CVS 2015 Annual Report Download - page 69

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67
2015 Annual Report
Variable Interest Entity In July 2014, the Company and Cardinal Health, Inc. (“Cardinal”) established Red Oak
Sourcing, LLC (“Red Oak”), a generic pharmaceutical sourcing entity in which the Company and Cardinal each own
50%. The Red Oak arrangement has an initial term of ten years. Under this arrangement, the Company and Cardinal
contributed their sourcing and supply chain expertise to Red Oak and agreed to source and negotiate generic
pharmaceutical supply contracts for both companies through Red Oak; however, Red Oak does not own or hold
inventory on behalf of either company. No physical assets (e.g., property and equipment) were contributed to Red
Oak by either company and minimal funding was provided to capitalize Red Oak.
The Company has determined that it is the primary beneficiary of this variable interest entity because it has the
ability to direct the activities of Red Oak. Consequently, the Company consolidates Red Oak in its consolidated
financial statements within the Retail/LTC Segment.
Cardinal is required to pay the Company 39 quarterly payments beginning in October 2014. As milestones are met,
the quarterly payments increase. The Company received approximately $122 million and $26 million from Cardinal
during the years ended December 31, 2015 and 2014, respectively. The payments reduce the Company’s carrying
value of inventory and are recognized in cost of revenues when the related inventory is sold. Revenues associated
with Red Oak expenses reimbursed by Cardinal for the years ended December 31, 2015 and 2014, as well as
amounts due to or due from Cardinal at December 31, 2015 and 2014 were immaterial.
Related party transactions The Company has an equity method investment in SureScripts, LLC (“SureScripts”),
which operates a clinical health information network. The Pharmacy Services and Retail/LTC 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 in the years ended December 2015 and 2014, and $48 million in
the year ended December 31, 2013, for the use of this network. The Company’s investment in and equity in earnings
of SureScripts for all periods presented is immaterial.
In connection with the acquisition of Omnicare in August 2015, the Company obtained an equity method investment
in Heartland Healthcare Services (“Heartland”). Heartland operates several long-term care pharmacies in four states.
Heartland paid the Company approximately $25 million for pharmaceutical inventory purchases during the period
from August 18, 2015 to December 31, 2015. Additionally, the Company performs certain collection functions for
Heartland and then passes those customer cash collections to Heartland. The Company’s investment in and equity
in earnings of Heartland as of and for the year ended December 31, 2015 is immaterial.
In September 2014, the Company made a charitable contribution of $25 million to the CVS Foundation (formerly
CVS Caremark Charitable Trust, Inc.) (the “Foundation”) to fund future giving. The Foundation is a non-profit entity
that focuses on health, education and community involvement programs. The charitable contribution was recorded
as an operating expense in the consolidated statement of income for the year ended December 31, 2014.
Income taxes The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are deter-
mined on the basis of the differences between the consolidated financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of
a change in the tax rates on deferred tax asset and liabilities is recognized in income in the period that includes the
enactment date.
The Company recognizes net deferred tax assets to the extent that it believes these assets are more likely than not
to be realized in making such a determination. The Company considers all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected future taxable income, tax planning
strategies, and results of recent operations. To the extent that the Company does not consider it more likely than not
that a deferred tax asset will be recovered, a valuation allowance is established.