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CVS Caremark 2011 Annual Report
for better health™
PHARMACY
Reinventing
for better health™
PHARMACY
Reinventing

Table of contents

  • Page 1
    Reinventing PHARMACY PH ARMACY for better health â„¢ CVS Caremark 2011 Annual Report

  • Page 2
    ..., CVS Caremark is uniquely positioned to be an important part of the solution with our best-in-class businesses and a growing suite of integrated offerings. Through our distinctive business model, we are reinventing pharmacy for better health. It's the CVS Caremark way and one that often differs...

  • Page 3
    Reinventing PHARMACY for better health â„¢ CVS CAREMARK 1 2011 ANNUAL REPORT

  • Page 4
    ...® locations. Financial Highlights fiscal year fiscal year (in millions, except per share figures) 2011 2010 % change Net revenues Operating profit Net income attributable to CVS Caremark Diluted EPS from continuing operations Stock price at year-end Market capitalization at year-end...

  • Page 5
    ... on our promises. We executed successfully on a number of initiatives across the enterprise, reporting solid results in a difficult environment. vur retail business continued to experience solid top- and bottom-line growth, and we achieved steady share gains. vur pharmacy benefit management, or PBM...

  • Page 6
    ... the 2011 and 2012 selling seasons with the Universal American acquisition, we have increased our book of business by 50 percent compared with 2010. At the same time, we have been successfully executing the PBM streamlining initiative we announced last year, CVS CAREMARK 4 2011 ANNUAL REPORT

  • Page 7
    ... retail loyalty program, it has more than 67 million active households and currently accounts for approximately 85 percent of our front-store sales. ExtraCare enables us to execute a targeted front-store promotional strategy and drive more profitable sales. CVS CAREMARK 5 2011 ANNUAL REPORT

  • Page 8
    ... their benefit structure to substantially reduce or eliminate co-pays at MinuteClinic, which will encourage cost-effective member behaviors and expand access to highquality care. MinuteClinic also offers our PBM clients flu vaccination and biometric screening CVS CAREMARK 6 2011 ANNUAL REPORT

  • Page 9
    ... rates and close gaps in care. We are particularly encouraged that many new customers have opted to implement Maintenance Choice® . This program gives qualifying plan participants the option of filling their 90-day maintenance prescriptions by mail or at one of our convenient retail locations...

  • Page 10
    ... users had 8 percent lower overall health care costs, and their emergency room expenses were 12 percent lower. Additionally, results from a recent RAND study found that the cost of MinuteClinic services compared to physicians' offices, urgent care, and CVS CAREMARK 8 2011 ANNUAL REPORT

  • Page 11
    ... than the other sites of care. Encouraging members to use MinuteClinic can be an important source of savings for our clients. Q: Per, CVS Caremark has the industry-leading specialty pharmacy offering. How will your efforts to address the growing challenges in specialty benefit from the combination...

  • Page 12
    ... for integrated pharmacy care. Powered by our proprietary Consumer Engagement Engineâ„¢ , the Pharmacy Advisor program places critical information into our pharmacists' workflow, whether they are at a PBM call center, mail order pharmacy, or in one of our 7,300 retail pharmacy stores. This enables...

  • Page 13
    ... influence channel: face-to-face interaction at the pharmacy. Pharmacist at Pharmacy 2-3X More Influential 3.1 2.7 2.2 Nurse at Hospital Pharmacist Call Family Member at Home 1.3 RN or MD at Work Site 0.3 Paper or Video Relative Effect of Intervention Approaches in Driving Adherence 11

  • Page 14
    We've made obtaining 90-day prescriptions easier than ever. 12

  • Page 15
    ..., its combination with Pharmacy Advisor (see pages 10-11) represents another opportunity to improve patient health. Together, the two programs can drive a significantly higher percentage change in optimally adherent members than either program on its own. CVS CAREMARK 13 2011 ANNUAL REPORT

  • Page 16
    ...we're helping clients control costs while also improving the specialty patient experience. For example, many specialty patients have the option of picking up their mail order prescriptions at our retail pharmacy stores. CVS Caremark has been a leader in this business since its inception more than 30...

  • Page 17
    Our specialty offerings utilize mail as well as retail locations. CVS CAREMARK 15 2011 ANNUAL REPORT

  • Page 18
    Our PBM services extend to a leading presence in Medicare Part D plans. 16

  • Page 19
    ... retail market positions in key sun-belt states, we stand to benefit from this trend to a greater extent than most other pharmacy players. Additionally, our retail pharmacists can play a key role in helping seniors choose the right plan for their specific needs. CVS CAREMARK 17 2011 ANNUAL REPORT

  • Page 20
    ...Physicians from these health systems have become some of our MinuteClinic physician directors. We are also working on integration of electronic medical records to facilitate bi-directional flow of information and provide the best care at the lowest overall cost. CVS CAREMARK 18 2011 ANNUAL REPORT

  • Page 21
    MinuteClinic is replacing highercost sites of care for appropriate services. 19

  • Page 22
    ... delivers to the region's homeless population, including improving access to proper dental care services. vur partnership with Direct Relief USA offered free flu shots to community clinic and health center patients who lacked health insurance. Additionally, CVS Caremark continued to offer more than...

  • Page 23
    ... of Financial Condition and Results of Operations 2011 45 Management's Report on Internal Control Over Financial Reporting 46 Report of Independent Registered Public Accounting Firm 47 Consolidated Statements of Income 48 Consolidated Balance Sheets 49 Consolidated Statements of Cash Flows...

  • Page 24
    ...benefits to approximately 3.6 million beneficiaries throuch the above mentioned insurance companies. Our Pharmacy Services secment cenerates net revenues primarily by contractinc with clients to provide prescription drucs to plan members. Prescription drucs are dispensed by our mail order pharmacies...

  • Page 25
    ... provides manacement and administrative services to support the Company. The Corporate secment consists of certain aspects of our executive manacement, corporate relations, lecal, compliance, human resources, corporate information technolocy and finance departments. CVS CAREMARK 23 2011 ANNUAL...

  • Page 26
    ... of Financial Condition and Results of Operations Results of Operations Summary of our ConSolidated finanCial reSultS Year Ended December 31, in millions, except per common share amounts 2011 2010 2009 Net revenues Gross profit Operatinc expenses Operatinc profit Interest expense, net Income...

  • Page 27
    ... year ended December 31, 2011, which resulted from a hicher averace interest rate durinc the period as we shifted from short-term debt to lonc-term debt. Durinc 2010, net interest expense increased by $11 million, to $536 million compared to 2009, due to an increase in our averace debt balances and...

  • Page 28
    ...Payments. (2) Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record...

  • Page 29
    ...retail drugstores, but excluding Maintenance Choice activity. (4) The results of the Pharmacy Services segment for the years ended December 31, 2010 and 2009, have been revised to reflect the results of TheraCom as discontinued operations. Net revenues in our Pharmacy Services Secment increased $11...

  • Page 30
    ...'s retail pharmacy network contracts and a larce health plan to the Caremark contract structure, which resulted in those contracts beinc accounted for usinc the cross method. As a result, net revenues increased by $1.1 billion durinc 2010 as compared to 2009. CVS CAREMARK 28 2011 ANNUAL REPORT

  • Page 31
    ...accounted for usinc the cross method, which results in hicher revenues, hicher cost of revenues and lower cross profit rates. The conversion of certain RxAmerica contracts to the Caremark contract structure increased our net revenues, increased our cost of revenues and lowered our cross profit rates...

  • Page 32
    ... related to sellinc, ceneral and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs, decreased to 1.8% of net revenues in 2011 compared to 2.0% and 1.9% in 2010 and 2009, respectively. As you review our Pharmacy Services...

  • Page 33
    ...year ended December 31, 2010, compared to 30.0% for the prior year. The decline in cross profit as a percentace of net revenues was driven by declines in the cross profit of our pharmacy sales, partially offset by increases in the cross profit of our front store sales. CVS CAREMARK 31 2011 ANNUAL...

  • Page 34
    .... Operatinc expenses increased $87 million, or 16.3% durinc 2010. Operatinc expenses within the Corporate secment include executive manacement, corporate relations, lecal, compliance, human resources, corporate information technolocy and finance related costs. CVS CAREMARK 32 2011 ANNUAL REPORT

  • Page 35
    ...purchases of property and equipment. In 2010, the increase in net cash used in investinc activities was primarily due to a reduction in the amount of proceeds received from sale-leaseback transactions, partially offset by less cash used for purchases of property and equipment. In 2011, cross capital...

  • Page 36
    ... of Financial Condition and Results of Operations Net cash used in financing activities was approximately $3.5 billion in 2011, compared to net cash used in financinc activities of $2.8 billion in 2010 and net cash used in financinc activities of $3.2 billion in 2009. Net cash used in financinc...

  • Page 37
    ...unsecured senior notes due May 18, 2020 (collectively, the "2010 Notes") for total proceeds of $991 million, which was net of discounts and underwritinc fees. The 2010 Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company's option at...

  • Page 38
    ... Financial Condition and Results of Operations equates to an annual dividend rate of $0.65 per share. On January 11, 2011, our Board of Directors authorized a 43% increase in our quarterly common stock dividend to $0.125 per share. This increase equated to an annual dividend rate of $0.50 per share...

  • Page 39
    ... cross method at the contract prices necotiated with our clients. Net revenue from our Pharmacy Services secment includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to us ("Mail Co-Payments...

  • Page 40
    ... net revenues in 2011, 2010 and 2009, respectively. If the prospective Member Co-Payment subsidies received differ from the amounts based on actual prescription claims, the difference is recorded in either accounts receivable or accrued expenses. We account for CMS oblications and Member Co-Payments...

  • Page 41
    ... services. Purchase discounts and administrative service fees are recorded as a reduction of "Cost of revenues". Retail Pharmacy Segment Vendor allowances received by the Retail Pharmacy segment reduce the carrying cost of inventory and are recognized in cost of revenues when the related inventory...

  • Page 42
    ... covered by this critical accountinc policy was $179 million as of December 31, 2011. Althouch we believe we have sufficient current and historical information available to us to record reasonable estimates for estimated inventory losses, it is possible that actual results could differ. In order...

  • Page 43
    ... that actual results could differ from the estimates used in our impairment tests. We have not made any material chances in the methodolocies utilized to test the carryinc values of coodwill and intancible assets for impairment durinc the past three years. CVS CAREMARK 41 2011 ANNUAL REPORT

  • Page 44
    ... as of December 31, 2011. We have not made any material chances in the reserve methodolocy used to record closed store lease reserves durinc the past three years. Self-inSuranCe liaBilitieS We are self-insured for certain losses related to ceneral liability, workers' compensation and auto liability...

  • Page 45
    ...an impact on the Company's financial condition or cash flows. In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment ("ASU 2011-08"). ASU 2011-08 allows entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reportinc...

  • Page 46
    ... power, preferences and/or spending patterns, drug utilization trends, the financial health of our PBM clients and our ability to secure necessary financing, suitable store locations and sale-leaseback transactions on acceptable terms. • Efforts to reduce reimbursement levels and alter health care...

  • Page 47
    ... millions, except per share amounts 2010 2009 record, process, summarize and report a system of internal accountinc controls and procedures to provide reason2008 able assurance, at an appropriate cost/benefit relationship, that the unauthorized use or disposition of Net revenues $ 96,413 acquisition...

  • Page 48
    ... uonsolidated balanue sheets of CVS Caremark Corporation as of Deuember 31, 2011 and 2010 and the related uonsolidated statements of inuome, shareholders' equity and uash flows for eauh of the three years in the period ended Deuember 31, 2011 of CVS Caremark Corporation and our report dated February...

  • Page 49
    ... share amounts 2011 2010 2009 Net revenues Cost of revenues Gross profit Operatinc expenses Operatinc profit Interest expense, net Income before income tax provision Income tax provision Income from continuinc operations Income (loss) from discontinued operations, net of tax Net income Net loss...

  • Page 50
    ...2010 Assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill Intancible assets, net Other assets Total assets Liabilities: Accounts payable Claims and discounts...

  • Page 51
    ...network pharmacies Cash paid to other suppliers and employees Interest received Interest paid Income taxes paid Net cash provided by operatinc activities Cash flows from investinc activities: Purchases of property and equipment Proceeds from sale-leaseback transactions Proceeds from sale of property...

  • Page 52
    ... 31, 2010 2009 Preference stock: Beginning of year Conversion to common stock End of year Common stock: Beginning of year Stock options exercised and stock awards End of year Treasury stock: Beginning of year Purchase of treasury shares Conversion of preference stock Employee stock purchase plan...

  • Page 53
    ... of Shareholders' Equity Dollars Year Ended December 31, in millions 2011 2010 2009 Retained earnincs: Becinninc of year Net income attributable to CVS Caremark Common stock dividends End of year Accumulated other comprehensive loss: Becinninc of year Net cash flow hedces, net of income tax Pension...

  • Page 54
    ... aCCountinG PoliCieS Description of business - CVS Caremark Corporation and its subsidiaries (the "Company") is the larcest pharmacy health care provider in the United States based upon revenues and prescriptions filled. The Company currently has three reportable business secments, Pharmacy Services...

  • Page 55
    ... on rates currently offered to the Company for debt with similar terms and maturities. The Company had outstandinc letters of credit, which cuaranteed foreicn trade purchases, with a fair value of $6 million as of December 31, 2011 and 2010. There were no outstandinc derivative financial instruments...

  • Page 56
    ... financial statements are properly stated. Durinc the interim period between physical inventory counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current trends. Property and equipment - Property, equipment...

  • Page 57
    ... 2011 2010 2009 Becinninc balance Acquisition of Generation Health Net loss attributable to noncontrollinc interest Endinc balance $ 34 - (4) 30 $ 37 - (3) 34 $ - 37 - 37 $ $ $ Revenue Recognition Pharmacy Services Segment - The PSS sells prescription drucs directly throuch its mail...

  • Page 58
    ... component of cost of revenues includes: (i) the cost of the prescription drucs purchased from manufacturers or distributors and shipped to members in clients' benefit plans from the PSS' mail service pharmacies, net of any volume-related or other discounts (see "Druc Discounts" previously in this...

  • Page 59
    ...million shares of its common stock at December 31, 2011 and 2010. These shares are desicnated for use under various employee compensation plans. Since the Company holds these shares, they are excluded from the computation of basic and diluted shares outstandinc. CVS CAREMARK 57 2011 ANNUAL REPORT

  • Page 60
    ... options' exercise prices were creater than the averace market price of the common shares and, therefore, the effect would be antidilutive. New Accounting Pronouncements In January 2010, the Financial Accountinc Standards Board ("FASB") issued Accountinc Standards Update ("ASU") 2010-06, Fair Value...

  • Page 61
    ... business of Universal American Corp. (the "UAM Medicare Part D Business") for approximately $1.3 billion. The UAM Medicare Part D Business offers prescription druc Below is a summary of the results of discontinued operations: Year Ended December 31, in millions 2011 2010 2009 Net revenues of...

  • Page 62
    ... of a future discounted cash flow valuation model and a comparable market transaction model. As the Company utilizes internal financial projections for the determination of future cash flows, the fair value methodolocy is considered to use inputs classified as Level 3 in the fair value hierarchy. If...

  • Page 63
    ... shares of common stock for $23 million under the 2008 Repurchase Procram. Durinc the year ended December 31, 2009, the Company repurchased approximately 57.0 million shares of common stock for approximately $2.0 billion, completinc the 2008 Repurchase Procram. CVS CAREMARK 61 2011 ANNUAL REPORT

  • Page 64
    ... fees. The 2011 Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company's option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2011 Notes were used to repay commercial...

  • Page 65
    ...unsecured senior notes due May 18, 2020 (collectively, the "2010 Notes") for total proceeds of $991 million, which was net of discounts and underwritinc fees. The 2010 Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company's option at...

  • Page 66
    ... noncancelable subleases. The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases qualify and are accounted for as operating leases...

  • Page 67
    ... $1 million for 2011, 2010 and 2009. Pursuant to various labor acreements, the Company also contributes to multiemployer health and welfare plans that cover union-represented employees. The plans provide postretirement health care and life insurance benefits to certain employees who meet elicibility...

  • Page 68
    ...2011, 2010 and 2009, respectively. The 2007 ESPP provides for the purchase of up to 15 million shares of common stock. Under the 2007 ESPP, elicible employees may purchase common stock at the end of each six month offerinc period at a purchase price equal to 85% of the lower of the fair market value...

  • Page 69
    ... the 1997 Incentive Compensation Plan (the "1997 ICP"). The terms of the 2010 ICP provide for crants of annual incentive and lonc-term performance awards to executive officers and other officers and employees of the Company or any subsidiary of the Company. Payment of such annual incentive and lonc...

  • Page 70
    ...The fair value of each stock option is estimated usinc the Black-Scholes option pricinc model based on the followinc assumptions at the time of crant: 2011 2010 2009 Dividend yield (1) Expected volatility (2) Risk-free interest rate (3) Expected life (in years) (4) Weichted-averace crant date fair...

  • Page 71
    ... of the Company's deferred tax assets and liabilities as of December 31: in millions 2011 2010 Deferred tax assets: Lease and rents Inventories Employee benefits Allowance for doubtful accounts Retirement benefits Net operatinc losses Other Total deferred tax assets Deferred tax liabilities...

  • Page 72
    ... open years will expire over the next twelve months, which may cause a utilization or reduction of the Company's reserve for uncertain tax positions of up to approximately $10 million. Durinc 2011, the Internal Revenue Service (the "IRS") completed an examination of the Company's 2010 consolidated...

  • Page 73
    ... condition, results of operations or future cash flows. Legal Matters Caremark (the term "Caremark" beinc used herein to cenerally refer to any one or more pharmacy benefit manacement subsidiaries of the Company, as applicable) is a defendant in a qui tam lawsuit initially filed by a relator...

  • Page 74
    .... In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of Rhode Island purportedly on behalf of purchasers of CVS Caremark Corporation stock between May 5, 2009 and November 4, 2009. The lawsuit names the Company and certain officers as...

  • Page 75
    ... of insider tradinc. In addition, a shareholder derivative lawsuit was filed in December 2009 in the same court acainst the directors and certain officers of the Company. A derivative lawsuit is a lawsuit filed by a shareholder purportinc to assert claims on behalf of a corporation acainst directors...

  • Page 76
    ... Retail co-payments for the years ended December 31, 2011, 2010 and 2009, respectively. (2) Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services segment clients use Retail Pharmacy segment stores to purchase covered products. When...

  • Page 77
    ... per share amounts 2011 2010 2009 Numerator for earnincs per common share calculation: Income from continuinc operations Net loss attributable to noncontrollinc interest Income from continuinc operations attributable to CVS Caremark, basic Income (loss) from discontinued operations, net of tax Net...

  • Page 78
    ... to Consolidated Financial Statements 16 Quarterly finanCial information (unaudited) First Quarter (1) Second Quarter (1) Third Quarter Fourth Quarter Year in millions, except per share amounts 2011: net revenues Gross profit operating profit income from continuing operations income (loss) from...

  • Page 79
    ... (1) Year (1) 2010: Net revenues Gross profit Operatinc profit Income from continuinc operations Income (loss) from discontinued operations, net of tax Net income Net loss attributable to noncontrollinc interest Net income attributable to CVS Caremark Basic earnincs per common share: Income from...

  • Page 80
    ...(24) (2) 2 $ 2009 13 - (19) 2 (4) $ 2008 11 - (214) 78 $ 2007 5 - - (2) 3 $ $ $ $ (125) $ (5) Represents the minority shareholders' portion of the net loss from our majority owned subsidiary, Generation Health, Inc., acquired in the fourth quarter of 2009. CVS CAREMARK 78 2011 ANNUAL REPORT

  • Page 81
    Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets The Board of Direutors and Shareholders CVS Caremark Corporation We have audited the auuompanying uonsolidated balanue sheets of CVS Caremark Corporation as of Deuember 31, 2011 and 2010, and the related uonsolidated...

  • Page 82
    ...CVS Caremark Corporation S&P 500 2007 2008 2009 2010 2011 S&P 500 Food & Staples Retail Group Index S&P 500 Healthuare Group Index Compound Annual Return Rate (3 Year) Compound Annual Return Rate (5 Year) Year End 2006 2007 2008 2009 2010 2011 Annual Return Rate (1 Year) CVS Caremark Corporation...

  • Page 83
    ... / Atlanta SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS CVS Caremark Corporation One CVS Drive, Woonsocket, RI 02895 (401) 765-1500 ANNUAL SHAREHOLDERS' MEETING May 10, 2012 CVS Caremark Corporate Headquarters STOCK MARKET LISTING The New York Stock Exchange Symbol: CVS TRANSFER AGENT AND...

  • Page 84
    ...do on our own. CARING treating people with respect and compassion so they feel valued and appreciated. INTEGRITY Delivering on our promises; doing what we say and what is right. ACCOUNTABILITY taking personal ownership for our actions and their results. The 2011 CVS Caremark Annual Report saved the...