 2013, compared to a market growth of about 11%. In fact, over the last three PBM selling seasons, we have won more than $20 billion in net new business, more than any other competitor in the space, with $4.3 billion coming in the current selling season alone. That just doesn't happen with a broken model. Our integrated model allows us to deliver more affordable, more accessible, and more effective care. Our capabilities continue to make us the model of choice. With that, hopefully that clears up these misconceptions that have been making the rounds. Now I look forward to sharing with you more details about our 2017 guidance. We provided the details of our outlook for the full year 2017 in the press release we issued earlier today. Our figures and growth comparisons versus 2016 exclude certain items that are listed in the non-GAAP tab in your books to enhance comparability. For the year, we are expecting consolidated net revenue growth of 4%-5.75%, and adjusted earnings per share to be in the range of $5.77-$5.93 per share, reflecting a decline of about a half percent to a growth of 2.5%. GAAP diluted EPS expected to be in the range of $5.02-$5.18 per share. The adjusted earnings per share guidance is consistent with the guidance that we provided on the Q3 earnings call. This reflects the loss of more than 40 million prescriptions due to the restricted network changes, the slower accretion from both Omnicare and Target, and continued margin pressures we've been experiencing. Offsetting these factors to some degree is the addition of members and the growth of claims resulting from the successful 2017 selling season that we had. Our cash flow continues to remain strong, and we expect $7.7 billion-$8.6 billion of cash from operations and $6 billion to $6.4 billion of free cash flow. Note that capital expenditures are expected to decline year-over-year due to the absence in 2017 of capital costs related to the integrations that we incurred in 2016. Now, given our focus is on the overall enterprise, last year I said that we would not continue to provide guidance by segment in order to better align with the enterprise focus. However, given the recent developments that have occurred and the impact they have specifically on the retail long-term care segment, we have decided to continue to provide segment guidance for 2017. We believe this allows for the right amount of transparency so you can best evaluate our progress towards our goals of returning to more healthy growth. However, we do view this as a temporary halt in our plans. At some point in the future, it is our intention to simply provide an enterprise outlook. Turning to the PBM, we expect continued healthy growth with revenues growing 8.5% to 10.5%. Given a successful selling season, we expect to see strong growth in adjusted claims, and despite gross margin pricing pressures, we expect strong growth in operating profit of 6.5%-9.5%. As for the retail long-term care segment, it will be a challenging year. Revenue growth is expected to be flat to down 1.5% due to the loss of prescriptions from the network changes, ongoing reimbursement pressures, and the slowdown in traffic in the front store. Comp script growth will be soft and is expected to be flat to up 1%. Operating profit is expected to decline 7% to 9.5%, mainly driven by those same factors. This morning, you will hear from Helena on how we are responding to these headwinds and our plans to return to healthy growth. Hopefully that gives you a quick snapshot of our outlook for 2017. Now, before I provide the details of our first quarter guidance, I would like to discuss some of the key drivers affecting profitability in 2017. As we stated in the past, we continue to see reimbursement and pricing pressures across our business, and we will lose more than 40 million prescriptions from recent network changes and will be challenged to grow dispensing volumes at retail. These items will be a drag on our business throughout the year. Omnicare and Target pharmacies and clinics are expected to be approximately $0.17 incrementally accretive in 2017. We are making good progress towards our original accretion estimates, but at a slower pace than we had originally anticipated when we announced those deals. Now, let me take the last two drivers one at a time. We continue to view generics as an opportunity to grow profits. You can see that there has been a slowdown in the amount of branded sales losing patent protection, and that is expected to continue going forward. But while the level of generic drug introductions ebbs and flows from year to year, our profits continue to benefit from the fact that we fill more than 85% of our prescriptions with generic drugs. From 2017 through 2019, there are more than $18 billion of branded drugs expected to move from brand to generic status, compared to nearly $45 billion of brand to generic changes in 2015 and 2016 alone. You can see that there is still an opportunity for growth in the years to come, albeit at a lower level than what we have seen in the past. This is especially true when the timing of the break-open period is considered, as this impacts the cadence of profitability. 2016's introductions will continue to have a positive impact as they wrap into 2017. As most of you know, our profitability is the highest during the break-open period, and that period occurs when there are three or more suppliers in the marketplace. This slide illustrates the amount of generics that are expected to be in the break-open period each year. As you can see, we are trending downward in 2017, resulting in a diminished tailwind, but the impact remains significant. The challenge going forward is that drugs that are coming to market are fewer and the number of manufacturers are limited, meaning the cost savings opportunities will be somewhat restricted. Among other factors, one issue of concern is the backlog of generic drugs awaiting approval with the FDA and within the industry. Based on the data available in July of this year, there are more than 4,000 generic drugs awaiting approval. Our hope is that in 2017, with continued congressional pressure, that this backlog will be addressed, and that with the consideration of new user fee legislation, approval times will continue to improve in both the generic and the innovator space. The more drugs that are approved, the more competition there will be, leading to greater abilities to lower costs for our clients. However, there's still a lot of uncertainty on what exactly will transpire, so we'll have to continue to monitor this very closely. While the generic opportunity is slowing, we're expecting to see a growing opportunity from biosimilars. Approximately $28 billion in specialty drugs are expected to lose exclusivity between 2016 and 2022, with another $5 billion expected in 2029. This differs from the chart that I showed you last year, mainly due to the expected delay of the launch of HUMIRA's biosimilar from 2019 to 2022. Still, the opportunity remains significant. With that said, we don't expect biosimilars to behave like generics. We expect them to behave more like branded drugs. We believe that we will be able to benefit from the increased competition within each category where biosimilars are launched. We have already begun to take advantage of this in our specialty formulary strategies, and we will lower costs for our clients while driving incremental margin for the enterprise going forward. In 2017, biosimilars are being included as a component of our 2017 standard formulary strategy, replacing higher-cost drugs. We believe we are well-positioned to benefit from biosimilars as they continue to come to market. Next, I'd like to give you some color on a new initiative we are beginning, a multi-year enterprise streamlining effort. This effort will generate significant savings and enhance cash flows in the next five years. It is grounded in three main pillars. First, we will modestly rationalize our existing store base. Secondly, we will more aggressively implement a shared services solution for many of our back office functions, thus improving the cost structure for our business units. Finally, we will take a fully integrated approach to our prescription fulfillment, taking advantage of all of our operational capabilities, regardless of which business unit they sit within. These efforts will support the continued objective of being the low-cost provider while providing members with ongoing superior service. Let me spend just a minute touching on each of these three pillars. Over the course of the next few months, it's our intention to close approximately 70 CVS Pharmacy locations. With the Target pharmacy integration now complete, we're in a position to more fully evaluate the patient access needs of our more than 9,600 pharmacies. With the addition of nearly 1,700 Target locations, we have the opportunity to trim our CVS store base while continuing to provide convenient local access to the millions of patients that we serve on a daily basis. These planned store closures will result in a charge that will add up to approximately $265 million, largely in 2017, as we write down the assets and accrue the remaining lease obligations. Yet this action will deliver higher financial returns over the longer term. In shared services, we are working to consolidate similar business unit activities in an effort to improve efficiencies and outcomes. As we centralize these activities, we are employing new information technology to enhance productivity. Our early results are very encouraging, with between 15%-20% reductions in labor costs for the activities that are relocated. Last year, we began this process with the opening of a new shared services center in Arizona, replacing multiple locations around the country. Our initial focus will be within our billing and collections processes across the various business units, with additional processes to be incorporated as the program matures. And probably the most exciting aspect of the program centers on our effort to optimize our pharmacy delivery platform. To put what this means into perspective, think about the process of filling a prescription as three core phases. First is verifying member coverage and entering the necessary data to complete the label and process the claim. Second is counting the medication and putting it into a vial. And finally, there's quality control, ensuring that the appropriate medication and dosage is provided to the appropriate patient. These three core phases are replicated throughout our business in each business unit and in literally thousands of locations across the country. Now, think about the many locations where we have excess capacity to perform more of these functions, whereas in other locations, our capacity is fully utilized and probably in need of more. The objective of this third pillar is to seamlessly redistribute various aspects of the workload to better maximize our script fulfillment capabilities through the use of both process redesign and technology, to use the excess capacity in one area to effectively support another area being overutilized. A simplistic example of this might be using a 24-hour retail pharmacist to perform prescription data entry between 1:00 A.M. and 6:00 A.M. when the pharmacy is not busy, in support of our mail order pharmacy, which sees virtually no downtime. This would take advantage of excess capacity at retail during a time when the pharmacist has limited patient support requirements while allowing the mail pharmacy to enhance its turnaround time. This is one just simplistic example, but as you look at our business and our infrastructure, you can imagine the many ways in which we can evolve our operations to improve productivity with a lens on optimizing customer service across our business. What's the outcome of this effort? We expect to deliver approximately $700 million-$750 million in annual savings across the enterprise by 2021, with cumulative savings of $3 billion in the first five years. This will help us gain efficiencies, streamline processes, and reduce corporate overhead expenditures. This will also free up capital for strategic investments that make sense for the enterprise and will contribute to our profitability. Retail long-term care will receive about two-thirds of the savings, as it is more cost-intensive to run those operations. The PBM will see about a third of the savings. We feel this is the right time to invest in this effort. As I said, this is expected to deliver nearly $3 billion of savings over the next five years and will position our enterprise for growth in the years to come. In 2017, the cost will outweigh the savings, but that is expected to flip beginning in 2018. Those are the major drivers behind our earnings numbers in 2017. And while not major drivers of annual adjusted earnings per share, I want to remind you of two accounting items that you should keep in mind. First, we'll be adopting the new share-based compensation accounting rules, which will impact income taxes, and earnings per share. This change will create more volatility in our estimates, and as such, we will be guiding to wider ranges on our quarterly EPS than we have in the past. Second, I want to remind you of the settlement of our largest defined benefit pension plan, which I talked about earlier this year. This settlement is currently estimated to be approximately $220 million, and it is expected to occur in the third quarter of 2017. Now, let me give you a sense of our front half, back half growth expectations. Like we experienced this year, we once again expect earnings growth to be significantly back half weighted. The first half of the year will not have the positive impact of leap day that we had in 2016. Additionally, while it does not affect the comparison between front half and back half, Easter will shift back to April this year and benefit the second quarter at the expense of the first quarter. Looking at the back half of the year, we will see more benefits from break open generics and new generic introductions. The trend for Medicare Part D profit growth to the back half weighted will continue due to the seasonality of that business combined with its continued expansion. Finally, as we embark on our enterprise streamlining initiative, the vast majority of the 2017 costs were expected to be recorded during the first half of the year, while the initial benefits derived from the program will not begin to ramp up until the back half. Turning to the first quarter of 2017, we expect consolidated net revenue growth of 2.5%-4.25%. We expect adjusted earnings per share to be in the range of $1.07-$1.13 per share, reflecting a year-over-year decline of 4.75%-9.75%. As I stated earlier, the first half of the year's profit growth is expected to be lower than the growth in the second half, and the first quarter expectations underscore this point. I will not go into them here, but you will find the guidance for the segments in the appendix of my presentation this morning. Now, let me touch on how CVS Health will reaccelerate and return to solid enterprise growth. On our Q3 earnings call, we stated that the long-term adjusted earnings per share target will be about 10% on average. Some years may be higher, and some years may be lower. That growth is expected to generate $7 billion-$8 billion in free cash per year on average. We will continue to utilize our share repurchase authorization thoughtfully after considering strategic investments. You will also see here our expectations for growth for revenue, operating profit, and share repurchases on average. I will discuss the assumptions behind these growth expectations in a moment, but first, let me illustrate why our new targets have changed from our former targets. As we have continued to expand, it is become more challenging to maintain a 10%-14% growth rate now that we have about $180 billion in revenue and more than $10 billion in operating profit. To put this in perspective, to continue to grow revenues at about 5%, we would need to add a company the size of eBay, which is number 300 on the Fortune 500 list, with more than $8 billion in annual revenues. To grow operating profit 5%, we would need to add the company the size of Mattel, with more than $500 million in operating profit. To grow EPS 5%, we would need to add the company the size of Molson Coors Brewing Company. Given the scale of our enterprise, that level of growth is very significant, which is why our new longer-term targets are at the lower end of our previous targets. There are a number of assumptions that we believe could impact the business as we look forward to 2018 and beyond. You can see them laid out here on the slide. For the sake of time, I will not discuss each one, but I will highlight a few that we feel are most important to keep in mind. On the positive side, we expect healthy growth in the PBM segment to continue. This includes specialty pharmacy growth and our continued selling season wins. We expect a positive impact from our effort to market new product offerings and to partner with payers to drive growth for the retail long-term care segment. The enterprise streamlining initiative will help generate significant savings over the next several years. Conversely, we expect to continue to see reimbursement and pricing pressures across our business that will offset some of these positive trends. This remains one of the more significant headwinds. With the changes in the federal government next year, many of you have asked about the potential for corporate tax reform and its impact on our business. I have not included any impact among the key assumptions driving our longer-term growth. At this time, there is still lots of uncertainty around the potential for corporate tax reform, so we will see how this plays out over time. Turning to our commitment to enhancing shareholder returns, this will continue to be an important focus area for us. We plan to continue to generate cash for shareholder returns through both dividends, return on invested capital, and share repurchases, as we have discussed in the past. We will continue to allocate this cash with these priorities in mind. We will make disciplined risk-adjusted decisions when deciding how to deploy this cash. We will invest in projects that help us grow our business with healthy long-term returns. We will either fund these types of projects or return the cash to our shareholders if that creates the best value. Our track record demonstrates our ability to do just that. Over the course of this morning, you are going to hear about the many projects we are funding that are expected to drive long-term enterprise growth. We continue to focus on health plans, our ability to drive value for them, and our ability to capture dispensary share, whether or not we are the PBM. We are also working on new innovations to fuel the PBM for future success. We expect to continue to grow in our specialty business with its unmatched assets and a track record of continuing to outpace the market. We are partnering with retail and with new service offerings and bundling services that enable us to grow share, such as 90-day programs, MinuteClinic services, as well as infusion and long-term care capabilities. We will continue to expand our reach in retail pharmacy with the Omnicare and Target assets that we have acquired. There are changes coming in healthcare, and one of those that is starting to gain more traction is value-based care. This presents opportunities as our model is most able to support delivering services which yields better outcomes at lower cost. Our ability to drive efficiencies in purchasing and expense control, and our status as a low-cost provider should help us to win new business and drive additional share. We see opportunities that remain in generics, Red Oak sourcing, as well as biosimilars. Lastly, we continue to look for strategic acquisitions to supplement our organic growth. In summary, our company is best positioned to drive more affordable, accessible, and effective care, and as a result, drive long-term growth. We have a proven track record of success in meeting longer-term growth targets, generating significant free cash, and optimizing capital allocation to drive shareholder value. On average, we expect to generate $7 billion-$8 billion of cash annually to enhance shareholder value as well. Our unique integrated model allows us to benefit from changes in the marketplace, while our streamlining effort will help position us for sustainable long-term enterprise growth. With that, I thank you for your time. I will ask Larry to join me, and we will start our Q&A process. Thanks, Dave. We have folks with mics in the room. We would ask that you wait for the mic so those on the webcast can hear the question, and just please raise your hand, state your name and affiliation, and we will come and find you. Robin up here. Ann. Thanks. Ann Hynes with Mizuho Securities. Could you tell us in your long-term 10% growth how you view M&A? Is that included, or would that be out of the- It is included. We have always talked about the fact that our business model is both to grow our business organically, but also supplement our business through strategic acquisitions. So even a major acquisition would be included in that? Yes, I think within the core, yes. With both Omnicare and Target, even though they are really just the dollar size is sizable compared to the enterprise value of the company, they are pretty small. So think about those as within our long-term targets, as an example. Thanks. Priscilla, right? I think that is Ross. Good morning. Ross Muken from Evercore. Thanks for laying out a lot of the viewpoints on the long term. I guess, the company's been remarkably successful over a pretty long period of time. You've gained share in all the markets you play. As you think about the developments in the last 12 months, what you could have foreseen, how you would have acted any differently competitively, what you think you now need to do to kind of evolve the solution, and how long it takes to kind of put some of those new elements in place. Help us put the whole picture together of how we get back to kind of that share gain machine that we've seen for some time. And obviously, you're confident, and so just help us understand where that confidence also comes from. Yeah, Ross, great question. You'll hear some additional detail as we go through the presentation. So, I'll just hit it at a high level in terms of, if you look at the success that we've had, Dave talked about ongoing selling season growth through the PBM. That's gone extremely well. Helena will show you a slide that, as we look at growth in the retail segment, about half of the growth has come through partnering with other PBMs and payers. So, we have a great relationship with many of those payers. I think we have an opportunity to take that to another level. That's what, again, you'll hear more about that this morning. I think to your question, Ross, what could we have seen in front of the marketplace? I think we have one of our competitors that's talking about the value of being independent and being disassociated with a PBM, and in the fact that they can play uniformly across the board. I think some of this, it's a question that has this created a perception that CVS Pharmacy does not have a neutral platform because of the success that we've seen across the Caremark book of business. We're going to dispel that perception because, quite frankly, it doesn't exist. I think as we go through the presentations this morning, you'll see how the capabilities that CVS Pharmacy can offer can add tremendous value for payers and their clients. I think that will be an important value proposition going forward, because I think there's more that we can do than our standalone retail competitors can. Lisa's over there. Priscilla, right here. Good morning. Ricky Goldwasser from Morgan Stanley. A question on the long-term guidance assumptions. You're assuming 11% top-line growth. When you think about kind of like the competitive environment, both on retail and PBM, does that 11% embed continued share gains, or are you factoring in the fact that you might see some share losses in the future? The second thing is, how sensitive is the growth algorithm on the operating income level to those top-line assumptions? Ricky, we do very much expect that we will be a share gainer over time, both from a PBM perspective and also from a retail perspective. I encourage you today, listen carefully to both Jon and Helena to talk about the many programs we have in place to capture share in those specific marketplaces. It is somewhat sensitive. You can see even this year, to some degree, the fact that we're not being able to grow the top line as robustly as we have in the past is not allowing us to grow the bottom line. We've always talked about that our business model is about delivering value to payors, and then part of doing that is getting more dispensing volume through one of our channels, and we can optimize our profit when we do that and deliver better outcomes when we do that. That algorithm and that business plan is embedded in those long-term targets, and that's how we think about achieving them. Just one follow-up. When we think about the health plan market, the managed care market where you're strategically focused, what percent of the market do you have today, and what's the opportunity, especially when we think about the smaller regional health plans, which we seem really kind of like could benefit from the tools that you have. Yeah, Ricky, as we look at the Caremark book of business, if you back out Medicare, about 60% of that, it's about a 60/40 split between health plan and employer, okay? It used to be 50/50. So, over the last couple years, we have had some very nice success in the health plan book. Your hypothesis is right. I think that some of the regional health plans continue to evaluate the benefits of outsourcing the pharmacy function. Size and scale are critically important. You'll hear more about that through the morning. I know one of the questions that has come up as we went through the third quarter call is, you look across the PBM space, how can everybody be talking about having a successful selling season? Part of the reality is the pie has gotten a little larger as a result of some of the health plans outsourcing their pharmacy benefit to PBMs. I think also important to this is not just the relationship we have as Caremark with health plans, it is also our relationship as CVS Pharmacy and MinuteClinic and our specialty pharmacy business with those health plans as well. We have pretty deep relationships with virtually all, in many respects, health plans across the nation. You will hear a little bit more about those capabilities that come to life when Helena does her presentation as well. Robin, there is a question in the back. Hi, John Ransom, Raymond James. What do you do about the situation where, say, a Cigna or, more appropriately probably, UnitedHealth is willing to use their PBM subsidiary as a loss leader to get health plan business? Since you do not have an affiliation with a single health plan, are there any talks in the works where you can share savings across the board, where if a client is really sensitive to rebates or drug spend, you can go to market with a strategy that is comparable to what United Optum is doing? Thanks. Oh, John, we have a lot of ways to plug into those health plans to drive value, number one, and many ways to share the economics that make sense for both of us. I would also encourage you to think about this notion of a loss leader in this space. Think about today, benefit managers, they bid out their program, and typically, they bid out the pharmacy business. You have to be competitive, you have to be right on price. They turn around and they bid out their health plan business, their medical benefit. By the way, you have to be right on price there. So it is pretty hard to, I will say, supplement or cross-subsidize one versus the other, certainly in the large employer market. That might be a little bit different in the small employer market, where we probably do not have a lot of share. But in the big market, it is pretty hard to play that game just structurally, the way the industry is put together. Lisa, over there. Lisa, I could not see you. You are hiding. Lisa Gill with J.P. Morgan. Thanks very much. I was hoping, Dave, maybe we could just go back to what happened this year on the drug retail side of the business, the big step-down. I really just want to understand what happened specifically. Is it that when you won all of those scripts years ago during the dispute between Express Scripts and Walgreens, because of the fixed cost infrastructure, they were more profitable, so now as they're rolling off, it's less profitable, so you're putting cost initiatives in place going forward. I just want to understand that. Also, you talk about all of the tools you have and how you differentiate yourself from the large competitor you talk about, but do you believe that they're rational in the marketplace? Do we feel that going forward, it's really going to be competing on those services and not just specifically on price? Yeah, we do think they're rational. Larry will chime in a bit about that. As you look at this both script gain and script loss in our business, that next script that rolls into one of our stores, as an example, there's typically no additional variable cost required to fill that. So that script is very profitable. You've seen us, and you can go back to when Express Scripts and Walgreens had the dispute, and when those scripts moved into our outlet, you saw us disproportionately grow earnings. The reverse of that is true when they go away. That next script that leaves, we can't downsize the asset base or in the operating structure within that store. So they're obviously more profitable, and you're seeing the effect of that is pretty sensitive on our business as we lose these 40 million scripts in the next year. Lisa, the question in terms of what are we seeing in the marketplace, if the question is more, is there a price war underway, I would say that we don't see evidence of that. Certainly, scale is important, and we have that scale to create value for our clients and for other PBMs. I think that today, there's a lot of focus on it's either CVS or it's Walgreens. I think to your question in terms of as you look to the future and as we see the migration to more value-based reimbursement, I think the capabilities of pharmacies will continue to become increasingly important. They're important today when you look at pharmacy's role in terms of impacting the Star Ratings program and the Medicare programs, but I think that's going to grow. I think that you'll see a future world where all pharmacies will not be created equal in terms of its capabilities. I think payers and PBMs will be evaluating the network construct with that added dimension in mind. Given what happened this year, you think about the Department of Defense being a big component of the scripts that came out, how do you safeguard against that going forward? Now that you've learned from this experience, is it the rationalization that you're talking about? I think that myself and other investors are saying, "Okay, we can look past 2017," but when we think about your drug retail business in 2018 and beyond, do you feel confident that if something like this were going to happen again, something completely out of your control, do you have the ability to be able to offset it? Lisa, I do think that if you look at, and you'll hear more about this in a little bit, so we'll probably come back in the second Q&A because it's an important topic. But I do think if you look at the capabilities that we have and the value prop that we're generating, I think over time, we're going to be a net winner in this game. As you think about when, just in the Caremark book, when people narrow the network and they move their members into more of our dispensing channels, we engage those members in more complete ways and add incremental value. I think as the healthcare system evolves to more value and more outcomes, you're going to see us disproportionately win in that game. There could be, like 2017, there's a year that, we're not going to win in 2017, but over the long term, I think we're well-positioned to win in that space. Okay. Thank you. John, over here. John Heinbockel, Guggenheim. If you think about the spread that you laid out in the long-term outlook, right, between revenue of 11 and operating income of six, and you should get on that 11, right, you think about the incremental profitability of that volume. Yep. Then the costs you're taking out, right? That would sort of suggest pretty significant gross margin erosion over time. Yeah. Is that solely reimbursement pressure? I do not think you have changed your philosophy of going after share for margin, correct? Yeah. It is not. Part of this is, think about the two business segments. Think about retail and PBM. PBM disproportionately has been growing more rapidly, and it carries a lower margin. Right. You see them, I will say, at the mix shift, which affects that ratio. It is not just margin pressure from that perspective. Secondly, can you dimensionalize, look at the three items in your streamlining initiative? Yep. Is the shared services piece, is that the biggest piece, and store rationalization the smallest? Yeah. I would say that in the short term, probably shared services is more impactful. I think as you get into the out years, if you think about our businesses, as I said, you think about our business in filling prescriptions, you think about where that's replicated in literally thousands of different places. If we could pick up some of those activities and move them around to take better advantage of our, I'll say, excess capacity on the margin, that's a big opportunity for us. We have a line of sight to several of those functions, but as we mature that process, I think there's a bigger go-get, if you will, on that side in future years. I think along those lines, when you think about the shared services functions, I think we've done a terrific job as we look at those acquisitions and what we've been able to do to integrate them from, I'll refer to it as a core operations perspective, as it relates to how they service their respective customers. I think where we saw the opportunity is in some of the shared services areas where we simply bolted on those capabilities, and Dave gave the example earlier on some of the billing functions that we see as an opportunity there. I would say that short term, that's probably a bigger opportunity. I think on the store rationalization piece, I think the fact that we're sitting here looking at this saying we got about 70 stores, it really speaks to the quality of our retail footprint and the discipline that has always existed in terms of looking at quality over quantity in terms of as we looked at organic retail expansion. I think longer term, there is a pretty big opportunity in terms of leveraging the efficiency of our pharmacy delivery platform. Priscilla, right behind. For sure. Thanks. Bob Jones, Goldman Sachs. You talked about winning in the marketplace by having differentiated offering. I was hoping maybe you could talk a little bit about the decision to partner with Optum on the 90-day at retail. Obviously, there's been a lot more 90-day at retail, which I think kind of verifies or gives credit to the Maintenance Choice program, but it seems like now that there's everyone offering one and you guys now offering one through one of the Medicare companies. Just wondering if you could talk about that decision. Yeah, Bob. Again, I think you'll hear more about this as we go through the presentations. It's something that we can come back to. But I mentioned earlier that we have had good relationships with other PBMs that are not named Caremark. And as I mentioned earlier, we have an opportunity to take that to another level. And you're right, there are many 90-day products programs out there today that are not all equal. Some have different economic benefits. And I think that as we look at the role that CVS Pharmacy can play, we can elevate the ability that we have to partner in a differentiated way while not compromising the value proposition that Caremark has and the differentiation that it can describe in the marketplace, largely as a result of the fact that we have integrated the assets across the CVS Health platform. I will probably stop there because our presenters will get irritated with me because I am stealing their thunder from their presentation. You will hear that common theme throughout the morning, and we can certainly come back to it with the Q&A at the end of the session. Priscilla, in the back. Hey, good morning, guys. George Hill from Deutsche Bank. Dave, I am wondering if you can help me reconcile something because you talked about how the marginal script is very profitable, but if I look at the near term, call it the near to medium term, the next one to two years, you are talking high single digit, low double digit revenue growth, cost savings program, which is probably 4%, 5%, 6% additive to operating earnings growth, and capital deployment, which should get you to the same place. Yep. It sounds like you are basically talking about high single digit revenue growth with no incremental gross profit contribution because all the earnings growth is going to come from capital deployment and cost savings programs. I guess, help me square the two. Why does it seem like the vast majority of the revenue that comes on over the next two years comes on- Well, that is not completely accurate. I mean, yes, we are getting some cost savings out of there, but it is a pretty small number in comparison to our cost base and our profit or operating profit base. If you look, if you step back, about half of the adjusted earnings per share growth is kind of through capital allocation. We have a pretty good We obviously have a line of sight to that, and the other half is kind of in the core of our business. You are going to see, obviously, we think reimbursement pressure is going to continue. We do not see that changing, and the pace of that has not changed. At the same token, each year, we have to disproportionately grow scripts to offset that margin pressure, and that is just the fact of our business. You will see core organic growth in our business. Okay. Then maybe if I could just get a quick follow-up to on Ricky Gawasa's question. Can you disaggregate that long-term 11% revenue growth a little bit? I guess, how do you think about volume? How do you think about share? How do you think about price? How do you think about M&A? Maybe just rank order the buckets. Yeah, I can, but we don't really disclose that. That's a really nice question, though. I tried. Good try, George. Good try. People have tried before. All right. We will take one more question, and again, we will have time for more questions at the end. All the way in the back. There's one all the way in the back. Right there. Hey, Dave Larsen with Leerink Partners. Larry, can you talk a bit about your willingness to pursue more narrow network deals or preferred network deals like you did with Optum? How many more of those are in the pipeline, if any? Are there like two more, five more, 10 more? Any thoughts on that? Well, Dave, we're not going to put a number on that other than to simply say that our goal and objective is to look for ways in which we can make CVS Pharmacy part of the solution in terms of working with, not just with Caremark, but with other PBMs. Again, we're being a little redundant with the comment that you'll see more examples of how we're thinking about that this morning, because we firmly believe we can be a preferred partner for all PBMs and health plans for that matter. You'll see some examples where we've worked with health plan where we're not their PBM, and we don't have to be to add value to their proposition in terms of how they're thinking about how they can satisfy the goals and objectives that their clients have in the market. Okay. Why would a competing PBM want to enter into a preferred relationship with you if they are competing with you on the Caremark side? Can you give any thoughts around that? Yeah. Dave, it is a great question. I think, listen, when you look at the healthcare landscape, okay, I do not think it is unique to the healthcare industry, the lines between competition and partnering are blurry. I think there is a reality that we can partner in the areas where it makes sense. We can also be competitors. If we are doing it right, okay, yes, we will win some and we will lose some on the competitive side, okay? But the ability to partner and grow together will more than offset any of the challenges that competing creates. That is our mindset. I think we have demonstrated that. John will give you an example of how we have done that in Medicare Part D, where we now have the largest Medicare product in SilverScript with more than 5 million members. Yet, we are the PBM for about 40 health plans where we are managing their pharmacy Medicare benefit. He will show you some numbers in terms of how those partners of ours grew faster than the marketplace in Medicare. I think it is a great example of how we can do both. Thanks very much. Okay, thank you, Dave. Thanks. We will be back for another Q&A after all of the presenters this morning. Now that we have detailed our 2017 guidance and provided our updated long-term financial targets, I wanted to talk about our position in the marketplace and expand on our plan to re-accelerate enterprise growth for the years to come. I want to start off with picking up where we left off in the Q&A, that compelling value proposition, and why it continues to resonate with stakeholders across the enterprise. We believe that we continue to have the most extensive suite of enterprise assets. On a standalone basis, each one of these would be market-leading. Yet, what really sets them apart lies in our ability, to a large degree through technology, to integrate pharmacy care from the payer to the provider to the patient. These capabilities help us to deliver on our goal of driving more affordable, accessible, and effective care, delivering value to all healthcare stakeholders. Let me give you some examples of what we mean. If you look at our proprietary programs, whether it is Maintenance Choice or Specialty Connect, they remain the gold standards in giving patients choice while delivering substantial savings for payers. Members can seamlessly move between channels as needed, enhancing their experience while driving appropriate utilization and better outcomes. Since we are channel-agnostic from an economic perspective, our incentives are absolutely fully aligned with those of our clients. We can work closely with them to help them realize all of the financial, the convenience, and the clinical benefits that come from our exclusive programs. Additionally, we have a full view of the patient and a single patient record for prescriptions and care that is provided across our channels. This minimizes any potential delays in things like patient identification, and at the same time, it provides important information in real time to our pharmacists, regardless of which channel the patient chooses. Our digital assets are fully integrated as well, giving patients the simplicity of downloading a single app to manage all of their prescription needs, including retail, mail, and specialty. Finally, our Health Engagement Engine is a very powerful clinical rules engine that integrates all of our enterprise assets, providing real-time, actionable healthcare information. It allows us to aggregate data from both internal and payer sources, and then marry it with our clinical research to identify opportunities to improve clinical care. This enables our more than 30,000 pharmacists and clinicians to have important conversations with patients that will help lead to better health outcomes and lower costs for payers. Not only does our model allow us to bring unique and innovative solutions to market, it also allows us to connect broadly with all healthcare stakeholders. These stakeholders, they all have different needs as they are all trying to navigate an evolving healthcare landscape. Through our assets and capabilities, we can bring them powerful solutions that are extremely difficult to be matched by standalone peers. If you look at some examples, take a look at traditional retail pharmacy. I mentioned earlier that pharmacy, while it is a frequent touchpoint for healthcare consumers, it inherently lacks the connections to payers that drive a lot of healthcare decision-making. Traditional PBMs, obviously, they have deep connections with their client base, but they lack the face-to-face consumer connections to truly impact clinical outcomes. Through our enterprise assets, we can partner broadly and deeply with all healthcare stakeholders. We have affiliations with more than 70 health systems across the country, and we provide affordable healthcare services and connectivity through our Epic EHR. We also partner with providers through many of our enterprise assets to enhance clinical care for their patients. Additionally, we have the connections with patients through our numerous customer-facing assets, whether it is a CVS Pharmacy, MinuteClinic, or Specialty, and we are now the leading provider of pharmacy services in the long-term care market, giving us access to patients and caregivers in the senior living space. Certainly, we have a diverse PBM book of business, including employers, government entities, and health plans. Here is a brief summary of what we see as our key competitive advantages. First, we are the premier company with the ability to impact patients, payers, and providers with innovative channel-agnostic solutions. Again, you will see throughout the morning why this is important. We also have deep clinical expertise across our enterprise assets and multiple patient touchpoints, enabling us to deliver superior outcomes at lower costs for both patients and clients. With CVS Pharmacy as the anchor of our suite of enterprise assets, we can provide an unmatched value proposition for all payers, regardless of whether or not we are their PBM. In Specialty, we have the broadest capabilities to holistically manage patients, provide clinical support, improve access to medications, and drive superior outcomes. We also remain the leading provider of pharmacy services in the growing long-term care space, and through our broad clinical capabilities, we can enhance the continuity of care to help improve patient outcomes. Through our industry-leading infusion services, we offer site of care management, a significant differentiator for clients as we help move patients to convenient, lower-cost sites of care. Additionally, we are the largest retail clinic operator with more than 1,100 MinuteClinics across the country. We have now seen more than 32 million patients since its inception, and MinuteClinic continues to offer unmatched access to convenient, high-quality, cost-effective care. Through copay incentives, this can help payers achieve significant cost savings. Finally, we have unparalleled scale across the country, both in terms of dispensed prescription volume along with managed claims volume to drive down costs. Moving to the PBM, our value proposition for our clients has never been stronger. We are focused on attaining, and they hire us to attain the lowest net cost, okay, for their pharmacy spend. Over the past five selling seasons, we have been very successful at winning new business with more than $40 billion in gross wins, and we have also been successful at retaining business with a five-year retention rate of between 96% and 97%. These strong selling season results, along with our continued success in Medicare Part D, have allowed our PBM membership to grow from 62 million in 2013 to nearly 90 million members expected for 2017. I think this is a powerful proof point that clients and patients alike value the unique capabilities that CVS Caremark brings to the marketplace. As we have been able to grow the number of lives in our PBM book of business, we have also been able to expand our enterprise dispensing share. From 2013 to 2017, we will have increased the number of prescriptions filled across our enterprise by more than 300 million prescriptions. Let me walk you through some of the opportunities that we see emerging in the healthcare marketplace and how we are positioned to take advantage of them. I am going to start with the growth in healthcare spending and the accelerating focus on trend management. It is no secret to anyone here that healthcare spending continues to grow at an unsustainable pace. It is expected to outpace GDP growth in the U.S., and this trend is being driven by increased utilization of healthcare services. A lot of that is fueled by an aging population, along with an increased incidence of chronic disease. It has been estimated that roughly half of all adults have at least one chronic condition. This is placing a tremendous strain on the healthcare system, as these patients account for more than three-quarters of all hospital admissions and more than 90% of all prescriptions filled. The growth in healthcare spend is also being driven by increased prescription drug costs. Historically, the growth in drug spend has trended below that of overall healthcare costs, but we see that trend reversing itself as the generic wave of the past decade subsides, brand inflation continues, and new specialty products continue to enter the market at elevated price points. These drivers of rising costs are creating new challenges for plan sponsors as they grapple with the trade-offs between the higher costs of care and plan designs that meet the needs of their members. As payers evaluate their plan design strategies to mitigate these cost increases, they are counting on PBMs to help control the drug costs impacting their overall spend. In fact, in a recent survey, nearly two-thirds of clients rated PBM cost management techniques among their top three methods of controlling rising healthcare costs. They rated it ahead of increasing employee cost sharing, implementing wellness programs, or replacing traditional health plans with consumer-directed plans. Pharmacy care continues to be one of the most cost-effective ways of keeping people healthy and out of the hospital and other acute care settings. The key for these plan sponsors is making sure that their members are receiving the appropriate medications at the lowest possible cost. No PBM is better positioned to offer innovative cost management solutions that meet the needs of both plan sponsors and patients than CVS Caremark. You know, we have all the tools of a traditional PBM, including utilization, formulary management, network strategies, generic programs, but we are even better at managing cost and outcomes when using the full suite of CVS Health assets. Assets that include site of care management and infusion capabilities, the ability to manage specialty trend under both the pharmacy and medical benefit using our NovoLogix platform, real-time trend surveillance to help our clients proactively identify trend drivers and respond quickly to changing market dynamics, and certainly best-in-class clinical programs to ensure that patients stay on their prescribed therapies. Taken together, these solutions have had a dramatic impact on client trend, because this year through September, client costs were reduced from an unmanaged gross trend of 11.8% to a managed trend of 3.3%, with actually more than a third of our clients experiencing a negative trend given the range of CVS Caremark programs that they have adopted. I want to highlight another important example of the value that PBMs broadly bring to the healthcare community, because much has been said over the past year about the rising list prices of pharmaceuticals. It is an issue that affects both our clients' healthcare costs and the ability of their members to afford needed prescriptions. But it is important to remember that as manufacturers continue to attempt to push price increases through the supply chain, PBMs have been very successful at mitigating these increases through a variety of tools and programs. This IMS industry chart illustrates that point. It shows the growing gap between gross and net drug price increases, and this growing delta reflects the success of innovative PBM management strategies. You will hear more from John in his presentation on the specific actions of CVS Caremark. Next, let me touch on the growing role that government is playing in healthcare, because today, government entities account for about two-thirds of all healthcare spending in the country, and this is expected to grow and reach nearly $3 trillion by 2025. It is being largely driven by the growth in Medicare and Medicaid. This growth will create opportunities for our company, but it is expected to continue to create margin compression, as these segments typically carry lower margins. However, I think as everyone here is aware, Medicare members in particular are among the highest utilizers of prescriptions, which will help fuel script top-line growth over the next decade. Healthcare reform has expanded insurance coverage to more than 20 million people, lowering the uninsured rate to 8.3%. That is actually the lowest level at any point in our nation's history. The recent election results have certainly introduced some uncertainty into how much of this progress will be maintained going forward. Although there is a lot of rhetoric around the repeal of the Affordable Care Act, we see a corresponding dialogue around Americans having accessibility to affordable care. You are seeing discussions around the continuation of some of the core policies of the ACA, and you are seeing those discussions in the same paragraphs talking about the need for changing the ACA. In the end, we believe that the demand for cost-effective care for all Americans will remain, and if the Affordable Care Act goes away, there is going to be the need for affordable care action. CVS Health can pivot to address policy changes in terms of delivering and being part of the solution. Moving on to an area where we have more certainty and a clearer line of sight is the growth potential in Medicare. We know that for the next decade, we have 10,000 people turning 65 every day as baby boomers continue to be added to the Medicare rolls. We are well-positioned to capitalize on this growth through our Medicare Part D product, SilverScript. I mentioned earlier, it is the largest PDP with more than 5.6 million members. Additionally, through Caremark, we support the Med D and MAPD offerings of more than 40 of our health plan clients, working with them to bring compelling offerings to market while improving their Star Ratings. In total, our PBM supports more than 12 million Medicare lives. In the retail business, we participate in preferred Part D networks where it makes economic sense, and we have been very successful at growing our share in this market, as Medicare now accounts for about a quarter of all scripts dispensed at CVS Pharmacy. We also have a leadership position in long-term care with Omnicare, and as the number of frail adults rises with an aging population, the need for long-term care services and support will grow as well. Another trend that we see, Dave alluded to it earlier, is the slow but inevitable movement towards value-based care. Healthcare costs, as I mentioned a minute ago, are increasing at an unsustainable rate, and the healthcare system is looking for new ways to control this growth. One of the ways is to bend the cost curve in moving away from a system that rewards healthcare participants by the volume of care provided, and towards a system that rewards them for achieving better outcomes at a lower cost. The journey to value-based care is underway. In fact, in a recent survey of providers participating in value-based care, they expect that in the next five years, more than 60% of their reimbursements will come from some arrangement linking payments to value. But despite the anticipated shift to value-based care, providers are challenged. Only a quarter of them are currently meeting their goals to lower healthcare costs. Now, we have a multitude of ways that we can assist payers and providers in their transition to a value-based care environment, and first is through effective pharmacy care. Pharmacy is an important cog in managing overall healthcare costs, and we have the unique capabilities to make healthcare dollars go further. Through our unique programs and clinical expertise, we can effectively manage costs while keeping patients adherent. You look at MinuteClinic, we provide low-cost, convenient access to healthcare services, and by implementing the Epic EHR system across our clinics, we have been able to expand our scope of services, and at the same time, giving us greater connectivity to other health systems. This enables us to triage patients to the most appropriate and the most cost-effective site of care. By migrating patients to infusion centers or infusion in the home from higher-cost settings like hospitals, we can also dramatically lower costs. Additionally, we can support patients as they transition through different stages along the continuum of care, ensuring that they stay adherent to their script therapies, preventing costly hospital readmissions. Our other enterprise capabilities and expertise, you look at Medicare Part D, it enables us to support our clients' goals in driving those Star Ratings, and we have been successful at delivering on this goal with 80% of the Med D lives that we support now in high-performing plans. We have unmatched clinical programs that are powered by the Health Engagement Engine and brought to life through the face-to-face interactions with healthcare consumers. Now, let's talk also about the importance of size and scale in driving down costs, because this year, we expect to dispense more than 1.3 billion prescriptions across our enterprise. That would include retail, long-term care, mail, and our specialty pharmacies, significantly more volume than any other retail or PBM peer. This gives us substantial procurement scale to be a more efficient purchaser of pharmaceuticals, lowering costs for payers. This scale is even further enhanced by our Red Oak generic sourcing venture with Cardinal Health, which is not included in these numbers. If we look at our managed claims volume, this year, we expect to manage nearly 1.4 billion claims within the Caremark book of business, making us the largest pharmacy benefit manager in the country. This significant claims volume gives us the needed scale to support negotiations with brand manufacturers for rebates or price protection, and certainly formulary placement. It is important to note that this creates significant value for our clients, Dave mentioned this earlier, as more than 90% of these rebates are passed back to them. We see significant opportunities to further leverage our formulary strategies as new products, including the biosimilars, enter the market in the coming years. The next trend that we see creating some significant opportunities for us is this increasing consumerism in healthcare and what we have been calling the retailization of healthcare. We see the continued growth of consumer-directed plans with more than 80% of large employers today offering CDHPs, and you can see that this is expected to grow over the next few years. We also see this trend playing out in the health insurance market, including the public exchanges, where we have seen consumers who are willing to shoulder more of the cost burden when they become sick in exchange for lower monthly premiums. As the cost burden on the patient increases, we have to shift our mindset to engage with them as healthcare consumers, not merely patients. Our 9,600 pharmacy locations enable us to have meaningful face-to-face interactions with these healthcare consumers, and this is a significant competitive advantage for us in the healthcare marketplace, and one that other PBMs and health plans do not have, and it makes us a real valued partner for all payers. As I noted in my introductory remarks, one way of thinking about our advantage position is to say that we own the last mile in the delivery of care. Our unmatched touchpoints, whether it is retail pharmacy, mail, specialty, MinuteClinic, long-term care, infusion, they put us in direct contact with healthcare consumers each and every day, no matter what healthcare road they happen to be on. I think this is a real underappreciated advantage of our model, is these face-to-face engagements and interactions have been proven to be two to three times more effective at increasing adherence and improving health outcomes. You combine that with our unique integrated programs and our full view of the patient, and what you have are healthcare solutions that are more affordable, more accessible, and more effective. You will see examples of this in action throughout the morning. The final opportunity that we see in the healthcare market is the growing role of digital in consumer decision-making. We've developed a three-pronged approach to digital innovation to help people save time, money, while enabling them to make the best possible healthcare decisions. Helena will provide more detail, but let me summarize our goals here with three simple objectives. We have a big opportunity to drive adoption by attracting new users and increasing engagement of active digital users, and we look for ways to personalize customer interactions to drive member engagement. Second, we aim to develop a convenient, fully integrated pharmacy and health experience that only CVS Health can provide. With our CVS Pharmacy app, we can enable prescription management across retail, specialty, and mail, while also integrating our front store and MinuteClinic. We will also drive ongoing innovations to further enhance mobile engagement, drive greater personalization, and enhance digital tools to deliver better health outcomes. We will look to harness emerging digital trends along with our data capabilities, all in an effort to improve patient care. We see our digital strategies as being critical to enhancing the customer experience, driving loyalty, and improving health outcomes. With that backdrop of our view of the landscape, let me spend my remaining time on our strategy for driving long-term sustainable enterprise growth, along with some actions that we're taking in response to the marketplace dynamics that we touched on earlier. Our growth strategy has been centered around five key strategic imperatives, and these have not changed. First is aggregating lives, and as we touched on earlier, we've been very successful at growing the membership in our PBM book of business by demonstrating value to existing and prospective clients through our cost management solutions and clinical capabilities. Second is to continue to grow share across our enterprise dispensing channels. Keep in mind that this is more than just a retail story, as we intend to grow share across our enterprise assets, including specialty and long-term care. Over the last few years, we have been executing on this quite well, and we see 2017 as an aberration, and given the actions that we're taking, we expect a return to healthy growth. Third, we must continue to execute with excellence, driving efficiencies across our enterprise so that we can continue to be a low-cost provider for payers while delivering exceptional service to patients. Fourth, we remain committed to driving innovation across all lines of our business, and I'll talk shortly about some of the ways we're innovating to drive increased value for our partners. Finally, we'll continue to operate with an enterprise mindset, recognizing that we have many avenues of growth across our broad suite of assets, and the solutions that we bring to market may adversely impact one area of the business to the benefit of another and to the benefit of the CVS Health enterprise. We've been steadfast in executing on these business imperatives to drive growth across our enterprise, and we'll continue to do so. As we mentioned earlier, in response to the near-term headwinds of next year, we have a plan in place to return to more robust levels of earnings growth. Importantly, this plan is not a departure from our enterprise growth strategy, but simply a set of actions to respond to near-term market dynamics. Let me review the four points of the plan. First, as you have heard this morning, we will leverage our enterprise capabilities and CVS Pharmacy's compelling value proposition to partner more broadly with other PBMs and health plans. Our recent announcement of the 90-day solution with Optum is an example of what we are talking about. We have capabilities that generate results that other retail competitors simply cannot match, and we have begun to offer a menu of bundled services, including our clinical capabilities, along with our MinuteClinic infusion and long-term care capabilities as a component of the CVS Pharmacy value proposition. CVS Pharmacy has unmatched clinical capabilities, and as mentioned earlier, the delivery of pharmacy care as we go forward will not simply be about the lowest cost, but will be about who can keep patients the healthiest and deliver the greatest overall healthcare value. You will hear more about these partnerships and capabilities in Helena's presentation. Second, we will continue to innovate to bring new integrated PBM products to market that capitalize on the benefits that are inherent in our unique integrated model while meeting the evolving needs of our clients and members. Our ongoing innovations will encompass clinical solutions to support patients at all stages of the care continuum. We are also bringing new value-based approaches in specialty and traditional pharmacy, including partnering with pharma in different ways to drive savings. These approaches will include indication-based pricing and outcomes-based contracting, where reimbursement is linked to a set of value-based attributes that can be measured and tracked to evaluate performance. We are also introducing new network strategies that ensure competitive reimbursement based on a series of performance metrics. Today, we are introducing a new generation of Maintenance Choice. This new version of our industry-leading program will bring a new level of convenience for patients, delivering pharmacy right to their door and right when they need it. You will hear more about these programs from Jon and Alan. Dave touched on our cost savings initiative in detail during his presentation. Let me just reiterate a couple of the key points. First, we continue to be focused on driving costs out of our business by improving productivity and optimizing our cost structure so that we can drive costs lower for our clients and the members that we serve. As part of this initiative, the three pillars that we are focused on, rationalizing our store footprint, enhancing the efficiency of our shared services functions, and optimizing our pharmacy delivery platform. Through these efforts, we expect to achieve nearly $3 billion in cumulative savings by 2021. Finally, we have significant cash generation capabilities that provide us with a variety of ways that we can grow and return value to shareholders. We remain confident that we can achieve solid operating profit growth across the enterprise in the years ahead, and our substantial cash flow affords us opportunities to bolster that growth, either through strategic acquisitions, to supplement our existing asset base, or through value-enhancing share repurchases, as Dave outlined earlier. Again, here are the key takeaways that we would like you to keep in mind as you listen to the remainder of this morning's presentations. Let me just conclude by stating that we remain very confident in our model and our position in this evolving healthcare landscape. We can bring value to all healthcare stakeholders, helping them achieve their goals of making care more affordable, accessible, and effective. With that, let's go ahead and take a break, and we will start again promptly at 10:05, with John's presentation. Good morning, ladies and gentlemen. Could you please take your seats? The program is about to begin. Thank you. Good morning, everyone. Very happy to be here to share with you our continued success in the marketplace with our PBM. This morning, I'll explain why PBMs are needed now more than ever to help control healthcare costs and improve outcomes, and why we believe CVS Caremark is uniquely positioned to address those needs. I'll begin by reviewing our performance highlights for this year, discuss how we're helping our clients manage their pharmacy benefit and control drug costs, and demonstrate how our integrated model delivers value to both members and providers. I'll close by sharing some of our innovations that will deliver future growth to meet the healthcare challenges of tomorrow. Earlier, Larry shared with you the key market dynamics facing CVS Health. First and foremost, payers continue to struggle to manage rising drug costs. PBMs continue to play a key role in keeping those costs in check. Today, payers are turning to their PBMs for help with an increasingly complex set of challenges beyond traditional cost management. Consumers are assuming an increasing share of their own healthcare costs, and the growing incidence of chronic illness combined with a rise of aging population require complex pharmacy regimens, while at the same time, the rise of value-based payment models putting more pressure on providers. The role of government as both a payer and a regulator is increasingly complex. Against this challenging backdrop, PBMs might not only need to help payers reduce pharmacy spend, but also must help drive more affordable, accessible, and effective care, delivering value to both members and providers. We believe CVS Caremark is uniquely positioned to address these market dynamics. As Larry mentioned, over the last decade, CVS has built an unparalleled enterprise with an unmatched range and number of touchpoints. Our ability to meet patients where they are, to influence their behavior when they are actively thinking about their health is unrivaled in our industry. In a few minutes, I will show you how we are using our integrated model to transform pharmacy care, delivering better results for clients and members. Let us take a look at why our model positions CVS Caremark as the PBM of choice. CVS Health was the first to innovate the traditional PBM model in anticipation of the evolving market needs. We continue to stay ahead of competitors by constantly innovating our integrated model, which allows us to bring new products and services to the market faster than either joint ventures or partnerships that others may have. Our purchasing scale is unrivaled in the industry. No other PBM can negotiate with pharmaceutical companies with our scale and expertise, whether they are a standalone PBM or part of an integrated health plan. Through our Health Engagement Engine, we are also able to distribute actionable clinical information throughout our enterprise and coordinate with providers, which enables us to seamlessly address patient needs while helping save money for our clients and improving care. Additionally, our integration across CVS Health, from the PBM to retail pharmacy to MinuteClinic and beyond, provides a far broader range of consumer touchpoints than our competitors. We believe our integrated model truly positions CVS Health as the PBM of choice, and let us take a look at how the model is resonating in the marketplace. Our solid growth continues with strong top-line revenue as well as operating profit growth. Since 2013, we have been able to achieve double-digit CAGRs for both revenue and profit, and we estimate that in 2017, our net revenues will be approximately $132 billion, and we will deliver just under $5 billion in operating profit. In a highly competitive selling season, we are leading the market and acquiring new business through our innovative offerings. Of the business that moved in the 2017 selling season, CVS Caremark won more than half the revenue. This resulted in gross new business wins of $7.8 billion for 2017, and that is combined with a 97% retention rate for our existing clients. Clearly, this was a very successful selling season, which continues to validate our integrated model. Let us take a look at the breakdown of those sales across segments. About two-thirds of our wins are from health plans such as Physicians Health Plan and Gateway Health. We also had more than $1 billion in union and government wins with clients such as the West Virginia Public Employees Insurance Agency, the Pennsylvania Teamsters, and POMCO on behalf of Westchester County. We continue to be very successful in the employer space as well, with more than $1 billion in revenue through clients such as Lenovo, Pearson Education, and Capgemini. Net new business is $4.3 billion. So let us take a look at how this business provides a platform of growth. Over the past three selling seasons, we have delivered approximately $31 billion in gross revenue and gained 42 million incremental prescriptions across the CVS Health enterprise. Here you can see enterprise prescription growth among the new group of clients that CVS Caremark onboarded in 2015, so we will call them the class of 2015. The light blue bar shows how many scripts we filled for these clients in CVS channels, which includes mail, retail, and specialty, in 2014 before they signed up and became a Caremark PBM client. The dark blue bar shows the number of prescriptions we expect to fill for these same clients in 2017, which is their third full year as a CVS Caremark client. As you can see, we will fill more than 20 incremental scripts in one of our channels in 2017 from the new business we onboarded in 2015. To recap, we filled 8.4 million scripts for these clients before they became a CVS Caremark client across all our channels, retail, mail, and specialty. In 2017, for these same clients, we will fill in total more than 29 million scripts. You can see we have grown our enterprise dispensing for these clients by more than 20 million prescriptions. Similarly, for the class of 2016, which are the new clients we onboarded in 2016, we expect to fill 14 million incremental scripts in 2017. For the class of 2017, and these are the clients that we are onboarding now, we expect to fill 7 million incremental scripts once they are a CVS Caremark client. We believe new business wins offer substantial upside for enterprise dispensing. What is the bottom line? The longer we serve a client, the more we are able to grow enterprise dispensing, which is a win for our clients who get the benefit of our integrated programs and also obviously a win for us. Let us take a look at two case studies that illustrate our record of success in increasing enterprise dispensing with health plans. This client is a health plan which we won effective January 2016. In just one calendar year, our script volume from this client has grown by nearly 7 million scripts, and that is across both Medicaid and Medicare lines of business. Success for this client was driven by the adoption of CVS Caremark network strategies, which delivered more than $20 million in annual savings for that health plan. On the right, you can see a large commercial health plan that has been a PBM client for several years. The number of scripts flowing through our channels continues to increase each year, again demonstrating that the longer we serve a client, the more we can grow enterprise dispensing. Complementing our partnership with health plans, we offer broad expertise in government programs. Medicare remains a critical growth driver for both CVS Health and our payer clients. Our SilverScript Insurance Company is the nation's largest standalone Medicare prescription drug plan, and we are very proud that it has earned four stars on the government's annual quality measurement system for the second consecutive year. We have built deep expertise through supporting SilverScript's more than 5 million members. When you include our health plans that are in the Medicaid business, we serve and support a total of 12 million lives under management. We provide operational and consultative services to these health plans as they design their Medicare plans by making formulary and plan design recommendations, and we also help them prepare for their annual bid to CMS. Our goal is to support them in bringing competitive products to the market, achieve their Star Ratings, and manage their plans' operations in this heavily regulated market so that they can continue to grow. I am very proud of the fact that 80% of the Medicare lives that we serve are in either four or five-star plans, which, as you know, is critical in Medicare Advantage. Our expertise in helping health plan clients deliver a competitive product in the market has enabled them to grow faster than the market has grown. The Medicare Part D market has grown on average 4.8% annually since 2013. Over that same time period, our clients have seen their Medicare membership grow by 7.6%, so they are clearly outpacing the market growth. Even though our clients sometimes compete with SilverScript, our unrivaled expertise in designing and administering Medicare prescription drug plans delivers an important value-added service to these plans. At the end of the day, our strength in Medicare enables both CVS Health and our clients to grow. Along with our strong performance in Medicare, we are consistently winning in specialty pharmacy. It is another key priority for our clients. As you can see, CVS Specialty revenue continues to outpace the market, growing at a CAGR of 29% compared to 19% for the industry. Alan Lotvin will provide a deeper dive on our specialty performance and outlook in a few minutes. Along with expertise in government programs and specialty pharmacy, our clients continue to demand top-quality service performance, both for themselves and their members. Our client satisfaction remains extremely high, with top two box scores of 96%, and is consistent with the high levels of member satisfaction at 94%. While we are proud of this performance, we continually strive to raise the bar even higher. Our team is incentivized to deliver great service, and we are investing in new performance, analytics, and tracking tools to drive continuous performance. In the past, we measured service in our call centers by scoring a sampling of calls. Now we have developed new methods of scoring on every single call that comes into our call centers so that we can pinpoint service performance down to the level of the individual customer care agent to make improvements precisely where they are needed. We are especially pleased that we are able to maintain satisfaction scores during the 2016 implementation phase when we onboarded more than 9 million new members. We believe the service innovations that I just described will deliver even greater results as we implement another new round of clients and plan designs in January. As you can see, our integrated model has enabled strong performance in 2016, and it is well-positioned for future growth. Let us dig a little deeper into how we help clients address their top priority, which is reducing cost. Without our PBM management, our clients would have experienced an unmanaged trend of 11.8% for 2016. As in previous years, the primary trend driver was branded drug inflation, with utilization growth of 2.3%. As you can see, our PBM management successfully brought trend down by 6.4% for our clients, and I will talk in a moment about our differentiated approach to reducing costs. Clients across our book of business are averaging a 3.3% year-to-date for 2016, and we even have a third of our clients that are experiencing negative trend. Let us take a closer look at how we continue to deliver these outstanding results. Drug pricing is certainly front and center in the headlines, with a lot of press about a few hyperinflating drugs. When you step back and look at the data, you can see that steady inflation on branded drugs in non-specialty categories, which ranges from more than 12% to nearly 15% over the past five years, is actually the key driver of cost to payers. By contrast, price inflation on generic medicines hovers around 3%, and that's helping to moderate the overall trend. Over the past five years, brand inflation, and this is before any PBM management programs, would have added $21 billion to our clients' spend, while generic inflation, on the other hand, would have added only $2 billion. Clearly, our clients need our services now more than ever. This slide shows the launch prices of select new specialty drugs over the last two decades. As you can see, we've experienced an order of magnitude increase in launch prices for specialty medicines. Alan will talk more about this, but you can see that these rising drug launch prices represent a growing concern for payers. Those concerns will continue to increase dramatically over the next five years. With 10,000 Americans turning 65 every single day and more than 200 new specialty drugs expected to launch in just the next two years, we expect the utilization of specialty drugs to continue to rise. Clearly, now is the time for PBMs to deliver greater savings than ever, and we believe we're uniquely positioned to do just that. Our differentiated three-pronged approach to cost management helps to reduce costs and deliver more affordable care for our clients. First, through intelligent purchasing, we help deliver the lowest net cost in each category. Our thoughtful and strategic purchasing decisions are guided by a comprehensive assessment of the marketplace, with clinical input from our independent pharmacy and therapeutics committee. Second, our real-time surveillance and dynamic trend management capabilities enable us to help clients identify trend drivers and rapidly address them. Finally, our versatile cost management strategies provide the flexibility necessary for each client to address their own unique priorities. It's the integration of these three components that really sets us apart in the industry. Let's walk through each prong of our approach in a little more detail. Intelligent purchasing is the bedrock of our approach. We take a holistic view, looking at the total cost for the client, not just the price for an individual drug. This strategic assessment, paired with our scale, allows us to move on the right opportunity at the right time so that we can negotiate with pharmaceutical companies from a position of strength and help drive lower costs for our clients. Some examples of these intelligent purchasing decisions and how they've translated into value for our clients include obtaining industry-leading generic pricing through the Red Oak sourcing venture with Cardinal Health, which is the largest generic sourcing entity, offering price protection on more than 90% of our pharma contracts if manufacturers raise prices over pre-negotiated thresholds. Since 2012, we've delivered $9 billion in incremental savings for clients who have aligned to our template formularies. Over the last three years, we've been able to significantly reduce the impact of pharmaceutical trend for our clients. While unmanaged trend remains and continues to grow at about 12%, the rebates and price protection that we negotiate with manufacturers, complemented by our utilization management and clinical tools, consistently helps protect our clients from bearing the brunt of that inflation. As you can see, our clients' cost post-rebate trend continues to decline as a result of our intelligent purchasing. Because the market is changing so rapidly, we know that continuous monitoring of trend drivers and the ability to quickly adapt is essential. Last year, if you remember, I provided you a demonstration of our interactive RxInsights tool, which enables our clients to closely monitor trend drivers and model personalized cost management opportunities. As a refresher, here's what the monitoring focuses on. First, we offer continuous analysis of manufacturer price increases, enabling us to react swiftly to egregious inflation and discourage unwarranted price hikes. Second, proactive monitoring of the drug pipeline enables us to conduct a thorough assessment of new-to-market drugs before they're included on our formularies. Third, we help to reduce fraud, waste, and abuse by auditing and investigating suspicious activity. For example, we conduct on-site investigational audits of about 4,500 retail pharmacies each year. Finally, we can detect inappropriate or unnecessary utilization increases within a category, class, or drug, and quickly apply versatile management strategies. Let's take a closer look at the savings impact that this dynamic approach to trend management can deliver for clients. Earlier this year, with real-time market surveillance, we identified a spike in the cost and quantity per claim being billed to certain clients for products containing lidocaine, which is commonly used in many compounds, such as topical pain creams. These compounds are often more expensive, but no more effective than over-the-counter pain relief products. Through our real-time monitoring, we were able to flag this activity for our clients, develop potential solutions to encourage more appropriate alternatives, help them evaluate their options, and ultimately implement a new approach. In this client example, the per-member, per-month spend on lidocaine dropped by nearly 90% in a matter of weeks without any adverse member impact. Another important area of surveillance is fraud, waste, and abuse. For example, we're all aware of the challenge that opioid abuse presents in this country. Our core safety and monitoring programs are designed to identify and reduce such prescription abuse. This surveillance and subsequent action helped save our clients $100 million in 2015. The third prong in our approach is versatile cost management. Our broad range of solutions allows us to work with clients to develop a strategy that aligns with their philosophy and targets unique drivers within their population. For simplicity, we've grouped these strategies into layers that work together to deliver the lowest net cost. The first tier, our foundational approaches, includes our template formularies, which eliminate redundancy across drug classes and help drive best economics on the remaining products. These solutions can deliver savings of up to 8%. The next tier, which we call targeted strategies, includes solutions such as drug-specific utilization management criteria, prior authorizations, and step therapies. These solutions can deliver savings of up to 13%. The final tier offers opportunities to drive incremental savings through network optimization, and these solutions can deliver savings of up to 4%. Let's take a closer look at these strategies in action. CVS Health has been the unrivaled leader in formulary innovations. In 2012, we became the first PBM to exclude high-cost drugs from our formulary in favor of less expensive clinical equivalents. In 2015, we made the decision not to cover newly launched drugs for up to the first 180 days that those drugs are on the market. This enables our clinical experts to thoroughly study the evidence supporting the use of those medicines and determine whether they deliver value over existing alternatives. Obviously, breakthrough drugs are reviewed on an expedited basis. More recently, we have implemented additional reviews of specialty medicines, and in 2017, we are rolling out biosimilar preference strategies as well as tools to manage hyperinflation. We are also in the process of rolling out an indication-based formulary, and I will talk a little bit more about that later. As you can see on the right side of the slide, clients that have developed their own custom formularies average slightly over $107 per member per month in drug costs. We offer several formulary options that can save clients money. As an example, if you look in the lower right-hand corner, our value formulary averages a little over $80 per member per month. This would deliver a 25% savings for custom formularies that clients manage themselves. While formulary management is the foundation of our versatile cost management strategy, CVS offers clients a wide range of products and services. More than 25 million members already are enrolled in our industry-leading Maintenance Choice program, and as we look out, we see the potential to grow Maintenance Choice up to 46 million members. If you combine Maintenance Choice with our other network strategies, like narrow and preferred networks, we believe there is an opportunity to grow participation up to 86 million members and deliver savings of up to 4%. Clients also have strongly adopted our formulary strategies, with 27 million members now covered by one of our formulary solutions. Clients appreciate that our integrated model and face-to-face communication can actually help members transition to new therapies when the plan makes a formulary change. We believe we have the opportunity to grow adoption of our formulary strategies up to 55 million covered lives across our book of business. With the cost of specialty medicines continuing to rise, as I shared earlier, we see growing adoption of exclusive specialty and specialty medical management programs, and these solutions can deliver up to 13% in savings for our clients. Again, Alan Lotvin will talk more about this in a few minutes. As you have just seen, our three-pronged approach to cost management makes CVS Caremark uniquely positioned to help clients drive down pharmacy trend while improving members' health outcomes. Now that I have addressed our clients' top priority, reducing costs, let us take a look at how our integrated model delivers value above and beyond cost management. We provide medication through multiple channels, not only our retail and mail pharmacies, but also our specialty pharmacies, our infusion network, and our long-term care pharmacies. We have not just only connected these dispensing channels, but we have fully integrated them so that we can enhance pharmacy care and member experience at every access point to deliver better results and greater satisfaction. Each of us knows how complex healthcare can be. For example, we know that three in four seniors are managing two or more chronic conditions, while 5% of the patient population with a specialty condition accounts for more than one-third of all healthcare costs. Many patients need help with managing both their own health conditions and those of their family. Helping patients adhere to their prescribed therapies is very important because the annual cost of non-adherence is about $300 billion in our country. Our payer clients are working hard to manage these macro trends on a micro level, and our integrated model offers numerous advantages in helping them do just that. Here's how we're uniquely able to accomplish that. Our proprietary Health Engagement Engine is the enabler, an unrivaled integrated platform that responsibly transforms healthcare data into actionable interventions designed to improve clinical outcomes and reduce costs. This capability makes CVS Health truly integrated, not just connected. I have a short video to show how our Health Engagement Engine works across our integrated platform. It appears that you're not taking your medication as prescribed by your doctor. Before you go, I see you are due for your A1C test. Your patients receive their medication. CVS Health has millions of conversations with members every day about their health, in our pharmacies, MinuteClinics, on phones, and through digital tools. We are also having these important conversations with them at doctors' offices, other pharmacies, hospitals, homes, and virtually anywhere our members go for care, so we can help ensure they are getting the quality care they need at affordable costs for you. Orchestrating this complex coordination of care is our Health Engagement Engine, our proprietary technology solution that combines clinical data and other health information used to enhance pharmacy care for our members with critical data from other sources provided to us for this purpose, such as medical benefits. It also supports the member's plan. The Health Engagement Engine uses this data to identify and prioritize opportunities to help improve cost, quality, and access for every member by driving very specific and targeted messages to the member and provider. It delivers these messages based on its learned understanding of their pharmacy care behaviors and prior response patterns. What accelerates effectiveness, however, is that the Health Engagement Engine works in a way that fits naturally into the member's life. We find them just when they need us, delivering the right message to help them make important care decisions at a time they are already thinking about their health. The Health Engagement Engine gathers valuable feedback based on what members and providers do, so care and access are always getting better and smarter. Connecting everyone caring for members through technology and the many CVS Health touchpoints is helping to make a difference, improving adherence, simplifying care management, raising quality, and reducing costs. That is integration where it matters. Now let us meet Sarah, whose care is coordinated across our multiple channels with the Health Engagement Engine. Sarah is 43 years old. She struggles with managing multiple sclerosis, which requires her to follow a complex specialty medication regimen. Additionally, her doctor recently told her that she is a pre-diabetic. Here are some of the ways that our Health Engagement Engine enables us to translate all of Sarah's information into actionable data that helps us deliver high-quality care for her. First, our Specialty Connect program makes it easier for Sarah to fill her specialty multiple sclerosis prescriptions. Sarah used to have to take a day off from work to stay home and wait for her specialty prescription to be delivered so that she could sign for the prescription and put the medication right into the refrigerator. Now, with Specialty Connect, she can pick up the medication at her local CVS Pharmacy when it is convenient for her. At the pharmacy, the pharmacist is prompted to offer to synchronize Sarah's prescriptions so she can pick up all the medications she needs with one visit. On average, our ScriptSync program improves medication adherence by 6%. Sarah speaks regularly with her specialty care team. The nurse helps Sarah watch for signs that her drug regimen needs to be changed so that she can prevent a flare-up of her multiple sclerosis, which could lead to a hospitalization. A recent study shows that engagement with our embedded nurses results in 52% less multiple sclerosis patients reporting flare-ups. The care team also helps Sarah register for our CVS app, which can be programmed to send text reminders so she does not forget to take her medications. Complementing those interventions, MinuteClinic also helps to support Sarah in preventing the onset of diabetes. All of this is possible because of our integrated model and our Health Engagement Engine. We think of it as integrated pharmacy care, and we know it delivers better results. Now let us take a look at some examples of the results our clients can achieve by adopting the unique programs made possible through our integrated model. First, our programs help ensure high-quality pharmacy care for routine conditions such as wellness and preventative care services. For example, our HealthTag reminder service delivered a 34% higher vaccination rate. Our flagship adherence program, Pharmacy Advisor, has increased adherence by nearly 10% and reduced gaps in care by 7.5%. Every member who achieves optimal adherence can help our clients reduce their overall healthcare costs. Another important intervention is our approach to specialty care management. Through our nurses working with chronic disease patients, we have been able to reduce hospitalizations by 23%. We also work with our clients' most fragile patients, for those who may be on 15 to 20 different medications, to help ensure they are on the right drugs and understand how to take them. Our programs have helped reduce hospital readmissions by 48% in these patients, which results in direct medical savings. As you can see, our unique ability to impact outcomes by engaging patients wherever they are on their healthcare continuum results in significant benefit for both patients and payers alike. Now that we have walked through the advantages of our integrated model, I would like to share a preview of our innovation roadmap, and I want to remind you that many of these innovations are fundamental outgrowths of our integrated model. We are planning a number of new products and services to anticipate and address unmet needs for both clients and members. We have a proud history of continuous innovation, and here are just some of the innovations CVS Health has introduced in the past few years to help deliver more affordable, effective, and accessible care. Over the next year, we will introduce additional solutions to engage members, build satisfaction and loyalty, and enhance outcomes. To promote affordability, we are rolling out a series of new programs to drive greater value in contracting, both with pharmaceutical manufacturers and in our retail network pharmacies. To promote quality and improve effectiveness, we are developing a series of transformed care programs for chronic conditions like diabetes. To ensure accessibility, we are expanding our flagship Maintenance Choice program to provide even greater flexibility and convenience. So let us take a look at a few of the highlights. We'll start with a deeper dive into our cost management innovations. Increasingly, we're exploring new ways to share risk with pharmaceutical manufacturers to ensure that our clients are getting the best possible value from their drug spend by more closely linking drug prices to the outcomes that those drugs deliver. Among other approaches, we're exploring ways to change a drug's reimbursement at the indication level so that clients pay more for the use of a given drug in diseases where that drug is shown to be more effective, and they pay less in diseases where the benefit is not as clear. Outcomes-based contracting is another option, and this approach involves monitoring the outcomes of the drug therapy and aligning reimbursement with the outcomes achieved. This type of contracting is relatively new in the marketplace, and we're exploring multiple models across the continuum. We're also rolling out several innovations to optimize value in our network strategy. Research shows that narrowing the pharmacy network delivers savings for clients by reducing redundancy, not by reducing access, and also can help drive improvements in adherence. Our new value-based network is a great example. The approximately 50,000 pharmacies participating in this new offering will meet a stringent set of performance criteria. The network is designed to provide a high level of member access and will also include a pay-for-performance component. We will measure the performance of those pharmacies across numerous key metrics, including formulary compliance, closing gaps in care, and adherence in specific disease states. Clients who adopt this network can achieve up to 3% savings while ensuring their members have ready access to consistent source of quality pharmacy care. Another critical area of innovation for CVS Health is partnering with our clients to address the growing incidence and cost of diabetes. Diabetes is a top driver of both spend and trend for our clients. One in three members will be diagnosed with diabetes in his or her lifetime, and members with type 2 diabetes have a higher annual medical cost of about $10,000 on average. Our integrated model gives us a unique opportunity to support diabetic patients' care plans. We've marshaled resources across our enterprise to provide high-touch, personalized support based on disease complexity through our new integrated diabetes program called Transform Diabetes Care. The program begins with stratifying each patient according to their disease complexity. Next, we target customized interventions for each patient cohort, and we provide highly personalized support to help improve medication adherence, better track and control A1C levels, and support healthy lifestyle behaviors. The program is available through our CVS specialized diabetes network, which includes all of our CVS Pharmacy locations and CVS Caremark mail service pharmacy. Our goal is to improve outcomes for members with diabetes while simultaneously reducing costs for our clients. We offer members a connected glucometer. In addition, members will receive comprehensive diabetic care visits at MinuteClinic locations, including A1C checks. Our new program also includes a year-over-year trend guarantee in the single digits for the anti-diabetic category. Think about this program very similar to how you would think about exclusive specialty. By increasing dispensing in our channels for these patients, we simultaneously reduce costs while improving clinical results. It's another example of a win-win for clients, patients, and CVS Health. Let me show you how this program works. Paul has just been diagnosed with type 2 diabetes. When he fills his prescription through any of our CVS Pharmacy locations or Caremark mail, the pharmacist will counsel Paul about how to manage his diabetes and stay adherent to his medication. Paul will receive a connected glucometer, which via cloud connectivity, will seamlessly share his blood glucose levels with our pharmacist-led wellness support team, enabling them to contact Paul and intervene with one-on-one coaching. Our program also offers Paul two comprehensive MinuteClinic diabetic visits at no out-of-pocket cost. During this visit, our licensed nurse practitioners and physician assistants will counsel Paul on lifestyle changes, including diet, to help reduce risk and prevent complications. Since all of our 1,100 MinuteClinic locations use the Epic EHR, data from the visit can be shared in many cases with a member's primary care doctor. When our clinician teams notice a problem from the data that Paul's glucometer has transmitted directly to the cloud, they will call Paul to provide additional individual support to help him better manage his blood glucose levels. No other company can offer this comprehensive set of consumer touchpoints, combined with the integration and connectivity across all of our channels, to manage chronic diseases like diabetes and deliver these type of results. We estimate that improving management of diabetics can save our clients $36 million per 100,000 lives. Beyond diabetes, another key area of innovation for CVS Health is the continued expansion and refinement of our core Maintenance Choice offering, which enables members to choose whether to pick up their maintenance medicines at retail or have them delivered through mail. Our latest iteration of the product, which I'll call Maintenance Choice 3.0, offers same-day delivery within two to three hours to their home or workplace. We are redefining convenience with Maintenance Choice 3.0, with more points of access for members than any other PBM. Let me give you some examples of how this expanded Maintenance Choice offering will benefit a wide range of patient needs and concerns. Patients like Bill, who have chronic conditions but are stable, will continue to benefit from the convenience of traditional mail delivery for their maintenance medications. By contrast, patients like Rick, whose chronic conditions require additional counseling at the pharmacy counter, will have better outcomes if they pick up their medicines at retail so that they can engage in important adherence interventions face-to-face with their pharmacist. Susan, on the other hand, doesn't have much time to run into the store. Curbside delivery enables her to maintain her busy schedule while remaining the champion caregiver and planner for her family. And finally, Lois will benefit from same-day home delivery, which will help her stay healthy when her symptoms require an immediate change to medication. Our home delivery service will be offered across CVS Pharmacies, not only enabling Lois to refill her maintenance medications in two to three hours, but also allowing her to order over-the-counter products and front store merchandise all in one convenient delivery. The bottom line, Maintenance Choice 3.0 puts care within easy reach for all types of patients across the care continuum. No other company can match the convenience and flexibility. In conclusion, it's clear that CVS Health is leading the evolution of the role of the PBM to meet the needs of today's healthcare environment. Next-generation pharmacy management is essential for payers, members, and providers alike, and CVS Health is paving the way for the healthcare system of tomorrow. Now more than ever, our integrated model plays a key role in delivering more affordable, accessible, and effective care for our clients and their members, with unmatched touchpoints to help them navigate the healthcare system and stay healthy. No other company can engage patients at so many points of care when they're already thinking about their health and deliver so many customized interventions. As the market continues to evolve, our continuing investments in innovation and integration will allow us to expand and deepen our payer and provider relationships while driving growth across our enterprise. The value we bring continues to be unmatched in our sector, and we believe we are strongly positioned to continue to win in the marketplace. Thank you, and now I'd like to turn the podium over to Alan Lotvin. Great. Thank you, John, and thank you all for taking some time this morning to learn more about CVS Specialty. Larry, Dave, and Jon all talked about specialty being a growth driver for our enterprise going forward, and let me show you a little bit about where that confidence comes from. First, I'll review some performance highlights, then talk about the integrated PBM specialty model in the context of an increasingly complex specialty market, and finally, how innovation and our enterprise assets will keep us the partner of choice for patients, physicians, and payers. Starting with performance highlights. Our enterprise specialty revenue in 2017 is projected to be about $60 billion. This represents both prescriptions that we dispense as well as those that we manage through our PBM, but are dispensed by others, and these managed scripts represent an adjacent growth opportunity. Focusing on the subset of our overall volume that's dispensed from our 13 specialty pharmacies or 74 infusion branches, next year we expect to put out about $37 billion in specialty medications. As Jon showed earlier, our growth has continued to outpace the market. Part of being the specialty pharmacy of choice and growing faster than the market is growing faster than our competitors. These charts show the relative size of the top specialty competitors with all other entities grouped into this light gray wedge. We went from number two in 2013 to leading the market by a significant margin in 2015, and this is testimony to the successful execution of our enterprise strategy of growing in the fastest-growing part of pharmacy. Now, our strategy within specialty has been to pursue a balanced, diversified set of growth initiatives, and here they are with their impact on gross profit growth. First, to win payer lives through CVS Caremark, then to win with other payers, and note that the open market is included in both of these bars. Outperform in rapidly growing newly launched drugs, optimizing our base business, in this case, driving generic dispensing rates, which are good for our customers and creates incremental opportunity for CVS Health, strategic acquisitions, and finally, you can see the effect of the invisible hand of the market. Over a four-year period, manufacturer-driven AWP price inflation and price compression offset each other nearly dollar for dollar at the gross profit line, and the impact here is measured in tens of basis points. Now, as I mentioned, outperforming with newly launched drugs has been an important contributor to growth, and some of these drugs have had limited distribution. Having access to those products is critical. The manufacturers are discriminating evaluators of specialty pharmacy services when choosing partners for their limited distribution products, and we've secured access to 30 of 35 limited distribution products generally used in our channels that launched over the last two years. Our success in garnering access to nearly all these products is testament to the level of service today. As we complete the rollout of an enhanced pharmacy operating model in 2017, we expect to drive substantial service enhancements while increasing efficiency. This operating model is organized around each stakeholder to meet their specific needs at every step of the process. Beginning in Q1 of 2017, our physician service center will be organized around individuals' physician specialties. It will take prescriptions all the way from generating the referral through the administrative and clinical reviews and the financial and counseling steps needed to turn them into a fillable prescription. Our 200-person strong field force is part of the physician service center and acts as the face to the doctor's office, streamlining that entire process. The key metric here is turnaround time to clear a prescription. Shortening the time to accept referrals and improving the physician experience should increase the number of referrals and our referral conversion rate. Both of these will contribute to revenue growth. The order then moves to our centers of excellence, and these are disease-specific care teams organized around a patient's condition that manage all of the clinical aspects of that patient's pharmaceutical care up to the point of scheduling a shipment. Once the shipment is scheduled with the patient, it moves to our backend dispensing operations, and these are organized geographically in order to take advantage of the reliability and cost-effectiveness of ground shipping as compared to overnight air. So irrespective of which of our 13 pharmacies actually provides care to the patient, the dispensing pharmacy is the one that's closest to that patient. When fully implemented, this geo-preferencing strategy will reduce our average shipping time by 40% and shipping costs by 34%. This model leverages investments in technology and infrastructure to provide superior levels of service to physicians and patients while simultaneously lowering costs for payers. The complexity of the market and the growing impact of specialty pharmacy on overall drug spend makes the integrated PBM specialty model more relevant than ever. One of the largest PBM consultants notes that standalone specialty pharmacies have an inherent business model conflict with payers because they primarily rely on increased utilization. A PBM-aligned specialty pharmacy works as part of a broader relationship to meet the cost management needs of the payer, and failure to do so would jeopardize the entire PBM relationship. Complexity continues to increase, and the old specialty model of focus on adherence and logistic support is insufficient to meet the emerging needs of patients and payers. From a patient perspective, the expansion of specialty medications into more common disease states means more specialty patients have more comorbidities with more complex multi-drug regimens. There are increasing numbers of conditions treated with therapies where some drugs are paid under the pharmacy benefit and some are paid under the medical benefit, and payers need strategies to manage this complexity. Other sources of complexity include a rich pipeline, still evolving regulations around biosimilars, and new competitive entrants. In this more complex world, stakeholders are looking for simplification, or at the very least, isolation from the complexity. Patients want easy access and some handholding through the clinical and financial challenges of getting started on specialty medications. Payers want confidence that they are getting value for the dollars being spent, that the appropriate patients are on therapy and are deriving meaningful clinical benefit. Physicians want their offices to be relieved of as much of the administrative burden as possible, and of course, quality care for their patients. Finally, manufacturers want appropriate use of their products and access to formularies. I would like to show you how our model positions CVS Specialty and CVS Health as the partner of choice in this more complex market or complex environment. Taking the perspective of our primary stakeholders, patients and payers, their goals fall into three categories each. For patients, adherence, clinical support, and convenient access. For payers, management of drugs irrespective of benefit and site of care management. The first two competitors are dispensing entities, pure play specialty pharmacies and retail pharmacies. They have capabilities around patient management, as shown in these first three columns. But where they really fall short is the ability to manage a plan's entire specialty spend, given they may only dispense a portion of the volume. Turning to our larger competitors, they have a broader view of the patient's history, augmenting their ability to manage patients. They are also focused on managing the plan's costs. However, because of a lack of last-mile connectivity to patients, they are unable to provide local pickup options. Due to either a lack of appropriate technology or potential channel conflicts, they do not have a complete medical benefit management solution for all customers. Ultimately, the market decides, and overwhelmingly, when people have had to vote with their wallets, the decision has been to choose CVS Specialty. We have captured 40% of the growth in the market since 2013. Now let us turn to the actual programs to show how we improve outcomes and reduce costs for patients and payers. Specialty patients consume a disproportionate amount of the healthcare dollar. In 2015, 5% of patients consumed 34% of total healthcare dollars for commercial payers. It is notable that 50% of these costs are for drugs and medical procedures that are not associated with their specialty condition. This is an indication of the significant comorbidities often seen in these patients. As Larry and John both described, no one is better positioned to take advantage of the most frequent interaction in healthcare, pharmacy, than CVS. This is when people are thinking about their health and ready to act. At CVS Specialty, we take advantage of this call to action with a care model that goes beyond the basic specialty model, which is focused on medication management only. By incorporating specially trained care management nurses, we are the only ones able to manage symptoms and comorbidities, provide social support, and secure unexciting but really important things like help with transportation. Now, reaching patients when they are focused on their health results in up to a 13-fold greater engagement rate as compared to less well-timed interventions. The outcomes of this are fewer ER visits and hospitalizations, which can produce up to an 11% reduction in the overall healthcare costs associated with these managed conditions. We have nearly 550 clients with about 14 million lives enrolled after only two years on the market. John talked about Specialty Connect. Specialty Connect is our unique enterprise approach to specialty. It combines local access options with central clinical support. When a patient is given a prescription, their first thought is not about which specialty pharmacy to go to. Rather, they simply take it to their local pharmacy, and this is where Specialty Connect steps in. Over the past two years, about 30% of our new starts in the largest specialty category have originated in one of our CVS pharmacies, and no other specialty pharmacy can do this. A little over half of those patients pick up their specialty prescriptions at CVS, with no need to wait at home and no need to take a day off work. Patients appreciate that flexibility and give us a net promoter score of 60, among the highest in healthcare. Not only do they like the service, but it improves clinical outcomes. Patients using Specialty Connect are up to 11.4 percentage points more adherent than patients in traditional retail, and that is a powerful, persuasive message with physicians. We are also disciplined in investigating new innovations. We balance looking far enough out to develop unique solutions, but not so far out that exciting concepts outrun the relevant science or technology. In early phases, we do a broad survey of the market and the medical literature, and we are starting to evaluate biomarkers in autoimmune disease and tumor-specific genomic profiling as tools to better inform treatment decisions. Now, we are further along with the use of wearable technology and dedicated apps to monitor disease progression and response to therapy. In pilot with multiple sclerosis patients are smartwatch-based accelerometers that evaluate postural instability. As an example of the last step in our process, we have deployed a two-way secure text messaging program in chronic myelogenous leukemia with really excellent early clinical results, and we will expand this to additional disease states next year. Now, importantly, 60% of the CVS Specialty patients have already opted into digital solutions like email or text messaging. This provides a ready base of hundreds of thousands of users to whom we can rapidly deploy new digital innovations. Moving from patients to payers, let me review our integrated PBM specialty offerings that create value for our clients. Here is a high-level proof point supporting that integrated PBM specialty model. Comparing specialty drug costs for clients where CVS Specialty is the exclusive option to Caremark clients who use multiple specialty pharmacies, including our own, the exclusive clients' costs are about 250 basis points lower. 250 basis points may sound modest, but in specialty, it adds up quickly, and for a million-life plan, this represents $10 million in annual savings. Importantly, these lower costs did not come at the expense of appropriate utilization. Clients using CVS Specialty exclusively saw a 60 basis point improvement in adherence as well. Even our most sophisticated health plan clients who've been managing specialty on their own can realize incremental savings when they take full advantage of our range of management tools. This is actual data consolidated across multiple clients and then normalized to a million-life plan. Taking this more integrated approach results in nearly 11% reduction in specialty pharmacy drug spend, and these savings are meaningful and they're repeatable. How have we delivered them? First, let me dispel one of the misconceptions in the market. That's that the adjudication of medical claims is a requirement for managing specialty spend effectively. This is a fallacy, and I'll show you the data available through the prior authorization process is superior to all administrative data in the management of specialty. First, let's look at the data that's actually available on administrative medical and pharmacy claims. The relevant data on medical claims are patient demographics, diagnosis, if a drug was administered, the drug code, and of course, the procedure code that the provider is billing. The data lags the actual service by days to weeks, depending on provider billing cycles and claims adjudication timelines. Another administrative data source is pharmacy claims, and like medical claims, they have demographic data, and diagnostic data can often be inferred from the drug, and of course, the specific national drug code is always on the claim. In general, these are available about a day after service. Note that neither of these administrative documents has clinical data other than diagnosis, and I'll contrast that with our preferred method of acquiring data to manage specialty, prior authorization. This is a much richer and more timely data set. One can require diagnosis or clinical exam data. You can ask for lab data and even response to therapy as a condition of coverage, and these data can then be used to support more clinically relevant algorithms in a variety of management programs. Let me give some examples using this data. For utilization management, the first step in evaluating intravenous immune globulin would be to first ensure that the diagnosis is either on-label or supported by the medical literature. Since this drug in particular shows a wide variety and a wide variability in effectiveness, we can use the response to therapy to ensure the patient is actually receiving benefit, and if not, stopping the drug. To operate more complex formularies, we can use lab data. For example, the specific genotype of the hepatitis C virus to choose the most cost-effective agent for that patient. In fact, that very example is part of our 2017 formulary. There has been a lot of discussion around medical claims. The takeaway to remember is that basically all of our specialty prescriptions undergo prior authorization review, and that process captures a richer and more timely data set for management than any other administrative source. With that in mind, let us dive a little deeper into management, starting with utilization, which is a key component of specialty growth. New drugs, new indications, and an aging population drive a utilization trend for specialty drugs of 7.2%, much higher than what we see in non-specialty agents. Utilization management covers a broad set of tools, including prior authorization, step therapy, and quantity edits, and no one manages prior auth across medical and pharmacy benefits as well as CVS Specialty. As we look to the next innovations in utilization management, we see opportunities for more complex disease-specific rule sets, and deeper integration of electronic health records and a greater adoption of electronic prior authorization can automate and further extend the utility of these tools. Finally, new clinical data from wearables or other biometric sensors will become available to our systems to help drive better decisions and better outcomes. If I move away from utilization and talk a little bit about the cost of each unit, inflation and escalating launch prices make the management of unit costs absolutely critical. Specialty branded inflation was 8.7% in 2015, and John touched on escalating launch prices. As an example, the last three oral oncology agents approved averaged $170,000 per patient per year. The two major approaches to manage unit's cost are formulary and plan design. Exclusion formularies will remain a key tool, and our 2017 formulary includes biosimilars like ZARXIO. As John discussed, in 2017, we will also begin a version of value-based contracting, creating increased competition by subdividing certain classes based on indication. Plan design will become more important. Tiered copay designs for specialty generics and biosimilars will encourage the use of these lower-cost agents. No one has cracked the code to influence launch price, and we have the first and probably only plan design that may do so. Tying the value created by a new drug directly to benefit coverage may fundamentally upend the current market dynamic. Fewer things have more near-term disruptive potential in specialty than biosimilars, and I will focus on the four biologics shown here, though the biosimilar pipeline extends much more broadly. These are the biosimilars that have already been filed, and it takes about 12 months from filing to approval. Working backwards in time, there is even more competition coming from late-phase clinical programs, and these take about 18 to 24 months from onset to filing. The early clinical and preclinical pipelines are also rich in biosimilars to these four agents. The big unknown here is the timeframe from approval to launch. There is very little precedent, lots of litigation, and this is creating considerable uncertainty for everyone in the market. To round out our discussion of formulary and drug selection, an emerging opportunity in specialty is driving generic utilization to lower costs. Now, PBMs have spent years perfecting generic substitution, so it is not surprising that a PBM-affiliated specialty pharmacy far outperforms other entities. These are generic dispensing rates for three specialty drugs, and we are able to drive higher GDRs faster because of the integrated strategies executed through the PBM and specialty pharmacy. This success translates into millions of dollars in incremental savings for a million-life health plan. The third leg of our management approach is managing specialty spend under the medical benefit, which will grow to more than half of the spend in the next few years. Today, to generate the results I showed earlier, we offer prior authorization across benefits and medical claims editing through our NovoLogix system. Looking forward, we are expanding the technology to automate our site of care program and earn rebates on medical specialty drugs on behalf of our clients. Again, given the rhetoric around medical claims, let me explain how we use the NovoLogix system to edit these claims and bill rebates. Remember, all medical and pharmacy adjudication platforms are separate, so the processes to aggregate claims data from disparate adjudication systems into data warehouses is ubiquitous in the industry. Because of that, building pipes between warehouses is relatively straightforward, and we currently have or are implementing health plan clients with 35 million covered lives into our claims editing platform. Let me show you the results of this fully commercialized technology. To orient you quickly, the x-axis is billed units or dose, the y-axis is the number of claims submitted at that dose, and the vertical gray line here represents the usual maximum dose for a 220-pound man. Each of these blue dots represents the number of claims submitted for any given number of billed units, and you can see that 99% of them are to the right of that maximum dose line, representing either over-dosage or over-billing. Here is the impact of using our claims editing system. Nearly all of those claims that were above the appropriate dose are now collected in this big dot, representing 510 of the total 668 claims in this dataset. You will note that 22% remain above the usual maximum dose. However, they have been clinically validated as appropriate through our process. Editing this claim set this way reduces costs by 33%, and these are market-leading results. From this discussion of payers, there are three key takeaways. First, we have the broadest set of capabilities to help payers manage specialty pharmacy. Second, we have ready access to all the data required to accomplish this. Finally, our programs are proven, they are in-market, and in commercial operation at scale today. In today's presentation, I provided insights into how our specialty offering helps drive more affordable, accessible, and effective care. As a recap, we are driving outcomes and savings with proven solutions in market today. We are using the CVS enterprise assets to provide the only local front door to specialty pharmacy, and using our last-mile connectivity to interact with patients where they choose. While we believe our integrated PBM specialty retail model is optimal, CVS Specialty's differentiated programs make us the specialty partner of choice for all payers. Consistent with our enterprise strategy to integrate pharmacy care, we utilize the most frequent interaction in healthcare to have positive clinical and financial impact on some of the most complex, expensive patients. And lastly, we're well-positioned for long-term growth with a solid track record of innovation and execution on our balanced growth portfolio. With that, I'll thank you for your time, and let me introduce Helena Foulkes, President of CVS Pharmacy. Thanks, Alan. Thank you. Okay. Good morning, everyone. Larry spoke earlier about the market forces we see shaping healthcare, and now I'm going to build on those comments to provide an update on how CVS Pharmacy is capitalizing on the retailization of healthcare by driving savings and improving outcomes, delivering best-in-class clinical outcomes, owning the last mile through our unmatched patient touchpoints, and leveraging our enterprise assets to be the best partner to PBMs and health plans. Here's what I plan to share with you today. First, I'll update you on our core retail pharmacy business. Second, I'll show you how we're leveraging our integrated enterprise capabilities to partner with PBMs and payers and deliver differentiated healthcare services at retail, improve health outcomes, and lower the cost of care. Third, I'll provide updates on three of our key business assets that are helping to drive growth: MinuteClinic, Omnicare, and our pharmacies inside Target. I will show you ways in which we are delivering on our front store growth strategy. Let us start with retail pharmacy. Our retail pharmacy and front store are important contributors to CVS Health's long-term enterprise growth. First and foremost, we are a pharmacy company. 75% of our retail revenue comes from pharmacy, and this is the core of our expertise and focus. As we increasingly focus on our health and beauty businesses, front store is focused on enhancing the pharmacy experience. We have a strong track record of high performance, growing our share of retail prescriptions by 300 basis points since September 2013, about half of which came from Target. We fill close to one in five prescriptions in the U.S. Our unique business model and the programs we have in place provide excellent service and value to our customers and to the payers and plans we serve as well. Size, scale, and expertise matter in healthcare. We are the largest retail pharmacy in the U.S. with more than 9,600 locations, 28,000 retail pharmacists, and 51,000 pharmacy technicians who help patients get on and stay on the right medications. We fill more than 1 billion prescriptions annually. Through this scale, we think of retail pharmacy as the last mile of healthcare, with our unmatched patient touchpoints and high frequency of consumer interaction. Our deep clinical expertise and industry-leading care programs drive best-in-class adherence rates for our patients, which also benefits our partners for metrics like Star Ratings. Compared to the top competitors, our adherence rates are 610 basis points higher among patients with diabetes, 580 basis points higher among those with hypertension, and 340 basis points higher for those with high cholesterol. Innovations like First Fill Counseling, our signature Pharmacy Advisor program, and ScriptSync are just a few of the programs that are driving these improved health outcomes for our patients. We achieve these industry-leading clinical outcomes by integrating them into our core workflow system and continuing our focus on driving consumer innovations. Let me drill down a little deeper on this. Because of our history with Caremark, we have built our clinical programs into the workflow system used by our retail pharmacists and technicians to ensure the execution of our patient care programs is a key priority. For example, if a diabetes patient enrolled in Pharmacy Advisor has not been taking a statin, there will be a hard stop at the register, prompting the technician to invite the patient to consult with the pharmacist. As we partner with other PBMs and health plans, we can take their clinical rules engines and feed the data into our clinical pipes to execute this kind of patient intervention for their members. This is an example of how we are leveraging our experience with Caremark to be a critical partner for other PBMs and health plans. It is not just the workflow system that is delivering improved adherence, it is also the high-touch interactions we deliver to ensure the right outreach is occurring at the right medium to the right patient at the right time. Our pharmacy innovation team has developed dozens of patient-centric programs, and through them, we conduct adherence outreach millions of times each week. By helping people take their medications as prescribed, we improve health, save lives, and significantly reduce medical costs for patients, payers, and the entire healthcare system. Let's look at our latest consumer innovation, ScriptSync. It allows patients with multiple medications to pick them all up at one time each month and to manage them online. ScriptSync is a unique solution that enables us to avoid manual interventions with the insurer by syncing up the fill dates for a patient's eligible prescriptions, leveraging her existing medication supply. Since launching ScriptSync in 2015, 73% of patients have accepted our offer to enroll, for a total of more than 1.5 million people. Among those patients, there's been a 6 percentage point lift in medication possession after enrollment. ScriptSync is now available through Caremark's mail service pharmacy. It solves a pain point for patients and also provides added value to our PBM and health plan partners by helping their members remain adherent. We do see the potential to drive more enrollees as we continue to refine the program and criteria for inclusion. Our digital tools are also driving improved health outcomes. As Larry said, we're focused on increasing adoption and continuing to integrate time and cost-saving tools to improve the patient experience. A great example is text messaging, which is the number one way consumers want to be communicated with. Two years ago, we sent fewer than 200 million adherence text alerts. Today, we send more than 600 million, a compound annual growth rate of 85%. We expect this trend to grow as more people adopt digital behaviors. In addition to driving adoption, we're innovating from a one-way "Your order is ready" message to a quick and easy two-way communications with our patients. For example, if we don't have a patient's insurance card on file, we simply ask them to take a picture of both sides of the card and text it to us. We prompt them to take action if a prescription has expired. Prior to the school year or allergy season, we text patients to remind them to fill prescriptions important to have on hand and give them the option to text us back for refill. These innovations save our patients time and money, and they free up our pharmacy teams to focus on high-touch interventions. Because we reach everyone, we're 50% more effective at getting people who have texts to refill their prescriptions. Having this ongoing digital dialogue with patients is another way we own the last mile of their path to better health. Due to our unique combination of capabilities, we've been able to outpace our pharmacy competitors, growing script volume close to four times faster than the overall retail market, roughly half due to the acquisition of Target pharmacies. Our growth has not been driven just by Caremark. In fact, nearly 55% of our growth since 2013 has been driven by share gains with other payers. Let me acknowledge our disappointment with the loss of the pharmacy business due to the network restrictions CVS Pharmacy has encountered. We know how difficult it can be for the patients who have to change their pharmacy. We're working hard to win more incremental business, and I'm confident we have the best value proposition for all payers. Although we know our growth will slow in 2017 due to those network changes, we see it as an aberration. We have a strong value proposition to offer all payers, and we will leverage our unique capabilities to return to healthy growth in 2018. Today, 65% of the prescriptions we fill are from PBMs and payers other than Caremark. We've always benefited from driving market innovations with Caremark, and this will not change. Now, we're also bringing our enterprise assets to other PBMs and health plans to help them meet their goals and grow our share of the prescription market overall. A month ago, during our third quarter earnings call, we discussed whether there is a perception that we're not a neutral platform, and you've already seen us take action on that with the Optum strategic relationship recently announced. We believe this partnership approach can be a real differentiator for CVS Pharmacy and can help payers lower their cost while enhancing service for their members. Let me turn now to how we will partner with others through our enterprise capabilities. Our unique integrated assets generate results for CVS Health that other retail competitors simply cannot match. They're an important component of the CVS Pharmacy value proposition as we work to build even stronger partnerships with others. As the healthcare market continues its evolution to a value-based environment, the clinical capabilities we have today at CVS Pharmacies will become increasingly important to our PBM customers. Let me offer a few examples. The first involves a Medicaid payer, not a Caremark client, who wanted to work with us to drive cost savings while supporting their clinical and member retention goals. We implemented several programs for this payer, including customized clinical pilots that relied on our in-store and telephonic capabilities, an emergency room diversion program to educate members about services available at MinuteClinic, and retail marketing services to support member retention. One of our clinical pilot programs targeted a portion of their members about a gap in care that could result in poorer outcomes and higher costs. We counseled approximately 90% of the targeted group during the three-month pilot period and closed gaps for patients at a rate two times higher than the client's expectations. This is a great example of how we can partner with a health plan, even if we are not the PBM. My second example is a payer with a large Medicare business who was looking for ways to improve their ratings in the Star Ratings program, a metric critical to their financial success. This partner was also not a Caremark client. Again, we were able to use a combination of our retail assets and clinical programs to help them improve. As we go forward, we'll bring more of our enterprise assets to help our partners achieve their outcomes. Specifically, this payer was looking to improve the adherence rate of its members and to raise its star rating. We implemented the client's clinical rules engine through our retail workflow so our pharmacists could counsel their members. We implemented ScriptSync, delivered clinical counseling through our call centers, implemented ReadyFill, and converted more of their members to 90-day prescriptions, and we enrolled their most complex patients into our high-touch Care 1-on-1 program, which assigns a dedicated pharmacy team to provide personal 24/7 support. As a result of these implementations, we helped this plan improve its Star Rating from a three to a four and achieve a 4% increase in adherence. Now, let's turn to the announcement we made with Optum two weeks ago. Our overall mindset is to find ways that our assets can help Optum and to look for ways where the relationship can help us grow share. The bottom line is that when they win and grow share, we win and grow share. The first phase of this strategic relationship with Optum provides their eligible members the option to fill their 90-day prescriptions at CVS Pharmacy at the same price to patients and payers at mail or retail. We will help improve consumer engagement and health outcomes for Optum's members, leveraging CVS Pharmacy's unmatched clinical capabilities. Optum will begin offering the 90-day pharmacy solution to commercial clients beginning in January 2017. Going forward, we continue to work with Optum to define a roadmap of other ways we can help each other by leveraging our suite of assets. This is a great example of how we will grow our share of the prescription market by partnering with other PBMs and health plans. Now, let me turn to an update on three of our key assets that will also continue to drive future growth. I will begin with MinuteClinic, an important differentiator in the marketplace that is continuing to innovate to provide more patients with high-quality, low-cost care. MinuteClinic's footprint of 1,136 clinics covers 33 states from coast to coast. More than 50% of the U.S. population lives within 10 miles of a MinuteClinic location, including the 79 clinics inside Target stores, which are now fully integrated with MinuteClinic systems and electronic records. MinuteClinic has more than half of the retail clinic market share, with approximately three times as many clinics as its next largest competitor. MinuteClinic employs nearly 3,000 nurse practitioners and physician assistants and has conducted more than 33 million patient visits to date. MinuteClinic enhances the CVS Pharmacy value proposition not only through its reach, but also by providing a low-cost alternative site of care, partnering with health systems on population health strategies, and engaging patients through a convenient and consumer-friendly experience. So let me spend a minute on each. First, low-cost care. Studies have shown that MinuteClinic is up to 80% less expensive than other sites of care, such as the emergency room. Through our MinuteClinic Savings Strategy Program, adopted for 4 million Caremark members in 2017, we reduce our rates with savings passed to the PBM members, encouraging utilization of this lower-cost site of care. Second, population health. MinuteClinic is partnering with payers, providers, and PBMs to address gaps in care by providing health risk assessments and biometric screenings and sharing electronic health records with health systems. Since installing the Epic EHR, we have exchanged over 10 million electronic records with more than 900 health organizations in all 50 states. Third, MinuteClinic is continuing to improve the patient engagement and access with new scheduling tools, expansion of primary care services, and telehealth. A third of our patients are using our online tools, which allow them to view wait times and hold their place in line. In 2017, we will add the ability for patients to book future appointments online and will expand the number of chronic diseases we treat. By leveraging all of MinuteClinic's assets, our patients and partners achieve better outcomes as well as cost savings. We will continue to make sure that we are making these services available to more health plans and partners. Now, let me turn to our long-term care capabilities and provide an update on Omnicare. It has been about 15 months since we completed our acquisition of Omnicare, a leading long-term care pharmacy serving more than 1 million patients and dispensing approximately 100 million prescriptions annually, and it still has significant opportunities to grow. In fact, with an estimated 10,000 baby boomers turning 65 every day, older adults are projected to account for 21% of the U.S. population by 2030. About 76% of Omnicare's business today is serving skilled nursing facilities, as this has historically been the focus of long-term care pharmacies. While we see opportunities to grow in the skilled nursing market, we are also encouraged by the significant growth potential in the assisted living and independent living markets. The combination of this marketplace growth and the consumer-facing assets of CVS gives Omnicare tremendous opportunities for continued expansion. We will do this in three ways. First, by achieving operational excellence across Omnicare's entire footprint. Second, by rolling out industry-leading transitions experiences, and third, by serving assisted living and independent living communities with new integrated capabilities. Let me briefly do a deeper dive into each of these three areas. First, CVS is sharing its extensive operational experience to help improve efficiency and productivity in the core skilled nursing business. When we acquired Omnicare, it was essentially a chain of chains. We have made key investments in people, processes, and technology to increase standardization, improve service levels, and make operational improvements across Omnicare's entire footprint. For example, through our national CVS Pharmacy network, we are able to fill emergency or stat scripts for skilled nursing facilities much more quickly in urgent situations. 77% of Omnicare's customers are within 3 miles of a CVS Pharmacy. In addition, using CVS's expertise in standardizing pharmacy operations, we are driving operational improvements and investments at Omnicare, including new workflow and intake processes for when residents move into the facility. We have made technology upgrades, including labor scheduling tools and e-prescribing enhancements to improve staff workflow. These investments are bringing increased standardization to Omnicare and driving much better satisfaction among the communities we serve. Second, we are capitalizing on our ability to provide industry-leading transitions experiences for seniors across various settings. For example, we have redesigned the process many Omnicare clients use to admit patients from the hospital. The new solution we are piloting with several Omnicare clients aims to reduce the average medication turnaround time from 10 hours to 2.5 hours. Traditionally, a patient leaves the hospital with discharge paperwork pinned to their clothing as they are transported to the post-acute facility. Then, when they arrive, the pharmacy order is entered manually, and the order is processed, and the medications are then delivered to the facility. Our technology solution transfers the patient's information much more quickly and securely, so the process can begin even as the patient is being transported. Similarly, we are providing greater oversight for patients discharged from Omnicare clients back to their home. Ultimately, we believe these transitions experiences can help further reduce hospital admission rates for Omnicare's clients. A study of a medication reconciliation program we implemented for one client found that it reduced readmission of fragile patients at home or in assisted living by greater than 50%. Finally, we have several initiatives in flight to accelerate growth with assisted living and independent living communities. CVS Pharmacy's retail expertise is helping to increase engagement among residents of assisted living communities, and our B2B capabilities, including Omnicare's improved operating processes, are enhancing our relationships with clients. As they experience our differentiated offerings, they understand the value of all residents filling their scripts with one pharmacy. In addition, we are now rolling out a differentiated pharmacy offering to independent living communities, the first phase of which will occur in early 2017 with some of the largest players in the market. This offering will include medication delivery, as well as a suite of integrated assets and best-in-class clinical programs such as Care 1-on-1. It has taken us longer than expected to learn the importance of marrying our B2C programs with our B2B offerings to satisfy the needs of both the resident and the staff, but we believe this is the winning formula to achieve success in this growing market. Only we can deliver these programs through our combination of assets. Now let me turn to an update on our acquisition of Target's retail pharmacies. Acquiring Target pharmacies expanded our footprint by more than 20%, giving us presence in new regions such as Seattle, Denver, Portland, and Salt Lake City. It also grew our presence in existing CVS Pharmacy markets. Together, this gave us significantly more lives and patients. We successfully completed the integration of Target's pharmacies, and although we saw an expected deterioration of the business during the conversions, we are now seeing encouraging growth post-conversion. We are very focused on converting more of Target's 30 million weekly guests into CVS Pharmacy customers. First, we continue to roll out our patient care and adherence programs, which we began doing in Q3 of this year. Prior to our acquisition, Target's pharmacies did do some adherence outreach to patients, but nothing at the scale of our programs. To date, the rollout of our patient care and adherence programs has been encouraging, and we expect to generate more than twice as many prescriptions tied to these programs in the Target channel in 2017 than we did in 2016. Second, we continue to sell Maintenance Choice to clients who now have access to CVS Pharmacies inside Target. In 2017, we expect to dispense 1.4 times more Maintenance Choice prescriptions in the Target channel compared to 2016. Third, we are delivering innovative in-store experiences such as flu clinics. In 2016, we saw twice the growth in flu immunizations in those stores where we had technicians set up tables in the aisles and invite Target guests to get a flu shot and meet the pharmacy staff. We are very optimistic about a growing script volume through our pharmacies in the Target channel. Finally, I will turn to an update on our front store growth strategy. As I said earlier, front store is focused on enhancing the pharmacy experience and driving profitable margin growth for the enterprise. We are on a journey to elevate categories like health and beauty, help customers discover innovative products, and expand the move from mass marketing to personalization, and invest in digital. Let us look at each of these in a little bit more detail. We are focused on improving health and beauty sales because they are most closely tied to the pharmacy and because they are a significant contributor to our front store margin growth. Profit margin in these categories is 1.7 times higher than others. Since 2011, sales in these categories have grown at a compound annual growth rate of 3.5%, and they are projected to grow two times faster than general merchandise and edibles over the next three years. Another way we drive front store margin is by increasing sales of our store brands, which focus on healthy food, exclusive beauty brands, and over-the-counter health products. For 2016, we expect to achieve a penetration rate of 22% toward our ultimate goal of 25%. Our store brand teams continue to innovate new products that consumers are responding to in a big way. For example, we launched our Gold Emblem Abound brand snacks in 2014, and the brand, which is focused on healthy, on-the-go snacking, is now a $70 million annual business. Our Gold Emblem and Gold Emblem Abound brands combined for over $350 million in sales and are the largest edibles brand in our store. As an example, our Gold Emblem natural pistachios outsell big brands like Lay's potato chips and Doritos. Also in 2014, we launched the exclusive Makeup Academy line of professional-grade cosmetics, and this brand has continued to exceed our expectations. We added a new line of premium implements and travel-size, on-the-go impulse items this year while continuing to drive organic growth, with sales of Makeup Academy brand up 110% over last year. In the OTC quadrant, we have rebranded more than 2,500 healthcare products from CVS Pharmacy to CVS Health, and we continue to innovate with products like single-serve cups for cold and flu relief that fit into most single-serve coffee machines and OTC on-the-go packs. Since 2014, our store brand penetration has increased approximately 300 basis points, with about half of that attributable to our tobacco exit. When it comes to our store brands, we will continue to make choices to drive healthy growth. We do see more national brand manufacturers coming to us with attractive offers in the category. It is not just about driving store brand penetration, it is about driving profitable growth. Our efforts to elevate health and beauty and transition from mass promotion to personalization are aligned with our five front store growth pillars, which I have shared with you before. Finding the right balance in our category mix and promotional spend is both an art and a science, and we are on the leading edge of that journey. Let us start with the first three pillars focused on enhancing the in-store experience for our customers. We will look at the last two pillars focused on digital and personalization. This shows you how we plan to devote more floor space to growing profitable product categories like health, beauty, and healthy food, and less to lower-margin, declining segments like general merchandise. If you look in our most productive stores today, you will find that health, beauty, and healthy food products make up roughly half of our front store selling space. In our future state, we see that growing to 80%. Although this transition won't happen overnight, we are laser-focused on higher growth, profitable businesses where we have a right to win. Let me show you how this will look to our customers. In our stores, consumers will find discovery zones highlighting emerging products, new end caps to elevate over-the-counter products at the front of the store, and messages emphasizing our health expertise. Similarly, we will highlight our expanding healthy food selection with discovery zones that have a variety of healthy drink, food, and snack options, allowing us also to highlight the innovative store brand products we're developing. Our beauty and healthy skincare products are showcased by new displays emphasizing healthy and advanced skincare and prominently elevated end caps. We're carrying more premier beauty products, and we're helping the consumer find the trends. I'd like to show you a short video now that brings it all together. Every day, we're helping people on their path to better health. It's our purpose, and it drives every decision we make, like taking tobacco out and bringing healthier items in. We've set ourselves on the right path, and we know the next steps to take. We're creating an experience that is beautiful, helpful, insightful, and engaging. We're reimagining our stores and resetting expectations by offering products with impact and products with heart. We're transforming how she thinks about health to help her achieve better balance every day, giving her options that are tried and true or alternative and new. We're helping her get well and stay well. We're delivering expert care in new and informative ways and helping her select products with confidence. We have brands that make life tasty for when she needs to grab and go, and over 100 organic options she's excited to try and that feel good to buy. We're helping her discover what's new, now, exciting, and wow, like beauty that delivers and delights, or skincare products she doesn't expect but will not forget. We are creating a new journey and crafting a new future, all in the name of better health, because here we know that health is everything. As we previously announced, in 2015, we reset 400 stores with more added in 2016, and we're seeing positive results. Sales in these stores have increased 2.5% compared to our control group, with a 9% increase in consumables, a 4% increase in beauty, and a 2% increase in health, as well as a decline of 6% in the low-margin general merchandise category. As we learn more about what works well in these stores, we have the ability to implement those wins across thousands of more stores, and we'll do this in a way that ensures a solid return on investment. Over the next several years, we see the potential to scale up resets in roughly 3,000 of our highest volume stores. The rollout of CVS/pharmacy y más stores, tailored to the unique needs of the Hispanic market, also continues to proceed successfully. We've learned a lot from our acquisition of Navarro and have established a center of excellence in Miami, where we continue to test and learn how to create a store environment where the Hispanic customer feels comfortable and welcome. It's an ongoing process because we know every market's different, and our products must be based on local needs and preferences in each of the approximately 1,400 stores that serve a significant percentage of Hispanic customers. in 2015, we reset 13 stores in South Florida, featuring approximately 2,300 new Hispanic products and services not found in traditional drugstores. This year, we reset 11 stores in Southern California, tailored more specifically to the Hispanic market there, which is culturally more Mexican than Caribbean. For example, in California, Hispanics have very specific preferences for brands that are well-known within Mexico. Next year, we plan 19 additional resets in California, Florida, and Texas, as well as partial resets in approximately 160 stores in California, Florida, Texas, Nevada, and New Mexico. We'll continue to expand these offerings beyond 2017. Now let's focus on our digital and personalization strategies to drive front store growth. Promotion is very important to our retail business, but traditional promotional vehicles like circulars are declining across the industry as fewer people read the Sunday newspaper. We are shifting our promotional dollars from mass circulars to more digital and personalized offers, and from targeting all customers to targeting those top 30% of our customers who drive 75% of our margin. In fact, we're leading the market in scaling back on our circular promotions. As we move away from mass promotions, we're shifting our dollars to focus on our most loyal customers. First, we're leveraging our own digital channels, such as email and mobile app, to push messages to high-value customers. Last year, we increased the number of emails to our customers by 42% and sent more than 10 billion offers through our digital channels. Second, we're partnering with social media companies like Pinterest and Facebook to reach the right consumer segments in mediums that matter to them. Third, we're partnering with Flipp to design our digital circular and other digital sites for new customers seeking value. Fourth, we're expanding personalized offers significantly. In the third quarter of 2016, we saw an increase of 21% in personalized coupons redeemed year over year. I want to say more about personalization and how we're able to deliver the right offers to the right customers. We've invested in building advanced predictive models that are allowing us to truly understand our customers, including their brand preferences, sensitivity to promotions, channel preferences, and more. This enables us to optimize the offers we send to them to make them much more relevant than we were able to do in the past. We can identify the exact offer a given customer is likely to redeem and maximize the potential impact of that offer. Lastly, we tailor the creative tone of each offer to match the category and the customer's needs. As we drive adoption of our digital channels, we'll have an increasing ability to expand personalization's reach and influence more customers. The more active and engaged our ExtraCare customers are in redeeming personalized offers, the more sales and margin growth they produce. Engaged shoppers' annual margin dollars are 3.6 times greater than the unengaged shopper, and growing faster. We know that pulling back on mass promotion drives profit, but also gives up the sales we get from deal seekers. To compensate for those lost deal seekers, we are focused on increasing the percentage of actively engaged ExtraCare members to drive their trips and share of wallet. We are investing in digital tools that complement and leverage our brick-and-mortar locations by giving our customers omni-channel options to make their shopping experience more convenient. In September, we officially launched CVS Curbside into 40 markets in approximately 4,000 stores. With CVS Curbside, customers can use the CVS mobile app to have front store purchases delivered to their car when they pull up to the store. Coming soon, we will pilot Curbside for pharmacy. You can think of this as allowing every store in our fleet essentially to have a drive-through. We are in the very early stages, and it is too soon to say what the impact will be. We do know that for moms with kids or older people with mobility issues, the service is compelling. Finally, we are piloting the next generation of convenience to have front store items, and ultimately prescriptions as well, delivered to customers' homes or office within hours. Our initial pilot of the front store service started in November, and soon we will add pharmacy service as well. We know that we are not done in any of these areas. We will continue to test, learn, and iterate as our customers tell us what they like about these services. In summary, through our front store growth strategy, we will continue to grow profitable categories like health, healthy food, and beauty, deliver innovative products and digital experiences to our customers, expand personalization to build stronger relationships with our most loyal and profitable customers. Let me emphasize that our focus is on driving profitable growth, and we will be willing to walk away from unprofitable sales to drive margin dollars. As I said, finding the right balance is both an art and a science, and we are on the leading edge of that journey. In conclusion, CVS Pharmacy will continue to capitalize on the retailization of healthcare, deliver differentiation in the marketplace, and drive enterprise growth for CVS Health, all while driving more affordable, accessible, and effective care for our customers. We believe CVS Pharmacy is the optimal partner to help drive outcomes and savings with unmatched clinical and digital innovations that make it easier for patients to save time, money, and stay healthy. We provide the front door to healthcare and own the last mile of our patients' path to better health, utilizing our unique insights into and frequent opportunities to help shape their behavior. CVS Pharmacy is the best partner for PBMs and health plans, offering a menu of services to meet their needs. Through our integrated pharmacy care, we can deliver best-in-class clinical programs to all patients, and we are well-positioned to deliver long-term enterprise growth by capitalizing on the retailization of healthcare and differentiating ourselves through our unique enterprise assets. Thank you very much, and I will turn it back to Larry. Okay. Well, thanks, Helena, and let me take a minute to thank everyone on our team for their presentations. I think you got a good sense of the depth and leadership that exists at CVS Health. We certainly hope that today has given you a greater appreciation for our company, and from this morning's Q&A, filled in some of the blanks in terms of picking up with the many times that we said you'll see examples of that in this morning's presentation, and at the same time, why we remain well-positioned regardless of how the healthcare market evolves. Again, no other company has the suite of assets and capabilities to drive a more affordable, accessible, and effective care, delivering value for all healthcare stakeholders. So, before we wrap up with our Q&A session, let me again just briefly reiterate those five key messages that we introduced earlier this morning. It started with, in an era of rising healthcare costs, we are the optimal partner to deliver savings and help improve outcomes for all healthcare stakeholders. I think you got a sense that through all of this morning's presentations, each individual described capabilities that are producing quantitative results. Second, we own the last mile of care delivery through our unmatched patient touchpoints across our suite of enterprise assets. Keep in mind, again, that retail pharmacy is quite often the front door to healthcare with the highest frequency of patient interaction, and all of this provides us with an unmatched ability to help change consumer behavior and drive outcomes. Again, you saw many examples of that in action. Third, we can be a strong partner for all PBMs and health plans by leveraging our enterprise assets and capabilities to meet the diverse and individual needs of these payers. The recent news of partnering with Optum, I think, is a great example of that in action. Fourth, we've built the capabilities to integrate pharmacy care from the payer to the provider to the patient, and our proprietary programs are seamlessly integrated through our Health Engagement Engine, providing a better member experience, greater adoption, and superior results. Again, as you heard this morning, more innovation is on the way that will continue to provide differentiation for Caremark in the marketplace. Finally, we're focused on maximizing shareholder value with an enterprise mindset. As Dave outlined, we have very strong cash generation capabilities, and we'll continue to employ a disciplined approach to capital allocation, returning value to our shareholders. So, we'll go ahead and open it up for Q&A. I'm going to ask all of our presenters to come on up here and join me on stage. As I mentioned earlier this morning, we're also being joined by Troy Brennan, our Chief Medical Officer, and Rocky Kraft, the President of our Long-Term Care Group. Again, as we mentioned, we've got folks with the microphones, so if you could wait until you get the mic so folks on the webcast can hear the question. We'll also be able to take questions from those on the webcast as well, so we'll work to weave those in as well. Robin, right up front here. Thank you. Eric Percher from Barclays. Helena, I think you started by saying that when they win, we win, which I think is very true in retail, but slightly concerning relative to PBM. If I think historically, if you wanted the access to 90-day retail or your unique programs, you had to go through the PBM. Moving forward, we see that you will be working with other payers, and you talked about, or I guess Jon talked about bringing rules engines into the CVS workflow. How do we think about what is unique to CVS and whether relationships with Optum or with others can act as a bit of a Trojan horse compared to your historically very high moat around these offerings? Go ahead. Yeah. It is something we have thought a lot about. I think that, as I mentioned when I talked about this, I feel like we are a better retailer because of our history and experience with Caremark, and we continue to focus with Jon on driving the innovations that he talked about. The level of integration there, and I will let him speak to that, I think is really unique. As we thought about partnering with other PBMs, though, we really felt like we needed to open up these suite of assets because it does give us an advantage versus other retailers who just do not have the assets. I think that is the approach we have taken there, and I will let Jon speak to the integration, which we think really is unique with Caremark. Yeah, I mean, I talked a lot about the value of the integration and most importantly, the results that the integration can deliver. As CVS Retail and Helena partner with other PBMs, we are going to continue to innovate. I talked about some of those innovations today, and from my perspective, we will continue to lead the market in innovation, and others will continue to try to catch up with us, and I think that will allow us to continue to have an advantage in the marketplace. Is it continuous innovation that you have to stay ahead and you're willing to open up everything that you have today, or is there a limit to what you will allow others to integrate with? Eric, I think it's probably a bit of a combination of both. I think you saw many examples this morning that the fact that these programs are integrated across the enterprise, largely through the Health Engagement Engine, that as we talked and as you saw examples, it provides for a better member experience and a better result. That point of differentiation will always exist because we have that integration, even partnering, you won't get that same level of integration. Maybe it'll get you part of the way there, and I think I'd probably express it that everybody has data. I think the ability that we have to use that data in a very differentiated way to influence behavior and produce an outcome is what is embedded a little bit in the secret sauce. Then I think the flip side of that is your question. I think that you saw examples that while we've had a series of innovations over the years, there's more that is being introduced, and there's more that's on the drawing board back in the lab. I think it's a combination of both that will allow Caremark to continue to differentiate itself in the marketplace, and at the same time, how CVS can be a preferred partner for health plans and other PBMs because of these unique capabilities that aren't necessarily possessed by our traditional retail competitors. All the way in the back. We're blinded by these lights, so if I know you and you're turning around saying, "I don't know why he's just saying all the way in the back," it's because I really can't see you, other than the hand. Well, let me help you out. I'm Alvin Concepcion from Citi. Just a question on the cost-cutting, cost-savings program. How much of it do you think is offensive, allowing you to continue your market share gains? How much of it is defensive in terms of being able to offset some of the industry pressures like reimbursement or even the network changes in 2017? Thank you. Yeah, Alvin Concepcion, maybe I will start and then flip it over to Dave Denton. I think most of you in this room know that we have always been pretty efficient as a low-cost provider. Oftentimes, we have gotten that question that in terms of demonstrating that level of efficiency, where do you go with that from there? I think we are always looking for opportunities, recognizing that in this marketplace, you have to continue to drive efficiency and productivity. So, in some respects, I would say it is a continuation of the journey that we have been on for many years. Yeah, I would say a little bit, it is probably, I agree with Larry, probably a little bit offensive in the sense of, go back and we have talked about this in many, over the last several years, you think about in an environment in which we have reimbursement pressure, we really offset those reimbursement pressures really in three ways. One is we have to get better from a cost perspective, and you see now the next turn of that with this streamlining effort. Two, we have to get better from a procurement perspective, really buying generics better, and obviously Red Oak was a big turn of that, and we continue to push on that. Third, and probably most importantly, we have to capture dispensing share in the marketplace. Obviously 2017, because of what has happened from a networks perspective, not allowing us to do that. I think what you heard today is all of our efforts are focused on how can we, again, reaccelerate that script capture to offset those reimbursement pressures in the marketplace. Being cost-effective will help us price right. Thank you. Robin, up here. Thanks. I just want to focus on rebates. You saw the analysts today talking about rebates, and if they went away, you make money other way. I guess, one, do you think rebates go away? Because I view rebates as a retroactive discount. Do you expect a change? How will the change occur? Who will be the driver? What would be the impetus? Maybe timing, if you think there will be a change. Yeah, maybe as part of that discussion, I will start then flip it over to Jon, because, Ann, maybe I will take the question just a little more broadly as well, because I think one of the things, Dave touched on this earlier in terms of dismissing some of the myths, is the characterization that PBMs are unnecessary middle people that are driving up cost in the healthcare economy, that just simply is not true. I think as we look at the PBM business in isolation, there is not one single profit driver of that business. Again, going back to some of Dave's comments earlier. Can we go to the slide that we took the format of the slide that we talked about this morning in terms of describing the various assets that exist within CVS Health, we said, "Gee, if we look at what the PBM does for our clients, in this particular case, specifically what CVS Caremark does for our clients, these are all of the tools, the programs, the capabilities that exist, that clients hire us to do in an effort to drive down their pharmacy spend make sure that their members are receiving the appropriate care." I think what is interesting about this is if we lined up five clients in terms of what is most important for you, there would be some commonality, but I think we would get five different answers. That is why oftentimes we turn around say, "If you have seen one PBM contract, that is exactly what you have seen, one PBM contract." Because we can meet the diverse needs of our client base, okay, by our capabilities. As Dave mentioned, as we look at the profitability of the business, it is based on the overall value proposition with which we provide. So maybe with that higher level context, I will flip it over to Jon to talk more about the rebates. Yes. I mean, as everyone knows, rebates are simply a discount after the drug has been dispensed, and I think part of the challenge in the marketplace is consumers have moved to high deductible health plans. They are not, in most cases, getting the advantage of those discounts. The plan gets the advantage of those discounts as we pass those rebates back to them. So, we do have the ability with high deductible plans to actually apply those rebates at point of sale. We are encouraging the marketplace to move in that direction so that consumers can take advantage of that. If rebates would go away, listen, pharma is not paying rebates because they want to. They are paying rebates because they want access to our market share. If for some reason they went away, and I still believe based on our formulary strategies, they still are going to want to pay to get access, it would probably just come in the form of a discount like we see in the generic markets today, which I think would be fine. I mean, we do great buying generics, and we are going to do great buying brands, whether it is a rebate or a discount upfront. So, I guess I am not concerned about all the rhetoric. The only other possible move is could the government get into negotiating these discounts in Medicare? That has been scored by many of the federal groups that do that, and it has shown that the federal government would not save money because they are not going to make those tough choices that we make as a PBM. I think it is a lot to do about nothing, quite frankly. Up here, Lisa. Larry, last year I asked you if it would make sense for CVS Health to own a health plan at the conference, and you said no. As we think about the suite of assets that you have today, one, what are some of the things that you think you're missing? If a health plan doesn't make sense, are there other ancillary services that you can provide within the context of what you're offering, especially around the MinuteClinic? One of the things that comes to mind is lab. I know you and I have talked about lab in the past, but as you expand that side of things, are other things that you think about that would enhance the overall offering of CVS Health? Well, Lisa, I'll start, and I know Dave will jump in as well, but we probably talk about that every year, okay? In terms of maybe in the form of the question that, what is missing from your overall value proposition? We sit here, and as we look at our capabilities, we say, "Well, there's no glaring hole." At the same time, if you go back to some of Dave's slides, we continue to find opportunities with those bolt-on or ancillary acquisitions that, where we believe that we can connect the dots, okay, and through a level of integration, bring something to the marketplace that doesn't exist today. I think that's our focus in terms of, as we look at the marketplace going forward, how do we continue to think about satisfying that goal? I think your question about labs, I know that always comes up in terms of, isn't that a natural fit for MinuteClinic? I think it's something that we continue to look at, that we do some point-of-care testing today. At the same time, we're continuing to evaluate technology in that space with a belief that there's probably a point in time where the technology will be a nice marriage to our capabilities at retail. Lisa, I think you'd think about us expanding kind of our suite of services really twofold, is taking what we have today and making it broader, i.e., MinuteClinic doing certain activities today, but extending their reach and doing more services. Also, if you think about the health plans and the payers that we serve, many of them are struggling with trying to engage patients across other dimensions of healthcare. We have that access point, so how can we think about our, I'll say, our platform and our chassis to be an avenue to add on capabilities, but really engage the patient in a more holistic manner? Okay, great. Thank you. Priscilla Wright. I think it is Ricky. Yes. Couple of questions. One follow-up on the rebate. I think, John, in your presentation, you had a slide that showed how rebates have grown from 2014 to 2016. When we think about that growth, to your point, you retain less than 10% of the rebate, but does this slide represent the growth in the rebate pool, or does it also represent increased plan design, utilization, and other benefits? It is probably a little bit of both, Ricky. Keep in mind, people have asked a lot about rebates as far as the fueling the profit growth and the PBM, and at the same time, while you have seen those rebate numbers grow, look at the profit margin within both our business and other PBMs, and you have seen that shrink. While we have probably done a lot better at collecting rebates because of our formulary and all the strategies we have deployed, it is just demonstrating yet again that the vast majority of that, over 90% of that, is going back and buy down the cost and the plan cost for those sponsors. I mean, what I would add is that as our book of business has grown, and we get more share, that makes pharmaceutical manufacturers even more interested in staying, having access to our book. So we go back each year and have negotiated better deals on the same drugs. We look to move drugs on and off. That creates value. Then the third component of the actual rebates is the price protection that we have on over 90% of our contracts, and we simply negotiate a threshold, and that is a negotiated point. If they raise their price over a certain threshold, then the balance of that price increase comes back to our clients in the form of a rebate. So that's why those lines continue to diverge. Ricky, there's probably one other variable as well, that as more competition has been introduced in a therapeutic class with comparative effectiveness, that has created additional opportunities for formulary management. Larry, question for you. I mean, over the years, you've built a very good relationship in Washington, D.C. So when you stand today, a lot of change is coming. What's kind of like your perspective of what should we expect from the new administration? Well, Ricky, I think that, number one, I do think that the administration will be very sensitive to the balance between government regulation and private sector innovation. John, I think, touched on it earlier. I think that hopefully there's reason for optimism that some of, by the way, we believe in regulation. We also think that there is a point of diminishing return, okay, where that regulation paralyzes private sector innovation to some degree. So, I think there's reason for optimism that we can find a more appropriate balance. I think we talked about our views in terms of where healthcare is headed, and obviously there's likely to be change. I think the goal of affordable care for all Americans will remain, okay? So maybe it becomes a question of who pays for it and how that care is delivered. That is an open question. And I think for all the reasons that you heard this morning, we are very confident that we can be an important part of that solution in the delivery of that care. I think the other interesting topic, and Dave touched on it earlier, is tax reform. This group knows the economics of our company profile, and with a 39% effective tax rate. So, any type of comprehensive tax reform should certainly be a benefit to our business, as today we pay about 1% of all corporate taxes in America. It is not. Priscilla, right? Or Sharon? Yep. Hi. Deborah Levin at MetLife. I had a question about biosimilars. You had talked about hoping to be able to capture that market, and I am interested in knowing if you expect to be able to convince doctors to change the patients already on branded biotech drugs or just be able to encourage new patients. Because, obviously, you are talking about biosimilars and not identical drugs. Alan, you want to? Well, I think Troy actually, you have had a lot of recent conversations, so I think Troy has the most Okay current data. Yeah, I think we'll be able to change them. I think that the data that's coming out of Europe, more and more extensive clinical trials where people are switching biosimilar back to the original agent, back to the biosimilar. They're not finding a lot of antigenicity associated with that. The organized doctors that we talk to are reading that literature, and I think they're getting more comfortable with it. I think over time, we are going to see a situation which we'll be able to sort of substitute a biosimilar for an existing agent rather than having to rely on a situation in which we would delay that through a grandfathering process. Sharon, right? There you go. Thanks. Bob Jones, Goldman Sachs. Yeah, Dave, you talked about the importance of winning share on a claims basis in the marketplace. I'm curious if maybe you guys could talk a little bit about Caremark's go-to-market strategy in this year's selling season. Are there any levers that you plan on being more aggressive with? Do you think there'll be a greater appetite for restrictive network options? Just curious if, obviously, Caremark being a vehicle to try to recapture some share. John, do you want to? Yeah. So Bob, if you look at the employer book of business, they have been pretty aggressive with either adopting formularies or adopting networks. The laggards in the market has really been the health plans, and we are beginning to see movement in the marketplace with health plans restricting networks. So, I think we will talk a lot more about that, and I think there is a lot more receptivity to doing it. It is easier for a health plan to do that in their fully insured book of business because they can make the decision and move that entire book all at one time, depending upon the different states. For their self-insured clients, they have to go in and sell it in one at a time, so that makes it a little more challenging. I think that will continue to be a challenge for them just because they are looking at the all-in healthcare cost, and they have a lot of competing priorities. But I think that between formulary and networks, I think those will be the biggest levers as we move into the next selling season. Maybe I would ask Alan to We have talked the last probably two years about the ongoing increase in focus on specialty. Maybe I will ask Alan to comment on his view through the client lens for 2018. I think, to pick up on where John was, I think it's clear that the expense associated with specialty has become an increasing burden on plans, and it's driving them to look for more and more solutions. Historically, particularly health plans would have been more resistant to looking at some of the medical benefit management type programs we have. Our ability to take the medical side and pharmacy side and put them together, because if you think about the number of drugs or conditions, cancer, multiple sclerosis, rheumatoid arthritis, pulmonary arterial hypertension, treated with drugs on both sides, that integrated cross-benefit management approach really resonates, both from a utilization management perspective, but also from a drug selection perspective. We're seeing more and more health plans that are looking for that entirely comprehensive view of specialty, not at a drug level, but at a patient or condition level. It's been, as we said, 35 million lives kind of rolling into that platform this year. The reason I'm optimistic you're going to see health plans move, three years ago, we were having these conversations with the pharmacy team. Now we're having these conversations with the C-suite. The C-suite is much more able to make these decisions and take risk around what is perceived disruption. Yes, back, Priscilla. Pete Costa, Wells Fargo. I want to build on that specialty conversation a little bit. First off, to reach your 11% long-term revenue growth target, clearly specialty is an important part of that. How much risk are you taking in specialty if the retail side of the business is signing more PBM agreements elsewhere, so somebody else can go around your tighter PBM controls that you have with the retail side? Is specialty completely separated from that, or are you still at risk with the PBM of losing customers? Specialty generally is a Most plans will handle specialty as a separate drug list, managed separately, recognizing that probably about half of the dollar volume probably at this point is through products that have some level of limited distribution, not through retail in general. Most plans understand that restricting specialty to a smaller network results in better economics, better clinical outcomes, and overall more control over the appropriateness of the utilization than having a broad network of 60,000 or more sites. But the PBMs generally have their own specialty business, so I am trying to understand if you are running at risk of losing PBM customers because the retail side of the business is contracted with more PBMs, don't you run the risk of losing specialty business? I think you have to We talked a couple years ago or last year about breaking the specialty market into a payer-directed market, which is about half the market, and a patient-directed market, which is about another half. Within that payer-directed, you have employers under ERISA rules who can completely limit their networks, and then you have health plans managed under Department of Insurance or fully regulated entities that are subject to any willing provider laws. That is where that part of the market is very difficult to narrow 100%. A very large chunk of our business, as you saw, still comes from, to coin an expression, or you used the expression, Larry used, payers named something other than Caremark. Actually, as we look at the specialty market, we are actually getting a bigger share because of the bundled offers that we are bringing between NovoLogix and Specialty Connect and our integrated specialty management capabilities. So we are seeing health plans that historically may have had three providers narrowing their network down to us being a provider, and many times, we may not even have to be the PBM to do that. So we actually are very bullish on our ability to continue to grow specialty. Thank you. We will have time for two more questions. Robin, all the way in the back. I think she needs a pair of roller skates. She has been having to run around everywhere, I feel bad. John Ransom, Raymond James. This is just my opinion only, but to me, the Mylan EpiPen thing that happened this summer triggered an avalanche, if you will, of manufacturers griping about gross-to-net. Then on top of that, I think John mentioned the problem with high prices and high copays not really working together. So, I guess my opinion is that I think something has got to change culturally to make this feel better for the patients who have these high copays, and maybe for the manufacturers who feel like they are losing all their profits in the channel. What I hear you guys doing is defending your model, and I think that is fair, and everybody is acting like they should in sort of a game theory mode. But isn't there a part of you thinking, "Gosh, five years down the road, it just can't keep looking like this, where the prices go up, the gross-to-net goes up, the copays go up, manufacturers get madder." Isn't there something kind of unsustainable about this whole setup that says, "The wall's got to fall, and we've got to kind of narrow this gross-to-net spread and make it a little easier for these 2%, 3% of the people who are on these high-cost specialty drugs." Thanks. Well, John, maybe I'll start. I know probably there's everybody up at this table's probably chomping at the bit to jump into that question, okay? No, listen, I think what we're trying to do is separate fact from fiction. If you start with, why do clients hire us to begin with, okay? They hire us to make sure that we're providing a pharmacy benefit at the lowest possible cost with the highest degree of service for their members. If you turn around and take a step back and say, "Why are we in this situation to begin with?" Okay, I think that to some degree, I mentioned earlier that the opportunity for formulary management, okay, or rebates has been introduced because there's more competition in the therapeutic classes with, again, to some degree, me-too drugs that have no incremental effectiveness that may be entering the marketplace at higher price points. So, if each and every one of you were running the benefit in HR for your company, why would you want to pay a higher cost for a treatment that already exists with an existing product, okay? That's the job that we're doing. So, as John mentioned, okay, we're certainly open, okay, to new and different ways. I think John alluded to some things that we've begun to do in terms of changing that pricing model, okay, that makes sense for pharma, and by the way, makes sense for our clients. We're certainly open to that, okay, in terms of, is there a better way to get there, as long as we're achieving that goal of lowering cost and providing that level of service. I don't know if anybody wants to jump in. I mean, the only thing I would add is, we have a short-term solution today where instead of the members paying the $600 for EpiPen, which is the AWP, and the client getting a $300 rebate, we could price that when the member picks it up at $300, less the other discounts, and the member gets the benefit of that. So, that capability exists today. We have a lot of clients that are actually on that, but we think as high deductible health plans grow, there is an opportunity to grow that. Now, that is a short-term solution. Where it goes from here, I think, as Larry said, very open to thinking about it very differently. Yeah. John, I think what we take exception to is, and I mentioned this earlier, is the implication that we are keeping all of those rebates. It gets back to this perception of PBMs are middle people that are making outsized profits as a result of this. I think, as we have talked throughout the morning, that is simply not true, not the case. Yes, up front here, Robin. Thanks. Rob Forker, Loomis Sayles. Can you generate $7 billion-$8 billion in free cash flow in 2018, or are there cost saves, investments that we should consider? Well, it is probably too early to talk about 2018 specifically, but if you just look over the history of the company over the last, let us say, seven or eight years, we have been pretty consistent on our cash generation year to year with maybe some timing here or there. I think we feel pretty confident in the power of that machine. So, I guess I would not be concerned about us over time being able to deliver that. Just narrowly within 2018, a little too early to tell. Okay, with that, let me again thank you for your time. We know how busy your schedules are, so it means a lot to us that you would make this a priority. On behalf of all of us, let me wish you and your families a very happy and healthy holiday season, and we will see you in the new year.

Data Source: Quartr Last updated: Dec 15, 2016

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