Earnings Call: Q2 2016

Aug 2, 2016

Summary

Q2 adjusted EPS rose 8.3% to $1.32, while operating profit grew 6.5% excluding acquisition costs. FY16 adjusted EPS guidance rose to $5.81-$5.89 and free cash flow guidance to $6.3B-$6.6B.

Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the 0. As a reminder, this conference is being recorded Tuesday, August 2nd, 2016. I would now like to turn the conference over to Nancy Christal, Senior Vice President, Investor Relations. Please go ahead, ma'am. Thanks, Silvana. Good morning, everyone. Thanks for joining us today. I am here this morning with Larry Merlo, President and CEO, and Dave Denton, Executive Vice President and CFO. Jon Roberts, President of CVS Caremark, and Helena Foulkes, President of CVS Pharmacy, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up so we can provide more people with the chance to ask their questions. I have one announcement this morning. Our annual analyst day has been scheduled for Thursday, December 15th, in New York City. You will have the opportunity to hear from several members of our senior management team who will provide a comprehensive update on our strategies for driving long-term growth. We plan to email invitations with more specific details at the end of the summer, but please save the date. Again, that is Thursday, December 15th. This morning, we posted a slide presentation on our website just before this call. The slides summarize the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance. Later this afternoon, we will be filing our Form 10-Q, and it will also be available on our website at that time. In addition, note that during today's presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, as described in our SEC filings, including the risk factor section and cautionary statement disclosures in those filings. During this call, we will use some non-GAAP financial measures when talking about our company's performance, including free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the reconciliations of these non-GAAP items to comparable GAAP measures on the Investor Relations portion of our website. As always, today's call is being simulcast on our website, and it will be archived there following the call for one year. Now, I will turn this over to Larry Merlo. Okay. Thanks, Nancy, and good morning, everyone. Thanks for joining us. I'm pleased to have the opportunity to discuss the strong second quarter results we posted today. Adjusted earnings per share increased 8.3% to $1.32. That is $0.01 above the high end of our guidance. Excluding acquisition-related costs in both years, operating profit increased 6.5% enterprise-wide, with operating profit in the retail long-term care segment in line with our expectations and operating profit in the PBM exceeding expectations. We generated more than $1.1 billion of free cash during the quarter, more than $2.9 billion year to date. As Dave will describe, we are raising our free cash flow target by $1 billion for the year. Given our outperformance this quarter and solid results year to date, we are raising and narrowing our adjusted EPS guidance range. Excluding the costs associated with the debt tender and acquisition-related costs, we currently expect to achieve adjusted EPS for 2016 of $5.81-$5.89, reflecting year-over-year growth of 12.5%-14.25%. That compares to our previous range of $5.73-$5.88. Dave will discuss this guidance in more detail during his financial review. Let me turn to the business update, and I will start with the PBM. The marketplace has been active, and I am pleased to report that with our differentiated value proposition, we see 2017 shaping up to be another successful selling season. We currently have gross wins of approximately $7.4 billion and net new business of approximately $4.6 billion. These new business numbers do not include any impact from our individual Med D PDP. I will touch on that shortly. I would also note that only about 7% of the gross wins relate to the previously discussed transition of the Coventry commercial business, which was acquired by Aetna back in 2013. To date, we have completed about 75% of our client renewals for 2017. That is a bit ahead of where we were at the same time last year, and our retention rate is currently at 97.5%. Importantly, we have continued to win in the marketplace while maintaining our pricing discipline. A lot has been said and written about the competitive dynamics of this selling season, and facts and realities can easily be lost or overlooked amidst the attention being paid to a few client shifts. Let me remind you of the things that have not changed in the competitive landscape, along with our ongoing strategic advantages. As you look at our key points of differentiation, we see consumer-directed healthcare gaining traction, and points of access are critical. Our more than 9,600 pharmacies give patients immediate access to advice as they take on more responsibility for their healthcare decisions. The data has shown the undeniable benefit of the face-to-face interactions for better adherence, reducing healthcare costs, and improving health outcomes. We have multiple patient touchpoints through our unique suite of assets, not just our retail pharmacies, but also mail, specialty, infusion, MinuteClinic, and now long-term care. At the same time, we are the only company with the ability to impact not only patients, but also payers and providers with our innovative channel-agnostic solutions. Maintenance Choice continues to be a truly integrated program, delivering financial, convenience, and clinical benefits to clients and members. It's not just about price, it's about enabling clinical programs that require deep integration of data. Our Health Engagement Engine serves as that enabler so that products like Maintenance Choice cannot easily be replicated through a partnership or an alliance. Additionally, we have the broadest capabilities to holistically manage specialty, which continues to be a key area of focus for clients. We continue to outperform in this area with specialty revenues increasing 22.9% in the second quarter. Clients continue to expect proactive, innovative, real-time solutions to manage their drug trend, and the insights tool that we demoed at our last analyst day is unmatched, and it delivers those real-time solutions for our clients. Furthermore, our scale and innovative purchasing strategies are unsurpassed, and they continue to drive meaningful value for our clients. In summary, those are just some of the factors that have differentiated us in the past and continue to drive our success this selling season. We're certainly not sitting still as we continue to find new and innovative ways to drive value for patients, payers, and providers. I also want to note that we continue to offer our clients cutting-edge solutions to formulary management, as we believe it is one of the most effective ways to manage rising drug costs while ensuring access to clinically appropriate care. Our 2017 formulary management strategy continues to address emerging cost drivers with new market-leading enhancements, which we have just announced to our clients effective this coming January. Given the growing number of supplemental indications for many drugs, we will be creating opportunities for additional client and member savings through an indication-based formulary. On a quarterly basis, products with significant cost inflation that have readily available, clinically appropriate, and more cost-effective alternatives may be evaluated and potentially removed from the formulary. Effective January 1, 2017, we expect to remove 35 products from our standard formulary, including 10 hyperinflationary products, as I just described. These formulary changes affect less than 1.5% of plan members while helping to reduce costs for clients and their members. In fact, from 2012 through 2017, this rigorous approach to formulary management will help generate total savings of more than $9 billion for our clients without disrupting member care. You can find an overview of our strategy along with the 2017 formulary details on the investor relations portion of our website. While it's too early to discuss the 2018 selling season, many of you have asked about the timing of the next FEP contract renewal. Let me clarify that the FEP specialty business has a request for information in the marketplace for January 2018. However, the FEP retail and mail order businesses, comprising more than 70% of our total FEP revenues of about $9 billion, have been extended until January 2019. Before turning to retail, let me touch briefly on our Med D PDP SilverScript. We currently have about 4.1 million captive lives in our individual PDP, about 1.2 million captive EGWP lives, and we serve another 6.4 million lives through our health plan clients. In total, we currently serve approximately 11.8 million Med D beneficiaries. Late last week, we received the preliminary benchmark results from CMS for 2017, and I'm pleased to report that SilverScript qualified in 32 of the 34 regions. These strong benchmark results should enable us to retain the vast majority of the auto-assignees we currently serve, along with the ability to attract new lives, and we are very pleased with these results. Moving on to second quarter results in the retail long-term care business, total same-store sales increased 2.1%, with pharmacy same-store sales up 3.9%. This was negatively impacted by about 355 basis points due to recent generic introductions. Pharmacy same-store prescription volumes increased 3.5%. That is on a 30-day equivalent basis, continuing to outperform overall market growth. Our retail pharmacy market share, again on a 30-day equivalent basis, was 23.9%, and that is up about 230 basis points versus the same quarter a year ago, driven by the inclusion of the Target pharmacies as well as underlying share growth. I am pleased to report that the Target integration has been completed ahead of schedule. We converted all 1,667 Target pharmacies, 79 clinics to CVS systems, programs, and interior branding. This was one of our smoothest integrations ever, despite the complexity of the store within a store format, and we certainly appreciate the strong communication and collaboration with our Target partners. With CVS systems and branding now in place, we are ramping up our patient care programs along with our marketing and member engagement campaigns that are expected to increase awareness and utilization of CVS at Target. Our long-term care pharmacy business through Omnicare continues to perform well and in line with our expectations. Our integration efforts are progressing as planned, and we remain on track to complete the vast majority of the integration activities by year-end. In addition to those integration activities, we are working with our long-term care clients to address the currently unmet needs of their residents, all with the goal of improving patient care and driving operational efficiencies. In Q1, we introduced the use of CVS pharmacies to speed the delivery of first fills and emergency needs to the facilities. This program continues to grow, and we now fill nearly half of all emergency scripts using a CVS pharmacy. In Q2, we began piloting our transition of care program to enable us to better serve patients as they transition across different care settings. We also continue to pilot our integrated service offerings to the assisted and independent living communities, offering residents enhanced prescription delivery options based on their preference and acuity level. While there is still much work to do, we remain excited about our ability to enhance patient care in these settings. Turning to the front store business, comps decreased 2.5% or 1.7% after adjusting for the negative impact of the shift of Easter from April last year to March of this year. We saw softer customer traffic, which was partially offset by a notable increase in basket size. At the same time, we saw notable front store margin gains in the quarter. Some of the traffic decline was expected as we continued to optimize our promotional spend for our lower value promotionally oriented customers. In contrast, we saw front store spend and margin increase with our most valuable customers. Through our personalization efforts, we continue to deliver a value-based offering derived from longitudinal shopping habits, while increasing engagement through app and email capabilities. Now, keep in mind that our front store business accounts for about 11% of enterprise revenues, and these personalization efforts are allowing us to invest our promotional spend in a very differentiated way, producing a margin flow-through. We will talk more about these efforts at our analyst day. We have also been focused on a mix shift towards our higher margin health, beauty, and store brand categories. We continue to roll out store resets to improve our health and beauty leadership. Following last year's health and beauty enhancements across thousands of stores, we continue to scale our healthy food selection, optimize our key categories in the health quadrant, and elevate our beauty offerings while improving shopability. Store brands are another area of significant opportunity. Our store brands represented 21.8% of front store sales in the quarter, and that is up about 85 basis points from the same quarter last year as we continue on our trajectory to a goal of 25%. Turning to store openings, in the second quarter, we opened 22 new stores, relocated nine others, closed 10, resulting in 12 net new stores, and we expect to open about 100 net new stores for the full year. As for MinuteClinic, we currently operate 1,136 clinics across 33 states plus the District of Columbia. As I noted earlier, the Target conversion was completed, and our nurse practitioner providers are adjusting well to the MinuteClinic scope of services and Epic EHR. Including Target, MinuteClinic revenues increased 15.2% versus the same quarter last year, despite the mild and late allergy season. The Hold My Place in Line online queuing tool that was launched nationally in March continued to gain momentum in Q2. By the end of the quarter, the use of the tool had increased to 13% of all MinuteClinic visits. Customer feedback is extremely positive, and further enhancements are underway to improve the customer experience. With that, I will turn it over to Dave for the financial review. Thank you, Larry, and good morning, everyone. Today, I will provide a detailed review of our second quarter results, followed with an update on our improved guidance. As I typically do, I will start first with a summary of the progress we have made in enhancing shareholder value through our strong capital allocation program. During the quarter, we paid $459 million in dividends. Our dividend payout ratio currently stands at 35.5%, but that is artificially high due to the loss on the debt extinguishment we incurred in the second quarter, as well as the ongoing integration costs associated with our recent acquisitions. On a more comparable basis, our payout ratio stands at 31.1%, and we remain well on track to achieve our target of 35% by 2018. In addition, we have continued to repurchase shares. During the second quarter, we repurchased 18.5 million shares for approximately $1.9 billion, or $102.32 per share, and we have now essentially completed our planned $4 billion in repurchases for 2016. As I said at our analyst day, we expected share repurchases to be front half loaded, and it very much played out that way. So between dividends and share repurchases, we returned approximately $2.4 billion to shareholders during this quarter and nearly $4.9 billion year to date. We continue to expect to return more than $5 billion to our shareholders in 2016 through both a combination of dividends and share repurchases. As Larry mentioned, we generated more than $1.1 billion of free cash in the second quarter, and we have produced more than $2.9 billion year to date. We are increasing our full year free cash flow guidance to a range of $6.3 billion-$6.6 billion from the prior range of $5.3 billion-$5.6 billion. This primarily reflects timing in our Medicare Part D SilverScript business, as well as overall improvements in the core. Basically, healthier members and lower utilization than what we assumed when we submitted our bids are leading to changes in the timing of our cash flows, as we expect to continue to be in a payable position with CMS at the end of this year. Now, turning to our debt. In order to take advantage of the current favorable interest rate environment, during the second quarter, we issued $3.5 billion in debt, refinancing approximately $3.1 billion of outstanding debt through a tender offer transaction. As a result, we booked a loss on the early extinguishment of debt of $542 million during the quarter. Furthermore, last month, we retired an additional $1.1 billion by calling certain debt, and as a result of that, we recorded a $102 million loss on the early extinguishment of debt during the third quarter. Together, these actions provide an ongoing benefit in terms of lower interest expense going forward. The benefit to 2016 is expected to be in the neighborhood of $50 million. Turning to the income statement, adjusted earnings per share came in at $1.32 per share, one cent above the high end of our guidance range, and up 8.3% over LY. GAAP diluted EPS was $0.86 per share. The retail long-term care segment delivered solid earnings within our expectations, while the PBM segment posted profit growth above the high end of our expectations. The outperformance in the quarter was primarily driven by better purchasing economics in the PBM. Let me quickly walk down the P&L. On a consolidated basis, revenues in the second quarter increased 17.6% to $43.7 billion. In the PBM segment, net revenues increased 20.7% to $29.5 billion. This growth is largely attributable to the increased volume of pharmacy network claims resulting from the very successful selling season we had last year. Additionally, and despite a year-over-year decline in Hep C sales, specialty pharmacy growth has been strong, driven in part by the Omnicare acquisition and the addition of its ACS book of business. Overall, PBM adjusted claims grew 18.7% in the quarter. Partially offsetting the sales growth was a 155 basis point increase in our generic dispensing rate to 85.4%. While achieving strong growth year-over-year, the PBM's top line did come in below our expectations. The chief drivers were lower than expected specialty revenues from the continued year-over-year decline in Hep C prescription volume due to lower new patient starts and fewer days of therapy. In our retail long-term care business, revenues increased 16% in the quarter to approximately $20 billion, driven by the addition of Omnicare and the pharmacies within Target, as well as solid pharmacy same-store sales. GDR increased by approximately 110 basis points to 86.1%, partially offsetting this increase. Turning to gross margin, operating expenses, operating profit, and the tax rate, where applicable, the numbers I am citing exclude non-GAAP adjustments in both current and prior periods, which we have reconciled for you on our website. Keep in mind that our guidance for the quarter also excluded those items. Gross profit dollars for the consolidated company increased a healthy 9.7% versus the same quarter of last year. Consolidated gross margins contracted approximately 115 basis points compared to Q2 of 2015 to 16.1%. Within the PBM segment, gross margin contracted by approximately 45 basis points versus Q2 of 2015 to 4.6%, primarily attributable to the mix of business and continued pricing compression, partially offset by the GDR improvement and favorable purchasing economics. However, gross profit dollars in the PBM increased 10.2% year-over-year, primarily due to strong claims growth, membership growth in SilverScript, improvements in GDR, and favorable purchasing economics. Of course, partially offsetting these drivers was continued price compression in the market. In the retail long-term care segment, gross margin declined approximately 165 basis points to 29.2%. About 40% of the decline in gross margin rate was mix-driven due to the acquisitions. Lower reimbursement rates also continued to pressure margins. Partially offsetting those pressures were increasing generic dispensing rates, as well as increased front store margins as we continue to rationalize our promotional strategies and improve our mix of products sold. Gross profit dollars increased 9.8% year-over-year in the retail long-term care segment, largely driven by the addition of Omnicare and Target businesses. Turning to expenses, we saw strong improvement in total operating expenses as a percentage of revenue from Q2 of 2015 to 10.5%. The PBM segment's SG&A rate improved about 10 basis points to 1.1%, benefiting from the additional sales leverage from the volume increases. SG&A as a percent of sales in the retail long-term care segment improved significantly by approximately 85 basis points to 20.3%. This too was driven by leverage from revenue growth, as well as the addition of the Omnicare business, which carries a lower SG&A rate relative to sales. Within the corporate segment, expenses were up approximately $25 million to $220 million, slightly better than our expectations. Consistent with our expectations, operating margins for the total enterprise decreased approximately 60 basis points in the quarter to 5.6%. Operating margin in the PBM decreased approximately 35 basis points to 3.5%, while operating margin at retail long-term care decreased approximately 80 basis points to 8.9%. For the quarter, operating profit growth in the operating segments and at the enterprise level was in line with or better than expectations, with the PBM increasing 10.5%, retail long-term care growing at 6.2%, and consolidated operating profit growing at 6.5%. Consolidated EBITDA was up 9.8% over LY to $3 billion. Going below the line on the consolidated income statement, net interest expense in the quarter increased approximately $150 million from last year to $280 million, due primarily to the debt issued in the third quarter of 2015 to fund the acquisitions we made last year. Our effective tax rate in the quarter was 39.3%, and our weighted average share count was 1.1 billion shares. With that, now let me update you on our guidance. I will focus on the highlights. You can find the additional details of our guidance on the slide presentation that we posted on our website earlier this morning. As Larry said, we are narrowing and raising our 2016 adjusted earnings per share range to $5.81-$5.89 from a prior range of $5.73-$5.88, which reflects strong year-over-year growth of 12.5%-14.25%. We have raised the midpoint by $0.045, reflecting the positive impact of the interest benefit derived from the debt extinguishment, as well as our outperformance in the second quarter. With respect to GAAP diluted EPS, in addition to narrowing the range and layering in the benefits from interest and the second quarter outperformance, we are revising our full-year guidance to also reflect a couple of additional items. One is the integration cost that we saw in the second quarter, which we explicitly excluded from our guidance on the last earnings call. These costs totaled approximately $81 million pre-tax. The other is the losses on the early extinguishment of debt that we completed in both the second quarter and now the third quarter. Those losses totaled $644 million pre-tax. We now expect GAAP diluted EPS to be in the range of $4.92-$5.00 per share. Keep in mind that our GAAP guidance for future periods continues to exclude the impact of acquisition-related integration costs, and we will update for those costs that we incur as the year progresses. Before I continue, let me remind you that the following guidance excludes all acquisition-related integration costs. In the PBM segment, we are decreasing revenue guidance to a range of 21%-22%, reducing the midpoint by 100 basis points. This decrease takes into account lower-than-anticipated volume of Hep C, as well as an associated reduction in days of therapy. At the same time, we are raising the midpoint of the PBM's operating profit guidance range by about 2.5 percentage points to account for the outperformance in the second quarter, as well as continued expectations for better purchasing economics over the course of the remainder of the year. This results in a new range of 13.5%-15.5%. In the retail long-term care segment, we are narrowing guidance for revenue growth by taking the top end of the range down by 50 basis points. The reduction in the high end mainly reflects our performance in the second quarter, as well as slightly weaker front store sales trends as we continue to execute on our targeted promotional strategies. We now expect retail long-term care revenue growth of 13%-13.75% and total comps of 1.75%-2.5%, while continuing to expect script comps of 3.5%-4.5%. Despite the revenue change, we remain confident in our prior operating profit expectations given the immaterial impact the changes I noted are expected to have on profitability. We are narrowing the range to take into account our performance in the second quarter. We now expect retail long-term care operating profit growth of 6.75%-8%. Consolidated net revenue growth is now expected to be 17%-17.75%. Intercompany revenue eliminations are now expected to be approximately 11.6% of segment revenues, and we expect higher intercompany profit eliminations. As I said before, we are increasing our free cash flow guidance for the year by $1 billion to a range of $6.3 billion-$6.6 billion. Let me provide guidance for the third quarter, which again excludes all acquisition-related integration costs. We expect adjusted earnings per share to be in the range of $1.55-$1.58 per share in the third quarter, reflecting growth of 21%-23.75% versus Q3 of 2015. GAAP diluted EPS is expected to be in the range of $1.38-$1.41 per share in the third quarter, which includes a $102 million loss on the early extinguishment of debt that we completed in July. At the risk of sounding a little bit like a broken record, I want to take a moment to remind you of several timing factors we have been highlighting since Analyst Day that affect the cadence of profit delivery throughout the year. The introduction and timing of break-open generics, the timing of profitability in our Medicare Part D business, the timing of the benefits from our strategies to drive profitability in the front end, the timing of share repurchases, and certain tax benefits were all factors expected to impact the cadence. While we have delivered two strong quarters slightly above our own expectations, the cadence of profit growth is still expected to be very much back half weighted. Our EPS guidance for the third quarter is very much in line with what we said at Analyst Day. All things considered, we see a ramp up in growth in Q3, and we still expect a strong back half to the year. As we've seen in years past, the timing of Medicare Part D profits in the third quarter remains difficult to forecast since this is the time period where the risk-sharing corridor is usually least effective at providing risk-sharing protection. Thus, changes in any current estimates, such as utilization, significantly impacts our timing of profits between the third and fourth quarters. This forecasting challenges is compounded by the significant growth in this business. We've made our best estimates and included those in our guidance, but keep in mind that there could be a shift of margin between the third and fourth quarters. Additionally, the tax benefits I mentioned are forecast to occur in the fourth quarter. If those come earlier, that will obviously benefit the third quarter at the expense of the fourth. We'll update everyone the final timing of these, again, when we report our results. Within the retail long-term care segment, we expect revenues to increase 11.5%-13% versus the third quarter of LY, driven in large part by the addition of the acquired businesses. Although sequentially, you will note a step down due to the mid-August anniversary of the closing of the Omnicare acquisition. Adjusted script comps are expected to increase in the range of 3%-4%, while we expect total same-store sales to be up 1% to up 2.25%. In the PBM, we expect third-quarter revenue growth of between 21.25%-22.5%, driven by continued strong growth in volumes, Medicare Part D, and non-Hep C specialty. Consolidated revenues are expected to grow 16.5%-17.75%. We expect a sequential increase in operating profit growth due to the impact of the timing of this year's generic introductions. Notably, CRESTOR, GLEEVEC, GLUMETZA are all breaking open in this quarter. As a result, we expect retail operating profit to increase 10%-12% and PBM operating profit to increase 20.25%-24.25% in the third quarter. Consolidated operating profit is expected to grow 14.75%-17.5%. In summary, we have posted strong growth year to date. Our 2016 outlook is strong across the enterprise, and we expect to generate very significant free cash this year. We remain committed to using this cash to drive returns for our shareholders through value-enhancing investments, dividends, and share repurchases. With that, I will now turn it back over to Larry. Okay, thanks, Dave. Let me wrap up, and then we will open it up for Q&A. Obviously, we are pleased with our second-quarter results, confident in our full-year outlook, and we have made good progress on integrating our recent acquisitions. The PBM selling season has been very successful, confirming again that our distinctive channel-agnostic solution resonates strongly in the market. We remain focused on continuing to provide innovative solutions that enhance access and lower healthcare costs, while at the same time improve health outcomes. Let us go ahead and open it up for your questions. Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your question. Good morning. This is Nathan Rich on for Bob this morning. Just wanted to start on your comments on the selling season. Appreciate all the detail that you gave, and definitely nice to see a strong new wins number. I was just wondering if you could talk about the mix of new business that you've won, how it looks for a health plan versus employer, and is there anything unique this year with regards to profitability, both from a pricing perspective, but also kind of considering the uptake of the suite of programs that you have to offer? Yeah. Nathan, it's Larry. I'll start and then ask Jon to comment as well. But of the business wins, about 75% of the business wins are in the health plan segment. Again, recognizing the value that we can bring our health plan clients. I think the themes that you've heard us talk about in the past have continued this year in terms of big focus on specialty, and I'll flip it over to Jon to talk more about our integrated programs. Yeah. Nathan, I would describe the selling season as pretty typical. The number of RFPs are comparable, and we've been at a consistent level of performance in the selling seasons over the last several years. If you look at the plan designs, which obviously drives profitability, clients continue to be focused on the tools that help them manage their pharmacy spend, and their top priority, as we've talked about many times, is specialty pharmacy. And we see both health plans and employers adopt our utilization management programs. We're seeing even stronger movement into exclusive specialty and a higher utilization of our specialty formularies. And clients across our, again, both health plans and employers, are becoming even more aggressive with all of our formulary strategies. Larry talked about our standard formulary option that we offer clients, good uptake of that, but we even have more aggressive formularies, Advanced Control and Value formularies that we continue to see increased interest in. And then our integrated programs, like Maintenance Choice, Specialty Connect, and Pharmacy Advisor, are becoming even more important as people not only look at the unit cost in pharmacy, but also how pharmacy can help reduce overall healthcare costs. So strong adoption of those programs as well. And so I think it's been, as I look at this new business mix and wins and profitability, I think it's pretty consistent with what we've seen over the last couple years. Great. Appreciate the detail. If I could just move over to the retail LTC segment, a question on gross margins. It seems like for several quarters now, you've seen some nice improvement in the front-end margin, and you highlighted the changes to the promotional cadence and some mix impact. Could you help us frame the opportunity for front-end margins just around the changes that you have made to promotions? Any comments on what impact this has had on the top line as we think about maybe the trade-off that you're making between top line and margin performance on the front end? Yeah. Nathan, it's Larry again. I think as you heard us comment on in the prepared remarks, and prior to today's call, the ability to utilize our ExtraCare data, to really understand our customers at a micro level is what's giving us, is what's providing us the opportunity to do what we talked about earlier around this personalization effort. Acknowledging that we can derive value in different ways. There's an awful lot of trial and error that goes on there. I would say that we're still learning from that. I mentioned earlier that Helena will talk more about that at Analyst Day in terms of the learnings that we've gotten and where we go from here. So, I guess to sum it up, we're certainly not done. We still think that we have capabilities beyond where we're at today. But as I mentioned, you have to take a surgical approach. So that we're preserving the value of our best customers and enhancing their experience. Just to be clear, Nathan, Steve here. Despite the fact of giving up, I'll say, a little bit of top line from a front store sales perspective, the flow-through to the business is accretive. Okay, great. Makes sense. Thank you. Our next question comes from the line of Lisa Gill with JPMorgan. Please proceed with your question. Great. Thank you and good morning. I had two questions on the PBM. The first question would be, Larry or Jon, can you maybe talk about where you're taking business from? We've now heard from Optum as well as Express Scripts. It sounds like everyone's having pretty good retention years, but clearly with $7.4 billion of gross wins, you're taking business from somewhere. Is it some of the smaller players? Are we seeing any incremental carve-out activity? How do we think about the competitive market right now and where that business is coming from? Go ahead, Jon. Lisa, this is Jon. I do not think there is any one competitor we are taking business from. I think it is across the spectrum, both large players and the small players. I think it is a very balanced selling season. And obviously, we continue to be very successful and our message continues to resonate. By the way, even on the renewals, when you look at how we are doing from a renewal perspective, again, very consistent performance relative to the last several years. I know there has been a lot in the press about a few contract moves, but when you step back and look at overall retention, we are very pleased. Okay, great. And then I guess my follow-up would just be around cash flow, Dave. I mean, obviously great cash flow in the quarter, great cash flow update for this year. How do we think about that on an ongoing basis? Is there some things in there that are one-time in nature? And would you think about doing an accelerated share repurchase with this incremental cash? How do we think about the deployment of it? Yeah. Lisa, a little bit of the cash flow, I would say probably 75% of the increased guidance is probably just think about that more as timing, as you think about us being in a payable position to the federal government at the end of the year. That will flip on us in 2017. So, think about that as just moving from 2016 into 2016 from 2017. I would say the balance is just general improved performance across our business in both PBM and retail. As it comes to capital allocation, as you know, we will continue to focus on what is the best use of our cash to drive value for our shareholders, and we will continue to think of and certainly come back to everyone as we think about how to use that cash over time. Okay, great. Thank you. Thanks. Our next question comes from the line of Charles Rhyee with Cowen & Company. Please proceed with your question. Great. Thanks. I want to talk a little bit, get back to specialty a bit, and when you talk about the 22% growth that you saw so far, can you talk about sort of the mix within that? What categories are you seeing this year that are going to be a big concern for your clients, as well as sort of the mix between utilization versus pricing? Yeah. Charles, this is Jon. I mean, we're seeing continued growth across all categories, so autoimmune, multiple sclerosis, and oncology are examples. Hepatitis C, as Larry and Dave mentioned, we're really seeing less utilization there. And then as you look at the specialty category and what's driving the growth, you have price increases really driving the majority of the growth. You have pretty strong utilization, north of 3%, more than you see in traditional pharmacy. And then you have new drugs coming into the market that also drive year-over-year growth. So, again, it's specialties growing faster than It's the fastest-growing part of the pharmacy benefit. It's our clients' highest priorities, and we have solutions for them that can actually help manage that, not only under the pharmacy benefit, but also under the medical benefit. And just for a clarification, can you remind us what percent of the PBM client business is served by the specialty pharmacy? So basically, how much you cover of the existing client base versus how much of the specialty business is outside the CVS space? Thanks. Yeah. Charles, it's right around 60%. Okay, great. Thank you. Thanks. Our next question comes from the line of Ross Muken with Evercore ISI. Please proceed with your question. Good morning. You've given us a ton of color so far on the success you've had. A lot has been made, at least in the investment community, about sort of a debate on the merits of whether your model, which has been so successful for so many years, will continue to be successful, and the changing competitive landscape, and ultimately what's happening with managed care. I mean, as you think about the outcome as it stands right now in terms of selling season wins and the feedback, Jon, you've got, and as you continue to evolve the strategy, I guess, where do you think some of us were wrong in terms of the assumptions? Or what are folks not focusing on where you continue to kind of push the needle and evolve the model and push share, where maybe folks aren't seeing it? I'm just trying to get a sense for where you feel like the messaging has been most off from our side of things, or the perception at least, versus kind of the reality of clearly what you're seeing in the market. Ross, it's Larry. First of all, let me just say UnitedOptum, obviously, they're a highly respected company, and their well-publicized wins this selling season demonstrate that they can successfully compete for business in the PBM space. At the same time, back to your question, if you ask why we've been successful and why we expect to continue to be successful, we continue to see this retailization of healthcare. You see more people in consumer-directed health plans. You see more care being chosen individually when you think about some of the government-sponsored care with Medicare. That points to the value associated with multiple consumer touchpoints. I touched on those in our prepared remarks that, there's 9,600 retail consumer touchpoints. We've got 80% of the U.S. population that lives within a couple miles of one of our stores, along with MinuteClinic assets and specialty and mail and infusion and now long-term care. We have created a true level of integration across these different assets. Ross, you remember years ago, we were talking about the Health Engagement Engine, which we now refer to as the Health Engagement Engine, and it's a piece of technology that connects the dots with these various capabilities so that it's not just about collecting data, it's about how we use that data to affect an outcome. So you combine that with the ability to touch the consumer in multiple different ways, and we think that that is our value proposition that will increase in importance and that has allowed us to bring products into the marketplace that can impact patients, payers, and providers. That's helpful, Larry. Maybe just in general, it seems like, again, another very successful season on health plan side. Obviously, you had that as well last year. Could you just remind us sort of what that means in terms of profit ramp and how we should think about the business won last year and how that's trended profit-wise or is expected to over the course of this year into next and that whole dynamic? Yeah. Ross, this is Dave. I will start off here. As you know, the health plan business is a little different than the employer business, whereas in the employer business, typically a benefit manager can make a decision for their population immediately, and those programs can be implemented pretty rapidly. In the health plan business, even despite a health plan, let us say, Chief Medical Officer wanting to adopt one of our programs, they need to in turn go and sell that through their book of business, or in some cases, in the Medicare book of business, the ramp-up of share is just a little slower. So think about us starting off at pretty thin margins and that ramping up over time, and the cadence of that is probably a little slower than the employer book of business. Ross, I guess if we look at the 16 health plan clients that we won, we are now talking to them about programs that they can implement in 2017. And they have four lines of business that, quite frankly, you have to think about very differently. So in Medicare, they cannot just simply narrow the network. They can have a preferred network. In Medicaid, we see very aggressively clients narrowing their network. With their fully insured book of business, they have to work through the Department of Insurance, and they historically have opted for consumer choice broad networks. We do see that changing. And for the self-insured, that is no different than our employer clients. So it is really arming them with programs and incentives to sell that into their employer book of business. It does move slower, as Dave said, but we are confident it will move, and we are confident we can grow share. Great, and thanks. Thanks, Ross. Our next question comes from the line of Alvin Concepcion with Citi. Please proceed with your question. Hi, thank you, and thanks for taking my question. I think you mentioned the retention rate in PBM was 97.5%. I am wondering, would you happen to know what it was last year at this time? Well, Alvin, the year ended up at 97.2%, for last year's selling season. As we mentioned, we have about 75% of the renewals done, so we are in the home stretch there. I do not know what the retention rate was at this time last year. It probably would not be that far off with where we are. Right. It is pretty similar to the selling season, right? The large players have made their decisions, and now it is down to the mid-market and the small players. I would say it is pretty comparable to where we were last year. Great. Thank you for that color. A question on retail. With things like ScriptSync and Curbside, you talked about it a bit last quarter, and maybe it is still early, but how should we think about retail comps longer term, in particular the front end? I am wondering if this would pressure your front end comps further or if you see baskets sort of offsetting the potential less traffic. No, Alvin, I do not see those aspects pressuring front-end comps. I think it is important to emphasize that some of what we are experiencing is planned as we think about our front store business and the segmentation or personalization strategies as we had talked earlier. Yeah, I would say too, Alvin, we have said all along, we are focused on driving profitable growth. When you look at where we are very pleased in our core health and beauty businesses, that is where we want to win, that is where our most valuable customers expect us to be unique, and that is going very well. Then we are pulling back in general merchandise and edibles businesses, which tend to be very promotional, and reinvesting those dollars in our best customers. I think you will continue to see us do that. Got it. Thank you very much. Thanks. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed with your question. Good morning, and congrats on a very good quarter, and thank you for all the details. The question I have here is on Maintenance Choice. Obviously, it has been proven to be a very effective tool to gain market share. Under a scenario that you lose a Maintenance Choice client, how much of the share do you expect to keep? Well, Ricky, we have had an extremely high retention rate of those Maintenance Choice clients. So, there is really not a good proxy there, okay, to answer that question. In the few cases where that has happened, CVS continues to be in the provider network, and we have retained a large percent of that business. Okay. When we think about the quarterly results, obviously you highlight on the press release and the prepared comments that there is contribution from Omnicare and Target. Can you quantify it for us, what percent of the operating income growth per segment was from acquisitions versus organic? Yeah. Ricky, Dave, we haven't broken that out. Quite honestly, the integration of those businesses are pretty complete now, so actually having them broken out is a little bit more difficult than you might imagine. They're part of our forecast for this year, and our forecast is very much in line from a quarter perspective. Okay. Just one last follow-up on the selling season. Obviously, last year, about 80% of the business came from managed care. When you think about the mix of business, I know that in your response to an earlier question, you said that it's similar to the last couple of years, but it seems that every year was a bit unique. So, what percent of the net new business, or maybe you should say what percent of gross wins are from managed care versus commercial book of business? Yeah. Ricky, it's around 75%. If you look at the mix of business within the PBM, excluding Med D, the makeup of that business is now 60% health plan, 40% employer. Thank you. Thanks. Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question. Sure. Larry or Helena, what can you tell us about those most valuable customers? I do not know how you define them, but when you think about importance to the business, either percent of sales or transactions, demographics, and where you see, when you think about your share of wallet with them, where are the biggest opportunities? Just curious, some color on those customers. Sure. We look at it a lot of different ways, but I would say at the most simple level, the top 30% of our customers drive about 75% of our sales and profit. We are meaningful to them, but we still have significant upside in terms of share of wallet opportunities for them. What we have really been focused on is the personalization strategy that Larry talked about, and essentially investing in those customers because we can see from the data where we have upside with them. We segment them either from a value perspective sometimes, or we look at them in terms of their shopping behaviors. So, we might look at beauty enthusiasts who, for example, tend to be less promotionally oriented and are very focused on new items and what's hot and relevant for them, and that might be very different than food and family loyalists who are looking for different kinds of offers and strategies. For us, it's all about getting at the very micro level and giving them targeted offers that matter for them, and we can track those customers over time. And we're very focused and pleased with the fact that we continue to grow sales and profitability among those best customers. John, it's Larry. If I could emphasize one point, I think you're hearing a theme emerge, and it's not a new theme. But whether we're talking about your point on the front store or some of the things that have come up earlier with some of the questions about the pharmacy, there is a tremendous amount of data out there, okay? And it's one thing to collect the data. It's another thing in terms of how do you use the data to create an outcome or behavioral change. And that's where we've made significant investments in our business, whether it's ExtraCare or whether it's the capabilities back in the pharmacy that is allowing us to do things in a very differentiated way that we think that is giving us an advantage in the marketplace. And that would obviously, I assume there's some customers that are truly unprofitable. I mean, how do you think about weaning yourself off of those, and then balancing that with obviously, there's the direct profit, but there's also overhead and other costs that they might cover. Right. Yeah. Right? Yeah, yeah, exactly. That's an interesting balance, right? That's the delicate balance that does not just make this a math exercise. We certainly know if you look at our bottom two deciles of customers, where there's potential, and that's what you saw us doing the last couple of quarters, is pulling back our promotional spend, but weaning those customers off of it. Yep. We certainly want to continue to keep their business and reinvesting that in other segments where we can see more profit upside. That is exactly the balance we are looking at. We have said before, the role of the front store is different in our company than other companies. It represents 11% of our total enterprise sales, but it also is the front door to how people start to use us as a pharmacy. As we look at those customers, we are looking not just at their front store sales and profitability, but we also know which of those customers are our pharmacy customers, and that is an important part of the decision-making process as well. Just one last one for Jon. Do you think at this point, competing solely on the basis of price or largely on the basis of prices is not something your customer base is particularly, your account base is particularly interested in? They have kind of moved off of that to capabilities? Jon, listen, as we have said many times, price has been important, it will continue to be important. We have talked about the fact that price is ticket to the game. Listen, when you look across the PBM business, we are talking a lot about retention rates. We never want to lose a client. At the same time, we do not forecast or expect to have 100% retention. You can look across the landscape, and you can see clients who, every contract renewal, they migrate to another PBM. Okay? So, there are going to be clients out there that have different priorities, and we think that with our differentiated offering, we can appeal to the broadest set of those clients. Thank you. And just to add to that, John, I mean, while we have to continue to be competitive on price, it's really our differentiated model and our ability to interact with the consumer and impact their behavior and lower overall healthcare costs, that's what's resonating in the market, and that's why we're continuing to win. Okay, thank you. Thanks, John. Our next question comes from the line of Eric Percher with Barclays. Please proceed with your question. Thank you. As we spoke with benefit managers yesterday, I think that there was some interest in the indication-based formulary and cost or inflation efforts, but what really caught their eye was your aggressiveness relative to biosimilars, particularly as compared to the one competitor whose formulary we have seen. Could you speak a little bit about what this represents in terms of your strategy on biosimilars? It seems like a material statement, and also how you think about the ability to serve and drive adoption of biosimilars, both as a PBM and as a retailer? Well, Eric, it is Larry. I will start and then flip it over to Jon. But as you have heard us talk in the past, while biosimilars are just beginning to enter the market and their impact will be nominal or minimal, in the near term, we believe that they will grow in importance, and they will behave more like brands than generics, which create opportunities within the formulary management area. So, that is how we have thought about it at a very high level. I will flip it over to Jon to talk more specifically. Yeah, and then Eric, maybe I will step back and talk about the three dimensions to our formulary strategy for this year, because it is a little bit different than what we have done in years past, and it does include these biosimilars, or in the case of BASAGLAR, it is a follow-on biologic, but I would think of it as a biosimilar. So first, we have got our normal therapeutic review that we started back in 2012, and that is all about making sure we have cost-effective medications for our clients and their members, and we have been able to deliver the $9 billion in savings that Larry talked about. And over the last several years, we have been able to negotiate price protection into those contracts, so if a manufacturer raises a price over a predetermined threshold, that comes back to our client in the form of a rebate and lowers their price. What we introduced this year is indication-based formulary. So, think about Hep C that has six different genotypes. The genotypes are different. So, we will have different formulary options based on the genotype. Or in the case of autoimmune, you have the same drugs that treat psoriasis and RA. We may have a different preferred product for psoriasis than we do for rheumatoid arthritis. And the third dynamic is really hyperinflation. We looked at drugs that had a three-year cumulative WAC increase of greater than 200%, and we have taken on 10 of those drugs this year. And our goal is to either we are not going to cover them or we are going to get the economics back to prior to these WAC increases that they took. And for biosimilars, I think it is just part of that theme. How can we get the lowest, most cost-effective drugs for our clients, to provide as a benefit to their members, and we think biosimilars will be an opportunity. When you look at biosimilars, most of the pipeline is filled with biosimilars under the medical benefit, with the exception of HUMIRA, but we'll continue to look to make decisions that are in the best interest of our clients and their members. Very good. Thank you. Next question. Our next question comes from the line of George Hill with Deutsche Bank. Please proceed with your question. Good morning, guys, and thanks for taking the question. Jon, we saw the preliminary Med D bid rates come out last week, and it looks like you are down a bit, or it looks like Med D providers will be down 2% as it relates to total revenue. I guess as we think about as the company goes to market and contracts in providing the benefit for 2017, if you think about where you get the cost savings to continue to drive those price declines, do you feel like more of them are coming on the pharmacy network side or more of them coming on what I will call the manufacturer side, either through formulary actions or through rebates? George, it is Larry. I will start, and then David or Jon or both will jump in here. George, I would say it is really the surround sound, okay, that is contributing to that. It is not just about the procurement side of things or the network side of things. I do think that Med D is a great example of competition prevailing in the marketplace, okay, to drive down overall costs. As you look today at the cost of the Med D program against what it was projected a decade ago, it is a fraction of that. The only thing I would add is, I think that is right. It is pretty balanced. We are getting, continue to get value to have a very competitive product in the market, really across all those dimensions. I think the only thing I would add is that I think our expertise and how we have been able to help SilverScript and our clients is really how you design your plan, how the formulary that supports that plan, what is your network strategy. All of those need to work together to provide a synergy that gives you a competitive product in the marketplace. That is really the expertise that we have built over the years and allows us to continue to be successful. Okay, that is helpful. Just maybe a quick housekeeping question for the net new wins for the PBM for next year. Does that or does that not include the balance of the Coventry business rolling on? No, George, it does. I think in our prepared remarks, I mentioned that less than 7% of the gross wins are made up of the Coventry business. Sorry, I missed that section. Thanks for the color, guys. Our next question comes from the line of Scott Mushkin with Wolfe Research. Please proceed. Hey, guys. Thanks for taking my questions. First up is just, and I know we touched on it a little bit for the 2016 and upselling, Jon, and you did a good job of the four different buckets, upselling your unique offerings into the healthcare plans. But I just wanted to get any update. I think you guys said you're about 23% penetrated processing scripts. I think it was at year end, maybe. I think I got that right. Any update on that number and where we're going as far as like Maintenance Choice and processing the scripts from healthcare plans? Yeah, Scott, it's Larry. In your own assets. Well, I think as Jon mentioned earlier, we have seen the ramp begin in terms of the clients that came online in January 2016. At our analyst day, we'll provide more insight and quantify exactly where that sits as we're able to ramp up through the year. Would you say, Larry, you're pleased with how things are going, or any thoughts? I know you talked a little bit last quarter about it's slow, but kind of methodical. Any updates on kind of how you're thinking about it? No, Scott, I think we're pleased with where we're at and recognizing that, as you've heard us talk about, this is a marathon, it's not a sprint, okay. And we're pleased with the progress that we're making. For the reasons that we mentioned earlier, okay, we think that the assets and capabilities that we bring will grow in importance, recognizing the direction that healthcare's headed. Perfect. Then, this is a little bit for Dave. The guidance, I think, Dave, you said incorporated a better second quarter, and also interest savings. But it does seem like the underlying business is performing better than expected, just maybe so far in the first couple quarters. Do you think that can actually continue into the back half, and how should we think about that. I guess it's particularly on the PBM side. Well, I do think obviously the business has performed well, I'd say kind of in both segments, both Q1 and Q2. Obviously, we are driving benefit from, I'll say below the line as we think about refinancing our debt. But again, you saw us raise operating performance expectations within the PBM segment for the balance of this year, and I continue to think that we're well-positioned as we think about delivery for Q3 and Q4. All right. I just want to sneak one last one in for Helena. Just on your best customers, Helena, where do you think you're priced compared to mass and online. Then I'll yield. Thanks, guys, for taking my questions. Yep, sure. We look at our price at the net price to customers, if you think about all of the promotions, ExtraCare rewards, and targeted offers we give them, and we think that's how the consumer views it. We think we're within striking range, essentially, of those competitors when you look at all those offers for our best customers. Perfect. Thanks. Thanks, Scott. Next question. Is from the line of Mark Wiltamuth with Jefferies. Please proceed with your question. Hi. Congrats on the PBM selling season news. Pleased to see that. What is the next step here at Target? The integration has gone well. At this point, can you tell if the stores that have CVS density around them, are those Target stores doing better? Do you plan to add more CVS stores around the existing Target? Well, Mark, I will start and then flip it over to Helena. As, and I am sure you know this, just as a reminder, any acquisition, especially on the retail side, you have to do the things you must do before you can do the things you like to do. I think we are all really pleased with the work of the team to be able to convert almost 1,700 pharmacies in what amounted to a six-month period. It was a terrific job by all, and we got tremendous support from our partners at Target. We have completed those activities within the last 30 days. Now we get to move to the things that we really like to do. I will flip it over to Helena to talk about that. Right. As you can imagine, with all of that conversion, there is always, we have done a lot of acquisitions, you do have a fair level of disruption. As Larry said, the Target folks have been great in working with us through all that. We were very pleased. The service scores coming out of those stores are tremendous. The leadership alignment is fantastic. We are on track to achieve our targeted EBIT for those pharmacies. Now we are really focused on ramping up our patient care programs. As we looked at this opportunity, there were really three big areas where we saw opportunity, and those are beginning now. First is the core clinical programs that we have always used at CVS, we call them our patient care programs, things like adherence outreach and other ways that we can drive clinical outcomes, which drive scripts. The second is around all the member engagement efforts that we have got going on, and these are essentially targeted at our members through the PBM who now have opportunities to fill prescriptions at Target. We are letting them know about that, inviting them into those Target pharmacies to experience the new offering, as well as some targeted marketing that we have been doing in conjunction with Target. Most of that has been digital, it has also been radio, and that is really just kicking off now as well. All those things together give us a high level of confidence that with all of these unique programs, as well as our brand recognition, our clinical capabilities, and these digital tools that we have introduced, that we will be able to increase script volumes in these locations. My question about your existing footprint where you have CVS stores around an existing Target, are those Targets performing better than the others? I would say the only thing we would really say is probably noteworthy in terms of performance is those markets where CVS had very little presence, like a Denver or a Portland, Oregon, those Target pharmacies are probably performing the best because, as you think about it, that is where our model of allowing Maintenance Choice members to now fill at a CVS Pharmacy inside a Target really is unique. They do not have a CVS nearby. So that is probably the one difference we have seen so far in performance. I think, Dave, what is important too, as you think about that combination, is the overlap between the Target pharmacies and the CVS pharmacies was pretty minimal. So I think there is not a lot of those situations where we are head-to-head, number one. That is why it was a good match from that perspective. Number two is that we share customers. Many of our customers shop the Target channel, and many of the Target customers shop the CVS channel. Right now, what we have done is given those customers options. So I think at the end of the day, it is going to be enhancing to our overall market share, not just switching from one box to another. Mark, I will just kind of wrap it up by saying it is a hard question to answer at this point for the reasons that Helena mentioned. We are just beginning the broad-based marketing programs. There is a tremendous opportunity to increase the level of awareness of CVS at Target, and all that work has just begun. Okay. Thank you very much. Before we take the next question, we just want to go back and add a little color to the question that came up earlier on the Coventry business. Yeah. So this is Dave. I just want, George Hill, you asked a question about Coventry. About, again, for the 1/1/2017 selling season, about 7% of our gross wins is related to the migration of the Coventry business onto the Caremark platform. There is an additional piece of Coventry commercial business that does migrate onto CVS on 1/1 of 2018. Okay, so next question. Is from the line of Steven Valiquette with Bank of America Merrill Lynch. Please proceed with your question. Okay. Thanks. Good morning, guys. Congrats on these results. I guess just for us, really probably another question on this PBM. It does seem that 2016 is a unique year where your PBM revenue growth is really almost double your operating profit growth, and that is partially because of the mix of wins you had for this year. I think really what everybody is trying to figure out on this call, kind of big picture without you giving any guidance, is that, can we generally assume that PBM revenue and EBITDA growth will hopefully be a little bit more in line with each other for 2017 than what we are seeing in 2016? Or should we still generally assume a large spread there next year? Thanks. Steve, this is Dave. I would say if you go back and look at our long-term targets, probably the best way to think about this, and you look at those targets, you have seen us give expectations that the top line is going to grow faster than the bottom line as we capture share, as specialty continues to grow, as we continue to invest in our business and do bolt-on acquisitions. I would say that that long-term forecast remains intact today, as you think about the top line growing more rapidly than the bottom line. I would expect that to occur. Okay. Also, since 2016 was kind of a record year for the wins you took on this year, does that $13 billion-$15 billion of business become more profitable and higher margin in 2017 than the 2016 contribution, just generally speaking? Generally speaking, that's essentially how this business typically operates. As we've always said, the health plan business, they're a little slower to kind of adopt our programs and to sell those programs in. Depending upon the complexion of the health plan business, some might be more Med D weighted versus commercial. The cadence of that ramp does vary, but it's typically a bit slower than the employer book of business. Okay. Then finally, just real quick, the FEP mail and retail extension to January 2019, I kind of missed your comments on that. Is that an early renewal and extension, that there'd be some different pricing on that for next year? Or is that just nothing changes on the pricing front, that was just your disclosure that that's still intact through January of 2019? Just wanted to get the extra color on that. Thanks. Yeah. So Steve, they had an option to extend the contract, and the economics were already built into that deal, and they chose to extend. So it was not a new financial arrangement. It was an extension of the existing deal we had offered them. Okay, perfect. Okay. All right, great. Thanks. Okay, we'll take two more questions, please. Our next question comes from the line of Mohan Naidu with Oppenheimer. Please proceed with your question. Thank you very much for squeezing me in. Larry, maybe given the success you're seeing with the Target pharmacies and clinics, is there any appetite to do more of such partnerships? Yeah. It's a great question, and we're certainly open to that. I think that as you look at how pharmacy is evolving and the importance of investments in technology to not just satisfy the regulatory priorities that are associated with pharmacy, but how pharmacy becomes an important part of the solution of driving down healthcare costs and serves as something more than just a dispenser of prescriptions. I think that as that increases in importance, I think that there may be more opportunities that present themselves, and we're certainly interested in those. All right. Thank you very much. Our final question comes from the line of David Larsen with Leerink. Please proceed with your question. Hey, congratulations on an excellent quarter. Can you talk about the impact of generic deflation and the performance of Red Oak? How is that progressing relative to expectations? Thanks. Dave Denton here. Obviously, we are very pleased with the progression of Red Oak. We continue to, both us and Cardinal, continue to see value from that joint venture. I would say that as we have talked about this in the past, both inflation and deflation across our business has not really been that impactful. So I do not think that the change in those levels of pricing within generics has been a major impact on us. It certainly has not been material, both this year and in prior years. So it is progressing very much as planned this year, and we will probably have more to update as far as generic introductions as we get to Analyst Day in December. Okay. Then in December, will you provide a new sort of five-year guidance range for these different metrics? We always update kind of our performance, both from a current period perspective and an ongoing perspective. So we'll certainly hit on key topics and the outlook for those key topics over the course of the next several years in December. Great. Thanks. Okay, everyone. Thanks for your ongoing interest in CVS, and if there are any follow-up questions, you can contact Nancy Christal. Thanks. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.