Ladies and gentlemen, thank you very much for standing by and welcome to the CVS Caremark third quarter earnings conference call. [Operator instructions.] As a reminder, today’s conference is being recorded on Tuesday November 5, 2013. Is now my pleasure to turn the conference over to Nancy Christal, senior VP, investor relations. Please go ahead, Ms. Christal.

Thank you, operator. Good morning everyone, and thanks for joining us. I’m here this morning with Larry Merlo, president and CEO, who will provide a business update, and Dave Denton, executive vice president and CFO, who will review our third quarter results and guidance. John Roberts, president of PBM is also with us today and will participate in the question and answer session following our prepared remarks. Mark Cosby, president of the retail business, was planning to join us, but is under the weather and not able to be here today. During the Q&A, please limit yourself to no more than one question with a quick follow up so we can provide more callers with the chance to ask their questions. I have one important reminder today, on Wednesday, December 18, we’ll host our 2013 analyst day in New York City. At that time, we’ll provide 2014 guidance and some longer term financial targets as well as a comprehensive update on our strategies for achieving those growth targets. You’ll have the opportunity to hear from several members of our senior management team about our PBM, specialty, retail, and MinuteClinic businesses, along with numerous enterprise wide initiatives that will capitalize on the evolving healthcare landscape and drive future growth. If you didn’t reply to your invitation, please let us know if you plan to be there, as space is filing up quickly. The meeting will be webcast for those unable to attend in person, but we do hope to see many of you there on December 18. Turning to this morning’s news, we posted a slide presentation on our website just before this call which summarizes the information you will hear today, as well as some additional facts and figures regarding our operating performance and guidance. I encourage you to review the slides. Additionally, we plan to file our quarterly report on Form 10-Q by the close of business today, and it will be available through our website at that time. During this call, we’ll use some non-GAAP financial measures when talking about our company’s performance, mainly free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-GAAP items as well as reconciliations to comparable GAAP measures on the Investor Relations portion of our website. And, as always, today’s call is being simulcast on our website and it will be archived there following the call for one year. Now before we continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we’ll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed Annual Report on Form 10-K and in our upcoming quarterly report on Form 10-Q. And now I’ll turn this over to Larry Merlo.

Thanks, Nancy. Good morning everyone, and thanks for joining us today. Now, given that our analyst day is next month, our business update this morning will be brief. However, I do want to take some time to cover some of the topics that I know are top of mind in the marketplace, such as the impact of the Affordable Care Act. But before we get to that, let’s kick things off with today’s earnings, because we’re pleased to report that we posted solid third quarter results across the enterprise. Overall operating profit increased more than 15%, with the PBM and retail businesses growing approximately 28% and 8% respectively. And it’s important to note that excludes the benefit from a legal settlement that was finalized during the third quarter. That settlement related to a prescription drug antitrust lawsuit with a drug manufacturer. We recorded a $72 million gain within operating expenses, which equates to a $0.04 per share benefit in Q3. Now, that said, adjusted earnings per share excluding the legal settlement came in at $1.05 for the quarter, and that’s $0.02 above the high end of our guidance. We also generated a substantial amount of free cash and year to date the total now stands at $3.1 billion and consistent with our goal at the beginning of the year, we remain committed to returning about $5 billion to our shareholders this year through both dividends and share repurchases. Considering our strong operating results to date, along with our outlook for the remainder of the year, we are raising and narrowing our earnings guidance for full year ’13 to a range of $3.94 to $3.97, and that’s a change from our previous range of $3.90 to $3.96. And again, that’s excluding the $0.04 benefit from the legal settlement. Dave will discuss our results and guidance in more detail during his financial review. With that, let me address some of the topics of interest that I alluded to earlier. I think as everyone knows, the healthcare environment is changing rapidly, and there are certainly a number of moving parts, from the Affordable Care Act to the private exchanges, and collectively we expect changes within this environment to be a net positive for our business in 2014. So let me walk you through the multiple ways that we’ll continue to grow our business in this evolving landscape. First, we’ll participate in coverage expansion and the public exchanges, as well as Medicaid. Second, we’ll participate in the private exchange market for both active employees and retirees. And I think it’s important to remember that our opportunities to participate are not limited to just our PBM, but span across our entire enterprise to include both our retail pharmacies, along with our MinuteClinic businesses. So let’s drill down a little further through our PBM, because we’ll participate in the public exchanges through our health plan clients on a carve-in basis, where the health plan offers integrated medical and pharmacy benefits and we provide the PBM services. In fact, our health plan client footprint spans 25 states covering nearly 70% of the eligible exchange population. In addition, as the number one PBM player in the managed Medicaid space, we’re also very well positioned to gain share through Medicaid expansion, and we certainly understand what these clients require. Moving to the private exchanges, we’ll participate through both a carve-in basis - again through our health plan clients - as well as on a carve-out basis as a standalone PBM where we have direct prescription benefit offerings on the exchange products. And we are well-positioned to win lives on the exchanges given our unique products and services as well as our trusted brand and name recognition. Within the private exchanges, we’ll also play an important role in providing coverage to retirees through our Silver Script prescription drug plan, as well as our health plan clients’ PDP and MAPD businesses. Now, there’s certainly been a lot of speculation about what various employers are going to do with their populations, recognizing and acknowledging that large employers cannot participate on the public exchanges until 2017. Well, the fact is that less than 1% of covered lives are expected to move to private exchange products in 2014. And based on conversations we have had with our PBM clients and private exchange partners, we believe that most large employers are taking a wait and see approach to private exchanges, particularly with their active employees. Now, we recently had a meeting with our client advisory group, and they told us that they feel they can manage costs effectively in their own environment while still maintaining both control and flexibility. That said, large employers may consider moving their retirees to the exchanges over time, and we may see more movement to private exchanges by smaller employers over the next few years, because the exchanges do offer a way to reduce administrative burdens. However, I want to emphasize the point that we are very well positioned to gain lives and market share in the exchange products. Recently, you have also been asking about the impact all of this will have on PBM margins. And as we’ve stated previously, we do expect to see some churn in PBM lives as some members may move from the employer bucket to the health plan bucket, and although this may result in margin compression in some instances, we expect this will be mitigated by cost management tools such as narrow networks, our proprietary Maintenance Choice offering, narrow formularies, step therapies, and the list goes on. And as a result, we do not expect a material impact on PBM margins in the foreseeable future. In addition to tighter pharmacy management tools, we also expect share gains from both market expansion and market churn as an additional lever to help offset PBM margin compression. And as I mentioned again, we’re well-positioned to win lives on the exchanges given our unique products and services, along with our trusted brand and name recognition. Now, I also mentioned it’s important to remember that the opportunities from healthcare reform go well beyond our PBM, because our consumer expertise in the new business to consumer world of healthcare is being welcomed by health plans across the country, and leveraging our retail footprint, we can support healthcare marketing initiatives ranging from limited pilot marketing programs to full-scale educational programs. In fact, over the next six months, we expect health plans to host more than 6,000 marketing events in more than 1,000 of our stores across 20 states. Some of these health plan partnerships also include participation in preferred or restricted retail pharmacy networks and many are taking advantage of the convenient and affordable MinuteClinic services as well as cost-saving PBM services and programs to better manage the specialty pharmacy segment. And on top of these opportunities, our retail business will obviously benefit from the expansion of coverage along with our ability to drive incremental scripts through our fixed retail cost structure. So while there are a lot of moving parts, all things considered, we’re very well positioned and we’ll certainly provide more specific context around our assumptions for the newly covered lives and pharmacy utilization that we expect from reform when we provide our guidance next month at analyst day. So with that, let me quickly review some highlights on the PBM business. We’ve had a strong 2014 selling season, despite the fact that the number of RFPs were down year over year. To date, we’ve completed 75% of renewals, and we have a retention rate of 96%. Our gross sales wins currently total $5.1 billion, with net new business of about $1.8 billion. And remember that this net new business excludes any impact from attrition in our Medicare Part D PDP business. Now with regard to the sanction imposed by CMS earlier this year, as we’ve talked about previously, it has prevented us from marketing our Silver Script PDP or enrolling new members. And recall that the sanction primarily affects our individual Silver Script prescription drug product. Today we have about 3.3 million Silver Script lives and we expect to have roughly 3 million lives in our individual Silver Script PDP by the end of January ’14. On our last call, we said that we expected our remediation efforts to be complete sometime near the end of the year, and we expect to meet that target. And once complete, the next step will be for CMS to conduct its review to determine whether the issues have been fixed, are not likely to recur, and ultimately CMS will determine when the sanction will be lifted. While we’re obviously disappointed that we have not been able to participate in the open enrollment period, it is important to remember that we still see significant opportunity to grow our Med D business over the long term. And we believe that the changes that we have made to strengthen the Med D management team, along with the remediation steps that we’ve taken will allow us to do just that. Now, on the heels of a successful 2014 selling season in our commercial PBM business, work has already begun on the 2015 selling season, and as all of you know, we have a long term strategic agreement with Aetna to provide their PBM services. And I’m happy to report that we have successfully completed the 2015 market check with Aetna, and we look forward to continuing our strong and mutually beneficial relationship. I’m also very pleased that we have successfully completed the migration of Aetna’s commercial business to the CVS Caremark platform. That’s pretty significant, since it means that more clients will have access to CVS Caremark’s differentiated offerings. Our joint efforts with the Aetna sales team have been successful to date, with numerous clients adopting our unique offerings, like Maintenance Choice, like Pharmacy Advisor, and we’re also working closely with Aetna to implement and administer their exchange offerings and other government programs resulting from the Affordable Care Act. Now turning to our specialty business, growth was strong. Revenue’s up approximately 22% year over year. This growth was driven by drug price inflation, utilization, new product launches, and new PBM clients. At our recent client forum, many of our clients expressed concerns about the rapid growth in specialty pharmacy costs, and they are increasingly open to new ideas and solutions that address the escalating growth in specialty, and we certainly view this as a significant opportunity. And you’ll hear more about our strategies to help clients manage the specialty trend next month at analyst day. Moving on to the retail business, we had another solid quarter. Total same-store sales increased 3.6% while pharmacy same-store sales increased a very healthy 5.7%. Pharmacy same-store sales were negatively impacted by about 320 basis points due to recent generic introductions, and that’s about half of the 670 basis point impact that we saw in Q2. Pharmacy same-store scripts increased 1.4% when counting 90-day scripts as one. It increased 4.5% on a 30-day equivalent basis. And we have seen a greater than historical rate of conversion to 90-day from 30-day scripts. And that’s being driven by the continued strong growth in our Maintenance Choice programs. I’m also pleased to report that the retention of scripts gained during last year’s impasse between Walgreens and Express Scripts continues to exceed our expectations. As you know, our goal was to retain at least 60% of those scripts this year and we are ahead of that goal. As for the front store business, comps decreased 1%, reflecting a decline in traffic. At the same time, we saw continued increase in basket size, as well as modestly higher front store margins. Our ExtraCare loyalty card continues to enable us to personalize our offers, creating more value for customers and gaining a bigger share of their wallet. In fact, this quarter we launched the My Weekly ad, a first of its kind personalized digital circular experience that taps into ExtraCare insights. And the My Weekly ad provides a unique weekly circular for every customer that’s geared to their shopping preferences, saving them both time and money. We hope you’ll log on and give it a try and we’ll speak more about this on analyst day. As for new stores, we opened 71 new or relocated stores, closed one during the quarter, resulting 48 net new stores in Q3, and this keeps us on track to achieve our 2-3% square footage growth target for the year. Let me turn briefly to MinuteClinic, which posted a revenue growth of 18% versus last year’s third quarter. We opened 42 net new clinics in the quarter, including clinics in two new states, Hawaii and Louisiana, ending Q3 with 726 clinics in 27 states and the District of Columbia. And our long term goal is to create a platform that supports primary care by providing integrated, high-quality care that is convenient, accessible, and affordable. And we’ll talk more about that next month as well. With that, let me turn it over to Dave for the financial review.

Thank you, Larry. Good morning everyone. Before turning to our results and our guidance, I want to highlight how our disciplined capital allocation program continues to enhance shareholder value. And during the third quarter, we paid approximately $276 million in dividends, bringing our year to date payout to $829 million. Additionally, we repurchased approximately 25.8 million shares for $1.5 billion in the quarter, at an average price of $58.98 per share. Year to date, we’ve repurchased 39.6 million shares for approximately $2.3 billion, again at an average price of $57.33. As you can see, the pace of buybacks accelerated throughout the third quarter, and we remain on track to complete approximately $4 billion of share repurchase in ’13, which is also included in our guidance. So between dividends and share repurchases, we have returned more than $3.1 billion to our shareholders through the first three quarters of this year alone and we continue to expect to return approximately $5 billion for the full year. We’ve also generated approximately $3.1 billion of free cash flow through September of this year. Improving our cash generation capabilities through improved working capital management remains an area of focus for us. And over the past several years, we’ve made excellent progress in reducing our cash cycle. As previously noted, we have some timing issues with respect to CMS payables and receivables that may affect our working capital and delivery of free cash flow for the year. Even so, we are maintaining our guidance of free cash flow of between $4.8 billion and $5.1 billion this year, while we work to offset this headwind to our target. As for the income statement, third quarter adjusted earnings per share from continuing operations of $1.05 per share was approximately $0.02 above the high end of our guidance, after removing the pre-tax gain of $72 million from the legal settlement. GAAP diluted EPS was $1.03 per share, including the $0.04 from the legal settlement. Earnings were higher than expected, primarily due to the outperformance in the PBM, a favorable tax rate, and a weighted average share count that was slightly lower than planned. Now let me quickly walk you through our results. On a consolidated basis, revenues in the third quarter increased 5.8% or approximately $1.7 billion to $32 billion. This exceeded the top of our guidance range, again driven by the PBM. PBM net revenues increased 7.8%, or approximately $1.4 billion, to $19.5 billion. This growth was more than 225 basis points above the high end of our guidance, and was driven by higher than anticipated claims volume, primarily from Maintenance Choice, as well as higher inflation within our specialty business. Script utilization trends were consistent with prior periods, and we saw increased utilization of the retail network and in Maintenance Choice claims, offset by declining trends in core mail order. Claims growth year over year was driven by net new client wins and increased membership within our existing book of business. Specialty pharmacy was also a key driver. Slightly offsetting these positive revenue drivers was a strong GDR, which is obviously good for the bottom line. The PBM’s generic dispensing rate increased 170 basis points versus the same quarter of last year to 81%. Note that starting with Q1 of this year, the sequential year over year rate of increase continues to slow from the high point of approximately 500 basis points in Q4 of last year to 170 basis points this quarter. This trend is expected to continue throughout Q4 of this year, given that fewer generic conversions are expected for the remainder of this year versus last year. Revenues in the retail business increased 5% in the quarter, or approximately $780 million, to $16.3 billion. As with the PBM, Maintenance Choice adoption was better than expected and helped drive overall performance to near the higher end of expectations. Like the PBM, new generic introductions negatively impacted retail sales, with our retail GDR increasing approximately 160 basis points versus the third quarter of ’12, to 81.5%. Now turning to gross margins, we reported 18.9% for the consolidated company in the quarter, an increase of approximately 20 basis points compared to Q3 of ’12. Within the PBM segment, gross margins increased by approximately 65 basis points versus the second quarter of last year to 6.6% while gross profit dollars increased approximately 20% year over year. The increase in margin rate year over year was primarily driven by better acquisition cost, rebate economics, timing of our Medicare Part D PDP margins, as well as the increase in GDR. The increase in margin dollars was driven by higher volumes from new clients and new members and higher specialty volumes versus the third quarter of last year as well as the shift of Medicare Part D profitability from Q4 into Q3 of this year. These positive drivers were partially offset by price compression as well as remediation and operating costs within our Medicare Part D business. Gross margin for the retail segment was 30%, down about 15 basis points from last year, while gross profit dollars increased 4.5% year over year. Given that pharmacy growth was stronger than front store growth in the quarter, pharmacy revenues as a percentage of total retail revenues increased by about 135 basis points. This shift in the business mix was the main driver of the climb in the overall retail margin rate since gross margins in the pharmacy business are lower than that in the front. Partially offsetting this was the increase in GDR as the continued increase in front store margins. Excluding the positive impact of the legal settlement, total consolidated operating expenses as a percentage of revenues improved versus the third quarter of ’12 by approximately 35 basis points to 12.3% while total SG&A dollars grew by 2.9%. The PBM segment SG&A rate improved by about 15 basis points to 1.5%, excluding the benefit of the $11 million settlement. PBM expenses declined approximately $4 million from the third quarter of last year, and this reflects reduced spending on the streamlining initiative as the project nears completion. In the retail segment, solid expense control resulted in an improvement in SG&A as a percentage of sales of 40 basis points to 21.3%, excluding the $61 million from the legal settlement. Overall retail SG&A expenses grew by about 3.1%. Within the corporate segment, expenses increased by approximately $10 million to $179 million. As a percentage of consolidated revenues, operating expenses were flat. Adding it all up and excluding the impact of the legal settlement, operating margins for the total enterprise improved approximately 55 basis points to 6.5%. Operating margins in the PBM improved 80 basis points to 5.1% while operating margin at retail improved by 25 basis points to 8.7%. For the quarter, we were comfortably within the high end of our guidance for operating profit growth in the retail segment, while we exceeded our expectations in the PBM. Excluding the benefit from the legal segment, retail operating profit increased a very healthy 8.2% while PBM operating profits increased a very strong 27.7%. Going below the line on the consolidated income statement, net interest expense in the quarter declined approximately $12 million from last quarter, to $122 million. The debt refinancing we did in the fourth quarter of last year continues to be the primary driver of the year over year decrease each quarter. Additionally, our effective tax rate was 38.2%, which was slightly better than we expected, and our weighted average share count was slightly lower than anticipated, at about $1.23 billion shares for the quarter. So now let me turn to our 2013 guidance, which we both raised and narrowed this morning. Excluding the impact of the legal settlement in the third quarter, we currently expect to deliver adjusted earnings per share of $3.94 to $3.97 for 2013, reflecting strong year over year growth of 14.75% to 15.75%, after removing the impact in 2012 of the early extinguishment of debt to make the numbers more comparable. GAAP diluted EPS from continuing operations is expected to be in the range of $3.73 to $3.76 per share. Our revised guidance reflects our solid performance for the first nine months of this year as well as our confidence in our outlook. Embedded in this guidance are share repurchases totaling approximately $4 billion for the year, including shares from a $1.7 billion accelerated share repurchase program that we began on October 1. The details of the program will be available in our 10-Q, which will be filed later today. Now let me walk you through our fourth quarter guidance. We expect adjusted earnings per share to be in the range of $1.09 per share to $1.12 per share, down 1.5% to 4.25% from Q4 of ’12 after removing the impact from last year’s fourth quarter resulting from the early extinguishment of debt. GAAP EPS from continuing operations is expected to in the range of $1.03 per share to $1.06 per share. As I said on our last quarterly call, we expect the fourth quarter to be somewhat atypical this year, driven mostly by the timing of break open generics and by Med D profits in the PBM. With respect to Medicare Part D, as I noted on our last earnings call, we are seeing a shift of profitability within the business from Q4, which has historically been our most profitable Med D quarter into Q3. A number of factors are affecting this, predominantly changes in earned rebates and the mix of the business across our Silver Script Choice versus our Silver Script Basic plan, as well as the impact of the sanction. As such, we expect the PBM segment’s operating profit to decline by 15% to 18% in the fourth quarter. We expect the retail segment’s operating profit to increase 2.75% to 4.5% in the quarter, driven by gains in both the front store as well as the pharmacy. For the PBM segment, we expect revenues to increase 3.5% to 5% for the fourth quarter and adjusted claims to be between $262 million and $265 million. For the retail segment, we expect revenue to increase 3.5% to 5%, with same-store sales to increase 2.25% to 3.75%. Same-store scripts are expected to increase 0.5% to 1.5% while adjusted script comps are forecasted to be between 3% and 4%. And now as a result, for the total enterprise in the quarter we expect revenues to be up approximately 2.75% to 4.25% from the fourth quarter of ’12. This is after intercompany eliminations, which are projected to equal about 10.6% of combined segment revenues. For the total company, gross profit margins are expected to be down significantly from last year’s fourth quarter, as both the retail and PBM segments will experience contraction. Expectations are that gross margin in the retail segment will be notably down due to fewer new generics available to offset continued reimbursement pressure. Gross margins in the PBM segment will be significantly down, due in large part to the timing of Medicare Part D profitability, but also due to fewer break open new generics to offset pricing pressures. These trends are occurring as expected, as we lap a large amount of break open generics in 2012. For the total company, operating expenses as a percentage of revenues are expected to moderately improve in the fourth quarter. PBM operating expenses should show modest improvement, driven in part by a reduction of streamlining costs year over year. Retail expense leverage should notably improve, and upturn from recent trends largely due to the fact that there are fewer new generics and therefore less deleveraging of expenses. And we expect operating expenses from the corporate segment to be between $190 million and $195 million. We expect operating margin for the total company in the quarter to be down 60 to 70 basis points from last year’s fourth quarter. We expect net interest expense of between $130 million and $135 million, and a tax rate of approximately 39% in the fourth quarter. We anticipate that we will have approximately 1.2 billion weighted average shares for the quarter, which would imply approximately 1.23 billion for the year. And as I said, we continue to expect to generate free cash flow in the range of $4.8 billion to $5.1 billion, and we remain focused on using our strong free cash flow to drive shareholder value now as well as into the future. And with that, I will turn it back over to Larry Merlo.

Thanks, Dave. And just to sum things up, obviously we’re pleased with our strong third quarter results, and optimistic about the outlook for this year and next. We see the evolving healthcare environment as an opportunity for growth, and we believe we’re very well positioned to gain market share across the enterprise. So with that, let’s go ahead and open it up for your questions.

[Operator instructions.] Our first question comes from the line of Robert Jones from Goldman Sachs. Please proceed with your question.

A lot of good detail on the PBM side, so I thought maybe I’d start off on the front end. Same-store sales down again this quarter, and I know you’re citing softer traffic. I was wondering if you could just maybe share some color on whether you think this has been more macro-driven, or is there some competitive changes going on that are driving a little softness on the front end?

We have discussed in the past that we continue to see a cautious consumer. We did see some pullback in consumer spending that began in the spring timeframe. It’s manifesting itself in fewer trips. At the same time, we have seen the promotional environment intensify in both the drug and mass channels. At the same time, we have not made dramatic changes in our promotional strategy. As a matter of fact, if you look at our year over year promotional circular page count, in the third quarter it was actually down 12%. And we continue to use ExtraCare as our point of differentiation along with delivering a way to create value for consumers. And we have been able to drive the basket size of our customers. And as Dave mentioned in his remarks, it’s also important to point out that through these efforts we’ve been able to achieve margin expansion. So I think on the front store sales issue, it’s always a bit of art and science, trial and error. Mark and his retail team are certainly focused on it. We would like our front store comps to be better, but we’ll be very disciplined about not chasing empty sales.

That makes a lot of sense. And Larry, I know you talked about a lot of the major topics in the sector, specifically the exchanges. And obviously look forward to getting more detail on that at the analyst day, but one of the other major topics as of late has been agreements across the supply chain as far as consolidating generic purchasing. I’m just wondering if you could weigh in given some of the activity as of late, as far as your view of your current positioning in generic sourcing and whether or not you think in light of some of these moves that you would be interested in trying to garner more scale.

Our position has really not changed since we discussed this on our last call. A generic sourcing alliance could present an interesting opportunity. We’re certainly always open to learning and evaluating opportunities in the marketplace, and if we were to determine that an alliance could drive higher returns for us, we’d certainly consider that. And we believe that we could do that without expending significant capital. So we’ll continue to watch it, and there may be some incremental opportunities domestically, but we still see the global sourcing environment less clear, but again we’ll be open to opportunities.

Continuing on, our next question comes from the line of Bob Willoughby from Bank of America Merrill Lynch. Please proceed.

In light of how fast the CVS share of the Caremark accounts has grown over the past few years, does it make sense to offer any type of quarterly update where you think your share stands and to offer any targets where that could go over the next couple of years?

Good question. As you know, we have seen substantial growth in share within CVS, within the Caremark book. I think over the past few years we’ve moved from roughly 18% to in excess of 31% at this point in time. My guess is those are longer term movement trends. So probably quarter by quarter it might not make the most sense. Probably year over year is probably a more comparable perspective. So you’ll probably see a little bit of that as we cycle into analyst day coming up here.

It’s a great question. I think it does make sense to look at it on an annual basis. And to Dave’s point, keep in mind that that retail percent of the Caremark book of business, while it’s grown, the pie has also grown at the same time. There have been north of $25 billion worth of new business wins during that period of time.

Any three year target per chance?

Not at this point.

Continuing on, next question is from Eric Bosshard from Cleveland Research. Please proceed with your question.

Can you give us any color on the share in the retail business now that is transitioning from 30- to 90-day? Where you think that might go, and how you are running the business or managing capacity in the stores differently as that has taken place?

We have seen it grow for some time now. Acknowledging growth off of a smaller base, but it has been growing north of 20%. And I think that there are a lot of variables in play that are driving that growth. I’ll start with Maintenance Choice, but there are also more plan designs out there that have 90-day options at retail, and there’s been a lot of information out there that 90-day prescriptions also improve medication adherence. So I think that that we’ll continue to see a disproportionate growth and an acceleration from 30 to 90. Obviously, on the retail side, we have always done an effective job of managing SG&A at the store level. And the labor models that we have built, along with our workflow in the pharmacy, enable us to flex our labor according to those volumes. And there are some labor efficiencies to be picked up there.

And then secondly, you talked about restricted or preferred networks. Just curious what you’re seeing take place, and what you’re facilitating through Caremark, and what you’re seeing take place in the market in terms of the appetite and adoption and utilization of preferred or narrowed networks on the retail front as we move into 2014.

We’ve clearly seen the growth of preferred networks in Medicare. Got off to a slow start when Medicare was first implemented, but you’ve seen a lot of movement, particularly over the last couple of years. In Medicaid, we’re seeing restricted networks in the managed Medicaid space. We think that continues to be something that this segment will be interested in. And in the employer space, you’ve seen - and Dave talked about our growth of Maintenance Choice, which is a form of a narrow network - interest from employers. I would say this year probably less interest, because employers were more focused on healthcare reform changes they needed to make within their own book of business. But it’s interesting that health plans that historically have not been interested in narrow networks, we’re seeing a lot of interest, particularly around their exchange offerings. So we’ve had several health plans adopt narrow networks for their public exchange offerings. So we think it continues to be an opportunity for plans and clients to save money through either preferred or restricted networks. So we continue to see good growth opportunities in this area.

Continuing on, our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

First, on Maintenance Choice, any comment on the relative growth rates of 2.0 and 1.0? And how much time do you think it takes for 2.0 to start then customers migrating from 2.0 to 1.0? Will that be one full contract cycle? Or shorter? Longer? What are your thoughts on that?

We’ll touch on this more at analyst day, but we have seen some adoption on 2.0. I think certainly, as we’ve talked, we see an opportunity to, when you look at 1.0 and 2.0, the opportunity to cover more than 30 million lives over time, I think we see an adoption track where a client gets into 2.0 and then ultimately migrates in to 1.0 to maximize the savings. But we’ll hit more of the metrics in December.

And then secondly, thinking about the front end and My Weekly ad, if you could segment traffic by loyalty of customer - I don’t know if you would do a decile or a quartile or whatever - is traffic down among the most loyal customers? Or is it down more among the least loyal, so maybe some of that is by your design? And then over time, as My Weekly ad gets greater adoption, what does that do to traffic and is that a significant incremental positive to margin, as you’re maybe wasting less promotional dollars?

Those are two great questions. If you look at our traffic through segmentation, we would see more of the declines among our least loyal customers. We continue to see growth in our most loyal customers. I think directionally, you’re spot on in terms of the reality of as we migrate over time, and reduce our dependency on the weekly circular, there is certainly an opportunity to deliver value to our ExtraCare members and create a high level of satisfaction and a bigger share of wallet, and to be able to do that so there’s a flowthrough to the P&L. And by the way, the My Weekly circular just becomes one more tool. That’s not going to be the single conduit that drives that behavior. It will be that in addition to many of the other attributes that ExtraCare offers the consumer.

Well, when you did ExtraCare, that helped growth, right? Will My Weekly ad help to the same degree, or not as much?

It’s early. We’re experimenting with it now. And that’s something that we’ll be able to talk about over time.

Continuing on, our next question comes from the line of Meredith Adler from Barclays. Please proceed.

I’d like to just go back a little bit to the discussion about the private exchanges, and you talk about some being carve-in of pharmacy benefit and some being carve-out. Do you have any sense of kind of what percentage is going to be carve-in and what is going to be carve-out? And then also, related to that, is there a difference in profitability when it’s carve-out versus carve-in?

I’ll take the first part of that. Acknowledging that A) it’s early, B) it’s a small sample size. But you know, what we have seen is a trend that really looks at the historical preference of the clients. And by that I mean if the employer had pharmacy as a carve-out option, then they’re going onto a private exchange product that continues to carve out pharmacy, and vice versa. If they have pharmacy carved in with their health plan, then they’re migrating to a carve-in product. And again, it’s a limited sample, but that’s what we’ve seen to date.

And then on the profitability, it’s really a function of what programs they adopt that really drives profitability. So it lowers their cost, but drives our profitability. Programs like mail formulary, network programs, and others. And we think with the consumer making that choice, they’re going to be more likely to make those selections for themselves.

Right. And then switching gears, a question back to the discussion of the front end, I don’t think you’re ever going to eliminate the circular, the one that isn’t tied to the loyalty card or the individual, but can you conceive of it being much less promotional and more kind of like an EDLP circular? I mean, there are other retailers who highlight their good deals every day, but not necessarily being focused on promotional items.

I think that you are right. I don’t think any of us see the circular going completely away. And I think that it will evolve over the next few years. I can see it being smaller. I can see it being more focused. Exactly what shape and form that takes, I think, is probably still an open question. I mean, we know that just because of the viewership or the readership of the newspaper, circular distribution is down from what it was five years ago. And so I think directionally you’re correct with your hypothesis.

Continuing on, our next question comes from the line of Lisa Gill with JPMorgan. Please go ahead.

Larry, thank you very much for all the comments on the public and private exchanges, but I’m actually going to ask a question around Medicare Part D. When you look at your now guidance of roughly 3 million members versus 3.3 million before, is that roughly in line with the 350,000 that you talked about last time? And secondly, anything you’re seeing in the open enrollment period that would change any of your thoughts around that going into next year?

In response to your first question, it is consistent with what we talked about on our last call in terms of the attrition of about 350,000 lives. And it’s early in open enrollment, but we have not seen anything that is contradictory to what we’ve talked about.

And then secondly, can you maybe just give us an update on where you are on RDS and conversion from RDS? Clearly the tax benefit goes away in 2014. And based on the sanctions that you have, can you just remind us if there’s any impact at all of moving people potentially to an EGWP or any other programs as they shift away from RDS?

We saw most employers focused on healthcare reform this year, so most of the movement to EGWPs happened the year before. We think there will be a pickup in activity this year. Our plan would be out of sanction, so we believe that we’ll be able to implement anyone that wants to move into an EGWP product moving forward.

The other thing I would mention is that we have been operating under a waiver from CMS to continue to enroll EGWP members that we had commitments to prior to the sanction. So that has been ongoing. That waiver has been extended through January of ’14.

Continuing on, our next question comes from the line of Scott Mushkin from Wolfe Research. Please proceed with your question.

I had a quick housekeeping item, and then I wanted to get to my questions. Flu shots, is that in your script number or not? I can’t remember.

Flu shots we do treat as a prescription. And I’ll call it season to date… The season kicks off in the August timeframe, and what I’m going to share with you probably goes through near the end of October. But we’ve administered just over 3 million flu shots across our retail business and MinuteClinic. And that’s up from last year.

The second question I have really goes to the outlook for the PBM. You guys talked about market share and that you feel like you can kind of, with the new environment, gain market share. It seems to me, as we look at Medicaid, I think you’re 31% of that bus. It’s grown quite a bit, so I want to understand can that go higher? Also, you commented that you’re in 25 states with the exchanges. Can you get to more states? Can 70% become 90%? And then the final question about next year as we have some big contracts out, like Tricare, what’s your confidence that you’ll continue to gain share on the PBM side of the business in those three different buckets?

In terms of Medicaid, and I think specifically you’re talking about the managed Medicaid environment. And you’re right, we have about 30% share of the managed Medicaid market. We certainly see more room for growth there. We’re estimating that the managed Medicaid market is going to grow by about 40% between now and 2016. So we see that, again, as a driver for growth.

As far as we’re in 25 states with 70%, as we continue to win in the marketplace and win health plans, which we had some wins this year, we’ll continue to expand our footprint. And just as far as winning across all segments, as Larry mentioned earlier, for the 2014 selling season we got over $5 billion in gross wins with 96% retention. If you look back over the last several years, we’ve continued to be very successful selling. Our integrated model continues to resonate in the marketplace with Maintenance Choice, Pharmacy Advisor, our integrated specialty capabilities we’re launching, what we’re able to do for our clients with MinuteClinic. So we’re very bullish on our growth opportunities moving forward.

And then one final follow up is if you continue to gain share like you have been, which is driving a tremendous amount of traffic into your assets, particularly your retail assets, and I know you’re doing the promotional stuff, but Larry we’ve talked about how do you get the incremental sales in a profitable way? It seems like there’s a tremendous untapped opportunity to take that traffic and convert it to some front end sales. Any other color on how we get that done?

First of all, I agree with you, and as I mentioned earlier, I think it was the first question, that our retail team is working hard to improve our comp sales performance. And I think some of what you’re describing lies in innovation and trial and error, and we’ve got a talented team focused on it, and we’ll continue to work and ultimately crack the code on that.

Our next question comes from Mark Wiltamuth from Jefferies. Please proceed with your question.

Wanted to ask a little bit about the specialty pharma environment. And I know you have a pilot going there to kind of join the CVS brick and mortar stores with the mail operations on specialty. If you could give us an update on what’s going on there and how you think that will evolve as the specialty trends continue to grow.

If you think of specialty today, and you think about it from an access to a member perspective, it’s primarily a mail channel today. What we’ve been able to do is take all of our specialty capabilities and connect them to our retail stores. So now members that want to get access to specialty medications can go in any one of our 7,400 stores as we roll this program out next year. We’ll leverage all of the back-end clinical capabilities, the billing capabilities, the fulfillment capabilities, and then we’ll be able to deliver that prescription either to the member’s home, like happens today with specialty pharmacy, or deliver it to their local CVS Pharmacy. And it’s interesting, very similar to Maintenance Choice, half the people want to pick up their specialty prescription in their CVS local store, the other half want it mailed to their home. When you think about it from a pharma perspective, historically adherence levels for specialty medications have been lower in the retail channel than in the specialty channel. In our pilots, we’ve been able to achieve the same levels of adherence through the integrated specialty offering that we have in mail. So we think pharma’s going to be pretty bullish on this capability. So we’re improving access, we’re achieving very high adherence levels, and we’re delivering all the clinical capabilities that these patients need, with the convenience that we’re able to offer through an integrated offering.

And is the bigger win capturing more prescriptions at the local pharmacy, or is it just the convenience of delivery for the consumer?

Well, I think about it in probably two parts. One is we think because we’ll have a differentiated offering, again it adds to our value proposition as we’re out trying to win new clients. Secondly, there is a segment of the population that is open. Medicare is an example, where the patient has choice where they get their specialty prescription filled. So we think we have a better value proposition for those patients, so we think we will capture more share of that open business.

And I think the only other point that I would make is that we can make it a seamless experience across all of the stakeholders that are involved here, to include the physician.

Continuing on, our next question comes from the line of Ross Muken with ISI Group. Please proceed with your question.

Maybe first just going back to all the stuff you laid out re reform. Do you feel like the more you continue to dig into this, and obviously there’s a lot of things changing and a lot of unknowns, but do you feel like the integrated model, you continue to figure out sort of new services, new offerings, new potential profit drivers as things change, and you really sort of have a structural advantage there, having the full suite of capabilities versus maybe some of your peers?

I think you said it very well. I don’t know that there’s a whole lot I would add to that, other than agreeing with you. And I think it gets back to what we’ve talked about many, many times, that if you think about, from the PBM perspective, that it’s largely been a B2B bus, and if you think about the new world order adding B2C segment, we’ve got expertise in both. And I think that that’s how we’re uniquely positioned to gain share, acknowledging that we are going to go through a period of churn in terms of who’s sponsoring the coverage. But we feel that we’re well-positioned and that whether you’re talking about our PBM assets, our retail assets, our MinuteClinic assets, that we can do things and bring differentiation into the market that would be difficult for standalone peers to replicate.

I guess you guys have done a good job of educating us. Maybe just quickly on the selling season, if you look at some of the net losses, could you maybe just sort of tick through how much of that was sort of acquisition and if not, in terms of the update from Q2, what were the key reasons where you saw maybe the business move away from you?

The numbers that we gave, to include the retention, does reflect the net impact of acquisition activity. And recognizing that we pick up some from acquisitions and we lose some. But acquisition activity posed a headwind for us in terms of the impact of that. And I’ll let Jon talk about it from a client perspective.

It’s a very sticky business. We’ve got retention at 96%, you add on top of that the $5 billion in new wins. You’re always going to see some movement as people go out and evaluate the market, but we’ve been very happy with our ability to retain customers. And with that 96% retention, including some of the acquisitions that are moving away from us, like Amerigroup.

We’ll take two more questions please.

Certainly, sir. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Zach [Sacheck]: Hey, good morning. This is Zach [Sacheck] for Ricky. Just had a question on your Medicare Part D preferred network. We’ve seen a proliferation in the number of Part D networks. I was wondering if you could talk about your offering for 2014 and how it compares to some of your competitors in the preferred network area.

We have a preferred network. It’s very similar to what we had this year. It’s about 25,000 pharmacies where they’ll get advantages. The member will have a lower copay if they go to a preferred pharmacy. And then we wrap the balance of the network around that so that we have the full suite of 65,000 pharmacies participating in it. But it’s been very successful, and we’ve created enough copay differential to drive pretty good share into those preferred pharmacies, so we’re very happy with the performance of that preferred network. And it’s allowed us to offer a very competitive product in the marketplace that will help us continue to grow as we move forward.

Also keep in mind, if we use Aetna as the example, that we have an Aetna preferred Med D product out in the marketplace that we’re supporting them on as well. Zach [Sacheck]: And then just a quick question on Minute Clinic. Of the 18% revenue growth you talked about, I was wondering if you would be willing to break down how much of that was organic versus new store growth? And then if you could talk at all about how the payer mix might have evolved over the course of the year?

I don’t know them off the top of my head, but we’ve been comping, if you look at it from a comp perspective, in the teens to low 20s most recently in MinuteClinic.

And your second question, in terms of payer mix, we have continued to see a high rate of adoption from health plans and even government sponsored programs. And if you look at MinuteClinic visits now that have some type of insurance copay tied to it, if you will, that number is now in the mid-80s.

And our last question comes from the line of David Magee from SunTrust. Please proceed with your question.

First question, just on the specialty pharma, you called out inflation as being a factor, and I was curious if you could quantify that and specify whether that’s sort of in line with the trend or are we seeing sort of a sustainable trend change there.

Especially inflation’s been pretty consistent over the last several years, so it’s generally 8% to 10%. You have to add on top of that mix, though, as new drugs come to the market they’re fairly expensive, and then utilization is the third component. So that translates into trend or cost increases that our clients are seeing that are in the high teens, low 20s, and clearly managing this area has become our clients’ top priority. And we’ll talk more about what we’re doing in this area on analyst day.

Do you have market share numbers on that bus year over year?

I don’t have that with me. We’ll probably touch a little bit on that at analyst day as well.

My last question has to do with the promotional environment that you anticipate on the front end. Have you sort of baked in a significantly more promotional environment this year relative to last year as it relates to the holidays? Or how do you view that at this time?

As Larry indicated before, we have seen the promotional environment increase over the last several months. I would say that while that has occurred in the marketplace, we have been pretty diligent in our approach to this. We have not really changed our promotional posture much. I’d say we continue to use our loyalty card program to drive performance for us and to make sure that there’s a good balance between what’s happening from a front store sales perspective, but also quite frankly what’s happening from a margin perspective. And we’ve been consistently kind of growing our front store margin rate. And again, there’s a balance there that we’ll watch closely.

So let me just thank everybody for joining us this morning, along with your interest in CVS Caremark. And we will look forward to seeing many of you next month at our analyst day in New York.