Ladies and gentlemen, thank you for standing by. Welcome to the CVS Health Fourth Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today, Thursday, February 9, 2017.

I'd now like to turn the conference over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead, madam..

Thank you, Nelson. Good morning, everyone, and thanks for joining us. I'm here this morning with Larry Merlo, President and CEO; and Dave Denton, Executive Vice President and CFO.

Jon Roberts, 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 question. Please note that we posted a slide presentation on our website before this call.

It summarizes the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance. Later this afternoon, we'll be filing our Form 10-K and it will also be available on our website.

During today's presentation, we'll make forward-looking statements within the meaning of the Federal Securities Laws. By their nature, all forward-looking statements involve risks and uncertainties.

Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the Risk Factors section and Cautionary Statement disclosures in those filings. During this call, we'll use some non-GAAP financial measures when talking about our company's performance.

In accordance with SEC regulations, you can find the reconciliations of these non-GAAP items to comparable GAAP measures on the Investor Relations portion of our website. And, as always, today's call is being simulcast on our website and it will be archived there, following the call, for one year. And now, I'll turn this over to Larry Merlo..

Well, thanks, Nancy. Good morning, everyone, and thanks for joining us. The solid fourth quarter results we posted today nicely wrap up our 2016 year. And for the full year, consolidated net revenue increased 15.8%, with operating profit growing 8.3% and adjusted earnings per share increasing 13.2% with strong results across the enterprise.

And the growth rates I'm citing are on a comparable basis and you can find the non-GAAP adjustments on the slides we posted on our website.

Now, as expected, enterprise growth in the fourth quarter was solid with consolidated net revenues increasing 11.7%, operating profit increasing 4.6%, and adjusted EPS increasing 11.8% to $1.71, a penny above the high-end of our guidance.

In the fourth quarter, operating profit in the Retail/Long Term Care segment was in line with expectations and operating profit in the PBM segment was ahead of expectations. We generated approximately $1.5 billion of free cash during the quarter and $8.1 billion for the full year, above the high-end of our guidance range.

And we'll continue to be thoughtful and discipline with respect to using our strong cash generation capabilities to return value to shareholders. For 2017, we are confirming the EPS and cash flow guidance we provided at our Analyst Day in December, and Dave will review the guidance details in his remarks.

Now, before turning to the business update, I want to touch on a few areas of investor interest.

And let me start on the topic of DIR within the Medicare Part D program, so we can correct some false and misleading statements in the marketplace which suggested that DIR performance network-based fees represent a material risk to our company; a statement that could not be further from the truth. So here's what you need to know about DIR.

First, DIR includes any rebates, any discounts or other price concessions that are unknown at the point-of-sale; and DIR, ultimately, is utilized to reduce the net cost of the Med D program. The second point; DIR performance network fees charged to pharmacies are allowed under CMS regulations.

They're fully passed through from the PBM to their clients. They are fully disclosed as part of the annual bid process. And, again, are ultimately used and reflected to help lower member premiums. As a matter of fact, member premiums over a five-year period have increased at a CAGR of just 1.7%.

So you can see the positive impact this is having on controlling costs. The third point, and for the reasons just mentioned, CVS Caremark does not keep or profit from performance network-based DIR. And as a reminder to everyone, both CVS Pharmacy and CVS Specialty participate in the same performance network programs being called into question.

The fourth point, network pharmacy providers are proactively informed of, and educated on, program details including their forecasted financial impact in advance of program implementation.

And the fifth and final point, any suggestion that Part D plans favor high-priced drugs to drive people through the benefit and into catastrophic coverage faster is erroneous, and the data proves that.

In fact, the percentage of our beneficiaries reaching the coverage gap and ultimately catastrophic coverage has decreased over the past several years and is a relatively small percentage of our overall population. Now, we don't think DIR is likely to go away given its effectiveness in helping to lower premiums.

But hypothetically, if it were to go away, there would be a level playing field, we would remain quite competitive, and we would not expect any material impact on our business. So I hope this clears up the gross misunderstandings surrounding DIR with the simple statements of fact.

So with that, let me move on to the topic of the potential repeal and replacement of the ACA. We believe it's important to provide affordable coverage for all Americans, which both Democrats and Republicans have acknowledged.

However, at this point, it's extremely difficult for us to comment on the possible scenarios that may play out in the coming months. And that said, CVS Health can pivot to address policy changes, help reduce healthcare costs, and bring meaningful solutions to the marketplace. I also want to address the ongoing rhetoric around drug pricing.

And whether it's new launches at elevated price points or increasing prices of older drugs, those contributing to a sense that government interventions are necessary and any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem.

And that's why both public and private payers continue to count on PBMs as indispensable partners that help to manage their drug trend.

And numerous evaluations from the FTC, or the Congressional Budget Office and other government agencies have consistently concluded that PBMs operate in a highly efficient market and drive real savings to the healthcare economy.

And our CVS Caremark solutions have helped reduce crime client costs from an unmanaged gross trend of 11.8% to a managed trend of 3.3%; and those results are for the first three quarters of 2016. In addition, a recent industry study showed that every dollar invested in PBM services returned $6 in savings for clients and members.

So the value of PBMs is quantitatively pretty clear. And one additional topic that we've received a lot of questions about centers on the potential impact of corporate tax reform. As you know, we are at the highest end of corporate tax payers given our domestic profile, with an effective tax rate around 39%.

And the details of tax reform certainly will matter, and today, while there's a lot of discussion, nothing has been reduced to writing. But suffice to say that a fairer tax code that includes a meaningful reduction in the effective corporate tax rate would allow CVS to unlock even greater economic opportunities.

So we certainly look forward to continuing to engage in the dialogue around all of these issues that may impact our industry, our business, and the clients and customers that we serve. So let me turn now to the business update, and I'll start with the 2017 PBM selling season.

Our gross and net client wins are slightly higher that at Analyst Day with gross wins totaling nearly $7.9 billion, net new business around 4.4 billion and a client retention rate of around 97%. And these numbers exclude enrollment results from our SilverScript PDP, which I'll touch on shortly.

In addition, I'm pleased to say that we have had an outstanding welcome season, continuing our record of strong implementations over the last few years. We processed significant more transactions during this year's welcome season, and client satisfaction showed continued improvement across all business lines reaching record performance levels.

And while we remain committed to improving and advancing every day, we continue to believe the investments we made in quality, automation and customer focus are delivering measurable value to our clients year after year.

Looking ahead, we have about 23 billion up for renewal in 2018, which is comparable with prior years from a percent of business perspective. As for new business, it's pretty early to gauge the full extent of RFP activities in the 2018 selling season.

And our strong service history, our size and scale, and our unique suite of capabilities gives us the tools we need to be successful in retaining business and winning in the marketplace as opportunities arise. Now, as we've discussed many times, top of mind for our clients continues to be managing their rapidly growing specialty trend.

And we offer a comprehensive set of solutions and continue to see solid growth in specialty. And specialty revenues increased 12% in the fourth quarter, continuing to outpace the market. Our Medicare Part D business, SilverScript, wrapped up another successful annual enrollment period and retained its position as the number one PDP spots.

We began the 2017 plan year with more than 5.5 million captive PDP lives and that includes EGWPs, and that's up about 10% from January of the prior year. When adding the Med D lives we manage for our health plan clients, the non-captive lives, the total rises to 12.3 million Med D lies under management.

And you can find a reconciliation of the Med D lives in the posted slides. Now, moving on to the fourth quarter results and the Retail/ Long Term Care business, same-store prescription volumes increased 2%. That's on a 30-day equivalent basis. Total same-store sales decreased 0.7%, with pharmacy same-store sales up 0.2%.

Our pharmacy comps were negatively impacted by about 380 basis points due to recent generic introductions. And they were also negatively impacted by the decision to restrict CVS out of the TRICARE network. And as we said on our last call, that network changes communicated in early October with a December 1 effective date.

And we saw these scripts begin to migrate out of our stores during the fourth quarter and in line with our expectations. Let me touch briefly on the CVS pharmacies within the Target stores.

And now that the integration is behind us, we're seeing improving script performance versus prior quarters; and this is being driven by the strength of our patient care programs and Maintenance Choice. The Target pharmacies have also exhibited a solid operational foundation providing high levels of service to our patients.

So we're making good progress since completing the integration activities and moving in the right direction. In our Long Term Care pharmacy business, we continue to target the significant growth opportunities we see in the Assisted and Independent Living markets.

And we're focused on creating better solutions that meet the need of senior living communities and their residents. And we're taking advantage of all of our enterprise assets, including CVS Pharmacy, our infusion properties and MinuteClinic.

And we launched some new programs in these settings during 2016, we're piloting others in early 2017 and we'll have more on these programs in the coming quarters. Before turning to the front store, let me highlight our recent announcement on generic epinephrine.

Given the urgent need in the marketplace for a less expensive epinephrine auto-injector for patients with life-threatening allergies, we partnered with Impax to purchase their product at a price lower than similar brand or authorized generic products.

And we now have available at all CVS Pharmacy locations the authorized generic for Adrenaclick at a cash price of about $110, a price that's 80% lower than that of the brand competition in the market.

And this move is consistent with the fact that increasing competition within therapeutic drug classes is a way to reduce the cost of prescription drugs, and we're using our capabilities and our scale to do just that.

Turning to the front store business, comps decreased 2.9% as a result of softer customer traffic, combined with our continued focus on increasing personalization and rationalizing our promotional strategies. At the same time, front store gross margin once again improved in the quarter versus last year.

And keep in mind that our front store business accounts for about 11% of our enterprise revenues, and these personalization efforts are allowing us to invest our promotional spend in a differentiated way producing margin flow-through.

In fact, we have started to further reduce mass promotion in 2017 to better serve our loyal customers and continue driving profitable front store sales.

We continue to focus on growing our beauty, healthcare and personal care businesses, and recognizing the growing presence in the digital market, we've been focused on enhancing our online capabilities to create an integrated health and pharmacy experience that only CVS can provide.

CVS Curbside is now live in about 4,000 CVS Pharmacy stores and it provides a fast, seamless shopping experience with customers ordering products on their mobile devices and then picking them up at a CVS store without getting out of the car.

We also introduced CVS Pay which allows customers to pick up prescriptions, use ExtraCare, pay for front store items, all with one scan of their CVS app. And this year, we plan to enhance our online shopping tool and further integrate personalization into digital platforms to increase engagement with health and beauty shoppers.

We also continue to roll out store resets to improve our health and beauty leadership. Our focus is on scaling our healthy food selection and optimizing our key categories in the health quadrant and elevating our beauty offerings while improving shopability. And finally, Store Brands remain an area of strength and significant opportunity.

Our Store Brands represented 23.7% of front store sales in the quarter and that's up about 160 basis points from the same quarter a year ago.

Now, before turning it over to Dave for the financial review, I want to again acknowledge the near-term headwinds in the retail business this year given the unexpected network changes we highlighted late last year. And as previously outlined, we have a plan in place to return to more robust levels of earnings growth.

And let me quickly summarize this four-point plan in response to the near-term market dynamics. First, we'll leverage our enterprise capabilities and CVS Pharmacy's compelling value proposition to partner more broadly with other PBMs and health plans to deliver the greatest overall healthcare value.

And our partnership with Optum, which starts with a 90-day solution, is a great example and we look forward to discussing other long-term opportunities to bring together complementary capabilities that provide greater convenience and value for our clients and customers.

We've begun to offer a menu of services to other PBMs and health plans as well, including exclusive capabilities such as MinuteClinic services, infusion and Long Term Care capabilities as a component of the CVS pharmacy value proposition.

Second, we'll continue to innovate to bring new integrated PBM products to market that capitalize on the benefits inherent in our unique integrated model, while meeting the ongoing needs of our clients and members. Third, as we discussed on Analyst Day, we've begun work on a new multi-year enterprise streamlining initiative.

And through these efforts, we expect to achieve nearly $3 billion in cumulative savings by 2021. And fourth, we have significant cash generation capabilities that provide us with a variety of ways to grow and return value to shareholders.

And we remain confident that we can achieve solid operating profit growth across the enterprise in the years ahead. And our substantial cash flow affords us opportunities to bolster that growth, either through strategic acquisitions to supplement our existing asset base or through value-enhancing share repurchases.

So with that, let me turn it over to Dave for the financial review..

driving productive long-term growth, generating significant levels of free cash flow, and remaining disciplined in our approach to capital allocation.

In summary, for the year of 2016, we delivered adjusted earnings per share growth on a comparable basis of more than 13%, generated more than $8 billion in free cash, and returned very significant $6.3 billion to shareholders through both dividends and share repurchases.

And I think this clearly demonstrates how we've continued to use our strong free cash flow to drive shareholder value. So with that, let's walk through some of the details. We continue to drive steady state improvement in our dividend payout ratio. Recall back in 2010 that our payout ratio was approximately 14%.

We finished 2016 with a payout ratio of 34.6%, more than double 2010's level and 450 basis points higher than 2015. Keep in mind that this ratio is artificially high as it includes the integration cost related to both Omnicare and Target, as well as other items described in our non-GAAP reconciliation on our website. So there's still room for growth.

We paid approximately $1.8 billion in dividends in 2016 and $456 million in the fourth quarter alone. Our earnings outlook this year, combined with the 18% increase in the dividend we announced at Analyst Day, keeps us well on track to achieve our targeted payout ratio of 35% by 2018.

Along with a significant increase in our dividend, we've continued to repurchase our shares. For all of 2016, we repurchased approximately 48 million shares for about $4.5 billion, averaging $96.78 per share. In the fourth quarter, we repurchased approximately 6.1 million shares for $461 million, averaging $75.20 per share.

At the end of 2016, we had $18.2 billion left in authorizations for share buybacks, and we continue to expect to repurchase $5 billion this year. Our expectation is that we will return more than $7 billion to our shareholders in 2017 through a combination of both dividends and share repurchases.

And given the dislocation of our stock price, recently, we entered into two accelerated share repurchase transactions totaling $3.6 billion and we've repurchased 36.1 million shares at a price of $80.34 per share in January. This represents 80% of the total value of the transaction, which will close by the third quarter.

We generated $1.5 billion of free cash in the fourth quarter. And all of 2016, we generated approximately $8.1 billion of free cash, which exceeded the high-end of our guidance by about $1 billion. The outperformance was primarily driven by the timing of PBM cash receipts and payables.

And keep in mind that some amount of this beat is timing within Medicare Part D as we will end 2016 in a payables position with CMS, and we will need to settle this obligation in 2017. At the same time, we improved our cash cycle by nearly 3.5 days, driven by improved inventory and payables management.

And we remain committed to further improvements in working capital as we look forward. For the year, our gross capital expenditures were approximately $2.2 billion; about $145 million lower than last year. This was due to our expected reduction in store openings as we integrated the Target pharmacies.

With $230 million and sale-leaseback proceeds, our net CapEx for the year was approximately $2 billion. As for the income statement, adjusted earnings per share came in at $1.71 per share, one penny above the high-end of our guidance range, up 11.8% over LY.

This is on a comparable basis, and the reconciliation of the adjusted earnings per share from GAAP can be found in our press release, as well as on the Investor Relations portion of our website. GAAP diluted EPS was $1.59 per share.

On an adjusted basis, results within the PBM were slightly above expectations, while Retail/Long Term Care was in line with our expectations. So with that, let me provide you some more details as I quickly walk down the P&L. On a consolidated basis, revenues in the fourth quarter increased 11.7% to nearly $46 billion.

In the PBM segment, net revenues increased 17.9% to $31.3 billion. As we've seen all year, this growth was attributable to increased volume and pharmacy network claims, as well as growth in specialty pharmacy.

While very strong, this top line growth was slightly below our guidance range, primarily driven due to lower inflation and drug mix versus our expectations. Partially offsetting the sales growth was an approximate 170 basis point increase in our generic dispensing rate to 85.4%. PBM adjusted claims grew by 19.9% in the quarter.

And we finished the year with 1.39 billion adjusted claims, at the top end of our expectations. I want to mention that for 2017 we're changing our methodology for counting pharmacy network claims in order to keep script counts consistent across our operating segments.

Going forward, 90-day prescriptions filled within our pharmacy networks will be adjusted to a 30-day equivalent basis, just as we've been doing within the Retail/Long Term Care segment for several years. This change will also make us more comparable to one of our competitors, who recently made a similar change.

The supporting schedules posted to our website this morning provide the historical adjusted script counts. So with the change to methodology, our PBM adjusted claims grew 24.6% in the fourth quarter. In our Retail/Long Term Care business, revenue increased 4.7% in the quarter to $20.8 billion.

This was in line with our expectations and driven primarily by strong pharmacy same-store sales script growth, partially offset by decline in front store same-store sales. During the quarter, GDR increased by approximately 120 basis points to 85.2%.

Turning to the gross margin, excluding acquisition-related integration costs recorded within the Retail/Long Term Care segment, we reported 16.6% for the consolidated company in the quarter, a contraction of approximately 115 basis points compared to Q4 2015.

This was consistent with our expectations and primarily driven by a mix shift as the lower margin PBM is growing faster than the Retail segment. Within the Retail segment, gross margin declined approximately 40 basis points versus Q4 of 2015, to 5.2%, while gross profit dollars increased 9.6% year-over-year.

The increase in gross profit was primarily due to increases in volumes, the improvement in GDR, and favorable rebate and purchasing economics. Partially offsetting these drivers was the impact of continued price compression.

We outperformed versus our expectations due to lower utilization within the Medicare D PDP, as well as more efficient expense management within cost of sales. The decline in gross margin rate in the PBM was primarily due to continued price compression and the timing of Med D margins, partially offset by improved cost of sales management.

Gross margin in the Retail/Long Term Care segment was 29.8%, down 40 basis points from last year, excluding acquisition-related integration cost. This decline was primarily driven by continued pressure on reimbursement rates.

Partially offsetting this was the increase in GDR and the strong front store margin improvement, aided by the continued rationalization of our promotional strategies and improved product mix. Gross profit dollars increased 3.4% in the quarter.

Turning to operating expenses, operating profit and the tax rate, the numbers I am citing on a comparable basis also exclude the items noted on the slides. Total operating expenses, as a percent of revenues, notably improved from Q4 2015 to 10%. The PBM segment SG&A rate improved approximately 25 basis points to 1.1%; thanks to improving efficiencies.

SG&A, as a percent of sales, in the Retail segment remained relatively flat to LY at 19.5%. Within the Corporate segment, expenses were up approximately $20 million to $236 million, above our expectation. This was primarily driven by higher severance associated with our continued focus on cost improvements.

Operating margin for the total enterprise declined approximately 45 basis points in the quarter to 6.6%. Operating margin in the PBM declined approximately 20 basis points to 4.2%, while operating margin at Retail declined approximately 40 basis points to 10.3% on an adjusted basis.

For the quarter, operating profit growth in the PBM was above expectations for the reasons I provided earlier, while Retail/Long Term Care was in line with our expectations. The PBM increased a solid 13.3%, and Retail/Long Term Care grew 0.8%, again, on an adjusted basis.

Going below the line on the consolidated income statement, net interest expense in the quarter decreased approximately $34 million from last year to $242 million, due primarily to paying down debt and a lower average interest rate on the debt that remains outstanding.

Our effective tax rate in the quarter was 38.5%, and our weighted-average share count was 1.1 billion shares. For the year, our effective tax rate was 38.6%. The tax rate was lower than expected for the quarter and the year due to certain permanent items that were recognized during the fourth quarter.

So with that, let me now touch on our 2017 guidance. I'll remind you that 2017 is expected to be a rebuilding year of sorts, but our goals remain clear and we fully intend to get back to healthy levels of growth going forward.

I'll focus on the highlights of our guidance here, but you could find all the details in the slide presentation that we posted on our website earlier this morning. In 2017, we continue to expect to deliver adjusted earnings per share in the range of $5.77 to $5.93, and GAAP diluted EPS from continuing operations in the range of $5.02 to $5.18.

Note that the growth rates have been adjusted slightly to reflect the actual Q4 2016 jump-off point, which you can see on our slides. Let me point out that we are now including an estimate of $35 million of Omnicare-related integration costs in the GAAP guidance.

Recall that we have been excluding those costs when we provided guidance last year, given our inability to reasonably forecast their magnitude and their timing. But with the integration winding down and the small amount of expected costs in 2017, we can now reasonably estimate these costs.

As you can see in the non-GAAP reconciliation, these costs were expected to be offset by minor changes in other non-GAAP adjustments resulting in no change to our GAAP guidance.

We have reduced our top line growth expectations in both the Retail/Long Term Care and the Pharmacy services segments, while at the same time maintaining our dollar estimates for operating profit within each segment. Both segments are being impacted by lower inflation than what we had originally forecasted.

Additionally, we're reducing script growth expectations at Retail to account for some softness that we're seeing in our business. As a result, we now expect revenues to be down 1.75% to 3.25% in the Retail/Long Term Care segment, with same store sales down 2.75% to 4.25% and same-store scripts between down 0.25% to up 0.75%.

Top line growth of 7.5% to 9.5 is now expected in the PBM, while claims growth remains unchanged except for the change in methodology that I laid out before. Under the new methodology, we now expect adjusted claims of $1.76 billion to $1.78 billion. We expect consolidated net revenue growth of 2.5% to 4.25%.

As I mentioned earlier, our expectations for operating profit generated in 2017 remains unchanged. After updating the baseline for Q4, we continue to expect Retail/Long Term Care operating profit to decline by 7% to 9.5%, and now expect PBM growth of 5.75% to 8.75%. This results in a decline of 2.5% to 5.25% in the consolidated operating profit.

Now, moving on to the first quarter guidance, we're making similar adjustments to the top line expectations to account for the same factors. We expect a decline of revenues in the Retail/Long Term Care segment of between 3.25% and 5%, with same-store sales down 4.25% to 6% and same-store scripts down 1% to 2%.

We now expect PBM revenues to grow 6.25% to 8%, and consolidated net revenues to grow 1% to 2.75%. As you may recall, we highlighted several timing factors at Analyst Day that affect the cadence of profit delivery throughout this year, which is expected to be significantly back half weighted.

With that in mind, in the first quarter we continue to expect adjusted earnings per share to be in the range of $1.07 to $1.13 per share, a decline of 4.75% to 9.75%. GAAP diluted EPS from continuing operations is expected to be in the range of $0.82 to $0.88 per share.

Additionally, our free cash flow guidance for the year remains in the range of $6 billion to $6.4 billion. I'm very pleased with the company's continued ability to generate significant cash flow, which will continue to play an important role in driving shareholder value over the longer term. And so, with that, I'll now turn it back over to Larry..

Okay. Well, thanks, Dave. And we remain confident that we are well-positioned as the healthcare market continues to evolve. We continue to have the most extensive suite of integrated enterprise assets, and on a stand-alone basis each one would be market-leading.

What really sets them apart lies in our ability in a large way through technology to integrate pharmacy care from the payer to the provider and ultimately to the patient. And these capabilities help us to deliver on our goal of driving more affordable, more accessible, and more effective care.

So with that, let's go ahead and open it up for your questions..

Thank you. Our first question comes from the line of Lisa Gill with JPMorgan. Please proceed..

Thanks very much, and thank you for all the color.

Larry, how do we solve for this problem of the perception that PBMs are part of the problem and not the solution? Is there a way to provide more transparency, maybe as an industry is there a way to provide more transparency on Medicare Part D? I appreciate, clearly, everything that you had to say today, but I think that the rhetoric discontinues because of that lack of transparency.

So any comments that you have around that, number one.

And number two, as this discussion is going on in D.C., are you and the other PBMs part of this discussion?.

Well, Lisa, it's a great question. And, first of all, I think it is important that the story be told in a succinct and factual way, starting with the key policymakers and decision-makers, and that starts in D.C. And we've certainly been having those discussions in an effort to separate fact from fiction.

And I think for the reasons that I alluded to in my prepared remarks there, we need to deal with this issue today.

But the PBM industry has dealt with this issue in the past and has gone through a series of reviews, as I alluded to earlier, whether it was through the FTC, through Congressional Budget Office, other governmental agencies that have quantified not just the role that PBMs play, but the value that PBMs bring to the healthcare economy.

And so, it is important that we start there. And at the same time, listen, we're having an awful lot of discussions with our clients. And as we talk about transparency with them, I do believe that they understand the role that we bring for them.

And I think that in this environment where benefit plan designs continue to evolve and change, I think we're doing more to share with them what we see as best practices across the industry, especially as you think about the growth of consumer-directed health plans and what it means to provide the value of those rebates or discounts at the point of sale and what it means to have a preventive drug list, where there's zero out of pocket expense for their members.

I just use those as two examples. So, Lisa, I don't think there's a single answer to that other than – which I think is where you were going – it really needs to be a surround-sound dialogue with a variety of constituents..

And, Jon, since he's in the room, I mean as we move through the early parts of the selling season, are people asking for different things? I mean, we clearly just heard what Larry talked about, high-deductible health plans, having more visibility.

Do you hear from your clients that they have the transparency that they want and, therefore, this is more of an outside type of event where the rest of us sitting here on the outside don't have the level of transparency we'd like, but your customers are happy and they feel like they're getting what they need out of their PBM and, therefore, over time this will solve for itself? I think that this is really just the biggest issue right now as we think about the PBM industry going forward..

I mean, Lisa, listen, those are all good points. I think at the end of the day our clients hire us to manage their pharmacy benefit. And the trend that we've seen through the first three quarters of the year is 3.3%. We'll be looking at our final number for 2016 in a couple weeks, and we think that number could potentially come down a little bit.

So they're very happy with the cost of their overall benefit relative to the price increases they're seeing in the market with branded prescriptions. Secondly, on the transparency issue, our clients do have audit rights with rebate contracts, network contracts.

They have the level of transparency they need while protecting our ability to negotiate and ensure that they get the best economics that we can in the marketplace. So I think part of the challenge is just the complexity of the pricing model in pharmacy. There's no easy answer for that, but we're continuing to work on it..

Lisa, it's Larry again. I think when I hear you ask that question, you think about the rhetoric from those who are perhaps selling the drugs from those who are buying the drugs. And when you hear that, it gives me pause in terms of taking a step back and really asking the question, why are we in this position to begin with.

And you look back and you think about just the sheer number of branded products that have come off patent over the last four, five years. We've got nearly $100 billion of branded drugs that have lost patent protection. Obviously, that's created somewhat of a headwind for the pharmaceutical industry.

You've got new products that have entered the market that to some degree I describe as me-too products that are entering the market at inflated price points with no incremental effectiveness over the existing therapies.

So why should sponsors of care pay for a higher price of those drugs, especially when many of those drugs are the ones that we're seeing advertised on TV, okay, countless times; and there's a cost to that.

So I think when you start connecting the dots in terms of why the rhetoric now, what has changed in the marketplace that is driving this, it starts to bring some of that dialogue to the discussion..

Larry, just last thing. I know Nancy wants to kick me off the call, but if it were to change, we go from gross to net, some model changes. Do you think that this has a substantial impact on your model, or is there still value to what you bring from a PBM perspective? And I'll stop there..

Lisa, I'll start, then I think Jon will want to jump in. But I think as we've talked many times, as we underwrite the business we underwrite it to an overall level of profitability, and there are many, many things – as we talked at Analyst Day, PBM tools that are utilized that create value for clients. So the answer to that would be no.

There's many, many other things that we do that create value for our clients and their members..

And, Lisa, the other thing I would add is, if branded products were to move from a gross to net, I think it would look more like the generic market where you would get discounts on the buy side. And we think we're in a great position to negotiate favorable economics and continue to deliver value to our clients. So that doesn't worry me at all..

Okay. Thank you so much..

Thanks, Lisa..

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim securities. Please proceed..

So, Larry, on the topic of partnering more broadly, how broad might you be thinking? And then, maybe talk about the dialogues you're having today in massaging the tension, right, between being partners and competitors at the same time.

And does that limit where you think you can take this?.

Yeah, John. Let me start, then Helena will jump in. But, John, listen, when you look at the industry broadly, I do think that for many stakeholders across the supply chain the lines are blurry in terms of being competitors and at the same time being partners. And I think that everybody is kind of learning their way around that.

There are many examples of that out in the marketplace. We shared some of those, beyond the example that you're alluding to, in terms of our CVS Pharmacy business. But you look at our Med D business where we have SilverScript and at the same time we're managing the Med D benefit for about 40 of our health plan clients.

And we can show that while we're competing and at the same time partnering, the health plan growth for our clients has been faster than the market. So I think it's a great example of how we can create a win-win situation. And so, the answer to your question in terms of how broadly, quite frankly, it's with all the PBMs that we do business with.

And I'll flip it over to Helena to talk in a little more detail about those conversations..

Right. So we started talking about this with you at Analyst Day, and I think that we're making nice progress. And really the change in strategy is we used to go to PBMs and health plans simply as a retailer essentially talking about rate.

And now what we're really doing is broadening the conversation and bringing to those conversations the idea of marrying the other assets within the CVS Health suite, so we could bring to them capabilities, for example, like MinuteClinic, like Omnicare.

And so, it's starting to really change the dialogue from being a rate-only conversation to one where we can bring even more value. And we're having those conversations, as Larry said, both with all the PBMs that we do business with.

And as we said to you at Analyst Day, 65% of the prescriptions that we fill are with other PBMs, so those are very important partners to us, along with health plan partners where we see great upside and potential. So it's very early in the game, but I'm encouraged by the kind of conversations we're having..

And then lastly, so you talked about a little bit of softness in – I think more particularly in the retail script business, and it may be a little bit beyond the network exits. If that's true, sort of a way to parse out where that might be coming from.

And I guess that that would be in addition to – I assume you're getting some flu benefit – it would be apart from that, correct?.

Yeah. John, it's Dave. I think flu is probably on the early stages here from a trend perspective, so I haven't really seen much of that compared to where we were last year. I would say that if you look at the network changes, they're tracking very consistent with what our expectations were.

I think we are seeing some soft script volume as we entered this year. I do believe that there was probably some utilization that probably flowed a bit into December at the expense of January, just as patients thought about where they were in their days of supply. But there's no one specific issue that's driving it at this point..

And I would just jump in on flu, essentially it hasn't been a really strong flu season. And in particular what we're mostly seeing is over-the-counter increases in the cold category, for example, but not so much flowing through to the script side..

Okay. Thank you..

Next question?.

Thank you. Our next question comes from the line of Ross Muken with Evercore. Please proceed..

Good morning, guys..

Good morning, Ross..

What more do you think can be done on the consumer side to start to educate the average individual with respect to the value-add and with respect to sort of a better visibility to what actually they're paying for on the drug price perspective? Because, obviously, one of the key issues is at the counter you're obviously not seeing the full rebate.

And we saw that in the EpiPen situation as well, where that causes quite a bit of furor.

I mean, what do you think you can do maybe to help on the consumer side educate a bit more about the value-add and about what the true cost is, given your toolkit?.

Yeah, Ross. Listen, it's a great question, and I think some of it goes back to the earlier point that I made that what can we do, how can we work with our clients on the PBM side in terms of best practices around plan design.

Obviously, there's a completely different story for that consumer at the pharmacy counter if the rebate value is flowing through at the point-of-sale versus back to the client and the client reflecting that rebate value in some way, but it kind of gets diluted across the overall plan design benefit.

And I think we obviously see that as a best practice amongst some other things that we can talk about there.

And listen, I think some of the – you brought up epinephrine, and I think what we were able to do with Impax is a great example of what can happen when we can introduce more competition within a therapeutic class even though it may not be an A/B rated generic. And yes, it does require an intervention with their physician oftentimes.

But I do believe that the medical community is becoming more sensitized to price being a variable around the quality and continuity of care. And by the way, we play that role at retail. And by the way, the PBM plays that role as well in the development of formularies. So, Ross, I think it's a complicated answer or question.

It's an important question, and I think it'll continue to evolve. We're already doing things and we're working hard to do more in that regard..

And maybe just on a longer term strategy perspective, many years ago now Caremarket and CVS got together and that was kind of a transformational transaction, really quite favorable obviously to the equity. And you gained a ton of share.

I mean, as you think about – obviously you talk about some of your strength in PBM relationships, but just more broadly across the healthcare system, the number of different places you can touch and different relationships you can have.

How would you say the dialogue is with other healthcare leaders, or the types of things, maybe not specifically, but in general the organization is thinking about in terms of how you can utilization this massive breadth you have and the delivery system and have a greater impact not only on the consumer, but on obviously your equity?.

Well, Ross, listen, it's another great question. And I think I'll probably take us back a minute to Analyst Day where we showed all of the different I'll say assets that we operate. And the common denominator across those assets lies in the fact that we're delivering that last mile of care to the patient.

And by the way, it doesn't matter where you're at in the health care supply chain. That becomes kind of the important conduit at the end of the day.

So I think there is a growing awareness and a growing understanding of the role that that can play, especially as there are more demands on changing consumer behavior, okay? Quite frankly, it kind of goes back to your first question. So I think it's that.

And it comes back to the other question that was asked that we've got to figure this out recognizing that the folks that we're having these discussions with oftentimes are competitors as well.

So I think it starts with a recognition and an acknowledgment that in cracking the code around this, we can find the sweet spot and still be competitors, but at the same time be partners. And I think we have some success stories. We're looking forward to growing that list of success stories with those objectives in mind..

Great. Thanks, Larry..

Thanks, Ross..

Thank you. Our next question comes from the line of Michael Cherny with UBS. Please proceed..

Good morning, guys, and thank you for all the details as well. I want to get back to Lisa's question a bit in terms of thinking about the PBM selling season.

Over the last few years you've seen evolution of the competition across the market, you've seen various mergers, you've seen some moving pieces in terms of alignment from a business model perspective.

As you go into the selling season, as you pitch your capabilities to the health plan community, to the employer community, what's changed in terms of what resonates from a historical perspective when you are out and selling against some solutions that essentially have not been proven yet to fully work in the market, to fully deliver the same types of savings that you guys have done historically?.

Michael, this is Jon. The PBM industry has been very dynamic. There's been a lot of consolidation really across the last 10 years and it's just continued to evolve.

I think is I'm out speaking to either health plan or employers, I talk about the fact that they have three very different models to choose from, and we talk about the different models and then spend a lot of time talking about our capabilities, which is it's all about getting the best unit cost, which is one thing that is important to them, but then all the things we can do to lower overall healthcare costs because of our ability to touch and influence the consumer.

And our ability to have more points of access through things like Specialty Connect, MinuteClinic, Maintenance Choice 3.0, where we're going to be able to deliver both prescriptions and front store products to someone's home. And I think the ability to do that has won the day.

If you look over the last three years, we've brought on $31 billion in new business. And so, I think the story we've been telling is becoming more important is people or clients are very interested in managing their overall healthcare costs.

So I think we're going to continue with our model to continue to have success in the marketplace, and the market is voting with their selections..

And, Michael, it's Larry. I think the only point that I would add, and again it brings us back to the Analyst Day, but you may recall Alan Lotvin showed some examples of how using the pharmacy data, okay, we can provide a similar level of integration as one may be thinking about integrating medical and pharmacy benefits.

And there's a lot of information and diagnostic information that can be ascertained simply doing a deeper dive in terms of the pharmacy information that we have. So we're looking to expand those capabilities, again, for the reasons that Jon acknowledged..

Great. Thanks, guys. I know you have a lot, so I'll keep it at one..

All right. Thanks, Michael..

Thank you. Our next question comes from the line of Steven Valiquette with Bank of America Merrill Lynch. Please proceed..

Thanks. Good morning, everybody. So it seemed pretty positive that you grew the Medicare Part D captive membership by over 10% for 2017.

And I guess my question is, without really going into any specific numbers, I think some investors are just wondering whether the margin profile of the SilverScript Part D business for 2017 will be about the same as what we saw in 2016? Or maybe just in general, I mean, what are the general margin trends for your Part D business over a two, three, four-year period? And people just want to get a better flavor for that.

Thanks..

Yeah. Steve, this is Dave. I think as we look at our Medicare Part D product, one, it's a very – a successful product in the marketplace and we've done quite well there. I think from a margin perspective and our expectation, I would say that it's a probably a similar profile as we cycle into 2017 versus what we saw in 2016. This is a competitive market.

You rebid this process and re-create a product every single year. So that's part of the dynamics of this market. And that's why, one, we bid successfully because we have a very nice competitive product, but also the fact that we're working really hard to reduce cost in this area. And our product is very efficient at doing that..

Okay, great. I'll keep it at one question as well. Thanks..

Great. See you soon. Take care..

Thanks, Steve..

Thank you. Our next question comes from the line of Robert Jones of Goldman Sachs. Please proceed..

Great. Thanks for the questions. Just to go back to the updated guidance, it does look like you guys are tweaking down some of the segment level assumptions.

And I know you touched on this in piecemeal throughout the prepared remarks, but could you maybe just go back and share with us what specifically changed from Analyst Day through today that would have you dialing back some of the assumptions around revenue for the retail and then revenue and profit growth for the PBM?.

Yeah. Just be real clear, Bob, it's Dave, is that keep in mind we did not adjust operating profit guidance at all. The dollars remain the same. We just trued it up from a growth perspective based on our results in Q4. So profit remains unchanged and our expectation for profit remains unchanged.

I think what you're seeing from a revenue perspective, the vast majority of our revenue adjustments, as we cycle into next year or into 2017, is all about inflation. While we're seeing the same number of inflationary events, the magnitude of that inflation event, each one of them, has been slightly softer than what we planned.

And I think this has been a topic where there's been a lot of dialogue in the marketplace about inflation, the worry of inflation. If inflation goes away, our profits would be hampered. And what you're seeing here is inflation is exactly dampening and our profits are remaining unchanged.

So I think it's the proof point a bit about maybe taking that worry off the table a bit..

Yeah. And, Bob, it's Larry. Listen, I guess, I just want to emphasize Dave's comments, okay? Because I think what we have seen over the last several weeks is more pharmaceutical companies coming out with, I'll call it, their version of the social contract, if you will.

And, as Dave mentioned, typically you see pricing activity occur in January; and we've seen similar levels of activity, but at a lower rate. So that's where it's coming from.

And as Dave pointed out, I think the fact that we're not changing our profit guidance and objectives reflects the comments that we made last year as this question was coming up that modest changes in inflation really have no impact on the profitability of the enterprise business..

No. That's all actually a really fair point. And I guess just to sneak one more in, because, Larry, you went to a lot of detail on the DIR fees and I think that was very helpful given how topical it is for investors right now.

But I guess the question that I'd have is, why do you think there has been such a recent misperception and angst from the customer side as it relates to these fees? I don't think anything that you laid out in those slides obviously would be unfair or untrue, but yet there seems to be a lot of angst coming out of the customers' side of those who receive those fees..

Yeah, Bob. Listen, I think it's a great question. And I think as we outlined in the prepared remarks that through the PBM lens we're working across the network to provide transparency across the pharmacy providers and providing education.

And by the way, when all this rhetoric began, we went back and we took a look at, if you looked at the overall reimbursement rates year-over-year, from 2016 to 2015, okay, in an environment where we've talked about pharmacy margins being under a lot of reimbursement pressures, there are many, many pharmacies to include some specialty pharmacies, in the SilverScript network that their reimbursement rates in 2016 were more favorable than what they were in 2015, largely as the result of the performance network fees and the performance that they demonstrated around that.

So I'm a little puzzled as to why all the rhetoric other than the fact that some people didn't get it right..

Got it. Thank you..

Thanks, Bob..

Thank you. Our next question comes from the line of Robert Willoughby with Credit Suisse. Please proceed. Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker) Hey, Dave, just a quick one. You did mention some upside to the cash flow for the year.

Was there any timing issues around that, i.e., any pull through from 2017? And just maybe for Larry on front end, obviously, I see the tradeoff between store traffic and basket size and profitability, but at some point doesn't that front end number have to grow or is just not something we can really count on going forward with the model?.

Yeah. Hey, Bob. On the cash flow, certainly from a 2016 yield perspective we did quite well at delivering over $8 billion of free cash. Some of that is timing as we've built a payables position with CMS. We will settle that up in 2017. So that's why you see the year-over-year decline from 2016 into 2017 is partially due to that.

I will say that I'm very proud of the team as we continue to improve our working capital terms. Part of that is our focus on inventory and receivable and payables management, but quite honestly part of that is the power of the PBM, as the PBM grows.

The PBM's a very efficient working capital enterprise, and you're seeing the effect of that play out from a free cash flow perspective both in 2016 and in 2017..

Go ahead. Bob, I'll flip your second question over to Helena..

Yeah. I think, Bob, we feel like we've probably been on, I'd call it, the leading edge of looking at our mix of mass spend versus targeted spend and probably more aggressive than the rest of the marketplace on pulling back on unprofitable promotion and really focused on driving profitable growth.

So I do think that as we cycle through that, the good news is we continue to grow share and win in health and beauty, which is the lion's share of our focus.

And where we've pulled back and seen more of an impact on comps has been in mostly the edibles and general merchandise businesses where we've been less focused and where we really don't have as much of a point of differentiation. A lot of those sales historically have been promotional. So that's the constant balance.

It's a balancing act we're always looking for, but wholeheartedly agree in the long run we do see this as a growth business. We stated at Analyst Day we'll continue in 2017 to pull back more on mass promotions. We continue to see profit potential there, but at the same time we're ramping up our targeted capabilities with ExtraCare.

And those things will evolve over the next couple of years. The only thing I would point out as well, just as you cycle into the first quarter and look for our performance, I did want you to know that we're cycling two things for Q1 in 2017 that will make the comparison more difficult. In 2016, we had Leap Day, which we won't have in 2017.

And we also have an Easter shift out of Q1 and into Q2. And if you add those two things together, just those things will adjust our growth in Q1 of this year by negative 185 basis points. So that's front store only in terms of just wanted to calibrate that for you as you look forward to Q1.

Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker) Thank you..

Thanks, Bob..

Thank you. Our next question comes from the line of David Larsen with Leerink. Please proceed..

Hi. Do you have a program similar to like Express Scripts SafeGuardRx program where you can guarantee trend in certain therapeutic classes and you work with manufacturers to perhaps share in risk? Thanks..

Yeah. So, David, this is Jon. So we do have price protection in 90% of our pharma contracts. So as manufacturers raise their prices over a pre-negotiated threshold, that value goes back to our clients in the form of a rebate. We will have certain guarantees in therapeutic classes. I talked about diabetes at Analyst Day.

So we're very targeted where we're using that. And I think at the end of the day our clients will evaluate us based on how their overall costs are being managed. And I think our trend, once we wrap up the year, will be received very well by both our clients and stand up well with our peers..

And, David, it's Larry. We also have some programs -- we've talked about these in the past -- on indication-based pricing which is a version of that. To some degree, that's largely in specialty. We're working with pharma in a different way, okay, based more on outcomes with the patient..

Okay, great. And then, just one more quick one.

If DIR fees went back to the same level they were at last year, would that have any impact on your P&L or would that all pass through to CMS?.

Passed through..

All those are passed through to CMS. They're all – it's all – think about it as part of our cost of goods sold as we price that insurance product. And so, that's how it's underwritten..

Great. Thank you..

Thank you. Our next question comes from the line of Eric Percher with Barclays. Please proceed..

Thank you. So what I have left is with respect to the selling season, and I know it's early in the stages.

But as we think about the share gains that you've had from managed care or healthcare plans over the last two years, have we reached a point where the low-hanging fruit has been plucked and it becomes harder to generate the same type of market share gains? Or do you think that opportunity remains where it has been and maybe will add to that the opportunity in Part D? Do you see that expanding at the same type of levels?.

Eric, It's Larry. I'll start, and then I think Jon will jump in. I think to a large degree those opportunities are more time-driven based on the current or existing contract, and it's going to end up tying back to the RFP process.

And I would say that there continues to – we've talked a lot over the last year about insourcing, outsourcing and the fact that we continue to believe that we bring a lot of value to that equation, and that there is – makes a lot of sense. I think when the health plan mergers were being bantered about, there was some growing concern around that.

And it looks like those are now in the rearview mirror. So we still continue to believe that we can bring value for smaller regional players. And, listen, we have a great relationship with Aetna, and we look forward to continuing to be a key partner with them and helping them to grow..

Hey, Eric. The only other thing I would add is, I don't view the health plan market as the low-hanging fruit is gone and it's going to be more challenging to win health plans moving forward. Quite frankly, the biggest barrier to health plans moving historically has been the level of effort and the disruption in those moves.

And what we've been able to do with automation and processes around moving health plans has really demonstrated we can do it in a near seamless way. As an example, I was with two CEOs of health plans that we won this year within 10 days of welcome season of 1/1, when they had just transitioned to us.

And they were just thankful and appreciative of the great job that we did in welcome season. So as I look forward, our capabilities and how we can help health plans manage their overall costs with all of our integrated assets and our ability to move them in a non-disruptive way I think becomes a compelling value proposition..

Thank you for that. And a quick one for Dave.

The ASR; can you tell us what the timing is in terms of impact at when it was put into place versus at close?.

It was put into place early in January. It should settle by the third quarter..

It'll settle in the third quarter.

And is there an initial amount versus total amount at the end that we (1:12:25)?.

Yeah. I'll encourage you to take a look at our filings later today. You can see it in our K..

Okay. Thank you..

Yeah..

Thanks, Eric.

Next question, please?.

Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed..

Yeah. Hi. Good morning. Thank you for taking my question. I have some follow-ups here. First, on the implied scripts for the year.

Can you remind us what are you assuming for the cadence of losing DoD in Prime? And once you normalize for these two contracts, what would be the implied script growth for 1Q that you're factoring into the guidance? And then, I have a couple of more follow-ups..

Yeah. Well, at the end of the day there's a little more than 40 million prescriptions that are cycling out of our business. So TRICARE began on really December 1 for the most part, so maybe some bleed before that, and Prime begins on January 1. So thinking about it, almost pretty equally spread throughout the year for the most part, Ricky.

So it's really 40 million scripts on our base from a volume perspective..

So what would that mean on a normalized businesses? Does this mean that kind of like on a normalized basis there's around 2% to 3% script growth for the rest of the business?.

Yeah. I haven't looked at it that way, Ricky. So I don't have that number right on the top of my head, but it's something that's easily calculated if you take that 40 million scripts, pro rate them over each of the quarters, you can kind of figure out where we'd be..

So that's where we're getting to, which is a little less than what you've done in the last couple of years, at 5%? So is that kind of like a function of just some additional losses that were not as publicized, or is it more kind of like slowdown of the market?.

No. That's not the case, Ricky. I think what you're seeing is a couple things. One, and I think probably the biggest, over the last couple of years we've seen a pretty big expansion of state Medicaid programs. So that was kind of fueling scripts into the marketplace, and so you're probably seeing a little bit less than that as we cycle into 2017..

Okay. That is helpful. And then, one question on the impact from pricing on margin. So just to clarify, because when we hear kind of like what other companies in the channel are saying, they're saying that January price increases came in line.

So are you basically making the assumption that we're not going to see that second price increase, that historically it's happened later in the year and that's where the impact is? That's first. And second of all, SG&A savings that you are seeing that help offset some of that are sustainable going forward.

Should we use this SG&A level as a new run rate?.

Well, Ricky, a couple of things just on – I would say that everybody probably had their own forecast and expectation for price increases; and what we specified today is based on our forecast for 2017. Inflation's coming in a little lighter than we expected. It's really twofold.

Partly is that what we've seen, pricing increases early in the year or late last year was a little less than what we thought. And also, we do anticipate that trend to continue throughout the year as we think about price increases later in the year as well..

And, Ricky, if you look at the 40 million prescriptions on our base at retail, it's about a 3.5% impact, if you will. 350 basis points, from a script perspective..

Okay, great. And then, just last thing on the selling season. Last couple of years 75% of the new business that you brought on was health plan, which is in line with your strategy.

When you look at the RFP pipeline for the 2017-2018 selling season, what's the mix that's coming up for renewal for the market, not for your book? Is it comparable in terms of the opportunity on health plan versus what we've seen in prior years?.

Ricky, it's still pretty early around that. And keep in mind that health plans typically start a little earlier. So, quite frankly, some of the stuff that's starting to come in right now is really for January of 2019 because of their cycle. So as we've done in prior years, we'll have more to say on this on the first quarter call.

We'll have a better idea of certainly the RFP activity consistent with prior years..

Okay. Thank you very much..

Thanks, Ricky..

Thank you. Our next question comes from the line of Alvin Concepcion with Citi. Please proceed..

Great. Thank you for squeezing me in. How would you characterize the savings you experienced for Red Oak versus what you would've expected by now? It sounds like it's still very much helping your profits in light of the revenue pressure.

So what inning would you say you are in, in achieving the savings targets through that venture?.

Yeah, Alvin. Listen, I think we're all very pleased with not just standing up Red Oak, but the value that it's bringing to the supply chain.

And I think as we've talked previously, the incremental year-over-year benefit obviously has slowed because we've got it up and running, but I think the Red Oak team continues to look for ways in which we can make the supply chain more efficient. And we're still looking and exploring those opportunities.

So I think we're all very pleased with where we are today and where we're going with it..

Great. And a quick follow-up.

How would you describe the competitive pricing environment during the quarter and so far in the year, both on the retail and PBM side? Is it still pretty rational?.

Yeah. I would say, Alvin, we haven't seen any material change and it' a competitive, but rational market as you just acknowledged..

Great. Thank you very much.

Okay. Thanks. So, Nelson, we'll take one more question, please..

Thank you. Our final question comes from the line of George Hill with Deutsche Bank. Please proceed..

Hey. Good morning, guys, and thanks for taking the question.

And I guess, Larry and Jon, this is a kind of a quick follow-up on the last one, which is, as it relates to the PBM selling season are you seeing anything that you would consider disruptive from any of the larger players, whether it's kind of a pricing or sales model, or offering? And then, my quick follow-up will be for Dave, just any guidance on interest expense in 2017?.

George, this is Jon. As far as anything new or disruptive for the selling season, it's pretty consistent with what we saw over the last couple of years. So nothing really new to report..

And, George, I think in our deck that we posted on the website, it should have our interest expense guidance for the year. And I'll pull it up real quickly for you here. (1:20:04). Do you see it? It's a billion....

Yeah, yeah. I'm still flipping through, but I can pull that up. I'll let you guys get off. Thank you..

Over $1 billion, George..

Good deal. Thank you..

Okay. So with that, I know it's been a long call, but hopefully we've provided a lot of information for you today and in light of some of the, I'll call them, current events in the marketplace. And we appreciate everyone's time. And as always, Nancy and Mike are available for any follow-ups you might have. Thanks, everyone..

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation, and ask that you please disconnect your line..