Earnings Conference Call

(1)

Third Quarter 2015

d Qua te

0 5

Earnings Conference Call

Larry Merlo

y

President & Chief Executive Officer

Dave Denton

Executive Vice President & Chief Financial Officer

(2)

Forward-looking Statements

During today’s presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward looking statements have risks and uncertainties Actual results forward-looking statements have 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 including the risk factors section and cautionary statement disclosures in those filings.

During this call, we will also use some non-GAAP financial measures g ,

when talking about our company’s performance, including 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.

(3)

Third Quarter 2015

Earnings Conference Call

Business Review

Larry Merlo

President &

Chief Executive Officer

(4)

Third Quarter: Continued Strong Results

Q3 2015 Change vs. Q3 2014

Adjusted EPS (1) (3) _$1.28 _11.5%

Retail/LTC Operating Profit (4) (5) _{$1,655 million} _8.4%

PBM O ti P fit (4) _{$1 162} _illi _{7 0%}

PBM Operating Profit (4) _{$1,162 million} _7.0%

Free Cash Flow $1.3 billion (10.6)%

Adjusted EPS of $1.29 (1) (2) _{versus guidance of $1.27 to $1.30} Refer to page 48 for end notes.

(5)

Financial Update:

2015 Guidance

• Expect 2015 full-year Adjusted EPS of $5.14 to $5.18

– Narrowing guidance range by raising lower end by 3¢

• Guidance includes: The addition of Omnicare’s operations beginning

on August 18th and the costs associated with the July 2015 debt on August 18th and the costs associated with the July 2015 debt financing

• Assume that Target deal closes near year endAssume that Target deal closes near year end

• Guidance excludes:

Operating results generated by the Target assets

– Operating results generated by the Target assets

– Deal-related integration costs

(6)

Steady State Targets

• Provided five-year financial targets in December of 2013, which

included many assumptions For example: included many assumptions. For example:

– Expected revenues to grow faster than operating profit, suggesting continued margin compression

– Our growth strategy is to focus on winning lives and gaining enterprise share to offset margin pressures; assumed we would continue to gain share in core business while making value-enhancing acquisitions

– Would employ disciplined approach to capital allocation to further enhance EPS growth rate

– Targeted adjusted EPS to grow 10% to 14% annually, on average, from 2013 to 2018

(7)

Preliminary 2016 Outlook

• Preliminary 2016 Adjusted EPS range of $5.68 to $5.88

– Reflects a growth rate of ~ 10% to 14% from the $5.16 midpoint of our 2015 Adjusted EPS guidance range

– Assumes completion of acquisition of Target’s pharmacies and clinics near year-end 2015, and excludes integration and transaction costs for both Omnicare and Target

– Assumes $4 billion of share repurchases in 2016

(8)

Preliminary 2016 Outlook

Omnicare and Target

• Omnicare

– Expected to be ~ 20¢ accretive to Adjusted EPS in 2016, excluding transaction and integration costs

• Target’s pharmacies and clinics

• Target s pharmacies and clinics

– Expected to be ~ 6¢ dilutive to Adjusted EPS in 2016, assuming the acquisition closes near the end of 2015

I l d i f i l d d i i 201 h

– Includes impact of previously-announced reduction in 2015 share repurchases

– Includes financing costs

(9)

Preliminary 2016 Outlook

Operating Profit Expectations

• Total enterprise: mid- to high-single digit growth

– Focused on an integrated enterprise strategy to drive long-term growth

• Retail/LTC segment: mid-single digit growth

C

– Continue to grow and gain share while experiencing ongoing margin

compression, due to business mix shift to lower margin lines of business, mainly Medicare and Medicaid, and reimbursement pressure from payors

• PBM segment: high-single to low-double digit growth

– In addition to usual margin compression, significant new business wins

80% f b i f h lth l t i ll h thi

– 80% of gross new business from health plans … typically have thinner margins in first year as our unique programs are sold in over time

• Continue to grow and gain share, both organically and through g g , g y g

(10)

PBM Business:

2016 Selling Season

• Gross wins of ~ $13.3 billion and net wins of ~ $11.4 billion

– Excludes impact from our individual Med D PDP

• Completed 80% of client renewals for 2016, consistent with past

years years

• Continue to have strong retention of about 98% (5)

(11)

PBM Business:

Specialty Pharmacy Growth Outpacing Market

• Healthy revenue growth of 32% year-over-year in Q3, outpacing

market growth rates and gaining share market growth rates and gaining share

– Driven by claims growth, inflation and inclusion of Omnicare’s specialty business

• Comprehensive set of programs to effectively manage specialty trend

(12)

PBM Business:

SilverScript

• SilverScript qualified in 32 of the 34 regions, enabling SilverScript to

retain vast majority of auto-assignees currently served retain vast majority of auto-assignees currently served

• Well-positioned in 2016 annual enrollment period, offering …

T o plans that ha e $0 ded ctibles

– Two plans that have $0 deductibles,

– Premiums in many states that are lower than prior-year levels, and

– Low co-pays for several frequently-prescribed drugsp y q y p g

• SilverScript recently received 4-star rating from CMS for the 2016

plan year

(13)

Omnicare:

Performance Reporting and Integration

Performance, Reporting and Integration

• Business performing as expected

Long term care business provides new pharmacy dispensing channel

– Long-term care business provides new pharmacy dispensing channel, enhancing our ability to provide continuity of care for patients as they transition through the health care system

S t ti

• Segment reporting:

– The long-term care operations, commercialization services, supply chain solutions and patient support services of Omnicare now included in the newly named Retail/LTC segment

newly-named Retail/LTC segment

– Omnicare’s specialty business integrated into CVS/specialty within the Pharmacy Services segment

• Integration:

– Integration well underway and focus is on ensuring a seamless transition for clients and patients

(14)

Retail/LTC Business:

Pharmacy Revenue and Script Growth

• Script comps increased 4.4% on a 30-day equivalent basis (7)

• Retail pharmacy market share increased ~ 55 bps versus Q3 2014, to

21.7%

• Pharmacy same-store sales increased 4.6%

– Negative impact of ~ 450 bps from new generic drug introductions

(15)

ScriptSync

TM

Successfully Launched in Q3

ScriptSync Successfully Launched in Q3

• Pharmacy service that aligns eligible maintenance prescriptions to be

ready together for pick-up at the same time ready together for pick-up at the same time

• More than 400,000 patients have signed up for ScriptSync so far,

surpassing enrollment projectionsp g p j

• Expect this enterprise program to contribute to improved medication

adherence and customer satisfaction

(16)

Front Store Revenue and Gross Margin

• Front store comps declined 5.8%

– On a comparable basis, adjusting for the impact of tobacco exit, comps would have been ~ 490 bps higher

• Decrease in front store traffic partially offset by increase in average

customer basket

• Gained share in core health and beauty businessesGained share in core health and beauty businesses

• Front store gross margin rate continued to benefit from the tobacco

exit, growth in the higher margin health and beauty businesses along g g g y g

(17)

Store Brands and Health & Beauty

• Store Brands saw continued progress in Q3 as its share of our front

store sales increased ~ 150 bps to 21.8% store sales increased 150 bps to 21.8%

– While about two-thirds of the improvement results from tobacco no longer being in the denominator, the rest is driven by new products and increased customer loyalty

customer loyalty

• Continues to be a great deal of opportunity from our focus on

positioning ourselves as a leading health and beauty destination to

p g g y

drive profitable growth

– Early results from the updated stores have been positive

Will d t A l t D

(18)

Real Estate Update and CVS/minuteclinic

• New stores:

– In Q3, opened 43 new retail drugstores, relocated 11, and closed 2, resulting in 41 net new retail drugstores

– In 2015, plan to add ~ 150 net new stores with an increase in retail square footage of ~ 2%

• MinuteClinics:

– Revenues up ~ 13% vs. same quarter a year ago

– Operate 1,020 clinics across 32 states and Washington, D.C.

• 23 new clinics added in Q3

(19)

Enterprise Digital

• Vision is to create a connected health experience to make it easier for

people to save time save money and stay healthy people to save time, save money and stay healthy

• To date, 27 million customers have engaged digitally with CVS

Health

• Engaging 36% of all specialty patients, making it the highest

(20)

Third Quarter 2015

Earnings Conference Call

Financial Review

Dave Denton

Executive Vice President &

Chief Financial Officer

(21)

Capital Allocation

• Dividends of $391 million in Q3; $1.2 billion year-to-date

– Dividend payout ratio of 28.9%, after excluding impact of non-recurring items

– Still on track to reach 35% targeted payout ratio by 2018

• Repurchased ~ 9 million shares in Q3 for $937 million

– Year-to-date, purchased ~ 37.8 million shares for ~ $3.9 billion, or p

$102.47 per share

– Expect to complete $5 billion of share repurchases in 2015, ~ 25% more than in 2014

• Year-to-date, have returned more than $5 billion to shareholders

(22)

July 2015 Senior Notes

• In support of acquisitions, issued series of senior notes in July totaling

$15 billion $15 billion

• Assumed ~ $700 million of remaining Omnicare debt

• As expected, new debt increased adjusted debt-to-EBITDA leverage

ratio above targets

– Committed to returning to 2 7x target; strong cash generation should enable

– Committed to returning to 2.7x target; strong cash generation should enable us to do so in a reasonable amount of time

(23)

Free Cash Flow

• Year-to-date, generated approximately $3.4 billion of free cash

• Continue to expect to produce between $5.9 and $6.2 billion of free

(24)

Income Statement:

Earnings per Share

• Q3 Adjusted EPS, excluding acquisition-related activity, of $1.29 (1) (2)

– Near high end of guidance range

– Excludes 1¢ of acquisition-related dilution from the net effect of the July 2015 debt financing partly offset by the inclusion of Omnicare’s operations

– Incurred ~ 10¢ of acquisition-related bridge financing, transaction and integration costs in the quarter

• GAAP diluted EPS of $1.10

• Adjusted EPS, excluding acquisition-related bridge financing,

t ti d i t ti t f $1 28 i Q3

transaction and integration costs, of $1.28 in Q3

– Includes 2.5 months of senior note financing costs, partially offset by a month and a half of Omnicare operations during Q3 (1) (3)

(25)

Revenues

(8)

Revenues

• Consolidated revenues of $38.6 billion, up 10.3% vs. LY

• PBM revenues of $25.5 billion, up 13.3% vs. LY

– Growth driven by specialty pharmacy and increased volume in pharmacy network claims

network claims

• Growth in specialty driven by increased claims due to new products and new clients, in addition to inflation

P ti ll ff t b i i GDR t 83 8% 130 b Q3 2014

(26)

Revenues

(8)

Revenues

• Retail/LTC revenues of $17.9 billion, up 6.9% vs. LY

– Excluding Omnicare’s long-term care business, revenue growth was solidly within guidance range

– Growth driven by inclusion of LTC business, strong pharmacy same store sales and script growth

– Retail/LTC GDR of 84.8%, up ~ 140bps vs. Q3 2014

(27)

Gross Profit Margin

(8)

Gross Profit Margin

• Consolidated gross margin of 17.2%, down ~ 125 bps vs. LY

– Decline due in part to mix shift, as lower margin PBM is growing faster than retail/LTC

• PBM gross margin of 5 8% down ~ 45 bps vs LY

• PBM gross margin of 5.8%, down ~ 45 bps vs. LY

– Decline due to ongoing price compression and business mix resulting in stronger growth of lower-margin areas, such as Medicare and Medicaid

– Partially offset by improvement in GDR, and favorable purchasing and rebate economics

(28)

Gross Profit Margin

(8)

Gross Profit Margin

• Retail/LTC gross margin of 30.0%, down ~ 125 bps vs. LY

– Decline due to continued pressure on pharmacy reimbursement rates, continuing mix shift towards pharmacy and addition of long-term care business, which carries a lower overall margin rate than retail

– Partially offset by increase in GDR, favorable pharmacy purchasing

economics, and increased front store margins due to changes in the mix of products sold

– Retail/LTC gross profit dollars up 2.6%

(29)

Operating Expenses

(8)

Operating Expenses

• Consolidated: expenses were 10.9% of revenues … ~ 120 bps YOY

improvement improvement

• PBM: expenses were 1.2% of revenues … ~ 20 bps YOY

improvementp

– Expenses declined by $10 million despite addition of Omnicare specialty business

(30)

Operating Expenses

(8)

Operating Expenses

• Retail/LTC: expenses were 20.8% of revenues … ~ 140 bps YOY

improvement improvement

– Driven by higher legal costs in 2014

– Excludes ~ $12 million of costs related to Omnicare integration

• Corporate expenses increased to $309 million

– Driven by acquisition-related transaction and integration costs, which y q g , totaled $115 million

– Excluding these costs, corporate expenses better than expected and improved year-over-yearp y y

(31)

Operating Profit Margin

(8)

Operating Profit Margin

• Consolidated operating margin of 6.4%, down ~ 5 bps vs. LY

• PBM operating margin of 4.6%, down ~ 25 bps vs. LY

(32)

Operating Profit

(8)

Operating Profit

• PBM

– PBM operating profit increased 7.0%

– PBM operating profit increased 6.2%, exceeding guidance of 2% to 6%, after excluding all acquisition-related items

• Retail/LTC

– Retail/LTC operating profit increased by 8.4%p g p y

– Core retail operating profit increased by 4.9%, versus guidance of 4% to 6%, after excluding all acquisition-related items

(33)

Below-the-line

Below the line

• Net interest expense of $261 million, up ~ $108 million vs. LY

– Driven by acquisition-related financing costs associated with bridge loan facility ($16 million) for Omnicare deal, and interest associated with the July 2015 senior notes

• Effective tax rate of 40.2%; year-over-year increase primarily due to

nondeductible transaction costs associated with the Omnicare

acquisitionq

– Excluding acquisition-related items, tax rate slightly lower than expected

(34)

2015 Guidance

• Expect 2015 full-year Adjusted EPS of $5.14 to $5.18

– Narrowing guidance range by raising lower end by 3¢

• Guidance includes: The addition of Omnicare’s operations beginning

on August 18th and the costs associated with the July 2015 debt on August 18th and the costs associated with the July 2015 debt financing

• Assume that Target deal closes near year endAssume that Target deal closes near year end

• Guidance excludes:

Operating results generated by the Target assets

– Operating results generated by the Target assets

– Deal-related integration costs

(35)

Guidance: 2015 Full-year

Healthy Enterprise Growth

Full-year 2015

Net Revenue Growth 9.75% to 10.25%

Adjusted EPS(1) (9) (10)

Year-over-year Growth(11)

$5.14 to $5.18

14.25% to 15.25%

(36)

Guidance: 2015 Q4

Enterprise Revenue and Earnings Per Share

Q4 2015

Adjusted EPS(1) (9) (10)

Year-over-year Growth

$1.51 to $1.55

24.75% to 28.25%

GAAP Diluted EPS $1.41 to $1.45

(37)

Adjusted EPS Walk

per share Low High

Adjusted EPS $1.51 $1.55

Subtract: estimated Target transaction costs (could

occur in 2015 or 2016) (0.02) (0.02)

(38)

Retail/LTC Segment

Q4 2015

N t R G th 9 0% t 10 5%

Same-store Sales

S t Adj t d S i t (7)

0.75% to 2.25%

Same-store Adjusted Scripts (7)

3.5% to 4.5%

Gross Profit Margin Moderate decline

Operating Expense

(% of revenue) Significant improvement

Operating Profit Growth

Operating Profit Margin

19.25% to 21.25%

Up 95 bps to 100 bps

(39)

Pharmacy Services Segment

Q4 2015

N t R G th 10 5% t 12 0%

Total Adjusted Claims (7) _{295 million to 300 million}

Total Adjusted Claims 295 million to 300 million

Gross Profit Margin Moderate improvement

(% of revenue) Modest improvement

24.0% to 27.0%

(40)

Consolidated Income Statement

Q4 2015

C t S t E $215 illi t $220 illi

Corporate Segment Expense $215 million to $220 million

Intercompany Eliminations _{~10 8%}

(% of combined segment revenues) 10.8%

Gross Profit Margin Modestly down

(% of revenue) Notable improvement

(41)

Consolidated Income Statement

Q4 2015

Net Interest Expense $275 million to $280 million

Effective Tax Rate ~39.3%

Weighted Average Shares (9) _{~1.11 billion}

(42)

Adjusted EPS Walk

per share Low High

Adjusted EPS (excluding acquisition-related bridge

financing , transaction and integration costs) $5.14 $5.18 Subtract: acquisition-related bridge financing, transaction and

(0 12) (0 12)

integration costs recorded through 9/30/15 (0.12) (0.12)

Adjusted EPS $5.02 $5.06

Subtract: estimated Target transaction costs (could occur in

2015 or 2016) (0.02) (0.02)

Adjusted EPS (including Target related costs in 2015) $5 00 $5 04

Adjusted EPS (including Target-related costs in 2015) $5.00 $5.04

(43)

Strong PBM Outlook

Full-year 2015

N t R G th 13 25% t 13 75%

Total Adjusted Claims (7) _{1 16 billion to 1 17 billion}

Total Adjusted Claims 1.16 billion to 1.17 billion

Gross Profit Margin Modest decline

(% of revenue) Modest improvement

12.75% to 13.50%

Flattish

(44)

Solid Outlook in Retail/LTC

Full-year 2015

N t R G th 5 25% t 5 75%

Same-store Sales (12) _{1.00% to 1.50%}

Same-store Adjusted Scripts (7) _{4.25% to 4.75%}

Gross Profit Margin Notable decline

(% of revenue) Notable improvement

6.25% to 6.75%

Flat to up

(45)

Consolidated Income Statement

Full-year 2015

C t S t E $790 illi t $800 illi

Corporate Segment Expense $790 million to $800 million

Intercompany Eliminations _{~ 10 9%}

(% of combined segment revenues) 10.9%

Gross Profit Margin Notably down

(% of revenue) Significant improvement

(46)

Consolidated Income Statement

Full-year 2015

N t I t t E $785 illi t $790 illi

Net Interest Expense $785 million to $790 million

Effective Tax Rate ~ 39 2%

Effective Tax Rate 39.2%

Weighted Average Shares (7) _{~ 1.13 billion}

Consolidated Amortization ~ $610 million

Consolidated D&A ~ $2.1 billion

(47)

Substantial Free Cash Flow

(billions) _{Full-year 2015}

O ti C h Fl $7 6 t $7 9

Operating Cash Flow $7.6 to $7.9

Gross Capital Expenditures ~ ($2.3) to ($2.2)

Sale-leaseback proceeds (13) _{$0.6 to $0.5}

Net Capital Expenditures ~ ($1.7)

Free Cash Flow

Year-over-year Growth

$5.9 to $6.2

(48)

Endnotes

1 Adjusted EPS equals income before income tax provision plus amortization less adjusted income tax provision and other 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision and other

(comprised of earnings allocated to participating securities), less net income attributable to noncontrolling interest, divided by the weighted average diluted common shares outstanding. The adjusted income tax provision is computed using the effective income tax rate computed from the consolidated statement of income.

2. Excludes 10 cents of acquisition-related bridge financing, transaction and integration costs as well as a net loss of 1 cent from the addition of Omnicare’s operations midway through the third quarter, partly offset by the financing costs related to the J l 2015 d bt fi i

July 2015 debt financing.

3. Excludes 10 cents of acquisition-related bridge financing, transaction and integration costs.

4. Excludes integration and transaction costs; includes Omnicare’s operations as of August 18, 2015.

5. Client retention rate is defined as: 1 less (projected 2016 lost revenues from known terminations occurring after January 1, 2015, divided by estimated 2016 PBM revenues) expressed as a percentage. Both terminations and PBM revenues exclude the individual PDP business.

6. Excluding $12 million of acquisition-related integration costs, operating profit for the Retail/LTC segment increased $128 million, or 8.4%, from $1,526.9 million for the three months ended September 30, 2014 to $1,654.6 million for the three months ended September 30, 2015.

7. Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal 30-day prescriptionp y p p

8. Results include Omnicare’s operations, except where noted.

9. Estimates for weighted-average share count and EPS assume completion of approximately $5.0 billion in share repurchases in 2015 as part of a $6.0 billion share repurchase program authorized by CVS Health’s board of directors in December 2013, and a $10.0 billion share repurchase program authorized by CVS Health’s board of directors in December 2014.

10. Excludes acquisition-related bridge financing, transaction and integration costs; includes Omnicare’s operations and financing costs related to July 2015 debt financing.

financing costs related to July 2015 debt financing.

11. Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in 2014.

12. We expect the tobacco exit to have a negative impact on total same-store sales of approximately 155 basis points for the full year 2015. We also expect it to have a negative impact of approximately 525 basis points on front store same-store sales for the full year 2015.

13. CVS Health finances a portion of its store development program through sale-leaseback transactions. Use of sale-leaseback financing is subject to change as we evaluate a variety of financing vehicles for future development; this may also result in financing is subject to change, as we evaluate a variety of financing vehicles for future development; this may also result in changes to our definition of free cash flow.