CVS 2014 Annual Report Download

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2014 Annual Report

Table of contents

  • Page 1
    2014 Annual Report

  • Page 2
    1 Health is Everything 14 Financial Highlights 15 Letter to Shareholders 20 Prescription for a Better World 21 2014 Financial Report

  • Page 3
    ...800 retail drug stores across the United States and in Brazil; CVS/caremark™, a leading pharmacy benefit manager (PBM) and mail service pharmacy serving more than 2,000 clients and their 65 million plan members; CVS/minuteclinic™, the nation's largest walk-in medical clinic provider with nearly...

  • Page 4
    ...only CVS Health offers, gives CVS/caremark plan members the option of receiving 90-day maintenance prescriptions in the way that suits them best-through our mail order pharmacies or at any of our CVS/pharmacy locations. Specialty Connectâ„¢ provides a similar in-store pickup option for CVS/specialty...

  • Page 5
    3 2014 Annual Report

  • Page 6
    ... and channel-agnostic approach. The company is a market leader in retail pharmacy, pharmacy benefits management, specialty pharmacy, and retail medical clinics-and very well-positioned in an era of consumer-directed health care. 4 1.7 billion 65+ million PBM plan members CVS Health prescriptions...

  • Page 7
    ...the No. 2 Medicare Part D prescription drug plan. $31 CVS Health includes the largest U.S. specialty pharmacy with $31 billion in revenues. $19 $22 $12 2011 2012 2013 2014 More than 24,000 pharmacists across our enterprise 50% of Specialty Connect patients choose CVS/pharmacy for pick up

  • Page 8
    ...to drive savings and help control overall health spending. We're at the beginning stages of health reform, but we're making real strides to achieve its goals with CVS Health." CVS Health Reduce costs, not care. With U.S. health care and prescription drug spending on the rise, CVS/caremark offers...

  • Page 9
    7 2014 Annual Report

  • Page 10
    ... in narrow or restricted pharmacy networks. Formulary management strategy expected to drive total incremental client savings of Reduced co-pay at CVS/minuteclinic can lower overall health care costs by 8% for patients who use our walk-in medical clinics $ 3.5 billion from 2012 through 2015

  • Page 11
    ...therapies and more all work together to achieve results. The company's loyalty program also provides customers with significant savings and value. Managing specialty cost growth trend CVS Health is the largest player in the rapidly growing U.S. specialty market. We are using our broad capabilities...

  • Page 12
    ... can be seen across CVS Health, from our decision to stop selling tobacco products to our clinical programs, unique specialty capabilities, MinuteClinic locations, and our affiliations with nearly 50 health systems. In specialty, we provide clinical support and drive superior outcomes through our...

  • Page 13
    11 2014 Annual Report

  • Page 14
    ... help to improve adherence such as Pharmacy Advisor, Specialty Connect, and our Patient Care Initiative. We have introduced programs that provide an earlier, easier, and more effective approach to engaging patients in behaviors that help to improve their health and saves lives. We are also making...

  • Page 15
    ... an 11% reduction in total health care costs for managed conditions. 2014 Annual Report Pharmacy Advisor programs achieve industry-leading adherence at CVS/pharmacy CVS/pharmacy Top 3 retail pharmacies 79% 71% 81% 75% Diabetes Therapy Hypertension Therapy Cholesterol Therapy The results are...

  • Page 16
    ...* Stock price at year-end Market capitalization at year-end plus proceeds from sale-leaseback transactions). $ 109,800 $ 84,437 * Free cash ï¬,ow is defined as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment Net...

  • Page 17
    ... benefit manager (PBM) and formation of new health care alliances to the ongoing expansion of our retail pharmacies and the elimination of tobacco products from our stores. Importantly, we have changed our corporate name to CVS Health. 2014 Annual Report 15 Our company is at the forefront of an...

  • Page 18
    ... health plans, government payors, and employers. With a 96 percent retention rate, net new business for 2015 totaled $3.6 billion. Clients value the strength of CVS/caremark's adherence programs, specialty services, and advanced formulary strategies. Pharmacy Advisor, Maintenance Choice, Specialty...

  • Page 19
    ... promotion, which aligns with our strategy to drive profitable growth. Our adherence programs and partnerships are providing value to our PBM and non-PBM patients alike Our channel-agnostic pharmacy care model has played a key role in enhancing member services and driving share gains. Plan members...

  • Page 20
    ...of health care, CVS/pharmacy has also partnered with a number of health plan clients on a variety of initiatives that help them reach out to consumers directly. For example, we host in-store events to drive member acquisition and have launched a solution that enables health plan members to pay their...

  • Page 21
    ... models has been fueled by states seeking cost savings opportunities. CVS/caremark participates in managed Medicaid through health plan clients, and our 19 percent share makes us an industry leader. Medicaid also currently accounts for 14 percent of prescriptions dispensed at CVS/pharmacy locations...

  • Page 22
    ... and Employee Resource Groups Among the top tier of companies listed on the Center for Political Accountability (CPA) Zicklin Index of Corporate Political Disclosure and Accountability Corporate Responsibility Magazine named CVS Health President and CEO Larry Merlo as the 2014 Responsible CEO of...

  • Page 23
    ... Income 54 Consolidated Balance Sheets 55 Consolidated Statements of Cash Flows 56 Consolidated Statements of Shareholders' Equity 57 Notes to Consolidated Financial Statements 88 Five-Year Financial Summary 89 Report of Independent Registered Public Accounting Firm 90 Stock Performance Graph

  • Page 24
    ... D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. Our clients are primarily employers, insurance companies, unions, government...

  • Page 25
    ...four mail order dispensing pharmacies, and 86 branches and six centers of excellence for infusion and enteral services located in 40 states, Puerto Rico and the District of Columbia. 23 2014 Annual Report Overview of Our Retail Pharmacy Segment Our Retail Pharmacy Segment sells prescription drugs...

  • Page 26
    ... management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments. Results of Operations Summary of our Consolidated Financial Results Y E A R E N DE D DE C E M B E R 3 1 , IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS 2014 2013 $ 126...

  • Page 27
    ...rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments for 2012 through 2014, offsetting the negative impacts described above. Please see the Segment Analysis later in this document for additional information about our gross profit. 25 2014 Annual Report...

  • Page 28
    ... impacted the growth rate in 2013 and negatively impacted the growth rate in 2014. CVS Health Loss from discontinued operations - In connection with certain business dispositions completed between 1991 and 1997, the Company retained guarantees on store lease obligations for a number of former...

  • Page 29
    ... financial statements for additional information about Retail Co-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...

  • Page 30
    ... mail claims, as well as 90-day claims filled at our retail stores under the Maintenance Choice program. (3) Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores, but excluding Maintenance Choice activity. Net revenues in our Pharmacy Services...

  • Page 31
    ... rate. • We completed the roll out of Specialty ConnectTM in May 2014, which integrates the Company's specialty pharmacy mail and retail capabilities, providing members with the choice to bring their specialty prescriptions to any CVS/pharmacy® location. Whether submitted through our mail order...

  • Page 32
    ..., either directly through our mail service and specialty retail pharmacies or indirectly through our pharmacy network, (ii) shipping and handling costs and (iii) the operating costs of our mail service dispensing pharmacies, customer service operations and related information technology support...

  • Page 33
    ... D-related PBM services to our health plan and other clients that have qualified as Medicare Part D plans, and (2) offering Medicare Part D pharmacy benefits through the Company's SilverScript prescription drug plan ("PDP"), which offers benefits to individual members and through employer group...

  • Page 34
    ..., 2013 and 2012 we continued to see a positive impact on our net revenues due to the growth of our Maintenance Choice program. As you review our Retail Pharmacy Segment's performance in this area, we believe you should consider the following important information: • Front store same store sales...

  • Page 35
    ...the Pharmacy Services Segment, as they are being processed through the Company's specialty mail order pharmacies. The implementation of Specialty Connect had a greater effect on revenues than on prescription volumes due to the higher dollar value of specialty products. Pharmacy same store sales were...

  • Page 36
    ... health care financing practices" in Part I, Item 1A, Risk Factors within our 2014 Form 10-K, for additional information. CVS Health Operating expenses in our Retail Pharmacy Segment include store payroll, store employee benefits, store occupancy costs, selling expenses, advertising expenses...

  • Page 37
    ..., human resources, corporate information technology and finance related costs. The increase in operating expenses in 2014 and 2013 was primarily due to increased strategic initiatives, benefits costs, facilities management and information technology costs. 2014 Annual Report Liquidity and Capital...

  • Page 38
    ... open market repurchases, privately negotiated transactions, accelerated share repurchase ("ASR") transactions, and/or other derivative transactions. The 2014 and 2013 Repurchase Programs may be modified or terminated by the Board of Directors at any time. The 2012 and 2011 Repurchase Programs have...

  • Page 39
    ...of which was used for the ASR effective January 2, 2015 described previously. As of December 31, 2014, the 2012 and 2011 Repurchase Programs were complete. 37 2014 Annual Report Short-term borrowings - We had $685 million of commercial paper outstanding at a weighted average interest rate of 0.55...

  • Page 40
    ... of discounts and underwriting fees. The 2014 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 2014 Notes...

  • Page 41
    ... our Board of Directors authorized a 38% increase in our quarterly common stock dividend to $0.225 per share. This increase equated to an annual dividend rate of $0.90 per share. 2014 Annual Report Off-Balance Sheet Arrangements In connection with executing operating leases, we provide a guarantee...

  • Page 42
    ... accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to them. Revenue Recognition Pharmacy Services Segment Our Pharmacy Services Segment sells prescription drugs directly through our mail service dispensing pharmacies...

  • Page 43
    ... The following revenue recognition policies have been established for the Pharmacy Services Segment. • Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the prescription is delivered. At the time of delivery, the Pharmacy Services Segment has...

  • Page 44
    ... store merchandise at the time the merchandise is purchased by the retail customer and recognizes revenue from the sale of prescription drugs when the prescription is picked up by the customer. Customer returns are not material. Revenue generated from the performance of services in our health care...

  • Page 45
    ... a straight-line basis over the life of the related contract. We have not made any material changes in the way we account for vendor allowances and purchase discounts during the past three years. 43 Inventory All prescription drug inventories in the Retail Pharmacy Segment have been valued at the...

  • Page 46
    .... These estimates can be affected by a number of factors including, but not limited to, general economic conditions, availability of market information as well as the profitability of the Company. Goodwill is tested for impairment on a reporting unit basis using a two-step process. The first step...

  • Page 47
    ... group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates, terminal growth rates; and forecasts of revenue, operating profit, depreciation and amortization, capital expenditures and future working capital...

  • Page 48
    ... uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which...

  • Page 49
    ... statements relating to corporate strategy; revenue growth; earnings or earnings per common share growth; adjusted earnings or adjusted earnings per common share growth; free cash ï¬,ow; debt ratings; inventory levels; inventory turn and loss rates; store development; relocations and new market...

  • Page 50
    ...• Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products. • Risks of declining gross margins in the PBM industry attributable to increased competitive pressures, increased client demand for lower prices, enhanced service offerings and/or...

  • Page 51
    ... and security of sensitive customer and business information. • Risks related to compliance with a broad and complex regulatory framework, including compliance with new and existing federal, state and local laws and regulations relating to health care, accounting standards, corporate securities...

  • Page 52
    .... Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors, written policies and procedures and a written Code of Conduct adopted by our Company's Board of Directors, applicable to all employees of our Company. In addition, we have an internal...

  • Page 53
    ...of CVS Health Corporation as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash ï¬,ows for each of the three years in the period ended December 31, 2014 of CVS Health Corporation and our report dated February 10, 2015...

  • Page 54
    ... 1 , IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2014 2013 $ 126,761 102,978 23,783 15,746 8,037 509 - 7,528 2,928 4,600 (8) 4,592 - $ 4,592 $ $ 2012 123,120 100,632 22,488 15,278 7,210 557 348 6,305 2,436 3,869 (7) 3,862 2 3,864 Net revenues Cost of revenues Gross profit Operating expenses Operating...

  • Page 55
    ...DE D DE C E M B E R 3 1 , IN MILLIONS 2014 2013 $ 4,592 (30) 3 59 32 4,624 - $ 4,624 $ $ 2012 3,862 - 3 (12) (9) 3,853 2 3,855 Net income Other ...CVS Health See accompanying notes to consolidated financial statements. $ 4,644 (35) 4 (37) (68) 4,576 - $ 4,576 53 2014 Annual Report

  • Page 56
    ... 31, 2013 Treasury stock, at cost: 550 shares at December 31, 2014 and 500 shares at December 31, 2013 Shares held in trust: 1 share at December 31, 2014 and 2013 Capital surplus Retained earnings Accumulated other comprehensive income (loss) Total CVS Health shareholders' equity Noncontrolling...

  • Page 57
    ...customers Cash paid for inventory and prescriptions dispensed by retail network pharmacies Cash paid to other suppliers and employees Interest received Interest paid Income taxes paid Net cash provided by operating activities Cash ï¬,ows from investing activities: Purchases of property and equipment...

  • Page 58
    ...year Transfer of shares to treasury stock $ (24,078) $ $ (31) - (31) CVS Health End of year Capital surplus: Beginning of year Stock option activity and stock awards Excess tax benefit on stock options and stock awards Transfer of shares held in trust to treasury stock Purchase of noncontrolling...

  • Page 59
    ... including mail order pharmacy services, specialty pharmacy and infusion services, plan design and administration, formulary management and claims processing. The Company's clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans...

  • Page 60
    ...the CVS/pharmacy, CVS, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names, the online retail websites, CVS.com, Navarro.com and Onofre.com.br, and 971 retail health care clinics operating under the MinuteClinic name (of which 963 were located in CVS/pharmacy stores). Corporate Segment...

  • Page 61
    ... 31, 2014. The fair value of the Company's long-term debt was estimated based on quoted rates currently offered in active markets for the Company's debt, which is considered Level 1 of the fair value hierarchy. The Company had outstanding letters of credit, which guaranteed foreign trade purchases...

  • Page 62
    ... the useful life of an asset are capitalized and depreciated. Application development stage costs for significant internally developed software projects are capitalized and depreciated. The following are the components of property and equipment at December 31: IN MILLIONS 60 2014 2013 $ 1,460...

  • Page 63
    ... client pays directly to the PSS, net of any volume-related or other discounts paid back to the client (see "Drug Discounts" on the following page), (ii) the price paid to the PSS by client plan members for mail order prescriptions ("Mail Co-Payments") and the price paid to retail network pharmacies...

  • Page 64
    ...the RPS' health care clinics is recognized at the time the services are performed. Sales taxes are not included in revenue. Loyalty Program - The Company's customer loyalty program, ExtraCare®, is comprised of two components: ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings coupons redeemed by...

  • Page 65
    ...estimated inventory losses. See Note 12 for additional information about the cost of revenues of the Company's business segments. 63 2014 Annual Report Vendor Allowances and Purchase Discounts The Company accounts for vendor allowances and purchase discounts as follows: Pharmacy Services Segment...

  • Page 66
    ... 2013 and 2012, respectively. Shares held in trust - The Company maintains grantor trusts, which held approximately 1 million shares of its common stock at December 31, 2014 and 2013, respectively. These shares are designated for use under various employee compensation plans. Since the Company holds...

  • Page 67
    ... compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the stock award (generally 3 to 5 years) using the straight-line method. Variable interest entity - In July 2014, the Company and Cardinal...

  • Page 68
    ...Pharmacy segments utilize this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees of approximately $50 million, $48 million and $32 million in the years ended December 31, 2014, 2013 and 2012, respectively, for the use...

  • Page 69
    ...606). ASU No. 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods...

  • Page 70
    ... required annual goodwill impairment tests. The Company concluded there were no goodwill impairments as of the testing date. Below is a summary of the changes in the carrying amount of goodwill by segment for the years ended December 31, 2014 and 2013: IN MILLIONS CVS Health Pharmacy Services $ 19...

  • Page 71
    ... open market repurchases, privately negotiated transactions, accelerated share repurchase ("ASR") transactions, and/or other derivative transactions. The 2014 and 2013 Repurchase Programs may be modified or terminated by the Board of Directors at any time. The 2012 and 2011 Repurchase Programs have...

  • Page 72
    ...2013 Repurchase Programs, $2.0 billion of which was used for the ASR effective January 2, 2015 described previously. As of December 31, 2014, the 2012 Repurchase Program was complete. During the year ended December 31, 2013, the Company repurchased an aggregate of 66.2 million shares of common stock...

  • Page 73
    ...MILLIONS 2014 2013 $ - 550 550 421 750 1,310 1,250 394 - 450 550 1,250 1,250 - 1,000 1,500 950 750 390 87 13,402 - (561) $ 12,841 2014 Annual Report Commercial paper 4.875% senior notes due 2014 3.25% senior notes due 2015 6.125% senior notes due 2016 1.2% senior notes due 2016 5.75% senior notes...

  • Page 74
    ... Capital Advantage Preferred Securities ("ECAPS") at par. The fees and write-off of deferred issuance costs associated with the early extinguishment of the ECAPS were immaterial. CVS Health On December 2, 2013, the Company issued $750 million of 1.2% unsecured senior notes due December 5, 2016...

  • Page 75
    ... 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 generally qualify and are accounted for as operating...

  • Page 76
    ... Company's funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. As of December 31, 2014 and 2013, the Company...

  • Page 77
    ... for each asset class on a plan by plan basis. The expected long-term rate of return for the plans ranged from 5.75% to 7.25% in 2014 and was 7.25% for all plans in 2013 and 2012. Historically, the Company used an investment strategy which emphasized equities in order to produce higher expected...

  • Page 78
    ... date of grant (the first day of the six month offering period) using the Black-Scholes Option Pricing Model. The following table is a summary of the assumptions used to value the ESPP awards for each of the respective periods: 2014 Dividend yield (1) Expected volatility (2) 76 CVS Health 2013...

  • Page 79
    ...fair value of each stock option is estimated using the Black-Scholes option pricing model based on the following assumptions at the time of grant: 2014 Dividend yield (1) Expected volatility (2) Risk-free interest rate (3) Expected life (in years) (4) Weighted-average grant date fair value 2013 1.65...

  • Page 80
    ...requisite service period. The following table is a summary of the Company's stock option activity for the year ended December 31, 2014: Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value SHARES IN THOUSANDS Shares Outstanding at December 31, 2013...

  • Page 81
    .... The Internal Revenue Service ("IRS") is currently examining the Company's 2012, 2013 and 2014 consolidated U.S. federal income tax returns under its Compliance Assurance Process ("CAP") program. The CAP program is a voluntary program under which participating taxpayers work collaboratively with...

  • Page 82
    ... Financial Statements The Company and its subsidiaries are also currently under income tax examinations by a number of state and local tax authorities. As of December 31, 2014, no examination has resulted in any proposed adjustments that would result in a material change to the Company's results...

  • Page 83
    ... and Human Services, requesting information relating to the processing of Medicaid and certain other government agency claims on behalf of its clients (which allegedly resulted in underpayments from our pharmacy benefit management clients to the applicable government agencies) on one of the Company...

  • Page 84
    ... which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to the Company's pharmacies in the form of gift cards, cash, non-prescription merchandise or discounts or coupons for non-prescription merchandise. The subpoena relates to an...

  • Page 85
    ...well as the false claims acts of several states, by using pharmacists, nurses and other staff to recommend and increase the sales and market share for certain Novartis specialty drugs in exchange for patient referrals, rebates and discounts provided by Novartis. The federal government has intervened...

  • Page 86
    ... the years ended December 31, 2014, 2013 and 2012, 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 this occurs, both the...

  • Page 87
    ... PER SHARE AMOUNTS 2014 2013 2012 Numerator for earnings per share calculation: Income from continuing operations attributable to common stockholders (1) Denominator for earnings per share calculation: Weighted average shares, basic Effect of dilutive securities Weighted average shares, diluted...

  • Page 88
    ... to CVS Health Net income attributable to CVS Health Diluted earnings per share: Income from continuing operations attributable to CVS Health Loss from discontinued operations attributable to CVS Health Net income attributable to CVS Health Dividends per share Stock price: (New York Stock Exchange...

  • Page 89
    ... to CVS Health Net income attributable to CVS Health Diluted earnings per share: Income from continuing operations attributable to CVS Health Loss from discontinued operations attributable to CVS Health Net income attributable to CVS Health Dividends per share Stock price: (New York Stock Exchange...

  • Page 90
    ... continuing operations attributable to CVS Health Loss from discontinued operations attributable to CVS Health Net income attributable to CVS Health Cash dividends per common share Balance sheet and other data: Total assets Long-term debt Total shareholders' equity Number of stores (at end of year...

  • Page 91
    Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of CVS Health Corporation We have audited the accompanying consolidated balance sheets of CVS Health Corporation as of December 31, 2014 and 2013, and the related consolidated statements of income, ...

  • Page 92
    ... Sector Group Index, which currently includes 55 health care companies. Relative Total Returns Since 2009 - Annual December 31, 2009 to December 31, 2014 $325 $300 $275 90 $250 $225 $200 $175 $150 CVS Health $125 $100 $75 $50 $25 $0 2009 CVS Health S&P 500 2010 2011 2012 2013 2014 S&P 500...

  • Page 93
    ....com Annual Shareholders' Meeting May 7, 2015 CVS Health Corporate Headquarters Stock Market Listing The New York Stock Exchange Symbol: CVS Financial and Other Company Information The Company's Annual Report on Form 10-K will be sent without charge to any shareholder upon request by contacting...

  • Page 94
    WE ARE A pharmacy innovation company OUR STRATEGY Reinventing pharmacy OUR PURPOSE Helping people on their path to better health OUR VALUES Innovation Collaboration Caring Integrity Accountability The CVS Health 2014 Annual Report achieved the following results by printing on paper containing ...