Earnings. Larry Merlo. President & Chief Executive Officer. Executive Vice President & Chief Financial Officer. November 4, 2014

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1 Third dquate Quarter Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer November 4, 2014

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 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 will also use some non-gaap financial measures when talking about our company s performance, including free cash flow and Adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-gaap items, as well as reconciliations to comparable GAAP measures, on the investor relations portion of our website CVS Health 2

3 Third Quarter 2014 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer November 4, CVS Health 3

4 Third Quarter: Continued Strength in 2014 Q Change vs. Q Adjusted EPS (1) (2) (3) $ % Retail Operating Profit (4) $1,527 million 8.8% PBM Operating Profit (5) $1,086 million 85% 8.5% Free Cash Flow (YTD) $3,606 million 17.4% Refer to page 37 for end notes CVS Health 4

5 PBM Business: 2015 Selling Season Update Gross wins of $6.4 billion, up $1 billion from last update Net-new business of $3.1 billion, up $500 million from last update Business lost to-date: ~50% due to acquisition ~25% due to clients that shifted a subset of their members (namely retiree populations) onto exchanges We are well-positioned to capture lives on exchanges Excludes any impact from our individual Med D PDP business Renewals Completed more than 80% of the $26 billion in business up for renewal Retention rate of just over 96% (6) Success again reflects track record of generating savings for clients through our suite of unique capabilities Refer to page 37 for end notes CVS Health 5

6 PBM Business: Specialty Pharmacy Strong results, with revenues up ~53% year-over-year in Q3 Key drivers: new business; Sovaldi, the new hepatitis C drug; and the addition of Coram infusion business Through Q3, numerous clients have signed up for our site-of-service management product enabled by Coram Continue to see client interest in and adoption of our medical pharmacy management offering through Novologix 2014 CVS Health 6

7 PBM Business: SilverScript Currently ~3 million lives enrolled in our individual PDP Expect to end year with approximately the same amount, with monthly add-ins expected to offset normal monthly attrition Significant opportunity to grow individual PDP business over the long term 2014 CVS Health 7

8 Retail Business: Revenue and Script Growth Total same-store sales increased 2.0% Pharmacy same-store sales increased 4.8%; market share up ~40 basis points Negative impact of ~190bps from new generic drug introductions i Negative impact of ~190bps due to transfer of specialty scripts from our retail segment to our PBM segment (Specialty Connect) No discernible impact on our pharmacy business from the tobacco exit Script comps increased 5.1% on a 30-day equivalent basis (7) Pharmacy margins increased; generic inflation and pharmacy reimbursement in line with expectations Refer to page 37 for end notes CVS Health 8

9 Retail Business: Medicare Part D In 2014, CVS is preferred in 5 of the top 10 Med D plans (based on lives) For 2015, we have contracted with 20 regional and national Med D plans We will continue to use our economic model to make sound decisions with respect to participation 2014 CVS Health 9

10 Retail Business: Front Store Trends Front store comps decreased 4.5% Comps would have been ~480bps higher if tobacco and estimated associated basket sales were excluded Adjusting for the tobacco impact in Q3 and the Easter shift in Q2, pro forma front store comps would reflect modest sequential improvement from Q3 Overall traffic declined while average customer ticket increased Front store margins increased; less than one third of improvement was driven by the absence of lower-margin tobacco sales The rest of the improvement was driven by our strategy of driving store brands and making responsible promotional investments 2014 CVS Health 10

11 Retail Business: Store Brands & Personalization Store Brands saw notable gains in Q3 Share of our front store sales increased ~210bps to 20.1% in Q3 Roughly half of improvement in store brand penetration relates to tobacco exit Gains in health, beauty, general merchandise and edibles Significant opportunity ty to continue to expand store brand penetrationet Will build on core equities in health and beauty as well as opportunistic growth in other categories Continuing on trajectory of using ExtraCare in differentiated ways to balance sales and margin growth 2014 CVS Health 11

12 Retail Business: Real Estate Update Navarro Discount Pharmacy acquisition completed on September 4 th includes 33 retail drugstores In addition to Navarro, opened 45 new retail drugstores, relocated 13, and closed 4, resulting in 74 net-new retail drugstores overall in Q3 On track to achieve 2% to 3% square footage growth for CVS Health 12

13 Retail Business: Continued Strong Growth at CVS/minuteclinic Revenues and customer visits up more than 25% and 30%, respectively, vs. same quarter last year Operate 936 clinics in 30 states and Washington D.C. 76 net new clinics added in Q3 Plan to open more than 30 new clinics in Q4 Added d 8 new health system alliances in Q3, bringing i total t to 44 affiliations throughout the U.S. Continue to build platform that supports primary care by providing integrated, high-quality care that is convenient, accessible, and affordable 2014 CVS Health 13

14 Business Update: Cardinal Health Venture: Red Oak Sourcing Largest generic sourcing entity in the U.S. To date, Red Oak Sourcing has met with approximately 40 suppliers covering more than 90% of the cumulative generic spend Manufacturers continue to be transitioned from legacy purchasing programs at CVS and Cardinal to the new Red Oak purchasing platform Extremely pleased with progress to date, and we look forward to its future contributions 2014 CVS Health 14

15 Third Quarter 2014 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer November 4, CVS Health 15

16 Financial Update: Capital Allocation Returned more than $1.1 billion to shareholders in Q3; more than $3.7 billion YTD Dividends of $324 million Already surpassed targeted payout ratio of 25% in 2014 Still on track to reach 35% targeted payout ratio by 2018 Repurchased more than 10 million shares for ~$800 million in Q3 Still on track to complete at least $4 billion in 2014 Still expect to return more than $5 billion to shareholders in CVS Health 16

17 Financial Update: Cash Flows Generated more than $1.4 billion of free cash in Q3; ~$3.6 billion YTD Driven by healthy growth in earnings and improvements in retail cash cycle Expect between $5.7 and $6.0 billion in free cash for 2014, up from previous guidance of $5.5 to $5.8 billion Driven primarily by tax benefit received from early extinguishment of debt 2014 CVS Health 17

18 Income Statement: Earnings per Share Adjusted EPS grew 9.0%, to $1.15 in Q3 (1) (2) (3) 1 per share above high end of guidance range Includes expected 3 negative impact from tobacco exit Reflects strong growth across our operating segments GAAP diluted EPS of $0.81 per share Refer to page 37 for end notes CVS Health 18

19 Income Statement/Balance Sheet: Debt Transactions Retired $2.0 billion of long-term debt at average rate of 6.0% Issued $1.5 billion at average rate of 2.74% $850 million, 2.25% note due 2019 $650 million, 3.375% note due 2024 Before tax cost of $521 million in Q3 Approximately 27 per share Annual EPS accretion of roughly 4 going gforward ~1 benefit from reduced interest in 2014 ~3 incremental benefit in CVS Health 19

20 Income Statement: Revenues Consolidated revenues of $35 billion, up 9.7% vs LY PBM revenues of $22.5 billion, up 15.7% vs. LY Strong performance driven by specialty, branded drug inflation, net-new business and product mix Offset to some degree by lower mail choice claims and an increase in generic dispensing Generic dispensing rate of 82.5%, up ~180bps vs. Q Retail revenues of $16.7 billion, up 3.1% vs. LY Better than expected, due to product mix, volumes, and generic launch delays Generic dispensing rate of 83.3%, up ~180bps vs. Q CVS Health 20

21 Income Statement: Segment Mix Shift and Tobacco Effects Implementation of Specialty Connect (SC) continues to transfer revenues from retail into PBM As expected, shift enhanced year-over-year top-line growth in the PBM by ~115bps with a negative impact on retail pharmacy comps of 190bps Exit from tobacco at the beginning of September also affected retail top-line growth As anticipated, front store comps would have been ~480bps higher if tobacco and estimated associated basket sales were excluded If adjusted for impacts of both SC and tobacco, pro forma retail revenue growth would have been 6.5% 2014 CVS Health 21

22 Income Statement: Gross Profit Margin Consolidated gross margin of 18.5%, down ~40bps vs. LY driven by mix shift and modest decline in PBM gross margin PBM gross margin of 6.2%, down ~40bps vs. LY PBM gross profit dollars up ~8.4% Decrease primarily driven by typical client compression and drug mix Partially offset by increase in GDR and better purchasing economics Retail gross margin of 31.3%, 3% up 125bps vs. LY Retail gross profit dollars up 7.4% Improvement driven by increase in pharmacy margins (better GDR and purchasing economics) Partially offset by continued reimbursement pressure Front store margins also expanded due to product mix, responsible promotions and tobacco exit 2014 CVS Health 22

23 Income Statement: Operating Expenses Consolidated operating expenses were 12.1% of consolidated revenues, an improvement of ~30bps vs. LY (2) PBM expenses were 7.9% of PBM revenues, an improvement of ~10bps to LY (5) Retail expenses were 22.1% of retail revenues, an increase of ~75bps vs. LY (4) Retail expenses grew 6.8% (4) Reflects higher legal and operating costs Corporate expenses were up $17 million vs. LY, to $196 million Reflects strategic initiatives as well as IT investments Refer to page 37 for end notes CVS Health 23

24 Income Statement: Operating Profit Margin Consolidated operating margin of 6.4%, a decline of ~10bps vs. LY (2) PBM operating margin of 4.8%, a decline of ~30bps vs. LY (5) Strong operating profit growth of 8.5% vs. LY, higher than expected Retail operating margin of 91% 9.1%, an improvement of ~50bps vs. LY (4) Retail operating profit increased a very healthy 8.8% (4) Refer to page 37 for end notes CVS Health 24

25 Income Statement: Below-the-line Net interest expense of $153 million, up ~$32 million vs LY Primarily driven by debt issued in Q4 2013, though saw some benefit from debt extinguishment at the end of Q Weighted-average share count of 1.16 billion shares Effective tax rate of 39.7% 2014 CVS Health 25

26 Guidance: 2014 Full-Year Solid Enterprise Growth Full-year 2014 Net Revenue Growth ~ % Adjusted EPS (1)(8) Year-over-year Growth (2) (3) $4.47 to $4.50 ~12.75% to 13.5% GAAP Diluted EPS $3.93-$3.96 Refer to page 37 for end notes CVS Health 26

27 Guidance: 2014 Fourth Quarter Enterprise Revenue and Earnings Per Share Q Net Revenue Growth ~9.0%-10.5% Adjusted EPS (1)(8) Year-over-year Growth (2) $1.18 to $1.21 6% to 8.75% GAAP Diluted EPS $1.12-$1.15 Refer to page 37 for end notes CVS Health 27

28 Guidance: 2014 Fourth Quarter Retail Pharmacy Q Net Revenue Growth 0.25% to 1.75% Same-store Sales (1.0%) to 0.5% Same-store Adjusted Scripts (7) 3.5% to 4.5% Gross Profit Margin Significant improvement Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Moderate decline 4.5% to 6.25% Up 40 bps to 45 bps Refer to page 37 for end notes CVS Health 28

29 Guidance: 2014 Fourth Quarter PBM Q Net Revenue Growth 16.75% to 18.25% Total Adjusted Claims (7) 270 million to 275 million Gross Profit Margin Notable decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement Flat to 2% Down 65 to 70 bps Refer to page 37 for end notes CVS Health 29

30 Guidance: 2014 Fourth Quarter Consolidated Income Statement Q Corporate Segment Expense $200 million to $205 million Intercompany Eliminations (% of combined segment revenues) ~10.8% Gross Profit Margin Significantly down Operating Expense (% of revenue) Notable improvement Operating Profit Margin Down 30 bps to 40 bps Refer to page 37 for end notes CVS Health 30

31 Guidance: 2014 Fourth Quarter Consolidated Income Statement Q Net Interest t Expense $125 million to $135 million Effective Tax Rate ~40.0% 0% Weighted Average Shares (8) ~1.15 billion Consolidated Amortization ~$130 million Refer to page 37 for end notes CVS Health 31

32 Guidance: 2014 Full-Year Substantial Free Cash Flow (billions) Full-year 2014 Operating Cash Flow $7.4 to $7.77 Gross Capital Expenditures ~($2.3) to ($2.2) Sale-leaseback proceeds (9) $0.6 to $0.5 Net Capital Expenditures ~(1.7) Free Cash Flow ~$5.7 to $6.0 Refer to page 37 for end notes CVS Health 32

33 Guidance: 2014 Full-Year Healthy Outlook in Retail Full-year 2014 Net Revenue Growth ~2.5% 25%to 3% Same-store Sales ~1.5% to 2% Same-store Adjusted Scripts (7) ~3.5% to 4.0% Gross Profit Margin Notable improvement Operating Expense (4) (% of revenue) Operating Profit Growth (4) Operating Profit Margin Moderate decline ~8.25% to 8.75% Up 50 bps to 55 bps Refer to page 37 for end notes CVS Health 33

34 Guidance: 2014 Full-Year Healthy Outlook in PBM Full-year 2014 Net Revenue Growth ~14.75% to 15.25% Total Adjusted Claims (7) billion to billion Gross Profit Margin Modest decline Operating Expense (5) (% of revenue) Operating Profit Growth (5) Operating Profit Margin Modest improvement ~14.0% to 14.5% Flattish Refer to page 37 for end notes CVS Health 34

35 Guidance: 2014 Full-Year Consolidated Income Statement Full-year 2014 Corporate Segment Expense $795 million to $800 million Intercompany Eliminations (% of combined segment revenues) ~10.8% Gross Profit Margin Moderately down Operating Expense (2) (% of revenue) Modest improvement Operating Profit Margin (2) Up 5 bps to 10 bps Refer to page 37 for end notes CVS Health 35

36 Guidance: 2014 Full-Year Consolidated Income Statement Full-year 2014 Net Interest t Expense $595 million to $605 million Effective Tax Rate ~39.6% Weighted Average Shares (8) ~1.17 billion Consolidated Amortization ~$520 million Consolidated D&A ~$1.9 billion Refer to page 37 for end notes CVS Health 36

37 Endnotes 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision, and other, which is comprised of earnings allocated to participating securities, 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 condensed consolidated statement of income. 2. Excludes $72 million gain from a legal settlement (~$0.04 per diluted share) recognized in the third quarter of Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in the third quarter of Excludes $61 million gain from a legal settlement recognized in the third quarter of Excludes $11 million gain from a legal settlement recognized in the third quarter of Client retention rate is defined as: 1 less (projected 2015 lost revenues from known terminations occurring after January 1, 2014, divided by estimated 2015 PBM revenues) expressed as a percentage. Both terminations and PBM revenues exclude the individual PDP business. 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 prescription 8. Estimates for weighted-average share count and EPS assume completion of approximately $4 billion in share repurchases in 2014 as part of a $6.0 billion share repurchase program authorized by CVS Health s board of directors in September 2012, and a $6.0 billion share repurchase program authorized by CVS Health s board of directors in December 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 changes to our definition of free cash flow CVS Health 37

Earnings Conference Call

First Quarter 2015 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer May 1, 2015 Forward-looking Statements During